Growth International Annual Report 2009

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FY2009 Annual Report · Growth International

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AG GROWTH INTERNATIONAL

INTRODUCTION TO THE AG GROWTH ANNUAL REPORT 2009

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)

Hi Roller Conveyors, 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)

Ag Growth International
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

From Left to Right:

Bill Maslechko, Governance Committee Chairman and Director

John R. Brodie, FCA, Audit Committee Chairman and Director

Bill Lambert, Board of Directors Chairman and Director

Rob Stenson, Chief Executive Officer and Director

David White, CA, Director

Gary Anderson, President, Chief Operating Officer and Director

Steve Sommerfeld, CA, Chief Financial Officer

Winnipeg, Manitoba

Colombia

Brazil

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Established in 1996, Ag Growth International (AGI)

is a leading manufacturer of portable and stationary

grain handling, storage and conditioning equipment

with approximately 1,400 dealers and distributors in

48 states, nine provinces, and overseas. Our corporate

divisions represent some of the most recognized

brands servicing the global agricultural industry, in

some cases with more than 150 years of experience.

Russia

Ukraine

Kazakhstan

China

India

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Australia

New Zealand

CEO MESSAGE

I welcome existing and prospective shareholders to our 2009
annual report. We are approaching our sixth anniversary as a
public company in May of 2010. In 2004, our first year as a public
company, AGI brought revenue of $63 million with corresponding
EBITDA of about $19 million.

we enjoy a market capitalization of $470 million. In addition, we
have distributed over $10 per share since our IPO which exceeds
the initial value of a trust unit. The combination of capital
appreciation and dividends has brought a return on investment that
greatly exceeds that of the TSX Index during the same period.

As we exit 2009 we are proud to report revenue of $237 million
with EBITDA of $60.7 million, essentially matching our top line in
2004. This performance has been very rewarding for those who
participated in our IPO. Our market cap at IPO was approximately
$100 million with a share price of $10. At the writing of this report

We recognize that we are a young company in the context of
the public markets. Despite our success, we are still a small
capitalization company and have a lot of work ahead of us to
realize the full potential that this company and industry present to
shareholders in the years ahead.

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SALES HISTORY

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240

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’04

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’06

’07

’08

’09

Divisions owned at IPO

Divisions acquired after IPO

2009 was a solid year for the company. Our revenue increased 19%
over 2008 and our EBITDA (normalized for foreign exchange impact)
increased approximately 45%. In June of 2009 we successfully
converted from an income trust to a corporation through a plan of
arrangement with Benachee Resources. This was in response to
the October 31, 2007 announcement by the Canadian government
that a trust tax will be imposed on Canadian income trusts
effective January 1, 2011. We felt our decision to convert early was
in the best interest of our shareholders. Uncertainty was removed
as to our future structure and the effect on distributions. Our
successful completion of the conversion combined with our ability
to maintain distribution levels was received well by our shareholder
base. The corporate structure has also expanded our shareholder
base which we hope will improve our liquidity and ultimately our
cost of capital.

On October 27, 2009 we successfully completed a $115 million
convertible debenture offering with a group of underwriters led
by TD Securities. We are excited with the flexibility and certainty
that this financing provides AGI. After the illiquidity that faced
both the debt and equity capital markets in the last couple of
years, we felt it was prudent to proceed with the financing. Given
the opportunities that we anticipate in the years ahead, we are
now able to execute on our medium-term business plan without
consideration for short-term volatility in the capital markets.
The funds will be targeted at strategic capital investments and
acquisition opportunities.

As we entered 2009 we faced both optimism and uncertainty. We
were confident that the headwinds we faced in 2008 as a result of
capacity constraints and volatile currency and steel markets were

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CAD–USD ExCHANGE RATE

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1.10

1.05

1.00

0.95

0.90

0.85

0.80

0.75

Dec 07

Mar 08

June 08

Sept 08

Dec 08

Mar 09

June 09

Sept 09

Dec 09

Mar 10

behind us for the time being. However, a dramatic redirection in
fertilizer application and a collapse in international credit markets
presented a lack of transparency for market fundamentals. Credit
tightening did negatively impact both our international expansion
efforts as well as domestic demand for commercial equipment.

However, this weakness was offset by continued strength in our
core market. The very strong balance sheets of North American
farmers minimized the impact on demand as a result of the credit
crisis. Also, favourable weather conditions propelled the U.S. to
another record corn crop and record soybean crop. It is of particular
interest that the corn crop edged out the 2007 record with
almost a 7 million acre reduction in planting and reduced fertilizer
application. This is a testament to the strength of the trend in yield
and volume increases. Grain volume is the primary driver for our
business model and this trend continues to have solid legs.

Despite another large crop commodity prices remain solid. This is
a reflection of our belief that the world is continually challenged
to meet growing demand. In particular, we believe that increased
storage, handling and conditioning infrastructure will be an
integral part of the solution to future shortfalls. Outside of North
America 10–20% of the world grain crop is lost due to spoilage
and transportation. This is low hanging fruit for producers
worldwide. However, most emerging countries only have the ability

to efficiently store 20–50% of the annual grain production. This
compares to on farm storage penetration of approximately 80% in
North America.

If emerging markets want to emulate North American
sophistication in storage, handling and conditioning, billions of
dollars of incremental investment has to be deployed over the next
couple of decades. We are focusing our business plan to capitalize
on what we believe to be an inevitable progression.

2010 is another year of investment in the future of AGI. In 2007, we
aggressively pursued capacity and human resource expansion as
well as investment in acquisition to expand our product offering.
Since then we have been solely focused on execution to maximize
the return on these investments. We are extremely pleased with
the results.

We are expecting only marginal growth in 2010 given the strong
domestics tailwinds we experienced in 2009. We are confident that
headwinds resulting from credit constraints are easing and we see
positive developments in our commercial equipment markets as
well as international markets.

In preparation for our next leg of growth, we have continued
to expand our resources in our international marketing and
support teams.

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We are aggressively continuing the rollout of our lean
manufacturing initiatives at the divisions. By the end of 2010 we
expect that over 70% of our revenue base will be at various stages
of implementation of lean practices. We were on a totally mass
production, batch production philosophy only three years ago.

Our strengthened balance sheet as a result of our recent debenture
offering positions us well for opportunities presented to us. Our
first substantial investment is underway at our Twister division.
We have ordered a new bin line for delivery in the second half of
the year. This line will fill substantial gaps in our product line. The
expansion will provide us with approximately $70 million of new
capacity in economic terms. It will also enable us to produce the
full spectrum of bin sizes which will allow us to lever the rest of
our products off of our expanded catalogue. This expansion will
approximate $15 million, plus increased working capital investment,
as we bring it into production.

We continue to look for opportunities focused on both product
line expansion as well as geographical expansion. As we climb the
learning curve in the international sphere we have continuously
been expanding the scope of our search as it relates to both our
catalogue and geography.

It has been a dynamic time during our first handful of years as a
public company. We have experienced strong growth over these
years. It has not come without challenges.

We have effectively expanded our catalogue to redefine our market
space while remaining focused in the grain industry.

We have expanded our management team substantially to provide
a new level of depth and greater resources to capitalize on
opportunities. I am pleased to say that this team has really gelled in
the last year. We have a young, experienced, dynamic management
group with the energy and experience to compete with anyone in
our market.

We have added substantial production capacity to position
ourselves for future growth not only with bricks and mortar,
but also building a core competency in lean manufacturing
techniques. Although a work in progress, we are well
underway with a transformation from a solely market driven
company to a well-rounded organization with complementary
manufacturing competency.

Finally we have restructured and refinanced to position AGI for
what we believe are tremendous opportunities in the years ahead.

We believe the tipping point has been crossed for our industry
segment. The pursuit of food security for nations around the world
will trigger investment in agriculture that we haven’t seen since the
green revolution a half century ago.

The management, employees and board of directors of AGI
are committed to focused, long-term value creation for our
shareholders. We thank all of those who have supported us through
the trials, tribulations and opportunities in the past six years. We
hope it has been as rewarding for you as it has been for us. We
also hope to have your continued support as we sustain and build a
world-class leader in grain handling, storage and conditioning.

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Rob Stenson
Chief Executive Officer

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Nobleford, Alberta

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AGI’s existing Twister business has provided us with an

opportunity to explore and learn the bin manufacturing

landscape. We have developed internal expertise and

confidence through the successful execution of major

lean initiatives over the last year. Our shop floor is now

lean – building today what we ship tomorrow.

With this experience and confidence, we are now

equipped to enter the large bin manufacturing industry.

We are moving forward with a major investment in

the development of our own large bin manufacturing

capabilities. We have ordered state of the art bin line

manufacturing equipment and have broken ground on

a brand new facility in Nobleford, Alberta to house

the operation.

This product line extension will position AGI for

international market share development and leverage

our entire product catalogue by allowing us to offer a

full spectrum of bin sizes. The bin line expansion will

approximate $15 million and will result in $70 million of

new capacity in economic terms. We will be ready for

business in 2011.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
March 11, 2010

Ag Growth International Inc. (“Ag Growth” or the “Company”)
acquired its predecessor, Ag Growth Income Fund (the “Fund”), on
June 3, 2009 pursuant to a statutory plan of arrangement under the
Canada Business Corporations Act. Pursuant to the arrangement,
Ag Growth acquired all of the trust units of the Fund in exchange
for common shares of Ag Growth, and the Fund was “converted”
from an open-ended limited purpose trust to a publicly listed
corporation (the “Conversion”). See “Conversion to a Corporation.”
Ag Growth continues to conduct business in the grain handling,
storage and conditioning market.

This Management’s Discussion and Analysis (“MD&A”) should
be read in conjunction with the audited consolidated financial
statements and accompanying notes of Ag Growth for the year
ended December 31, 2009. Results are reported in Canadian dollars
unless otherwise stated and have been prepared in accordance
with Canadian generally accepted accounting principles.
Throughout this MD&A references are made to “EBITDA,”
“adjusted EBITDA,” “gross margin,” “funds from operations”
and “payout ratio.” A description of these measures and their
limitations are discussed below under “Non-GAAP Measures.”
See also “Risks and Uncertainties” in this MD&A and in our most
recently filed Annual Information Form, and “Forward-Looking
Statements” below.

Information in this MD&A reflects Ag Growth as a corporation
on and subsequent to June 3, 2009 and as the Fund prior thereto.
All references to “common shares” refer collectively to Ag
Growth’s common shares on and subsequent to June 3, 2009 and
to the Fund’s trust units prior to the Conversion. All references
to “dividends” refer to dividends paid or payable to holders of
Ag Growth common shares on and subsequent to June 3, 2009
and to distributions paid or payable to Fund unitholders prior to
Conversion. All references to “shareholders” or “security holders”
refer collectively to holders of Ag Growth’s common shares on and
subsequent to June 3, 2009 and to Fund unitholders prior to the
Conversion. References to the “Share Award Incentive Plan” should
be read as references to the “Unit Award Incentive Plan” for all
periods prior to the Conversion.

FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements that reflect
our expectations regarding the future growth, results of
operations, performance, business prospects, and opportunities
of the Company. Forward-looking statements may contain such

words as “anticipate,” “believe,” “continue,” “could,” “expects,”
“intend,” “plans,” “will” or similar expressions suggesting future
conditions or events. In particular, the forward looking statements
in this MD&A include statements relating to the benefits of the
Conversion, our business and strategy, including growth in sales
to developing markets, the impact of crop conditions in our market
areas, the impact of current economic conditions on the demand
for our products, our working capital and capital expenditure
requirements, capital resources and the payment of dividends.
Such forward-looking statements reflect our current beliefs and
are based on information currently available to us, including
certain key expectations and assumptions concerning anticipated
financial performance, business prospects, strategies, product
pricing, regulatory developments, tax laws, the sufficiency of
budgeted capital expenditures in carrying out planned activities,
foreign exchange rates and the cost of materials, labour and
services. 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 international, national and local
business conditions, crop yields, crop conditions, seasonality,
industry cyclicality, volatility of production costs, commodity
prices, foreign exchange rates, and competition. In addition,
actual results may be materially impacted by the pace of recovery
from the recent global economic crisis, including the cost and
availability of capital and the possibility of deterioration in the
Company’s working capital position. These risks and uncertainties
are described under “Risks and Uncertainties” in this MD&A and
in our most recently filed 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.

OPERATING RESULTS
Ag Growth reported record sales and EBITDA for the year ended
December 31, 2009. Demand for portable grain handling and
aeration equipment remained strong due to the size of the crop
in the U.S., a late and wet harvest season in most areas of North
America, as well as positive agricultural fundamentals including
successive large harvests and continued high levels of on-farm
storage. Sustained capacity gains at the Westfield division played
a major role in allowing Ag Growth to capitalize on these positive
market drivers.

Sales for the year ended December 31, 2009 were $237.3 million, an
increase of 19% over 2008. In addition to positive demand drivers
and an increase in capacity at Westfield, sales benefited from the
sales price increases announced in 2008 and a weaker Canadian
dollar. Product prices in 2010 are expected to approximate the
levels experienced in 2009.

Adjusted EBITDA for the year ended December 31, 2009 was $59.3
million (2008 – $41.0 million). The 45% increase over 2008 was
due primarily to significant increases in sales and gross margin of
portable grain handling and aeration equipment, improved results
at Edwards/Twister, and the impact of foreign exchange, offset by
a decrease in commercial sales activity.

Gross margin as a percentage of sales for the year ended
December 31, 2009 was 41.4% (2008 – 35.7%). The significant
increase in the gross margin percentage was largely the result
of sales price increases, the impact of foreign exchange and an
increase in capacity and efficiency at Westfield (the Westfield
capacity improvement initiative was completed in March 2008) and
Edwards/Twister.

For financial statement reporting purposes, Ag Growth translates
its U.S. dollar denominated debt to Canadian dollars at the rate
of exchange in effect on the balance sheet date. The gain on
translating U.S. dollar debt into Canadian dollars was $6.4 million
in 2009, compared to a loss of $8.7 million in 2008. For the year
ended December 31, 2009, EBITDA was $60.7 million (2008 – $34.6
million). The increase in EBITDA in 2009 is due to a significant
increase in operating income and foreign exchange gains.

OPERATING RESULTS

(thousands of dollars)

Sales

Cost of goods sold

Gross margin

Selling, general and administrative expenses

Other expenses (1)

Stock based compensation

Corporate conversion (2)

Loss (gain) on foreign exchange

Interest expense

Amortization

Earnings before tax

Current income taxes

Future income taxes

Net earnings for the period

Net earnings per share

Basic

Fully diluted

EBITDA (3)(4)

Adjusted EBITDA (3)(4)(5)

(1) Research and development, capital taxes and other expense (income).
(2) See “Conversion to a Corporation.”
(3) See “non-GAAP Measures.”
(4) Excludes Conversion costs.
(5) Excludes the gain (loss) on foreign exchange.

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Year Ended December 31

2009

2008

237,294

199,341

139,156

98,138

31,949

421

6,491

2,113

(1,403)

4,803

8,354

45,410

774

(667)

45,303

3.53

3.45

60,680

59,277

128,264

71,077

27,751

855

1,520

6,389

2,733

8,525

23,304

1,552

540

21,212

1.64

34,562

40,951

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ASSETS AND LIABILITIES

(thousands of dollars)

Year Ended December 31

Total assets

Total liabilities

2009

387,850

211,051

2008

228,464

102,928

Dividends Declared
The table below summarizes dividends and distributions declared
to security holders of Ag Growth and the Fund for the years ended
December 31, 2009 and 2008. The Company’s dividend policy is
described in the “Dividends” section of this MD&A.

DIVIDENDS

(thousands of dollars)

Year Ended December 31

Trust units

10,726

2009

Class B units (1)

Preferred shares (2)

Common shares

Total

116

15,465

26,316

2008

26,419

282

26,701

(1) Prior to Conversion, there were 136,085 Class B Exchangeable

units outstanding in a subsidiary of the Fund that were
exchangeable for Fund Trust units at the option of the holder on
a one-for-one basis at any time.

(2) Pursuant to the Plan of Arrangement (see “Conversion to
a Corporation”), Ag Growth issued 4,000,000 redeemable
preferred shares that were entitled to receive cash dividends at
a rate of $0.05 per share per annum. The preferred shares were
also convertible at the holder’s option into 140,452 common
shares. On October 15, 2009, the holder of the redeemable
preferred shares exercised the conversion option and there are
now no redeemable preferred shares outstanding.

Sales
Sales for the year ended December 31, 2009 were $237.3 million,
compared to $199.3 million in 2008. The increase in sales over 2008
is largely due to the following:

•

Strong demand for portable grain handling and aeration
equipment that resulted from the size of the crop in the U.S., a
late and wet harvest season in most areas of North America,
as well as to positive agricultural fundamentals including
successive large harvests and continued high levels of
on-farm storage.

