Strongco Income Fund
TSX : SQP.UN

Strongco Income Fund

April 30, 2008 13:09 ET

Strongco Announces First Quarter 2008 Results

MISSISSAUGA, ONTARIO--(Marketwire - April 30, 2008) -

Summary

- Revenues increased 3% from first quarter 2007 to $84.1 million

- Further growth was negatively impacted by supply on several key products.

- Net loss $0.5 million compared to break-even in first quarter 2007

- Champion acquisition to add approximately $40 million in annualized revenues

- Current bank credit facility expanded by 50% to $30 million

- Established $12 million term facility for real estate acquisition and construction

- Monthly distributions changed to $0.05 per unit cash & $0.05 per unit equity (combined $1.20 per unit on an annualized basis)

Strongco Income Fund (TSX:SQP.UN) today released financial results for the first quarter ended March 31, 2008.

"The first quarter was a period of substantial investment for future growth," said Robin MacLean, President and CEO of Strongco Limited Partnership, the Fund's operating subsidiary. "The measures taken by the Fund during the period were consistent with Strongco's long term objectives and pave the way for operational improvements that we anticipate during the balance of 2008."

Revenues increased 3% from the same period in 2007 to $84.1 million. Of Strongco's two operating divisions, the larger Equipment Distribution unit experienced improved equipment sales from existing operations and the acquisition of Champion Road Machinery, offsetting decreased activity in Engineered Systems.

Gross margin increased by $0.9 million to $16.1 million, which equates to a gross margin percentage of 19.1%, compared to 18.6% in the first quarter of 2007.

Net loss totalled 0.5 million, or $0.05 per share, versus break-even in 2007.

Distributable cash was negative $0.8 million, compared to positive $0.4 million in the 2007 period.

The most significant operational measure during the quarter was the $25 million acquisition of the Champion Road Machinery division of Volvo Group Canada Ltd. The transaction removed overlap between Volvo and Strongco dealers in Ontario, consolidating Strongco's sales and service operations for Volvo products across the province.

The acquisition is projected to add approximately $40.0 million, or 10%, to Strongco annualized revenues. EBITDA of the acquisition on a trailing basis was approximately $2.0 million a year. Strongco's analysis indicates synergies can be gained from rationalization and integration that would increase that figure in the order of 50%.

To strengthen the Fund's financial capacity in advance of the acquisition, trustees approved the expansion of Strongco's current bank credit facility by $10 million to $30 million. Also approved was a new term acquisition and construction facility totalling approximately $12 million.

The term facility was arranged to partly finance the Champion deal and to finance the acquisition and construction of real estate in Edmonton as a separate consideration. "Historically, Strongco has leased facilities as the most cost-effective option," said Mr. MacLean. "However, sales growth in Alberta has been so rapid, we need to expand our customer service capacity by quickly building facilities that are purpose-built to meet our needs."

Concurrently, during the first quarter trustees changed the structure of distributions to unitholders. Strongco's former monthly cash distribution of $0.10 per unit ($1.20 per unit on an annualized basis) was restructured into distributions consisting of $0.05 per unit in cash and an "in-kind" distribution of $0.05 per unit in equity, settled with additional units issued to unitholders.

The first distribution under the revised regime was for the month of March, paid on April 21, 2008 to unitholders of record at the close of business on March 31, 2008.

The revised distribution policy allows the Fund to better conserve cash and deploy it toward growth initiatives, while maintaining balance sheet integrity.

Conference Call Details

Strongco will hold a conference call on Wednesday, April 30, 2008 at 3:30 pm ET to discuss first quarter results. Analysts and investors can participate by dialing 416-644-3433 or toll free 1-800-590-1817. An archived audio recording will be available until midnight on May 14, 2008. To access it, dial 416-640-1917 or 1-877-289-8525 followed by passcode 21270238#.

About Strongco

Strongco Limited Partnership is one of the largest multi-line industrial equipment distribution providers in Canada. Over 700 employees provide retail service at 30 branches located from Nova Scotia to Alberta. Strongco sells, rents and services mobile industrial equipment to sectors that include construction, road building, mining, forestry, utilities and municipalities. Strongco represents several leading equipment manufacturers including Volvo, Case, Manitowoc, Cedarapids and more.

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

Forward-Looking Statements

All statements contained in this news release that do not directly and exclusively relate to historical facts constitute forward-looking statements as of the date of this press release. These statements include the statement concerning our outlook for 2008 and 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.

Report to Unitholders

The first quarter of 2008 was a period of substantial investment for future growth of Strongco Limited Partnership, the Fund's operating subsidiary. The measures taken by the Fund during the period were consistent with Strongco's long term objectives and pave the way for operational improvements that we anticipate during the balance of 2008.

During the quarter, revenues increased 3% from the same period in 2007 to $84.1 million. Further growth was impacted negatively by supply of several key products. Of Strongco's two operating divisions, the larger Equipment Distribution unit experienced improved equipment sales from existing operations and the acquisition of Champion Road Machinery, offsetting decreased activity in Engineered Systems.

Gross margin increased by $0.9 million to $16.1 million, which equates to a gross margin percentage of 19.1%, compared to 18.6% in the first quarter of 2007.

Net loss totalled 0.5 million, or $0.05 per share, versus break-even in 2007.

Distributable cash was negative $0.8 million, compared to positive $0.4 million in the 2007 period.

The most significant operational measure during the quarter was the $25 million acquisition of the Champion Road Machinery division of Volvo Group Canada Ltd. The transaction removed overlap between Volvo and Strongco dealers in Ontario, consolidating Strongco's sales and service operations for Volvo products across the province.

