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Strongco Reports Fourth Quarter Profits of $0.38 per Unit and Announces Distribution Reduction


WEBWIRE

MISSISSAUGA, ONTARIO -- Strongco Income Fund (TSX: SQP.UN) today released its results for the fourth quarter of 2006 and announced Distribution Reduction.

For the three months ended December 31st, 2006, Strongco Income Fund (“Strongco”) generated net income after tax of $3.8 million, ($0.38 per unit) on revenues of $118.4 million, versus $4.7 million, ($0.47 per unit) on revenues of $105.5 million for the comparable quarter 2005. The increase in revenues came from both equipment sales and the Engineered Systems group. Earnings were down as Strongco encountered increased competition in the Equipment Distribution segment and an Engineered Systems sales mix that included a higher proportion of subcontracted component sales.

For the fiscal year ended December 31st, 2006, Strongco Income Fund generated record net income after tax of $22.6 million, ($2.25 per unit) on revenues of $456.9 million versus $16.5 million, ($1.67 per unit), on revenues of $412.9 million for fiscal 2005. Net income before tax, a more comparable figure taking into account the Reorganization, was $21.5 million for the fiscal year ended December 31st, 2006 as compared to $19.2 million in 2005.

In light of the market conditions experienced in the latter portion of 2006 and continued softening in the construction equipment sector, particularly in the west, Strongco Income Fund announced today that it will be decreasing monthly cash distributions from $0.18 per unit to $0.10 per unit effective with the March distribution payable on April 20, 2007 to unit holders of record at the close of business on March 31, 2007.

Mr. Robin MacLean, President commented, “Although our 2006 results are a record for Strongco, we are concerned moving into 2007. After a couple of years of accelerated growth and strong results, 2007 is expected to be a far more challenging year with equipment manufacturers seeking to reduce inventory levels, resulting in increased competition and margin pressure. This, coupled with potential further weakening in economic conditions has resulted in a decision to take a more cautious approach to distribution levels at this time. Although this represents a significant reduction in our distribution level, we feel that $0.10 per unit is more reflective of our current outlook for 2007.”

Strongco will host a conference call at 9:30 a.m. on Thursday, March 15, 2007, to further discuss its fourth quarter. To participate in the conference call, dial 416-641-6440 or 1-877-871-4065, reservation number is 21329223 a few minutes prior to 9:30 a.m. on the 15th. A taped version of the call will be available until March 29, 2007. Dial 416-626-4100 or 1-800-558-5253 and enter the reservation number 21329223.

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 2007. 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

Management’s Discussion and Analysis
The following management discussion and analysis (“MD&A”) provides a review of the consolidated financial condition and results of operations of Strongco Income Fund, Strongco GP Inc. (“Strongco GP”) and Strongco Limited Partnership (the “Partnership”) (collectively referred to as the “Fund” or “Strongco”), for the year ended December 31, 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, 2006. 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, all of which are published separately and are available on SEDAR at www.sedar.com.

Unless otherwise indicated, all financial information within this discussion and analysis is in Canadian dollars millions except per unit amounts. The information in this MD&A is current to March 14, 2007.

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.

On October 31, 2006, the Government of Canada announced its Tax Fairness Plan that proposed changes to the way income trusts and their investors are taxed. The proposed changes would affect existing publicly traded trusts and partnerships commencing with the 2011 taxation year (assuming those trusts and partnerships adhere to the guidelines on “normal growth” as defined by the Department of Finance on December 15, 2006). Under draft legislative proposals that were released on December 21, 2006, distributions by the Fund would be subject to a distribution tax. The Fund is currently considering these proposals and the possible impact they will have on the Fund and its investors. If the proposed tax for 2011 of 31.5% had been applied on a proforma basis to the Fund’s 2006 taxable Canadian income, the Fund’s earnings and cash provided by operating activities would have been reduced by approximately $5.4 million or $0.54 per unit. However, at December 31, 2006 the legislation had not yet been introduced in Parliament and these proposals are not expected to have an immediate impact on the Fund’s tax treatment or the tax treatment of distributions to investors.

Distributions

The Fund’s policy is to make distributions of it’s 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.

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

Financial Highlights

($ millions, except per unit amounts) 2006 2005 2004
--------------------------------------------------------------------

Revenues $ 456.9 $ 412.9 $ 343.8
Income before income taxes $ 21.5 $ 19.2 $ 10.2
Net income $ 22.6 $ 16.5 $ 7.7

Basic earnings per unit $ 2.25 $ 1.67 $ 0.81
Diluted earnings per unit $ 2.25 $ 1.67 $ 0.80

Dividends per common share $ - $ 0.05 $ 0.10
Distributions per unit $ 2.00 $ 1.25 $ -

Total assets $ 200.5 $ 171.2 $ 148.9

Debt $ 79.1 $ 70.8 $ 58.7

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 Manitowoc Crane Group (“Manitowoc”). The Engineered Systems segment designs, manufactures, sells, installs and services dry bulk material handling equipment, including belt conveyors, screw conveyors, idlers, feed milling and grain handling equipment and their related assemblies.

In 2006, Strongco continued to focus on its core business of mobile equipment sales and service and its engineered systems group. With this strong foundation, Strongco began executing its plans to lead in product support and customer care. In 2005 and 2006, Strongco has continued to invest in product support. This has resulted in an increased expense base but this is viewed as a necessary investment to generate continued product support and equipment sales growth.

In 2006 Strongco generated net income of $22.6 million ($2.25 per unit) as compared to net income of $16.5 million ($1.67 per unit) in 2005. Income before income taxes, a more comparable measure given the reorganization, was $21.5 million for 2006 as compared to $19.2 million in 2005, an increase of 12.0% . By either measure, net income or income before income taxes, the 2006 results are a record high for Strongco.

Financial Results - Annual

Consolidated revenues increased by $44.0 million (10.7%) from $412.9 million in 2005 to $456.9 million in 2006. As indicated in the chart below, the Equipment Distribution segment accounted for the majority of the revenue increase, while the Engineered Systems segment revenues included $6.2 million for one large project.

Revenue by Business Segment

($ millions) 2006 % 2005 % Change
-------- ------ -------- ------ ------

Equipment Distribution $ 414.9 90.8% $ 379.6 91.9% $ 35.3

Engineered Systems 42.0 9.2% 33.3 8.1% 8.7

-------- -------- ------
$ 456.9 100.0% $ 412.9 100.0% $ 44.0

In 2006, Equipment Distribution segment revenues increased 9.3% representing a $35.3 million improvement over 2005. Within this segment, the increase in revenues related to equipment sales, corresponding to continued strong growth in the Alberta construction equipment market.
In eastern Canada (Atlantic and Quebec), equipment sales increased 4.6% . Although infrastructure and construction projects continued in eastern Canada, construction equipment sales gains were offset by weaker sales into the forestry sector as compared to prior years. The forestry industry in the east was down significantly, negatively impacting both equipment sales and product support activity.

In 2006, equipment sales revenues in the central region decreased by 1.2% compared to 16.9% growth in 2005. Construction equipment sales gains were offset by the significant decline in forestry equipment sales.

During 2006, equipment sales revenues in the western region increased by 36.5% corresponding to the accelerated commercial, residential and infrastructure spending in Alberta. Resource based projects in Alberta continued at record levels driving all construction segments. However, as the year progressed, equipment sales growth moderated as other issues came into play such as operator availability.

In 2006, Strongco experienced the greatest year over year growth in our Volvo construction equipment and Manitowoc crane lines as compared to our other lines.

