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Strongco Corporation Unaudited Interim Condensed Consolidated Financial Statements September 30, 2014 and 2013 Notice required under National Instrument 51-102, “Continuous Disclosure Obligations,” Part 4.3 (3) (a). The accompanying unaudited condensed interim financial statements for Strongco Corporation as at and for the nine-month and three-month periods ended September 30, 2014, together with the accompanying notes have not been reviewed by the Company’s auditors Strongco Corporation Unaudited Interim Consolidated Statement of Financial Position (in thousands of Canadian dollars, unless otherwise indicated) As at Se pte m be r 30, 2014 As at De ce m be r 31, 2013 As at Se pte m be r 30, 2013 As s e ts Curre nt as s e ts Cash $ Trade and other receivables Inventories [note 3] 45 $ 57 $ 326 54,309 48,762 55,110 294,804 242,579 283,811 Prepaid expenses and other deposits 2,505 2,017 2,830 Assets classif ied as held f or sale [note 4] 1,064 - - 352,727 293,415 342,077 Property and equipment [note 5] 30,369 61,385 54,810 Rental f leet 30,658 29,844 25,233 Def erred income tax asset [note 10] 1,914 - 760 Intangible asset 1,800 1,800 1,800 Non-curre nt as s e ts Other assets Total as s e ts 1,944 155 249 66,685 93,184 82,852 $ 419,412 $ 386,599 $ 424,929 $ 21,688 $ 25,402 $ 25,213 Liabilitie s and s hare holde rs ' e quity Curre nt liabilitie s Bank indebtedness Trade and other payables Def erred revenue and customer deposits 54,427 32,725 47,147 1,070 1,396 894 Equipment notes payable - non-interest bearing [note 8] - interest bearing [note 8] Current portion of f inance lease obligations 77,442 29,079 53,864 149,650 163,899 171,200 4,809 4,612 4,162 Current portion of notes payable [note 9] 179 4,958 4,363 Current portion of provisions f or other liabilities [note 7] 171 177 97 309,436 262,248 306,940 Def erred income tax liability [note 10] 3,237 3,365 2,858 Finance lease obligations 5,343 6,479 5,749 18,904 36,166 30,863 Non-curre nt liabilitie s Notes payable and other liabilities [note 9] Long-term portion of provisions f or other liabilities [note 7] Employee f uture benef it obligations Total liabilitie s Contingencies, commitments and guarantees [note 12] 202 806 811 6,567 4,405 8,042 34,253 51,221 48,323 343,689 313,469 355,263 Share holde rs ' e quity Shareholders' capital [note 13] 65,324 65,324 65,324 Accumulated other comprehensive income 1,687 950 470 Contributed surplus 1,064 875 796 Retained earnings 7,648 5,981 3,076 Total s hare holde rs ' e quity Total liabilitie s and s hare holde rs ' e quity 75,723 $ 419,412 73,130 $ 386,599 69,666 $ 424,929 The accom panying notes are an integral part of these unaudited interim condensed consolidated financial statem ents. 2 Strongco Corporation Unaudited Interim Consolidated Statement of Income For the three and nine month periods ended September 30 (in thousands of Canadian dollars, unless otherwise indicated, except share and per share amounts) Three-month period ended September 30 2014 2013 Revenue [note 15] Cost of sales Gross profit $ Expenses Administration Distribution Selling Other income Operating income Interest expense Income before income taxes 129,216 $ 107,342 21,874 131,693 107,535 24,158 Nine-month period ended September 30 2014 2013 $ 369,524 $ 304,724 64,800 369,358 302,086 67,272 11,375 5,870 4,239 (7,796) 8,186 9,416 6,281 4,079 (1,355) 5,737 30,060 18,266 12,002 (7,894) 12,366 27,014 18,776 11,391 (1,692) 11,783 2,582 5,604 2,826 2,911 8,459 3,907 7,885 3,898 115 928 (314) 1,180 $ 4,221 $ 2,718 0.15 $ 0.32 $ 0.21 Provision for (recovery of) income taxes [note 10] Net income attributable to shareholders for the period $ 5,489 $ Earnings per share Basic and diluted $ 0.42 $ 1,983 Weighted average number of shares [note 14] - basic 13,221,719 13,179,262 13,221,719 13,145,752 - diluted 13,221,719 13,190,306 13,221,719 13,172,918 The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. 3 Strongco Corporation Unaudited Interim Consolidated Statement of Comprehensive Income For the three and nine month periods ended September 30 (in thousands of Canadian dollars, unless otherwise indicated) Three-month period ended September 30 2014 2013 Net income attributable to shareholders for the period $ Items that will not be reclassified to net earnings: Actuarial gain (loss) on post-employment benefit obligations (net of tax of $905) $ (2,554) Adjustment to employee benefit obligation due to tax rate change Items that may be reclassified to net earnings: Currency translation adjustment Comprehensive income attributable to shareholders for the period 5,489 1,498 $ - 739 $ 2,404 2,718 1,291 (2) (308) $ 4,221 (2,554) - 644 3,575 $ (177) (4) $ 1,983 Nine-month period ended September 30 2014 2013 441 $ 4,450 The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. 