Strongco Income Fund
TSX : SQP.UN

Strongco Income Fund

October 30, 2007 16:37 ET

Strongco Reports Third Quarter Results

MISSISSAUGA, ONTARIO--(Marketwire - Oct. 30, 2007) - Strongco Income Fund (TSX:SQP.UN) today released its results for the third quarter of 2007.

Highlights:

- Revenues of $100.5 million essentially consistent with the third quarter of 2006. Equipment distribution revenues declined slightly by 1.5% while revenues in the Engineered Systems segment increased 12%. The slight decline in Equipment Distribution revenues was largely the result of competitive pressures and the impact of the strengthening Canadian dollar as unit sales volumes actually increased on a comparative quarter basis.

- Earnings before tax for the quarter were $3.1 million, a decline from our third quarter 2006 levels. The decrease was related to the continued pressure on margins as a result of the more competitive market and the higher fixed operating costs associated with our product support investments.

- Net income at $3.1 million for the quarter was down significantly on a comparative quarter basis, as the comparative quarter in 2006 was positively impacted by $2.7 million in future tax amounts existing prior to the reorganization on September 1, 2006.

- Inventories increased significantly during the third quarter. This increase relates directly to the timing of shipments relating to new product launches and our positioning for certain demand models. The global construction equipment market has remained strong and in order to secure product we have taken stronger inventory positions in certain models.

- Distributable cash for the quarter was $3.7 million essentially consistent with the third quarter 2006.

Mr. Robin MacLean, President commented, "Our third quarter results were in line with our expectations. During the third quarter, Strongco continued to experience the competitive pressures that manifested earlier this year both on equipment and parts sales. We actually increased the number of units sold during the third quarter as compared to the third quarter of 2006. Competition remains strong with continued pressure from the weak U.S. construction market. Our Engineered Systems group continues with a healthy backlog and its activity levels remain strong with increased opportunities in the mining sector."




Financial Highlights
(Unaudited)
Three Months Ended Nine Months Ended
($ millions, except per September 30 September 30
unit amounts) 2007 2006 2007 2006
--------------------------------------------------------------------------

Revenues $ 100.5 $ 100.9 $ 288.3 $ 338.5
Income before income taxes $ 3.1 $ 4.4 $ 7.4 $ 17.8
Net income $ 3.1 $ 7.1 $ 5.6 $ 18.8

Basic and diluted earnings per
unit $ 0.31 $ 0.71 $ 0.56 $ 1.87

Distributable cash per unit $ 0.37 $ 0.38 $ 0.90 $ 1.50

Distributions per unit $ 0.30 $ 0.52 $ 1.06 $ 1.46

Total assets $ 217.5 $ 199.9
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The fund announced the monthly distribution for November of $0.10 per unit, payable December 20, 2007 for unitholders of record on November 30, 2007.

Strongco will host a conference call at 9:30 a.m. on Wednesday, October 31st, 2007, to further discuss its third quarter results. To participate in the conference call, dial 1-800-952-4629, reservation number is 21352621 a few minutes prior to 9:30 a.m. on the 31st. A taped version of the call will be available until November 14th, 2007. Dial 416-626-4100 or 1-800-558-5253 and enter the reservation number 21352621.

All statements contained in this press release that do not directly and exclusively relate to historical facts constitute forward-looking statements as of the date of this press release. These forward-looking statements include the statement concerning our outlook for 2007. These forward-looking statements are not guarantees. Although we believe that these forward-looking statements are based on information and assumptions which are current, reasonable and complete, these statements are necessarily subject to a number of factors that could cause actual results to vary significantly from current expectations. Please refer to the "Forward-Looking Statements" section in the accompanying Management's Discussion and Analysis.

Strongco Income Fund is a trust established to hold the securities of Strongco Limited Partnership, a full-line equipment sales and service provider. Its units are listed on the Toronto Stock Exchange and its website can be accessed at www.strongco.com.



For further information contact:
Grant McCardle,
Chief Financial Officer.
Telephone No.: 905-565-3808
Email: cfo@strongco.com




Report to Unitholders

During the third quarter, the impact of many of our improvements and investments were diluted by the effect of the comparatively more competitive construction equipment market and the strengthening of the Canadian dollar. Although dollar volumes were relatively flat, improvements were seen both in unit volume of equipment and parts corresponding to changes in our sales group and our investments in product support.

The third quarter results were in line with our expectations. During the third quarter, Strongco continued to experience the competitive pressures that manifested earlier this year both on equipment and parts sales. The slight decline in Equipment Distribution revenues was largely the result of competitive pressures and the impact of the strengthening Canadian dollar as unit sales volumes actually increased on a comparative quarter basis.

The global construction equipment market remains extremely strong contrasting the weaker North American construction equipment market especially in the United States. We remain concerned about the impact that the slower U.S. housing and construction market will have in Canada, but we have made a number of changes to strengthen our sales organization.



Financial Highlights

Three Months Ended Nine Months Ended
($ millions, except per unit September 30 September 30
amounts) 2007 2006 2007 2006
---------------------------------------------------------------------------

Revenues $ 100.5 $ 100.9 $ 288.3 $ 338.5
Income before income taxes $ 3.1 $ 4.4 $ 7.4 $ 17.8
Net income $ 3.1 $ 7.1 $ 5.6 $ 18.8

Basic and diluted earnings per
unit $ 0.31 $ 0.71 $ 0.56 $ 1.87

Distributable cash per unit $ 0.37 $ 0.38 $ 0.90 $ 1.50

Distributions per unit $ 0.30 $ 0.52 $ 1.06 $ 1.46

Total assets $ 217.5 $ 199.9
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Third Quarter Highlights

- Third quarter revenues essentially remained flat on a comparative quarter basis. Equipment distribution revenues declined slightly by 1.5% while revenues in our Engineered Systems segment increased 12%. The slight decline in Equipment Distribution revenues was largely the result of mix and the impact of the strengthening Canadian dollar. During the third quarter, Strongco equipment unit sales increased 5%.

- Earnings before tax were $3.1 million down from our third quarter 2006 levels. The decrease was related to the continued pressure on margins as a result of the more competitive market and the higher fixed operating costs associated with our product support investments.

- Net income at $3.1 million for the quarter was down significantly on a comparative quarter basis. Net income for the comparative quarter in 2006 was positively impacted by $2.9 million in future tax amounts existing prior to the reorganization on September 1, 2006.