Revenues from customer support activities (parts and service) increased slightly from 2005 levels. Our product support group has been an investment area for Strongco and is key to our strategic direction. This investment does not immediately generate revenues. During periods with high equipment sales, a higher proportion of customer service resources are directed to pre-delivery inspections and warranty work. It is not unusual for customer support activities to increase at a slower rate than equipment revenues as new equipment usually carries a warranty for some defined term. Customer support revenues typically are not impacted until the new equipment is out of the warranty period.

Revenues in the Engineered Systems segment increased by $8.7 million (26.1%) from $33.3 million in 2005 to $42.0 million in 2006. This growth was primarily due to the recognition of $6.2 million of revenue from one large project which is expected to be fully completed in the first quarter of 2007. Additional revenue growth was a result of the strength in the mining, industrial and building products industries. These industries continue to perform at record levels due to both consumer and industrial demands. During 2006, the Engineering Systems group continued to see both the number and size of projects increase and experienced continued growth within their belt conveyor product line. There is $4.0 million of deferred revenue on the balance sheet for this segment relating to orders expected to be shipped in the first half of 2007.

Revenue by Territory

($ millions) 2006 % 2005 % Change
-------- ------ -------- ------ ------

Eastern (Atlantic / Quebec) $ 122.5 26.8% $ 117.6 28.5% $ 4.9

Central (Ontario) 172.5 37.8% 166.9 40.4% 5.6

Western (Manitoba to B.C.) 157.2 34.4% 125.3 30.3% 31.9

Other 4.7 1.0% 3.1 0.8% 1.6

-------- -------- ------
$ 456.9 100.0% $ 412.9 100.0% $ 44.0

Gross Margin
Strongco’s gross margin increased by $5.5 million (7.6%) to $78.2 million (gross margin percentage - 17.1%) in 2006 from $72.7 million in 2005 (gross margin percentage - 17.6%) mainly as a result of the increase in revenue base. Overall gross margin as a percentage decreased as a result of higher competition especially in the latter half of the year. Margins on new and used equipment as well as parts were impacted as underlying market demand decreased as the year progressed.

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 76.1 % of revenues and 42.6% of gross margin for this segment in 2006 (74.0% of revenues and 38.3% of gross margin in 2005).

Gross margins for the Fund’s Engineered Systems segment improved only slightly from 2005 despite the increase in revenue base as gross margin percentage declined due to significantly lower margins on the larger projects shipped or in progress late in 2006. Large projects typically have a greater proportion of sub-contracted components and external engineering costs which result in lower margins as opposed to our own manufactured components and engineering.

Administrative, Distribution and Selling Expense

Administrative, distribution and selling expenses increased by $3.3 million (6.3%) to $55.7 million in 2006 from $52.4 million in 2005. The increase in expenses was primarily related to higher selling and product support expenses. Selling expenses increased with the higher equipment sales volume and included increases in staff, travel and especially freight costs.

Product support expense increases reflect our continued investment in product support, with additional service technicians and related costs such as training and service vehicle expenses. These expenses are not immediately fully recoverable as training time and costs, as well as the equipment life cycle impact recoveries and ultimately profitability.

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 by $0.3 million from $1.6 million in 2005 to $1.9 million in 2006.

Interest Expense

Strongco’s interest expense rose $0.6 million to $2.2 million in 2006 from $1.6 million in 2005. This was a result of the increase in the Fund’s level of interest bearing debt in addition to higher interest rates. In 2005, the Fund’s level of interest bearing debt averaged $27.8 million versus an average of $36.1 million in 2006. This increase corresponds in part to higher inventory levels as well as changes in manufacturer programs with respect to interest free financing.

Net Income

The following summarizes Strongco’s pre-tax income by segment over the past two years:

Pre-Tax Income by Segment

$ millions 2006 2005
------- -------

Equipment Distribution $ 25.1 $ 24.0

Engineered Systems 1.6 1.9

Corporate (5.2) (6.7)

------- -------
$ 21.5 $ 19.2

On an after tax basis, 2006 net income was $22.6 million compared to $16.5 million in 2005.
Financial Condition and Liquidity

Cash generated from operating activities was $21.0 million in 2006 compared to $9.7 million in 2005. This was primarily due to the higher earnings base and a decrease in working capital requirements of $0.4 million compared to an increase of $8.4 million in 2005.

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

December 31 December 31
Year ended 2006 2005
----------- -----------

Accounts receivable $ 8.7 $ 9.2
Inventories 19.8 14.6
Prepaids 0.6 (0.3)
Income & other taxes receivable (0.1) 0.6
----------- -----------
29.0 24.1

Accounts payable and accrued liabilities 13.8 3.9
Deferred revenue & customer deposits 7.0 -
Equipment notes payable - non interest bearing 0.8 9.6
Equipment notes payable - interest bearing 7.8 3.5
Income & other taxes payable - (0.1)
Accrued benefit liability - (1.2)
----------- -----------
29.4 15.7

----------- -----------
Increase (decrease) in non-cash working capital $ (0.4) $ 8.4
----------- -----------

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. In 2006, the normal seasonal trend was influenced by the strength of economic activity experienced in 2005.

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

Revenues $ 118.4 $ 100.9 $ 133.3 $ 104.3 $ 456.9
Net income before income taxes $ 3.7 $ 4.5 $ 8.0 $ 5.3 $ 21.5
Net income $ 3.8 $ 7.2 $ 6.7 $ 4.9 $ 22.6

Basic earnings per unit $ 0.38 $ 0.71 $ 0.67 $ 0.49 $ 2.25
Diluted earnings per unit $ 0.38 $ 0.71 $ 0.67 $ 0.49 $ 2.25

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

Revenues $ 105.5 $ 102.1 $ 116.1 $ 89.2 $ 412.9
Net income before income taxes $ 4.9 $ 5.4 $ 6.1 $ 2.8 $ 19.2
Net income $ 4.7 $ 5.2 $ 4.9 $ 1.7 $ 16.5

Basic earnings per unit $ 0.47 $ 0.52 $ 0.49 $ 0.18 $ 1.67
Diluted earnings per unit $ 0.47 $ 0.52 $ 0.49 $ 0.18 $ 1.67

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

Revenues $ 95.2 $ 88.4 $ 94.9 $ 65.3 $ 343.8
Net income (loss) before
income taxes $ 3.3 $ 3.1 $ 4.0 $ (0.2) $ 10.2
Net income (loss) $ 2.2 $ 2.3 $ 3.3 $ (0.1) $ 7.7

Basic earnings (loss) per unit $ 0.23 $ 0.25 $ 0.35 $ (0.01) $ 0.81
Diluted earnings (loss) per
unit $ 0.22 $ 0.24 $ 0.34 $ (0.01) $ 0.80

A discussion of the Fund’s previous quarterly results can be found in the Fund’s quarterly Management’s Discussion and Analysis reports available on SEDAR at www.sedar.com.
Financial Results - Fourth Quarter

Consolidated revenues in the fourth quarter increased by $12.9 million (12.2%) from $105.5 million in 2005 to $118.4 million in 2006. The increase was primarily due to higher equipment sales in the Equipment Distribution segment as well as increased revenues in the Engineered Systems segment which included $6.2 million of revenue related to one large project.

Revenue by Business Segment

Q4 Q4
($ millions) 2006 % 2005 % Change
-------- ------ -------- ------ ------

Equipment Distribution $ 103.5 87.4% $ 97.9 92.8% $ 5.6

Engineered Systems 14.9 12.6% 7.6 7.2% 7.3

-------- -------- ------
$ 118.4 100.0% $ 105.5 100.0% $ 12.9

In the fourth quarter of 2006, Equipment Distribution segment revenues increased 5.7% representing a $5.6 million improvement over the fourth quarter of 2005. Within this segment, the increase in revenues related to equipment sales, corresponding to continued strong growth in the construction equipment market especially in Alberta being offset by weaker forestry sales across all regions.
In eastern Canada (Atlantic and Quebec), equipment sales increased by 29.8%, primarily as a result of increased crane sales in Quebec. Construction equipment sales were down slightly, corresponding to the slower market. Forestry equipment sales were significantly lower as the forestry industry remained depressed.