•

Sales levels benefited from sales price increases, a more
favourable rate of foreign exchange and higher capacity at
Westfield (the Westfield capacity improvement initiative was
completed in March 2008). Product prices in 2010 are expected
to approximate the levels experienced in 2009.

Total international sales in 2009 were $16.5 million (2008 –
$17.4 million). Sales to developing markets were $3.6 million
in 2009 (2008 – $6.5 million). The decrease in 2009 was in
line with management expectations as macro-economic
factors including the availability of credit negatively impacted
developing markets. Early indicators appear to suggest an
improving credit situation in emerging markets which may result
in increased international sales in 2010.

The Company’s financial statements translate U.S. dollar
denominated sales into Canadian dollars based on the actual
foreign exchange rate in the month of the sale. For the year
ended December 31, 2009, the more favourable exchange rate
compared to 2008 resulted in an increase in reported sales
of $15.2 million, compared to the sales that would have been
reported using the exchange rates in effect in 2008.

Gross Margin
Gross margin as a percentage of sales for the year ended
December 31, 2009 was 41.4%, compared to 35.7% in 2008. The
increase in gross margin percentages compared to 2008 was
largely due to the following:

•

Gross margin at most divisions in 2009 has benefited from
lower input costs compared to 2008, particularly a decrease in
steel costs in the latter portion of the year. Based on existing
conditions, management currently anticipates materials input
costs in 2010 to approximate the levels experienced in the
second half of 2009.

The positive impact of foreign exchange added approximately
1% to the 2009 gross margin percentage, compared to the gross
margin that would have been reported using the exchange rates
in effect in 2008.

Gross margin on the Twister product line has improved
significantly in 2009 due to production improvements
that resulted largely from the implementation of lean
manufacturing practices.

Gross margin percentages on portable grain handling, storage
and aeration equipment benefited from the realization of price
increases announced in 2008.

Completion of the capacity improvement initiative at Westfield
increased throughput and efficiency, however gross margin was
negatively impacted while the project was implemented in the
first quarter of 2008.

Rate of Foreign Exchange
The rate of exchange between the Canadian and U.S. dollars may
be a significant factor when comparing financial results to prior
periods. A weaker Canadian dollar will result in higher sales and
higher expenses as transactions denominated in U.S. dollars are
translated to Canadian dollars at a higher rate. For the year ended
December 31, 2009, sales denominated in U.S. dollars accounted
for 72% of total sales (2008 – 74%) and U.S. dollar denominated
expenses equated to 33% of sales (2008 – 36%).

Ag Growth’s sales denominated in U.S. dollars significantly
exceed its purchases denominated in U.S. dollars and as a result a
weaker Canadian dollar benefits the Company’s financial results.
Ag Growth’s average rate of exchange per U.S. dollar for the
year ended December 31, 2009 was $1.15, compared to $1.04 in
2008. Accordingly, the weaker Canadian dollar in 2009 positively
impacted Ag Growth’s financial results compared to 2008. The
Canadian dollar has strengthened recently, and accordingly the
favourable impact of foreign exchange realized in 2009 may not be
realized going forward.

Expenses
Selling, general and administrative expenses for the year ended
December 31, 2009 were $31.9 million or 13.4% of sales (2008 –
$27.8 million or 13.9%). The increase of $4.1 million over 2008 is
primarily due to the following:

•

A number of Ag Growth’s selling, general and administrative
expenses are denominated in U.S. dollars. Due to a weaker
Canadian dollar these expenses were translated to Canadian
dollars at a higher rate. The impact of the weaker Canadian
dollar was to increase these expenses by $1.0 million compared
to 2008.

Sales and marketing expense increased $1.7 million due largely
to the development of an international sales group, wage
adjustments, and increased expenditures related to advertising
and brochure development.

Salary expense increased $1.3 million due to personnel
additions to facilitate growth and acquisition integration, wage
adjustments, an increase in performance related and other
bonuses, and a number of smaller items.

•

Costs of $0.7 million were incurred with respect to the
implementation of lean manufacturing at Edwards and
Union Iron.

•

A number of miscellaneous items with variances of $0.3 million
or less accounted for the remaining change.

Other significant items include the following:

•

Calculation of the share award incentive plan (“SAIP”) expense
is based on the trading price of the Company’s common shares
at the balance sheet date and the vesting provisions of the
SAIP. For the year ended December 31, 2009, Ag Growth
recorded an expense related to the SAIP of $3.8 million (2008 –
$0.7 million).

Ag Growth’s long-term incentive plan (“LTIP”) provides for
annual awards based on distributable cash generated. The
awards are expensed over the term of the participant’s vesting
period and as a result the expense in 2009 also includes a
component related to fiscal 2007 and 2008. For the year ended
December 31, 2009, Ag Growth recorded an expense related to
the LTIP of $2.7 million (2008 – $0.9 million).

For financial statement reporting purposes, Ag Growth
translates its U.S. dollar denominated debt to Canadian dollars
at the rate of exchange in effect on the balance sheet date.
For the year ended December 31, 2009, the Company recorded
a gain on the translation of its U.S. dollar debt of $6.4 million
(2008 – loss of $8.7 million). The significant unrealized loss in
2008 was largely the result of the depreciation of the Canadian
dollar in the fourth quarter of 2008. Also included in “gain (loss)
on foreign exchange” are gains or losses on foreign exchange
derivative contracts and the gains or losses on the translation
of U.S. dollar denominated working capital.

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

Adjusted EBITDA for the year ended December 31, 2009 was
$59.3 million (2008 – $41.0 million). The increase over 2008 is
due primarily to significant increases in sales and gross margin at
Westfield and at Edwards and the impact of foreign exchange on
U.S dollar denominated sales and expenses.

EBITDA for the year ended December 31, 2009 was $60.7 million,
compared to $34.6 million in 2008. The increase in EBITDA is the
result of a significant increase in operating income and the gain on
foreign exchange.

The Company’s bank indebtedness as at December 31, 2009 was
$nil (2008 – $nil) and its outstanding long-term debt was CAD
$25.4 million (2008 – $52.8 million), comprised of USD $25.0
million aggregate principal amount of non-amortizing secured
notes that bear interest at 6.80% and mature October 29, 2016.
The Company is also party to a credit facility with three Canadian
chartered banks that includes CAD $10.0 million and USD $2.0
million available for working capital purposes, and provides for
non-amortizing long-term debt of up to CAD $38.0 million and USD
$20.5 million. These facilities were fully repaid in October 2009 and

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no amounts were drawn as at December 31, 2009. The facilities
bear interest at rates of prime plus 0.50 % to prime plus 1.50%
based on performance calculations and matures on October 29,
2012. For financial reporting purposes long-term debt is shown
net of the related deferred financing costs of $0.8 million. For the
year ended December 31, 2009, the Company’s effective interest
rate on its U.S. dollar term debt was 4.2% (2008 – 5.1%), and after
consideration of the effect of its interest rate swaps was 4.5%
(2008 – 5.2%). For the year ended December 31, 2009, Ag Growth’s
effective interest rate on its Canadian dollar term debt was 3.4%
(2008 – 4.8%). See “Financial Instruments.”

At December 31, 2009 the Company has outstanding $115 million
aggregate principal amount of convertible unsecured subordinated
debentures (2008 – $nil). The Debentures bear interest at
an annual rate of 7.0% and mature December 31, 2014. See
“Capital Resources.”

Amortization of capital assets for the year ended December 31,
2009 was $5.4 million (2008 – $5.5 million), and the amortization of
intangibles in 2009 was $3.0 million (2008 – $3.0 million).

For the year ended December 31, 2009, the Company recorded
a current tax expense of $0.8 million (2008 – $1.6 million). The

SELECTED ANNUAL INFORMATION

(thousands of dollars, other than per share data)

current tax expense relates to certain subsidiary corporations of
Ag Growth, including its U.S. based divisions. Ag Growth converted
from an income trust to a taxable corporation on June 3, 2009 (see
“Conversion to a Corporation”). As at June 3, 2009, Ag Growth had
Canadian future tax assets of approximately $69.8 million available
to offset the impact of Canadian taxable income on a go-forward
basis. For the year ended December 31, 2009, the Company reduced
its Canadian tax liability to zero through the utilization of $10.4
million of its future tax assets.

For the year ended December 31, 2009, the Company recorded a
future tax recovery of $0.7 million (2008 – expense of $0.5 million).
The future tax recovery in 2009 is comprised of a net expense of
$1.8 million related to the utilization of future tax assets, offset
by a $1.6 million recovery that resulted from the Conversion, and a
recovery of $0.9 million that related to the application of corporate
tax rates to reversals of temporary differences between the
accounting and tax treatment of depreciable assets, intangibles,
reserves, deferred compensation plans and deferred financing fees.

For the year ended December 31, 2009, the Company reported net
earnings of $45.3 million (2008 – $21.2 million), basic net earnings
per share of $3.53 (2008 – $1.64), and fully diluted net earnings per
share of $3.45 (2008 – $1.64).

Twelve Months Ended December 31

Sales

EBITDA (1)

Adjusted EBITDA (1)

Net income

Earnings per share – basic

Earnings per share – fully diluted

Funds from operations (1)

Payout ratio (1)

Dividends declared per share (2)

Fund trust units

Class B units

Common shares

Total assets

Total long-term liabilities

2009

237,294

60,680

59,277

45,303

3.53

3.45

52,165

50%

0.85

1.19

387,850

174,024

2008

199,341

34,562

40,951

21,212

1.64

38,554

69%

2.07

N/A

228,464

65,216

2007

130,371

32,368

28,250

12,366

1.06

25,553

77%

1.68

N/A

210,683

37,399

(1) See “non-GAAP Measures”
(2) Effective June 3, 2009, the Company converted from an open-ended limited purpose trust to a publicly listed corporation

(see “Conversion to a Corporation”). Accordingly, Fund trust units and Class B units received distributions for the first five months of 2009,
and common shareholders of the publicly listed corporation received dividends thereafter.

The following factors impact comparability between years in the
table above:

of the conversion option was estimated at $7.5 million and
included in shareholders’ equity.

•

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

Total assets and long-term liabilities were impacted by
financing activities in 2009 as the Company issued $115 million
face value of convertible debentures, repaid its long-term debt,
and issued new long-term debt. Cash provided by financing
activities in 2009, excluding dividend payments of $29.3 million,
was $88.3 million. On the date of issuance of the debentures,
long-term liabilities increased $107.5 million as the fair value

•

Subsequent to January 15, 2008, results reflect the acquisition
of Applegate.

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

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

Fiscal 2007 includes a non-cash future tax expense of $9.5
million related to the enactment of taxation laws related to
income trusts.

QUARTERLY FINANCIAL INFORMATION

(thousands of dollars)

Sales

55,289

66,840

68,316

46,849

Fiscal 2009

237,294

2009

Gain (Loss)
on Fx

Net Earnings
(Loss)

Diluted Earnings
per Share

(2,028)

1,722

2,228

(519)

1,403

10,127

16,431

15,126

3,619

0.79

1.27

1.16

0.27

3.45

45,303

2008

Sales

35,138

55,950

60,012

48,241

Gain (Loss)
on Fx

Net Earnings
(Loss)

Diluted Earnings
per Share

(586)

291

(1,242)

(4,852)

1,889

7,460

9,753

2,110

0.14

0.58

0.75

0.17

Fiscal 2008

199,341

(6,389)

21,212

1.64

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. Due to the
seasonality of Ag Growth’s working capital movements, cash
provided by operations 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 share are significantly impacted by the rate of
exchange between the Canadian and U.S. dollars.

The second quarter of 2009 includes an expense of $1.7
million related to the Conversion and a future tax recovery of
$1.8 million.

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FOURTH QUARTER
Ag Growth reported record EBITDA in the fourth quarter of 2009,
due largely to continued high demand for portable grain handling
equipment and strong gross margin percentages. The fourth
quarter of 2009, compared to the same period in 2008, was
positively impacted by a late harvest and the resulting extension of
in-season sales, offset by the impact of a stronger Canadian dollar.

Sales
Sales for the three months ended December 31, 2009 were $46.8
million (2008 – $48.2 million). The decrease of $1.4 million or 3%
from the fourth quarter of 2008 is largely due to the following:

•

Sales of portable grain handling equipment increased as a late
harvest extended the in-season sales period for grain augers.

Sales were negatively impacted by foreign exchange. For the
fourth quarter of 2009, the stronger Canadian dollar resulted
in a decrease in reported sales of $2.9 million compared to the
sales that would have been reported using the exchange rates
in effect in the fourth quarter of 2008.

Sales of aeration equipment decreased compared to the
fourth quarter of 2008. In 2008, Edwards was not able to fill a
significant number of in-season orders until the fourth quarter,
whereas in 2009 Edwards’ production was sufficient to fill these
orders in the third quarter.

Gross Margin
Gross margin as a percentage of sales for the quarter ended
December 31, 2009 was 38.6%, compared to 35.9% in 2008. The
increase in gross margin percentages compared to 2008 was
largely due to the following:

•

The fourth quarter of 2009 was negatively impacted by foreign
exchange. The negative impact of a stronger Canadian dollar
compared to the fourth quarter of 2008 reduced the gross
margin percentage by approximately 1%, compared to gross
margins that would have been reported using the exchange
rates in effect in those periods in 2008.

Sales in the fourth quarter of 2009 were more heavily weighted
towards higher margin portable grain handling equipment.

Gross margin at Union Iron improved compared to 2008 as a
result of higher sales volume and sales mix.

Expenses
For the three months ended December 31, 2009, selling, general
and administrative expenses were $7.8 million or 16.6% of sales

(2008 – $7.9 million or 16.4%). The decrease of $0.1 million from
2008 is primarily due to the following:

•

A number of Ag Growth’s selling, general and administrative
expenses are denominated in U.S. dollars. Due to a stronger
Canadian dollar in Q4 these expenses were translated to
Canadian dollars at a lower rate. The impact of the stronger
Canadian dollar was to decrease these expenses by $0.2 million
compared to 2008.

Sales and marketing expense increased $0.3 million due
largely to the development of an international sales group and
investment in offshore territory development.

A number of miscellaneous items with variances of $0.2 million
or less and certain reclassifications of comparative figures
accounted for the remaining change.

Other significant items include the following:

•

Calculation of the SAIP expense is based on the trading price of
the Company’s common shares at the balance sheet date and
the vesting provisions of the plan. For the three months ended
December 31, 2009, Ag Growth recorded an expense related to
the SAIP of $0.7 million (2008 – $0.1 million).

The LTIP awards are expensed over the term of the participant’s
vesting period and as a result the expense in 2009 also includes
a component related to awards from both 2007 and 2008.
For the three months ended December 31, 2009, Ag Growth
recorded an expense related to the LTIP of $0.6 million (2008 –
$0.2 million).

Ag Growth recorded a loss on foreign exchange of $0.5 million
in the fourth quarter of 2009, compared to a loss of $4.9 million
in the same period in 2008. The significant loss in 2008 was
largely due to the unrealized loss on translating U.S. dollar debt
that resulted from the depreciation of the Canadian dollar.

Adjusted EBITDA for the three months ended December 31, 2009
was $9.2 million (2008 – $8.9 million). The increase is due primarily
to an increase in gross margin percentages compared to 2008.
EBITDA for the three months ended December 31, 2009 was $8.7
million, compared to $4.1 million in 2008. The increase in EBITDA is
the result of higher gross margins and a significant increase in the
gain on foreign exchange.

For the three months ended December 31, 2009, the Company
reported net earnings of $3.6 million (2008 – $2.1 million), basic
net earnings per share of $0.28 (2008 – $0.17), and fully diluted net
earnings per share of $0.27 (2008 – $0.17).

CASH FLOW AND LIQUIDITY
The table below reconciles net earnings to cash provided by operations for the years ended December 31, 2009 and 2008:

(thousands of dollars)

Net earnings for the period

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

Amortization

Future income taxes

Translation loss (gain) on foreign exchange

Non-cash interest expense

Stock based compensation

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

Accounts receivable

Inventory

Prepaid expenses and other assets

Accounts payable and accruals

Customer deposits

LTIP

Income taxes payable

Year Ended December 31

2009

45,303

8,354

(667)

(8,029)

778

6,491

52,230

310

3,900

(671)

2,141

(3,775)

(20)

275

2,160

2008

21,212

8,525

540

8,745

349

1,520

40,891

(14,182)

(13,155)

304

(359)

(1,444)

(1,242)

(29,987)

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Cash provided by operations

54,390

10,904

For the year ended December 31, 2009, cash provided by
operations was $54.4 million (2008 –$10.9 million). The significant
improvement in cash flow from operations was achieved largely
because sales and net earnings increased without a proportionate
investment in working capital. In fiscal 2008 significant cash
resources were required to increase inventory levels, primarily to
support increased demand and production capacity. The required
increase in inventory levels was achieved by the end of 2008
and accordingly a similar investment in inventory levels in fiscal
2009 was not required. Increased capacity and demand in 2008
also resulted in a significant increase in fourth quarter sales and
a higher than historical accounts receivable balance at year-end.
Accounts receivable at December 31, 2009 were not significantly
different from the prior year largely because fourth quarter sales in
2009 approximated the sales levels of 2008. A number of smaller
changes account for the remaining variance.