- Inventories increased significantly during the third quarter. This increase relates directly to the timing of shipments relating to new product launches and our positioning for certain demand models. The global construction equipment market has remained strong and in order to secure product we have taken stronger inventory positions in certain models.

- Distributable cash for the quarter was $3.7 million, essentially at the same level as the third quarter 2006.The fund announced the monthly distribution for November of $0.10 per unit, payable December 20, 2007 for unitholders of record on November 30, 2007.

- We remain committed to product support and going forward, we are focusing on levering our investments while controlling expenditures. Product support remains one of the key equipment purchase criteria as our customers rely on up-time.

- We have reinforced our sales focus by investing in the regional management teams and expect this to have a continued positive impact on our sales performance.

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"), for the three and nine months ended September 30, 2007. This discussion and analysis should be read in conjunction with the accompanying unaudited interim consolidated financial statements and with the Fund's audited consolidated financial statements, accompanying notes and MD&A contained in the Fund's annual report for the year ended December 31, 2006 ("Annual Report"). For additional information and details, readers are referred to the Fund's quarterly financial statements and quarterly MD&A for fiscal 2006 as well as the Fund's Notice of Annual Meeting of Unitholders and Information Circular ("IC") dated March 14, 2007, and the Fund's Annual Information Form ("AIF") dated March 14, 2007, 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 Canadian millions of dollars except per unit amounts. The information in this MD&A is current to October 30, 2007.


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 ("Strongco Limited 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.

Proposed changes to the taxation of income trusts passed third reading in the House of Commons on June 12, 2007. The proposals 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 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.

Distributions

The Fund's policy is to make distributions of its available cash to the maximum extent possible to Unitholders. 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 March 14, 2007, the Fund announced that the monthly cash distributions to Unitholders will be decreased from $0.18 per unit to $0.10 per unit commencing with the distribution in respect of the month ended March 31, 2007. This reduction was made in response to the increased level of competition and softening in the construction equipment sector.




Financial Highlights

Three Months Ended Nine Months Ended
($ millions, except per unit September 30 September 30
amounts) 2007 2006 2007 2006
---------------------------------------------------------------------------
Revenues $ 100.5 $ 100.9 $ 288.3 $ 338.5
Income before income taxes $ 3.1 $ 4.4 $ 7.4 $ 17.8
Net income $ 3.1 $ 7.1 $ 5.6 $ 18.8

Basic and diluted earnings per
unit $ 0.31 $ 0.71 $ 0.56 $ 1.87

Distributions per unit $ 0.30 $ 0.52 $ 1.06 $ 1.46

Total assets $ 217.5 $ 199.9
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Overview

Strongco's operations are comprised of two business segments. The Equipment Distribution segment is one of the largest multi-line mobile equipment distributors in Canada. This segment sells and rents new and used equipment and provides after-sale customer support (parts and service). This segment distributes numerous equipment lines in various geographic territories, including those manufactured by Volvo Construction Equipment North America Inc. ("Volvo"), Case Corporation ("Case"), and Manitowoc Crane Group ("Manitowoc"). The Engineered Systems segment designs, manufactures, sells, installs and services dry bulk material handling equipment, including belt conveyors, screw conveyors, idlers, feed milling and grain handling equipment and their related assemblies.

Financial Results - Three Months Ended September 30, 2007

Consolidated revenues decreased by $0.4 million (0.5%) from $100.9 million in 2006 to $100.5 million in 2007. As indicated in the table below, a decrease in Equipment Distribution segment revenues was offset by a $1.0 million increase in Engineered Systems segment revenues.



Revenue by Business Segment

Three months ended September 30 2007 % 2006 % Change
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Equipment Distribution $ 91.2 90.7% 92.6 91.8% $ (1.4)
Engineered Systems 9.3 9.3% 8.3 8.2% 1.0
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$ 100.5 100.0% $ 100.9 100.0% $ (0.4)
-----------------------------------------------------------------------
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In the third quarter of 2007, Equipment Distribution segment revenues decreased by $1.4 million (1.5%) from $92.6 million in 2006 to $91.2 million in 2007. The slight decrease in revenues within this segment was primarily related to equipment sales, particularly in the West. Gross dollar equipment sales were impacted by the relative strength of the Canadian dollar. The forestry sector generated some activity, but overall remained weak, as this sector continues to struggle in Canada.

Revenues in the Engineered Systems segment increased by $1.0 million (12.0%) from $8.3 million in 2006 to $9.3 million in 2007. The Engineered Systems group continues to experience strong demand for projects in the mining sector.



Revenue by Geographic Region

Three months ended September 30 2007 % 2006 %
---------------------------------------------------------------

Eastern (Atlantic / Quebec) $ 32.6 32.4% $ 25.9 25.6%

Central (Ontario) $ 42.8 42.6% $ 36.7 36.4%

Western (Manitoba to B.C.) $ 24.1 24.0% $ 37.7 37.4%

Other $ 1.0 1.0% $ 0.6 0.6%

---------------------------------------------------------------
$ 100.5 100.0% $ 100.9 100.0%
---------------------------------------------------------------

During the third quarter, equipment sales were stronger in our Eastern and
Central regions. This growth occurred entirely in the construction
equipment segment while the Forestry segment has remained flat.


Gross Margin

Strongco's gross margin decreased by $.8 million (4.4%) to $17.4 million (gross margin percentage -17.3%) in 2007 from $18.2 million in 2006 (gross margin percentage - 18.1%).

Within the Equipment Distribution segment, business activities include the sale of machinery, customer support (parts and service) and equipment rentals. Equipment sales generate a significantly lower margin than customer support activities, accounting for 72.0% of revenues and 36.1% of gross margin for this segment in the third quarter of 2007 (72.7% of revenues and 38.3% of gross margin in the third quarter of 2006). Gross margin as a percentage was down on equipment sales reflecting the effects of the strengthening Canadian dollar and the higher level of competition experienced in 2007.

Gross margins for the Fund's Engineered Systems segment decreased by $0.2 million from $1.7 million in the third quarter of 2006 to $1.5 million in the third quarter of 2007 as a result of a higher revenue base and a slight decrease in gross margin percentage. During the third quarter, certain projects contained a higher proportion of sub-contracted components.
Administrative, Distribution and Selling Expense

Administrative, distribution and selling expenses increased by $1.2 million to $14.4 million in 2007 from $13.2 million in 2006. The increase in expenses were primarily related to higher expenses in the customer support departments within the Equipment Distribution segment. During the quarter, salary and benefit expenses were up corresponding to changes in our sales structure, parts staffing and competitive wage pressures. Expenses were also up as a result of higher training expenses relating to the new product launches, predominantly in our Volvo line.