The acquisition is projected to add approximately $40.0 million, or 10%, to Strongco annualized revenues. EBITDA of the acquisition on a trailing basis was approximately $2.0 million a year. Strongco's analysis indicates synergies can be gained from rationalization and integration that would increase that figure in the order of 50%.

To strengthen the Fund's financial capacity in advance of the acquisition, trustees approved the expansion of Strongco's current bank credit facility by $10 million to $30 million. Also approved was a new term acquisition and construction facility totalling approximately $12 million.

The term facility was arranged to partly finance the Champion deal and to finance the acquisition and construction of real estate in Edmonton as a separate consideration. Historically, Strongco has leased facilities as the most cost-effective option. However, sales growth in Alberta has been so rapid, we need to expand our customer service capacity by quickly building facilities that are purpose-built to meet our needs.

The Fund measures balance sheet leverage with a ratio of equity to managed capital, with managed capital including interest-bearing debt, equipment notes payable and other interest-bearing debt. The Fund's internal guidelines permit a maximum ratio of 3.0 to 1, which is below traditional levels for equipment distributors. At March 31, 2008, Strongco's ratio was 2.4 to 1. By comparison, at the same time last year it was 1.4 to 1, so while our debt has increased, it's still within the guideline.

During the first quarter trustees changed the structure of distributions to unitholders. Strongco's former monthly cash distribution of $0.10 per unit ($1.20 per unit on an annualized basis) was restructured into distributions consisting of $0.05 per unit in cash and an "in-kind" distribution of $0.05 per unit in equity, settled with additional units issued to unitholders. The first distribution under the revised regime was for the month of March, paid on April 21, 2008 to unitholders of record at the close of business on March 31, 2008. The revised policy allows the Fund to better conserve cash and deploy it toward growth initiatives, while maintaining balance sheet integrity.

Looking ahead to the balance of 2008, Strongco is well positioned to continue making productivity-enhancing investments in concert with our growth strategy. The Fund believes distributions to unitholders are being made at an appropriate level.

Management's Discussion and Analysis

The following management discussion and analysis ("MD&A") provides a review of the consolidated financial condition and results of operations of Strongco Income Fund, Strongco GP Inc. ("Strongco GP") and Strongco Limited Partnership (the "Partnership") (collectively referred to as the "Fund" or "Strongco"), as at and for the three months ended March 31, 2008. 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, 2007 ("Annual Report"). For additional information and details, readers are referred to the Fund's quarterly financial statements and quarterly MD&A for fiscal 2007 as well as the Fund's Notice of Annual Meeting of Unitholders and Information Circular ("IC") dated March 4, 2008, and the Fund's Annual Information Form ("AIF") dated March 28, 2008, 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 April 29, 2008.

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.

On December 1, 2007, the Fund sold the assets related to discontinued operations of the aerial rental business for proceeds of $1.7 million. The results of the related operations have been reported as discontinued operations and prior period amounts in this MD&A and accompanying financial statements have been reclassified to conform to the current period presentation.

On March 20, 2008, the Fund purchased substantially all of the assets (excluding real property) of the Champion Road Machinery division (the "Champion Business") of Volvo Group Canada Inc. for a total consideration of $25 million. The Champion business provides full service sales, rentals, parts and service for the Volvo Motor Grader line in Ontario. In addition to graders, the Champion Business carries the Volvo Compact line in Ontario as well as Holder North America, E.D. Etnyre & Co., and Viking. The Fund, in its press release dated March 20, 2008, had announced the acquisition price for the Champion business as approximately $28 million. Subsequent acquisition accounting adjustments reduced the total consideration to $25 million.

Distributions

The Fund's policy is to make distributions of cash and units in-kind that is consistent with balancing long-term growth strategies and provide current income 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.

On March 17, 2008, the Fund announced that the structure of distributions to unitholders would change to distributions consisting of $0.05 per unit in cash and an "in-kind" distribution of $0.05 per unit in equity, to be settled with additional units issued to unitholders, subject to regulatory approval and commencing with the distribution in respect of the month ended March 31, 2008. In-kind units will be issued at a deemed price equal to the volume-weighted average price of all units traded on the Toronto Stock Exchange on the 10 trading days preceeding the applicable record date. This change in distribution structure will allow Strongco to retain cash within the Fund for the purposes of reducing debt and facilitate expansion through internal growth and acquisitions.



Financial Highlights

Three Months ended
March 31
($ millions, except per unit amounts) 2008 2007
----------------------------------------------------------------------------
Revenues $ 84.1 $ 81.5
(Loss) earnings from continuing operations before
income taxes $ (0.5) $ 0.3
(Loss) net income $ (0.5) $ -

Basic and diluted (loss) earnings per unit $ (0.05) $ -

Distributions per unit $ 0.30 $ 0.46

Total assets $ 238.3 $ 184.4
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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 March 31, 2008

Consolidated revenues increased by $2.6 million (3.2%) from $81.5 million in 2007 to $84.1 million in 2008. As indicated in the table below, a decrease in Engineered Systems segment revenues was offset by a $9.7 million increase in Equipment Distribution segment revenues.



Revenue by Business Segment

Three months ended March 31 2008 % 2007 % Change
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Equipment Distribution $ 76.7 91.2% 67.0 82.2% $ 9.7
Engineered Systems 7.4 8.8% 14.5 17.8% (7.1)
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$ 84.1 100.0% $ 81.5 100.0% $ 2.6
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In the first quarter of 2008, Equipment Distribution segment revenues increased by $9.7 million (14.5%) from $67.0 million in 2007 to $76.7 million in 2008. The increased revenues within this segment were related to equipment sales across all geographic regions with particular strength coming from our Volvo and Case construction equipment lines.

