Strongco Income Fund
TSX : SQP.UN

Strongco Income Fund

October 27, 2005 15:29 ET

Strongco Reports Third Quarter Profits of $0.52 per Unit and Announces Distributions for November and December 2005; January and February 2006 and a Special Distribution for November 2005

MISSISSAUGA, ONTARIO--(CCNMatthews - Oct. 27, 2005) - Strongco Income Fund (TSX:SQP.UN) today released its results for the third quarter of 2005.

For the three months ended September 30th, 2005, Strongco Income Fund ("Strongco") generated net income after tax of $5.2 million, ($0.52 per unit) on revenues of $102.1 million, versus $2.3 million, (0.25 per unit) on revenues of $88.4 million for the comparable quarter 2004. On a diluted basis the net income per unit was $0.52 versus $0.24 last year. The increase in revenues was led by equipment sales especially Volvo, Tigercat and our National and Grove crane lines.

For the nine months ended September 30th, 2005, Strongco Income Fund generated net income after tax of $11.8 million, ($1.20 per unit) on revenues of $307.4 million versus $5.5 million, ($0.59 per unit), on revenues of $248.5 million for the comparable period in 2004. On a diluted basis, the net income per unit was $1.20 versus $0.57 last year. During the first quarter of 2005, Strongco expensed $1.1 million ($0.08 per unit) of costs related to the 'Plan of Arrangement' with respect to Strongco's conversion to an Income Trust.

Mr. Robin MacLean, President commented, "We are pleased with the results, which were in line with our expectations and expect this to continue for the balance of the year. Our third quarter revenues were up 16% and our pretax income was up 75% on a year over year basis. For the nine months, revenues were up 24% and pretax income was up 107%."

Strongco Income Fund also announced today the following cash distributions: $0.15 per unit for November 2005 will be payable on December 20, 2005 to Unitholders of record at the close of business on November 30, 2005; $0.15 per unit for December 2005 will be due and payable to Unitholders of record on December 31, 2005 and shall be distributed by January 20, 2006; $0.15 per unit for January 2006 will be payable on February 20, 2006 to Unitholders of record at the close of business on January 31, 2006; $0.15 per unit for February 2006 will be payable on March 20, 2006 to Unitholders of record at the close of business on February 28, 2006.

Strongco Income fund is pleased to announce a special cash distribution of $0.05 per unit for November 2005 will be payable on December 20, 2005 to Unitholders of record at the close of business on November 30, 2005.

Mr. Charles M. Phillips, President & CEO of Armtec Infrastructure Income Fund was appointed to the Board of Trustees.

Strongco will host a conference call at 9:30 a.m. on Friday, October 28th, 2005, to further discuss its second quarter. To participate in the conference call, dial 416-641-6707 or 1-888-793-1728, reservation number is 21265948 a few minutes prior to 9:30 a.m. on the 28th. A taped version of the call will be available until November 11th, 2005. Dial 416-626-4100 or 1-800-558-5253 and enter the reservation number 21265948.

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

Report to Unitholders

For the three months ended September 30th, 2005, Strongco Income Fund (the "Fund" or "Strongco") generated earnings of $0.52 per unit ($0.52 per unit on a diluted basis) versus earnings of $0.25 per unit ($0.24 per unit on a diluted basis) in the comparable quarter last year. Revenues for the third quarter of 2005 were $102.1 million versus $88.4 million for the comparable quarter in 2004.

For the nine months ended September 30th, 2005, Strongco generated earnings of $1.20 per unit ($1.20 per unit on a diluted basis) versus earnings of $0.59 per unit ($0.57 per unit on a diluted basis) in the comparable period last year. Revenues for the nine months ended September 30th of 2005 were $307.4 million versus $248.5 million for the comparable period in 2004. The increased revenues were mainly a result of increased equipment sales led by the Volvo, Tigercat and Grove lines. During the first quarter of 2005, the Company expensed $1.1 million ($0.08 per unit) of costs related to the 'Plan of Arrangement' with respect to the Company's conversion to an Income Trust.

In addition to our regular monthly distribution of $0.15 per unit, a special distribution of $0.05 per unit will be paid on December 20, 2005 to unitholder's of record at the close of business on November 30, 2005.

Charles M. Phillips has been appointed as a trustee of the Fund effective October 27, 2005. Charles is the President and CEO of Armtec Infrastructure Income Fund.

