Annual Report 2005
Ag Growth Income Fund
#3 – 59 Scurfield Blvd., Winnipeg, MB R3Y 1V2
Telephone: 204.489.1855 • Fax: 204.488.6929
Investor Relations: Steve Sommerfeld
Telephone:204.489.1855 • Email: steve@aggrowth.com
Auditors: Ernst & Young LLP (Winnipeg)
Transfer Agent: Computershare Investor Services Inc.
Shares Listed: Toronto Stock Exchange
Stock Symbol: AFN.UN
To Our Unitholders:
On behalf of the Board of Trustees, Management and Employees of Ag Growth Income Fund,
welcome to our 2005 Annual Report, representing our first full year as an Income Trust. It has
been a year of great success and progress. We have achieved robust growth in sales, EBITDA
and most importantly sustainable growth in monthly cash distributions.
In April 2005 Ag Growth completed the acquisition of the Edwards Group, of Lethbridge,
Alberta. The acquisition provides a strong strategic fit with our other product lines and our
distribution network. The acquisition was immediately accretive and offers potential for
further growth in the future.
In 2005 we took several steps to round out Ag Growth’s senior management team, adding a
new Corporate Controller position, a Director of Corporate Development and a Manufacturing
Engineering Manager. These talented individuals will strengthen our ability to sustain
recent growth and create additional opportunities for improvement and growth in the future.
Internally, we will be leaning up manufacturing operations to become even more competitive
and market responsive. Externally, we will continue to explore acquisitions selectively to
ensure favourable, accretive results.
As we enter 2006, we remain cognizant of the Fund’s need to continue its evolutionary
process. Ag Growth has built its success on its ability as an organization to embrace change.
It has demonstrated time and again its willingness to adapt as needed in order to realize new
opportunities. Going forward we will draw on these experiences to further our pursuit of
sustainable bottom line growth. We will also call upon our collective wisdom to ensure that
our development is positive for all of our stakeholders.
In closing, we would like to congratulate everyone involved with making 2005 such a
successful year. We would also like to thank all of our unitholders for their participation
and for their belief in our potential.
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 current and prospective unitholders to read the annual report for our first
full year as a publicly traded trust. We are very pleased with our results in 2005.
2005 revenue grew to $84 million from full year revenue of $63 million in 2004.
We have experienced impressive growth despite a smaller crop in 2005 compared to the
record breaking crop of 2004. We were able to capitalize on momentum from the 2004 crop
in the first six months of the year and reap market share gains particularly in our core US
market. Growth has also resulted from the successful integration of the Edwards Group of
Companies acquisition, which was acquired in April 2005.
To begin, we would like to provide a macroeconomic overview of our market place as it
specifically relates to Ag Growth. Industry sentiment remains strong even though many
analysts are pointing to a flat to slightly declining environment for farm equipment sales
in 2006 across North America. There are a number of positive factors as well as negative
influences that will impact us as we enter 2006.
We expect the decline in the US corn and soybean crop to provide less momentum
for grain handling equipment than we experienced entering 2005. We must remember
that 2004 was a massive crop and the 2005 crop, which is 8% and 5% smaller for corn
and soybeans respectively, is still the second largest on record. We are pleased that the
trend toward greater productivity, as a result of better farming practices and better seed
technologies, remains intact.
As a result of these successive large crops in the US market, agriculture commodity prices are
at very low levels, which does have a dampening effect on the net farm income. This is partly
mitigated by direct government payments which are forecast to be $21.4 billion in 2005, 61%
above 2004 levels of $13.3 billion and 52% above the average from 1995-2004. This again
reinforces the strength of the US farm bill to encourage “fence-to-fence” plantings of crops
even in times of low prices. The bill encourages high volume production which is the strongest
driver of our revenues.
The USDA estimates that the cost of energy in a normal year is roughly 10% of a farmer’s direct
cost of corn production before including the indirect impact on fertilizer prices. Given the
continuation of very high energy prices we expect some decline in capital spending in 2006.
Western Canada has had another bad year, due to the excess moisture levels that have existed
in the last two years. These conditions, coupled with the multi-year drought prior to this time,
have had a dampening effect on the psychology of the Western Canadian farmer. It may take
some time to repair the tentative spending patterns currently being experienced.
Over the past couple of years we have also been challenged by volatile steel prices and the
appreciation of the Canadian dollar. Pressures resulting from the spike in steel prices have
subsided and, for the time being, we are quite comfortable that relative stability has returned
to the steel markets. The continued appreciation of the dollar has put further pressure on our
margins but at current levels we are confident of our ability to remain highly competitive
in our markets. The price increases, which we implemented in response to steel price
escalations and to the strengthening Canadian dollar, have proven adequate to cushion us.
On a more positive note, the USDA forecasts 2005 net farm income of $71.8 billion, down
13% from 2004 net income of $82.5 billion. This still greatly exceeds the 1995-2004
average of $52.4 billion by 37%. The late 1990’s and early 2000 period was particularly
depressed for agriculture, so the last couple of years represent a rebound to more normal
conditions.
Due to the strong net incomes of farmers over the last couple of years, the 2005 debt to asset
ratio sits at 13.4%, the lowest level since the early 1990’s. This should provide continued
support for farm equipment spending.
President’s Message
The opening of the US border to Canadian cattle following the BSE Crisis should help to
positively impact producers in Alberta and Saskatchewan. This should provide some
momentum for our cattle related products but more importantly, given the level of mixed
farming in these provinces, provide a return to profitability for these producers.
From a more micro view, Hurricane Katrina has caused the US rail and barge system to be
stretched to the limit as a result of the reduction in capacity at the major terminals in New
Orleans. Storage facilities are overflowing which is pushing storage back to the farm gate
in the US Midwest, a core market for Ag Growth. Currently, huge stockpiles are being stored
on the ground which has been accelerating on-farm handling, storage and drying as farmers
scramble to preserve the quality of their inventories. This situation should correct itself by
mid-year, but for the time being, is having a stimulative effect on the sales of grain-handling
equipment.
Longer term, we are cautiously optimistic of the fundamentals for our business. The same
supply-demand fundamentals that have impacted other commodities, as a result of growth in
China, are impacting agricultural commodities but have not yet had a similar impact on prices
in our sector.
Soybeans are maintaining an annual demand growth rate of 6% driven by a shift to vegetable
protein in livestock rations. Increasing consumption of meat in Chinese diets, as the standard
of living improves, is driving demand for corn and soybeans. China has not been self-sufficient
in grain and soybeans since 1999.
Despite large North American stockpiles of corn, as a result of successive large crops, world
end stocks are forecast at 350 million tons. This represents an end-stocks-to-use ratio of 17%,
the lowest level since 1975. World wheat inventories are at a 33 year low. The stocks-as days-
use are estimated at 80 days. This compares to approximately 130 days in the 1998 to 2001
period. Despite these fundamentals, the spot prices for wheat and corn remain depressed.
Should the trend toward depletion of stockpiles continues, we could experience significant
strengthening in agricultural commodity prices over the next few years.
With consideration for the above factors, we remain quite positive about the prospects for
the Fund. We are confident that we have entrenched market share gains from 2004 and 2005.
We continue with the roll out of our research and development programs and are meeting with
on-going success. We have recently launched a lean manufacturing initiative at our largest
division, Westfield, which we are confident will increase productivity in the short to medium
turn and, if we achieve the anticipated results, will be expanded to our other divisions.
Increased focus on developing markets in Europe over the last few years is beginning to
gain traction and should result in a strong market position as these markets accelerate
the adoption of North American farming and grain handling practices.
We are very pleased with the positive momentum as we complete our first quarter. This
momentum should provide a solid base for the year as we wait for the 2006 crop.
Again, we would like to thank our unitholders for their support. We are committed to working
hard to create long term value for our customers, our community and our unitholders.
Sincerely,
Rob Stenson
President and CEO
Ag Growth Income Fund
Operational Highlights
Distributable Cash
Distribution Highlights:
• Total distributable cash generated in 2005 was $2.10/unit
• Cash distributions declared of $1.73/unit
• Payout ratio of 69.3% before specials and 83.6% including specials
regular Cash Distribution (00) (per unit/per month)
0.
