Growth International Annual Report 2004

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FY2004 Annual Report · Growth International

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A N N U A L R E P O R T 2 0 0 4

Ag Growth Income Fund
Box 39 - 74, Hwy 205 East, Rosenort, Manitoba R0G 1W0
Telephone: 204-746-2396 Fax: 204-746-2241

Investor Relations: Rob Stenson
Telephone: 204-746-2396 Email: robstenson@aggrowth.com

Auditors: Ernst & Young LLP (Winnipeg)

Transfer Agent: Computershare Trust Company of Canada

Shares Listed: Toronto Stock Exchange
Stock Symbol: AFN.UN

Ag Growth
IPO: May 18, 2004 (Founded: 1996)

Batco Manufacturing
Acquired: 1997 (Founded: 1992)

Wheatheart Manufacturing
Acquired: 1998 (Founded: 1973)

Westﬁeld Industries
Acquired: 2000 (Founded: 1950)

Edwards Group
Acquired: 2005 (Founded: 1991)

To Our Unitholders:

On behalf of the Board of Trustees, management and

employees of Ag Growth it is my pleasure to welcome you

to the ﬁrst Annual Report of the Ag Growth Income Fund.

With the establishment of the Fund on March 24, 2004

and the subsequent IPO on May 18, 2004, the audited

statements encompass a partial year only. However, we

have provided you with some additional ﬂavor, particularly

in the President’s message that will offer you a broader

perspective of the Fund and its activities.

Although chairmanship of this Fund is a relatively new responsibility, my involvement

and that of my ﬁrm, Tricor Paciﬁc Capital, dates back ﬁve years. What appealed to us

then, still appeals to us today. Simply stated, we like the fundamentals of the business.

Ag Growth is a market leader in its niche as a low cost producer with strong brand

loyalty and a demonstrated ability to consistently generate high margins and strong free

cashﬂow. In some ways, the most intriguing aspect of the business is its highly motivated

entrepreneurial minded senior management team. Rob Stenson and his team show

ﬁerce determination in their pursuit of product excellence, customer satisfaction

and market leadership.

As we look to the future, we believe Ag Growth is well positioned to capitalize on further

growth opportunities. We have demonstrated an ability to grow both organically and

through accretive acquisitions. Ag Growth enjoys the support of a dedicated and highly

talented Board of Trustees, along with some of the ﬁnest ﬁnancial and legal professionals in

the business. We appreciate everyone’s interest and support in our inaugural year and look

forward to your continued participation in the years to come.

Sincerely,

Rod Senft

Chairman of the Board
Ag Growth Income Fund

President’s Message

On behalf of management, our employees and the Board

of Trustees of Ag Growth Income Fund, we welcome new

unitholders and invite you to read our ﬁrst annual report.

This report encompasses the period from the Fund’s IPO

on May 18, 2004 through December 31, 2004. I would like

to take this opportunity to give you a brief overview of the

evolution of the Fund, our strategy and the industry in which

we operate.

The roots of the company lie in Swift Current, Saskatchewan, at Batco Manufacturing,

which was launched by members of the current management team in the early 1990s. Batco

designs and builds belt conveyors targeted at gentle handling applications on the farm. We

successfully capitalized on a growing trend in specialty crop production in Western Canada.

Having met with success in this market niche, management next set its sights on the much

larger US market. As a result, further growth was realized and opportunities for strategic

product line expansion arose as dealers demanded a greater breadth and scope of product

offerings.

In November 1996, Ag Growth was formed and subsequently completed a reverse takeover

of Batco Manufacturing. The company’s expanded strategy included a platform to grow

organically while also attracting new investment to acquire additional product lines that

were synergistic with our current offerings.

In May 1998, Ag Growth bought Wheatheart Manufacturing of Saskatoon, Saskatchewan.

This provided an extension into additional grain handling equipment and accessories.

Wheatheart has beneﬁted from the geographic diversiﬁcation of Ag Growth while our

relationship with our customers has beneﬁted from a broader catalogue of related products.

In May 2000, Ag Growth bought Westﬁeld Industries of Rosenort, Manitoba. Westﬁeld is the

largest manufacturer of portable grain augers in North America. Ag Growth’s combination of

three market niche leaders has resulted in the most competitive offering of portable grain

handling equipment throughout North America and, increasingly, worldwide.

Our strategy has remained consistent throughout our stages of development, from

conceptual start-up to becoming a publicly traded trust on the TSX.

Our ultimate goal is to be a single-stop supplier of the highest quality grain handling

equipment and related products for both dealers and farmers. We have remained focused

on being a market-driven company that listens to our customers. We have positioned our

research and development efforts toward new products and innovations that meet the

increasingly demanding needs of our customers. This focus has resulted in a business model

that is embraced by customers and provides strong returns for investors.

We are very excited as we continue with our strategy as an Income Trust. We believe that the

lower cost of capital associated with our current structure will enhance our ability to grow,

both organically and through a disciplined acquisition program.

We are very pleased with our initial performance since our transition to a trust. The

anticipated rebound in market conditions has come to fruition. The agricultural sector was

challenged in 2002 and 2003 by a prolonged downturn in commodity prices and a severe

drought pattern throughout North America and Australia, encompassing the majority of

our key markets. The result was one of the most depressed agricultural environments in

two decades.

We are proud that, through this period, Ag Growth performed exceedingly well. Revenues

and EBITDA were very strong despite the harsh market conditions. We attribute this to a

number of factors.

First, our grain handling equipment is relatively low priced and an integral part of the

day-to-day farming operation. This differentiates us from many farm equipment companies.

Farmers need our product for the efﬁcient operation of their farms and must replace the

equipment through good times and bad.

President’s Message

Second, although we are in a competitive marketplace, our position as a low-cost

producer is an advantage in challenging environments.

Third, our geographic diversiﬁcation and the strength of our distribution network help

us to stabilize demand for our products, sheltering us from regional drought patterns.

This is an advantage not enjoyed by many of our competitors.

Finally, the breadth of our product offering, focused on grain handling equipment, gives

us an unsurpassed advantage with our customers, who value the quality, selection, and

aftermarket service and support that we can offer.

Ag Growth ﬁnished 2004 surpassing the expectations presented in conjunction with our

Initial Public Offering. Western Canada faced another challenging year, due to extremely wet

conditions and early frosts that affected both the volume and quality of the crop. However,

the US Midwest rebounded strongly and delivered yet another record crop. This speaks to

the strength of our broad geographic focus.

Entering 2005, we are off to a very strong start. On aggregate, our pre-season order

backlogs are the largest we have ever experienced. The inventory pipeline throughout our

distribution network is very lean, which drives underlying demand as we replenish these

levels. In anticipation of another strong year for the company, we have increased our plant

capacity with a focus on labour recruitment and retention. Crop volume is the key driver of

our business and, barring a substantial drought as we enter a new crop season, we expect

current conditions to propel us to another strong growth year.

Fundamentals for the agriculture sector remain buoyant in the near-term. Most players in the

industry have seen a rebound from the lows experienced in 2002/2003. Although the large

North American crop experienced during this past cycle has softened commodity prices,

world food stocks are at low levels by historic standards as a result of supply exceeding

demand over the last few years.

Commodity prices are not the key driver for Ag Growth. Grain handling equipment demand

is primarily driven by the volume of grains produced. This driver remains positive as more

food is required every year to feed a growing world population. In the near-term, farmers

should be compelled to maximize plantings and yields as world food stocks are brought

back in balance.

Longer term fundamentals are also strong for the Fund. World food demand is expected to

continue to grow as a result of expanding populations and demand for higher protein diets,

as areas such as China and India experience increases in their standard of living.

To meet this demand, producers continue to improve farming practices and adopt better

seed technologies. This should continue to drive per-acre yield enhancement as it has for the

past 50 years. Other countries are just beginning to adopt the more sophisticated farming

techniques and economies of scale prevalent among North American producers. The result

is increasing adoption of on-farm storage and, ultimately, grain handling. This will continue

to open new world markets for grain handling equipment.

Ag Growth Income Fund continues to seek accretive growth opportunities. This is evidenced

by the recent signing of an agreement to purchase substantially all of the assets of the

Edwards Group of Companies based in Lethbridge, Alberta. Edwards has a leading market

position in the manufacture of aeration and grain drying equipment in Western Canada.

Edwards product offerings are very complementary with our current catalogue and we

expect to beneﬁt from synergies in both marketing and production as we move forward

together. We expect the acquisition to further strengthen the ability of our company to grow

and add value for both customers and unitholders.

In closing, I would like to take this opportunity to welcome new unitholders as well as the

ﬁne people at the Edwards Group of Companies to the Ag Growth family.

Sincerely,

Rob Stenson

President and CEO
Ag Growth Income Fund

Operational Highlights

Given the timing of the Fund’s creation and subsequent IPO, the ﬁnancial

statements, accompanying notes and MD & A are limited to a partial year

only. In order to provide the reader with additional perspective on the

business, we have included some highlights and commentary that reﬂect the operations of

Ag Growth for the entire calendar year. 2004 was particularly challenging for the agricultural

industry as it faced a dramatic escalation in steel prices, continued devaluation of the US

currency, a killer frost in Western Canada and year two of the BSE crisis. Yet it provided Ag

Growth the opportunity to further validate the strength of its strategic plan and its ability to

respond effectively to new challenges.

Pro Forma Historical Sales 1992 – 2004

)
s
n
o
i
l
l
i

(

$70

$60

$50

$40

$30

$20

$10

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Note: Pro Forma Historical Sales are presented as a compilation of Batco, Wheatheart and

Westﬁeld sales since 1992 regardless of actual acquisition dates.

We countered margin pressure with aggressive interim price increases in March and again in

September. The lag effect of honouring price commitments on existing orders tempered the full

impact of the adjustments in 2004. Market acceptance of our increased prices, and those of our

competitors, underscores the signiﬁcance of our products as farm consumables with relatively

low price points, requiring replacement typically every three to seven years. Alternate sourcing

of materials and components both offshore and in the USA, provided additional margin relief.