Other Income & Expense

Other income and expense is primarily comprised of any gain or loss on disposition of fixed and rental assets, service fees paid by manufacturers in compensation for sales made within the distributor's region from sources other than the distributor and any gains or losses recognized with respect to foreign exchange. Other income increased by $0.5 million from $0.4 million in 2006 to $0.9 million in 2007.

Interest Expense

Strongco's interest expense increased to $0.8 million in 2007 from $0.6 million in 2006. This was a result of the Fund's higher level of interest bearing debt as well as higher interest rates.

Net Income

The following summarizes Strongco's pre-tax income by segment:



Three months ended September 30 2007 2006
--------------------------------------------------

Equipment Distribution $ 3.8 $ 5.5

Engineered Systems 0.4 0.1

Corporate (1.1) (1.2)

--------------------------------------------------
$ 3.1 $ 4.4
--------------------------------------------------
--------------------------------------------------


On an after tax basis, net income was $3.1 million ($0.31 per unit basic and fully diluted) for the three months ended September 30, 2007 compared to net income of $7.1 million ($0.71 per unit basic and fully diluted) during the third quarter of 2006. In the third quarter of 2006, net income was positively impacted by $2.7 million ($0.27 per unit) in future tax amounts existing prior to the reorganization on September 1, 2006 which were eliminated and recognized into income. 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 rate.

Financial Condition and Liquidity

Cash generated from operating activities was $9.4 million in the third quarter of 2007 compared to $1.8 million cash used in operating activities in the third quarter of 2006. The increase in inventories in the third quarter was more than offset by the net increase in equipment notes payable. The reduction in accounts receivable offset the reduction in accounts payable and deferred revenue & customer deposits. Net income for the quarter was $3.1 million. Significant components of the change in working capital requirements are as follows:



Three months ended September 30 2007 2006
------------------------------------------------------------------

Accounts receivable $ (6.5) $ (11.7)
Inventories 23.9 (0.9)
Prepaids 0.3 0.1
Income & other taxes receivable - 0.8
------------------------------------------------------------------
17.7 (11.7)

Accounts payable and accrued liabilities (2.1) (5.4)
Deferred revenue & customer deposits (2.8) 0.8
Equipment notes payable - non interest bearing 30.9 (14.3)
Equipment notes payable - interest bearing (2.8) 1.3
Other - -
------------------------------------------------------------------
23.2 (17.6)

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Increase (decrease) in non-cash working capital $ (5.5) $ 5.9
------------------------------------------------------------------
------------------------------------------------------------------


The Fund has an operating line of credit to a maximum of $20.0 million with a schedule 2 Canadian chartered bank. In addition, the Fund has lines of credit available from various equipment lenders which are used to finance equipment inventory. All of these facilities are renewable annually.

Summary of Quarterly Data

In general, business activity in the Equipment Distribution segment (which comprises the majority of Strongco's revenue and earnings base) 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 pickup in the second quarter as construction and other contracts begin to be put out for bid 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 (parts and service) activities. Fourth quarter activity generally strengthens as companies make year end capital spending decisions in addition to the exercise of purchase options on equipment which has previously gone out on rental contracts. In 2006, the normal seasonal trend was influenced by carried-over strength of economic activity experienced in 2005.



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

Revenue $ 100.5 $ 106.0 $ 81.9
Net income before income taxes $ 3.1 $ 4.3 $ -
Net income $ 3.1 $ 2.5 $ -

Basic and diluted earnings per unit $ 0.31 $ 0.25 $ -


2006
Q4 Q3 Q2 Q1
-----------------------------------------------------------------------

Revenue $ 118.4 $ 100.9 $ 133.3 $ 104.3
Net income before income taxes $ 3.7 $ 4.5 $ 8.0 $ 5.3
Net income $ 3.8 $ 7.2 $ 6.7 $ 4.9

Basic and diluted earnings per unit $ 0.38 $ 0.71 $ 0.67 $ 0.49


2005
Q4 Q3 Q2 Q1
-----------------------------------------------------------------------
Revenue $ 105.5 $ 102.1 $ 116.1 $ 89.2
Net income before income taxes $ 4.9 $ 5.4 $ 6.1 $ 2.8
Net income $ 4.7 $ 5.2 $ 4.9 $ 1.7

Basic and diluted earnings per unit $ 0.47 $ 0.52 $ 0.49 $ 0.18


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.

Financial Results - Nine Months Ended September 30, 2007

Consolidated revenues decreased by $50.2 million (14.8%) from $338.5 million in 2006 to $288.3 million in 2007. As indicated in the table below, a decrease in Equipment Distribution segment revenues were partially offset by a $7.7 million increase in Engineered Systems segment revenues.




Revenue by Business Segment

Nine months ended September 30 2007 % 2006 % Change
----------------------------------------------------------------------

Equipment Distribution $ 253.5 87.9% $ 311.4 92.0% $ (57.9)

Engineered Systems 34.8 12.1% 27.1 8.0% 7.7

----------------------------------------------------------------------
$ 288.3 100.0% $ 338.5 100.0% $ (50.2)
----------------------------------------------------------------------
----------------------------------------------------------------------


In the nine months ended September 30, 2007, Equipment Distribution segment revenues decreased by $57.9 million (18.6%) from $311.4 million in 2006 to $253.5 million in 2007. The decrease in revenues within this segment was primarily related to equipment sales across all geographic regions. Equipment sales in all regions and across all lines were down with the exception of our crane line. Sales were impacted by lower demand levels and significant competitive pressure during the first and second quarters of 2007.

Revenues in the Engineered Systems segment increased by $7.7 million (28.4%) from $27.1 million in 2006 to $34.8 million in 2007. During the nine months ended September 30, 2007, the Engineered Systems group was able to complete additional projects and recognize revenue of $4.0 million which had been deferred on the balance sheet at December 31, 2006. The Engineered Systems group continues to experience strong demand for projects in the mining sector.



Revenue by Geographic Region

Nine months ended September 30 2007 % 2006 % Change
----------------------------------------------------------------------

Eastern (Atlantic / Quebec) $ 81.1 28.1% $ 92.0 27.1% $ (10.9)

Central (Ontario) 116.2 40.3% 128.8 38.1% (12.6)

Western (Manitoba to B.C.) 87.9 30.5% 114.7 33.9% (26.8)

Other 3.1 1.1% 3.0 0.9% 0.1

----------------------------------------------------------------------
$ 288.3 100.0% $ 338.5 100.0% $ (50.2)
----------------------------------------------------------------------
----------------------------------------------------------------------



Gross Margin

Strongco's gross margin decreased by $8.1 million (13.5%) to $51.9 million (gross margin percentage -18.0%) in 2007 from $60.0 million in 2006 (gross margin percentage - 17.7%) as a result of lower equipment segment revenues.

