Growth International Annual Report 2007

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FY2007 Annual Report · Growth International

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Growing
Strong

Ag Growth Income Fund
1301 Kenaston Blvd.
Winnipeg, MB R3P 2P2
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

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

Batco Manufacturing, Acquired: 1997 (Founded 1992)

Wheatheart Manufacturing, Acquired: 1998 (Founded 1973)

Westfield Industries, Acquired: 2000 (Founded 1950)

Edwards Group, Acquired: 2005 (Founded 1964)

Hansen Manufacturing, Acquired: 2006 (Founded 1982)

Twister Pipe Ltd., Acquired: 2007 (Founded 1976)

Union Iron, Inc., Acquired: 2007 (Founded 1852)

Applegate Steel Inc., Acquired: 2008 (Founded 1955)

AnnuAl RepoRt 2007

Growing
Strong

Ag Growth Income Fund
1301 Kenaston Blvd.
Winnipeg, MB R3P 2P2
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

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

Batco Manufacturing, Acquired: 1997 (Founded 1992)

Wheatheart Manufacturing, Acquired: 1998 (Founded 1973)

Westfield Industries, Acquired: 2000 (Founded 1950)

Edwards Group, Acquired: 2005 (Founded 1964)

Hansen Manufacturing, Acquired: 2006 (Founded 1982)

Twister Pipe Ltd., Acquired: 2007 (Founded 1976)

Union Iron, Inc., Acquired: 2007 (Founded 1852)

Applegate Steel Inc., Acquired: 2008 (Founded 1955)

to our unitholders

On behalf of the management,
employees and board of
trustees at Ag Growth Income
Fund, we enthusiastically

present our 2007 annual report to prospective and current
unitholders. 2007 was a very successful year for the Fund,
despite some economic and operational challenges. We
have grown revenue successfully from $81.5 million in
fiscal 2006 to $130.7 million in 2007 and EBITDA from
$24.2 million to $32.4 million, representing growth of 60%
and 32% respectively. The result has been strong growth
in revenues from both acquisitions and organic growth.

For several years we have been predicting a resurgence
of agricultural commodity prices as we watched world
inventories on a downward trajectory. However, we
didn’t anticipate the sheer magnitude of the move. At the
writing of this report, wheat prices are approaching $11
a bushel on the Chicago Board of Trade and corn is north
of $5 a bushel. These prices are all-time records for these
important commodities. “Beans in the teens” is a situation
only experienced a couple of times in the past.

eBItDA Since Ipo

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EBITDA
2004

EBITDA
2005

EBITDA
2006

EBITDA
2007

to our unitholders

With low inventory levels in all three of these key
commodities at the same time, we expect a fight for
acreage to occur over the next few years. We feel that
this points to an environment of firm commodity prices
over a longer cycle than has been traditional in the
grains and oilseeds. Russia and China have both recently
announced that they will soon be imposing export tariffs
on grain which indicates that large consumers of grain
are attempting to hoard their production for domestic
consumption. Most measures point to this cycle being
demand as opposed to supply driven, which has been
more typical throughout history.

The world is beginning to realize that the boost to
mandated ethanol production in the U.S. is only one
dimension of the demand. Although a significant factor to
U.S. fundamentals, ethanol demand still accounts for only
3–4% of worldwide grain demand. It is becoming more and
more apparent that the world is in a tight supply situation
for the foreseeable future. We are doing our business and
investment planning with this assumption in mind.

Grain price Index vs. Days of World Grain Inventory

Supply Demand Imbalances

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Corn, Soy & Wheat Index

Days of Grain Inventory

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We are very excited about the potential for 2008. As a result
of exceptional demand, we are beginning the year with
an extremely lean inventory pipeline. Order backlogs at
most of our divisions are at all-time highs. Several capacity
initiatives are beginning to see fruition. Delays in capacity
improvement at our Westfield operation negatively
impacted 2007 results, but we expect to begin reaping
strong capacity improvements as we continue into 2008.
In addition, we have leased a new 30,000 sq ft facility in
Winnipeg to further enhance capacity. We are incurring
costs to get it up and running but expect to begin seeing
the benefits of this initiative in the second quarter of 2008.

The second quarter should also see the completion of
an expansion at our Batco division in Swift Current. The
expansion should help improve the layout of the facility
and help alleviate bottlenecks resulting from the painting
procedure.

We are currently shipping in a recently acquired powder
coat paint line for installation in our new 160,000 sq ft
facility in Randolph County, Indiana. Once we have paint
capabilities in the plant, we can begin integrating our
Applegate Steel operation into it, as well as transitioning
select products from Canadian operations to free up
further capacity. We don’t foresee significant benefit from
this new capacity until the second half of 2008.

It was a strong year for repositioning the company for
growth in the agriculture sector. We had a very strong first
year for our Hi Roller Conveyor division, acquired at the
end of 2006. Our first year reinforced the due diligence
that told us that Hi Roller has exceptional brand equity in
the commercial grain handling sector.

Governor of Indiana, Mitch
Daniels, along with Paul
Franzmann, Vice President
Corporate Development,
and Gary Anderson,
President, Chief Operating
Officer and Trustee

to our unitholders

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Our June acquisition of the Twister bin line caused
significant distraction and costs as we moved it into our
Nobleford facility. However, we are more excited than
ever for the medium term prospects for the product line.
Although grain bins are a lower margin product than most
of our other lines, they open opportunities to bundle
our higher margin handling and aeration accessories.
Strategically, we feel this small acquisition will drive
significant EBITDA growth for Ag Growth relative to the
costs of acquiring and moving the division.

We also would like to welcome the Union Iron Works
team, under the leadership of Bob Curry, to the Ag Growth
family. We completed the acquisition of this Decatur,
Illinois based company in November. The company has
experienced exceptional growth in the marketing of its
range of commercial grain handling equipment in the past
number of years. We hope to build on their past successes
as we lever marketing synergies with our other divisions.
Union Iron has choppier seasonality than many of our
divisions with the second and third quarter traditionally
delivering most of the EBITDA.

We would also like to welcome Applegate Steel, under
the management of Dwayne Brim and Aaron Applegate,
to the Ag Growth team. We completed this small tuck
under acquisition early in 2008. The company had fallen
on tough times as a result of excessive leverage applied
to the company by the previous ownership group. The

cattle related product line should provide synergies with
our Wheatheart and Edwards cattle related products. We
will be moving the product line into our new Randolph
County plant during 2008 and this provides us with a
solid management team and ready workforce to begin
integrating Canadian production. By combining these
initiatives, we are confident that we will develop a thriving,
profitable enterprise in Indiana.

The addition of Shane Knutson as our Director of
International Sales was another shift in strategic direction
for the company in 2007. The rapid strengthening of
agricultural commodities during the year is accelerating
the demand for equipment to modernize farm level
infrastructure around the world. Shane’s extensive
contacts in many of these emerging new markets are
helping accelerate our plans and ability to penetrate these
markets as they develop. Although off-shore sales have
traditionally been a very small percentage of our overall
revenue, we anticipate that we can build a team to make
off-shore markets a much more significant percentage of
our revenues over the next few years. In particular, we
are already seeing great opportunity in expanding our
overseas business now that we have a more complete
line of commercial products with our Hi Roller, Union
Iron, Edwards and Twister products. We are continuing
to search for acquisitions that further expand this
commercial catalogue.

World Market opportunity & Growth
Total % Grain, Corn & Oilseed Production Worldwide (2007)

Canada & US
21%

European Union
12%

Brazil/Argentina
9%

Russia/Ukraine/
Kazakhstan
6%

China
19%

India
9%

Other Asia
4%

Australia
1%

*Regions/Countries not shown represent remaining 19%

Despite all of the positive events of the year we have
experienced some growing pains. EBITDA margins
slipped from 30% to 25%. We are pleased with these
results given continued headwinds from the appreciating
Canadian dollar which negatively impacted margins as
well as a realignment of our gross margin profile resulting
from our product mix. In particular, two acquisitions
completed during the year contributed aggregate negative
EBITDA of approximately $1 million. The Twister product
line acquisition, which closed in June, has resulted in
negative results as we incurred expenses of moving the
equipment and inventory into our Nobleford plant, having
a heavy impact in our fourth quarter. Also, our Union
Iron acquisition, completed in November, contributed
negatively as a result of its seasonality. The company
generally contributes flat to negative EBITDA in the first
and fourth quarters of the year with revenue and cash flow
heavily weighted in the second and third quarters.

Results also did not meet full potential as record demand
in the second half of the year surpassed our optimistic
projections and we did not have sufficient product in
our inventory pipeline. In particular, at Westfield, our

largest division, we had production deficiencies during
the year as a result of a major capacity expansion project.
Consequently, inventory levels were depleted in the third
quarter and we did not have sufficient inventory to meet
very strong demand through the full harvest cycle. This
negatively impacted our sales mix in the quarter. As we
begin realizing the capacity improvements we will more
than compensate for the opportunity cost in 2007.

Westfield Stockpoint and Warehouse
Inventory entering Qtr. 4

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to our unitholders

Ag Growth Income Fund
Stock chart since initial public offering May 2004

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We are working hard to get these growing pains behind
us so we can solidify our next leg of organic growth. We
have added substantially to the senior management team
with a focus on manufacturing strength and acquisition
integration and are confident of solid growth in 2008.
We thank all stakeholders for their support in this active
year and assure you that we are working hard to provide
sustainable long-term value to our customers and our
unitholders.

We look forward to a prosperous 2008.

Rob Stenson
Chief Executive Officer

MAnAGeMent’S DISCuSSIon AnD AnAlYSIS
March 17, 2008

This Management’s Discussion and Analysis should be
read in conjunction with the audited consolidated financial
statements and accompanying notes of Ag Growth Income
Fund for the year ended December 31, 2007. Results are
reported in Canadian dollars unless otherwise stated
and have been prepared in accordance with Canadian
generally accepted accounting principles. Throughout
this Management’s Discussion and Analysis references
are made to “EBITDA”, “standardized and adjusted
distributable cash”, and “payout ratio”. A description
of these measures and their limitations are discussed
under “Non-GAAP Measures”. See also “Risks and
Uncertainties” and “Forward-Looking Statements”.

FORWARD-LOOKING STATEMENTS
This Management’s Discussion and Analysis contains
forward-looking statements that reflect our expectations
regarding the future growth, results of operations,
performance, business prospects, and opportunities
of the Fund. Forward-looking statements may contain
such words as “anticipate”, “believe”, “continue”,
“could”, “expects”, “intend”, “plans”, “will” or similar
expressions suggesting future conditions or events.
Such forward-looking statements reflect our current
beliefs and are based on information currently available
to us. Forward-looking statements involve significant
risks and uncertainties. A number of factors could cause
actual results to differ materially from results discussed
in the forward-looking statements, including changes in
national and local business conditions, crop yields, crop
conditions, seasonality, industry cyclicality, volatility of
production costs, commodity prices, foreign exchange
rates, and competition. These risks and uncertainties
are described under “Risks and Uncertainties” in our
2007 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 except as expressly required by law.

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 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. All Class C units were converted 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 Trust
units of the Fund and the Class B and Class C units of
AGHLP participate pro rata in distributions.

On October 2, 2007, the Fund completed an equity
financing whereby it issued 1,730,000 Trust units at
a price of $26.00 per Trust unit for gross proceeds of
$45.0 million. Net proceeds after expenses of the offering
were $42.4 million. Subsequent to the closing of the
equity offering, the Fund repaid $30.7 million and U.S.
$12.0 million of its outstanding long-term debt. The
remaining $2.3 million was applied against expenses of
the offering, including underwriters’ commission.

As at December 31, 2006, December 31, 2007 and
March 17, 2008, the following units were issued and
outstanding and participated pro rata in distributions:

December 31, 2006

October 2, 2007 equity financing

December 31, 2007 and March 17, 2008

Trust units

Class B units (1)

Total

11,088,915

1,730,000

12,818,915

136,085

11,225,000

1,730,000

136,085

12,955,000

(1) The Fund has issued one Special Voting Unit for each Class B 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 trust units trade on the Toronto Stock Exchange under the symbol AFN.UN.

Management’s Discussion and Analysis

ENACTMENT OF LEGISLATION IMPOSING TAXATION
ON INCOME TRUSTS
In June 2007, the Government of Canada enacted new
legislation imposing additional income taxes upon
publicly traded income trusts, including the Fund,
effective January 1, 2011. Prior to June 2007, the Fund
estimated the future income tax on certain temporary
differences between amounts recorded on its balance
sheet for book and tax purposes at a nil effective tax
rate. Upon enactment of the June 2007 legislation, the
Fund estimated the effective tax rate to be 31.5% and
as a result future income tax liabilities for the period
increased by $11.1 million. On December 14, 2007, further
legislation was enacted by the federal government to
reduce the effective rate of tax on the Fund’s temporary
differences from the previous rate of 31.5% to 29.5% in
2011 and 28.0% thereafter. As a result the Fund reduced
its expected future income tax liability related to the
legislation from $11.1 million to $9.5 million. Temporary
differences reversing before 2011 will still give rise to nil

OPERATING RESULTS

future income taxes. The amount and timing of reversals
of temporary differences will depend on the Fund’s future
operating results, acquisitions and dispositions of assets
and liabilities, and distribution policy. A significant change
in any of the preceding assumptions could materially
affect the Fund’s estimate of the future tax liability.

Based on its assets and liabilities as at December 31, 2007,
the Fund has estimated the amount of its temporary
differences which were previously not subject to tax and
has estimated the periods in which these differences
will reverse. The fund estimates that approximately
$33.8 million net taxable temporary differences will
reverse after January 1, 2011, resulting in an additional
$9.5 million future income tax liability. The taxable
temporary differences relate principally to the Fund’s
intangible assets. Until 2011, the new legislation does
not directly affect the Fund’s cash flow from operations.
However, as enacted in its present form, the legislation
will, all other things being equal, result in a reduction of
cash available for distribution commencing in 2011.

Sales
Cost of goods sold
Gross margin
Selling, general and administration
Professional fees
Long-term incentive plan
Unit award incentive plan
Research and development
Capital taxes
Gain on foreign exchange
Other income

EBITDA *
Amortization
Interest expense
Earnings before provision for income taxes
Current income taxes
Future income taxes
Net earnings for the year
Net earnings per unit
Net earnings per unit before future tax adjustment (1)

Year Ended

Year Ended
December 31, 2007 December 31, 2006
81,525,437

$ 130,701,961
79,985,690
50,716,271
18,742,608
740,505

799,596

1,402,093

884,399

250,000

(4,117,783)
(353,483)
18,347,935
32,368,336
5,764,536

2,548,277

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
3,834,891

1,017,516

24,055,523

19,322,346

1,933,245
9,756,700
$ 12,365,578

1.06

1.88

48,705

229,800
19,043,841
1.70

1.70

(1) As described above under “Enactment of Legislation Imposing Taxation on Income Trusts”, in 2007 the Fund recorded
a non-cash future income tax expense of $9.5 million due to the enactment of legislation that impacted the taxation of
income trusts.

* See discussion of non-GAAP measures.