As a consequence, margin erosion was limited to three points, from a gross margin of 49.3% in

2003 to 46.3% in 2004. The following chart illustrates the production cost breakdown for 2004:

Cost of Sales Analysis, December 31, 2004

Production
Labour
26%

Steel
30%

Other Material
& Shop Supplies
12%

Major
Components
32%

Geographic Diversiﬁcation

The long-term effects of a devalued US currency

required Ag Growth to re-evaluate its channels of

distribution and to explore opportunities to reduce costs associated with doing business

in the USA. Accordingly, we established a full service factory operated warehouse facility

centrally located in Springﬁeld, Illinois. This change enabled us to achieve cost savings as

well as more hands-on management of the territory. Based on the success of this model, we

will be implementing a similar structure in Iowa in 2005 along with a series of other channel

reforms. The map at right provides detail of Ag Growth’s extensive distribution network as

well as a breakdown of sales by region for 2004. In total, Ag Growth has approximately 1,400

dealers and distributors across North America.

A record corn and soybean harvest in the Midwest USA demonstrated the value of

geographic diversiﬁcation, mitigating the impact of the mid-August frost in Western Canada.

In 2004, sales in Western Canada represented 22% of total sales, down from 25% in 2003.

Of the 48 states and nine provinces in which Ag Growth sells product, only 10 accounted for

more than 5% of total sales. No single state or province accounted for more than 15% of

total sales.

Geographic Diversiﬁcation

Western Canada
22%

Northwest
1%

Midwest
34%

Great Plains
22%

Eastern Canada
3%

Northeast
9%

Southwest
1%

Southeast
3%

Offshore
5%

Manufacturing Plants

Factory Warehouse Locations

Contract Warehouses

Distribution Warehouses

Organic Growth

Ag Growth has a proud history of original equipment design. R & D innovations have

ﬂourished in an entrepreneurial environment. Typically, we invest approximately $700,000

annually to improve existing products, extend product lines and to develop new products.

This enables Ag Growth to maintain market leadership and brand strength. The Westﬁeld

launch of the MK 130 Plus auger series was very successful. Developed in late 2003, this

line targets high volume producers and small commercial operations. The Westﬁeld 8" bin

unload product line showed great traction in 2004, growing 350% over ﬁrst-year sales. At

Wheatheart, we designed a new line of post pounders targeted at the US skid steer market.

In total, sales of product in 2004 that was designed in 2003 / 2004 exceeded $4.5 million.

Year 2 of our offshore development initiatives continued at an encouraging growth rate of

14% over 2003 and 56% over 2002. Double branding of augers has proved beneﬁcial to both

Westﬁeld and Wheatheart networks in Australia. Western Europe saw further development

as it provides a low risk launch point for product destined to former Soviet satellites. Further

development of offshore markets will remain a signiﬁcant focal point for further organic

growth over the next few years.

Management’s Discussion and Analysis

March 21, 2005

This Management’s Discussion and Analysis should be read in conjunction with
the audited consolidated ﬁnancial statements and accompanying notes (“Financial
Statements”) of Ag Growth Income Fund for the initial 283-day period ended
December 31, 2004. Results are reported in Canadian dollars unless otherwise
stated and have been prepared in accordance with Canadian generally accepted
accounting principles.

OVERVIEW OF THE FUND

Ag Growth Income Fund [the “Fund”] is an unincorporated, open-ended, limited
purpose trust established under the laws of the Province of Ontario by a
Declaration of Trust made as at March 24, 2004. On May 5, 2004, the Fund ﬁled a
ﬁnal prospectus for the sale of 6,904,000 units at $10 per unit. In conjunction with
the IPO, the Fund acquired indirectly all of the securities and assets of Ag Growth
Industries Inc. [“Ag Growth”], which conducts business in the grain handling,
storage, and conditioning market. As consideration for the acquisition, the owners
of Ag Growth received, in addition to cash, 800,000 Class B Exchangeable units
and 1,926,000 Class C Exchangeable Subordinated units of AGX Holdings Limited
Partnership [“AGHLP”], a wholly owned subsidiary of the Fund. The units of
the Fund and the Class B and Class C units of AGHLP participate pro rata in the
distributions of net earnings. Subsequent to the date of the offering, a total of
630,022 Class B units of AGHLP have been exchanged for 630,022 units of the
Fund. The owners of Ag Growth currently retain a 22% interest in the Fund as well
as holding 2,095,978 Special Voting Units (1).

As at March 21, 2005, the following units of the Fund were issued and outstanding:

Fund units
Class B Exchangeable units
Class C Exchangeable Subordinated units
Total units that participate pro rata in distributions

Special Voting Units (1)

7,534,022
169,978
1,926,000
9,630,000

2,095,978

(1) The Fund has issued a Special Voting Unit for each Class B and Class C unit
outstanding. The Special Voting Units are not entitled to any interest or share in
the Fund, or in any distribution from the Fund, but are entitled to vote on matters
related to the Fund.

Ag Growth Income Fund units trade on the Toronto Stock Exchange under the
symbol AFN.UN.

Management’s Discussion and Analysis

BASIS OF MANAGEMENT’S DISCUSSION AND ANALYSIS

The Fund was inactive until its acquisition of Ag Growth on May 18, 2004. Included
in the Fund’s results of operations are the results of Ag Growth’s operations for the
228-day period from the date of acquisition to December 31, 2004. Comparative
results provided, for purposes of Management’s Discussion and Analysis, are
Ag Growth’s results of operations for the nine-month period ended December 31,
2003. Comparative results for a 228-day period ended December 31, 2003 are not
available for Ag Growth. Therefore, to provide meaningful information to the reader,
the following Management Discussion and Analysis will refer to the Combined
Operating Results of the Fund for the nine-month period ended December 31, 2004
which are comprised of the operations of the Fund for the 283 day period ended
December 31, 2004 (which includes only 228 days of active operations from
May 18 to December 31, 2004), and Ag Growth’s results of operations from April 1
to May 17, 2004 (the “combined operating results”). The combined operating
results will be compared to Ag Growth’s results of operations for the nine-month
period ended December 31, 2003. Readers are cautioned that the combined
operating results presented are not the results of the Fund for the 283-day period
ended December 31, 2004 and have been presented only to provide the reader
with additional information to enhance the comparability of operating results to
Ag Growth’s nine-month period ended December 31, 2003.

The table at right reconciles the operating results reported by the Fund to the
combined operating results for the nine-month period ended December 31, 2004
that includes the operations of Ag Growth for the period April 1 – May 17, 2004.
Other than transactions related to the initial public offering on May 18, 2004, there
are no unusual items in either Ag Growth’s or the Fund’s results for the nine-month
period ended December 31, 2004.

Management’s Discussion and Analysis

SUMMARY FINANCIAL INFORMATION

The Fund

Ag Growth
(Pre Fund)

283 Day
period

April 1 –
December 31, May 17,
2004
$

2004*
$

Combined
operating
results

Ag Growth
(Pre Fund)

Nine-month Nine-month

period

December 31, December 31,

2004
$

2003
$

Sales
Cost of sales
Gross margin
Operating expenses
1,993,422
EBITDA before IPO expenses 11,142,404 2,052,680
IPO expenses
1,401,750
EBITDA **
650,930
Amortization
101,671
Interest expense
688,467 384,654
Write-off deferred ﬁnance fees 0
0
Earnings before tax
164,605
8,887,409
Tax expense (recovery)
(184,557)
164,000
Net earnings
349,162
8,723,409

42,404,586 8,654,417 51,059,003 43,871,318
22,683,058 4,608,315 27,291,373 22,433,809
19,721,528 4,046,102 23,767,630 21,437,509
10,572,546
9,040,759
8,579,124
13,195,084 12,396,750
1,401,750
0
11,793,334 12,396,750
1,142,157
1,668,199
3,274,298
1,073,121
1,749,156
0
6,231,139
9,052,014
(20,557) 3,544,501
9,072,571 2,686,638

0
11,142,404
1,566,528

Net earnings per unit

0.91

N/A

* The Fund was inactive until its acquisition of Ag Growth on May 18, 2004.
Included in the Fund’s results of operations are the results of Ag Growth’s
operations for only the 228-day period from the date of acquisition, May 18, 2004,
to December 31, 2004.

** See discussion of non-GAAP measures.

December 31, 2004
$

December 31, 2003
$

Total assets
Total long-term liabilities

120,671,166
20,068,593

102,561,321
45,486,755

Management’s Discussion and Analysis

For the period May 18 to December 31, 2004, the Fund generated distributable
cash of $1.0058 per unit and declared regular distributions, in accordance with
the Fund’s targeted monthly distributions, of $0.8079 per unit. In addition, the
Fund declared two special distributions totalling $0.1380 per unit. With respect
to the 283-day period ended December 31, 2004, the table below summarizes the
distributions declared for trust units of Ag Growth and for Class B Exchangeable
limited partnership units and Class C Subordinated limited partnership units of
AGX Holdings Limited Partnership:

Trust units
Class B Exchangeable units
Class C Exchangeable Subordinated units

OPERATING RESULTS

Impact of Foreign Exchange

7,033,487
253,727
1,821,803
9,109,017

The average exchange rate used by the Fund to record its US Dollar denominated
sales decreased signiﬁcantly in 2004 compared to 2003. As a result, sales for the
three and nine months ended December 31, 2004 were negatively impacted by
foreign exchange, compared to the same periods in 2003.

Historically, Ag Growth has entered foreign exchange contracts to mitigate foreign
exchange risk. In ﬁscal 2004, foreign exchange contracts totalled USD $14.0 million
with an average rate of $1.3279. In 2003, foreign exchange contracts totalled
USD $12.8 million with an average rate of $1.5957. Largely as a result of the
differing hedge rates, the company’s effective exchange rate on sales for the nine
months ended December 31, 2004 is signiﬁcantly lower than for the comparable
period in 2003.

The effect of foreign exchange on the three-month periods ended December 31, 2004
and 2003 is slightly less signiﬁcant than for the nine-month periods then ended.
Ag Growth did not apply hedge accounting in ﬁscal 2003 and consequently 2003
sales at the favourable hedge rate had all been recorded by the end of the third
quarter. As a result, sales in the fourth quarter of 2003 were recorded at an average
rate of approximately $1.36. This compares to an average exchange rate on sales of
approximately $1.24 for the three months ended December 31, 2004.