In fiscal 2010 we expect that non-cash working capital
requirements will approximate the patterns experienced in 2009.
Ag Growth’s working capital requirements in 2010 will be impacted

by sales demand as well as certain risk factors including foreign
exchange rates and fluctuations in input costs.

Working Capital Requirements
Interim period working capital requirements typically reflect the
seasonality of the business. Ag Growth’s collections of accounts
receivable are weighted towards the third and fourth quarters.
This collection pattern, combined with historically high sales in the
third quarter that result from seasonality, typically lead to accounts
receivable levels increasing throughout the year and peaking in
the third quarter. 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 operating lines in the first or second quarter. The operating
line 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 operating line balance by early in the fourth quarter.

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Results in 2009 generally reflected these expectations, however
due to proceeds received from its debenture offering (see
“Convertible Debentures”) and a significant increase in cash
provided by operations, the Company did not draw on its operating
lines to the same extent as in prior years. Working capital
requirements in 2010 are expected to approximate historical
patterns, with the exception that the Company expects its cash
on hand will be sufficient to finance seasonal working capital
requirements and as a result does not expect to utilize its operating
line balance.

Investment in One Earth Farms
on December 22, 2009, the Company purchased two million
common shares at $1.00 per share in the private company one
earth Farms Corp. (“one earth”), a Canadian corporate farming
organization. the Company’s investment represents approximately
4.4% of the outstanding shares of one earth. one earth’s objective
is to become Canada’s largest, most efficient operating farm
through partnerships with First nations and other key strategic
agricultural companies. one earth has deposited $2 million with
Ag Growth as a prepayment for future purchases of Ag Growth
equipment.

Capital Expenditures
Ag Growth had maintenance capital expenditures of $2.2 million
for the year ended December 31, 2009 (2008 – $2.3 million).
Maintenance capital expenditures in 2009 relate primarily to
purchases of manufacturing equipment and were funded through
cash from operations.

Ag Growth defines maintenance capital expenditures as cash
outlays required to maintain plant and equipment at current
operating capacity and efficiency levels. non-maintenance capital
expenditures encompass other investments, including cash outlays
required to increase operating capacity or improve operating
efficiency. Ag Growth had non-maintenance capital expenditures
of $2.6 million in 2009 (2008 – $8.9 million). the following capital
expenditures were classified as non-maintenance in 2009 and were
financed through cash from operations:

i. union City, Indiana – a manufacturing facility was acquired
to allow for the transfer of certain production from western
Canada as well as to provide a more efficient facility for
Applegate. Ag Growth expended $0.8 million on this project
in 2009 and additional expenditures are not expected to
be significant.

ii. Westfield warehousing facility – Westfield invested $1.3 million
towards constructing a new warehousing facility in Fargo,
nD. Additional expenditures in 2010 are not expected to be
significant and the Company expects to sell its existing facility
in 2010.

iii. Westfield robotics – Westfield invested $0.2 million in
additional robotic manufacturing to increase capacity.
Additional expenditures are not expected to be significant.

iv. Completion of projects from 2008 – an additional $0.3 million
was expended with respect to capacity initiatives at Batco
and Westfield. Additional expenditures are not expected to
be significant.

Maintenance capital expenditures are expected to increase to over
$3.0 million in 2010 and it is anticipated that these expenditures
will be financed from operations. non-maintenance capital
expenditures in 2010 are expected to increase significantly and
are expected to be financed from the proceeds of the Company’s
october 2009 debenture offering (See “Capital Resources –
Convertible Debentures”). the Company expects to invest in the
following non-maintenance projects in 2010:

i. Grain storage bin capacity – the Company expects to invest
approximately $15 million to increase its grain storage bin
production capacity and to expand the breadth of its storage
bin product line to include larger bins. the capital expenditure
relates to a stand-alone bin manufacturing facility in nobleford,
AB, and automated storage bin production equipment. the
investment is expected to allow the Company to capitalize on
international sales opportunities and to increase sales in north
America. In addition, the investment should greatly increase the
Company’s storage bin production efficiencies. the project is
expected to be completed in the fourth quarter of 2010.

ii. Consolidation of edwards’ production facilities – edwards
currently operates out of facilities in lethbridge, AB and
nobleford, AB. In 2010 the Company expects to invest
approximately $4 million to expand the existing facility
in nobleford and subsequently transfer production from
lethbridge to the newly expanded plant. Consolidation of the
facilities is expected to result in lower operating costs. the
project is expected to be completed in the fourth quarter of
2010. the Company expects to sell the existing lethbridge
facility in 2011 and proceeds from the sale are expected to
approximate the $4 million initial investment.

iii. Westfield facility expansion – Westfield’s primary facility
in Rosenort, MB is currently supported by a leased facility
in Winnipeg, MB. In 2010 the Company expects to invest
approximately $3.5 million to expand the Rosenort facility
and transfer production from Winnipeg to the main plant in
Rosenort. the investment is expected to lower operating costs,
improve the coordination of production activities and provide
Westfield with increased space to perform research and
development. the project is expected to be completed in the
fourth quarter of 2010.

iv. A number of less significant growth capital expenditures are

expected to total approximately $2.0 million in 2010.

Cash Balance
For the year ended December 31, 2009, the Company’s cash
balance increased $104.7 million (2008 – decreased $16.0 million),
and as at December 31, 2009, the Company had a cash balance of
$109.1 million (2008 – $4.4 million).

Cash provided by financing activities in 2009, excluding dividend
payments of $29.3 million, was $88.3 million (2008 – $13.5 million).
Net proceeds from the Company’s October 2009 debenture offering
were approximately $109.9 million, the proceeds of which were
used in part to repay existing long-term debt. The Company also
entered a new credit facility in October 2009. The net effect of
these transactions was to increase the Company’s cash balance by
$83.7 million.

CONTRACTUAL OBLIGATIONS

(thousands of dollars)

Total

Debentures

Long-term debt

Operating leases

Total obligations

115,000

26,212

2,412

2010

1,305

143,624

1,321

Debentures relate to the aggregate principal amount of debentures
issued by the Company in October 2009 (see “Convertible
Debentures”). Long-term debt at December 31, 2009 is comprised
of USD $25.0 million aggregate principal amount of secured notes
issued through a note purchase and private shelf agreement.
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.

As at March 11, 2010, the Company had outstanding commitments
of $12.2 million in relation to capital expenditures for building
and equipment.

CAPITAL RESOURCES

Cash
The Company had a cash balance of $109.1 million as at
December 31, 2009 (2008 – $4.4 million).

Long-term Debt
On October 29, 2009, the Company authorized the issue and
sale of USD $25.0 million aggregate principal amount of secured
notes through a note purchase and private shelf agreement. The
notes are non-amortizing and bear interest at 6.80% and mature
October 29, 2016. The agreement also provides for a possible
future issuance and sale of notes of up to an additional USD $75.0
million aggregate principal amount, with maturity dates no longer
than ten years from the date of issuance. Ag Growth is subject to
certain financial covenants, including a maximum leverage ratio
and a minimum debt service ratio, and is in compliance with all
financial covenants.

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680

696

2012

208

223

2013

2014 +

114

115,000

26,165

105

141,270

On October 29, 2009, the Company also entered a credit facility
with three Canadian chartered banks that includes CAD $10.0
million and USD $2.0 million available for working capital purposes,
and provides for non-amortizing long-term debt of up to CAD
$38.0 million and USD $20.5 million. No amounts were drawn
under these facilities as at December 31, 2009. The facilities bear
interest at rates of prime plus 0.50 % to prime plus 1.50% based
on performance calculations and matures on October 29, 2012.
Ag Growth is subject to certain financial covenants, including a
maximum leverage ratio and a minimum debt service ratio, and is in
compliance with all financial covenants.

For the year ended December 31, 2009, the Company’s effective
interest rate on its U.S. dollar term debt was 4.2% (2008 – 5.1%),
and after consideration of the effect of its interest rate swaps
was 4.5% (2008 – 5.2%). For the year ended December 31, 2009,
Ag Growth’s effective interest rate on its Canadian dollar term debt
was 3.4% (2008 – 4.8%). See “Financial Instruments.”

Convertible Debentures
On October 27, 2009, the Company issued $100 million aggregate
principal amount of convertible unsecured subordinated debentures
(the “Debentures”) at a price of $1,000 per Debenture. The
Debentures bear interest at an annual rate of 7.0% payable
semi-annually on June 30 and December 31 in each year,
commencing June 30, 2010. The maturity date of the Debentures
is December 31, 2014.

Ag Growth granted the underwriters an over-allotment option to
purchase up to 15% of the principal amount of the Debentures on
the same terms and conditions as the offering of the Debentures.

The underwriters exercised the over-allotment option in full on
November 6, 2009 resulting in the issue of an additional $15 million
principal amount of Debentures.

Including the over-allotment option, the net proceeds of the
offering, after payment of the underwriters’ fee of $4.6 million and
expenses of the offering of $0.5 million, were approximately $109.9
million. The net proceeds of the offering will be used by Ag Growth
for general corporate purposes and were used to repay existing
indebtedness of approximately USD $37.6 million and CAD $11.9
million under the Company’s credit facility.

Each Debenture is convertible into common shares of the Company
at the option of the holder at any time on the earlier of the maturity
date and the date of redemption of the Debenture, at a conversion
price of $44.98 per common share being a conversion rate of
approximately 22.2321 common shares per $1,000 principal amount
of Debentures. A total of 2,556,692 common shares are reserved
for issue on conversion of the Debentures.

The Debentures are not redeemable before December 31, 2012. On
and after December 31, 2012 and prior to December 31, 2013, the
Debentures may be redeemed, in whole or in part, at the option of
the Company at a price equal to their principal amount plus accrued
and unpaid interest, provided that the volume weighted average
trading price of the common shares during the 20 consecutive
trading days ending on the fifth trading day preceding the date
on which the notice of redemption is given is not less than 125%

of the conversion price. On and after December 31, 2013, the
Debentures may be redeemed, in whole or in part, at the option of
the Company at a price equal to their principal amount plus accrued
and unpaid interest.

On redemption or at maturity, the Company may, at its option,
subject to regulatory approval and provided that no event of
default has occurred, elect to satisfy its obligation to pay the
principal amount of the Debentures, in whole or in part, by issuing
and delivering for each $100 due that number of freely tradeable
common shares obtained by dividing $100 by 95% of the volume
weighted average trading price of the common shares on the
Toronto Stock Exchange (“TSX”) for the 20 consecutive trading
days ending on the fifth trading day preceding the date fixed for
redemption or the maturity date, as the case may be. Any accrued
and unpaid interest thereon will be paid in cash. The Company may
also elect, subject to any required regulatory approval and provided
that no event of default has occurred, to satisfy all or part of its
obligation to pay interest on the Debentures by delivering sufficient
freely tradeable common shares to satisfy its interest obligation.

Ag Growth’s convertible debentures trade on the TSX under the
symbol AFN.DB.

COMMON SHARES
The following common shares were issued and outstanding and
participated pro rata in dividends during the periods indicated:

December 31, 2007

Purchased under normal course issuer bid

Outstanding at December 31, 2008

Conversion (2)

Common shares issued upon Conversion (2)(3)

Conversion of redeemable preferred shares

Outstanding at December 31, 2009

Share award incentive plan issuance

Outstanding at March 11, 2010

# Fund Trust Units

# Class B Units (1)

# Common Shares

12,818,915

(200,000)

12,618,915

(12,618,915)

136,085

(136,085)

12,755,000

182,588

140,452

13,078,040

73,333

13,151,373

(1) Prior to Conversion, there were 136,085 Class B Exchangeable units outstanding in a subsidiary of the Fund that were exchangeable for

Fund Trust units at the option of the holder on a one-for-one basis at any time.

(2) See “Conversion to a Corporation.”
(3) Pursuant to the Plan of Arrangement, consideration included 182,588 common shares.

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On October 22, 2008, Ag Growth commenced a normal course
issuer bid for up to 1,262,090 common shares, representing 10% of
its public float at that time. The normal course issuer bid terminated
on October 21, 2009 and was not renewed. Common shares
purchased under the normal course issuer bid were cancelled.
Common shares were purchased at market price and in accordance
with TSX requirements. For the period ending December 31, 2008,
Ag Growth purchased and cancelled 200,000 common shares at
an average share price of $19.47 for total cash consideration of
$3.9 million. No common shares were purchased under the normal
course issuer bid in the year ended December 31, 2009.

On December 10, 2009, Ag Growth commenced a new normal
course issuer bid for up to 1,272,423 common shares, representing
10% of the Company’s public float at that time. The normal course
issuer bid will terminate on December 9, 2010 unless terminated
earlier by Ag Growth. The Company did not purchase any common
shares under the normal course issuer bid in the periods ended
December 31, 2009 and March 11, 2010.

The Company has issued $115 million aggregate principal amount
of convertible unsecured subordinated debentures. Ag Growth has
reserved 2,556,692 common shares for issuance upon conversion
of the Debentures. See “Convertible Debentures.”

Ag Growth has granted 220,000 share awards under its share
award incentive plan. Effective January 1, 2010, a total of 73,333
awards vested and the equivalent number of common shares were
issued to the participants. The remaining 146,667 share awards
remain outstanding at March 11, 2010 and, subject to vesting
and payment of the exercise price, are each exercisable for one
common share.

In April 2009, the administrator of the LTIP acquired 11,008 common
shares to satisfy its obligations with respect to awards under the
LTIP for fiscal 2008. In April 2008, the administrator of the LTIP
acquired 70,400 common shares to satisfy its obligations with
respect to fiscal 2007. These common shares are not cancelled but
rather are held by the administrator until such time as they vest to
the LTIP participants. As at December 31, 2009, a total of 23,467
common shares related to the LTIP had vested to the participants.
On January 1, 2010, an additional 27,136 common shares vested to
the participants.

A total of 8,419 deferred grants of common shares are outstanding
under the Company’s Director’s Deferred Compensation Plan.

Ag Growth’s common shares trade on the TSX under the
symbol AFN.

REDEEMABLE PREFERRED SHARES
Pursuant to the Plan of Arrangement (see “Conversion to a
Corporation”), Ag Growth issued 4,000,000 redeemable preferred
shares with a stated value of $1.00 per share. The preferred
shares were entitled to receive fixed cumulative preferential cash
dividends, as and when declared by the Board, out of monies
properly applicable to the payment of dividends at a rate $0.05
per share per annum. Each preferred share was also convertible
at the holder’s option into 0.035113 of a common share, for a total
of 140,452 common shares, at any time up to three years from the
date of issuance. Each preferred share was redeemable at any
time from the date of issuance until June 30, 2010 at the option of
Ag Growth, and retractable at the holder’s option at any time on
or after June 30, 2010, in each case for $1.00 cash per preferred
share plus accrued and unpaid cumulative dividends thereon. The
redeemable preferred shares were not publicly traded. On October
15, 2009, the holder of the redeemable preferred shares exercised
the conversion option and there are now no redeemable preferred
shares outstanding.

DIVIDENDS
Ag Growth declared dividends to security holders of $26.3 million
for the year ended December 31, 2009 (2008 – $26.7 million). The
amount decreased from the prior year as 2008 included a special
distribution of $3.1 million as was required under the Fund’s income
trust structure. The Company converted to a corporation on June 3,
2009 (see “Conversion to a Corporation”). Excluding the 2008
special distribution, dividends in 2009 increased $2.7 million, due
to an increase in the monthly dividend level by $0.03 per share to
$0.17 per share effective August 2008, and to an increase in the
outstanding number of common shares.

Ag Growth’s policy is to pay monthly dividends. The Company’s
Board of Directors reviews financial performance and other factors
when assessing dividend levels. An adjustment to dividend levels
may be made at such time as the Board determines an adjustment
to be in the best interest of the Company and its shareholders.