Equipment sales revenues in the central region had a decrease of 16.6% on a comparative quarter basis. Construction equipment sales were slower, corresponding to the softer construction market which was impacted by both demand and the mild, wet weather conditions. The forestry equipment market remained quiet as the Canadian forestry segment continued to soften.

Equipment sales revenues in the western region increased by 24.8% corresponding to the growth in commercial, residential and infrastructure spending in Alberta. The growth rate started to slow in the fourth quarter as equipment sales were impacted by issues such as operator availability.

Revenues from customer support activities (parts and service) increased marginally from fourth quarter 2005 levels.

Revenues in the Engineered Systems segment increased by $7.3 million (96.1%) from $7.6 million in the fourth quarter of 2005 to $14.9 million in the fourth quarter of 2006 which included $6.2 million related to one large project which is expected to be completed in the first quarter of 2007. Product demand remained strong during the fourth quarter as projects for the mining and building materials industries remained strong. There is $4.0 million of deferred revenue on the balance sheet for this segment relating to orders expected to be shipped in the first half of 2007.

Revenue by Territory

Q4 Q4
($ millions) 2006 % 2005 % Change
-------- -------- ------

Eastern (Atlantic / Quebec) $ 30.5 25.8% $ 26.2 24.8% $ 4.3

Central (Ontario) 43.6 36.8% 42.6 40.4% 1.0

Western (Manitoba to B.C.) 42.6 36.0% 36.1 34.2% 6.5

Other 1.7 1.4% 0.6 0.6% 1.1

-------- -------- ------
$ 118.4 100.0% $ 105.5 100.0% $ 12.9

Gross Margin
The Fund’s gross margin for the fourth quarter decreased by $0.1 million from $18.3 million (gross margin percentage - 17.4%) in 2005 to $18.2 million (gross margin - 15.4%) in 2006 as the higher revenue base was offset by a lower gross margin percentage.

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 76.7 % of revenues and 43.5% of gross margin for this segment in the fourth quarter of 2006 (74.5% of revenues and 38.9% of gross margin in the fourth quarter of 2005). During the fourth quarter we experienced the highest level of competition in some time as manufacturers and dealers were pushing to reduce inventory levels. In addition, margin on used equipment sales was pressured by an increased population of used equipment in the marketplace. Margins on forestry equipment continued to be pressured corresponding to the overall decline in the sector. In addition, we experienced downward pressure on pricing and margins for construction parts during the quarter.

Gross margins for the Fund’s Engineered Systems segment improved from $1.6 million in the fourth quarter of 2005 to $1.8 million in the fourth quarter of 2006 as the significantly higher revenue base was offset by a reduction in gross margin percentage due to larger, lower margin projects shipped or in progress during the quarter. In addition, the large project highlighted previously entailed extensive use of outside engineering and fabrication services which further negatively impacted margins.

Administrative, Distribution and Selling Expense

Administrative, distribution and selling expenses increased by $1.3 million to $14.6 million in the fourth quarter of 2006 from $13.3 million in the fourth quarter of 2005. The increase in expenses were primarily related to higher expenses in the equipment sales departments as well as selling expenses in the Engineered Systems segment.

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 and expense increased by $0.4 million from $0.4 million in the fourth quarter of 2005 to $0.8 million in the fourth quarter of 2006.

Interest Expense

Strongco’s interest expense increased $0.2 million to $0.6 million in the fourth quarter of 2006 from $0.4 million in the fourth quarter of 2005. This was a result of a higher level of interest bearing debt as well as higher interest rates. This increase corresponds in part to higher inventory levels as well as changes in manufacturer programs with respect to interest free financing.

Net Income

The following summarizes Strongco’s pre-tax income by segment for the fourth quarter over the past two years:

Pre-Tax Income by Segment
Q4 Q4
$ millions 2006 2005
------- --------

Equipment Distribution $ 4.8 $ 6.0

Engineered Systems 0.3 0.2

Corporate (1.4) (1.3)

------- --------
$ 3.7 $ 4.9

Strongco earned $3.8 million ($0.38 per unit) during the fourth quarter of 2006 compared to net income of $4.7 million ($0.47 per unit) in the fourth quarter of 2005.
Financial Condition and Liquidity

Cash generated from operating activities was $9.1 million in the fourth quarter of 2006 compared to cash generated from operating activities of $6.6 million in the fourth quarter of 2005 despite the lower earnings base. This was primarily due to a reduction in working capital requirements of $4.2 million during the quarter compared to a decrease of $1.5 million during the fourth quarter of 2005.

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

December 31 December 31
Three Months Ended 2006 2005
----------- ------------

Accounts receivable $ 8.7 $ (2.5)
Inventories (7.5) 3.2
Prepaids (0.4) (0.1)
Income & other taxes receivable (0.3) 0.6
----------- ------------
0.5 1.2

Accounts payable and accrued liabilities 8.0 1.9
Deferred revenue & customer deposits - 1.3
Equipment notes payable - non interest bearing (6.1) (2.6)
Equipment notes payable - interest bearing 2.8 2.9
Income & other taxes payable - (0.8)
----------- ------------
4.7 2.7

Decrease in non-cash working capital $ (4.2) $ (1.5)
----------- ------------
----------- ------------

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.
The Fund expects that continued cash flows from operations in 2007, together with currently available credit facilities will be sufficient to fund its requirements, including working capital, distributions, capital investments and other uses of cash.

Debt

As at As at
December 31 December 31
2006 2005
----------- -----------

Bank indebtedness 0.9 1.3
Equipment notes payable - non interest bearing 40.2 39.4
Equipment notes payable - interest bearing 38.0 30.1

----------- -----------
79.1 70.8
----------- -----------
----------- -----------

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 seven months from the date of financing. Interest rates float with the prime or one month Canadian 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 Twelve months
ended ended
Distributable cash (in thousands) December 31, 2006 December 31, 2006
----------------- ------------------

Cash provided by operating activities $ 8,825 $ 20,970

Deduct
Net change in non-cash working capital
balances related to operations (4,219) (360)
Capital expenditures (352) (1,310)

----------------- ------------------
Distributable cash $ 4,254 19,300
----------------- ------------------

Unitholder distributions declared $ 5,423 20,086

Shortfall $ (1,169) (786)

Capital expenditures levels have increased in 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 in the calculation of distributable cash as Strongco currently has an operating line of credit to a maximum of $20.0 million which is available for use to fund general corporate requirements including working capital requirements. In addition, Strongco finances equipment inventory through the use of vendor floor plans and wholesale finance arrangements with various finance companies. While the operations of the Fund are subject to seasonality (as explained earlier in the ’Summary of Quarterly Data’), the Fund has structured its distribution policy to declare regular monthly distributions evenly throughout the year, despite quarterly fluctuations in earnings. Consequently, the results of the fourth quarter ended December 31, 2006 should not be considered representative of a twelve month period of distributable cash. Distributions for the three months ended December 31, 2006, have been funded from the combination of an excess of distributable cash over distributions over the first six months of the year in addition to borrowings on the Fund’s operating line to make up the shortfall.

