Strongco Income Fund
TSX : SQP.UN

Strongco Income Fund

October 26, 2006 13:20 ET

Strongco Reports Third Quarter Profits of $0.71 Per Unit Which Includes the $0.29 Per Unit Future Income Tax Recovery Triggered by the Reorganization

MISSISSAUGA, ONTARIO--(CCNMatthews - Oct. 26, 2006) - Strongco Income Fund (TSX:SQP.UN) today released its results for the third quarter of 2006.

For the three months ended September 30th, 2006, Strongco Income Fund ("Strongco") generated net income after tax of $7.2 million, ($0.71 per unit) on revenues of $100.9 million, versus $5.2 million, ($0.52 per unit) on revenues of $102.1 million for the comparable quarter 2005. Notwithstanding this increase in earnings, income before tax for the three months ended September 30th, 2006 was $4.5 million as compared to $5.4 million for the comparable quarter 2005. Net income after tax was positively impacted by $2.9 million ($0.29 per unit) in future income tax amounts existing prior to the reorganization on September 1st, 2006 which have been eliminated and recognized into income.

For the nine months ended September 30th, 2006, Strongco Income Fund generated net income after tax of $18.8 million, ($1.87 per unit) on revenues of $338.5 million versus $11.8 million, ($1.20 per unit), on revenues of $307.4 million for the comparable period in 2005. The Fund generated income before tax of $17.8 million for the nine months ended September 30th, 2006 as compared to $14.3 million for the comparative period in 2005, an increase of $3.5 million or 24%.

On September 1st, 2006, Strongco completed its reorganization, in which all of the operations of the operating company were transferred into the new limited partnership.

Mr. Robin MacLean, President commented, "Our third quarter results declined on a comparable quarter basis largely as a result of weaker forestry equipment sales and our continued investment in product support. We continue to have success with our Volvo and Manitowoc lines and continue to have a strong backlog in our Engineered Systems group. Our results to date, met our expectations and we remain confident for 2006."

Strongco Income Fund also announced today the following cash distribution: $0.18 per unit for November 2006 will be payable on December 20th, 2006 to Unitholders of record at the close of business on November 30th, 2006

Strongco will host a conference call at 9:30 a.m. on Friday, October 27th, 2006, to further discuss its third quarter. To participate in the conference call, dial 416-641-6442 or 1-877-871-4065, reservation number is 21306210 a few minutes prior to 9:30 a.m. on the 27th. A taped version of the call will be available until November 10th, 2006. Dial 416-626-4100 or 1-800-558-5253 and enter the reservation number 21306210.

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 2006. 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:

Len Phillips,
Vice President Administration & Corporate Secretary
Telephone No.: 905-565-3840
Email: lphillips@strongco.com


Report to Unitholders

Strongco's third quarter is typically one of the weaker quarters. Our third quarter 2006 results reflect this traditional cycle.

For the three months ended September 30, 2006, Strongco generated earnings of $0.71 per unit versus earnings of $0.52 per unit in the comparable quarter last year. Notwithstanding this increase in earnings, income before income taxes for the quarter was $4.5 million, after expensing $0.4 million as a result of the reorganization versus $5.4 million for the comparable quarter in 2005 a decline of $0.9 million. Net income after tax was positively impacted by $2.9 million ($0.29 per unit) in future income tax amounts existing prior to the reorganization on September 1, 2006, which have been eliminated and recognized into income. Revenues for the third quarter of 2006 declined 1.2% to $100.9 million versus $102.1 million for the comparable quarter in 2005. Although unit sales increased, the change in mix and decline in forestry equipment sales resulted in the overall decrease.

For the nine months ended September 30, 2006, Strongco generated earnings of $1.87 per unit versus earnings of $1.20 per unit in the comparable period last year. Revenues for the first nine months of 2006 were $338.5 million versus $307.4 million for the comparable period in 2005. Equipment sales, predominately in Alberta, continued to drive revenue growth. Strongco's Volvo construction equipment and Manitowoc crane lines continue to be the main drivers behind this growth. Strong sales in these have been offsetting a weaker performance in the forestry sector.

In September 2006, Strongco was awarded the lattice boom crane line of the Manitowoc Crane Group for the provinces of Alberta, Saskatchewan and Manitoba expanding Strongco's offerings beyond Manitowoc's National and Grove product lines.

On September 1, 2006, the Fund completed a reorganization in which all of the operations of the Strongco Inc. were transferred into a new limited partnership (Strongco Limited Partnership). The Fund expensed $0.6 million ($0.06 per unit) of costs related to this reorganization during the period ended September 30, 2006.

This report contains forward-looking information. Please refer to the "Forward-Looking Statements" section in the accompanying Management Discussion and Analysis.

Management's Discussion and Analysis

The following management discussion and analysis ("MD&A") provides a review of the consolidated financial condition and results of operations of Strongco Income Fund, Strongco GP Inc. ("Strongco GP") and Strongco Limited Partnership (the "Partnership") (collectively referred to as the "Fund" or "Strongco"), for the three and nine months ended September 30, 2006. 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, 2005. For additional information and details, readers are referred to the Fund's quarterly financial statements and quarterly MD&A for fiscal 2005 and 2006 as well as the Fund's Notice of Annual and Special Meeting of Unitholders and Information Circular dated March 24, 2006, and the Fund's Annual Information Form ("AIF") dated March 24, 2006, 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 a declaration of trust dated March 21, 2005 as amended and restated on April 28, 2005 and September 1, 2006.

