Strongco Income Fund
TSX : SQP.UN

Strongco Income Fund

March 04, 2009 07:32 ET

Strongco Announces Fourth Quarter and 2008 Year-End Results

2008 Highlights - Total revenues increased 8.4% to $427 million - Equipment division sales gained 14.4% to $398.3 million - Gross margin $71.9 million vs $68.9 million in 2007 - Net loss of $0.4 million vs net income of $8.3 million in 2007 - New President & CEO and Chief Financial Officer - Acquired Champion Road Machinery from Volvo - Increased Case equipment sales by 25%

MISSISSAUGA, ONTARIO--(Marketwire - March 4, 2009) - Strongco Income Fund (TSX:SQP.UN) today released unaudited financial results for the fourth quarter and fiscal year ended December 31, 2008.

"Strongco made progress during 2008 in growing our Equipment Distribution segment revenue base," said Robert Dryburgh, President and Chief Executive Officer. "However, profitability was reduced by higher expenses plus reserve charges taken primarily against forestry-related equipment in inventory."

During 2008 Strongco restructured its sales force, which is yielding benefits in the form of increased sales in all regions of Canada where the Fund operates, plus market share improvements. In addition, the acquisition of Champion Road Machinery in early 2008 contributed new revenues in Ontario, which helped to offset lower sales of forestry-related equipment nationwide.

"The sudden and significant downturn in the economic outlook for Canada in the fourth quarter, accompanied by declining oil prices and a sharp weakening of the Canadian dollar, had a substantial effect on our fourth quarter," Mr. Dryburgh said. "Strongco was unable to fully pass on the increased cost of incoming equipment purchased in U.S. dollars. The Fund also incurred a foreign exchange loss on settlement of outstanding trade payables denominated in U.S. dollars."

The weakening economy led some customers, particularly in Alberta, to defer purchase decisions. The increased cost of incoming equipment and lower-than-planned sales resulted in higher-than-anticipated levels of equipment inventory at year end. Critical reviews of inventories during the third and fourth quarters in the context of the declining economy led to a total non-cash reserve for the year of $2.6 million charged against gross margin.

While year-end equipment inventories were higher than expected, management continues to focus on inventory reduction. From a high point of $177.8 million at June 30, 2008, inventories decreased to $167.5 million at December 31, 2008.

Fourth Quarter 2008 Review

Revenues for the fourth quarter increased by 3.0% from the same period in 2007, to $110.6 million. The Equipment Distribution segment increased revenues by 7.9% to $103.6 million. Revenues in the Engineered Systems segment decreased by 38.0%, due to the completion of a large mining project in 2007 for which there was no replacement in 2008.

Gross margin for the quarter at $17.6 million equates to a gross margin percentage of 15.9% compared to $17.7 million, or 16.5% in the same period of 2007. The change in percentage was due to the decline in value of the Canadian dollar and $1.1 million in inventory reserves, mostly related to the forestry sector.

Administrative, distribution and selling expenses increased by $2.1 million to $17.5 million. The rise was partly due to higher staff costs related to the Champion acquisition in March 2008. In addition, occupancy costs increased because of new branches opened during 2008 in Fort McMurray and Red Deer, Alberta and St. John's, Newfoundland, a new replacement facility built in Boucherville, Quebec and extensive renovations completed to the outlet in Calgary. Lease renewals during 2008 for existing facilities also increased operating expenses.

A year-end evaluation of goodwill that arose on the acquisition of Champion in March 2008 indicated that the goodwill was impaired and resulted in a non-cash charge of $0.9 million that was recorded against earnings in the fourth quarter.

Net loss for the quarter was $2.6 million, compared to net income of $2.7 million in 2007. Basic and diluted loss amounted to $0.25 per unit, versus net income of $0.26 per unit last year.

Fiscal 2008 Financial Review

Total revenues for 2008 increased by 8.4% to $427.3 million.

Revenues in the Equipment Distribution segment increased by 14.4% to $398 million from 2007, despite constraints in product supply in the first half of the year and a significant decline in sales to the forestry sector. The Champion business, acquired in the first quarter, contributed $27.0 million to revenues generated in central Canada. Strongco was recognized by Volvo as its highest-volume dealer in North America for 2008.

In the Engineered Systems segment, revenues decreased by 37.0% to $29.0 million. This was due to delays and cancellations of capital projects due to the economic slowdown in Canada and the U.S. This segment has generated revenues through small contracts and supply of parts to previously completed projects and has reduced its cost base to come into alignment with this lower level of revenues.

Gross margin for the year increased by 4.6% to $72.0 million. This equates to a gross margin percentage of 16.8%, down from 17.5% in 2007.

Administrative, distribution and selling expenses increased by 14.4% to $67.1 million. The increase in overhead was due to Champion's ongoing operating costs, plus severance and recruiting costs combined with new and expanded facilities in key markets nationwide.

Net loss for the year was $0.4 million, compared to net income of $8.3 million in 2007. Basic and diluted loss amounted to $0.04 per unit, versus net income of $0.79 per unit last year.

The Fund's distributable cash for the year was $12,000, compared to $9.3 million in 2007. Unitholders received cash distributions and units constituting distributions in kind totalling $0.70 per unit, down from $1.40 per unit last year. Distributions were suspended beginning in August 2008.



Financial Highlights

($ millions except per unit amounts)

---------------------------------------------------------------------------
Period ended December 31 3 months 12 months
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2008 2007 2008 2007
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Revenues $ 110.6 $107.3 $ 427.3 $394.1
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Earnings (loss) from continuing
operations before income taxes $ (2.6) $ 2.1 $ (0.1) $ 9.9
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Net income (loss) $ (2.6) $ 2.7 $ (0.4) $ 8.3
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Basic & diluted earnings (loss)
per unit $(0.25) $ 0.26 $(0.04) $ 0.79
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Financial Position

As at December 31, 2008, the Fund was not in compliance with certain covenants associated with its operating line of credit. In addition, the Fund has other credit lines with various non-bank equipment lenders which have specific covenants. In the case of two such lenders, the covenant breaches under the bank operating line of credit resulted in non-compliance under the equipment notes. The Fund has received waivers from the bank and equipment lenders involved. The Fund has requested amendments to certain bank covenant requirements going forward.

The Fund continues to have access to the operating line of bank credit, which provides for an effective maximum line of $20 million. In addition, Strongco can make use of lines of credit from equipment manufacturers for the purpose of financing product inventories.

Outlook

Strongco's sales staff reorganization and the new facilities in strategic locations across Canada that were completed during 2008 are expected to continue to yield solid benefits in sales volumes, service levels, rental revenues and increased market share.

The economic downturn across North America has affected all of Strongco's market areas and Alberta in particular due to declining oil prices. Such conditions are expected to prevail for the balance of 2009, and are likely to reduce unit sales of new equipment. However, in this environment it is anticipated that customers will seek to extend the productive life of their existing equipment through service and repair, which benefits Strongco's higher-margin product support business.

On the cost side, management is continuing its emphasis on cost controls and expense reduction. Since early 2008, Strongco reduced headcount by 7.5% after allowing for the Champion acquisition. Further reductions are being made primarily through attrition, and a hiring freeze is in place. Costs were incurred in 2008 related to the staff reorganization, which were one-time in nature and are mostly complete. Management also continues to be very focused on reducing inventories and debt.

Audited Management's Discussion and Analysis and Financial Statements will be made available shortly at www.strongco.com and www.sedar.com.

Conference Call Details

Strongco will hold a conference call on Wednesday, March 4, 2009 at 10:00 am ET to discuss fourth quarter results. Analysts and investors can participate by dialing 416-644-3425 or toll free 1-800-733-7571. An archived audio recording will be available until midnight on March 18, 2009. To access it, dial 416-640-1917 or 1-877-289-8525 and enter passcode 21298540#.

About Strongco

Strongco Income Fund is a trust established to hold 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.



Information contact

David Wood
Chief Financial Officer
905-565-3808
cfo@strongco.com


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 2009 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

Strongco Income Fund

Management's Discussion and Analysis

The following management discussion and analysis ("MD&A") provides a review of the consolidated financial condition and results of operations of Strongco Income Fund, Strongco GP Inc. ("Strongco GP") and Strongco Limited Partnership (the "Partnership") collectively referred to as the "Fund" or "Strongco", as at and for the year ended December 31, 2008. This discussion and analysis should be read in conjunction with the Fund's audited consolidated financial statements and accompanying notes as at and for the year ended December 31, 2008. For additional information and details, readers are referred to the Fund's quarterly financial statements and quarterly MD&A for fiscal 2007 and 2008 as well as the Fund's Notice of Annual Meeting of Unitholders and Information Circular ("IC") dated March XX, 2009, and the Fund's Annual Information Form ("AIF") dated March XX, 2009, all of which are published separately and are available on SEDAR at www.sedar.com.

Unless otherwise indicated, all financial information within this discussion and analysis is in millions of Canadian dollars except per unit amounts. The information in this MD&A is current to March XX, 2009.

STRONGCO INCOME FUND

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

On September 1, 2006, Strongco completed a reorganization in which all of the operations of Strongco Inc. ("the Company") were transferred into a new limited partnership, the Partnership.

The transfer of the operations of the Company to the Partnership was recorded at the carrying values of the Company's assets and liabilities on September 1, 2006 in accordance with the continuity of interest method of accounting, as the Partnership is considered to be a continuation of the Company.

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

DISTRIBUTIONS

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

On March 14, 2007, the Fund announced that the monthly cash distributions to Unitholders would 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 be changed to distributions consisting of $0.05 per unit in cash and an "in-kind" distribution of $0.05 per unit, to be settled with additional units issued to unitholders, subject to regulatory approval and commencing with the distribution in respect of the month ended March 31, 2008. In-kind units are issued at a deemed price equal to the volume-weighted average price of all units traded on the Toronto Stock Exchange on the 10 trading days ending on the third trading day preceding the record date. This change in distribution structure was designed to allow Strongco to retain more cash within the Fund for the purposes of reducing debt and facilitating expansion through internal growth and acquisitions.

On August 11, 2008, the Fund announced that distributions to unitholders would be suspended until further notice, commencing with the distribution for the month ended August 31, 2008. This change was in response to lower than expected, year to date results in both of Strongco's operating segments, concerns about the near term economic outlook and a need to retain cash to maintain balance sheet strength.

FINANCIAL HIGHLIGHTS



($ millions, except per unit amounts) 2008 2007 2006
----------------------------------------------------------------------------
Revenues $ 427.3 $ 394.1 $ 453.9
Earnings (loss) from continuing operations before
income taxes $ (0.1) $ 9.9 $ 21.8
Net income (loss) $ (0.4) $ 8.3 $ 22.6

Basic and diluted earnings (loss) per unit $ (0.04) $ 0.79 $ 2.15

Distributions per unit $ 0.70 $ 1.40 $ 2.00

Total assets $ 240.9 $ 206.7 $ 203.9

Debt $ 134.0 $ 105.4 $ 82.6
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OVERVIEW

Strongco's operations are comprised of two business segments, the Equipment Distribution and Engineered Systems.

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) to customers that operate in infrastructure, construction, mining, oil and gas exploration, forestry and industrial markets. This segment distributes numerous equipment lines in various geographic territories. The primary lines distributed include those manufactured by:

i. Volvo Construction Equipment North America Inc. ("Volvo"), for which Strongco has distribution agreements in Alberta, Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland

ii. Case Corporation ("Case"), for which Strongco has distribution agreements in a substantial portion of Ontario, and

iii. Manitowoc Crane Group ("Manitowoc"), for which Strongco has distribution agreements for the Manitowoc brands, Grove, National and Manitowoc, covering much of Canada, excluding Nova Scotia, New Brunswick and Prince Edward Island.

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

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.

Strongco's strategy is to increase earnings in all segments by growing revenues, improving operating margins and managing expenses, concurrent with strengthening the balance sheet. Additional revenue and earnings improvements will be achieved through increasing market share, geographic expansion, acquisitions, organic growth and cost control.

FINANCIAL RESULTS -- ANNUAL



Consolidated Results of Operations
($ thousands, except per unit
amounts) 2008 2007 $ Change % Change
----------------------------------------------------------------------------
Revenues $ 427,321 $ 394,088 $ 33,233 8.4%
Cost of sales 355,337 325,184 30,153 9.3%
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Gross Margin 71,984 68,904 3,080 4.5%

Administration, distribution and
selling expenses 67,070 58,637 8,433 14.4%
Amortization of intangible assets 544 - 544 -
Goodwill impairment 848 - 848 -
Other income (733) (2,733) 2,000 -73.2%
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Operating income 4,255 13,000 (8,745) -67.3%
Interest expense 4,382 3,093 1,289 41.7%
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Earnings (loss) from continuing
operations before income (127) 9,907 (10,034) -101.3%
Provision for income taxes 271 1,194 (923) 1,912.5%
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Earnings (loss) from continuing
operations (398) 8,713 (9,111) -104.6%
Earnings (loss) from discontinued
operations - (379) 379 -
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Net income (loss) and comprehensive
income (loss) (398) 8,334 (8,732) -104.8%
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Basic and diluted earnings (loss)
per unit (0.04) 0.79
Number of units issued 10,508,719 10,508,719
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Key ratios:
Gross margin as a percentage of
revenues 16.8% 17.5%
Administration, distribution and
selling expenses as percentage of
revenues 15.7% 14.9%
Operating income as a percentage
of revenues 1.0% 3.3%


Revenue by Business Segment

($ millions) 2008 % 2007 % Change
----------------------------------------------------------------------------

Equipment Distribution $ 398.3 93.2% $ 348.1 88.3% $ 50.2
Engineered Systems 29.0 6.8% 46.0 11.7% (17.0)
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$ 427.3 100.0% $ 394.1 100.0% $ 33.2
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Equipment Distribution Segment

Revenues in the Equipment Distribution segment increased by $50.2 million (14.4%) to $398.3 million from $348.1 million in 2007. Segment revenues for the year benefited by approximately $27.0 million from the acquisition of Champion in March of 2008. Additionally, as discussed in previous MD&A and the Fund's 2007 Annual Report, the efforts to upgrade Strongco's sales and customer support teams have begun to generate improved results. In 2008, Strongco improved the market share of the majority of its Volvo product lines across the areas in which it operates and has been recognized as the largest volume Volvo equipment dealer in North America for the year. Revenues from the Case equipment lines increased by 25% in 2008 compared to 2007. These improvements were offset by a $16.0 million decline in sales across all regions into the depressed forestry sector primarily of products manufactured by Tigercat Inc. ("Tigercat"). The distribution agreement between Strongco and Tigercat was terminated in September 2007.