Management's Discussion and Analysis

The following management discussion and analysis ("MD&A") provides a review of the consolidated financial condition and results of operations of Strongco Income Fund (the "Fund" or "Strongco") and Strongco Inc. (the "Company"), for the three and nine months ended September 30, 2005. This discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements and with the audited consolidated financial statements related to the Company and management's discussion and analysis contained in the Company's annual report. For additional information and details, readers are referred to the Company's quarterly financial statements and quarterly MD&A for fiscal 2004 and 2005, as well as the Company's Annual Information Form ("AIF") and the Management Information Circular ("MIC") dated March 24, 2005, 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.

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 the declaration of Trust dated March 21, 2005.

On February 24, 2005, the Company announced that it had engaged BMO Nesbitt Burns Inc. as its financial advisor in connection with the review of a proposal to transform the Company into a new publicly traded income fund that will carry on the existing Strongco business. The Board of Directors approved a Plan of Arrangement (the "Plan") to proceed with such transformation and an announcement to that effect was made by the Company on March 16, 2005. At the Annual and Special Meeting of shareholders held April 28, 2005, the Plan was approved.

Pursuant to the Plan which became effective on May 6, 2005, the Fund acquired all of the issued and outstanding shares of Strongco Inc. in exchange for units of the Fund on a one for one basis. As a result of which, Strongco Inc. continues to carry on business as a wholly owned subsidiary of Strongco Income Fund.

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 of the following month.



Financial Highlights Three Months Nine Months
Ended Ended
September 30 September 30
2005 2004 2005 2004
---------------------------------------------------------------------

Revenue $102.1 $88.4 $307.4 $248.5
Income before income taxes $5.4 $3.1 $14.3 $6.9
Net income $5.2 $2.3 $11.8 $5.5

Basic earnings per unit $0.52 $0.25 $1.20 $0.59
Diluted earnings per unit $0.52 $0.24 $1.20 $0.57

Dividends per common share $- $0.05 $0.05 $0.05
Distributions per unit $ 0.45 $- $0.75 $-

Total assets $169.9 $151.4


Financial Results - Three Months Ended September 30, 2005

Consolidated revenues for the three months ended September 30, 2005 increased by $13.7 million (15.5%) to $102.1 million from $88.4 million for the three months ended September 30, 2004. As indicated in the chart below, Equipment Distribution revenues increased 18.3% representing a $14.5 million improvement over the third quarter of 2004 which included $2.9 million of revenues from operations in Manitoba which were disposed of in the fourth quarter of 2004. Revenues in the Engineered Systems segment increased by $0.6 million (8.8%) on a comparative quarter basis due to generally stronger capital equipment markets. Revenues in the Equipment Rentals segment declined by $1.4 million from $2.4 million for the third quarter of 2004 to $1.0 million for the third quarter of 2005. Rental revenues in the third quarter of 2004 included $1.3 million of revenues from operations in Saskatchewan which were disposed of in the fourth quarter of 2004.



Revenue by Business Segment

Three months ended September 30 2005 % 2004 % Change
---- - ---- - ------

Equipment Distribution $93.7 91.8% $79.2 89.6% $14.5

Equipment Rentals 1.0 1.0% 2.4 2.7% (1.4)

Engineered Systems 7.4 7.2% 6.8 7.7% 0.6

------ ----- ------
$102.1 100.0% $88.4 100.0% $13.7

Within the Equipment Distribution segment, the increase in revenues
was primarily the result of higher equipment sales in Alberta.


Revenue by Geographic Region

Three months ended September 30 2005 % 2004 % Change
---- - ---- - ------

Eastern (Atlantic / Quebec) $26.3 25.8% $29.2 33.0% $(2.9)

Central (Ontario) 37.9 37.1% 37.8 42.8% 0.1

Western (Manitoba to B.C.) 37.3 36.5% 20.9 23.6% 16.4

Other 0.6 0.6% 0.5 0.6% 0.1

------ ----- ------
$102.1 100.0% $88.4 100.0% $13.7


Gross Margin

Strongco's gross margin for the three months ended September 30, 2005 increased by $2.1 million (12.8%) to $18.5 million from $16.4 million for the three months ended September 30, 2004 due to the higher revenue base.

Within the Equipment Distribution segment, business activities include the sale of machinery, customer support (parts and service) and equipment rentals. Equipment sales generate a significantly lower margin than customer support activities, accounting for 72.9 % of segment revenues and 37.1% of gross margin for this segment in the third quarter of 2005 (69.6% of segment revenues and 31.1% of segment gross margin in the third quarter of 2004). In the third quarter of 2005, gross margin (%) improved over the third quarter of 2004 in both equipment sales and customer support activities, however, overall gross margins (%) declined slightly due to the relative volume of equipment sales.