Revenues in the Engineered Systems segment decreased by $7.1 million (49.0%) from $14.5 million in 2007 to $7.4 million in 2008. During the first quarter of 2007, the Engineered Systems segment was completing a large project for the mining sector.



Revenue by Geographic Region

Three months ended March 31 2008 % 2007 % Change
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Eastern (Atlantic / Quebec) $ 22.9 27.2% $ 18.3 22.5% $ 4.6

Central (Ontario) $ 33.5 39.8% $ 34.1 41.8% (0.6)

Western (Manitoba to B.C.) $ 27.3 32.5% $ 27.7 34.0% (0.4)

Other $ 0.4 0.5% $ 1.4 1.7% (1.0)

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$ 84.1 100.0% $ 81.5 100.0% $ 2.6
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During the first quarter, equipment segment revenues were stronger in all regions. The Engineered systems segment revenues were down in all regions.

Gross Margin

Strongco's gross margin increased by $0.9 million (5.9%) to $16.1 million (gross margin percentage 19.1%) in 2008 from $15.2 million in 2007 (gross margin percentage 18.6%).

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 69.6% of revenues and 37.9% of gross margin for this segment in the first quarter of 2008 (67.0% of revenues and 33.1% of gross margin in the first quarter of 2007). Gross margin as a percentage increased on equipment sales from 9.7% for the three months ended March 31, 2007 to 9.9% for the three months ended March 31, 2008.

Gross margins for the Fund's Engineered Systems segment decreased by $0.3 million from $2.0 million (gross margin percentage 13.8%) in the first quarter of 2007 to $1.7 million (gross margin percentage 23.0%) in the first quarter of 2008 as a result of a lower revenue base and a significant increase in gross margin percentage, primarily due to a change from large projects to sales of higher margin parts being supplied to projects completed in 2006 and 2007.

Administrative, Distribution and Selling Expense

Administrative, distribution and selling expenses increased by $1.2 million to $16.0 million in 2008 from $14.8 million in 2007. During the quarter, salary and benefit expenses were up corresponding to changes in our sales structure, parts staffing and competitive wage pressures. In addition, occupancy costs have increased with a new facility added in the first quarter of 2008, increased occupancy rates for existing facilities where leases have renewed or escalated. Expenses also increased as result of operating costs in the customer support departments within the Equipment Distribution segment.

As part of the "Champion Business" acquisition (please see note 5 in the accompanying financial statements), unfulfilled sales orders ("order backlog") at the date of acquisition were fair-valued at $0.2. A portion of these sales orders were completed in March 2008, and the Fund amortized to expense in March 2008, the related fair-value of $0.1. The balance is expected to be amortized to expense in the second quarter of 2008.

Other Income & Expense

Other income and expense is primarily comprised of any gain or loss on disposition of fixed 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 decreased by $0.2 million from $0.6 million in 2007 to $0.4 million in 2008.

Interest Expense

Strongco's interest expense increased to $1.0 million in 2008 from $0.7 million in 2007. This was a result of the Fund's higher level of interest bearing debt.

Net Income

The following summarizes Strongco's (loss) earnings from continuing operations before income taxes by segment:



Three months ended March 31 2008 2007
---------------------------------------------------

Equipment Distribution $ 0.7 $ 0.9

Engineered Systems 0.2 0.3

Corporate (1.4) (0.9)

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$ (0.5) $ 0.3
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On an after tax basis, net loss for the three months ended March 31, 2008 was $0.5 million as compared to the three months ended March 31, 2007 at slightly above breakeven. 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.

Loss and Loss per Unit from Discontinued Operations

Discontinued operations include the results of the former aerial rental business. On December 1, 2007. the Fund, consistent with previously stated intentions, sold assets of the aerial rental business for proceeds of $1.7 and recorded a small gain. The results of the related operations have been reported as discontinued operations and prior period amounts have been reclassified to conform to the current period presentation. The results from discontinued operations for the three months ended March 31, 2008 and 2007 were as follows:



($ millions, except per unit amounts) 2008 2007
----------------------------------------------------------------------

Revenues $ 0.4
Cost of goods sold 0.3
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Gross margin - 0.1
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Administration, distribution and selling expenses 0.1
Amortization 0.2
Other expenses -
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Loss from discontinued operations before the following - (0.2)
Interest 0.1
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Loss from discontinued operations before income taxes - (0.3)
Provision for income tax - -
----------------------------------------------------------------------
Loss for the period $ - $ (0.3)

Loss per unit, basic and diluted, from
discontinued operations. $ - $ (0.03)
----------------------------------------------------------------------


Financial Condition and Liquidity

Cash generated from operating activities was $21.2 million in the first quarter of 2008 compared to $0.1 million cash generated from operating activities in the first quarter of 2007. The increase in inventories in the first quarter was more than offset by the net increase in equipment notes payable. Net loss for the quarter was $0.5. The changes in working capital include the changes in the working capital assets acquired as part of the "Champion Business" acquisition effective March 20, 2008. Significant components of the change in working capital requirements, net of the Champion Business are as follows:



Three months ended March 31 2008 2007
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Accounts receivable $ (6.1) $ (12.3)
Inventories 15.3 (2.9)
Prepaids 0.3 (0.1)
Income & other taxes receivable (0.2) (0.2)
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9.3 (15.5)

Accounts payable and accrued liabilities 4.2 (9.5)
Deferred revenue & customer deposits (1.3) (4.7)
Equipment notes payable - non interest bearing (3.8) (11.9)
Equipment notes payable - interest bearing 14.9 10.1
Other - (0.1)
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14.0 (16.1)
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'Increase (decrease) in non-cash working capital
net of the effects of the Champion acquisition $ (4.7) $ 0.6
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Increase (decrease) in non-cash working capital
related to the Champion acquisition $ (17.0) $ -
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Consolidated increase (decrease) in non-cash working
capital $ (21.7) $ 0.6
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The Fund has an operating line of credit to a maximum of $30.0 million with a 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. In addition to the foregoing lines of credit, the Fund has an additional term acquisition and construction term facility totaling approximately $12.0 million.