0.
t
i
n
u
/
$
0.0
0.0
0
January
february
march
april
may
June
July
month
august
september
october
november
December
Note: In January 2006 regular distribution increased to $0.14/unit/month
PerformanCe as ComPareD to tsX inDeX (since inception)
$
.90
.0
.0
.0
.0
.0
.0
.0
.0
.00
may , 00
Dec. , 00
Dec. , 00
ag growth units
s&P/tsX index
= Ag growth
= TSX Index
eDwarDs aCquisition
About the Acquisition:
• Acquired April 8, 2005
• Purchase price of $21.7 million
• Funds raised via private placement
• Strong strategic fit with existing product lines and
distribution network
• Immediately accretive
About the Company:
• Established in 1991
• Production facilities located in Lethbridge and
Nobleford, Alberta
• 70 Employees
• Primary focus is aeration equipment
• Dominant market share in Western Canada
• Strong potential for further export development
Operational Highlights
sales highlights
• Overall sales growth of 33% over 2004
• Excluding Edwards acquisition sales growth of 14% over 2004
• In US dollars, US sales growth of 31% over 2004 (excluding Edwards)
Pro forma historiCal sales 99 – 00
$90
$80
$70
$60
$50
$40
$30
$20
$1 0
$0
)
s
n
o
i
l
l
i
M
(
*
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 200 3 2004 2005
Note: Pro Forma Historical Sales are presented as a compilation of Batco, Wheatheart and
Westfield sales since 1992 regardless of actual acquisition dates.
* Edwards Group sales are included from date of acquisition April 8, 2005.
manufaCturing highlights
• Ag Growth operations include five production facilities
totaling 320,000 square feet
• Westfield Division is a high volume, low cost producer
• Wheatheart, Batco and Edwards Divisions utilize job
shop style manufacturing
• In 2005 Westfield Division integrated laser cutting
capabilities into its operations to accommodate greater
design and production flexibility while enhancing market
responsiveness
• In 2006 Westfield Division is embarking on a major lean
manufacturing initiative to improve throughput,
space utilization and inventory turns
9
Geographic Diversification
western Canada
.9%
eastern Canada
.%
northwest
0.%
midwest
.9%
great Plains
.9%
northeast
.%
southwest
.%
southeast
.%
offshore
.%
Distribution highlights
• Channel reform continued in 2005 improving marketing
effectiveness and reducing distribution cost in US
• With the acquisition of Edwards, Canadian dollar sales increased
from 25% in 2004 to 30% in 2005
Manufacturing
Plants
Factory Warehouse
Locations
• Only seven states or provinces account for more than 5% of sales
• No one state or province accounts for more than 15% of total sales
Distribution
Warehouses
0
Management’s Discussion and Analysis
March 16, 2006
This Management’s Discussion and Analysis should be read in conjunction with the audited
consolidated financial statements and accompanying notes of Ag Growth Income Fund
for the year ended December 31, 2005. 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. Effective
April 8, 2005, the Fund acquired substantially all of the assets of The Edwards Group of
Companies, a leading manufacturer of agricultural aeration equipment. In conjunction with
the acquisition of the Edwards Group, the Fund issued an additional 1,595,000 units via a
private placement. Subsequent to this unit issuance, the prior owners of Ag Growth hold a
19% interest in the Fund and hold 2,095,978 Special Voting Units.
As at March 16, 2006, the following units were issued and outstanding:
Trust units
Class B Exchangeable units
Class C Exchangeable Subordinated units
total units that participate pro rata in distributions
Special Voting Units*
9,129,022
169,978
1,926,000
11,225,000
2,095,978
* 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. To provide
meaningful information to the reader, comparative results for the year ended December 31,
2004 include Ag Growth’s results of operations for the 137-day period ended May 17, 2004.
Management’s Discussion and Analysis will refer to the Combined Operating Results of
the Fund for the year ended December 31, 2004, which is comprised of the operations of
the Fund for the 228-day period ended December 31, 2004, and Ag Growth’s results of
operations for the 137-day period ended May 17, 2004 (the “combined operating results”).
Readers are cautioned that the combined operating results presented are not the results
of the Fund for the year ended December 31, 2004 and have been presented only to provide
the reader with additional information to enhance comparability to operating results of
the Fund for the year ended December 31, 2005.
ComParatiVe results – Year-enDeD DeCember , 00
The table on page 13 reconciles the operating results reported by the Fund to the combined
operating results for the year ended December 31, 2004. Other than transactions related
to the initial public offering on May 18, 2004, and the gain on sale of Ag Growth’s
outstanding foreign exchange contracts in January 2004, there are no unusual items
in either Ag Growth’s or the Fund’s results for the year ended December 31, 2004.
Certain comparative figures have been reclassified to conform with the current period’s
presentation.
management’s Discussion and analysis
the fund *
ag growth
(Pre Fund)
Combined
operating
results
Year Ended
Inception –
May 17, 2004 Dec 31, 2004 Dec 31, 2004
$
January 1 –
$
$
Sales
Cost of sales
Gross margin
19,746,893
11,017,758
8,729,135
43,547,884
22,683,058
20,864,826
63,294,777
33,700,816
29,593,961
General and administration
Professional fees
Long term incentive plan
Research and development
Capital taxes
Loss (gain) on foreign exchange
Other income
Total operating expenses
4,359,563
249,271
0
205,138
203,605
(587,173)
(28,352)
4,402,052
7,246,922
678,554
265,788
290,502
236,321
1,143,298
(138,963)
9,722,422
EBITDA before gain on sale and IPO expenses 4,327,083
Gain on sale **
(4,553,611)
IPO expenses
1,401,750
EBITDA ***
7,478,944
11,142,404
0
0
11,142,404
11,606,485
927,825
265,788
495,640
439,926
556,125
(167,315)
14,124,474
15,469,487
(4,553,611)
1,401,750
18,621,348
Amortization ***
Interest expense
Earnings before tax
Tax expense
net earnings
287,486
1,082,401
6,109,057
2,562,000
3,547,057
1,566,528
688,467
8,887,409
164,000
8,723,409
1,854,014
1,770,868
14,996,466
2,726,000
12,270,466
* 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. Also, certain
figures have been reclassified to conform with the current period’s presentation.
** In January 2004 Ag Growth realized a gain on the sale of its outstanding forward foreign
exchange contracts. Due to the significance of the gain it has been segregated from
operating expenses.
*** See discussion of non-GAAP measures.
management’s Discussion and analysis
the edwards group acquisition
Effective April 8, 2005, the Fund acquired substantially all of the assets of The Edwards
Group of Companies. Results of operations of the Edwards Group are included in the
results of the Fund for the period subsequent to the acquisition. Furthermore, Edwards’
assets and liabilities have been consolidated with those of the Fund. In conjunction with
the acquisition, the Fund completed a private placement of 1,595,000 Trust Units priced
at $13.50 per unit for gross proceeds of approximately $21.5 million. The Fund’s expenses
in connection with the offering were approximately $1.1 million. Net assets acquired were
as follows:
Accounts receivable
Inventory
Prepaid expenses and other assets
Property, plant and equipment
Intangible assets
Brand name
Distribution network
Patent
Goodwill
Accounts payable and accrued liabilities
$
1,348,830
3,672,603
174,246
6,992,000
4,363,000
2,839,000
250,000
3,406,168
(1,360,104)
21,685,743
management’s Discussion and analysis
oPerating results
Sales
Cost of sales
Gross margin
General and administration
Professional fees
Long term incentive plan
Research and development
Capital taxes
Loss (gain) on foreign exchange
Other income
Total operating expenses
EBITDA before gain on sale and IPO expenses
Gain on sale (1)
IPO expenses
EBITDA **
Amortization ***
Interest expense
Earnings before tax
Tax expense
net earnings
net earnings per unit
Year Ended December 31
2005
$
2004 *
$
84,033,945
45,132,586
38,901,359
13,235,750
530,532
933,001
622,695
328,716
(1,355,991)
(436,638)
13,858,065
25,043,294
0
0
25,043,294
4,040,948
1,035,153
19,967,193
315,123
19,652,070
1.82
63,294,777
33,700,816
29,593,961
11,606,485
927,825
265,788
495,640
439,926
556,125
(167,315)
14,124,474
15,469,487
(4,553,611)
1,401,750
18,621,348
1,854,014
1,770,868
14,996,466
2,726,000
12,270,466
0.91*
* Results for the year ended December 31, 2004 include the results of Ag Growth for the
period January 1 to May 17, 2004. See “Basis of Management’s Discussion and Analysis”.
