Strongco Income Fund
TSX : SQP.UN

Strongco Income Fund

March 04, 2008 22:03 ET

Strongco Reports Fourth Quarter Results

MISSISSAUGA, ONTARIO--(Marketwire - March 4, 2008) - Strongco Income Fund (TSX:SQP.UN) today released its results for the fourth quarter of 2007.

For the three months ended December 31st, 2007, Strongco Income Fund ("Strongco") generated net income after tax of $2.7 million, ($0.27 per unit) on revenues of $107.2 million, versus $3.8 million, ($0.38 per unit) on revenues of $117.7 million for the comparable quarter 2006. The decline in revenues came from both equipment sales and the Engineered Systems group. Earnings were down as Strongco encountered margin pressures both on equipment and parts sales. Engineered Systems revenues were down as the prior year's quarter sales mix included a higher proportion of subcontracted component sales.

For the fiscal year ended December 31st, 2007, Strongco Income Fund generated net income after tax of $8.3 million, ($0.83 per unit) on revenues of $394.1 million versus $22.6 million, ($2.25 per unit), on revenues of $453.9 million for fiscal 2006. Revenues and net income were both impacted by lower equipment sales in 2007.

Mr. Robin MacLean, President commented, "2007 was a challenging year for Strongco. We took a number of actions to address our weaknesses and position Strongco for future growth. With strong infrastructure demand in our territories we are looking forward to the market opportunities in 2008. We have invested in our sales structure and product support during 2007 and look forward to realizing returns. We expect a challenging year for our Engineered Systems group as U.S. manufacturers enter the Canadian market."

Strongco will host a conference call at 9:30 a.m. on Wednesday, March 5, 2008, to further discuss its fourth quarter. To participate in the conference call, dial 1-800-926-9175 reservation number is 21376279 a few minutes prior to 9:30 a.m. on the 5th. A taped version of the call will be available until March 19, 2008. Dial 1-800-558-5253 or 416-626-4100 and enter the reservation number 21376279.

All statements contained in this press release that do not directly and exclusively relate to historical facts constitute forward-looking statements as of the date of this press release. These forward-looking statements include the statement concerning our outlook for 2008. These forward-looking statements are not guarantees. Although we believe that these forward-looking statements are based on information and assumptions which are current, reasonable and complete, these statements are necessarily subject to a number of factors that could cause actual results to vary significantly from current expectations. Please refer to the "Forward-Looking Statements" section in the accompanying Management's Discussion and Analysis.

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



For further information contact:

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


Management's Discussion and Analysis

The following management discussion and analysis ("MD&A") provides a review of the consolidated financial condition and results of operations of Strongco Income Fund, Strongco GP Inc. ("Strongco GP") and Strongco Limited Partnership (the "Partnership") (collectively referred to as the "Fund" or "Strongco"), for the year ended December 31, 2007. This discussion and analysis should be read in conjunction with the accompanying unaudited interim consolidated financial statements and with the Fund's audited consolidated financial statements, accompanying notes and MD&A contained in the Fund's annual report for the year ended December 31, 2007. For additional information and details, readers are referred to the Fund's quarterly financial statements and quarterly MD&A for fiscal 2006 and 2007 as well as the Fund's Notice of Annual and Special Meeting of Unitholders and Information Circular dated March 14, 2007, all of which are published separately and are available on SEDAR at www.sedar.com.

Unless otherwise indicated, all financial information within this discussion and analysis is in Canadian dollars millions except per unit amounts. The information in this MD&A is current to March 4, 2008.

STRONGCO INCOME FUND

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

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

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

Proposed changes to the taxation of income trusts passed third reading in the House of Commons on June 12, 2007. The changes are not intended to apply to taxation years ending prior to 2011 for income trusts that commenced trading prior to November 2006. However, in accordance with the recommendations of the Canadian Institute of Chartered Accountants contained in section 3465, the Fund has estimated its temporary differences, determined the periods over which these differences are expected to reverse and applied the current substantively enacted tax rates that will apply in the periods those temporary differences are expected to reverse. Taxable income that is not distributed to the unitholders is generally taxed in the Trust at the highest federal and provincial income tax rates that are applicable to individuals. Beginning with the 2011 taxation year, distributions will be taxed at the Specified Investment Flow-Through Entity rate.

DISTRIBUTIONS

The Fund's policy is to make distributions of its available cash to the maximum extent possible to Unitholders. The Fund makes monthly distributions to Unitholders of record on the last business day of each month payable on or about the 20th day of the following month.

On March 14, 2007, the Fund announced that the monthly cash distributions to Unitholders will be decreased from $0.18 per unit to $0.10 per unit commencing with the distribution in respect of the month ended March 31, 2007. This reduction was made in response to the increased level of competition and softening in the construction equipment sector.

The Fund intends to continue making distributions to Unitholders; however, cash distributions are not assured, and may be reduced or suspended at any time. The Fund's ability to make cash distributions and the actual amount distributed depends on: financial performance, debt covenants and obligations, the continuing availability of new or replacement debt on similar terms and conditions, working capital requirements, future tax obligations and future capital requirements.



FINANCIAL HIGHLIGHTS

($ millions, except per unit amounts) 2007 2006 2005
---------------------------------------------------------------------------

Revenues $ 394.1 $ 453.9 $ 412.9
Earnings from continuing operations before
income taxes 9.9 21.8 19.2
Net income 8.3 22.6 16.5

Basic and diluted earnings per unit 0.8 2.3 1.7

Dividends per common share - 0.1
Distributions per unit 1.4 2.0 1.3

Total assets 206.7 203.9 171.2

Debt 105.4 82.6 70.8
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OVERVIEW

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

In 2007, Strongco continued to focus on its core business of mobile equipment sales and service and its engineered systems group. Strongco has continued to execute its plans to lead in product support and customer care and invest in product support. This has resulted in an increased expense base; but, is necessary to generate continued product support and equipment sales growth.

In 2007, Strongco generated net income of $8.3 million ($0.83 per unit) as compared to net income of $22.6 million ($2.25 per unit) in 2006. Earnings from continuing operations before income taxes, a more comparable measure given the reorganization in 2006 and the revised tax provisions for 2007, was $9.9 million for 2007 as compared to $21.8 million in 2006, a decrease of 54.6%.

FINANCIAL RESULTS - ANNUAL

Consolidated revenues decreased by $59.8 million (13.3%) from $453.9 million in 2006 to $394.1 million in 2007. As indicated in the table below, the decrease in Equipment Distribution segment revenues was marginally offset by a $4.0 million increase in Engineered Systems segment revenues.



Revenue by Business Segment

($ millions) 2007 % 2006 % Change
--------------------------------------------------------------

Equipment Distribution $ 348.1 88.3% 411.9 90.7% $ (63.8)
Engineered Systems 46.0 11.7% 42.0 9.3% 4.0
--------------------------------------------------------------
$ 394.1 100.0% $ 453.9 100.0% $ (59.8)
--------------------------------------------------------------
--------------------------------------------------------------


Equipment Distribution segment revenues decreased by $63.8 million (15.5%) from $411.9 million in 2006 to $348.1 million in 2007. The decrease in revenues within this segment was primarily related to equipment sales, particularly in the West. Gross dollar equipment sales were impacted by the relative strength of the Canadian dollar. The forestry sector generated some activity, but overall remained weak, as this sector continues to struggle in Canada.

In eastern Canada (Atlantic and Quebec), equipment sales decreased 6.6% as compared to a 4.6% increase in 2006 over 2005. This decrease occurred primarily in the 1st quarter of 2007 during a period of significantly higher competition driven by higher levels of dealer inventories in North America. The forestry sector remained weak throughout 2007 with even lower year over year forestry equipments sales.