Within the Equipment Distribution segment, business activities include equipment sales, customer support (parts and service) and equipment rentals which for 2008 were as follows:



Equipment Distribution Revenues

($ millions) 2008 % 2007 % Change
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Equipment Sales $ 282.0 70.8% $ 251.6 72.3% $ 30.4
Equipment Rentals $ 17.7 4.4% $ 9.5 2.7% $ 8.2
Product Support $ 98.6 24.8% $ 87.0 25.0% $ 11.6
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$ 398.3 100.0% $ 348.1 100.0% $ 50.2
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Equipment Sales

In Eastern Canada (Atlantic and Quebec), equipment sales increased by 10.3% in 2008, compared to a 6.6% decrease in 2007 despite a 12.1% decline in sales of forestry products as a result of the severe decline in forestry sector. The combination of a realigned sales force and higher infrastructure spending, particularly in Quebec, has led to increased sales of Volvo products and higher revenues from product support. Crane equipment sales also experienced a 62.2% increase in 2008 over 2007 in Eastern Canada.

In 2008, equipment sales in Central Canada increased by 18.8%, compared to an 8.0% decline in 2007 over 2006. The acquisition of Champion more than offset the $5.7 million decline in forestry products sold in this region and decrease in Crane unit sales of $3.7 million from 2007 to 2008.

In 2008, the recent restructuring of the sales force in Alberta began to yield results in the form of increased volumes and market share improvements in Volvo products. Equipment sales in this region increased by 4.3% in 2008 compared to a decrease of 29.9% in 2007 over 2006 despite a $2.0 million decline in forestry sales. Strongco's product lines principally serve the construction and infrastructure segments in this region. Strongco services the oil and mining sectors primarily in the site preparation phase and does not distribute the very large heavyweight mining or oil production equipment which has been a growth segment in this region in recent years.

Equipment Rentals

Rental revenues were $17.7 million in 2008 compared to $9.5 million in 2007. This segment enters into short-term rental contracts with purchase options with certain key customers. This type of contract is referred to as a rental purchase option contract ("RPO"). Under an RPO, a portion of the rental revenue is applied toward the purchase price of the equipment should the customer exercise the purchase option. Normally, the significant majority of RPO's are converted to sales within a six month period and this market practice is a method of building sales revenues and the field population of equipment. As discussed later in this MD&A, the majority of RPO's are usually converted to sales in the fourth quarter. However, due to the economic downturn in the latter part of 2008, a smaller percentage of these contracts converted to sales during the fourth quarter. In Eastern Canada, rental revenues increased by 87% over 2007, and in Western Canada, the increase was 184% as part of Strongco's strategy to increase market share. In Central Canada, the rental revenue growth was approximately 6% in 2008 mainly due to the acquisition of Champion which has on going seasonal road grader rental programs with certain municipalities in Ontario.

Product Support

Product support revenues improved by 13.3% from 2007, including the effect of the Champion acquisition. Sales of new equipment usually carry a warranty for a defined term and customer support revenues are not impacted until the warranty period expires. Warranty periods vary from manufacturer to manufacturer and can vary depending on customer purchases of extended warranties. Product support activities, therefore, tend to increase at a slower rate and lag equipment sales by three to five years. The increasing equipment population in the field leads to increased product support activities over time.

In Eastern Canada, product support revenues increased by 14.8% from 2007, with a particularly strong performance in Quebec, validating the restructuring of the management and customer service organization in this region beginning in 2007. Ontario, similarly, produced a similar increase in product support revenues, gaining 27.1% over 2007, including the effect of Champion. In the West, however, results were disappointing with flat revenues year over year in our Volvo business and a decline of 8.6% on the crane side. The restructuring mentioned above and the focus on customer service has improved the customer service index in Alberta for Volvo products during 2008 but this has not yet translated into increased sales. Crane sales were affected by the expiry of a large rebuild supply contract with a major customer which was completed in 2007.

Engineered Systems

Engineered Systems segment revenues totaled $29.0 million in 2008, a decrease of $17.0 million (37.0%) from $46.0 million in 2007. The economic slowdown in Canada and the United States has caused customers to delay or cancel capital projects and negatively impacted this segment's revenues and related gross margins. In addition, the completion in 2007 of a large project with a customer in the mining industry for which there was no replacement in 2008, contributed to the year over year decline in engineered systems sales. The segment has taken steps to reduce spending and eliminate overhead costs as it adjusts to the slower economic environment.



Revenue by Geographic Region

($ millions) 2008 % 2007 % Change
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Eastern (Atlantic / Quebec) $ 124.7 29.2% $ 112.3 28.5% $ 12.4

Central (Ontario) $ 180.1 40.9% $ 158.5 40.2% 21.6

Western (Manitoba to B.C.) $ 120.5 28.2% $ 119.4 30.3% 1.1

Other $ 2.0 0.5% $ 3.9 1.0% (1.9)

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$ 427.3 100.0% $ 394.1 100.0% $ 33.2
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Gross Margin

Strongco's gross margin increased by $3.1 million or 4.5%, to $72.0 million in 2008 from $68.9 million in 2007. Gross margin as a percentage of revenue was 16.8% in 2008 compared with 17.5% in 2007.

Equipment sales typically generate a lower gross margin percentage than product support activities. Equipment sales accounted for approximately 71% of revenues and 33% of gross margin in 2008, compared to 72% of revenues and 37% of gross margin in 2007. In 2008, equipment sales gross margin was negatively impacted by the following factors:

i. Most significantly, the termination of the distribution agreement with Tigercat at the end of 2007 and the softness in the forestry sector throughout 2008, led to Strongco selling a substantial amount of Tigercat forestry product at negative margins. In addition, Strongco established reserves against the value of specific equipment inventories, primarily related to product supplied to the forestry sector. A $1.5 million reserve was charged to gross margins in the third quarter and, in the fourth quarter, in the face of a declining economy and, specifically, in the weakened forestry sector, Strongco provided a further reserve of $1.1 million. The provision for equipment inventory in 2007 was $0.2 million. These reserves are in addition to reserves recorded against parts inventories of $1.9 million in 2008 compared to $1.2 million in 2007.

ii. With a lesser impact for the year overall, the significant and rapid weakening of the Canadian dollar in the fourth quarter of 2008 negatively affected equipment gross margins. Strongco purchases the majority of its products based on U.S. dollar prices and historically has not hedged currency in an effort to reduce its exposure to fluctuations in the value of the Canadian dollar relative to the U.S. dollar.

Gross margin for the Engineered Systems segment decreased to $6.1 million in 2008 from $9.1 million in 2007. Gross margin as a percentage of revenue was 21.2% in 2008 compared to 19.7% in 2007. The reduction in sales reflects a decrease in the level of large project sales in 2008. Large projects typically incorporate higher proportions of subcontracted work resulting in lower gross margin percentages. Smaller jobs and the supply of replacement parts to completed projects have supported the segment's current gross margin levels.

Administrative, Distribution and Selling Expense

Administrative, distribution and selling expenses increased by $8.4 million or 14.4%, to $67.1 million in 2008, from $58.6 million in 2007. The rate of increase in overheads from 2007 to 2008 exceeded the rate of increase in revenues. This disparity arose for three main reasons:

i. Champion: the acquisition of Champion in March of 2008 not only added to the Administrative, distribution and selling expense in the year, but also had the affect of adding costs disproportionately since the seasonality of Champion results in revenues in the first quarter being higher than other quarters because of Champion's on going seasonal rental programs on graders with a number of municipalities in Ontario for snow removal.

ii. Severances: Severance and recruiting costs of approximately $1.4 million were incurred in three main areas:

a. Restructuring staff on the integration of Champion into Strongco,

b. Severance and recruiting costs related to the replacement of the Chief Executive Officer and Chief Financial Officer,

c. Severance costs related to restructuring of the sales and product support organization across the Fund.

iii. New and expanded facilities:

a. new branches in Fort McMurray, Alberta and St. John's, Newfoundland were opened in the first quarter of 2008,

b. a new facility in Boucherville, Quebec was opened in the second quarter of 2008 and a new facility was constructed in Red Deer, Alberta during the year and opened in January 2009, and

c. an expansion of the Calgary equipment facility was completed in the second quarter of 2008.

It is expected that this new capacity will enable Strongco to grow its sales in the future. While these costs added to overheads disproportionately to the growth in revenues, Strongco also experienced increased costs arising from wage and salary increases and increased occupancy costs on leases which expired and were renewed during the year.

Strongco has introduced more stringent cost controls in order to reduce costs.

Amortization of Intangibles and Goodwill Impairment

As a result of the general economic downturn and the weakness in the Fund's major market sectors, the recent covenant violations under the Fund's lending agreements (see "Acquisition of Champion" below) and the recent decline in the Fund's market capitalization, management performed an impairment test on the Fund's long-lived assets, including goodwill. Based upon these tests, management determined that the goodwill, which arose on the acquisition of Champion in 2008, had been impaired and recorded a charge against earnings of $0.8 million.

Other Income

Other income and expense is primarily comprised of any gain or loss on disposition of fixed assets, foreign exchange gains or losses and service fees paid to Strongco as compensation for sales of a supplier's new equipment by other third parties into the regions where Strongco has distribution rights. The net decrease in other income to $0.7 million in 2008 from $2.7 million in 2007 is largely due to foreign exchange losses of $1.5 million incurred in the fourth quarter of 2008 combined with lower service fees in the year. The foreign exchange loss was the result of the rapid devaluation of the Canadian dollar in October 2008 and impact on the translation of the Fund's U.S. dollar liabilities.

Interest Expense

Strongco's interest expense increased to $4.4 million in 2008 from $3.1 million in 2007. The fund's interest bearing debt comprises Bank Indebtedness and interest bearing Equipment Notes. Overall debt, including non interest bearing Equipment notes increased with the acquisition of Champion described below, and continued to increase through a peak level in the third quarter. At year end, overall debt is at its lowest level since the end of the first quarter but the interest bearing debt has remained at a level higher than 2007. Much of this can be attributed to the rental fleet and related equipment notes acquired with Champion. In addition, the increased level of inventory on RPO's leads to a higher level of equipment notes converting from non interest bearing to interest bearing as the equipment ages. The impact of this increased level of interest bearing debt was partially offset by declining interest rates in the latter half of 2008.

Net Income

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



($ millions) 2008 2007
----------------------------------------------------------------------------
Equipment Distribution $ 6.3 $ 11.8
Engineered Systems - 2.7
Corporate (6.4) (4.6)
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Earnings from continuing operations before income taxes $ (0.1) $ 9.9
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----------------------------------------------------------------------------


On an after-tax basis, the net loss for the year was $0.4 million ($0.04 loss per unit basic and fully diluted) for 2008 compared to net income of $8.3 million ($0.79 per unit basic and fully diluted) in 2007. Following substantive enactment of changes to the taxation of income trusts in 2007 and in accordance with the recommendations of the Canadian Institute of Chartered Accountants contained in Handbook section 3465, the Fund has estimated its temporary differences, determined the periods over which these differences are expected to reverse and applied the current substantively enacted tax rates that will apply in the periods those temporary differences are expected to reverse. The Fund has expensed $0.3 million for these temporary differences in 2008 compared to $1.2 million in 2007. The Fund is taxable to the extent its taxable income exceeds distributions until taxation years ending in 2011. Beginning with the 2011 taxation year, distributions will be taxed at the Specified Investment Flow-Through Entity ("SIFT") rate.

Loss and Loss per Unit from Discontinued Operations

On December 1, 2007, the Fund sold the assets of the aerial rental business for proceeds of $1.7 million. The results of the related operations were reported as discontinued operations. The results from discontinued operations for the years ended December 31, 2008 and 2007 were as follows:



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

Revenues $ - $ 2.0
Cost of goods sold - 1.0
----------------------------------------------------------------------------
Gross margin - 1.0
----------------------------------------------------------------------------

Administration, distribution and selling expenses - 0.4
Amortization - 0.7
Other expenses - 0.1
----------------------------------------------------------------------------
Earnings from discontinued operations before the following - (0.2)
Interest - 0.2
----------------------------------------------------------------------------
Earnings from discontinued operations before income taxes - (0.4)
Provision for income tax - -
----------------------------------------------------------------------------
Earnings for the period $ - $ (0.4)

Loss per unit, basic and diluted, from discontinued
operations. $ - $(0.04)
----------------------------------------------------------------------------


Acquisition of Champion

On March 20, 2008, the Fund purchased substantially all of the assets (excluding real property) of Champion for a total consideration of $25.0 million including deal-related costs of $0.2 million. The consideration was comprised of cash of $22.8 million and a non-interest bearing note payable in favour of Volvo Group Canada Inc. of $2.5 million with $1.25 due on March 1, 2010 and $1.25 due on March 1, 2011. Part of the cash consideration was provided by $15.7 million in equipment notes borrowed by Strongco from Volvo Financial Services ("VFS") coincident with the purchase of Champion. The funds from these equipment notes were paid directly to Volvo from VFS and were used to finance the equipment inventory purchased with Champion. These equipment notes were payable on the same terms as Strongco's other equipment notes payable with VFS and were secured by the machinery inventories of the Champion Business.

Financial Condition and Liquidity

Cash provided by operating activities of continuing operations was $7.8 million in 2008, which compared to $9.7 million cash provided by operating activities in 2007. Cash provided in operating activities in 2008 includes $20.9 million from non-cash working capital acquired on the purchase of Champion in March 2008. Excluding the non-cash working capital acquired on the Champion purchase, cash flow used in operating activities was $13.2 million. The year over year change in cash provided by operating activities was due primarily to the $20.9 million of non-cash working capital balances acquired with the Champion purchase.