As a result of a weaker than expected first quarter of 2008, the Fund did not meet its consolidated debt service coverage covenant relating to the operating line of credit as at March 31, 2008. As of April 29, 2008, the Fund has received a waiver of its requirement to comply, as at March 31, 2008, with the consolidated debt service coverage ratio covenant under its operating line of credit. As at March 31, 2008, the Fund's consolidated debt service coverage ratio was 0.73:1, while the operating line of credit required a ratio of no less than 0.90:1. In connection with the foregoing, the Fund is required to and has undertaken to provide additional information to its lender. In addition, the Fund obtained an amendment modifying its debt to tangible net worth ratio under its operating line of credit. The debt to tangible net worth covenant was amended from 3.0:1 to 3.25:1, reducing to 3.0:1 on July 1, 2008. As at March 31, 2008, the Fund had a debt to tangible net worth ratio of 3.16:1.

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.



2008
($ millions, except per unit amounts) Q4 Q3 Q2 Q1
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Revenue $ 84.1
(Loss) earnings from continuing operations
before income taxes $ (0.5)
Net (loss) income $ (0.5)

Basic and diluted (loss) earnings per unit $ (0.05)

2007
($ millions, except per unit amounts) Q4 Q3 Q2 Q1
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Revenue $ 107.2 $ 99.9 $ 105.5 $ 81.5
Earnings from continuing operations before
income taxes $ 2.2 $ 3.1 $ 4.3 $ 0.3
Net income $ 2.7 $ 3.1 $ 2.5 $ -

Basic and diluted earnings per unit $ 0.27 $ 0.31 $ 0.25 $ -

2006
Q4 Q3 Q2 Q1
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Revenue $ 117.7 $ 100.2 $ 132.5 $ 103.5
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 $ 0.66 $ 0.48


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.



Debt
As at As at
March 31 March 31
2008 2007
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Bank indebtedness $ 10.8 $ 6.6
Equipment notes payable - non interest bearing 46.3 28.3
Equipment notes payable - interest bearing 75.4 48.0

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$ 132.5 $ 82.9
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Strongco's working capital requirements are supported by a secured, revolving demand facility to a maximum of $30 million provided by a 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
Distributable cash (in thousands) March 31, 2008 March 31, 2007
----------------------------------------------------------------------------

Cash provided by operating activities $ 21,168 $ 86

Add (deduct)
Net change in non-cash working capital
balances related to operations (21,663) 644
Capital expenditures (341) (292)
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Distributable cash $ (836) $ 438
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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 $30.0 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 three months ended March 31, 2008 should not be considered representative of a twelve month period of distributable cash. Distributions for the three months ended March 31, 2008 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
Distributable cash (in thousands) March 31, 2008 March 31, 2007
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Net (loss) income $ (554) $ 33

Add (deduct)
Provision for future income tax 45 -
Depreciation & amortization 251 449
Amortization of intangible assets 124
Gain on disposition of assets (14) (35)
Stock based compensation 10 15
Change in non-cash post retirement
benefits and accrued benefit assets 225 92
Other (582) 176
Capital expenditures (341) (292)

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Distributable cash $ (836) $ 438
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Unitholder cash distributions declared $ 2,510 $ 4,620

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Excess / (shortfall) $ (3,346) $ (4,182)
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Contractual Obligations

The Fund has contractual obligations for operating lease commitments, notes payable 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.

As at December 31, 2007, the Fund, as a result of the review of new vehicle lease contracts in 2007, reclassified certain leased vehicles as assets under capital leases based upon the respective contract terms and past experience. During the three months ended March 31, 2008, the Fund renegotiated the contract terms and reclassified the leases as "operating leases". The contractual obligations due by period under operating leases have been adjusted for this reclassification.

As part of the acquisition of the Champion Road Machinery division of Volvo Group Canada Inc., the Fund assumed a number of 'buy back contracts' and the information presented below has been adjusted for these acquired obligations. The contractual obligations under operating leases also includes those lease obligations assumed by the Fund as part of the acquisition.

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 $35.2 $6.3 $16.8 $5.6 $6.5
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Contingent obligation by
period
---------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After 5
Total 1 Year years years years
---------------------------------------------------------------------------
'Buy back contracts' $8.5 $1.9 $1.9 $3.8 $0.9
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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
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March 31, 2008 10,043,185


On April 21, 2008, the Fund will issue 91,902 new units in settlement of "in-kind" units portion of the distribution. The established volume-weighted average price per unit is $5.462079.

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, 2008, the Fund adopted the recommendations of the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1535 "Capital Disclosures", Section 3862 "Financial Instruments - Disclosures", Section 3863 "Financial Instruments - Presentation" and Section 3031 "Inventories. The adoption of the new standards resulted in additional disclosures in the notes to the unaudited interim consolidated financial statements.

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 March 31, 2008.