Within the Equipment Rental segment, gross margins (%) continued to improve despite the lower revenue base as a result of the continuing disposition of the company's underutilized rental fleet.

Gross margins for the Fund's Engineered Systems segment improved by $0.3 million from $1.4 million in the third quarter of 2004 to $1.7 million in the third quarter of 2005 through a combination of higher revenues and a slight improvement in gross margin (%).

Administrative, Distribution and Selling Expense

Administrative, distribution and selling expenses were flat at $13.2 million for the three months ended September 30, 2005 and the three months ended September 30, 2004 as increases in expenses of $1.0 million were offset by the elimination of $1.0 million of expenses associated with the equipment operations in Manitoba and the rental operations in Saskatchewan which were disposed of in the fourth quarter of 2004.

Interest Expense

Strongco's interest expense for the three months ended September 30, 2005 declined to $0.4 million from $0.6 million for the three months ended September 30, 2004. This was primarily a result of the reduction in the Fund's level of interest bearing debt offset by higher interest rates in the third quarter of 2005 versus the third quarter of 2004.

Net Income (loss)

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



Three months ended September 30 2005 2004
---- ----

Equipment Distribution $6.3 $4.9

Equipment Rentals 0.2 -

Engineered Systems 0.2 -

Corporate (1.3) (1.8)

----- -----
$5.4 $3.1


On an after tax basis, Strongco earned $5.2 million ($0.52 per unit basic and diluted) for the three months ended September 30, 2005 compared to net income of $2.3 million ($0.25 per unit basic and $0.24 per unit diluted) during the third quarter of 2004.

Summary of quarterly data



2005
-------------------
($ millions, except per unit amounts) Q3 Q2 Q1
------------------------------------- -------------------

Revenue $102.1 $116.1 $89.2
Income before income taxes $5.4 $6.1 $2.8
Net income $5.2 $4.9 $1.7

Basic earnings per unit $0.52 $0.49 $0.18
Diluted earnings per unit $0.52 $0.49 $0.18


2004
-------------------------
Q4 Q3 Q2 Q1
-------------------------

Revenue $95.2 $88.4 $94.9 $65.3
Income (loss) before income taxes $2.7 $3.7 $4.0 $(0.2)
Net income (loss) $2.2 $2.3 $3.3 $(0.1)

Basic earnings (loss) per unit $0.23 $0.25 $0.35 $(0.01)
Diluted earnings (loss) per unit $0.22 $0.24 $0.34 $(0.01)


2003
-------------------------
Q4 Q3 Q2 Q1
-------------------------

Revenue $81.8 $73.1 $93.1 $72.2
Income (loss) before income taxes $2.1 $1.5 $2.1 $(0.4)
Net income (loss) $1.8 $1.5 $2.2 $(0.5)

Basic earnings (loss) per unit $0.19 $0.16 $0.24 $(0.06)
Diluted earnings (loss) per unit $0.19 $0.16 $0.24 $(0.06)


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

Financial Condition and Liquidity

Cash generated from operating activities was $7.7 million in the third quarter of 2005 compared to cash generated from operating activities of $4.0 million in the third quarter of 2004. This was primarily due to the significantly higher earnings base as well as a decrease in working capital requirements of $1.9 million during the quarter compared to a decrease of $0.6 million during the third quarter of 2004.

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



September 30 September 30
Three Months Ended 2005 2004
------------ ------------

Accounts receivable $0.4 $(1.7)
Inventories (5.9) (2.6)
Prepaids (1.1) (0.9)
------------ ------------
(6.6) (5.2)

Accounts payable and accrued liabilities (3.9) (7.3)
Equipment notes payable - non interest bearing (3.0) 2.1
Equipment notes payable - interest bearing 3.6 0.6
Income & other taxes payable (0.2) -
Accrued benefit liability (1.2) -
------------ ------------
(4.7) (4.6)

------------ ------------
Decrease in non-cash working capital $(1.9) $(0.6)
------------ ------------


Financial Results - Nine Months Ended September 30, 2005

Consolidated revenues for the nine months ended September 30, 2005 increased by $58.9 million (23.7%) to $307.4 million from $248.5 million for the nine months ended September 30, 2004. As indicated in the chart below, Equipment Distribution revenues increased 24.2% representing a $54.3 million improvement over the nine months ended September 30, 2004 which included $11.3 million of revenues from operations in Manitoba which were disposed of in the fourth quarter of 2004. Revenues in the Engineered Systems segment increased by $8.5 million (49.4%) on a comparative basis due to continued strength in project work in agricultural and mining applications. Revenues in the Equipment Rentals segment declined by $3.9 million from $6.5 million for the nine months ended September 30, 2004 to $2.6 million for the nine months ended September 30, 2005. Rental revenues in the nine months ended September 30, 2004 included $3.7 million of revenues from operations in Saskatchewan which were disposed of in the fourth quarter of 2004.