Also, certain figures have been reclassified to conform with the current period’s presentation.
** In January 2004 Ag Growth realized a gain on the sale of its outstanding forward foreign
exchange contracts. Due to the significance of the gain it has been segregated from
operating expenses.
*** See discussion of non-GAAP measures.
Total assets
Total liabilities
December 31, 2005 December 31, 2004
$
$
144,352,812
33,574,028
120,671,166
31,102,526
For the year ended December 31, 2005, the Fund generated distributable cash of $2.10
per weighted average unit and declared cash distributions of $1.73 per unit. The table on
page 16 summarizes the distributions declared for trust units of the Fund and for Class B
Exchangeable limited partnership units and Class C Subordinated limited partnership units
of AGX Holdings Limited Partnership. The Fund’s distribution policy is described in the
“Distributions” section of this document.
management’s Discussion and analysis
Trust units
Class B Exchangeable units
Class C Exchangeable Subordinated units
overall Performance
$
15,288,686
294,317
3,334,869
18,917,872
Operating results for the year-ended December 31, 2005 were positively impacted by
the acquisition of the Edwards Group on April 8, 2005. Sales, EBITDA, and net earnings
increased significantly over the prior year in part due to the inclusion of the Edwards
results, which were consistent with management expectations. Also, as described under
“The Edwards Group Acquisition” above, several balance sheet items were affected by the
acquisition.
The Fund reported a substantial increase in sales, EBITDA, and net earnings for the year
ended December 31, 2005 even after allowing for the inclusion of Edwards. Sales in 2005
were positively influenced by favourable crop conditions in many key US markets, an
increase in the number of auger units sold, higher per unit revenue on most products, and
new product development. Gross margins remained relatively stable while total operating
expenses decreased. The strong financial performance in 2005 was achieved despite the
continued strengthening of the Canadian dollar.
foreign exchange
Sales and expenses are recorded at the monthly rate of exchange. In 2005, Ag Growth
generated 65% of its sales in US dollars (2004 - 67%), with a much lower proportion of its
expenses being US dollar denominated. As a result, only a portion of the negative impact
on sales that results from a strengthening of the Canadian dollar is offset by the benefit
related to US dollar purchases. Sales and expenses are recorded at the actual monthly
rate of exchange and, accordingly, gains or losses on the Fund’s foreign currency hedging
instruments are included in operating expenses.
The impact of foreign currency hedges has been included, along with the gain or loss on the
translation of US dollar working capital, in operating expenses as a gain or loss on foreign
exchange. Ag Growth’s foreign currency hedging instruments impact the sales line on the
income statement only to the extent that the contract premium is amortized to sales. This
amortization to sales amounted to $220,826 for the year-ended December 31, 2005.
The Canadian dollar strengthened further in 2005 and as a result sales denominated in US
dollars were translated to Canadian dollars at a lower rate. For the year-ended December
31, 2005, US dollar sales were translated to Canadian dollars at an average rate of $1.21
($0.83) compared to $1.31 ($0.76) in 2004, a decrease of 8%. As the Fund generated
approximately 65% of its 2005 sales in US dollars, the stronger Canadian dollar had a
significant negative effect on sales.
management’s Discussion and analysis
sales
For the year ended December 31, 2005, sales increased $20.7 million or 32.8% over 2004.
Excluding Edwards, sales for the year increased $9.1 million or 14.4% over 2004. The
significant increase in sales is largely the result of an increase in auger sales that resulted
from the Fund’s ability to use its strong market share and geographic diversification to
capitalize on favourable conditions in several key US markets. The strength of the Fund’s
distribution network also contributed to strong sales in certain drought-impacted areas
of the US corn belt. Sales benefited from the large price increases on most products
implemented throughout 2004 in response to rising input costs, and a trend towards larger,
more expensive auger units, which resulted in higher per unit revenue in 2005. Sales from
recently developed products, including a heavier line of augers and a new line of post
pounders, also contributed to the increase in sales compared to 2004. These factors more
than offset the negative impact of a stronger Canadian dollar, which resulted in US dollar
denominated sales being recorded at exchange rates approximately 8% lower than in the
same period in 2004.
expenses
Gross margin as a percentage of sales for year ended December 31, 2005 was 46.3%,
compared to 46.8% in 2004. The inclusion of results for the Edwards Group in 2005 did not
significantly impact gross margin percentages compared to the prior year. The Fund was
able to maintain a strong gross margin percentage despite the significant strengthening
of the Canadian dollar, as gross margins benefited from production efficiencies, high sales
volumes, price increases implemented in 2004 to offset rising input costs, and a decline in
certain input costs compared to the prior year.
For the year ended December 31, 2005, total operating expenses were $13.9 million,
including $1.4 million recorded by the Edwards Group, compared to $14.1 million in 2004,
prior to the gain Ag Growth realized on the sale of its outstanding forward foreign exchange
contracts and the accrual of IPO expenses. Excluding Edwards, the $1.6 million decrease
from 2004 is primarily due to the following:
• General and administrative expenses increased $0.3 million or 2.3%, as savings
related to the rationalization of the Fund’s distribution network and the elimination
of management fees payable to the owners of Ag Growth prior to the IPO were offset
by higher sales and marketing costs and an increase in earnings based compensation
bonuses.
• Professional fees decreased $0.4 million as the majority of the costs related to a
successful patent defence were incurred in the prior year.
• Long-term incentive plan expense increased $0.7 million due to a 20% rise in the Fund’s
distribution rate and a 217% increase in per unit special distributions.
• In 2005, largely due to gains on foreign exchange contracts, the Fund recorded a gain on
foreign exchange of $1.4 million. In 2004 the Fund recorded a loss on foreign exchange
of $0.6 million, as the gain on foreign exchange contracts was much smaller and it was
more than offset by the downward revaluation of US dollar working capital that resulted
from the significant strengthening of the Canadian dollar in that year.
management’s Discussion and analysis
• Other income increased $0.3 million, primarily due to the inclusion in 2005 of
$0.2 million related to the fair value of the Fund’s interest rate swap.
• A number of smaller miscellaneous items accounted for the remaining change.
Prior to the initial public offering on May 18, 2004, Ag Growth realized a net gain of
$4.6 million on the sale of its forward foreign exchange contracts. Ag Growth subsequently
entered into a number of new forward foreign exchange contracts that continue to form
part of the Fund’s hedging strategy. The $4.6 million gain on sale significantly affected Ag
Growth’s financial results for the year ended December 31, 2004.
net earnings and ebitDa (see discussion of non-GAAP measures)
EBITDA for the year ended December 31, 2005 was $25.0 million, compared to $15.5 million
in 2004 prior to the gain Ag Growth realized on the sale of its outstanding foreign exchange
contracts and the accrual of IPO expenses in that year. The significant increase in EBITDA is
the result of the acquisition of the Edwards Group, strong sales, stable gross margins, and
a decrease in total operating expenses. After recognition of the gain on the sale of foreign
exchange contracts and the accrual of IPO expenses, EBITDA for the year ended December
31, 2004 was $18.6 million.
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 year ended December 31, 2005, the Fund’s
effective interest rate on its term debt was 4.8%, and after consideration of the effect of the
Fund’s interest rate swap (see “Financial Instruments”) was 4.5%.
Amortization for the year ended December 31, 2005 was $4.0 million and includes the
amortization of intangible assets of $1.7 million, the amortization of deferred financing
costs of $0.4 million, and the amortization of property, plant and equipment of $1.9 million.
Compared to 2004, the increase in amortization of property, plant and equipment and
intangibles is largely the result of the acquisition of the Edwards Group.
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 corporations.
The recorded tax expense of $315,123 for the year ended December 31, 2005 represents
primarily income taxes and large corporation tax payable on the net income and taxable
capital primarily allocated to Ag Growth through its ownership in AGLP after deductions for
interest expense, financing fees and capital taxes.