ASSETS AND LIABILITIES

Total assets

Total liabilities

Year Ended

Year Ended
December 31, 2007 December 31, 2006

$ 210,683,040

$ 170,232,551

$ 64,028,506

59,267,926

DISTRIBUTIONS DECLARED
The table below 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.

Trust units

Class B units

Class C units (1)

Total distributions

Year Ended

Year Ended
December 31, 2007 December 31, 2006

$ 19,355,977

17,257,452

228,623

252,348

1,348,200

$ 19,584,600

$ 18,858,000

(1) 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. 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.

ACqUISITIONS

The inclusion of the assets and operating results of the
following acquisitions significantly impacts comparisons
to 2006:

Effective December 31, 2006, the Fund acquired
substantially all of the assets of Hansen Manufacturing
Corp. (“Hansen” or “Hi Roller”), a manufacturer of
enclosed belt conveyors.

Effective May 31, 2007, the Fund acquired substantially all
of the operating assets of Twister Pipe Ltd. (“Twister”), a
manufacturer of grain storage bins, aeration equipment,
and bin unload systems.

Effective November 19, 2007, the Fund acquired 100% of
the outstanding shares of Union Iron Inc. (“Union Iron”)
and the shares and assets of certain related companies
of Union Iron, a manufacturer of material handling and
storage equipment.

OVERALL PERFORMANCE
The agricultural sector surged in 2007 as a worldwide
increase in crop demand, low crop inventories, and the
expansion of the ethanol industry drove commodity
prices to record highs and encouraged farmers to increase
planted acres and to maximize yields. Demand for the
Fund’s portable and stationary grain handling equipment

increased in response to these drivers and the Fund
enjoyed a significant increase in sales at all divisions.

The Fund’s EBITDA increased 34%, from $24.2 million in
2006 to $32.4 million in 2007. Although EBITDA growth
was substantial, the Fund’s gross margin and EBITDA as a
percentage of sales was constrained in 2007:

•

Gross margin was negatively impacted by the
acquisitions of Twister and Union Iron, and the impact
of foreign exchange. Excluding these items, gross
margin for the three months ended December 31, 2007
was 37.0% (2006 – 40.0%) and for the year ended
December 31, 2007 was 41.6% (2006 – 43.3%).

Sales, gross margin and EBITDA were negatively
impacted by costs related to the implementation of the
Westfield capacity improvement initiative. In addition
to the direct and ancillary costs incurred in the first
three quarters of 2007, the project had a significant
impact on the fourth quarter:

•

The project was substantially complete at the
end of the third quarter. However, the related
implementation of lean manufacturing resulted
in certain production inefficiencies and Westfield
was not able to fully realize upon the capacity
improvements in the fourth quarter.

Management’s Discussion and Analysis

•

Throughput at Westfield increased in the fourth
quarter compared to 2006, but the increases in
production were not sufficient in magnitude to
meet continued strong demand. In the third quarter,
production constraints coupled with exceptional
demand resulted in an unprecedented drawdown of
field inventory. Over the course of the third quarter
in 2007, field inventory decreased approximately
58%. This compares to a more typical drawdown
of approximately 12% in 2006. Entering the fourth
quarter of 2007, Westfield field inventory was down
50% compared to the prior year.

Westfield entered the fourth quarter with severely
depleted field inventory and was not able to
fully realize upon capacity improvements, and
accordingly was unable to meet strong demand. The
loss of higher margin Westfield sales in the fourth
quarter of 2007 resulted in reduced EBITDA as well
as lower consolidated gross margin and EBITDA
percentages.

Westfield production capacity gains are expected to be
realized by the second quarter of 2008. The physical move
of Twister equipment to Nobleford was completed in the
fourth quarter of 2007, however Twister production is not
expected to reach full capacity until later in the second
quarter of 2008. Gross margin and EBITDA percentages
in 2008 are expected to benefit from a 3% price increase
on most U.S. product offerings that was implemented
January 1, 2008. Market conditions appear favourable for
additional price increases in 2008.

SALES
Sales for the year ended December 31, 2007 were
$130.7 million, including $29.8 million recorded at Hi
Roller, $4.4 million at Twister, and $0.6 million at Union
Iron. Excluding the impact of acquisitions, sales in 2007
were $96.0 million, compared to $81.5 million in 2006. The
increase of $14.5 million or 18% over 2006 is largely due to
the following:

•

Sales in the U.S. increased $10.7 million or 20% over
the prior year due to increased sales of portable augers,
belt conveyors, bin-unload equipment, and aeration
equipment. U.S. demand was stimulated by positive
market conditions including an increase in on-farm
storage, higher commodity prices, and a record corn
harvest. Sales per unit benefited from price increases
implemented on January 1, 2007 and June 1, 2007.

•

Sales in Canada increased $2.7 million or 11% over
2006. Sales of Wheatheart grain augers increased
significantly as more aggressive distribution resulted in
market share growth. Sales at Edwards also increased
significantly due to increased demand in the U.S. and
improved market conditions in Western Canada.

International sales increased $1.1 million due to an
expanding market in Europe and improved agricultural
conditions in Australia.

U.S. sales were negatively impacted by the appreciation
of the Canadian dollar. Had the average exchange rates
experienced in 2006 been in effect in 2007, all other
factors remaining constant, sales excluding acquisitions
for the year ended December 31, 2007 would have
increased an additional $3.1 million.

Sales in 2007 were negatively impacted by the
Westfield capacity improvement initiative. Production
inefficiencies related to both project implementation
and the introduction of lean manufacturing
significantly limited productivity gains in 2007.
Throughput at Westfield increased compared to 2006,
however the increases in production were not sufficient
in magnitude to meet exceptional demand.

FOREIGN EXCHANGE
Sales and expenses denominated in a foreign currency are
recorded each month at the rate of exchange in effect on
the closing business day of the previous month. For the
year ended December 31, 2007, sales denominated in U.S.
dollars accounted for 75% of total sales (2006 – 67%). U.S.
dollar denominated expenses equated to 28% of sales for
the year ended December 31, 2007, compared to historical
levels of 15% to 20%. The proportion of U.S. dollar sales
and expenses increased largely due to the acquisition of
U.S. based Hi Roller and robust demand in the U.S. market.

As sales denominated in U.S. dollars significantly exceed
purchases denominated in that currency, the Fund is
negatively impacted by a strengthening Canadian dollar.
The Fund’s average rate of exchange for the year ended
December 31, 2007 was $1.08, an increase of 4.4%
compared to the 2006 average exchange rate of $1.13.

Ag Growth has entered into a series of hedging
arrangements to partially mitigate the potential effect of
fluctuating exchange rates. Realized gains or losses on
foreign currency hedging instruments have been included,
along with the gain or loss on the translation of U.S. dollar
monetary items, in operating expenses as a gain or loss on
foreign exchange.

GROSS MARGIN
Gross margin as a percentage of sales for the year
ended December 31, 2007 was 38.8%, compared to
43.3% in 2006. A change in the product mix of sales
and costs related to Westfield’s capacity improvement
initiative significantly impacted the Fund’s gross margin
percentage:

The Fund’s sales mix has changed substantially
with the acquisitions of Hi Roller, Twister, and Union
Iron. The Fund’s highest margin division, Westfield
Industries, accounted for 60% of total sales in 2006
compared to 42% in the current year.

Twister was acquired on May 31, 2007 and for the
seven months ended December 31, 2007 reported
gross margin of negative $0.5 million. Gross margin
was negatively impacted by costs related to the
transition of operations from Calgary to Nobleford and
by the higher costs of operating in the Calgary facility
prior to the move.

Union Iron was acquired on November 19, 2007
and due largely to seasonality factors reported a
negative 0.7% gross margin percentage for the period
November 19, 2007 to December 31, 2007. Historically,
Union Iron’s sales and EBITDA have been heavily
weighted towards the second and third quarters.

Gross margin was also negatively impacted by the
stronger Canadian dollar. Excluding the impact of
Twister and Union Iron, and had the average exchange
rates experienced in 2006 been in effect in 2007, all
other factors remaining constant, gross margin as a
percentage of sales for 2007 was 41.6%

•

Bin-unload equipment is sold directly to a U.S. based
storage bin manufacturer that incurs all further selling
and distribution costs. Accordingly, the achievable
gross margin percentage is necessarily lower to
compensate the U.S. bin manufacturer for covering the
costs of sales and distribution.

EXPENSES
For the year ended December 31, 2007, selling, general
and administrative expenses were $18.7 million
(2006 – $12.6 million). Selling, general and administrative
expenses as a percentage of sales decreased to 14.3% in
2007 from 15.4% in 2006. Excluding acquisitions, general
and administrative expenses were $15.6 million, an
increase of $3.0 million over the prior year. The variance
compared to 2006 is primarily due to the following:

•

Salaries and wages increased $1.6 million, largely
due to $0.3 million in retention bonuses, $0.2 million
in retirement allowances, personnel additions at the
corporate level to facilitate organic growth and the
integration of acquisitions, salary increases, a higher
accrual for performance based bonuses, and a number
of smaller items.

Sales and marketing expenses increased $0.6 million
due to an increase in salary that resulted primarily from
additional personnel and inflationary wage increases,
increased advertising, an increase in overseas
marketing activity, and a number of smaller items.

•

A number of miscellaneous items accounted for the
remaining change.

Significant variances compared to 2006 were also
recorded in the following:

Direct and ancillary costs related to the implementation
of the Westfield capacity improvement initiative
negatively impacted the gross margin percentage. In
addition, although the Westfield capacity improvement
project was substantially complete at the end of
the third quarter, the related implementation of
lean manufacturing resulted in certain production
inefficiencies and Westfield was not able to meet
fourth quarter demand. The difficulty in meeting fourth
quarter demand was exacerbated by strong sales in
the third quarter that prematurely depleted inventory
levels. The production inefficiencies and the loss of
Westfield’s higher margin sales resulted in a lower
consolidated gross margin percentage.

•

Research and development costs in 2007 were
$0.9 million, a $0.3 million decrease from 2006. The
decrease was largely the result of the allocation of
engineering resources to the Twister integration.

Professional fees were $0.7 million, an increase of
$0.3 million over 2006. The increase was due to a
number of incidental legal fees and a higher accrual
for audit fees.

The adoption of a unit award incentive plan in
May 2007 resulted in an expense related to the
plan of $1.4 million for the twelve months ended
December 31, 2007. The total cost of the plan is based
on the Fund’s unit price and is expensed over the plan’s
vesting period (see “Unit Award Incentive Plan”).

Management’s Discussion and Analysis

EBITDA AND NET EARNINGS (see discussion of
non-GAAP measures)
EBITDA for the year ended December 31, 2007 was
$32.4 million, compared to $24.2 million in 2006. The
EBITDA increase of $8.2 million or 34% over 2006 was
largely the result of the following:

EBITDA at divisions acquired before December 31, 2006
(Batco, Wheatheart, Westfield and Edwards) increased
14% over 2006. The benefit of increased sales, the
result of robust demand in the U.S., was partially offset
by gross margin pressures that resulted from foreign
exchange, the capacity improvement initiative at
Westfield, and product mix of sales.

Hi Roller results in 2007 benefited from a strong
domestic agricultural market and growth in sales
related to new ethanol facilities.

For its seven-month period ended December 31, 2007,
Twister reported negative EBITDA of $0.9 million.
The Fund incurred significant costs, largely in the
fourth quarter of 2007, in relation to the transition of
operations from Calgary to Nobleford.

Union Iron recorded negative EBITDA of $0.2 million
due largely to seasonality factors as the Fund
reported Union Iron results only for the period
November 19, 2007 to December 31, 2007.
Historically, Union Iron’s sales and EBITDA have
been heavily weighted towards the second and third
quarters. Accordingly, EBITDA for the period ended
December 31, 2007 was in line with management
expectations.

•

debt was U.S. $26.5 million. Interest rates on both
facilities are based on performance calculations. For
the year ended December 31, 2007, the Fund’s effective
interest rate on its Canadian dollar term debt was 6.1%
(2006 – 5.8%), and after consideration of the effect of the
Fund’s interest rate swap was 5.2% (2006 – 4.7%). For
the year ended December 31, 2007, the Fund’s effective
interest rate on its U.S. dollar term debt was 8.6% and
after consideration of the effect of the Fund’s interest rate
swaps was 6.5% (see “Financial Instruments”).

Amortization for the year ended December 31, 2007
was $5.8 million (2006 – $3.8 million) and included the
amortization of capital assets of $3.4 million and the
amortization of intangible assets of $2.4 million. Compared
to 2006, amortization was most significantly impacted
by the acquisitions of Hi Roller and Twister, and the
amortization of the new paint line at the Westfield facility.

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’s divisions that are based in
Canada are carried out within a limited partnership.
Income from the limited partnership is not subject to
tax but flows through to the holders of the partnership
units, which includes the Fund. The Fund’s distributions
are taxable in the hands of the unitholders. As a result
of the Fund’s structure, a current tax provision is
recorded only for the Fund’s subsidiary corporations,
including its U.S. based divisions, and for the year ended
December 31, 2007 was $1.9 million. The current tax
provision is net of a reversal of a $0.5 million tax accrual
that management has determined is no longer required.

Selling, general and administrative expenses at the
corporate level increased $2.4 million compared to
2006, largely due to adding management resources
to facilitate organic growth and the integration of
acquisitions, salary adjustments, and increased sales
and marketing expenses. Fiscal 2007 also included
$0.3 million in non-recurring retention bonuses and a
$0.2 million retirement allowance.

The Fund recorded future tax expense of $9.8 million
for the year ended December 31, 2007. In addition to the
expense derived primarily from the utilization of future
tax assets, as described in the Fund’s December 31, 2007
audited financial statements, future tax expense includes
an additional $9.5 million related to the enactment of
taxation laws related to income trusts for taxation years
commencing January 1, 2011. See “New Developments”.

•

The Fund adopted a unit award incentive plan in 2007
and for the year ended December 31, 2007 recorded an
expense of $1.4 million.

The Fund’s credit facility includes operating lines of
CAD $10.0 million and U.S. $2.0 million, and provides
for long-term debt of up to U.S. $66.5 million. As at
December 31, 2007 no amounts were outstanding under
the operating lines and the Fund’s outstanding long-term

For the year ended December 31, 2007, the Fund recorded
net earnings of $12.4 million (2006 – $19.0 million) and
earnings per basic and diluted unit of $1.06 (2006 – $1.70).
Net earnings were significantly impacted by a non-cash
future tax charge related to the enactment of taxation
laws related to income trusts. Excluding the impact of the
non-cash future tax charge related to the enactment of
taxation laws related to income trusts, earnings per basic
and diluted unit in 2007 were $1.88.

qUARTERLY FINANCIAL INFORMATION

2007

Sales

Gain (Loss)
on FX

Net Earnings
(Loss)

Net Earnings
per Unit

$ 28,171,350

58,895

$ 5,617,907

35,067,508

1,077,557

(4,902,784)

40,798,315

26,664,788

1,117,489

8,976,385

1,863,842

2,674,070

Fiscal 2007

$ 130,701,961

4,117,783

$ 12,365,578

0.50

(0.44)

0.80

0.20

1.06

2006

Sales

Gain (Loss)
on FX

Net
Earnings

Net Earnings
per Unit

$ 19,705,011

201,001

$ 4,115,585

22,571,529

22,049,541

17,199,356

120,997

1,102,119

5,157,065

5,771,138

2,549,326

4,000,053

Fiscal 2006

$ 81,525,437

$ 3,973,443

$ 19,043,841

0.37

0.46

0.51

0.36

1.70

Interim period revenues and earnings historically reflect
some seasonality. The third quarter is typically the
strongest primarily due to high in-season demand at the
farm level. Adjusted distributable cash generated per unit
will also typically be highest in the third quarter. Due to
the seasonality of the Fund’s working capital movements,
standardized distributable cash generated per unit will
typically be highest in the fourth quarter. The following
factors impact comparability between quarters in the
table above:

•

Sales, gain (loss) on foreign exchange, net earnings,
and net earnings per unit are significantly impacted by
the rate of exchange between the Canadian and U.S.
dollars.