Non-cash working capital increased during the year by $5.6 million which compared to a decrease in non-cash working capital in 2007 of $3.6 million. The change in non-cash working capital, excluding non-cash working capital assets acquired on the purchase of Champion in March 2008, was a decrease of $15.3 million. Significant components of the change in working capital requirements are as follows:



($ millions) 2008 2007
----------------------------------------------------------------------------

Accounts receivable $ 2.9 $ (7.8)
Inventories 11.1 12.8
Prepaids 0.4 (0.4)
Income & other taxes receivable (0.2) 0.4
----------------------------------------------------------------------------
14.2 5.0

Accounts payable and accrued liabilities 11.2 (9.0)
Deferred revenue & customer deposits 0.3 (6.2)
Equipment notes payable - non interest bearing (11.8) 7.2
Equipment notes payable - interest bearing 35.8 9.5
Less: new equipment notes payable to finance Champion
acquisition (15.7)
Other - (0.1)
----------------------------------------------------------------------------
19.8 1.4
----------------------------------------------------------------------------
Consolidated (increase) decrease in non-cash working
capital related to operations $ (5.6) $ 3.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Less non-cash working capital acquired with the Champion
Business $(20.9) $ -
----------------------------------------------------------------------------
Consolidated decrease in non-cash working capital excluding
working capital acquired with Champion acquisition $ 15.3 $ 3.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Bank Credit Facilities

The Fund has a credit facility with a Canadian Chartered Bank which provides a $20 million 364-Day committed operating line of credit which is renewable annually. Borrowings under the line of credit are limited by a standard borrowing base calculation based on accounts receivable and inventory typical of such lines of credit. As collateral the Fund has provided a $50 million debenture and a security interest in accounts receivables, inventories (subordinated to the collateral provided to the equipment inventory lenders), capital assets (subordinated to collateral provided to lessors), real estate and on intangible and other assets. Under its operating facility the Fund is able to issue letters of credit up to a maximum of $5 million. Outstanding letters of credit reduce the Fund's availability under its operating line of credit. For certain customers, Strongco issues letters of credit as a guarantee of Strongco's performance on the sale of equipment to the customer. As at December 31, 2008, there were $0.2 million (2007 - $0.3 million) of outstanding letters of credit.

In addition to its operating line of credit, the Fund has a $5 million line for foreign exchange forward contracts as part of its bank credit facilities ("FX Line") available to hedge foreign currency exposure. Under this FX Line, Strongco can purchase foreign exchange forward contracts up to a maximum of $5 million with terms not to expire beyond the remaining term of the operating line of credit. As at December 31, 2008, the Fund had outstanding foreign exchange forward contracts under this facility totaling US$2.4 million at an average exchange rate of $1.22 Canadian for each US$1.00 with maturities between February 2009 and the end of March 2009 (December 31, 2007 - $nil).

The bank credit facility contains financial covenants that require the Fund to maintain certain financial ratios and meet certain financial thresholds. 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 and the Fund had a debt to tangible net worth ratio of 3.16:1 while the operating line of credit required a ratio of no greater than 3.0:1. For the purposes of the operating line of credit, debt is defined as total liabilities less future income tax amounts and subordinated debt. On April 29, 2008, the Fund 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. 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. The consolidated debt service coverage ratio covenant was revised in June of 2008 from 0.9:1 to 1.3:1.

As at June 30, 2008, the Fund did not meet its debt to tangible net worth covenant relating to its operating line of credit. As at June 30, 2008, the Fund had a debt to tangible net worth ratio of 3.33:1. On August 11, 2008, the Fund received a waiver of its requirement to comply with the debt to tangible net worth covenant as at June 30, 2008, and also entered into an amended credit facility agreement. Under the conditions of the amended credit facility, the Fund's lender has raised the Fund's borrowing rates by 0.25%, cancelled the Fund's $12 million term facility for real estate acquisition and construction, and restricted its operating line of credit to $20 million until such time as the Fund returns to full compliance with the covenants contained in the amended credit facility. Also under the amended credit facility, the debt to tangible net worth covenant was amended from 3.0:1 to 3.25:1, reducing to 3.0:1 for September 30, 2008 and December 31, 2008, and the lender's prior written consent is required for the Fund to declare or pay cash distributions on any class or kind of its units, repurchase or redeem any of its units or reduce its capital in any way whatsoever or repay any unitholders' advance. As a result of non-compliance with the operating facility covenant requirements, through cross-default provisions, the Fund defaulted on certain equipment notes payable from two creditors in the amount of $120,093 and $109,648 as at June 30, 2008 and March 31, 2008, respectively. On August 11, 2008 the Fund also received letters from each of the two creditors acknowledging the bank letters in respect of the first and second quarters, and as a result the two creditors waived the first and second quarter defaults.

Prior to September 30, 2008, the Fund obtained an amendment of its credit facility modifying its debt to tangible net worth ratio under its operating line of credit from 3.0:1 to 3.5:1, reducing to 3.0:1 for December 31, 2008. As at September 30, 2008, the Fund was in compliance with all of its covenants as they relate to the operating line of credit and those additional covenants as required by the providers of the Fund's equipment notes payable.

As at December 31, 2008, the Fund had a debt to tangible net worth ratio of 3.33:1 while the operating line of credit required a ratio of no greater than 3.0:1 and the Fund's consolidated debt service coverage ratio was 1.05:1, while the operating line of credit required a ratio of no less than 1.3:1. On February 27, 2009, the bank agreed to waive the covenant defaults at December 31, 2008 and forbear exercising its rights under the credit facility agreement any time prior to March 31, 2009 subject to the Fund providing copies of its audited financial statements for the year ended December 31, 2008 and forecast projections for 2009 and payment of a fee of $50,000. With this waiver and forbearance the bank amended the facility to increase the interest rate on the operating line from a range of bank prime plus 0.50% to bank prime plus 1.00%, to a range of bank prime plus 0.50% to bank prime plus 1.50%, and to permanently reduce the operating line to $20 million.

Based on its 2009 projections, the Fund is likely to not be in compliance with the debt to tangible net worth and debt service coverage covenants under its bank credit facility as at March 31, 2009 and as a result of cross default provisions, the Fund is also likely to be in violation of covenants under certain of its equipment notes payable as at March 31, 2009. The Fund has made a request to its bank to amend the debt to tangible net worth and debt service coverage covenants going forward to avoid future covenant violations. The bank is currently giving consideration to this request. However there is no assurance the bank will grant these amendments or provide waivers or forbearance for future covenant violations should they occur. If future covenant violations were to occur, the bank and equipment note lenders, at their option, could declare the Fund to be in default under their respective lending agreements, which in turn could result in a restriction of the Fund's access to funds under those lending facilities. There is no assurance that the Fund would be able to obtain funding from alternative sources.

Equipment Notes

In addition to its bank operating line of credit, the Fund has lines of credit available from various non-bank equipment lenders which are used to finance equipment inventory ("equipment notes payable"). Some equipment notes are interest free for periods up to seven months from the date of financing after which they bear interest at rates ranging from 1.65% to 2.85% over the one month Canadian Bankers' Acceptance Rate and 0.25% over the prime rate of Canadian chartered banks. As collateral for these equipment notes, the Fund has provided liens on specific inventories and accounts receivable. Principal repayments on the equipment notes commence over the period from the date of financing to twelve months thereafter and are due in full when the related equipment is sold. All of equipment notes facilities are renewable annually.

Certain of the Fund's equipment notes payable to two creditors contain restrictive financial covenants, including requiring the Fund to remain in compliance with the financial covenants under all of its other lending agreements. While the Fund has remained in compliance with the specific covenants under all of its equipment notes, the covenant violations under its bank operating line of credit, as noted above, resulted in violations under the equipment notes with these two creditors ("cross-default"). On February 27, 2009, the Fund received waivers the cross-default of covenants at December 31, 2008 from each equipment note creditor.

The balance outstanding under the Fund's debt facilities at December 31, 2008 was as follows:



Debt Facilities
As at December 31 ($ millions) 2008 2007
----------------------------------------------------------------------------

Bank indebtedness $ 12.8 $ 5.8
Equipment notes payable - non interest bearing 35.6 47.4
Equipment notes payable - interest bearing 83.3 47.5
Capital lease obligations 4.7
Other notes payable 2.3
----------------------------------------------------------------------------
$134.0 $105.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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 gain in the second quarter as construction and other contracts begin to be tendered and companies begin to prepare for summer activity. The third quarter generally tends to be slightly slower from an equipment sales standpoint, which is partially offset by continued strength in equipment rentals and customer support activities. Fourth quarter activity generally strengthens as companies make year end capital spending decisions in addition to the exercise of purchase options on equipment which has previously gone out on RPO's.



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

Revenue $ 110.6 $ 106.6 $ 126.0 $ 84.1
(Loss) earnings from continuing
operations before income taxes $ (2.6) $ - $ 3.0 $ (0.5)
Net (loss) income $ (2.6) $ (0.2) $ 2.9 $ (0.5)

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

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

Revenue $ 107.3 $ 99.8 $ 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 $ 0.26 $ 0.30 $ 0.23 $ -

2006
($ millions, except per unit amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------

Revenue $ 117.7 $ 100.2 $ 132.5 $ 103.5
Earnings from continuing operations
before income taxes $ 3.9 $ 4.5 $ 8.0 $ 5.4
Net income $ 3.8 $ 7.2 $ 6.7 $ 4.9

Basic and diluted earnings per unit $ 0.36 $ 0.68 $ 0.64 $ 0.47


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

FINANCIAL RESULTS - FOURTH QUARTER



Consolidated Results of Operations for the Three Months Ended December 31
($ thousands, except per unit
amounts) 2008 2007 $ Change % Change
----------------------------------------------------------------------------

Revenues $ 110,626 $ 107,302 $ 3,324 3.1%
Cost of sales 93,042 89,549 3,493 3.9%
----------------------------------------------------------------------------
Gross Margin 17,584 17,753 (169) -1.0%

Administration, distribution and
selling expenses 17,536 15,392 2,144 13.9%
Amortization of intangible assets 327 - 327 -
Goodwill impairment 848 - 848 -
Other expense (income) 383 (604) 987 -163.4%
----------------------------------------------------------------------------
Operating income (1,510) 2,965 (4,475) -150.9%
Interest expense 1,120 838 282 33.7%
----------------------------------------------------------------------------
Earnings (loss) from continuing
operations before income taxes (2,630) 2,127 (4,757) -223.6%
Provision for income taxes (52) (645) 593 -91.9%
----------------------------------------------------------------------------
Earnings (loss) from continuing
operations (2,578) 2,772 (5,350) -193.0%
Loss from discontinued operations - (43) 43 -100.0%
----------------------------------------------------------------------------
Net and comprehensive income (loss) (2,578) 2,729 (5,307) -194.5%
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

Key ratios:
Gross margin as a percentage of
revenues 15.9% 16.5%
Administration, distribution and
selling expenses as percentage of
revenues 15.9% 14.3%
Operating income (loss) as a
percentage of revenues -1.4% 2.8%


Revenue by Business Segment

Three months ended December 31 2008 % 2007 % Change
----------------------------------------------------------------------------

Equipment Distribution $ 103.7 93.8% $ 96.0 89.5% $ 7.7
Engineered Systems 6.9 6.2% 11.3 10.5% (4.4)
----------------------------------------------------------------------------
$ 110.6 100.0% $ 107.3 100.0% $ 3.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Equipment Distribution Revenues

($ millions) 2008 % 2007 % Change
----------------------------------------------------------------------------

Equipment Sales $ 72.6 70.0% $ 72.0 75.0% $ 0.6
Equipment Rentals $ 5.4 5.2% $ 3.2 3.3% $ 2.2
Product Support $ 25.7 24.8% $ 20.8 21.7% $ 4.9
----------------------------------------------------------------------------
$ 103.7 100.0% $ 96.0 100.0% $ 7.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Equipment Distribution segment revenues in the fourth quarter increased by $7.7 million or 8.0% over the same period in 2007. Equipment sales were flat year over year with strong sales in Atlantic Canada and Central Canada being offset by the equipment sales decline in Alberta of 11.9% from last year due to the economic downturn. The uncertainty surrounding oil and gas production caused customers to cancel and defer purchase decisions and also choose not to convert RPO's into purchases. This contributed to a decline in sales and an increase in rental revenues in the fourth quarter of 2008 compared to 2007. Product support revenues improved 23.6% over 2007 and showed improvement over last year in all regions of the country.

Engineered Systems

Fourth quarter revenues in the Engineered Systems segment were down $4.3 million or 38.4% from the fourth quarter of 2007. The completion of a large project for a customer in the mining sector in 2007 for which there was no replacement in 2008, contributed to the year over year decline in engineered systems sales. Because of the economic slowdown in both Canada and the United States, large capital projects have been stalled or not released. The segment is currently supplying parts to completed projects and working on smaller projects and has reduced spending and overhead costs in response to the weaker markets.



Revenue by Geographic Region

Three months ended December 31 2008 % 2007 % Change
----------------------------------------------------------------------------
Eastern (Atlantic / Quebec) $ 34.1 30.8% $ 31.2 29.1% $ 2.9
Central (Ontario) $ 46.9 42.4% $ 43.8 40.8% 3.1
Western (Manitoba to B.C.) $ 29.2 26.4% $ 31.5 29.4% (2.3)
Other $ 0.4 0.4% $ 0.8 0.7% (0.4)
----------------------------------------------------------------------------
$ 110.6 100.0% $ 107.3 100.0% $ 3.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------


By geographic region, fourth quarter revenues were higher in Eastern and Central Canada due to strong equipment sales in the Atlantic and Central regions. The Champion acquisition has added to Central Canada revenues in 2008. Revenues in Western Canada were down compared to 2007 due to economic uncertainty caused by the weakness in the oil sands.

Gross Margin

Strongco's gross margin in the fourth quarter remained virtually unchanged from a year ago at $17.6 million. As a percentage of revenue, gross margin was 15.9% in the fourth quarter of 2008 compared to 16.5% in the fourth quarter of 2007.

