Strongco Income Fund
TSX : SQP.UN

Strongco Income Fund

March 26, 2010 06:00 ET

Strongco Announces Fourth Quarter and Year End 2009 Results

Summary Of 2009 12-Month Results (i) - Revenues totalled $291.8 million, a decrease of 27% in a market that was down greater than 50% - Gross margin improved to 20.5% from 16.5%, as a percent of revenue - Expenses decreased 9% to $55.8 million - Earnings from continuing operations rose to $0.7 million from $0.4 million loss - EBITDA from continuing operations was $18.0 million, down 12% - Equipment finance notes reduced by $14.0 million to $104.8 million (i) Percentages compare year end 2009 with year end 2008. All comparative figures are restated to reflect treatment of Engineered Systems as a Discontinued Operation.

MISSISSAUGA, ONTARIO--(Marketwire - March 26, 2010) - Strongco Income Fund (TSX:SQP.UN) today released financial results for the fourth quarter and year ended December 31, 2009.

"Without question, 2009 was a very tough year," said Robert Dryburgh, President and Chief Executive Officer of the Fund. "However, despite the unprecedented economic downturn, we improved the profitability of Strongco's core business. We also rationalized our branch network, reduced our people count, disposed of a non-strategic business, improved our balance sheet and established a more solid financial position to support future growth. Critical to that future, we continued to cultivate our customer relationships and maintained overall national market share."

"I am proud of the accomplishments of the Strongco team, but we are not satisfied," Mr. Dryburgh added. "In 2010, we will continue to emphasize customer service and seek to improve market share, while containing operating costs. We will also maintain our attention on asset management and improve inventory control and debt reduction. We expect to be in a solid position as construction markets begin to recover during 2010."

Financial Highlights (i)

($ millions except per unit amounts)



----------------------------------------------------------------------------
Period ended December 31 3 months 12 months
----------------------------------------------------------------------------
2009 2008 2009 2008
----------------------------------------------------------------------------
Revenues $ 67.5 $ 103.7 $ 291.8 $ 398.3
----------------------------------------------------------------------------
EBITDA from continuing
operations (ii) $ 2.8 $ 4.3 $ 18.0 $ 20.5
----------------------------------------------------------------------------
Earnings (loss) from
continuing operations $ (2.1) $ (2.3) $ 0.7 $ (0.4)
----------------------------------------------------------------------------
Net income (loss) $ (2.1) $ (2.6) $ 0.0 $ (0.4)
----------------------------------------------------------------------------
Basic and diluted earnings
(loss) continuing operations
per unit $ (0.20) $ (0.22) $ 0.07 $ (0.04)
----------------------------------------------------------------------------
Basic and diluted net income
(loss) per unit $ (0.20) $ (0.25) $ 0.00 $ (0.04)
----------------------------------------------------------------------------
Distributions per unit Nil Nil Nil $ 0.70
----------------------------------------------------------------------------
Equipment in inventory $ 124.5 $ 137.8
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Bank debt $ 10.0 $ 12.8
----------------------------------------------------------------------------
Equipment notes payable $ 104.8 $ 118.8
----------------------------------------------------------------------------


(i) Strongco's Engineered Systems division was sold during the second quarter of 2009 and is considered a Discontinued Operation. Results for 2008 have been restated accordingly.
(ii) See comments concerning non-GAAP measures at end of release.

Fourth Quarter 2009 Review

As in previous quarters, during the fourth quarter, sales of new equipment continued to trail levels of 2008. Reflecting business anxiety of the recession, customers continued to repair, refurbish and rent equipment rather than buy new.

"While our markets were down 50% on average, the shift in customer preferences resulted in our total revenues being down only 35% in the quarter," said David Wood, Vice President and Chief Financial Officer. "In addition, product support sales offer higher margins than sales of new equipment. As a result, we achieved an improved margin percentage compared to the fourth quarter of 2008."

Total revenues during the three-month period decreased by 35% from the same period in 2008 to $67.5 million. Of the total, equipment sales declined by 42% to $42.3 million, while rentals were down by 24% to $4.2 million and product support revenues moved down 17% to $21.0 million.

Gross margin for the quarter was $13.1 million, versus $16.0 million in 2008. Gross margin as a percentage of revenue increased to 19.4% from 15.4% in the same period last year. The improved margin percentage resulted from a number of factors, including the continued trend of customers to repair existing equipment, rather than buy new, which increased the sales mix of higher margin product support business. In addition, unusual inventory writeoffs experienced in 2008 were not repeated in 2009.

Administrative, distribution and selling expenses were down 9% to $14.4 million during the fourth quarter. The decrease was due to operational restructuring and cost rationalization measures undertaken earlier in the year, plus improved cost recoveries and tighter cost controls.

The quarter ended with a loss from continuing operations of $2.1 million, compared to a loss from continuing operations of $2.3 million in 2008. This measure removes the Engineered Systems division, which was sold in the second quarter of 2009 and is reported as a Discontinued Operation.

Net loss for the quarter was $2.1 million, compared to a net loss of $2.6 million in the same quarter of 2008. Basic and diluted net loss amounted to $0.20 per unit, versus a net loss of $0.25 per unit last year.

Strongco is providing EBITDA for the first time in the current reporting period. "We decided to begin reporting EBITDA to provide comparability with other issuers in our space and to highlight the sources of cash in Strongco's operations," said Mr. Wood.

"We've also separately broken out the amortization of equipment inventory on rent included in our cost of sales on the face of our statement of cash flows to more clearly illustrate the cash generated from operations."

In the fourth quarter of 2009, EBITDA was $2.9 million compared to $4.3 million in the same quarter of 2008. Lower rental revenues resulted in lower amortization of equipment inventory on rent, contributing to the decline in EBITDA in the quarter.

Fiscal 2009 Financial Review

Total revenues for 2009 decreased by 27% from 2008 to $291.8 million, reflecting the economic downturn during the year. The markets that Strongco serves are estimated to be down greater than 50% year over year.

Strongco's equipment sales across Canada were down $98.3 million, or 35%, compared to 2008. The largest decline was in Western Canada, which reported a 59% drop, while Central and Eastern regions saw declines of 36% and 10%, respectively.

Equipment rentals and product support activities were affected by the economic decline, but less so than the impact on equipment sales as many customers chose to rent rather than purchase. Rental revenues and product support sales declined by 19% and 5%, respectively, compared to 2008.

As a result of lower revenues during 2009, gross margin for the year decreased by 8.9% to $59.9 million. As a percentage of revenue, gross margin increased to 20.5% from 16.5% in 2008.

Administrative, distribution and selling expenses declined by 8.6% to $55.8 million in 2009. The decrease resulted from operational restructuring, cost rationalization, improved cost recoveries and tighter cost controls.

Earnings from continuing operations totalled $0.7 million, versus a loss from continuing operations of $0.4 million in 2008.

Net income for the year was $18,000, compared to a net loss of $0.4 million last year. Basic and diluted earnings amounted to $0.00 per unit, versus a loss of $0.04 per unit.

EBITDA from continuing operations was $18.0 million in 2009, compared to $20.5 million in 2008. With the decline in rental revenues, the related amortization of the equipment on rent also declined to $11.2 million from $14.3 million and consequently impacted EBITDA.

Financial Position

The Fund's balance sheet and overall financial position improved substantially in 2009. Great strides were made in reducing equipment inventories during the year, which at December 31, 2009 stood at $124.5 million, down from $137.8 million a year earlier. In addition, the Fund's total liabilities were $140.9 million at December 31, 2009, which was down from $186.3 million at the same time last year.

The Fund continues to have access to a $20.0 million operating line of bank credit. At December 31, 2009 the balance outstanding was $10.0 million, down from $12.8 million at the end of 2008. Strongco also has a $10.0 million foreign exchange facility available under its bank credit facility to hedge its purchases of equipment inventory in US dollars. Strongco makes use of credit lines from equipment manufacturers and other third party lenders on an as-needed basis to finance purchases of equipment inventory. These lines total $150.0 million, of which Strongco had drawn $104.9 million at 2009 year end, down from $118.9 million at the same time in 2008.

During the fourth quarter of 2009, Strongco made voluntary payments to its employee pension plans totalling $1.2 million.

Outlook

The economic recession that reduced sales of new equipment in 2009 has not ended, but there is a growing sense that the economy is slowly improving. In addition, Strongco's current order book for new construction equipment is close to double what it was at the end of 2009.

While such signs are encouraging, Canadian markets overall for new construction equipment are expected to remain weak at least through the first quarter of 2010. During this period, many customers are likely to continue repairing, refurbishing and renting equipment, rather than buying new. Activity is more likely to increase during the second quarter as the industry enters the summer season and as economic stimulus funding begins to benefit the construction sector. Markets in eastern Canada are expected to show the most improvement, while Alberta is not likely to exhibit a substantial turnaround during 2010.

For the year, the ongoing strength of the Canadian dollar, combined with competitive markets, is expected to put pressure on selling prices. That is likely to be offset by rising volumes in the second half of the year as the recovery gains momentum.

During 2010 management will focus on working capital, inventory management and debt reduction. Strongco operations will emphasize market share relative to margins, product support sales and cost reductions while maintaining an industry-leading level of customer service.

Conference Call Details

Strongco will hold a conference call on Friday, March 26, 2010 at 10 am ET to discuss fourth quarter and year end 2009 results. Analysts and investors can participate by dialing 416-644-3416 or toll free 1-800-814-4861. An archived audio recording will be available until midnight on April 9, 2010. To access it, dial 416-640-1917 or 1-877-289-8525 and enter passcode 4271344#.

About Strongco

Strongco Income Fund is a trust established to hold one of the largest multi-line industrial equipment distribution providers in Canada. Over 600 employees provide retail service at 27 branches located from Newfoundland to Alberta. Strongco sells, rents and services mobile industrial equipment to sectors that include construction, road building, mining, forestry, utilities and municipalities. Strongco represents leading equipment manufacturers, including Volvo, Case, Manitowoc, Cedarapids, Fassi, Allied, Gomaco, Taylor, ESCO and Dressta.

Strongco Income Fund is listed on the Toronto Stock Exchange under the symbol SQP.UN.



J. David Wood
Vice President and Chief Financial Officer
Phone: 905 565 3808
E-mail: jdwood@strongco.com


Non-GAAP measures

"EBITDA" refers to earnings before interest, income taxes, amortization of capital assets, amortization of intangible assets, depreciation of equipment inventory on rent, and goodwill impairment. EBITDA is a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not an earnings measure recognized by GAAP, does not have standardized meanings prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers. The Fund's management believes that EBITDA is an important supplemental measure in evaluating the Fund's performance and in determining whether to invest in Units. Readers of this information are cautioned that EBITDA should not be construed as an alternative to net income or loss determined in accordance with GAAP as indicators of the Fund's performance or to cash flows from operating, investing and financing activities as measures of the Fund's liquidity and cash flows. The Fund's method of calculating EBITDA may differ from the methods used by other issuers and, accordingly, the Fund's EBITDA may not be comparable to similar measures presented by other issuers.

Forward-Looking Statements

This news release contains "forward-looking" statements within the meaning of applicable securities legislation which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Fund or industry results, to be materially different from any future results, events, expectations, performance or achievements expressed or implied by such forward-looking statements. All such forward-looking statements are made pursuant to the "safe harbour" provisions of applicable Canadian securities legislation. Forward-looking statements typically contain words or phrases such as "may", "outlook", "objective", "intend", "estimate", "anticipate", "should", "could", "would", "will", "expect", "believe", "plan" and other similar terminology suggesting future outcomes or events.

This news release contains forward-looking statements relating to the outlook for the Fund, market share, the construction markets and the economy generally. Forward-looking statements respecting the outlook for the Fund, market share, the construction markets and the economy generally are based upon the anticipated operating and financial results of the Fund, the views of management and the trustees of the Fund respecting the performance of the Fund and anticipated market conditions.

Forward-looking statements involve numerous assumptions and should not be read as guarantees of future performance or results. Such statements will not necessarily be accurate indications of whether or not such future performance or results will be achieved. You should not unduly rely on forward-looking statements as a number of factors, many of which are beyond the control of the Fund, could cause actual performance or results to differ materially from the performance or results discussed in the forward-looking statements, including, actual future market conditions being different than anticipated by management and the trustees of the Fund; actual future operating and financial results of the Fund being different than anticipated by management and the trustees of the Fund; general economic conditions; business cyclicality, relationships with manufacturers; access to products; competition with existing business; reliance on key personnel; litigation and product liability claims; inventory obsolescence; sufficiency of credit availability; credit risks of customers; warranty claims; technology interpretations; and labour relations. Although the forward-looking statements contained in this news release are based upon what management of the Fund believes are reasonable assumptions, the Fund cannot assure investors that actual performance or results will be consistent with these forward-looking statements. These statements reflect current expectations regarding future events and operating performance and are based on information currently available to the Fund's management. There can be no assurance that the plans, intentions or expectations upon which these forward-looking statements are based will occur. All forward-looking statements in this news release are qualified by these cautionary statements. These forward-looking statements and outlook are made as of the date of this news release and, except as required by applicable law, the Fund assumes no obligation to update or revise them to reflect new events or circumstances.

www.strongco.com

Strongco Income Fund

Management's Discussion and Analysis

The following management discussion and analysis ("MD&A") provides a review of the consolidated financial condition and results of operations of Strongco Income Fund, Strongco GP Inc. ("Strongco GP") and Strongco Limited Partnership ("the Partnership") collectively referred to as the "Fund" or "Strongco", as at and for the year ended December 31, 2009. This discussion and analysis should be read in conjunction with the accompanying audited consolidated financial statements as at and for the year ended December 31, 2009. For additional information and details, readers are referred to the Fund's quarterly financial statements and quarterly MD&A for fiscal 2009 as well as the Fund's Notice of Annual Meeting of Unitholders and Information Circular ("IC") dated March 26, 2010, and the Fund's Annual Information Form ("AIF") dated March 26, 2010, all of which are published separately and are available on SEDAR at www.sedar.com.

Unless otherwise indicated, all financial information within this discussion and analysis is in millions of Canadian dollars except per unit amounts. The information in this MD&A is current to March 25, 2010.

STRONGCO INCOME FUND

Strongco Income Fund is an unincorporated, open-ended, limited purpose trust established under the laws of the Province of Ontario pursuant to a declaration of trust dated March 21, 2005 as amended and restated on April 28, 2005 and September 1, 2006.

On September 1, 2006, Strongco completed a reorganization in which all of the operations of Strongco Inc. ("the Company") were transferred into a new limited partnership, the Partnership. The transfer of the operations of the Company to the Partnership was recorded at the carrying values of the Company's assets and liabilities on September 1, 2006 in accordance with the continuity of interest method of accounting, as the Partnership is considered to be a continuation of the Company.

The Government of Canada enacted changes to the taxation of income trusts under its Tax Fairness Plan. The changes are not intended to apply to taxation years ending prior to 2011 for income trusts that commenced trading prior to November 2006. However, in accordance with section 3465 of the CICA Handbook, the Fund has estimated its temporary differences, determined the periods over which those temporary differences are expected to reverse and applied the current substantively enacted tax rates that will apply in the periods to those temporary differences. Taxable income that is not distributed to Unitholders is generally subject to tax at the highest federal and provincial income tax rates that are applicable to individuals. Beginning in the 2011 taxation year, distributions will be subject to tax at the Specified Investment Flow-Through rate.

FINANCIAL HIGHLIGHTS



Income Statement Highlights Year ended December 31,
----------------------------------------------------------------------------
($ millions, except per unit
amounts) 2009 2008 2007
----------------------------------------------------------------------------
Revenues $ 291.8 $ 398.3 $ 348.1
Earnings from continuing operations $ 0.7 $ (0.4) $ 6.0
Earnings (loss) from discontinued
operations $ (0.7) $ - $ 2.4
----------------------------------------------------------------------------
Net income (loss) $ - $ (0.4) $ 8.4
----------------------------------------------------------------------------

Basic and diluted earnings (loss)
per unit from continuing
operations $ 0.07 $ (0.04) $ 0.57
Basic and diluted earnings (loss)
per unit $ - $ (0.04) $ 0.79
Distributions per unit $ - $ 0.70 $ 1.40
EBITDA (note 1) $ 18.0 $ 20.5 $ 19.5

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Balance Sheet Highlights
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Equipment inventory $ 124.5 $ 137.8 $ 113.4
Total assets $ 195.6 $ 240.9 $ 206.7
Debt (bank debt and other notes
payable) $ 12.3 $ 15.1 $ 5.8
Equipment notes payable $ 104.8 $ 118.9 $ 94.9
Total liabilities $ 140.9 $ 186.3 $ 147.3
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Note 1 - "EBITDA" refers to earnings before interest, income taxes, amortization of capital assets, amortization of intangible assets, amortization of equipment inventory on rent, and goodwill impairment. EBITDA is presented as a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not a measure of financial performance under Canadian Generally Accepted Accounting Principles ("GAAP") and therefore has no standardized meaning prescribed by GAAP and may not be comparable to similar terms and measures presented by other similar issuers. EBITDA is intended to provide additional information on the Fund's performance and should not be considered in isolation, seen as a measure of cash flow from operations or as a substitute for measures of performance prepared in accordance with GAAP.

COMPANY OVERVIEW

In May of 2009, Strongco disposed of the net assets of its Engineered Systems business and now operates in one business segment, Equipment Distribution. The Engineered Systems business has been reflected as a discontinued operation in the current period and prior period comparative figures have been restated accordingly. The results of operations discussed in this Management Discussion and Analysis refers to the Equipment Distribution business only.

Strongco's Equipment Distribution business is one of the largest multi-line mobile equipment distributors in Canada. This business sells and rents new and used equipment and provides after-sale product support (parts and service) to customers that operate in infrastructure, construction, mining, oil and gas exploration, forestry and industrial markets. This business distributes numerous equipment lines in various geographic territories. The primary lines distributed include those manufactured by:



i. Volvo Construction Equipment North America Inc. ("Volvo"), for which
Strongco has distribution agreements in each of Alberta, Ontario,
Quebec, New Brunswick, Nova Scotia, Prince Edward Island and
Newfoundland
ii. Case Corporation ("Case"), for which Strongco has a distribution
agreement for a substantial portion of Ontario, and
iii. Manitowoc Crane Group ("Manitowoc"), for which Strongco has
distribution agreements for the Manitowoc, Grove and National
brands, covering much of Canada, excluding Nova Scotia,
New Brunswick and Prince Edward Island.


The distribution agreements with Volvo and Case provide exclusive rights to distribute the products manufactured by these manufacturers in specific regions and/or provinces.

In addition to the above noted primary lines, Strongco also distributes several other secondary or ancillary equipment lines.

On March 20, 2008, the Fund purchased substantially all of the assets (excluding real property) of the Champion Road Machinery division of Volvo Group Canada Inc. ("Champion") for a total consideration of $25 million. Champion provided full service sales, rentals, parts and service for the Volvo Motor Grader line in Ontario. In addition to graders, Champion carried the Volvo line of compact equipment in Ontario, including smaller loaders, mini-excavators and skidsteers.

FINANCIAL RESULTS - ANNUAL

Consolidated Results of Operations



Year ended December 31,
--------------------------------------------
($ thousands, except
per unit amounts) 2009 2008 2007
------------------------------------------------------------------
Revenues $ 291,795 $ 398,289 $ 348,056
Cost of sales 231,847 332,463 288,214
------------------------------------------------------------------
Gross Margin 59,948 65,826 59,842
Admin, distribution
and selling expenses 55,822 61,062 52,562
Amortization of
intangible assets - 544 -
Goodwill impairment - 848 -
Other income (1,816) (690) (2,617)
------------------------------------------------------------------
Operating income 5,942 4,062 9,897
Interest expense 4,433 4,143 2,736
------------------------------------------------------------------
Earnings (loss) from
continuing operations
before income taxes 1,509 (81) 7,161
Provision for income
taxes 775 276 1,194
------------------------------------------------------------------
Earnings (loss) from
continuing operations 734 (357) 5,967
Earnings (loss) from
discontinued
operations (716) (41) 2,367
------------------------------------------------------------------
Net income (loss) and
comprehensive income
(loss) 18 (398) 8,334
------------------------------------------------------------------
Basic and diluted
earnings (loss) per
unit from continuing
operations 0.07 (0.04) 0.57
Basic and diluted
earnings (loss) per
unit 0.00 (0.04) 0.79
Number of units issued 10,508,719 10,508,719 10,508,719
------------------------------------------------------------------
Key financial
measures:
Gross margin as a
percentage of
revenues 20.5% 16.5% 17.2%

Admin, distribution
and selling expenses
as percentage of
revenues 19.1% 15.3% 15.1%
Operating income as a
percentage of
revenues 2.0% 1.0% 2.8%
EBITDA (note 1) 18,017 20,520 19,548
------------------------------------------------------------------

2009/2008 2008/2007
------------------------------------------------------
($ thousands, except
per unit amounts) $ Change % Change $ Change % Change
----------------------------------------------------------------------------
Revenues $ (106,494) -26.7% $ 50,233 14.4%
Cost of sales (100,616) -30.3% 44,249 15.4%
----------------------------------------------------------------------------
Gross Margin (5,878) -8.9% 5,984 10.0%
Admin, distribution
and selling expenses (5,240) -8.6% 8,500 16.2%
Amortization of
intangible assets (544) - 544 -
Goodwill impairment (848) - 848 -
Other income (1,126) 163.2% 1,927 -73.6%
----------------------------------------------------------------------------
Operating income 1,880 46.3% (5,835) -59.0%
Interest expense 290 7.0% 1,407 51.4%
----------------------------------------------------------------------------
Earnings (loss) from
continuing operations
before income taxes 1,590 1963.0% (7,242) -101.1%
Provision for income
taxes 499 180.8% (918) -76.9%
----------------------------------------------------------------------------
Earnings (loss) from
continuing operations 1,091 305.6% (6,324) -106.0%
Earnings (loss) from
discontinued
operations (675) 1646.3% (2,408) -101.7%
----------------------------------------------------------------------------
Net income (loss) and
comprehensive income
(loss) 416 104.5% (8,732) -104.8%
----------------------------------------------------------------------------
Basic and diluted
earnings (loss) per
unit from continuing
operations 0.11 (0.61)
Basic and diluted
earnings (loss) per
unit 0.04 (0.83)
Number of units issued
----------------------------------------------------------------------------
Key financial
measures:
Gross margin as a
percentage of
revenues

Admin, distribution
and selling expenses
as percentage of
revenues
Operating income as a
percentage of
revenues
EBITDA (note 1)
----------------------------------------------------------------------------


Note 1 - "EBITDA" refers to earnings before interest, income taxes, amortization of capital assets, amortization of intangible assets, amortization of equipment inventory on rent, and goodwill impairment. EBITDA is presented as a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not a measure of financial performance under Canadian Generally Accepted Accounting Principles ("GAAP") and therefore has no standardized meaning prescribed by GAAP and may not be comparable to similar terms and measures presented by other similar issuers. EBITDA is intended to provide additional information on the Fund's performance and should not be considered in isolation, seen as a measure of cash flow from operations or as a substitute for measures of performance prepared in accordance with GAAP.

Market Overview

Economic activity in North America was generally robust throughout 2007 and into the first half of 2008. With the exception of the forestry sector, which remained depressed, oil and gas, construction and industrial markets generally remained strong through this period. The economy slowed considerably in the second half of 2008 as the crisis in global financial markets, brought on by the sub-prime mortgage collapse, mounted, culminating in the near collapse of the U.S. banking system in September 2008. This was followed quickly by a rapid and substantial decline in oil prices which resulted in a severe downturn in activity in the Alberta oil sands, depressing the economy of that province. The Canadian economy and the value of the Canadian dollar fell sharply in the fourth quarter of 2008 in response to the combined impact of the global financial crisis and the effect on Alberta of the rapid decline in oil prices. This weakness continued into 2009 with the economy slipping into a recession which lasted throughout the year.