Management’s Discussion and Analysis

Sales

Combined sales for the nine-month period ended December 31, 2004 increased
16.4% over the same period in 2003. The signiﬁcant increase was largely the
result of the Fund’s ability to capitalize on the record US corn crop using its sizable
market share and its widespread distribution network. The Fund also beneﬁted
from an increase in new product revenue, primarily due to the continued success
of its new auger and bin load-out lines. Finally, price increases implemented
throughout 2004 in response to rising input costs, and a trend towards larger,
more expensive units, has resulted in higher per unit revenue. The increase also
reﬂects a recovery from the poor market conditions experienced in the ﬁrst half of
2003. It is important to note that the increase was achieved even though US Dollar
denominated sales were recorded at considerably lower exchange rates in 2004,
and despite poor crop conditions in Western Canada.

Expenses

Gross margin as a percentage of sales for the nine-month periods ended December
31, 2004 and 2003 were 46.5% and 48.9% respectively. As a percentage of sales,
the decline in gross margin was expected and is largely due to the impact of
recording US Dollar denominated sales at a lower exchange rate. Gross margin
in 2004 has also been negatively impacted by rising steel costs, as there is a
delay between the time the higher input costs are incurred and the time the price
increases implemented to offset the higher input costs appear in the Fund’s results.

Combined operating expenses for the nine-months ended December 31, 2004
increased $1.5 million over the same period in 2003. The increase was the result of
higher salary expenses of $0.7 million that related largely to higher earnings based
bonus accruals, a $0.6 million increase in professional fees that related primarily
to the successful defence of a patent infringement lawsuit, a $0.3 million increase
in warehousing costs that related largely to the addition of a new warehouse in
Illinois, and an accrual to the Fund’s long term incentive plan of $0.3 million. These
increases were offset by lower capital taxes of $0.3 million and the elimination
of management fees payable prior to the IPO that totalled $0.5 million in the
nine-months ended December 31, 2003. A number of smaller miscellaneous items
accounted for the remaining change.

Included in the results of the Ag Growth period April 1 to May 17, 2004 is the
accrual of $1.4 million of IPO related costs. No unusual expenses were recorded in
the 283-day period ended December 31, 2004.

Management’s Discussion and Analysis

Net earnings and EBITDA (see discussion of non-GAAP measures)

For the nine-months ended December 31, 2004, EBITDA before IPO costs as a
percentage of sales was 25.8%, compared to 28.3% for the nine-month period
ended December 31, 2003. The decrease in EBITDA percentage compared to 2003
was expected and is primarily the result of recording US Dollar denominated
transactions at a lower exchange rate. Also, EBITDA in 2004 has been negatively
impacted by rising steel costs, as there is a delay between the time the higher
input costs are incurred and the time the price increases implemented to offset
the higher input costs appear in the Fund’s results. As a percentage of sales,
EBITDA after IPO costs decreased from 28.3% to 23.1% for the nine months ended
December 31, 2003 and 2004 respectively.

Upon completion of the IPO on May 18, 2004, the Fund retired the existing debt
obligations of Ag Growth and entered into a new credit facility with a single lender.
The credit facility includes term debt of $20 million and an operating facility of
$15 million, increasing to $18 million for the period May 31 to September 30 each
year. Both facilities bear interest at rates based on performance calculations.
For the 228-day period ended December 31, 2004, the Fund’s effective interest
rate on both its term debt and operating facility was 4.5%, which is in line with
management expectations.

Amortization for the 228-day period ended December 31, 2004 of $1.6 million
includes the amortization of intangible assets of $0.9 million, the amortization of
deferred ﬁnancing costs of $0.2 million, and the amortization of property, plant and
equipment of $0.5 million.

The Fund is a mutual fund trust for income tax purposes and therefore is not
subject to tax on income distributed to unitholders. The manufacturing business
operations of the Fund are carried out within a limited partnership. Income from
the limited partnership is not subject to tax but ﬂows through to the holders of
the partnership units, which include the Fund. The Fund’s distributions are taxable
in the hands of the unitholders. As a result of the Fund’s structure, tax expense is
recorded only for the Fund’s subsidiary corporation, Ag Growth. The recorded tax
expense of $164,000 for the nine months ended December 31, 2004 represents
taxes payable on the net income allocated to Ag Growth through its ownership in
AGLP after deductions for interest expense and capital taxes.

Net earnings for the nine-month period ended December 31, 2004 were
$8.7 million, or $0.91 per basic and diluted unit.

Management’s Discussion and Analysis

Quarterly Financial Information

2004

2004
Fourth Quarter Third Quarter Second Quarter *
$

2004

Total sales
Net earnings
Net earnings per unit

13,915,323
1,798,911
0.19

21,154,339
5,483,492
0.57

7,334,924
1,441,006
0.15

*Includes the results of Ag Growth’s operations only for the 44-day period
May 18, 2004 to June 30, 2004. See “Basis of Management’s Discussion
and Analysis”.

Interim period revenues and earnings historically reﬂect some seasonality. The
third quarter is typically the strongest primarily due to high in-season demand at
the farm level. Historically, revenues and earnings in the ﬁrst, second, and fourth
quarters are relatively similar. Distributable cash generated per unit will also
typically be highest in the third quarter.

The Fund’s collections of accounts receivable are weighted towards the third and
fourth quarters. This collection pattern, combined with seasonally high sales in
the third quarter, result in accounts receivable levels increasing throughout the
year and peaking in the third quarter. In order to ensure the Fund has adequate
supply throughout its distribution network in advance of the in-season demand
experienced primarily in the third quarter, inventory levels must be gradually
increased throughout the year. Accordingly, inventory levels increase in the ﬁrst
and second quarters and then begin to decline in the third and fourth quarters as
sales levels exceed production.

As a result of these working capital movements, historically, Ag Growth’s use of
its bank revolver is higher in the ﬁrst and second quarters. The revolver balance
begins to decline in the third quarter as collections of accounts receivable increase
and inventory levels begin to decrease. Ag Growth has generally fully repaid its
revolver balance by early in the fourth quarter.

Management’s Discussion and Analysis

FOURTH QUARTER

Sales for the three-months ended December 31, 2004 were $13.9 million, an
increase of 15.2% over the same period in 2003. The signiﬁcant increase was
largely the result of high preseason demand, as the Fund’s US distribution network
began the process of rebuilding their inventory levels for 2005 after a very strong
2004 harvest season. Sales in the fourth quarter also beneﬁted from the continued
success of the Fund’s new auger and bin load-out lines, and from an extended
harvest in certain areas of the US. The strong fourth quarter sales in 2004 were
slightly offset by a decrease in Canadian sales compared to 2003.

Gross margin as a percentage of sales increased to 45.2% for the three months
ended December 31, 2004, from 38.6% for the same period in 2003. Gross
margin in the fourth quarter of 2004 beneﬁted from the impact of price increases
implemented earlier in the year to offset rising input costs, as well as from the
efﬁciencies gained from higher volumes. These margin gains were offset by the
impact of a lower effective US exchange rate.

Operating expenses for the three-month period ended December 31, 2004 were
$3.8 million, up from $2.8 million for the same period in 2003. The increase in
2004 was largely the result of a $0.4 million increase in professional fees related
primarily to the successful defence of a patent infringement lawsuit. Salary
expense increased $0.4 million due to higher earnings based bonus accruals,
and the Fund accrued $0.3 million in the fourth quarter related to its long-term
incentive plan. These increases were partially offset by a $0.2 million decrease in
capital taxes.

EBITDA as a percentage of sales for the three-months ended December 31, 2004 was
17.8%, compared to 15.5% for the three-month period ended December 31, 2003. The
increase in EBITDA percentage compared to 2003 is primarily the result of a stronger
gross margin offset by an increase in operating expenses as described above.

In the three months ended December 31, 2004, the Fund generated $14.4 million
from operating activities. As the Fund’s collections of accounts receivable are
weighted towards the fourth quarter, cash generated from the reduction of
accounts receivable in the quarter totalled $12.0 million. The Fund also received
$3.1 million in customer deposits related to orders to be shipped in 2005. During
the three months ended December 31, 2004, the Fund had capital expenditures
of $0.3 million that related primarily to purchases of manufacturing equipment
and a semi tractor unit. During the period the Fund paid off its bank revolver of
$4.2 million and ended the period with a cash balance of $6.8 million.

Management’s Discussion and Analysis

CASHFLOW AND LIQUIDITY

On May 5, 2004, the Fund ﬁled a ﬁnal prospectus for the sale of 6,904,000 units
at $10 per unit for aggregate proceeds of $69,040,000. The costs of issuance
were $6,345,752 resulting in net proceeds of $62,694,248. On May 18, 2004, in
conjunction with the initial public offering, the Fund acquired indirectly, all of the
securities and assets of Ag Growth, which conducts business in the grain handling,
storage and conditioning equipment market. The owners of Ag Growth received
cash and Class B Exchangeable units and Class C Exchangeable Subordinated
units of AGHLP as consideration for the acquisition of Ag Growth, and retained a
28% interest in the Fund as well as holding 2,760,000 Special Voting Units. The
Special Voting Units are not entitled to any interest or share in the Fund, or in any
distribution from the Fund, but are entitled to vote on matters related to the Fund.
In the period May 18, 2004 to December 31, 2004, 618,913 Class B Exchangeable
units were exchanged into 618,913 trust units of the Fund. Subsequent to
December 31, 2004, 11,109 Class B Exchangeable Units were exchanged into 11,109
units of the Fund. Currently, the previous owners of Ag Growth hold a 22 % interest
in the Fund as well as holding 2,095,978 Special Voting Units.

During the period May 18, 2004 to December 31, 2004, the successful completion
of the Fund’s business cycle was reﬂected in the $18.5 million generated from
operating activities. During the period the Fund had capital expenditures of
$0.7 million that related primarily to the purchases of two semi-tractor units,
a forklift, a trailer, and manufacturing equipment. In the period from May 18 to
December 31, 2004, the Fund paid off its bank revolver of $5.3 million and ended
the period with a cash balance of $6.8 million.

CONTRACTUAL OBLIGATIONS

Total

2005

2006

2007

2008

2009

0
Long-term debt 20,102,088
Operating leases
171,274 109,985 67,321 14,151
Total obligations 20,739,671 308,347 20,204,769 136,993 75,411 14,151

33,495 20,033,495

637,583 274,852

27,008

8,090

On May 18, 2004 the Fund entered a two-year, non-amortizing, $20 million term
loan facility that upon maturity is extendible annually for twelve months at the
lenders option. The operating leases relate to vehicle, equipment, and warehouse
facility leases entered in the normal course of business. In addition, the Fund
is committed to a lease for equipment over a ﬁve-year period with total lease
payments of approximately $587,000. The lease terms will be ﬁnalized in 2005.