Within the Equipment Distribution segment, business activities include the sale of machinery, product support and equipment rentals. Equipment sales, which generate a significantly lower margin than customer support activities, account for 70.0% of revenues and 27.7% of gross margin for this segment in the fourth quarter of 2008 compared to 75.1% of revenues and 41.9% of gross margin for the same quarter in 2007. At year end Strongco made additional reserves against the values of certain equipment in the amount of $1.2 million in addition to a reserve of $1.5 million made in the third quarter of 2008. This reserve related to various pieces of equipment and attachments and certain parts, mainly related to Tigercat products which are sold into the forestry sector. Also, in the fourth quarter, equipment sales gross margin was negatively impacted by decline in value experienced by the Canadian dollar in October 2008 where the sale price had been quoted and committed to in Canadian dollars and the equipment was purchased subsequent to the decline in the strength of the Canadian dollar.

Gross margin for the Engineered Systems segment decreased to $1.6 million or 22.6% of revenue, in the fourth quarter of 2008 from $2.8 million or 25.0% of revenue in the same quarter of 2007 due to lower revenues and change in product mix in the fourth quarter of 2008.

Administrative, Distribution and Selling Expense

Administrative, distribution and selling expenses increased by $2.1 million to $17.5 million in the fourth quarter of 2008 from $15.4 million in 2007. Salary and benefit expenses were up in the most recent quarter in part due to the acquisition of Champion in March 2008. In addition, occupancy costs have increased due to new branches being added in Fort McMurray, Alberta and St. John's, Newfoundland, a new, larger replacement facility in Boucherville, Quebec, an expansion of the Calgary equipment facility and a new branch in Red Deer, Alberta. As well, Strongco experienced increased occupancy rates for existing facilities where leases have renewed or escalated. Expenses also increased as result of operating costs from increased activity in the customer support departments within the Equipment Distribution segment.

Other Expense (Income)

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. For the three months ended December 31, 2008, the Fund incurred a net expense of $0.4 million which compared to other income of $0.6 million in the fourth quarter of 2007. The decline was primarily due to the change in value of Canadian currency relative to that of the United States in October of 2008 which resulted in a loss on the translation of the Fund's U.S. dollar liabilities.

Interest Expense

Strongco's interest expense increased by $0.3 million to $1.1 million in 2008 from $0.8 million in 2007. This was a result of the Fund's higher level of interest bearing debt. At year end, the overall debt level is at its lowest level since the end of the first quarter but the interest bearing debt has remained at a level higher than 2007. Much of this can be attributed to the rental fleet and related equipment notes acquired with Champion. In addition, the increased level of inventory on RPO's leads to a higher level of equipment notes converting from non interest bearing to interest bearing as the equipment ages. The impact of this increased level of interest bearing debt was partially offset by lower interest rates in the fourth quarter of 2008 as compared to the fourth quarter of 2007.

Net Income (Loss)

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



Three months ended December 31 2008 2007
----------------------------------------------------------------------------

Equipment Distribution $ (0.4) $ 2.2
Engineered Systems (0.3) 1.1
Corporate (1.9) (1.1)
----------------------------------------------------------------------------
Earnings (loss) from continuing operations before income
taxes $ (2.6) $ 2.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The Government of Canada enacted changes to the taxation of income trusts under its Tax Fairness Plan. The changes are not intended to apply to taxation years ending prior to 2011 for income trusts that commenced trading prior to November 2006. However, in accordance with the recommendations of the Canadian Institute of Chartered Accountants contained in Handbook section 3465, the Fund has estimated its temporary differences, determined the periods over which these differences are expected to reverse and applied the current substantively enacted tax rates that will apply in the periods those temporary differences are expected to reverse. The Fund recorded a tax recovery of $52 for these temporary differences in the fourth quarter of 2008 as compared to $645 of tax expense in the fourth quarter of 2007. 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 million. 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 December 31, 2008 and 2007 were as follows:



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

Revenues $ - $ 0.5
Cost of goods sold - 0.2
----------------------------------------------------------------------------
Gross margin - 0.3
----------------------------------------------------------------------------

Administration, distribution and selling expenses - 0.1
Amortization - 0.1
Other expenses - -
----------------------------------------------------------------------------
Loss from discontinued operations before the following - 0.1
Interest - 0.1
----------------------------------------------------------------------------
Loss from discontinued operations before income taxes - -
Provision for income tax - -
----------------------------------------------------------------------------
Loss for the period $ - $ -

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


Financial Condition and Liquidity

Cash used in operating activities was $6.0 million in the fourth quarter of 2008 compared to $0.6 million cash generated from operating activities in the fourth quarter of 2007. The year over year change was due to the net loss for the three months ended December 31, 2008 of $2.5 million compared to net earnings of $2.7 million in the fourth quarter of 2007.

Non-cash working capital increased in the quarter $5.0 million which compared to an increase of $3.2 million in the fourth quarter of 2007. Significant components of the change in working capital requirements are as follows:



Change in Non-Cash Working Capital
Three months ended December 31, ($ millions) 2008 2007
----------------------------------------------------------------------------

Accounts receivable $ (1.0) $ (0.3)
Inventories (6.3) (13.6)
Prepaids 0.6 0.4
Income & other taxes receivable (0.1)
----------------------------------------------------------------------------
(6.7) (13.6)

Accounts payable and accrued liabilities 1.7 (1.7)
Deferred revenue & customer deposits 2.0 1.0
Equipment notes payable - non interest bearing (11.8) (19.1)
Equipment notes payable - interest bearing (3.1) 3.0
Other (0.4) -
----------------------------------------------------------------------------
(11.6) (16.8)
----------------------------------------------------------------------------

Decrease in non-cash working capital $ 4.9 $ 3.2
----------------------------------------------------------------------------


Operating Line of Credit

The Fund has a credit facility with a Canadian Chartered Bank which provides a $20 million 364-Day committed operating line of credit which is renewable annually. Borrowings under the line of credit are limited by a standard borrowing base calculation based on accounts receivable and inventory typical of such lines of credit. As collateral the Fund has provided a $50 million debenture and a security interest in accounts receivables, inventories (subordinated to the collateral provided to the equipment inventory lenders), capital assets (subordinated to collateral provided to lessors), real estate and on intangible and other assets. Under its operating facility the Fund is able to issue letters of credit up to a maximum of $5 million. Outstanding letters of credit reduce the Fund's availability under its operating line of credit. For certain customers, Strongco issues letters of credit as a guarantee of Strongco's performance on the sale of equipment to the customer. As at December 31, 2008, there were $0.2 million (2007 - $0.3 million) of outstanding letter credits.

In addition to its operating line of credit, the Fund has a $5 million line for foreign exchange forward contracts as part of its bank credit facilities ("FX Line") available to hedge foreign currency exposure. Under this FX Line Strongco can purchase foreign exchange forward contracts up to a maximum of $5 million with terms not to expire beyond the remaining term of the operating line of credit.

The bank credit facility contains financial covenants that require the Fund to maintain certain financial ratios and meet certain financial thresholds. As at December 31, 2008, the Fund was not in compliance with the debt to tangible net worth and debt service coverage covenants relating to its operating line of credit. As at December 31, 2008, the Fund had a debt to tangible net worth ratio of 3.33:1 while the operating line of credit required a ratio of no greater than 3.0:1 and the Fund's consolidated debt service coverage ratio was 1.05:1, while the operating line of credit required a ratio of no less than 1.3:1. On February 27, 2009, the bank agreed to waive the covenant defaults at December 31, 2008 and forbear exercising its rights under the credit facility agreement any time prior to March 31, 2009 subject to the fund providing copies of its audited financial statements for the year ended December 31, 2008 and forecast projections for 2009 and payment of a fee of $50,000. With this waiver and forbearance the bank amended the facility to increase the interest rate on the operating line from a range of bank prime plus 0.50% to bank prime plus 1.00%, to a range of bank prime plus 0.50% to bank prime plus 1.50%, and to permanently reduce the operating line to $20 million.

Based on its 2009 projections, the Fund is not likely to be in compliance with the debt to tangible net worth and debt service coverage covenants under its bank credit facility as at March 31, 2009 and as a result of cross default provisions, the Fund is also likely to be in violation of covenants under certain of its equipment notes payable as at March 31, 2009. The Fund has made a request to its bank to amend the debt to tangible net worth and debt service coverage covenants going forward to avoid future covenant violations. The bank is currently giving consideration to this request. However, there is no assurance the bank will grant these amendments or provide waivers or forbearance for future covenant violations should they occur. If future covenant violations were to occur, the bank and equipment note lenders, at their option, could declare the Fund to be in default under their respective lending agreements, which in turn could result in a restriction of the Fund's access to funds under those lending facilities. There is no assurance that the Fund would be able to obtain funding from alternative sources.

Equipment Notes

In addition to its bank operating line of credit, the Fund has lines of credit available from various non-bank equipment lenders which are used to finance equipment inventory ("equipment notes payable"). Some of equipment notes are interest free for periods up to seven months from the date of financing after which they bear interest at rates ranging from 1.65% to 2.85% over the one month Canadian Bankers' Acceptance Rate and 0.25% over the prime rate of Canadian chartered banks. As collateral for these equipment notes, the Fund has provided liens on specific inventories and accounts receivable. Principal repayments on the equipment notes commence over the period from the date of financing to twelve months thereafter and are due in full when the related equipment is sold. All of equipment notes facilities are renewable annually.

Certain of the Fund's equipment notes payable to two creditors contain restrictive financial covenants, including requiring the Fund to remain in compliance with the financial covenants under all of its other lending agreements. While the Fund was in compliance with the specific covenants under all of its equipment notes at December 31, 2008, the covenant violations under its bank operating line of credit, as noted above, resulted in violations under the equipment notes with these two creditors ("cross-default"). On February 27, 2009, the Fund received waivers the cross-default of covenants at December 31, 2008 from each equipment note creditor.

The balance outstanding under the Fund's debt facilities at December 31, 2008 was as follows:




Debt Facilities
As at December 31 ($ millions) 2008 2007
----------------------------------------------------------------------------

Bank indebtedness $ 12.8 $ 5.8
Equipment notes payable - non interest bearing 35.6 47.4
Equipment notes payable - interest bearing 83.3 47.5
Capital lease obligations 4.7
Other notes payable 2.3
----------------------------------------------------------------------------
$134.0 $105.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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 not measures of financial performance under Canadian Generally Accepted Accounting Principles ("GAAP") 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 millions) December 31, 2008 December 31, 2007
----------------------------------------------------------------------------
Cash provided by (used in) operating
activities $ (6.0) $ 0.7
Add (deduct)
Net change in non-cash working capital
balances related to operations 4.9 $ 3.2
Capital expenditures (0.3) $ (0.1)
Principal payments under capital lease
obligations - $ (1.4)
Purchase of assets under capital lease
obligations - $ (2.0)
----------------------------------------------------------------------------
Distributable cash $ (1.4) $ 0.4
----------------------------------------------------------------------------
Other sources of distributable cash
Term debt incurred to fund capital
expenditures (1) - 2.0
Proceeds on sale of assets held for
sale (2) - 1.7
----------------------------------------------------------------------------
Distributable cash as adjusted $ (1.4) $ 4.1
----------------------------------------------------------------------------

1. Term debt requires principal payments over the term of the obligation.
These payments reduce distributable cash.
2. The Fund has included the proceeds from the sale of the assets related
to discontinued operations as these assets will not be replaced. The
proceeds were applied to bank indebtedness when received.


The Fund has added (deducted) the net change in non-cash working capital balances as Strongco currently has an operating line of credit to a maximum of $20 million which is available for use to fund general corporate requirements including working capital requirements. In addition, Strongco finances equipment inventory through the use of vendor floor plans and wholesale finance arrangements with various finance companies. 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. Cash Distributions for the year ended December 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. On August 11, 2008, the Fund announced that distributions to unitholders will be suspended until further notice, commencing with the distribution for the month ended August 31, 2008. Under the amended credit facility dated August 11, 2008, the lender's prior written consent is required for the Fund to declare or pay cash distributions on any class or kind of its units.

As a result of the review of new vehicle lease contracts in 2007, the Fund had reclassified certain leased vehicles as assets under capital leases based upon the respective contract terms and past experience. The terms of these leases were renegotiated in the first quarter of 2008 and have been reclassified as operating leases as of March 31, 2008.



Three months Three months
ended ended
Distributable cash (in millions) December 31, 2008 December 31, 2007
----------------------------------------------------------------------------

Net (loss) income $ (2.6) $ 2.7
Add (deduct)
Provision for future income tax $ (0.0) $ (0.6)
Depreciation & amortization $ 0.3 $ 1.8
Amortization of intangibles $ 0.3 $ -
Goodwill impairment $ 0.8 $ -
Change in non-cash post retirement
benefits and accrued benefit assets $ 0.0 $ 0.1
Other $ 0.0 $ (0.1)
Capital expenditures $ (0.3) $ (0.1)
Principal payments under capital lease
obligations $ - $ (1.4)
Purchase of assets under capital lease
obligations $ - $ (2.0)
----------------------------------------------------------------------------
Distributable cash $ (1.4) $ 0.4
----------------------------------------------------------------------------
Unitholder distributions declared $ - $ 3.0
----------------------------------------------------------------------------
Shortfall before the following $ (1.4) $ (2.6)
----------------------------------------------------------------------------
Other sources of distributable cash
Capital lease obligations incurred to
fund capital expenditures (1) $ - $ 2.0
Proceeds on sale of assets held for sale $ - $ 1.7
----------------------------------------------------------------------------
Excess / (shortfall) as adjusted $ (1.4) $ 1.0
----------------------------------------------------------------------------


Years ended December 31
Distributable cash (in millions) 2008 2007
----------------------------------------------------------------------------

Cash provided by operating activities $ 7.8 $ 10.0
Add (deduct)
Net change in non-cash working capital balances related
to operations (5.6) 3.6
Capital expenditures (2.2) (0.8)
Principal payments under capital lease obligations - (1.4)
Purchase of assets under capital lease obligations - (2.0)
----------------------------------------------------------------------------
Distributable cash $ 0.0 $ 9.4
----------------------------------------------------------------------------
Other sources of distributable cash
Capital lease obligations incurred to fund capital
expenditures (1) - 2.0
Proceeds on sale of assets held for sale - 1.7
----------------------------------------------------------------------------
Distributable cash as adjusted $ 0.0 $ 13.0
----------------------------------------------------------------------------