As a consequence, construction activity in North America slowed significantly in the latter part of 2008 and into 2009, resulting in extremely weak markets for heavy equipment. The markets for new heavy equipment in Canada in which Strongco operates are estimated to be down on average between 40% and 50% in 2009, compared to 2008, with the largest decline in Alberta as a result of significantly reduced activity in the oil sands and weak natural gas markets. In the weak and uncertain economic environment, customers delayed or reduced equipment purchases. Rather than purchase new equipment, many customers chose instead to purchase used equipment or repair and refurbish their existing equipment. Given the magnitude of the reduction in construction activity in Alberta, many customers let their equipment sit idle, only performing repairs or maintenance when they had work and only when absolutely necessary. Governments at different levels announced stimulus programs for infrastructure improvements. While this created some initial optimism, funding was slow to be allocated to specific projects, resulting in little impact on construction markets in 2009 and a "wait and see" attitude across the construction industry in Canada.

Strongco's results have been reflective of the relative strength of the economy as a whole and the construction sector specifically. Equipment distribution revenues in 2007 declined by 15% to $348.1 million from the peak in 2006 of $411.9 million, primarily as a result of the depressed forestry sector and competitive pressures, particularly in Western Canada. Fueled by market share gains in second half of 2007, equipment distribution revenues in the first half of 2008 remained strong, further buoyed by the incremental revenues from the acquisition of Champion in March 2008 but moderated by shortages in certain large equipment classes. Revenues in the first half of 2008 were up 34% from the first half of 2007. As the economy and construction sector began to weaken, particularly in the fourth quarter of 2008, the pace of revenues slowed resulting in a full year increase in 2008 of only 14% from 2007. With the continuing weakness in construction markets in 2009, Strongco's equipment sales overall were down 35% in 2009, a positive achievement in markets that were down by an average of between 40% and 50%. In the face of this decline in demand for new equipment, Strongco's total revenues were down 27% year over year. Rental and product support revenues were down only 19% and 5%, respectively, as customers preferred to rent or repair existing machinery, rather than buy equipment in the uncertain economy. The largest sales declines were experienced in Alberta where the markets served by Strongco fell by an estimated 70% in 2009 compared to 2008 as the provincial economy was severely impacted by the decline in the oil sands and the natural gas market. Strongco's revenues in Ontario and Eastern Canada, while down, were down less than the market overall and were buoyed by strong product support revenues and sales of a few large cranes in Quebec towards the end of the year.

The significant decline in the overall demand for new construction equipment across the country left many dealers holding high levels of aging inventories and led to aggressive price competition in the market. In addition, most dealer inventory is purchased from equipment manufacturers in US dollars. Consequently, selling prices, and thus margins on inventory purchased when the Canadian dollar was weaker, have been under increased pressure due to the strengthening of the Canadian dollar during 2009. With lower total volumes of equipment being sold in the market, market share has been volatile from month to month and region to region. However, despite the lower sales volumes and aggressive competition for new equipment, Strongco has successfully maintained its overall market share for new equipment in 2009 while at the same time holding average selling prices and improving margins year over year.

Equipment Distribution Revenues

A breakdown of revenue within the Equipment Distribution business for the years ended December 31, 2009, 2008 and 2007 is as follows:



Year Ended December 31, 2009/08 2008/07
($ millions) 2009 2008 2007 % Var % Var
----------------------------------------------------------------------------
Eastern Canada (Atlantic and
Quebec)
-----------------------------
Equipment Sales $ 71.9 $ 79.6 $ 72.1 -10% 10%
Equipment Rentals $ 4.7 $ 5.3 $ 2.8 -12% 87%
Product Support $ 38.0 $ 35.7 $ 31.1 6% 15%
----------------------------------------------------------------------------
Total Eastern Canada $ 114.6 $ 120.6 $ 106.1 -5% 14%
----------------------------------------------------------------------------

-----------------------------
Central Canada (Ontario)
-----------------------------
Equipment Sales $ 79.9 $ 124.2 $ 104.5 -36% 19%
Equipment Rentals $ 5.9 $ 4.0 $ 3.7 51% 6%
Product Support $ 36.3 $ 38.5 $ 30.3 -6% 27%
----------------------------------------------------------------------------
Total Central Canada $ 122.2 $ 166.6 $ 138.5 -27% 20%
----------------------------------------------------------------------------

-----------------------------
Western Canada (Manitoba to
BC)
-----------------------------
Equipment Sales $ 31.9 $ 78.2 $ 75.0 -59% 4%
Equipment Rentals $ 3.7 $ 8.5 $ 3.0 -56% 184%
Product Support $ 19.4 $ 24.4 $ 25.6 -21% -4%
----------------------------------------------------------------------------
Total Western Canada $ 55.1 $ 111.1 $ 103.5 -50% 7%
----------------------------------------------------------------------------

-----------------------------
TOTAL Equipment Distribution
-----------------------------
Equipment Sales $ 183.7 $ 282.0 $ 251.6 -35% 12%
Equipment Rentals $ 14.3 $ 17.7 $ 9.5 -19% 86%
Product Support $ 93.7 $ 98.6 $ 87.0 -5% 13%
----------------------------------------------------------------------------
TOTAL Equipment Distribution $ 291.8 $ 398.3 $ 348.1 -27% 14%
----------------------------------------------------------------------------


Equipment Sales

While equipment sales in 2008 were up over 2007 in the first half, due in part to the acquisition of Champion in March 2008, the pace of equipment sales declined in the latter half of the year due to the significant weakening of the economy resulting in only a 12% increase in equipment sales total for the full year 2008 compared to 2007. With the continued economic weakness and significant decline in construction markets in Canada, equipment sales fell in all regions of the country in 2009. Compared to 2008, Strongco's overall equipment sales across Canada were down $98.3 million or 35%. In the markets that Strongco serves, total market unit volumes were down on average approximately 50% in 2009. Strongco's unit volume was down only 40% as overall market share improved slightly. In addition to lower volumes, Strongco saw a shift in sales mix away from higher priced units such as large cranes and articulated trucks. Price competition in certain product categories such as graders and excavators was significant. However, average selling prices across most product categories and overall average selling prices remained consistent year over year from 2008 to 2009.

Equipment sales were down year over year in all regions of Canada with the largest decline in Western Canada, especially in Alberta, where the markets that Strongco serves were off between 60% and 70% generally, and even higher for crane products. An analysis of equipment sales by region is as follows:

Following an increase of 10% in 2008 over 2007, equipment sales in Eastern Canada decreased by $7.7 million or 10% in 2009. While heavy equipment markets in Eastern Canada have been least affected by the recession, competition was particularly aggressive, especially compact equipment lines, resulting in Strongco giving up some market share in that product category in the region. Crane sales in Eastern Canada improved year over year in 2009 due to sales of a few large cranes in Quebec. Also, in Quebec, towards the end of 2009, there were indications of government stimulus monies affecting construction activity.

As a result of a relatively strong first half of the year and the acquisition of Champion in March of 2008, equipment sales in Central Canada increased in 2008 over 2007 by 19% or $19.7 million. However, with the decline in the market in the latter part of 2008 and 2009, equipment sales decreased by $44.3 million or 36% in 2009 over 2008. The markets for new construction equipment in which Strongco participates in Ontario were estimated to be down between 40% and 50% year over year in 2009. Strongco performed well in 2009 in the Ontario market for new general purpose construction equipment, capturing a larger share of the smaller market. After giving up some market share in the first half of 2009, Strongco regained market share in its compact lines of equipment in the third quarter but for the full year Strongco's market share in compact product was down slightly year over year in 2009. In addition, aggressive price competition for graders in 2009 has resulted in Strongco losing some market share in this product segment in Ontario. Crane sales in Ontario were down $8.3 million or 35% in 2009 compared to 2008 as a result of weak construction markets.

After several years of growth, oil prices declined sharply in the fall of 2008. Alberta has been hardest hit due to the weakness in the price for oil and natural gas which has led to a significant decline in the oil sands and in construction activity in the province as a whole. Strongco's product lines in Alberta serve the oil sector, primarily in the site preparation phase, as well as natural gas production, both of which have been significantly impacted by weakness in the energy sector. In addition, Strongco serves construction and infrastructure segments in the region, which have also been severely impacted by the weak economic conditions. The market for heavy construction equipment in Alberta was estimated to be down by approximately 60% year over year in 2009 and the market for cranes by more than 75%. With a strong economy in the first half of 2008 and benefiting from a restructured sales force, Strongco's sales in 2008 increased by 4% over 2007 to $78.2 million. However, as a result of the sharp decline in the market, Strongco's equipment sales in Western Canada were down $46.3 million or 59% year over year in 2009. Despite the depressed and extremely competitive market, Strongco maintained its market share in general purpose equipment (GPPE) and improved its market share position in road equipment, which bodes well for when the Alberta economy recovers.

Equipment Rentals

It is common industry practice for certain customers to rent to meet their heavy equipment needs rather than commit to a purchase. In some cases this is in response to the seasonal demands of the customer, as in the case of municipal snow removal contracts, or to meet the customers' needs for a specific project. In other cases, certain customers prefer to enter into short-term rental contracts with an option to purchase after a period of time or hours of machine usage. This latter type of contract is referred to as a rental purchase option contract ("RPO"). Under an RPO, a portion of the rental revenue is applied toward the purchase price of the equipment should the customer exercise the purchase option. This provides flexibility to the customer and results in a more affordable purchase price after the rental period. Normally, the significant majority of RPO's are converted to sales within a six month period and this market practice is a method of building sales revenues and the field population of equipment. With the weak and uncertain economy, a smaller proportion of RPO's have converted and customers have been more inclined to rent equipment rather than purchase which has resulted in rental revenue being a higher proportion of total revenues in 2009.

Strongco's rental revenues increased substantially in 2008 over 2007 from $9.5 million to $17.7 million due in large part to the acquisition of Champion Road Machinery in March 2008, which had a large seasonal rental component of graders for snow removal, as well as a continuation of a robust economy in the first half of 2008. With the economic decline in the latter part of 2008 and into 2009, rental revenues declined but to a lesser extent than equipment sales as, in the uncertain economy, many customers preferred to rent equipment rather than commit to purchase. Rental revenues in 2009 overall were $14.3 million, which was down 19% from 2008. Central Canada posted a 51% increase in rental revenues in 2009 due mainly to the full year impact of acquisition of the Champion business. However, the increase in Ontario rentals was more than offset by a large decrease in rental revenues in Alberta, which has traditionally been a strong rental market, and in Eastern Canada due to the weak economy.

Product Support

Sales of new equipment usually carry the warranty from the manufacturer for a defined term. Product support revenues from the sales of parts and service are therefore not impacted until the warranty period expires. Warranty periods vary from manufacturer to manufacturer and depending on customer purchases of extended warranties. Product support activities (sales of parts and service outside of warranty), therefore, tend to increase at a slower rate and lag equipment sales by three to five years. The increasing equipment population in the field leads to increased product support activities over time.

Product support revenues increased in 2008 from 2007 by $11.6 million or 13% due to a continuation of a strong economy and an increasing population of equipment in the field outside of warranty. The acquisition of Champion in March 2008 also contributed to the year over year increase. As the economy weakened towards the end of 2008 and into 2009 and activity in the construction sector declined, the volume of product support business also declined. However, the reduction in product support was less than decline in equipment sales as in the uncertain environment, customers chose to repair and refurbish existing machines, rather than buy new equipment.

Despite large declines in heavy equipment markets overall, Strongco's product support revenues were down only $4.9 million or 5% in total across the country in 2009 compared to 2008. Product support activities were mixed on a regional basis. In Alberta, where significant amounts of equipment in customers' hands were sitting idle and not being repaired, product support revenues were down 21% year over year compared with 2008. In Ontario, parts and service sales declined only 6% in 2009 and in Eastern Canada, despite softer equipment markets, parts and service sales were up 6% over 2008.

Gross Margin



Year Ended December 31,
2009 2008 2007
--------------------------------------------------------
$ $ $
Gross Margin millions GM% millions GM% millions GM%
----------------------------------------------------------------------------
Equipment Sales $ 19.0 10.3% $ 21.7 7.7% $ 21.8 8.7%
Equipment Rentals $ 2.4 16.8% $ 2.6 14.7% $ 1.3 13.7%
Product Support $ 38.5 41.1% $ 41.5 42.1% $ 36.7 42.2%
----------------------------------------------------------------------------
Total Gross Margin $ 59.9 20.5% $ 65.8 16.5% $ 59.8 17.2%
----------------------------------------------------------------------------


2009/2008 2008/2007
---------------------------------------
$ $
Gross Margin Variance % Var Variance % Var
-----------------------------------------------------------
Equipment Sales (2.7) -11% (0.1) 0%
Equipment Rentals (0.2) -8% 1.3 100%
Product Support (3.0) -8% 4.8 13%
-----------------------------------------------------------
Total Gross Margin $ (5.9) -9% $ 6.0 10%
-----------------------------------------------------------


As a result of the higher revenues in 2008 compared to 2007, Strongco's gross margin increased by $6.0 million, or 10% year over year. As a percentage of revenue, gross margin in 2008 decreased slightly to 16.5% from 17.2% in 2007 due to a lower margin on equipment sales principally as a result of unusual inventory reserves of $2.6 million primarily related forestry equipment recorded in the latter half of 2008.

With lower revenues in 2009, Strongco's gross margin declined by $5.9 million or 9%, to $59.9 million. However, as a percentage of revenue, gross margin improved in 2009 to 20.5% due primarily to the higher proportion of product support revenue in 2009. In addition, the gross margin percentage in 2008 was negatively impacted by the unusual inventory reserves of $2.6 million primarily related to forestry equipment recorded in the latter half of 2008. Equipment sales typically generate a lower gross margin percentage than rental revenues and product support activities. With a weak and uncertain economy in 2009, many customers preferred to rent equipment to meet their equipment needs or to repair/refurbish existing equipment which resulted in rentals and sales of parts and service being a higher proportion of total revenues and contributed to an improvement in Strongco's overall gross margin percentage in 2009. Equipment sales accounted for approximately 63% of total revenues in 2009 compared to 71% in 2008, while product support revenues represented 32% of total revenues compared to only 25% in 2008 and rentals were 5% of total revenues in 2009 compared to 4% in 2008.

The gross margin percentage on equipment sales was 10.3% in 2009, up from 7.7% in 2008 due in part to a slightly higher proportion of used equipment sales and higher margins on sales on new equipment in 2009. Sales of used equipment and equipment that has come off rental typically generate higher margins than sales of new equipment and Strongco had a slightly higher proportion of used equipment sales and sales of equipment that had come off rental in 2009, which contributed to an improved gross margin percentage on equipment sales overall. In addition, the gross margin percentage in 2008 was negatively impacted by the unusual inventory reserves of $2.6 million primarily related to forestry equipment recorded in latter half of 2008. This improvement in gross margin percentage was achieved despite aggressive price competition for new equipment and sales of certain pieces of older forestry equipment at very low margins. These forestry units had been written down to net realizable value due in part to the weakness in the forestry sector overall and the termination of the TigerCat distribution agreement at the end of 2007, and, as anticipated, the sale of these older units generated very low margins.

Gross margin percentage on rentals was slightly higher in 2009 at 16.8% compared 14.7% in 2008 due primarily to the mix of product rented in 2009.

Gross margin percentage on product support activities was 41.1% in 2009, which was down slightly from 42.1% in 2008 and 42.2% in 2007 due to a higher proportion of parts sales which command lower margins compared to service revenue and price competition for parts.

Administrative, Distribution and Selling Expense

As a result of incremental costs from the acquisition of Champion and the opening of five new expanded branch facilities in 2008, Strongco's administrative, distribution and selling expenses increased from $52.6 million in 2007 to $61.1 million in 2008. However, through restructuring and cost rationalization, improved cost recovery and tighter cost controls, Strongco has been successful in reducing its operating expenses in 2009. Administrative, distribution and selling expenses in 2009 were $55.8 million, an improvement of $5.3 million, or 9%, over 2008.

As a consequence of the weak economy, Strongco incurred increased costs in certain areas in 2009. Bad debts related to customer bankruptcies and other delinquent payments increased in 2009. The problem was greatest in Alberta, where the economy was the most depressed. The write-off of bad debts and increased provision for potentially uncollectible accounts amounted to $0.7 million in 2009 compared to $0.3 million in 2008. In addition, as a result of the lower volume of service work, idle time and non-chargeable shop labour was higher in 2009 by $0.2 million compared to 2008. In response to the difficult economic conditions in 2009, Strongco was diligent in managing its equipment and parts inventory and reducing purchases of new inventory. As a result, the Company incurred increased freight to move equipment inventory between branches and regions in 2009 compared to 2008. This was offset by lower freight on equipment sales due to the lower volumes.

In response to the weak economic conditions, Strongco continued to reengineer and refine its cost structure to reduce costs in 2009 which resulted in substantial savings far in excess of these additional costs. The consolidation of three branches in Northern Ontario and another three in Southern Ontario in 2009 were part of that plan and resulted in savings in operating costs, including a reduction in headcount, of $0.4 million in 2009 with annualized savings estimated at $1.2 million. The closure and relocation costs associated with these branch consolidations amounted to $0.6 million. In addition, headcount was reduced across the Company by a further 74 full time employees or 12% of the workforce in 2009. This resulted in savings in 2009 of $2.6 million and will result in estimated annual savings of $3.5 million going forward. The majority of the headcount reductions were managed through attrition and by closely managing the hiring of replacement employees. As a result, the costs for severance and other termination costs for these headcount reductions amounted to only $0.2 million. Strongco will continue to closely manage its costs and look for additional opportunities to refine its cost structure.

Other Income

Other income and expense is primarily comprised of gains or losses on disposition of fixed assets, foreign exchange gains or losses, service fees received by Strongco as compensation for sales of new equipment by other third parties into the regions where Strongco has distribution rights for that equipment and commissions received from third party financing companies for customer purchase financing Strongco places with such finance companies. Other income in 2009 was $1.8 million compared to $0.7 million in 2008 and $2.6 million in 2007. In 2008, Strongco incurred a net foreign exchange loss of $1.5 million as a result of the sharp decline in the value of the Canadian dollar in the fourth quarter of the year. In 2009, Strongco incurred a net foreign exchange gain of $0.3 million due to the strengthening of the Canadian dollar during the year. Commissions received from finance companies were less in 2009 than in 2008 and 2007 as a result of the lower sales volumes in 2009.

Interest Expense

Strongco's interest expense was $4.4 million in 2009 compared to $4.1 million in 2008. The Fund's interest bearing debt comprises bank indebtedness and interest bearing equipment notes. Strongco typically finances equipment inventory under lines of credit available from various non-bank finance companies. Most equipment financing has interest free periods for up to seven months from the date of financing after which the equipment notes become interest bearing. The rate of interest on the Fund's bank indebtedness and interest bearing equipment notes varies with Canadian chartered bank prime rate ("prime rate") and Canadian Bankers Acceptances Rates ("BA rates"). As a result of the weak economy and the credit crisis in financial markets, the Fund's equipment note lenders experienced a decrease in the availability of and an increase in the cost of credit. As a result, these equipment finance companies increased the premium over prime rate and BA rates on the Fund's equipment notes in 2009. However, this was largely offset by lower prime rates and BA rates in 2009. The net result was a slightly higher average interest rate charged on the Fund's equipment notes in 2009 compared with 2008. In addition, while bank debt levels were reduced during 2009 from a peak of $18.0 in August 2008, the average balance outstanding under the Fund's bank credit facility during 2009 was consistent with 2008. However, the average balance of interest bearing equipment notes outstanding in 2009 was slightly higher in 2009 than in 2008. This resulted in a slightly higher average level of interest bearing debt overall in 2009 (see discussion under "Financial Condition and Liquidity"), which contributed to the higher interest expense in the year.

Earnings from Continuing Operations and Net Income (Loss)

The earnings from continuing operations after tax for 2009 were $0.7 million ($0.07 per unit), which compared to a loss from continuing operations after tax of $0.4 million (loss of $0.04 per unit) in 2008 and earnings of $6.0 million ($0.57 per unit) in 2007. This improvement in profits in 2009 over 2008 is a substantial achievement in light of the significant decline in revenues year over year.

After the loss from discontinued operations, net earnings in 2009 were at a breakeven compared to a net loss of $0.4 million (loss of $0.04 per unit) and net earnings of $8.3 million ($0.79 per units) in 2007.

Following enactment of changes to the taxation of income trusts in 2007 and in accordance with the recommendations of the Canadian Institute of Chartered Accountants contained in Handbook section 3465, the Fund has estimated its temporary differences, determined the periods over which these differences are expected to reverse and applied the current substantively enacted tax rates that will apply in the periods those temporary differences are expected to reverse. The Fund has expensed $0.8 million for these temporary differences in 2009 compared to an expense of $0.3 million in 2008. The Fund is taxable to the extent its taxable income exceeds distributions until taxation years ending in 2011. Beginning with the 2011 taxation year, distributions will be taxed at the Specified Investment Flow-Through Entity ("SIFT") rate.

EBITDA From Continuing Operations

EBITDA (see note 1 below) from continuing operations in 2009 was $18.0 million which compares to $20.5 million in 2008 and $19.5 in 2007. EBITDA was calculated as follows:



Year Ended December 31,
2009 2008 2007 2009/2008 2008/2007
-------------------------------------------------------------
$ millions $ millions $ millions $ Variance $ Variance
----------------------------------------------------------------------------
Earnings from
continuing
operations $ 0.7 $ (0.4) $ 6.0 $ 1.1 $ (6.4)
Add Back:
Interest $ 4.4 $ 4.1 $ 2.7 $ 0.3 $ 1.4
Income taxes $ 0.8 $ 0.3 $ 1.2 $ 0.5 $ (0.9)
Amortization
of capital
assets $ 0.9 $ 0.8 $ 2.0 $ 0.1 $ (1.2)
Amortization
of intangible
assets $ - $ 0.5 $ - $ (0.5) $ 0.5
Amortization
of equipment
inventory on
rent $ 11.2 $ 14.3 $ 7.6 $ (3.1) $ 6.7
Goodwill
impairment $ - $ 0.8 $ - $ (0.8) $ 0.8
-------------------------------------------------------------
EBITDA (note 1)
- from
continuing
operations $ 18.0 $ 20.5 $ 19.5 $ (2.5) $ 1.0
-------------------------------------------------------------


Note 1 - "EBITDA" refers to earnings before interest, income taxes, amortization of capital assets, amortization of intangible assets, amortization of equipment inventory on rent, and goodwill impairment. EBITDA is a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not an earnings measure recognized by GAAP, does not have standardized meanings prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers. The Fund's management believes that EBITDA is an important supplemental measure in evaluating the Fund's performance and in determining whether to invest in Units. Readers of this information are cautioned that EBITDA should not be construed as an alternative to net income or loss determined in accordance with GAAP as indicators of the Fund's performance or to cash flows from operating, investing and financing activities as measures of the Fund's liquidity and cash flows. The Fund's method of calculating EBITDA may differ from the methods used by other issuers and, accordingly, the Fund's EBITDA may not be comparable to similar measures presented by other issuers.

Discontinued Operations

In May 2009, Strongco sold the net assets of its Engineered Systems business allowing Strongco to focus its resources and management efforts on growing its core Equipment Distribution business. The initial proceeds on sale of $6.5 million were settled in cash with $0.5 million deposited in trust with lawyers by the purchaser to be released in November 2009, subject to any claims under the standard indemnification provisions contained in the asset purchase agreement. During the third quarter of 2009, certain claims under the indemnification provisions totaling $0.2 million were settled out of the funds held in trust. These claims were reflected as a reduction in the proceeds on sale resulting in net proceeds of $6.3 million and a total loss on sale of $0.6 million. In November 2009, the remaining funds in the trust of $0.3 million were released to Strongco.

In accordance with the CICA Handbook section 3475 - Disposal of Long-Lived Assets and Discontinued Operations, the results of operations of the Engineered Systems business, together with the loss on sale have been reported as discontinued operations in 2009, and prior years comparative figures have been reclassified to conform to disclosure in the current period. The assets and liabilities of the Engineered Systems business in prior periods have also been reclassified as assets held for sale.

