Growth International Annual Report 2006

Plain-text annual report

Annual Report 2006 Ag Growth IPO: May 18, 2004 (Founded 1996) Batco Manufacturing, Acquired: 1997 (Founded 1992) Wheatheart Manufacturing, Acquired: 1998 (Founded 1973) Westﬁ eld Industries, Acquired: 2000 (Founded 1950) Edwards Group, Acquired: 2005 (Founded 1991) Hansen Manufacturing, Acquired: 2006 (Founded 1982) Ag Growth Income Fund #3 – 59 Scurﬁ eld 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 On behalf of management, our employees, and the Board of Trustees of Ag Growth Income Fund, we invite existing and prospective investors to review our 2006 annual report. The Fund made a number of positive strides in 2006, despite challenges that included a strengthening currency, a pullback in U.S. crop production, adverse weather conditions in many core markets, and internal succession issues. Our 2006 operating results reﬂ ect the strength of our brands, distribution, and business plan as we ended the year within reach of the record numbers posted in 2005. The assessment of our company is often impacted by factors other than our operating results. Sentiment towards the agriculture sector, which is often under appreciated and misunderstood by the investment community, can eclipse the impact of our fundamental drivers of grain volume and trends in storage practices. In 2006, the decision of the Canadian Finance Minister to propose changes to the future of the income trust market provided another, unanticipated challenge. Nonetheless, the support of our core unitholder base allowed the Fund to persevere and at the time of writing our unit price approached new highs. The Fund punctuated the close of a successful 2006 with a USD $18.5 million debt ﬁ nancing to purchase the assets of Hansen Manufacturing, based in Sioux Falls, South Dakota. We are excited about the acquisition and welcome Hansen’s excellent management team and respected Hi Roller brand name to the Ag Growth family. The acquisition is our ﬁ rst foray into stationary grain handling equipment, providing an opportunity for the further consolidation of suppliers to larger farms, commercial grain handling facilities and newly emerging bio-energy facilities. As well as adding an industry leader to the Ag Growth group of companies, the acquisition provided reassurance that the Fund can carry out its business plan within the proposed rules restricting the expansion of the trust sector. I would like to devote my remaining remarks to share with you our perspective on how the dramatic changes taking place in the agriculture sector position the Fund for substantial growth in the years ahead. The advancement of technology in hybrid and genetically modiﬁ ed seeds, combined with improved farming techniques, has resulted in a steady increase in the productivity of the North American farmer. As grain volumes are a key driver for our business, these advancements have provided a steady, if somewhat subdued growth platform for our company. Ag Growth has capitalized To Our Unitholders 1 on increasing grain volumes through the development of a broad catalogue of grain handling equipment and the strength of an industry leading distribution network. The foundation Ag Growth has developed over the last decade has positioned it well to capitalize on a fundamental shift in our industry. Due to a number of factors, including increased demand from heavily populated countries including China and India, the supply demand dynamic for most grains has experienced pressure not seen since 1972. Stock-to-use ratios are approaching 30 year lows and we are optimistic that an even stronger supply imbalance is currently emerging, positioning grain prices for a sustained rally. An increase in food demand positions agriculture for a short-term bull cycle. However, we believe the development of the corn-based ethanol industry has initiated a longer-term shift in supply demand fundamentals. Environmental and political concerns, demonstrated by the introduction of the U.S. Energy Policy Act of 2005, which in essence triples the amount bio-fuel required by 2012, have created unprecedented demand for alternatives to fossil based fuels. To meet the requirements of the Act, a dramatic buildup of ethanol capacity is underway. Current estimates are that the ethanol industry has the potential to absorb 35% of the total U.S. corn crop in the next couple of years, fundamentally changing the supply available for traditional food demand. Planted area: Corn, wheat, and soybeans (USDA) These developments bode well for Ag Growth for a number of reasons. First, we are seeing signs of competition for acreage between agriculture commodities, resulting in a shift towards corn acres. As corn typically yields over three times the number of bushels per acre as other grains, this shift adds a very important, new demand factor to the grain handling industry. The United States Department of Agriculture (USDA) has released its planting intentions forecast and expects 86 million acres to be seeded to corn in 2007. This is up from approximately 79 million acres in 2006 and greatly exceeds the historical average of 75 million acres. The USDA also forecasts that corn may exceed 90 million acres in the next few years. Secondly, we expect that a large amount of grain traditionally bound for the export market will be handled and conditioned at the farm gate. This transition is in the early stages as farmers add To Our Unitholders 2 Corn: Domestic use and exports (USDA) storage capacity to accommodate increased volumes. More on-farm storage means more handling equipment is required. The magnitude of this shift will make itself apparent as the ethanol industry begins to mature and stabilize. We are conﬁ dent that the trend is entrenched and will be positive for the increased use of our equipment. We are actively engaged in improving plant capacity to accommodate the anticipated increased demand over the next few years. We also expect that higher grain prices should accelerate worldwide investment in farm infrastructure. As the world is challenged to produce more grain volume to meet increasing demand, we expect other countries to attempt to emulate North American grain production and storage practices. North American farmers are the most efﬁ cient producers in the world. As capital is invested to modernize overseas farming, we would anticipate an acceleration of the trend towards on-farm storage, handling and conditioning of grain as these measures increase crop quality and reduce spoilage. Again, the more volume of harvested crop that is handled on the farm, the more equipment we sell. There is much debate as to the viability and proﬁ t potential of the huge number of new ethanol plants that are coming online. I will not venture an opinion. The industry is in such a rapid state of development that it is difﬁ cult to foresee the ethanol landscape a few years ahead. However, we are conﬁ dent that, no matter what the future holds for ethanol producers, there will be a dramatic increase in demand for the crops that our equipment handles. I am very proud to be associated with the skilled and professional individuals that have joined our team as we have grown from a start-up company with $2 million revenue into a market leader with over $80 million in sales and EBITDA of over $24 million. Our strategic focus on grain handling has been instrumental to our strong operating results, which have often exceeded the expectations related to our sector. We are very optimistic about the outlook for agriculture. We would like to express our most sincere gratitude to our current unitholders for their support over the last year. We would also like to thank the members of our Board of Trustees who resigned in 2006 for their important contributions since the IPO of the Fund. We are committed to continuing to work hard at creating value for our customers and our unitholders in the years to come. Rob Stenson CEO, Ag Growth Income Fund 3 As many of you already know, 2006 was a year of particular challenge for Ag Growth. We were confronted with fundamental succession issues that made a rising Canadian currency, drought in areas of the Great Plains, and a quick, dry harvest in western Canada pale in comparison. The good news is that, to everyone’s credit, we were able to work through it. I would like to acknowledge the exceptional strength and dedication of our senior management team. They kept their eyes on the ball and delivered the results. A capacity improvement project at Westﬁ eld, our largest Division, is well underway and on schedule for completion by spring 2007. We were also able to ﬁ nalize the exciting acquisition of Hansen Manufacturing Corp of Sioux Falls, South Dakota. The acquisition provides immediate accretion as well as a strategic platform for further growth. By year end, we had also concluded the Board succession process and subsequently reappointed Rob Stenson as CEO. We feel we have successfully positioned Ag Growth to capitalize on what we strongly believe to be opportune times for our company. We are proud to share the following highlights from 2006 and remain very optimistic about the possibilities in 2007. In 2006, Ag Growth Industries celebrated 10 years of success. Our roots are in Batco Manufacturing, Swift Current, Saskatchewan. President’s Message 4 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 Sales and EBITDA After adjusting for movements in foreign exchange, and considering several weather related factors, we are conﬁ dent that we were able to sustain our market share gains from 2005. Sales 2005 EBITDA 2005 Sales 2006 EBITDA 2006 (F/X adjusted 2005 to 2006) Geographic Diversiﬁ cation of Sales for 2006 Canada 30% Great Plains 18% Midwest 41% Offshore 3% Peripheral Regions 8% No one state or province in North America represents more than 15% of sales. Only six states or provinces represent more than 5% of sales. 