Pursuant to a Plan of Arrangement (the "Plan"), which became effective on May 6, 2005, Strongco Income Fund acquired all of the issued and outstanding shares of Strongco Inc. (the "Company") in exchange for units of Strongco Income Fund on a one for one basis. As a result, the Company continued to carry on business as a wholly owned subsidiary of Strongco Income Fund. The transfer of the common shares of the Company to Strongco Income 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 Strongco Income Fund is considered to be a continuation of the Company.

On September 1, 2006 Strongco completed a reorganization in which all of the operations of the Company were transferred into a new limited partnership (Strongco Limited Partnership). As a partnership the underlying operations of the Fund are no longer subject to income taxes but rather income taxes are exigible directly at the unitholder level and accordingly, all existing future income tax amounts have been eliminated and recognized in the consolidated statement of income. 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.

Distributions

The Partnership has adopted a policy to distribute an amount of its distributable cash required to provide the Fund with its monthly distributions to Unitholders. Distributions will be made on the units of the Partnership within 30 days following the end of each month and are intended to be received by the Fund prior to its related distribution to Unitholders.

Distributable cash will represent, in general, all the Partnership's available cash subject to: (i) retaining such reasonable working capital and other reserves as may be considered appropriate by the directors of Strongco GP; (ii) the satisfaction of the Partnership's debt service obligations, if any, under credit facilities or other agreements with third parties; (iii) satisfying the Partnership's interest and other expense obligations, and any applicable taxes; (iv) satisfying obligations under the Partnership's long-term incentive plan, and retaining such reserves to stabilize distributions to Unitholders as considered appropriate by the directors of Strongco GP; (v) providing for capital expenditures as considered appropriate by the directors of Strongco GP from time to time; and (vi) applicable law and compliance with any other contractual obligations.

The Fund intends to make monthly cash distributions, generally payable to Unitholders of record on the last business day of each month payable on or about the 20th day of the following month.



Financial Highlights Three Months Ended Nine Months Ended
September 30 September 30
2006 2005 2006 2005
-----------------------------------------------------------------------

Revenue $ 100.9 $ 102.1 $ 338.5 $ 307.4
Income before income taxes $ 4.5 $ 5.4 $ 17.8 $ 14.3
Net income $ 7.2 $ 5.2 $ 18.8 $ 11.8

Basic earnings per unit $ 0.71 $ 0.52 $ 1.87 $ 1.20
Diluted earnings per unit $ 0.71 $ 0.52 $ 1.87 $ 1.20

Dividends per common share $ - - $ - $ 0.05
Distributions per unit $ 0.52 $ 0.45 $ 1.46 $ 0.75

Total assets $ 199.9 $ 170.8


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"), Tigercat Industries, Inc. ("Tigercat"), and the 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 and feed milling and grain handling equipment and their related assemblies.

Financial Results - Three Months Ended September 30, 2006

Consolidated revenues decreased by $1.2 million (1.2%) from $102.1 million in 2005 to $100.9 million in 2006. As indicated in the table below, a $2.1 million decline in Equipment Distribution segment revenues were offset by a slight increase in Engineered Systems segment revenues on a comparative quarter basis.



Revenue by Business Segment

Three months ended September 30 2006 % 2005 % Change
------- ----- ------- ---- -------
Equipment Distribution $ 92.6 91.8% $ 94.7 92.8% $ (2.1)

Engineered Systems 8.3 8.2% 7.4 7.2% 0.9

------- ------- -------
$ 100.9 100.0% $ 102.1 100.0% $ (1.2)


In the third quarter of 2006, Equipment Distribution segment revenues declined slightly (2.2%) by $2.1 million from the comparable period in 2005. The decrease in revenues reflects the seasonality of the equipment sales and a change in the equipment sales mix during the quarter.

In eastern Canada (Atlantic and Quebec), equipment distribution segment revenues declined 9.6%, largely as a result of lower equipment sales.

In the third quarter of 2006, equipment distribution segment revenues in the central region decreased by 3.1% primarily due to lower rental revenue and a decline in parts revenues.

Equipment distribution segment revenues in the western region for the three months ended September 30, 2006 increased by 3.3% on a comparative quarter basis.

Revenues in the Engineered Systems segment for the three months ended September 30, 2006 increased by $0.9 million (12.2%) from $7.4 million in 2005 to $8.3 million in 2006. This increase largely reflects the timing of project shipments.