Years ended December 31
Distributable cash (in millions) 2008 2007
----------------------------------------------------------------------------
Net income $ (0.4) $ 8.3
Add (deduct)
Provision for future income tax $ 0.3 $ 1.2
Depreciation & amortization $ 1.2 $ 3.1
Amortization of intangibles $ 0.5 $ -
Goodwill impairment $ 0.8 $ -
Gain on disposition of assets $ - $ (0.1)
Interest accretion on note payable $ 0.1 $ -
Stock based compensation $ 0.1 $ 0.1
benefits and accrued benefit assets $ 0.2 $ 0.6
Other $ (0.6) $ 0.3
Capital expenditures $ (2.2) $ (0.8)
Principal payments under capital lease obligations $ - $ (1.4)
Purchase of assets under capital lease obligations $ - $ (2.0)
----------------------------------------------------------------------------
Distributable cash $ 0.0 $ 9.4
----------------------------------------------------------------------------
Unitholder cash distributions declared $ 4.6 $ 13.7
----------------------------------------------------------------------------
Shortfall before the following $ (4.6) $ (4.3)
----------------------------------------------------------------------------
Other sources of distributable cash
Capital lease obligations incurred to fund capital
expenditures (1) - $ 2.0
Proceeds on sale of assets held for sale - $ 1.7
----------------------------------------------------------------------------
Shortfall as adjusted $ (4.6) $ (0.6)
----------------------------------------------------------------------------


Years ended December 31
Reconciliation of accounting net income to taxable income
($ millions) 2008 2007
----------------------------------------------------------------------------
Accounting net income (loss) $ (0.4) $ 8.3
Add (deduct)
Provision for (recovery of) income taxes 0.3 1.2
Permanent differences (1) 1.3 0.5
Reorganization costs - 0.3
Pension adjustment (2) 0.3 0.6
Recapture of capital cost allowance -- assets held for
sale - 2.4
Other non-permanent timing differences 2.6 -
(Includes minor differences between capital cost allowance
and accounting amortization / depreciation)
----------------------------------------------------------------------------
Taxable income $ 4.0 $ 13.3
----------------------------------------------------------------------------
Distributions 7.1 13.7
----------------------------------------------------------------------------
Return of capital $ 3.1 $ 0.4
----------------------------------------------------------------------------

Other Income % 56.6% 97.1%
Return of capital % 43.4% 2.9%

1. Permanent differences represent expenses of the Fund that are not
deductible for income tax purposes.
2. The pension adjustment represents the difference between the actual
payments and the pension expense.


Unitholder Distributions

Distributions to unitholders in 2008 were satisfied in cash and with the issue of additional units ("distributions in-kind") as follows:



Years ended December 31, 2008
Distributions (in millions) 2008
----------------------------------------------------------------------------
Cash distributions $ 4.5
Distibutions in-kind $ 2.6
----------------------------------------------------------------------------
Total Distributions $ 7.1
----------------------------------------------------------------------------


Unitholder distributions (per unit) in 2008 were comprised as follows:



Date Date Capital Income Total
--------------------------------------------------------------------------
January 31 February 20 $0.043 $0.057 $0.100
February 29 March 20 $0.043 $0.057 $0.100
March 31 April 21 $0.043 $0.057 $0.100
April 30 May 20 $0.043 $0.057 $0.100
May 30 June 20 $0.043 $0.057 $0.100
June 30 July 21 $0.043 $0.057 $0.100
July 31 August20 $0.043 $0.057 $0.100
$0.000
$0.000
$0.000
$0.000
$0.000
--------------------------------------------------------------------------
$0.304 $0.396 $0.700
--------------------------------------------------------------------------
--------------------------------------------------------------------------


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'). These contracts are subject to certain conditions being met by the customer and range in term from three to ten years. The Fund's maximum potential losses pursuant to the majority of these buy back contracts are limited, under an agreement with a third party, to 10% of the original sale amounts. In addition, this agreement provides a financing arrangement in order to facilitate the buy back of equipment. A reserve of $708,000 (2007 - $456,000) has been accrued in the Fund's accounts with respect to these commitments.

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 first quarter of 2008, the Fund renegotiated the lease 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 Champion, 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 include those lease obligations assumed by the Fund as part of the acquisition.

The Fund has provided a guarantee of lease payments under the assignment of a property lease which expires January 31, 2014. Total lease payments from January 1, 2009 to January 31, 2014 are $759,000 (2007 -- $895,000).

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
----------------------------------------------------------------------------
Operating leases $ 37.4 $ 8.7 $ 12.4 $ 7.1 $ 9.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Contingent obligation by period
----------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After 5
Total 1 Year years years years
----------------------------------------------------------------------------
Buy back contracts $ 10.0 $ 0.9 $ 3.1 $ 5.7 $ 0.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------


UNITHOLDER CAPITAL

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



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

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


RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF TRUSTEES

Management is responsible for the information disclosed in this MD&A and the Consolidated Financial Statements and accompanying notes, and has in place appropriate information systems, procedures and controls to ensure that information used internally by management and disclosed externally is materially complete and reliable. In addition, the Fund's Audit Committee, on behalf of the Board of Trustees, provides an oversight role with respect to all public financial disclosures made by the Fund, and has reviewed this MD&A and the accompanying audited consolidated financial statements.

DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

Disclosure Controls

Management is responsible for establishing and maintaining disclosure controls and procedures in order to provide reasonable assurance that material information relating to the Fund is made known to them in a timely manner and that information required to be disclosed is reported within time periods prescribed by applicable securities legislation. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on management's evaluation of the design and effectiveness of the Fund's disclosure controls and procedures, the Fund's Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are designed and operating effectively as of December 31, 2008 to provide reasonable assurance that the information being disclosed is recorded, summarized and reported as required.

Internal Controls Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian generally accepted accounting principles. Internal control systems, no matter how well designed, have inherent limitations and therefore can only provide reasonable assurance as to the effectiveness of internal controls over financial reporting, including the possibility of human error and the circumvention or overriding of the controls and procedures. Management used the Internal Control - Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as the control framework in designing its internal controls over financial reporting. Based on management's design and testing of the effectiveness of the Fund's internal controls over financial reporting, the Fund's Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are designed and operating effectively as of December 31, 2008 to provide reasonable assurance that the financial information being reported is materially accurate. During the fourth quarter ended December 31, 2008, there have been no changes in the design of the Fund's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.

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 writedown is recorded against the book value of specific pieces of equipment to ensure that inventory values reflect the lower of cost and estimated net realizable value. The Fund identifies slow moving or obsolete parts inventory and estimates appropriate obsolescence provisions by aging the inventory. The Fund takes advantage of supplier programs that allow for the return of eligible parts for credit within specified time periods.

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 pensions on an accrual basis. The accrual costs are determined by independent actuaries using the projected benefit method prorated on service and based on assumptions that reflect management's best estimates. The assumptions were determined by management recognizing the recommendations of Strongco's actuaries. These key assumptions include the rate used to discount obligations, the expected rate of return on plan assets, the rate of compensation increase and the growth rate of per capita health care costs.

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

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

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

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

Future Income Taxes

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

CHANGES IN ACCOUNTING POLICY

Capital Disclosures

Effective January 1, 2008, the Fund adopted the recommendations of the CICA on Capital Disclosures ("Section 1535"), which requires the disclosure of both qualitative and quantitative information that enables users of financial statements to evaluate the entity's objectives, policies and processes for managing capital.

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

Financial Instruments

Effective January 1, 2008, the Fund adopted the recommendations of the CICA on two new accounting standards, Financial Instruments - Disclosures ("Section 3862") and Financial Instruments - Presentation ("Section 3863"), which apply to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007. These new standards revise and enhance the disclosure requirements, and carry forward, substantially unchanged the presentation requirements. These new standards emphasize the significance of financial instruments to the entity's financial position and performance, the nature and extent of risks arising from financial instruments, and how these risks are managed.

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

Inventories

Effective January 1, 2008, the Fund adopted the recommendations of the CICA on a new accounting standard, "Inventories" ("Section 3031") which requires inventory to be measured at the lower of cost and net realizable value. The standard provides guidance on the types of costs that can be capitalized and requires the reversal of previous inventory write-downs if economic circumstances have changed to support higher inventory values.

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Goodwill and Intangible Assets

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". New Section 3064 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.

International Financial Reporting Standards

On February 13, 2008, The Canadian Accounting Standards Board confirmed that the use of International Financial Reporting Standards ("IFRS") will be required in Canada for publicly accountable enterprises for fiscal years beginning on or after January 1, 2011. The Fund will be required to report using IFRS beginning January 2011. The Fund has begun the process of evaluating the effect and planning for the conversion of the Fund's reporting to IFRS. The impact of the ultimate adoption of IFRS on the Fund has not yet been determined.

Business Combinations, Consolidations and Non-Controlling Interests

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

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

In January 2009, the CICA approved EIC 173 Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. This guidance clarified that an entity's own credit risk and the credit risk of the counterparty should be taken into account in determining the fair value of financial assets and financial liabilities including derivative instruments. This guidance is applicable to fiscal periods ending on or after January 12, 2009. The Fund will adopt this guidance for the fiscal period beginning on January 1, 2009. The Fund is in process of evaluating the impact of this new guidance.

International Financial Reporting Standards ("IFRS")

In February 2008, the Accounting Standards Board of Canada confirmed January 1, 2011 as the changeover date for Canadian publicly accountable enterprises to start using International Financial Reporting Standards as issued by the International Accounting Standards Board. IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences in recognition, measurement and disclosures.

As a result, the Fund is developing a plan to convert its consolidated financial statements to IFRS. The Fund is currently in the process of assessing the differences between IFRS and the Fund's current accounting policies, as well as the alternatives available on adoption. This assessment includes the impact of conversion on information technology and data systems, internal control over financial reporting, disclosure controls and procedures and business activities. Changes in accounting policies are likely. These changes may materially impact the Fund's financial statements in future.

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

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

Some of the 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 with demonstrated ability to produce a competitive, well accepted, high quality product range. Although distribution agreements with these manufacturers are cancelable 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 Fund as one of several defendants in proceedings under the Superior Court of Quebec. The action claims errors and omissions in the contractual execution of work entrusted to the defendants and names the Fund as jointly and severally liable for damages of approximately $5.9 million. Although we cannot predict the outcome at this time, based on the opinion of external legal counsel, the Fund believes that they have a strong defense against the claim and that it is without merit.

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. In order to minimize the exposure to fluctuations in exchange rates, the fund enters into foreign exchange forward contracts on a transaction specific basis.

INTEREST RATE

Interest rate risk arises from potential changes in interest rates and the impact on the cost of borrowing. The majority of the Fund's debt is floating rate debt which exposes the Fund to fluctuations in short term interest rates.

RISKS RELATING TO THE UNITS

Unpredictability and Volatility of Unit Price

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

Nature of Units

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

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

CASH DISTRIBUTIONS

Although the Fund intends to distribute the income earned by the Fund, less expenses and amounts, if any, paid by the Fund in connection with the redemption of units, there can be no assurance regarding the amounts of income to be generated by the Fund. The actual amount paid in respect of the units will depend upon numerous factors, including profitability, the availability and cost of acquisitions, fluctuations in working capital expenditures, applicable law and other factors beyond the control of the Fund. Cash distributions are not guaranteed and will fluctuate with the Fund's performance. Strongco has the discretion to establish cash reserves for the proper conduct of its business. Adding to these reserves in any year would reduce the amount of cash available for distribution in that year. There can be no assurance regarding the actual levels of cash distributions by the Fund.

LEVERAGE AND RESTRICTIVE COVENANTS

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

The existing credit facilities are payable on demand following an event of default 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 changes have now been enacted and will affect the Fund commencing with the 2011 taxation year (assuming that the Fund adheres to the guidelines on "normal growth" as defined by the Department of Finance on December 15, 2006 as amended on December 4, 2008 and February 25, 2009).

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

SUBSEQUENT EVENTS

Subsequent to December 31, 2008, the Fund entered into a new financing arrangement with a third party lender to provide wholesale financing for certain lines of equipment inventory to a maximum of $10 million. This new wholesale financing facility is in addition to the Fund's existing wholesale financing facilities.

Subsequent to December 31, 2008, one of the Fund's equipment note lenders amended its wholesale financing agreement to reduce the maximum available under the facility by $15 million and increase interest rates on outstanding equipment notes payable by 3.0%. The Fund's outstanding equipment notes under this facility at December 31, 2008, were below the reduced maximum availability and the reduction had no impact on the Fund's financial condition or liquidity. The increase in interest rates on this facility will not have a material impact on the Fund's future earnings.

OUTLOOK

The overall economic outlook for Canada for 2009 is extremely uncertain. The uncertainties surrounding oil and gas production continue to depress the market in Alberta. While various levels of government have committed to stimulus programs which include a focus on infrastructure spending, the impact of these initiatives and the timing of any spending is not yet clear. In this climate, it is expected that the markets in which Strongco operates will have a reduced demand for new equipment.

However, the acquisition of Champion at the end of the first quarter of 2008 will add to sales in 2009 and, importantly, has improved Strongco's access to municipal governments not only for the road graders and compact equipment, which were Champion's expertise, but also for the larger pieces of equipment historically offered by Strongco. When infrastructure spending does begin to generate construction activities, Strongco will participate at the early site preparation stage of projects where earth moving equipment is most utilized.

In an economic environment where the decision to make a capital purchase of a new piece of equipment is more difficult, Strongco does expect sales of used equipment to be more significant. In addition, it is expected that Strongco's higher margin product support business, which involves parts and service, will increase as some customers decide to extend the life of existing equipment rather than purchase.

Strongco management is focused on controlling costs and does not anticipate that 2009 will include cost factors experienced in 2008 in the areas of severance or inventory reserves in recognition of the diminished value of equipment, particularly equipment held for the forestry sector. These costs are more fully described earlier in this MD&A

In addition, Strongco's management continues to focus on working capital management in general and inventory and debt reduction in particular.

FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis contains forward-looking statements that involve assumptions and estimates that may not be realized and other risks and uncertainties. These statements relate to future events or future performance and reflect management's current expectations and assumptions which are based on information currently available to the Fund's management. The forward-looking statements include but are not limited to: (i) the ability of the Fund to meet contractual obligations through cash flow generated from operations, (ii) the expectation that customer support revenues will grow following the warranty period on new machine sales and (iii) the outlook for 2009, 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 Champion 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 Strongco's products and services. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward looking statements. These factors include and are not restricted to the risks identified above, as well as various risks relating to Champion acquisition including risks relating to integration and realization of expected synergies, reliance on key personnel of Champion and potential undisclosed liabilities associated with Champion. 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.