5 Capacity Improvement Project – Westﬁ eld Division Until recently, Westﬁ eld’s manufacturing processes were based on long cycle, high volume production runs. While we achieved low cost producer status, we were beginning to bump up against capacity constraints. Traditional mass production processes were creating wasted motion and wasted space. In February 2006 we began introducing lean manufacturing principles to the shop ﬂ oor. After initial training, our employees quickly embraced the concepts through a series of power change events. By summer we envisioned an entirely new plant layout and production ﬂ ow. A total of 22 truckloads of new equipment were ordered for delivery in December and January. At the time of this writing, we are commissioning the equipment. The state-of-the-art paintline will provide an entirely new backbone for further process improvements and efﬁ ciencies. We intend to lever off of our successes at Westﬁ eld by introducing lean manufacturing principles to our other manufacturing facilities in the near future. We are addressing capacity constraints by automating manual processes. The new paint line is considered leading-edge in the shortline industry. Lean manufacturing cells will improve efﬁ ciencies and throughput. Continuous improvement is driven by the empowerment of our workforce. President’s Message 6 Hansen Manufacturing Corp. PROFILE ACQUISITION DETAILS • Founded in 1982 • Acquired on Dec 31, 2006 • Located in Sioux Falls, South Dakota • Purchase price of USD $18.5 million • 50 - 65 full-time, non-union employees • Debt ﬁ nanced • 8-acre site, with approximately 62,600 sq. ft. facility • Strong strategic ﬁ t • Hi Roller brand is recognized as the market leader • Immediately accretive in its space Hansen Installation: Conveyor and Support Walkway Hansen Installation: Fill Conveyors and Support Walkways 7 R & D Ag Growth has always prided itself on its ability to listen to its customers and develop ideas relevant to the marketplace. However, the challenge at times has been to turn these ideas into product offerings in a timely manner. Last summer, we established a stand-alone Research and Development Centre in Saskatoon. The intent was to create an environment free from the day-to-day distractions of our manufacturing operations. While the Centre is still in its infancy, the beneﬁ ts are already apparent. The expansion of Wheatheart’s auger line will enable us to geographically expand our double branding strategy into the heart of the U.S. Midwest. At Edwards, a line of U.S. style aeration equipment was developed to offset the risk of regional concentration. While our R&D efforts to develop this line were not in time to offset harvest conditions in western Canada, we are conﬁ dent they will provide us with valuable geographic diversiﬁ cation in the long run. The Wheatheart GH Series galvanized auger was designed to take advantage of an opening in the U.S. galvanized auger market. It is tailor-made for the U.S. corn-belt. The Grain Guard low speed centrifugal fan line by Edwards is targeting corn growers throughout the midwest U.S. 8 MANAGEMENT’S DISCUSSION AND ANALYSIS MARCH 15, 2007 This Management’s Discussion and Analysis should be read in conjunction with the audited consolidated ﬁ nancial statements and accompanying notes of Ag Growth Income Fund for the year ended December 31, 2006. Results are reported in Canadian dollars unless otherwise stated and have been prepared in accordance with Canadian generally accepted accounting principles. FORWARD-LOOKING STATEMENTS This Management’s Discussion and Analysis may contain forward-looking statements that reﬂ ect our expectations regarding the future growth, results of operations, performance, 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 reﬂ ect our current beliefs and are based on information currently available to us. Forward-looking statements involve signiﬁ cant risks and uncertainties. A number of factors could cause actual results to differ materially from results discussed in the forward-looking statements, including changes in national and local business conditions, decreased crop yields, crop conditions, seasonality, industry cyclicality, volatility of production costs, commodity prices, foreign exchange rates, and competition. These risks and uncertainties are fully described in our 2006 Annual Report and our Annual Information Form. 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 and we undertake no obligation to update such statements. 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. The Fund holds 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. The previous owners of Ag Growth were issued Class B exchangeable limited partnership units (“Class B units”) and Class C exchangeable subordinated limited partnership units (“Class C units”) of AGX Holdings Limited Partnership (“AGHLP”), a wholly owned subsidiary of the Fund, as partial consideration for the Fund’s acquisition of Ag Growth. The units of the Fund and the Class B and Class C units of AGHLP participate pro rata in distributions. AGHLP converted all Class C units to Class B units on a one-for-one basis upon the occurrence of the subordination end date in 2006. The Class B units are exchangeable for trust units of the Fund at the option of the holder on a one-for-one basis at any time. The following table illustrates the exchange of Class C units to Class B units, and exchanges of Class B units to trust units of the Fund. The total number of units that participate in the distribution of net earnings has not changed. 9 December 31, 2005 Exchange of Class C units for Class B units Exchange of Class B units for units of the Fund 9,129,022 0 1,959,893 169,978 1,926,000 (1,959,893) 1,926,000 (1,926,000) 0 Trust Units Class B Units Class C Units December 31, 2006 and March 15, 2007 11,088,915 136,085 Special Voting Units (1) 0 136,085 0 0 (1) The Fund has issued a Special Voting Unit for each Class B unit 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. The Fund’s units trade on the Toronto Stock Exchange under the symbol AFN.UN. OPERATING RESULTS Sales Cost of goods sold Gross margin Selling, general and administration Professional fees Long-term incentive plan Research and development Capital taxes Gain on foreign exchange Other income EBITDA * Amortization Interest expense Earnings before provision for income taxes Provision for income taxes Net earnings for the year Net earnings per unit * See discussion of non-GAAP measures. 2006 2005 $81,525,437 46,207,537 35,317,900 $84,033,945 45,132,586 38,901,359 12,587,274 461,026 854,000 1,160,200 297,189 (3,973,443) (243,099) 11,143,147 13,235,750 530,532 933,001 622,695 328,716 (1,355,991) (436,638) 13,858,065 24,174,753 25,043,294 3,834,891 1,017,516 19,322,346 278,505 $19,043,841 4,040,948 1,035,153 19,967,193 315,123 $19,652,070 $1.70 $1.82 Management’s Discussion and Analysis 10 Total assets Total liabilities ACQUISITIONS December 31, 2006 December 31, 2005 $170,232,551 $59,267,926 $144,352,812 $33,574,028 Effective December 31, 2006, the Fund acquired substantially all of the assets of Hansen Manufacturing Corp. (“Hansen”) a leading manufacturer of enclosed belt conveyors. The acquisition was effective at the close of business on December 31, 2006, and accordingly the operating results of Ag Growth for the year then ended do not include the results of Hansen’s operations. The inclusion of Hansen signiﬁ cantly impacts the comparison of assets and liabilities as at December 31, 2006 and 2005. Effective April 8, 2005, the Fund acquired substantially all of the assets of The Edwards Group of Companies. The inclusion of Edwards signiﬁ cantly impacts the comparison of operating results for the twelve months ended December 31, 2006 to the same period in 2005. DISTRIBUTIONS AND DISTRIBUTABLE CASH For the twelve-month period ended December 31, 2006, the Fund generated distributable cash from operations of $1.96 per unit (2005 – $2.10) and declared cash distributions of $1.68 per unit (2005 – $1.73). As per the table below, distributable cash available to unitholders for the twelve-month period ended December 31, 2006 was $1.71 per unit (see “Distributions”). The following table summarizes the distributions declared for trust units of the Fund and for Class B units and Class C units of AGHLP. The Fund’s distribution policy is described in the “Distributions” section of this document. Distributable cash is a non-GAAP measure and is described and reconciled to cash ﬂ ow from operating activities under the sections “Distributions” and “Non-GAAP Measures”. 11 Distributions Declared Trust units of the Fund Class B units Class C units Distributable Cash from Operations Generated from operations Distributable Cash Available Generated from operations Non-maintenance CAPEX (1) Costs of acquisition (2) Available to unitholders 2006 2005 $ Per unit $ Per unit $17,257,452 252,348 1,348,200 $18,858,000 $1.68 $1.68 $0.70 $1.68 $15,288,686 294,317 3,334,869 $18,917,872 $1.73 $1.73 $1.73 $1.73 $21,978,594 $1.96 $22,628,723 $2.10 $21,978,594 (1,881,932) (894,182) $19,202,480 $1.96 (0.17) (0.08) $1.71 $22,628,723 0 0 $22,628,723 $2.10 0.00 0.00 $2.10 (1) Non-maintenance capital expenditures are deﬁ ned as cash outlays related to increasing operating capacity or improving operating efﬁ ciency. In the fourth quarter of 2006, the Fund incurred costs of $1.9 million related to a capacity improvement initiative at its Westﬁ eld facility. The total cost of the project is expected to be approximately $3.8 million. See “Capital Expenditures”. (2) Costs incurred in relation to the acquisition of Hansen were funded from retained cash ﬂ ow. See “Acquisitions” and “Distributions”. All Class C units were exchanged for Class B units upon the subordination end date in June 2006. There were no Class C distributions declared subsequent to their exchange. OVERALL PERFORMANCE For the year-ended December 31, 2006, sales and EBITDA were $81.5 million and $24.2 million respectively, compared to $84.0 million and $25.0 million in 2005. The appreciation of the Canadian dollar in 2006 signiﬁ cantly impacted the comparability of results between the two years. After adjusting 2006 results to reﬂ ect the average foreign exchange rates in effect in 2005, sales and EBITDA in 2006 would have been $85.5 million and $25.5 million respectively. Sales in the U.S. corn-belt increased signiﬁ cantly in 2006 due primarily to market gains related to distribution network rationalization, a trend towards more on-farm storage, and per unit price increases. Sales of the Fund’s bin unload equipment also increased signiﬁ cantly compared to 2005 due to the strength of the North American storage market. Hot and dry weather conditions in western Canada and certain Plains states led to reduced crop quantity and an exceptionally early harvest, which reduced demand for both grain handling and aeration equipment. Gross Management’s Discussion and Analysis 12 margin was negatively impacted by the appreciation of the Canadian dollar as well as lower sales volume, particularly at Edwards. Operating expenses decreased signiﬁ cantly in 2006, due primarily to lower general and administrative expenses and a higher gain on foreign exchange (see “Foreign Exchange”). SALES Sales for the year-ended December 31, 2006 were $81.5 million, compared to $84.0 million for the same period in 2005. The decrease of $2.5 million was largely the result of the following: • As discussed under “Foreign Exchange”, the appreciation of the Canadian dollar resulted in a decrease in recorded sales of $4.0 million compared to the twelve-month period ended December 31, 2005. Excluding the impact of foreign exchange, sales increased $1.5 million over 2005. • Sales in the U.S. market, adjusted to reﬂ ect the average foreign exchange rate in effect in 2005, increased $3.3 million over the prior year. The increase was due to robust sales in the key U.S. corn-belt, the result of market gains related to changes in the Fund’s distribution network and the continued trend towards more on-farm storage, and per unit price increases. Sales of bin-unload equipment increased due to the strength of the North American storage market. Drought conditions in