Revenue by Geographic Region

Three Months Ended September 2006 % 2005 % Change
------- ----- ------- ----- -------
Eastern (Atlantic / Quebec) $ 25.9 25.6% $ 26.3 25.8% $ (0.4)

Central (Ontario) 36.7 36.4% 37.9 37.1% (1.2)

Western (Manitoba to B.C.) 37.7 37.4% 37.3 36.5% 0.4

Other 0.6 0.6% 0.6 0.6% -

------- ------- -------
$ 100.9 100.0% $ 102.1 100.0% $ (1.2)


Gross Margin

Strongco's gross margin for the three months ended September 30, 2006 decreased by $0.4 million (2.2%) to $18.2 million (gross margin percentage - 18.1%) in 2006 from $18.6 million for the three months ended September 30, 2005 (gross margin percentage - 18.3%) due to in the lower 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 72.7 % of segment revenues and 38.3% of gross margin for this segment in the third quarter of 2006 (75.9% of segment revenues and 42.3% of segment gross margin in the third quarter of 2005). In the third quarter of 2006, gross margin (%) improved over the third quarter of 2005 in equipment sales and declined slightly in rentals and customer support activities.

Gross margins for the Fund's Engineered Systems segment were flat at $1.7 million in the third quarter of 2005 and the third quarter of 2006 as a result of the higher revenue base, offset by a lower gross margin percentage (%). The Engineered Systems group sales are comprised of sales of manufactured equipment and distributed products which are purchased for resale. Third quarter shipments included projects that included a larger proportion of sub-contracted components which typically reduce the overall margin.

Administrative, Distribution and Selling Expense

Administrative, distribution and selling expenses remained flat at $13.2 million in the third quarter of 2006 and the third quarter of 2005.

In addition, the Fund expensed $0.4 million in costs related to the reorganization into a limited partnership.

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 distributors region from sources other than the distributor and any gains or losses recognized with respect to foreign exchange. Other income increased slightly by $0.1 million from $0.3 million in the third quarter of 2005 to $0.4 million in the third quarter of 2006.

Interest Expense

Strongco's interest expense increased slightly to $0.6 million in the third quarter of 2006 from $0.4 million in the third quarter of 2005. This was a result of the Fund's higher level of interest bearing debt as well as higher interest rates.

Net Income (loss)

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



Three months ended September 30 2006 2005
------- -------
Equipment Distribution $ 5.5 $ 6.5

Engineered Systems 0.1 0.2

Corporate (1.2) (1.3)
------- -------
$ 4.4 $ 5.4


On an after tax basis, net income was $7.2 million ($0.71 per unit basic and fully diluted) for the three months ended September 30, 2006 compared to net income of $5.2 million ($0.52 per unit basic and fully diluted) during the third quarter of 2005. Third quarter results for 2006 include $2.9 million of future income tax amounts existing prior to the reorganization, which have been eliminated and recognized into income.

Financial Condition and Liquidity

Cash used in operating activities was $1.8 million in the third quarter of 2006 compared to cash provided by operating activities of $7.7 million in the third quarter of 2005. This was primarily due a lower earnings base (excluding the elimination of future income taxes upon the reorganization) as well as an increase in working capital requirements of $5.9 million in the third quarter of 2006 compared to a decrease of $1.9 million in the third quarter of 2005.

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



Three months ended September 30 2006 2005
-------- -------
Accounts receivable $ (11.7) $ 0.4
Inventories (0.9) (5.9)
Prepaids 0.1 (1.1)
Income & other taxes receivable 0.8 -
-------- -------
(11.7) (6.6)

Accounts payable and accrued liabilities (5.4) (3.9)
Deferred revenue and customer deposits 0.8 (3.0)
Equipment notes payable - non interest bearing (14.3) 3.6
Equipment notes payable - interest bearing 1.3 (0.2)
Income & other taxes payable - (1.2)
-------- -------
(17.6) (4.7)

-------- -------
Increase (decrease) in non-cash working capital $ 5.9 $ (1.9)
-------- -------


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

Summary of Quarterly Data

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



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

Revenue $ 100.9 $ 133.3 $ 104.3
Income before income taxes $ 4.5 $ 8.0 $ 5.3
Net income $ 7.2 $ 6.7 $ 4.9

Basic earnings per unit $ 0.71 $ 0.67 $ 0.49
Diluted earnings per unit $ 0.71 $ 0.67 $ 0.49

2005
--------------------------------
Q4 Q3 Q2 Q1
--------------------------------

Revenue $ 105.5 $ 102.1 $ 116.1 $ 89.2
Income before income taxes $ 4.9 $ 5.4 $ 6.1 $ 2.8
Net income $ 4.7 $ 5.2 $ 4.9 $ 1.7

Basic earnings per unit $ 0.47 $ 0.52 $ 0.49 $ 0.18
Diluted earnings per unit $ 0.47 $ 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 $ 3.3 $ 3.1 $ 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)


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

Financial Results - Nine Months Ended September 30, 2006

Consolidated revenues for the nine months ended September 30, 2006 increased by $31.1 million (10.1%) to $338.5 million from $307.4 million for the nine months ended September 30, 2005. As indicated in the table below, the Equipment Distribution segment accounted for the majority of the revenue increase, while the Engineered Systems segment increased slightly on a comparative basis.



Revenue by Business Segment

Nine months ended September 30 2006 % 2005 % Change
------- ----- ------- ----- ------
Equipment Distribution $ 311.4 92.0% $ 281.7 91.6% $ 29.7

Engineered Systems 27.1 8.0% 25.7 8.4% 1.4

------- ------- ------
$ 338.5 100.0% $ 307.4 100.0% $ 31.1


In the nine months ended September 30, 2006, Equipment Distribution segment revenues increased 10.5% representing a $29.7 million improvement over the comparable period in 2005. The increase in revenues within this segment primarily related to equipment sales, corresponding to the continued strong growth in the Alberta construction equipment market. The Volvo product line and our National and Grove crane lines have shown the most significant improvement during the first nine months.