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

Net income $ 3,808 $ 22,594

Add (deduct)
Provision for future income tax - (3,086)
Depreciation & amortization 474 1,986
Write-down of rental equipment 71 132
Gain on disposition of assets 214 (89)
Stock based compensation 5 14
Change in non-cash post retirement
benefits and accrued benefit assets (217) (852)
Other 251 (89)
Capital expenditures (352) (1,310)

----------------- ------------------
Distributable cash $ 4,254 $ 19,300
----------------- ------------------

Add (deduct)
Provision for current income tax (84) 1,967

----------------- ------------------
Distributable cash before tax $ 4,170 $ 21,267
----------------- ------------------

Strongco Income Fund was established pursuant to a Plan of Arrangement effective May 6, 2005. A comparison of distributable cash and distributable cash before tax for the three and eight months ended December 31, 2005 and December 31, 2006 is as follows:

Three months Three months
ended ended
Distributable cash (in thousands) December 31, 2006 December 31, 2005
----------------- -----------------

Cash provided by operating activities $ 8,825 $ 6,562

Deduct
Net change in non-cash working
capital balances related to operations (4,219) (1,458)
Capital expenditures (352) (95)

----------------- -----------------
Distributable cash $ 4,254 $ 5,009
----------------- -----------------

Unitholder distributions declared $ 5,423 $ 5,022

Three months Three months
ended ended
Distributable cash (in thousands) December 31, 2006 December 31, 2005
----------------- -----------------

Net income $ 3,808 $ 4,695

Add (deduct)
Provision for future income tax - (127)
Depreciation & amortization 474 565
Write-down of rental equipment 71 -
Gain on disposition of assets 214 (79)
Stock based compensation 5 -
Change in non-cash post retirement
benefits and accrued benefit assets (217) 50
Other 251 -
Capital expenditures (352) (95)

----------------- -----------------
Distributable cash $ 4,254 $ 5,009
----------------- -----------------

Add (deduct)
Provision for current income tax (84) 479
----------------- -----------------

Distributable cash before tax $ 4,170 $ 5,488
----------------- -----------------

Eight months Eight months
ended ended
Distributable cash (in thousands) December 31, 2006 December 31, 2005
----------------- ------------------

Cash provided by operating activities $ 13,993 $ 7,710

Add (deduct)
Net change in non-cash working
capital balances related to operations (605) 8,256
Capital expenditures (801) (391)

----------------- ------------------
Distributable cash $ 12,587 $ 15,575
----------------- ------------------

Unitholder distributions declared $ 14,060 $ 12,554

Eight months Eight months
ended ended
Distributable cash (in thousands) December 31, 2006 December 31, 2005
----------------- ------------------

Net income $ 15,789 $ 13,834

Add (deduct)
Provision for future income tax (3,031) 12
Depreciation & amortization 1,270 1,555
Write-down of rental equipment 85 -
Gain on disposition of assets (46) (89)
Stock based compensation 11 -
Change in non-cash post retirement
benefits and accrued benefit assets (580) 654
Other (110) -
Capital expenditures (801) (391)

----------------- ------------------
Distributable cash $ 12,587 $ 15,575
----------------- ------------------

Add
Provision for current income tax 1,242 1,164

----------------- ------------------
Distributable cash before tax $ 13,829 $ 16,739
----------------- ------------------

Unitholder Distributions

Unitholder distributions (per unit) in 2006 were comprised as follows:

Record Payment Return Of Other
Date Date Capital Income Total
----------- ----------- --------------- -------------- -------------
January 31 February 20 $ 0.006116145 $ 0.143883855 $ 0.150000000
February 28 March 20 $ 0.006116145 $ 0.143883855 $ 0.150000000
March 31 April 20 $ 0.006116145 $ 0.143883855 $ 0.150000000
April 28 May 19 $ 0.006116145 $ 0.143883855 $ 0.150000000
May 31 June 20 $ 0.026116145 $ 0.143883855 $ 0.170000000
June 30 July 20 $ 0.026116145 $ 0.143883855 $ 0.170000000
July 31 August 21 $ 0.026116145 $ 0.143883855 $ 0.170000000
August 31 September 20 $ 0.026116145 $ 0.143883855 $ 0.170000000
September 29 October 20 $ 0.040181158 $ 0.139818842 $ 0.180000000
October 31 November 20 $ 0.040181158 $ 0.139818842 $ 0.180000000
November 30 December 20 $ 0.040181158 $ 0.139818842 $ 0.180000000
December 29 January 19 $ 0.040181158 $ 0.139818842 $ 0.180000000

--------------- -------------- -------------
$ 0.289653792 $ 1.710346208 $ 2.000000000

Contractual Obligations
Contractual obligations are set out in the following table. Management believes that these obligations will be 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 21.8 6.4 9.1 4.6 1.7

The Fund also has contingent contractual obligations where the Fund has agreed to buy back equipment from customers at the option of the customer for a specified price at future dates (’buy back contracts’). These contracts are subject to certain conditions being met by the customer and range in term from three to ten years. The Fund’s maximum potential losses pursuant to the majority of these buy back contracts are limited, under an agreement with a third party, to 10% of the original sale amounts. In addition, this agreement provides a financing arrangement in order to facilitate the buy back of equipment. A reserve of $446 (2005 - $380) has been accrued in the Fund’s accounts with respect to these commitments.

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

“Buy back contracts” 6.3 2.7 0.9 1.4 1.3

Unitholder Capital
The Fund is authorized to issue an unlimited number of units without nominal or par value.

Issued and fully paid units at: Number of Units Amount
------------------------------------------------------------

March 7, 2007 10,043,185 $ 54.5

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. Note 2 to the Consolidated Financial Statements describes the significant accounting policies used in preparation of the Consolidated Financial Statements. The more significant estimates are as follows:

Inventory Valuation

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

Allowance for Doubtful Accounts

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

Revenue Recognition

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

Post Retirement Obligations

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

The discount rate is used to determine the present value of future cash flows that we expect will be required to pay employee benefit obligations. Management’s assumptions of the discount rate are based on current interest rates on long-term debt of high quality corporate issuers. Strongco determines the appropriate discount rate at the end of every year and has lowered the assumed discount rate from 6.0% in 2005 to 5.0% per cent in 2006 which resulted in an increase in estimated post retirement obligations.

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

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

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

Future Accounting Standards

The Canadian Institute of Chartered Accountants (CICA) has issued three new accounting standards that are effective for the Fund’s fiscal year commencing on January 1, 2007, which are to be applied on a retroactive basis without restatement to prior periods: Section 1530, Comprehensive Income; Section 3855, Financial Instruments -- Recognition and Measurement; and Section 3865 Hedges.

Comprehensive Income

Under Section 1530, comprehensive income is comprised of net earnings and other comprehensive income (“OCI”), which represents changes in unitholders’ equity during a period arising from transactions and other events with non-owner sources. OCI generally would include unrealized gains and losses on financial assets classified as available-for-sale, unrealized foreign currency translation adjustments net of hedging arising from self-sustaining foreign operations and changes in the fair value of the effective portion of hedging instruments. As a result of adopting these standards, a new category, “accumulated other comprehensive income”, will be added to unitholders’ equity and certain other unrealzed gains and losses will be reported in OCI until realization.

Financial Instruments -- Recognition and Measurement

Section 3855 establishes standards for recognizing and measuring financial assets, financial liabilities and non-financial derivatives. All financial instruments are required to be measured at fair value on initial recognition, except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as held-for-trading, available-for-sale, held-to-maturity, loans and receivables, or other liabilities.

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

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

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

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

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

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

Hedges

Section 3865 specifies the criteria under which hedge accounting can be applied and how hedge accounting should be executed for each of the permitted hedging strategies: fair value hedges, cash flow hedges and hedges of a foreign currency exposure of a net investment in a self-sustaining foreign operation.

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

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

Impact of Adopting Sections 1530, 3855 and 3865

The transition adjustment attributable to the above described standards will be recognized in the opening balance of retained earnings or AOCI at January 1, 2007 and is not expected to be material to our consolidated financial position.