certain Plains states negatively impacted sales of grain handling and aeration equipment. • Sales in Canada decreased $1.1 million compared to 2005, primarily due to unusually hot and dry weather in western Canada that led to an exceptionally early harvest. The adverse weather conditions resulted in reduced demand for both grain handling and aeration equipment. International sales decreased $0.7 million compared to 2005, due primarily to severe drought conditions in Australia. • • The Edwards Group, a manufacturer of aeration equipment, was severely impacted by the poor weather conditions in western Canada and certain Plains states, due both to the nature of its products and its exposure to these regional markets. Edwards’ North American sales decreased $0.7 million from the exceptional results recorded in 2005, even though 2006 included twelve months of sales while 2005 included sales only for the period subsequent to its April 8, 2005 acquisition. FOREIGN EXCHANGE Sales and expenses are recorded at a monthly rate of exchange. For the twelve-month period ended December 31, 2006, Ag Growth generated 67% of its sales in U.S. dollars (2005 – 65%). Historically, U.S. dollar denominated expenses have equated to approximately 15% to 20% of sales. As a result of this imbalance, the negative impact on sales from a stronger Canadian dollar is only partially offset by the beneﬁ t of lower U.S. dollar expenses. The average rate of exchange for the twelve-month period ended December 31, 2006 was $1.13, compared to $1.21 in 2005. Had the average exchange rates experienced in 2005 been in effect in 2006, sales and EBITDA for the twelve month period ended December 31, 2006 would have increased $4.0 million and $1.3 million respectively. 13 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 U.S. 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. Amortization to sales for the twelve-month period ended December 31, 2006 was $238,185 (2005 – $220,826). The Fund’s 2006 foreign exchange hedging instruments were at contract rates similar to those of 2005. As the actual foreign exchange spot rate in 2006 was lower than 2005, the spread between the contract rate and the actual spot rate was greater, the result of which was a higher gain on foreign exchange compared to the prior year (see “Expenses”). EXPENSES Gross margin as a percentage of sales for the year ended December 31, 2006 was 43.3%, compared to 46.3% in 2005. The decline in gross margin percentage is largely due to the strengthening of the Canadian dollar. As discussed under Foreign Exchange, the Fund’s U.S. dollar sales greatly exceed its U.S. dollar purchases, and accordingly a stronger Canadian dollar negatively impacts the Fund’s gross margin percentage. Had the exchange rates experienced in 2005 been in effect in 2006, gross margin for the year ended December 31, 2006 would have been 44.9%. Lower sales volumes, particularly at Edwards, have also negatively impacted gross margin compared to 2005. For the year ended December 31, 2006, total operating expenses were $11.1 million, compared to $13.9 million in 2005, a decrease of $2.8 million. Excluding Edwards, as its 2005 operating expenses were included in results only subsequent to its April 8, 2005 acquisition date, total operating expenses decreased $3.3 million compared to 2005, primarily due to the following: • Selling, general and administration expenses decreased $1.1 million compared to 2005 due to a $0.4 million decrease in commission expenses, largely the result of changes made to the Fund’s distribution network, and lower salary expenses of $0.6 million that were largely the result of lower performance based bonuses. These decreases were partially offset by consulting fees of $0.2 million related to the capacity improvement initiative at the Westﬁ eld facility. • The Fund’s gain on foreign exchange increased from $1.4 million in 2005 to $4.0 million in 2006, due to an increase in the spread between its foreign exchange contract rates and the actual foreign exchange spot rate. • Research and development expenses increased $0.4 million due to costs related to the start up of the Fund’s new research and development facility and to product line expansions at Westﬁ eld and Edwards. • A number of smaller miscellaneous items accounted for the remaining change. Management’s Discussion and Analysis 14 EBITDA AND NET EARNINGS (see discussion of non-GAAP measures) EBITDA for the year-ended December 31, 2006 was $24.2 million, compared to $25.0 million in 2005. The comparison to 2005 was most signiﬁ cantly impacted by the further appreciation of the Canadian dollar. Prior to its acquisition of Hansen, the Fund’s credit facility included 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, with interest rates on both facilities based on performance calculations. For the year-ended December 31, 2006, the Fund’s effective interest rate on its term debt was 5.8% (2005 – 4.8%), and after consideration of the effect of the Fund’s interest rate swap (see “Financial Instruments”) was 4.7% (2005 – 4.5%). The Hansen acquisition was effective at the close of business December 31, 2006, and accordingly Ag Growth’s results for the year then ended do not include interest expense related to the USD $18.5 million term debt. Amortization for the year-ended December 31, 2006 was $3.8 million compared to $4.0 million in 2005. Amortization for the year-ended December 31, 2006 includes the amortization of intangible assets of $1.6 million, the amortization of deferred ﬁ nancing costs of $0.1 million, and the amortization of property, plant and equipment of $2.1 million. Compared to 2005, the decrease in amortization is largely the result of lower amortization of deferred ﬁ nance costs. The Fund is a mutual fund trust for income tax purposes at this time, 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 ﬂ ows through to the holders of the partnership units, which includes 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 current tax expense of $48,705 for the year-ended December 31, 2006 represents primarily tax payable on the net income and taxable capital primarily allocated to Ag Growth and its subsidiaries through its ownership in Ag Growth Industries Limited Partnership after deductions for interest expense, ﬁ nancing fees and capital taxes. On October 31, 2006 the Federal Government announced proposed changes to the taxation of income trusts that, if enacted, would result in certain of the Fund’s distributions being subject to tax (see “Risk Factors”). For the year-ended December 31, 2006, the Fund recorded net earnings of $19.0 million and earnings per basic and diluted unit of $1.70, compared to net earnings of $19.7 million and earnings per basic and diluted unit of $1.82 in 2005. 15 QUARTERLY FINANCIAL INFORMATION 2006 Q1 Q2 Q3 Q4 Fiscal 2006 Q1 Q2 Q3 Q4 Fiscal 2005 Q1 (2) Q2 (3) Q3 Q4 Fiscal 2004 Sales $19,705,011 22,571,529 22,049,541 17,199,356 $81,525,437 Sales $16,013,438 24,363,985 26,755,797 16,900,725 $84,033,945 Sales N/A $7,855,520 21,780,593 13,911,771 $43,547,884 Gain (Loss) on FX (1) Net Earnings Net Earnings per Unit $201,001 120,997 1,102,119 2,549,326 $3,973,443 $4,115,585 5,157,065 5,771,138 4,000,053 $19,043,841 $0.37 0.46 0.51 0.36 $1.70 2005 Gain (Loss) on FX (1) Net Earnings Net Earnings per Unit $220,020 115,822 (274,763) 1,294,912 $1,355,991 $3,449,185 6,255,028 6,567,557 3,380,300 $19,652,070 $0.36 0.56 0.59 0.31 $1.82 2004 Gain (Loss) on FX (1) Net Earnings Net Earnings per Unit N/A $(520,596) (626,254) 3,552 $(1,143,298) N/A $1,441,006 5,483,492 1,798,911 $8,723,409 N/A $0.15 0.57 0.19 $0.91 (1) Certain comparative ﬁ gures have been reclassiﬁ ed to conform to the current period’s presentation. (2) Prior to IPO date of May 18, 2004. (3) Includes results of operations only for the 44-day period May 18 to June 30, 2004. Management’s Discussion and Analysis 16 Interim period revenues and earnings historically reﬂ ect 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 following factors impact comparability between quarters in the previous table: • Sales, gain (loss) on foreign exchange, net earnings, and net earnings per unit are signiﬁ cantly impacted by the prevailing rate of exchange between the Canadian and U.S. dollars. • The third quarter of 2006 was adversely affected by hot and dry weather conditions in western Canada that negatively impacted sales of grain handling and aeration equipment. • The ﬁ rst quarter of 2006, compared to the same period in 2005, was signiﬁ cantly impacted by the April 8, 2005 acquisition of the Edwards Group. • The ﬁ rst and second quarters of 2005 were exceptionally strong due to demand that resulted from the record 2004 U.S. harvest. FOURTH QUARTER Sales for the three-months ended December 31, 2006 were $17.2 million, compared to $16.9 million for the same period in 2005. The increase of $0.3 million was largely the result of the following: • The appreciation of the Canadian dollar resulted in a decrease in recorded sales of $0.5 million compared to the three-month period ended December 31, 2005. Excluding the impact of foreign exchange, sales increased $0.8 million over the same period in 2005 (see “Foreign Exchange”). • Sales in the U.S. market, after adjusting for the change in foreign exchange rates (see “Foreign Exchange”), increased $2.9 million compared to the prior year. The increase resulted from robust sales in the key U.S. corn-belt, higher sales of bin-unload equipment, and per unit price increases, partially offset by the impact of drought conditions in certain Plains states. • Sales in Canada decreased $1.5 million compared to the fourth quarter of 2005 due to an exceptionally early harvest in western Canada that resulted in lower demand for grain handling and aeration equipment. International sales decreased $0.6 million compared to 2005, due primarily to severe drought conditions in Australia. • Gross margin as a percentage of sales for the three-months ended December 31, 2006 was 40.0%, compared to 42.1% in 2005. Gross margin in the fourth quarter is typically lower than other quarters due primarily to preseason sales initiatives. The decline in gross margin percentage from the fourth quarter of 2005 is largely due to the strengthening of the Canadian dollar. As discussed under Foreign Exchange, the Fund’s U.S. dollar sales greatly exceed its U.S. dollar purchases, and as a result a stronger Canadian dollar negatively impacts the Fund’s gross margin percentage. Had the average exchange rate experienced in 2005 been in effect in 2006, gross margin for the three months ended December 31, 2006 would have been 41.2%. Lower sales volumes, particularly at Edwards, also negatively impacted gross margin. 