Net earnings for the year ended December 31, 2005 was $19.7 million and earnings per
basic and diluted unit for the year was $1.82.
management’s Discussion and analysis
quarterly financial information
Total sales
Gain (loss) on
foreign exchange
Net earnings
Basic and diluted net
earnings per unit
Total sales
Gain (loss) on
foreign exchange
Net earnings
Basic and diluted net
earnings per unit
2005 Q4
$
2005 Q3
$
2005 Q2
$
2005 Q1
$
16,900,725
26,755,797
24,363,985
16,013,438
1,294,912
3,380,300
(274,763)
6,567,557
115,822
6,255,028
220,020
3,449,185
0.31
0.59
0.56
0.36
2004 Q4
$
2004 Q3
$
2004 Q2*
$
2004 Q1**
$
13,911,771
21,780,593
7,855,520
3,552
1,798,911
(626,254)
5,483,492
(520,596)
1,441,006
0.19
0.57
0.15
N/A
N/A
N/A
N/A
* Includes results of operations only for the 44-day period May 18 to June 30, 2004.
** Prior to IPO date of May 18, 2004.
*** Certain comparative figures have been reclassified to conform to the current period’s
presentation.
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.
Distributable cash generated per unit will also typically be highest in the third quarter. The
second, third, and fourth quarters of 2005, compared to the same periods in 2004, were
significantly impacted by the April 8, 2005 acquisition of the Edwards Group. The gain
on foreign exchange in the fourth quarter of 2005 was largely the result of gains on the
Fund’s foreign exchange contracts. A similar gain was not recorded in the fourth quarter of
2004, as the Fund’s contract rates were more similar to prevailing market rates. The first
and second quarters of 2005 were stronger than 2004 largely due to demand that resulted
from the record 2004 US harvest. The second quarter of 2004 reflects the operations of
Ag Growth for only the 44-day period from the date of the Fund’s May 18, 2004 IPO to the
quarter-end date.
9
management’s Discussion and analysis
fourth quarter
Operating results for the three months ended December 31, 2005 were positively impacted
by the acquisition of the Edwards Group. Sales, EBITDA, and net earnings increased
significantly over the same period in 2004 in part due to the inclusion of Edwards. However,
even after excluding the effect of Edwards, the Fund reported a substantial increase in
sales, EBITDA, and net earnings. The positive results recorded the fourth quarter of 2005
were the result of the following factors.
Sales for the three-months ended December 31, 2005 were $16.9 million, an increase of
21.5% over the $13.9 million recorded in the same period in 2004. Excluding Edwards, sales
increased $1.1 million or 8.3% over 2004. Fourth quarter demand was high in both 2005
and 2004. The increase in 2005 was primarily the result of increased overseas sales, as
the Fund continues to expand markets in Australia and Europe, higher auger sales at the
Wheatheart division, and new product revenue, offset by a strengthening Canadian dollar.
Gross margin as a percentage of sales was 42.1% in the fourth quarter of 2005, compared
with 45.2% for the three months ended December 31, 2004. The decrease in gross margin
percentage is primarily the result of a lower US exchange rate, as the effective rate of
exchange decreased from $1.26 in the fourth quarter of 2004 to $1.17 in the fourth quarter
of 2005, partially offset by the benefit of lower input costs compared to the prior year.
Total operating expenses for the three-month period ended December 31, 2005 were
$2.2 million, including Edwards’ costs of $0.5 million. This compares to total operating
expenses of $3.8 million for the same period in 2004. Excluding Edwards, the decrease of
$2.1 million from 2004 is largely the result of a $1.3 million increase in the gain on foreign
exchange. Operating expenses compared to the fourth quarter of 2004 also decreased
due to a $0.3 million decline in legal fees, an insurance recovery that led to a $0.2 million
decrease in repairs and maintenance expense, and an increase in other income of
$0.2 million that related to the Fund’s interest rate swap. A number of smaller
miscellaneous items accounted for the remaining change.
EBITDA for the three-month period ended December 31, 2005 was $4.9 million, compared
to $2.5 million for the same period in 2004. The increase in EBITDA compared to 2004
is primarily the result of the acquisition of the Edwards Group and lower total operating
expenses, offset by a lower gross margin. Net earnings for the three months ended
December 31 increased from $1.8 million in 2004 to $3.4 million in 2005 due to the factors
discussed above.
In the three months ended December 31, 2005, the Fund generated $15.3 million from
operating activities, including $0.5 million generated by Edwards, compared to $14.4
million in the same period in 2004. Excluding Edwards, the $0.4 million increase was
due to a $2.0 million increase in earnings before non-cash charges, offset by a decrease
in the cash generated through movement in non-cash working capital. During the three
months ended December 31, 2005, the Fund had capital expenditures of $0.4 million (2004
- $0.3 million) that related primarily to purchases of manufacturing equipment, computer
hardware and software, and building improvements. During the three months ended
December 31, 2005 the Fund paid off its bank revolver of $1.0 million (2004 - $4.2 million)
and ended the period with a cash balance of $8.1 million (2004 - $7.0 million).
0
management’s Discussion and analysis
Cashflow anD liquiDitY
The table below reconciles net income to cash flow from operations for the years ended
December 31, 2005 and 2004.
Net income
Add charges (deduct credits) to operations not
requiring a current cash payment:
Amortization
Future income taxes
Deferred foreign exchange loss
Loss (gain) on sale of assets
Net change in non-cash working capital balances
related to operations:
Accounts receivable
Inventory
Prepaid expenses and other
Accounts payable
Long term incentive plan
Customer deposits
Income tax payable
Cash flow from operations
Add (deduct) unusual items: **
IPO expenses
Gain on sale ***
Cash flow from operations excluding unusual items
December 31
2005
$
2004*
$
19,652,070
12,270,466
4,040,948
236,000
34,540
12,120
23,975,678
(1,441,926)
(967,153)
(270,328)
(442,001)
667,213
(721,769)
477,481
(2,698,483)
21,277,195
0
0
21,277,195
1,854,014
317,000
(47,900)
(16,419)
14,377,161
1,404,431
(2,949,234)
(703,721)
655,729
265,788
3,240,883
(864,900)
1,048,976
15,426,137
1,401,750
(4,553,611)
12,274,276
* Results for the period ended December 31, 2004 include the results of Ag Growth for the
period January 1 to May 17, 2004. See “Basis of Management’s Discussion and Analysis”.
** Due to the significance of the IPO expenses and the gain on sale of foreign exchange
contracts, and their impact on the comparability of results, cash flow used in operations
has also been presented net of these items.
*** In January 2004 Ag Growth realized a gain on the sale of its outstanding forward foreign
exchange contracts. Due to the significance of the gain it has been presented separately.
management’s Discussion and analysis
Cash flow from operations for the year ended December 31, 2005 was $21.3 million, an
increase of $8.9 million over the same period in 2004, prior to the gain Ag Growth realized
on the sale of its outstanding foreign exchange contracts and the accrual of IPO expenses.
Excluding cash flow generated from Edwards of $2.6 million, the remaining $6.3 million
increase resulted from substantial growth in earnings before non-cash charges, offset by a
decrease in the cash generated through movement in non-cash working capital.
Interim period working capital requirements typically reflect some seasonality. 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 in-season demand, inventory levels must be gradually increased throughout
the year. Accordingly, inventory levels typically increase in the first and second quarters
and then begin to decline in the third or fourth quarter as sales levels exceed production.
As a result of these working capital movements, historically, Ag Growth’s use of its bank
revolver is typically highest in the first and second quarters. The revolver balance would
normally begin declining in the third quarter as collections of accounts receivable increase.
Ag Growth has generally fully repaid its revolver balance by early in the fourth quarter.
The Fund had capital expenditures of $1.3 million in the year ended December 31, 2005,
compared to $0.7 million for the period May 18, 2004 to December 31, 2004. Capital
expenditures in 2005 related primarily to purchases of manufacturing equipment, forklifts,
semi trailer units, computer hardware and software, and building improvements. The Fund
anticipates total capital expenditures in 2006 will approximate the amounts expended in
2005, and that all 2006 capital expenditures will be funded through operations.
For the year ended December 31, 2005, the Fund’s cash balance increased $1.1 million.