In eastern Canada (Atlantic and Quebec), equipment distribution segment revenues declined slightly from 2005 levels. Although forestry equipment sales remained weak, any declines were offset by increases in construction equipment sales and equipment sales into the mining sector.

In the central region, equipment distribution segment revenues for the nine months ended September 30, 2006 increased by 1.6% versus the nine months ended September 30, 2005. Steady commercial and residential construction resulted in improved equipment sales.

In the western region, equipment distribution segment revenues increased by 36.6% versus the comparative nine month period in 2005. Accelerated commercial, residential, and infrastructure spending continued with the resource boom in Alberta.

Within the equipment distribution segment, revenues from customer support activities (parts and service) increased by 2.1% from 2005 levels. Product support remains a focus and investment centre for Strongco. Product support growth typically lags and is more modest than equipment sales growth. Although we have increased the available resources in product support a higher proportion of these product support resources are directed to pre-delivery inspections and warranty work during periods of high equipment sales. Customer support revenues typically are not impacted until the new equipment is out of the warranty period which can be anywhere between 1 and 3 years after new machine delivery.

Revenues in the Engineered Systems segment increased by $1.4 million (5.5%) from $25.7 million for the nine months ended September 30, 2005 to $27.1 million for the nine months ended September 30, 2006. During the second quarter of 2006, the Engineered Systems group wound down its construction group. Although, the construction group had contributed $2.2 million of revenues during the first quarter of 2006 completing earlier projects, it had since been relatively inactive especially during the last nine months due to its focus on the agricultural market segment which has been in steady decline. There were no significant costs associated with the wind down of this group. Overall for our Engineered Systems segment, the focus and activity in the industrial sector has more than offset this decline during the first nine months of 2006. Although revenues have not increased significantly, the year to date revenues solely reflects the timing of deliveries as the underlying sales order levels are much higher than in prior years. There is $7.5 million of deferred revenue on the balance sheet for this segment relating to orders which are expected to be shipped in the latter part of this year and early next year.



Revenue by Geographic Region

Nine months ended September 30 2006 % 2005 % Change
------- ----- ------- ----- ------

Eastern (Atlantic / Quebec) $ 92.0 27.1% $ 91.3 29.7% $ 0.7

Central (Ontario) 128.8 38.1% 124.4 40.5% 4.4

Western (Manitoba to B.C.) 114.7 33.9% 89.2 29.0% 25.5

Other 3.0 0.9% 2.5 0.8% 0.5

------- ------- ------
$ 338.5 100.0% $ 307.4 100.0% $ 31.1


Gross Margin

Strongco's gross margin for the nine months ended September 30, 2006 increased by $5.6 million (10.3%) to $60.0 million (gross margin percentage - 17.7%) in 2006 from $54.4 million for the nine months ended September 30, 2005 (gross margin percentage - 17.7%) due to in 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 75.9 % of segment revenues and 42.3% of gross margin for this segment in the nine months ended September 30, 2006 (73.8% of segment revenues and 38.0% of segment gross margin in the nine months ended September 30, 2005). In the nine months ended September 30, 2006, gross margin (%) improved slightly over the comparable period in 2005 in equipment sales and in customer support activities.

Gross margins for the Fund's Engineered Systems segment were slightly lower at $6.0 million for the nine months ended September 30, 2006 versus $6.1 million for the comparable period in 2005. This decrease relates to the relative mix of manufactured versus distributed products sales and product mix during the period.

Administrative, Distribution and Selling Expense

Administrative, distribution and selling expenses increased by $2.1 million from $39.1 million for the nine months ended September 30, 2005 to $41.2 million for the nine months ended September 30, 2006. The increase in expenses was primarily related to higher selling expenses corresponding to the generation of higher equipment sales volume, as well as additional expenses in the customer support departments relating to the hiring of additional customer support representatives and service technicians in the latter half of 2005.

In addition, the Fund expensed $0.6 million in costs related to the reorganization into a limited partnership.

Interest Expense

Strongco's interest expense for the nine months ended September 30 increased to $1.6 million in 2006 from $1.2 million in 2005. This was primarily a result of the increase in the Fund's level of interest bearing debt as well as higher interest rates in the first nine months of 2006 versus the first nine months of 2005.

Net Income

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



Pre-Tax Income by Segment

Nine months ended September 30 2006 2005
------- -------

Equipment Distribution $ 20.3 $ 17.9

Engineered Systems 1.3 1.7

Corporate (3.8) (5.3)

------- -------
$ 17.8 $ 14.3


On an after tax basis, Strongco earned $18.8 million ($1.87 per unit basic and fully diluted) for the nine months ended September 30, 2006 compared to income of $11.8 million ($1.20 per share basic and fully diluted) during the first nine months of 2005. Results for the nine months ended September 30, 2006 include $2.9 million of future income tax amounts existing prior to the reorganization which have been eliminated and recognized into income.