17 For the three months ended December 31, 2006, total operating expenses were $1.6 million, compared to $2.2 million in 2005, a decrease of $0.6 million. The decrease is primarily due to the following: • For the three months ended December 31, 2006, the Fund recorded a gain on foreign exchange of $2.5 million, compared to $1.3 million for the same period in 2005. The Fund’s gain on its foreign exchange contracts was higher than the previous year due to the further strengthening of the Canadian dollar. • Research and development expenses increased $0.3 million, largely due to costs incurred at the Fund’s new research and development facility and to product line expansions at the Westﬁ eld and Edwards divisions. • A number of smaller miscellaneous items accounted for the remaining change. EBITDA for the three-month period ended December 31, 2006 was $5.3 million, compared to $4.9 million in 2005. The comparison to 2005 was most signiﬁ cantly impacted by fourth quarter demand in the U.S. corn-belt and increased sales of bin-unload equipment, an increase in the gain on the Fund’s foreign exchange contracts, offset by the negative impact on sales and gross margin of the further appreciation of the Canadian dollar. For the three months ended December 31, 2006, the Fund recorded net earnings of $4.0 million and earnings per basic and diluted unit of $0.36, compared to net earnings of $3.4 million and earnings per basic and diluted unit of $0.31 in 2005. 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. EBITDA is not a ﬁ nancial 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 ﬂ ows from operating, investing, and ﬁ nancing activities as a measure of the Fund’s liquidity and cash ﬂ ows. 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 ﬁ nancial performance. The Fund deﬁ nes distributable cash from operations as EBITDA less interest expense, maintenance capital expenditures (see “Capital Expenditures”), and current taxes. The Fund deﬁ nes distributable cash available to unitholders as distributable cash from operations, adjusted for non-operational expenditures. Distributable cash is not a ﬁ nancial measure recognized by Canadian generally accepted accounting principles (“GAAP”) and does not have a standardized meaning prescribed by GAAP. 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 18 Payout ratio is a non-GAAP measure used by Canadian income funds as an indicator of the amount of generated distributable cash that is distributed to the unitholders. The Fund deﬁ nes payout ratio as total distributions expressed as a percentage of distributable cash generated from operations. Payout ratio is not a ﬁ nancial measure recognized by Canadian generally accepted accounting principles (“GAAP”) and does not have a standardized meaning prescribed by GAAP. The method of calculating the Fund’s payout ratio may differ from similar computations as reported by similar entities and, accordingly, may not be comparable to payout ratio as reported by such entities. CASH FLOW AND LIQUIDITY The table below reconciles net earnings to cash provided by operations for the years ended December 31, 2006 and 2005. Net earnings Add charges (deduct credits) to operations not requiring a current cash payment: Amortization Future income taxes Deferred foreign exchange gain Loss (gain) on sale of property, plant & equipment Net change in non-cash working capital related to operations: Accounts receivable Inventory Prepaid expenses and other assets Accounts payable and accrued liabilities Long-term incentive plan Customer deposits Income taxes payable Twelve Months Ended December 31 2006 2005 $19,043,841 $19,652,070 3,834,891 229,800 33,476 (37,546) 4,040,948 236,000 34,540 12,120 23,104,462 23,975,678 (408,816) (505,850) 329,687 267,421 (79,001) 2,558,018 (29,219) (1,441,926) (967,153) (270,328) (442,001) 667,213 (721,769) 477,481 Cash provided by operations $25,236,702 $21,277,195 Cash provided by operations for the year-ended December 31, 2006 was $25.2 million, an increase of $4.0 million over 2005. An increase in customer deposits that resulted from the timing of certain pre-season sales initiatives increased cash provided by operations by $3.3 million compared to 2005. A number of smaller changes account for the remaining variance. 19 WORKING CAPITAL Interim period working capital requirements typically reﬂ ect 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 ﬁ rst 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 begins to draw on its bank revolver in the ﬁ rst or second quarter. The revolver balance typically peaks in the second or third quarter and normally begins to decline later in the third quarter as collections of accounts receivable increase. Ag Growth has typically fully repaid its revolver balance by early in the fourth quarter. Results in 2006 have generally reﬂ ected these expectations. The inclusion of Hansen in 2007 is not expected to signiﬁ cantly impact the seasonality of working capital requirements. CAPITAL EXPENDITURES The Fund had maintenance capital expenditures of $1.1 million for the year-ended December 31, 2006 (2005 – $1.3 million). Maintenance capital expenditures in 2006 relate primarily to purchases of a semi tractor unit and trailer, a building addition, and manufacturing equipment. The Fund anticipates total maintenance capital expenditures in 2007 will approximate the amounts expended in 2006, plus approximately $0.3 million related to the newly acquired Hansen division. All 2007 capital expenditures are expected to be funded through operations. The Fund deﬁ nes maintenance capital expenditures as cash outlays required to maintain plant and equipment at current operating capacity and efﬁ ciency levels. Non-maintenance capital expenditures are deﬁ ned as cash outlays required to increase operating capacity or improve operating efﬁ ciency. The Fund has commenced a capacity improvement initiative at its Westﬁ eld facility that has been categorized as a non-maintenance capital expenditure. In addition to anticipated capacity enhancements, the initiative is expected to improve the quality and ﬁ nish of the Westﬁ eld product through the implementation of a new paint system. The total cost of the project is expected to be approximately $3.8 million and will be ﬁ nanced through working capital. For the year-ended December 31, 2006, non-maintenance capital expenditures related to the capacity enhancement project totaled $1.9 million. The Fund’s credit facility allows for the elimination of capital expenditures from its ﬁ nancial covenant calculations provided that the Fund has sufﬁ cient availability in its revolver facility. As at December 31, 2006, the non-maintenance capital expenditures did not impact the Fund’s ﬁ nancial covenants. Management’s Discussion and Analysis 20 CASH BALANCE For the year ended December 31, 2006, the Fund’s cash balance, including cash held in trust, increased $1.1 million, which was in line with management expectations for the reasons discussed previously. CONTRACTUAL OBLIGATIONS TOTAL 2007 2008 2009 2010 2011 Long-term debt Operating leases CAPEX (1) Total obligations $41,575,645 2,153,552 385,200 $44,114,397 $10,391,773 $31,168,538 $15,334 527,448 803,616 385,200 0 $1,204,150 $11,048,143 $31,695,986 656,370 0 $0 145,424 0 $145,424 $0 20,694 0 $20,694 (1) As at December 31, 2006, the Fund had issued purchase orders totaling $385,200 with respect to the capacity improvement project at Westﬁ eld. A deposit of $346,680 related to this equipment was paid in 2006. The non-amortizing term loans of $41.6 million mature August 31, 2007 and includes loans of CAD $20.0 million and USD $18.5 million. The loans are 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 August 31, 2007 maturity date, all amounts outstanding under the facilities become repayable in four equal quarterly instalments of principal, commencing November 30, 2008. The remaining long-term debt relates to GMAC ﬁ nanced vehicle loans that will be fully repaid in 2008. The operating leases relate to vehicle, equipment, and warehouse facility leases entered into in the normal course of business. The Fund has issued purchase orders of $0.4 million for equipment related to the Westﬁ eld capacity initiative (see “Capital Expenditures”) and expects non-maintenance capital expenditures related to this project will approximate $1.9 million in 2007. Delivery of the remaining equipment is expected to occur in the ﬁ rst quarter of 2007. 21 DISTRIBUTIONS The Fund declared distributions to public unitholders of $4.7 million and $17.3 million for the three and twelve-month periods ended December 31, 2006 (2005 – $3.9 million and $15.3 million). Furthermore, consistent with the Fund’s prospectus dated May 5, 2004, the Fund declared distributions to Ag Growth’s previous owners of $0.1 million and $1.6 million for the three and twelve-months ended December 31, 2006 (2005 – $1.4 million and $3.6 million). The amounts declared to Ag Growth’s previous owners have decreased as a number of exchangeable units were exchanged for publicly traded units of the Fund (see “Overview of the Fund”). The Fund’s policy is to make monthly distributions to holders of both trust units of the Fund and Class B units of AGHLP. Furthermore, in accordance with the terms of the Fund’s prospectus, holders of Class C Subordinated Exchangeable limited partnership units received distributions quarterly. The Fund’s Declaration of Trust requires that it distribute all taxable income earned in its ﬁ scal 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 ﬁ nancial 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 from operations is deﬁ ned as EBITDA, less maintenance capital expenditures, interest, and cash income tax expense. The objective of presenting these measures is to calculate the amount that is available for distribution to unitholders and exchangeable unitholders. The distributable cash deﬁ nition excludes changes in working capital as they are necessary to drive organic growth and are expected to be ﬁ nanced by the Fund’s operating facility (see “Capital Resources”). Distributable cash should not be construed as an alternative to cash ﬂ ows from operating, investing, and ﬁ nancing activities as a measure of the Fund’s liquidity and cash ﬂ ows. Management’s Discussion and Analysis 22 Distributable cash can be reconciled to cash provided by operating activities as noted in the following chart. Cash provided by operating activities Change in non-cash working capital Deferred foreign exchange gain Gain (loss) on sale of property, plant and equipment Net maintenance capital expenditures Distributable cash from operations * Non-maintenance capital expenditures Acquisition costs Distributable cash available to unitholders * Twelve Months ended December 31 2006 2005 $25,236,702 (2,132,240) (33,476) 37,546 (1,129,938) 21,978,594 (1,881,932) (894,182) $19,202,480 $21,277,195 2,698,483 (34,540) (12,120) (1,300,295) 22,628,723 0 0 $22,628,723 Weighted average units outstanding Distributions declared per weighted average unit 11,225,000 $1.6800 10,801,123 $1.7515 Distributable cash from operations Distributable cash generated per unit * Distribution percentage Distributable cash available to unitholders Distributable cash generated per unit * Distribution percentage * See discussion of non-GAAP measures below. $1.96 85.8% $1.71 98.2% $2.10 83.6% $2.10 83.6% Distributions declared for the year ended December 31, 2006 of $1.68 per unit represent a 2.9% decrease from distributions of $1.73 in 2005. Distributions in 2006 represent a 29.2% increase over the per unit distribution disclosed in the Fund’s 2004 prospectus. Distributions for the years ended December 31, 2006 and 2005 were funded entirely through operations. 