Revenue by Business Segment

Nine months ended September 30 2005 % 2004 % Change
---- - ---- - ------
Equipment Distribution $279.1 90.8% $224.8 90.5% $54.3

Equipment Rentals 2.6 0.8% 6.5 2.6% (3.9)

Engineered Systems 25.7 8.4% 17.2 6.9% 8.5

------ ------- -------
$307.4 100.0% $248.5 100.0% $58.9

Within the Equipment Distribution segment, the increase in revenues
was primarily the result of significantly higher equipment sales.

Within the Engineered Systems segment booking levels remain strong
with the return to more normal capital spending levels across the
country.


Revenue by Geographic Region

Nine months ended September 30 2005 % 2004 % Change
---- - ---- - ------
Eastern (Atlantic / Quebec) $91.3 29.7% $80.6 32.4% $10.7

Central (Ontario) 124.4 40.5% 103.9 41.9% 20.5

Western (Manitoba to B.C.) 89.2 29.0% 62.7 25.2% 26.5

Other 2.5 0.8% 1.3 0.5% 1.2

------ ------- -------
$307.4 100.0% $248.5 100.0% $58.9


Gross Margin

Strongco's gross margin for the nine months ended September 30, 2005 increased by $6.7 million (14.1%) to $54.1 million from $47.4 million for the nine months ended September 30, 2004 as a result of the higher revenue base.

The Fund's gross margin percentage declined by 1.5% from 19.1% in the nine months ended September 30, 2004 to 17.6% in the nine months ended September 30, 2005. This was mainly due to a significantly higher mix of lower margin equipment sales in the first nine months of 2005 (74.5% of equipment distribution segment revenue) versus the first nine months of 2004 (67.8% of equipment distribution segment revenue).

Administrative, Distribution and Selling Expense

Administrative, distribution and selling expenses decreased slightly from $39.5 million for the nine months ended September 30, 2004 to $39.1 million for the nine months ended September 30, 2005 as increases in expenses of $2.6 million relating to higher selling expenses corresponding to the higher equipment sales volume, were offset by the elimination of $3.0 million of expenses associated with the Equipment operations in Manitoba and the Rental operations in Saskatchewan which were disposed of in the fourth quarter of 2004.

During the first quarter of 2005, the Company expensed $1.1 million comprised of advisory fees, legal and audit costs related to the 'Plan of Arrangement' with respect to the Company's conversion to an Income Trust.

Interest Expense

Strongco's interest expense for the nine months ended September 30, 2005 declined to $1.2 million in 2005 from $2.2 million in 2004. This was primarily a result of the reduction in the Fund's level of interest bearing debt offset by higher interest rates in the first nine months of 2005 versus the first nine months of 2004.

Net Income

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



Pre-Tax Income by Segment

Nine months ended September 30 2005 2004
---- ----
Equipment Distribution $17.9 $12.3

Equipment Rentals - (1.4)

Engineered Systems 1.7 (0.3)

Corporate (5.3) (3.7)

----- -----
$14.3 $6.9


On an after tax basis, Strongco earned $11.8 million ($1.20 per unit basic and diluted) for the nine months ended September 30, 2005 compared to income of $5.5 million ($0.59 per unit basic and $0.57 per unit diluted) during the first nine months of 2004. This improvement was through a combination of higher margins and lower interest expense.

Financial Condition and Liquidity

Despite the significantly higher earnings base, cash generated from operating activities was $3.2 million in the first nine months of 2005 compared to cash generated from operating activities of $8.3 million in the first nine months of 2004. This was primarily due to an increase in working capital requirements of $9.9 million during the nine months ended September 30, 2005 compared to an increase in working capital requirements of $1.3 million in the nine months ended September 30, 2004.

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



September 30 September 30
Nine Months Ended 2005 2004
------------ ------------

Accounts receivable $12.3 $(1.0)
Inventories 11.3 (1.3)
Prepaids (0.2) (0.4)
------------ ------------
23.4 (2.7)

Accounts payable and accrued liabilities 1.4 (3.1)
Equipment notes payable - non interest bearing 12.1 7.4
Equipment notes payable - interest bearing (0.7) (8.0)
Income & other taxes payable 0.7 (0.3)
------------ ------------
13.5 (4.0)

------------ ------------
Increase in non-cash working capital $9.9 $1.3
------------ ------------


The increase in working capital requirements in the first nine months of 2005 were primarily comprised of a higher level of receivables and higher inventory levels, partially offset by related equipment financing.