Management’s Discussion and Analysis

TRANSACTIONS WITH RELATED PARTIES

Under the terms of the long term incentive plan (“LTIP”), 10% to 20% of cash
distributions in excess of an established threshold are contributed to a pool of
funds set aside to purchase units of the Fund in the market. The cost is accrued
as an expense in the period when cash distributions paid or payable exceed the
thresholds established by the LTIP. As at December 31, 2004, a total of $265,788
has been accrued for the LTIP.

DISTRIBUTIONS

Distributions are paid at the end of the month that follows the month when
the cash was earned. Consistent with the distribution amount anticipated in
the IPO, the Fund declared distributions to public unitholders of $6.0 million
for the 283-day period ended December 31, 2004, including $2.4 million in the
three-month period ended December 31, 2004. Furthermore, consistent with
the Fund’s prospectus dated May 5, 2004, the Fund declared distributions to
Ag Growth’s previous owners of $1.8 million for the 283 day period ended
December 31, 2004, including $0.7 million in the fourth quarter.

The Fund may make additional distributions in excess of monthly distributions.
Distributions in respect of the month ended December 31 of each year will include
such amounts as are necessary to ensure that the Fund will not be liable for
income taxes under Part I of the Tax Act. Accordingly, on December 17, 2004 the
Fund announced a special distribution of $0.07 per unit, representing the Fund’s
estimate of the distribution required to ensure the Fund was not liable for income
taxes under Part I of the Tax Act. Upon completion of the ﬁscal year it became
apparent that an additional special distribution was required, and as a result the
Fund announced a second special distribution of $0.068 per unit to unitholders of
record on March 31, 2005.

Management’s Discussion and Analysis

The Fund’s policy is to make stable monthly distributions to unitholders based
on estimated distributable cash for the year. Due to the seasonal nature of its
business, it is anticipated that distributable cash generated in the third quarter
will be higher than in other quarters. Distributable cash for the periods is
calculated as follows:

283 Day
Period Ended
December 31,
2004*
$

Three-months
Ended
December 31,
2004
$

Net income for the period
Amortization
Interest expense
Tax expense
EBITDA**
Less: Interest expense
Net maintenance capital expenditures
Current income taxes
Distributable cash **

8,723,409
1,566,528
688,467
164,000
11,142,404
688,467
730,790
37,000
9,686,147

1,798,911
361,405
250,767
71,500
2,482,583
250,767
296,542
21,500
1,913,774

Distributable cash generated per unit

1.0058

0.1987

Regular distributions declared per unit
Special distributions declared per unit
Total distributions declared per unit

0.8079
0.1380
0.9459

0.3249
0.1380
0.4629

Distribution % before special distribution
Distribution % including special distribution

80.32%
94.04%

163.51%
232.96%

** See discussion of non-GAAP measures below.

Management’s Discussion and Analysis

The table below reconciles net income to cash ﬂow from operations:

Net income
Add charges (deduct credits) to operations not requiring

a current cash payment:

Amortization
Deferred foreign exchange loss
Future income taxes
Gain on sale of property, plant and equipment
Long term incentive plan

Add charges (deduct credits) for net change in

non-cash working capital balances related to operations

Cash provided by operating activities

8,723,409

1,566,528
(47,900)
127,000
(16,419)
265,788

7,846,534
18,464,940

CAPITAL RESOURCES

The Fund has a two-year, non-amortizing, $20 million term loan with a single
lender. The loan expires in May 2006 and is extendible annually for additional
one-year terms at the lenders option. The Fund also has available a $15 million
operating facility, increasing to $18 million for the period May 31 to September 30.
At December 31, 2004, the operating facility was not being utilized. Interest rates
on both facilities are based on performance calculations. The Fund is party to an
interest rate swap agreement to hedge the impact of ﬂuctuating interest rates on
its term loan.

OFF-BALANCE SHEET ARRANGEMENTS

The Fund has no off balance sheet arrangements with the exception of the interest
rate swap and foreign currency contracts discussed below in Financial Instruments.

Management’s Discussion and Analysis

CRITICAL ACCOUNTING 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 disclosure of contingent assets and liabilities at the date of the ﬁnancial
statements and the reported amount of revenues and expenses during the period.
We believe the accounting policies that are critical to our business relate to our use
of estimates regarding the recoverability of accounts receivable and the valuation
of inventory, intangibles, and goodwill. Due to the nature of Ag Growth’s business
and the credit terms it provides to its customers, estimates and judgments are
inherent in the on-going assessment of the recoverability of accounts receivable.
In addition, assessments and judgments are inherent in the determination of the
net realizable value of inventories. Another area requiring judgment includes the
allocation of the purchase price at the time of the IPO, speciﬁcally the allocation
between goodwill and other intangible assets, and the amortization period of the
intangible assets. In the normal course of its operations, the Fund may become
involved in various legal actions. The Fund maintains, and regularly updates on
a case-by-case basis, provisions when the expected loss is both likely and can
be reasonably estimated. While management has applied judgment based on
assumptions believed to be reasonable in the circumstances, actual results can
vary from these assumptions. It is possible that materially different results would
be reported using different assumptions.

FINANCIAL INSTRUMENTS

Risk from foreign exchange arises as a result of variations in exchange rates
between the Canadian and the US Dollar. Historically, approximately 60% of
Ag Growth’s sales are denominated in US Dollars while a much smaller proportion
of its expenses are denominated in this currency. The Fund has entered into foreign
exchange contracts with a Canadian chartered bank to hedge its foreign currency
exposure on anticipated US dollar sales transactions and the collection of the
related accounts receivable. At December 31, 2004, the Fund had outstanding
USD $37.0 million of forward foreign exchange contracts, dated from March 2005
to December 2006, with a Canadian Dollar equivalent of $48.7 million. As at
December 31, 2004, the Fund has recorded a deferred foreign exchange loss of
$47,900 with respect to its foreign exchange contracts. At December 31, 2004, the
unrealized gain on forward foreign exchange contracts was $3,588,689.

Management’s Discussion and Analysis

The Fund is subject to risks associated with ﬂuctuating interest rates on its
long-term debt. To manage this risk, the Fund has entered into an interest rate
swap transaction with a Canadian chartered bank. The swap transaction expires on
May 4, 2006. The swap transaction involves the exchange of the underlying ﬂoating
interest rate for an effective ﬁxed interest rate of 3.07% plus 1.25% to 2.25% based
on performance calculations. The notional amount of the swap transaction at
December 31, 2004 was $20.0 million. At December 31, 2004, a cash payment of
$63,418 would have been required to settle the interest rate swap.

CHANGES IN ACCOUNTING POLICIES

On January 19, 2005 the Canadian Institute of Chartered Accountants issued
Emerging Issues Committee Abstract 151 (“EIC 151”), “Exchangeable Securities
Issued by Subsidiaries of Income Trusts”. The abstract sets out the conditions
that must be met in order to present exchangeable securities representing
the retained interest in a subsidiary of an income trust as part of unitholders’
equity. Management has determined that the characteristics of the Class B and C
Exchangeable units of AGHLP, a subsidiary of the Fund, satisfy the conditions of EIC
151 and are therefore appropriately presented as part of unitholders’ equity rather
than as a non-controlling interest. As permitted, the Fund has chosen to adopt the
provisions of this abstract for the nine-month period ended December 31, 2004.
The implementation of this abstract results in an increase in net earnings for the
period ended December 31, 2004 of $1,908,721, an increase in unitholders’ equity
of $21,070,870 and a decrease in non-controlling interest on the balance sheet of
$22,979,591.

In an effort to harmonize Canadian GAAP with US GAAP, the Canadian Accounting
Standards Board has issued sections:

• 1530, Comprehensive Income;
• 3855, Financial Instruments—Recognition and Measurement; and
• 3865, Hedges.

Under these new standards, all ﬁnancial assets should be measured at fair value
with the exception of loans, receivables and investments that are intended to be
held to maturity and certain equity investments, which should be measured at cost.
Similarly, all ﬁnancial liabilities should be measured at fair value when they are
held for trading or they are derivatives. Gains and losses on ﬁnancial instruments
measured at fair value will be recognized in the income statement in the periods
they arise with the exception of gains and losses arising from:

• Financial assets held for sale, for which unrealized gains and losses are

deferred in other comprehensive income until sold or impaired; and

• Certain ﬁnancial instruments that qualify for hedge accounting.

Management’s Discussion and Analysis

Sections 3855 and 3865 make use of “other comprehensive income”. Other
comprehensive income comprises revenues, expenses, gains and losses that
are recognized in comprehensive income, but are excluded from net income.
Unrealized gains and losses on qualifying hedging instruments, translation of
self-sustaining foreign operations, and unrealized gains or losses on ﬁnancial
instruments held for sale will be included in other comprehensive income
and reclassiﬁed to net income when realized. Comprehensive income and its
components will be a required disclosure under the new standard. These new
standards are effective for ﬁscal years beginning on or after October 1, 2006 and
early adoption is permitted. Management has not yet determined the impact of
the adoption of these standards on the presentation of the Fund’s results from
operations or ﬁnancial position.

RISKS AND UNCERTAINTIES

The risks and uncertainties described below are not the only risks and
uncertainties we face. We believe that the risks mentioned are the principal risks
relating to our operations. There are other risks that relate to the structure of
the Fund. Additional risks and uncertainties not currently known to us or that we
currently deem immaterial also may impair operations. If any of the following risks
actually occur, our business, results of operations and ﬁnancial condition, and the
amount of cash available for distribution could suffer.

Industry Cyclicality

The performance of the farm equipment industry is cyclical, with sales depending
on the performance of the agricultural sector. To the extent that the agricultural
sector declines or experiences a downturn, this is likely to have a negative impact
on the farm equipment industry.

Seasonality of Business

The seasonality of the demand for Ag Growth’s products results in lower cash
ﬂow in the ﬁrst three quarters of each calendar year and may impact the ability
of the Fund to make cash distributions to Unitholders, or the quantum of such
distributions, if any. No assurance can be given that the Fund’s credit facility will be
sufﬁcient to offset the seasonal variations in Ag Growth’s cash ﬂow.