23 Historical distributable cash generated from operations per unit and distributions declared as a percentage of distributable cash generated is as follows: 2006 (1) Specials (2) Q4 Q3 Q2 Q1 Distributable cash generated Distributions declared Distribution percentage YTD distribution percentage N/A N/A N/A N/A $0.4270 $0.4200 98.4% 85.8% $0.5763 $0.4200 72.9% 82.3% $0.5214 $0.4200 80.6% 88.0% $0.4335 $0.4200 96.9% 96.9% 2005 Specials (2) Q4 Q3 Q2 Q1 Distributable cash generated Distributions declared Distribution percentage YTD distribution percentage N/A $0.3000 N/A 83.6% $0.3722 $0.3900 104.8% 68.7% $0.6859 $0.3800 55.4% 60.6% $0.6271 $0.3403 54.3% 64.2% $0.3936 $0.3249 82.6% 82.6% (1) Distributable cash from operations. In 2006 certain adjustments were made to calculate distributable cash available to unitholders (see “Distributions”). (2) Special distributions declared in excess of the regular monthly distributions. Distributable Cash From Operations Distributable Cash Generated Distributions Declared (1) Payout Ratio Period Ended December 31, 2004 Year Ended December 31, 2005 Year Ended December 31, 2006 Cumulative since inception $ 9,686,147 22,628,723 21,978,594 $ 54,293,464 $ 9,109,017 18,917,872 18,858,000 $ 46,884,889 94.0% 83.6% 85.8% 86.4% (1) Distributions declared include special distributions of $1,328,940 in 2004 and $3,367,500 in 2005. The Fund’s Declaration of Trust requires that it distribute all taxable income earned in its ﬁ scal periods ending December 31. Due to a number of tax deductions available to the Fund and its subsidiary entities, since inception the Fund has retained $7.4 million for internal purposes. In the fourth quarter of 2006 the Fund invested $1.9 million of its retained cash in a strategic capital expenditure at its Westﬁ eld facility. The total cost of the Westﬁ eld capacity improvement initiative is expected to be $3.8 million, and the remaining $1.9 million will also be funded from retained cash. In the fourth quarter of 2006, the Fund acquired Hansen Manufacturing and Management’s Discussion and Analysis 24 funded approximately $0.9 million of the related acquisition costs from its retained cash. The remaining amounts retained have been used primarily to further strengthen the Fund’s ﬁ nancial position and to allow for future strategic or expansionary capital expenditures. CAPITAL RESOURCES The Fund’s credit facility includes term debt of CAD $20.0 million and USD $18.5 million, and operating facilities of CAD $15.0 million (increasing to CAD $18.0 million for the period May 31 to September 30 each year) and USD $1.0 million. Both the term and operating facilities bear interest at rates based on performance calculations. For the year ended December 31, 2006, the Fund’s effective interest rate on its term debt was 5.8% (2005 – 4.8%), and after consideration of the effect of the Fund’s interest rate swap (see “Financial Instruments”) was 4.7% (2005 – 4.5%). The term loans mature August 31, 2007 and are extendible annually at the lender’s option. At December 31, 2006 and 2005 the Fund had not drawn on its operating facilities. 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 August 31, 2007 maturity date, all amounts outstanding under the facilities become repayable in four equal quarterly instalments of principal, commencing November 30, 2008. In addition, under the terms of the credit 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 ﬂ uctuating 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 and the interest rate swaps (see “Financial Instruments”). CRITICAL ACCOUNTING ESTIMATES The preparation of ﬁ nancial 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 ﬁ nancial 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 and the fair value of goodwill and intangible assets. Goodwill and indeﬁ nite life intangible assets are tested for impairment at least annually. 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 25 judgment based on assumptions believed to be reasonable in the circumstances, actual results can vary from these assumptions. It is possible that materially different results would be reported using different assumptions. FINANCIAL INSTRUMENTS Risk from foreign exchange arises as a result of variations in exchange rates between the Canadian and the U.S. Dollar. The Fund has entered into foreign exchange contracts with a Canadian chartered bank to hedge its foreign currency exposure on anticipated U.S. dollar sales transactions and the collection of the related accounts receivable. At December 31, 2006, the Fund had outstanding the following foreign exchange and option contracts: Forward Foreign Exchange Contracts Settlement Dates March – December 2007 Face Amount USD $8,625,000 Average Rate CDN Unrealized Gain (Loss) CDN $ 1.1943 $308,917 Settlement Dates March – December 2007 March – December 2007 March – December 2007 January – December 2008 Total Currency Options Face Amount USD $4,625,000 4,625,000 9,250,000 7,800,000 $26,300,000 Call Rate CND $1.1363 $1.1300 $1.1363 $1.0700 Put Rate CDN $1.2985 $1.1975 $1.2410 $1.2115 Unrealized Gain (Loss) CDN $44,449 (102,992) (48,385) (478,667) $(585,595) As at December 31, 2006, the Fund has recorded a deferred foreign exchange gain of $20,116 with respect to its hedged accounts receivable. The Fund is subject to risks associated with ﬂ uctuating interest rates on its long-term debt. To manage this risk, the Fund has entered into a number of interest rate swap transactions with a Canadian chartered bank: (i) Notional amount of CAD $20.0 million, expires May 4, 2008, effective interest rate of 3.68%, resulting in interest charges to the Fund of 3.68% plus a variable rate based on performance calculations. (ii) Notional amount of USD $11.0 million, expires August 31, 2007, effective interest rate of 5.43%, resulting in interest charges to the Fund of 5.43% plus a variable rate based on performance calculations. (iii) Notional amount of USD $7.5 million, expires August 31, 2007, effective interest rate of 5.43%, resulting in interest charges to the Fund of 5.43% plus a variable rate based on performance calculations. Management’s Discussion and Analysis 26 At December 31, 2006, the fair value of the interest rate swap contract (i) was $141,398 and this amount has been recorded in prepaid expenses and other assets. Interest rate swap transactions (ii) and (iii) above were entered effective January 24, 2007. CHANGES IN ACCOUNTING POLICIES The Canadian Institute of Chartered Accountants has issued three new accounting standards; Hedges, Financial Instruments—Recognition and Measurement, and Comprehensive Income. These standards are effective for the Fund beginning in ﬁ scal 2007 and management is currently assessing the impact these changes will have on its ﬁ nancial statements for the period ending March 31, 2007. Management does not believe the impact of the changes will be material. The new standard for Hedges speciﬁ es the criteria under which hedge accounting can be applied and how hedge accounting can be executed for each of the permitted hedging strategies. For cash ﬂ ow hedges where the Fund is hedging the variability in cash ﬂ ows related to anticipated sales to customers in the U.S. and the collection of the related accounts receivable, the effective portion of the changes in the fair values of the derivative instruments will be recorded through other comprehensive income until the hedged items are recognized in the Consolidated Statement of Operations. The Financial Instruments—Recognition and Measurement standard will require ﬁ nancial assets to be classiﬁ ed as available for sale, held to maturity, trading or loans and receivables. The Comprehensive Income standard will require a new component of unitholders’ equity on the Consolidated Balance Sheet. The major component will be the changes in the fair value of the effective portion of cash ﬂ ow hedging instruments. 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. The Fund’s Annual Information Form contains a thorough description of these and 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 ﬁ nancial condition, and the amount of cash available for distribution could suffer. Industry Cyclicality The performance of the agricultural industry is cyclical, and to the extent that the agricultural sector declines or experiences a downturn, this is likely to have a negative impact on the farm equipment and commercial grain handling industry, and the business of Ag Growth. 27 Seasonality of Business The seasonality of the demand for Ag Growth’s products results in lower cash ﬂ ow in the ﬁ rst 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 sufﬁ cient to offset the seasonal variations in Ag Growth’s cash ﬂ ow. Risk of Decreased Crop Yields Decreased crop yields due to poor weather conditions and other factors are a signiﬁ cant risk affecting Ag Growth. Both reduced crop volumes and the accompanying decline in farm incomes can negatively affect demand for grain handling equipment. 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 signiﬁ cant 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 inﬂ uenced by a variety of unpredictable factors that are beyond the control of Ag Growth, including weather, government (Canadian, U.S. 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 ﬁ nancial and capital resources than Ag Growth. Ag Growth could face increased competition from newly formed or emerging entities, as well as from established entities that choose to focus (or increase their existing focus) on Ag Growth’s primary markets. As the grain handling equipment sector is fragmented, there is also a risk that a larger, formidable competitor may be created through a combination of one or more smaller competitors. Ag Growth may also face potential competition from the emergence of new products or technology. Management’s Discussion and Analysis 28 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 ﬂ oods experienced in Manitoba in 1997, and insurance coverage for this type of business interruption is limited. Ag Growth is not able to predict the occurrence of business interruptions. Litigation In the ordinary course of its business, Ag Growth may be party to various legal actions, the outcome of which cannot be predicted with certainty. One category of potential legal actions is product liability claims. Farming is an inherently dangerous occupation. Grain handling equipment used on farms may result in product liability claims that require not only proper insuring of risk, but management of the legal process as well. Dependence on Key Personnel Ag Growth’s future business, ﬁ nancial condition, and operating results depend on the continued contributions of certain of Ag Growth’s executive ofﬁ cers and other key management and personnel, certain of whom would be difﬁ cult 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 U.S. dollars, but a materially smaller proportion of its expenses are denominated in U.S. dollars. As a result, a signiﬁ cant strengthening of the Canadian dollar against the U.S. dollar will negatively impact the return from U.S. dollar sales revenue. To mitigate the effects of exchange rate ﬂ uctuation, 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 ﬂ uctuating exchange rates through December 2008. 