The reader is referred to Note 3 in the accompanying interim unaudited consolidated financial statements for the period ended March 31, 2008 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 a significant portion of its operating cash flow will make additional capital and operating expenditures dependent on increased cash flow or additional financing in the future. Lack of those funds could limit the future growth of the Fund and its cash flow.

Tax Related Risks

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

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

On October 31, 2006, the Government of Canada announced its Tax Fairness Plan that proposed changes to the way income trusts and their investors are taxed. The 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 three months of 2008, we experienced higher levels of equipment sales than during the first quarter of 2007 with a slight decline in product support revenues. The higher level of competition experienced in early 2007 was not as prevalent during the first quarter of 2008. Activity levels in all regions have improved over 2007. The Engineered Systems segment revenues declined during the first quarter of 2008 as compared to the first quarter of 2007, due in part from a shift from having large projects in process and being completed to supplying replacement and repair parts to completed projects. The net effect of these changes on the Engineered Systems segment has been a reduction in income before taxes for the group of $120 for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007.

We expect 2008 to remain challenging as constraints on supply of equipment continue to increase. The addition of the Champion business in March 2008 consolidates our Volvo product offerings in Central Canada. The Champion business is expected to add approximately $40 million to annualized revenues.

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 2008, including a return to more traditional seasonality. These forward-looking statements also include statements concerning additions to annualized revenues and increases to EBITDA attributable to the Champion business acquisition. There is significant risk that forward-looking statements will not prove to be accurate. These statements are based on a number of assumptions, including, but not limited to, continued demand for 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, as well as various risks relating to the Champion business acquisition including risks relating to integration and realization of expected synergies, reliance on key personnel of the Champion business and potential undisclosed liabilities associated with the Champion business. 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

Strongco Income Fund



CONSOLIDATED BALANCE SHEETS

As at As at
March 31 December 31
(unaudited - in thousands of dollars) $ 2008 $ 2007
----------- ------------

ASSETS
Current
Accounts receivable (note 15) 39,255 39,095
Inventories 171,374 138,796
Prepaid expenses and deposits 2,125 1,786
Income and other taxes receivable - 173
----------- ------------
Total current assets 212,754 179,850
Capital assets, net 17,140 20,868
Other assets 334 333
Accrued benefit asset 5,421 5,680
Intangibles (note 5) 1,893
Goodwill (note 5) 722
----------- ------------
238,264 206,731
----------- ------------

LIABILITIES AND UNITHOLDERS' EQUITY

Current
Bank indebtedness 10,750 5,771
Accounts payable and accrued liabilities 42,817 34,999
Distributions payable to unitholders 502 1,004
Deferred revenue and customer deposits 2,005 3,310
Equipment notes payable - non-interest bearing 46,330 47,460
Equipment notes payable - interest bearing 75,374 47,480
Current portion of capital lease obligations - 2,019
----------- ------------
Total current liabilities 177,778 142,043
Future income taxes 1,250 1,205
Other liabilities - 581
Notes payable 2,154
Capital lease obligations - 2,731
Accrued benefit liability 695 729
----------- ------------
Total liabilities 181,877 147,289
----------- ------------
Contingencies (note 13)

Unitholders' equity
Unitholder capital (note 9) 54,534 54,534
Deferred compensation (note 9) (61) (71)
Retained earnings 1,914 4,979
----------- ------------
Total unitholders' equity 56,387 59,442
----------- ------------
238,264 206,731
----------- ------------

See accompanying notes



Strongco Income Fund

CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS

Three months
ended March 31
(unaudited - in thousands of dollars,
except per unit amounts) $ 2008 $ 2007
----------- ------------

Revenue 84,134 81,462
Cost of sales 68,033 66,298
----------- ------------
Gross margin 16,101 15,164

Expenses
Administration, distribution and selling 15,958 14,772
Amortization of intangible assets - order backlog 124 -
Other income (434) (578)

----------- ------------
Income before the following 453 970
Interest 958 673

----------- ------------
(Loss) earnings from continuing operations before
income taxes (505) 297
Provision for income taxes 49 -

----------- ------------
(Loss) earnings from continuing operations (554) 297
----------- ------------
Loss from discontinued operations - (264)

----------- ------------
Net (loss) income and comprehensive (loss) income (554) 33
----------- ------------
Retained earnings, beginning of period 4,979 10,303
Unitholder distributions (2,511) (4,620)
----------- ------------
Retained earnings, end of period 1,914 5,716
----------- ------------

Basic and diluted earnings per unit
(Loss) earnings from continuing operations $ (0.05) $ 0.03
Loss from discontinued operations $ - $ (0.03)
----------- ------------
(Loss) earnings per unit $ (0.05) -
----------- ------------
----------- ------------
Weighted average number of units 10,043,185 10,043,185
----------- ------------

See accompanying notes



Strongco Income Fund

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months
ended March 31
(unaudited - in thousands of dollars) $ 2008 $ 2007
----------- ------------

OPERATING ACTIVITIES
(Loss) income from continuing operations (554) 297
Add (deduct) items not involving a current
outlay (inflow) of cash
Amortization of capital assets 251 227
Amortization of intangible assets (note 5) 124
Gain on disposal of capital assets (14) (30)
Stock based compensation 10 15
Future income taxes 45 -
Other (357) 268
----------- ------------
(495) 777
Net change in non-cash working capital balances
related to operations 21,663 (644)
----------- ------------
Cash provided by operating activities of
continuing operations 21,168 133
Cash used by operating activities of
discontinued operations - (24)
----------- ------------
Cash provided by operating activities 21,168 109
----------- ------------