Risk and Uncertainties

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

Business and Economic Cycles

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

Competition

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

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

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

Manufacturer Risk

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

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

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

The termination of one or more of Strongco’s distribution agreements with its original equipment manufacturers, as a result of a change in control of the manufacturer or otherwise, will 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 naming a division of the Company as one of several defendants in proceedings under the Superior Court of Quebec. The action claims errors and omissions in the contractual execution of work entrusted to the defendants and names the Company as jointly and severally liable for damages of approximately $5.9 million. Although we cannot predict the outcome at this time, based on the opinion of external legal counsel, the Company believes that they have a strong defence against the claim and that it is without merit.

Dependence on Key Personnel

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

Information Systems

The equipment segment of the Fund utilizes a legacy business system which has been successfully in operation for over 15 years. As with any business system, it is necessary to evaluate its adequacy and support of current and future business demands. The system was written and was supported by the Fund’s Information Systems Manager who retired on December 31, 2006. The Fund 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 Company and should not be viewed by investors as shares in the Company. As holders of Units, Unitholders will not have the statutory rights normally associated with ownership of shares of a corporation including, for example, the right to bring “oppression” or “derivative” actions.

The Units are not “deposits” within the meaning of the Canada Deposit Insurance Corporation Act (Canada) and are not insured under the provisions of that Act or any other legislation. Furthermore, the Fund is not a trust company and, accordingly, is not registered under any trust and loan company legislation as it does not carry on or intend to carry on the business of a trust company. In addition, although the Fund qualifies as a “mutual fund trust” as defined by the 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 other 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 Registered Retirement Savings Plans, Registered Retirement Income Funds, Deferred Profit Sharing Plans and Registered Education Savings Plans (collectively “Deferred Income Plans”). The Fund will endeavour to ensure that the Units continue to be qualified investments for Deferred Income Plans. The Tax Act imposes penalties for the acquisition or holding of non-qualified investments in such plans and there is no assurance that the conditions prescribed for such qualified investments will be adhered to at any particular time. Finally, if the Fund ceases to qualify as mutual fund trust for purposes of the Tax Act, the Fund will be required to pay tax under Part XII.2 of the Tax Act. The payment of Part XII.2 tax by the Fund will affect the amount of cash available for distribution by the Fund and may have adverse consequences for Unitholders.

On October 31, 2006, the Government of Canada announced its Tax Fairness Plan that proposed changes to the way income trusts and their investors are taxed. The proposed changes would affect the Fund commencing with the 2011 taxation year (assuming that the Fund adheres to the guidelines on “normal growth” as defined by the Department of Finance on December 15, 2006). Under draft legislative proposals that were released on December 21, 2006, distributions by the Fund would be subject to a distribution tax. The Fund is currently considering these proposals and the possible impact they will have on the Fund and its investors. If the proposed tax for 2011 of 31.5% had been applied on a proforma basis to the Fund’s 2006 taxable Canadian income, the Fund’s earnings and cash provided by operating activities would have been reduced by approximately $5.4 million or $0.54 per unit. However, at December 31, 2006 the legislation had not yet been introduced in Parliament and these proposals are not expected to have an immediate impact on the Fund’s tax treatment or the tax treatment of distributions to investors.

Disclosure Controls and Procedures

In accordance with Regulation 52-109 respecting certification of disclosure in issuers’ annual and interim filings, the Chief Executive Officer and Chief Financial Officer, together with other members of management have evaluated the effectiveness of the Fund’s internal disclosure controls and procedures as of the year ended December 31, 2006. Based upon that evaluation, they have concluded that the Fund’s internal disclosure controls and procedures provide reasonable assurance that (i) information required to be disclosed by the Fund in its annual filings, interim filings or other reports filed or submitted by it under applicable securities legislation is recorded, processed, summarized and reported within the prescribed time periods, and (ii) material information regarding the Fund is accumulated and communicated to the Funds management, including its Chief Executive Officer and Chief Financial Officer in a timely manner.

Additionally, the Chief Executive Officer and the Chief Financial Officer, together with other members of management, have designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reporting in accordance with GAAP. There has been no change in the design of the Fund’s internal controls over financial reporting during the fourth quarter of 2006 that would materially affect, or is reasonably likely to materially affect the Fund’s internal controls over financial reporting.

While the Officers of the Fund have evaluated the effectiveness of internal disclosure controls and procedures for the year ended December 31, 2006 and have concluded that they are being maintained as designed, it should be noted that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, including instances of fraud, if any, have been detected. These inherent limitations include, amongst other items: (i) that management’s assumptions and judgments could ultimately prove to be incorrect under varying conditions and circumstances; or (ii) the impact of isolated errors.

Additionally, controls may be circumvented by the unauthorized acts of individuals, by collusion of two or more people, or by management override. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential (future) conditions.

Outlook

Strongco has remained committed to our strategic focus on our core business, capitalizing on equipment sales, investing in our product support departments and developing our Engineered Systems group. In 2006, Strongco generated record earnings both before and after tax.

For 2007, this focus will continue but we are expecting a far more cautious marketplace with a higher degree of competition. There are increasing signs that the construction market will be softer in 2007, which will impact pricing and equipment sales. Against this background though, we remain committed to our strategic investment in the higher margin product support aspect of the business.

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 $4.0 of deferred revenue currently on the balance sheet and (iv) the outlook for 2007. 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. 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 may be found on SEDAR at www.sedar.com.

Strongco Income Fund

CONSOLIDATED BALANCE SHEETS

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

ASSETS
Current
Accounts receivable 46,938 38,217
Inventories 126,002 106,238
Prepaid expenses and deposits 1,403 774

Income and other taxes receivable 519 570
------- --------
Total current assets 174,862 145,799
Rental equipment, net (note 3) 2,529 3,840
Capital assets, net (note 4) 16,247 16,133
Other assets 559 -
Accrued benefit asset (note 11) 6,277 5,440
------- --------
200,474 171,212
------- --------

LIABILITIES AND UNITHOLDERS’ EQUITY
Current
Bank indebtedness (note 5) 974 1,327
Accounts payable and accrued liabilities 44,019 30,226
Distributions payable to unitholders 1,808 1,506
Deferred revenue and customer deposits 9,505 2,478
Equipment notes payable - non-interest bearing (note 6) 40,201 39,373
Equipment notes payable - interest bearing (note 6) 37,968 30,144
------- --------
Total current liabilities 134,475 105,054
Future income taxes (note 9) - 3,086
Other liabilities 470 -
Accrued benefit liability (note 11) 728 743
------- --------
Total liabilities 135,673 108,883
------- --------

Commitments and contingencies (notes 10 and 12)

Unitholders’ equity
Unitholder capital (note 7) 54,534 54,534
Deferred compensation (note 8) (36) -
Retained earnings 10,303 7,795
------- --------
Total unitholders’ equity 64,801 62,329
------- --------
200,474 171,212
------- --------

See accompanying notes

Strongco Income Fund

CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS

(unaudited - in
thousands
of dollars, Three months Twelve months
except per ended December 31 ended December 31
unit amounts) $ 2006 $ 2005 $ 2006 $ 2005
------------ ------------ ------------ ------------

Revenue 118,427 105,504 456,910 412,857
Cost of sales 100,276 87,203 378,746 340,117
------------ ------------ ------------ ------------
Gross margin 18,151 18,301 78,164 72,740

Expenses
Administration,
distribution and
selling 14,552 13,345 55,740 52,436
Reorganization
expense (note 1) 62 - 678 1,100
Other income (768) (432) (1,937) (1,601)
------------ ------------ ------------ ------------
Income before
the following 4,305 5,388 23,683 20,805