The second quarter of 2007 includes a non-cash future
tax accrual of $11.1 million related to the enactment
of taxation laws related to income trusts for taxation
years commencing January 1, 2011. The fourth quarter
of 2007 includes a $1.5 million credit to future taxes to
reflect a lower expected effective tax rate.

Subsequent to November 19, 2007, results reflect the
acquisition of Union Iron.

Subsequent to May 31, 2007, results reflect the
acquisition of Twister.

•

Subsequent to December 31, 2006, results reflect the
acquisition of Hi Roller.

FOURTH qUARTER
Sales for the three months ended December 31, 2007
were $26.7 million, compared to $17.2 million for the same
period in 2006. Excluding the impact of acquisitions,
sales in the fourth quarter of 2007 were $19.3 million. The
increase of $2.1 million or 12% over 2006 was largely the
result of the following:

•

Sales in the U.S. market decreased $0.7 million
compared to the prior year, due primarily to the impact
of foreign exchange. Had the average exchange rates
experienced in the fourth quarter of 2006 been in
effect in the fourth quarter of 2007, all other factors
remaining constant, sales excluding acquisitions for
the quarter ended December 31, 2007 would have
increased $1.9 million and as a result fourth quarter
2007 sales, compared to the same period in 2006,
would have increased $1.2 million.

Sales in Canada increased $2.0 million compared to the
fourth quarter of 2006, primarily due to a significant
increase in Wheatheart grain auger sales that resulted
from more aggressive distribution and market share
growth. Sales at Edwards also increased significantly
due to increased U.S. demand and improved market
conditions in Western Canada.

Management’s Discussion and Analysis

•

International sales increased $0.8 million compared to
the fourth quarter of 2006, due primarily to a growing
market in Europe and improved conditions in Australia
compared to the fourth quarter of 2006.

Sales in the fourth quarter of 2007 were negatively
impacted by the Westfield capacity improvement
initiative. Production inefficiencies related to both
project implementation and the introduction of lean
manufacturing significantly limited productivity gains
in 2007. Throughput at Westfield increased compared
to 2006, however the increases in production were not
sufficient in magnitude to meet exceptional demand
and as a result field inventories were severely depleted
by the end of the third quarter. Throughput at Westfield
increased in the fourth quarter compared to 2006,
but the increases in production were not sufficient
in magnitude to make up for depleted field inventory
levels and accordingly Westfield was unable to meet
fourth quarter demand.

Gross margin as a percentage of sales for the three
months ended December 31, 2007 was 31.6%, compared
to 40.0% in 2006.

•

Gross margin was impacted by negative gross margin
at Twister, the result of costs related to moving
production to Nobleford, and a negative gross margin
at Union Iron, the result of seasonality.

•

For the three months ended December 31, 2007, selling,
general and administrative expenses were $5.1 million
(2006 – $3.3 million). In the fourth quarter of 2007, selling,
general and administrative expenses as a percentage of
sales were 19.2% (2006 – 19.1%). Excluding acquisitions,
selling, general and administrative expenses were $4.2
million, an increase of $0.9 million over the prior year.
The variance compared to 2006 is primarily due to the
following:

•

Salaries and wages increased $0.6 million, largely
due to $0.1 million in retention bonuses, $0.2 million
in retirement allowances, personnel additions at the
corporate level, salary increases, a higher accrual for
performance based bonuses, and a number of
smaller items.

•

A number of miscellaneous items accounted for the
remaining change.

Significant variances compared to the fourth quarter of
2006 were also recorded in the following:

•

Research and development costs in 2007 were
$0.2 million compared to $0.4 million in the same
period in 2006. The decrease was largely the result
of the redeployment of engineering resources to the
Twister integration.

•

The adoption of a unit award incentive plan in
May 2007 resulted in an expense related to the
plan of $0.7 million for the three months ended
December 31, 2007. The total cost of the plan is based
on the Fund’s unit price and is expensed over the plan’s
vesting period (see “Unit Award Incentive Plan”).

The Fund recorded a gain on foreign exchange of
$1.9 million, compared to $2.5 million in 2006. The
smaller gain in 2007 was largely the result of lower
realized gains on foreign currency contracts, as the
contracts in effect in the fourth quarter of 2006 were at
higher rates than those in effect in the fourth quarter
of 2007.

Other income increased $0.3 million compared to the
fourth quarter of 2006 due to the receipt of $0.1 million
of state assistance related to acquisition of the
manufacturing facility in Union City, Indiana, and a
number of smaller items.

EBITDA for the three-month period ended December 31,
2007 was $3.9 million, compared to $5.3 million in 2006:

•

EBITDA at the Fund’s existing divisions decreased
$0.4 million, largely due to factors related to the
Westfield capacity initiative and the impact of foreign
exchange. Had the average exchange rates experienced
in 2006 been in effect in 2007, all other factors
remaining constant, EBITDA at the existing divisions
would have increased $1.4 million and accordingly after
adjusting for foreign exchange, EBITDA at the existing
divisions would have increased $0.7 million or 18%
compared to 2006.

For the quarter ended December 31, 2007, Twister
reported negative EBITDA of $0.6 million. Significant
costs related to the transition of operations from Calgary
to Nobleford adversely impacted Twister’s results.

Union Iron recorded negative EBITDA of $0.2 million
due largely to seasonality factors as the Fund
reported Union Iron results only for the period
November 19, 2007 to December 31, 2007. Historically,
Union Iron’s sales and EBITDA have been heavily
weighted towards the second and third quarters.
Accordingly, EBITDA for the period ended December 31,
2007 was in line with management expectations.

Gain on foreign exchange decreased $0.7 million
compared to 2006 as gains related to measuring U.S.
dollar denominated debt to current exchange rates
were more than offset by smaller gains on foreign
exchange contracts.

•

Compared to 2006, EBITDA was negatively impacted
by increased expenses at the corporate level that
included $0.7 million related to the Fund’s unit award
incentive plan, increased personnel to facilitate organic
growth and the integration of acquisitions, $0.1 million
in non-recurring retention bonus and a $0.2 million
retirement allowance.

Direct and ancillary costs related to the implementation
of the Westfield capacity improvement initiative
negatively impacted the gross margin and EBITDA
percentages. In addition, although the Westfield
capacity improvement project was substantially
complete at the end of the third quarter, the related
implementation of lean manufacturing resulted in
certain production inefficiencies and Westfield was
not able to meet fourth quarter demand. The difficulty
in meeting fourth quarter demand was exacerbated
by strong sales in the third quarter that prematurely
depleted inventory levels. The production inefficiencies
and the loss of Westfield’s higher margin sales resulted
in a lower consolidated gross margin and EBITDA
percentages.

For the three months ended December 31, 2007, the Fund
recorded net earnings of $2.7 million and earnings per
basic and diluted unit of $0.20, compared to net earnings
of $4.0 million and earnings per basic and diluted unit of
$0.36 in 2006.

NON-GAAP MEASURES
References to “EBITDA” are to earnings before
interest, income taxes, depreciation and amortization.
Management believes that, in addition to net income
or loss, EBITDA is a useful supplemental measure in
evaluating the Fund’s performance. EBITDA is not a
financial measure recognized by GAAP and does not have
a standardized meaning prescribed by GAAP. Management
cautions investors that EBITDA should not replace net
income or loss as an indicator of performance, or cash
flows from operating, investing, and financing activities
as a measure of the Fund’s liquidity and cash flows. The
Fund’s method of calculating EBITDA may differ from the
methods used by other issuers.

Standardized and adjusted distributable cash are
non-GAAP measures generally used by Canadian income
funds as an indicator of financial performance. The Fund
defines standardized distributable cash as cash flow from
operating activities less capital expenditures. The Fund
defines adjusted distributable cash as cash flow from
operating activities before the net change in non-cash

Management’s Discussion and Analysis

working capital balances and before items not affecting
cash other than items that impact amortization, interest
expense, future taxes, or tax reserves, less maintenance
capital expenditures (see “Capital Expenditures”).
Standardized and adjusted distributable cash are not
financial measures recognized by GAAP and do not have
a standardized meaning prescribed by GAAP. The method
of calculating the Fund’s standardized and adjusted
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.

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 defines payout ratio as total distributions
expressed as a percentage of standardized and adjusted
distributable cash. Payout ratio is not a financial
measure recognized by 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, 2007 and 2006.

Net earnings for the period

Add charges (deduct credits) to operations not requiring a current cash payment:

Amortization

Future income taxes

Deferred foreign exchange gain

Translation gain on foreign exchange

Non-cash component of interest expense

Long-term incentive plan

Unit award incentive plan

Gain on sale of property, plant & equipment

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

Customer deposits

Income taxes payable

Cash provided by operations

2007

2006

$ 12,365,578

$ 19,043,841

5,764,536

3,834,891

9,756,700

(2,866,877)

189,802

799,596

1,402,093

229,800

33,476

(43,526)

(37,546)

27,367,902

23,104,462

4,729,157

521,922

(30,234)

87,347

(854,000)

(408,816)

(505,850)

329,687

267,431

(79,001)

5,405,636

2,558,018

(154,371)

(29,219)

9,705,457

2,132,240

$ 37,073,359

$ 25,236,702

For the year ended December 31, 2007, cash provided by
operations was $37.1 million, compared to $25.2 million
in 2006. The increase from 2006 is the result of increased
net earnings after non-cash items and an increase in the

net change in non-cash working capital balances that
resulted from increased demand and the acquisition of
Hi Roller. A number of smaller changes account for the
remaining variance.

WORKING CAPITAL
Interim period working capital requirements typically
reflect some seasonality. The Fund’s collections of
accounts receivable are weighted towards the third
and fourth quarters. This collection pattern, combined
with seasonally high sales in the third quarter, result in
accounts receivable levels increasing throughout the
year and peaking in the third quarter. In order to ensure
the Fund has adequate supply throughout its distribution
network in advance of in-season demand, inventory
levels must be gradually increased throughout the year.
Accordingly, inventory levels typically increase in the first
and second quarters and then begin to decline in the third
or fourth quarter as sales levels exceed production. As a
result of these working capital movements, historically,
Ag Growth begins to draw on its bank revolver in the
first 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.
Operating results in 2007 generally reflected these
expectations.

CAPITAL EXPENDITURES
The Fund had maintenance capital expenditures of
$1.8 million for the year ended December 31, 2007
(2006 – $1.1 million). Maintenance capital expenditures in
2007 relate primarily to purchases of a semi tractor unit
and trailer and manufacturing equipment. The increase
from 2006 is largely the result of the acquisitions of
Hi Roller and Union Iron. All 2007 maintenance capital
expenditures were funded through cash from operations.

The Fund defines maintenance capital expenditures as
cash outlays required to maintain plant and equipment
at current operating capacity and efficiency levels.
Non-maintenance capital expenditures are defined as cash
outlays required to increase operating capacity or improve

CONTRACTUAL OBLIGATIONS

operating efficiency. The following capital expenditures
were classified as non-maintenance in 2007:

i. Westfield capacity improvement initiative. In addition

to anticipated capacity enhancements, the initiative
is expected to improve the quality and finish of the
Westfield product through the implementation of
a new paint system. The total expenditure in 2007
was $1.7 million to bring the project total to $3.6
million. The project is substantially complete and
projects costs were consistent with management
expectations.

ii. Purchase of manufacturing facility in Union City,
Indiana for U.S. $0.9 million. The 160,000 square
foot facility provides the Fund with manufacturing
capabilities in its core U.S. market, in a region
with ready access to labour, and will help alleviate
labour constraints in western Canada. Additional
expenditures on the building of approximately
$0.1 million are anticipated in 2008.

iii. Building and equipment related to the Twister

acquisition. Subsequent to the acquisition of Twister,
the Fund invested $1.6 million in building renovations
and certain equipment not included in the purchase
agreement.

iv. Expansion of Batco manufacturing facility. To

enhance capacity and improve productivity Batco is
adding approximately 6,000 square feet to its facility
at a total projected cost of $0.7 million. In 2007 a total
of $0.3 million was expended on the Batco expansion.

CASH BALANCE
For the year ended December 31, 2007 the Fund’s cash
balance increased $11.7 million (2006 – $0.6 million).
The increase over 2006 was the result of increased net
earnings after non-cash items and an increase in the net
change in non-cash working capital balances that resulted
from increased demand and the acquisition of Hi Roller.

Total

2008

2009

2010

2011

2012 +

Long-term debt

Operating leases

Total obligations

$ 26,217,584

11,978 $ 6,555,727 $ 19,648,052

1,827

2,563,682

812,318

636,848

537,288

381,367

195,861

$ 28,781,266

$ 824,296 $ 7,192,575 $ 20,185,340

383,194

$ 195,861

Management’s Discussion and Analysis

Long-term debt at December 31, 2007 includes
non-amortizing term loans of $26.2 million
(U.S. $26.5 million), which for financial reporting
purposes are shown net of the related deferred financing
costs of $0.6 million. The remaining long-term debt relates
to GMAC financed vehicle loans. The operating leases
relate primarily to vehicle, equipment, warehousing, and
facility leases and were entered into in the normal course
of business.

DISTRIBUTIONS
The Fund declared distributions to public unitholders
of $19.4 million for the year ended December 31, 2007
(2006 – $17.3 million). Furthermore, consistent with the
Fund’s prospectus dated May 5, 2004, in 2007 the Fund
declared distributions to Ag Growth’s previous owners
of $0.2 million (2006 – $1.6 million). The distributions
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”). Distributions declared per unit in 2007 are
unchanged from 2006.

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

Standardized Distributable Cash

Cash provided by operations

Capital expenditures

Standardized distributable cash generated

Standardized distributable cash generated per unit

Distributions declared

Standardized payout ratio

the Fund’s prospectus, holders of Class C units received
distributions quarterly prior to their conversion to Class B
units on the subordination end date in 2006. The Fund’s
Declaration of Trust requires that it distribute all taxable
income earned in its fiscal period ending December 31. It
may be necessary for the Fund to estimate one or more
special distributions to achieve this requirement.

The Fund’s Board of Trustees reviews financial
performance and other factors when assessing the Fund’s
distribution levels. An adjustment to distribution levels
will be made at such time as the Board determines the
adjustment is sustainable and in the long-term best
interest of the Fund and its unitholders.