ContraCtual obligations
Total
$
2006
$
2007
$
2008
$
2009
$
2010 +
$
Long-term debt
Operating leases
total obligations
20,041,093
1,296,037
21,337,130
23,502 10,015,331 10,002,260
451,814
248,438
475,316 10,411,981 10,250,698
396,650
0
140,820
140,820
0
58,315
58,315
management’s Discussion and analysis
The term loan of $20 million included in long-term debt above matures May 2006 and is
extendible annually for an additional one-year term at the lender’s option. Under the terms
of the credit facility agreement, if the bank elects to not extend the operating and term
loan facilities beyond the current May 31, 2006 maturity date, all amounts outstanding
under the facilities become repayable in four equal quarterly instalments of principal,
commencing August 31, 2007.
The operating leases relate to vehicle, equipment, and warehouse facility leases entered
into in the normal course of business.
Distributions
The Fund declared distributions to public unitholders of $15.3 million for the year
ended December 31, 2005, including $6.3 million in the three-month period then ended.
Furthermore, consistent with the Fund’s prospectus dated May 5, 2004, the Fund declared
distributions to Ag Growth’s previous owners of $3.6 million and $1.4 million for the year
and three months ended December 31, 2005 respectively.
The Fund’s policy is to make monthly distributions to holders of both Trust units and Class
B Exchangeable limited partnership units. Furthermore, in accordance with the terms of the
Fund’s prospectus, holders of Class C Subordinated Exchangeable limited partnership units
receive distributions quarterly provided the relevant terms of subordination have been met,
which they have since the inception of the Fund. 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 one or more special distributions to achieve this
requirement.
The Fund’s Board of Trustees reviews financial performance and other factors when
assessing the Fund’s distribution levels. An adjustment to distribution levels will be made
at such time as the Board determines the adjustment is sustainable and in the long-term
best interest of the Fund and its unitholders.
Distributable cash generated for the year and quarter ended December 31, 2005 and the
283-day period and quarter ended December 31, 2004 is calculated as on page 24.
management’s Discussion and analysis
December 31, 2005
December 31, 2004
12 Months
$
3 Months
$
12 Months*
$
3 Months
$
Net income for the period
Add: Amortization
Interest expense
Tax expense
EBITDA**
Less: Interest expense
Net capital expenditures
Current income taxes
Distributable cash **
19,652,070
4,040,948
1,035,153
315,123
25,043,294
1,035,153
1,300,295
79,123
22,628,723
3,380,300
1,167,305
267,909
87,123
4,902,637
267,909
423,086
34,123
4,177,519
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
Weighted average units
outstanding
Distributable cash generated
per unit
Distributions per weighted
average unit
Regular distributions
Special distributions
Distribution Percentage
Before special distribution
After special distribution
10,801,123
11,225,000
9,630,000
9,630,000
2.0950
0.3722
1.0058
0.1987
1.4515
0.3000
1.7515
0.3900
0.3000
0.6900
0.8079
0.1380
0.9459
0.3249
0.1380
0.4629
69.28%
83.60%
104.78%
185.38%
80.32%
94.04%
163.51%
232.96%
* The Fund was inactive until its acquisition of Ag Growth on May 18, 2004. Included in the
Fund’s distributable cash calculation are the results of 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 below.
*** On a non-weighted basis, per unit cash distributions for the year and quarter ended
December 31, 2005 were $1.7315 and $0.6900 respectively.
Distributions for 2004 and 2005 were funded entirely through operations, and no portion of
the distribution represents a return on capital. For tax purposes, the 2004 distributions are
comprised of 96.9599% other income and 3.0401% dividends, while the 2005 distributions
are 100% other income. The cash distribution in 2005 of $1.73 per unit represents a 33%
increase over the $1.30 per unit distribution disclosed in the Fund’s 2004 prospectus.
management’s Discussion and analysis
Historical distributable cash generated per unit and distributions declared as a percentage
of distributable cash generated is as follows:
Distributable Cash for Periods ended December , 00
Generated per Unit
Distribution %
3 months
$
0.18
0.63
0.20
N/A
YTD
$
0.18
0.81
1.01
N/A
Quarter
%
88.8
51.6
163.5
N/A
YTD
%
88.8
59.8
80.3
94.0
Q2 *
Q3
Q4
Special **
* Includes results of operations only for the 44-day period May 18 to June 30, 2004.
** Total special distributions of $0.138 per unit consists of $0.07 per unit paid
January 30, 2005 to unitholders of record on December 31, 2004, and $0.068
per unit paid April 30, 2005 to unitholders of record on March 31, 2005.
Distributable Cash for Periods ended December , 00
Generated per Unit
YTD
$
3 months
$
0.40
0.64
0.69
0.37
N/A
0.40
1.04
1.73
2.10
N/A
Distribution %
Quarter
%
82.6
54.2
55.4
104.8
N/A
YTD
%
82.6
64.2
60.6
68.7
83.6
Q1
Q2
Q3
Q4
Special *
* Total special distributions of $0.30 per unit consists of $0.12 per unit paid
December 30, 2005 to unitholders of record on November 30, 2005, and $0.18
per unit paid January 30, 2006 to unitholders of record on December 30, 2005.
Distributable Cash summary
Distributable
Cash Generated
$
Distributions
Declared *
$
Payout
Ratio
%
Period Ended December 31, 2004
Year Ended December 31, 2005
Cumulative
9,686,147
22,628,723
32,314,870
9,109,017
18,917,872
28,026,889
94.0
83.6
86.7
* Distributions declared include special distributions of $1,328,940 in 2004 and
$3,367,500 in 2005.
management’s Discussion and analysis
CaPital resourCes
The term loan matures May 2006 and is extendible annually at the lender’s 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, 2005, the Fund’s bank indebtedness was
$Nil. Under the terms of the credit facility agreement, if the bank elects to not extend the
operating loan and term loan facilities beyond the current May 31, 2006 maturity date,
all amounts outstanding under the facilities become repayable in four equal quarterly
instalments of principal, commencing August 31, 2007. In addition, under the terms of the
facility agreement, the operating and term loan facilities will bear interest at prime plus
0.0%, 0.50%, or 1.00% per annum based on performance calculations. The Fund is party to
an interest rate swap agreement to mitigate 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 foreign currency
contracts discussed below in Financial Instruments.
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. The Fund believes the accounting policies that are critical
to its business relate to the 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 related to the IPO and the acquisition of the Edwards
Group, 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.
management’s Discussion and analysis
finanCial instruments
Risk from foreign exchange arises as a result of variations in exchange rates between the
Canadian and the US Dollar. Historically, over 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, 2005, the Fund had
outstanding $23.1 million US of forward foreign exchange contracts, dated from March
2006 to December 2007, with a Canadian Dollar equivalent of $30.2 million. The Fund also
has outstanding reverse knock-in currency options consisting of a series of call and put
options, with a face value of $4.6 million US, at rates of $1.1363 and $1.2750 respectively,
with maturities dated from March 2007 to December 2007. As at December 31, 2005,
the Fund has recorded a deferred foreign exchange loss of $13,360 with respect to its
hedged accounts receivable. At December 31, 2005, the unrealized gain on forward foreign
exchange contracts was $3.4 million.
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, 2008 and involves the
exchange of the underlying floating interest rate for an effective fixed interest rate of 3.68%,
resulting in interest charges to the Fund of 3.68% plus a variable rate based on performance
calculations. The notional amount of the swap transaction at December 31, 2005 was
$20.0 million. At December 31, 2005, the fair value of the interest rate swap contract was
$175,803, and this amount has been recorded to prepaid expenses and other assets and
included in other income on the income statement.
Changes in aCCounting PoliCies
In an effort to harmonize Canadian GAAP with US GAAP, the Canadian Accounting Standards
Board has issued the following 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 of the CICA Handbook 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.
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.
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.
9
management’s Discussion and analysis
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.
foreign exchange risk
Ag Growth generates a majority 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 foreign exchange
contracts. Ag Growth has entered into a series of hedging arrangements to mitigate the
potential effect of fluctuating exchange rates through December 2007. 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.
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.