FUNDS FROM OPERATIONS
Funds from operations, defined under “non-GAAP measures,” is
the equivalent of EBITDA (1), less interest expense, current cash
taxes and maintenance capital expenditures, plus the non-cash
component of interest expense and stock based compensation and
adjusted for the translation gain or loss on foreign exchange. The
objective of presenting this measure is to provide a measure of
free cash flow. The definition excludes changes in working capital
as they are necessary to drive organic growth and have historically
been financed by the Company’s operating facility (See “Capital
Resources”). Funds from operations should not be construed as an
alternative to cash flows from operating, investing, and financing
activities as a measure of the Company’s liquidity and cash flows.

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(thousands of dollars)

EBITDA

Stock based compensation

Non-cash interest expense

Translation loss (gain) on foreign exchange

Interest expense

Current income tax

Maintenance capital expenditures

Funds from operations (2)

Year Ended December 31

2009

2008

60,680

34,562

6,491

778

(8,029)

(4,803)

(774)

(2,178)

1,520

349

8,745

(2,733)

(1,552)

(2,337)

52,165

38,554

Funds from operations can be reconciled to cash provided by operating activities as follows:

(thousands of dollars)

Year Ended December 31

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Cash provided by operating activities

Change in non-cash working capital

Conversion costs

Maintenance capital expenditures

Funds from operations (2)

Basic weighted average shares outstanding

Dividends declared per share

Funds from operations per share (2)

Payout ratio (2)

(1) See “EBITDA and Net Earnings.”
(2) See “non-GAAP Measures.”

2009

54,390

(2,160)

2,113

(2,178)

52,165

12,835,166

2.04

4.06

50%

2008

10,904

29,987

(2,337)

38,554

12,923,988

2.07

2.98

69%

The following table displays total funds from operations and total dividends declared since Ag Growth’s 2004 initial public offering:

FUNDS FROM OPERATIONS

(in thousands of dollars)

Period Ended December 31, 2004

Year Ended December 31, 2005

Year Ended December 31, 2006

Year Ended December 31, 2007

Year Ended December 31, 2008

Year Ended December 30, 2009

Cumulative since inception

Generated

Dividends Declared (1)

Payout Ratio

9,887

22,676

21,974

25,553

38,554

52,165

9,109

18,918

18,858

19,585

26,701

26,307

170,809

119,478

92%

83%

86%

77%

69%

50%

70%

(1) Includes special distributions of the Fund of $1,329 in 2004, $3,368 in 2005, and $3,061 in 2008. Excludes $9 dividend paid to holders of

preferred shares in 2009.

Dividends in a fiscal year are typically funded entirely through
cash from operations, although due to seasonality dividends may
be funded on a short-term basis by the Company’s operating lines.
In 2008, due to increased working capital investments required
to maintain growth, total dividends exceeded cash provided by
operations. As a result, a portion of 2008 dividends were financed
from the Company’s opening cash balance. In fiscal 2009 dividends
were funded entirely through cash from operations and the
Company expects dividends in 2010 will also be funded through
cash from operations.

Ag Growth’s Board of Directors reviews financial performance and
other factors when assessing dividend levels. An adjustment to
dividend levels may be made at such time as the Board determines
an adjustment to be in the best interest of the Company and
its shareholders.

CONVERSION TO A CORPORATION
The Fund’s decision to convert to a corporation arose from the
federal government’s October 31, 2006 announcement and
subsequent legislation (the “SIFT legislation”) to impose additional
income taxes on publicly traded income trusts, including the Fund,
effective January 1, 2011. In addition, in order to qualify under new
legislation for a tax-free conversion, it was necessary to convert
to a corporation before the end of 2013. Management and the
Fund’s Board of Trustees had been proactively assessing several
options available to provide long-term stability of distributions
for unitholders while mitigating the impact of the trust taxation
legislated by the Federal Government in June 2007. As the
tax enhancement value related to the income trust structure
diminished, it was determined that the benefits of an early
conversion to a corporation outweighed the value of remaining
under the trust structure.

The Conversion was completed pursuant to a Plan of Arrangement
that was approved at a special meeting (the “Special Meeting”)
of the Fund’s unitholders and holders of exchangeable limited
partnership units of AGX Holdings Limited Partnership held
on June 3, 2009. Under the Plan of Arrangement, the Fund’s
unitholders received one common share of Benachee Resources
Inc. (“Benachee”) in exchange for each Fund unit and/or
exchangeable unit held, resulting in the Fund unitholders becoming
shareholders of Benachee. Benachee then changed its name
to “Ag Growth International Inc.” and the existing trustees and
management of the Fund became the board and management of
Ag Growth. The Conversion was accounted for as a continuity of
interests of the Fund since there was no change of control and
since Ag Growth continues to operate the business of the Fund.
Ag Growth did not retain the business previously carried on by
Benachee. Costs incurred with respect to the Conversion in 2009
were $2.1 million.

Pursuant to the Plan of Arrangement, Ag Growth also issued
consideration in the form of $5.0 million cash, an additional
182,588 common shares, and stated value $4.0 million redeemable
preferred shares which are convertible into 140,452 common
shares. On October 15, 2009, the holder exercised the conversion
option on the redeemable preferred shares.

Complete details of the terms of the Plan of Arrangement are
set out in the Arrangement Agreement and the Management
Information Circular for the Special Meeting that have been filed by
Ag Growth on SEDAR (www.sedar.com).

RELATED PARTY TRANSACTIONS
Burnet, Duckworth & Palmer LLP provide legal services to the
Company and a Director of Ag Growth is a partner of Burnet,
Duckworth & Palmer LLP. The total cost of these legal services
related to the Conversion and the debenture offering during
the year ended December 31, 2009 was $0.9 million. These
transactions are measured at the exchange amount and were
incurred during the normal course of business on similar terms and
conditions to those entered into with unrelated parties.

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. By their nature, these estimates are subject to a
degree of uncertainty and are based on historical experience and
trends in the industry. Management reviews these estimates on
an ongoing basis. 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.

Ag Growth 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, convertible debentures and future income taxes.
Ag Growth’s accounting policies are described in Note 2 to the
audited financial statements for the year ended December 31, 2009.

Allowance for Doubtful Accounts
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 ongoing assessment of the recoverability of accounts
receivable. Ag Growth maintains an allowance for doubtful

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accounts to reflect expected credit losses. A considerable amount
of judgment is required to assess the ultimate realization of
accounts receivable and these judgments must be continuously
evaluated and updated. Ag Growth is not able to predict changes
in the financial conditions of its customers, and the Company’s
judgment related to the recoverability of accounts receivable may
be materially impacted if the financial condition of the Company’s
customers deteriorates.

Valuation of Inventory
Assessments and judgments are inherent in the determination
of the net realizable value of inventories. The cost of inventories
may not be fully recoverable if they are slow moving, damaged,
obsolete, or if the selling price of the inventory is less than its
cost. Ag Growth regularly reviews its inventory quantities and
reduces the cost attributed to inventory no longer deemed to be
fully recoverable. Judgment related to the determination of net
realizable value may be impacted by a number of factors including
market conditions.

Goodwill and Intangible Assets
Assessments and judgments are inherent in the determination
of the fair value of goodwill and intangible assets. Goodwill and
indefinite life intangible assets are recorded at cost and finite life
intangibles are recorded at cost less accumulated amortization.
Goodwill and intangible assets are tested for impairment at
least annually. Assessing goodwill and intangible assets for
impairment requires considerable judgment and is based in part
on current expectations regarding future performance. Changes in
circumstances including market conditions may materially impact
the assessment of the fair value of goodwill and intangible assets.

Future Income Taxes
Future income taxes are calculated based on assumptions related
to the future interpretation of tax legislation, future income tax

rates, and future operating results, acquisitions and dispositions
of assets and liabilities. Ag Growth periodically reviews and
adjusts its estimates and assumptions of income tax assets and
liabilities as circumstances warrant. A significant change in any of
the Company’s assumptions could materially affect Ag Growth’s
estimate of future tax assets and liabilities.

Future Benefit of Tax-loss Carryforwards
Ag Growth should only recognize the future benefit of tax-loss
carryforwards where it is more likely than not that sufficient future
taxable income can be generated in order to fully utilize such losses
and deductions. We are required to make significant estimates
and assumptions regarding future revenues and earnings, and our
ability to implement certain tax planning strategies, in order to
assess the likelihood of utilizing such losses and deductions. These
estimates and assumptions are subject to significant uncertainty
and if changed could materially affect our assessment of the ability
to fully realize the benefit of the future income tax assets. Future
tax asset balances would be reduced and additional income tax
expense recorded in the applicable accounting period in the event
that circumstances change and we, based on revised estimates and
assumptions, determined that it was no longer more likely than not
that those future tax assets would be fully realized.

FINANCIAL INSTRUMENTS

Foreign Exchange Contracts
Risk from foreign exchange arises as a result of variations in
exchange rates between the Canadian and the U.S. dollar.
Ag Growth has entered into foreign exchange contracts with two
Canadian chartered banks 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,
2009, the Company had outstanding the following foreign
exchange contracts:

Settlement Dates

January – December 2010

January – November 2011

Forward Foreign Exchange Contracts

Face Amount
USD (000s)

50,000

45,000

Average Rate
CAD

1.1722

1.0955

CAD Amount
(000s)

58,610

49,298

At December 31, 2009, the fair value of the outstanding forward
foreign exchange contracts was a gain of $7.8 million. Consistent
with prior periods, the Company has elected to apply hedge

accounting for these contracts and the unrealized gain has been
recognized in other comprehensive income for the year ended
December 31, 2009.

As at December 31, 2009, the Company also had outstanding a series of call and put options as follows:

Expiration Date

March 30, 2010

October 28, 2010

December 31, 2010

Expiration Date

March 30, 2010

October 28, 2010

December 31, 2010

Buyer: Ag Growth

Call Amount
CAD (000s)

2,440

6,100

3,660

Seller: Ag Growth

Call Amount
USD (000s)

4,000

10,000

6,000

Put Amount
USD (000s)

2,000

5,000

3,000

Put Amount
CAD (000s)

5,220

13,050

7,830

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At December 31, 2009, the fair value of the outstanding call and put
options was a gain of $1.6 million. These call and put options are
not considered to be an effective hedge for accounting purposes
and the unrealized gain has been included in the Company’s foreign
exchange gain for the year ended December 31, 2009.

Interest Rate Swap Transactions
Ag Growth’s term debt is subject to risks associated with
fluctuating interest rates on its long-term debt. To manage this
risk, the Company had three interest rate swap transactions with
a Canadian chartered bank with a total notional amount of USD
$26.5 million that resulted in interest charges to the Company of
2.88% plus a variable rate based on performance calculations. The
swap transactions expired August 29, 2009. At December 31, 2009
there were no interest rate swap transactions outstanding. See
“Capital Resources.”

OUTLOOK
The primary demand drivers for portable grain handling and
aeration equipment are volume of grains grown, storage practices
and commodity prices, and management believes these factors will
continue to be supportive of high levels of demand in 2010:

•

The 2009 harvest in the U.S. resulted in record production
of both corn and soybeans. The United States Department
of Agriculture estimates 2009 corn production at 13.2 billion
bushels (2008 – 12.1 billion) and soybean production at 3.4
billion bushels (2008 – 3.0 billion). The large U.S. crop resulted
in strong sales in 2009, a large amount of grain to be handled
in 2010, and low levels of ending inventory throughout
Ag Growth’s distribution network, which is supportive of
demand in the first half of 2010.

•

The 2009 U.S. harvest also resulted in record yields per acre,
with corn yielding 165.2 bushels per acre (2008 – 153.9)
and soybean yielding 44.0 bushels per acre (2008 – 39.6).
Management expects the long-term trend towards increased
yields to continue due to the increasing prevalence of larger
and more sophisticated farming operations, improved land
management and enhanced seed technology.

On-farm grain storage in the U.S. has increased significantly in
recent years and the increase in on-farm storage infrastructure
has increased the size of the market for portable grain handling
and aeration equipment as U.S. farmers handle more grain at
the farm level compared to prior years.

Agricultural commodity prices have retracted from record
highs however they remain well above historical averages.
Management believes that current commodity prices should be
supportive of higher than historical levels of corn and soybean
plantings in 2010.

Demand for grain storage and stationary grain handling equipment
is expected to increase slightly in 2010. Based on existing
conditions, management currently anticipates domestic sales
activity to increase slightly compared to 2009, and early indicators
appear to suggest an improving credit situation in emerging markets
which may result in increased international sales. Management
remains confident that demand in international markets is poised to
increase, and in 2010 will continue to lay the foundation for growth
in these markets through further development of its international
sales team and a $15 million investment to expand its storage
bin manufacturing capabilities. Demand in 2010 is contingent on
a number of macro-economic factors, including the availability of
credit, particularly in new international markets.

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Ag Growth’s financial results are impacted by the rate of exchange
between the Canadian and U.S. dollars. A stronger Canadian
dollar negatively impacts sales and gross margin percentages
compared to prior periods. For the year ended December 31, 2009,
Ag Growth’s average rate of exchange was $1.15. The Canadian
dollar strengthened in the latter portion of 2009 and accordingly
the favourable impact of foreign exchange realized in 2009 may
not be realized in 2010. However, the potential negative impact of
a stronger Canadian dollar in 2010 would be mitigated as a large
portion of the Company’s 2010 foreign exchange exposure has been
hedged with contracts at an average rate of $1.18.

Overall, management expects sales levels in 2010 to approximate
the record activity experienced in 2009, however a return to more
historical seasonality may result in a higher proportion of 2010 sales
being recorded in the second half compared to 2009. Gross margin
percentages at the divisional level are expected to approximate
2009 actual margins, as lower input costs and production efficiencies
are expected to offset the negative impact of foreign exchange. On
a consolidated basis, gross margin is expected to decrease slightly
as 2010 sales are expected to be slightly more heavily weighted
towards lower margin grain storage and commercial grain handling.
Based on prevailing exchange rates, Ag Growth’s gain on foreign
exchange is expected to increase compared to 2009 due to a higher
average rate on its foreign exchange hedging contracts. Consistent
with prior years, demand in 2010, particularly in the second half, will
be influenced by crop conditions. On balance, management expects
to consolidate the gains achieved in 2009 and through facility
expansion, international development and potentially M&A, build a
foundation for substantial growth in 2011 and beyond.

RISKS AND UNCERTAINTIES
The risks and uncertainties described below are not the only risks
and uncertainties we face. 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 dividends could be materially
adversely affected.

Industry Cyclicality and General Economic Conditions
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 grain
handling, storage and conditioning industry, and the business
of Ag Growth. The agricultural sector has benefited from 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 grain handling, storage and conditioning
industry, and the business of Ag Growth.

Future developments in the domestic and global economies may
negatively impact the demand for our products. Management

cannot estimate the level of growth or contraction of the economy
as a whole or of the economy of any particular region or market that
we serve. Adverse changes in our financial condition and results of
operations may occur as a result of continuing negative economic
conditions, declines in stock markets, contraction of credit
availability or other factors affecting economic conditions generally.

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, storage and
conditioning 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 seeks to manage its
exposure to material and component price volatility by planning and
negotiating significant purchases on an annual basis, and endeavours
to pass 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.

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. In addition, Ag Growth may denominate its long-term
borrowings in U.S. dollars. Accordingly, fluctuations in the rate of
exchange between the Canadian dollar and the U.S. dollar may
significantly impact the Company’s financial results. Management
has implemented a foreign currency hedging strategy and has
entered into a series of hedging arrangements to partially mitigate
the potential effect of fluctuating exchange rates. 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.

Acquisition and Expansion Risk
Ag Growth may expand its operations by increasing the scope of
operations at existing facilities or by acquiring additional businesses,
products or technologies. There can be no assurance that the
Company will be able to identify, acquire, or profitably manage
additional businesses, or successfully integrate any acquired
business, products, or technologies into the business, or increase
the scope of operations at existing facilities without substantial
expenses, delays or other operational or financial difficulties. The
Company’s ability to increase its scope of operations or acquire
additional businesses may be impacted by its cost of capital

and access to credit. Acquisitions and expansions 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 Ag Growth’s performance. In
addition, there can be no assurance that an increase in the scope
of operations at existing facilities or that acquired businesses,
products, or technologies will achieve anticipated revenues and
income. The failure of the Company to manage its acquisition or
expansion strategy successfully could have a material adverse
effect on Ag Growth’s results of operations and financial condition.

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. A decrease in commodity prices could negatively
impact the agricultural sector, and the business of Ag Growth. New
legislation or amendments to existing legislation, including the
Energy Independence and Security Act in the U.S., may ultimately
impact demand for the Company’s products. 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, storage and conditioning 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.