The results from discontinued operations for 2009, 2008 and 2007 were as follows:



Year Ended December 31,
($ thousands, except per unit amounts) 2009 2008 2007
----------------------------------------------------------------------------
Revenues $ 8,982 $ 29,032 $ 46,031
Cost of sales 7,435 22,874 36,969
----------------------------------------------------------------------------
Gross Margin 1,547 6,158 9,062

Administration, distribution and
selling expenses 2,484 6,008 6,075
Other (income)/expense 110 (43) (116)
----------------------------------------------------------------------------
Operating income (loss) $ (1,047) $ 193 $ 3,103
Interest expense 60 239 356
Loss on sale of business 556
----------------------------------------------------------------------------
Earnings (loss) before income taxes (1,663) (46) 2,747
Provision for income taxes (947) (5) -
----------------------------------------------------------------------------
Earnings (loss) from discontinued
operations after tax $ (716) $ (41) $ 2,747
----------------------------------------------------------------------------
Basic and diluted earnings (loss) per
unit from discontinued operations $ (0.07) $ (0.00) $ 0.26
----------------------------------------------------------------------------


Cash Flow, Financial Resources and Liquidity

Cash Flow Provide By (Used In) Operating Activities:

During 2009, Strongco used $3.2 million of cash in operating activities of continuing operations. Earnings from continuing operations in 2009, before changes in working capital, provided cash of $12.0 million. However, this was more than offset by $15.2 million of cash used to increase net working capital. During 2008, $7.9 million of cash was generated from operating activities of continuing operations. Earnings of continuing operations in 2008, before working capital changes, provided $16.8 million of cash. In addition, $8.9 million of cash was used in increasing in net working capital in 2008. Strongco Engineered Systems, which was sold in May 2009, used cash of $0.4 million in 2009. This discontinued operation used cash of $0.1 million in 2008.

The components of the cash used in and provided operating activities were as follows:



Year Ended December
31,
($ millions) 2009 2008
----------------------------------------------------------------------------
Earnings (loss) from continuing operations 0.7 (0.4)
Non-cash items 11.3 17.2
----------------------------------------------------------------------------
12.0 16.8
Changes in non-cash working capital balances (15.2) (8.9)
----------------------------------------------------------------------------
Cash provided by (used in) operating activities of
continuing operations (3.2) 7.9
Cash (used in) operating activities of discontinued
operations (0.4) (0.1)
----------------------------------------------------------------------------
Cash provided by (used in) operating activities (3.6) 7.8
----------------------------------------------------------------------------


Non-cash items in 2009 includes amortization of equipment inventory on rent of $11.2 million, amortization of capital assets of $0.9 million and other non-cash items of ($0.8) million. Non-cash items in 2008 includes amortization of equipment inventory on rent of $14.3 million, amortization of capital assets of $0.9 million, amortization of intangible assets of $0.5 million, goodwill impairment of $0.8 million and other non-cash items of $0.7 million. Lower volumes of equipment rentals in 2009 resulted in the lower amortization of equipment inventory on rent.

As a consequence of the weak markets for heavy equipment in 2009, Strongco's revenue in the fourth quarter of 2009 was lower than in the fourth quarter of 2008 which resulted in a lower accounts receivable balance at December 31, 2009 than existed a year earlier. Account Receivable at December 31, 2009, were $27.1 million down $13.1 million from $40.2 million at December 31, 2008. The average age of receivables outstanding at the end of the year was unchanged at approximately 42 days.

In response to the weak heavy equipment markets and lower sales, Strongco management was diligent in managing inventory and significantly curtailed the amount of equipment and parts inventory purchased in 2009. As a result, inventory at the end of 2009 was $19.6 million lower than a year earlier.

In addition to reducing inventory purchases, Strongco's operating expenses were significantly reduced through restructuring activities and other cost control measures in 2009. This resulted in reduced spending levels in 2009 which in turn resulted in a lower balance of accounts payable at the end of 2009 compared to 2008. Accounts payable and accrued liabilities at December 31, 2009 were $20.8 million, which was down $21.3 million from $42.1 million at December 31, 2008.

With reduced purchases of equipment inventory and continued focus on reducing debt, Strongco's equipment notes were reduced on 2009. The balance of equipment notes outstanding at December 31, 2009 was $104.8 million, which was down $14.1 million from $118.9 million at December 31, 2008.

Components of non-cash working capital at December 31, 2009 and 2008 were as follows:



Year Ended December 31,
($ millions) 2009 2008 Change
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Accounts receivable 27.1 40.2 (13.1)
----------------------------------------------------------------------------

Equipment inventory 124.5 137.8 (13.3)
Parts inventory 17.7 20.4 (2.7)
Service work in process 2.3 5.9 (3.6)
----------------------------------------------------------------------------
Total inventory 144.5 164.1 (19.6)
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Accounts payable 20.9 42.1 (21.2)
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Equipment notes payable 104.8 118.9 (14.1)
----------------------------------------------------------------------------


Cash Provided By (Used In) Investing Activities:

During 2009, Strongco restricted spending for fixed assets and other investing activities in response to the weak construction markets and lower revenues in the year. Net cash used in investing activities of continuing operations amounted to $0.2 million in 2009. Capital expenditures in 2009 amounted to $0.7 million and related to the upgrade of facilities and purchase of miscellaneous shop equipment. The use of cash for the purchase of capital assets was offset by the $0.9 million in cash generated on the sale of the Fund's branch in Timmins, Ontario as part of the consolidation of three Northern Ontario Branches provided. This compared to capital expenditures of $1.5 million in 2008 related mainly to the five new leased branch facilities opened in 2008 as well as miscellaneous shop equipment in other branches. In addition, the acquisition of Champion in 2008 was settled partially in cash from bank borrowing of $7.2 million plus additional equipment notes of $15.7 million and a promissory note of $2.4 million.

Cash flow from investing activities of discontinued operations includes the net proceeds received on the sale of Strongco Engineered Systems of $6.2 million.

The components of the cash used in operating activities were as follows:



Year Ended December 31,
($ millions) 2009 2008
----------------------------------------------------------------------------

Purchase of capital assets (0.7) (1.5)
Acquisition 0.0 (7.2)
Proceeds from disposition of capital assets 0.9 0.0
----------------------------------------------------------------------------
Cash provided by (used in) investing activities of
continuing operations 0.2 (8.6)

Cash provided by (used in) investing activities of
discontinued operations 6.2 (0.7)
----------------------------------------------------------------------------
Cash provided by (used in) investing activities 6.4 (9.3)
----------------------------------------------------------------------------


Cash Provided By (Used In) Financing Activities:

During 2009, Strongco reduced its bank debt by $2.8 million primarily as a result of the $6.2 million of cash received on the sale of Strongco Engineered Systems and $0.9 million of proceeds on the sale of the Timmins facility offset by the $3.6 million of cash used in operating activities and $0.7 million of capital expenditures in the year. Bank debt at December 31, 2009 was $10.0 million compared to $12.8 million at December 31, 2008. No distributions were paid in 2009 following suspension of distributions in August 2008 (see discussion under "Distributions" following).

Financing activities generated a net $1.5 million of cash in 2008. In 2008, borrowing under the Company's bank facility increased by $7.1 million. Bank debt at December 31, 2008 was $12.8 million compared to $5.7 million at December 31, 2007. The Fund also made cash distributions of $5.6 million in 2008. In summary, the $7.1 million of cash provided from the increased borrowing on the bank line, plus the $7.8 million of cash provided from operations in 2008, was principally used to partially fund the acquisition of Champion in the amount of $7.2 million, pay Unitholder distributions of $5.6 million, fund capital expenditures of $1.5 million and fund investing activities of Strongco Engineered Systems.



($ millions) 2009 2008
----------------------------------------------------------------------------

Increase (decrease) in bank indebtedness (2.8) 7.1
Unitholder distributions 0.0 (5.6)
----------------------------------------------------------------------------
Cash (used in) provided by financing activities (2.8) 1.5
----------------------------------------------------------------------------


Bank Credit Facilities

The Fund has a credit facility with a Canadian Chartered Bank which provides a $20 million 364-Day committed operating line of credit which is renewable annually. As at December 31, 2009, there was $7.6 million drawn on the credit line (2008 - $11.0 million). Borrowings under the line of credit are limited by a standard borrowing base calculation, based on accounts receivable and inventory, typical of such lines of credit. As collateral the Fund has provided a $50 million debenture and a security interest in accounts receivable, inventories (subordinated to the collateral provided to the equipment inventory lenders), capital assets (subordinated to collateral provided to lessors), real estate and on intangible and other assets. Interest rates on the operating line range between bank prime rate plus 0.50% and bank prime rate plus 1.50% and between the one month Canadian Bankers' Acceptance Rates ("BA rates") plus 1.75% and BA rates plus 2.75%, depending on the Fund's ratio of debt to tangible net worth ("TNW"). Under its operating facility the Fund is able to issue letters of credit up to a maximum of $5 million. Outstanding letters of credit reduce the Fund's availability under its operating line of credit. For certain customers, Strongco issues letters of credit as a guarantee of Strongco's performance on the sale of equipment to the customer. As at December 31, 2009, there were $0.1 million (2008 - $0.2 million) of outstanding letters of credit.

In addition to its operating line of credit, the Fund has a $10 million line for foreign exchange forward contracts as part of its bank credit facilities ("FX Line") available to hedge foreign currency exposure. As at December 31, 2009, the Fund had outstanding foreign exchange forward contracts under this facility totaling US$2.4 million at an average exchange rate of $1.07 Canadian for each US$1.00 with maturities between January 2010 and June 2010. This compared to forward contracts of US$2.4 million at an average exchange rate of $1.22 Canadian for each US$1.00 outstanding at December 31, 2008.

The Fund's bank credit facility contains financial covenants that require the Fund to maintain certain financial ratios and meet certain financial thresholds. In particular, the facility contains covenants that require the Fund to maintain a minimum ratio of total current assets to current liabilities ("Current Ratio covenant") of 1.1 : 1, a minimum tangible net worth ("TNW covenant") of $54 million, a maximum ratio of total debt to tangible net worth ("Debt to TNW Ratio covenant") of 3.5 : 1 and a minimum ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") minus capital expenditures to total interest ("Debt Service Coverage Ratio covenant") of 1.2 : 1. For the purposes of calculating covenants under the credit facility, debt is defined as total liabilities less future income tax amounts and subordinated debt. The Debt Service Coverage Ratio is measured at the end of each quarter on a trailing twelve month basis. Other covenants are measured as at the end of each quarter.

On April 15, 2009, the bank renewed the credit facility and the $20 million operating line of credit, and increased the foreign exchange line ("FX Line") from $5 million to $10 million. In conjunction with this renewal, the bank amended the covenants with effect as of March 31, 2009, as follows:



1. The Debt to TNW Ratio covenant was increased to 3.5 : 1 from 3.0 : 1;
2. The Debt Service Coverage Ratio covenant was reduced from 1.3 : 1 to 1.0
: 1, for the periods ending March 31, 2009 and June 30, 2009, increasing
to 1.1 : 1 for the period ending September 30, 2009, increasing to 1.2 :
1 for the period ending December 31, 2009 and increasing to 1.3 : 1 for
the year 2010; and
3. A new one-time covenant requiring the Fund's equipment inventory to be
no more than $135 million as at December 31, 2009 was added.


All other terms and conditions of the credit facility remained unchanged.

The Fund was in compliance with all covenants under its bank credit facility as at December 31, 2009.

In 2008 and in the first quarter of 2009, the Fund was not in compliance with certain of the financial covenants under its bank credit facility and as a result, through cross-default provisions under its equipment finance facilities, the Fund was also in default of its equipment notes. The Fund obtained waivers for each of these defaults and negotiated amendments to its bank credit facility. Subsequent to March 31, 2009, the Fund has remained in compliance with all covenants under its bank credit facilities and equipment notes.

In addition to the covenants, the bank's prior written consent is required for the Fund to declare or pay any cash distributions on its units, repurchase or redeem any of its units or reduce its capital in any way whatsoever, or repay any Unitholders' advance.

Equipment Notes

In addition to its bank operating line of credit, the Fund has lines of credit available totaling $150 million (2008 - $140 million) from various non-bank equipment lenders which are used to finance equipment inventory. During 2009, the Fund entered into new financing arrangement with a new third party lender to provide wholesale financing for certain lines of equipment inventory to a maximum of $10 million. At December 31, 2009, there was $104.8 million borrowed on the equipment finance lines compared to $118.9 million borrowed at December 31, 2008.

Typically, these equipment notes are interest free for periods up to seven months from the date of financing after which they bear interest at rates ranging from 4.25% to 5.85% over the one month BA rate and 4.0% to 6.0% over the prime rate of a Canadian chartered bank. As collateral for these equipment notes, the Fund has provided liens on specific inventories and accounts receivable. Equipment notes are payable in full when the financed equipment is sold. If the equipment is not sold within twelve months from the date of financing, monthly principal repayments equal to 3% of the original principal balance of the note will commence over the next twelve months, and the remaining balance is due in full after twenty four months. All of the Fund's equipment notes facilities are renewable annually.

During 2009, in response to the general lack of credit availability and higher cost of credit currently in the market, certain of the Fund's equipment note lenders increased the rates on its credit lines. These rate increases ranged from 0.5% to 5.75%. This increase in interest rates did not have a material impact on the Fund's earnings in 2009.

Certain of the Fund's equipment note credit agreements contain restrictive financial covenants, including requiring the Fund to remain in compliance with the financial covenants under all of its other lending agreements ("cross default provisions"). The Fund was in compliance with all financial covenants under these equipment notes at December 31, 2009.

The balance outstanding under the Fund's debt facilities at December 31, 2009 was as follows:



Debt Facilities
As at December 31 ($ millions) 2009 2008
-------------------------------------------------------------- -------------
Bank indebtedness (including outstanding cheques) $ 10.0 $ 12.8
Equipment notes payable - non interest bearing $ 28.7 $ 35.6
Equipment notes payable - interest bearing $ 76.2 $ 83.3
Other notes payable $ 2.3 $ 2.3
-------------------------------------------------------------- -------------
$ 117.2 $ 134.0
-------------------------------------------------------------- -------------


As at December 31, 2009 there was $9.9 million of unused credit available under the bank credit line. While availability under the bank line fluctuates daily depending on the amount of cash received and cheques and other disbursements clearing the bank, availability generally ranged between $8 million and $15 million throughout 2009. The Fund also had availability under its equipment finance facilities of $45.2 million at December 31, 2009.

Management expects the Canadian economy will continue to strengthen throughout 2010 and with government stimulus spending for infrastructure, construction markets, in general, will improve, which in turn will lead to increased spending for heavy construction equipment (see Outlook section). As a result, management anticipates Strongco's cash flows from operations, before changes in working capital, will improve throughout 2010. While management anticipates increased purchases of equipment to support the expected increased level of activity in construction markets, inventory levels will continue to be managed closely relative to sales activity. Management does not expect significant growth in working capital as any increased investment in equipment inventory will be financed through the availability under the Fund's equipment finance facilities. Management does not feel that materially increased investment in capital assets will be required to support the anticipated level of growth.

With the level of funds available under the Company's bank credit line, the current availability under the equipment finance facilities and anticipated improvement in cash flows from operations, management believes the Fund will have adequate financial resources to fund its operations and make the necessary investment in equipment inventory and fixed assets to support its operations in the future.

FINANCIAL RESULTS - FOURTH QUARTER

Consolidated Results of Operations for the Three Months Ended December 31





($ thousands, except Three month ending December 31,
per unit amounts) 2009 2008 2007
------------------------------------------------------------------
Revenues $ 67,494 $ 103,679 $ 96,076
Cost of sales 54,405 87,663 81,049
------------------------------------------------------------------
Gross Margin 13,089 16,016 15,027
Admin, distribution
and selling expenses 14,374 15,801 13,845
Amortization of
intangible assets 327
Goodwill impairment 848
Other income (590) 344 (580)
------------------------------------------------------------------
Operating income (695) (1,304) 1,762
Interest expense 1,135 1,059 747
------------------------------------------------------------------
Earnings (loss) from
continuing operations
before income taxes (1,830) (2,363) 1,015
Provision for income
taxes 270 (47) (637)
------------------------------------------------------------------
Earnings (loss) from
continuing operations (2,100) (2,316) 1,652
Earnings (loss) from
discontinued
operations - (262) 1,069
------------------------------------------------------------------
Net income (loss) and
comprehensive income
(loss) (2,100) (2,578) 2,721
------------------------------------------------------------------

Basic and diluted
earnings (loss) per
unit (0.20) (0.25) 0.26
Number of units issued 10,508,719 10,508,719 10,508,719
------------------------------------------------------------------

Key financial
measures:
Gross margin as a
percentage of
revenues 19.4% 15.4% 15.6%
Admin, distribution
and selling expenses
as percentage of
revenues 21.3% 15.2% 14.4%
Operating income as a
percentage of
revenues -1.0% -1.3% 1.8%
EBITDA (note1) $ 2,867 $ 4,302 $ 5,727
------------------------------------------------------------------

2009/2008 2008/2007
------------------------------------------------------
($ thousands, except
per unit amounts) $ Change % Change $ Change % Change
----------------------------------------------------------------------------
Revenues $ (36,185) -34.9% $ 7,603 7.9%
Cost of sales (33,258) -37.9% 6,614 8.2%
----------------------------------------------------------------------------
Gross Margin (2,927) -18.3% 988 6.6%
Admin, distribution
and selling expenses (1,427) -9.0% 1,956 14.1%
Amortization of
intangible assets (327) - 327 -
Goodwill impairment (848) - 848 -
Other income (934) -271.5% 924 -159.3%
----------------------------------------------------------------------------
Operating income 609 -46.7% (3,067) -174.1%
Interest expense 76 7.2% 312 41.8%
----------------------------------------------------------------------------
Earnings (loss) from
continuing operations
before income taxes 533 22.6% (3,379) -333.0%
Provision for income
taxes 317 -674.5% 590 -92.6%
----------------------------------------------------------------------------
Earnings (loss) from
continuing operations 216 9.3% (3,969) -240.3%
Earnings (loss) from
discontinued
operations 262 100.0% (1,331) -124.5%
----------------------------------------------------------------------------
Net income (loss) and
comprehensive income
(loss) 478 18.5% (5,300) -194.8%
----------------------------------------------------------------------------

Basic and diluted
earnings (loss) per
unit 0.05 (0.50)
Number of units issued
----------------------------------------------------------------------------

Key financial
measures:
Gross margin as a
percentage of
revenues
Admin, distribution
and selling expenses
as percentage of
revenues
Operating income as a
percentage of
revenues
EBITDA (note1)
----------------------------------------------------------------------------


Note 1 - "EBITDA" refers to earnings before interest, income taxes, amortization of capital assets, amortization of intangible assets, amortization of equipment inventory on rent, and goodwill impairment. EBITDA is presented as a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not a measure of financial performance under Canadian Generally Accepted Accounting Principles ("GAAP") and therefore has no standardized meaning prescribed by GAAP and may not be comparable to similar terms and measures presented by other similar issuers. EBITDA is intended to provide additional information on the Fund's performance and should not be considered in isolation, seen as a measure of cash flow from operations or as a substitute for measures of performance prepared in accordance with GAAP.

Equipment Distribution Revenues

Construction activity in North America remained very slow in the fourth quarter of 2009 resulting in continued weak markets for heavy equipment. The markets for new heavy equipment in Canada in which Strongco operates were estimated to be down on average between 40% and 45% in the fourth quarter of 2009 compared to the same period in 2008 with the softest markets in Alberta as a result of significantly reduced activity in the oil sands and weak natural gas markets. Funding from government announced stimulus programs for infrastructure improvements has been slow to be allocated to specific projects. As a result, customers continued to delay or reduce equipment purchases until their business picks up or there is a clear sign of increased infrastructure spending and approved projects. Many customers have chosen instead to rent equipment or repair and refurbish their existing equipment in this uncertain economic environment. Given the significant reduction in construction activity in Alberta, many customers continue to let their equipment sit idle and only perform repairs or maintenance when they had work and it was absolutely necessary.

Strongco's results in the fourth quarter of 2009 were reflective of this current economic reality with significantly reduced equipment sales while product support revenues and rental revenue were down a lesser amount. Overall, Strongco's equipment sales were down 42% year over year in the fourth quarter, while total revenues were down 35%. The biggest sales declines continued to be in Alberta where the economy has been severely impacted by the decline in the oil sands and the natural gas market. Strongco's revenues in Ontario and Eastern Canada, while down, were down less than the market overall and have been buoyed by strong product support revenues and rentals. In the fourth quarter of 2009, there were indications that government stimulus monies was beginning to reach construction markets.

The significant decline in the overall demand for new construction equipment across the country left many dealers holding high levels of aging inventories and led to aggressive price competition in the market. In addition, with lower total volumes of equipment being sold in the market, market share has been volatile from month to month and region to region. However, despite the decline in sales and aggressive competition for new equipment, Strongco successfully maintained its overall market share for new equipment in the fourth quarter of 2009 while at the same time improving margins year over year in the quarter.

A breakdown of revenue within the Equipment Distribution business for the three months ended December 31, 2009, 2008 and 2007 were as follows:



Equipment Distribution
Revenues

Three Months Ended December
31, 2009/08 2008/07
($ millions) 2009 2008 2007 % Var % Var
----------------------------------------------------------------------------
Eastern Canada (Atlantic and
Quebec)
-----------------------------
Equipment Sales $ 18.8 $ 22.2 $ 20.2 -15% 10%
Equipment Rentals $ 1.5 $ 1.6 $ 1.2 -6% 33%
Product Support $ 8.7 $ 8.9 $ 7.2 -2% 24%
----------------------------------------------------------------------------
Total Eastern Canada $ 29.0 $ 32.7 $ 28.6 -11% 14%
----------------------------------------------------------------------------

-----------------------------
Central Canada (Ontario)
-----------------------------
Equipment Sales $ 17.4 $ 32.6 $ 31.4 -47% 4%
Equipment Rentals $ 1.7 $ 1.4 $ 0.9 21% 56%
Product Support $ 8.1 $ 10.0 $ 7.3 -19% 37%
----------------------------------------------------------------------------
Total Central Canada $ 27.2 $ 44.0 $ 39.6 -38% 11%
----------------------------------------------------------------------------

-----------------------------
Western Canada (Manitoba to
BC)
-----------------------------
Equipment Sales $ 6.1 $ 18.0 $ 20.4 -66% -12%
Equipment Rentals $ 1.0 $ 2.5 $ 1.1 -60% 127%
Product Support $ 4.2 $ 6.5 $ 6.3 -35% 3%
----------------------------------------------------------------------------
Total Western Canada $ 11.3 $ 27.0 $ 27.8 -58% -3%
----------------------------------------------------------------------------

-----------------------------
TOTAL Equipment Distribution
-----------------------------
Equipment Sales $ 42.3 $ 72.8 $ 72.0 -42% 1%
Equipment Rentals $ 4.2 $ 5.5 $ 3.2 -24% 72%
Product Support $ 21.0 $ 25.4 $ 20.8 -17% 22%
----------------------------------------------------------------------------
TOTAL Equipment Distribution $ 67.5 $ 103.7 $ 96.0 -35% 8%
----------------------------------------------------------------------------


Equipment Sales

Total equipment sales in the fourth quarter were up 1% year over year from 2008 over 2007, however on a regional basis were up in Central and Eastern Canada but down in Western Canada in response to the weak oil and gas markets. As the economy and construction markets in Canada continued to decline in 2009, equipment sales were lower in all regions of the country in the fourth quarter of 2009 compared to the fourth quarter of 2008 with the largest decline in Alberta where the market for Strongco's products was estimated to be off by on average between 50% and 60%. Compared to 2008, Strongco's overall equipment sales across Canada were down $30.5 million or 42% year over year in the fourth quarter. In the markets that Strongco serves, total unit volumes were down on average between 35% and 45% year over year in the fourth quarter of 2009. Correspondingly, Strongco's unit volume was down on average 37% in the fourth quarter and its overall market share was maintained year over year. In addition to lower volumes, Strongco saw a shift in sales mix away from higher priced units (large cranes and trucks) and continued to experience significant price competition in certain product categories (graders and excavators) in the fourth quarter. However, Strongco's average selling prices across most product categories and overall average selling prices in the fourth quarter remained consistent year over year from 2008 to 2009.