0
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 special
distributions to achieve this requirement. In any event, the final amount determined to be
payable will be distributed in January to unitholders on December 31.
taxation of income trusts
There can be no assurance that Canadian federal income tax laws or the judicial
interpretation thereof or the administrative and/or assessing practices of the Canada
Revenue Agency and/or the treatment of mutual fund trusts will not be changed in a
manner that adversely affects the holders of Trust Units.
outlooK
The Fund anticipates strong demand in the first half of 2006. Market sentiment in the
US remains positive, primarily due to a very strong 2005 harvest, and as a result product
order backlog is high. Although the 2005 US crop was large, it was slightly smaller than
the record 2004 crop, which may translate into slightly lower demand in the first half of
2006 compared to the prior year. Sentiment in Western Canada remains subdued after two
successive years of excessive moisture. The Fund continues to face challenges with respect
to the stronger Canadian dollar. Although the impact of a stronger currency has been
largely addressed in 2006 through foreign currency hedging, a further strengthening of the
dollar will continue to pressure gross margins. Although demand in the second half of 2006
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 2006.
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.
management’s Discussion and analysis
Amortization in the Combined Operating Results for the period ended December 31, 2004 is
a non-GAAP measure as amortization, based on a combination of assets valued at historical
cost and fair value, would not be combined when reporting under GAAP. The combined
operating results for the period ended December 31, 2004, representing the financial
results of Ag Growth prior to its acquisition by the Fund (January 1, 2004 to May 17, 2004)
and the Fund’s financial results from inception to December 31, 2004, have been presented
to provide the reader with additional information to enhance comparability to operating
results of the Fund for the period ended December 31, 2005.
DisClosure Controls anD ProCeDures
Ag Growth’s management is responsible for establishing and maintaining disclosure
controls and procedures to ensure that information used internally and disclosed externally
is complete and reliable. The Fund’s Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the disclosure controls and procedures and have concluded
that they are adequate and effective for the year ended December 31, 2005.
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.
aDDitional information
Additional information relating to the Fund, including all public filings, is available on
SEDAR (www.sedar.com).
inVestor relations
Steve Sommerfeld
#3, 59 Scurfield Blvd, Winnipeg, MB R3Y 1V2
Phone: (204) 489-1855
Email: steve@aggrowth.com
Auditors’ Report
to the unitholders of ag growth income fund
We have audited the consolidated balance sheets of ag growth income fund as
at December 31, 2005 and 2004 and the consolidated statements of earnings,
unitholders’ equity and cash flows for the year ended December 31, 2005 and
the 283-day period ended December 31, 2004. 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 audits.
We conducted our audits 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, 2005 and 2004
and the results of its operations and its cash flows for the year ended December
31, 2005 and the 283-day period ended December 31, 2004 in accordance with
Canadian generally accepted accounting principles.
Winnipeg, Canada,
February 22, 2006.
Chartered Accountants
Consolidated balance sheets
Consolidated statements of earnings
As at December 31
assets [notes 9 and 10]
Current
Cash and cash equivalents
Accounts receivable
Inventory [note 5]
Prepaid expenses and other assets
Future tax assets
total current assets
Property, plant and equipment [note 6]
Goodwill
Intangible assets [note 7]
Deferred financing costs [note 8]
Future tax assets [note 12]
Deferred foreign exchange loss
liabilities anD unitholDers’ equitY
Current
Accounts payable and accrued liabilities
Customer deposits
Income taxes payable
Distributions payable
Long-term incentive plan [note 14]
Current portion of long-term debt [note 10]
total current liabilities
Long-term debt [note 10]
total liabilities
Commitments [notes 15 and 17]
unitholders’ equity [note 11]
See accompanying notes
On behalf of the Board of Trustees:
2005
$
2004
$
8,148,634
7,305,809
20,113,333
1,402,999
221,000
37,191,775
11,913,442
35,970,059
58,923,988
149,188
191,000
13,360
144,352,812
4,962,948
3,103,402
553,074
3,980,510
933,001
23,502
13,556,437
20,017,591
33,574,028
7,001,929
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
120,671,166
4,044,845
3,825,171
75,593
2,789,041
265,788
33,495
11,033,933
20,068,593
31,102,526
110,778,784
144,352,812
89,568,640
120,671,166
Rod Senft
Trustee
John R. Brodie, FCA
Trustee
Consolidated balance sheets
Consolidated statements of earnings
Year ended
December 31,
2005
$
84,033,945
45,132,586
38,901,359
13,235,750
530,532
933,001
622,695
328,716
(1,355,991)
(436,638)
13,858,065
25,043,294
121,364
913,789
1,035,153
24,008,141
1,928,907
439,371
1,672,670
4,040,948
19,967,193
79,123
236,000
315,123
19,652,070
$1.82
283-day
period ended
December 31,
2004*
[note 2]
$
43,547,884
22,683,058
20,864,826
7,246,922
678,554
265,788
290,502
236,321
1,143,298
(138,963)
9,722,422
11,142,404
122,767
565,700
688,467
10,453,937
504,734
206,452
855,342
1,566,528
8,887,409
37,000
127,000
164,000
8,723,409
$0.91
10,801,123
9,630,000
sales
Cost of goods sold
gross margin
Expenses
Selling, general and administration
Professional fees
Long-term incentive plan
Research and development
Capital taxes
Loss (gain) on foreign exchange
Other income
Earnings before the following
Interest expense
Short-term debt
Long-term debt
Earnings before amortization and income taxes
Amortization of property, plant and equipment
Amortization of deferred financing costs
Amortization of intangible assets
Earnings before provision for income taxes
Provision for income taxes [note 12]
Current
Future
net earnings for the period
Basic and diluted net earnings per unit
Basic and diluted weighted average number
of units outstanding
* Includes the results of Ag Growth’s operations for the 228-day period from May 18, 2004
to December 31, 2004.
See accompanying notes
Consolidated statement of unitholders’ equity
Consolidated statements of Cash flows
Year ended December 31, 2005
Unitholders’ Accumulated Accumulated
distributions
earnings
$
$
capital
$
[note 11]
Total
$
balance, beginning of period
Issuance of units [note 4]
Issuance costs [note 4]
Net earnings for the period
Distributions declared
balance, end of period
89,954,248
21,532,500
(1,056,554)
—
—
110,430,194
8,723,409
—
—
19,652,070
—
28,375,479
89,568,640
(9,109,017)
21,532,500
—
(1,056,554)
—
19,652,070
—
(18,917,872)
(18,917,872)
(28,026,889) 110,778,784
283-day period ended December 31, 2004
[includes the results of Ag Growth’s operations for the 228-day period ended
December 31, 2004] [note 2]
Unitholders’ Accumulated Accumulated
distributions
earnings
$
$
capital
$
Total
$
—
30
(30)
69,040,000
(6,345,752)
—
—
—
—
—
—
—
—
—
—
—
30
(30)
69,040,000
(6,345,752)
27,260,000
—
—
89,954,248
—
8,723,409
—
8,723,409
—
—
(9,109,017)
(9,109,017)
27,260,000
8,723,409
(9,109,017)
89,568,640
balance, beginning of period
Issuance of initial
subscriber units
Redemption of initial
subscriber units
Issuance of units on initial
public offering
Issuance costs
Issuance of AGHLP units
as consideration on
acquisition of Ag Growth
Net earnings for the period
Distributions declared
balance, end of period
See accompanying notes
Consolidated statement of unitholders’ equity
Consolidated statements of Cash flows
283-day
period ended
December 31, December 31,
Year ended
2005
$
2004*
[note 2]
$
19,652,070
8,723,409
4,040,948
236,000
34,540
12,120
23,975,678
1,566,528
127,000
(47,900)
(16,419)
10,352,618
(2,698,483)
21,277,195
8,112,322
18,464,940
oPerating aCtiVities
Net earnings for the period
Add charges to operations not requiring a
current cash payment
Amortization
Future income taxes
Deferred foreign exchange gain (loss)
Loss (gain) on sale of property, plant and equipment
Net change in non-cash working capital
balances related to operations [note 18]
Cash provided by operating activities
inVesting aCtiVities
Acquisition of property, plant and equipment
Acquisition of assets of the Edwards Group of Companies
Proceeds from sale of property, plant and equipment
Acquisition of Ag Growth Industries Inc.