Financial Condition and Liquidity

Cash provided by operating activities was $12.1 million in the nine months ended September 30, 2006 compared to $3.2 million in the nine months ended September 30, 2005. This was primarily due to the significantly higher earnings base as well as an increase in working capital requirements of $3.9 million in the first nine months of 2006 compared to an increase of $9.9 million in the first nine months of 2005.

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



September 30 September 30
Nine Months Ended 2006 2005
------------ ------------
Accounts receivable $ - $ 11.6
Inventories 27.3 11.4
Prepaids 1.1 (0.2)
Income and other taxes receivable 0.2 -
------------ ------------
28.6 22.8

Accounts payable and accrued liabilities 5.8 2.0
Deferred revenue and customer deposits 6.9 (1.4)
Equipment notes payable - non interest bearing 6.9 12.1
Equipment notes payable - interest bearing 5.1 0.7
Income & other taxes payable - 0.7
Accrued benefit liability - (1.2)
------------ ------------
24.7 12.9

------------ ------------
Increase in non-cash working capital $ 3.9 $ 9.9
------------ ------------

Debt

As at As at
September 30 September 30
2006 2005
------------ ------------

Bank indebtedness 3.9 3.4
Equipment notes payable - non interest bearing 46.3 41.9
Equipment notes payable - interest bearing 35.2 27.3

------------ ------------
85.4 72.6
------------ ------------


Strongco's working capital requirements are supported by a secured, revolving demand facility provided by a schedule 2 Canadian chartered bank. In addition, various non-bank lenders provide secured wholesale financing on equipment inventory ("equipment notes payable"), some of which is interest free for periods up to twelve months from the date of financing. Interest rates float with the prime or one month bankers 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 Nine months
ended ended
Distributable cash (in thousands) September 30, 2006 September 30, 2006
------------------ ------------------

Cash (used in) provided by
operating activities $ (1,842) $ 12,145

Add (deduct)
Net change in non-cash working
capital balances related to
operations 5,904 3,859
Capital expenditures (287) (958)

------------------ ------------------
Distributable cash $ 3,775 $ 15,046
------------------ ------------------

Unitholder distributions declared $ 5,223 $ 14,663


Capital expenditures levels have increased during the first nine months of 2006 from historical levels. With the increase in revenues and strong growth in certain markets, the Fund has made additional investments in infrastructure including equipment and buildings.

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 in note 8 to the financial statements), the Fund has structured its distribution policy to declare regular monthly distributions evenly throughout the year, despite quarterly fluctuations in earnings. Consequently, the results of the third quarter or the nine month period ended September 30, 2006 should not be considered representative of a twelve month period of distributable cash. Distributions for the three months ended September 30, 2006, have been funded from an excess of distributable cash over distributions over the first six months of the year. For the nine months ended September 30, 2006, other than normal operational requirements, Strongco has not specifically borrowed amounts to finance distributions.



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

Net income $ 7,137 $ 18,786

Add (deduct)
Provision for future income tax (2,925) (3,086)
Depreciation & amortization 478 1,512
Write-down of rental equipment - 61
Gain on disposition of assets (235) (303)
Stock based compensation 4 9
Change in non-cash post retirement
benefits and accrued benefit assets (199) (635)
Other (198) (340)
Capital expenditures (287) (958)

------------------ ------------------
Distributable cash $ 3,775 $ 15,046
------------------ ------------------

Add (deduct)
Provision for current income tax 206 2,051

------------------ ------------------
Distributable cash before tax $ 3,981 $ 17,097
------------------ ------------------


Strongco Income Fund was established pursuant to a Plan of Arrangement effective May 6, 2005. A comparison of distributable cash for the three and five months ended September 30, 2005 and September 30, 2006 is as follows:



Three months Three months
ended ended
Distributable cash (in thousands) September 30, 2006 September 30, 2005
------------------ ------------------

Cash (used in) provided by operating
activities $ (1,842) $ 7,674

Add (deduct)
Net change in non-cash working
capital balances related to
operations 5,904 (1,875)
Capital expenditures (287) (163)

------------------ ------------------
Distributable cash $ 3,775 $ 5,636
------------------ ------------------

Unitholder distributions declared $ 5,223 $ 4,519


Three months Three months
ended ended
Distributable cash (in thousands) September 30, 2006 September 30, 2005
------------------ ------------------

Net income $ 7,137 $ 5,214

Add (deduct)
Provision for future income tax (2,925) 300
Depreciation & amortization 478 590
Write-down of rental equipment - -
Gain on disposition of assets (235) (2)
Stock based compensation 4 -
Change in non-cash post retirement
benefits and accrued benefit assets (199) (263)
Other (198) (40)
Capital expenditures (287) (163)

------------------ ------------------
Distributable cash $ 3,775 $ 5,636
------------------ ------------------

Add (deduct)
Provision for current income tax 206 (95)

------------------ ------------------
Distributable cash before tax $ 3,981 $ 5,541
------------------ ------------------


Five months Five months
ended ended
Distributable cash (in thousands) September 30, 2006 September 30, 2005
------------------ ------------------