In 2007, equipment sales revenues in the central region decreased by 8.0% as compared to a 1.2% decline in 2006 over 2005. As in eastern Canada, the decrease was primarily in the 1st and 2nd quarters of 2007 with some recovery in the 3rd quarter. Significant declines in construction and forestry equipment sales were offset by gains in crane equipment sales.

Equipment sales in the western region decreased 29.9% compared to an increase of 36.5% in 2006 over 2005. Reduced forestry equipment sales account for approximately 14% of the total decrease with construction and crane equipment making up the balance of the decrease. Higher levels of competition and reduced demand for general purpose production equipment were evident in the western region throughout the year. Strongco's product lines principally serve the construction and infrastructure segments and do not include very large heavyweight mining production equipment which has been the growth segment for many other companies. Sales of the smaller capacity cranes more suited to supporting drilling and gas exploration activities represented the majority of the decline in crane sales.

Revenues from customer support activities (parts and service) remained consistent with the level experienced in 2006 with gross dollar parts sales impacted by the relative strength of the Canadian dollar. This investment does not immediately generate revenues. During periods with high equipment sales, a higher proportion of customer service resources are directed to pre-delivery inspections and continuing warranty work. It is not unusual for customer support activities to increase at a slower rate than equipment revenues as new equipment usually carries a warranty for some defined term. Customer support revenue increases can lag behind equipment sales from three to five years. Customer support revenues typically are not impacted until the new equipment is out of the warranty period. Warranty periods vary from manufacturer to manufacturer and can vary depending on customer purchases of extended warranties.

Engineered Systems segment revenues increased $4.0 million (9.5%) from $42.0 million in 2006 to $46.0 million in 2007. This growth was primarily due to the completion of several large projects during the year. Additional revenue growth was a result of continuing strength in the mining, industrial and building products industries. At the end of 2007, deferred revenues related to incomplete projects has reduced to $0.3 million as compared to $4.0 million at the end of 2006. Typically, sales of replacement parts to completed projects will increase following a limited warranty period. The Engineered Systems group continues to experience strong demand for projects in the mining sector.



Revenue by Geographic Region

($ millions) 2007 % 2006 % Change
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Eastern (Atlantic / Quebec) $ 112.3 28.5% $ 122.5 27.0% $ (10.2)

Central (Ontario) 158.5 40.2% 169.5 37.4% (11.0)

Western (Manitoba to B.C.) 119.4 30.3% 157.2 34.6% (37.8)

Other 3.9 1.0% 4.7 1.0% (0.8)

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$ 394.1 100.0% $ 453.9 100.0% $ (59.8)
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Gross Margin

Strongco's gross margin decreased by $7.8 million (10.2%) to $68.9 million (gross margin percentage - 17.5%) in 2007 from $76.7 million in 2006 (gross margin percentage - 16.9%) mainly as the result of the decrease in equipment sales revenues. Overall gross margin as a percentage increased as a result of product support sales revenues and Engineered Systems revenues representing a larger proportion of total revenues.

Within the Equipment Distribution segment, business activities include the sale of machinery, customer support (parts and service) and equipment rentals. Equipment sales generate a significantly lower margin than customer support activities, accounting for 71.9% of revenues and 36.8% of gross margin for this segment for 2007 (76.1% of revenues and 42.6% of gross margin in 2006). Gross margin as a percentage was down on equipment sales reflecting the effects of the strengthening Canadian dollar and the higher level of competition experienced in 2007. Gross margin on parts sales were impacted by increased competition and the relative strength of the Canadian dollar.

Gross margins for the Fund's Engineered Systems segment increased by $1.3 million from $7.8 million in 2006 to $9.1 million in 2007 as a result of a higher revenue base and a slight increase in gross margin percentage.

Administrative, Distribution and Selling Expense

Administrative, distribution and selling expenses increased by $4.3 million (7.9%) to $58.6 million in 2007 from $54.3 million in 2006. A significant proportion of the increase in expenses is related to higher expenses in the customer support departments within the Equipment Distribution segment. During the second half of the year, salary and benefit expenses were also up corresponding to changes in our sales structure, parts staffing and competitive wage pressures. Expenses were also up as a result of higher training expenses relating to the new product launches, predominantly in our Volvo line, higher occupancy costs relating to new or recently renewed facilities and higher travel and automobile expenses.

Other Income & Expense

Other income and expense is primarily comprised of any gain or loss on disposition of fixed assets, service fees paid by manufacturers in compensation for sales made within the distributor's region from sources other than the distributor and any gains or losses recognized with respect to foreign exchange. Other income increased by $0.7 million from $2.0 million in 2006 to $2.7 million in 2007.

Interest Expense

Strongco's interest expense increased by $1.1 million to $3.1 million in 2007 from $2.0 million in 2006. This was a result of the Fund's higher level of interest bearing debt and slightly higher interest rates earlier in 2007. This increase corresponds in part to higher inventory levels as well as changes in manufacturing programs with respect to interest free financing. Over the past 3 years, there has been a trend to shorter term interest free financing programs.

Net Income

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



($ millions) 2007 2006
--------------------------------------

Equipment Distribution $ 11.8 $ 25.4

Engineered Systems 2.7 1.6

Corporate (4.6) (5.2)

--------------------------------------
$ 9.9 $ 21.8
--------------------------------------
--------------------------------------


On an after tax basis, net income was $8.3 million ($0.83 per unit basic and fully diluted) for 2007 compared to net income of $22.6 million ($2.25 per unit basic and fully diluted) in 2006. For 2006, net income was positively impacted by $1.1 million ($0.11 per unit) in future tax amounts existing prior to the reorganization on September 1, 2006 which were eliminated and recognized in income. For 2007, following substantive enactment of changes to the taxation of income trusts 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 $1.2 million for these temporary differences 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 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 the remaining rental assets for proceeds of $1.7 and recorded a small gain. The results of the related operations have been reported as discontinued operations and prior period amounts have been reclassified to conform to the current period presentation. The results from discontinued operations for the years ended December 31, 2007 and 2006 were as follows:



($ millions, except per unit amounts) 2007 2006
------------------------------------------------------------------------

Revenues $ 2.0 $ 3.0
Cost of goods sold 1.0 1.5
------------------------------------------------------------------------
Gross margin 1.0 1.5
------------------------------------------------------------------------

Administration, distribution and selling expenses 0.4 0.4
Amortization 0.7 1.1
Other expenses 0.1 0.1
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Loss from discontinued operations before the following (0.2) (0.1)
Interest 0.2 0.2
------------------------------------------------------------------------
Loss from discontinued operations before income taxes (0.4) (0.3)
Provision for income tax - -
------------------------------------------------------------------------
Loss for the year $ (0.4) $ (0.3)

Loss per unit, basic and diluted, from
discontinued operations. $ (0.04) $ (0.03)
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Financial Condition and Liquidity

Cash generated from operating activities was $10.0 million in 2007 compared to $21.7 million cash generated from operating activities in 2007. The increase in inventories was more than offset by the net increase in equipment notes payable. The reduction in accounts receivable largely offset the reduction in accounts payable. Net income for the year was $8.3 million.

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



($ millions) 2007 2006
---------------------------------------------------------------

Accounts receivable $ (7.8) $ 8.7
Inventories 12.8 19.8
Prepaids (0.4) 0.6
Income & other taxes receivable 0.4 (0.1)
---------------------------------------------------------------
5.0 29.0

Accounts payable and accrued liabilities (9.0) 13.8
Deferred revenue & customer deposits (6.2) 7.0
Equipment notes payable - non interest bearing 7.2 0.8
Equipment notes payable - interest bearing 9.5 7.8
Other (0.1) -
---------------------------------------------------------------
1.4 29.4
---------------------------------------------------------------

Increase (decrease) in non-cash working capital $ 3.6 $ (0.4)
---------------------------------------------------------------
---------------------------------------------------------------


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

Summary of Quarterly Data

In general, business activity in the Equipment Distribution segment (which comprises the majority of Strongco's revenue and earnings base) follows a weather related pattern of seasonality. Typically, the first quarter is the weakest quarter as construction and infrastructure activity is constrained in the winter months. This is followed by a strong pickup in the second quarter as construction and other contracts begin to be put out for bid and companies begin to prepare for summer activity. The third quarter generally tends to be slightly slower from an equipment sales standpoint, which is partially offset by continued strength in equipment rentals and customer support (parts and service) activities. Fourth quarter activity generally strengthens as companies make year end capital spending decisions in addition to the exercise of purchase options on equipment which has previously gone out on rental contracts. In 2006, the normal seasonal trend was influenced by carried-over strength of economic activity experienced in 2005.