STANDARDIZED DISTRIBUTABLE CASH
The Canadian Institute of Chartered Accountants
(CICA) has issued an interpretive release providing
guidance on standardized preparation and disclosure of
distributable cash for income trusts. The CICA calculation
of standardized distributable cash is based on cash
flows from operating activities, including the effects of
changes in non-cash working capital, less total capital
expenditures. The table below uses this method to set out
standardized distributable cash.

2007

2006

$ 37,073,359

$ 25,236,702

(6,305,511)

(2,767,084)

$ 30,767,848

$ 22,469,618

2.64

1.68

63.6%

2.00

1.68

84.0%

Management feels that the standardized distributable
cash calculation distorts the Fund’s distributable cash
and payout ratios, as the Fund’s non-cash working capital
fluctuates dramatically due to seasonality of the Fund’s
business and cash flow cycle. In addition the standardized
distributable cash calculation does not contemplate
the timing or source of funding for strategic capital
expenditures and as a result may not provide complete
information with respect to distributable cash ultimately
available for distribution.

ADJUSTED DISTRIBUTABLE CASH
Adjusted distributable cash, as defined under “non-GAAP
measures,” is the equivalent of EBITDA less maintenance
capital expenditures, cash interest expense, and current
cash tax expense. The objective of presenting these
measures is to calculate the amount that is available for
distribution to unitholders and exchangeable unitholders.
The adjusted distributable cash definition excludes
changes in working capital as they are necessary to
drive organic growth and are expected to be financed by
the Fund’s operating facility (see “Capital Resources”).

Adjusted distributable cash should not be construed as an alternative to cash flows from operating, investing, and
financing activities as a measure of the Fund’s liquidity and cash flows. Adjusted distributable cash can be reconciled to
cash provided by operating activities as follows:

Cash provided by operating activities

Change in non-cash working capital

Reversal of reserve (1)

Deferred foreign exchange loss

Long-term incentive plan

Translation gain (loss) on FX

Gain on sale of equipment

Net maintenance capital expenditures

Adjusted distributable cash from operations (2)

Non-maintenance capital expenditures (3)

Acquisition costs funded from cash flow

Adjusted distributable cash available to unitholders

Weighted average units outstanding

Distributions declared per weighted average unit

Adjusted distributable cash from operations

Distributable cash generated per unit (2)

Payout ratio

Adjusted distributable cash available to unitholders

Distributable cash generated per unit (2)

Payout ratio

Year Ended

Year Ended
December 31, 2007 December 31, 2006

$ 37,073,359

$ 25,236,702

(9,705,457)

(2,132,240)

(500,000)

(799,596)

2,866,877

43,526

(1,816,161)

27,162,548

(4,489,350)

(33,476)

37,546

(1,129,938)

21,978,594

(1,637,146)

(894,182)

$ 22,673,198

$ 19,447,266

11,651,575

11,225,000

1.68

2.33

71.8%

1.95

86.2%

1.68

1.96

85.8%

1.73

97.1%

(1) See “EBITDA and net earnings”.
(2) See discussion of non-GAAP measures.
(3) Non-maintenance capital expenditures funded from cash flow are reflected as a deduction in cash available to

unitholders.

The following table reconciles standardized distributable cash to adjusted distributable cash from operations:

Standardized distributable cash

Change in non-cash working capital

Reversal of tax reserve

Deferred foreign exchange loss

Long-term incentive plan

Translation gain (loss) on FX

Gain on sale of equipment

Non-maintenance capital expenditures

Adjusted distributable cash

Year Ended

Year Ended
December 31, 2007 December 31, 2006

$ 30,767,848

$ 22,469,618

(9,705,457)

(2,132,240)

(500,000)

(799,596)

2,866,877

43,526

4,489,350

(33,476)

37,546

1,637,146

$ 27,162,548

$ 21,978,594

Management’s Discussion and Analysis

Period Ended December 31, 2004

Year Ended December 31, 2005

Year Ended December 31, 2006

Year Ended December 31, 2007

Cumulative since inception

Adjusted Distributable Cash

Distributable
Cash Generated

Distributions
Declared (1)

$ 9,686,147

9,109,017

22,628,723

21,978,594

27,162,548

18,917,872

18,858,000

19,584,600

$ 81,456,012

$ 66,469,489

Payout
Ratio

94.0%

83.6%

85.8%

72.1%

81.6%

(1) Distributions declared include special distributions of $1,328,940 in 2004 and $3,367,500 in 2005.

Distributions declared for the year ended December 31,
2007 of $1.68 per unit are consistent with distributions
declared in 2006, and represent a 29.2% increase over
the per unit distribution disclosed in the Fund’s 2004
prospectus. Distributions are funded entirely through
cash from operations.

The Fund’s Declaration of Trust requires that it distribute
all taxable income earned in its fiscal periods ending
December 31. Due to a number of tax deductions
available to the Fund and its subsidiary entities and to
the acquisitions of its U.S. divisions, since inception the
Fund has retained $15.2 million for internal purposes. The
amounts retained have been used primarily to strengthen
the Fund’s financial position, to fund certain strategic
CAPEX projects, to fund certain acquisition costs, and
to allow for future strategic or expansionary capital
expenditures.

CAPITAL RESOURCES
The Fund’s credit facility includes operating lines of
CAD $10.0 million and U.S. $2.0 million, and provides
for long-term debt of up to U.S. $66.5 million. As at
December 31, 2007 no amounts were outstanding under
the operating lines and the Fund’s outstanding long-term
debt was U.S. $26.5 million. Interest rates on both
facilities are based on performance calculations. For
the year ended December 31, 2007, the Fund’s effective
interest rate on its Canadian dollar term debt was 6.1%
(2006 – 5.8%), and after consideration of the effect of the
Fund’s interest rate swap was 5.2% (2006 – 4.7%). For
the year ended December 31, 2007, the Fund’s effective
interest rate on its U.S. dollar term debt was 8.6% and
after consideration of the effect of the Fund’s interest rate
swaps was 6.5% (see “Financial Instruments”).

Under the terms of the credit facility agreement, the
operating and term loan facilities will bear interest
at prime plus 0.00%, 0.50%, or 1.00% per annum
based on performance calculations. The loans mature
August 31, 2008 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 and term loan facilities beyond
the current August 31, 2008 maturity date, all amounts
outstanding under the facilities become repayable in four
equal quarterly instalments of principal, commencing
November 30, 2009.

CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity
with Canadian generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount
of revenues and expenses during the period. The Fund
believes the accounting policies that are critical to its
business relate to the use of estimates regarding the
recoverability of accounts receivable and the valuation
of inventory, intangibles, goodwill, and future income
taxes. 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 indefinite life intangible assets are tested
for impairment at least annually. Future income taxes are
calculated based on assumptions related to the future

interpretation of tax legislation, future income tax rates,
future operating results, acquisitions and dispositions of
assets and liabilities, and distribution policy. In the normal
course of its operations, the Fund may become involved in
various legal actions. The Fund maintains, and regularly
updates on a case-by-case basis, provisions when
the expected loss is both likely and can be reasonably
estimated. While management has applied judgment
based on assumptions believed to be reasonable in
the circumstances, actual results can vary from these
assumptions. It is possible that materially different results
would be reported using different assumptions.

FINANCIAL INSTRUMENTS
Risk from foreign exchange arises as a result of variations
in exchange rates between the Canadian and the U.S.
Dollar. The Fund has entered into foreign exchange
contracts with a Canadian chartered bank to partially
hedge its foreign currency exposure on anticipated U.S.
dollar sales transactions and the collection of the related
accounts receivable. As at December 31, 2007 the Fund
had outstanding the following foreign exchange option
contracts:

Settlement Dates

January – December 2008

Face Amount
U.S.

$ 7,800,000

Call Rate
CDN

$ 1.0700

Put Rate
CDN

$ 1.2115

Unrealized Gain
(Loss) CDN

$ 654,856

Currency Options

Subsequent to December 31, 2007 the Fund entered into a series of forward foreign exchange contracts as follows:

Settlement
Dates

July – December 2008

Face Amount
U.S.

$ 28,000,000

Average Rate
CDN

1.0251

CDN Amount

$ 28,703,300

Forward Foreign Exchange Contracts

The Fund is subject to risks associated with fluctuating
interest rates on its long-term debt. To manage this risk,
as at December 31, 2007, the Fund had outstanding the
following interest rate swap transactions with a Canadian
chartered bank:

i. Notional amount of U.S. $17.5 million, expires

August 31, 2008, effective interest rate of 4.83%,
resulting in interest charges to the Fund of 4.83% plus
a variable rate based on performance calculations.

ii. Notional amount of U.S. $2.5 million, expires

August 31, 2008, effective interest rate of 4.83%,
resulting in interest charges to the Fund of 4.83% plus
a variable rate based on performance calculations.

iii. Notional amount of U.S. $6.5 million, expires

August 31, 2008, effective interest rate of 5.10%,
resulting in interest charges to the Fund of 5.10% plus
a variable rate based on performance calculations.

At December 31, 2007, the fair value of the interest rate
swap contracts was a loss of $107,564, and this amount
has been recorded in prepaid expenses and other assets.

NEW DEVELOPMENTS

Acquisition of Applegate Steel Inc.
Effective January 15, 2008, the Fund acquired substantially
all of the assets of Applegate Steel Inc. (“Applegate”), for
cash consideration of $3.0 million plus costs related to the
acquisition. The acquisition was funded from cash flow.
Applegate manufactures livestock gates, panels, feeders
and stock tanks at locations in Indiana and Iowa.

Equity Offering and Repayment of Long-Term Debt
On October 2, 2007, the Fund completed an equity
financing whereby it issued 1,730,000 Trust units at
a price of $26.00 per Trust unit for gross proceeds
of $45.0 million. Subsequent to the closing of the
equity offering, the Fund repaid $30.7 million and U.S.
$12.0 million of its outstanding long-term debt. The
remaining $2.3 million was applied against expenses of
the offering, including underwriters’ commission.

Management’s Discussion and Analysis

Enactment of Legislation Imposing Taxation on
Income Trusts
As described in the Fund’s audited financial statements
for the year ended December 31, 2007, in June 2007
the Government of Canada enacted legislation that will
impose additional income taxes on publicly traded income
trusts including the Fund for taxation years commencing
January 1, 2011. The Fund continues to evaluate the new
legislation and the Fund’s organizational alternatives in
light of the new legislation.

Future income tax liabilities for the period increased
$11.1 million upon the June 2007 enactment of new
tax legislation. Until June 2007 the Fund had been tax
effecting the reversal of taxable temporary differences at
a nil tax rate on the assumption that the Fund would make
sufficient tax deductible cash distributions to unitholders
such that the Fund’s taxable income would be nil for the
foreseeable future. The new legislation limits the tax
deductibility of cash distributions such that income taxes
may become payable in the future. On December 14, 2007,
further legislation was enacted by the federal government
to reduce the effective rate of tax on the Fund’s temporary
differences from the previous rate of 31.5% to 29.5% in
2011 and 28.0% thereafter. As a result, the Fund reduced
its expected future income tax liability related to the
legislation from $11.1 million to $9.5 million.

The Fund has estimated its future income taxes based on its
best estimates of results of operations and tax pool claims
and cash distributions in the future assuming no material
change to the Fund’s current organizational structure. As
currently interpreted, Canadian GAAP does not permit the
Fund’s estimate of future income taxes to incorporate any
assumptions related to a change in organizational structure
until such structures are given legal effect.

The Fund’s estimate of its future income taxes will vary
as do the Fund’s assumptions pertaining to the factors
described above, and such variations may be material.

Until 2011, the new legislation does not directly affect the
Fund’s cash flow from operations, and accordingly, the
Fund’s financial condition.

Unit Award Incentive Plan
On May 10, 2007, the unitholders of Ag Growth approved
the adoption by the Fund of a Unit Award Incentive
Plan (the “UAIP”) which authorizes the Trustees to
grant awards (“Unit Awards”) to persons, firms or
corporations who are employees or officers of the Fund
or any affiliates of the Fund or who are consultants or

other service providers to the Fund and its affiliates
(“Service Providers”). Unit Awards may not be granted
to non-management Trustees.

Under the terms of the UAIP, any Service Provider may
be granted Unit Awards. Each Unit Award will entitle the
holder to be issued the number of trust units designated
in the Unit Award, upon payment of an exercise price of
$0.10 per Fund Unit and such Fund Units will vest and
may be issued as to one third on each of January 1, 2010,
January 1, 2011 and January 1, 2012 or such earlier or later
dates as may be determined by the Trustees. In lieu of
receiving trust units, the holder, with the consent of the
Fund, may elect to be paid cash for market value of the
units in excess of exercise price of the units. The UAIP
provides for immediate vesting of the Unit Awards in the
event of retirement, death, termination without cause, or
in the event the Service Provider becomes disabled.

The UAIP provides that the maximum number of trust units
reserved for issuance pursuant to Unit Awards shall not
exceed the 220,000 trust units currently granted, subject
to adjustment in lieu of distributions, if applicable.

The UAIP will be recognized as a direct award of units,
resulting in an expense to be charged against income and
a related liability recorded over the period of time to which
the award vests. As at December 31, 2007, 220,000 Unit
Awards have been granted and remain outstanding. For
the year ended December 31, 2007, the Fund recorded an
expense of $1,402,093 for the Unit Awards.

Long-Term Incentive Plan
The Fund adopted an amended and restated long-term
incentive plan with an effective date of January 1, 2007.
Pursuant to the LTIP, the Fund establishes the amount
to be allocated to eligible participants based upon
the amount by which the Fund’s distributable cash as
defined in the LTIP exceeds a predetermined threshold.
Accordingly, for fiscal 2007 the Fund will make available
$2.2 million for the LTIP and will use these funds to
purchase units within 121 days of year end. The units
awarded vest over a three-year period commencing
one year after the fiscal year of the award. The expense
related to the LTIP will be recorded in relation to the
vesting period and accordingly the total award related to
the current fiscal year will be expensed as to 36% in the
current fiscal year, and 36%, 20% and 8% in the three
fiscal years subsequent to the current year.

For the year ended December 31, 2007, the Fund has
recorded an expense with respect to the LTIP of $799,596,
which represents 36% of the total 2007 LTIP of $2.2 million.

Accounting Policy Changes
Effective January 1, 2007, the Fund adopted the Canadian
Institute of Chartered Accountants [“CICA”] Handbook
Section 3855, “Financial Instruments – Recognition and
Measurement”; Section 3865, “Hedges”; and Section
1530, “Comprehensive Income”. The adoption of these
new standards resulted in changes in the accounting
policies for financial instruments and hedges.

The principal changes in accounting policies, financial
statement reporting and disclosure recommendations
for comprehensive income and its components and the
presentation of equity are described below:

[a] Section 3855, “Financial Instruments – Recognition
and Measurement”

This Section sets out the standards for the recognition and
measurement of financial assets and financial liabilities.
The standard prescribes when to recognize a financial
instrument in the balance sheet and at what amount.
Depending on their balance sheet classification, fair value
or amortized costs are used. This standard also prescribes
the basis of presentation for gains and losses on financial
instruments. Based on financial instrument classification,
gains and losses on financial instruments are recognized
in net earnings or other comprehensive income.