Pre-existing Fund structure tax credits received
Cash used in investing activities
(1,300,295)
(21,685,743)
61,000
—
240,000
(22,685,038)
finanCing aCtiVities
Decrease in bank indebtedness
Repayment of long-term debt
Distributions paid
Issuance of units, net of expenses
Issuance of long-term debt
Increase in deferred financing costs on long-term debt
Initial public offering of fund units, net of expenses
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
—
(60,995)
(17,726,403)
20,475,946
—
(134,000)
—
—
—
2,554,548
(730,790)
—
42,776
(32,133,771)
—
(32,821,785)
(5,266,052)
(32,899,936)
(6,319,976)
—
20,119,967
(661,011)
62,694,248
(16,000,000)
(308,466)
21,358,774
net increase in cash and cash equivalents during the period 1,146,705
Cash and cash equivalents, beginning of period
7,001,929
Cash and cash equivalents, end of period
8,148,634
7,001,929
—
7,001,929
supplemental cash flow information
Interest paid
Income taxes paid (recovered)
1,032,655
(339,970)
680,606
1,394,013
* Includes the results of Ag Growth’s operations for the 228-day period from May 18, 2004 to December 31, 2004.
See accompanying notes
notes to Consolidated financial statements
December 31, 2005
. 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 and its wholly-owned subsidiaries conduct 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.
. basis of Presentation
The Fund prepares its consolidated financial statements in accordance with Canadian
generally accepted accounting principles. These consolidated financial statements reflect
the results of operations of the Fund for the year ended December 31, 2005. Although a
Declaration of Trust for the Fund was made on March 24, 2004, the Fund was inactive until
its acquisition of Ag Growth Industries Inc. [“Ag Growth”] on May 18, 2004. As a result,
comparative financial information provided on the statements of earnings, unitholders’
equity and cash flows only include the results of Ag Growth’s operations for the period
May 18, 2004 to December 31, 2004.
. 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.
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 materials and finished goods. Raw materials are 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, 2005
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% - 5%
20%
20%
20% - 30%
30%
20% - 30%
declining balance
straight line
declining balance
declining balance
declining balance
declining balance
Goodwill represents the amounts paid to acquire Ag Growth and the Edwards Group in
excess of the estimated 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 estimated fair value of its reporting unit to its carrying value. The carrying value of
goodwill is written down to estimated fair value if the carrying value of the reporting unit’s
goodwill exceeds its estimated fair value.
intangible assets
Intangible assets are comprised of brand names, which are considered to have an indefinite
life, distribution networks, which are being amortized over 25 years on a straight-line
basis, and a patent acquired from the Edwards Group which is being amortized over a one
year period. Indefinite life intangible assets are tested for impairment at least annually
by comparing their estimated fair values to their carrying values. The carrying value of an
indefinite life intangible asset is written down to its estimated fair value if its carrying value
exceeds its estimated 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 estimated 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.
9
notes to Consolidated financial statements
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 are 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 at the time product is shipped, free on board shipping point,
and title passes and there is evidence a sales arrangement exists, the sales price is fixed
and determinable and collectibility is reasonably assured. 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 based on
historical experience.
research and Development
Research expenses are charged to earnings in the period they are incurred. Development
expenses are charged to earnings unless management believes the costs meet generally
accepted criteria for deferral and amortization.
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 whereby rental payments are expensed as incurred.
0
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”], the Fund establishes an amount
to be allocated to eligible participants based on 10% to 20% of cash distributions in excess
of an established threshold. The cost is accrued as an expense in the period when it is
determined an amount payable under the LTIP appears likely.
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 foreign exchange contracts to specific
anticipated sales transactions. 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.
The Fund purchases foreign exchange contracts to hedge anticipated sales to customers
in the United States and the collection of 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 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.
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.
notes to Consolidated financial statements
The Fund uses foreign currency swap agreements to manage its cash positions. The Fund’s
foreign currency swap agreements do not qualify for hedge accounting. 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.
During the year, the terms of the interest rate swap were changed and it no longer qualifies
for hedge accounting. These swaps are measured at their fair value and included in prepaid
expenses and other assets on the consolidated balance sheet. Changes in the fair value
of the foreign currency swaps and interest rate swaps are recognized in earnings and
are included in loss (gain) on foreign exchange and interest expense, respectively, in the
corresponding period.
employee benefit Plans
The Fund contributes to a group retirement savings plan subject to maximum limits per
employee. The Fund accounts for such defined contributions as an expense in the period
in which the contributions are made. The expense recorded in 2005 was $346,730
[2004 - $172,445].
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.
. issuanCe of funD units anD aCquisition
Effective April 8, 2005, the Fund acquired substantially all of the assets of The Edwards
Group of Companies [“the Edwards Group”], a leading manufacturer of agricultural aeration
equipment, for cash consideration in the amount of $21,685,743. In conjunction with
the acquisition, the Fund completed a private placement of 1,595,000 Trust Units priced
at $13.50 per unit for gross proceeds of $21,532,500. The Fund has recorded expenses
in connection with the offering, including commissions payable to the underwriters, of
$1,056,554.
The acquisition has been accounted for by the purchase method with the results of the
Edwards Group’s operations included in the Fund’s earnings from the date of acquisition
[the consolidated statement of earnings includes the results of the Edward Group’s
operations for the 268-day period from April 8, 2005 to December 31, 2005]. The assets
and liabilities of the Edwards Group were initially recorded in the consolidated financial
statements at their estimated fair values, as follows:
notes to Consolidated financial statements
Net assets acquired
Accounts receivable
Inventory
Prepaid expenses and other assets
Property, plant and equipment
Intangible assets
Brand name
Distribution network
Patent
Goodwill
Accounts payable and accrued liabilities
. inVentorY
Raw materials
Finished goods
$
1,348,830
3,672,603
174,246
6,992,000
4,363,000
2,839,000
250,000
3,406,168
(1,360,104)
21,685,743
December 31,
2005
$
December 31,
2004
$
6,019,628
14,093,705
20,113,333
4,080,743
11,392,834
15,473,577
. ProPertY, Plant anD equiPment
December 31, 2005
December 31, 2004
Accumulated Net book
amortization
$
value
$
Cost
$
Accumulated Net book
amortization
$
value
$
Cost
$
861,315
5,177,931
—
287,744
861,315
4,890,187
611,315
2,940,739
—
611,315
80,893 2,859,846
7,000
7,000
—
10,486
2,942
7,544
121,047
26,282
94,765
83,543
10,831
72,712
1,438,283
480,185
958,098
1,197,541
183,447 1,014,094
565,714
159,442
406,272
285,842
60,667
225,175
6,127,774
14,299,064
1,424,969
4,702,805
2,385,622 11,913,442
998,442
6,127,908
165,954
832,488
504,734 5,623,174
Land
Buildings
Leasehold
improvements
Furniture and
fixtures
Automotive
equipment
Computer
equipment
Manufacturing
equipment
notes to Consolidated financial statements
. intangible assets
December 31, 2005
December 31, 2004
Accumulated Net book
amortization
$
value
$
Cost
$
Accumulated Net book
amortization
$
value
$
Cost
$
Distribution
network
Brand name
Patent
37,839,000
23,363,000
250,000
61,452,000
2,340,512
—
187,500
2,528,012
35,498,488 35,000,000
23,363,000 19,000,000
—
58,923,988 54,000,000
62,500
855,342 34,144,658
— 19,000,000
—
—
855,342 53,144,658
. DeferreD finanCing Costs
December 31, 2005
December 31, 2004
Accumulated Net book
amortization
$
value
$
Cost
$
Accumulated Net book
amortization
$
value
$
Cost
$
795,011
645,823
149,188
661,011
206,452
454,559
9. 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 a rate of prime to prime plus
1.0% per annum based on performance calculations. The effective interest rate during
the year was 4.81% [2004 – 4.50%]. At December 31, 2005 and 2004, there was no
amount 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
0. long-term Debt
December 31,
2005
$
December 31,
2004
$
Term loan, interest payable monthly at prime to
prime plus 1% per annum based on performance
calculations. As described in note 15, the Fund has
entered into a swap contract that effectively fixes
the Fund’s interest rate at 3.68%, plus 1.0%, 1.5%,
or 2.0% per annum based on performance calculations.