Equipment Rentals

While the economy began to soften in the latter half of 2008, Strongco's rental revenues in the fourth quarter increased substantially in 2008 over 2007 due to the acquisition of Champion Road Machinery in March 2008, which had a large seasonal rental component of graders for snow removal. With the continued economic decline in 2009, rental revenues were lower in the fourth quarter of the year compared to the same period in 2008, but to a lesser extent than equipment sales as in the uncertain economy, many customers have continued to prefer to rent equipment rather than commit to purchase. Rental revenues in the fourth quarter of 2009 overall were $4.2 million, which was down 24% from the fourth quarter of 2008. Central Canada realized a 21% increase in rental revenues in the fourth quarter of 2009 due mainly to the impact of acquisition of the Champion business in 2008, and there was no significant change in Eastern Canada. However, this was more than offset by a large decrease year over year in rental revenues in Alberta in the fourth quarter.

Product Support

Product support revenues increased in the fourth quarter of 2008 compared to the fourth quarter of 2007 due to an increasing population of equipment in the field outside of warranty as well as the acquisition of Champion. As the economy weakened towards the end of 2008 and into 2009, the volume of product support business declined but to a lesser extent than equipment sales as, in the uncertain environment, customers chose to repair and refurbish existing machines, rather than buy new equipment.

Despite large declines in heavy equipment markets overall, Strongco's product support revenues were down only 17% in total across the country in the fourth quarter of 2009 compared to the fourth quarter of 2008. Product support activities in the fourth quarter were mixed on a regional basis. In Alberta, where significant amounts of equipment in customers' hands were sitting idle and not being repaired, product support revenues were down 35% compared with the fourth quarter of 2008. In Ontario, parts and service sales declined only 19% in the fourth quarter of 2009 and in Eastern Canada, despite softer equipment markets, product support sales were down only 2% over the fourth quarter of 2008.

Gross Margin



Three Months Ended December 31,
2009 2008 2007
---------------------------------------------------------------
Gross Margin $ millions GM% $ millions GM% $ millions GM%
----------------------------------------------------------------------------
Equipment
Sales $ 3.8 9.0% $ 4.1 5.6% $ 6.3 8.8%
Equipment
Rentals $ 0.6 14.3% $ 0.8 14.5% $ 0.4 12.5%
Product
Support $ 8.7 41.4% $ 11.1 43.7% $ 8.3 39.9%
----------------------------------------------------------------------------
Total Gross
Margin $ 13.1 19.4% $ 16.0 15.5% $ 15.0 15.6%
----------------------------------------------------------------------------


2009/2008 2008/2007
-------------------------------------------
Gross Margin $ Variance % Var $ Variance % Var
--------------------------------------------------------
Equipment
Sales $ (0.3) -7% $ (2.2) -35%
Equipment
Rentals $ (0.2) -25% $ 0.4 100%
Product
Support $ (2.4) -22% $ 2.8 34%
--------------------------------------------------------
Total Gross
Margin $ (2.9) -18% $ 1.0 7%
--------------------------------------------------------


As a result of the higher revenues in the fourth quarter of 2008 compared to the fourth quarter of 2007, Strongco's gross margin increased by $1.0 million, or 7%. As a percentage of revenue, total gross margin in the fourth quarter of 2008 was consistent with the fourth quarter of 2007 at 15.5%, with an improvement in the gross margin percentage on rental and product support revenues offset by a decrease in the gross margin percentage on equipment sales. The gross margin and gross margin percentage on equipment sales in the fourth quarter of 2008 was lower due primarily to additional unusual inventory reserves primarily related to forestry equipment recorded in the latter part of 2008.

The gross margin percentage on equipment sales improved the fourth quarter 2009, to 9.0% from 5.6% in the fourth quarter of 2008 due primarily to the margin compression in the fourth quarter of 2008 from the additional unusual inventory reserves. There were no significant or unusual inventory reserves recorded in the fourth quarter of 2009. The gross margin percentage of 9.0% in the fourth quarter is lower than the year to date gross margin percentage to the end the third quarter of 2009 of 10.0%. Aggressive price competition for new equipment continued to put pressure on equipment gross margins the fourth quarter. In addition, the Canadian dollar strengthened from $0.82 US dollars at December 31, 2008 to $0.96 US dollars at December 31, 2009. As heavy equipment is typically purchased in US dollars, with the strengthening of the Canadian dollar in 2009, sales of certain equipment inventory in the fourth quarter that had been purchased in 2008 and the first quarter of 2009 at higher costs when the Canadian dollar was weaker, were sold in the quarter at lower margins. The Canadian dollar has remained near $1.05 through the first quarter of 2010. Original equipment manufacturers ("OEM") have been supportive in offering additional discounts and incentives to aid Strongco to sell inventory purchased at higher exchange rates at reasonable margins and management expects this OEM support to continue.

Gross margin percentage on equipment rentals improved in the fourth quarter of 2008 compared to the same period in 2007 due to increased discipline over the sales force, which lead to improved rental rates. Gross margin percentage on equipment rentals declined slightly to 14.3% in the fourth quarter of 2009 from 14.5% in the fourth quarter of 2008 due primarily to the mix of equipment rented.

Gross margin percentage on product support activities improved in the fourth quarter of 2008 compared to the same period in 2007 due to increased sales discipline. Gross margin percentage on product support activities was 41.4% in the fourth quarter of 2009, which was down slightly from 43.7% in the fourth quarter of 2008 due to a higher proportion of parts sales which command lower margins compared to service revenue and ongoing price competition for parts.

Administrative, Distribution and Selling Expense

As a result of incremental costs from the acquisition of Champion and the opening of five new expanded branch facilities in 2008, Strongco's administrative, distribution and selling expenses increased in the fourth quarter of 2008 compared to the fourth quarter of 2007. However, through restructuring and cost rationalization, improved cost recovery and tighter cost controls that Strongco implemented in the latter part of 2008 and throughout 2009, operating expenses in the fourth quarter of 2009 were reduced well below the fourth quarter of 2008 levels. Administrative, distribution and selling expenses in the fourth quarter of 2009 were $14.4 million, an improvement of $1.4 million or 9% over the fourth quarter of 2008. Strongco will continue to closely manage its costs and look for additional opportunities to refine its cost structure.

Other Income

Other income and expense is primarily comprised of gains or losses on disposition of fixed assets, foreign exchange gains or losses, service fees received by Strongco as compensation for sales of new equipment by other third parties into the regions where Strongco has distribution rights for that equipment and commissions received from third party financing companies for customer purchase financing Strongco places with such finance companies. Other income in the fourth quarter of 2009 was $0.6 million compared to an expense of $0.3 million in the fourth quarter of 2008 and income of $0.6 million in the fourth quarter of 2007. In 2008, Strongco incurred a net foreign exchange loss of $1.5 million as a result of the sharp decline in the value of the Canadian dollar in the fourth quarter of the year, while in the fourth quarter of 2009 Strongco incurred a small net foreign gain of $0.03 million. In addition, commissions from finance companies were lower in the fourth quarter of 2009 than in the fourth quarter of 2008.

Interest Expense

Strongco's interest expense was $1.1 million in the fourth quarter of 2009 which was fairly consistent with the fourth quarter of 2008 and compared to $0.7 million in the fourth quarter of 2007. The Fund's interest bearing debt comprises bank indebtedness and interest bearing equipment notes. Strongco typically finances equipment inventory under lines of credit available from various non-bank equipment lenders. Most equipment notes are interest free for periods up to seven months from the date of financing after which they become interest bearing. The rate of interest on the Fund's bank indebtedness and interest bearing equipment notes varies with Canadian chartered bank prime rate ("prime rate") and Canadian Bankers Acceptances Rates ("BA rates"). The premium over prime rate and BA rates on the Fund's equipment notes was higher in the fourth quarter of 2009 than in the fourth quarter of 2008, although this was largely offset by lower prime rates and BA rates in 2009. The net result was a slightly higher average interest rate charged on the Fund's bank indebtedness and equipment notes in the fourth quarter of 2009 compared with the fourth quarter of 2008. In addition, the average balance outstanding under the Fund's bank credit facility and interest bearing equipment notes were lower during the fourth quarter of 2009 than in the fourth quarter of 2008 which largely offset the slightly higher average rate of interest in 2009. Interest bearing equipment notes were higher in the fourth quarter of 2008 compared to the fourth quarter of 2007 which contributed to the quarter over quarter increase in interest in the fourth quarter of 2008.

Loss from Continuing Operations and Net (Loss)

Strongco incurred a loss from continuing operations after tax in the fourth quarter of 2009 of $2.1 million ($0.20 per unit), which compared to a loss from continuing operations after tax of $2.3 million (loss of $0.22 per unit) in the fourth quarter of 2008 and earnings of $1.7 million ($0.16 per unit) in the fourth quarter of 2007.

EBITDA From Continuing Operations

EBITDA (see note 1 below) from continuing operations in the fourth quarter of 2009 was $2.8 million which compares to $4.3 million in the fourth quarter of 2008 and $5.7 in the fourth quarter of 2007. EBITDA was calculated as follows:



Three Months Ended December 31,
2009 2008 2007 2009/2008 2008/2007
----------------------------------- ----------- -----------
$ millions $ millions $ millions $ Variance $ Variance
---------------------------------------------------- ----------- -----------
Earnings from
continuing
operations $ (2.1) $ (2.3) $ 1.8 $ 0.2 $ (4.1)
Add Back:
Interest $ 1.1 $ 1.1 $ 0.7 $ - $ 0.4
Income taxes $ 0.3 $ - $ (0.7) $ 0.3 $ 0.7
Amortization of
capital assets $ 0.2 $ 0.2 $ 1.5 $ - $ (1.3)
Amortization of
intangible
assets $ - $ 0.3 $ - $ (0.3) $ 0.3
Amortization of
equipment
inventory on
rent $ 3.3 $ 4.2 $ 2.4 $ (0.9) $ 1.8
Goodwill
impairment $ - $ 0.8 $ - $ (0.8) $ 0.8
----------------------------------- ----------- -----------
EBITDA (note 1) -
from continuing
operations $ 2.8 $ 4.3 $ 5.7 $ (1.5) $ (1.4)
----------------------------------- ----------- -----------


Note 1 - "EBITDA" refers to earnings before interest, income taxes, amortization of capital assets, amortization of intangible assets, amortization of equipment inventory on rent, and goodwill impairment. EBITDA is a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not an earnings measure recognized by GAAP, does not have standardized meanings prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers. The Fund's management believes that EBITDA is an important supplemental measure in evaluating the Fund's performance and in determining whether to invest in Units. Readers of this information are cautioned that EBITDA should not be construed as an alternative to net income or loss determined in accordance with GAAP as indicators of the Fund's performance or to cash flows from operating, investing and financing activities as measures of the Fund's liquidity and cash flows. The Fund's method of calculating EBITDA may differ from the methods used by other issuers and, accordingly, the Fund's EBITDA may not be comparable to similar measures presented by other issuers.

Cash Flow

Cash Flow Used In Operating Activities:

During the fourth quarter of 2009, Strongco used $1.2 million of cash in operating activities of continuing operations primarily as a result of a loss from continuing operations in 2009, which before non-cash working capital changes, provided cash of $0.5 million in the fourth quarter. This was offset by $1.8 million of cash used by an increase in net working capital in the quarter. During the fourth quarter of 2008, a loss from continuing operations, before non-cash working capital changes, provided cash of $3.4 million while an increase in net working capital used cash of $8.7 million. In addition, the discontinued Engineered Systems business used cash of $0.6 million in the fourth quarter of 2008.

The components of the cash used in and provided operating activities were as follows:



Three Months Ended
December 31,
($ millions) 2009 2008
----------------------------------------------------------------------------

Earnings (loss) from continuing operations (2.1) (2.3)
Non-cash items 2.6 5.7
----------------------------------------------------------------------------
0.5 3.4
Changes in non-cash working capital balances (1.8) (8.7)
----------------------------------------------------------------------------
Cash (used in) operating activities of continuing
operations (1.3) (5.3)
Cash (used in) operating activities of
discontinued operations 0.1 (0.6)
----------------------------------------------------------------------------
Cash (used in) operating activities (1.2) (5.9)
----------------------------------------------------------------------------


Non-cash items in 2009 includes amortization of equipment inventory on rent of $3.3 million, amortization of capital assets of $0.2 million and other non-cash items of ($0.9) million. Non-cash items in 2008 includes amortization of equipment inventory on rent of $4.2 million, amortization of capital assets of $0.2 million, amortization of intangible assets of $0.3 million, goodwill impairment of $0.8 million and other non-cash items of $0.2 million. Lower volumes of equipment rentals in the fourth quarter of 2009 resulted in the lower amortization of equipment inventory on rent.

Continued weak markets for heavy equipment resulted in revenue in the fourth quarter of 2009 lower than in the third quarter of the year. This resulted in a decrease in accounts receivable in the fourth quarter of 2009. Account receivables at December 31, 2009 were $27.1 million which was down $6.3 million from $33.4 million at September 30, 2009. The average age of receivables outstanding at the end of the year was unchanged from September 2009 at approximately 40 days.

In response to ongoing weakness in the markets for heavy equipment, Strongco management continued to manage inventory levels closely and significantly curtailed the amount of equipment and parts inventory purchased in the fourth quarter of 2009. As a result inventory levels dropped further in the fourth quarter of the year. Equipment inventory at December 31, 2009 was $124.5 million which was down $14.5 million from $139.0 million at September 30, 2009. Parts inventory was $17.7 million at December 31, 2009, which was down $1.2 million from $18.9 million at September 30, 2009. Service work in process (WIP) was $2.3 million at December 31, 2009, which was down $1.2 million from $3.5 at September 30, 2009.

Strongco continued to manage expenses and reduce spending levels in the fourth quarter of 2009 which in turn resulted in a lower balance of accounts payable at the end of the year than at the end of September 2009. Accounts payable and accrued liabilities at December 31, 2009 were $20.9 million, which was down $8.7 million from $29.6 million at September 30, 2009.

With reduced purchases of equipment inventory and continued focus on reducing debt, Strongco's equipment notes were reduced further in the fourth quarter of 2009. The balance of equipment notes outstanding at December 31, 2009 was $104.8 million, which was down $12.8 million from $117.6 million at September 30, 2009.

Cash Provided By (Used In) Investing Activities:

Net cash used in investing activities of continuing operations amounted to $0.2 million in the fourth quarter of 2009. Capital expenditures in the quarter amounted to $0.3 million and primarily related to the upgrade of facilities and purchase of miscellaneous shop equipment. This compared to capital expenditures of $0.3 million in the fourth quarter of 2008 related mainly facilities upgrades and miscellaneous shop equipment.

The release of the portion of the purchase price on the sale of Strongco Engineered Systems that had been held in escrow provided cash of $0.5 million from investing activities of discontinued operations in the fourth quarter of 2009.

The components of the cash used in operating activities were as follows:



Three Months Ended
December 31,
--------------------------
($ millions) 2009 2008
----------------------------------------------------------------------------

Purchase of capital assets (0.3) (0.3)
----------------------------------------------------------------------------
Cash used in investing activities of continuing
operations (0.3) (0.3)

Cash provided by investing activities of
discontinued operations 0.5 0.0
----------------------------------------------------------------------------
Cash provided by (used in) investing activities 0.2 (0.3)
----------------------------------------------------------------------------


Cash Provided By Financing Activities:

Financing activities generated $0.9 million of cash in the fourth quarter of 2009 primarily from an increase in bank debt used to fund operating activities. By comparison, in the fourth quarter 2008, borrowing under the Company's bank facility increased by $6.3 million, which was used to fund operating activities and capital expenditures in the quarter.



Three Months Ended
Cash Provided By Financing Activities December 31,
($ millions) 2009 2008
----------------------------------------------------------------------------

Increase (decrease) in bank indebtedness 1.0 6.3
----------------------------------------------------------------------------
Cash provided by financing activities 1.0 6.3
----------------------------------------------------------------------------


SUMMARY OF QUARTERLY DATA

In general, business activity in the Equipment Distribution segment follows a weather related pattern of seasonality. Typically, the first quarter is the weakest quarter as construction and infrastructure activity is constrained in the winter months. This is followed by a strong gain in the second quarter as construction and other contracts begin to be tendered and companies begin to prepare for summer activity. The third quarter generally tends to be slightly slower from an equipment sales standpoint, which is partially offset by continued strength in equipment rentals and customer support activities. Fourth quarter activity generally strengthens as customers make year end capital spending decisions and exercise purchase options on equipment which has previously gone out on RPO's. In addition, purchases of snow removal equipment are typically made in the fourth quarter. However, as a result weak economic conditions and significantly reduced construction activity in Canada, the markets for heavy equipment in 2009 were extremely weak throughout 2009.

A summary of quarterly results for the current and previous two years is as follows:



2009
($ millions, except per
unit amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------

Revenue $ 67.5 $ 74.6 $ 76.6 $ 73.1
Earnings from continuing
operations before income
taxes $ (1.8) $ 0.1 $ 2.0 $ 1.2
Net income (loss) $ (2.1) $ (0.5) $ 1.4 $ 1.2

Basic and diluted
earnings
(loss) per unit $ (0.20) $ (0.05) $ 0.14 $ 0.11

2008
($ millions, except per
unit amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------

Revenue $ 103.7 $ 98.7 $ 119.2 $ 76.9
Earnings (loss) from
continuing operations
before income taxes $ (2.4) $ (0.2) $ 3.1 $ (0.6)
Net income (loss) $ (2.6) $ (0.1) $ 2.9 $ (0.6)

Basic and diluted
earnings
(loss) per unit $ (0.25) $ (0.01) $ 0.27 $ (0.05)

2007
($ millions, except per
unit amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------

Revenue $ 96.1 $ 90.5 $ 94.5 $ 67.0
Earnings (loss) from
continuing operations
before income taxes $ 1.0 $ 2.7 $ 3.5 $ -
Net income $ 2.7 $ 3.1 $ 2.5 $ -

Basic and diluted
earnings
(loss) per unit $ 0.26 $ 0.30 $ 0.23 $ -


A discussion of the Fund's previous quarterly results can be found in the Fund's quarterly Management's Discussion and Analysis reports available on SEDAR at www.sedar.com.

DISTRIBUTIONS

The Fund's policy is to make distributions from distributable cash generated in the year. Distributions of cash and units in-kind are made consistent with the intent of balancing long-term growth strategies and the provision of current income to Unitholders. Prior to the suspension of distributions described below, monthly distributions were made to Unitholders of record on the last business day of each month payable on or about the 20th day of the following month.

On March 31, 2007, the monthly cash distributions to Unitholders were decreased from $0.18 per unit to $0.10 per unit. This reduction was made in response to the increased level of competition and softening in the construction equipment sector.

On March 31, 2008, the structure of distributions to Unitholders was changed to distributions consisting of $0.05 per unit in cash and an in-kind distribution of $0.05 per unit, to be settled with additional units issued to Unitholders. In-kind units were issued at a deemed price equal to the volume-weighted average price of all units traded on the Toronto Stock Exchange on the 10 trading days ending on the third trading day preceding the record date. This change in distribution structure was designed to allow Strongco to retain more cash within the Fund for the purposes of reducing debt and facilitating expansion through internal growth and acquisitions.

On August 31, 2008, distributions to Unitholders were suspended until further notice. This change was in response to lower than expected results in 2008, concerns about the near term economic outlook and a need to retain cash to maintain balance sheet strength. No distributions were made in 2009.

DISTRIBUTABLE CASH

Distributable cash is presented as a measure of the extent to which the Fund is able to generate cash sufficient to fund Unitholder distributions on an ongoing basis. Distributable cash is not a measure of financial performance under Canadian Generally Accepted Accounting Principles ("GAAP") and therefore has no standardized meaning prescribed by GAAP and may not be comparable to similar terms and measures presented by other similar issuers. Distributable cash is intended to provide additional information on the Fund's performance and should not be considered in isolation, seen as a measure of liquidity or as a substitute for measures of performance prepared in accordance with GAAP.



Three months ended Year ended
December 31, December 31,
Distributable cash (in
millions) 2009 2008 2009 2008
----------------------------------------------------------------------------

Net income $ (2.1) $ (2.6) $ - $ (0.4)
Add (deduct)
Provision for future
income tax $ 0.3 $ - $ 0.1 $ 0.3
Depreciation &
amortization $ 3.6 $ 4.4 $ 12.1 $ 15.1
Amortization of
intangibles $ - $ 0.3 $ - $ 0.5
Goodwill impairment $ - $ 0.8 $ - $ 0.8
Change in non-cash post
retirement
benefits and
accrued benefit assets $ (1.2) $ - $ (1.2) $ 0.2
Other $ (0.1) $ 0.2 $ 1.5 $ (0.7)
Capital expenditures $ (0.5) $ (0.3) $ (0.7) $ (1.5)
----------------------------------------------------------------------------
Distributable cash $ - $ 2.8 $ 11.8 $ 14.3
----------------------------------------------------------------------------
Proceeds from disposal
of capital assets $ - $ - $ 0.9 $ -
Proceeds from sale of
discontinued operation $ 0.5 $ - $ 6.2 $ -
----------------------------------------------------------------------------
Adjusted distributable
cash $ 0.5 $ 2.8 $ 18.9 $ 14.3
----------------------------------------------------------------------------
Unitholder distributions
declared $ - $ - $ - $ 4.6
----------------------------------------------------------------------------
Excess (shortfall) $ 0.5 $ 2.8 $ 18.9 $ 9.7
----------------------------------------------------------------------------



Three months ended Year ended
December 31, December 31,
Distributable cash (in
millions) 2009 2008 2009 2008
----------------------------------------------------------------------------

Cash provided by (used
in) operating
activities $ (1.2) $ (5.9) $ (3.6) $ 7.8
Add (deduct)
Net change in non-cash
working capital
related
to continuing
operations $ 1.7 $ 8.7 $ 15.2 $ 8.9
Net change in non-cash
working
capital related
to discontinued
operations $ - $ 0.3 $ 0.9 $ (0.9)
Capital expenditures $ (0.5) $ (0.3) $ (0.7) $ (1.5)
----------------------------------------------------------------------------
Distributable cash $ - $ 2.8 $ 11.8 $ 14.3
----------------------------------------------------------------------------
Proceeds from
disposal of
capital assets $ - $ - $ 0.9 $ -
Proceeds from sale of
discontinued operation $ 0.5 $ - $ 6.2 $ -
----------------------------------------------------------------------------
Adjusted distributable
cash $ 0.5 $ 2.8 $ 18.9 $ 14.3
----------------------------------------------------------------------------


The Fund has added (deducted) the net change in non-cash working capital balances as Strongco currently has an operating line of credit to a maximum of $20 million which is available for use to fund general corporate requirements including working capital requirements. In addition, Strongco finances equipment inventory through the use of vendor floor plans and wholesale finance arrangements with various finance companies.

CONTRACTUAL OBLIGATIONS

The Fund has contractual obligations for operating lease commitments and notes payable. In addition, the Fund has contingent contractual obligations where it has agreed to buy back equipment from customers at the option of the customer for a specified price at future dates ("buy back contracts"). These buy back contracts are subject to certain conditions being met by the customer and range in term from three to ten years. The Fund's maximum potential losses pursuant to the majority of these buy back contracts are limited, under an agreement with the original equipment manufacturer, to 10% of the original sale amounts. In addition, this agreement provides a financing arrangement in order to facilitate the buy back of equipment. As at December 31, 2009, the total buy back contracts outstanding were $9.8 million (2008 - $10.0 million). A reserve of $0.7 million (2008 - $0.7 million) has been accrued in the Fund's accounts as at December 31, 2009 with respect to these commitments.