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

Revenue $ 107.2 $ 99.9 $ 105.5 $ 81.5
Earnings from continuing operations before
income taxes $ 2.2 $ 3.1 $ 4.3 $ 0.3
Net income $ 2.7 $ 3.1 $ 2.5 $ -

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


2006
Q4 Q3 Q2 Q1
---------------------------------------------------------------------------
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 $ 0.38 $ 0.71 $ 0.67 $ 0.49


2005
Q4 Q3 Q2 Q1
---------------------------------------------------------------------------
Revenue $ 105.5 $ 102.1 $ 116.1 $ 89.2
Net income before income taxes $ 4.9 $ 5.4 $ 6.1 $ 2.8
Net income $ 4.7 $ 5.2 $ 4.9 $ 1.7
Basic and diluted earnings per unit $ 0.47 $ 0.52 $ 0.49 $ 0.18


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

Financial Results - Fourth Quarter

Consolidated revenues decreased by $10.5 million (8.9%) from $117.7 million in 2006 to $107.2 million in 2007.



Revenue by Business Segment

($ millions) Q4 2007 % Q4 2006 % Change
------------------------------------------------------------------

Equipment Distribution $ 96.0 89.6% $ 102.8 87.3% $ (6.8)

Engineered Systems 11.2 10.4% 14.9 12.7% (3.7)

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$ 107.2 100.0% $ 117.7 100.0% $ (10.5)
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------------------------------------------------------------------


In the fourth quarter, Equipment Distribution segment revenues decreased by $6.8 million (6.6%) from $102.8 million in 2006 to $96.0 million in 2007.

In eastern Canada (Atlantic and Quebec), equipment sales decreased by 3.0%, with equipment sales up 7.0% in Quebec and down 40.3% in Atlantic for the three months ended December 31, 2007. For the year, equipment sales in Atlantic were up 1.9%.

In the central region, equipment sales increased 16.6% on a comparative quarter basis as a result of strong equipment sales in December.

In the west, equipment sales decreased 30.0% on a comparative basis as sales of general purpose production equipment returned to more normal levels following the extraordinary levels of 2006.

Revenues from customer support activities (parts and service) decreased 2.5% on a comparative quarter basis, with gross dollar parts sales impacted by the relative strength of the Canadian dollar.

Revenues in the Engineered Systems segment decreased by $3.7 million (24.8%) from $14.9 million in 2006 to $11.2 million in 2007. The Engineered Systems group continues to experience strong demand for projects in the mining sector.



Revenue by Geographic Region

($ millions) Q4 2007 % Q4 2006 % Change
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Eastern (Atlantic / Quebec) $ 31.2 29.1% $ 30.5 25.9% $ 0.7

Central (Ontario) 43.7 40.8% 42.9 36.5% 0.8

Western (Manitoba to B.C.) 31.5 29.4% 42.6 36.2% (11.1)

Other 0.8 0.7% 1.7 1.4% (0.9)

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$ 107.2 100.0% $ 117.7 100.0% $ (10.5)
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Gross Margin

Strongco's gross margin was unchanged at $17.8 million (gross margin percentage - 16.5%) in 2007 compared to $17.8 million in 2006 (gross margin percentage - 15.1%).

Within the Equipment Distribution segment, business activities include the sale of machinery, customer support (parts and service) and equipment rentals. Equipment sales generate a significantly lower margin than customer support activities, accounting for 75.1% of revenues and 41.9% of gross margin for this segment in the three months ended December 30, 2007 (77.2% of revenues and 44.4% of gross margin in the fourth quarter of 2006.) As in 2006, we continued to experience downward pressures on pricing and margins for construction parts.

Gross margins for the Fund's Engineered Systems segment increased by $1.0 million from $1.8 million for the fourth quarter of 2006 to $2.8 million for the fourth quarter of 2007. Gross margin as a percentage of revenues was 25.0% for the three months ended December 31, 2007 versus 12.1% for the three months ended December 31, 2006. This was a result of more parts shipments versus larger revenue but lower margin projects of earlier in 2007 and 2006.

Administrative, Distribution and Selling Expense

Administrative, distribution and selling expenses increased by $1.1 million to $15.4 million (7.7%) in 2007 from $14.3 million for the fourth quarter of 2006. The increase in expenses were primarily related to higher expenses within the Equipment Distribution segment. The increase was comprised of higher salary and benefit costs related to the increase in staffing and increases in response to the competitive labour market, especially in Alberta. Freight, travel and training expenses were also up on a year over year basis.

Other Income & Expense

Other income and expense is primarily comprised of any gain or loss on disposition of fixed and rental assets, service fees paid by manufacturers in compensation for sales made within the distributor's region from sources other than the distributor and any gains or losses recognized with respect to foreign exchange. Other income decreased by $0.2 million from $0.8 million in 2006 to $0.6 million in 2007.

Interest Expense

Strongco's interest expense increased $0.3 to $0.8 million in 2007 from $0.5 million for 2006. This was a result of the Fund's higher level of interest bearing debt.

Net Income

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



($ millions) Q4 2007 Q4 2006
--------------------------------------------

Equipment Distribution $ 2.2 $ 5.0

Engineered Systems 1.1 0.3

Corporate (1.1) (1.4)

--------------------------------------------
$ 2.2 $ 3.9
--------------------------------------------
--------------------------------------------


On an after tax basis, net income was $2.7 million ($0.27 per unit basic and diluted) for the fourth quarter of 2007 compared to net income of $3.8 million ($0.38 per unit basic and diluted) for the fourth quarter of 2006. In the fourth quarter of 2007, net income after tax was positively impacted by $0.6 million and for the fourth quarter of 2006, net income after tax was positively impacted by $0.1 million future income tax recoveries.

The Fund is taxable to the extent its taxable income exceeds distributions until taxation years ending in 2011. Beginning with the 2011 taxation year, distributions will be taxed at the Specified Investment Flow-Through Entity rate.

Financial Condition and Liquidity

Cash generated from operating activities was $0.6 million in the fourth quarter of 2007 compared to $9.5 million cash generated from operating activities in the fourth quarter of 2006. Net income for the fourth quarter of 2007 was $2.7 million compared to $3.8 million in the fourth quarter of 2006. Non-cash working capital increased by $3.2 million in the fourth quarter of 2007 compared to a $4.2 million dollar reduction in the comparable quarter of 2006. In the fourth quarter of 2007, some machinery inventories were temporarily financed using the Fund's operating line of credit.