Risk of Decreased Crop Yields

Decreased crop yields due to poor weather conditions and other factors are
a signiﬁcant risk affecting Ag Growth. Both reduced crop volumes and the
accompanying decline in farm incomes can negatively affect demand for grain
handling equipment.

Management’s Discussion and Analysis

Potential Volatility of Production Costs

Various materials and components are purchased in connection with Ag Growth’s
manufacturing process, some or all of which may be subject to wide price variation.
In particular, steel purchases represented 30% of 2004 production costs, and
other major components such as drivelines, gear boxes, hydraulic motors, valves,
winches, gasoline engines and belting represented 32% of 2004 production costs.
Consistent with past and current practices within the industry, Ag Growth manages
its exposure to material and component price volatility by planning and negotiating
signiﬁcant purchases on an annual basis, and passing through to customers, most,
if not all, of the price volatility. There can be no assurance that industry dynamics
will allow Ag Growth to continue to reduce its exposure to volatility of production
costs by passing through price increases to its customers.

Commodity Prices, International Trade and Political Uncertainty

Prices of commodities are inﬂuenced by a variety of unpredictable factors that
are beyond the control of Ag Growth, including weather, government (Canadian,
United States and other) farm programs and policies, and changes in global
demand or other economic factors. The world grain market is subject to numerous
risks and uncertainties, including risks and uncertainties related to international
trade and global political conditions.

Competition

Ag Growth experiences competition in the markets in which it operates. Certain
of Ag Growth’s competitors may have greater ﬁnancial and capital resources
than Ag Growth. Ag Growth could face increased competition from newly formed
or emerging entities, as well as from established entities that choose to focus
(or increase their existing focus) on Ag Growth’s primary markets. As the grain
handling equipment sector is fragmented, there is also a risk that a larger,
formidable competitor may be created through a combination of one or more
smaller competitors. Ag Growth may also face potential competition from the
emergence of new products or technology.

Management’s Discussion and Analysis

Business Interruption

The operation of the manufacturing facilities of Ag Growth are subject to a number
of business interruption risks, including delays in obtaining production materials,
plant shutdowns, labour disruptions and weather conditions/natural disasters.
Ag Growth may suffer damages associated with such events that it cannot insure
against or which it may elect not to insure against because of high premium costs
or other reasons. For instance, Ag Growth’s Rosenort facility is located in an area
that was affected by widespread ﬂoods experienced in Manitoba in 1997, and
insurance coverage for this type of business interruption is limited. Ag Growth is
not able to predict the occurrence of business interruptions.

Litigation

In the ordinary course of its business, Ag Growth may be party to various legal
actions, the outcome of which cannot be predicted with certainty. One category
of potential legal actions is product liability claims. Farming is an inherently
dangerous occupation. Grain handling equipment used on farms may result
in product liability claims that require not only proper insuring of risk, but
management of the legal process as well.

Dependence on Key Personnel

Ag Growth’s future business, ﬁnancial condition, and operating results depend on
the continued contributions of certain of Ag Growth’s executive ofﬁcers and other
key management and personnel, certain of whom would be difﬁcult to replace.

Distribution, Sales Representative and Supply Contracts

Ag Growth typically does not enter into written agreements with its dealers,
distributors or suppliers. As a result, such parties may, without notice or penalty,
terminate their relationship with Ag Growth at any time. In addition, even if such
parties should decide to continue their relationship with Ag Growth, there can be
no guarantee that the consideration or other terms of such contracts will continue
on the same basis.

Management’s Discussion and Analysis

Foreign Exchange Risk

Ag Growth generates a majority (approximately 65% in 2004) of its sales in US
dollars, but a materially smaller proportion of its expenses are denominated in
US dollars. As a result, a signiﬁcant strengthening of the Canadian dollar against
the US dollar will negatively impact the return from US dollar sales revenue. To
mitigate the effects of exchange rate ﬂuctuation, management has implemented
a hedging strategy of purchasing forward foreign exchange contracts. Ag Growth
has entered into a series of hedging arrangements at average exchange rates
of C$1.3121 in 2005 and C$1.3227 in 2006 to mitigate the potential effect of
ﬂuctuating exchange rates through December 2006. To the extent that Ag Growth
does not adequately hedge its foreign exchange risk, changes in the exchange rate
between the Canadian dollar and the US dollar may have a material adverse effect
on Ag Growth’s results of operations, business, prospects and ﬁnancial condition.

Acquisitions and Integration of Additional Businesses

As part of its business strategy, Ag Growth may pursue select strategic
acquisitions. While Ag Growth has historically acquired businesses and
successfully integrated their operations into its existing corporate structure, there
can be no assurance that Ag Growth will ﬁnd additional attractive acquisition
candidates or succeed at effectively managing the integration of any businesses
acquired in the future.

Potential Undisclosed Liabilities Associated with Acquisitions

To the extent that prior owners of businesses acquired by Ag Growth failed to
comply with or otherwise violated applicable laws, Ag Growth, as a successor
owner, may be ﬁnancially responsible for these violations. In particular, to the
extent that businesses acquired by Ag Growth have failed to make all necessary
ﬁlings with applicable governmental, regulatory or tax authorities prior to the date
of their acquisition by Ag Growth, Ag Growth may be subject to certain penalties
and/or liabilities.

Uninsured and Underinsured Losses

Ag Growth will use its discretion in determining amounts, coverage limits and
deductibility provisions of insurance, with a view to maintaining appropriate
insurance coverage on its assets and operations at a commercially reasonable cost
and on suitable terms. This may result in insurance coverage that, in the event of
a substantial loss, would not be sufﬁcient to pay the full current market value or
current replacement cost of its assets or cover the cost of a particular claim.

Management’s Discussion and Analysis

Distributions

The Fund’s Declaration of Trust requires that it distribute all taxable income earned
in its ﬁscal period ending December 31. It may be necessary for the Fund to estimate
a special year-end distribution to achieve this requirement. The initial distribution,
if any, will be made in December and paid to unitholders of record on December 31.
Upon completion of the annual ﬁnancial statements, a ﬁnal determination of any
additional distribution will be made, and the additional amount, if any, will be paid
to unitholders of record at that time. If the Fund is required to make an additional
distribution, the unitholders of record on December 31 will be required to include
the amount of the additional distribution in their taxable income. If they are not
unitholders at the record date of the additional payment they will be required
to include the amount in their taxable income even though they do not receive
the distribution.

OUTLOOK

Current conditions point to a strong ﬁscal 2005 for the Fund. Market demand is
high, particularly in key US markets, as the Fund’s distribution network replenishes
its inventory after a very strong 2004 harvest. The Fund’s product order backlog
is signiﬁcant, and in anticipation of strong demand throughout 2005 the Fund
has continued to take steps to increase production capacity through automation,
labour efﬁciencies, and inter-divisional production opportunities. The Fund
continues to face challenges with respect to the high cost of steel and a stronger
Canadian dollar, however the impact of these developments has been largely
addressed through price increases and a foreign currency hedging program.
Although demand in the second half of 2005 will be inﬂuenced by crop conditions,
existing indicators suggest that in the absence of severe weather patterns the Fund
can look forward to sound ﬁnancial results in ﬁscal 2005.

PROPOSED TRANSACTION

The Fund has entered into an agreement to acquire substantially all of the assets
of The Edwards Group of Companies (“Edwards”) for $20 million. Edwards is a
manufacturer of agricultural equipment, largely focused on grain aeration systems
and related products. The acquisition is to be ﬁnanced through a bought deal
private placement of units priced at $13.50 per unit for estimated net proceeds of
$21.5 million. The Fund’s estimated expenses in connection with the acquisition
and the offering are $1.5 million. The offering is subject to receipt of Toronto Stock
Exchange approval and other customary conditions, and is scheduled to close on
March 31, 2005, subject to the concurrent closing of the Edwards acquisition.

Management’s Discussion and Analysis

NON-GAAP MEASURES

References to “EBITDA” are to earnings before interest, income taxes, depreciation
and amortization. Management believes that, in addition to net income or
loss, EBITDA is a useful supplemental measure in evaluating its performance.
Speciﬁcally, management believes that EBITDA is the appropriate measure from
which to make adjustments to determine the Fund’s distributable cash. EBITDA
is not a ﬁnancial measure recognized by Canadian generally accepted accounting
principles (“GAAP”) and does not have a standardized meaning prescribed by
GAAP. Management cautions investors that EBITDA should not replace net income
or loss as an indicator of performance, or cash ﬂows from operating, investing, and
ﬁnancing activities as a measure of the Fund’s liquidity and cash ﬂows. The Fund’s
method of calculating EBITDA may differ from the methods used by other issuers.

Distributable cash is a non-GAAP measure generally used by Canadian income
funds as an indicator of ﬁnancial performance. The Fund deﬁnes distributable cash
as EBITDA less interest expense, maintenance capital expenditures, and current
taxes. The method of calculating the Fund’s distributable cash may differ from
similar computations as reported by similar entities and, accordingly, may not be
comparable to distributable cash as reported by such entities.

FORWARD-LOOKING STATEMENTS

This Management Discussion and Analysis may contain forward-looking
statements which reﬂect our expectations regarding the future growth, results
of operations, performance and business prospects, and opportunities of the
Fund. Forward-looking statements contain such words as “anticipate”, “believe”,
“continue”, “could”, “expects”, “intend”, “plans” or similar expressions suggesting
future conditions or events. Such forward-looking statements reﬂect our current
beliefs and are based on information currently available to us. Forward-looking
statements involve signiﬁcant risks and uncertainties. A number of factors
could cause actual results to differ materially from results discussed in the
forward-looking statements, including the effects, as well as changes in national
and local business conditions, decreased crop yields, industry cyclicality, and
competition. Although the forward-looking statements contained in this MD&A are
based on what we believe to be reasonable assumptions, we cannot assure readers
that actual results will be consistent with these forward-looking statements.

30
10

Auditors’ Report

To the Unitholders of Ag Growth Income Fund

We have audited the consolidated balance sheet of the Ag Growth

Income Fund as at December 31, 2004 and the consolidated statements of
earnings, unitholders’ equity and cash ﬂows for the 283-day period then ended.
These ﬁnancial statements are the responsibility of the Fund’s management.
Our responsibility is to express an opinion on these ﬁnancial statements based on
our audit.