Within the Equipment Distribution segment, business activities include the sale of machinery, customer support (parts and service) and equipment rentals. Equipment sales generate a significantly lower margin than customer support activities, accounting for 70.8% of revenues and 35.4% of gross margin for this segment in the nine months ended September 30, 2007 (75.9% of revenues and 42.3% of gross margin in the nine months ended September 30, 2006).

Gross margins for the Fund's Engineered Systems segment increased by $0.3 million from $6.0 million for the nine months ended September 30, 2006 to $6.3 in the nine months ended September 30, 2007 as a result of increased revenues. Gross margin as a percentage of revenues was 18.0% for the nine months ended September 30, 2007 versus 21.1% for the nine months ended September 30, 2006. This was as a result of larger, lower margin projects shipped or in progress in the nine months ended September 30, 2007 as well as one large project which entailed extensive use of outside engineering and fabrication services which further negatively impacted margins.

Administrative, Distribution and Selling Expense

Administrative, distribution and selling expenses increased by $2.9 million to $44.1 million in 2007 from $41.2 million for the nine months ended September 30, 2006. The increase in expenses were primarily related to higher expenses within the Equipment Distribution segment. The increase was comprised of higher salary and benefit costs related to the increase in staffing and increases in response to the competitive labour market, especially in Alberta. Freight, travel and training expenses are also up on a year over year basis.

Other Income & Expense

Other income and expense is primarily comprised of any gain or loss on disposition of fixed and rental assets, service fees paid by manufacturers in compensation for sales made within the distributor's region from sources other than the distributor and any gains or losses recognized with respect to foreign exchange. Other income increased by $0.9 million from $1.2 million in 2006 to $2.1 million in 2007.

Interest Expense

Strongco's interest expense increased to $2.4 million in 2007 from $1.6 million for the nine months ended September 30, 2006. This was a result of the Fund's higher level of interest bearing debt as well as higher interest rates.


Net Income

The following summarizes Strongco's pre-tax income (loss) by segment:



Nine months ended September 30 2007 2006
----------------------------------------------

Equipment Distribution $ 9.3 $ 20.3

Engineered Systems 1.6 1.3

Corporate (3.5) (3.8)

----------------------------------------------
$ 7.4 $ 17.8
----------------------------------------------
----------------------------------------------


On an after tax basis, net income was $5.6 million ($0.56 per unit basic and fully diluted) for the nine months ended September 30, 2007 compared to net income of $18.8 million ($1.87 per unit basic and fully diluted) during the nine months ended September 30, 2006. In the nine months ended September 30, 2007, net income after tax was negatively impacted by $1.8 million ($0.18 per unit) for future income tax amounts, whereas net income was positively affected by a $1.0 million future income tax recovery in the nine months ended September 30, 2006 as a result of the reorganization of the operations of the Fund into a limited partnership completed on September 1, 2006.

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 rate.

Financial Condition and Liquidity

Cash provided by operating activities was $9.3 million in the nine months ended September 30, 2007 compared to $12.1 million cash generated from operating activities in the nine months ended September 30, 2006. The change in non-cash working capital for the nine months ended September 30, 2007 was $0.4 million with the increase in inventories more than offset by the increase in equipment notes payable. Net income for the same period of $5.6 million, $1.9 million in future income tax amounts and $1.4 million in amortization expense account for primarily all of the $9.3 million in cash provided by operating activities.




Significant components of the change in working capital requirements are as
follows:

Nine months ended September 30 2007 2006
-----------------------------------------------------------------------

Accounts receivable $ (7.5) $ -
Inventories 26.4 27.3
Prepaids - 1.1
Income & other taxes receivable (0.2) 0.2
-----------------------------------------------------------------------
18.7 28.6

Accounts payable and accrued liabilities (7.3) 5.8
Deferred revenue & customer deposits (7.2) 6.9
Equipment notes payable - non interest bearing 26.4 6.9
Equipment notes payable - interest bearing 6.5 5.1
Other (0.1) -
-----------------------------------------------------------------------
18.3 24.7

-----------------------------------------------------------------------
Increase in non-cash working capital $ 0.4 $ 3.9
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Debt

As at As at
September 30 September 30
2007 2006
--------------------------------------------------------------------------

Bank indebtedness $ 3.6 $ 3.9
Equipment notes payable - non interest bearing 66.6 46.3
Equipment notes payable - interest bearing 44.5 35.2

--------------------------------------------------------------------------
$ 114.7 $ 85.4
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Strongco's working capital requirements are supported by a secured, revolving demand facility provided by a schedule 2 Canadian chartered bank. In addition, 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. Interest rates float with the prime or one month banker's acceptance rate under most of the Fund's credit facilities.

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 and Distributable cash before tax are non-GAAP measures, and therefore have no standardized meaning prescribed by GAAP and may not be comparable to similar terms and measures presented by other similar issuers. Distributable cash and Distributable cash before tax are 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 Three months
ended ended
September 30, September 30,
Distributable cash (in thousands) 2007 2006
---------------------------------------------------------------------------

Cash (used in) provided by operating
activities $ 9,440 $ (1,842)

Add (deduct)
Net change in non-cash working capital
balances related to operations (5,504) 5,904
Capital expenditures (196) (287)

---------------------------------------------------------------------------
Distributable cash $ 3,740 $ 3,775
---------------------------------------------------------------------------


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 $20.0 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. While the operations of the Fund are subject to seasonality (as explained earlier in the 'Summary of Quarterly Data'), the Fund has structured its distribution policy to declare regular monthly distributions evenly throughout the year, despite quarterly fluctuations in earnings. Consequently, the results of the nine months ended September 30, 2007 should not be considered representative of a twelve month period of distributable cash. Distributions for the nine months ended September 30, 2007 have been partially funded from borrowings on the Fund's operating line to make up the shortfall between Distributable Cash and Cash Distributions.