4 Strongco Corporation Unaudited Interim Consolidated Statement of Changes in Shareholders’ Equity For the nine month periods ended September 30 (in thousands of dollars, unless otherwise indicated) Number of shares Balance - December 31, 2012 13,128,719 Shareholders' capital $ 64,898 Accumulated other comprehensive income $ 29 Retained earnings (deficit) Contributed surplus $ 707 $ Total (933) $ 64,701 Net income for the period - - - 2,718 Other comprehensive income: Currency translation adjustment - 441 - - 64,898 470 707 1,291 3,076 - - 237 - 237 426 - (148) - 278 Adjustment to employee benefit obligation due to change in discount rate Total comprehensive income Share-based compensation expense Issuance of shares on exercise of stock options Balance - September 30, 2013 93,000 13,221,719 $ Number of shares Balance - December 31, 2013 13,128,719 65,324 Shareholders' capital $ Net income for the period 65,324 $ 470 $ Accumulated other comprehensive income $ 950 796 $ Contributed surplus $ 875 3,076 2,718 441 1,291 69,151 $ 69,666 Retained earnings $ 5,981 Total $ 73,130 - - - 4,221 4,221 Currency translation adjustment - 739 - - Adjustment to employee benefit obligation due to change in discount rate - - - (2,554) (2,554) 65,324 (2) 1,687 875 7,648 (2) 75,534 - - 189 - Other comprehensive income Adjustment to employee benefit obligation due to tax rate change Total comprehensive income Share-based compensation expense Balance - September 30, 2014 13,128,719 $ 65,324 $ 1,687 $ 1,064 $ 7,648 739 189 $ 75,723 The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. 5 Strongco Corporation Unaudited Interim Consolidated Statement of Cash Flows For the nine month periods ended September 30 (in thousands of Canadian dollars, unless otherwise indicated) 2014 Cash flows from operating activities Net income (loss) for the period Adjustments for Depreciation - property and equipment Depreciation - equipment inventory on rent Depreciation - rental fleet Gain on disposal of property and equipment [note 5] Gain on sale of rental fleet Share-based payment expense Interest expense Income tax expense (recovery) Employee future benefit expense Foreign exchange gain Changes in non-cash working capital [note 16] Funding of employee future benefit obligations Interest paid Income taxes paid Net cash provided by (used in) operating activities Cash flows from investing activities Purchases of rental fleet Proceeds from sale of rental fleet Purchases of property and equipment Proceeds from sale of property and equipment [note 5] Net cash provided by (used in) investing activities Cash flows from financing activities Increase (decrease) in bank indebtedness Increase in long-term debt Repayment of long-term debt Repayment of finance lease obligations Issue of share capital Repayment of business acquisition purchase financing Net cash provided by (used in) financing activities Foreign exchange on cash balances Change in cash and cash equivalents during the period Cash and cash equivalents - Beginning of period Cash and cash equivalents - End of period $ 4,221 2013 $ 2,718 4,415 13,862 3,449 3,702 16,241 2,245 $ (8,224) (261) 189 8,459 (314) 1,334 (12) (17,004) (2,631) (8,590) (140) (1,247) (1,512) (1,116) 89 7,885 1,180 1,066 (15) (19,503) (1,534) (8,032) (3,082) 332 $ (13,071) 11,586 (7,060) 41,131 32,586 $ (11,906) 8,234 (26,267) 11,502 (18,437) $ (3,792) 391 (25,052) (2,908) (31,361) $ 9,901 14,013 (4,465) (2,367) 426 (514) 16,994 $ 10 $ $ (12) $ 57 45 $ 42 (1,069) 1,395 326 The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. 6 Strongco Corporation Notes to Unaudited Interim Condensed Consolidated Financial Statements For the three and nine month periods ended September 30, 2014 and September 30, 2013 (in thousands of dollars, unless otherwise indicated) 1 General information Strongco Corporation (“Strongco” or the “Company”) sells and rents new and used equipment and provides after-sale product support (parts and service) to customers that operate in infrastructure, construction, mining, oil and gas exploration, forestry and industrial markets in Canada and the United States. The Company is a public entity, incorporated and domiciled in Canada and listed on the Toronto Stock Exchange. The address of its registered office is 1640 Enterprise Road, Mississauga, Ontario L4W 4L4. 