Debt
As at As at
September 30 September 30
2005 2004

Bank indebtedness $3.4 $10.9
Equipment notes payable - non interest bearing 41.9 25.2
Equipment notes payable - interest bearing 27.3 31.8
Current portion of long term debt - 3.2
Long term debt - 0.1

------------ ------------
$72.6 $71.2
------------ ------------


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. Distributable Cash is a non-GAAP measure, and therefore has no standardized meaning prescribed by GAAP and may not be comparable to similar terms and measures presented by other similar issuers. Distributable Cash is intended to provide additional information on the Fund's performance and should not be considered in isolation, seen as a measure of liquidity or as a substitute for measures of performance prepared in accordance with GAAP.



Five months
ended
Distributable cash (in thousands) September 30, 2005
------------------

Net income $9,139

Add (deduct)
Provision for future income tax 140
Depreciation & amortization 990
Capital expenditures (296)
------------------
Distributable cash $9,973
------------------
Add (deduct)
Provision for current income tax 685

------------------
Distributable cash before tax $10,658
------------------

Unitholder distributions declared $7,532


Contractual Obligations

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

There have been no material changes to operating lease and long term debt obligations during the nine months ended September 30, 2005.

Contingent contractual obligations at September 30, 2005 are as follows:



Contingent obligation by period
Less Than 2 to 3 4 to 5 After 5
Total 1 Year years years years
---------------------------------------------------------------------

"Buy back contracts" $5.0 $0.5 $1.9 $1.2 $1.4


Outstanding Units

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



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

October 21, 2005 10,043,185


Risk and Uncertainties

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.

The Fund's financial performance is subject to certain risk factors which may affect any or all of its business sectors. These are more fully detailed in Management's Discussion and Analysis for the year ended December 31, 2004 included in the Company's 2004 Annual Report.

Outlook

Strongco's financial performance in the nine months ended September 30, 2005 met our expectations and we are optimistic for the balance of 2005.

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. 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. Such statements reflect management's current beliefs and are based on information available to them. Management is under no obligation (and expressly disclaims any such obligation) to update or revise the forward looking information, whether as a result of new information, future events or otherwise.

Robin MacLean

President & Chief Executive Officer

October 27, 2005



CONSOLIDATED BALANCE SHEETS
(unaudited)

As at As at As at
September 30 September 30 December 31
(in thousands of dollars) $ 2005 $ 2004 $ 2004
---- ---- ----
ASSETS
Current
Accounts receivable 39,771 29,955 27,447
Inventories 103,028 86,020 91,659
Prepaid expenses and deposits 901 1,418 1,090
------------ ------------ -----------
Total current assets 143,700 117,393 120,196
Rental equipment, net 4,665 12,800 5,975
Capital assets, net 16,277 16,937 16,779
Other assets 145 124 -
Accrued benefit asset 5,100 4,188 4,297
------------ ------------ -----------
169,887 151,442 147,247
------------ ------------ -----------

LIABILITIES AND UNITHOLDERS' EQUITY
Current
Bank indebtedness 3,350 10,940 1,025
Accounts payable and accrued
liabilities 28,580 22,153 27,241
Distributions payable to unitholders 1,506 - -
Equipment notes payable -
non-interest bearing 41,949 25,202 29,828
Equipment notes payable -
interest bearing 27,337 31,822 26,642
Current portion of long-term debt - 3,188 1,183
Income and other taxes payable 798 88 110
------------ ------------ -----------
Total current liabilities 103,520 93,393 86,029
Long-term debt - 96 -
Future income taxes 3,213 2,158 3,301
Accrued benefit liability 498 966 1,199
------------ ------------ -----------
Total liabilities 107,231 96,613 90,529
------------ ------------ -----------


Unitholders' equity
Unitholder capital (note 5) 54,534 - -
Share capital (note 5) - 52,171 52,369
Retained earnings 8,122 2,658 4,349
------------ ------------ -----------
Total unitholders' equity 62,656 54,829 56,718
------------ ------------ -----------
169,887 151,442 147,247
------------ ------------ -----------
See accompanying notes


CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS
(unaudited)

Three months Nine months
(in thousands of dollars, ended September 30 ended September 30
except per unit amounts) $ 2005 $ 2004 $ 2005 $ 2004
---- ---- ---- ----