The Fund has provided a guarantee of lease payments under the assignment of a property lease which expires January 31, 2014. Total lease payments from January 1, 2010 to January 31, 2014 are $0.6 million (2008 - $0.8 million).

Contractual obligations are set out in the following tables. Management believes that the Fund will generate sufficient cash flow from operations to meet its contractual obligations.



Payment due by period
----------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After 5
($ millions) Total 1 Year years years years
----------------------------------------------------------------------------
Operating leases $30.0 $7.6 $13.1 $5.0 $4.3
----------------------------------------------------------------------------


Contingent obligation by period
----------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After 5
($ millions) Total 1 Year years years years
----------------------------------------------------------------------------
Buy back contracts $9.8 $1.2 $3.8 $4.8 $0.0
----------------------------------------------------------------------------


UNITHOLDER CAPITAL

The Fund is authorized to issue an unlimited number of units pursuant to the Declaration of Trust. Each unit is transferable and represents an equal beneficial interest in any distributions from the Fund and in the net assets of the Fund. All units are of the same class with equal rights and privileges.



Issued and outstanding Units at: Number of Units
----------------------------------------------------------------------------

As at December 31, 2007 10,043,185
Issued April 21, 2008 91,902
Issued May 20, 2008 84,325
Issued June 20, 2008 88,598
Issued July 18, 2008 95,448
Issued August 20, 2008 105,261
Issued August 21, 2008 to December 31, 2008 -
Issued December 31, 2008 to December 31, 2009 -
----------------------------------------------------------------------------
As at December 31, 2009 10,508,719
----------------------------------------------------------------------------


There have been no units issued subsequent to December 31, 2009.

OUTLOOK

While economic conditions in the United States remain uncertain, there have been early signs that the Canadian economy is beginning to stabilize and there is an emerging sense of confidence that a recovery will begin to take hold. Oil prices have recovered somewhat and activity in the Alberta oils sands is increasing, and the strength of the stock market and the Canadian dollar are further evidence that recovery is beginning.

Despite these indications, it remains unclear when any recovery will translate into demand for construction equipment. Accordingly, management anticipates that construction markets in Canada will remain weak at least through the first quarter of 2010, as customers severely impacted by the recession in 2009, are taking a wait and see attitude. Construction markets in Eastern Canada are expected to begin to improve in the second quarter of the year with the onset of warmer spring weather and as Government stimulus and infrastructure spending starts to filter through the system and is allocated to specific projects. The growth in the number of construction projects being put out for tender and increased activity amongst construction companies in project engineering, design and planning are optimistic signs that construction activity and the purchase of heavy equipment will improve as the year progresses. In Alberta, management is not anticipating any material turnaround in market activity in construction markets or related to oil discovery in 2010.

Management anticipates that the demand for construction equipment will remain weak in the first quarter of 2010 as a consequence of the continuing weak construction markets. While backlogs at the end of 2009 were down significantly from the levels at the end of 2008, they have been building and as of March 15, 2010 stood at more than double the level at December 31, 2009, an indication that, as the economy improves and confidence in construction markets builds, demand for equipment will increase. It is anticipated that customers' preference will be to rent equipment or repair existing equipment to meet their needs in the near term but as construction activity increases in the second and third quarters of the year, customers will commit to purchase equipment.

The new Harmonized Sales Tax (HST) being introduced effective July 1, 2010 in Ontario and British Columbia, under which provincial sales tax will now be a flow through tax and recoverable along with the GST, is expected to cause some customers in those provinces to delay purchasing of equipment until after implementation of the tax. While this may result in lower volumes in the first half of the year, it should result in increased demand for equipment in the second half of the year.

Management expects the Canadian dollar to strengthen to near or better than par with the US dollar by the middle of the second quarter but decline in the third and fourth quarter to average between $US 0.93 and $US 0.97. The strength of the Canadian dollar, combined with continued strong competition, is expected to put pressure on selling prices but with increased demand, management anticipates higher volumes overall in 2010.

In summary, management anticipates a slow start to 2010 but improvement throughout the year as the economy and construction markets improve. Managing working capital and inventory, and debt reduction, will remain a priority. Management's attention will continue to be focused on market share relative to margins, a continuing emphasis on product support sales and cost reductions consistent with maintaining a high standard of customer service.

CONVERSION TO A CORPORATION

On October 31, 2006, the Minister of Finance (Canada) (the "Minister") announced the Federal government's proposal to change the tax treatment of publicly traded income funds such as the Fund (the "SIFT Rules"). The SIFT Rules were subsequently enacted in the Income Tax Act. The SIFT Rules result in a tax being applied at the trust level on distributions of certain income from publicly traded mutual fund trusts at rates of tax comparable to the combined federal and provincial corporate tax and to treat such distributions as dividends to Unitholders. Publicly traded income funds which were in existence on October 31, 2006 have a four year transition period and generally are not subject to the SIFT Rules until 2011, provided such trusts experienced only "normal growth" and no "undue expansion" before then.

As a result of the changes in tax legislation and after consideration of the benefits of conversion (see below), the Board of Trustees has decided to recommend to the Unitholders conversion of Strongco from an income fund to a corporation. A plan of arrangement for conversion will be distributed to the Unitholders for consideration and approval at the Fund's Annual General Meeting on May 14, 2010. If approved, it is currently anticipated that the Fund will convert to a corporation effective July 1, 2010. The conversion plan in summary calls for the incorporation of a new corporation ("New Strongco") that will issue shares to the Unitholders in exchange for the units of the Fund on a one for one basis so that the Unitholders will become shareholders in New Strongco, after which the Fund will be wound up into New Strongco. New Strongco will carry on the business of the Fund going forward, which will be unchanged following the conversion except that New Strongco will be subject to taxation as a corporation.

The Trustees of Strongco, in recommending the Arrangement to Unitholders, believe the Arrangement provides a number of strategic benefits to the Fund and its Unitholders including, without limitation, the following:



-- the Arrangement will simplify the business structure of Strongco and
provide a structure similar to other publicly owned industry
participants;
-- the Arrangement is a tax efficient way for New Strongco to retain cash
for future growth and repayment of debt;
-- completion of the Arrangement will eliminate the risks and uncertainty
facing the Fund as a result of the tax legislation relating to mutual
fund trusts;
-- completion of the Arrangement may result in greater access to capital
and the removal of the "normal growth" and "undue expansion
restrictions" in the SIFT Rules that potentially limited Strongco's
ability to consider strategic acquisitions;
-- Strongco will no longer be restricted in its efforts to broaden its
investor base to include more non-resident shareholders as is presently
the case under its current legal structure.


Details of the conversion will be outlined in the Fund's Management Information Circular, which contains the Plan of Arrangement, and will be provided to the Unitholders prior to Annual General Meeting on May 14, 2010.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the financial statements. The Fund bases its estimates and assumptions on past experience and various other assumptions that are believed to be reasonable in the circumstances. This involves varying degrees of judgment and uncertainty which may result in a difference in actual results from these estimates. The more significant estimates are as follows:

Inventory Valuation

The value of the Fund's new and used equipment is evaluated by management throughout each year. Where appropriate, a provision is recorded against the book value of specific pieces of equipment to ensure that inventory values reflect the lower of cost and estimated net realizable value. The Fund identifies slow moving or obsolete parts inventory and estimates appropriate obsolescence provisions by aging the inventory. The Fund takes advantage of supplier programs that allow for the return of eligible parts for credit within specified time periods. The inventory provision as at December 31, 2009 with changes from December 31, 2008 is as follows:



Provision for Inventory Obsolescence ($ millions)
----------------------------------------------------------------------------
Provision for inventory obsolescence as at December 31,
2008 $ 4.4
Inventory disposed of during the year $ (1.9)
Additional provisions made during the year $ 0.6
----------------------------------------------------------------------------
Provision for inventory obsolescence as at December 31,
2009 $ 3.1
----------------------------------------------------------------------------


In the latter half of 2008, unusual inventory provisions totaling $2.6 million, primarily related to forestry equipment, were booked. Throughout 2009, a substantial portion of this inventory was sold releasing $1.9 million of those provisions. Additional provisions totaling $0.6 million were booked in 2009 based upon management's assessment that the net realizable value on certain older pieces of equipment inventory was below cost.

Allowance for Doubtful Accounts

The Fund performs credit evaluations of customers and limits the amount of credit extended to customers as appropriate. The Fund is however exposed to credit risk with respect to accounts receivable and maintains provisions for possible credit losses based upon historical experience and known circumstances. The allowance for doubtful accounts as at December 31, 2009 with changes from December 31, 2008 is as follows:



Allowance for Doubtful Accounts
----------------------------------------------------------------------------
Allowance for doubtful accounts as at December 31, 2008 $ 1.0
Accounts written off during the year $ (0.3)
Additional provisions made during the year $ 0.7
----------------------------------------------------------------------------
Allowance for doubtful accounts as at December 31, 2009 $ 1.4
----------------------------------------------------------------------------


Post Retirement Obligations

Strongco performs a valuation at least every three years to determine the actuarial present value of the accrued pension and other non-pension post retirement obligations. Pension costs are accounted for and disclosed in the notes to the financial statements on an accrual basis. Strongco records employee future benefit costs other than pensions on an accrual basis. The accrual costs are determined by independent actuaries using the projected benefit method prorated on service and based on assumptions that reflect management's best estimates. The assumptions were determined by management recognizing the recommendations of Strongco's actuaries. These key assumptions include the rate used to discount obligations, the expected rate of return on plan assets, the rate of compensation increase and the growth rate of per capita health care costs.

The discount rate is used to determine the present value of future cash flows that we expect will be required to pay employee benefit obligations. Management's assumptions of the discount rate are based on current interest rates on long-term debt of high quality corporate issuers.

The assumed return on pension plan assets of 7.0% per annum is based on expectations of long-term rates of return at the beginning of the fiscal year and reflects a pension asset mix consistent with the Fund's investment policy.

The costs of employee future benefits other than pension are determined at the beginning of the year and are based on assumptions for expected claims experience and future health care cost inflation.

Changes in assumptions will affect the accrued benefit obligation of Strongco's employee future benefits and the future years' amounts that will be charged to results of operations.

Future Income Taxes

At each quarter end the Fund evaluates the value and timing of the Fund's temporary differences. Future income tax assets and liabilities, measured at substantively enacted tax rates, are recognized for all temporary differences caused when the tax bases of assets and liabilities differ from those reported in the consolidated financial statements.

Changes or differences in these estimates or assumptions may result in changes to the current or future tax balances on the unaudited consolidated balance sheet, a charge or credit to income tax expense in the unaudited consolidated statements of earnings and may result in cash payments or receipts. Where appropriate, the provision for future income taxes and future income taxes payable are adjusted to reflect management's best estimate of the Fund's future income tax accounts.

RISK AND UNCERTAINTIES

Strongco's financial performance is subject to certain risk factors which may affect any or all of its business sectors. The following is a summary of risk factors which are felt to be the most relevant. These risks and uncertainties are not the only ones facing the Fund. Additional risks and uncertainties not currently known to the Fund or which the Fund currently considers immaterial, may also impair the operations of the Fund. If any such risks actually occur, the business, financial condition, or liquidity and results of operations of the Fund, the ability of the Fund to make cash distributions on the units and the trading price of the Fund's units could be adversely affected.

BUSINESS AND ECONOMIC CYCLES

Strongco operates in a capital intensive environment. Strongco's customer base consists of companies operating in the construction and urban infrastructure, aggregates, forestry, mining, municipal, utility, industrial and resource sectors which are all affected by trends in general economic conditions within their respective markets. Changes in interest rates, commodity prices, exchange rates, availability of capital and general economic prospects may all impact their businesses by affecting levels of consumer, corporate and government spending. Strongco's business and financial performance is largely affected by the impact of such business cycle factors on its customer base. The Fund has endeavored to minimize this risk by: (i) operating in various geographic territories across Canada with the belief that not all regions are subject to the same economic factors at the same time, (ii) serving a variety of industries which respond differently at different points in time to business cycles and (iii) seeking to increase the Fund's focus on customer support (parts and service) activities which are less subject to changes in the economic cycle.

COMPETITION

The Fund faces strong competition from various distributors of products which compete with the products it sells. Strongco competes with regional and local distributors of competing product lines. Strongco competes on the basis of: (i) relationships maintained with customers over many years of service; (ii) prompt customer service through a network of sales and service facilities in key locations; (iii) access to products; and (iv) the quality and price of their products. In most product lines in most geographic areas in which Strongco operates, their main competitors are distributors of products manufactured by Caterpillar, John Deere, Komatsu and Hitachi, and other smaller brands.

MANUFACTURER RISK

Most of Strongco's equipment distribution business consists of selling and servicing mobile equipment products manufactured by others. As such, Strongco's financial results may be directly impacted by: (i) the ability of the manufacturers it represents to provide high quality, innovative and widely accepted products on a timely and cost effective basis and (ii) the continued independence and financial viability of such manufacturers.

Most of Strongco's equipment distribution business is governed by distribution agreements with the original equipment manufacturers, including Volvo, Case and Manitowoc. These agreements grant the right to distribute the manufacturers' products within defined territories which typically cover an entire province. It is an industry practice that, within a defined territory, a manufacturer grants distribution rights to only one distributor. This is true of all the distribution arrangements entered into by Strongco. Most distribution agreements are cancelable upon 60 to 90 days notice by either party.

Some of the Strongco's equipment suppliers provide floor plan financing to assist with the purchase of equipment inventory. In some cases this is done by the manufacturer, and in other cases the manufacturer engages a third party lender to provide the financing. Most floor plan arrangements include an interest-free period of up to seven months.

The termination of one or more of Strongco's distribution agreements with its original equipment manufacturers, as a result of a change in control of the manufacturer or otherwise, may have a negative impact on the operations of Strongco.

In addition, availability of products for sale is dependent upon the absence of significant constraints on supply of products from original equipment manufacturers. During times of intense demand or during any disruption of the production of such equipment, Strongco's equipment manufacturers may find it necessary to allocate their limited supply of particular products among their distributors.

The ability of Strongco to maintain and expand its customer base is dependent upon the ability of Strongco's suppliers to continuously improve and sustain the high quality of their products at a reasonable cost. The quality and reputation of their products is not within Strongco's control and there can be no assurance that Strongco's suppliers will be successful in improving and sustaining the quality of their products. The failure of Strongco's suppliers to maintain a market presence could have a material impact upon the earnings of the Fund.

The Fund believes that this element of risk has been mitigated through the representation of its equipment manufacturers with demonstrated ability to produce a competitive, well accepted, high quality product range and by distributing products of multiple manufacturers.

In addition, distribution agreements with these manufacturers are cancelable by either party within a relatively short notice period as specified in the relevant distribution agreement. However, Strongco believes that it has established strong relationships with its key manufacturers and maintains significant market share for their product and as a result is at little risk of distribution agreements being cancelled.

CONTINGENCIES

In the ordinary course of business, the Fund may be exposed to contingent liabilities in varying amounts and for which provisions have been made in the consolidated financial statements as appropriate. These liabilities could arise from litigation, environmental matters or other sources.

A statement of claim has been filed naming a division of the Fund as one of several defendants in proceedings under the Superior Court of Quebec. The action claims errors and omissions in the contractual execution of work entrusted to the defendants and names the Fund as jointly and severally liable for damages of approximately $5.9 million. The Fund's counsel has filed a statement of defense and discoveries are underway. A trial date has not yet been set. Although it is impossible to predict the outcome at this time, based on the opinion of external legal counsel, the Fund believes that they have a strong defense against the claim and that it is without merit.

DEPENDENCE ON KEY PERSONNEL

The expertise and experience of its senior management is an important factor in Strongco's success. Strongco's continued success is thus dependent on its ability to attract and retain experienced management.

INFORMATION SYSTEMS

The Fund utilizes a legacy business system which has been successfully in operation for over 15 years. As with any business system, it is necessary to evaluate its adequacy and support of current and future business demands. The system was written and was supported by the Fund's Information Systems Manager who retired on December 31, 2006. The Fund is utilizing an outside consultant to support its current system and is currently evaluating alternative systems as potential replacements for its current system.

FOREIGN EXCHANGE

While the majority of the Fund's sales are in Canadian dollars, significant portions of its purchases are in U.S. dollars. While the Fund believes that it can maintain margins over the long term, short, sharp fluctuations in exchange rates may have a short term impact on earnings. In order to minimize the exposure to fluctuations in exchange rates, the fund enters into foreign exchange forward contracts on a transaction specific basis.

INTEREST RATE

Interest rate risk arises from potential changes in interest rates and the impact on the cost of borrowing. The majority of the Fund's debt is floating rate debt which exposes the Fund to fluctuations in short term interest rates. See discussion under "Cash Flow, Financial Resources and Liquidity" above.

RISKS RELATING TO THE UNITS

Unpredictability and Volatility of Unit Price

A publicly-traded income trust will not necessarily trade at values determined by reference to the underlying value of its business. The prices at which the units will trade cannot be predicted. The market price of the units could be subject to significant fluctuations in response to variations in quarterly operating results and other factors. The annual yield on the units as compared to the annual yield on other financial instruments may also influence the price of units in the public trading markets. In addition, the securities markets have experienced significant price and volume fluctuations from time to time in recent years that often have been unrelated or disproportionate to the operating performance of particular issuers. These broad fluctuations may adversely affect the market price of the units.

Nature of Units

The units are hybrid securities in that they share certain attributes common to both equity securities and debt instruments. The units do not represent a direct investment in the Fund and should not be viewed by investors as shares in the Fund. As holders of units, Unitholders will not have the statutory rights normally associated with ownership of shares of a corporation including, for example, the right to bring "oppression" or "derivative" actions.

The units are not "deposits" within the meaning of the Canada Deposit Insurance Corporation Act (Canada) and are not insured under the provisions of that Act or any other legislation. Furthermore, the Fund is not a trust company and, accordingly, is not registered under any trust and loan company legislation as it does not carry on or intend to carry on the business of a trust company. In addition, although the Fund qualifies as a "mutual fund trust" as defined by the Income Tax Act Canada (the "Tax Act"), the Fund is not a "mutual fund" as defined by applicable securities legislation.

CASH DISTRIBUTIONS

Although the Fund intends to distribute the income earned by the Fund, less expenses and amounts, if any, paid by the Fund in connection with the redemption of units, there can be no assurance regarding the amounts of income to be generated by the Fund. The actual amount paid in respect of the units will depend upon numerous factors, including profitability, the availability and cost of acquisitions, fluctuations in working capital expenditures, applicable law and other factors beyond the control of the Fund. Cash distributions are not guaranteed and will fluctuate with the Fund's performance. Strongco has the discretion to establish cash reserves for the proper conduct of its business. Adding to these reserves in any year would reduce the amount of cash available for distribution in that year. There can be no assurance regarding the actual levels of cash distributions by the Fund. On August 31, 2008, distributions to Unitholders were suspended until further notice. This change was in response to lower than expected results in 2008, concerns about the near term economic outlook and a need to retain cash to maintain balance sheet strength. No distributions were made in 2009.

LEVERAGE AND RESTRICTIVE COVENANTS

The existing credit facilities contain restrictive covenants that limit the discretion of Strongco's management with respect to certain business matters and may, in certain circumstances, restrict the Partnership's ability to make distributions, which could adversely impact cash distributions on the units. These covenants place restrictions on, among other things, the ability of the Partnership to incur additional indebtedness, to create other security interests, to complete amalgamations and acquisitions, make capital expenditures, to pay dividends or make certain other payments and guarantees and to sell or otherwise dispose of assets. The existing credit facilities also contain financial covenants requiring the Partnership to satisfy financial ratios and tests, (see discussion under 'Financial Condition and Liquidity' above). A failure of the Partnership to comply with its obligations under the existing credit facilities could result in an event of default which, if not cured or waived, could permit the acceleration of the relevant indebtedness. The existing credit facilities are secured by customary security for transactions of this type, including first ranking security over all present and future personal property of the Partnership, a mortgage over the Partnership's central real property and an assignment of insurance. If the Partnership is not able to meet its debt service obligations, it risks the loss of some or all of its assets to foreclosure or sale. There can be no assurance that, at any particular time, if the indebtedness under the existing credit facilities were to be accelerated, the Partnership's assets would be sufficient to repay in full that indebtedness.

The existing credit facilities are payable on demand following an event of default and are renewable annually. If the existing credit facilities are replaced by new debt that has less favourable terms or if the Partnership cannot refinance its debt, funds available for distribution to the Fund and cash distributions to Unitholders may be adversely impacted.

CAPITAL INVESTMENT

The timing and amount of capital expenditures by the Fund will directly affect the amount of cash available for distribution to Unitholders. Distributions may be reduced, or even eliminated, at times when the board of trustees of the Fund deems it necessary to make significant capital or other expenditures.

RESTRICTIONS ON POTENTIAL GROWTH

The payout by the Fund of a significant portion of its operating cash flow will make additional capital and operating expenditures dependent on increased cash flow or additional financing in the future. Lack of those funds could limit the future growth of the Fund and its cash flow.

TAX RELATED RISKS

The income of the Partnership and the Fund must be computed and will be taxed in accordance with Canadian tax laws, all of which may be changed in a manner that could adversely affect the amount of distributable cash available to Unitholders. There can be no assurance that Canadian federal income tax laws respecting the treatment of mutual fund trusts will not be changed in a manner which adversely affects the holders of units. If the Fund ceases to qualify as a "mutual fund trust" under the Tax Act, the income tax considerations would be materially and adversely different in certain respects. The Declaration of Trust provides that an amount equal to the taxable income of the Fund will be distributed each year to Unitholders in order to eliminate the Fund's taxable income and provides that additional units may be distributed to Unitholders in lieu of cash distributions. Unitholders will generally be required to include an amount equal to the fair market value of those units in their taxable income, in circumstances when they do not directly receive a cash distribution.

If the Fund ceases to qualify as a "mutual fund trust" under the Tax Act, the units will cease to be qualified investments for Registered Retirement Savings Plans, Registered Retirement Income Funds, Deferred Profit Sharing Plans and Registered Education Savings Plans (collectively "Deferred Income Plans"). The Fund will endeavour to ensure that the units continue to be qualified investments for Deferred Income Plans. The Tax Act imposes penalties for the acquisition or holding of non-qualified investments in such plans and there is no assurance that the conditions prescribed for such qualified investments will be adhered to at any particular time. Finally, if the Fund ceases to qualify as mutual fund trust for purposes of the Tax Act, the Fund will be required to pay tax under Part XII.2 of the Tax Act. The payment of Part XII.2 tax by the Fund will affect the amount of cash available for distribution by the Fund and may have adverse consequences for Unitholders.

On October 31, 2006, the Government of Canada announced its Tax Fairness Plan that proposed changes to the way income trusts and their investors are taxed. The changes have now been enacted and will affect the Fund commencing with the 2011 taxation year (assuming that the Fund adheres to the guidelines on "normal growth" as defined by the Department of Finance on December 15, 2006 as amended on December 4, 2008 and February 25, 2009).

The changes to the taxation of income trusts are not intended to apply to taxation years ending prior to 2011 for income trusts that commenced trading prior to November 2006 (such as the Fund), so long as the income trust adheres to the guidelines on "normal growth". However, in accordance with the recommendations of the Canadian Institute of Chartered Accountants contained in section 3465, the Fund has estimated its temporary differences, determined the periods over which these differences are expected to reverse and applied the current substantively enacted tax rates that will apply in the periods those temporary differences are expected to reverse. Taxable income that is not distributed to the Unitholders is generally taxed in the Trust at the highest federal and provincial income tax rates that are applicable to individuals. Beginning with the 2011 taxation year, distributions will be taxed at the Specified Investment Flow-Through Entity rate. The Fund has announced its intention to convert to a corporation and will be asking Unitholders to approve conversion at its annual meeting on May 14, 2010.

DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

Disclosure Controls

Management is responsible for establishing and maintaining disclosure controls and procedures in order to provide reasonable assurance that material information relating to the Fund is made known to them in a timely manner and that information required to be disclosed is reported within time periods prescribed by applicable securities legislation. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on management's evaluation of the design and effectiveness of the Fund's disclosure controls and procedures, the Fund's Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are designed and operating effectively as of December 31, 2009 to provide reasonable assurance that the information being disclosed is recorded, summarized and reported as required.

Internal Controls Over Financial Reporting

Management is responsible for establishing and maintaining adequate 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 generally accepted accounting principles. Internal control systems, no matter how well designed, have inherent limitations and therefore can only provide reasonable assurance as to the effectiveness of internal controls over financial reporting, including the possibility of human error and the circumvention or overriding of the controls and procedures. Management used the Internal Control - Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as the control framework in designing its internal controls over financial reporting. Based on management's design and testing of the effectiveness of the Fund's internal controls over financial reporting, the Fund's Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are designed and operating effectively as of December 31, 2009 to provide reasonable assurance that the financial information being reported is materially accurate. During the fourth quarter ended December 31, 2009, there have been no changes in the design of the Fund's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.

CHANGES IN ACCOUNTING POLICY

Fair Value and Liquidity Risk Disclosure

Effective October 1, 2009, the Fund adopted the recommendations of the CICA on the amended accounting standard, Section 3862, "Fair Value and Liquidity Risk Disclosure". The amendment is effective for fiscal years ending on or after September 30, 2009 and now requires that all financial instruments measured at fair value be categorized into one of the following three hierarchy levels for disclosure purposes:



-- Level 1 - Using quoted prices in active markets for identical
instruments that are observable;
-- Level 2 - Using quoted prices for similar instruments and inputs other
than quoted prices that are observable and derived from or corroborated
market data; or
-- Level 3 - Valuations derived from valuation techniques in which one or
more significant inputs are unobservable.


The three levels distinguish between the levels of observable inputs when measuring fair value. The amendment only affects the Fund's fair value disclosure in the notes to the audited consolidated statements and did not have an impact on the results of operations and financial condition of the Fund.

Goodwill and Intangible Assets

Effective January 1, 2009, the Fund adopted the recommendations of the CICA on a new accounting standard, Section 3064, "Goodwill and Intangible Assets": which replaces Section 3062, "Goodwill and other Intangible Assets" and Section 3450, "Research and Development Costs". New Section 3064 addresses when an internally developed intangible asset meets the criteria for recognition as an asset.

The adoption of the above described standard did not have a material impact on the Fund's consolidated financial statements

Credit Risk and the Fair Value of Financial Assets and Financial Liabilities

Effective January 1, 2009, the Fund adopted the recommendations of the CICA guidance under EIC 173 Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. This guidance clarified that an entity's own credit risk and the credit risk of the counterparty should be taken into account in determining the fair value of financial assets and financial liabilities including derivative instruments.

The adoption of the above described standard did not have a material impact on the Fund's consolidated financial statements.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Business Combinations, Consolidations and Non-Controlling Interests

In January 2009, The Canadian Accounting Standards Board issued the following new Handbook sections: 1582 - Business Combinations, 1601 - Consolidations, and 1602 - Non-Controlling Interests. These standards are effective January 1, 2011. The Fund has not yet determined the impact of the adoption of these standards on its consolidated financial statements.

International Financial Reporting Standards ("IFRS")

In March 2009, the Accounting Standards Board ("AcSB") issued its exposure draft, "Adopting IFRS in Canada, II", which reconfirmed that publicly accountable enterprises are required to adopt International Financial Reporting Standards ("IFRS") for fiscal years beginning on or after January 1, 2011. Accordingly, the Fund's first annual consolidated financial statements in accordance with IFRS will be for the year ending December 31, 2011 and will include the comparative period of 2010. Starting in the first quarter of 2011, the Fund will provide unaudited consolidated financial statements in accordance with IFRS including comparative figures for 2010.

The Fund is continuing to assess the financial reporting impacts of adopting IFRS. While the full impacts of adoption on the financial position and results of operations of the Fund have not been fully assessed and approved by the Board of Directors, the Fund does anticipate a significant increase in disclosure resulting from the adoption of IFRS. The Fund is identifying and assessing these additional disclosure requirements, as well as system changes that may be necessary to compile the required disclosures.

The Fund has established an internal IFRS project team that is led by executive management and includes key participants from various areas of the Fund as necessary to achieve a smooth transition to IFRS. Regular progress reporting to the audit committee on the status of the IFRS implementation has been ongoing throughout 2009 and will continue in 2010. This changeover process involves three separate and distinct phases:



-- Phase 1, Diagnostic Phase - This phase focuses on assessing the
differences between Canadian generally accepted accounting principles
(GAAP) and IFRS that will have the most significant impacts on the Fund.
The Diagnostic Phase was completed in fiscal 2008.

-- Phase 2, Design and Development Phase - This phase will focus on
determining the specific requirements of adopting IFRS as well as
evaluating the various alternatives and elections available to the Fund
as a result of the conversion to IFRS. This phase will involve the
design and development of detailed solutions to address the differences
identified including changes to IT systems, processes and the
preparation of shell financial statements including disclosure
requirements in accordance with IFRS.

-- Phase 3, Implementation Phase - This phase includes the implementation
and testing of the key system processes, IT systems and internal control
changes required to fully embed IFRS within the organization to achieve
ongoing IFRS compliance.


The Fund is now in Phase 2 of its changeover process and preliminary analysis has identified a number of differences. The areas most likely to have a significant impact include: the initial adoption of IFRS; employee benefits, property, plant and equipment, impairment of assets and the classification of trust units. These areas may impact the Fund's policies, procedures and financial statement disclosures. The Fund's progress-to-date has resulted in the following preliminary conclusions and assessments:



-- First-time adoption of IFRS ("IFRS 1")


IFRS 1 provides the framework for the first-time adoption of IFRS and outlines that, in general, an entity shall apply the principles under IFRS retrospectively and that adjustments arising on conversion from GAAP to IFRS shall be directly recognized in retained earnings. However, IFRS 1 also provides a number of optional exemptions from retrospective application of certain IFRS requirements as well as mandatory exceptions which prohibit retrospective application of standards.



-- Employee Benefits


IAS 19, Employee Benefits ("IAS 19") requires the past service cost element of defined benefit plants to be expensed on an accelerated basis, with vested past service costs being expensed immediately and unvested past service costs being recognized on a straight-line basis until the benefits become vested. Under Canadian GAAP, past service costs are generally amortized on a straight-line basis over the expected average remaining service period of active employees in the defined benefit plan. In addition, actuarial gains and losses are permitted under IAS 19 to be recognized directly in equity, rather than through earnings, as required under Canadian GAAP.

The Fund maintains various defined benefit pension plans and other post employment benefit plans which will be subject to different accounting treatment under IFRS as compared to Canadian GAAP. The Fund is currently reviewing its alternatives under IAS 19 and accordingly, the extent of the impact of applying IAS 19 cannot be determined at this time.



-- Property, plant and equipment


While IAS 16 - Property, Plant and Equipment ("IAS 16") and GAAP contain the same basic principles; differences in application of the standards exist. For instance, the amounts capitalized on initial recognition of an item of property, plant and equipment may be different under IFRS and consideration needs to be given to whether there are individually significant components of an item of property, plant and equipment that need to be identified and depreciated based on their specific useful lives. In addition, unlike GAAP, IFRS permits property, plant and equipment to be measured using the cost model or the revaluation model.

Significant progress has been made in this area, although the work has not yet been completed. The Fund expects to continue to reflect property, plant and equipment using the cost model.



-- Impairment of assets


The GAAP impairment analysis for long-lived assets involves a two step process, the first of which compares the asset carrying values with undiscounted future cash flows to determine whether impairment exists. If the carrying value exceeds the amount recoverable on an undiscounted basis, then the cash flows are discounted to calculate the amount of the impairment and the carrying values are written down to estimated fair value.

IAS 36, Impairment of Assets, uses a one-step approach for both testing for and measurement of impairment, with asset carrying values being compared to the higher of value in use and fair value less costs to sell. Value in use is defined as being equal to the present value of future cash flows expected to be derived from the asset in its current state. In the absence of an active market, fair value less costs to sell may also be determined using discounted future cash flows. This may result in more frequent write-downs where carrying values of assets were previously accepted under GAAP on an undiscounted cash flow basis, but could not be supported on a discounted cash flow basis.



-- Trust/exchangeable units


The Fund believes that under IFRS it may be necessary to reclassify its Trust units from equity to liabilities. We are currently evaluating the impact of this.



-- Internal Controls over Financial Reporting and Disclosure


In accordance with the Fund's approach to the certification of internal controls required under Canadian Securities Administrators' National Instrument 52-109, all entity level, information technology, disclosure and business process controls will require updating and testing to reflect changes arising from the Fund's conversion to IFRS. Where material changes are identified, these changes will be mapped and tested to ensure that no material deficiencies exist as a result of the Fund's conversion to these new accounting standards.

Several IFRS standards are in the process of being amended by the International Accounting Standards Board ("IASB"). Amendments to existing standards are expected to continue until the transition date of January 1, 2011. The Fund monitors the IASB's activities on an ongoing basis, giving consideration to any proposed changes, where applicable, in its assessment of differences between IFRS and GAAP. However, since all potential changes to IFRS that will be effective as at December 31, 2011 are not yet known, any conclusions drawn at this point in time must be considered preliminary.

FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis contains forward-looking statements that involve assumptions and estimates that may not be realized and other risks and uncertainties. These statements relate to future events or future performance and reflect management's current expectations and assumptions which are based on information currently available to the Fund's management. The forward-looking statements include but are not limited to: (i) the ability of the Fund to meet contractual obligations through cash flow generated from operations, (ii) the expectation that customer support revenues will grow following the warranty period on new machine sales and (iii) the outlook for 2010. There is significant risk that forward-looking statements will not prove to be accurate. These statements are based on a number of assumptions, including, but not limited to, continued demand for Strongco's products and services. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward looking statements. The inclusion of this information should not be regarded as a representation of the Fund or any other person that the anticipated results will be achieved and investors are cautioned not to place undue reliance on such information. These forward-looking statements are made as of the date of this MD&A, or as otherwise stated and the Fund does not assume any obligation to update or revise them to reflect new events or circumstances.

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



Strongco Income Fund

UNAUDITED CONSOLIDATED BALANCE SHEETS

As at December 31 (in thousands of dollars) 2009 2008
----------------------------------------------------------------------------

ASSETS
Current
Accounts receivable (note 19) $ 27,088 $ 40,190
Inventories (note 6) 144,461 164,091
Prepaid expenses and deposits 1,255 1,232
Assets held for sale (note 5) - 9,675
----------------------------------------------------------------------------
Total current assets 172,804 215,188

Capital assets, net (note 7) 14,133 15,073
Other assets 243 241
Accrued benefit asset (note 16) 6,607 5,415
Intangibles (note 3) 1,800 1,800
Assets held for sale (note 5) - 3,166
----------------------------------------------------------------------------
$ 195,587 $ 240,883
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES AND UNITHOLDERS' EQUITY
Current
Bank indebtedness (notes 8 and 19) $ 10,014 $ 12,844
Accounts payable and accrued liabilities (note
19) 20,866 42,116
Deferred revenue and customer deposits 515 2,654
Equipment notes payable - non-interest bearing
(note 9) 28,671 35,577
Equipment notes payable - interest bearing
(note 9) 76,172 83,307
Current portion of capital lease obligations
(note 10) 92 -
Current portion of notes payable (note 3) 1,094 -
Liabilities related to assets held for sale
(note 5) - 5,342
----------------------------------------------------------------------------
Total current liabilities 137,424 181,840

Future income taxes (note 14) 1,424 1,342
Notes payable (note 3) 1,218 2,264
Capital lease obligations (note 10) 104 -
Accrued benefit liability (note 16) 769 712
Liabilities related to assets held for sale
(note 5) - 175
----------------------------------------------------------------------------
Total liabilities 140,939 186,333
----------------------------------------------------------------------------
Contingencies (note 17)

Unitholders' equity
Unitholder capital (note 11) 57,089 57,089
Contributed surplus (note 12) 80 -
Deficit (2,521) (2,539)
----------------------------------------------------------------------------
Total unitholders' equity 54,648 54,550
----------------------------------------------------------------------------
$ 195,587 $ 240,883
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes



Strongco Income Fund

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (DEFICIT)

(in thousands of dollars, Three months ended Twelve months ended
except units and per unit December 31 December 31
amounts) 2009 2008 2009 2008
----------------------------------------------------------------------------

Revenue $ 67,494 $ 103,679 $ 291,795 $ 398,289
Cost of sales 54,405 87,663 231,847 332,463
----------------------------------------------------------------------------
Gross margin 13,089 16,016 59,948 65,826

Expenses
Administration, distribution
and selling 14,374 15,801 55,822 61,062
Amortization of intangibles
-- order backlog (note 3) - 327 - 544
Goodwill impairment (note 4) - 848 - 848
Other income (590) 344 (1,816) (690)
----------------------------------------------------------------------------
Income before the following (695) (1,304) 5,942 4,062
Interest 1,135 1,059 4,433 4,143
----------------------------------------------------------------------------
Earnings from (loss)
continuing operations
before income taxes (1,830) (2,363) 1,509 (81)
Provision for income taxes
(note 14) 270 (47) 775 276
----------------------------------------------------------------------------
Earnings (loss) from
continuing operations (2,100) (2,316) 734 (357)
----------------------------------------------------------------------------
Loss from discontinued
operations - (262) (716) (41)
----------------------------------------------------------------------------
Net income (loss) and
comprehensive income (loss) $ (2,100) $ (2,578) $ 18 $ (398)
----------------------------------------------------------------------------

Retained earnings (deficit),
beginning of period (421) 39 (2,539) 4,979
Unitholder distributions - - - (7,120)
----------------------------------------------------------------------------
Deficit, end of period $ (2,521) $ (2,539) $ (2,521) $ (2,539)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Earnings (loss) per unit
Continuing operations --
basic and diluted (0.20) (0.22) 0.07 (0.04)
Discontinued operations
-- basic and diluted - (0.03) (0.07) (0.00)
----------------------------------------------------------------------------
Earnings (loss) per unit $ (0.20) $ (0.25) $ 0.00 $ (0.04)
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Number of units issued and
to be issued 10,508,719 10,508,719 10,508,719 10,508,719
----------------------------------------------------------------------------

See accompanying notes



Strongco Income Fund

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS



Three months ended Twelve months ended
December 31 December 31
(in thousands of dollars) 2009 2008 2009 2008
----------------------------------------------------------------------------

OPERATING ACTIVITIES
Earnings (loss) from
continuing operations $ (2,100) $ (2,316) $ 734 $ (357)
Add (deduct) items not
involving a current
outlay (inflow) of cash
Amortization of capital
assets 229 192 866 793
Amortization of
equipment inventory on
rent 3,333 4,239 11,209 14,273
Amortization of
intangible assets - 327 - 544
Goodwill impairment - 848 - 848
Loss on disposal of
capital assets (11) (23) 82 (44)
Stock based compensation 80 41 80 71
Interest accretion on
note payable (note 3) 34 34 135 110
Future income taxes 243 (36) 82 319
Accrued benefit (asset)
liability and other (1,294) 50 (1,223) 252
----------------------------------------------------------------------------
514 3,356 11,965 16,809
Net change in non-cash
working capital balances
related to operations
(note 21) (1,759) (8,716) (15,158) (8,854)
----------------------------------------------------------------------------
Cash provided by (used
in) operating activities
of continuing operations (1,245) (5,360) (3,193) 7,955
Cash used in operating
activities of
discontinued operations - (590) (391) (114)
----------------------------------------------------------------------------
Cash provided by (used
in) operating activities (1,245) (5,950) (3,584) 7,841
----------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of capital
assets (263) (309) (696) (1,476)
Acquisition (note 3) - - - (7,169)
Proceeds on disposal of
capital assets 12 23 882 44
----------------------------------------------------------------------------
Cash used in investing
activities of continuing
operations (251) (286) 186 (8,601)
Cash provided by (used
in) investing activities
of discontinued
operations 500 (20) 6,228 (744)
----------------------------------------------------------------------------
Cash provided by (used
in) investing activities 249 (306) 6,414 (9,345)
----------------------------------------------------------------------------

FINANCING ACTIVITIES
Increase (decrease) in
bank indebtedness 996 6,256 (2,830) 7,073
Unitholder distributions - - - (5,569)
----------------------------------------------------------------------------
Cash provided by (used
in) financing activities 996 6,256 (2,830) 1,504
----------------------------------------------------------------------------

Net increase in cash and
cash equivalents during
the period $ - $ - $ - $ -
Cash and cash
equivalents, beginning
of period - - - -
----------------------------------------------------------------------------
Cash and cash
equivalents, end of
period $ - $ - $ - $ -
----------------------------------------------------------------------------

Supplemental cash flow
information
Interest paid $ 1,073 $ 1,163 $ 4,358 $ 4,376
Income taxes recovered $ (91) $ (9) $ (79) $ (343)

See accompanying notes


Strongco Income Fund

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2009 and 2008 (unless otherwise indicated in thousands of dollars, except per unit amounts)

1. ORGANIZATION

Strongco Income Fund (the "Fund" or "Strongco") is an unincorporated, open-ended, limited purpose trust established under the laws of Ontario pursuant to a declaration of trust dated March 21, 2005, as amended and restated on April 28, 2005 and September 1, 2006. Following receipt of unitholder approval in April, 2006 and an income tax ruling from the Canada Revenue Agency in July, 2006 Strongco completed a reorganization on September 1, 2006 whereby the Fund transferred substantially all of its operating assets and certain liabilities to Strongco Limited Partnership ("Strongco LP") which will continue to carry on the business.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of Strongco Income Fund have been prepared by management in accordance with Canadian generally accepted accounting principles within the framework of the significant accounting policies summarized below:

Basis of consolidation

The consolidated financial statements include the accounts of the Fund and its subsidiaries. All transactions and balances between the Fund and its subsidiaries have been eliminated.

Use of estimates

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Changes in accounting policy



a. Effective January 20, 2009, the Fund adopted the recommendations of the
CICA on a new accounting standard, Section 3064, "Goodwill and
Intangible Assets", which replaces Section 3062, "Goodwill and other
Intangible Assets" and Section 3450, "Research and Development Costs".
New Section 3064 addresses when an internally developed intangible asset
meets the criteria for recognition as an asset. The adoption of the
above described standard did not have a material impact on the Fund's
consolidated financial statements.

b. Effective January 1, 2009, the Fund adopted the recommendations of the
CICA guidance under EIC 173 "Credit Risk and the Fair Value of Financial
Assets and Financial Liabilities". This guidance clarified that an
entity's own credit risk and the credit risk of the counterparty should
be taken into account in determining the fair value of financial assets
and financial liabilities including derivative instruments. The adoption
of the above described standard did not have a material impact on the
Fund's consolidated financial statements.

c. Effective October 1, 2009, the Fund adopted the recommendations of the
CICA on the amended accounting standard, Section 3862, "Fair Value and
Liquidity Risk Disclosure". The amendment is effective for fiscal years
ending on or after October 1, 2009 and now requires that all financial
instruments measured at fair value be categorized into one of the
following three hierarchy levels for disclosure purposes:

-- Level 1 - Using quoted prices in active markets for identical
instruments that are observable;
-- Level 2 - Using quoted prices for similar instruments and inputs
other than quoted prices that are observable and derived from or
corroborated market data; or
-- Level 3 - Valuations derived from valuation techniques in which one
or more significant inputs are unobservable.

The three levels distinguish between the levels of observable inputs
when measuring fair value. The amendment only affects the Fund's
fair value disclosure in the notes to the audited consolidated
statements and did not have an impact on the results of operations
and financial condition of the Fund.


Revenue recognition

Revenue is recognized when there is a written arrangement in the form of a contract or purchase order with the customer, a fixed or determinable sales price is established with the customer, performance requirements are achieved, and ultimate collection of the revenue is reasonably assured.



a. Revenue from sales of equipment is recognized at the time title to the
equipment and significant risks of ownership passes to the customer,
which is generally at the time of shipment of the product to the
customer. From time to time, the Fund agrees to buy back equipment from
certain customers at the option of the customer for a specified price at
future dates. The Fund's maximum potential losses pursuant to the
majority of these buy back contracts are limited, under an agreement
with a third party, to 10% of the original sale amounts. Revenues for
these sales are recognized at the time significant risks and rewards of
ownership passes to the customer;

b. Revenue from equipment rentals is recognized in accordance with the
terms of the relevant agreement with the customer, either evenly over
the term of that agreement or on a usage basis such as the number of
hours that the equipment is used. Certain rental contracts contain an
option for the customer to purchase the equipment at the end of the
rental period. Should the customer exercise this option to purchase,
revenue from the sale of the equipment is recognized as in a) above;

c. Product support services include sales of parts and servicing of
equipment. For the sale of parts, revenues are recognized when the part
is shipped to the customer. For servicing of equipment, revenues are
recognized as the service work is completed and billed.


Foreign currency translation

Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rate prevailing at the consolidated balance sheet date. Revenue and expenses are effectively recorded at the rate of exchange in effect on the transaction dates. Exchange gains or losses are included in the determination of earnings for the year.

Financial instruments

The fair market values of the Fund's current financial assets and liabilities approximate carrying values due to their short-term nature. The Fund enters into foreign currency forward contracts to reduce the impact of currency fluctuations on the cost of certain pieces of equipment ordered for future delivery to customers. These contracts are recorded at their fair value with gains and losses recorded in income (loss).

Employee future benefit plans

The Fund accrues its obligations under employee future benefit plans and the related costs, net of plan assets. The Fund has adopted the following policies:

The actuarial determination of the accrued benefit obligations for pensions and other retirement benefits uses the projected benefit method prorated on service (which incorporates management's best estimate of future salary levels, other cost escalation, retirement ages of employees and other actuarial factors).

For the purpose of calculating the expected return on plan assets, those assets are valued at fair value.

Actuarial gains (losses) arise from the difference between actual long-term rate of return on plan assets for a period and the expected long-term rate of return on plan assets for that period and from changes in actuarial assumptions used to determine the accrued benefit obligation. The excess of the net accumulated actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the average remaining service period of active employees. The average remaining service period of the active employees covered by the employee pension plan is 16 years for 2009 and 15 years for 2008. For the executive pension plan, the period used to amortize gains and losses is based on the average expected remaining lifetime of the retirees (14 years for 2009 and 15 years for 2008).

Past service costs arising from plan amendments are deferred and amortized on a straight-line basis over the average remaining service period of the employees active at the date of the amendment.

On January 1, 2000, the Fund adopted the new accounting standard on employee future benefits using the prospective application method. The Fund is amortizing the transitional obligation on a straight-line basis over 16 years, which was the average remaining service period of employees expected to receive benefits as of January 1, 2000.

When the restructuring of a future benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement.

Stock-based compensation plan

The Fund accounts for stock options using the fair value method. Under the fair value method, compensation expense for options is measured at the grant date using an option pricing model and recognized in income on a straight-line basis over the vesting period.

Earnings per unit

The Fund follows the treasury stock method for the presentation and disclosure of basic and diluted earnings per unit. On March 17, 2008, the Fund changed the structure of distributions to unitholders. Distributions from March 20, 2008 until August 20, 2008 were in cash and "in-kind". Beginning with the month ended August 31, 2008, monthly distributions were suspended (see note 11). Prior years' basic and diluted earnings (loss) per unit have been restated to take into effect all units issued as at December 31, 2009.

Cash and cash equivalents

Cash and cash equivalents consist of all bank balances and short-term investments with remaining maturities of less than 90 days at the date of acquisition.

Inventories

Inventories are recorded at the lower of cost and net realizable value. The cost of equipment inventories is determined on a specific item basis. The cost of repair and distribution parts is determined on a weighted average cost basis. Equipment inventory while on rent is amortized based upon expected usage while on rent.