The Fund has made the following classifications:

•

Cash and cash equivalents are classified as “assets
held for trading” and are measured at fair value. Gains
and losses resulting from the periodic revaluation are
recorded in net earnings.

Accounts receivable are classified as “loans and
receivables” and are recorded at fair value upon
initial measurement. Subsequent measurements are
recorded at amortized cost using the effective interest
rate method.

Accounts payable and accrued liabilities, distributions
payable, long-term incentive plan and acquisition,
transaction and financing costs payable are classified
as “other financial liabilities” and are initially
measured at their fair value upon initial measurement.
Subsequent measurements are recorded at amortized
cost using the effective interest rate method.

•

Long-term debt is classified as an “other financial
liability” and is initially measured at fair value.
Subsequent measurements are recorded at amortized
cost using the effective interest rate method. The
deferred financing costs, previously reported on a
separate line item on the consolidated balance sheets,
are now netted against the carrying value of the related
debt and amortized into interest expense using the
effective interest rate method. Prior to the adoption
of the new standards, the amortization of deferred
financing costs was reported as a separate line item in
the consolidated statements of earnings.

•

Derivative financial instruments are measured at
fair value, even when they are part of a hedging
relationship. All changes in fair value are recorded in
earnings unless cash flow hedge accounting is used, in
which case the effective portion of the changes in fair
value is recorded in other comprehensive income.

Fair value is based on quoted market prices when
available. However, when financial instruments lack an
available trading market, fair value is determined using
management’s estimates and is calculated using market
factors with similar characteristics and risk profiles.

[b] Section 3865, “Hedges”

This Section sets out the standards specifying when and
how an entity can use hedge accounting. This standard
offers entities the possibility of applying different
reporting options than those set out in Section 3855,
“Financial Instruments – Recognition and Measurement”,
to qualifying transactions that they elect to designate as
hedges for accounting purposes.

The Fund elected to apply hedge accounting for certain of
its foreign exchange forward contracts and interest rate
swaps. The foreign exchange forward contracts and swaps
are designated as cash flow hedges. They are measured
at fair value at the end of each period and the effective
portion of the gain or loss resulting from remeasurement
is recognized in other comprehensive income. Any
ineffectiveness is recognized in net earnings. When hedge
accounting is discontinued, the amounts previously
recognized in accumulated other comprehensive income
are reclassified to net earnings during the periods when
the variability in the cash flows of the hedged item

Management’s Discussion and Analysis

affects net earnings. Gains and losses on derivatives are
reclassified immediately to net earnings when the hedged
item is sold or early terminated, or the hedged anticipated
transaction is probable of not occurring. Accumulated
gains or losses in other comprehensive income related
to the foreign exchange forward contracts and swaps are
subsequently recognized in earnings when the hedged
item affects earnings.

[c] Section 1530, “Comprehensive Income”

This Section describes the reporting and disclosure
standards with respect to comprehensive income and its
components. Comprehensive income is comprised of net
earnings and other comprehensive income or loss. Other
comprehensive income includes changes in the fair value
of derivative instruments designated as cash flow hedges,
all net of applicable income taxes. The components of
comprehensive income are disclosed in the consolidated
statement of comprehensive income.

Impact of change on the consolidated financial
statements
The Sections were adopted retroactively without
restatement of the consolidated financial statements
of prior periods. As at January 1, 2007, the impact on
the consolidated balance sheet of measuring the long-
term debt using the effective interest rate method was
a decrease in deferred financing costs of $318,012 and a
decrease in long-term debt of $318,012. The impact on the
consolidated balance sheet of measuring derivatives at
fair value as at January 1, 2007 was a decrease in prepaid
expenses and other assets by $276,679. Comprehensive
income was decreased by the same amount as a transition
adjustment.

Accounting changes
Effective January 1, 2007, the Fund adopted the new
CICA Handbook Section 1506, “Accounting Changes”.
The section establishes criteria for changing accounting
policies, together with the accounting treatment and
disclosure of changes in accounting policies, changes
in accounting estimates, and the correction of errors. It
includes the disclosure on an interim and an annual basis,
of a description and the impact of the Fund’s financial
results of any new primary source of Canada GAAP that
has been issued but is not yet effective. The adoption
of this new section did not have an effect on the Fund’s
financial position or on the results of its operations.

New Accounting Standards Effective January 1, 2008

Capital Disclosures and Financial Instruments –
Presentation and Disclosure

The CICA issued three new accounting standards: section
1535, Capital Disclosures, section 3862, Financial
Instruments – Disclosures, and section 3863, Financial
Instruments – Presentation. These new standards
will be effective for fiscal years beginning on or after
October 1, 2007 and the Fund will adopt them on
January 1, 2008. The Fund is in the process of evaluating
the disclosure and presentation requirements of the new
standards.

Section 1535 establishes disclosure requirements about
an entity’s capital and how it is managed. The purpose
will be to enable users of the financial statements to
evaluate the entity’s objectives, policies and processes for
managing capital.

Sections 3862 and 3863 will replace section 3861,
Financial Instruments – Disclosure and Presentation,
revising and enhancing its disclosure requirements,
and carrying forward unchanged its presentation
requirements. These new sections will place increased
emphasis on disclosures about the nature and extent of
risks arising from financial instruments and how the entity
manages those risks.

Inventories
The CICA issued section 3031, Inventories, which will
replace section 3030, Inventories. This new standard is
effective for fiscal years beginning on or after July 1, 2007,
and the Fund will adopt this section on January 1, 2008.
Section 3031 provides more extensive guidance on
measurement and expands disclosure requirements to
increase transparency. The Fund’s accounting policy for
inventories is consistent with measurement requirements
in the new standard and therefore it is not anticipated
that the results of the Fund will be impacted, however,
additional disclosures will be required in relation to
inventories carried at net realizable value, the amount of
inventories recognized as an expense, and the amount of
any write-downs of inventories.

International Financial Reporting Standards [“IFRS”]
In 2005, the AcSB announced that accounting standards
in Canada are to converge with IFRS. On February 13,
2008, the AcSB had confirmed that the use of IFRS
will be required by January 1, 2011, with appropriate
comparative data from the prior year. Under IFRS, the
primary audience is capital markets and as a result, there
is significantly more disclosure required, specifically for
quarterly reporting. Further, while IFRS uses a conceptual
framework similar to Canadian GAAP, there are significant
differences in accounting policy that must be addressed.
While the Fund has begun assessing the adoption of IFRS
for 2011, the financial impact of the transition to IFRS
cannot be reasonably estimated at this time.

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 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 financial 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. The
agricultural sector has recently been positively impacted
by the expansion of the ethanol industry, and to the extent
the ethanol industry 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.

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

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

Potential Volatility of Production Costs
Various materials and components are purchased in
connection with Ag Growth’s manufacturing process,
some or all of which may be subject to wide price
variation. Consistent with past and current practices
within the industry, Ag Growth manages its exposure to
material and component price volatility by planning and
negotiating significant purchases on an annual basis,
and passing through to customers, most, if not all, of the
price volatility. There can be no assurance that industry
dynamics will allow Ag Growth to continue to reduce its
exposure to volatility of production costs by passing
through price increases to its customers.

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

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

Management’s Discussion and Analysis

Acquisition and Expansion Risk
The Fund may expand its operations, depending on
certain conditions, by acquiring additional businesses,
products or technologies. There can be no assurance that
the Fund will be able to identify, acquire, or profitably
manage additional businesses, or successfully integrate
any acquired business, products, or technologies into
the business without substantial expenses, delays or
other operational or financial difficulties. Furthermore,
acquisitions may involve a number of special risks
including diversion of management’s attention, failure
to retain key personnel, unanticipated events or
circumstances, and legal liabilities, some or all of which
could have a material adverse effect on the Fund’s
performance. In addition, there can be no assurance that
acquired businesses, products, or technologies, if any, will
achieve anticipated revenues and income. The failure of
the Fund to manage its acquisition or expansion strategy
successfully could have a material adverse effect on
the Fund’s results of operations and financial condition.
The Fund is subject to restrictions on its ability to grow
without becoming subject to additional income taxes that
would otherwise not apply to the Fund until the taxation
year commencing January 1, 2011.

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

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

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

Labour Costs and Shortages and Labour Relations
The success of Ag Growth’s business depends on a large
number of both hourly and salaried employees. Changes
in the general conditions of the employment market could
affect the ability of Ag Growth to hire or retain staff at
current wage levels. The occurrence of either of these
events could have an adverse effect on the Fund’s results
of operations. There is no assurance that some or all of
the employees of Ag Growth will not unionize in the future.
If successful, such an occurrence could increase labour
costs and thereby have an adverse affect on Ag Growth’s
results of operations.

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 significant
strengthening of the Canadian dollar against the U.S.
dollar will negatively impact the return from U.S. dollar
sales revenue. To partially mitigate the effects of
exchange rate fluctuation, management has implemented
a foreign currency hedging strategy. Ag Growth has
entered into a series of hedging arrangements to partially
mitigate the potential effect of fluctuating 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 financial condition.

Interest Rates
The Fund’s term and operating credit facilities
bear interest at rates that are in part dependant on
performance based financial 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 fluctuating market interest rates.
These swap arrangements mature on August 31, 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 sufficient to pay the full current market value or
current replacement cost of its assets or cover the cost of
a particular claim.

Nature of Trust Units
Securities such as the Trust Units are hybrids in that they
share certain attributes common to both equity securities
and debt instruments. The Trust Units do not represent
a direct investment in the business of Ag Growth/AGLP
and should not be viewed by investors as shares or debt
of Ag Growth/AGLP. As holders of Trust Units, Unitholders
will not have the statutory rights normally associated
with ownership of shares of a corporation including, for
example, the right to bring “oppression” or “derivative”
actions. The Trust Units represent a fractional interest in
the Fund. The Fund’s primary asset will be its interest in
AGOT. The price per Trust Unit is a function of anticipated
distributable cash.

The rights of Unitholders are established by the
Declaration of Trust. Although the Declaration of Trust
confers upon a Unitholder many of the same protections,
rights and remedies as an investor would have as a
shareholder of a corporation governed by the Canada
Business Corporations Act (the “CBCA”), significant
differences exist.

Many of the provisions of the CBCA respecting the
governance and management of a corporation have been
incorporated in the Declaration of Trust. For example,
Unitholders are entitled to exercise voting rights in
respect of their holdings of Units in a manner comparable
to shareholders of a CBCA corporation and to elect
Trustees and appoint auditors. The Declaration of Trust
also includes provisions modeled after comparable
provisions of the CBCA dealing with the calling and
holding of meetings of Unitholders and Trustees, the
quorum for and procedures at such meetings and the
right of Unitholders to participate in the decision-making
process where certain fundamental actions are proposed
to be undertaken. Unlike shareholders of a CBCA
corporation, Unitholders do not have a comparable right
of a shareholder to make a proposal at a general meeting
of the Fund. The matters in respect of which Unitholder
approval is required under the Declaration of Trust are
generally less extensive than the rights conferred on the
shareholders of a CBCA corporation, but effectively extend
to certain fundamental actions that may be undertaken
by the Fund’s subsidiary entities. These Unitholder
approval rights are supplemented by provisions of
applicable securities laws that are generally applicable
to issuers (whether corporations, trusts or other
entities) that are “reporting issuers” or the equivalent
or listed on the TSX. Unitholders do not have recourse
to a dissent right under which shareholders of a CBCA
corporation are entitled to receive the fair value of their
shares where certain fundamental changes affecting the
corporation are undertaken (such as an amalgamation,
a continuance under the laws of another jurisdiction,
the sale of all or substantially all of its property, a going
private transaction or the addition, change or removal of
provisions restricting: (i) the business or businesses that
the corporation can carry on; or (ii) the issue, transfer
or ownership of shares). As an alternative, Unitholders
seeking to terminate their investment in the Fund are
entitled to exercise the redemption rights provided by the
Declaration of Trust, as described under “— Redemption
Right” above. Unitholders similarly do not have recourse
to the statutory oppression remedy that is available to
shareholders of a CBCA corporation where the corporation
undertakes actions that are oppressive, unfairly
prejudicial or that disregard the interests of security
holders and certain other parties.

Management’s Discussion and Analysis

Shareholders of a CBCA corporation may also apply
to a court to order the liquidation and dissolution
of the corporation in those circumstances, whereas
Unitholders may rely only on the general provisions of
the Declaration of Trust which permit the winding up of
the Fund with the approval of a Special Resolution of the
Unitholders. Shareholders of a CBCA corporation may
also apply to a court for the appointment of an inspector
to investigate the manner in which the business of the
corporation and its affiliates is being carried on where
there is reason to believe that fraudulent, dishonest or
oppressive conduct has occurred. The Declaration of
Trust allows Unitholders to pass resolutions appointing
an inspector to investigate the Trustees’ performance of
their responsibilities and duties, but this process would
not be subject to court oversight or assurance of the other
investigative procedures, rights and remedies available
under the CBCA. The CBCA also permits shareholders
to bring or intervene in derivative actions in the name of
the corporation or any of its subsidiaries, with the leave
of a court. The Declaration of Trust does not include a
comparable right of the Unitholders to commence or
participate in legal proceedings with respect to the Fund.

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.

As described in the Fund’s audited financial statements
for the year ended December 31, 2007, in June 2007 the
Government of Canada enacted legislation imposing
additional income taxes on the Fund for taxation years
commencing January 1, 2011. Effective January 1, 2011,
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 legislation also specifies

that “undue growth” may result in immediate taxation
of income trusts that would otherwise not be subject
to taxation until 2011. The legislation provides 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
is phased in annually from 2007 – 2010. The legislation
could have an adverse effect on the Fund, its ability to pay
distributions and the market value of its units.

There can be no assurance that the Fund will be able
to reorganize its legal and tax structure to reduce the
expected impact of the legislation. In addition, there
can be no assurance that the Fund will maintain its
“grandfathered” status under the legislation until 2011. If
the Fund exceeds “normal growth” during the transitional
period from October 31, 2006 to December 31, 2010, the
legislation would become effective on a date earlier than
January 1, 2011. Loss of grandfathered status could have a
material and adverse effect on the value of the Units.

Until June 2007 the Fund had been tax effecting the
reversal of taxable temporary differences at a nil tax rate
on the assumption that the Fund would make sufficient
tax deductible cash distributions to unitholders such that
the Fund’s taxable income would be nil for the foreseeable
future. The new legislation limits the tax deductibility of
cash distributions such that income taxes may become
payable in the future.

The Fund has estimated its future income taxes based on
its best estimates of results of operations and tax pool
claims and cash distributions in the future assuming
no material change to the Fund’s current organizational
structure. As currently interpreted, Canadian GAAP does
not permit the Fund’s estimate of future income taxes
to incorporate any assumptions related to a change in
organizational structure until such structures are given
legal effect.

The Fund’s estimate of its future income taxes will vary
as do the Fund’s assumptions pertaining to the factors
described above, and such variations may be material.