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 U.S. dollar may have a material adverse effect on Ag Growth’s results of operations, business, prospects and ﬁ nancial condition. 29 Interest Rates The Fund’s term and operating credit facilities bear interest at rates that are in part dependant on performance based ﬁ nancial ratios. The Fund’s cost of borrowing may be impacted to the extent that the ratio calculation results in an increase in the performance based component of the interest rate. The Fund is party to a number of interest rate swap arrangements to mitigate the impact of ﬂ uctuating market interest rates. These swap arrangements mature on August 31, 2007 and May 4, 2008. In the event the Fund enters new interest rate swap arrangements, the rate of the new contracts will be a function of prevailing market rates. 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 sufﬁ cient to pay the full current market value or current replacement cost of its assets or cover the cost of a particular claim. 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. On October 31, 2006, the federal government announced a proposal to disallow as a tax deduction the distributions made by most income trusts. If the proposal is implemented, taxable income generated by most income trusts will be subject to tax at a special rate based on the federal-provincial corporate tax rates. Unitholders will be taxed on such distributions as if they have received a taxable dividend paid by a taxable Canadian corporation. There will be a transitional period so that existing income trusts and their investors will not be subject to the proposed tax until 2011. The proposals also speciﬁ ed that “undue growth” may result in immediate taxation of income trusts that would otherwise not be subject to taxation until 2011. The government has stated that the maximum growth permissible is 100% of an entity’s market capitalization determined as at the close of trading on October 31, 2006, and that the growth limit will be phased in annually from 2007 – 2010. The proposed legislation is still in draft form and subject to continuing debate. The implementation of the legislation could have an adverse effect on the Fund, its ability to pay distributions and the market value of its units. Management’s Discussion and Analysis 30 OUTLOOK Demand in the ﬁ rst half of 2007, excluding Edwards, is expected to be strong due to positive market sentiment in the U.S. corn-belt and an increase in on-farm storage. Management expects that demand at the Edwards division in the ﬁ rst half of 2007 will continue to be adversely impacted by the unfavourable weather conditions experienced in 2006. The implementation of the capacity improvement initiative, scheduled for the ﬁ rst quarter of 2007, will result in a brief plant slowdown at the Westﬁ eld division and may result in the deferral of some sales until later in the year. The order backlog at Hansen is higher than in previous years, in part due to the expansion of the ethanol industry. As Hansen was acquired effective December 31, 2006, the inclusion of Hansen’s results will impact the comparability of results to the prior year. Taxable income generated at Hansen Manufacturing in 2007 is subject to U.S. and state taxes and accordingly will impact the Fund’s tax provision. Consistent with prior years, demand in 2007, particularly in the second half, will be inﬂ uenced by crop conditions, crop mix, and storage practices. The value of the Canadian dollar relative to its U.S. counterpart will continue to impact the ﬁ nancial results of the Fund. The Fund’s foreign currency hedging instruments in place for ﬁ scal 2007 are at rates less favourable than the 2006 contracts, and as result management does not expect the gain on its hedging instruments in 2007 will be as large as the gain realized in 2006. The acquisition of Hansen Manufacturing, based in Sioux Falls, South Dakota, will increase the Fund’s exposure to foreign exchange. On October 31, 2006, the federal government announced a proposal to disallow as a tax deduction the distributions made by most income trusts. If the proposal is implemented, taxable income generated by most income trusts will be subject to tax at a special rate based on the federal-provincial corporate tax rates. Unitholders will be taxed on such distributions as if they have received a taxable dividend paid by a taxable Canadian corporation. There will be a transitional period so that existing income trusts and their investors will not be subject to the proposed tax until 2011 (see “Risk Factors”). DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Fund’s Chief Executive Ofﬁ cer and Chief Financial Ofﬁ cer, on a timely basis so that appropriate decisions can be made regarding public disclosure. As at the end of the year covered by this MD&A, management of the Fund, with the participation of the Chief Executive Ofﬁ cer and the Chief Financial Ofﬁ cer, evaluated the effectiveness of the Fund’s disclosure controls and procedures as required by Canadian securities laws. Based on that evaluation, the Chief Executive Ofﬁ cer and the Chief Financial Ofﬁ cer have concluded 31 that, as of the end of the year covered by this MD&A, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Fund’s annual ﬁ lings and interim ﬁ lings (as such terms are deﬁ ned under Multilateral Instrument 52-109-Certiﬁ cation of Disclosure in Issuers’ Annual and interim Filings) and other reports ﬁ led or submitted under Canadian securities laws is recorded, processed, summarized and reported within the time periods speciﬁ ed by those laws and that material information is accumulated and communicated to management of the Fund, including the Chief Executive Ofﬁ cer and the Chief Financial Ofﬁ cer, as appropriate to allow timely decisions regarding required disclosure. Internal Controls over Financial Reporting Management of the Fund is responsible for designing internal controls over ﬁ nancial reporting for the Fund as deﬁ ned under Multilateral Instrument 52-109 issued by the Canadian Securities Administrators. Management has designed such internal controls over ﬁ nancial reporting, or caused them to be designed under their supervision, to provide reasonable assurance regarding the reliability of ﬁ nancial reporting and the preparation of the ﬁ nancial statements for external purposes in accordance with GAAP. There have been no changes in the Fund’s internal controls over ﬁ nancial reporting that occurred during the fourth quarter of 2006, the most recent interim period, that have materially affected, or are reasonably likely to materially affect, the Fund’s internal controls over ﬁ nancial reporting. On December 31, 2006, the Fund acquired substantially all of the assets of Hansen Manufacturing Corp. Due to the short period of time between the acquisition date and the certiﬁ cation date of March 15, 2007, management was unable to complete its review of internal controls over ﬁ nancial reporting for the newly acquired division. At year-end, the related disclosure risks were mitigated as all assets and liabilities acquired were evaluated and recorded in the Fund’s consolidated ﬁ nancial statements as part of the purchase price allocation. The acquisition was effective at the close of business on December 31, 2006 and as a result the Fund’s operating results do not include results of Hansen’s operations. ADDITIONAL INFORMATION Additional information relating to the Fund, including all public ﬁ lings, is available on SEDAR (www.sedar.com). INVESTOR RELATIONS Steve Sommerfeld #3 – 59 Scurﬁ eld Blvd, Winnipeg, MB R3Y 1V2 Telephone: 204.489.1855 Email: steve@aggrowth.com Management’s Discussion and Analysis 32 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, 2006 and 2005 and the consolidated statements of earnings, unitholders’ equity and cash ﬂ ows for the years ended December 31, 2006 and 2005. These ﬁ nancial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these ﬁ nancial 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 ﬁ nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁ nancial statements. An audit also includes assessing the accounting principles used and signiﬁ cant estimates made by management, as well as evaluating the overall ﬁ nancial statement presentation. In our opinion, these consolidated ﬁ nancial statements present fairly, in all material respects, the ﬁ nancial position of the Fund as at December 31, 2006 and 2005 and the results of its operations and its cash ﬂ ows for the years ended December 31, 2006 and 2005 in accordance with Canadian generally accepted accounting principles. Winnipeg, Canada, March 1, 2007 Chartered Accountants 33 CONSOLIDATED BALANCE SHEETS As at December 31 ASSETS [notes 8 and 9] Current Cash and cash equivalents Cash held in trust [note 3] Accounts receivable Inventory [note 4] Prepaid expenses and other assets Future tax assets [note 11] Total current assets Property, plant and equipment [note 5] Goodwill Intangible assets [note 6] Deferred ﬁ nancing costs [note 7] Future tax assets [note 11] 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 13] Deferred foreign exchange gain Acquisition, transaction and ﬁ nancing costs payable Current portion of long-term debt [note 9] Total current liabilities Long-term debt [note 9] Total liabilities Commitments [notes 14 and 16] Unitholders’ equity See accompanying notes On behalf of the Board of Trustees: 2006 $ 2005 $ 8,706,130 582,638 10,882,840 22,641,383 1,185,200 182,200 44,180,391 14,226,481 42,262,026 69,245,641 318,012 — — 170,232,551 7,236,269 5,661,420 523,855 1,571,500 854,000 20,116 1,825,121 15,334 17,707,615 41,560,311 59,267,926 8,148,634 — 7,437,285 20,113,333 1,271,523 221,000 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 33,574,028 110,964,625 170,232,551 110,778,784 144,352,812 Consolidated Financial Statements Bill Lambert Trustee John R. Brodie, FCA Trustee 34 CONSOLIDATED STATEMENTS OF EARNINGS Year ended December 31 Sales Cost of goods sold Gross margin Expenses Selling, general and administration Professional fees Long-term incentive plan Research and development Capital taxes 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 ﬁ nancing costs Amortization of intangible assets Earnings before provision for income taxes Provision for income taxes [note 11] Current Future Net earnings for the year 2006 $ 81,525,437 46,207,537 35,317,900 12,587,274 461,026 854,000 1,160,200 297,189 (3,973,443) (243,099) 11,143,147 24,174,753 99,845 917,671 1,017,516 23,157,237 2,109,643 149,188 1,576,060 