Three months Three months
ended ended
September 30, September 30,
Distributable cash (in thousands) 2007 2006
---------------------------------------------------------------------------

Net income $ 3,117 $ 7,137

Add (deduct)
Provision for future income tax 8 (2,925)
Depreciation & amortization 479 478
Gain on disposition of assets (38) (235)
Stock based compensation 39 4
Change in non-cash post retirement
benefits and accrued benefit assets 410 (199)
Other (79) (198)
Capital expenditures (196) (287)

---------------------------------------------------------------------------
Distributable cash $ 3,740 $ 3,775
---------------------------------------------------------------------------

Unitholder distributions declared $ 3,013 $ 5,223

---------------------------------------------------------------------------
Excess / (shortfall) $ 727 $ (1,448)
---------------------------------------------------------------------------



Nine months Nine months
ended ended
Distributable cash (in thousands) September 30, 2007 September 30, 2006
---------------------------------------------------------------------------

Cash provided by operating
activities $ 9,316 $ 12,145

Add (deduct)
Net change in non-cash working
capital balances related to
operations 353 3,859
Capital expenditures (687) (958)

---------------------------------------------------------------------------
Distributable cash $ 8,982 $ 15,046
---------------------------------------------------------------------------



Nine months Nine months
ended ended
Distributable cash (in thousands) September 30, 2007 September 30, 2006
---------------------------------------------------------------------------

Net income $ 5,605 $ 18,786

Add (deduct)
Provision for future income tax 1,850 (3,086)
Depreciation & amortization 1,363 1,512
Write-down of rental equipment - 61
Gain on disposition of assets (151) (303)
Stock based compensation 69 9
Change in non-cash post retirement
benefits and accrued benefit
assets 487 (635)
Other 446 (340)
Capital expenditures (687) (958)

---------------------------------------------------------------------------
Distributable cash $ 8,982 $ 15,046
---------------------------------------------------------------------------

Unitholder distributions declared $ 10,645 $ 14,663

---------------------------------------------------------------------------
Excess / (shortfall) $ (1,663) $ 383
---------------------------------------------------------------------------


Contractual Obligations

The Fund has contractual obligations for operating lease commitments, long term debt and contingent contractual obligations where the Fund has agreed to buy back equipment from customers at the option of the customer for a specified price at future dates ('buy back contracts') which are more fully explained in the Fund's Management's Discussion and Analysis included with its Annual Report which is available on SEDAR at www.sedar.com.

There have been no material changes to operating lease and long term debt obligations during the nine months ended September 30, 2007.


Contractual obligations are set out in the following tables. Management believes that these obligations will be comfortably met through cash flow generated from operations.



Payment due by period
---------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After 5
Total 1 Year years years years
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Operating leases $19.7 $1.7 $14.0 $3.7 $0.3
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Contingent obligation by period
---------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After 5
Total 1 Year years years years
---------------------------------------------------------------------------
'Buy back contracts' $6.0 $1.0 $1.2 $2.9 $0.9
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Outstanding Units

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

September 30, 2007 10,043,185


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 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. 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.

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.

Revenue Recognition

The Fund recognizes revenues for construction jobs within the Engineered Systems segment on a percentage of completion basis. This approach to revenue recognition requires management to make a number of estimates and assumptions surrounding the expected profitability of the contract, the estimated degree of completion based upon cost progression and other factors. Although these factors are regularly reviewed as part of the project management process, changes in estimates or assumptions could lead to changes in the revenues recognized in a given period.

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 pension 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 our 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 unaudited 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.

Adoption of New Accounting Standards

Effective January 1, 2007, the Fund adopted the recommendations of the Canadian Institute of Chartered Accountants ("CICA") on accounting for Comprehensive Income ("Section 1530"), Financial Instruments -- Recognition and Measurement ("Section 3855"), Financial Instruments -- Disclosure and Presentation ("Section 3861") and Hedges ("Section 3865"). The adoption of these new standards resulted in changes in the accounting for financial instruments and hedges.

As provided under the standards, the adoption of these recommendations is done retroactively without restatement of the consolidated financial statements of prior periods. Therefore the comparative interim unaudited consolidated financial statements have not been restated. On adoption of the above described standards, there was not a material impact on our consolidated financial position at September 30, 2007.

The reader is referred to Note 3 in the accompanying interim unaudited consolidated financial statements for the period ended September 30, 2007 for further details regarding the adoption of these standards.

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

Each of Strongco's business segments operates in a capital intensive environment. Strongco's customer base consists of companies operating in the construction and urban infrastructure, aggregates, forestry, mining, feed mill and grain handling, 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 endeavoured 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

Strongco faces strong competition in each of its business segments from various distributors of products which compete with the products it sells.

The Equipment Distribution segment competes with regional and local distributors of competing product lines. They compete 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 the Equipment Distribution segment operates, their main competitors are distributors of Caterpillar products.

No single competitor competes with Engineered Systems segment in all of its territories or in all of its product lines. Consequently, its competition comes primarily from regional companies which compete in specific product lines and specific territories. The Engineered Systems segment's competitive strengths consist of its reputation for product quality and its ability to meet specific customer requirements for custom engineered products.

Manufacturer Risk

The large majority 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 the business of the Equipment Distribution segment is governed by distribution agreements with the original equipment manufacturers whose products they sell. 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 cancellable upon 60 to 90 days notice by either party.

Some of the suppliers for the Equipment Distribution segment 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 Strongco's 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 its representation of equipment manufacturers who have demonstrated the ability to produce a competitive, well accepted, high quality product range. Although distribution agreements with these manufacturers are cancellable by either party within a relatively short notice period as specified in the relevant distribution agreement, Strongco believes that it has established strong relationships with its key manufacturers.

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 interim unaudited 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 Company 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 Company as jointly and severally liable for damages of approximately $5.9 million. Although we cannot predict the outcome at this time, based on the opinion of external legal counsel, the Company believes that they have a strong defence 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 Equipment Distribution segment of 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 the system while an evaluation of current and future requirements is undertaken during the upcoming periods.

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.

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.

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 Company and should not be viewed by investors as shares in the Company. 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.

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. 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 or 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 substantially all 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 proposed changes would 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).

Proposed changes to the taxation of income trusts passed third reading in the House of Commons on June 12, 2007. The proposals 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 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 is currently considering these changes and the possible impact they will have on the Fund and its investors.

Outlook

In the first nine months of 2007, we saw higher levels of competition, in addition to the return to the more traditional seasonality of our business, which had previously been masked by accelerated demand especially in Western Canada. Our results for the third quarter ended September 30, 2007 were in line with our expectations. We expect the balance of 2007 to remain challenging with increased competition as equipment manufacturers continue to seek to reduce inventory levels against a background of traditional seasonality. Our Engineered Systems group has a strong backlog and we remain confident with its activity levels for 2007.