UNAUDITED CONSOLIDATED BALANCE SHEETS


As at December 31 (in thousands of dollars) - UNAUDITED 2008 2007
----------------------------------------------------------------------------

ASSETS
Current
Accounts receivable (note 19) $ 46,350 $ 39,095
Inventories (note 6) 167,469 138,796
Prepaid expenses and deposits 1,369 1,786
Income and other taxes receivable - 173
----------------------------------------------------------------------------
Total current assets 215,188 179,850
----------------------------------------------------------------------------
Capital assets, net (note 7) 18,110 20,868
Other assets 370 333
Accrued benefit asset (note 16) 5,415 5,680
Intangibles (note 3) 1,800 -
----------------------------------------------------------------------------
$ 240,883 $ 206,731
----------------------------------------------------------------------------
----------------------------------------------------------------------------

LIABILITIES AND UNITHOLDERS' EQUITY
Current
Bank indebtedness (note 8) $ 12,844 $ 5,771
Accounts payable and accrued liabilities 46,498 34,999
Distributions payable to unitholders - 1,004
Deferred revenue and customer deposits 3,614 3,310
Current portion of capital lease obligations (note 10) - 2,019
Equipment notes payable - non-interest bearing (note 9) 35,577 47,460
Equipment notes payable - interest bearing (note 9) 83,307 47,480
----------------------------------------------------------------------------
Total current liabilities 181,840 142,043
----------------------------------------------------------------------------
Future income taxes (note 14) 1,517 1,205
Other liabilities - 581
Notes payable (note 3) 2,264 -
Capital lease obligations (note 10) - 2,731
Accrued benefit liability (note 16) 712 729
----------------------------------------------------------------------------
Total liabilities 186,333 147,289
----------------------------------------------------------------------------
Contingencies (note 17)

Unitholders' equity
Unitholder capital (note 11) 57,089 54,534
Deferred compensation (note 13) - (71)
Retained earnings (Deficit) (2,539) 4,979
----------------------------------------------------------------------------
Total unitholders' equity 54,550 59,442
----------------------------------------------------------------------------
$ 240,883 $ 206,731
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes



UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS
(DEFICIT)


(in thousands of dollars, Three months Twelve months
except units and ended December 31 ended December 31
per unit amounts) UNAUDITED 2008 2007 2008 2007
----------------------------------------------------------------------------

Revenue $ 110,626 $ 107,302 $ 427,321 $ 394,088

Cost of sales 93,042 89,549 355,337 325,184
----------------------------------------------------------------------------
Gross margin 17,584 17,753 71,984 68,904

Expenses
Administration, distribution
and selling 17,536 15,392 67,070 58,637
Amortization of intangibles
-- (note 3) 327 - 544 -
Goodwill impairment (note 4) 848 - 848 -
Other income 383 (604) (733) (2,733)

----------------------------------------------------------------------------
Income (loss) before the
following (1,510) 2,965 4,255 13,000
Interest 1,120 838 4,382 3,093

----------------------------------------------------------------------------
Earnings (loss) from
continuing operations
before income taxes (2,630) 2,127 (127) 9,907
Provision for income taxes
(note 14) (52) (645) 271 1,194
----------------------------------------------------------------------------
Earnings (loss) from
continuing operations (2,578) 2,772 (398) 8,713
----------------------------------------------------------------------------
Income (loss) from
discontinued operations
(note 5) - (43) - (379)

----------------------------------------------------------------------------
Net income (loss) and
comprehensive income
(loss) $ (2,578) $ 2,729 $ (398) $ 8,334
----------------------------------------------------------------------------

Retained earnings,
beginning of year 39 5,263 4,979 10,303
Unitholder distributions
(note 11) - (3,013) (7,120) (13,658)
----------------------------------------------------------------------------
Retained earnings (deficit),
end of year $ (2,539) $ 4,979 $ (2,539) $ 4,979
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Earnings (loss) per unit
Continuing operations
-- basic and diluted (0.25) 0.26 (0.04) 0.83
Discontinued operations
-- basic and diluted - - - (0.04)
----------------------------------------------------------------------------
Earnings (loss) per unit $ (0.25) $ 0.26 $ (0.04) $ 0.79
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Number of units issued 10,508,719 10,508,719 10,508,719 10,508,719
----------------------------------------------------------------------------

See accompanying notes



UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


Three months Twelve months
(in thousands of dollars) ended December 31 ended December 31
UNAUDITED 2008 2007 2008 2007
----------------------------------------------------------------------------

OPERATING ACTIVITIES
Income (loss) from
continuing operations $ (2,578) 2,772 $ (398) $ 8,713
Add (deduct) items not
involving a current outlay
(inflow) of cash
Amortization of capital
assets 316 1,635 1,161 2,412
Amortization of
intangible assets 327 - 544 -
Goodwill impairment 848 - 848 -
Gain on disposal of
capital assets (23) (2) (45) (136)
Stock based compensation 41 15 71 84
Future income taxes (43) (645) 312 1,205
Interest accretion on
note payable (note 3) 34 - 110 -
Other 44 2 (370) 935
---------------------------------------------------------------------------
(1,034) 3,777 2,233 13,213
Net change in non-cash
working capital balances
related to operations (1) (4,916) (3,198) 5,608 (3,551)
---------------------------------------------------------------------------
Cash (used in) provided
by operating activities of
continuing operations (5,950) 579 7,841 9,662
Cash provided by operating
activities of
discontinued operations - 83 - 316
---------------------------------------------------------------------------
Cash (used in) provided by
operating activities (5,950) 662 7,841 9,978
---------------------------------------------------------------------------

INVESTING ACTIVITIES
Purchase of capital assets (329) (128) (2,221) (815)
Acquisition (note 3) (1) - - (7,169) -
Proceeds on disposal of
capital assets 23 37 45 183
---------------------------------------------------------------------------
Cash used in investing
activities of continuing
operations (306) (91) (9,345) (632)
Cash provided by investing
activities of
discontinued operations - 1,608 - 1,689
---------------------------------------------------------------------------
Cash used in investing
activities (306) 1,517 (9,345) 1,057
---------------------------------------------------------------------------

FINANCING ACTIVITIES
Increase (decrease) in
bank indebtedness 6,256 2,204 7,073 4,797
Capital lease repayments - (1,370) - (1,370)
Unitholder distributions - (3,013) (5,569) (14,462)
---------------------------------------------------------------------------
Cash provided by (used in)
financing activities 6,256 (2,179) 1,504 (11,035)
---------------------------------------------------------------------------

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

Supplemental cash flow
information
Interest paid $ 1,163 $ 821 $ 4,376 $ 3,168
Income taxes recovered $ (9) $ (82) $ (343) $ (338)


See accompanying notes

(1) - The presentation of $15.7 million of cash flow relating to equipment
notes on the acquisition has been modified from the presentation in
the financial statements of prior quarters. Refer to note 3.


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2008 and 2007 (unless otherwise indicated in thousands of dollars, except per unit amounts)

1. ORGANIZATION

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Basis of consolidation

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

Use of estimates

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

Changes in accounting policy

a) Effective January 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 Fund's objectives, policies and procedures for managing capital. These new disclosures are shown in note 20.

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 19.

(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 new disclosures are included in note 6.

The adoption of the above described standards did not have a material impact on the Fund's audited consolidated financial statements for the year ended December 31, 2008.

Revenue recognition

Revenue from the sale or distribution of products is recognized at the time goods are shipped to customers and the substantial risks and rewards of ownership have been transferred. Revenue from the rental and servicing of products is recognized as these services are provided. Revenues for long-term construction jobs within the Engineered Systems segment are recognized on a percentage of completion basis. Percentage of completion is generally determined based on the portion of accumulated expenditures to date as compared to total anticipated expenditures. Provisions are made for expected returns, collection losses and warranty costs based on the Fund's past experience.

Foreign currency translation

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

Financial instruments

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

Employee future benefit plans

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

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

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

Actuarial gains (losses) arise from the difference between actual long-term rate of return on plan assets for a period and the expected long-term rate of return on plan assets for that period and from changes in actuarial assumptions used to determine the accrued benefit obligation. The excess of the net accumulated actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the average remaining service period of active employees. The average remaining service period of the active employees covered by the employee pension plan is 15 years for 2008 and 2007. For the executive pension plan, the period used to amortize gains and losses is based on the average expected remaining lifetime of the retirees (15 years for 2008 and 2007).

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

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

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

Stock-based compensation plan

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

Earnings per unit

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

Cash and cash equivalents

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

Inventories

Inventories are recorded at the lower of cost and net realizable value. The cost of equipment inventories is determined on a specific item basis. The cost of repair and distribution parts is determined on a weighted average cost basis.

Capital assets

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



Buildings 3% to 5%
Machinery and equipment 10% to 30%
Computer software 30%
Vehicles 30%
Vehicles under capital leases 25%


Leasehold improvements are amortized on a straight-line basis over the remaining term of the lease.

Discontinued operations

Income and cash flows from assets held for sale with which the Fund will have no ongoing involvement or continuing cash flows are included in discontinued operations. Interest expense is allocated to assets held for sale on the basis of net asset value. Refer to note 5 for details of discontinued operations.

Income taxes

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

Under the terms of the Income Tax Act (Canada), the Fund is not subject to income taxes to the extent that its taxable income in a year is paid or payable to unitholders. Accordingly, no provision for current income taxes for the Fund is made. The Fund intends to distribute to its unitholders all or virtually all of its taxable income and taxable capital gains that would otherwise be taxable in the Fund and intends to continue to meet the requirements under the Income Tax Act (Canada) applicable to such trusts. Currently, the Fund does not pay income tax as long as distributions to Unitholders meet or exceed the amount of the Fund's income that would otherwise be taxable.

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

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

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

Impairment of long-lived assets

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

Goodwill and intangible assets with indefinite lives

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

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

Recently issued accounting pronouncements

Goodwill and Intangible Assets

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.

International Financial Reporting Standards

On February 13, 2008, The Canadian Accounting Standards Board confirmed that the use of International Financial Reporting Standards ("IFRS") will be required in Canada for publicly accountable profit oriented enterprises for fiscal years beginning on or after January 1, 2011. The Fund will be required to report using IFRS beginning January 2011. The Fund has begun the process of evaluating the effect and planning for the conversion of the Fund's reporting to IFRS. The impact of the ultimate adoption of IFRS on the Fund has not yet been determined.

Business Combinations, Consolidations and Non-Controlling Interests

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

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

In January 2009, the CICA approved EIC 173 Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. This guidance clarified that an entity's own credit risk and the credit risk of the counterparty should be taken into account in determining the fair value of financial assets and financial liabilities including derivative instruments. This guidance is applicable to fiscal periods ending on or after January 12, 2009. The Fund will adopt this guidance for the fiscal period beginning on January 1, 2009. The Fund is in process of evaluating the impact of this new guidance.

3. ACQUISITION

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

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

The 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 Fund allocated the purchase price on a preliminary basis to the identifiable assets and liabilities acquired based on their estimated fair values at the time of acquisition. Subsequent to the date of acquisition, the Fund obtained additional information necessary to complete its allocations and valuation of identifiable intangible assets. The purchase price allocation was assigned to the net identifiable assets acquired based on their fair values as follows:



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


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

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

4. GOODWILL IMPAIRMENTS

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

5. DISCONTINUED OPERATIONS

On December 1, 2007, the Fund sold the remaining rental assets for proceeds of $1,689 and recorded a gain on disposal of $10. The results of the related rental operations were reported as discontinued operations in 2007.

The results of discontinued operations for the year ended December 31, 2007 were as follows:



2008 2007
$ $
-------------------------------------------------------------------------
Revenues - 2,005
Cost of goods sold - 989
-------------------------------------------------------------------------
Gross margin - 1,016
-------------------------------------------------------------------------

Expenses
Administration, distribution and selling - 431
Amortization of assets held for sale - 705
Other expenses - 108
-------------------------------------------------------------------------
Loss before the following - (228)
Interest - 151
-------------------------------------------------------------------------
Loss before income taxes (379)
Provision for income taxes - -
-------------------------------------------------------------------------
Net loss for the year - (379)
-------------------------------------------------------------------------


6. INVENTORIES

Inventories are recorded at the lower of cost and net realizable value. The cost of purchased equipment inventories is determined on a specific item basis. The cost of purchased repair and distribution parts is determined on a weighted average cost basis. 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 year ended December 31, 2008, the Fund recorded $2.6 million of equipment write-downs (2007 - $0.8 million).

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 year ended December 31, 2008, the Fund expensed $603 (2007 - $174) in additional obsolescence and scrap provisions.

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



Inventory components as at December 31,
(net of write-downs and provisions) 2008 2007
$ $
--------------------------------------------------------------------------
Equipment 137,836 113,380
Parts 20,415 17,866
Finished goods 1,290 1,304
Work in process 6,572 5,013
Raw materials 1,356 1,233
--------------------------------------------------------------------------
167,469 138,796
--------------------------------------------------------------------------


7. CAPITAL ASSETS

Capital assets consist of the following:



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

Land 3,009 - 3,009
Buildings and leasehold improvements 16,020 6,402 9,618
Machinery, equipment and vehicles 20,581 15,098 5,483
Vehicles under capital leases - - -
--------------------------------------------------------------------------
39,610 21,501 18,110
--------------------------------------------------------------------------
--------------------------------------------------------------------------

2007
------------------------------
Net
Accumulated book
Cost amortization value
$ $ $
--------------------------------------------------------------------------

Land 3,009 - 3,009
Buildings and leasehold improvements 14,218 5,067 9,151
Machinery, equipment and vehicles 15,663 11,705 3,958
Vehicles under capital leases 6,120 1,370 4,750
--------------------------------------------------------------------------
39,010 18,142 20,868
--------------------------------------------------------------------------
--------------------------------------------------------------------------


8. BANK CREDIT FACILITY AND BANK INDEBTEDNESS

The Fund has a credit facility with a Canadian Chartered Bank which provides a $20 million 364-Day committed operating line of credit which is renewable annually. Borrowings under the line of credit are limited by a standard margining of accounts receivable and inventory typical of such lines of credit. 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 million debenture. As at December 31, 2008 interest rates on this operating line ranged from bank prime plus 0.50% to bank prime plus 1.00% dependent on the Fund's debt to tangible net worth ratio. Under its operating facility the Fund is able to issue letters of credit up to a maximum of $5 million. Outstanding letters of credit reduce the Fund's availability under its operating line of credit. For certain customers, Strongco issues letters of credit as a guarantee of Strongco's performance on the sale of equipment to the customer. As at December 31, 2008, there were $0.2 million (2007 - $0.3 million) of outstanding letter credits. As at December 31, 2008, the Fund had utilized $12,844 (2007 - $5,771) of this operating line of credit.