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 Company to make cash dividends
to shareholders, or the quantum of such dividends, if any. No
assurance can be given that the Ag Growth’s credit facility will be
sufficient to offset the seasonal variations in Ag Growth’s cash flow.

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 2009, 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, storage and conditioning 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 Company’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.

Availability of Credit
Ag Growth’s credit facility expires October 29, 2012, and is renewable
at the option of the lenders. There can be no guarantee the Company
will be able to obtain alternate financing and no guarantee that
future credit facilities will have the same terms and conditions as the
existing facility. This may have an adverse effect on the Company, its
ability to pay dividends and the market value of its common shares. In

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addition, the business of the Company may be adversely impacted in
the event that the Company’s customer base does not have access to
sufficient financing. Sales related to the construction of commercial
grain handling facilities, sales to developing markets, and sales to
North American farmers may be impacted.

Interest Rates
Ag Growth’s term and operating credit facilities bear interest at
rates that are in part dependant on performance based financial
ratios. The Company’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. To the
extent that the Company has term and operating loans where the
fluctuations in the cost of borrowing are not mitigated by interest
rate swaps, the Company’s cost of borrowing may be impacted by
fluctuations in market interest 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.

Cash Dividends are not Guaranteed
Future dividend payments by Ag Growth and the level thereof is
uncertain, as Ag Growth’s dividend policy and the funds available
for the payment of dividends from time to time will be dependent
upon, among other things, operating cash flow generated by
Ag Growth and its subsidiaries, financial requirements for
Ag Growth’s operations and the execution of its growth strategy,
fluctuations in working capital and the timing and amount of capital
expenditures, debt service requirements and other factors beyond
the control of Ag Growth.

Income Tax Matters
In the ordinary course of business, Ag Growth may be subject
to audits by tax authorities. While management anticipates
that Ag Growth’s tax filing positions will be appropriate and
supportable, it is possible that tax matters, including the
calculation and determination of revenue, expenditures, deductions,
credits and other tax attributes, taxable income and taxes payable,
may be reviewed and challenged by the tax authorities. If such
challenge were to succeed, it could have a material adverse effect
on Ag Growth’s tax position. Further, the interpretation of and
changes in tax laws, whether by legislative or judicial action or
decision, and the administrative policies and assessing practices of
taxation authorities, could materially adversely affect Ag Growth’s
tax position.

Possible Failure to Realize Anticipated Benefits of
the Conversion
Achieving the anticipated benefits of the Conversion will depend
in part on Ag Growth’s ability to realize the anticipated growth
opportunities from reorganizing the Fund into a corporate
structure. Management expects that the corporate structure will
allow Ag Growth to adopt similar policies with respect to capital
expenditures as were in place with the trust structure. In addition,
the Conversion is expected to simplify the operations of the
continuing entity. The realization of the anticipated benefits of the
Conversion will require the dedication of substantial management
effort, time and resources. There can be no assurance that
management will be successful in refocusing the continuing entity
into a growth-oriented entity.

Ag Growth May Issue Additional Common Shares
Diluting Existing Shareholders’ Interests
The Company is authorized to issue an unlimited number of common
shares for such consideration and on such terms and conditions
as shall be established by the Directors without the approval of
any shareholders, except as required by the TSX. In addition, the
Company may, at its option, satisfy its obligations with respect to the
interest payable on the Debentures and the repayment of the face
value of the Debentures through the issuance of common shares.

Leverage, Restrictive Covenants
The degree to which Ag Growth is leveraged could have important
consequences to the shareholders, including: (i) the ability to obtain
additional financing for working capital, capital expenditures or
acquisitions in the future may be limited; (ii) a material portion of
Ag Growth’s cash flow from operations may need to be dedicated
to payment of the principal of and interest on indebtedness, thereby
reducing funds available for future operations and to pay dividends;
(iii) certain of the borrowings under the Company’s credit facility
may be at variable rates of interest, which exposes Ag Growth
to the risk of increased interest rates; and (iv) Ag Growth may be
more vulnerable to economic downturns and be limited in its ability
to withstand competitive pressures. Ag Growth’s ability to make
scheduled payments of principal and interest on, or to refinance,
its indebtedness will depend on its future operating performance
and cash flow, which are subject to prevailing economic conditions,
prevailing interest rate levels, and financial, competitive, business
and other factors, many of which are beyond its control.

The ability of Ag Growth to make dividends or make other
payments or advances will be subject to applicable laws and
contractual restrictions contained in the instruments governing
its indebtedness, including the Company’s credit facility and note
purchase agreement. Ag Growth’s credit facility and note purchase
agreement contain restrictive covenants customary for agreements
of this nature, including covenants that limit the discretion of
management with respect to certain business matters. These

covenants place restrictions on, among other things, the ability of
Ag Growth to incur additional indebtedness, to pay dividends or
make certain other payments and to sell or otherwise dispose of
material assets. In addition, the credit facility and note purchase
agreement contain a number of financial covenants that will require
Ag Growth to meet certain financial ratios and financial tests. A
failure to comply with these obligations could result in an event of
default which, if not cured or waived, could permit acceleration of
the relevant indebtedness and trigger financial penalties including
a make-whole provision in the note purchase agreement. If the
indebtedness under the credit facility and note purchase agreement
were to be accelerated, there can be no assurance that the assets
of Ag Growth would be sufficient to repay in full that indebtedness.
There can also be no assurance that the credit facility or any other
credit facility will be able to be refinanced.

International Sales and Operations
A portion of Ag Growth’s sales are generated in overseas markets
and Ag Growth anticipates increasing its offshore sales and
operations in the future. Sales and operations outside of North
America, particularly in emerging markets, are subject to various
risks, including: currency exchange rate fluctuations; foreign
economic conditions; trade barriers; competition with domestic
and international manufacturers and suppliers; exchange controls;
national and regional labour strikes; political risks and risks of
increases in duties; taxes and changes in tax laws; expropriation
of property, cancellation or modification of contract rights,
unfavourable legal climate for the collection of unpaid accounts;
changes in laws and policies governing operations of foreign-based
companies, as well as risks of loss due to civil strife and acts of
war. There is no guarantee that one or more of these factors will
not materially adversely affect Ag Growth’s offshore sales and
operations in the future.

ACCOUNTING POLICY CHANGES
On January 1, 2009, Ag Growth adopted the CICA Handbook
Section 3064, “Goodwill and Intangible Assets,” which replaced
the existing “Goodwill and Intangible Assets” standard. The new
standard revises the requirement for recognition, measurement,
presentation and disclosure of intangible assets. The adoption of
this standard did not have a material impact on the Company’s
consolidated financial statements.

On January 1, 2009, Ag growth adopted Emerging Issues
Committee (“EIC”) Abstract EIC-173, “Credit Risk and the Fair
Value of Financial Assets and Financial Liabilities.” EIC-173
provides further information on the determination of the fair value
of financial assets and financial liabilities under Section 3855,
“Financial Instruments – Recognition and Measurement.” It states
that an entity’s own credit and the credit risk of the counterparty
should be taken into account in determining the fair value of
financial assets and liabilities, including derivative instruments.

EIC-173 is applied retrospectively, without restatement of prior
periods, to all financial assets and liabilities measured at fair value.
The adoption of EIC-173 did not have a have a material impact on
the Company’s consolidated financial statements.

Amendments to 3862, “Financial Instruments – Disclosures,”
establish a fair value hierarchy which requires the Company to
maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The Company
primarily applies the market approach for recurring fair value
measurements. The Section describes three levels of inputs that
may be used to measure fair value:

•

Level 1 – Unadjusted quoted prices in active markets for
identical assets or liabilities. An active market for the asset
or liability in a market in which transactions for the asset or
liability occur with sufficient frequency and volume to provide
pricing information on an ongoing basis.

Level 2 – Observable inputs other than level 1 prices, such as
quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable
or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.

•

Level 3 – Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the
assets or liabilities.

The amended section is to be applied prospectively and is effective
for Ag Growth’s annual financial statements for the year ended
December 31, 2009. This amended accounting policy did not have a
significant impact on Ag Growth’s annual financial statements.

NEW ACCOUNTING STANDARDS

Section 1582, “Business Combinations”
In January 2009, the CICA issued the new Handbook Section 1582,
“Business Combinations” effective for fiscal years beginning on or
after January 1, 2011. Earlier adoption of Section 1582 is permitted.
This pronouncement further aligns Canadian GAAP with U.S.
GAAP and International Financial Reporting Standards (“IFRS”) and
changes the accounting for business combinations in a number of
areas. It establishes principles and requirements governing how
an acquiring company recognizes and measures in its financial
statements identifiable assets acquired, liabilities assumed, any
non-controlling interest in the acquiree, and goodwill acquired. The
section also establishes disclosure requirements that will enable
users of the acquiring company’s financial statements to evaluate
the nature and financial effects of its business combinations.
Ag Growth is considering the impact of the adoption of this
pronouncement on its consolidated financial statements in fiscal
2011 in connection with its conversion to IFRS.

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Section 1601, “Consolidated Financial Statements”
and Section 1602, “Non-Controlling Interests”
In January 2009, the CICA issued the new Handbook Section
1601, “Consolidated Financial Statements,” and Section 1602,
“Non-Controlling Interests,” effective for fiscal years beginning on
or after January 1, 2011. Earlier adoption of these recommendations
is permitted. These pronouncements further align Canadian GAAP
with U.S. GAAP and IFRS. Sections 1601 and 1602 change the
accounting and reporting of ownership interests in subsidiaries
held by parties other than the parent. Non-controlling interests
are to be presented in the consolidated statement of financial
position within equity but separate from the parent’s equity. The
amount of consolidated net income attributable to the parent
and to the non-controlling interest is to be clearly identified and
presented on the face of the consolidated statement of income. In
addition, these pronouncements establish standards for a change
in a parent’s ownership interest in a subsidiary and the valuation
of retained non-controlling equity investments when a subsidiary
is deconsolidated. They also establish reporting requirements
for providing sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests
of the non-controlling owners. Ag Growth is currently considering
the impact of the adoption of these pronouncements on its
consolidated financial statements in fiscal 2011 in connection with
its conversion to IFRS.

Conversion to International Financial Reporting
Standards
In February 2008, the AcSB confirmed that IFRS will replace
Canadian GAAP in 2011 for profit-oriented Canadian publicly
accountable enterprises. Ag Growth will be required to report its
results in accordance with IFRS starting in 2011. Under IFRS, the
primary audience is capital markets and as a result there may be
significantly more disclosure required, particularly for quarterly
reporting. Further, while IFRS uses a conceptual framework
similar to Canadian GAAP, there may be significant differences in
accounting policy that must be addressed.

The Company formally commenced an IFRS conversion project in
the third quarter of 2008 and engaged the services of an external
advisor with IFRS expertise to work with management. Regular
reporting is provided to Ag Growth’s senior management and to
the Audit Committee of the Board of Directors. An assessment was
initiated to examine the extent of the impact that the conversion
may have on financial reporting, business processes, internal
controls and information systems. The Company’s plan is aimed
in particular at identifying the differences between IFRS and the
Company’s current accounting policies, as well as assessing the
impact of various accounting alternatives offered pursuant to IFRS.
Ag Growth’s assessment of key areas including Income Taxes,

Foreign Exchange, and Property Plant and Equipment continued in
2009. The Company will continue to evaluate these and other key
areas in the coming quarters. The financial impact of the transition
to IFRS cannot be reasonably estimated at this time, however,
there will likely be changes in accounting policies and these may
materially impact the Company’s financial statements.

CERTIFICATION OF DISCLOSURE CONTROLS AND
PROCEDURES AND INTERNAL CONTROL OVER
FINANCIAL REPORTING
Management is responsible for the design and operation of
disclosure controls and procedures and internal control over
financial reporting and is required to evaluate the effectiveness of
these controls on an annual basis.

An effective system of disclosure controls and procedures and
internal control over financial reporting is highly dependent
upon adequate policies and procedures, human resources and
information technology. All control systems, no matter how well
designed, have inherent limitations, including the possibility of
human error and the circumvention or overriding of the controls or
procedures. As a result, there is no certainty that our disclosure
controls and procedures or internal control over financial reporting
will prevent all errors or all fraud.

In addition, changes in business conditions or changes in the
nature of the Company’s operations may render existing controls
inadequate or affect the degree of compliance with policies and
procedures. Accordingly, even disclosure controls and procedures
and internal control over financial reporting determined to be
effective can only provide reasonable assurance of achieving their
control objectives.

Disclosure Controls and Procedures
Disclosure controls and procedures are designed to: (a) provide
reasonable assurance that material information required to be
disclosed by us is accumulated and communicated to management
to allow timely decisions regarding required disclosure; and (b)
ensure that information required to be disclosed by us is recorded,
processed, summarized, and reported within the time periods
specified in applicable securities legislation.

Our management, with the participation of the Chief Executive
Officer and the Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures as
of December 31, 2009. Based upon this evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that
these disclosure controls and procedures, as defined by National
Instrument 52-109, Certification of Disclosure in Issuers’ Annual and
Interim Filings, are effective for the purposes set out above.

Internal Control over Financial Reporting
Our management is responsible for designing, establishing and
maintaining an adequate system of internal control over financial
reporting. Our internal control system was designed to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes,
in accordance with Canadian generally accepted accounting
principles (“Canadian GAAP”).

Our management, with the participation of the Chief Executive
Officer and the Chief Financial Officer, has conducted an evaluation
of the effectiveness of our internal control over financial reporting
using the framework recommended by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”)
as at December 31, 2009. Based on that evaluation, management
concluded that our internal control over financial reporting, as
defined by National Instrument 52-109, Certification of Disclosure
in Issuers’ Annual and Interim Filings, is effective to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with
Canadian GAAP.

Changes in Internal Control over Financial Reporting
Under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial Officer, we
have evaluated changes in internal control over financial reporting
that occurred during the fiscal quarter ended December 31, 2009
and found no change that has materially affected, or is reasonably
likely to materially affect, internal control over financial reporting.

The Company’s Board of Directors and Audit Committee reviewed
and approved the 2009 audited consolidated financial statements
and this MD&A prior to its release.

NON-GAAP MEASURES
References to “EBITDA” are to earnings before interest, income
taxes, depreciation, amortization and Conversion costs. References
to “Adjusted EBITDA” are to EBITDA before the gain (loss) on
foreign exchange. Management believes that, in addition to
net income or loss, EBITDA and Adjusted EBITDA are useful
supplemental measures in evaluating the Company’s performance.
EBITDA and Adjusted EBITDA are not financial measures recognized
by GAAP and do not have standardized meanings prescribed by
GAAP. Management cautions investors that EBITDA and Adjusted
EBITDA should not replace net income or loss as indicators of
performance, or cash flows from operating, investing, and financing
activities as a measure of the Company’s liquidity and cash flows.
Ag Growth’s method of calculating EBITDA and Adjusted EBITDA
may differ from the methods used by other issuers.

References to “gross margin” are to sales less cost of goods sold.

Management believes that, in addition to net income or loss, gross
margin provides a useful supplemental measure in evaluating
Ag Growth’s performance. Gross margin is not a financial measure
recognized by GAAP and does not have a standardized meaning
prescribed by GAAP. Management cautions investors that gross
margin 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 Company’s liquidity and cash flows.
Ag Growth’s method of calculating gross margin may differ from
the methods used by other issuers.

References to “funds from operations” are to cash flow from
operating activities, before Conversion costs and before the net
change in non-cash working capital balances related to operations,
less maintenance capital expenditures. Management believes
that, in addition to cash provided by (used in) operating activities,
funds from operations provide a useful supplemental measure in
evaluating its performance. Funds from operations is not a financial
measure recognized by GAAP and does not have a standardized
meaning prescribed by GAAP. The method of calculating funds from
operations may differ from similar computations as reported by
similar entities. Management cautions investors that funds from
operations 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 Company’s liquidity and cash flows.

References to “payout ratio” are to dividends declared as a
percentage of funds from operations. 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
Company’s payout ratio may differ from similar computations
as reported by similar entities and, accordingly, may not be
comparable to the payout ratio as reported by such entities.

ADDITIONAL INFORMATION
Additional information relating to Ag Growth, including
Ag Growth’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

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Russia

Ukraine

Kazakhstan

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Kazakhstan

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AGI Senior Management and International Team
members at a tradeshow in Hannover, Germany.

At the time of our Ipo in 2004, AGI was primarily a north American

company. overseas business was limited to minor distribution

of portable handling equipment in Australia, new Zealand and a

handful of Western european countries.