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 cashflow 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 2007, including a return to more traditional seasonality. These statements are based on a number of assumptions, including, but not limited to, continued demand for our 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. These factors include and are not restricted to the risks identified above. 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.

Robin MacLean, President and Chief Executive Officer



CONSOLIDATED BALANCE SHEETS

As at As at As at
(unaudited - in thousands of September 30 September 30 December 31
dollars) 2007 2006 2006
---------------------------------------------------------------------------

ASSETS
Current
Accounts receivable $ 39,383 $ 38,162 $ 46,938
Inventories 152,356 133,522 126,002
Prepaid expenses and deposits 1,443 1,831 1,403
Income and other taxes receivable 254 803 519
---------------------------------------------------------------------------
Total current assets 193,436 174,318 174,862
Rental equipment, net 1,734 2,917 2,529
Capital assets, net 16,290 16,154 16,247
Other assets 227 405 559
Accrued benefit asset 5,790 6,079 6,277
---------------------------------------------------------------------------
$ 217,477 $ 199,873 $ 200,474
---------------------------------------------------------------------------
---------------------------------------------------------------------------

LIABILITIES AND UNITHOLDERS' EQUITY
Current
Bank indebtedness $ 3,567 $ 3,912 $ 974
Accounts payable and accrued
liabilities 36,650 36,022 44,019
Distributions payable to
unitholders 1,004 1,808 1,808
Deferred revenue and customer
deposits 2,348 9,407 9,505
Equipment notes payable -
non-interest bearing 66,555 46,301 40,201
Equipment notes payable - interest
bearing 44,480 35,200 37,968
---------------------------------------------------------------------------
Total current liabilities 154,604 132,650 134,475
Future income taxes (note 5) 1,850 - -
Other liabilities 584 65 470
Accrued benefit liability 728 747 728
---------------------------------------------------------------------------
Total liabilities 157,766 133,462 135,673
---------------------------------------------------------------------------
Contingencies (note 9)

Unitholders' equity
Unitholder capital (note 4) 54,534 54,534 54,534
Deferred compensation (note 4) (86) (41) (36)
Retained earnings 5,263 11,918 10,303
---------------------------------------------------------------------------
Total unitholders' equity 59,711 66,411 64,801
---------------------------------------------------------------------------
$ 217,477 $ 199,873 $ 200,474
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes



CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

(unaudited - in thousands of Three months Nine months
dollars, except units and per ended September 30 ended September 30
unit amounts) 2007 2006 2007 2006
--------------------------------------------------------------------------

Revenue $ 100,458 $ 100,922 $ 288,311 $ 338,483
Cost of sales 83,080 82,697 236,421 278,470
--------------------------------------------------------------------------
Gross margin 17,378 18,225 51,890 60,013

Expenses
Administration, distribution
and selling 14,360 13,232 44,119 41,188
Reorganization expense (note 1) - 413 - 616
Other income (937) (417) (2,054) (1,169)

--------------------------------------------------------------------------
Income before the following 3,955 4,997 9,825 19,378
Interest 830 579 2,381 1,627

--------------------------------------------------------------------------
Income before income taxes 3,125 4,418 7,444 17,751
Provision for income taxes
(note 5) 8 (2,719) 1,839 (1,035)

--------------------------------------------------------------------------
Net income and comprehensive
income $ 3,117 $ 7,137 $ 5,605 $ 18,786
--------------------------------------------------------------------------
Retained earnings, beginning
of period 5,159 10,004 10,303 7,795
Unitholder distributions (3,013) (5,223) (10,645) (14,663)
--------------------------------------------------------------------------
Retained earnings, end of
period $ 5,263 11,918 $ 5,263 $ 11,918
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Basic and diluted earnings
per unit
Earnings per unit $ 0.31 $ 0.71 $ 0.56 $ 1.87
--------------------------------------------------------------------------
Weighted average number of
units 10,043,185 10,043,185 10,043,185 10,043,185
--------------------------------------------------------------------------

See accompanying notes



CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months Nine months
ended ended
(unaudited - in thousands of September 30 September 30
dollars) 2007 2006 2007 2006
---------------------------------------------------------------------------

OPERATING ACTIVITIES
Net income $ 3,117 $ 7,137 $ 5,605 $ 18,786
Add (deduct) items not involving a
current outlay (inflow) of cash
Amortization of rental equipment 180 247 586 813
Amortization of capital assets 299 231 777 699
Write-down of rental equipment - - - 61
Gain on disposal of capital assets
and rental equipment (38) (235) (151) (303)
Stock based compensation 39 4 69 9
Future income taxes 8 (2,925) 1,850 (3,086)
Other 331 (397) 933 (975)
---------------------------------------------------------------------------
3,936 4,062 9,669 16,004

Net change in non-cash working
capital balances related to
operations 5,504 (5,904) (353) (3,859)
---------------------------------------------------------------------------
Cash provided by (used in)
operating activities 9,440 (1,842) 9,316 12,145
---------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of rental equipment - (5) - (222)
Purchase of capital assets (196) (282) (687) (736)
Proceeds on disposal of capital
assets and rental equipment 60 424 227 590
---------------------------------------------------------------------------
Cash provided by (used in)
investing activities (136) 137 (460) (368)
---------------------------------------------------------------------------

FINANCING ACTIVITIES
Increase (decrease) in bank
indebtedness (6,291) 3,912 2,593 2,585
Unitholder distributions (3,013) (5,122) (11,449) (14,362)

---------------------------------------------------------------------------
Cash used in financing activities (9,304) (1,210) (8,856) (11,777)
---------------------------------------------------------------------------

Net increase in cash and cash
equivalents during the period $ - $ (2,915) $ - $ -
Cash and cash equivalents,
beginning of period - 2,915 - -
---------------------------------------------------------------------------
Cash and cash equivalents, end of
period $ - $ - $ - $ -
---------------------------------------------------------------------------

Supplemental cash flow information
Interest paid $ 837 $ 596 $ 2,347 $ 1,584
Income taxes paid (recovered) $ (19)$ 1,050 $ (256)$ 2,251

See accompanying notes


Notes to Unaudited Interim Consolidated Financial Statements

September 30, 2007 (in thousands of dollars, except per unit amounts or where otherwise noted)

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 Strongco Inc. (the "Company") transferred substantially all of its operating assets and certain liabilities to Strongco Limited Partnership which will continue to carry on the business.