INVESTING ACTIVITIES
Purchase of capital assets (341) (292)
Acquisition (note 5) (22,807)
Proceeds on disposal of capital assets 14 30
----------- ------------
Cash used in investing activities (23,134) (262)
----------- ------------

FINANCING ACTIVITIES
Increase in bank indebtedness 4,979 5,577
Unitholder distributions (3,013) (5,424)

----------- ------------
Cash provided by financing activities 1,966 153
----------- ------------

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

Supplemental cash flow information
Interest paid 948 685
Income taxes recovered (292) (192)

See accompanying notes


Notes to Unaudited Interim Consolidated Financial Statements

March 31, 2008 (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 the Company transferred substantially all of its operating assets and certain liabilities to Strongco Limited Partnership ("Strongco LP") which continues to carry on the business.

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, 2007, ("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 2007 Annual Report.

Basis of Consolidation

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

3. ADOPTION OF NEW ACCOUNTING STANDARDS

(a) Effective January 1, 2008, the Fund adopted the recommendations of the CICA section 1535, Capital Disclosures, which requires the Fund to make new disclosures to enable users of the financial statements to evaluate the Company's objectives, policies and procedures for managing capital. These new disclosures are shown in note 16.

(b) Effective January 1, 2008, the Fund adopted the recommendations of the CICA section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation, which modify the disclosure and presentation requirements for CICA Handbook Section 3861. The new disclosures are included in note 15.

(c) Effective January 1, 2008, the Fund adopted the recommendations of the CICA section 3031, Inventories, which requires the Fund to measure inventories at the lower of cost and net realizable value. The standard provides guidance on the types of costs that can be capitalized and requires reversal of previous inventory write-downs if economic circumstances have changed to support higher inventory values. The adoption of the standard did not have a material impact on our unaudited interim consolidated financial statements. The new disclosures are included in note 6.

4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

The CICA issued a new accounting standard, Section 3064, "Goodwill and Intangible Assets", which replaces Section 3062, "Goodwill and other Intangible Assets" and Section 3450, "Research and Development Costs". The standard addresses when an internally developed intangible asset meets the criteria for recognition as an asset. These changes are effective for fiscal years beginning on or after October 1, 2008, with earlier adoption permitted, and will be adopted by the Fund effective January 1, 2009. The Fund is currently evaluating the effects of adopting these changes.

5. ACQUISITION

On March 20, 2008, the Fund purchased substantially all of the assets (excluding real property) of the Champion Road Machinery division (the "Champion Business") of Volvo Group Canada Inc. for a total consideration of $24,961 including deal-related costs of $167. The consideration was comprised of cash of $22,807 and a non-interest bearing note detailed below.

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

The Fund arranged new equipment notes payable secured by the machinery inventories of the Champion Business, as at the effective date of acquisition, in the amount of $15,661.

The Fund allocated the purchase price on a preliminary basis to the identified assets and liabilities acquired based on their estimated fair values at the time of acquisition. The purchase price allocation is considered preliminary until the Fund has obtained the necessary information to complete its allocations and valuation of identifiable intangible assets. As a result, the purchase price allocation may be adjusted in 2008.

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



$
----------------------------------------------------------------------------
Accounts receivable 4,358
Prepaids and other assets 37
Inventory 18,046
Accounts payable and accrued liabilities (1,151)
Fixed assets 932
Identifiable intangible assets subject to amortization
Distribution rights 1,800
Order backlog 217
Excess of purchase price over fair value of identifiable assets
acquired (goodwill) 722
----------------------------------------------------------------------------
Total adjusted purchase price, including deal-related costs 24,961
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The order backlog is amortized as the related equipment sales are finalized. In March of 2008, $124 of this amount was amortized to expense. The Fund expects the balance to be amortized to expense before June 30, 2008.

The Champion Business provides full service sales, rentals, parts and service for the Volvo Motor Grader line in Ontario. In addition to graders, the Champion Business carries the Volvo Compact line in Ontario as well as Holder North America, E.D. Etnyre & Co. and Viking.

6. INVENTORY

Inventories are recorded at the lower of cost and net realizable value. The cost of purchased equipment inventories is determined on a specific item basis. The cost of purchased repair and distribution parts is determined on a weighted average cost basis. Manufacturing overheads are allocated to manufactured inventory using standard costs that are based on normal plant capacities. Spare parts and stand-by equipment used in the Fund's operations are not included in inventory.

The value of the Fund's new and used equipment is evaluated by management throughout each year. Where appropriate, a write down is recorded against the book value of specific pieces of equipment to ensure that inventory values reflect the lower of cost or estimated net realizable value. For the three months ended March 31, 2008, no write-downs of equipment were recorded.

Throughout the year, Fund management identifies slow moving or obsolete parts inventory and estimates appropriate obsolescence provisions by aging the inventory. Similarly, management estimates appropriate provisions for scrap in the manufacturing segment. For the three months ended March 31, 2008, the Fund expensed $124 in additional obsolescence and scrap provisions.

During the three months ended March 31, 2008, there were no reversals of write-downs or provisions recognized in prior periods.

7. CAPITAL LEASE OBLIGATIONS

At December 31, 2007, as a result of the review of new vehicle lease contracts in 2007, the Fund reclassified certain leased vehicles as assets under capital leases based upon the respective contract terms and past experience. The associated capital lease obligation was $4,750 as at December 31, 2007. Interest expensed with respect to the capital leases for the years ended December 31, 2007 and 2006 was $254 and $214. These leases were renegotiated during the three months ended March 31, 2008 and have been reclassified as operating leases for the quarter ended March 31, 2008.