2 Basis of presentation These interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standards (“IAS”) 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (“IASB”). These interim condensed consolidated financial statements do not include all of the information required for full annual financial statements and should be read in conjunction with the Company’s annual financial statements for the year ended December 31, 2013, which are available at www.sedar.com and on the Company’s website at www.strongco.com. The timely preparation of the interim condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies, if any, as at the date of the financial statements and the reported amounts of revenue and expenses during the period. By their nature, estimates are subject to measurement uncertainty and changes in such estimates in future years could require a material change in the interim condensed consolidated financial statements. These interim condensed consolidated financial statements were authorized for issuance by the Board of Directors of the Company on October 29, 2014. The accounting policies followed in these interim condensed consolidated financial statements are the same as those applied in the Company’s consolidated financial statements for the year ended December 31, 2013, except the following interpretation and amendments that were adopted, as required, on January 1, 2014: IAS 32 Financial Instruments: Presentation In December 2011, the IASB amended IAS 32 to clarify certain requirements for offsetting financial assets and liabilities. The amendment addresses the meaning and application of the concepts of legally enforceable right of set-off and simultaneous realization and settlement. The amendment affects presentation and disclosures but does not have an impact on financial results. IAS 36 Impairment of Assets The amendment reverses the unintended requirement in IFRS 13 Fair Value Measurement, to disclose the recoverable amount of every cash-generating unit to which significant goodwill or indefinite-lived intangible assets have been allocated. Under the amendment, the recoverable amount is required to be disclosed only when an impairment loss has been recognized or reversed. The amendment affects presentation and disclosures but does not have an impact on financial results. 7 Strongco Corporation Notes to Unaudited Interim Condensed Consolidated Financial Statements For the three and nine month periods ended September 30, 2014 and September 30, 2013 (in thousands of dollars, unless otherwise indicated) International Financial Reporting Interpretations Committee (“IFRIC”) 21 - Levies IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. The adoption of these standards and amendments had no impact on the unaudited interim condensed consolidated financial statements. Accounting standard adopted during the period The Company has adopted the following standard during the period. IFRS 5 Non-current assets held for sale and discontinued operations Non-current assets and disposal groups are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its immediate condition. Management must be committed to the sale, and it should be expected to qualify for recognition as a completed sale within one year from the date of classification. Assets (and disposal groups) classified as held for sale are measured at the lower of the carrying amount or fair value less costs to sell. Comparative amounts Certain comparative amounts have been reclassified to conform to current period’s unaudited interim condensed consolidated financial statements presentation. 8 Strongco Corporation Notes to Unaudited Interim Condensed Consolidated Financial Statements For the three and nine month periods ended September 30, 2014 and September 30, 2013 (in thousands of dollars, unless otherwise indicated) 3 Inventories Inventory components, net of write-downs and provisions are as follows: As at Equipment in-stock Equipment on rental contract with a purchase option Equipment on a short-term rental contract Equipment Parts Work-in-process Total inventory September 30, 2014 $ $ 194,898 40,406 23,251 258,555 December 31, 2013 $ 156,817 38,909 16,278 212,004 29,246 7,003 294,804 $ 26,369 4,206 242,579 September 30, 2013 $ $ 186,361 45,814 21,398 253,573 24,877 5,361 283,811 As at September 30, 2014, provisions against inventory totalled $5,097 (December 31, 2013 - $4,365; September 30, 2013 - $4,544). During the period, the Company recorded inventory write-downs of $2,844 (2013 - $678). 