OUTLOOK
Demand for portable grain handling equipment in 2008
is expected to be very strong due to positive market
sentiment in the U.S., fuelled by record high agricultural
commodity prices and an increase in on-farm storage,
successive large corn harvests in the U.S., and depleted
inventory levels throughout the Fund’s distribution
network. Consistent with prior years, demand in 2008,
particularly in the second half, will be influenced by crop
conditions.

Demand for storage and stationary grain handling
equipment, manufactured by the Fund’s Hi Roller, Union
Iron and Twister divisions, remains very strong. Hi Roller
and Union Iron are expected to continue to benefit from
the robust U.S. agricultural sector. Demand for Twister
products is expected to be strong due to an improving
Western Canadian agricultural sector and an increased
focus on overseas markets.

Fiscal 2008 will include a full twelve months of results for
Union Iron. In the three years prior to its acquisition, Union
Iron averaged revenue of U.S. $17.4 million. Union Iron is
a profitable but lower margin business and accordingly
its inclusion should positively impact EBITDA but may
result in lower consolidated gross margin and EBITDA
percentages in 2008. Union Iron is historically seasonal
with sales and EBITDA weighted towards the second and
third quarters.

Fiscal 2008 will include a full twelve months of results
for Twister. In the three years prior to its acquisition,
Twister averaged revenue of $12.9 million. Twister is a
lower margin business and accordingly its results may
lower the Fund’s consolidated gross margin and EBITDA
percentages. The integration of Twister continued into the
first quarter of 2008 and accordingly Twister may have a
negative contribution to EBITDA in the first quarter.

The results of Applegate Steel will be included subsequent
to its acquisition on January 15, 2008. Revenues from
Applegate’s business over the last number of years have
ranged from U.S. $9 million to over U.S. $12 million.
Applegate is a lower margin business that operates in
livestock segment of the agricultural sector. Management
does not expect Applegate to make a significant
contribution to EBITDA in the first two quarters of 2008.

The Fund continues to face production capacity challenges
due to labour constraints in Western Canada. A number
of human resource initiatives appear to be alleviating this
pressure, however, the benefit of these initiatives will be
limited in the first quarter of 2008. Initiatives to address
capacity also include the addition of a feeder plant in
Winnipeg, Manitoba, which is expected to help alleviate
capacity constraints at the Westfield facility starting in the
second quarter of 2008, and the acquisition of a facility
in Union City, Indiana, which in the third quarter of 2008
is expected to commence production of certain products
currently manufactured in Western Canada.

Gross margin pressures related to the Westfield capacity
improvement initiative continued into the first quarter of
2008 but are expected to be substantially resolved by the
end of March 2008. Twister transition issues are expected
to continue into the second quarter of 2008. Gross margin
in 2008 may also be impacted by movement in the price of
steel and a further strengthening of the Canadian dollar.

Net earnings in 2007 were negatively impacted by a
$9.5 million non-cash future income tax accrual that
related to the enactment of legislation that imposed
taxation on income trusts. The Fund does not anticipate
a similar future income tax charge in 2008. The Fund’s
outstanding long-term debt is at a lower level than was
outstanding throughout most of fiscal 2007. Accordingly,
at current debt levels and all other factors remaining
constant, the Fund expects interest expense related to its
long-term debt to decrease compared to 2007.

The value of the Canadian dollar relative to its U.S.
counterpart will continue to impact the financial results
of the Fund. Any appreciation of the Canadian dollar
adversely impacts sales and earnings compared to prior
years. In fiscal 2007, the Fund’s average rate of exchange
for quarters ended March 31, June 30, September 30
and December 31 were $1.17, $1.11, $1.06 and $0.99
respectively. Also, as the Fund’s foreign currency hedging
instruments in place for fiscal 2008 are at contract rates
lower than the contract rates in 2007, the Fund expects to
realize a smaller gain on foreign exchange in 2008.

Management’s Discussion and Analysis

On November 19, 2007, the Fund acquired Union Iron Inc.,
and on January 15, 2008 the Fund acquired Applegate
Steel Inc. Management has not fully completed its
review of internal controls over financial reporting for
the newly acquired operations. Management expects to
have finalized the design and implementation of internal
controls prior to completion of the current fiscal year.
For the period covered by this MD&A, management has
undertaken specific procedures to satisfy itself with
respect to the accuracy and completeness of the acquired
operations financial information.

ADDITIONAL INFORMATION
Additional information relating to the Fund, including the
Fund’s most recent Annual Information Form, is available
on SEDAR (www.sedar.com).

INVESTOR RELATIONS
Steve Sommerfeld
1301 Kenaston Blvd, Winnipeg, MB R3P 2P2
Phone: (204) 489-1855
Email: steve@aggrowth.com

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 Officer and Chief Financial
Officer, on a timely basis so that appropriate decisions can
be made regarding public disclosure.

As at December 31, 2007, management of the Fund, with
the participation of the Chief Executive Officer and the
Chief Financial Officer, evaluated the effectiveness of the
Fund’s disclosure controls and procedures as required by
Canadian securities laws. Based on that evaluation, the
Chief Executive Officer and the Chief Financial Officer have
concluded that, as of December 31, 2007, the disclosure
controls and procedures were effective to provide
reasonable assurance that information required to be
disclosed in the Fund’s annual filings and interim filings
(as such terms are defined under Multilateral Instrument
52-109 – Certification of Disclosure in Issuers’ Annual
and Interim Filings) and other reports filed or submitted
under Canadian securities laws is recorded, processed,
summarized and reported within the time periods
specified by those laws and that material information is
accumulated and communicated to management of the
Fund, including the Chief Executive Officer and the Chief
Financial Officer, 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 financial reporting for the Fund as
defined under Multilateral Instrument 52-109 issued by
the Canadian Securities Administrators. Management has
designed such internal controls over financial reporting,
or caused them to be designed under their supervision,
to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of the financial
statements for external purposes in accordance with GAAP.

AuDItoR’S 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, 2007 and 2006 and the
consolidated statements of earnings, unitholders’ equity and cash flows for the years ended December 31, 2007 and
2006 and the consolidated statement of comprehensive income for the year ended December 31, 2007. These financial
statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position
of the Fund as at December 31, 2007 and 2006 and the results of its operations and its cash flows for the years ended
December 31, 2007 and 2006 in accordance with Canadian generally accepted accounting principles.

Winnipeg, Canada
March 6, 2008

Chartered Accountants

Consolidated Financial Statements

CONSOLIDATED BALANCE SHEETS
As at December 31

ASSETS [notes 7 and 8]
Current
Cash and cash equivalents
Cash held in trust [note 3]

Accounts receivable

Inventory [note 4]

Prepaid expenses and other assets [note 12]

Future tax assets [note 10]
Total current assets
Property, plant and equipment, net [note 5]

Goodwill [note 3]

Intangible assets, net [note 6]

Deferred financing costs, net [note 2]

LIABILITIES AND UNITHOLDERS’ EqUITY

Current
Accounts payable and accrued liabilities

Customer deposits

Income taxes payable

Distributions payable

Long-term incentive plan

Deferred foreign exchange gain

Acquisition, transaction and financing costs payable [note 3]

Current portion of long-term debt [note 8]
Total current liabilities
Long-term debt [note 8]

Future income taxes [note 10]

Long-term incentive plan [note 14]

Unit award incentive plan [note 15]
Total liabilities
Commitments [notes 12 and 16]
Unitholders’ equity

See accompanying notes

On behalf of the Board of Trustees:

2007
$

2006
$

20,410,588

1,488,100

9,923,311

28,958,667

1,972,143

—

62,752,809

21,035,091

51,925,887

74,969,253

—

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

210,683,040

170,232,551

10,312,067

11,558,632

369,484

1,813,700

—

2,563,676

11,978

26,629,537

25,622,780

9,574,500

799,596

1,402,093

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

—

64,028,506

59,267,926

146,654,534

110,964,625

210,683,040

170,232,551

Bill Lambert
Trustee

John R. Brodie, FCA
Trustee

CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31

Sales

Cost of goods sold

Gross margin

Expenses

Selling, general and administrative

Professional fees

Long-term incentive plan [note 14]

Unit award incentive plan [note 15]

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 financing costs

Amortization of intangible assets

Earnings before income taxes

Provision for income taxes [note 10]

Current

Future

Net earnings for the year

Basic and diluted net earnings per unit

2007
$

130,701,961

79,985,690

50,716,271

2006
$

81,525,437

46,207,537

35,317,900

18,742,608

12,587,274

740,505

799,596

1,402,093

884,399

250,000

(4,117,783)

(353,483)

18,347,935

32,368,336

191,470

2,356,807

2,548,277

29,820,059

3,396,489

—

2,368,047

5,764,536

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

24,055,523

19,322,346

1,933,245

9,756,700

11,689,945

12,365,578

$1.06

48,705

229,800

278,505

19,043,841

$1.70

Basic and diluted weighted average number of units outstanding [note 9]

11,651,575

11,225,000

See accompanying notes

Consolidated Financial Statements

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME [note 2]
Year ended December 31

Net earnings

Other comprehensive income

Change in fair value of derivatives designated as cash flow hedges

Realized gains on derivatives designated as cash flow hedges
recognized in net earnings in the current year

Other comprehensive income

Comprehensive income

See accompanying notes

2007
$

12,365,578

3,926,253

(3,110,075)

816,178

13,181,756

CONSOLIDATED STATEMENTS OF UNITHOLDERS’ EqUITY
Year ended December 31, 2007

Unitholders’
capital
$

Accumulated
earnings
$

Accumulated
distributions
$

Accumulated
other
comprehensive
income
$

[note 2]

Total
$

Balance, December 31, 2006

110,430,194

47,419,320

(46,884,889)

—

110,964,625

Transition adjustment [note 2]

—

Issuance of units [note 9]

Issuance costs [note 9]

Net earnings for the year

Distributions declared [note 11]

Other comprehensive income

for the year

44,980,000

(2,610,568)

—

(19,584,600)

(276,679)

—

44,980,000

(2,610,568)

12,365,578

(19,584,600)

—

816,178

—

12,365,578

—

Balance, December 31, 2007

152,799,626

59,784,898

(66,469,489)

539,499

146,654,534

Year ended December 31, 2006

Unitholders’
capital
$

Accumulated
earnings
$

Accumulated
distributions
$

Accumulated
other
comprehensive
income
$

[note 2]

Total
$

Balance, December 31, 2005

110,430,194

28,375,479

(28,026,889)

Net earnings for the year

Distributions declared [note 11]

—

19,043,841

—

(18,858,000)

Balance, December 31, 2006

110,430,194

47,419,320

(46,884,889)

—

110,778,784

19,043,841

(18,858,000)

110,964,625

See accompanying notes

Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31

OPERATING ACTIVITIES

Net earnings for the year

Add (deduct) items not affecting cash

Amortization

Future income taxes

Deferred foreign exchange gain

Translation gain on foreign exchange

Non-cash component of interest expense

Long-term incentive plan

Unit award incentive plan

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 Twister Pipe Ltd. [note 3]

Acquisition of shares in Union Iron Inc., net of cash acquired [note 3]

Proceeds from sale of property, plant and equipment

Transfer to cash held in trust

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

Financing costs on long-term debt

Cash provided by financing 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 flow information

Interest paid

Income taxes paid

See accompanying notes

2007
$

2006
$

12,365,578

19,043,841

5,764,536

9,756,700

—

(2,866,877)

189,802

799,596

1,402,093

(43,526)

27,367,902

9,705,457

37,073,359

(6,305,511)

(1,405,499)

(7,720,793)

(19,187,464)

94,750

(905,450)

3,834,891

229,800

33,476

—

(37,546)

23,104,462

2,132,240

25,236,702

(2,767,084)

(21,655,971)

—

58,945

(582,638)

(35,429,967) (

24,946,748)

(42,669,454)

(23,498)

(19,342,400)

(21,267,010)

42,369,432

30,158,104

(454,616)

10,061,066

11,704,458

8,706,130

20,410,588

—

21,558,050

—

267,542

557,496

8,148,634

8,706,130

2,550,257

2,066,661

1,028,367

49,600

noteS to ConSolIDAteD FInAnCIAl StAteMentS
December 31, 2007

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.

2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies are summarized below:

Principles of consolidation
The consolidated financial statements include the
accounts of the Fund and its wholly-owned subsidiaries
Ag Growth Operating Trust, AGX Holdings Inc., AGX
Holdings Limited Partnership [“AGHLP”], Ag Growth
Industries Limited Partnership, Ag Growth Industries
Inc. [“Ag Growth”], Westfield Distributing Ltd., Westfield
Distributing (North Dakota) Inc., Hansen Manufacturing
Corp. and Union Iron Inc. All material intercompany
balances and transactions have been eliminated.

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

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

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 on a declining balance basis
using the following annual rates:

Buildings

Furniture and fixtures

Automotive equipment

Computer equipment

Manufacturing equipment

4% – 5%

20%

30%

Leasehold improvements are amortized over the term of
the lease.

Goodwill
Goodwill represents the amounts paid to acquire Ag
Growth, the Edwards Group, Union Iron Inc. [“Union Iron”]
[note 3[a]], Twister Pipe Ltd. [“Twister”] [note 3[b]] and
Hansen Manufacturing Corp. [“Hansen”] [note 3[c]] in
excess of the estimated fair value of the net identifiable
assets acquired. Goodwill is not subject to amortization.
Goodwill is tested for impairment annually or when
an event or change in circumstances that indicate the
carrying value may not be recoverable by comparing the
estimated fair value of its reporting unit to its carrying
value. The carrying value of goodwill is written down to
estimated fair value if the carrying value of the reporting
unit’s goodwill exceeds its estimated fair value.

Intangible assets
Intangible assets are comprised of brand names, which
are considered to have an indefinite life, distribution
networks, which are being amortized over 8, 10 and
25 years on a straight-line basis and patents acquired from
Hansen which will be amortized over their remaining lives.
Indefinite life intangible assets are tested for impairment
annually or when an event or change in circumstances
that indicate the carrying value may not be recoverable
by comparing their estimated fair values to their carrying
values. The carrying value of an indefinite life intangible
asset is written down to its estimated fair value if its
carrying value exceeds its estimated fair value.

notes to Consolidated Financial Statements

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

Income taxes
In June 2007, the Government of Canada enacted new
legislation imposing additional income taxes upon publicly
traded income trusts, including the Fund, effective
January 1, 2011. Prior to June 2007, the Fund estimated
the future income tax on certain temporary differences
between amounts recorded on its consolidated balance
sheets for book and tax purposes at a nil effective tax
rate. Under the legislation, the Fund now estimates the
effective tax rate on the post 2010 reversal of these
temporary differences to be 29.5% in 2011 and 28%
thereafter. Temporary differences reversing before 2011
will still give rise to nil future income taxes.

While the Fund believes it will be subject to additional
tax under the new legislation, the estimated effective tax
rate on temporary difference reversals after 2011 may
change in future periods. As the legislation is new, future
technical interpretations of the legislation could occur
and could materially affect management’s estimate of the
future income tax liability.