8. BANK INDEBTEDNESS

Bank indebtedness consists of an operating line of credit to a maximum of $30,000 (2007 - $20,000), renewable annually. As at March 31, 2008, the Fund had utilized $10,750 (2007 - $6,551) of this operating line of credit. In addition to the operating line of credit, the Fund has access to an additional $12,000 term facility for real estate acquisition and construction. As at March 31, 2008, the Fund had not utilized this facility. As collateral, the Fund has provided an assignment of book debts, a charge on inventories subordinated to the collateral provided to the equipment inventory lenders, a charge on capital assets subordinated to collateral provided to lessors, a charge on real estate, a charge on intangible and other assets, and a $50,000 debenture.

9. UNITHOLDERS' EQUITY

(a) Authorized

Unlimited number of units.

(b) Issued

Details of issued unitholders' capital is as follows:



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

Units, January 1, 2007 10,043,185 54,534

Units, March 31, 2008 10,043,185 54,534
---------------------------------------------------------------
---------------------------------------------------------------


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

On April 21, 2008, the Fund will issue 91,902 new units in settlement of "in-kind" units portion of the distribution. The established volume-weighted average price per unit is $5.462079.

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

10. INCOME TAXES

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




Three Months
Ended March 31
2008
------------------------------------------------------------

$
Current income tax expense 4
Future income tax expense 45
------------------------------------------------------------
49
------------------------------------------------------------
------------------------------------------------------------


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



Three Months
Ended March 31
2008
$
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Loss from continuing operations before taxes (505)
Statutory tax rate 46.4%

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Provision for income taxes at statutory tax rate (234)
Adjustments thereon for the effect of:
Temporary differences 45
Losses not benefited 234
Other 4
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49
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The net future income tax liability is represented by the following:

As at March 31
2008
$
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Eligible capital expenditures and other reserves 446
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Future income tax assets 446
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Capital assets 651
Accrued benefit asset 1,045
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Future income tax liabilities 1,696
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Net future income tax liability 1,250
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Proposed changes to the taxation of income trusts passed third reading in the House of Commons on June 12, 2007. The changes are not intended to apply to taxation years ending prior to 2011, for income trusts that commenced trading prior to November 2006. However, in accordance with the recommendations of the CICA contained in Section 3465, 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.

11. POST RETIREMENT OBLIGATIONS

Net benefit plan expense for the three months ended March 31, 2008 and 2007 are as follows:



Three months ended
March 31
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2008 2007
-------------------------------------------------------------------
Net benefit plan expense $ 309 $ 296
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12. 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.

13. 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.

14. SEGMENTED INFORMATION

The Fund has two reportable segments: Equipment Distribution and Engineered Systems. The Fund's operations are all in Canada. The Equipment Distribution segment sells, rents and services mobile industrial equipment and sells related parts. The Engineered Systems segment designs, manufactures, sells, installs and services bulk material handling equipment.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Fund evaluates performance based on profit and loss from operations before income taxes. The Fund accounts for intersegment sales and transfers at cost. The Fund's reportable segments are strategic business units which are reported as segments because each business unit was managed separately. Losses, interest expense and amortization from discontinued operations have been eliminated from the Equipment Distribution segmented information presented herein.



As at and for the three months ended
March 31, 2008
----------------------------------------------------------------------------
Equipment Engineered Segment Reconciling Fund
Distribution Systems Totals Items Total
----------------------------------------------------------------------------

Gross Revenue 76,730 7,485 84,215 84,215
Intersegment 1 80 81 81
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Net Revenue 76,729 7,405 84,134 - 84,134
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Interest Expense 911 47 958 958
Earnings from
continuing
operations before
income taxes 680 226 906 (1,411) (a) (505)
Amortization of
capital assets 175 74 249 2 251
Amortization of
intangible assets 124 - 124 - 124
Segment total assets 220,745 11,493 232,238 6,026 (b) 238,264
Segment capital assets 14,309 2,822 17,131 9 17,140
Segment goodwill 722 - 722 - 722
Capital expenditures 111 230 341 341
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As at and for the three months ended
March 31, 2007
----------------------------------------------------------------------------
Equipment Engineered Segment Reconciling Fund
Distribution Systems Totals Items Total
----------------------------------------------------------------------------

Gross Revenue 66,982 14,567 81,549 81,549
Intersegment 87 87 87
---------------------------------------------------------------------------
Net Revenue 66,982 14,480 81,462 - 81,462
----------------------------------------------------------------------------

Interest Expense 580 93 673 673
Earnings from
continuing operations
before income taxes 850 346 1,196 (899) (a) 297
Amortization of
capital assets 145 80 225 2 227
Segment total (b)
assets 162,062 16,293 178,355 6,093 184,448
Segment capital
assets 13,709 2,743 16,452 16 16,468
Capital
expenditures 251 41 292 292
Assets held for
sale 2,133 2,133 2,133
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(a) The reconciling items to adjust segment profit (loss) represent common corporate costs not allocated to the segments as well as corporate and Fund head office costs incurred during the year.

(b) The reconciling items represent prepaid expenses, accrued benefit assets carried on the corporate head office ledger, offset by the elimination of the intercompany receivables at the corporate head office.

15. FINANCIAL INSTRUMENTS

Categories of financial assets and liabilities

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




As at March 31, 2008
------------------------------------------------------------------------
Loans and receivables (1) 39,255
Other financial liabilities (2) 178,331
------------------------------------------------------------------------


(1) Includes accounts receivable.