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



($ millions) Q4 2007 Q4 2006
---------------------------------------------------------------------

Accounts receivable $ (0.3) $ 8.7
Inventories (13.6) (7.5)
Prepaids 0.4 (0.4)
Income & other taxes receivable (0.1) (0.3)
---------------------------------------------------------------------
(13.6) 0.5

Accounts payable and accrued liabilities (1.7) 8.0
Deferred revenue & customer deposits 1.0 -
Equipment notes payable - non interest bearing (19.1) (6.1)
Equipment notes payable - interest bearing 3.0 2.8
Other - -
---------------------------------------------------------------------
(16.8) 4.7

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Increase (decrease) in non-cash working capital $ 3.2 $ (4.2)
---------------------------------------------------------------------
---------------------------------------------------------------------


Debt

As at December 31
($ millions) 2007 2006
-------------------------------------------------------------

Bank indebtedness $ 5.8 $ 0.9
Equipment notes payable - non interest bearing 47.4 40.2
Equipment notes payable - interest bearing 47.5 38.0
Capital lease obligations 4.7 3.5
-------------------------------------------------------------
$ 105.4 $ 82.6
-------------------------------------------------------------
-------------------------------------------------------------


Strongco's working capital requirements are supported by a secured, revolving demand facility provided by a Canadian chartered bank. In addition, various non-bank lenders provide secured wholesale financing on equipment inventory ("equipment notes payable"), some of which is interest free for periods up to seven months from the date of financing. Interest rates float with the prime or one month banker's acceptance rate under most of the Fund's credit facilities.

Distributable Cash

Distributable cash is presented as a measure of the extent to which the Fund is able to generate cash sufficient to fund Unitholder distributions on an ongoing basis. Distributable cash and Distributable cash before tax are non-GAAP measures, and therefore have no standardized meaning prescribed by GAAP and may not be comparable to similar terms and measures presented by other similar issuers. Distributable cash and Distributable cash before tax are intended to provide additional information on the Fund's performance and should not be considered in isolation, seen as a measure of liquidity or as a substitute for measures of performance prepared in accordance with GAAP.



Three months Three months
ended ended
Distributable cash (in thousands) December 31, 2007 December 31, 2006
---------------------------------------------------------------------------

Cash provided by operating
activities $ 662 $ 9,554

Add (deduct)
Net change in non-cash working
capital balances related
to operations 3,198 (4,219)
Capital expenditures (128) (352)
Principal payments under capital
lease obligations (1,370) (729)
Purchase of assets under capital
lease obligations (1,954) (4,166)
---------------------------------------------------------------------------
Distributable cash $ 408 $ 88
---------------------------------------------------------------------------

Other sources of distributable cash
Capital lease obligations incurred
to fund capital expenditures (1) 1,954 4,166
Proceeds on sale of assets held
for sale (2) 1,689

---------------------------------------------------------------------------
Distributable cash as adjusted $ 4,051 $ 4,254
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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 held for
sale 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 $20.0 million which is available for use to fund general corporate requirements including working capital requirements. In addition, Strongco finances equipment inventory through the use of vendor floor plans and wholesale finance arrangements with various finance companies. While the operations of the Fund are subject to seasonality (as explained earlier in the 'Summary of Quarterly Data'), the Fund has structured its distribution policy to declare regular monthly distributions evenly throughout the year, despite quarterly fluctuations in earnings. Distributions for the year ended December 31, 2007 have been partially funded from borrowings on the Fund's operating line to make up the shortfall between Distributable Cash and Cash Distributions.

As a result of the review of new vehicle lease contracts in 2007, the Fund has reclassified certain leased vehicles as assets under capital leases based upon the respective contract terms and past experience.



Three months Three months
ended ended
Distributable cash (in thousands) December 31, 2007 December 31, 2006
---------------------------------------------------------------------------

Net income $ 2,729 $ 3,808

Add (deduct)
Provision for future income tax (645) -
Depreciation & amortization 1,754 1,203
Write-down of rental equipment 71
Gain on disposition of assets 5 214
Stock based compensation 15 5
Change in non-cash post retirement
benefits and accrued benefit assets 111 (217)
Other (109) 251
Capital expenditures (128) (352)
Principal payments under capital
lease obligations (1,370) (729)
Purchase of assets under capital
lease obligations (1,954) (4,166)
---------------------------------------------------------------------------
Distributable cash $ 408 $ 88
---------------------------------------------------------------------------

Unitholder distributions declared $ 3,013 $ 5,423

---------------------------------------------------------------------------
Excess / (shortfall) before the
following $ (2,605) $ (5,335)
---------------------------------------------------------------------------

Other sources of distributable cash
Capital lease obligations incurred
to fund capital expenditures 1,954 4,166
Proceeds on sale of assets held
for sale 1,689

---------------------------------------------------------------------------
Excess / (shortfall) as adjusted $ 1,038 $ (1,169)
---------------------------------------------------------------------------



Years ended December 31
Distributable cash (in thousands) 2007 2006
-----------------------------------------------------------------------

Cash provided by operating activities $ 9,978 $ 21,699

Add (deduct)
Net change in non-cash working capital balances
related to operations 3,551 (360)
Capital expenditures (815) (1,310)
Principal payments under capital lease obligations (1,370) (729)
Purchase of assets under capital lease obligations (1,954) (4,166)
-----------------------------------------------------------------------
Distributable cash $ 9,390 $ 15,134
-----------------------------------------------------------------------

Other sources of distributable cash
Capital lease obligations incurred to
fund capital expenditures 1,954 4,166
Proceeds on sale of assets held for sale 1,689

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Distributable cash as adjusted $ 13,033 $ 19,300
-----------------------------------------------------------------------


Years ended December 31
Distributable cash (in thousands) 2007 2006
-------------------------------------------------------------------------

Net income $ 8,334 $ 22,594
Add (deduct)
Provision for future income tax 1,205 (3,086)
Depreciation & amortization 3,117 2,715
Write-down of rental equipment - 132
Gain on disposition of assets (146) (89)
Stock based compensation 84 14
Change in non-cash post retirement
benefits and accrued benefit assets 598 (852)
Other 337 (89)
Capital expenditures (815) (1,310)
Principal payments under capital lease obligations (1,370) (729)
Purchase of assets under capital lease obligations (1,954) (4,166)
-------------------------------------------------------------------------
Distributable cash $ 9,390 $ 15,134
-------------------------------------------------------------------------

Unitholder distributions declared $ 13,658 $ 20,086

-------------------------------------------------------------------------
Excess / (shortfall) before the following $ (4,268) $ (4,952)
-------------------------------------------------------------------------

Other sources of distributable cash
Capital lease obligations incurred to
fund capital expenditures 1,954 4,166
Proceeds on sale of assets held for sale 1,689

-------------------------------------------------------------------------
Excess / (shortfall) as adjusted $ (625) $ (786)
-------------------------------------------------------------------------


Years ended December 31
Reconciliation of accounting net income to taxable income
($ millions) 2007 2006
--------------------------------------------------------------------------

Accounting net income $ 8.3 $ 22.6

Add (deduct)
Provision for (recovery of) income taxes 1.2 (1.1)
Permanent differences (1) 0.5 0.5
Reorganization costs 0.3 0.3
Pension adjustment (2) 0.6 (0.8)
Recapture of capital cost allowance -- assets held
for sale 2.4
Depreciation and recapture of assets held for sale 1.4
Other non-permanent timing differences - -
(Includes minor differences between capital cost
allowance and accounting amortization / depreciation)
Strongco Inc. taxable income (3) (5.7)

--------------------------------------------------------------------------
Taxable income $ 13.3 $ 17.2
--------------------------------------------------------------------------

Distributions 13.7 20.1

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Return of capital $ 0.4 $ 2.9
--------------------------------------------------------------------------

Other Income % 97.1% 85.6%
Return of capital % 2.9% 14.4%


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.
3. Strongco Inc. was a taxable entity to August 31, 2006. This income
($5.7) million is included in accounting net income for 2006 but is not
part of the Fund's taxable income and is therefore a deduction in 2006.