During the nine months ended September 30, 2006, the Company incurred and expensed $0.6 million of costs with respect to the Company's reorganization into a limited partnership.

2. BASIS OF PRESENTATION

The unaudited interim consolidated financial statements of the Fund have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP"), using the same accounting policies as outlined in Note 2 of the consolidated financial statements for the Fund as at and for the year ended December 31, 2006, ("Annual Report") except as described in note 3 below.

Management is required to make estimates and assumptions that affect the amounts reported in the unaudited interim consolidated financial statements. Management believes that the estimates are reasonable, however, actual results could differ from these estimates. The unaudited interim consolidated financial statements do not conform in all respects to the disclosure requirements of Canadian GAAP for annual financial statements and should, therefore, be read in conjunction with the Fund's 2006 Annual Report.

3. ADOPTION OF NEW ACCOUNTING STANDARDS

(a) Effective January 1, 2007, the Fund adopted the recommendations of the Canadian Institute of Chartered Accountants ("CICA") on accounting for Comprehensive Income ("Section 1530"). Under Section 1530, comprehensive income is comprised of net earnings and other comprehensive income ("OCI"), which represents changes in unitholders' equity during a period arising from transactions and other events with non-owner sources. OCI generally would include unrealized gains and losses on financial assets classified as available-for-sale, unrealized foreign currency translation adjustments net of hedging arising from self-sustaining foreign operations and changes in the fair value of the effective portion of cash flow hedging instruments. As a result of adopting these standards, a new category, "accumulated other comprehensive income" ("AOCI"), is added to unitholders' equity and certain other unrealized gains and losses will be reported in OCI until realization.

The Fund had no significant adjustments to OCI during the nine months ended September 30, 2007 therefore adoption of this standard did not require the Fund to include a consolidated statement of comprehensive income.

(b) Effective January 1, 2007, the Fund adopted the recommendations of the CICA on accounting for Financial Instruments - Recognition and Measurement ("Section 3855") and Financial Instruments - Disclosure and Presentation ("Section 3861"). Section 3855 establishes standards for recognizing and measuring financial assets, financial liabilities and non-financial derivatives. All financial instruments are required to be measured at fair value on initial recognition, except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as held-for-trading, available-for-sale, held-to-maturity, loans and receivables, or other liabilities.

Financial assets and liabilities classified as held-for-trading are required to be measured at fair value with gains and losses recognized in net earnings in the period in which they arise.

Financial assets classified as held-to-maturity, loans, receivables and financial liabilities (other than those held-for-trading) are required to be measured at amortized cost using the effective interest method of amortization.

Available-for-sale financial assets are required to be measured at fair value with unrealized gains and losses recognized in OCI. Investments in equity instruments classified as available-for-sale that do not have a quoted market price in an active market should be measured at cost.

Derivative instruments must be recorded on the balance sheet at fair value, including those derivatives that are embedded in a financial instrument or other contract but are not closely related to the host financial instrument or contract. Changes in the fair values of derivative instruments are required to be recognized in net earnings, except for derivatives that are designated as a cash flow hedge, in which case the fair value change for the effective portion of such hedge relationship is required to be recognized in OCI.

The standard permits designation of any financial instrument whose fair value can be reliably measured as held-for-trading on initial recognition or adoption of the standard, even if that instrument would not otherwise satisfy the definition of held-for-trading set out in Section 3855.

The standard specifically excludes Section 3065, Leases, from the definition of financial instruments, except for derivatives that are embedded in a lease contract. Other significant accounting implications arising on adoption of the standard include the initial recognition of certain financial guarantees at fair value on the balance sheet and the use of the effective interest method of amortization for any transaction costs or fees, premiums or discounts earned or incurred for financial instruments measured at amortized cost.

(c) Effective January 1, 2007, the Fund adopted the recommendations of the CICA on accounting for Hedges ("Section 3865"). Section 3865 specifies the criteria under which hedge accounting can be applied and how hedge accounting should be executed for each of the permitted hedging strategies: fair value hedges, cash flow hedges and hedges of a foreign currency exposure of a net investment in a self-sustaining foreign operation.

In a fair value hedging relationship, the carrying value of the hedged item will be adjusted by gains or losses attributable to the hedged risk and recognized in net earnings. The changes in the fair value of the hedged item, to the extent that the hedging relationship is effective as defined by the standard ("effective"), will be offset by changes in the fair value of the hedging derivative. In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging derivative will be recognized in OCI. The ineffective portion as defined by the standard ("ineffective") will be recognized in net earnings. The amounts recognized in AOCI will be reclassified to net earnings in those periods in which net earnings is affected by the variability in the cash flows of the hedged item. In hedging a foreign currency exposure of a net investment in a self-sustaining foreign operation, the effective portion of foreign exchange gains and losses on the hedging instruments will be recognized in OCI and the ineffective portion is recognized in net earnings.

Deferred gains or losses on the hedging instrument with respect to hedging relationships that were discontinued prior to the transition date but qualify for hedge accounting under the new standards will be recognized in the carrying amount of the hedged item and amortized to net earnings over the remaining term of the hedged item for fair value hedges, and for cash flow hedges will be recognized in AOCI and reclassified to net earnings in the same period during which the hedged item affects net earnings. However, for discontinued hedging relationships that do not qualify for hedge accounting under the new standards, the deferred gains and losses will be recognized in the opening balance of retained earnings on transition.

As of January 1, 2007, the Fund has elected the following balance sheet classifications with respect to its financial assets and liabilities:

- Cash and cash equivalents are classified as "assets held for trading" and are measured at fair value. Gains and losses resulting from the periodic revaluation are recorded in net income.

- Accounts receivable are classified as "loans and receivables": and are recorded at amortized cost, which upon their initial measurement is equal to their fair value. Subsequent measurements are recorded at amortized cost using the effective interest rate method.

- Accounts payable and accrued liabilities, equipment notes payable and long-term debt are classified as "other financial liabilities" and are initially measured at their fair value. Subsequent measurements are recorded at amortized cost using the effective interest rate method.

The adoption of the above described standards did not have a material impact on our unaudited interim consolidated financial statements.

Basis of Consolidation

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

4. UNITHOLDERS' EQUITY

(a) Authorized

Unlimited number of units.

(b) Issued

Details of issued unitholders' capital are as follows:



Unitholders' Capital

Units Amount
# $
-------------------------------------------
-------------------------------------------
As at January 1, 2006 10,043,185 54,534
As at September 30, 2007 10,043,185 54,534
-------------------------------------------


Deferred compensation is comprised of unit based compensation related to the Long-Term Incentive plan.