3,834,891 19,322,346 48,705 229,800 278,505 19,043,841 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 Basic and diluted net earnings per unit $1.70 $1.82 Basic and diluted weighted average number of units outstanding [note 10] See accompanying notes 11,225,000 10,801,123 35 CONSOLIDATED STATEMENT OF UNITHOLDERS’ EQUITY Year ended December 31, 2006 Accumulated earnings $ Accumulated distributions $ Total $ 28,375,479 19,043,841 — 47,419,320 (28,026,889) (18,858,000) (46,884,889) 110,778,784 — 19,043,841 (18,858,000) 110,964,625 Accumulated earnings $ Accumulated distributions $ Total $ 8,723,409 — — 19,652,070 — 28,375,479 (9,109,017) — — — (18,917,872) (28,026,889) 89,568,640 21,532,500 (1,056,554) 19,652,070 (18,917,872) 110,778,784 Unitholders’ capital $ [note 10] 110,430,194 — — 110,430,194 Unitholders’ capital $ [note 10] 89,954,248 21,532,500 (1,056,554) — — 110,430,194 Balance, beginning of year Net earnings for the year Distributions declared [note 12] Balance, end of year Year ended December 31, 2005 Balance, beginning of year Issuance of units [note 3] Issuance costs [note 3] Net earnings for the year Distributions declared [note 12] Balance, end of year See accompanying notes Consolidated Financial Statements 36 CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31 OPERATING ACTIVITIES Net earnings for the year Add charges (deduct credits) to operations not requiring a current cash payment Amortization Future income taxes Deferred foreign exchange gain Loss (gain) on sale of property, plant and equipment Net change in non-cash working capital balances related to operations [note 17] Cash provided by operating activities INVESTING ACTIVITIES Acquisition of property, plant and equipment Acquisition of assets of Hansen Manufacturing Corp. [note 3] Acquisition of assets of the Edwards Group of Companies [note 3] Proceeds from sale of property, plant and equipment Pre-existing Fund structure tax credits received Cash used in investing activities FINANCING ACTIVITIES Repayment of long-term debt Distributions paid Issuance of units, net of expenses Issuance of long-term debt Increase in deferred ﬁ nancing costs on long-term debt Transfer to cash held in trust Cash provided by (used in) ﬁ nancing activities Net increase in cash and cash equivalents during the year Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental cash ﬂ ow information Interest paid Income taxes paid (recovered) See accompanying notes 2006 $ 2005 $ 19,043,841 19,652,070 3,834,891 229,800 33,476 (37,546) 23,104,462 4,040,948 236,000 34,540 12,120 23,975,678 2,132,240 25,236,702 (2,698,483) 21,277,195 (2,767,084) (21,655,971) 58,945 — (24,364,110) (1,300,295) — — (21,685,743) 61,000 240,000 (22,685,038) (23,498) (21,267,010) — 21,558,050 — (582,638) (315,096) 557,496 8,148,634 8,706,130 (60,995) (17,726,403) 20,475,946 — (134,000) — 2,554,548 1,146,705 7,001,929 8,148,634 1,028,367 49,600 1,032,655 (339,970) 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2006 1. DESCRIPTION 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. On October 31, 2006, the Federal Government of Canada announced proposed changes to the taxation of income trusts and other ﬂ ow through entities. If enacted, the legislation would cause the Fund to be taxed on certain distributions at a special rate. The Fund is currently evaluating the impacts of the proposed legislation. If enacted as proposed, certain of the Fund’s distributions will be subject to tax beginning in 2011. The anticipated accounting impact of the proposed taxation changes, when substantively enacted, would be to trigger the recognition of the future income tax assets and liabilities with a corresponding impact on future tax expense. The amount would be based on temporary differences expected to reverse after the date that the taxation changes take effect and would be measured using income tax rates substantively enacted at the balance sheet date. 2. SIGNIFICANT ACCOUNTING POLICIES The signiﬁ cant accounting policies are summarized below: Principles of Consolidation The consolidated ﬁ nancial 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 Industries Inc. [“Ag Growth”], Westﬁ eld Distributing Ltd., Westﬁ eld Distributing (North Dakota) Inc. and Hansen Manufacturing Corp. 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 ﬁ nished 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 ﬁ rst-in, ﬁ rst-out basis. Notes to Consolidated Financial Statements 38 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 Furniture and ﬁ xtures Automotive equipment Computer equipment Manufacturing equipment 4% – 5% 20% 30% 30% 30% declining balance declining balance declining balance declining balance declining balance Leasehold improvements are amortized over the term of the lease. Goodwill Goodwill represents the amounts paid to acquire Ag Growth, the Edwards Group [note 3] and Hansen [note 3] in excess of the estimated fair value of the net identiﬁ able 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 indeﬁ nite life, distribution networks, which are being amortized over 10 and 25 years on a straight-line basis, and patents acquired from Hansen, which will be amortized over their remaining lives. Indeﬁ nite 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 indeﬁ nite 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 ﬁ nite life intangible assets is recognized when an event or change in circumstances causes the asset’s carrying value to exceed the total undiscounted cash ﬂ ows 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 ﬁ nancing costs are amortized on a straight-line basis over thirty-two months. 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. 39 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 beneﬁ ts are recognized when realization is considered more likely than not to be realized. On October 31, 2006, the Federal Government of Canada announced proposed changes to the taxation of income trusts and other ﬂ ow through entities. If enacted, the legislation would cause the Fund to be taxed on certain distributions at a special rate. The Fund is currently evaluating the impacts of the proposed legislation. If enacted as proposed, certain of the Fund’s distributions will be subject to tax beginning in 2011. 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 balance sheet dates. 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 reﬂ ected 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 ﬁ xed 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. Customer deposits are recorded as a current liability when cash is received from the customer and recognized as revenue at the time product is shipped as noted above. 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 classiﬁ ed as either capital or operating. Leases which transfer substantially all the beneﬁ ts and risks of ownership of the property to the Fund are accounted for as capital leases. Capital lease obligations reﬂ ect 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. Notes to Consolidated Financial Statements 40 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. The cash award is paid directly to eligible participants by the Fund. Derivative Financial Instruments Derivative ﬁ nancial instruments are utilized by the Fund to assist in the management of its foreign currency and interest rate exposures. The Fund’s policy is not to utilize derivative ﬁ nancial 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 speciﬁ c 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 ﬂ ows of hedged items. The Fund purchases foreign exchange contracts to hedge anticipated sales to customers in the U.S. and the collection of the related accounts receivable. Foreign exchange translation gains and losses on foreign currency denominated derivative ﬁ nancial instruments used to hedge anticipated U.S. dollar denominated sales are recognized in foreign exchange gain/loss when the sale is recorded. For foreign exchange contracts used to hedge anticipated U.S. 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. 41 The Fund uses foreign currency swap agreements to manage its cash positions. The Fund’s foreign currency swap agreement does not qualify for hedge accounting. The Fund also enters into interest rate swaps in order to reduce the impact of ﬂ uctuating 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 ended December 31, 2005, the terms of the interest rate swap were changed and it no longer qualiﬁ es 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 other income, respectively. Employee Beneﬁ t Plans The Fund contributes to a group retirement savings plan subject to maximum limits per employee. The Fund accounts for such deﬁ ned contributions as an expense in the period in which the contributions are made. The expense recorded in 2006 was $419,444 [2005 – $346,730]. Use of Estimates The preparation of ﬁ nancial 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. 3. ISSUANCE OF FUND UNITS AND ACQUISITIONS [a] Acquisition of Hansen Manufacturing Corp. Effective December 31, 2006, the Fund acquired substantially all of the assets of Hansen Manufacturing Corp. [“Hansen”], a manufacturer of enclosed belt conveyors, for cash consideration of $23,163,080. In conjunction with the acquisition, the Fund incurred an additional term loan of U.S. $18,500,000 and incurred transaction costs of $576,170. The acquisition has been accounted for by the purchase method with the results of Hansen’s operations included in the Fund’s earnings from the date of acquisition [the consolidated statement of earnings does not include results of Hansen’s operations for the year ended December 31, 2006 as the acquisition was effective at the close of business on December 31, 2006]. The assets and liabilities of Hansen were initially recorded in the consolidated ﬁ nancial statements at their estimated fair values, as noted in the following chart. Notes to Consolidated Financial Statements 42 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 Consideration Cash Acquisition and transaction costs payable $ 3,168,215 2,022,200 111,888 1,497,411 4,071,558 6,786,707 1,039,448 6,291,967 (1,826,314) 23,163,080 21,655,971 1,507,109 23,163,080 As at December 31, 2006, the Fund had cash held in trust in the amount of $582,638 relating to the acquisition of Hansen. The asset purchase agreement provides for adjustments to the purchase price for working capital adjustments to be ﬁ nalized between the vendor and the Fund, thus the purchase price allocation is subject to change. [b] Acquisition of the Edwards Group of Companies Effective April 8, 2005, the Fund acquired substantially all of the assets of The Edwards Group of Companies [“the Edwards Group”], a 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 ﬁ nancial statements at their estimated fair values, as noted in the following chart. 43 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 4. 