4 Assets classified as held for sale Land and building are transferred to assets classified as assets held for sale from property and equipment when they meet the criteria to be assets classified as held for sale. Land and buildings previously included in assets classified as held for sale are transferred to property and equipment when it is determined that they no longer meet the criteria to be assets classified as held for sale. The fair value measurement of assets held for sale is categorized within Level 2 of the fair value hierarchy. Land and buildings classified as assets held for sale are facilities which the Company has previously announced that it intends to sell through sale leaseback transactions. The Company has entered into agreements or received letters of intent to sell certain properties in Canada subject to due diligence and normal commercial conditions. During the three and nine months ended September 30, 2014, the Company sold assets held for sale and recorded a gain of $8,170 which is reported in other income in the consolidated statements of income. 5 Property and equipment During the nine months ended September 30, 2014, the Company acquired property and equipment, excluding new branch construction, of $7,312 (nine months ended September 30, 2013 - $1,190). During the nine months ended September 30, 2014, the Company incurred expenditures of $1,793 to complete the construction of the facilities in Fort McMurray, Alberta and Saint-Augustin-de-Desmaures, Quebec (2013 - $20,471). 9 Strongco Corporation Notes to Unaudited Interim Condensed Consolidated Financial Statements For the three and nine month periods ended September 30, 2014 and September 30, 2013 (in thousands of dollars, unless otherwise indicated) During the third quarter, the Company completed a sale and leaseback transaction for its Mississauga, Ontario branch and head office. Proceeds from the sale were $17.3 million, resulting in a gain of $8.4 million. Also, the Company completed a sale and leaseback transaction for its Saint-Augustin-deDesmaures, Quebec branch. Proceeds from the sale were $7.9 million, resulting in a loss of $0.1 million. During the second quarter, the Company completed a sale and leaseback transaction for its Fort McMurray, Alberta branch. Proceeds from the sale were $19.4 million, including a $2.0 million vendor take-back mortgage to be paid over 10 years recorded in prepaid expenses and other deposits ($0.2 million) and other assets ($1.8 million). The sale resulted in a loss of $0.2 million. In addition, during the nine month period, the Company entered into an agreement to sell its Moncton, New Brunswick branch and listed for sale its Val D’Or, Quebec facility. The carrying value of these properties has been reclassified to assets held for sale (land - $188 and buildings - $876). 6 Bank indebtedness The Company has credit facilities with banks in Canada and the United States that provide committed operating lines of credit totalling approximately $38.4 million. The Canadian bank credit facility is a three-year committed facility expiring in September 2015 and provides an operating line of credit for a maximum of $30.0 million. During the period the Company’s bank provided a temporary increase in the operating line to $35.0 million to the end of September 2014, after which the operating line reduced back to $30.0 million. The U.S. bank operating line of credit is renewable annually in June of each year with the next renewal extended to June 2015, at the option of both the lender and the Company. The U.S. bank credit facility provides a maximum operating line of credit of U.S. $3.0 million. 7 Provisions for other liabilities The Company 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 10 years. As at September 30, 2014, the total obligation under these contracts was $11,485 (December 31, 2013 - $11,638; September 30, 2013 - $12,375). The Company'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 provision of $373 (December 31, 2013 $982; September 30, 2013 - $908) has been accrued in the Company's accounts with respect to these potential losses. The long-term portion of the provision of $202 (December 31, 2013 - $805; September 30, 2013 - $811) is classified as long-term liabilities. 