Interest 581 406 2,208 1,569

------------ ------------ ------------ ------------
Income before
income taxes 3,724 4,982 21,475 19,236
Provision for
(recovery of)
income taxes
(note 9) (84) 287 (1,119) 2,759
------------ ------------ ------------ ------------

Net income 3,808 4,695 22,594 16,477
------------ ------------ ------------ ------------

Retained
earnings,
beginning of
period 11,918 8,122 7,795 4,349
Common share
dividends - - - (477)
Unitholder
distributions (5,423) (5,022) (20,086) (12,554)
------------ ------------ ------------ ------------
Retained
earnings,
end of period 10,303 7,795 10,303 7,795
------------ ------------ ------------ ------------

Basic earnings
per unit
Earnings per unit $ 0.38 $ 0.47 $ 2.25 $ 1.67
Weighted average
number of units 10,043,185 10,043,185 10,043,185 9,886,552

Diluted earnings
per unit
Earnings per unit $ 0.38 $ 0.47 $ 2.25 $ 1.67
Weighted average
number of units 10,043,185 10,043,185 10,043,185 9,886,552

See accompanying notes

Strongco Income Fund

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Twelve
months ended months ended
December 31 December 31

(unaudited - in thousands
of dollars) $ 2006 $ 2005 $ 2006 $ 2005
------ ------- ------ --------
OPERATING ACTIVITIES
Net Income 3,808 4,695 22,594 16,477
Add (deduct) items not
involving a current
outlay (inflow) of cash
Amortization of rental
equipment 239 330 1,052 1,444
Amortization of capital
assets 235 235 934 921
Write-down of rental
equipment 71 - 132 -
(Gain) / loss on disposal
of capital assets and rental
equipment 214 (79) (89) (207)
Stock based compensation 5 - 14 102
Future income taxes - (127) (3,086) (215)
Other 34 50 (941) (363)
------ ------- ------ --------
4,606 5,104 20,610 18,159

Net change in non-cash
working capital balances
related to operations 4,219 1,458 360 (8,439)
------ ------- ------ --------
Cash provided by
operating
activities 8,825 6,562 20,970 9,720

INVESTING ACTIVITIES
Purchase of rental
equipment - (4) (222) (24)
Purchase of capital assets (352) (91) (1,088) (604)
Proceeds on disposal of
capital assets and rental
equipment (112) 578 478 1,251
------ ------- ------ --------
Cash (used in) provided by
investing activities (464) 483 (832) 623

FINANCING ACTIVITIES
Increase (decrease) in
bank indebtedness (2,938) (2,023) (353) 302
Decrease in rental
equipment financing - - - (1,183)
Common share dividends - - - (477)
Unitholder distributions (5,423) (5,022) (19,785) (11,048)
Issuance of share capital - - - 2,063
------ ------- ------ --------
Cash used in financing
activities (8,361) (7,045) (20,138) (10,343)

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

Supplemental cash flow
information
Interest paid 575 385 2,159 1,574
Income taxes paid /
(recovered) (377) 1,780 1,874 3,671

Strongco Income Fund
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2006 and 2005 (unless otherwise indicated in thousands of dollars, except per unit amounts)

1. ORGANIZATION

Strongco Income Fund (the “Fund” or “Strongco”) is an unincorporated, open-ended, limited purpose trust established under the laws of Ontario pursuant to a declaration of trust dated March 21, 2005, as amended and restated on April 28, 2005 and September 1, 2006. 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 shares, 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 (“Strongco LP”) which will continue to carry on the business.

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Basis of consolidation

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

Use of estimates

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

Revenue recognition

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

Foreign currency translation

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

Financial instruments

The fair market values of the Fund’s current financial assets and liabilities approximate carrying values due to their short-term nature.

Employee future benefit plans

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

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

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

Actuarial gains (losses) arise from the difference between actual long-term rate of return on plan assets for a period and the expected long-term rate of return on plan assets for that period and from changes in actuarial assumptions used to determine the accrued benefit obligation. The excess of the net accumulated actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the average remaining service period of active employees. The average remaining service period of the active employees covered by the employee pension plan is 15 years for 2006 and 2005. For the executive pension plan, the period used to amortize gains and losses is based on the average expected remaining lifetime of the retirees (17 years for 2006 and 16 years for 2005).

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

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

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

Stock-based compensation plan

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

Earnings per unit

The Fund follows the treasury stock method for the presentation and disclosure of basic and diluted earnings per unit.

Cash and cash equivalents

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

Inventories

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

Rental equipment

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

Capital assets

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

Buildings 3% to 5%
Machinery and equipment 10% to 30%
Vehicles 30%

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

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

On October 31, 2006, the Canadian federal government announced tax proposals pertaining to taxation of distributions paid by income trusts and changes to the personal tax treatment of trust distributions that will be applicable starting in 2011. Currently, the Fund does not pay income tax as long as distributions to Unitholders meet or exceed the amount of the Fund’s income that would otherwise be taxable. The proposed law would result in a two tired tax structure similar to that of corporations whereby the taxable portion of distributions would be subject to income tax payable by the Fund at a rate of 31.5% while taxable Canadian Unitholders would receive the favourable tax treatment on distributions currently applicable to qualifying dividends. The taxable status would change if the proposed tax changes were enacted and this would result in the recording of future income taxes at the substantially enacted tax rates in respect of temporary differences that are expected to reverse after the date the changes take effect. As of the date of these financial statements, the government’s proposal remains draft and has not been passed into law.

3. RENTAL EQUIPMENT

The Fund maintains certain equipment which is allocated for rental purposes. Rental equipment consists of the following:

2006 2005
$ $
------------------------------------------------

Cost 11,452 13,288
Less accumulated amortization 8,923 9,448
------------------------------------------------
2,529 3,840
------------------------------------------------
------------------------------------------------

During the year the Fund recorded a $132 (2005 - Nil) write-down of rental equipment to its fair market value within its Equipment Rentals segment. Fair market value was determined based on prices for similar assets.
4. CAPITAL ASSETS

Capital assets consist of the following:

2006
-----------------------------
Net
Accumulated book

Cost amortization value
$ $ $
---------------------------------------------------------------------

Land 3,009 - 3,009
Buildings and leasehold improvements 14,032 4,656 9,376
Machinery, equipment and vehicles 14,906 11,044 3,862
---------------------------------------------------------------------
31,947 15,700 16,247
---------------------------------------------------------------------
---------------------------------------------------------------------

2005
-----------------------------
Net
Accumulated book
Cost amortization value
$ $ $
---------------------------------------------------------------------

Land 3,009 - 3,009
Buildings and leasehold improvements 13,487 4,289 9,198
Machinery, equipment and vehicles 14,834 10,908 3,926
---------------------------------------------------------------------
31,330 15,197 16,133
---------------------------------------------------------------------
---------------------------------------------------------------------

5. BANK INDEBTEDNESS
Bank indebtedness consists of an operating line of credit to a maximum of $20,000 (2005 - $20,000), renewable annually. As at December 31, 2006, the Fund had utilized $974 (2005 - $1,327) of this operating line of credit. As at December 31, 2006, the bank indebtedness bears interest at the bank’s prime lending rate plus 0.50% (2005 - 0.50%), which represents an effective interest rate of 6.50% (2005 - 5.50%) . As collateral, the Fund has provided an assignment of book debts, a charge on inventories subordinated to the collateral provided to the equipment inventory lenders (note 6), a charge on capital assets subordinated to collateral provided to lessors, a charge on real estate, a charge on intangible and other assets, and a $50,000 debenture.