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 2005 $ 6,019,628 14,093,705 20,113,333 2006 $ 7,823,469 14,817,914 22,641,383 Notes to Consolidated Financial Statements 44 5. PROPERTY, PLANT AND EQUIPMENT 2006 2005 Accumulated Net book amortization $ value $ Cost $ Cost $ Accumulated Net book amortization $ value $ 861,315 5,408,773 — 521,148 861,315 4,887,625 861,315 5,177,931 — 287,744 861,315 4,890,187 Land Buildings Leasehold improvements 16,167 1,855 14,312 7,000 7,000 — Furniture and ﬁ xtures Automotive equipment Computer equipment Manufacturing equipment 187,575 49,231 138,344 121,047 26,282 94,765 1,921,817 807,165 1,114,652 1,438,283 480,185 958,098 793,973 300,909 493,064 565,714 159,442 406,272 9,512,456 18,702,076 2,795,287 4,475,595 6,717,169 14,226,481 6,127,774 14,299,064 1,424,969 4,702,805 2,385,622 11,913,442 Included in the cost above is approximately $1,882,000 [2005 – $Nil] of manufacturing equipment which has not been amortized as this asset was not placed in use as of year end. 6. INTANGIBLE ASSETS 2006 2005 Accumulated Net book amortization $ value $ Cost $ Cost $ Accumulated Net book amortization $ value $ Distribution network Brand name Patent 44,625,707 27,434,558 1,289,448 73,349,713 3,854,072 40,771,635 — 27,434,558 1,039,448 69,245,641 250,000 4,104,072 37,839,000 23,363,000 250,000 61,452,000 2,340,512 35,498,488 — 23,363,000 62,500 2,528,012 58,923,988 187,500 45 7. DEFERRED FINANCING COSTS 2006 2005 Accumulated Net book amortization $ value $ Cost $ Cost $ Accumulated Net book amortization $ value $ 1,113,023 795,011 318,012 795,011 645,823 149,188 During the year, the Fund incurred $318,012 of deferred ﬁ nancing costs relating to the acquisition of Hansen. 8. 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 5.76% [2005 – 4.81%]. At December 31, 2006 and 2005, there was no amount outstanding under this facility. Collateral for the operating facility includes a general security agreement over all assets, ﬁ rst position collateral mortgages on land and buildings, and assignments of rents and leases and security agreements for patents and trademarks. In conjunction with the acquisition of Hansen, the Fund added an operating facility of U.S. $1.0 million. The facility bears interest at a rate of prime to prime plus 1% per annum based on performance calculations. The Hansen acquisition was effective at the close of business on December 31, 2006 and accordingly this facility was not utilized in 2006. Notes to Consolidated Financial Statements 46 9. LONG-TERM DEBT Term loan, interest payable monthly at prime to prime plus 1% per annum based on performance calculations. As described in note 14, the Fund has entered into a swap contract that effectively ﬁ xes 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, 2006 would have been 5.76% [2005 – 4.81%] and after consideration of the effect of the interest rate swap was 4.68% [2005 – 4.48%] Term loan of U.S. $18,500,000, interest payable monthly at prime to prime plus 1% per annum based on performance calculations. On January 24, 2007 the Fund entered into an interest rate swap contract that effectively ﬁ xes the Fund’s interest rate at 5.43%, plus 1.0%, 1.5%, or 2.0% per annum based on performance calculations. The term loan was effective at the close of business on December 31, 2006 and as a result no interest expense was incurred in the year ended December 31, 2006 GMAC loans, 0% maturing in 2007 and 2008, with monthly payments of $1,958. Vehicles ﬁ nanced are pledged as collateral Less current portion 2006 $ 2005 $ 20,000,000 20,000,000 21,558,050 — 17,595 41,575,645 15,334 41,560,311 41,093 20,041,093 23,502 20,017,591 Under the agreement for the term loans, the Fund is required to maintain certain ﬁ nancial covenants. As at December 31, 2006 and 2005, the Fund was in compliance with the applicable ﬁ nancial covenant terms. Collateral for the term loans and operating facility [note 8] includes a general security agreement over all assets, ﬁ rst position collateral mortgages on land and buildings, assignments of rents and leases and security agreements for patents and trademarks. The term loans mature August 31, 2007 and are 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 August 31, 2007 maturity date, all amounts outstanding under the facilities become repayable in four equal quarterly instalments of principal, commencing on November 30, 2008. 47 Principal repayments due within the next three ﬁ scal years, if the term loans are not renewed and are repayable commencing November 30, 2008, are as follows: 2007 2008 2009 10. UNITHOLDERS’ CAPITAL Unitholders’ capital is comprised of the following: Fund Trust units $ 68,883,378 20,475,946 111,090 89,470,414 19,598,930 109,069,344 Balance, December 31, 2004 Issuance of units, net of costs Exchange of units Balance, December 31, 2005 Exchange of units Balance, December 31, 2006 Balance, December 31, 2004 Issuance of units [note 3] Exchange of units Balance, December 31, 2005 Exchange of units Balance, December 31, 2006 $ 15,334 10,391,773 31,168,538 41,575,645 Total Unitholders’ capital $ Class B Class C Exchangeable Exchangeable units of AGHLP $ units of AGHLP $ 1,810,870 — (111,090) 1,699,780 (338,930) 1,360,850 Fund Trust units # 7,522,913 1,595,000 11,109 9,129,022 1,959,893 11,088,915 19,260,000 — — 19,260,000 (19,260,000) 89,954,248 20,475,946 — 110,430,194 — — 110,430,194 Class B Class C Exchangeable Exchangeable units of AGHLP # 181,087 — (11,109) 169,978 (33,893) 136,085 units of AGHLP # 1,926,000 — — 1,926,000 (1,926,000) — The Fund Declaration of Trust provides that an unlimited number of trust units may be issued. Each trust unit represents an equal undivided beneﬁ cial 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. Notes to Consolidated Financial Statements 48 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, 2006, there were 136,085 Special Voting Units outstanding [December 31, 2005 – 2,095,978 units], which were attached to the outstanding Class B Exchangeable LP Units of AGHLP and the Class C Exchangeable Subordinated LP Units of AGHLP. AGHLP exchanged all Class C units to Class B units on a one-for-one basis upon the occurrence of the subordination end date in 2006. The Class B units are exchangeable for Fund Trust units at the option of the holder on a one-for-one basis at any time. 11. 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: 2006 2005 $ % $ % 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 19,322,346 19,967,193 260,372 (446,488) (18,858,000) 724,718 (18,917,872) 602,833 Provision for income taxes Large corporation tax Income tax provision 278,505 — 278,505 38 — 38 236,000 79,123 315,123 39 13 52 Signiﬁ cant components of the Fund’s future tax assets are shown below: Future tax assets Financing costs Non-capital losses 2006 $ 31,200 151,000 182,200 2005 $ 116,500 295,500 412,000 49 12. DISTRIBUTIONS TO UNITHOLDERS For the year ended December 31, 2006, the Fund made distributions of $18,858,000 which equated to $1.68 weighted average per unit [2005 – $18,917,872 or $1.75 weighted average per unit]. 13. 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 signiﬁ cant 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 deﬁ ned in the LTIP 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 LTIP at December 31, 2006 of $854,000 [2005 – $933,001]. 14. FINANCIAL INSTRUMENTS The Fund has the following ﬁ nancial instruments: cash and cash equivalents, cash held in trust, accounts receivable, accounts payable and accrued liabilities, customer deposits, distributions payable, long-term incentive plan, acquisition, transaction and ﬁ nancing costs payable, 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 signiﬁ cant credit risks arising from these ﬁ nancial instruments. Currency Exposures Risk from foreign exchange arises as a result of variations in exchange rates between the Canadian and the U.S. dollar. The Fund has entered into foreign exchange contracts to hedge its foreign currency exposure on anticipated U.S. dollar sales transactions and the collection of the related accounts receivable. At December 31, 2006, the Fund had outstanding forward foreign exchange contracts as follows: Settlement dates Face value $U.S. Average rate $Cdn March 2007 to December 2007 8,625,000 1.1943 Notes to Consolidated Financial Statements 50 At December 31, 2006, the Fund had outstanding a series of foreign exchange call and put options as follows: Settlement dates March 2007 to December 2007 March 2007 to December 2007 March 2007 to December 2007 January 2008 to December 2008 Interest Rate Exposures Face value $U.S. 4,625,000 4,625,000 9,250,000 7,800,000 Call $Cdn 1.1363 1.1300 1.1363 1.0700 Put $Cdn 1.2985 1.1975 1.2410 1.2115 The Fund is subject to risks associated with ﬂ uctuating 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 ﬂ oating interest rate of prime to prime plus 1.00% per annum for an effective ﬁ xed 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, 2006 and 2005 was $20,000,000. Fair Value At December 31, 2006, the carrying value of the Fund’s ﬁ nancial instruments approximates their fair value with the exception of derivative ﬁ nancial instruments. The interest rate swap is marked to market. The unrealized loss on foreign exchange contracts was $276,679 at December 31, 2006 [2005 – unrealized gain of $3,384,312]. Upon maturity of the foreign exchange contracts, any gain/loss would be recognized in realized foreign exchange gain/loss in the consolidated statement of earnings. 15. 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: Canada United States International Revenues 2006 $ 24,240,155 54,483,272 2,802,010 81,525,437 2005 $ 25,369,699 55,166,890 3,497,356 84,033,945 Property, plant and equipment, goodwill and intangible assets as at 2006 $ 2005 $ 105,819,068 19,915,080 — 125,734,148 106,577,247 230,242 — 106,807,489 51 16. COMMITMENTS The Fund has entered into various operating leases for ofﬁ ce and manufacturing equipment, warehouse facilities and vehicles. Minimum annual lease payments required in aggregate are as follows: 2007 2008 2009 2010 2011 and forward $ 803,616 656,370 527,448 145,424 20,694 2,153,552 As at December 31, 2006, the Fund has commitments relating to the purchase of equipment outstanding in the amount of $385,000. 17. 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 18. COMPARATIVE FIGURES 2006 $ (408,816) (505,850) 329,687 267,421 (79,001) (29,219) 2,558,018 2,132,240 2005 $ (1,441,926) (967,153) (270,328) (442,001) 667,213 477,481 (721,769) (2,698,483) Certain comparative ﬁ gures have been reclassiﬁ ed to conform to the current year’s presentation. Notes to Consolidated Financial Statements 52 Ofﬁ cers: Rob Stenson, Chief Executive Ofﬁ cer and Trustee Gary Anderson, President, Chief Operating Ofﬁ cer and Trustee Steve Sommerfeld, Chief Financial Ofﬁ cer Dan Donner, Vice President Sales and Marketing Paul Franzmann, Vice President Corporate Development Trustees (left to right): Gary Anderson Bill Maslechko Bill Lambert David White Rob Stenson (seated) John R. Brodie (photo unavailable) Additional information relating to the Fund, including all public ﬁ lings, is available on SEDAR (www.sedar.com).

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