We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the ﬁnancial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the ﬁnancial statements. An audit also includes
assessing the accounting principles used and signiﬁcant estimates made by
management, as well as evaluating the overall ﬁnancial statement presentation.

In our opinion, these consolidated ﬁnancial statements present fairly, in all material
respects, the ﬁnancial position of the Fund as at December 31, 2004 and the
results of its operations and its cash ﬂows for the 283-day period then ended in
accordance with Canadian generally accepted accounting principles.

Winnipeg, Canada,

March 11, 2005.

Chartered Accountants

Consolidated Balance Sheet

As at December 31, 2004

ASSETS [notes 10 and 11]
Current
Cash and cash equivalents [note 4]
Restricted cash [note 15]
Accounts receivable
Inventory [note 6]
Prepaid expenses and other assets
Total current assets
Property, plant and equipment [note 7]
Other assets

Goodwill [note 3]
Intangible assets [note 8]
Deferred ﬁnancing costs [note 9]
Future tax assets [note 13]
Deferred foreign exchange loss

LIABILITIES AND UNITHOLDERS’ EQUITY
Current
Accounts payable and accrued liabilities
Income taxes payable
Customer deposits
Distributions payable
Long-term incentive plan [note 15]
Current portion of long-term debt [note 11]
Total current liabilities
Long-term debt [note 11]
Total liabilities
Commitments [notes 16 and 18]
Unitholders’ equity

See accompanying notes

On behalf of the Board of Trustees:

6,736,141
265,788
4,515,053
15,473,577
958,425
27,948,984
5,623,174

32,888,891
53,144,658
454,559
563,000
47,900
87,099,008
120,671,166

4,044,845
75,593
3,825,171
2,789,041
265,788
33,495
11,033,933
20,068,593
31,102,526

89,568,640
120,671,166

Rod Senft
Trustee

John R. Brodie FCA
Trustee

Consolidated Statement of Earnings

For the 283-day period ended December 31, 2004
[including Ag Growth’s results of operations for the
228-day period ended December 31, 2004 [note 2]]

Sales
Cost of goods sold
Gross margin
Expenses

Selling, general and administration
Professional fees
Research and development
Long-term incentive plan
Capital taxes
Other income

Earnings before the following
Interest expense

Short-term debt
Long-term debt

Earnings before amortization and income taxes
Amortization of intangible assets
Amortization of deferred ﬁnancing costs
Amortization of property, plant and equipment

Earnings before income taxes
Provision for income taxes [note 13]

Current
Future

Net earnings for the period

Basic and diluted net earnings per unit

42,404,586
22,683,058
19,721,528

7,246,922
678,554
290,502
265,788
236,321
(138,963)
8,579,124
11,142,404

122,767
565,700
10,453,937
855,342
206,452
504,734
1,566,528
8,887,409

37,000
127,000
164,000
8,723,409

0.91

Basic and diluted weighted average number of units outstanding

9,630,000

See accompanying notes

Consolidated Statement of Unitholders’ Equity

For the 283-day period ended December 31, 2004
[including Ag Growth’s results of operations for the
228-day period ended December 31, 2004 [note 2]]

Unitholders’ Accumulated Accumulated
distributions
earnings
$
$

capital
$

Total
$

[note 12]

—

(30)

Issuance of initial
subscriber units
Redemption of initial
subscriber units
Issuance of units on initial
public offering [note 3]
Issuance costs [note 3]
Issuance of AGHLP units as
consideration on acquisition
of Ag Growth [note 3]
—
Net earnings for the period
— 8,723,409
Distributions declared
—
—
Balance, December 31, 2004 89,954,248 8,723,409

69,040,000
(6,345,752)

27,260,000

—
—

—

(30)

— 69,040,000
(6,345,752)
—

— 27,260,000
8,723,409
—
(9,109,017)
(9,109,017)
(9,109,017) 89,568,640

See accompanying notes

Consolidated Statement of Cash Flows

For the 283-day period ended December 31, 2004
[including Ag Growth’s results of operations for the
228-day period ended December 31, 2004 [note 2]]

OPERATING ACTIVITIES
Net earnings for the period
Add (deduct) charges (credits) to operations
not requiring a current cash payment (receipt)

Amortization
Deferred foreign exchange loss
Future income taxes
Gain on sale of property, plant and equipment

Long-term incentive plan

8,723,409

1,566,528
(47,900)
127,000
(16,419)
265,788
10,618,406

Consolidated Statement of Cash Flows (Con’t)

Net change in non-cash working capital
balances related to operations

Accounts receivable
Inventory
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Income taxes payable [note 13]

Customer deposits

Cash provided by operating activities

INVESTING ACTIVITIES
Acquisition of property, plant and equipment
Proceeds from sale of property, plant and equipment
Acquisition of Ag Growth Industries Inc. [note 3]
Transfers to restricted cash for long-term incentive plan
Cash used in investing activities

FINANCING ACTIVITIES
Decrease in bank indebtedness
Repayment of long-term debt
Issuance of long-term debt
Increase in deferred ﬁnancing costs on long-term debt
Initial public offering of fund units, net of expenses [note 3]
Distributions paid
Redemption of Class D preferred shares of Ag Growth
Payment of dividend on Class D preferred shares of Ag Growth
Cash provided by ﬁnancing activities

Net increase in cash during the period
Cash position, beginning of period
Cash position, end of period

Supplemental cash ﬂow information
Interest paid
Income taxes paid [note 13]

See accompanying notes

7,781,221
(34,470)
(487,740)
(1,347,304)
(1,357,012)
3,291,839
7,846,534
18,464,940

(730,790)
42,776
(32,133,771)
(265,788)
(33,087,573)

(5,266,052)
(32,899,936)
20,119,967
(661,011)
62,694,248
(6,319,976)
(16,000,000)
(308,466)
21,358,774

6,736,141
—
6,736,141

680,606
1,394,013

Notes to Consolidated Financial Statements

December 31, 2004

1. ORGANIZATION AND NATURE OF BUSINESS

Ag Growth Income Fund [the “Fund”] is an unincorporated, open-ended, limited
purpose trust established under the laws of the Province of Ontario by a
Declaration of Trust made as at March 24, 2004. The Fund conducts business in
the grain handling, storage, and conditioning market. Each unitholder participates
pro rata in distributions of net earnings and, in the event of termination,
participates pro rata in the net assets remaining after satisfaction of all liabilities.
Income tax obligations related to the distribution of net earnings by the Fund are
the obligations of the unitholders.

2. BASIS OF PRESENTATION

The Fund prepares its consolidated ﬁnancial statements in accordance with
Canadian generally accepted accounting principles. These consolidated ﬁnancial
statements reﬂect the Fund’s results of operations for the 283-day period ended
December 31, 2004 [including the results of Ag Growth’s operations for the
228-day period from May 18, 2004 to December 31, 2004]. As the Fund commenced
operations on March 24, 2004, no comparative information is provided.

3. ISSUANCE OF FUND UNITS AND ACQUISITION

Notes to Consolidated Financial Statements

December 31, 2004

The acquisition has been accounted for by the purchase method with the results of
Ag Growth’s operations included in the Fund’s earnings from the date of acquisition
[the consolidated statement of earnings includes the results of Ag Growth’s
operations for the 228-day period from May 18, 2004 to December 31, 2004]. The
consolidated ﬁnancial statements reﬂect the assets and liabilities of Ag Growth at
assigned fair values as follows:

Net assets acquired

Accounts receivable
Inventory
Prepaid expenses and other assets
Property, plant and equipment
Future tax assets
Intangible assets
Brand name
Distribution network

Goodwill

Bank indebtedness
Accounts payable and accrued liabilities

Income taxes payable

Dividends payable
Long-term debt

Redeemable preferred shares

Consideration given

Cash
Class B Exchangeable Units of

AGX Holdings Limited Partnership [note 12]

Class C Exchangeable Subordinated Units of

AGX Holdings Limited Partnership [note 12]

12,296,274
15,439,107
470,685
5,423,475
690,000

19,000,000
35,000,000
32,888,891
(5,266,052)
(5,925,481)
(1,432,605)
(308,466)
(32,882,057)
(16,000,000)
59,393,771

32,133,771

8,000,000

19,260,000
59,393,771

Notes to Consolidated Financial Statements

December 31, 2004

Supplemental cash ﬂow information
Details of sources and use of cash upon issuance of Fund units and acquisition of
securities and assets of Ag Growth are as follows:

69,040,000
(6,345,752)
20,000,000
(661,011)
82,033,237
(32,841,000)
(16,000,000)
(750,000)
(308,466)
32,133,771

Aggregate proceeds from issuance of Fund units
Costs of issuance
Proceeds from long-term debt
Financing costs

Debt retirement
Redemption of Class D redeemable preferred shares
Payment of costs associated with the transaction
Dividends paid on Class D redeemable preferred shares
Cash consideration given on acquisition of Ag Growth

4. SIGNIFICANT ACCOUNTING POLICIES

The signiﬁcant accounting policies are summarized below:

Principles of consolidation

The consolidated ﬁnancial statements include the accounts of the Fund and its
wholly-owned subsidiaries Ag Growth Operating Trust, AGX Holdings Inc., AGX
Holdings Limited Partnership [“AGHLP”], Ag Growth Industries Limited Partnership,
Ag Growth, Westﬁeld Distributing Ltd. and Westﬁeld Distributing (North Dakota)
Inc. All material intercompany balances and transactions have been eliminated. The
ﬁnancial statements consolidate 100% of the assets and liabilities of Ag Growth as
at December 31, 2004 and 100% of the revenues and expenses of the operations of
Ag Growth for the period from May 18, 2004 to December 31, 2004.

Cash and cash equivalents

Cash and cash equivalents consist of cash and highly liquid money market funds
with maturities of less than three-months.

Inventory

Inventory is comprised of raw material and ﬁnished goods. Raw material is
recorded at the lower of cost and replacement cost. Finished goods are recorded
at the lower of cost, which includes direct costs and an allocation of direct
manufacturing overhead, and net realizable value. Cost is determined on a ﬁrst-in,
ﬁrst-out basis.