8 Equipment notes payable In addition to its bank credit facilities, the Company has lines of credit available totalling approximately $318 million from various non-bank equipment lenders in Canada and the United States, which are used to finance equipment inventory. As at September 30, 2014, there was approximately $242 million borrowed on these equipment finance lines (December 31, 2013 – approximately $193 million; September 30, 2013 – approximately $238 million). Typically, these equipment notes are interest-free for periods up to 12 months from the date of financing, after which they bear interest at variable rates based upon 30-day and 90-day Bankers’ Acceptance rates (“BA”), the prime rate of a Canadian chartered bank, and 30-day and 90-day LIBOR rates plus the 10 Strongco Corporation Notes to Unaudited Interim Condensed Consolidated Financial Statements For the three and nine month periods ended September 30, 2014 and September 30, 2013 (in thousands of dollars, unless otherwise indicated) financing company’s margin. As at September 30, 2014, the rates ranged from 2.81% to 7.25% with an effective weighted average rate of 5.39%. As collateral for these equipment notes, the Company has provided liens on the specific inventory financed and any related accounts receivable. In the normal course of business, these liens cover substantially all of the equipment inventories. Monthly principal repayments equal to 3.00% of the original principal balance of the note commence 12 months from the date of financing and the remaining balance is due in full at the earlier of 24 months after financing or when the financed equipment is sold. While financed equipment is out on rent, monthly curtailments are required equal to the greater of 70% of the rental revenue and 2.5% of the original value of the note. Any remaining balance after 24 months, which is due in full, is normally refinanced with the lender over an additional period of up to 24 months. All of the Company’s equipment notes facilities are renewable annually. On May 6, 2014, the Company entered into an interest rate swap agreement available under the credit facility with its bank to fix the floating BA rate on $25 million of interest bearing debt at a fixed interest rate equal to 1.78% for a period of three years to May 6, 2017. As at September 30, 2014, the Company has total outstanding swaps in place to fix the interest rate on $50 million of interest bearing debt at approximately 5.94%. Certain of the Company’s bank and equipment finance credit agreements contain restrictive financial covenants, including requiring the Company to remain in compliance with the financial covenants under all of its other lending agreements (“cross default provisions”). As at September 30, 2014, the Company was in compliance with all financial covenants. 9 Notes payable and other liabilities Notes payable and other liabilities comprise of the following: Equipment plan notes payable - rental fleet (i) Term note - United States (ii) Term note - Canada (iii) Construction facility - Fort McMurray (iv) Construction facility - Saint-Augustin-de-Desmaures (v) Current portion Long-term portion September 30, 2014 $ 15,495 3,588 - $ 19,083 179 18,904 December 31, 2013 $ 15,808 3,531 5,021 11,461 $ 5,303 41,124 4,958 36,166 September 30, 2013 $ 12,570 3,455 5,380 9,603 $ 4,218 35,226 4,363 30,863 (i) In addition to equipment notes payable as described in note 8, the Company utilizes floor plan notes payable to finance its rental fleet. Payment is required at the earlier of the sale of the item and per contractual schedule ranging from 12 to 24 months. Effective interest rates range from 2.81% to 6.25% with various maturity dates. (ii) The Company’s bank credit facilities in the United States include a term note secured by real estate and cross-collateralized with the Company’s revolving line of credit in the United States. The term note matures in May 2017 and bears interest at a rate of LIBOR plus 2.75%. Monthly 11 Strongco Corporation Notes to Unaudited Interim Condensed Consolidated Financial Statements For the three and nine month periods ended September 30, 2014 and September 30, 2013 (in thousands of dollars, unless otherwise indicated) payments of principal of US$13 plus accrued interest are required under the terms of the note. The Company has interest rate swap agreements in place related to the term note, which have converted the variable rate on the term loans to a fixed rate of 4.14%. The term loans and swap agreements expire in May 2017, at which point a balloon payment for the balance of the loans is due. (iii) The Company’s bank credit facilities