Cash provided by operating activities $ 5,168 $ 1,148

Add (deduct)
Net change in non-cash working
capital balances related to
operations 3,614 9,714
Capital expenditures (449) (296)

------------------ ------------------
Distributable cash $ 8,333 $ 10,566
------------------ ------------------

Unitholder distributions declared $ 8,636 $ 7,532


Five months Five months
ended ended
Distributable cash (in thousands) September 30, 2006 September 30, 2005
------------------ ------------------

Net income $ 11,981 $ 9,139

Add (deduct)
Provision for future income tax (3,031) 140
Depreciation & amortization 796 990
Write-down of rental equipment 14 -
Gain on disposition of assets (260) (10)
Stock based compensation 6 -
Change in non-cash post retirement
benefits and accrued benefit assets (363) 685
Other (361) (82)
Capital expenditures (449) (296)

------------------ ------------------
Distributable cash $ 8,333 $ 10,566
------------------ ------------------

Add (deduct)
Provision for current income tax 1,326 685

------------------ ------------------
Distributable cash before tax $ 9,659 $ 11,251
------------------ ------------------


Contractual Obligations

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

There have been no material changes to operating lease and long term debt obligations during the nine months ended September 30, 2006.

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



Payment due by period
Less Than 1 to 3 4 to 5 After 5
Total 1 Year years years years
------------------------------------------------------------------

Operating leases 20.2 1.5 13.5 4.0 1.2


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

"Buy back contracts" 5.9 2.3 1.2 1.4 1.0


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 23, 2006 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.

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 6 months or more.

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 cancelable by either party within a relatively short notice period as specified in the 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 Consolidated Financial Statements as appropriate. These liabilities could arise from litigation, environmental matters or other sources.

A statement of claim has been filed on August 30, 2005, naming a division of the Partnership 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 name 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 Partnership 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 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 is supported by the Fund's Information Systems Manager who will be retiring at the end of this year. Following this retirement, the Fund will utilize an outside consultant to support the system while an evaluation of current and future requirements is undertaken during the upcoming period.

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 a Partnership interest. 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 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 the borrower'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 borrower to incur additional indebtedness, to create other security interests, to complete mergers, amalgamations and acquisitions, to undertake an unsolicited take-over bid utilizing the existing credit facilities, make capital expenditures, to pay dividends or make certain other payments, investments, loans and guarantees and to sell or otherwise dispose of assets. The existing credit facilities also contain financial covenants requiring the borrower to satisfy financial ratios and tests. A failure of the borrower 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 borrower, a leasehold mortgage over the Partnership's central real property and a first ranking pledge of all present and future material subsidiaries of the borrower and an assignment of insurance. If the borrower 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, if the indebtedness under the existing credit facilities were to be accelerated, the borrower'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 Deferred Income Plans and RESPs. The Fund will endeavour to ensure that the Units continue to be qualified investments for Deferred Income Plans and RESPs. The Tax Act imposes penalties for the acquisition or holding of non-qualified investments in such plans and there is no assurance that the conditions prescribed for such qualified investments will be adhered to at any particular time. Finally, if the Fund ceases to qualify as mutual fund trust for purposes of the Tax Act, the Fund will be required to pay tax under Part XII.2 of the Tax Act. The payment of Part XII.2 tax by the Fund will affect the amount of cash available for distribution by the Fund and may have adverse consequences for Unitholders.

Outlook

Strongco's financial performance for the nine months ended September 30, 2006 met our expectations and we remain confident for the balance of 2006. We continue to enjoy a high sales order backlog for our engineered systems segment. We expect to continue to benefit from the strong demand for our products and services particularly in Alberta although at a less accelerated rate.

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, (iii) the expectation that the Engineered systems group will be able to ship and realize revenue on $7.5 of deferred revenue currently on the balance sheet and (iv) the outlook for the balance of 2006. These statements are based on a number of assumptions, including, but not limited to, continued demand for our products and services, particularly in Alberta. 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 and in the Management's Discussion and Analysis section of the 2005 Annual Report which can be found on SEDAR at www.sedar.com. 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 hereof and the Fund does not assume any obligation to update or revise them to reflect new events or circumstances.

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

Robin MacLean, President and Chief Executive Officer



CONSOLIDATED BALANCE SHEETS
(unaudited)

As at As at As at
September 30 September 30 December 31
(in thousands of dollars) $ 2006 $ 2005 $ 2005
------- ------- -------

ASSETS
Current
Accounts receivable 38,162 40,643 38,217
Inventories 133,522 103,028 106,238
Prepaid expenses and deposits 1,831 901 774
Income and other taxes receivable 803 - 570
------- ------- -------
Total current assets 174,318 144,572 145,799
Rental equipment, net 2,917 4,665 3,840
Capital assets, net 16,154 16,277 16,133
Other assets 405 145 -
Accrued benefit asset 6,079 5,100 5,440
------- ------- -------
199,873 170,759 171,212
------- ------- -------