Revenue 102,080 88,351 307,353 248,490
Cost of sales 83,552 71,917 253,238 201,114
---------- --------- --------- ---------
Gross margin 18,528 16,434 54,115 47,376

Expenses
Administration, distribution
and selling 13,156 13,126 39,091 39,496
Plan of arrangement expense - - 1,100 -
Other income (456) (422) (1,493) (1,264)
---------- --------- --------- ---------
Income before the following 5,828 3,730 15,417 9,144
Interest 409 632 1,163 2,243

---------- --------- --------- ---------
Income before income taxes 5,419 3,098 14,254 6,901
Provision for income taxes
(note 6) 205 779 2,472 1,392

---------- --------- --------- ---------
Net income 5,214 2,319 11,782 5,509
---------- --------- --------- ---------

Retained earnings (deficit),
beginning of period 7,427 810 4,349 (2,380)
Common share dividends - (471) (477) (471)
Unitholder distributions (4,519) - (7,532) -
---------- --------- --------- ---------
Retained earnings, end of
period 8,122 2,658 8,122 2,658
---------- --------- --------- ---------

Basic earnings per unit
Earnings per unit $0.52 $0.25 $1.20 $0.59
---------- --------- --------- ---------
Weighted average number of
units 10,043,185 9,417,711 9,833,766 9,416,312
---------- --------- --------- ---------

Diluted earnings per unit
Earnings per unit $0.52 $0.24 $1.20 $0.57
---------- --------- --------- ---------
Weighted average number of
units 10,043,185 9,605,721 9,833,766 9,588,673
---------- --------- --------- ---------
See accompanying notes


CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

Three months Nine months
ended ended
September 30 September 30
(in thousands of dollars) $ 2005 $ 2004 $ 2005 $ 2004
---- ---- ---- ----
OPERATING ACTIVITIES
Net income 5,214 2,319 11,782 5,509
Add (deduct) items not involving a
current outlay (inflow) of cash
Amortization of rental equipment 358 833 1,114 2,656
Amortization of capital assets 232 261 686 740
Loss on disposal of assets held for sale - - - 14
(Gain) loss on disposal of capital
assets and rental equipment (2) 26 (128) 73
Stock based compensation - 6 102 21
Future income taxes 300 748 (88) 1,929
Other (303) (794) (413) (1,327)
------- ------- ------- --------
5,799 3,399 13,055 9,615
Net change in non-cash working
capital balances
related to operations 1,875 553 (9,897) (1,272)
------- ------- ------- --------
Cash provided by operating activities 7,674 3,952 3,158 8,343

INVESTING ACTIVITIES
Purchase of rental equipment - (3) (20) (43)
Purchase of capital assets (163) (107) (513) (266)
Proceeds on disposal of assets
held for sale - - - 3,966
Proceeds on disposal of capital
assets and rental equipment 64 757 673 2,076
------- ------- ------- --------
Cash provided by (used in) investing
activities (99) 647 140 5,733

FINANCING ACTIVITIES
Increase (decrease) in bank
indebtedness (3,055) (3,244) 2,325 (10,525)
Repayment of long-term debt - (6) - (379)
Decrease in financing of rental
equipment - (885) (1,183) (2,720)
Common share dividends - (471) (477) (471)
Unitholder distributions (4,520) - (6,026) -
Issuance of share capital - 7 2,063 19
------- ------- ------- --------
Cash used in financing activities (7,575) (4,599) (3,298) (14,076)

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

Supplemental cash flow information
Interest paid 398 633 1,189 2,311
Income taxes paid (recovered) 118 (121) 1,891 (318)

See accompanying notes


Notes to Unaudited Interim Consolidated Financial Statements

September 30, 2005 (in thousands of dollars, except per unit amounts or where otherwise noted)

1. Organization

Strongco Income Fund (the "Fund" or "Strongco") is an unincorporated, open-ended, limited purpose trust established under the laws of Ontario pursuant to a declaration of Trust dated March 21, 2005. The Fund was established to invest in the common shares and unsecured subordinated notes of Strongco Inc. (the "Company") pursuant to a Plan of Arrangement (the "Plan") effective May 6, 2005. In accordance with the Plan, each issued and outstanding share of the Company was transferred to the Fund in exchange for one unit of the Fund. The transfer of the common shares of the Company to the Fund was recorded at the carrying values of the Company's assets and liabilities on May 6, 2005 in accordance with the continuity of interest method of accounting as the Fund is considered to be a continuation of the Company.

During the nine months ended September 30, 2005, the Company incurred and expensed $1.1 million of costs with respect to the Company's conversion to an income trust.