Unitholder Distributions

Unitholder distributions (per unit) in 2007 were comprised as follows:

Record Payment Return of Other Total
Date Date Capital Income
--------------------------------------------------------------------
January 31 February 20 $ 0.005432489 $ 0.174567511 $ 0.180000000
February 28 March 20 $ 0.005432489 $ 0.174567511 $ 0.180000000
March 30 April 20 $ 0.003018050 $ 0.096981950 $ 0.100000000
April 30 May 21 $ 0.003018050 $ 0.096981950 $ 0.100000000
May 31 June 20 $ 0.003018050 $ 0.096981950 $ 0.100000000
June 29 July 20 $ 0.003018050 $ 0.096981950 $ 0.100000000
July 31 August 20 $ 0.003018050 $ 0.096981950 $ 0.100000000
August 31 September 20 $ 0.003018050 $ 0.096981950 $ 0.100000000
September 28 October 19 $ 0.003018050 $ 0.096981950 $ 0.100000000
October 31 November 20 $ 0.003018050 $ 0.096981950 $ 0.100000000
November 30 December 20 $ 0.003018050 $ 0.096981950 $ 0.100000000
December 31 January 18 $ 0.003018050 $ 0.096981950 $ 0.100000000
--------------------------------------------------------------------
$ 0.041045478 $ 1.318954522 $ 1.360000000
--------------------------------------------------------------------
--------------------------------------------------------------------


Contractual Obligations

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



--------------------------------------------------------
Less Than 1 to 3 4 to 5 After 5
Total 1 Year years years years
--------------------------------------------------------
Operating leases $ 26.5 $5.2 $7.4 $5.4 $8.5
--------------------------------------------------------
--------------------------------------------------------


The Fund also has 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 $456 thousand (2006 - $446 thousand) has been accrued in the Fund's accounts with respect to these commitments.



Contingent obligation by period
--------------------------------------------------------------
Less Than 1 to 3 4 to 5 After 5
Total 1 Year years years years
--------------------------------------------------------------
'Buy back contracts' $ 4.8 $0.7 $1.2 $2.9 -
--------------------------------------------------------------
--------------------------------------------------------------


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 fully paid units at: Number of Units
----------------------------------------------------
March 4, 2008 10,043,185
----------------------------------------------------
----------------------------------------------------


CRITICAL ACCOUNTING ESTIMATES

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

Inventory Valuation

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

Allowance for Doubtful Accounts

The Fund performs credit evaluations of customers and limits the amount of credit extended to customers as appropriate. The Fund is however exposed to credit risk with respect to accounts receivable and maintains provisions for possible credit losses based upon historical experience and known circumstances.

Revenue Recognition

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

Post Retirement Obligations

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

The discount rate is used to determine the present value of future cash flows that we expect will be required to pay employee benefit obligations. Management's assumptions of the discount rate are based on current interest rates on long-term debt of high quality corporate issuers. Strongco determines the appropriate discount rate at the end of every year and has increased the assumed discount rate from 5.0% in 2006 to 5.5% in 2007, resulting in a slight decrease in estimated post retirement obligations.

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 and is unchanged from 2006.

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 consolidated balance sheet, a charge or credit to income tax expense in the 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

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

Comprehensive Income

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

The Fund had no adjustments to OCI during the year ended December 31, 2007 therefore adoption of this standard did not require the Fund to include a consolidated statement of comprehensive income.

Financial Instruments - Recognition and Measurement

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

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

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

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

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

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

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

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

Hedges

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

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

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

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

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

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

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

As provided under the standards, the adoption of these recommendations is done retroactively without restatement of the consolidated financial statements of prior periods.

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Capital Disclosures

The CICA issued a new accounting standard, Section 1535, Capital Disclosures, 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 Fund will adopt this standard beginning January 1, 2008 and is currently evaluating the effect of adopting this standard.

Financial Instruments

The CICA issued two new accounting standards, Section 3862, Financial Instruments - Disclosures, and Section 3863, Financial Instruments - Presentation, 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 Fund will adopt this standard beginning January 1, 2008 and is currently evaluating the effect of adopting this standard.

Inventories

The CICA issued a new accounting standard, Section 3031, "Inventories" 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 Fund will adopt this standard beginning January 1, 2008 and is currently evaluating the effect of adopting this standard.

RISK AND UNCERTAINTIES

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

BUSINESS AND ECONOMIC CYCLES

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

COMPETITION

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

The Equipment Distribution segment competes with regional and local distributors of competing product lines. They compete on the basis of: (i) relationships maintained with customers over many years of service; (ii) prompt customer service through a network of sales and service facilities in key locations; (iii) access to products; and (iv) the quality and price of their products. In most product lines in most geographic areas in which the Equipment Distribution segment operates, their main competitors are distributors of Caterpillar products.

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

MANUFACTURER RISK

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

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

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

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

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

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

The Fund believes that this element of risk has been mitigated through its representation of equipment manufacturers who have demonstrated the ability to produce a competitive, well accepted, high quality product range. Although distribution agreements with these manufacturers are cancellable by either party within a relatively short notice period as specified in the relevant distribution agreement, Strongco believes that it has established strong relationships with its key manufacturers.

CONTINGENCIES

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

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

DEPENDENCE ON KEY PERSONNEL

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

INFORMATION SYSTEMS

The Equipment Distribution segment of the Fund utilizes a legacy business system which has been successfully in operation for over 15 years. As with any business system, it is necessary to evaluate its adequacy and support of current and future business demands. The system was written and was supported by the Fund's Information Systems Manager who retired on December 31, 2006. The Fund is utilizing an outside consultant to support the system while an evaluation of current and future requirements is undertaken during the upcoming periods.

FOREIGN EXCHANGE

While the majority of the Fund's sales are in Canadian dollars, significant portions of its purchases are in U.S. dollars. While the Fund believes that it can maintain margins over the long term, short, sharp fluctuations in exchange rates may have a short term impact on earnings.

INTEREST RATE

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

RISKS RELATING TO THE UNITS

Unpredictability and Volatility of Unit Price

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

Nature of Units

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

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

CASH DISTRIBUTIONS

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

LEVERAGE AND RESTRICTIVE COVENANTS

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

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

CAPITAL INVESTMENT

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

RESTRICTIONS ON POTENTIAL GROWTH

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

TAX RELATED RISKS

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

If the Fund ceases to qualify as a "mutual fund trust" under the Tax Act, the units will cease to be qualified investments for Registered Retirement Savings Plans, Registered Retirement Income Funds, Deferred Profit Sharing Plans and Registered Education Savings Plans, Registered Disability Savings plans and the proposed tax-free savings accounts (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. In addition, if the Fund ceases to qualify as mutual fund trust for purposes of the Tax Act, the Fund will be required to pay tax under Part XII.2 of the Tax Act. The payment of Part XII.2 tax by the Fund will affect the amount of cash available for distribution by the Fund and may have adverse consequences for Unitholders.

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

Legislation to implement the proposed changes to the taxation of income trusts was contained in Bill C-52 which received Royal Assent on June 22, 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 Canadian Institute of Chartered Accountants contained in section 3465, the Fund has estimated its temporary differences, determined the periods over which these differences are expected to reverse and applied the current substantively enacted tax rates that will apply in the periods those temporary differences are expected to reverse. Taxable income that is not distributed to the unitholders is generally taxed in the Trust at the highest federal and provincial income tax rates that are applicable to individuals. Beginning with the 2011 taxation year, distributions will be taxed at the Specified Investment Flow-Through Entity rate. The Fund is currently considering these changes and the possible impact they will have on the Fund and its investors.

OUTLOOK

Strongco remains committed to our strategic focus on our core business, capitalizing on equipment sales, investing in our product support departments and developing our Engineered Systems group. While 2006 generated record earnings both before and after tax, 2007 proved to be a challenging and difficult year with significant manufacturer driven competition early in the year in an effort to reduce inventory levels. We invested heavily in personnel, product support infrastructure and inventory in preparation for 2008 and subsequent years.

For 2008, this focus will continue and, we expect a more stable marketplace with moderate competition (as compared to that experienced in the early months of 2007). Supplies of some types of equipment are constrained by manufacturer capacity and strained by continuing global demand for equipment. Strongco has responded with increased inventory and appropriate ordering strategies. During 2007, Strongco made significant changes to its sales organization in order to respond to customer needs and market conditions Strongco is facing customer support capacity constraints and is taking action to increase and improve its ability to deliver effective and efficient customer support in 2008.

FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis contains forward-looking statements that involve assumptions and estimates that may not be realized and other risks and uncertainties. These statements relate to future events or future performance and reflect management's current expectations and assumptions which are based on information currently available to the Fund's management. The forward-looking statements include but are not limited to: (i) the ability of the Fund to meet contractual obligations through cashflow generated from operations, (ii) the expectation that customer support revenues will grow following the warranty period on new machine sales and (iii) the outlook for 2008, including a return to more traditional seasonality. These statements are based on a number of assumptions, including, but not limited to, continued demand for our products and services. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward looking statements. These factors include and are not restricted to the risks identified above. The inclusion of this information should not be regarded as a representation of the Fund or any other person that the anticipated results will be achieved and investors are cautioned not to place undue reliance on such information. These forward-looking statements are made as of the date of this MD&A, or as otherwise stated and the Fund does not assume any obligation to update or revise them to reflect new events or circumstances.

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



Strongco Income Fund

CONSOLIDATED BALANCE SHEETS

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

ASSETS
Current
Accounts receivable 39,095 46,938
Inventories 138,796 126,002
Prepaid expenses and deposits 1,786 1,403
Income and other taxes receivable 173 519
-------- --------
Total current assets 179,850 174,862
Assets held for sale, net (note 3) 2,529
Capital assets, net (note 4) 20,868 19,684
Other assets 333 559
Accrued benefit asset (note 12) 5,680 6,277
--------- ---------
206,731 203,911
--------- ---------

LIABILITIES AND UNITHOLDERS' EQUITY
Current
Bank indebtedness (note 5) 5,771 974
Accounts payable and accrued liabilities 34,999 44,019
Distributions payable to unitholders 1,004 1,808
Deferred revenue and customer deposits 3,310 9,505
Current portion of capital lease obligations
(notes 4 and 7) 2,019 1,256
Equipment notes payable - non-interest bearing
(note 6) 47,460 40,201
Equipment notes payable - interest bearing (note 6) 47,480 37,968
--------- ---------
Total current liabilities 142,043 135,731
Future income taxes (note 10) 1,205 -
Other liabilities 581 470
Capital lease obligations (notes 4 and 7) 2,731 2,181
Accrued benefit liability (note 12) 729 728
--------- ---------
Total liabilities 147,289 139,110
--------- ---------

Commitments and contingencies (notes 11 and 13)

Unitholders' equity
Unitholder capital (note 8) 54,534 54,534
Deferred compensation (note 9) (71) (36)
Retained earnings 4,979 10,303
--------- ---------
Total unitholders' equity 59,442 64,801
--------- ---------
206,731 203,911
--------- ---------

See accompanying notes


Strongco Income Fund

CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS

(unaudited - in
thousands
of dollars, Three months Twelve months
except per ended December 31 ended December 31
unit amounts) $ 2007 $ 2006 $ 2007 $ 2006
---- ---- ---- ----

Revenue 107,202 117,772 394,088 453,915
Cost of sales 89,449 99,956 325,184 377,233
--------- --------- --------- ---------
Gross margin 17,753 17,816 68,904 76,682

Expenses
Administration,
distribution
and selling 15,392 14,254 58,637 54,266
Reorganization
expense (note 1) 62 - 678
Other income (605) (791) (2,733) (2,004)

--------- --------- --------- ---------
Income before
the following 2,966 4,291 13,000 23,742
Interest 839 530 3,093 1,977

--------- --------- --------- ---------
Earnings from
continuing
operations
before income taxes 2,127 3,761 9,907 21,765
Provision for
(recovery
of) income
taxes (note 10) (645) (84) 1,194 (1,119)
--------- --------- --------- ---------

Earnings from
continuing
operations 2,772 3,845 8,713 22,884
Loss from
discontinued
operations
(note 3) (43) (37) (379) (290)

--------- --------- --------- ---------
Net income 2,729 3,808 8,334 22,594
--------- --------- --------- ---------

Retained
earnings,
beginning of
period 5,263 11,918 10,303 7,795
Unitholder
distributions (3,013) (5,423) (13,658) (20,086)
--------- --------- --------- ---------
Retained
earnings, end
of period 4,979 10,303 4,979 10,303
--------- --------- --------- ---------

Basic and
diluted
earnings per
unit
Earnings from
continuing
operations per
unit $ 0.28 $ 0.39 $ 0.87 $ 2.28
Loss from
discontinued
operations per
unit $ (0.01) $ (0.01) $ (0.04) $ (0.03)
--------- --------- --------- ---------
Earnings per
unit $ 0.27 $ 0.38 $ 0.83 $ 2.25

Weighted
average number
of units 10,043,185 10,043,185 10,043,185 10,043,185

See accompanying notes



Strongco Income Fund

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months Twelve months
(unaudited - in thousands ended December 31 ended December 31
of dollars) $ 2007 $ 2006 $ 2007 $ 2006
---- ---- ---- ----

OPERATING ACTIVITIES
Income from continuing
operations 2,772 3,845 8,713 22,884
Add (deduct) items not
involving a current outlay
(inflow) of cash
Amortization of capital
assets 1,635 964 2,412 1,663
(Gain) / loss on disposal
of capital assets (2) 13 (136) (22)
Stock based compensation 15 5 84 14
Future income taxes (645) - 1,205 (3,086)
Other 66 34 935 (941)
-------- ------- -------- --------
3,841 4,861 13,213 20,512

Net change in non-cash
working capital balances
related to operations (3,198) 4,219 (3,551) 360
-------- ------- -------- --------
Cash provided by operating
activities of continuing
operations 643 9,080 9,662 20,872
Cash provided by operating
activities of discontinued
operations 19 474 316 827
-------- ------- -------- --------
Cash provided by operating
activities 662 9,554 9,978 21,699

INVESTING ACTIVITIES
Purchase of capital assets (128) (352) (815) (1,088)
Purchase of assets under
capital lease obligations (1,954) (4,166) (1,954) (4,166)
Proceeds on disposal of
capital assets 37 11 183 62
-------- ------- -------- --------
Cash used in investing
activities from continuing
operations (2,045) (4,507) (2,586) (5,192)
Cash provided by investing
activities of discontinued
operations 1,608 (123) 1,689 194
-------- ------- -------- --------
Cash used in investing
activities (437) (4,630) (897) (4,998)

FINANCING ACTIVITIES
Increase (decrease) in bank
indebtedness 2,204 (2,938) 4,797 (353)
Increase in capital lease
obligations 1,954 4,166 1,954 4,166
Capital lease repayments (1,370) (729) (1,370) (729)
Unitholder distributions (3,013) (5,423) (14,462) (19,785)
-------- ------- -------- --------
Cash used in financing
activities (225) (4,924) (9,081) (16,701)

Net change 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 821 575 3,168 2,159
Income taxes paid /
(recovered) (82) (377) (338) 1,874


Strongco Income Fund

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2007 and 2006 (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 Company transferred substantially all of its operating assets and certain liabilities to Strongco Limited Partnership ("Strongco LP") which will continue to carry on the business.

During the year ended December 31, 2006, the Company incurred and expensed $0.7 million of costs with respect to the Company's reorganization into a limited partnership.

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

The Fund had no OCI during the year ended December 31, 2007 therefore consolidated net income is equal to consolidated comprehensive income.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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 2007 and 2006. 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 2007 and 17 years for 2006).

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.

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.

Rental equipment

Amortization of rental equipment is provided on a straight-line basis over periods ranging from four to ten years.

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%
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 3 for details of discontinued operations.

Income taxes

The Company 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, 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.