Since then we have expanded our strategic focus to capitalize on

the growing international demand for grain handling infrastructure.

through acquisitions and research and development, we have

added commercial and industrial equipment to our portfolio of

products. AGI can now offer a spectrum of solutions for the

smallest farm producer to the highest throughput commercial

grain port in the world. this ability will be further enhanced by the

expansion of our storage bin line in nobleford, Alberta.

our export initiative is being driven by our qualified International

Marketing team, boasting eight languages spoken. Most dramatic

is our progress in the highest potential market in eastern europe,

where we increased our presence in such key areas as the Black

Soil region of ukraine, new and expanded port facilities in the Black

Sea of Russia, and the Steppes of Kazakhstan.

AUDITORS’ REPORT

To the Shareholders of Ag Growth International Inc.

We have audited the consolidated balance sheets of Ag Growth International Inc. as at December 31, 2009 and 2008 and the consolidated
statements of earnings and retained earnings (accumulated deficit), comprehensive income (loss) and cash flows for the years then ended.
These financial statements are the responsibility of Ag Growth’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 Ag Growth as at
December 31, 2009 and 2008 and the results of its operations and its cash flows for the years then ended in accordance with Canadian
generally accepted accounting principles.

Winnipeg, Canada
March 5, 2010

Chartered Accountants

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CONSOLIDATED BALANCE SHEETS (See Corporate Conversion – note 2)

2009
$ (000s)

As at December 31
2008
$ (000s)

ASSETS (notes 12 and 13)
Current
Cash and cash equivalents
Accounts receivable
Inventory (note 8)
Prepaid expenses and other assets
Income taxes recoverable
Derivative instruments (note 19)
Future income taxes (note 18)
Total current assets
Property, plant and equipment, net (note 9)
Goodwill
Intangible assets, net (note 11)
Other investment (note 10)
Derivative instruments (note 19)
Future income taxes (note 18)

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current
Accounts payable and accrued liabilities
Customer deposits
Dividends payable
Transaction and financing costs payable (note 25)
Long-term incentive plan (note 21)
Derivative instruments (note 19)
Current portion of deferred credit (note 18)
Current portion of long-term debt (note 13)
Total current liabilities
Long-term debt (note 13)
Convertible unsecured subordinated debentures (note 15)
Deferred credit (note 18)
Future income taxes (note 18)
Derivative instruments (note 19)
Share award incentive plan (note 22)
Total liabilities
Commitments (note 24)
Shareholders’ equity (notes 14, 15 and 16)
Common shares
Accumulated other comprehensive income (loss) (note 14)
Contributed surplus (note 14)
Retained earnings (accumulated deficit)
Total shareholders’ equity

See accompanying notes

On behalf of the Board of Directors:

Bill Lambert
Director

John R. Brodie, FCA
Director

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109,094
25,072
39,432
1,858
598
7,652
10,103
193,809
27,779
52,337
69,023
2,000
1,848
41,054
387,850

13,930
8,340
2,224
1,028
2,184
–
9,305
16
37,027
25,403
103,107
38,601
1,047
–
5,866
211,051

157,279
5,590
8,653
5,277
176,799
387,850

4,391
25,382
43,332
1,187
873
–
–
75,165
28,973
52,337
71,989
–
–
–
228,464

11,789
10,115
5,230
–
191
9,519
–
18
36,862
52,791
–
–
10,162
1,041
2,072
102,928

148,255
(10,560)
1,551
(13,710)
125,536
228,464

CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (ACCUMULATED DEFICIT)

Year Ended December 31

Sales

Cost of goods sold

Gross margin

Expenses

Selling, general and administrative

Stock-based compensation (notes 21, 22 and 23)

Research and development

Other income

Loss (gain) on foreign exchange

Corporate conversion (note 6)

Interest (note 27)

Amortization (note 27)

Earnings before income taxes

Provision for (recovery of) income taxes (note 18)

Current

Future

Net earnings for the year

Accumulated deficit, beginning of year

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Dividends to shareholders

Common shares purchased in the market under normal course issuer bid (note 14)

Net earnings for the year

Retained earnings (accumulated deficit), end of year

Net earnings per share – basic (note 28)

Net earnings per share – diluted (note 28)

See accompanying notes

2009
$ (000s)

237,294

139,156

98,138

31,949

6,491

1,144

(723)

(1,403)

2,113

4,803

8,354

52,728

45,410

774

(667)

107

45,303

(13,710)

(26,316)

–

45,303

5,277

$3.53

$3.45

2008
$ (000s)

199,341

128,264

71,077

27,751

1,520

1,139

(284)

6,389

–

2,733

8,525

47,773

23,304

1,552

540

2,092

21,212

(6,685)

(26,701)

(1,536)

21,212

(13,710)

$1.64

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Net earnings for the year

Other comprehensive income (loss)

Change in fair value of derivatives designated as cash flow hedges

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

Income tax effect on items enumerated above

Other comprehensive income (loss) for the year

Comprehensive income

See accompanying notes

Year Ended December 31

2009
$ (000s)

45,303

12,511

5,894

(2,255)

16,150

61,453

2008
$ (000s)

21,212

(11,410)

311

–

(11,099)

10,113

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CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31

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OPERATING ACTIVITIES

Net earnings for the year

Add (deduct) items not affecting cash

Amortization

Future income taxes

Translation loss (gain) on foreign exchange

Non-cash component of interest expense

Stock-based compensation

Net change in non-cash working capital balances related to operations (note 29)

Cash provided by operating activities

INVESTING ACTIVITIES

Acquisition of property, plant and equipment

Acquisition of assets of Benachee Resources Inc. (note 6)

Acquisition of assets of Applegate Steel Inc., net of cash acquired (note 7)

Proceeds from sale of property, plant and equipment

Transaction and financing costs payable

Payments in current period with respect to acquisitions in prior periods

Cash used in investing activities

FINANCING ACTIVITIES

Repayment of long-term debt

Dividends paid

Issuance of convertible unsecured subordinated debentures, net of issuance costs

Common share issuance costs

Issuance of long-term debt, net of expenses

Transfer from cash held in trust

Purchase of shares in the market under the long-term incentive plan

Purchase of shares in the market under the normal course issuer bid

Cash provided by (used in) financing activities

Net increase (decrease) 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

2009
$ (000s)

45,303

8,354

(667)

(8,029)

778

6,491

52,230

2,160

54,390

(4,771)

(5,000)

–

123

1,028

–

(8,620)

(52,281)

(29,322)

109,936

(50)

30,936

–

(286)

–

58,933

104,703

4,391

109,094

2,813

353

2008
$ (000s)

21,212

8,525

540

8,745

349

1,520

40,891

(29,987)

10,904

(11,197)

–

(3,324)

–

(2,692)

(17,175)

(12)

(23,285)

–

(12)

18,141

1,488

(2,170)

(3,899)

(9,749)

(16,020)

20,411

4,391

2,733

2,775

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 (in thousands of dollars, except where otherwise noted and per share data)

1. DESCRIPTION OF BUSINESS
Ag Growth International Inc. (“Ag Growth” or the “Company”)
acquired all of the trust units of its predecessor, Ag Growth Income
Fund (the “Fund”) in exchange for common shares of Ag Growth
pursuant to an arrangement completed under Section 192 of
the Canada Business Corporations Act effective June 3, 2009.
Ag Growth subsequently reorganized its corporate structure
through a series of wind-ups and a corporate amalgamation (the
“Conversion”) (note 2). Ag Growth conducts business in the grain
handling, storage and conditioning market.

Included in these consolidated financial statements are the
accounts of Ag Growth and its predecessor, the Fund, (collectively
hereinafter referred to as “Ag Growth” or the “Company”) and all of
its subsidiary limited partnerships and incorporated companies.

2. CORPORATE CONVERSION
The Conversion was completed pursuant to a Plan of Arrangement
with, among others, Ag Growth (then known as Benachee
Resources Inc. (“Benachee”)) (note 6). As a result of the Conversion,
holders of Fund trust units and Class B exchangeable units of a
subsidiary of the Fund received one common share of Benachee
in exchange for every unit held on the effective date of the
Conversion, and Benachee changed its name to Ag Growth
International Inc.

The Conversion was accounted for as a continuity of interests of
the Fund since there was no change of control and since Ag Growth
continues to operate the business of the Fund. These consolidated
financial statements reflect Ag Growth as a corporation on and
subsequent to June 3, 2009 and as Ag Growth Income Fund prior
thereto. All references to “common shares” refer collectively
to Ag Growth’s common shares on and subsequent to June 3,
2009 and to Fund units prior to the Conversion. All references
to “dividends” refer to dividends paid or payable to holders of
Ag Growth common shares on and subsequent to June 3, 2009
and to distributions paid or payable to Fund unitholders prior to
the Conversion. All references to “shareholders” refer collectively
to holders of Ag Growth’s common shares on and subsequent
to June 3, 2009 and to Fund unitholders prior to the Conversion.
References to the “Share Award Incentive Plan” should be read as
references to the “Unit Award Incentive Plan” for all periods prior
to the Conversion.

3. SUMMARY OF SIGNIFICANT ACCOUNTING

POLICIES

The significant accounting policies are summarized below:

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

As at December 31, 2009, as a result of an internal reorganization
which comprised of a series of wind-ups and a corporate
amalgamation, the consolidated balance sheets include the
accounts of Ag Growth and its wholly-owned subsidiaries AGX
Holdings Inc., Ag Growth Industries Partnership, Westfield
Distributing (North Dakota) Inc., Hansen, Union Iron, Applegate and
Applegate Trucking Inc.

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

Inventory
Inventory is comprised of raw materials and finished goods.
Ag Growth values inventory at the lower of cost and net realizable
value. The cost of finished goods includes direct costs and an
allocation of fixed manufacturing overhead. Cost is determined on
a first-in, first-out basis. Net realizable value for finished goods and
raw materials is generally considered to be the selling price in the
ordinary course of business less the estimated costs of completion
and estimated costs to make the sale. A review of inventory is
performed at each quarter end to determine if a write-down or
reversal of previously recorded write-downs in carrying value
is required. The write-down and/or reversal of write-down is
recorded in cost of goods sold as recognized.

A
N
N
U
A
L
R
E
P
O
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T

’
0
9

3
9

9
0
’

T
R
O
P
E
R
L
A
U
N
N
A

0
4

(In thousands of dollars, except where otherwise noted and per share data)

Property, Plant and Equipment
Property, plant and equipment are recorded at cost, net of
accumulated 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.

Other Investment
The Company accounts for long-term investments where it has the
ability to exercise significant influence using the equity method of
accounting. In situations where the Company does not exercise
significant influence over a long-term investee that is not quoted for
trading in an active market, the investments are recorded at cost.
In the event there is a loss in value that is other than temporary in
nature, the investment will be written down to its estimated fair
value and the Company will recognize a loss in its consolidated
statement of earnings.

Goodwill
Goodwill represents the amounts paid to acquire Ag Growth, the
Edwards Group, Applegate (note 7 (a)), Union Iron, Twister Pipe
Ltd. and Hansen 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 are being amortized
over their remaining lives of 11 years. 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.

Impairment of Property, Plant and Equipment and
Finite Life Intangible Assets
Impairment of property, plant and equipment and finite life
intangible assets is assessed when an event or change in
circumstances causes the carrying value of the asset to exceed the
total undiscounted cash flows expected from its use and eventual
disposition. The impairment loss is measured by deducting the
estimated fair value of the asset from its carrying value.

Income Taxes
The Company uses the liability method of accounting for income
taxes. Under this method, current income taxes are recognized for
the estimated income taxes payable for the current year. Future
income tax assets and liabilities are recognized for temporary
differences between the tax and accounting bases of assets
and liabilities as well as for the benefit of losses available to be
carried forward to future years for tax purposes that are more
likely than not to be realized. They are measured using enacted
and substantively enacted tax rates expected to apply to taxable
income in the years in which the temporary differences are
expected to be recovered in income.

In June 2007, the Government of Canada enacted new legislation
imposing additional income taxes upon publicly traded income
trusts (specified investment flow-through “SIFT” entities),
including Ag Growth, effective January 1, 2011. Prior to June 2007,
Ag Growth estimated the future income taxes 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 for periods prior to the Conversion, Ag Growth
estimated the effective tax rates 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. Subsequent to the Conversion, Ag Growth
is no longer an income trust and, accordingly, is required to
estimate its future income taxes on the reversals of all temporary
differences, including those reversing before 2011. As a result, an
additional future income tax recovery of $1,598 was recorded as of
the effective date of the Conversion.

Foreign Currency Translation
Ag Growth 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 consolidated 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

(In thousands of dollars, except where otherwise noted and per share data)

rate of exchange except for amortization which is translated at
the historical rates of the related assets. Gains and losses on
translation are reflected in net earnings for the year.

award vests and is reclassified to contributed surplus at such time
the shares are purchased. When the award vests and shares are
released, the contributed surplus is credited to common shares.

Revenue Recognition
Ag Growth 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. 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.

Investment Tax Credits
Federal and provincial investment tax credits are accounted for as
a reduction of the cost of the related assets or expenditures in the
year in which the credits are earned and when there is reasonable
assurance that the credits can be used to recover taxes.

Leases
Leases are classified as either capital or operating. Leases which
transfer substantially all the benefits and risks of ownership of
the property to Ag Growth 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.

Share Award Incentive Plan
Ag Growth has a share award incentive plan (the “ Share Award
Plan”) as described in note 22. The Share Award Plan will be
recognized as a direct award of shares, 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 Ag Growth’s shares 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.

Directors’ Deferred Compensation Plan
As described in note 23, the Directors of Ag Growth participate
in the Directors’ Deferred Compensation Plan whereby they are
required to receive a minimum of 20% of their remuneration in
the form of common shares that vest over a period of three years.
The cost is charged against earnings over the period of time to
which the award vests, and a corresponding amount is recorded
to contributed surplus. When the award vests and shares are
released, the contributed surplus is credited to common shares.

Convertible Unsecured Subordinated Debentures
The carrying value of convertible unsecured subordinated
debentures is being accreted to its maturity value through charges
to income over the term of the debentures based on the effective
interest rate method.

Financial Instruments, Hedges and
Comprehensive Income

Recognition and Measurement

Ag Growth has made the following classifications:

Net Earnings per Share
Net earnings per share is based on the consolidated net earnings
for the year divided by the weighted average number of shares
outstanding during the year. Diluted earnings per share is computed
in accordance with the treasury stock method and based on the
weighted average number of shares and dilutive share equivalents.

Long-term Incentive Plan
Under the terms of the long-term incentive plan (“LTIP”), as
described in note 21, Ag Growth 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. The liability is recorded over the period of time the

•

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, dividends payable, and
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.

A
N
N
U
A
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P
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’
0
9

4
1

9
0
’

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R
L
A
U
N
N
A

2
4

(In thousands of dollars, except where otherwise noted and per share data)

•

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. Financing costs are netted against the carrying value
of the related debt and amortized to interest expense using the
effective interest rate method.

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
until the hedged item is settled, at which time gains or losses
are recorded in earnings.

Transaction costs that are directly attributable to the acquisition
or issue of financial instruments that are classified as
held-to-maturity, loans and receivables, or other financial liabilities
are included in the initial carrying value of such instruments and
amortized using the effective interest rate method.

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.

Hedges

Ag Growth 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 and ineffectiveness is recognized in 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. When hedge accounting is discontinued, the
accumulated gain or loss in other comprehensive income is
deferred and recognized when the gain or loss on the item hedged
is recognized, unless the hedged item is no longer probable of
occurring, then, the accumulated gain or loss is recognized in
current earnings immediately.

Comprehensive income

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.

Employee benefit plans
Ag Growth contributes to group retirement savings plans subject
to maximum limits per employee. Ag Growth accounts for such
defined contributions as an expense in the period in which the
contributions are required to be made. The expense recorded in
2009 was $1,038 (2008 – $781).

Use of estimates
The preparation of financial statements in accordance with
Canadian generally accepted accounting principles (“GAAP”)
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 dates 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 indefinite life intangible assets, goodwill, convertible
unsecured subordinated debentures, assessment of foreign
exchange unit of measure, valuation of accounts receivable,
inventory, income taxes, derivatives, stock-based compensation,
and the estimated useful life of long-lived assets. By their nature,
these estimates are subject to measurement uncertainty and may
impact the consolidated financial statements of Ag Growth in
future periods. Actual results could differ from these estimates.

4. CHANGES IN ACCOUNTING POLICIES
On January 1, 2009, Ag Growth adopted the following Canadian
Institute of Chartered Accountants (“CICA”) Handbook Sections:

Section 3064, “Goodwill and Intangible Assets”
On January 1, 2009, Ag Growth adopted the CICA Handbook
Section 3064, “Goodwill and Intangible Assets,” which replaced
the existing “Goodwill and Intangible Assets” standard. The new
standard revises the requirement for recognition, measurement,
presentation and disclosure of intangible assets. The adoption
of this standard did not have a material impact on Ag Growth’s
consolidated financial statements.