2. Basis of Presentation

Management is required to make estimates and assumptions that affect the amounts reported in the unaudited interim consolidated financial statements. Management believes that the estimates are reasonable, however, actual results could differ from these estimates. The unaudited interim consolidated financial statements do not conform in all respects to the disclosure requirements of Canadian GAAP for annual financial statements and should, therefore, be read in conjunction with the Company's 2004 Annual Report.

Certain items in the comparative unaudited interim consolidated financial statements have been reclassified to conform to the presentation adopted in the current period.

3. Summary of Significant Accounting Policies

The unaudited interim consolidated financial statements of the Fund have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP"), using the same accounting policies as outlined in Note 1 of the consolidated financial statements for the Company for the year ended December 31, 2004 except those as listed below.

Basis of Consolidation

The interim consolidated financial statements include the accounts of the Fund and its wholly-owned subsidiary companies. All material intercompany balances and transactions have been eliminated.

Income Taxes

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. Accordingly, no provision for future income taxes for the Fund is made under the recommendations of CICA Handbook section 3465.

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 differences are expected to reverse.

4. Bank Indebtedness

Upon annual renewal, the Fund reduced its operating line of credit to a maximum of $20,000 under the same terms and conditions as outlined in the Company's 2004 Annual Report.

5. Unitholders' Equity and Contributed Surplus

(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 and share capital are as follows:



Share Capital Nine months Nine months
ended ended
September 30, September 30,
2005 2004
--------------- ----------------
Shares Amount Shares Amount
# $ # $
---------------------------------------------------------------------
Common shares, beginning of
period 9,469,885 52,369 9,408,635 52,131
Shares issued pursuant to
exercise of stock options 573,300 2,165 13,750 40
Shares exchanged pursuant to
the Plan of Arrangement (10,043,185) (54,534)
---------------------------------------------------------------------
Common shares, end of period - - 9,422,385 52,171
---------------------------------------------------------------------
---------------------------------------------------------------------


Unitholders' Capital Nine months Nine months
ended ended
September 30, September 30,
2005 2004
-------------- ----------------
Units Amount Units Amount
# $ # $
---------------------------------------------------------------------
Units, beginning of period - - - -
Units issued pursuant to
the Plan of Arrangement 10,043,185 54,534 - -
---------------------------------------------------------------------
Units, end of period 10,043,185 54,534 - -
---------------------------------------------------------------------
---------------------------------------------------------------------


(c) Stock-based compensation plan

Under the terms of the Company's stock based compensation plan, there were certain provisions intended to ensure that the rights of the holder's of options were not adversely affected by certain events, such as the arrangement. In accordance with the provisions of this Plan, the Company permitted all holders of options to exercise their options during a twenty day period following April 13, 2005, after which, all rights of options holders to such options and to exercise same terminated and ceased to have further force and effect.

A summary of the status of the Company's stock option plan and changes for the three and nine months ended September 30, 2005 and 2004 are as follows:



Three months Three months
ended ended
September 30, September 30,
2005 2004
------------- ----------------
Weighted Weighted
Average Average
Shares Exercise Shares Exercise
# Price # Price
---------------------------------------------------------------------
Options outstanding, beginning of period - $- 622,050 $3.50
Exercised - - (5,000) 1.37
Expired / forfeited - - - -
---------------------------------------------------------------------
Options outstanding, end of period - - 617,050 $3.52
---------------------------------------------------------------------
---------------------------------------------------------------------


Nine months Nine months
ended ended
September 30, September 30,
2005 2004
------------- -----------------
Weighted Weighted
Average Average
Shares Exercise Shares Exercise
# Price # Price
---------------------------------------------------------------------
Options outstanding, beginning
of period 580,800 $3.60 630,800 $3.47
Exercised (573,300) 3.60 (13,750) 1.37
Expired / forfeited (7,500) 3.50 - -
---------------------------------------------------------------------
Options outstanding, end of period - - 617,050 $3.52
---------------------------------------------------------------------
---------------------------------------------------------------------


6. Income Taxes

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

Three months Nine months
ended ended
September 30 September 30
2005 2004 2005 2004
$ $ $ $
---------------------------------------------------------------------
Income before income taxes 5,419 3,098 14,254 6,901
---------------------------------------------------------------------
Combined statutory tax rate 34.8% 34.7% 34.8% 34.7%
---------------------------------------------------------------------
---------------------------------------------------------------------