6. EQUIPMENT NOTES PAYABLE

Various non-bank lenders provide secured wholesale financing on equipment inventory (“equipment notes payable”), some of which is interest free for periods up to seven months from the date of financing. Thereafter, the equipment notes payable bear interest at rates ranging from 1.65% to 2.75% over the one month Canadian Bankers’ Acceptance Rate and 0.50% over the prime rate of Canadian chartered banks. As collateral, the Fund has provided liens on specific inventories and accounts receivable with an approximate book value of $68,000 (2005 - $76,000). The effective interest rates on these notes payable as at December 31, 2006 ranged from 5.95% to 7.05% (2005 - 5.50% to 6.60%) . Principal repayments commence over the period from the date of financing to twelve months thereafter and are due in full when the related equipment is sold.

7. 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 and share capital are as follows:

2006 2005
-------------- --------- --------
Shares Amount Shares Amount

Share capital # $ # $
--------------------------------------------------------------------------
Common shares, beginning of year - - 9,469,885 52,369
Shares issued pursuant
to exercise of stock options - - 573,300 2,165
Shares exchanged pursuant
to the Plan of Arrangement - - (10,043,185) (54,534)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Common shares, end of year - - - -
--------------------------------------------------------------------------
--------------------------------------------------------------------------

2006 2005
------------------- -------------------
Units Amount Units Amount
Unitholders’ capital # $ # $
---------------------------------------------------------------------------

Units, beginning of year 10,043,185 54,534 - -
Units issued pursuant to the
Plan of Arrangement - - 10,043,185 54,534
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Units, end of year 10,043,185 54,534 10,043,185 54,534
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(c) Stock-based compensation plan
The Company had a stock-based compensation plan in place to grant options to employees, officers and directors to purchase common shares of the Company. The options were exercisable at a price not less than the average of the daily average trading prices of the common shares on the Toronto Stock Exchange for the five trading days immediately preceding the date the options are granted. Options issued prior to January 1, 2003 expire after 10 years and options issued subsequent to January 1, 2003 expire after 6 years. Unless otherwise determined by the Board of Directors, 25% of the options issued vest at the end of each of the first four years following the date on which the options were granted.

Under the terms of the Company’s stock based compensation plan, there were certain provisions intended to ensure that the rights of the holders of options were not adversely affected by certain events, such as the Plan. 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 as at December 31, 2006 and 2005 and the changes during the years then ended are as follows:

2006 2005
---------------- ------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
# $ # $
---------------------------------------------------------------------------

Options outstanding, beginning of year - - 580,800 3.60
Granted - - - -
Exercised - - (573,300) 3.60
Expired/forfeited - - (7,500) 3.50
---------------------------------------------------------------------------
Options outstanding, end of year - - - -
---------------------------------------------------------------------------
---------------------------------------------------------------------------

The stock compensation expense was $Nil for 2006 ($102 - 2005).
8. LONG-TERM INCENTIVE PLAN

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

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

An amount of $50 was transferred into the LTIP pool in 2006 relating to the excess of cash distributions over threshold amounts in 2005. The LTIP compensation expense was $14 in 2006 (2005 - $Nil). Pending Trustee approval, it is anticipated that an amount of $119 will be transferred in to the LTIP pool in 2007 relating to the excess of cash distributions over threshold amounts in 2006.

9. INCOME TAXES

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

2006 2005
$ $
---------------------------------------------

Current income tax expense 1,967 2,974
Future income tax recovery (3,086) (215)
---------------------------------------------
(1,119) 2,759

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

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

2006 2005
$ $
--------------------------------------------------------------------

Income before income taxes 21,475 19,236
Statutory tax rate 34.2% 34.8%
--------------------------------------------------------------------
--------------------------------------------------------------------

Provision for income taxes at statutory tax rate 7,344 6,694
Adjustments thereon for the effect of:
Large Corporations Tax - 71
Permanent and other differences 59 288
Income of the Fund distributed to unitholders (3,890) (4,016)
Income not subject to tax (1,754) -
Reversal of future income taxes (note 2) (2,862) -
Other (16) (278)
--------------------------------------------------------------------
(1,119) 2,759
--------------------------------------------------------------------
--------------------------------------------------------------------

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

2006 2005
$ $
----------------------------------------------------------

Liabilities deductible for tax when paid - 723
Other - 193
----------------------------------------------------------
Future income tax assets - 916
----------------------------------------------------------

Rental fleet - 1,336
Capital assets - 735
Prepaid pension payments - 1,893
Holdbacks - 38
----------------------------------------------------------
Future income tax liabilities - 4,002
----------------------------------------------------------
Net future income tax liability - (3,086)
----------------------------------------------------------
----------------------------------------------------------

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

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

2007 6,357
2008 4,995
2009 4,100
2010 2,729
2011 1,912
Thereafter 1,654
------------------
------------------

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

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

2006 2005
$ $
------------------------------------------------------------------

Accrued benefit obligation, beginning of year 23,236 18,334
Current service cost 1,716 1,266
Interest cost 1,225 1,131
Benefits paid (896) (1,521)
Actuarial loss 361 4,026
------------------------------------------------------------------
Accrued benefit obligation, end of year 25,642 23,236
------------------------------------------------------------------

Fair value of plan assets, beginning of year 21,745 18,472
Actual return on plan assets 3,060 2,572
Employer contributions 1,592 1,581
Employee contributions 739 641
Benefits paid (896) (1,521)
------------------------------------------------------------------
Fair value of plan assets, end of year 26,240 21,745
------------------------------------------------------------------
------------------------------------------------------------------

Plan assets consist of:
% %
---------------------------------------------------------------
Asset category
Equity securities 69.5 67.6
Debt securities 30.5 30.3
Other - 2.1
---------------------------------------------------------------
Total 100.0 100.0
---------------------------------------------------------------
---------------------------------------------------------------

Fair value of plan assets 26,240 21,745
Accrued benefit obligation 25,642 23,236
---------------------------------------------------------------
Funded status of plan -- surplus (deficit) 598 (1,491)
Unamortized net actuarial loss 5,004 6,410
Unamortized transitional obligation 155 172
---------------------------------------------------------------
Accrued benefit asset 5,757 5,091
---------------------------------------------------------------
---------------------------------------------------------------

Elements of defined benefit costs recognized in the year:

2006 2005
$ $
-------------------------------------------------------------------------

Current service cost, net of employee contributions 977 625
Interest on accrued benefits 1,225 1,131
Actual return on plan assets (3,060) (2,572)
Actuarial loss 361 4,026
-------------------------------------------------------------------------
Elements of defined benefit costs before adjustments
recognized: (497) 3,210
Adjustments to recognize the long term nature of
benefit costs:
- return on assets (expected vs actual in year) 1,494 1,260
- actuarial gains (recognized vs actual in year) (88) (3,897)
- transitional obligation (amortization) 17 17
-------------------------------------------------------------------------
Defined benefit costs recognized 926 590
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

2006 2005
$ $
-----------------------------------------------------------------

Accrued benefit obligation, beginning of year 1,998 1,901
Current service cost 20 71
Interest cost 96 111
Benefits paid (177) (261)
Actuarial loss 56 176
-----------------------------------------------------------------
Accrued benefit obligation, end of year 1,993 1,998
-----------------------------------------------------------------

Fair value of plan assets, beginning of year 1,621 1,437
Actual return on plan assets 172 182
Employer contributions 205 263
Benefits paid (177) (261)
-----------------------------------------------------------------
Fair value of plan assets, end of year 1,821 1,621
-----------------------------------------------------------------
-----------------------------------------------------------------

Plan assets consist of:

% %
------------------------------------
Asset category
Equity securities 69.5 67.6
Debt securities 30.5 30.3
Other - 2.1
------------------------------------
Total 100.0 100.0
------------------------------------
------------------------------------

Fair value of plan assets 1,821 1,621
Accrued benefit obligation 1,993 1,998
------------------------------------------------------
Funded status of plan -- deficit (172) (377)
Unamortized net actuarial loss 665 696