The operating line of credit contains financial covenants which the Fund must maintain. As at December 31, 2008, the Fund was not in compliance with certain of these covenants (see note 20). On February 27, 2009, the lender agreed to waive the covenant defaults and to forbear from exercising its rights under the bank credit facility agreement any time prior to March 31, 2008 subject to the Fund providing the lender its audited consolidated financial statements for the year ended December 31, 2008 and its forecast projections for 2009, and payment of a fee of $50. With this waiver and forbearance the lender increased the rate of interest on the operating line to a range from bank prime plus 0.50% to bank prime plus 1.50% effective January 1, 2009.

In addition to its operating line of credit, the Fund has a $5 million line for foreign exchange forward contracts as part of its bank credit facilities ("FX Line") available to hedge foreign currency exposure. Under this FX Line Strongco can purchase foreign exchange forward contracts up to a maximum of $5 million with terms not to expire beyond the remaining term of the operating line of credit. As at December 31, 2008, the Fund had outstanding foreign exchange forward contracts under this facility totalling US$2,365 at an average exchange rate of $1.22 Canadian for each US$1.00 with maturities between February 2009 and the end of March 2009, (December 31, 2007 - $nil).

9. EQUIPMENT NOTES PAYABLE

Various non-bank lenders provide secured wholesale financing on equipment inventory ("equipment notes payable"), some of which is interest free for periods up to seven months from the date of financing. Thereafter, the equipment notes payable bear interest at rates ranging from 1.65% to 2.85% over the one month Canadian Bankers' Acceptance Rate and 0.25% over the prime rate of Canadian chartered banks. As collateral, the Fund has provided liens on specific inventories and accounts receivable with an approximate book value of $138,000 (2007 -$93,000). The effective interest rates on these notes payable as at December 31, 2008 ranged from 3.15% to 4.35% (2007 - 6.25% to 7.40%) . Principal repayments commence over the period from the date of financing to twelve months thereafter and are due in full when the related equipment is sold or within twenty four months from the date of financing if the related equipment is not sold.

The equipment notes are payable on demand and therefore have been classified as current liabilities (see note 20).

10. CAPITAL LEASE OBLIGATIONS

At December 31, 2007, the Fund had vehicles under capital leases of $4,750 at an interest rate of 7.75% . Interest expensed with respect to the capital leases for the year ended December 31, 2007 was $254. The future minimum annual payments, interest and balance of obligations were as follows:



For the years ending December 31 2008 2007
$ $
----------------------------------------------------------------------------
2008 - 2,010
2009 - 1,829
2010 - 1,178
2011 - 481
2012 - 28
----------------------------------------------------------------------------
Total minimum lease payments - 5,526
----------------------------------------------------------------------------
Less amount representing interest 776
Present value of minimum lease payments - 4,750
----------------------------------------------------------------------------
Current portion of obligations under capital leases - 2,019
----------------------------------------------------------------------------
- 2,731
----------------------------------------------------------------------------


During 2008, these leases were renegotiated and have been classified as operating leases as at December 31, 2008.

11. UNITHOLDERS' EQUITY

(a) Authorized

Unlimited number of units.

(b) Issued

Pursuant to the Plan, the Fund acquired all of the issued and outstanding shares of Strongco Inc. in exchange for units of the Fund with no par value on a one for one basis effective May 6, 2005.

Details of issued unitholders' capital is as follows:



2008 2007
-------------- ---------------
Units Amount Units Amount
Unitholders' capital # $ # $
--------------------------------------------------------------------------

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


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

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

12. STOCK BASED COMPENSATION

On August 11, 2008, the Fund issued an irrevocable option to the newly appointed Chief Executive Officer to purchase 100,000 units in the capital of the Fund. The compensatory options are not exercisable prior to the approvals of the Unitholders at the next meeting of the Unitholders and the TSX. Unitholders will also be asked to approve an option price of $2.98 per unit. Accordingly, there is no compensation cost recognized in the consolidated financial statements for the year ended December 31, 2008.

13. LONG-TERM INCENTIVE PLAN

Key senior management of the Fund and its affiliates are eligible to participate in the Strongco Long-Term Incentive Plan (the "LTIP"). Pursuant to the LTIP, Strongco will set aside a pool of funds based upon the amount by which the Fund's distributions per unit exceed cash distribution threshold amounts. A trustee will then purchase units in the market with such pool of funds and will hold such units until such time as ownership vests to each participant, generally over three years. The LTIP is expected to be administered by the Trustees of the Fund. Subsequent to December 31, 2008, the Fund discontinued the LTIP.

The amount of the excess which forms the LTIP incentive pool will be determined based upon a range of 10% to 20% of the aggregate gross distributions per unit in excess of base distribution payments.

An amount of $nil was transferred into the LTIP pool in 2008 relating to the excess of cash distributions over threshold amounts in 2007. The LTIP compensation expense was $71 in 2008 (2007 - $59). Pending Trustee approval, it is anticipated that an amount of $nil will be transferred in to the LTIP pool in 2009 as cash distributions did not exceed threshold amounts in 2008.

14. INCOME TAXES

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



2008 2007
$ $
---------------------------------------------------------------------------
Current income tax recovery (41) (11)
Future income tax expense 312 1,205
---------------------------------------------------------------------------
271 1,194
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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



2008 2007
$ $
---------------------------------------------------------------------------

Earnings (loss) before taxes (127) 9,907
Statutory tax rate 46.4% 46.4%
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Provision for income taxes at statutory tax rate (59) 4,596
Adjustments thereon for the effect of:
Permanent and other differences 925 1,205
Income of the Fund distributed to Unitholders (613) (4,596)
Other 18 (11)

---------------------------------------------------------------------------
271 1,194
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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



2008 2007
$ $
---------------------------------------------------------------------------

Eligible capital expenditures and other reserves 933 353
---------------------------------------------------------------------------
Future income tax assets 933 353
---------------------------------------------------------------------------

Capital and other assets 616 513
Accrued benefit asset 1,834 1,045
---------------------------------------------------------------------------
Future income tax liabilities 2,450 1,558
---------------------------------------------------------------------------
Net future income tax liability 1,517 1,205
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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

15. OPERATING LEASE COMMITMENTS

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



$
--------------------------------------------------------------------------

2009 8,718
2010 7,072
2011 5,340
2012 3,857
2013 3,279
Thereafter 9,215
--------------------------------------------------------------------------
--------------------------------------------------------------------------


16. POST RETIREMENT OBLIGATIONS

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

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



2008 2007
$ $
----------------------------------------------------------------------------

Accrued benefit obligation, beginning of year 26,341 25,642
Current service cost 1,887 1,845
Interest cost 1,507 1,399
Benefits paid (1,655) (1,667)
Actuarial gain (6,693) (878)
----------------------------------------------------------------------------
Accrued benefit obligation, end of year 21,387 26,341
----------------------------------------------------------------------------

Fair value of plan assets, beginning of year 24,412 26,240
Actual return on plan assets (4,050) (1,138)
Employer contributions 708 86
Employee contributions 957 891
Benefits paid (1,655) (1,667)
----------------------------------------------------------------------------
Fair value of plan assets, end of year 20,372 24,412
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Plan assets consist of:



2008 2007
% %
----------------------------------------------------------------------------
Asset category
Equity securities 64.0 66.6
Debt securities 35.3 33.4
Other 0.7 -
----------------------------------------------------------------------------
Total 100.0 100.0
----------------------------------------------------------------------------

$ $
Fair value of plan assets 20,372 24,412
Accrued benefit obligation 21,387 26,341
----------------------------------------------------------------------------
Funded status of plan - deficit (1,015) (1,929)
Unamortized net actuarial loss 5,698 6,917
Unamortized transitional obligation 121 138
----------------------------------------------------------------------------
Accrued benefit asset 4,804 5,126
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Elements of defined benefit costs recognized in the year:



2008 2007
$ $
----------------------------------------------------------------------------

Current service cost, net of employee contributions 930 953
Interest on accrued benefits 1,507 1,399
Actual return on plan assets 4,050 1,138
Actuarial gain (6,693) (878)
----------------------------------------------------------------------------
Elements of defined benefit costs before adjustments
recognized: (206) 2,612
Adjustments to recognize the long term nature of benefit
costs:
- return on assets (expected vs actual in year) (5,759) (2,949)
- actuarial gains (recognized vs actual in year) 6,979 1,037
- transitional obligation (amortization) 17 17
----------------------------------------------------------------------------
Defined benefit costs recognized 1,031 717
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The Fund measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as of December 31 of each year. For this pension plan, the most recent actuarial valuation for funding purposes was performed as of August 31, 2006 and the next required valuation will be due no later than August 31, 2009.

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



2008 2007
$ $
---------------------------------------------------------------------------

Accrued benefit obligation, beginning of year 1,866 1,993
Current service cost - -
Interest cost 98 95
Benefits paid (170) (170)
Actuarial gain (169) (52)
---------------------------------------------------------------------------
Accrued benefit obligation, end of year 1,625 1,866
---------------------------------------------------------------------------

Fair value of plan assets, beginning of year 1,596 1,821
Actual return on plan assets (289) (96)
Employer contributions 90 41
Benefits paid (170) (170)
---------------------------------------------------------------------------
Fair value of plan assets, end of year 1,227 1,596
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Plan assets consist of:



% %
---------------------------------------------------------------------------
Asset category
Equity securities 64.9 67.0
Debt securities 34.3 32.4
Other 0.8 0.6
---------------------------------------------------------------------------
Total 100.0 100.0
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Fair value of plan assets 1,227 1,596
Accrued benefit obligation 1,625 1,866
---------------------------------------------------------------------------
Funded status of plan - deficit (398) (270)
Unamortized net actuarial loss 988 800
Unamortized transitional obligation 21 24
---------------------------------------------------------------------------
Accrued benefit asset 611 554
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Elements of defined benefit costs recognized in the year:



$ $
---------------------------------------------------------------------------
Current service cost, net of employee
contributions - -
Interest on accrued benefits 98 95
Actual return on plan assets 289 96
Actuarial gain (169) (52)
---------------------------------------------------------------------------
Elements of defined benefit costs before
adjustments recognized: 218 139
Adjustments to recognize the long term nature of
benefit costs:
- return on assets (expected vs actual in year) (398) (218)
- actuarial gains (recognized vs actual in year) 210 84
- transitional obligation (amortization) 3 3
---------------------------------------------------------------------------
Defined benefit costs recognized 33 8
---------------------------------------------------------------------------
---------------------------------------------------------------------------


The Fund measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as of December 31 of each year. For this pension plan, the most recent funding valuation was performed as of June 30, 2006 and the next required valuation will be due no later than June 30, 2009.

Accrued benefit asset is comprised as follows:



2008 2007
$ $
--------------------------------------------------------------------------

Employee Plan 4,804 5,126
Executive Plan 611 554
--------------------------------------------------------------------------
5,415 5,680
--------------------------------------------------------------------------
--------------------------------------------------------------------------


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



2008 2007
$ $
--------------------------------------------------------------------------

Accrued benefit obligation, beginning of year 1,367 1,528
Current service cost - -
Interest cost 70 73
Benefits paid (130) (125)
Actuarial (gain) loss 125 (109)
--------------------------------------------------------------------------
Accrued benefit obligation, end of year 1,432 1,367
--------------------------------------------------------------------------

Fair value of plan assets - -
Accrued benefit obligation 1,432 1,367
--------------------------------------------------------------------------
Funded status of plan - deficit (1,432) (1,367)
Unamortized net actuarial loss 520 410
Unamortized transitional obligation 200 228
--------------------------------------------------------------------------
Accrued benefit liability (712) (729)
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Elements of defined benefit costs recognized in the year



2008 2007
$ $
--------------------------------------------------------------------------

Current service cost, net of employee
contributions - -
Interest on accrued benefits 70 73
Actuarial (gain) loss 125 (109)
--------------------------------------------------------------------------
Elements of defined benefit costs before
adjustments recognized: 195 (36)
Adjustments to recognize the long term nature of
benefit costs:
- actuarial loss (gain) (recognized vs actual
in year) (107) 132
- transitional obligation (amortization) 28 29
--------------------------------------------------------------------------
Defined benefit costs recognized 116 125
--------------------------------------------------------------------------
--------------------------------------------------------------------------


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



Accrued benefit obligation as of the 2008 2007
end of the period % %
-------------------------------------------------------------------------

Discount rate 7.50 5.50
Rate of compensation increase 3.00 3.00
-------------------------------------------------------------------------
-------------------------------------------------------------------------

2008 2007
Benefit cost for the period % %
-------------------------------------------------------------------------

Discount rate 5.50 5.25
Expected long-term rate of return on plan assets 7.00 7.00
Rate of compensation increase 3.00 3.00
-------------------------------------------------------------------------
-------------------------------------------------------------------------


The actual claims cost for 2008 was used to project the 2009 expense. The assumed health care cost trend rate is 9.5% in 2009, declining by 0.5% per annum to 5.0% per annum in 2018 and thereafter. The assumed dental cost rate is 4.0% per annum.

Assumed health and dental care cost trend rates have a significant effect on the amounts reported for the health and dental care plans. A one percentage point change in assumed health and dental care cost trend rates would have the following effects for 2008:



Increase Decrease
----------------------------------------------------------------------------

Total of service and interest cost 7 (6)
Accrued benefit obligation as of December 31, 2008 119 (93)
----------------------------------------------------------------------------
----------------------------------------------------------------------------


In addition, the Fund maintains a defined contribution plan available only to certain employees (approximately 9.8% of the workforce (2007 - 6.1%)) who were existing members of the plan following a previous acquisition and members of a defined contribution plan of a business acquired in 2008. In 2008, the Fund's contributions were $188 (2007 - $106). The Fund also maintains a group RSP/LIRA available only to certain employees (approximately 10.2% of the workforce (2007 - 10.8%)) under the terms of a collective bargaining agreement. In 2008, the Fund's contributions were $163 (2007 - $79).