Notes to Consolidated Financial Statements

December 31, 2004

Property, plant and equipment

Property, plant and equipment are recorded at cost, net of amortization.
Amortization is provided over the estimated useful lives of the assets using the
following rates and methods:

Buildings
Leasehold improvements
Furniture and ﬁxtures
Automotive equipment
Computer equipment
Manufacturing equipment

Goodwill

4% - 10%
20%
20%
20% - 30%
30%
20% - 30%

declining balance
straight line
declining balance
declining balance
declining balance
declining balance

Goodwill represents the amount paid to acquire Ag Growth in excess of the
fair value of the net identiﬁable assets acquired. Goodwill is not subject to
amortization. Goodwill is tested for impairment at least annually by comparing the
fair value of its reporting unit to its carrying value. The carrying value of goodwill
is written down to fair value if the carrying value of the reporting unit’s goodwill
exceeds its fair value.

Intangible assets

Intangible assets are comprised of Ag Growth’s brand name, which is considered
to have an indeﬁnite life, and Ag Growth’s distribution network, which is being
amortized over 25 years on a straight-line basis. Indeﬁnite life intangible assets
are tested for impairment at least annually by comparing their fair values to their
carrying values. The carrying value of an indeﬁnite life intangible asset is written
down to its fair value if its carrying value exceeds its fair value.

Impairment of property, plant and equipment and ﬁnite life intangible assets

Impairment of property, plant and equipment and ﬁnite life intangible assets is
recognized when an event or change in circumstances causes the asset’s carrying
value to exceed the total undiscounted cash ﬂows expected from its use and
eventual disposition. The impairment loss is calculated by deducting the fair value
of the asset from its carrying value.

Deferred ﬁnancing costs

Deferred ﬁnancing costs are amortized on a straight-line basis over the two-year
term of the related debt ﬁnancing.

Notes to Consolidated Financial Statements

December 31, 2004

Income taxes

The Fund is a mutual fund trust for income tax purposes and therefore is not
subject to tax on income distributed to unitholders. Taxes payable on income of the
Fund distributed to unitholders is the responsibility of individual unitholders.

The Fund’s corporate subsidiaries use the liability method of accounting for income
taxes. Under this method, assets or liabilities are recognized for the future income
tax consequences of temporary differences between the carrying amounts of
assets and liabilities and their tax bases. Future income taxes are measured using
the substantively enacted tax rates expected to be in effect in the years in which
those temporary differences are expected to reverse. Future income tax beneﬁts
are recognized when realization is considered more likely than not.

Foreign currency translation

The Fund follows the temporal method of accounting for the translation of its
integrated foreign subsidiary and foreign currency transactions. Monetary assets
and liabilities denominated in foreign currencies are translated to Canadian
dollars at the exchange rates in effect at the consolidated balance sheet date.
Non-monetary assets and liabilities denominated in foreign currencies are
translated to Canadian dollars at their historical exchange rates. Revenue and
expenses denominated in foreign currencies are translated to Canadian dollars at
the monthly rate of exchange. Gains and losses on translation are reﬂected in net
earnings for the period.

Revenue recognition

The Fund recognizes revenue when the risks and rewards of ownership in the
products have transferred to its customer and collection is reasonably assured.
Subject to the terms of the contract, these criteria are generally met when
the products are shipped, freight on board shipping point. For products on
consignment, revenue is recognized upon the sale of the product by the consignee.
Provision is made at the time revenue is recognized for estimated product returns
and warranties.

Research and development

Research expenses are charged to earnings in the period they are incurred.
Development expenses are charged to earnings unless the Fund believes the costs
meet generally accepted criteria for deferral and amortization.

Notes to Consolidated Financial Statements

December 31, 2004

Leases

Leases are classiﬁed as either capital or operating. Leases which transfer
substantially all the beneﬁts and risks of ownership of the property to the Fund
are accounted for as capital leases. Capital lease obligations reﬂect the present
value of future lease payments, discounted at the appropriate interest rate. All
other leases are accounted for as operating leases wherein rental payments are
expensed as incurred.

Net earnings per unit

Net earnings per unit is based on the consolidated net earnings for the period
divided by the weighted average number of units outstanding during the period.
Diluted earnings per unit is computed in accordance with the treasury stock
method and based on the weighted average number of units and dilutive unit
equivalents.

Long-term incentive plan

Under the terms of the long-term incentive plan [“LTIP”], 10% to 20% of cash
distributions in excess of an established threshold are contributed to a pool of
funds set aside to purchase units of the Fund in the market. The cost is accrued
as an expense in the period when cash distributions exceed the thresholds
established by the LTIP.

Derivative ﬁnancial instruments

Derivative ﬁnancial instruments are utilized by the Fund in the management of
its foreign currency and interest rate exposures. The Fund’s policy is not to utilize
derivative ﬁnancial instruments for trading or speculative purposes.

The Fund formally documents all relationships between hedging instruments
and hedged items, as well as its risk management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives to speciﬁc anticipated sales transactions and long-term debt on the
consolidated balance sheet. The Fund also formally assesses, both at the hedge’s
inception and on an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in fair values or cash
ﬂows of hedged items.

Notes to Consolidated Financial Statements

December 31, 2004

The Fund purchases forward foreign exchange contracts to hedge anticipated sales
to customers in the United States and the related accounts receivable. Foreign
exchange translation gains and losses on foreign currency denominated derivative
ﬁnancial instruments used to hedge anticipated US dollar denominated sales are
recognized as an adjustment of the revenues when the sale is recorded. For forward
foreign exchange contracts used to hedge anticipated US dollar denominated sales
and the collection of the related accounts receivable, the portion of the forward
premium or discount on the contract relating to the period prior to consummation
of the sale is also recognized as an adjustment of the revenues when the sale is
recorded; and the portion of the premium or discount that relates to the resulting
account receivable is amortized over the expected period to collection of the
accounts receivable.

The Fund also enters into interest rate swaps in order to reduce the impact of
ﬂuctuating interest rates on its long-term debt. These swap agreements require
the periodic exchange of payments without the exchange of the notional principal
amount on which the payments are based. The Fund designates its interest rate
hedge agreements as hedges of the underlying debt. Interest expense on the debt
is adjusted to include the payments made or received under the interest
rate swaps.

Realized and unrealized gains or losses associated with derivative instruments,
which have been terminated or cease to be effective prior to maturity, are deferred
under other current, or non-current, assets or liabilities on the consolidated
balance sheet and recognized in earnings in the period in which the underlying
hedged transaction is recognized. In the event a designated hedged item is
sold, extinguished or matures prior to the termination of the related derivative
instrument, any realized or unrealized gain or loss on such derivative instrument is
recognized in earnings.

The Fund also uses foreign currency swap agreements to manage its cash
positions. The Fund’s foreign currency swap agreements do not qualify for hedge
accounting. These swaps are measured at their fair value and recorded on the
consolidated balance sheet. Changes in the fair value of the swaps are recognized
in earnings in the corresponding period.

Use of estimates

The preparation of ﬁnancial statements in accordance with Canadian generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies at the consolidated balance sheet date and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from these estimates.

Notes to Consolidated Financial Statements

December 31, 2004

5. CHANGE IN ACCOUNTING POLICY

On January 19, 2005 the Canadian Institute of Chartered Accountants issued
Emerging Issues Committee Abstract 151 (“EIC 151”), “Exchangeable Securities
Issued by Subsidiaries of Income Trusts”. The abstract sets out the conditions
that must be met in order to present exchangeable securities representing
the retained interest in a subsidiary of an income trust as part of unitholders’
equity. Management has determined that the characteristics of the Class B and C
Exchangeable units of AGHLP, a subsidiary of the Fund, satisfy the conditions of
EIC 151 and are therefore appropriately presented as part of unitholders’ equity
rather than as a non-controlling interest. As required, the Fund has chosen to adopt
the provisions of this abstract for the 283-day period ended December 31, 2004.
The implementation of this abstract results in an increase in net earnings for the
period ended December 31, 2004 of $1,908,721, an increase in unitholders’ equity
of $21,070,870 and a decrease in non-controlling interest on the balance sheet of
$22,979,591.

6. INVENTORY

Raw materials
Finished goods

7. PROPERTY, PLANT AND EQUIPMENT

4,080,743
11,392,834
15,473,577

2004

Accumulated
amortization
$

Net book
value
$

—
80,893
2,942
10,831
183,447
60,667
165,954
504,734

611,315
2,859,846
7,544
72,712
1,014,094
225,175
832,488
5,623,174

Cost
$

611,315
2,940,739
10,486
83,543
1,197,541
285,842
998,442
6,127,908

Land
Buildings
Leasehold improvements
Furniture and ﬁxtures
Automotive equipment
Computer equipment
Manufacturing equipment

Notes to Consolidated Financial Statements

December 31, 2004

8. INTANGIBLE ASSETS

2004

Cost
$

Accumulated
amortization
$

Net book
value
$

Distribution network
Brand name

35,000,000
19,000,000
54,000,000

855,342
—
855,342

34,144,658
19,000,000
53,144,658

9. DEFERRED FINANCING COSTS

2004

Cost
$

Accumulated
amortization
$

Net book
value
$

661,011

206,452

454,559

10. BANK INDEBTEDNESS

The Fund has an operating facility of $15 million, increasing to $18 million for
the period May 31 to September 30. The facility bears interest at rates of prime
plus 0.25%, 0.75% or 1.25% per annum based on performance calculations. The
effective interest rate during the period was 4.50%. At December 31, 2004, no
amount was outstanding under this facility. Collateral for the operating facility
includes a general security agreement over all assets and ﬁrst position collateral
mortgages on land and buildings.

Notes to Consolidated Financial Statements

December 31, 2004

11. LONG-TERM DEBT

Term loan, matures May 2006, extendible annually for

additional one-year terms at the lender’s option, interest
payable monthly at prime plus 0.25%, 0.75% or 1.25%
per annum based on performance calculations. As
described in note 16, the Fund has entered into a swap
contract that effectively ﬁxes the Fund’s interest rate at
3.07% plus 1.25%, 1.75% or 2.25% per annum based on
performance calculations. The effective interest rate
during the period was 4.50% and after consideration
of the effect of the interest rate swap was 4.32%.
GMAC loans, 0% maturing in 2007 and 2008, with
monthly payments of $2,791. Vehicles ﬁnanced are
pledged as collateral.

Less current portion

20,000,000

102,088
20,102,088
33,495
20,068,593

Under the agreement for the term loan, the Fund is required to maintain certain
ﬁnancial covenants. As at December 31, 2004, the Fund is in compliance with the
applicable ﬁnancial covenant terms.