5. INCOME TAXES

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



Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
$ $ $ $
----------------------------------------------------------------------------
Current income tax (recovery) expense - 206 (11) 2,051
Future income tax expense (recovery) 8 (2,925) 1,850 (3,086)
----------------------------------------------------------------------------
8 (2,719) 1,839 (1,035)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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



Three months ended Nine months ended
September 30 September 30
2007 2006 2007 2006
$ $ $ $
---------------------------------------------------------------------------
Income before income taxes 3,125 4,418 7,444 17,751
---------------------------------------------------------------------------
Combined statutory tax rate 46.4% 34.7% 46.4% 34.7%
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Provision for income taxes at
combined statutory tax rate 1,450 1,533 3,455 6,160
Adjustments thereon for the
effect of:
Estimated temporary differences
reversing in taxation years 2011
and beyond 8 - 1,850 -
Future income tax recoveries to
August 31, 2006 (2,862) (2,862)
Permanent and other differences - 66 - 229
Change in tax rates - (15) - (146)
Income of the Fund distributed
to unitholders (1,450) (1,441) (3,455) (4,435)
Other - - (11) 19
---------------------------------------------------------------------------
$ 8 $ (2,719) $ 1,839 $ (1,035)
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Proposed changes to the taxation of income trusts passed third reading in the House of Commons on June 12, 2007. The proposals 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.

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.

6. POST RETIREMENT OBLIGATIONS

Net benefit plan expense for the three and nine months ended September 30, 2007 and 2006 are as follows:



Three months ended Nine months ended
September 30 September 30
---------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------

Net benefit plan expense $358 $ 343 $949 $ 1,018
---------------------------------------------------------------
---------------------------------------------------------------


7. SEGMENTED INFORMATION

Segmented information for the three and nine months ended September 30, 2007 and 2006 are as follows:



As at and for the three months ended
September 30, 2007
--------------------------------------------------------------------------
Equipment Engineered Segment Reconciling Fund
Distribution Systems totals Items total
--------------------------------------------------------------------------

Gross sales 91,160 9,364 100,524 100,524
Intersegment - 66 66 66
--------------------------------------------------------------------------
Net sales 91,160 9,298 100,458 - 100,458
--------------------------------------------------------------------------

Interest expense (735) (95) (830) - (830)
Income before income
taxes 3,774 367 4,141 (1,016) (a) 3,125
Amortization of
capital assets
and rental equipment 354 124 478 1 479
Write-down of rental
equipment - - - - -
Segment total assets 194,549 17,146 211,695 5,782 (b) 217,477
Segment capital and
rental assets 15,305 2,707 18,012 12 18,024
Capital and rental
asset expenditures 32 164 196 - 196
--------------------------------------------------------------------------


As at and for the three months ended
September 30, 2006
--------------------------------------------------------------------------
Equipment Engineered Segment Reconciling Fund
Distribution Systems totals Items total
--------------------------------------------------------------------------

Gross sales 92,595 8,394 100,989 100,989
Intersegment - 67 67 67
--------------------------------------------------------------------------
Net sales 92,595 8,327 100,922 - 100,922
--------------------------------------------------------------------------

Interest
expense (504) (75) (579) - (579)
Income before
income taxes 5,512 138 5,650 (1,232) (a) 4,418
Amortization of
capital assets
and rental equipment 388 89 477 1 478
Write-down of
rental equipment - - - - -
Segment total assets 173,827 18,917 192,744 7,129 (b) 199,873
Segment capital
and rental assets 16,208 2,847 19,055 16 19,071
Capital and
rental asset
expenditures 159 128 287 - 287
--------------------------------------------------------------------------


Nine months ended September 30, 2007
--------------------------------------------------------------------------
Equipment Engineered Segment Reconciling Fund
Distribution Systems totals Items total
--------------------------------------------------------------------------

Gross sales 253,505 35,034 288,539 288,539
Intersegment - 228 228 228
--------------------------------------------------------------------------
Net sales 253,505 34,806 288,311 - 288,311
--------------------------------------------------------------------------

Interest expense (2,116) (265) (2,381) - (2,381)
Income before income
taxes 9,326 1,635 10,961 (3,517) (a) 7,444
Amortization of
capital assets
and rental equipment 1,073 285 1,358 5 1,363
Write-down of rental
equipment - - - - -
Capital and rental
asset expenditures 467 220 687 - 687
--------------------------------------------------------------------------


Nine months ended September 30, 2006
--------------------------------------------------------------------------
Equipment Engineered Segment Reconciling Fund
Distribution Systems totals Items total
--------------------------------------------------------------------------

Gross sales 311,352 27,384 338,736 338,736
Intersegment - 253 253 253
--------------------------------------------------------------------------
Net sales 311,352 27,131 338,483 - 338,483
--------------------------------------------------------------------------

Interest expense (1,399) (228) (1,627) - (1,627)
Income before
income taxes 20,240 1,308 21,548 (3,797) (a) 17,751
Amortization of
capital assets
and rental equipment 1,223 285 1,508 4 1,512
Write-down of
rental equipment 61 - 61 - 61
Capital and
rental asset
expenditures 571 384 955 3 958
--------------------------------------------------------------------------

(a) The reconciling items to adjust segment profit (loss) represent common
costs not allocated to the segments and head office costs incurred
during the period.

(b) The reconciling items to adjust segment total assets includes prepaid
expenses and accrued benefit assets carried on the head office ledger,
offset by the elimination of the inter-entity receivables at the head
office.


8. SEASONALITY OF BUSINESS

Interim period revenues and earnings in the equipment distribution segment (which comprises the majority of Strongco's revenue and earnings base) historically 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 pickup in the second quarter as construction and other contracts begin to be put out for bid and companies begin to prepare for summer activity. The third quarter generally tends to be a bit slower from an equipment sales standpoint, which is partially offset by continued strength in equipment rentals and customer support (parts and service) activities. Fourth quarter activity generally strengthens as companies make year end capital spending decisions in addition to the exercise of purchase options on equipment which has previously gone out on rental contracts.

9. 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 unaudited interim consolidated financial statements as appropriate. These liabilities could arise from litigation, environmental matters or other sources.

10. DISTRIBUTIONS TO UNITHOLDERS

The Fund distributes 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.

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.

11. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS

The comparative unaudited interim consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 2007 unaudited interim consolidated financial statements.

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