in Canada included a term note secured by the Mississauga, Ontario property and cross-collateralized with the Company’s revolving line of credit in Canada (“Term note – Canada”). The term note was to mature in June 2017 and bore interest at the bank’s one-month Bankers’ Acceptance (BA) rate plus 4%. Monthly principal payments of $120 plus accrued interest were required under the terms of the note. On September 29, 2014 the Company completed the sale leaseback of this facility and the outstanding balance of the term loan was repaid in full. (iv) In September 2011, the Company secured a construction loan facility with its bank to finance the construction of a new Fort McMurray, Alberta branch (“Construction Facility – Fort McMurray”). Under this facility, the Company was able to borrow 70% of the cost of the land and building construction costs to a maximum of $13.9 million. Interest on this construction loan was at the bank’s prime lending rate plus 3.0%. During March 2014, this construction loan was converted to a term loan which was to mature in March 2029 and bore interest at the bank’s prime lending rate plus 3.0%. Monthly principal payments of $77 plus accrued interest were required under the terms of the note. On June 30, 2014, the Company completed the sale leaseback of this facility and the outstanding balance of the term loan was repaid in full. (v) In March 2013, the Company secured a construction loan facility with its bank to finance the construction of a new Saint-Augustin-de-Desmaures branch, outside of Quebec City, Quebec. Under this facility, the Company was able to borrow 70% of the cost of the land and building construction costs to a maximum of $6.0 million. Interest on this construction loan was at the bank’s prime lending rate plus 3.0%. During March 2014, this construction loan was converted to a term loan which was to mature in March 2029 and bore interest at the bank’s prime lending rate plus 3.0%. Monthly principal payments of $33 plus accrued interest were required under the terms of the note. On August 13, 2014, the Company completed the sale leaseback of this facility and the outstanding balance of the term loan was repaid in full. 10 Income taxes The major components of the income tax expense in the interim consolidated statement of income are: Three months ended September 30 2014 2013 Current income tax expense Deferred tax recovery related to origination and reversal of deferred taxes $ $ 792 $ (677) 115 $ 992 Nine months ended September 30 2014 2013 $ (64) 928 $ 825 $ (1,139) (314) $ 1,676 (496) 1,180 12 Strongco Corporation Notes to Unaudited Interim Condensed Consolidated Financial Statements For the three and nine month periods ended September 30, 2014 and September 30, 2013 (in thousands of dollars, unless otherwise indicated) 11 Employee future benefits obligations During the nine months ended September 30, 2014, the discount rate used to value the obligations under the Company’s defined benefit pension plans decreased from 5.00% to 4.10% for the employee plan. This resulted in a $3,459 actuarial loss ($2,554 after tax) for the nine months ended September 30, 2014, which was recorded in Other Comprehensive Income. 12 Contingencies, commitments and guarantees In the ordinary course of business activities, the Company may be contingently liable for litigation. On an ongoing basis, the Company assesses the likelihood of any adverse judgments 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 matter. 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. As at September 30, 2014, management has determined that there is no pending or actual litigation requiring a provision. 13 Shareholders’ capital Authorized: Unlimited number of shares Issued: As at September 30, 2014, a total of 13,221,719 shares (December 31 and September 30, 2013 – 13,221,719) with a stated valued of $65,324 (December 31 and September 30, 2013 - $65,324) were issued and outstanding. On April 30, 2014, the Company granted irrevocable options to certain members of senior management to purchase 95,000 shares of the Company. These options have an exercise price of $3.67 per share, which is equal to the average trading price of the Company’s units over the five days immediately following April 30, 2014. A third of the options vest and become exercisable after 36 months from the grant date, a third of the options vest and become exercisable after 48 months from the grant date and the balance vest and become exercisable after 60 months from the grant