Recently issued accounting pronouncements

Capital Disclosures

The CICA issued a new accounting standard, Section 1535, Capital Disclosures, 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 Fund will adopt this standard beginning January 1, 2008 and is currently evaluating the effect of adopting this standard.

Financial Instruments

The CICA issued two new accounting standards, Section 3862, Financial Instruments - Disclosures, and Section 3863, Financial Instruments - Presentation, 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 Fund will adopt this standard beginning January 1, 2008 and is currently evaluating the effect of adopting this standard.

Inventories

The CICA issued a new accounting standard, Section 3031, "Inventories" 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 Fund will adopt this standard beginning January 1, 2008 and is currently evaluating the effect of adopting this standard.

3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

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 have been reported as discontinued operations and prior period amounts have been reclassified to conform to the current period presentation. During 2007, the Fund recorded amortization of the assets held for sale on a basis consistent with prior years. The sale did not have a material impact on current assets or liabilities and changes in these amounts have not been segregated from the accounts of continuing operations.

The results of discontinued operations for the years ended December 31, 2007 and 2006 are as follows:



2007 2006
$ $
------------------------------------------------------
------------------------------------------------------
Revenues 2,005 2,995
Cost of goods sold 989 1,513
------------------------------------------------------
Gross margin 1,016 1,482
------------------------------------------------------

Expenses
Administration, distribution and selling 431 422
Amortization of assets held for sale 705 1,052
Other expenses 108 67
------------------------------------------------------
Loss before the following (228) (59)
Interest 151 231
------------------------------------------------------
Loss before income taxes (379) (290)
Provision for income taxes - -
------------------------------------------------------
Net loss for the year (379) (290)
------------------------------------------------------


Assets held for sale $
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net assets held for sale as at January 1, 2007 2,529
Less 2007 transfers to continuing operations, net of accumulated
amortization 145
Less amortization expense for 2007 705
--------------------------------------------------------------------------
Net assets held for sale as at December 1, 2007 1,679
Proceeds on disposal of assets held for sale 1,689
--------------------------------------------------------------------------
Gain on sale of assets held for sale 10
--------------------------------------------------------------------------
--------------------------------------------------------------------------


4. CAPITAL ASSETS

Capital assets consist of the following:



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


2006
--------------------------
Net
Accumulated book
Cost amortization value
$ $ $
---------------------------------------------------------------
Land 3,009 - 3,009
Buildings and leasehold improvements 14,032 4,656 9,376
Machinery, equipment and vehicles 14,906 11,044 3,862
Vehicles under capital leases 4,166 729 3,437
---------------------------------------------------------------
36,113 16,429 19,684
---------------------------------------------------------------
---------------------------------------------------------------


As a result of the review of new vehicle lease contracts in 2007, the Fund has reclassified certain leased vehicles as assets under capital leases based upon the respective contract terms and past experience.

5. BANK INDEBTEDNESS

Bank indebtedness consists of an operating line of credit to a maximum of $20,000 (2006 - $20,000), renewable annually. As at December 31, 2007, the Fund had utilized $5,771 (2006 - $974) of this operating line of credit. As at December 31, 2007, the bank indebtedness bears interest at the bank's prime lending rate plus 0.50% (2006 - 0.50%), which represents an effective interest rate of 6.50% (2006 - 6.50%). 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 (note 6), a charge on capital assets subordinated to collateral provided to lessors, a charge on real estate, a charge on intangible and other assets, and a $50,000 debenture.

6. 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 2.75% over the one month Canadian Bankers' Acceptance Rate and 0.50% 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 $93,000 (2006 - $68,000). The effective interest rates on these notes payable as at December 31, 2007 ranged from 6.25% to 7.40% (2006 - 5.95% to 7.05%). 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.

7. 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 years ended December 31, 2007 and 2006 was $254 and $214. The future minimum annual payments, interest and balance of obligations are as follows:



For the years ending December 31 2007 2006
$ $
-----------------------------------------------------------------
2007 - 1,256
2008 2,010 1,247
2009 1,829 1,068
2010 1,178 446
2011 481 100
2012 28 -
-----------------------------------------------------------------
Total minimum lease payments 5,526 4,117
-----------------------------------------------------------------
-----------------------------------------------------------------
Less amount representing interest 776 680
Present value of minimum lease payments 4,750 3,437
-----------------------------------------------------------------
Current portion of obligations under capital leases 2,019 1,256
-----------------------------------------------------------------
2,731 2,181
-----------------------------------------------------------------


8. 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 the Company in exchange for units of the Fund on a one for one basis effective May 6, 2005.

Details of issued unitholders' capital is as follows:



2007 2006
------------------ ------------------
Units Amount Units Amount
Unitholders' capital # $ # $
--------------------------------------------------------------

Units, beginning of year 10,043,185 54,534 10,043,185 54,534

Units, end of year 10,043,185 54,534 10,043,185 54,534

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


The Fund's policy is to make distributions of its available cash to the maximum extent possible to Unitholders. The Fund makes monthly distributions to Unitholders of record on the last business day of each month payable on or about the 20th day of the following month.

9. 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.

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 $119 was transferred into the LTIP pool in 2007 relating to the excess of cash distributions over threshold amounts in 2006. The LTIP compensation expense was $59 in 2007 (2006 - $14). Pursuant to the LTIP plan no amount will be transferred in to the LTIP pool in 2008 as cash distributions did not exceed threshold amounts in 2007.

10. INCOME TAXES

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



2007 2006
$ $
------------------------------------------------------

Current income tax (recovery) expense (11) 1,967
Future income tax expense (recovery) 1,205 (3,086)
------------------------------------------------------
1,194 (1,119)
------------------------------------------------------
------------------------------------------------------


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



2007 2006
$ $
----------------------------------------------------------------

Earnings from continuing operations before taxes 9,907 21,765
Statutory tax rate 46.4% 34.2%
----------------------------------------------------------------
----------------------------------------------------------------

Provision for income taxes at statutory tax rate 4,596 7,444
Adjustments thereon for the effect of:
Temporary differences 1,205 59
Income of the Fund distributed to unitholders (4,596) (3,890)
Income not subject to tax - (1,854)
Reversal of future income taxes (note 2) - (2,862)
Other (11) (16)
----------------------------------------------------------------
1,194 (1,119)
----------------------------------------------------------------
----------------------------------------------------------------


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



2007 2006
$ $
-----------------------------------------------------------

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

Capital assets 513 -
Accrued benefit asset 1,045 -
-----------------------------------------------------------
Future income tax liabilities 1,558 -
-----------------------------------------------------------
Net future income tax liability 1,205 -
-----------------------------------------------------------
-----------------------------------------------------------


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

11. 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:



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

2008 5,181
2009 4,031
2010 3,442
2011 2,951
2012 2,394
Thereafter 8,511
-------------------
-------------------


12. 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:



2007 2006
$ $
----------------------------------------------------------------

Accrued benefit obligation, beginning of year 25,642 23,236
Current service cost 1,845 1,716
Interest cost 1,399 1,225
Benefits paid (1,667) (896)
Actuarial (gain) loss (878) 361
----------------------------------------------------------------
Accrued benefit obligation, end of year 26,341 25,642
----------------------------------------------------------------

Fair value of plan assets, beginning of year 26,240 21,745
Actual return on plan assets (1,138) 3,060
Employer contributions 86 1,592
Employee contributions 891 739
Benefits paid (1,667) (896)
----------------------------------------------------------------
Fair value of plan assets, end of year 24,412 26,240
----------------------------------------------------------------
----------------------------------------------------------------


Plan assets consist of:

% %
---------------------------------------------------------
Asset category
Equity securities 66.6 69.5
Debt securities 33.4 30.5
Other - -
Total 100.0 100.0
---------------------------------------------------------