(2) Includes bank indebtedness, accounts payable and accrued liabilities, income taxes payable, equipment and other notes payable.

The Fund has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies; however, considerable judgment is required to develop these estimates. The fair values of the Fund's financial instruments are not materially different from their carrying value.

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

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

As at March 31, 2008, the Fund had not entered into any foreign exchange forward contracts. These contracts, when entered into, hedge the Canadian operations' expected exposure to U.S. dollar denominated cash flows.

Risks arising from financial instruments and risk management

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

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

Foreign exchange risk

The Fund operates in Canada. The functional and reporting currency of the Fund is Canadian dollars. Foreign exchange risk arises because the amount of Canadian dollars receivable or payable for transactions denominated in foreign currencies may vary due to changes in exchange rates ("transaction exposures"). The balance sheet of the Fund includes U.S. dollar denominated accounts payable and accounts receivable. These amounts are translated into Canadian dollars at each period end, with resulting gains and losses recorded in earnings. The objective of the Fund's foreign exchange risk management activities is to minimize transaction exposures. The Fund manages this risk by entering into foreign exchange forward contracts on a transaction specific basis. The Fund does not currently hedge translation exposures. Substantially all of the Fund's purchases are translated into Canadian dollars at the date of receipt. The Fund's exposure to foreign exchange translation risk is minimal; therefore, no sensitivity or quantitative analysis is included in these notes.

Interest rate risk

The Fund's interest rate risk primarily arises from its floating rate debt, in particular its bank operating line of credit and its interest-bearing equipment notes payable. As at March 31, 2008, all of the Fund's interest-bearing debt is subject to movements in floating interest rates.

At at March 31, 2008, the Fund had $86,124 in interest bearing floating rate debt. A +/- 1% change in interest rates would have an effect of $214 on earnings from continuing operations.

Credit risk

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

The objective of managing counter party credit risk is to prevent losses in financial assets. The Fund's management continuously performs credit evaluations of customers and limits the amount of credit extended to customers as appropriate. The Fund is, however, exposed to credit risk with respect to accounts receivable and maintains provisions for possible credit losses based upon historical experience and known circumstances. In certain circumstances, the Fund registers liens, priority agreements and other security documents to further reduce the risk of credit losses. From time to time the Fund requires deposits before certain services are provided or contracts undertaken. As at March 31,2008, the Fund held customer deposits of $404.

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

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



As at March 31, 2008
----------------------------------------------------------------------------
Total accounts receivable 40,372
Less: Allowance for doubtful accounts (1,117)
----------------------------------------------------------------------------
Total accounts receivable, net 39,255
----------------------------------------------------------------------------
Of which:
Not overdue 28,244
Past due 12,128
Less: Allowance for doubtful accounts as at
December 31, 2007 (1,147)
Decrease in allowance for the three months
ended March 31, 2008 30
--------------------
Allowance for doubtful accounts as at March 31, 2008 (1,117)
----------------------------------------------------------------------------
Total accounts receivable, net 39,255
----------------------------------------------------------------------------
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Liquidity risk

Liquidity risk arises through excess of financial obligations over available financial assets due at any point in time. The Fund's objective in managing liquidity risk is to maintain sufficient readily available reserves in order to meet its liquidity requirements at any point in time. The Fund achieves this by maintaining sufficient availability of funding from committed credit facilities. As at March 31, 2008, the Fund had undrawn lines of credit available to it of $19,250.

The contractual maturities of the Fund's financial liabilities were presented in the Fund's consolidated financial statements for the year ended December 31, 2007.

16. MANAGEMENT OF CAPITAL

The Fund defines capital that it manages as unitholders' equity and total managed debt instruments consisting of equipment notes payable (both interest-bearing and interest-free) and other interest bearing debt. The Fund's objectives when managing capital are to ensure that the Fund will continue as a going concern, so that it can provide products and services to its customers and returns to its unitholders.

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

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

As at March 31, 2008 and March 31, 2007, the above capital management criteria can be illustrated as follows:



March 31 March 31
Debt Instruments 2008 2007
------------------------------------------------------------------------
------------------------------------------------------------------------
Interest bearing debt 10,750 6,551
Equipment notes payable 121,704 76,364
Other interest bearing debt 2,154 -
------------------------------------------------------------------------
Total debt instruments 134,608 82,915
------------------------------------------------------------------------
Unitholders' equity 56,387 60,110
------------------------------------------------------------------------
------------------------------------------------------------------------
Ratio of total debt instruments to unitholders' equity 2.4 1.4
------------------------------------------------------------------------
------------------------------------------------------------------------


As at March 31, 2008, the Fund did not meet its consolidated debt service coverage and debt to tangible net worth covenants relating to the operating line of credit. As of April 29, 2008, the Fund has received a waiver of its requirement to comply, as at March 31, 2008, with the consolidated debt service coverage ratio covenant under its operating line of credit. As at March 31, 2008, the Fund's consolidated debt service coverage ratio was 0.73:1, while the operating line of credit required a ratio of no less than 0.90:1. In connection with the foregoing, the Fund is required to and has undertaken to provide additional information to its lender. In addition, the Fund obtained an amendment modifying its debt to tangible net worth ratio under its operating line of credit. The debt to tangible net worth covenant was amended from 3.0:1 to 3.25:1, reducing to 3.0:1 on July 1, 2008. As at March 31, 2008, the Fund had a debt to tangible net worth ratio of 3.16:1.

17. 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.

18. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS

The comparative consolidated financial statements have been reclassified to disclose loss from discontinued operations in 2007.

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