Capital assets

Capital assets are initially recorded at cost. Amortization is provided on a declining balance basis using the following annual rates:



Buildings 3% to 5%
Machinery and equipment 10% to 30%
Computer software 30%
Vehicles 30%


Computer equipment under capital leases and leasehold improvements are amortized on a straight-line basis over the remaining term of the lease.

Leases

Leases entered into by the Fund, in which substantially all of the benefits and risks of ownership are transferred to the Fund, are recorded as obligations under capital leases. Obligations under capital leases reflect the present value of future minimum lease payments, discounted at an appropriate interest rate, are reduced by rental payments net of imputed interest. Equipment under capital leases are depreciated based on the useful life of the asset. All other leases are classified as operating leases. Payments for these leases are charged to income on a straight-line basis over the life of the assets.

Discontinued operations

Income and cash flows from assets held for sale with which the Fund will have no ongoing involvement or continuing cash flows are included in discontinued operations. Refer to note 5 for details of discontinued operations.

Income taxes

The Fund follows the liability method of tax allocation to account for income taxes. Under this method of tax allocation, future income tax assets and liabilities are determined based upon the differences between the financial reporting and tax bases of assets and liabilities and are measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse.

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 unitholders. The Fund intends 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 and intends to continue to meet the requirements under the Income Tax Act (Canada) applicable to such trusts. Currently, the Fund does not pay income tax as long as distributions to Unitholders meet or exceed the amount of the Fund's income that would otherwise be taxable.

As a result of the reorganization of the operations of the Fund into a limited partnership which was completed on September 1, 2006, the underlying operations of the Fund would not be subject to income taxes but rather income taxes would be exigible directly at the unitholder level and accordingly, all existing future income tax amounts were eliminated and recognized in the consolidated statement of income for the year ended December 31, 2006.

Proposed changes to the taxation of income trusts were substantively enacted on June 12, 2007. The changes are not intended to apply to taxation years ending prior to 2011, for income trusts that commenced trading prior to November 2006. However, in accordance with the recommendations of the CICA contained in Section 3465 of the CICA Handbook, the Fund has estimated its temporary differences reversing in the 2011 taxation year and beyond and applied the current substantively enacted tax rates that will apply in the periods those temporary differences are expected to reverse.

Taxable income that is not distributed to unitholders is generally taxed in the Trust at the highest federal and provincial income tax rates that are applicable to individuals. Beginning with the 2011 taxation year, distributions will be taxed at the Specified Investment Flow-Through Entity rate.

Impairment of long-lived assets

The Fund reviews whether there are any indicators that the carrying amount of its capital assets and identifiable intangible assets with definite lives ("long-lived depreciable assets") may not be recoverable. If such indicators are present, the Fund assesses the recoverability of the assets or group of assets by determining whether the carrying value of such assets can be recovered through undiscounted future cash flows expected to arise as a direct result of the use of the assets over their remaining useful lives and eventual disposition. If the sum of the undiscounted future cash flows is less than the carrying amount, then the fair value of the assets is determined and any excess of the carrying amount of the assets over their estimated fair value is recorded as a charge to earnings.

Goodwill and intangible assets with indefinite lives

Goodwill represents the excess of the purchase price of an acquired enterprise over the fair value of identifiable assets acquired. Goodwill is not subject to amortization but is subject to an annual review for impairment, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. The impairment review is a two-step test that first considers whether the fair value of the reporting unit to which the goodwill relates is greater than the carrying value of all assets of the reporting unit, including goodwill. Fair value of the reporting unit is determined based on the discounted future cash flows of the reporting unit. Where the fair value of the reporting unit exceeds the carrying value of all assets, then the goodwill is considered not to be impaired. Where the carrying value of all assets of the reporting unit exceeds its fair value then the estimated fair value of the goodwill is determined and compared to its carrying value. Where the carrying value of the goodwill exceeds its estimated fair value, an impairment loss equal to the excess is recorded as a charge to earnings. Refer to note 4 for details of goodwill impairments.

Identifiable intangible assets with indefinite lives acquired are not subject to amortization but are subject to an annual review for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The review for impairment compares the fair value of the intangible asset to its carrying value. Where the carrying value of the intangible asset exceeds its fair value an impairment loss equal to the excess is recorded as a charge to earnings.

Recently issued accounting pronouncements

International Financial Reporting Standards

In March 2009, the Accounting Standards Board ("AcSB") issued its exposure draft, "Adopting IFRS in Canada, II", which reconfirmed that publicly accountable enterprises are required to adopt International Financial Reporting Standards ("IFRS") for fiscal years beginning on or after January 1, 2011. Accordingly, the Fund's first annual consolidated financial statements in accordance with IFRS will be for the year ending December 31, 2011 and will include the comparative period of 2010. Starting in the first quarter of 2011, the Fund will provide unaudited interim consolidated financial statements in accordance with IFRS including comparative figures for 2010.

The Fund is currently assessing the financial reporting impacts of adopting IFRS. While the full impacts of adoption on the financial position and results of operations of the Fund have not been fully assessed, the Fund does anticipate a significant increase in disclosure resulting from the adoption of IFRS.

The process to changeover to IFRS involves three separate and distinct phases: diagnostic, design and development and implementation. The Fund is now in the design and development phase of its changeover process and preliminary analysis has identified a number of differences. These areas may impact the Fund's policies, procedures and financial statement disclosures.

Business Combinations, Consolidations and Non-Controlling Interests

In January 2009, The Canadian Accounting Standards Board issued the following new Handbook sections: 1582 - Business Combinations, 1601 - Consolidations, and 1602 - Non-Controlling Interests. These standards are effective January 1, 2011. The Fund has not yet determined the impact of the adoption of these standards on its consolidated financial statements.

3. ACQUISITION

On March 20, 2008, the Fund purchased substantially all of the assets (excluding real property) of the Champion Road Machinery division ("Champion") of Volvo Group Canada Inc. for a total consideration of $24,984 including deal-related costs of $190. The consideration was comprised of cash of $22,830 and a non-interest bearing note detailed below. Part of the cash consideration was provided by $15,661 in equipment notes borrowed by Strongco from Volvo Financial Services ("VFS") coincident with the purchase of Champion. These funds from these equipment notes were paid directly to Volvo from VFS and were used to finance the equipment inventory purchased with Champion. These equipment notes payable were on the same terms as Strongco's other equipment notes with VFS (see note 9 - Equipment Notes Payable) and were secured by the machinery inventories of Champion acquired.

A non-interest bearing note payable in favour of Volvo Group Canada Inc. of $2,412 with $1,162 due on March 1, 2010 and $1,250 due on March 1, 2011 has been classified as long-term debt. The note is secured with certain assets of Champion. The note has been discounted at 6.0% using the effective interest rate method, resulting in a discount of $346 that will be amortized as expense to continuing operations over the three-year period to March 2011. The original note of $2,500 was reduced in 2009 by $88 due to a reduction received from Volvo.

The acquisition was recorded using the purchase method and the operating results have been included in the Fund's operating results from the acquisition date The purchase price allocation was assigned to the net identifiable assets acquired based on their fair values as follows:




$
----------------------------------------------------------------------------
Accounts receivable 4,358
Prepaids and other assets 37
Inventory 17,616
Accounts payable and accrued liabilities (1,151)
Fixed assets 932
Identifiable intangible assets with indefinite life, subject to
impairment review
Distribution rights 1,800
Identifiable intangible assets subject to amortization
Order backlog 544
Excess of purchase price over fair value of identifiable assets
acquired (goodwill) 848
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total adjusted purchase price, including deal-related costs 24,984
----------------------------------------------------------------------------


The order backlog was amortized as the related equipment sales were finalized in 2008.

Champion provided full service sales, rentals, parts and service for the Volvo Motor Grader line in Ontario. In addition to graders, Champion carried the Volvo Compact line in Ontario.

4. GOODWILL IMPAIRMENTS

In 2008, as a result of the general economic downturn and the weakness in the Fund's major market sectors, covenant violations under the Fund's lending agreements (see note 20) and decline in the Fund's market capitalization, management performed an impairment test on the Fund's long-lived assets, including goodwill. Based upon these tests, management determined that the goodwill associated with the acquisition of Champion (see note 3) had been impaired and recorded a charge against earnings of $848 before income taxes. No other impairments were identified as a result of this testing.

5. DISCONTINUED OPERATIONS

On May 26, 2009, the Fund completed the sale of the assets and liabilities of its Engineered Systems segment, allowing Strongco to focus its resources and management efforts on growing its core Equipment Distribution business. Proceeds of $6,284 resulted in a loss on sale, after deal costs, of $556. Initial proceeds of $5,962 on the sale were settled in cash with an additional $500 deposited in trust with working capital adjustments to be completed by August 11, 2009. Claims under the indemnification provisions totaling $178 were settled out of the funds held in trust and the remaining trust deposit of $322 was released to Strongco in November 2009.

In accordance with the CICA Handbook section 3475 - Disposal of Long-Lived Assets and Discontinued Operations, the results of operations of the Engineered Systems business, together with the loss on sale have been reported as discontinued operations for the year ended December 31, 2009, and prior year comparative figures have been reclassified to conform to disclosure in the current period. The assets and liabilities of the Engineered Systems business in prior periods have also been reclassified as assets held for sale. The results from discontinued operations for the year ended December 31, 2009, including the loss on sale, were as follows:




($ thousands, except per unit amounts) 2009 2008
----------------------------------------------------------------------------
Revenues $ 8,982 $ 29,032
Cost of sales 7,435 22,874
----------------------------------------------------------------------------
Gross Margin 1,547 6,158

Administration, distribution and selling expenses 2,484 6,008
Other (income)/expense 110 (43)
----------------------------------------------------------------------------
Operating income (loss) $ (1,047) $ 193
Interest expense 60 239
Loss on sale of business 556
----------------------------------------------------------------------------
(Loss) before income taxes (1,663) (46)
Recovery of income taxes (947) (5)
----------------------------------------------------------------------------
(Loss) from discontinued operations after tax $ (716) $ (41)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted earnings (loss) per unit from
discontinued operations $ (0.07) $ (0.00)


The loss on sale of $556 was calculated as follows:
($ thousands)
----------------------------------------------------------------------------
Accounts receivable 3,754
Prepaids and other assets 553
Inventory 2,519
Legal and exit costs 450
Capital assets, net 2,929
Other assets 67
Accounts payable and accrued liabilities (3,432)
----------------------------------------------------------------------------
6,840
----------------------------------------------------------------------------
Cash Proceeds 6,284
----------------------------------------------------------------------------
Loss on Sale 556
----------------------------------------------------------------------------


The assets and liabilities of the Engineered Systems segment reclassified as "held for sale" as at December 31, 2008 were as follows:



($ thousands)
----------------------------------------------------------------------------
ASSETS
Current
Accounts receivable 6,160
Prepaids and other assets 137
Inventory 3,378
----------------------------------------------------------------------------
Total current assets held for sale 9,675
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Long Term
Fixed assets 3,037
Other 129
----------------------------------------------------------------------------
Total long term assets held for sale 3,166
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
Current
Accounts payable and accrued liabilities 4,382
Deferred revenue and customer deposits 960
----------------------------------------------------------------------------
Total current liabilities related to assets held for sale 5,342
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Long Term
Future Income Taxes 175
----------------------------------------------------------------------------
Total long term liabilities related to assets held for sale 175
----------------------------------------------------------------------------


6. INVENTORIES

Inventories are recorded at the lower of cost and net realizable value. The cost of purchased equipment inventories is determined on a specific item basis. The cost of purchased repair and distribution parts is determined on a weighted average cost basis. Spare parts and stand-by equipment used in the Fund's operations are not included in inventory.

The value of the Fund's new and used equipment is evaluated by management throughout each year. Where appropriate, a write down is recorded against the book value of specific pieces of equipment to ensure that inventory values reflect the lower of cost or estimated net realizable value. For the year ended December 31, 2009, the Fund recorded $390 of equipment write-downs (2008 - $2.6 million).

Throughout the year, Fund management identifies slow moving or obsolete parts inventory and estimates appropriate obsolescence provisions by aging the inventory. For the year ended December 31, 2009, the Fund expensed $191 (2008 - $494) in additional obsolescence and scrap provisions.

During the year ended December 31, 2009, there were no reversals of write-downs or provisions recognized in prior periods.

Inventory costs recognized as an expense during the year are reported as cost of sales in the consolidated statements of operations. Cost of sales also includes amortization of equipment inventory on rent of $11,209 (2008 - $14,273). Equipment inventory on rent as at December 31, 2009 was $33,919 (2008 - $32,381).



Inventory components as at December 31,
(net of write-downs and provisions)
2009 2008
$ $
- -
Equipment 124,518 137,836
Parts 17,679 20,415
Work in process 2,264 5,840
----------------------------------------------------------------------------
144,461 164,091
----------------------------------------------------------------------------


7. CAPITAL ASSETS

Capital assets consist of the following:



2009
----
Net
Accumulated book
Cost amortization value
$ $ $

Land 2,883 - 2,883
Buildings and leasehold improvements 13,052 5,481 7,571
Machinery, equipment and vehicles 14,154 10,669 3,485
Computer equipment under capital leases 236 42 194
----------------------------------------------------------------------------
30,325 16,192 14,133
----------------------------------------------------------------------------


2008
----
Net
Accumulated book
Cost amortization value
$ $ $

Land 3,005 - 3,005
Buildings and leasehold improvements 14,201 5,498 8,703
Machinery, equipment and vehicles 13,969 10,604 3,365
Vehicles under capital leases - - -
----------------------------------------------------------------------------
31,175 16,103 15,073
----------------------------------------------------------------------------


8. BANK CREDIT FACILITY AND BANK INDEBTEDNESS

The Fund has a credit facility with a Canadian Chartered Bank which provides a $20 million 364-Day committed operating line of credit which is renewable annually (see note 20). Borrowings under the line of credit are limited by a standard borrowing base calculation based on accounts receivable and inventory typical of such lines of credit. As collateral the Fund has provided a $50 million debenture and a security interest in accounts receivables, inventories (subordinated to the collateral provided to the equipment inventory lenders), capital assets (subordinated to collateral provided to lessors), real estate and on intangible and other assets. Interest rate on the operating line ranges between bank prime rate plus 0.50% and bank prime rate plus 1.50% and between the one month Canadian Bankers' Acceptance Rates ("BA rates") plus 1.75% and BA rates plus 2.75%, depending on the Fund's ratio of debt to tangible net worth ("TNW"). Under its operating facility the Fund is able to issue letters of credit up to a maximum of $5 million. Outstanding letters of credit reduce the Fund's availability under its operating line of credit. For certain customers, Strongco issues letters of credit as a guarantee of Strongco's performance on the sale of equipment to the customer. As at December 31, 2009, there was outstanding letters of credit of $74 (2008 - $200).

In addition to its operating line of credit, the Fund has a $10 million line for foreign exchange forward contracts as part of its bank credit facilities ("FX Line") available to hedge foreign currency exposure. Under this FX Line, Strongco can purchase foreign exchange forward contracts up to a maximum of $10 million. As at December 31, 2009, the Fund had outstanding foreign exchange forward contracts under this facility totaling US$2,438 at an average exchange rate of $1.07 Canadian for each US $1.00 with settlement dates between January and June 2010 (December 31, 2008 - US$2,365 at an average exchange rate of $1.22 Canadian for each US $1.00).

9. EQUIPMENT NOTES PAYABLE

Various non-bank lenders provide secured wholesale financing on equipment inventory ("equipment notes payable"), some of which is interest free for periods up to seven months from the date of financing. Thereafter, the equipment notes payable bear interest at rates ranging from 4.25% to 5.85% over the one month Canadian Bankers' Acceptance Rate and 4.0% to 6.0% over the prime rate of Canadian chartered banks. The effective interest rates on these notes payable as at December 31, 2009 ranged from 4.56% to 8.25% (2008 - 3.15% to 4.35%). Monthly principal repayments equal to 3% of the original face value of the notes commence twelve months from the date of financing and the remaining balance is due in full twenty four months after the date of financing or when the financed equipment is sold. As collateral, the Fund has provided liens on specific inventories and accounts receivable with an approximate book value of $117,000 (2008 - $138,000). The equipment notes are payable on demand and therefore have been classified as current liabilities (see note 20).

10. CAPITAL LEASE OBLIGATIONS

At December 31, 2009, the Fund had computers under capital leases of $196 at an interest rate of 4.2%. The capital leases expire over a 33 month term through to July 2012. The future minimum annual payments, interest and balance of obligations were as follows:



For the years ending December 31 2009 2008
$ $
2010 92 -
2011 89 -
2012 28 -
----------------------------------------------------------------------------
Total minimum lease payments 209 -
Less amount representing interest 13 -
----------------------------------------------------------------------------
Present value of minimum lease payments 196 -
Current portion of obligations under capital leases 92 -
----------------------------------------------------------------------------
Long term portion of obligations under capital leases 104 -
----------------------------------------------------------------------------


11. UNITHOLDERS' EQUITY

(a) Authorized

Unlimited number of units.

(b) Issued

Details of issued unitholders' capital is as follows:




2009 2008
---- ----
Units Amount Units Amount
Unitholders' capital # $ # $

Units, beginning of year 10,508,719 57,089 10,043,185 54,534
Units issued April 21, 2008 91,902 502
Units issued May 20, 2008 84,325 506
Units issued June 20, 2008 88,598 511
Units issued July 18, 2008 95,448 516
Units issued August 20, 2008 105,261 520
----------------------------------------------------------------------------
Units, end of year 10,508,719 57,089 10,508,719 57,089
----------------------------------------------------------------------------


The Fund's policy is to make distributions of cash and units in-kind consistent with balancing long-term growth strategies and the providing of current income to unitholders. On March 17, 2008, the Fund changed the structure of distributions to unitholders. Beginning with the March 2008 distribution, distributions have been in cash and by issuing units in-kind, with units issued to unitholders at a deemed price equal to the volume-weighted average price of all units traded on the Toronto Stock Exchange on the 10 trading days ending on the third trading day preceding the record date. The Fund makes monthly distributions to unitholders of record on the last business day of each month payable on or about the 20th day of the following month.

On August 12, 2008, the Fund announced that monthly distributions were suspended until further notice, beginning with the month ended August 31, 2008.

12. STOCK BASED COMPENSATION

On August 11, 2008, the Fund issued irrevocable options to the then newly appointed Chief Executive Officer to purchase 100,000 units in the capital of the Fund. The options have an exercise price of $2.98 per unit which is equal to the average trading price of the Fund's units over the five days immediately following August 11, 2008. Fifty percent of the options vest and become exercisable after 12 months from the grant date and the balance vest and become exercisable after 24 months from the grant date. The options expire five years from the issue date on August 11, 2013. The options were approved by the unitholders at the annual meeting of the unitholders on April 30, 2009. The stock-based compensation expense of these options is based upon the estimated fair value of the options at the grant date, which was determined using the Black-Scholes option pricing model, amortized on a straight line basis over the two year vesting period of the option. The following assumptions were used in determining the fair value of the option using the Black-Scholes model:



Risk-free rate of return 3%
Option Life 5 years
Expected volatility 60%


The stock based compensation expense related to stock options for 2009 was $80 (2008 - $nil).

On October 28, 2009, the Fund issued irrevocable options to certain members of senior management to purchase 375,000 units in the capital of the Fund. The compensatory options, which have an exercise price of $4.50 per unit, are not exercisable prior to the approvals of the unitholders at the next meeting of the unitholders. Accordingly, there is no compensation cost recognized in the consolidated financial statements for the year ended December 31, 2009.

13. LONG-TERM INCENTIVE PLAN

Key senior management of the Fund and its affiliates are eligible to participate in the Strongco Long-Term Incentive Plan (the "LTIP"). Pursuant to the LTIP, Strongco will set aside a pool of funds based upon the amount by which the Fund's distributions per unit exceed cash distribution threshold amounts. A trustee 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, generally over three years. In 2009 and 2008, $nil was transferred into the LTIP pool relating to the excess of cash distributions over threshold amounts. The LTIP compensation expense was $nil in 2009 (2008 - $71).

14. INCOME TAXES

Significant components of the provision for (recovery of) income taxes are as follows:



2009 2008
$ $
---------------------------------------------------------------------------
Current income tax expense (recovery) 693 (43)
Future income tax expense 82 319
---------------------------------------------------------------------------
775 276
---------------------------------------------------------------------------


The provision for income taxes differs from that which would be obtained by applying the statutory tax rate as a result of the following:



2009 2008
$ $
---------------------------------------------------------------------------
Earnings (loss) before taxes 1,509 (81)
Statutory tax rate 46.40% 46.40%
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Provision for income taxes at statutory tax rate 700 (38)
Adjustments thereon for the effect of:
Permanent & other differences 234 909
Income of the Fund to be distributed to unitholders - (613)
Income of the Fund not subject to tax (79) -
Other (80) 18
---------------------------------------------------------------------------
775 276
---------------------------------------------------------------------------


The net future income tax liability is represented by the following:



2009 2008
$ $
---------------------------------------------------------------------------
Eligible capital expenditures and other reserves 1,017 933
---------------------------------------------------------------------------
Future income tax assets 1,017 933
---------------------------------------------------------------------------

Capital and other assets 476 441
Accrued benefit asset 1,966 1,834
---------------------------------------------------------------------------
Future income tax liabilities 2,441 2,275
---------------------------------------------------------------------------
Net future income tax liability 1,424 1,342
---------------------------------------------------------------------------


The Government of Canada enacted changes to the taxation of income trusts under its Tax Fairness Plan. The changes are not intended to apply to taxation years ending prior to 2011, for income trusts that commenced trading prior to November 2006. However, in accordance with the recommendations of the CICA contained in Section 3465, the Fund has estimated its temporary differences reversing in the 2011 taxation year and beyond and applied the current substantively enacted tax rates that will apply in the periods those temporary differences are expected to reverse.

15. OPERATING LEASE COMMITMENTS

The Fund has entered into various operating leases for its premises, certain vehicles, furniture and fixtures and equipment. Approximate future minimum annual payments under these operating leases are as follows:




$
2010 7,581
2011 5,523
2012 4,063
2013 3,481
2014 2,808
Thereafter 6,521
------------------------------
Total 29,977
------------------------------


16. POST RETIREMENT OBLIGATIONS

The Fund has a number of funded and unfunded benefit plans that provide pension, as well as other retirement benefits to some of its employees. One of its defined benefit plans is based on years of service and final average salary, while another one is a career average plan. The Fund also has other post retirement benefit obligations which include an unfunded retiring allowance plan and a non-contributory dental and health care plan. Under these plans, the cost of benefits is determined using the projected benefit method prorated on services.

Effective May 29, 2009, Strongco sold its Engineered Systems segment (note 5). Employees of the Engineered Systems segment were transferred to the purchaser. Benefits earned by the transferred employees were frozen in the Strongco Employees' Pension Plan on that date. This transaction constitutes a curtailment under CICA 3461 accounting. Remeasurement of the value of the affected members' benefits resulted in an actuarial gain of $360. This amount was used to reduce the Plan's net unamortized actuarial losses. In addition, a pro rata portion of the outstanding transitional obligation was reflected as a curtailment loss and increased the 2009 Plan expense by $19.