Fair value of plan assets 24,412 26,240
Accrued benefit obligation 26,341 25,642
---------------------------------------------------------
Funded status of plan - surplus (deficit) (1,929) 598
Unamortized net actuarial loss 6,917 5,004
Unamortized transitional obligation 138 155
---------------------------------------------------------
Accrued benefit asset 5,126 5,757
---------------------------------------------------------
---------------------------------------------------------


Elements of defined benefit costs recognized in the year:



2007 2006
$ $
---------------------------------------------------------------------------

Current service cost, net of employee contributions 953 977
Interest on accrued benefits 1,399 1,225
Actual return on plan assets 1,138 (3,060)
Actuarial (gain) loss (878) 361
---------------------------------------------------------------------------
Elements of defined benefit costs before adjustments
recognized: 2,612 (497)
Adjustments to recognize the long term nature of benefit
costs:
- return on assets (expected vs actual in year) (2,949) 1,494
- actuarial losses (gains) (recognized vs actual in year) 1,037 (88)
- transitional obligation (amortization) 17 17
---------------------------------------------------------------------------
Defined benefit costs recognized 717 926
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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:



2007 2006
$ $
-------------------------------------------------------------

Accrued benefit obligation, beginning of year 1,993 1,998
Current service cost - 20
Interest cost 95 96
Benefits paid (170) (177)
Actuarial (gain) loss (52) 56
-------------------------------------------------------------
Accrued benefit obligation, end of year 1,866 1,993
-------------------------------------------------------------

Fair value of plan assets, beginning of year 1,821 1,621
Actual return on plan assets (96) 172
Employer contributions 41 205
Benefits paid (170) (177)
-------------------------------------------------------------
Fair value of plan assets, end of year 1,596 1,821
-------------------------------------------------------------
-------------------------------------------------------------


Plan assets consist of:
% %
-----------------------------------------------------
Asset category
Equity securities 67.0 69.5
Debt securities 32.4 30.5
Other 0.6 -
-----------------------------------------------------
Total 100.0 100.0
-----------------------------------------------------
-----------------------------------------------------

Fair value of plan assets 1,596 1,821
Accrued benefit obligation 1,866 1,993
-----------------------------------------------------
Funded status of plan - deficit (270) (172)
Unamortized net actuarial loss 800 665
Unamortized transitional obligation 24 27
-----------------------------------------------------
Accrued benefit asset 554 520
-----------------------------------------------------
-----------------------------------------------------


Elements of defined benefit costs recognized in the year:



2007 2006
$ $
--------------------------------------------------------------------------

Current service cost, net of employee contributions - 20
Interest on accrued benefits 95 96
Actual return on plan assets 96 (172)
Actuarial (gain) loss (52) 56
--------------------------------------------------------------------------
Elements of defined benefit costs before adjustments
recognized: 139 -
Adjustments to recognize the long term nature of benefit
costs:
- return on assets (expected vs actual in year) (218) 58
- actuarial (gains) losses (recognized vs actual in year) 84 (27)
- transitional obligation (amortization) 3 3
--------------------------------------------------------------------------
Defined benefit costs recognized 8 34
--------------------------------------------------------------------------
--------------------------------------------------------------------------


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:



2007 2006
$ $
---------------------------------

Employee Plan 5,126 5,757
Executive Plan 554 520
---------------------------------
5,680 6,277
---------------------------------
---------------------------------


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



2007 2006
$ $
---------------------------------------------------------------

Accrued benefit obligation, beginning of year 1,528 1,562
Current service cost - -
Interest cost 73 74
Benefits paid (125) (137)
Actuarial (gain) loss (109) 29
---------------------------------------------------------------
Accrued benefit obligation, end of year 1,367 1,528
---------------------------------------------------------------

Fair value of plan assets - -
Accrued benefit obligation 1,367 1,528
---------------------------------------------------------------
Funded status of plan - deficit (1,367) (1,528)
Unamortized net actuarial loss 410 543
Unamortized transitional obligation 228 257
---------------------------------------------------------------
Accrued benefit liability (729) (728)
---------------------------------------------------------------
---------------------------------------------------------------


Elements of defined benefit costs recognized in the year



2007 2006
$ $
--------------------------------------------------------------------------
Current service cost, net of employee contributions - -
Interest on accrued benefits 73 74
Actuarial (gain) loss (109) 29
--------------------------------------------------------------------------
Elements of defined benefit costs before adjustments
recognized: (36) 103
Adjustments to recognize the long term nature of benefit
costs:
- actuarial loss (gain) (recognized vs actual in year) 132 (9)
- transitional obligation (amortization) 29 29
--------------------------------------------------------------------------
Defined benefit costs recognized 125 123
--------------------------------------------------------------------------
--------------------------------------------------------------------------


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



2007 2006
Accrued benefit obligation as of the end of the period % %
--------------------------------------------------------------------

Discount rate 5.50 5.25

Rate of compensation increase 3.00 3.00
--------------------------------------------------------------------
--------------------------------------------------------------------

2007 2006
Benefit cost for the period % %
--------------------------------------------------------------

Discount rate 5.25 5.00
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 2007 was used to project the 2008 expense. The assumed health care cost trend rate is 8.5% until 2009, declining by 0.5% per annum to 5.0% per annum in 2016 and thereafter. The assumed dental cost rate is 4.0% per annum.

Assumed health and dental care cost trend rates have a significant effect on the amounts reported for the health and dental care plans. A one percentage point change in assumed health and dental care cost trend rates would have the following effects for 2007:



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

Total of service and interest cost 9 (8)
Accrued benefit obligation as of December 31, 2007 125 (104)
-----------------------------------------------------------------------
-----------------------------------------------------------------------


In addition, the Fund maintains a defined contribution plan available only to certain employees (approximately 6.1% of the workforce (2006 - 5.4%)) who were existing members of the plan following a previous acquisition. In 2007, the Fund's contributions were $106 (2006 - $103). The Fund also maintains a group RSP/LIRA available only to certain employees (approximately 10.8% of the workforce (2006 - 9.6%)) under the terms of a collective bargaining agreement. In 2007, the Fund's contributions were $79 (2006 - $93).

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, 2007 was $140 (2006 - $120).

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, 2007 was $23.

Total cash payments for employee future benefits for 2007 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 $573 (2006 - $2,200).

13. 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, 2007, the total obligation under these contracts was $4,762 (2006 - $6,245). 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 $456 (2006 - $446) 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 property leases which expire between January 1, 2008 and January 31, 2014. Total lease payments from January 1, 2008 to January 31, 2014 are $895 (2006 - $1,125).

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

14. SEGMENTED INFORMATION

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

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Fund evaluates performance based on profit and loss from operations before income taxes. The Fund accounts for intersegment sales and transfers at cost. The Fund's reportable segments are strategic business units which are reported as segments because each business unit was managed separately. Losses, interest expense and amortization from discontinued operations (note 3) have been eliminated from the Equipment Distribution segmented information presented herein.



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


2006
---------------------------------------------------------------------------
Equipment Engineered Segment Reconciling Company
Distribution Systems Totals Items Total
---------------------------------------------------------------------------

Gross
Revenue 411,866 42,348 454,214 454,214
Intersegment 1 298 299 299
---------------------------------------------------------------------------
Net Revenue 411,865 42,050 453,915 - 453,915
---------------------------------------------------------------------------

Interest
Expense (1,630) (347) (1,977) (1,977)
Earnings from
continuing
operations
before
income taxes 25,384 1,595 26,979 (5,214) (a) 21,765
Amortization
of capital
assets 1,285 371 1,656 7 1,663
Segment
total assets 178,538 18,296 196,834 7,077 (b) 203,911
Segment
capital assets 16,906 2,761 19,667 17 19,684
Assets held
for sale 2,529 2,529 2,529
Capital
expenditures 710 370 1,080 8 1,088
---------------------------------------------------------------------------

(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 intercompany receivables at the corporate head
office.


15. 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.

16. DISTRIBUTIONS TO UNITHOLDERS

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

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

17. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS

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

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