EIC-173, “Credit Risk and the Fair Value of Financial
Assets and Financial Liabilities”
On January 1, 2009, Ag Growth adopted Emerging Issues
Committee (“EIC”) Abstract 173, “Credit Risk and the Fair Value of
Financial Assets and Financial Liabilities.” EIC-173 provides further
information on the determination of the fair value of financial
assets and financial liabilities under CICA Handbook Section 3855,
“Financial Instruments– Recognition and Measurement.” It states

(In thousands of dollars, except where otherwise noted and per share data)

that an entity’s own credit and the credit risk of the counterparty
should be taken into account in determining the fair value of
financial assets and liabilities, including derivative instruments.
EIC-173 is applied retrospectively, without restatement of prior
periods, to all financial assets and liabilities measured at fair
value. The adoption of EIC-173 did not have a material impact on
Ag Growth’s consolidated financial statements.

5. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2009, the CICA issued the new Handbook Section 1582,
“Business Combinations” effective for fiscal years beginning on or
after January 1, 2011. Earlier adoption of Section 1582 is permitted.
This pronouncement further aligns Canadian GAAP with U.S.
GAAP and International Financial Reporting Standards (“IFRS”) and
changes the accounting for business combinations in a number of
areas. It establishes principles and requirements governing how
an acquiring company recognizes and measures in its financial
statements identifiable assets acquired, liabilities assumed, any
non-controlling interest in the acquiree, and goodwill acquired. The
section also establishes disclosure requirements that will enable
users of the acquiring company’s financial statements to evaluate
the nature and financial effects of its business combinations.
Ag Growth is considering the impact of the adoption of this
pronouncement on its consolidated financial statements in fiscal
2011 in connection with its conversion to IFRS.

In January 2009, the CICA issued the new Handbook Section
1601, “Consolidated Financial Statements,” and Section 1602,
“Non-Controlling Interests,” effective for fiscal years beginning on
or after January 1, 2011. Earlier adoption of these recommendations
is permitted. These pronouncements further align Canadian GAAP
with U.S. GAAP and IFRS. Sections 1601 and 1602 change the
accounting and reporting of ownership interests in subsidiaries
held by parties other than the parent. Non-controlling interests
are to be presented in the consolidated statements of cash flows
within equity but separate from the parent’s equity. The amount
of consolidated net income attributable to the parent and to the
non-controlling interest is to be clearly identified and presented on
the face of the consolidated statements of earnings. In addition,
these pronouncements establish standards for a change in a
parent’s ownership interest in a subsidiary and the valuation of
retained non-controlling equity investments when a subsidiary
is deconsolidated. They also establish reporting requirements
for providing sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests
of the non-controlling owners. Ag Growth is currently considering
the impact of the adoption of these pronouncements on its
consolidated financial statements in fiscal 2011 in connection with
its conversion to IFRS.

6. PLAN OF ARRANGEMENT
The Conversion was completed effective June 3, 2009 pursuant
to a Plan of Arrangement with, among others, Benachee. As a
result of the Plan of Arrangement, holders of Fund trust units and
Class B exchangeable units of the Fund received one common
share of Benachee in exchange for every unit held on the effective
date of the Conversion, and Benachee changed its name to
Ag Growth International Inc. Pursuant to the Plan of Arrangement,
consideration in the form of $5.0 million cash, 182,588 common
shares at an estimated fair value of $24.65 per share and par
value $4.0 million of redeemable preferred shares, convertible into
140,452 common shares, was issued to the parent corporation of
Benachee, a participant in the Plan of Arrangement. Immediately
prior to June 3, 2009, Benachee transferred substantially all of its
assets and all of its liabilities to a related company. Ag Growth
recorded its acquisition of Benachee as an acquisition of assets.

The Conversion was accounted for as a continuity of interests of
the Fund since there was no change of control and since Ag Growth
continues to operate the business of the Fund. Transaction costs
related to the Conversion of $2.1 million have been expensed in the
year ended December 31, 2009.

On June 3, 2009, the effective date of the Plan of Arrangement, the
following Benachee assets and liabilities have been recorded in the
consolidated financial statements:

Future income tax asset

Deferred credit (note 18)

Total consideration

Total consideration is comprised of:

Cash

Common shares

Redeemable preferred shares (note 16)

Total consideration

7. ACQUISITIONS

$ (000s)

69,800

56,300

13,500

$ (000s)

5,000

4,500

4,000

13,500

(a) Applegate Steel Inc.
Effective January 15, 2008, Ag Growth acquired substantially all
of the operating assets of Applegate, a manufacturer of livestock
equipment, for cash consideration of $3,441, which includes
transaction costs of $392.

A
N
N
U
A
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R
E
P
O
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’
0
9

4
3

9
0
’

T
R
O
P
E
R
L
A
U
N
N
A

4
4

(In thousands of dollars, except where otherwise noted and per share data)

The acquisition has been accounted for by the purchase method
with the results of Applegate’s operations included in Ag Growth’s
earnings from the date of acquisition. The assets and liabilities
of Applegate 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

Accounts payable and accrued liabilities

Goodwill

Cash consideration, including transaction costs

117

1,276

1,218

2,328

(1,837)

283

3,441

Goodwill at the time of acquisition is deductible for income taxes
over a period of 15 years.

9. PROPERTY, PLANT AND EQUIPMENT

(b) Prior Year Acquisitions
As described in the December 31, 2008 audited consolidated
financial statements, subsequent to December 31, 2007, transaction
costs related to the acquisitions made in prior years were paid from
cash and cash held in trust. As at December 31, 2007, Ag Growth
had cash held in trust in the amount of $1,488. The cash held in
trust was released in 2008.

8. INVENTORY

Raw materials

Finished goods

2009
$

21,580

17,852

39,432

2008
$

20,050

23,282

43,332

During the year ended December 31, 2009, inventories of $139,156
(2008 – $128,264) were expensed through cost of goods sold.
Inventory is recorded at the lower of cost and net realizable value.
There were no write-downs of finished goods and no reversals of
write-downs included in cost of goods sold during the year.

Land

Buildings

Leasehold improvements

Furniture and fixtures

Automotive equipment

Computer equipment

Manufacturing equipment

2009

Accumulated
amortization
$

Net book
value
$

–

1,762

422

390

2,192

907

13,026

18,699

2,504

12,796

547

1,651

504

9,772

27,779

Cost
$

2,504

14,558

427

937

3,843

1,411

22,798

46,478

2008

Accumulated
amortization
$

Net book
value
$

–

1,211

217

241

1,660

702

9,280

13,311

2,504

11,574

210

604

1,567

567

11,947

28,973

Cost
$

2,504

12,785

427

845

3,227

1,269

21,227

42,284

Included in manufacturing equipment above is approximately
$206 (2008 – $885) of construction-in-progress, the cost of which
has not been amortized as this asset was not placed in use as of
December 31, 2009.

10. OTHER INVESTMENT
On December 22, 2009, the Company purchased two million
common shares at $1.00 per share in the private company One
Earth Farms Corp. (“One Earth”), a Canadian corporate farming

organization. In conjunction with the Company’s investment, One
Earth provided Ag Growth with a non-refundable deposit of $2,000
for future purchases of grain handling, storage and conditioning
equipment. As the purchase and the deposit were conditional upon
each other the transaction has been recorded as a non-monetary
exchange. The exchange of non-monetary assets was recorded
at $2,000 representing the fair value of the common shares
at the time of issuance based on the share price paid by other
third parties at that time. The Company’s investment represents
approximately 4.4% of the outstanding shares of One Earth.

(In thousands of dollars, except where otherwise noted and per share data)

11. INTANGIBLE ASSETS

Distribution networks

Brand names

Patents

2009

Accumulated
amortization
$

11,889

–

529

12,418

Net book
value
$

38,225

30,038

760

69,023

Cost
$

50,114

30,038

1,289

81,441

2008

Accumulated
amortization
$

9,016

–

436

9,452

Net book
value
$

41,098

30,038

853

71,989

Cost
$

50,114

30,038

1,289

81,441

12. BANK INDEBTEDNESS
Ag Growth has operating facilities of Cdn. $10 million and U.S.
$2.0 million. The facilities bear interest at a rate of prime plus 0.5%
to prime plus 1.5% per annum based on performance calculations.
The effective interest rate during the year ended December 31,
2009 on Ag Growth’s Canadian dollar term debt was 3.4% (2008 –
4.8%), and on its U.S. dollar term debt was 4.2% (2008 – 5.1%). At
December 31, 2009 and 2008, there were no amounts outstanding
under these facilities. The facilities mature October 29, 2012.
Collateral for the operating facilities rank pari passu with the
Series A secured notes (note 13) and include 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.

13. LONG-TERM DEBT

Series A secured notes

Term loans

GMAC loans

Less current portion

Less deferred financing costs

2009
$

26,165

–

26,212

793

2008
$

–

53,002

53,063

254

25,403

52,791

The Series A secured notes were issued on October 29, 2009. The
non-amortizing notes bear interest at 6.8%, payable quarterly
beginning January 31, 2010, and mature October 29, 2016.

Term loans bear interest at rates of prime plus 0.5% to prime
plus 1.5% based on performance calculations. There were no
term loans outstanding at December 31, 2009 (2008 – $6,920 and
U.S. $37,630). The effective interest rate on Canadian dollar term
loans in 2009 was 3.4% and on U.S. dollar term loans was 4.2%.
During the year, the Company settled interest rate swap contracts
of U.S. $26,500 that were used to fix a portion of its U.S. dollar
denominated debt, and the effective interest rate on the U.S. term
loans after consideration of the interest rate swaps was 4.5%.
Ag Growth’s credit facility provides for term loans of up to Cdn
$38,000 and U.S. $20,500, and matures October 29, 2012.

GMAC loans bear interest at 0% and mature in 2011 and 2014. The
vehicles financed are pledged as collateral.

Collateral for the Series A secured notes and term loans rank
pari passu and include 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.

Principal repayments due within the next five fiscal years and
thereafter are as follows:

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N
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A
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P
O
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0
9

4
5

2010

2011

2012

2013

2014 and thereafter

–

26,165

26,212

(In thousands of dollars, except where otherwise noted and per share data)

14. SHAREHOLDERS’ EQUITY

(a) Common Shares
Authorized – Unlimited number of voting common shares without par value
Issued – 13,020,099 common shares

Fund Trust
units
$

Class B
units
$

Total
Fund Trust
and Class B
units
$

Common
shares
$

(notes 2 and 6)

Balance, December 31, 2007

Purchase of units under LTIP (note 21)

Purchase of units under normal course issuer bid

Issuance costs

Balance, December 31, 2008

Purchase of units under LTIP (note 21)

Settlement of LTIP obligation (note 21)

Balance prior to Conversion

Conversion

Issuance of common shares pursuant to Plan of Arrangement

Preferred shares conversion to common shares (note 16)

Issuance costs

Balance, December 31, 2009

151,439

(2,170)

(2,363)

(12)

146,894

(286)

723

147,331

(147,331)

–

9
0
’

T
R
O
P
E
R
L
A
U
N
N
A

6
4

Balance, December 31, 2007

Purchase of units under LTIP

Purchase of units under normal course issuer bid

Balance, December 31, 2008

Purchase of units under LTIP (note 21)

Settlement of LTIP obligation (note 21)

Balance prior to Conversion

Conversion

Issuance of common shares pursuant to Plan of Arrangement

Preferred shares conversion to common shares (note 16)

Balance, December 31, 2009

1,361

152,800

–

(2,170)

(2,363)

(12)

1,361

148,255

–

1,361

(1,361)

–

(286)

723

148,692

(148,692)

–

Fund Trust
units
#

Class B
units
#

12,818,915

136,085

(70,400)

(200,000)

–

12,548,515

136,085

(11,008)

23,467

12,560,974

(12,560,974)

–

136,085

(136,085)

–

148,692

4,500

4,137

(50)

157,279

Common
shares
#

(notes 2 and 6)

–

12,697,059

182,588

140,452

13,020,099

(In thousands of dollars, except where otherwise noted and per share data)

The 13,020,099 common shares as at December 31, 2009 are net of
57,941 common shares being held by the Company under the terms
of the LTIP until vesting conditions are met.

Prior to the Conversion, there were 136,085 Class B Exchangeable
units outstanding in a subsidiary of the Fund that were
exchangeable for Fund Trust units at the option of the holder on a
one-for-one basis at any time. In conjunction with the Conversion,
these Class B units were exchanged for common shares of
Ag Growth.

Issuance of Common Shares
In conjunction with the Conversion, Ag Growth issued 182,588
common shares from treasury to the sole shareholder of Benachee.
The fair value of the common shares of $24.65 per common share
was based on the average trading price of the Fund’s units on
the two days before and the two days after April 19, 2009, the
date the Fund’s Trustees approved and announced the terms of
the transaction.

Normal Course Issuer Bid
On October 22, 2008, Ag Growth commenced a normal course
issuer bid for up to 1,262,090 common shares, representing 10%
of the Company’s public float at that time. The normal course
issuer bid terminated on October 21, 2009 and was not renewed.
For the year ended December 31, 2008, Ag Growth purchased and
cancelled 200,000 shares for total cash consideration of $3,899.
Ag Growth did not purchase any common shares under the normal
course issuer bid during the year ended December 31, 2009.

On December 10, 2009, Ag Growth commenced a new normal
course issuer bid for up to 1,272,423 common shares, representing
10% of the Company’s public float at that time. The normal course

issuer bid will terminate on December 9, 2010 unless terminated
earlier by Ag Growth. The Company did not purchase any common
shares under the normal course issuer bid during the year ended
December 31, 2009.

(b) Contributed Surplus

Balance, December 31, 2007

Settlement of LTIP obligation

Balance, December 31, 2008

Equity settled director compensation (note 23)

Settlement of LTIP obligation (note 21)

Shares vested under LTIP

Equity component of convertible unsecured
subordinated debentures (note 15)

Equity component of preferred shares (note 16)

Conversion of preferred shares (note 16)

Balance, December 31, 2009

–

1,551

(723)

632

7,146

400

(400)

8,653

Balance, December 31, 2007

Other comprehensive loss in year

Balance, December 31, 2008

Other comprehensive income in year

Balance, December 31, 2009

15. CONVERTIBLE UNSECURED SUBORDINATED DEBENTURES

Principal amount

Equity component

Accretion

Financing fees, net of amortization

Convertible unsecured subordinated debentures

2009
$

115,000

(7,475)

185

(4,603)

103,107

539

(11,099)

(10,560)

16,150

5,590

2008
$

–

On October 27, 2009, the Company issued convertible unsecured
subordinated debentures in the aggregate principal amount of $100
million, and on November 6, 2009 the underwriters exercised in full
their over-allotment option and the Company issued an additional

$15 million of debentures (the “Debentures”). The net proceeds of
the offering, after payment of the underwriters’ fee of $4.6 million
and expenses of the offering of $0.5 million, were approximately
$109.9 million. The Debentures were issued at a price of $1,000

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(In thousands of dollars, except where otherwise noted and per share data)

per Debenture and bear interest at an annual rate of 7.0%
payable semi-annually on June 30 and December 31 in each year
commencing June 30, 2010. The maturity date of the Debentures is
December 31, 2014.

Each Debenture is convertible into common shares of the Company
at the option of the holder at any time on the earlier of the maturity
date and the date of redemption of the Debenture, at a conversion
price of $44.98 per common share being a conversion rate of
approximately 22.2321 common shares per $1,000 principal amount
of Debentures. Ag Growth has reserved 2,556,692 common shares
for issuance upon conversion of the Debentures.

On redemption or at maturity, the Company may, at its option,
elect to satisfy its obligation to pay the principal amount of the
Debentures by issuing and delivering common shares. The Company
may also elect to satisfy its obligations to pay interest on the
Debentures by delivering common shares. The Company does not
expect to exercise this option and as a result the potentially dilutive
impact has been excluded from the calculation of fully diluted
earnings per share (note 28). The number of any shares issued will
be determined based on market prices at the time of issuance.

The Company presents and discloses its financial instruments in
accordance with the substance of its contractual arrangement.
Accordingly, upon issuance of the Debentures, the Company
recorded a liability of $107,525, less related offering costs of
$4,735. The liability component has been accreted using the
effective interest rate method, and in the year ended December 31,
2009 the Company recorded accretion of $185 and related interest
expense of $1,456. The estimated fair value of the holder’s
option to convert Debentures to common shares in the amount
of $7,475 has been separated from the fair value of the liability
and is included in shareholders’ equity, net of its pro rata share of
financing costs of $329.