In February 2006, Strongco established a new defined contribution retirement savings program for executive officers, the ("DCRSP") with retroactive effect to January 1, 2006. The expense related to the DCRSP for the twelve months ended December 31, 2008 was $168 (2007 - $140).

In June 2007, Strongco established a new defined contribution retirement savings program for general managers, the ("DCRSP-GM"). The expense related to the DCRSP-GM for the seven months ended December 31, 2008 was $58 (2007 - $23).

Total cash payments for employee future benefits for 2008 consisting of cash contributed by the Fund to its funded pension plans, cash payments directly to beneficiaries for its unfunded other benefit plans and cash contributed to its defined contribution plan were $1,466 (2007 - $573).

17. CONTINGENCIES

(a) The Fund has agreed to buy back equipment from certain customers at the option of the customer for a specified price at future dates ("buy back contracts"). These contracts are subject to certain conditions being met by the customer and range in term from three to ten years. At December 31, 2008, the total obligation under these contracts was $10,025 (2007 - $4,762). The Fund's maximum potential losses pursuant to the majority of these buy back contracts are limited, under an agreement with a third party, to 10% of the original sale amounts. A reserve of $708 (2007 - $456) has been accrued in the Fund's accounts with respect to these commitments.

The Fund has provided a guarantee of lease payments under the assignment of a property lease which expires January 31, 2014. Total lease payments from January 1, 2009 to January 31, 2014 are $759 (2007 - $895).

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

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

18. SEGMENTED INFORMATION

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 (note 5) have been eliminated from the Equipment Distribution segmented information presented herein.



2008
----------------------------------------------------------------------------
Equipment Engineered Segment Reconciling Company
Distribution Systems Totals Items Total
----------------------------------------------------------------------------
Gross Revenue 398,290 29,329 427,619 - 427,619
Intersegment 1 297 298 - 298
----------------------------------------------------------------------------
Net Revenue 398,289 29,032 427,321 - 427,321
----------------------------------------------------------------------------

Interest
Expense (4,143) (239) (4,382) (4,382)
Earnings from
continuing
operations
before income
taxes 6,304 (46) 6,258 (6,385) (a) (127)
Amortization of
capital assets 780 368 1,148 13 1,161
Amortization of
intangible
assets 544 - 544 - 544
Goodwill
impairment 848 - 848 848
Segment total (b)
assets 221,285 12,841 234,126 6,757 240,883
Segment
intangible
assets 1,800 - 1,800 - 1,800
Segment
goodwill - - - - -
Segment capital
assets 15,044 3,037 18,081 29 18,110
Capital
expenditures 1,445 745 2,190 31 2,221
----------------------------------------------------------------------------
----------------------------------------------------------------------------


2007
----------------------------------------------------------------------------
Equipment Engineered Segment Reconciling Company
Distribution Systems Totals Items Total
----------------------------------------------------------------------------
Gross Revenue 348,058 46,302 394,360 394,360
Intersegment 1 271 272 272
----------------------------------------------------------------------------
Net Revenue 348,057 46,031 394,088 - 394,088
----------------------------------------------------------------------------

Interest
Expense (2,737) (356) (3,093) (3,093)
Earnings from
continuing
operations
before income
taxes 11,772 2,747 14,519 (4,612) (a) 9,907
Amortization of
capital assets 2,037 368 2,405 7 2,412
Segment total
assets 188,484 13,907 202,391 4,340 (b) 206,731
Segment capital
assets 18,191 2,667 20,858 10 20,868
Capital
expenditures 538 277 815 - 815
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(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 and accrued benefit
assets carried on the corporate head office ledger, offset by the
elimination of the inter-company receivables at the corporate head
office.


19. FINANCIAL INSTRUMENTS

Categories of financial assets and liabilities

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



As at December 31, 2008
Loans and receivables(1) 46,350
Liabilities(2) 182,109
---------------------------------------------------------------------------

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


The Fund has determined the estimated fair values of its financial instruments based on appropriate valuation methodologies; however, considerable judgment is required to develop these estimates. The fair values of the Fund's financial assets are not materially different from their carrying value. The fair values of the Fund's financial liabilities were approximately $180,000 as at December 31, 2008. These fair values were determined using a discounted cash flow model with the Fund's current risk adjusted rate of 6.5%.

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



Maturities of Financial Liabilities As at December 31, 2008

Financial Liability Less than 3 to 12 12 to 24 24 to 36 Total
3 months months months months
Bank indebtedness(1) 12,844 - - - 12,844
Accounts payable and
accrued liabilities 47,349 - - - 47,349
Customer deposits 768 - - - 768
Equipment notes payable
(2)
non-interest bearing 35,577 - - - 35,577
Equipment notes payable
(2) 83,307 - - - 83,307
interest bearing
Notes payable - - 1,250 1,250 2,500
----------------------------------------------------------------------------
179,845 - 1,250 1,250 182,345
----------------------------------------------------------------------------
----------------------------------------------------------------------------

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

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


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

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

The Fund enters into foreign currency forward contracts to reduce the impact of currency fluctuations on the cost of certain pieces of equipment ordered for future delivery to customers. As at December 31, 2008, the Fund had outstanding foreign exchange forward contracts totalling US$2,365 at an average exchange rate of $1.22 Canadian for each US$1.00 with maturities between February 2009 and the end of March 2009, (December 31, 2007 - $nil). These foreign currency forward contracts are not considered hedges and as a result any gain or loss resulting from the fair valuation of these contracts at each month end prior to their settlement is charged to earnings from continuing operations. The fair valuation of these contracts at December 31, 2008 resulted in no significant gain or loss.

Risks arising from financial instruments and risk management

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

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

Foreign exchange risk

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

As at December 31, 2008, the Fund carried $3,908 in U.S. dollar denominated liabilities net of U.S. dollar denominated accounts receivable. A +/- $0.10 change in foreign exchange rate between Canadian and U.S. currencies would have an effect of approximately $390.8 on earnings from continuing operations for the year ended December 31, 2008.

Interest rate risk

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

As at December 31, 2008, the Fund had $96,151 in interest bearing floating rate debt. A +/- 1.0% change in interest rates would have an effect of approximately $962 on earnings from continuing operations for the year ended December 31, 2008.

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 December 31, 2008, the Fund held customer deposits of $768.

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

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



As at December 31, 2008
----------------------------------------------------------------------------
Total accounts receivable 47,972
Less: Allowance for doubtful accounts (1,622)
----------------------------------------------------------------------------
Total accounts receivable, net 46,350
----------------------------------------------------------------------------
Of which:
Current 33,582
Past due 14,390
----------------------------------------------------------------------------
47,972
----------------------------------------------------------------------------
Less: Allowance for doubtful accounts as at
December 31, 2007 (1,147)
Increase in allowance for the year ended
December 31, 2008 (475)
----------------------------------------------------------------------------
Allowance for doubtful accounts as at December
31, 2008 (1,622)
----------------------------------------------------------------------------
Total accounts receivable, net 46,350
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Liquidity risk

Liquidity risk arises through excess of financial obligations over available financial assets due at any point in time. The Fund's objective in managing liquidity risk is to maintain sufficient readily available reserves in order to meet its liquidity requirements at any point in time. The Fund achieves this by maintaining sufficient availability of funding from committed credit facilities. As at December 31, 2008, the Fund had undrawn lines of credit available to it of $6,956.

20. MANAGEMENT OF CAPITAL

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

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

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

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



December 31 December 31
Managed Debt Instruments 2008 2007
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Interest bearing debt 12,844 5,771
Equipment notes payable 118,884 94,940
Other debt 2,264 -
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Total managed debt instruments 133,992 100,711
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Unitholders' equity 54,550 59,442
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Ratio of total managed debt instruments to
unitholders' equity 2.5 1.7
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The Fund has a credit facility with a Canadian Chartered Bank which provides an operating line of credit. Under the credit facility agreement the Fund is required to maintain certain financial covenants. 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 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 and the Fund had a debt to tangible net worth ratio of 3.16:1 while the operating line of credit required a ratio of no greater than 3.0:1. For the purposes of the operating line of credit, debt is defined as total liabilities less future income tax amounts and subordinated debt. On April 29, 2008, the Fund 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. 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. The consolidated debt service coverage ratio covenant was revised in June of 2008 from 0.9:1 to 1.3:1.

As at June 30, 2008, the Fund did not meet its debt to tangible net worth covenant relating to its operating line of credit. As at June 30, 2008, the Fund had a debt to tangible net worth ratio of 3.33:1. On August 11, 2008, the Fund received a waiver of its requirement to comply with the debt to tangible net worth covenant as at June 30, 2008, and also entered into an amended credit facility agreement. Under the conditions of the amended credit facility, the Fund's lender has raised the Fund's borrowing rates by 0.25%, cancelled the Fund's $12 million term facility for real estate acquisition and construction, and restricted its operating line of credit to $20 million until such time as the Fund returns to full compliance with the covenants contained in the amended credit facility. Also under the amended credit facility, the debt to tangible net worth covenant was amended from 3.0:1 to 3.25:1, reducing to 3.0:1 for September 30, 2008 and December 31, 2008, and the lender's prior written consent is required for the Fund to declare or pay cash distributions on any class of its units, repurchase or redeem any of its units or reduce its capital in any way whatsoever or repay any unitholders' advance.

As a result of non-compliance with the operating facility covenant requirements, through cross-default provisions, the Fund defaulted on certain equipment notes payable from two creditors in the amount of $120,093 and $109,648 as at June 30, 2008 and March 31, 2008, respectively. On August 11, 2008 the Fund also received letters from each of the two creditors acknowledging the bank letters in respect of the first and second quarters, and as a result the two creditors waived the first and second quarter defaults.

Prior to September 30, 2008, the Fund obtained an amendment of its credit facility modifying its debt to tangible net worth ratio under its operating line of credit from 3.0:1 to 3.5:1, reducing to 3.0:1 for December 31, 2008. As at September 30, 2008, the Fund was in compliance with all of its covenants as they relate to the operating line of credit and those additional covenants as are required by the providers of the Fund's equipment notes payable.

As at December 31, 2008, the Fund was not in compliance with the debt to tangible net worth and debt service coverage covenants relating to its operating line of credit. As at December 31, 2008, the Fund had a debt to tangible net worth ratio of 3.33:1 while the operating line of credit required a ratio of no greater than 3.0:1 and the Fund's consolidated debt service coverage ratio was 1.05:1, while the operating line of credit required a ratio of no less than 1.3:1. On February 27, 2009, the bank agreed to waive the covenant defaults at December 31, 2008 and forbear from exercising its rights with respect to these breaches under the credit facility agreement any time prior to March 31, 2009 subject to the Fund providing copies of its audited financial statements for the year ended December 31, 2008 and forecast projections for 2009, and payment of a fee of $50. With this waiver and forbearance the bank amended the facility to increase the interest rate on the operating line from a range of bank prime plus 0.50% to bank prime plus 1.00%, to a range of bank prime plus 0.50% to bank prime plus 1.50%, and to permanently reduce the operating line to $20 million.

As a result of non-compliance with the operating facility covenant requirements, through cross-default provisions, the Fund defaulted on certain equipment notes payable from two creditors in the amount of $106,887 as at December 31, 2008. On February 27, 2009 the Fund also received waivers from each of the two creditors subject to the Fund satisfying the conditions required by the bank as above.

Based on its 2009 projections, the Fund is likely to not be in compliance with the debt to tangible net worth and debt service coverage covenants under its bank credit facility as at March 31, 2009 and as a result of cross default provisions, the Fund is also likely to be in violation of covenants under certain of its equipment notes payable as at March 31, 2009. The Fund has made a request to its bank to amend the debt to tangible net worth and debt service coverage covenants going forward to avoid future covenant violations. There is no assurance the bank will grant these amendments or provide waivers or forbearance for future covenant violations should they occur. If future covenant violations were to occur, the bank and equipment note lenders, at their option, could declare the Fund to be in default under their respective lending agreements, which in turn could result in a restriction of the Fund's access to funds under those lending facilities. There is no assurance that the Fund would be able to obtain funding from alternative sources.

21. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES

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



2008 2007
$ $
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Accounts receivable 2,897 (7,843)
Inventories 11,057 12,794
Prepaids (454) 383
Income & other taxes receivable (173) (346)
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13,327 4,988
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Accounts payable and accrued liabilities 10,348 (9,020)
Deferred revenue & customer deposits 304 (6,195)
Equipment notes payable - non interest bearing (11,883) 7,259
Equipment notes payable - interest bearing 35,827 9,512
Less: new equipment notes payable to finance
acquisition of the Champion Business (note 3) (15,661) -
Other - (119)
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18,935 1,437
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(Increase) decrease in non-cash working capital
related to operations 5,608 (3,551)
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Changes to equipment notes payable in 2008 includes $15,661 in equipment notes borrowed by Strongco from Volvo Financial Services ("VFS") coincident with the purchase of Champion in March 2008 (see note 3 - Acquisition).

22. ECONOMIC RELATIONSHIP

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

23. DISTRIBUTIONS TO UNITHOLDERS

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

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

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

24. SUBSEQUENT EVENTS

Subsequent to December 31, 2008, the Fund entered into a new financing arrangement with a third party lender to provide wholesale financing for certain lines of equipment inventory to a maximum of $10 million. The rate of interest under this wholesale finance facility is bank prime plus 2% with the minimum bank prime set at 4.25%. This new wholesale financing facility is in addition to the Fund's existing wholesale financing facilities as described in note 9.

Subsequent to December 31, 2008, one of the Fund's equipment note lenders amended its wholesale financing agreement to reduce the maximum available under the facility by $15 million and increase interest rates on outstanding equipment notes payable by 3.0%. The Fund's outstanding equipment notes under this facility at December 31, 2008, were below the reduced maximum availability.

25. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS

The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 2008 consolidated financial statements.

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