LIABILITIES AND UNITHOLDERS' EQUITY
Current
Bank indebtedness 3,912 3,350 1,327
Accounts payable and accrued liabilities 36,022 28,291 30,226
Distributions payable to unitholders 1,808 1,506 1,506
Deferred revenue and customer deposits 9,407 1,161 2,478
Equipment notes payable -
non-interest bearing 46,301 41,949 39,373
Equipment notes payable - interest bearing 35,200 27,337 30,144
Income and other taxes payable (note 5) - 798 -
------- ------- -------
Total current liabilities 132,650 104,392 105,054
Future income taxes - 3,213 3,086
Accrued benefit liability 747 498 743
Other liabilities 65 - -
------- ------- -------
Total liabilities 133,462 108,103 108,883
------- ------- -------

Unitholders' equity
Unitholder capital (note 4) 54,534 54,534 54,534
Deferred compensation (note 4) (41) - -
Retained earnings 11,918 8,122 7,795
------- ------- -------
Total unitholders' equity 66,411 62,656 62,329
------- ------- -------
199,873 170,759 171,212
------- ------- -------

See accompanying notes


CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(unaudited)

(in thousands of Three months Nine months
dollars, except ended September 30 ended September 30
per unit amounts) $ 2006 $ 2005 $ 2006 $ 2005
---- ---- ---- ----

Revenue 100,922 102,080 338,483 307,353
Cost of sales 82,697 83,426 278,470 252,914
------- ------- ------- -------
Gross margin 18,225 18,654 60,013 54,439

Expenses
Administration,
distribution and selling 13,232 13,156 41,188 39,091
Reorganization expense
(note 1) 413 - 616 1,100
Other income (417) (330) (1,169) (1,169)

------- ------- ------- -------
Income before the
following 4,997 5,828 19,378 15,417

Interest 579 409 1,627 1,163

------- ------- ------- -------
Income before income taxes 4,418 5,419 17,751 14,254
(Recovery of) provision
for income taxes (note 5) (2,719) 205 (1,035) 2,472

------- ------- ------- -------
Net income 7,137 5,214 18,786 11,782
------- ------- ------- -------

Retained earnings,
beginning of period 10,004 7,427 7,795 4,349
Common share dividends - - - (477)
Unitholder distributions (5,223) (4,519) (14,663) (7,532)
------- ------- ------- -------
Retained earnings, end
of period 11,918 8,122 11,918 8,122
------- ------- ------- -------

Basic earnings per unit
Earnings per unit $ 0.71 $ 0.52 $ 1.87 $ 1.20
-------- -------- -------- --------
Weighted average
number of units 10,043,185 10,043,185 10,043,185 9,833,766
---------- ---------- ---------- ---------

Diluted earnings per
unit
Earnings per unit $ 0.71 $ 0.52 $ 1.87 $ 1.20
---------- ---------- ---------- ---------
Weighted average
number of units 10,043,185 10,043,185 10,043,185 9,833,766
---------- ---------- ---------- ---------

See accompanying notes


CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

Three months Nine months
ended September 30 ended September 30
(in thousands of dollars) $ 2006 $ 2005 $ 2006 $ 2005
---- ---- ---- ----

OPERATING ACTIVITIES
Net income 7,137 5,214 18,786 11,782
Add (deduct) items not
involving a current outlay
(inflow) of cash
Amortization of rental equipment 247 358 813 1,114
Amortization of capital assets 231 232 699 686
Write-down of rental equipment - - 61 -
Gain on disposal of capital assets
and rental equipment (235) (2) (303) (128)
Stock based compensation 4 - 9 102
Future income taxes (note 5) (2,925) 300 (3,086) (88)
Other (397) (303) (975) (413)
------- ------ ------- ------
4,062 5,799 16,004 13,055

Net change in non-cash
working capital balances
related to operations (5,904) 1,875 (3,859) (9,897)
------- ------ ------- ------
Cash provided by (used in)
operating activities (1,842) 7,674 12,145 3,158

INVESTING ACTIVITIES
Purchase of rental equipment (5) - (222) (20)
Purchase of capital assets (282) (163) (736) (513)
Proceeds on disposal of
capital assets and rental equipment 424 64 590 673
------- ------ ------- ------
Cash provided by (used in)
investing activities 137 (99) (368) 140

FINANCING ACTIVITIES
Increase (decrease) in bank
indebtedness 3,912 (3,055) 2,585 2,325
Decrease in financing of
rental equipment - - - (1,183)
Common share dividends - - - (477)
Unitholder distributions (5,122) (4,520) (14,362) (6,026)
Issuance of share capital - - - 2,063
------- ------ ------- ------
Cash used in financing
activities (1,210) (7,575) (11,777) (3,298)

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

Supplemental cash flow information
Interest paid 596 398 1,584 1,189
Income taxes paid 1,050 118 2,251 1,891

See accompanying notes


Notes to Unaudited Interim Consolidated Financial Statements

September 30, 2006 (in thousands of dollars, except per unit amounts or where otherwise noted)

1. ORGANIZATION

Strongco Income Fund (the "Fund" or "Strongco") is an unincorporated, open-ended, limited purpose trust established under the laws of Ontario pursuant to a declaration of trust dated March 21, 2005, as amended and restated on April 28, 2005 and September 1, 2006. 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. All references to units, earnings per unit and Unitholder's equity shall mean share, earnings per share and Shareholder's equity for periods prior to May 6, 2005.

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 which will continue to carry on the business.