The amount and timing of reversals of temporary
differences will also depend on the Fund’s future
operating results, acquisitions and dispositions of assets
and liabilities, and distribution policy. A significant change
in any of the preceding assumptions could materially
affect the Fund’s estimate of the future tax liability.

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

Revenue recognition
The Fund recognizes revenue at the time product is
shipped, free on board shipping point, title passes
and there is evidence a sales arrangement exists, the
sales price is fixed and determinable and collectibility
is reasonably assured. For products on consignment,
revenue is recognized upon the sale of the product by
the consignee. A 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 classified as either capital or operating. Leases
which transfer substantially all the benefits and risks of
ownership of the property to the Fund are accounted for
as capital leases. Capital lease obligations reflect the
present value of future lease payments, discounted at the
appropriate interest rate. All other leases are accounted
for as operating leases whereby rental payments are
expensed as incurred.

Net earnings per unit
Net earnings per unit is based on the consolidated net
earnings for the year divided by the weighted average
number of units outstanding during the year. 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”],
as described in note 14, the Fund establishes an amount
to be allocated to eligible participants based on 10% to
20% of distributable cash in excess of an established
threshold. The cost is charged against earnings over the
period of time to which the award vests.

Unit award incentive plan
The Fund has a unit award incentive plan [the “UAIP”]
as described in note 15. The UAIP will be recognized as
a direct award of units, resulting in an expense to be
charged against earnings over the period of time to which
the award vests. The expense and related liability are
based on the market price of the Fund’s units at the end of
the year and as such could increase or decrease from one
period to the next in relation to the market price.

•

Financial instruments, hedges and comprehensive
income
Effective January 1, 2007, the Fund adopted the Canadian
Institute of Chartered Accountants [“CICA”] Handbook
Section 3855, “Financial Instruments – Recognition and
Measurement”; Section 3865, “Hedges”; and Section
1530, “Comprehensive Income”. The adoption of these
new standards resulted in changes in the accounting
policies for financial instruments and hedges.

[a] Section 3855, “Financial Instruments – Recognition

and Measurement”

The Fund has made the following classifications:

•

Cash and cash equivalents are classified as “assets
held for trading” and are measured at fair value. Gains
and losses resulting from the periodic revaluation are
recorded in net earnings.

Accounts receivable are classified as “loans and
receivables” and are recorded at fair value plus
initial measurement. Subsequent measurements are
recorded at amortized cost using the effective interest
rate method.

Accounts payable and accrued liabilities, distributions
payable, acquisition, transaction and financing costs
payable are classified as “other financial liabilities”
and are measured at their fair value upon initial
measurement. Subsequent measurements are
recorded at amortized cost using the effective interest
rate method.

•

[b] Section 3865, “Hedges”

notes to Consolidated Financial Statements

recognized in accumulated other comprehensive income
are classified to net earnings during the periods when
the variability in the cash flows of the hedged items
affects net earnings. Gains and losses on derivatives are
reclassified immediately to net earnings when the hedged
item is sold or early terminated, or the hedged anticipated
transaction is probable of not occurring. Accumulated
gains or losses in other comprehensive income related
to the foreign exchange forward contracts and swaps are
subsequently recognized in earnings when the hedged
item affects earnings.

[c] Section 1530, “Comprehensive Income”

Impact of change on the consolidated financial
statements
The Sections were adopted retroactively without
restatement of the consolidated financial statements of
prior periods. As at January 1, 2007, the impact on the
consolidated balance sheet of measuring the long-term
debt using the effective interest rate method was a
decrease in deferred financing costs of $318,012 and a
decrease in long-term debt of $318,012. The impact on the
consolidated balance sheet of measuring derivatives at
fair value as at January 1, 2007 was a decrease in prepaid
expenses and other assets by $276,679. Comprehensive
income was decreased by the same amount as a transition
adjustment.

Accounting changes
Effective January 1, 2007, the Fund adopted the new
CICA Handbook Section 1506, “Accounting Changes”.
The section establishes criteria for changing accounting
policies, together with the accounting treatment and
disclosure of changes in accounting policies, changes
in accounting estimates, and the correction of errors. It
includes the disclosure on an interim and an annual basis,
a description and the impact of the Fund’s financial results
of any new primary source of Canadian generally accepted
accounting principles that has been issued but is not yet
effective. The adoption of this new section did not have an
effect on the Fund’s financial position or on the results of
its operations.

Employee benefit plans
The Fund contributes to group retirement savings
plans subject to maximum limits per employee. The
Fund accounts for such defined contributions as an
expense in the period in which the contributions are
made. The expense recorded in 2007 was $553,418
[2006 – $419,444].

Use of estimates
The preparation of financial statements in accordance
with Canadian generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities
and disclosure of contingencies at the consolidated
balance sheet date and the reported amounts of revenue
and expenses during the reporting periods. Key areas
where management has made complex or subjective
judgements, as a result of matters that are inherently
uncertain, include among others, the fair value of certain
assets including long-lived assets and goodwill, valuation
of accounts receivable, inventory and income taxes. By
nature, these estimates are subject to measurement
uncertainty and may impact the financial statements of
future periods. Actual results could differ from these
estimates.

Future accounting changes
[a] Capital Disclosures and Financial Instruments

– Presentation and Disclosure

The CICA issued three new accounting standards:
Section 1535, “Capital Disclosures”; Section 3862,
“Financial Instruments – Disclosures”; and Section 3863,
“Financial Instruments – Presentation”. These new
standards will be effective for fiscal years beginning on
or after October 1, 2007 and the Fund will adopt them on
January 1, 2008. The Fund is in the process of evaluating
the disclosure and presentation requirements of the new
standards.

Sections 3862 and 3863 will replace Section 3861,
“Financial Instruments – Disclosure and Presentation”,
revising and enhancing its disclosure requirements, and
carrying forward the presentation requirements. These
new sections will place increased emphasis on disclosures
about the nature and extent of risks arising from financial
instruments and how the entity manages those risks.

[b] Inventories

The CICA issued Section 3031, “Inventories”, which will
replace Section 3030, “Inventories”. The Fund will adopt
this section on January 1, 2008. Section 3031 provides
more extensive guidance on measurement, and expands
disclosure requirements to increase transparency. The
Fund’s accounting policy for inventories is consistent
with measurement requirements in the new standard and
therefore it is not anticipated that the results of the Fund
will be impacted, however, additional disclosures will be
required in relation to inventories carried at net realizable
value, the amount of inventories recognized as an expense
and the amount of any write-downs of inventories. Section
3031 also provides for the recognition and measurement
of any reversal arising from an increase of net realizable
value.

[c] International Financial Reporting Standards [“IFRS”]

In 2005, the AcSB announced that accounting standards in
Canada are to converge with IFRS. On February 13, 2008,
the AcSB had confirmed that the use of IFRS will be
required by January 1, 2011, with appropriate comparative
data from the prior year. Under IFRS, the primary
audience is capital markets and as a result, there is
significantly more disclosure required, specifically for
quarterly reporting. Further, while IFRS uses a conceptual
framework similar to Canadian GAAP, there are significant

differences in accounting policy that must be addressed.
While the Fund has begun assessing the adoption of IFRS
for 2011, the financial impact of the transition to IFRS
cannot be reasonably estimated at this time.

3. ACqUISITIONS

[a] Union Iron Inc.
Effective November 19, 2007, the Fund acquired 100%
of the outstanding shares of Union Iron and the shares
and assets of certain companies related to Union Iron, a
manufacturer of material handling and storage equipment,
for consideration of $21,532,520. In conjunction with
the acquisition, the Fund incurred transaction costs of
$223,122.

The acquisition has been accounted for by the purchase
method with the results of Union Iron’s operations
included in the Fund’s earnings from the date of
acquisition. As a result of the timing of the acquisition in
relation to the Fund’s reporting schedule, the purchase
price allocation has not been finalized. Management is
in the process of updating its estimates and adjustments
to the initial estimates may be required, and these
adjustments may be material. The assets and liabilities
of Union Iron have been recorded in the consolidated
financial statements at their estimated fair values, as
follows:

Net assets acquired

Cash

Accounts receivable

Inventory

Prepaid expenses and other assets

Property, plant and equipment

Intangible assets – distribution network

Intangible assets – brand name

Goodwill

Accounts payable and accrued liabilities

Customer deposits

Consideration

Cash

Acquisition and transaction costs payable

775,431

1,797,305

2,672,665

160,724

2,925,812

5,243,530

2,098,196

7,822,249

(1,759,685)

(203,707)

21,532,520

19,962,895

1,569,625

21,532,520

notes to Consolidated Financial Statements

As at December 31, 2007, the Fund had cash held in trust
in the amount of $494,050 relating to the acquisition of
Union Iron. Cash held in trust will be released when the
terms of the purchase agreement are met.

The asset purchase agreement provides for adjustments
to the purchase price of up to U.S. $3,100,000 based on
the achievement of certain earnings targets for the years
2008, 2009 and 2010. An increase in the purchase price
adjustment will be recognized upon the achievement of
the earnings targets and will be recorded to goodwill.

[b] Acquisition of Twister Pipe Ltd.
Effective May 31, 2007, the Fund acquired substantially
all of the operating assets of Twister, a manufacturer of
grain bins for consideration of $8,220,793. In conjunction
with the acquisition, the Fund incurred transaction costs
of $388,223.

The acquisition has been accounted for by the purchase
method with the results of Twister’s operations included
in the Fund’s earnings from the date of acquisition. The
assets and liabilities of Twister were initially recorded in
the consolidated financial statements at their estimated
fair values, as follows:

Net assets acquired

Accounts receivable

Inventory

Prepaid expenses and other assets

Property, plant and equipment

Intangible asset – brand name

Goodwill

Accounts payable and accrued liabilities

Customer deposits

Consideration

Cash

Acquisition and transaction costs payable

1,972,323

4,166,541

56,486

1,025,000

800,000

1,717,078

(1,228,766)

(287,869)

8,220,793

7,720,793

500,000

8,220,793

As at December 31, 2007, the Fund had cash held in trust
in the amount of $500,000 relating to the acquisition of
Twister which was released subsequent to year end.

In the course of the completion of the purchase price
allocation there was an increase recorded to goodwill in
the amount of $630,000.

[c] Acquisition of Hansen Manufacturing Corp.
Effective December 31, 2006, the Fund acquired
substantially all of the assets of Hansen, a manufacturer
of enclosed belt conveyors, for consideration of
$23,237,508. In conjunction with the acquisition, the Fund
incurred an additional term loan of U.S. $18,500,000 and
incurred transaction costs of $650,598.

The acquisition was 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
2006 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 financial statements at their estimated fair
values, as follows:

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

3,776,736

7,031,420

1,039,448

6,416,504

(1,826,314)

23,237,508

22,743,458

494,050

23,237,508

As at December 31, 2007, the Fund had cash held in trust in the amount of $494,050 [2006 – $582,638] relating to the
acquisition of Hansen which was released subsequent to year end.

During the year, the fund finalized the working capital and purchase price allocation, resulting in a decrease in brand
name of $294,822, and increase in distribution network of $244,713 and an increase in goodwill of $124,536. Additional
acquisition costs of $74,428 were recorded during the year.

4. INVENTORY

Raw materials

Finished goods

2007
$

12,342,820

16,615,847

28,958,667

2006
$

7,823,469

14,817,914

22,641,383

notes to Consolidated Financial Statements

5. PROPERTY, PLANT AND EqUIPMENT

2007

Accumulated
amortization
$

Cost
$

894,394

—

Net book
value
$

894,394

2006

Accumulated
amortization
$

—

Net book
value
$

861,315

Cost
$

861,315

7,961,631

781,564

7,180,067

5,408,773

521,148

4,887,625

Land

Buildings

Leasehold

improvements

419,209

22,698

396,511

16,167

1,855

14,312

Furniture and
fixtures

Automotive

equipment

Computer

equipment

Manufacturing
equipment

263,929

95,727

168,202

187,575

49,231

138,344

2,428,632

1,154,981

1,273,651

1,921,817

807,165

1,114,652

985,038

493,547

491,491

793,973

300,909

493,064

15,861,128

5,230,353

28,813,961

7,778,870

10,630,775

21,035,091

9,512,456

2,795,287

6,717,169

18,702,076

4,475,595

14,226,481

Included in manufacturing equipment above is approximately $520,000 [2006 – $1,882,000] of construction-in-progress,
the cost of which has not been amortized as this asset was not placed in use as of year end.

6. INTANGIBLE ASSETS

2007

Accumulated
amortization
$

Cost
$

Net book
value
$

Cost
$

2006

Accumulated
amortization
$

Net book
value
$

50,113,950

6,129,034

43,984,916

44,625,707

3,854,072

40,771,635

30,037,973

—

30,037,973

27,434,558

—

27,434,558

1,289,448

343,084

946,364

1,289,448

250,000

1,039,448

81,441,371

6,472,118

74,969,253

73,349,713

4,104,072

69,245,641

Distribution
networks

Brand names

Patents

7. BANK INDEBTEDNESS
The Fund has an operating facility of $10 million. 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 6.10%
[2006 – 5.76%]. At December 31, 2007 and 2006,
there were no amounts outstanding under this facility.
Collateral for the operating facility includes a general
security agreement over all assets, first position collateral
mortgages on land and buildings, and assignments of
rents and leases and security agreements for patents and
trademarks.

In conjunction with the acquisitions of Hansen and
Union Iron, the Fund added two operating facilities
of U.S. $1.0 million. The facilities bear interest at a
rate of prime to prime plus 1% per annum based on
performance calculations. The effective interest rate
during the year was 8.55% [2006 – not applicable]. As at
December 31, 2007 and December 31, 2006, there were no
amounts outstanding under these facilities.

8. LONG-TERM DEBT

Term loan, interest payable monthly at prime to prime plus 1% per annum based
on performance calculations. The Fund has entered into a swap contract that
effectively fixes the Fund’s interest rate at 3.68%, plus 1.0%, 1.5%, or 2.0% per
annum based on performance calculations. The effective interest rate during the
year ended December 31, 2006 would have been 5.76% and after consideration
of the effect of the interest rate swap was 4.68%. Balance of principal was
repaid during 2007

Term loans of U.S. $26,500,000 [2006 – U.S. $18,500,000], interest payable monthly
at prime to prime plus 1% per annum based on performance calculations. The
Fund entered into interest rate swap contracts that effectively fixes the Fund’s
interest rate at 4.83% on U.S. $20,000,000 and 5.10% on U.S. $6,500,000 plus
1.0%, 1.5%, or 2.0% per annum based on performance calculations. The effective
interest rate during the year ended December 31, 2007 would have been 8.6%
and after consideration of the effect of the interest rate swap was 6.5%

GMAC loans, 0% maturing in 2008 and 2011, with monthly payments of $1,928.

Vehicles financed are pledged as collateral

Less current portion

Less deferred financing costs

2007
$

2006
$

—

20,000,000

26,184,650

21,558,050

32,934

17,595

26,217,584

41,575,645

11,978

582,826

15,334

—

25,622,780

41,560,311

The Fund’s credit facility provides for long-term debt of up
to U.S. $66,500,000.