The effective interest rate during the year ended
December 31, 2005 would have been 4.81%
[2004 – 4.50%] and after consideration of the effect
of the interest rate swap was 4.48% [2004 – 4.32%]
GMAC loans, 0% maturing in 2007 and 2008, with
monthly payments of $1,958. Vehicles financed
are pledged as collateral
Less current portion
20,000,000
41,093
20,041,093
23,502
20,017,591
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, 2005 and 2004, the Fund was in compliance with the
applicable financial covenant terms. Collateral for the term loan and operating facility
[note 9] includes a general security agreement over all assets and first position collateral
mortgages on land and buildings.
The term loan matures May 2006 and is extendible annually for an additional one-year term
at the lender’s option. Under the terms of the credit facility agreement, if the bank elects
to not extend the operating loan and term loan facilities beyond the current May 31, 2006
maturity date, all amounts outstanding under the facilities become repayable in four equal
quarterly instalments of principal, commencing on August 31, 2007.
Principal repayments due within the next four fiscal years, if the term loan is not renewed
and is repayable commencing August 31, 2007, are as follows:
2006
2007
2008
$
23,502
10,015,331
10,002,260
20,041,093
notes to Consolidated financial statements
. unitholDers’ CaPital
Unitholders’ capital is comprised of the following:
Fund
Trust
units
$
Class B
Class C
Exchangeable Exchangeable
units of
AGHLP
$
units of
AGHLP
$
Total
Unitholders’
capital
$
Issuance of initial subscriber units
Redemption of initial
subscriber units
Issuance of units on initial
30
(30)
public offering
Issuance costs
Issuance of units of AGHLP
as consideration on
acquisition of Ag Growth
Exchange of units
Balance, December 31, 2004
Issuance of units, net of costs
Exchange of units
balance, December , 00
69,040,000
(6,345,752)
—
6,189,130
68,883,378
20,475,946
111,090
89,470,414
Issuance of initial subscriber units
Redemption of initial subscriber
subscriber units
Issuance of units on initial
public offering
Issuance of units of AGHLP as
consideration on acquisition
of Ag Growth
Exchange of units
Balance, December 31, 2004
Issuance of units [note 4]
Exchange of units
balance, December , 00
—
—
—
—
—
—
—
—
30
(30)
69,040,000
(6,345,752)
8,000,000
(6,189,130)
1,810,870
—
(111,090)
1,699,780
19,260,000
—
19,260,000
—
—
19,260,000
27,260,000
—
89,954,248
20,475,946
—
110,430,194
Fund
Trust
units
#
Class B
Class C
Exchangeable Exchangeable
units of
AGHLP
#
units of
AGHLP
#
3
(3)
6,904,000
—
618,913
7,522,913
1,595,000
11,109
9,129,022
—
—
—
—
—
—
800,000
(618,913)
181,087
—
(11,109)
169,978
1,926,000
—
1,926,000
—
—
1,926,000
notes to Consolidated financial statements
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, 2005, there were 2,095,978 Special
Voting Units outstanding [December 31, 2004 – 2,107,087 units], 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 year ended
December 31, 2005, 11,109 Class B Exchangeable LP Units of AGHLP, with a value of
$111,090, were exchanged into 11,109 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 is determined
based on certain earnings and cumulative cash distribution thresholds of the Fund over a
24-month period.
notes to Consolidated financial statements
. 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 the corporate subsidiaries of the
Fund, which are 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:
Year ended
December 31,
2005
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/limited partners
Income of subsidiary companies subject to tax
19,967,193
8,887,409
(446,488)
565,566
(18,917,872)
602,833
(9,109,017)
343,958
Provision for income taxes
Large corporation tax
Income tax provision
236,000
79,123
315,123
39
13
52
127,000
37,000
164,000
37
11
48
During the year ended December 31, 2005, the Fund recorded $240,000 of tax credits and
$85,000 of benefits related to non-capital loss carryforwards which pre-existed the Fund
structure and have been credited to goodwill.
Significant components of the Fund’s future tax assets are shown below:
future tax assets
Financing costs
Non-capital losses
December 31,
2005
$
December 31,
2004
$
116,500
295,500
412,000
377,000
186,000
563,000
notes to Consolidated financial statements
The non-capital losses expire as follows:
2014
2015
$
264,500
31,000
. Distributions to unitholDers
For the year ended December 31, 2005, the Fund made distributions of $18,917,872 which
equated to $1.7515 weighted average per unit [283-day period ended December 31, 2004
- $9,109,017 or $0.95 weighted average per unit].
. 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 establishes the
amount to be allocated to eligible participants based upon the amount by which the Fund’s
distributions exceed cash distribution thresholds [as defined in the LTIP plan documents].
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 a recorded liability with respect to the fiscal 2005 LTIP at December 31, 2005
of $933,001 [December 31, 2004 - $265,788].
. finanCial instruments
The Fund has the following financial instruments: cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities, customer deposits, distributions
payable, long-term incentive plan, long-term debt, an interest rate swap arrangement,
foreign exchange contracts and foreign currency swap agreements. 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.
9
notes to Consolidated financial statements
At December 31, 2005, the Fund had outstanding forward foreign exchange contracts as
follows:
Settlement dates
March 2006 to December 2006
March 2007 to December 2007
Face value
$US
18,500,000
4,625,000
Average rate
$Cdn
1.3227
1.2357
In addition, the Fund entered into currency options consisting of a series of call and put
options at rates of $1.1363 and $1.2750 respectively. These contracts mature in 2007 and
have a total face value of $4,625,000 US.
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 an interest rate swap transaction
with a Canadian chartered bank. The swap transaction expires on May 4, 2008. The swap
transaction involves the exchange of the underlying floating interest rate of prime to prime
plus 1.00% per annum for an effective fixed interest rate of 3.68% plus 1.00% to 2.00% per
annum based on performance calculations. The notional amount of the swap transaction at
December 31, 2005 and 2004 was $20,000,000.
fair Value
At December 31, 2005, the carrying value of the Fund’s financial instruments approximates
their fair value with the exception of derivative financial instruments. The unrealized gain
on foreign exchange contracts was $3,384,312 at December 31, 2005 [December 31, 2004
- $3,588,689]. Upon maturity of the foreign exchange contracts, any gain/loss would
be recognized in sales and/or realized foreign exchange gain/loss in the consolidated
statement of earnings.
0
notes to Consolidated financial statements
. segmenteD DisClosure
The Fund operates in one business segment related to the manufacturing and distributing
of portable grain handling and aeration 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:
Year ended
December 31,
2005
$
25,369,699
55,166,890
3,497,356
84,033,945
Canada
United States
International
. Commitments
Revenues
Property, plant and
equipment, goodwill and
intangible assets as at
283-day
period ended
December 31, December 31, December 31,
2005
$
2004
$
2004
$
10,079,209
31,105,714
2,362,961
43,547,884
106,577,247
230,242
—
106,807,489
91,420,726
235,997
—
91,656,723
The Fund has entered into various operating leases for office and manufacturing
equipment, warehouse facilities and vehicles. Minimum annual lease payments
required in aggregate are as follows:
2006
2007
2008
2009
2010 and forward
$
451,814
396,650
248,438
140,820
58,315
1,296,037
notes to Consolidated financial statements
. net Change in non-Cash worKing CaPital balanCes relateD to oPerations
Accounts receivable
Inventory
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Long-term incentive plan
Income taxes payable
Customer deposits
Year ended
December 31,
2005
$
(1,441,926)
(967,153)
(270,328)
(442,001)
667,213
477,481
(721,769)
(2,698,483)
283-day
period ended
December 31,
2004*
[note 2]
$
7,781,221
(34,470)
(487,740)
(1,347,304)
265,788
(1,357,012)
3,291,839
8,112,322
* Includes the results of Ag Growth’s operations for the 228-day period from May 18, 2004
to December 31, 2004 [note2].
9. ComParatiVe figures
Certain comparative figures have been reclassified to conform to the current year’s
presentation.
Officers
Rob Stenson
President and Chief Executive Officer
Gary Anderson
Vice President and Chief Operating Officer
Steve Sommerfeld
Chief Financial Officer
Trustees
(left to right)
Greg Smith
Rob Stenson
Rod Senft
Chairman of the Board of Trustees
W. Terrence Wright, Q.C.
John R. Brodie, FCA
Harold Bjarnason
J. Trevor Johnstone (photo unavailable)
Additional Information
Additional information relating to the Fund, including all public filings,
is available on SEDAR (www.sedar.com).