Principal repayments due within the next four ﬁscal years are as follows:

2005
2006
2007
2008

33,495
20,033,495
27,008
8,090
20,102,088

Collateral for the term loan and operating facility [note 10] includes a general
security agreement over all assets and ﬁrst position collateral mortgages on land
and buildings.

Notes to Consolidated Financial Statements

December 31, 2004

12. UNITHOLDERS’ CAPITAL

Unitholders’ capital is comprised of the following:

Class B

Class C

Exchangeable Exchangeable

units of
AGHLP
$

Total
Unitholders’
capital
$

Fund
Trust
units
$

Issuance of initial
subscriber units
Redemption of initial
subscriber units
Issuance of units on initial
public offering [note 4]
Issuance costs [note 4]
Issuance of units of AGHLP as
consideration on acquisition
of Ag Growth [note 4]
Exchange of units

(30)

69,040,000
(6,345,752)

—

—
—

—

(30)

— 69,040,000
(6,345,752)
—

—
6,189,130

8,000,000
(6,189,130)

19,260,000 27,260,000
—

—

Balance, December 31, 2004

68,883,378

1,810,870

19,260,000 89,954,248

Fund
Trust
units
#

Class B

Class C

Exchangeable Exchangeable

units of
AGHLP
#

Issuance of initial
subscriber units
Redemption of initial
subscriber units
Issuance of units on initial
public offering [note 4]
Issuance of units of AGHLP as
consideration on acquisition
of Ag Growth [note 4]
Exchange of units

(3)

6,904,000

—

—
618,913

800,000
(618,913)

1,926,000
—

Balance, December 31, 2004

7,522,913

181,087

1,926,000

Notes to Consolidated Financial Statements

December 31, 2004

The Fund Declaration of Trust provides that an unlimited number of trust units may
be issued. Each trust unit represents an equal undivided beneﬁcial interest in the
Fund and any distributions from the Fund. Each trust unit is transferable, entitles
the holder thereof to participate equally in distributions of the Fund, is not subject
to future calls or assessments, entitles the holder to rights of redemption and
entitles the holder to one vote at all meetings of unitholders.

The Fund Declaration of Trust also provides for the issuance of an unlimited number
of Special Voting Units. The Special Voting Units are only issuable for the purpose
of providing voting rights to the holders of Exchangeable LP Units or Subordinated
LP Units. Each unit is entitled to one vote on matters related to the Fund. The
Special Voting Units are not entitled to any interest or share in the Fund or in any
distribution from the Fund. There is no value attached to these units. At December
31, 2004, there were 2,107,087 Special Voting Units outstanding, which were
attached to the outstanding Class B Exchangeable LP Units of AGHLP and the Class C
Exchangeable Subordinated LP Units of AGHLP.

The Class B Exchangeable LP Units of AGHLP are exchangeable for trust units of
the Fund at the option of the holder on a one-for-one basis at any time. During
the period, 618,913 Class B Exchangeable LP Units of AGHLP, with a value of
$6,189,130, were exchanged into 618,913 Units of the Fund.

The Class C Subordinated Exchangeable LP Units of AGHLP are exchangeable for
Class B Exchangeable LP Units of AGHLP on a one-for-one basis at the option of the
holder after December 31, 2009 and by AGHLP on the subordination end date which
can be no earlier than June 30, 2006, and is determined based on certain earnings
and cash distribution thresholds of the Fund.

Notes to Consolidated Financial Statements

December 31, 2004

13. INCOME TAXES

Income tax obligations relating to distributions from the Fund are the obligations
of the unitholders and accordingly, no provision for income taxes on the income of
the Fund has been made. A provision for income taxes is recognized for Ag Growth.
Ag Growth is subject to tax, including large corporation tax.

The provision for income taxes varies from the amount that would be expected if
computed by applying the Canadian federal and provincial statutory income tax
rates to the earnings before income taxes as shown in the following table:

283-day
period ended
December 31,
2004

Earnings before income taxes
Temporary differences and

non-tax deductible expenses

Earnings subject to tax in the hands of unitholders
Net income of subsidiary companies

Provision for income taxes
Large corporation tax
Income tax provision

8,887,409

565,566
(9,109,017)
343,958

127,000
37,000
164,000

Signiﬁcant components of the Fund’s future tax assets are shown below:

37
11
48

Future tax assets
Financing costs
Non-capital loss [expires in 2014]

377,000
186,000
563,000

Cash paid for income taxes of $1,394,013 includes amounts paid towards
Ag Growth’s taxes payable for the 137-day period ended May 17, 2004.

Notes to Consolidated Financial Statements

December 31, 2004

14. DISTRIBUTIONS TO UNITHOLDERS

Distributions of $0.95 per unit of the Fund and per Class B and Class C
Exchangeable units of AGHLP, totalling $9,109,017 were declared for the 283-day
period ended December 31, 2004.

15. LONG-TERM INCENTIVE PLAN

Key senior management of the Fund are eligible to participate in the Fund’s LTIP.
The purpose of the LTIP is to provide eligible participants with compensation
opportunities that encourage ownership of units of the Fund, enhance the Fund’s
ability to attract, retain and motivate key personnel and reward key senior
management for signiﬁcant performance and associated growth in distributions.
Pursuant to the LTIP, the Fund sets aside a pool of funds based upon the amount by
which the Fund’s distributions exceed cash distribution thresholds [as deﬁned in
the LTIP plan documents]. A trustee then purchases units of the Fund in the market
with such pool of funds and holds these units until such time as ownership vests
to each participant. The LTIP is administered by the Corporate Governance and
Compensation Committee.

The Board of Trustees of the Fund or the Corporate Governance and Compensation
Committee has the power to, among other things, determine those individuals who
participate in the LTIP and determine the level of participation of each participant.

The Fund has recorded an accrual of $265,788 with respect to purchases of
units to be made in the market. An equal amount of cash has been restricted for
this purpose.

Notes to Consolidated Financial Statements

December 31, 2004

16. FINANCIAL INSTRUMENTS

The Fund has the following ﬁnancial instruments: cash and cash equivalents,
restricted cash, accounts receivable, accounts payable and accrued liabilities,
distributions payable, long-term debt, an interest rate swap arrangement, and
forward foreign exchange contracts. It is management’s opinion that the Fund is not
exposed to signiﬁcant credit risks arising from these ﬁnancial instruments.

Currency exposures

Risk from foreign exchange arises as a result of variations in exchange rates
between the Canadian and the US dollar. The Fund has entered into foreign
exchange contracts to hedge its foreign currency exposure on anticipated US
dollar sales transactions and the collection of the related accounts receivable. At
December 31, 2004, the Fund had outstanding forward foreign exchange contracts
as follows:

Settlement dates

Face value
$US

Average rate
$Cdn

March 2005 to December 2005
March 2006 to December 2006

18,500,000
18,500,000

1.3121
1.3227

Interest rate exposures

The Fund is subject to risks associated with ﬂuctuating interest rates on its long-
term debt. To manage this risk, the Fund has entered into, for hedging purposes,
an interest rate swap transaction with a Canadian chartered bank. The swap
transaction expires on May 4, 2006. The swap transaction involves the exchange
of the underlying ﬂoating interest rate of prime plus 0.25% to 1.25% per annum
for an effective ﬁxed interest rate of 3.07% plus 1.25% to 2.25% per annum based
on performance calculations. The notional amount of the swap transaction at
December 31, 2004 was $20,000,000.

Fair value

At December 31, 2004, the carrying value of the Fund’s ﬁnancial instruments
approximates their carrying value with the exception of derivative ﬁnancial
instruments. At December 31, 2004, a cash payment of $63,418 would have been
due to settle the interest rate swap agreement. The unrealized gain on forward
foreign exchange contracts was $3,588,689.

Notes to Consolidated Financial Statements

December 31, 2004

17. SEGMENTED DISCLOSURE

The Fund operates in one business segment related to the manufacturing and
distributing of portable grain handling equipment. Geographic information about
the Fund’s revenues is based on the product shipment destination. Assets are
based on their physical location as at the period end:

Property,
plant and
equipment,
goodwill
and
intangible
assets at
December 31,
2004
$

91,420,726
235,997
—
91,656,723

Revenues
for the
283-day
period ended
December 31,
2004
$

10,079,209
29,962,416
2,362,961
42,404,586

Canada
United States
International

18. COMMITMENTS

The Fund has entered into various operating leases for ofﬁce equipment and
vehicles. Minimum annual lease payments required in aggregate and over the next
ﬁve ﬁscal years are as follows:

2005
2006
2007
2008
2009

274,852
171,274
109,985
67,321
14,151
637,583

In addition, the Fund is committed to a lease for equipment over a ﬁve year period
with total lease payments of approximately $587,000. The lease terms will be
ﬁnalized in 2005.

Notes to Consolidated Financial Statements

December 31, 2004

19. SUBSEQUENT EVENT

On March 14, 2005, the Fund entered into an agreement to acquire substantially
all of the assets of The Edwards Group of Companies, a leading manufacturer of
agricultural equipment, for cash consideration in the amount of $20.0 million. In
conjunction with the acquisition, the Fund has reached an agreement to offer for
sale on a “bought deal” basis a private placement of Trust Units priced at $13.50
per unit for gross proceeds of approximately $21.5 million. The Fund’s estimated
expenses in connection with the acquisition and the offering are $1.5 million.
The offering is subject to receipt of Toronto Stock Exchange approval and other
customary conditions, and is scheduled to close on March 31, 2005, subject to the
concurrent closing of the Edwards acquisition.

Investor Relations
Rob Stenson
Box 39, Rosenort, MB R0G 1W0

Phone: (204) 746-2396
Email: robstenson@aggrowth.com

Ofﬁcers
Rob Stenson
President and Chief Executive Ofﬁcer

Gary Anderson
Vice President and Chief Operating Ofﬁcer

Steve Sommerfeld
Chief Financial Ofﬁcer

Trustees
Rod Senft
Chairman of the Board of Trustees

Harold Bjarnason

John Brodie, FCA

J. Trevor Johnstone

Greg Smith

Rob Stenson

W. Terrence Wright, Q.C.

Additional Information

Additional information relating to the Fund, including all public ﬁlings,
is available on SEDAR (www.sedar.com).