Under the agreement for the term loans, the Fund is
required to maintain certain financial covenants. As at
December 31, 2007 and 2006, the Fund was in compliance
with the applicable financial covenant terms. Collateral
for the term loans and operating facility [note 7] includes
a general security agreement over all assets, first 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, 2008 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, 2008
maturity date, all amounts outstanding under the facilities
become repayable in four equal quarterly instalments of
principal, commencing on November 30, 2009.

Principal repayments due within the next four fiscal years,
if the term loans are not renewed and are repayable
commencing November 30, 2009, are as follows:

2008

2009

2010

2011

11,978

6,555,727

19,648,052

1,827

26,217,584

notes to Consolidated Financial Statements

9. UNITHOLDERS’ CAPITAL
Unitholders’ capital is comprised of the following:

Balance, December 31, 2005

Exchange of units

Balance, December 31, 2006

Issuance of units, net of costs

Balance, December 31, 2007

Balance, December 31, 2005

Exchange of units

Balance, December 31, 2006

Issuance of units

Balance, December 31, 2007

On October 2, 2007, the Fund completed an equity
financing whereby it issued 1,730,000 Trust Units at
a price of $26.00 per Trust Unit for gross proceeds of
$44,980,000. Expenses incurred in connection with the
offering were $2,610,568 resulting in net proceeds of
$42,369,432.

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

The Fund Declaration of Trust also provides for the
issuance of an unlimited number of Special Voting Units.

Fund
Trust
units
$

Class B
Exchangeable
units of
AGHLP
$

Class C
Exchangeable
units of
AGHLP
$

Total
Unitholders’
capital
$

89,470,414

19,598,930

1,699,780

19,260,000

110,430,194

(338,930)

(19,260,000)

—

109,069,344

1,360,850

42,369,432

—

151,438,776

1,360,850

—

110,430,194

42,369,432

152,799,626

Fund
Trust
units
#

9,129,022

1,959,893

11,088,915

1,730,000

12,818,915

Class B
Exchangeable
units of
AGHLP
#

169,978

(33,893)

136,085

—

136,085

Class C
Exchangeable
units of
AGHLP
#

1,926,000

(1,926,000)

—

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, 2007, there
were 136,085 Special Voting Units outstanding [2006 -
136,085 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.

10. INCOME TAXES
The components of income tax expense are as follows:

Current

Future

Provision for income taxes

2007
$

1,933,245

9,756,700

11,689,945

2006
$

48,705

229,800

278,505

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 earnings before income taxes as shown in the following table:

2007
$

2006
$

24,055,523

19,322,346

2,761,711

260,372

(19,584,600) (

18,858,000)

7,232,634

724,718

2,561,076

(500,000)

9,494,000

(134,369)

278,505

—

11,689,945

278,505

2007
$

—

2006
$

31,200

151,000

182,200

9,574,500

—

Earnings before income taxes and other comprehensive income

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

Combined federal and provincial income tax at statutory rate of 35.41%

[2006 – 38.43%]

Reversal of reserve

Income trust future tax

Rate differential and other

Income tax provision

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

Future tax assets

Financing costs

Non-capital losses

Future tax liabilities

Net taxable temporary difference

For the year ended December 31, 2007, the Fund has
recorded a current income tax expense of $1,933,245.
The expense is comprised of an income tax expense
of $2,376,224 related to income of U.S. corporation
subsidiaries, $57,021 related to income of a Canadian
subsidiary, and a recovery of $500,000 related to
the reversal of an accrual for which management has
determined is no longer required.

Due to new legislation enacted by the Government of
Canada in June 2007 that imposed additional income
taxes upon publicly traded income trusts effective
January 1, 2011, the Fund recorded a one-time charge of
$11,135,000 to the future tax provision during the second
quarter of 2007. This charge was based on an effective
tax rate of 31.5% applied to the temporary differences
expected to reverse after December 31, 2010. On
December 14, 2007, further legislation was enacted by the
federal government to reduce the effective rate of tax on
the Fund’s temporary differences from the previous rate of
31.5% to 29.5% in 2011 and 28% in 2012 and thereafter.

notes to Consolidated Financial Statements

11. DISTRIBUTIONS TO UNITHOLDERS
The Declaration of Trust provides that the Fund will,
subject to applicable law, distribute to Trust Unitholders
by way of monthly distributions all of its distributable
cash, being all cash received from its indirect ownership in
Ag Growth Industries Limited Partnership [“AGLP”], which
will carry on the business of Ag Growth, less amounts set
aside for:

[a] administrative expenses and other obligations of the

Fund;

[b] amounts that may be paid by the Fund in connection
with any cash redemptions or repurchases of Trust
Units;

[c] satisfaction of its debt service obligations [principal

and interest] on indebtedness, if any; and

[d] any amount that the Trustees may reasonably consider
to be necessary to provide for the payment of any
costs or expenses and for reasonable reserves.

The Fund’s distribution policy is to pay cash distributions
on or about the 30th of each month to unitholders of
record on the last business day of the preceding month.

The Fund may make additional distributions in excess of
monthly distributions. The distribution in respect of the
month ended December 31 of each year will include such
amounts as are necessary to ensure that the Fund will not
be liable for income taxes under Part I of the Tax Act. Any
income of the Fund that is unavailable for cash distribution
will, to the extent necessary to ensure that the Fund does
not have any such income tax liability, be distributed to
Trust Unitholders in the form of additional Trust Units,
subject to applicable securities laws. The distribution
policy may be amended only with the approval of a
majority of the votes cast at a meeting of Unitholders.

For the year ended December 31, 2007, the Fund declared
distributions of $19,584,600 which equated to $1.68
weighted average per unit [2006 – $18,858,000 or $1.68
weighted average per unit].

12. FINANCIAL INSTRUMENTS
The Fund has the following financial instruments: cash and
cash equivalents, accounts receivable, accounts payable,
distributions payable, acquisition, transaction and
financing costs payable, long-term debt, interest rate and
cash management swap arrangements, foreign exchange
contracts and foreign currency swap agreements. It is
management’s opinion that the Fund is not exposed
to significant credit risks arising from these financial
instruments.

Risk management policies
The Fund manages risk and risk exposures through
a combination of insurance, derivative financial
instruments, a system of internal and disclosure controls
and sound business practices. The Fund uses certain
derivative financial instruments to manage risks of
fluctuation in interest rates and foreign exchange rates.
The Fund enters into interest rate swap agreements in
order to limit exposure to increases in interest rates and
fix interest rates on certain portions of long-term debt.
The Fund enters into foreign currency forward and option
contracts to limit exposure on certain anticipated future
U.S. dollar sales and cash flows. The maximum length
of time over which the Fund hedges its exposure to the
variability in future cash flows related to anticipated
future U.S. dollar sales is no more than two years.

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, 2007, the Fund has outstanding foreign
exchange call and put options with an aggregate face
value of U.S. $7,800,000 outstanding with various
settlement dates throughout 2008 as follows:

Face value
U.S. $

7,800,000

Call
Cdn. $

1.0700

Put
Cdn. $

1.2115

Interest rate exposures
The Fund is subject to risks associated with fluctuating
interest rates on its long-term debt. To manage this risk,
the Fund has entered into a number of interest rate swap
transactions with a Canadian chartered bank:

[a] Notional amount of U.S. $17.5 million, expires

August 31, 2008, effective interest rate of 4.83%,
resulting in interest charges to the Fund of 4.83% plus
a variable rate based on performance calculations.

[b] Notional amount of U.S. $6.5 million, expires

August 31, 2008, effective interest rate of 5.10%,
resulting in interest charges to the Fund of 5.10% plus
a variable rate based on performance calculations.

[c] Notional amount of U.S. $2.5 million, expires

August 31, 2008, effective interest rate of 4.83%,
resulting in interest charges to the Fund of 4.83% plus
a variable rate based on performance calculations.

Fair value
At December 31, 2007, the carrying value of cash and
cash equivalents, accounts receivable, accounts payable,
distributions payable, acquisition, transaction and
financing costs payable and long-term debt approximates
their fair value. At December 31, 2007, the fair value and
carrying value of the foreign exchange contracts that are
part of an effective hedging relationship was an unrealized
gain (loss) of $647,063 [2006 – ($276,679)], the fair value
and carrying value of the interest rate swaps that are part
of an effective hedging relationship was an unrealized
loss of $107,564 [2006 – nil] and the fair value and carrying
value of the interest rate and cash management swaps

that are not part of an effective hedging relationship was
nil [2006 – unrealized gain of $141,398]. The fair value of
these derivatives is included in prepaid expenses and
other assets.

Over the next twelve months, the Fund expects to realize
an estimated $0.5 million in net gains reported in other
comprehensive income as at December 31, 2007.

The following summarizes the methods and assumptions
used in estimating the fair value of the Fund’s financial
instruments:

[a] Short-term financial instruments approximate their

carrying amount due to the relatively short period to
maturity. These include cash and cash equivalents,
accounts receivable, accounts payable, distributions
payable, acquisition, transaction and financing costs
payable.

[b] Long-term debt with a variable interest rate is carried
at amortized cost, which reflects fair value as the
interest rate is the current market rate available to the
Fund.

[c] Derivatives are fair valued using standard pricing

models with market-based inputs.

13. SEGMENTED DISCLOSURE
The Fund operates in one business segment related to the
manufacturing and distributing of portable and stationary
grain handling, storage and conditioning 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 year end:

Canada

United States

International

Revenues

Property, plant and
equipment, goodwill and
intangible assets as at
December 31

2007
$

30,549,763

93,846,690

6,305,508

2006
$

2007
$

2006
$

24,240,155

109,801,110

105,819,068

54,483,272

38,129,121

19,915,080

2,802,010

—

130,701,961

81,525,437

147,930,231

125,734,148

notes to Consolidated Financial Statements

The unitholders reserved for issuance 220,000 Fund Units,
subject to adjustment in lieu of distributions, if applicable.
The aggregate number of Unit Awards granted to any
single Service Provider shall not exceed 5% of the issued
and outstanding Fund Units. In addition:

[a] The number of Fund Units issuable to insiders at
any time, under all security based compensation
arrangements of the Fund, shall not exceed 10% of the
issued and outstanding Fund Units; and

[b] The number of Fund Units issued to insiders, within
any one-year period, under all security based
compensation arrangements of the Fund, shall not
exceed 10% of the issued and outstanding Fund Units.

During the year, 220,000 Unit Awards were granted and
remain outstanding as at December 31, 2007. For the year
ended December 31, 2007, the Fund recorded an expense
of $1,402,093 for the Unit Awards.

For the year ended December 31, 2007, the 220,000
Unit Awards granted were excluded from the calculation
of diluted net earnings per unit because their effect is
anti-dilutive.

14. LONG-TERM INCENTIVE PLAN
The Fund adopted an amended and restated long-term
incentive plan with an effective date of January 1, 2007.
Pursuant to the long-term incentive plan, the Fund
establishes the amount to be allocated to eligible
participants based upon the amount by which the Fund’s
distributable cash as defined in the long-term incentive
plan exceeds a predetermined threshold. Accordingly, the
Fund will make available $2.2 million for the long-term
incentive plan and will use these funds to purchase units
within 121 days of year end. The units awarded vest over
a three-year period commencing one year after the fiscal
year of the award. The expense related to the long-term
incentive plan will be recorded in relation to the vesting
period and accordingly the total award related to the
current fiscal year will be expensed as to 36% in the
current fiscal year, and 36%, 20% and 8% in the three
fiscal years subsequent to the current year.

For the year ended December 31, 2007, the Fund has
recorded an expense with respect to the long-term
incentive plan of $799,596.

15. UNIT AWARD INCENTIVE PLAN
On May 10, 2007, the unitholders of Ag Growth approved
the adoption by the Fund of a unit award incentive
plan which will authorize the Trustees to grant awards
[“Unit Awards”] to employees or officers of the Fund
or any affiliates of the Fund or who are consultants or
other service providers to the Fund and its affiliates
[“Service Providers”]. Unit Awards may not be granted to
non-management Trustees.

Under the terms of the UAIP, any Service Provider may
be granted Unit Awards. Each Unit Award will entitle the
holder to be issued the number of Fund Units designated
in the Unit Award, upon payment of an exercise price of
$0.10 per Fund Unit and such Fund Units will vest and
may be issued as to one third on each of January 1, 2010,
January 1, 2011 and January 1, 2012 or such earlier or later
dates as may be determined by the Trustees. In lieu of
receiving units, the holder, with the consent of the Fund,
may elect to be paid cash for market value of the units in
excess of exercise price of the units. The UAIP provides
for immediate vesting of the Unit Awards in the event of
retirement, death, termination without cause, or in the
event the Service Provider becomes disabled.

16. COMMITMENTS
The Fund has entered into various operating leases for office and manufacturing equipment, warehouse facilities and
vehicles. Minimum annual lease payments required in aggregate are as follows:

2008

2009

2010

2011

2012

812,318

636,848

537,288

381,367

195,861

2,563,682

17. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES RELATED TO OPERATIONS
The net change in non-cash working capital balances related to operations consists of the following:

2007
$

2006
$

4,729,157

521,922

(30,234)

5,220,845

87,347

5,405,636

(154,371)

(854,000)

4,484,612

9,705,457

(408,816)

(505,850)

329,687

(584,979)

267,421

2,558,018

(29,219)

(79,001)

2,717,219

2,132,240

Decrease (increase) in current assets

Accounts receivable

Inventory

Prepaid expenses and other assets

Increase (decrease) in current liabilities

Accounts payable and accrued liabilities

Customer deposits

Income taxes payable

Long-term incentive plan

18. SUBSEqUENT EVENTS
Effective January 15, 2008, the Fund acquired substantially
all of the operating assets of Applegate Steel Inc., a
manufacturer of livestock gates, panels, feeders and stock
tanks, for cash consideration of $3.4 million. The asset
acquisition and related transaction costs were funded
from the Fund’s cash balance. Due to the timing of the
acquisition, the allocation of the purchase price has not
yet been finalized.

Subsequent to year end, the Fund acquired a building
in Sioux Falls, South Dakota for consideration of
approximately U.S. $3.3 million.

notes to Consolidated Financial Statements

Profiles – 2007 Acquisitions

Union Iron Works, Inc.
• Founded in 1852
• Located in Decatur, Illinois
• Approximately 135,000 sq. ft. of manufacturing and warehousing facilities
• Well respected brands (Union Iron and HSI)
• Acquired November 19, 2007
• Purchased for U.S. $20.5 million

Twister Pipe Ltd.
• Founded in 1976
• Originally located in Calgary, Alberta
• Relocated to Edward’s Nobleford Plant in fall 2007
• Second largest corrugated bin supplier in Western Canada
• Acquired May 31, 2007
• Purchased for CAD $6.2 million

Officers
Rob Stenson, Chief Executive Officer and Trustee
Gary Anderson, President, Chief Operating Officer and Trustee
Steve Sommerfeld, Chief Financial Officer
Dan Donner, Vice President Sales and Marketing
Paul Franzmann, Vice President Corporate Development

Trustees
Gary Anderson
John R. Brodie, FCA
Bill Lambert, Chairman
Bill Maslechko
Rob Stenson
David White

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