date. The options expire seven years from the issue date, on April 30, 2021. The stock-based compensation expense of these options is based on the estimated fair value of the options at the grant date, which was determined using the Black-Scholes option pricing model, amortized over the vesting period of the options. The following assumptions were used in determining the fair value of the options using the Black-Scholes model: Risk-free interest rate Option life Expected volatility Estimated forfeiture rate 1.43% 7 years 38% 8.5% The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may not necessarily be the actual outcome. Other assumptions have been based on the Company’s historical experience. The dividend rate assumption used in the Black-Scholes option pricing model is nil% for all stock option grants. 13 Strongco Corporation Notes to Unaudited Interim Condensed Consolidated Financial Statements For the three and nine month periods ended September 30, 2014 and September 30, 2013 (in thousands of dollars, unless otherwise indicated) As at September 30, 2014, stock options totalling 469,141 (December 31 and September 30, 2013 – 374,141) had been granted and were outstanding with a weighted average remaining contractual life of 47.5 months (December 31, 2013 – 48.3; September 30, 2013 – 51.4) and the weighted average exercise price was $4.63 (December 31, 2013 - $4.87; September 30, 2013 - $4.87). No stock options were cancelled or forfeited during the period. As at September 30, 2014, restricted share units totalling 80,965 had been granted and were outstanding (December 31 and September 30, 2013 – 80,965) with a weighted average unit value of $5.50 (December 31 and September 30, 2013 – $5.50). Stock-based compensation expense resulting from the stock options and RSUs for the period ended September 30, 2014 is $189 (2013 - $237). 14 Earnings per share Three-month period ended September 30 2014 2013 Nine-month period ended September 30 2014 2013 Weighted average number of shares for basic earnings per share calculation Effect of dilutive options outstanding 13,221,719 - 13,179,262 11,044 13,221,719 - 13,145,752 27,166 Weighted average number of shares for diluted earnings per share calculation 13,221,719 13,190,306 13,221,719 13,172,918 The computation of dilutive options outstanding only includes those options having exercise prices below the average market price of the shares during the period. 15 Segment information Management has determined that the Company has one reportable segment, Equipment Distribution, based on reports reviewed by the President and Chief Executive Officer. This business sells and rents new and used equipment and provides after-sale product support (parts and service) to customers that operate in infrastructure, construction, mining, oil and gas exploration, forestry and industrial markets. A breakdown of revenue from the Equipment Distribution segment is as follows: Equipment sales Equipment rentals Product support Total Equipment Distribution Three-month period ended September 30 2014 2013 $ 83,635 $ 87,811 9,038 8,472 36,543 35,410 $ 129,216 $ 131,693 Nine-month period ended September 30 2014 2013 $ 241,978 $ 245,782 21,608 22,664 105,938 100,912 $ 369,524 $ 369,358 14 Strongco Corporation Notes to Unaudited Interim Condensed Consolidated Financial Statements For the three and nine month periods ended September 30, 2014 and September 30, 2013 (in thousands of dollars, unless otherwise indicated) 16 Changes in non-cash working capital The components of the changes in non-cash working capital are detailed below: For the nine-month period ended September 30 Changes in non-cash working capital Trade and other receivables Inventories Prepaid expenses and other deposits Other assets Trade and other payables Provision for other liabilities Deferred revenue and customer deposits Equipment notes payable 2014 $ $ (5,164) (65,137) (248) 11 20,810 (6) (340) 33,070 (17,004) 2013 $ $ (10,563) (24,710) (854) 42 1,789 (238) (373) 15,405 (19,503) 17 Seasonality The Company’s interim period revenues and earnings historically follow 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 increase 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 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 that has previously gone out on rental contracts. 18 Economic relationship The Company sells, rents 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 overall operations. The Company has had an ongoing relationship with Volvo since 1991. 15