Information about the Fund's defined benefit pension plan for employees is as follows:



2009 2008
$ $
Accrued benefit obligation, beginning of year 21,387 26,341
Current service cost 1,223 1,887
Interest cost 1,616 1,507
Benefits paid (2,409) (1,655)
Actuarial (gain) loss 4,205 (6,693)
Corporate restructuring giving rise to:
Curtailments (360) -
----------------------------------------------------------------------------
Accrued benefit obligation, end of year 25,662 21,387
----------------------------------------------------------------------------

Fair value of plan assets, beginning of year 20,372 24,412
Actual return on plan assets 3,905 (4,050)
Employer contributions 2,086 708
Employee contributions 797 957
Benefits paid (2,409) (1,655)
----------------------------------------------------------------------------
Fair value of plan assets, end of year 24,751 20,372
----------------------------------------------------------------------------


Plan assets consist of:



% %
Asset category
Equity securities 65.9 64.0
Debt securities 28.6 35.3
Other 5.5 0.7
---------------------------------------------------------------------------
Total 100.0 100.0
---------------------------------------------------------------------------

Fair value of plan assets 24,751 20,372
Accrued benefit obligation 25,662 21,387
---------------------------------------------------------------------------
Funded status of plan -- surplus (deficit) (911) (1,015)
Unamortized net actuarial loss 6,842 5,698
Unamortized transitional obligation 85 121
---------------------------------------------------------------------------
Accrued benefit asset 6,016 4,804
---------------------------------------------------------------------------


Elements of defined benefit costs recognized in the year:



2009 2008
$ $
Current service cost, net of employee contributions 426 930
Interest on accrued benefits 1,616 1,507
Actual (return) loss on plan assets (3,905) 4,050
Actuarial (gain) loss 4,205 (6,693)
Curtailment losses 19 -
----------------------------------------------------------------------------
Elements of defined benefit costs before
adjustments recognized: 2,361 (206)
Adjustments to recognize the long term
nature of benefit costs:
- (return) loss on assets (expected vs actual in year) 2,444 (5,759)
- actuarial (gains) losses (recognized vs actual in year) (3,948) 6,979
- transitional obligation 16 17
----------------------------------------------------------------------------
Defined benefit costs recognized 873 1,031
----------------------------------------------------------------------------


The Fund measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as of December 31 of each year. For this pension plan, the most recent actuarial valuation for funding purposes was performed as of August 31, 2009 and the next required valuation will be due no later than August 31, 2010.

Information about the Fund's defined benefit pension plan for executives is as follows:



2009 2008
$ $
Accrued benefit obligation, beginning of year 1,625 1,866
Current service cost - -
Interest cost 108 98
Benefits paid (170) (170)
Actuarial (gain) loss 267 (169)
----------------------------------------------------------------------------
Accrued benefit obligation, end of year 1,830 1,625
----------------------------------------------------------------------------

Fair value of plan assets, beginning of year 1,227 1,596
Actual return (loss) on plan assets 213 (289)
Employer contributions 67 90
Benefits paid (170) (170)
----------------------------------------------------------------------------
Fair value of plan assets, end of year 1,337 1,227
----------------------------------------------------------------------------


Plan assets consist of:



% %
Asset category
Equity securities 69.5% 64.9%
Debt securities 30.4% 34.3%
Other 0.1% 0.8%
----------------------------------------------------------------------------
Total 100.0% 100.0%
----------------------------------------------------------------------------

Fair value of plan assets 1,337 1,227
Accrued benefit obligation 1,830 1,625
----------------------------------------------------------------------------
Funded status of plan -- deficit (493) (398)
Unamortized net actuarial loss 1,066 988
Unamortized transitional obligation 18 21
----------------------------------------------------------------------------
Accrued benefit asset 591 611
----------------------------------------------------------------------------



2009 2008
$ $
Current service cost, net of employee contributions - -
Interest on accrued benefits 108 98
Actual (return) loss on plan assets (213) 289
Actuarial (gain) loss 267 (169)
----------------------------------------------------------------------------
Elements of defined benefit costs before
adjustments recognized: 162 218
Adjustments to recognize the long term nature
of benefit costs:
- return (loss) on assets (expected vs actual in year) 131 (398)
- actuarial gains (losses) (recognized vs actual in year) (209) 210
- transitional obligation (amortization) 3 3
----------------------------------------------------------------------------
Defined benefit costs recognized 87 33
----------------------------------------------------------------------------


The Fund measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as of December 31 of each year. For this pension plan, the most recent funding valuation was performed as of June 30, 2009 and the next required valuation will be due no later than June 30, 2012.

Accrued benefit asset is comprised as follows:



2009 2008
$ $
Employee Plan 6,016 4,804
Executive Plan 591 611
----------------------------------------------------------------------------
6,607 5,415
----------------------------------------------------------------------------


Information about the Fund's other post retirement benefit obligations, in aggregate, is as follows:



2009 2008
$ $
Accrued benefit obligation, beginning of year 1,432 1,367
Current service cost - -
Interest cost 96 70
Benefits paid (98) (130)
Actuarial loss 117 125
----------------------------------------------------------------------------
Accrued benefit obligation, end of year 1,547 1,432
----------------------------------------------------------------------------

Fair value of plan assets - -
Accrued benefit obligation 1,547 1,432
----------------------------------------------------------------------------
Funded status of plan -- deficit (1,547) (1,432)
Unamortized net actuarial loss 607 520
Unamortized transitional obligation 171 200
----------------------------------------------------------------------------
Accrued benefit liability (769) (712)
----------------------------------------------------------------------------


Elements of defined benefit costs recognized in the year



2009 2008
$ $
Current service cost, net of employee contributions - -
Interest on accrued benefits 96 70
Actuarial loss 117 125
Settlement gain - -
----------------------------------------------------------------------------
Elements of defined benefit costs before
adjustments recognized: 213 195
Adjustments to recognize the long term
nature of benefit costs:
- actuarial gain (recognized vs actual in year) (87) (107)
- past service costs (amortized vs actual in year) - -
- transitional obligation (amortization) 29 28
----------------------------------------------------------------------------
Defined benefit costs recognized 155 116
----------------------------------------------------------------------------


The significant actuarial assumptions adopted in measuring the Fund's accrued benefit obligations are as follows:



2009 2008
Accrued benefit obligation as of the end of the period % %

Discount rate 6.25 7.50
Rate of compensation increase 3.00 3.00
----------------------------------------------------------------------------

2009 2008
Benefit cost for the period % %

Discount rate 7.50 5.50
Expected long-term rate of return on plan assets 7.00 7.00
Rate of compensation increase 3.00 3.00
----------------------------------------------------------------------------


The actual claims cost for 2009 was used to project the 2010 expense. The assumed health care cost trend rate is 8.0% in 2010, declining by 0.5% per annum to 5.0% per annum in 2016 and thereafter. The assumed dental cost rate is 4.0% per annum.

Assumed health and dental care cost trend rates have a significant effect on the amounts reported for the health and dental care plans. A one percentage point change in assumed health and dental care cost trend rates would have the following effects for 2009:



Increase Decrease

Total of service and interest cost 8 (7)
Accrued benefit obligation as of December 31, 2009 144 (117)
----------------------------------------------------------------------------


In addition, the Fund maintains a defined contribution plan available only to certain employees (approximately 12.0% of the workforce (2008 - 9.8%)) who were existing members of the plan following a previous acquisition and members of a defined contribution plan of a business acquired in 2008. In 2009, the Fund's contributions were $176 (2008 - $188). The Fund also maintains a group RSP/LIRA available only to certain employees (approximately 13.4% of the workforce (2008 - 10.2%)) covered under a collective bargaining agreement. In accordance with the terms of the collective bargaining agreement in 2009, the Fund's contributions were $191 (2008 - $163).

In February 2006, the Fund established a new defined contribution retirement savings program for executive officers, the ("DCRSP") with retroactive effect to January 1, 2006. The expense related to the DCRSP for the year ended December 31, 2009 was $227 (2008 - $168).

In June 2007, Strongco established a new defined contribution retirement savings program for designated senior management, the ("DCRSP-GM"). The expense related to the DCRSP-GM for the year ended December 31, 2009 was $59 (2008 - $58).

Total cash payments for employee future benefits for 2009 consisting of cash contributed by the Fund to its funded pension plans, cash payments directly to beneficiaries for its unfunded other benefit plans and cash contributed to its defined contribution plan were $2,858 (2008 - $1,466).

17. CONTINGENCIES

(a) The Fund has agreed to buy back equipment from certain customers at the option of the customer for a specified price at future dates ("buy back contracts"). These contracts are subject to certain conditions being met by the customer and range in term from three to ten years. At December 31, 2009, the total obligation under these contracts was $9,769 (2008 - $10,025). The Fund's maximum potential losses pursuant to the majority of these buy back contracts are limited, under an agreement with a third party, to 10% of the original sale amounts. A reserve of $699 (2008 - $708) has been accrued in the Fund's accounts with respect to these commitments.

The Fund has provided a guarantee of lease payments under the assignment of a property lease which expires January 31, 2014. Total lease payments from January 1, 2010 to January 31, 2014 are $610 (2008 - $759).

(b) In the ordinary course of business activities, the Fund may be contingently liable for litigation. On an ongoing basis, the Fund assesses the likelihood of any adverse judgements or outcomes, as well as potential ranges of probable costs or losses. A determination of the provision required, if any, is made after analysis of each individual issue. The required provision may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy dealing with these matters.

A statement of claim has been filed naming a division of the Fund as one of several defendants in proceedings under the Superior Court of Quebec. The action claims errors and omissions in the contractual execution of work entrusted to the defendants and names the Fund as jointly and severally liable for damages of approximately $5.9 million. Although the Fund cannot predict the outcome at this time, based on the opinion of external legal counsel, the Fund believes that they have a strong defense against the claim and that it is without merit.

18. SEGMENTED INFORMATION

As a result of the divestiture of the Engineered Systems segment, the Fund operates in one reportable segment, Equipment Distribution. Equipment Distribution business is one of the largest multi-line mobile equipment distributors in Canada. This business sells and rents new and used equipment and provides after-sale product support (parts and service) to customers that operate in infrastructure, construction, mining, oil and gas exploration, forestry and industrial markets. Financial information with respect to the Engineered Systems segment is disclosed in note 5.

A breakdown of revenue within the Equipment Distribution segment is as follows:



2009 2008
----------------------------------------------------------------------------
Equipment sales 183,751 281,950
Equipment rentals 14,321 17,714
Product support 93,723 98,625
----------------------------------------------------------------------------
Total equipment distribution 291,795 398,289
----------------------------------------------------------------------------


19. FINANCIAL INSTRUMENTS

Categories of financial assets and liabilities

Under GAAP, financial instruments are classified into one of the five categories: held-for-trading, held to maturity investments, loans and receivables, available-for-sale financial assets and other financial liabilities. The carrying values of the Fund's financial instruments, including those held for sale on the consolidated balance sheet are classified into the following categories:



2009
Loans and receivables (1) 27,088
Liabilities (2) 138,550
----------------------------------------------------------------------------
(1) Includes accounts receivable.
(2) Includes bank indebtedness, accounts payable and accrued liabilities,
equipment and other notes payable.


The Fund has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies; however, considerable judgment is required to develop these estimates. The fair values of the Fund's financial assets are not materially different from their carrying value. The fair values of the Fund's financial liabilities were approximately $135,000 as at December 31, 2009. These fair values were determined using a discounted cash flow model with the Fund's current risk adjusted rate of 6.5%.

The amendment to Section 3862 is applied to financial assets and liabilities, such as derivative instruments consisting of foreign exchange forward contracts (Level 2 - inputs, other than quoted prices in active markets, that are observable, either directly or indirectly). Losses of $45 were included in Other Income for the year ended December 31, 2009.

The anticipated maturities of the Fund's financial liabilities are as follows:



Maturities of Financial
Liabilities As at December 31, 2009

Financial Liability Less than 3 to 12 12 to 24
3 months months months Total
Bank indebtedness (1) 10,014 - - 10,014
Accounts payable and accrued
liabilities 20,866 - - 20,866
Customer deposits 515 - - 515
Equipment notes payable (2)
non-interest bearing 28,671 - - 28,671
Equipment notes payable (2) 76,172 - - 76,172
interest bearing - - -
Notes payable 1,162 - 1,250 2,412
----------------------------------------------------------------------------
137,400 - 1,250 138,650
----------------------------------------------------------------------------

(1) Bank operating line of credit is due on demand and therefore the
maturity is reflected as due currently.

(2) Equipment notes are due on demand and therefore the maturity is
reflected as due currently. Principal repayments commence over the
period from the date of financing to twelve months thereafter and are
due in full when the related equipment is sold or within twenty four
months from the date of financing if the related equipment is not sold
(see note 9).


Foreign exchange forward contracts, interest rate swaps and other hedging arrangements

On a transaction specific basis, the Fund utilizes financial instruments to manage the risk associated with fluctuations in foreign exchange. The Fund formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions.

The Fund enters into foreign currency forward contracts to reduce the impact of currency fluctuations on the cost of certain pieces of equipment ordered for future delivery to customers. As at December 31, 2009, the Fund had outstanding foreign exchange forward contracts totalling US$2,438 at an average exchange rate of $1.07 Canadian for each US$1.00 with maturities between January and the end of June 2010. These foreign currency forward contracts are not considered hedges for accounting purposes and as a result any gain or loss resulting from the fair valuation of these contracts at each month end prior to their settlement is charged to earnings from continuing operations. The outstanding foreign exchange contracts are reported as accrued liabilities in the consolidated balance sheets and changes in the outstanding amount are reported as changes in non-cash working capital balances related to operations on the consolidated statements of cash flows. The fair valuation of these contracts at December 31, 2009 was $45.

Risks arising from financial instruments and risk management

The Fund's activities expose it to a variety of financial risks: market risk (including foreign exchange and interest rate), credit risk and liquidity risk. The Fund's overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Fund's financial performance. The Fund does not purchase any derivative financial instruments for speculative purposes.

Risk management is the responsibility of the corporate finance function. The Fund's operations along with the corporate finance function, indentify, evaluate and, where appropriate, hedge financial risks. Material risks are monitored and are regularly discussed with the audit committee of the board of trustees.

Foreign exchange risk

The Fund operates in Canada. The functional and reporting currency of the Fund is Canadian dollars. Foreign exchange risk arises because the amount of Canadian dollars receivable or payable for transactions denominated in foreign currencies may vary due to changes in exchange rates ("transaction exposures"). The balance sheet of the Fund includes U.S. dollar denominated accounts payable and accounts receivable. These amounts are translated into Canadian dollars at each period end, with resulting gains and losses recorded in earnings. The objective of the Fund's foreign exchange risk management activities is to minimize transaction exposures. The Fund manages this risk by entering into foreign exchange forward contracts on a transaction specific basis. The Fund does not currently hedge translation exposures. Substantially all of the Fund's purchases are translated into Canadian dollars at the date of receipt.

As at December 31, 2009, the Fund carried $2,487 in U.S. dollar denominated liabilities net of U.S. dollar denominated accounts receivable. A +/- $0.10 change in foreign exchange rate between Canadian and U.S. currencies would have an effect of approximately $249 on earnings from continuing operations for the year ended December 31, 2009.

Interest rate risk

The Fund's interest rate risk primarily arises from its floating rate debt, in particular its bank operating line of credit and its interest-bearing equipment notes payable. As at December 31, 2009, all of the Fund's interest-bearing debt is subject to movements in floating interest rates.

As at December 31, 2009, the Fund had $86,186 in interest bearing floating rate debt. A +/- 1.0% change in interest rates would have an effect of approximately $862 on earnings from continuing operations for the year ended December 31, 2009.

Credit risk

Credit risk arises from cash and cash equivalents held with banks and financial institutions, derivative financial instruments (foreign exchange forward contracts), as well as credit exposure to customers, including outstanding accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the financial assets.

The objective of managing counterparty credit risk is to prevent losses in financial assets. The Fund's management continuously performs credit evaluations of customers and limits the amount of credit extended to customers as appropriate. The Fund is, however, exposed to credit risk with respect to accounts receivable and maintains provisions for possible credit losses based upon historical experience and known circumstances. In certain circumstances, the Fund registers liens, priority agreements and other security documents to further reduce the risk of credit losses. From time to time the Fund requires deposits before certain services are provided or contracts undertaken. As at December 31, 2009, the Fund held customer deposits of $515.

The carrying amount of accounts receivable is reduced by an allowance for doubtful accounts. The provision of the allowance for doubtful accounts is recognized in the income statement within operating expenses in the period of provision. When a receivable balance is considered uncollectible, it is written off against the allowance for doubtful accounts. Subsequent recoveries of amounts previously written off are credited against operating expenses in the income statement.

The following table sets forth details of the age of receivables that are not overdue as well as an analysis of overdue amounts and related allowance for the doubtful accounts:




As at December 31, 2009
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Total accounts receivable 28,450
Less: Allowance for doubtful accounts (1,362)
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Total accounts receivable, net 27,088
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Of which: Total AR
Current 17,400
1-30 Days Past Due 7,291
31 -60 Days Past Due 1,784
Greater than 60 Days Past Due 1,975
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28,450
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Less: Allowance for doubtful accounts as at December 31, 2008 (1,033)
Increase in allowance for the year ended December 31, 2009 (329)
----------------------------------------------------------------------------
Allowance for doubtful accounts as at December 31, 2009 (1,362)
----------------------------------------------------------------------------
Total accounts receivable, net 27,088
----------------------------------------------------------------------------


There were no significant balances outstanding with individual customers as of December 31, 2009.

Liquidity risk

Liquidity risk arises through excess of financial obligations over available financial assets due at any point in time. The Fund's objective in managing liquidity risk is to maintain sufficient readily available reserves in order to meet its liquidity requirements at any point in time. The Fund achieves this by maintaining sufficient availability of funding from committed credit facilities. As at December 31, 2009, the Fund had undrawn lines of credit available to it of $9.9 million.

20. MANAGEMENT OF CAPITAL

The Fund defines capital that it manages as unitholders' equity and total managed debt instruments consisting of equipment notes payable (both interest-bearing and interest-free) and other interest bearing debt. The Fund's objectives when managing capital are to ensure that the Fund has adequate financial resources to maintain liquidity necessary to fund its operations and provide returns to its unitholders.

Equipment notes payable comprise a significant portion of the Fund's capital. Increases and decreases in equipment notes payable can be significant from period to period and is dependent upon multiple factors including: availability of supply from manufacturers, seasonal market conditions, local market conditions and date of receipt of inventories from the manufacturer.

The Fund manages its capital structure in a manner to ensure that its ratio of total managed debt instruments to unitholders' equity does not exceed 3.0:1.

As at December 31, 2009 and December 31, 2008, the above capital management criteria can be illustrated as follows:



December 31 December 31
Managed Debt Instruments 2009 2008
----------------------------------------------------------------------------
Interest bearing debt 10,014 12,844
Equipment notes payable 104,843 118,884
Notes payable 2,312 2,264
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Total managed debt instruments 117,169 133,992
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Unitholders' equity 54,648 54,550
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Ratio of total managed debt instruments to
unitholders' equity 2.1 2.5
----------------------------------------------------------------------------


The Fund has a credit facility with a Canadian Chartered Bank which provides a $20 million 364-Day committed operating line of credit which is renewable annually. Refer to note 8 for details of the credit facility.

The Fund's bank credit facility contains financial covenants that require the Fund to maintain certain financial ratios and meet certain financial thresholds. In particular, the facility contains covenants that require the Fund to maintain a minimum ratio of total current assets to current liabilities ("Current Ratio covenant") of 1.1 : 1, a minimum tangible net worth ("TNW covenant") of $54 million, a maximum ratio of total debt to tangible net worth ("Debt to TNW Ratio covenant") of 3.5 : 1 and a minimum ratio of earnings before interest, taxes, depreciation and amortization ("EBITDA") minus capital expenditures to total interest ("Debt Service Coverage Ratio covenant") of 1.2 : 1. For the purposes of calculating covenants under the credit facility, debt is defined as total liabilities less future income tax amounts and subordinated debt. The Debt Service Coverage Ratio is measured at the end of each quarter on a trailing twelve month basis. Other covenants are measured as at the end of each quarter.

On April 15, 2009, the bank renewed the credit facility and the $20 million operating line of credit, and increased the foreign exchange line ("FX Line") from $5 million to $10 million. In conjunction with this renewal, the bank amended the covenants with effect as of March 31, 2009, as follows:



1. The Debt to TNW Ratio covenant was increased to 3.5 : 1 from 3.0 : 1;
2. The Debt Service Coverage Ratio covenant was reduced from 1.3 : 1 to 1.0
: 1, for the periods ending March 31, 2009 and June 30, 2009, increasing
to 1.1 : 1 for the period ending September 30, 2009, increasing to 1.2 :
1 for the period ending December 31, 2009 and increasing to 1.3 : 1 for
the year 2010; and
3. A new one-time covenant requiring the Fund's equipment inventory to be
no more than $135 million as at December 31, 2009 was added.

All other terms and conditions of the credit facility remained
unchanged.


The Fund was in compliance with all covenants under its bank credit facility as at December 31, 2009. In 2008 and the first quarter of 2009, the Fund was not in compliance with certain of the financial covenants under it bank credit facility and as a result, through cross-default provisions under its equipment finance facilities, the Fund was also in default of its equipment notes. The Fund obtained waivers for each of these defaults and negotiated amendments to its bank credit facility. Subsequent to March 31, 2009, the Fund has remained in compliance with all covenants under its bank credit facilities and equipment notes.

In addition to the covenants, the bank's prior written consent is required for the Fund to declare or pay any cash distributions on its units, repurchase or redeem any of its units or reduce its capital in any way whatsoever, or repay any unitholders' advance.

21. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES

The net changes in non-cash working capital balances related to continuing operations are as follows:



2009 2008
Accounts receivable 13,102 (3,956)
Inventories 19,630 (10,882)
Depreciation of equipment inventory on rent (11,209) (14,273)
Prepaids (23) 401
Income & other taxes receivable 772 173
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22,272 (28,537)
----------------------------------------------------------------------------

Accounts payable and accrued liabilities (21,250) 11,508
Deferred revenue & customer deposits (2,139) (108)
Equipment notes payable - non-interest bearing (6,906) (11,883)
Equipment notes payable - interest bearing (7,135) 35,827
Less: New equipment notes payable to finance acquisition
of the Champion Business - (15,661)
Other
----------------------------------------------------------------------------
(37,430) 19,683
----------------------------------------------------------------------------
(15,158) (8,854)
----------------------------------------------------------------------------


Changes to equipment notes payable in 2008 includes $15,661 in equipment notes borrowed by Strongco from Volvo Financial Services ("VFS") coincident with the purchase of Champion in March 2008 (see note 3 - Acquisition).

22. ECONOMIC RELATIONSHIP

The Fund, through its Equipment Distribution segment, sells and services heavy equipment and related parts. Distribution agreements are maintained with several equipment manufacturers, of which the most significant are with Volvo Construction Equipment North America, Inc. The distribution and servicing of Volvo products account for a substantial portion of the Equipment Distribution segments operations. The Fund has had an ongoing relationship with Volvo since 1991.

23. DISTRIBUTIONS TO UNITHOLDERS

The Fund has previously distributed a portion of its cash flow after adjusting for any amounts that the Trustees may reasonably consider to be necessary to provide for the payment of any costs or expenses, including any tax liability of the Fund, that have been or are reasonably expected to be incurred in the activities and operations of the Fund (to the extent that such costs or expenses have not otherwise been taken into account in the calculation of the cash flow of the Fund) and for reasonable reserves.

On August 12, 2008, the Fund announced that monthly distributions were suspended until further notice, beginning with the month ended August 31, 2008.

The cash flow of the Fund is computed as the sum of all cash amounts received by the Fund in or in respect of such Distribution Period, including all income, interest, distributions, dividends, proceeds from the disposition of securities, returns of capital and repayments of indebtedness, as well as all amounts received by the Fund in any prior Distribution Period to the extent not previously distributed adjusted by a) all costs and expenses of the Fund that, in the opinion of the Trustees, may reasonably be considered to have accrued and become owing in respect of, or which relate to, such Distribution Period or a prior Distribution Period if not accrued in such prior period; (b) all amounts payable in cash that relate to the redemption or repurchase of Units and that have become payable by the Fund in such Distribution Period; (c) any interest expense incurred by the Fund between distributions; and (d) all amounts that relate to the repayment of the principal amount of any indebtedness of the Fund during such Distribution Period (net of any such amounts that have been refinanced during such Distribution Period). Distribution Period means each calendar month from and including the first day thereof and to and including the last day thereof.

24. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS

The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 2009 consolidated financial statements.

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