Provision for income taxes at combined
statutory tax rate 1,885 1,073 4,960 2,393
Adjustments thereon for the effect of:
Large Corporations Tax 42 31 136 177
Permanent and other differences 56 (325) 64 (464)
Income of the Fund distributed
to unitholders (1,531) - (2,441) -
Prior year recoveries (247) - (247) (714)
---------------------------------------------------------------------
$205 $779 $2,472 $1,392
---------------------------------------------------------------------
---------------------------------------------------------------------


7. Employee Future Benefits

Net benefit plan expense for the three and nine months ended
September 30, 2005 and 2004 are as follows:

Three months Nine months
ended ended
September 30 September 30
2005 2004 2005 2004
------------ ------------
$ $ $ $

Net benefit plan expense 341 466 1,294 1,136


8. Segmented Information

Segmented information for the three and nine months ended September
30, 2005 and 2004 are as follows :

As at and for the three months ended September 30, 2005
---------------------------------------------------------------------
Equip-
ment Equip- Engin- Recon-
Distri- ment eered Segment ciling Company
bution Rentals Systems Totals Items Total
---------------------------------------------------------------------

Gross Sales 93,726 1,033 7,395 102,154 102,154
Intersegment 1 - 73 74 74
---------------------------------------------------------------------
Net Sales 93,725 1,033 7,322 102,080 - 102,080

Interest expense (330) (31) (48) (409) (409)
Segment profit
(loss) 6,336 178 220 6,734 (1,315)(a) 5,419
Amortization of
capital assets
and rental equipment 187 315 87 589 1 590
Segment total
assets 148,562 4,839 11,359 164,760 5,127(b) 169,887
Segment capital
and rental assets 14,002 4,090 2,821 20,913 29 20,942
Capital and rental
asset expenditures 123 - 40 163 163
---------------------------------------------------------------------


As at and for the three months ended September 30, 2004
---------------------------------------------------------------------
Equip-
ment Equip- Engin- Recon-
Distri- ment eered Segment ciling Company
bution Rentals Systems Totals Items Total
---------------------------------------------------------------------

Gross Sales 79,237 2,381 6,795 88,413 88,413
Intersegment 13 - 49 62 62
---------------------------------------------------------------------
Net Sales 79,224 2,381 6,746 88,351 - 88,351

Interest expense (492) (94) (46) (632) (632)
Segment profit
(loss) 4,896 (19) (16) 4,861 (1,763)(a) 3,098
Amortization of
capital assets
and rental equipment 269 747 74 1,090 4 1,094
Segment total
assets 121,892 14,274 10,592 146,758 4,684(b) 151,442
Segment capital
and rental assets 14,746 12,440 2,521 29,707 30 29,737
Capital and rental
asset expenditures 28 3 79 110 110
---------------------------------------------------------------------


Nine months ended September 30, 2005
---------------------------------------------------------------------
Equip-
ment Equip- Engin- Recon-
Distri- ment eered Segment ciling Company
bution Rentals Systems Totals Items Total
---------------------------------------------------------------------

Gross Sales 279,118 2,599 25,861 307,578 307,578
Intersegment 1 - 224 225 225
---------------------------------------------------------------------
Net Sales 279,117 2,599 25,637 307,353 - 307,353

Interest expense (902) (95) (166) (1,163) (1,163)
Segment profit
(loss) 17,940 (16) 1,704 19,628 (5,374)(a) 14,254
Amortization of
capital assets
and rental equipment 554 985 256 1,795 5 1,800
Capital and rental
asset expenditures 196 1 336 533 533
---------------------------------------------------------------------


Nine months ended September 30, 2004
---------------------------------------------------------------------
Equip-
ment Equip- Engin- Recon-
Distri- ment eered Segment ciling Company
bution Rentals Systems Totals Items Total
---------------------------------------------------------------------

Gross Sales 224,787 6,488 17,415 248,690 248,690
Intersegment 13 - 187 200 200
---------------------------------------------------------------------
Net Sales 224,774 6,488 17,228 248,490 - 248,490

Interest expense (1,753) (348) (142) (2,243) (2,243)
Segment profit
(loss) 12,345 (1,404) (328) 10,613 (3,712)(a) 6,901
Amortization of
capital assets
and rental equipment 847 2,315 222 3,384 12 3,396
Capital and rental
asset expenditures 133 40 136 309 309
---------------------------------------------------------------------


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

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

9. Long-Term Incentive Plan

Key senior management of the Company 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.

10. Contingencies

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.

11. Subsequent Event

On October 27, 2005 the Fund announced a special cash distribution of $0.05 per unit payable on December 20, 2005 to unitholders of record on November 30, 2005.

Contact Information