During the quarter ended March 31, 2005, the Company incurred and expensed $1.1 million of costs with respect to the Company's conversion to an income trust.

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

2. BASIS OF PRESENTATION

Management is required to make estimates and assumptions that affect the amounts reported in the unaudited interim consolidated financial statements. Management believes that the estimates are reasonable, however, actual results could differ from these estimates. The unaudited interim consolidated financial statements do not conform in all respects to the disclosure requirements of Canadian GAAP for annual financial statements and should, therefore, be read in conjunction with the Fund's 2005 Annual Report.

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 2 of the consolidated financial statements for the Fund for the year ended December 31, 2005.

Basis of Consolidation

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

4. 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 are as follows:

Unitholders' Capital Nine months ended Nine months ended
September 30, 2006 September 30, 2005
------------------ ------------------
Units Amount Units Amount
# $ # $
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Units, beginning of period 10,043,185 54,354 9,469,885 52,369
Units issued pursuant to
the exercise of options - - 573,300 2,165
-------------------------------------------------------------------------
Units, end of period 10,043,185 54,354 10,043,185 54,534
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deferred compensation (41) -
-------------------------------------------------------------------------
-------------------------------------------------------------------------


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



5. INCOME TAXES

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

Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
$ $ $ $
----------------------------------------------------------------------
Current income tax expense 206 (95) 2,051 2,560
Future income tax recovery (2,925) 300 (3,086) (88)
----------------------------------------------------------------------
(2,719) 205 (1,035) 2,472
----------------------------------------------------------------------
----------------------------------------------------------------------


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



Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
$ $ $ $
---------------------------------------------------------------------------
Income before income taxes 4,418 5,419 17,751 14,254
---------------------------------------------------------------------------
Combined statutory tax rate 34.7% 34.8% 34.7% 34.8%
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Provision for income taxes at combined
statutory tax rate 1,533 1,885 6,160 4,960
Adjustments thereon for the effect of:
Large Corporations Tax - 42 - 136
Permanent and other differences 66 56 229 64
Change in tax rates (15) - (146) -
Income of the Fund distributed to
unitholders (1,441) (1,531) (4,435) (2,441)
Prior year (recoveries) expense - (247) 19 (247)
Future income tax recoveries to
August 31, 2006 (2,862) - (2,862) -
---------------------------------------------------------------------------
$ (2,719) $ 205 $ (1,035) $ 2,472
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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 are no longer subject to income taxes but rather income taxes would be exigible directly at the unitholder level and accordingly, all existing future income tax amounts have been eliminated and recognized in the consolidated statement of income.

6. POST RETIREMENT OBLIGATIONS

Net benefit plan expense for the three and nine months ended September 30, 2006 and 2005 are as follows:



Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
------------------ -----------------
$ $ $ $

Net benefit plan expense 343 341 1,018 1,294


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 nine months ended September 30, 2006 was $87.

7. SEGMENTED INFORMATION

Segmented information for the three and nine months ended September 30, 2006 and 2005 are as follows:



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

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

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


As at and for the three months ended September 30, 2005
---------------------------------------------------------------------------
Equipment Engineered Segment Reconciling Fund
Distribution Systems totals Items total
---------------------------------------------------------------------------

Gross sales 94,759 7,395 102,154 102,154
Intersegment 1 73 74 74
---------------------------------------------------------------------------
Net sales 94,758 7,322 102,080 - 102,080
---------------------------------------------------------------------------

Interest expense (361) (48) (409) (409)
Income before income taxes 6,514 220 6,734 (1,315)(a) 5,419
Amortization of capital
assets and rental equipment 502 87 589 1 590
Segment total assets 154,273 11,359 165,632 5,127(b) 170,759
Segment capital and
rental assets 18,092 2,821 20,913 29 20,942
Capital and rental asset
expenditures 123 40 163 163
---------------------------------------------------------------------------


Nine months ended September 30, 2006
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Equipment Engineered Segment Reconciling Fund
Distribution Systems totals Items total
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Gross sales 311,352 27,384 338,736 338,736
Intersegment - 253 253 253
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Net sales 311,352 27,131 338,483 - 338,483
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Interest expense (1,399) (228) (1,627) (1,627)
Income before income taxes 20,240 1,308 21,548 (3,797)(a) 17,751
Amortization of capital
assets and rental equipment 1,223 285 1,508 4 1,512
Write-down of rental
equipment 61 - 61 61
Capital and rental
asset expenditures 571 384 955 3 958
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Nine months ended September 30, 2005
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Equipment Engineered Segment Reconciling Fund
Distribution Systems totals Items total
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Gross sales 281,717 25,861 307,578 307,578
Intersegment 1 224 225 225
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Net sales 281,716 25,637 307,353 - 307,353
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Interest expense (997) (166) (1,163) (1,163)
Income before income taxes 17,924 1,704 19,628 (5,374)(a) 14,254
Amortization of capital
assets and rental equipment 1,539 256 1,795 5 1,800
Capital and rental
asset expenditures 197 336 533 533
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(a) The reconciling items to adjust segment profit (loss) represent common costs not allocated to the segments and head office costs incurred during the period.

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

8. SEASONALITY OF BUSINESS

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

9. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS

The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 2006 consolidated financial statements.

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