Unamortized transitional obligation 27 30
------------------------------------------------------
Accrued benefit asset 520 349
------------------------------------------------------
------------------------------------------------------

Elements of defined benefit costs recognized in the year:

2006 2005
$ $
------------------------------------------------------------------------

Current service cost, net of employee contributions 20 71
Interest on accrued benefits 96 111
Actual return on plan assets (172) (182)
Actuarial loss 56 176
------------------------------------------------------------------------
Elements of defined benefit costs before adjustments
recognized: - 176
Adjustments to recognize the long term nature of benefit
costs:
- return on assets (expected vs actual in year) 58 82
- actuarial gains (recognized vs actual in year) (27) (149)
- transitional obligation (amortization) 3 2
------------------------------------------------------------------------
Defined benefit costs recognized 34 111
------------------------------------------------------------------------
------------------------------------------------------------------------

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

2006 2005
$ $
--------------------------------

Employee Plan 5,757 5,091
Executive Plan 520 349
--------------------------------
6,277 5,440
--------------------------------
--------------------------------

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

2006 2005
$ $
------------------------------------------------------------------

Accrued benefit obligation, beginning of year 1,562 1,760
Current service cost - 394
Interest cost 74 94
Benefits paid (137) (1,381)
Actuarial loss 29 708
Settlement - (13)
------------------------------------------------------------------
Accrued benefit obligation, end of year 1,528 1,562
------------------------------------------------------------------

Fair value of plan assets - -
Accrued benefit obligation 1,528 1,562
------------------------------------------------------------------
Funded status of plan -- deficit (1,528) (1,562)
Unamortized net actuarial loss 543 533
Unamortized transitional obligation 257 286
------------------------------------------------------------------
Accrued benefit liability (728) (743)
------------------------------------------------------------------
------------------------------------------------------------------

Elements of defined benefit costs recognized in the year:

2006 2005
$ $
--------------------------------------------------------------------------

Current service cost, net of employee contributions - 394
Interest on accrued benefits 74 94
Actuarial loss 29 708
Settlement gain - 51
--------------------------------------------------------------------------
Elements of defined benefit costs before adjustments
recognized: 103 1,247
Adjustments to recognize the long term nature of benefit
costs:
- actuarial gain (recognized vs actual in year) (9) (715)
- past service costs (amortized vs actual in year) - 366
- transitional obligation (amortization) 29 28
--------------------------------------------------------------------------
Defined benefit costs recognized 123 926
--------------------------------------------------------------------------
--------------------------------------------------------------------------

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

2006 2005
Accrued benefit obligation as of the end of the period % %
----------------------------------------------------------------------

Discount rate 5.25 5.00
Rate of compensation increase 3.00 3.00
----------------------------------------------------------------------
----------------------------------------------------------------------

2006 2005
Benefit cost for the period % %
---------------------------------------------------------------

Discount rate 5.00 6.00
Expected long-term rate of return on plan assets 7.00 7.00
Rate of compensation increase 3.00 2.00
---------------------------------------------------------------
---------------------------------------------------------------

The assumed health care cost trend rate is 10.5% in 2007, declining by 1.0% per annum to 4.5% per annum in 2013 and thereafter. The assumed dental cost rate is 4.5% per annum.
Assumed health and dental care cost trend rates have a significant effect on the amounts reported for the health and dental care plans. A one percentage point change in assumed health and dental care cost trend rates would have the following effects for 2006:

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

Total of service and interest cost 9 (7)
Accrued benefit obligation as of December 31, 2006 186 (152)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

In addition, the Fund maintains a defined contribution plan available only to certain employees (approximately 5.4% of the workforce (2005 - 6.0%)) who were existing members of the plan following a previous acquisition. In 2006, the Fund’s contributions were $103 (2005 - $97). The Fund also maintains a group RSP/LIRA available only to certain employees (approximately 9.6% of the workforce (2005 - 9.0%)) under the terms of a collective bargaining agreement. In 2006, the Fund’s contributions were $93 (2005 - $59).
In February 2006, Strongco established a new defined contribution retirement savings program for executive officers, the (“DCRSP”) with retroactive effect to January 1, 2006. The expense related to the DCRSP for the twelve months ended December 31, 2006 was $120.

Total cash payments for employee future benefits for 2006 consisting of cash contributed by the Fund to its funded pension plans, cash payments directly to beneficiaries for its unfunded other benefit plans and cash contributed to its defined contribution plan were $2,200 (2005 - $3,382).

12. CONTINGENCIES

(a) The Fund has agreed to buy back equipment from certain customers at the option of the customer for a specified price at future dates (“buy back contracts”). These contracts are subject to certain conditions being met by the customer and range in term from three to ten years. At December 31, 2006, the total obligation under these contracts was $6,245 (2005 - $5,867). The Fund’s maximum potential losses pursuant to the majority of these buy back contracts are limited, under an agreement with a third party, to 10% of the original sale amounts. A reserve of $446 (2005 - $380) has been accrued in the Fund’s accounts with respect to these commitments.

The Fund has provided a guarantee of lease payments under the assignment of property leases which expire between January 1, 2007 and January 31, 2014. Total lease payments from January 1, 2007 to January 31, 2014 are $1,125 (2005 - $1,351).

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

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

13. SEGMENTED INFORMATION

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

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Fund evaluates performance based on profit and loss from operations before income taxes. The Fund accounts for intersegment sales and transfers at cost. The Fund’s reportable segments are strategic business units which are reported as segments because each business unit was managed separately.

2006
--------------------------------------------------------------------------
Equipment Engineered Segment Reconciling Company
Distribution Systems Totals Items Total
--------------------------------------------------------------------------
Gross Revenue 414,861 42,348 457,209 457,209
Intersegment 1 298 299 299
--------------------------------------------------------------------------
Net Revenue 414,860 42,050 456,910 - 456,910
--------------------------------------------------------------------------

Interest
Expense (1,861) (347) (2,208) (2,208)
Income before
income taxes 25,094 1,595 26,689 (5,214)(a) 21,475
Amortization
of capital
assets and
rental equipment 1,608 371 1,979 7 1,986
Write-down of
rental equipment 132 132 132
Segment total
assets 175,101 18,296 193,397 7,077(b) 200,474
Segment
capital and
rental assets 15,998 2,761 18,759 17 18,776
Capital and
rental asset
expenditures 932 370 1,302 8 1,310
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2005
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Equipment Engineered Segment Reconciling Company
Distribution Systems Totals Items Total
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Gross Revenue 379,555 33,562 413,117 413,117
Intersegment 1 259 260 260
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Net Revenue 379,554 33,303 412,857 - 412,857
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Interest
Expense (1,385) (184) (1,569) (1,569)
Income before
income taxes 23,997 1,937 25,934 (6,698)(a) 19,236
Amortization
of capital
assets and
rental equipment 2,016 342 2,358 7 2,365
Write-down of
rental equipment - - -
Segment total
assets 151,277 13,849 165,126 6,086(b) 171,212
Segment capital
and rental assets 17,161 2,795 19,956 17 19,973
Capital and
rental asset
expenditures 232 396 628 - 628
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(a) The reconciling items to adjust segment profit (loss) represent common corporate costs not allocated to the segments as well as corporate and Fund head office costs incurred during the year.
(b) The reconciling items represent prepaid expenses and accrued benefit assets carried on the corporate head office ledger, offset by the elimination of the intercompany receivables at the corporate head office.

14. ECONOMIC RELATIONSHIP

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

15. 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.

16. SUBSEQUENT EVENT

On March 14, 2007, the Fund announced that the monthly cash distribution to Unitholders will be decreased from $0.18 per Unit to $0.10 per Unit commencing with the distribution in respect of the month ending March, 2007.



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