16. REDEEMABLE PREFERRED SHARES
Pursuant to the Plan of Arrangement completed on June 3, 2009,
Ag Growth issued 4,000,000 redeemable preferred shares with a
stated value of $1.00 per share. The preferred shares were entitled
to receive fixed cumulative preferential cash dividends, as and
when declared by the Board of Directors, out of monies properly
applicable to the payment of dividends at a rate of $0.05 per share
per annum. Each redeemable preferred share was also convertible
at the holder’s option into 0.035113 of a common share, and
effective October 15, 2009, the redeemable preferred shares were
converted to 140,452 common shares.

The Company presents and discloses its financial instruments in
accordance with the substance of its contractual arrangement.
Accordingly, on the effective date of the Conversion, $3.6 million
of the Company’s redeemable preferred shares were classified as
a liability since the Company was obligated to pay cash to redeem
these preferred shares. The liability component has been accreted
using the effective interest rate method until October 15, 2009
when the liability was settled for common shares, and in the year
ended December 31, 2009, the Company recorded accretion of $137
and related interest expense of $58. The estimated fair value of the
holder’s option to convert the Class A preferred shares to common
shares in the amount of $400 has been separated from the fair
value of the liability and was recorded to contributed surplus. Upon
conversion to common shares, the accreted value of the preferred
share liability of $3,737 and the equity component of preferred
shares of $400 were transferred to common shares.

17. CAPITAL STRUCTURE
Ag Growth’s capital structure is comprised of shareholders’ equity
and long-term debt. Ag Growth’s objectives when managing
its capital structure are to maintain and preserve Ag Growth’s
access to capital markets, continue its ability to meet its financial
obligations, including the payment of dividends, and finance organic
growth and acquisitions.

Ag Growth monitors its capital structure using non-GAAP financial
metrics including net debt to earnings before interest, taxes,
depreciation and amortization (“EBITDA”) and corporate conversion
costs for the immediately preceding 12-month period and net debt
to shareholders’ equity. Ag Growth defines net debt as long-term
debt plus the liability component of Debentures, less cash and
cash equivalents.

Ag Growth’s optimal capital structure targets to maintain its
net debt to EBITDA ratio at levels below 2.5, after taking into
consideration the impacts of industry cyclicality and acquisitions.
The table below calculates the ratio based on EBITDA achieved in
the previous 12 months:

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(In thousands of dollars, except where otherwise noted and per share data)

Net debt

EBITDA

Ratio

2009

19,416

60,680

2008

48,400

34,562

0.32 times

1.40 times

Ag Growth’s optimal capital structure targets to maintain its
net debt to shareholders’ equity ratio at levels below 1.0, after
taking into consideration the impacts of industry cyclicality
and acquisitions:

Net debt

Shareholders’ equity

2009

19,416

176,799

2008

48,400

125,536

Ratio

0.11 times

0.39 times

Ag Growth’s capital management objectives, evaluation measures,
definitions and targets have changed over the periods presented to
incorporate the issuance of its Debentures. Ag Growth is subject
to certain financial covenants in its credit facility agreement which
must be maintained to avoid acceleration of the termination of the
agreement. Ag Growth is in compliance with all financial covenants.

18. INCOME TAxES
Ag Growth converted from a publicly traded income trust to
a publicly traded corporation on June 3, 2009 (notes 2 and 6).
Accordingly, Ag Growth’s calculation of current and future income
taxes for the year ended December 31, 2009 is based on the
conversion to a corporate structure, whereas the calculation of
current and future income taxes for the year ended December 31,
2008 is based on Ag Growth being a publicly traded income trust.

The components of income tax expense are as follows:

Current

Future

Future SIFT

Provision for income taxes

2009
$

774

(667)

–

107

2008
$

1,552

110

430

2,092

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:

Earnings before income taxes and other comprehensive income

SIFT temporary differences

Earnings subject to tax in the hands of unitholders/limited

partners (note 2)

Corporate income subject to tax

Tax at statutory rate of 30.71% (2008 – 36.12%)

Charge against deferred credit

Establishment of future tax due to conversion to a corporation

Tax rate changes

Foreign rate differential

Permanent differences and other

Corporate income tax provision

Future SIFT income tax

Provision for income taxes

2009
$

45,410

–

(10,843)

34,567

10,616

(8,394)

(1,598)

399

180

(1,096)

107

–

107

2008
$

23,304

8,117

(26,701)

4,720

1,705

–

(43)

–

1,662

430

2,092

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(In thousands of dollars, except where otherwise noted and per share data)

Ag Growth’s future income tax asset and liability are comprised of the following components:

Future tax liability related to derivatives included in other comprehensive income

Future tax asset related to property, plant and equipment, tangible assets, non-capital losses,

exploration and development expenses, and investment tax credits

Future tax asset – current

Future tax liability related to derivatives included in other comprehensive income

Future tax asset related to property, plant and equipment, intangible assets, non-capital losses,

exploration and development expenses, and investment tax credits

Valuation allowance – Canadian non-capital losses and exploration and development expenses

Future tax asset related to other temporary differences

Future tax asset – long-term

Future tax liability – U.S. Operations

Future tax liability related to property, plant and equipment, intangible assets, non-capital losses,

exploration and development expenses, and investment tax credits

Future tax asset related to other temporary differences

Future tax liability – long-term

Net total

Ag Growth has available to carry forward the following as at December 31, 2009 and 2008:

Canadian non-capital losses

Canadian federal and provincial investment tax credits

Canadian exploration and development expenses

2009
$

(1,765)

11,868

10,103

(490)

62,984

(23,483)

2,043

41,054

(1,047)

–

(1,047)

50,110

2009
$

103,096

4,711

103,269

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2008
$

–

(190)

(10,588)

616

(10,162)

2008
$

–

As at December 31, 2009, the non-capital loss carryforwards
available to reduce future years taxable income expire in 2027. The
Canadian federal and provincial investment tax credits have an
expiry period ranging from 2025 to 2029. The Canadian exploration
and development expenses may be carried forward indefinitely.

Included in the $4,711 Canadian federal and provincial investment
tax credits is $4,229 of investment tax credits related to assets
acquired under the plan of arrangement. The remainder relate to
manufacturing and processing tax credits.

The Company recorded a deferred credit relating to the difference
between the future income tax asset and the amount of the
consideration paid pursuant to the Plan of Arrangement. The credit
is being amortized to income in proportion to the reversal of the

future tax asset. As at December 31, 2009 the balance of the
deferred credit is $47,906.

Income tax provisions, including current and future income tax
assets and liabilities, require estimates and interpretations of
federal and provincial income tax rules and regulations, and
judgments as to their interpretation and application to Ag Growth’s
specific situation. The amount and timing of reversals of temporary
differences will also depend on Ag Growth’s future operating
results, acquisitions and dispositions of assets and liabilities.
Therefore, it is possible that the ultimate value of Ag Growth’s
income tax assets and liabilities could change in the future and that
changes to these amounts could have a material effect on these
consolidated financial statements.

(In thousands of dollars, except where otherwise noted and per share data)

19. FINANCIAL INSTRUMENTS AND FINANCIAL

RISK FACTORS

Ag Growth has the following financial instruments: cash and cash
equivalents, accounts receivable, accounts payable and accrued
liabilities, transaction and financing costs payable, long-term debt,
convertible unsecured subordinated debentures, interest rate swap
arrangements and foreign exchange contracts.

Ag Growth is exposed to financial risks arising from its financial
assets and liabilities. Ag Growth’s objectives in managing these
risks are to protect from volatility in net earnings and to minimize
exposure from fluctuations in market rates. The financial risks
include foreign exchange risk, interest rate risk, credit risk and
liquidity risk as follows:

(a) Foreign Exchange Risk
Ag Growth operates primarily in North America and as a result
fluctuations in the rate of exchange between the U.S. and
Canadian dollar can have a significant effect on its cash flows and
reported results. To mitigate exposure to the fluctuating rate of
exchange, Ag Growth enters into foreign exchange contracts and
denominates a portion of its debt in U.S. dollars. At December 31,
2009, Ag Growth’s U.S. dollar denominated debt totalled U.S.
$25.0 million and the Company has entered into the following
foreign exchange contracts to sell U.S. dollars in order to hedge its
foreign exchange risk:

Settlement dates

Face value
U.S. $

Average rate
Cdn. $

January 2010 to December 2010

January 2011 to November 2011

50,000

45,000

1.1722

1.0955

At December 31, 2009, Ag Growth had outstanding a series of
foreign exchange call and put options not designated as a hedge
instrument as follows:

CALLS
Expiration date

March 30, 2010

October 28, 2010

December 31, 2010

PUTS
Expiration date

March 30, 2010

October 28, 2010

December 31, 2010

Face value
U.S. $

Strike price
$

2,000

5,000

3,000

1.2200

Face value
U.S. $

Strike price
$

4,000

10,000

6,000

1.3050

Ag Growth’s sales denominated in U.S. dollars for the year ended
December 31, 2009 were U.S. $149.1 million, and the total of its
cost of goods sold and its selling, general and administrative
expenses denominated in that currency were U.S. $66.9 million.
Accordingly, a 10% increase or decrease in the value of the
U.S. dollar relative to its Canadian counterpart would result in a
$14.9 million increase or decrease in sales and a total increase or
decrease of $6.7 million in its cost of goods sold and its selling,
general and administrative expenses. In relation to Ag Growth’s
foreign exchange hedging contracts, a 10% increase or decrease
in the value of the U.S. dollar relative to its Canadian counterpart
would result in an increase or decrease in the foreign exchange loss
of $7.2 million and an increase or decrease to other comprehensive
income of $9.9 million.

(b) Interest Rate Exposures
Ag Growth has historically been subject to risks associated with
fluctuating interest rates on its long-term debt and to manage this
risk entered into interest rate swap transactions with a Canadian
chartered bank. Ag Growth’s long-term debt at December 31, 2009
consists of fixed rate debt and there were no interest rate swap
transactions outstanding.

At December 31, 2009, if interest rates on debt were to fluctuate
by 1%, and all other variables were held constant, the impact on
Ag Growth’s earnings before income taxes would be $241.

(c) Credit Risk
Credit risk is the risk that a customer will fail to perform an
obligation or fail to pay amounts due causing a financial loss. A
substantial portion of Ag Growth’s accounts receivable is with
customers in the agriculture industry and is subject to normal
industry credit risks. This credit exposure is mitigated through
the use of credit practices that limit transactions according to
the customer’s credit quality and due to the accounts receivable
being spread over a large number of customers. Ag Growth
establishes a reasonable allowance for non-collectible amounts
with this allowance netted against the accounts receivable on the
consolidated balance sheets. Ag Growth does not hold collateral as
security for these balances.

Ag Growth does not believe it has significant concentration risk.
The maximum credit risk exposure associated with accounts
receivable is the total carrying value.

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(In thousands of dollars, except where otherwise noted and per share data)

As is typical in the agriculture sector, Ag Growth may offer
extended terms on its accounts receivable to match the cash flow
cycle of its customer. The table below sets out the details of the
accounts receivable balances outstanding as at December 31,
2009, based on the status of the receivable in relation to when the
receivable is due and payable:

Neither impaired nor past due

Not impaired and past the due date as follows:

Within 30 days

31 to 60 days

61 to 90 days

Over 90 days

Allowance for doubtful accounts

Total accounts receivable

17,552

3,457

927

795

2,840

(499)

25,072

There were no accounts receivable deemed uncollectible. In the
event that an amount is deemed uncollectible, the credit loss is
charged against the allowance.

The following table represents a summary of the movement of the
allowance for doubtful accounts:

Balance, beginning of year

Allowance for doubtful accounts

Write-off of specific accounts receivable

Balance, end of year

2009
$

528

220

(249)

499

2008
$

197

361

(30)

528

(d) Liquidity Risk
Liquidity risk is the risk Ag Growth will encounter difficulties in
meeting its financial liability obligations. Ag Growth manages its
liquidity risk through cash and debt management. In managing
liquidity risk, Ag Growth has access to committed short and
long-term debt facilities as well as to equity markets, the
availability of which is dependent on market conditions. Ag Growth
believes it has sufficient funding through the use of these facilities
to meet foreseeable borrowing requirements.

The following are the contractual maturities of non-derivative
financial liabilities as at December 31, 2009:

Accounts payable and accrued liabilities

Long-term debt, including the current portion

Dividends payable

Carrying
amount
$

Contractual
cash flows
$

13,930

26,212

2,224

13,930

26,212

2,224

Convertible unsecured subordinated debentures

103,107

Transaction and financing costs payable

1,028

146,501

0 to 6
months
$

13,930

2,224

–

1,028

17,190

6 – 12
months
$

12 – 24
months
$

–

After 24
months
$

–

26,180

–

103,107

–

129,287

Fair value
Amendments to Section 3862, “Financial Instruments –
Disclosures,” establish a fair value hierarchy which requires the
Company to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The
Company primarily applies the market approach for recurring fair
value measurements. The Section describes three levels of inputs
that may be used to measure fair value:

Level 1 – Unadjusted quoted prices in active markets for identical
assets or liabilities. An active market for the asset or liability in a
market in which transactions for the asset or liability occur with
sufficient frequency and volume to provide pricing information on
an ongoing basis.

Level 2 – Observable inputs other than level 1 prices, such as
quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially
the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no
market activity and that are significant to the fair value of the
assets or liabilities.

The following table presents information about the Company’s
assets and liabilities measured at fair value on a recurring basis as
of December 31, 2009 and indicates the fair value hierarchy of the
valuation techniques used to determine such fair value.

(In thousands of dollars, except where otherwise noted and per share data)

Assets

Cash and cash equivalents

Derivative financial instruments

Level 1
$

109,094

–

Level 2
$

–

9,500

Level 3
$

–

Total
$

109,094

9,500

The fair value of a financial instrument on initial recognition
is normally the transaction price, which is the value of the
consideration given or received.

At December 31, 2009, the carrying value of cash and cash
equivalents, accounts receivable, accounts payable and accrued
liabilities and transaction and financing costs payable approximates
their fair value due to the relatively short period to maturity.
Long-term debt with a variable interest rate is carried at amortized
cost, which approximates fair value. Derivatives are valued based
on market quotations. 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. At December 31, 2009,
the fair value and carrying value of the foreign exchange contracts
was an unrealized gain of $9,500 (2008 – loss of $10,101) and there
were no interest rate swaps outstanding (2008 – the fair value
and carrying value of the interest rate swaps that were part of an
effective hedging relationship was an unrealized loss of $459).

As at the issuance date, the fair value of the liability component of
the debenture was estimated by discounting the future payments
of interest and principal over the period to their maturity date of
December 31, 2014. As at December 31, 2009, the fair value of
the liability component of the debenture using the same valuation
technique was approximately $106,400.

Over the next 12 months, Ag Growth expects to realize an
estimated $6.0 million in net gains presently reported in
accumulated other comprehensive income as unrealized gains as at
December 31, 2009.

20. SEGMENTED DISCLOSURE
Ag Growth operates in one business segment related to the
manufacturing and distributing of grain handling, storage and
conditioning equipment. Geographic information about Ag Growth’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

2009
$

61,246

159,533

16,515

237,294

2008
$

49,762

132,222

17,357

199,341

2009
$

106,313

42,826

–

149,139

2008
$

108,585

44,714

–

153,299

21. LONG-TERM INCENTIVE PLAN
Pursuant to the LTIP, the Company establishes the amount to be
allocated to eligible participants based upon the amount by which
distributable cash, as defined in the LTIP, exceeds a predetermined
threshold. The amount owing to participants is recorded as a
long-term incentive plan liability with the offset recorded to net
earnings. At such time that the common shares are purchased the
liability is reclassified to contributed surplus under shareholders’

equity. In April 2009, the administrator purchased 11,008 common
shares in the market for $286 to satisfy its obligation related
to fiscal 2008. During the year ended December 31, 2009, $91
was reclassified from the long-term incentive plan liability to
contributed surplus.

The common shares awarded vest over a three-year period
commencing one year after the fiscal year of the award. As at
December 31, 2009, 23,467 LTIP common shares have vested to the

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participants. Cash dividends paid on common shares held by the
administrator are payable to participants in the plan. The expense
related to the LTIP is recorded in relation to the vesting period and
accordingly, the total award will be expensed as to 36% in the
initial fiscal year and 36%, 20% and 8% in the next three fiscal
years, respectively, subsequent to the current year. For the year
ended December 31, 2009, Ag Growth has recorded an expense
with respect to the LTIP of $2,650 (2008 – $850). The amount to be
expensed in future periods with respect to the LTIP is $4,037.

22. SHARE AWARD INCENTIVE PLAN
The Company has a share award incentive plan which authorizes
the Directors to grant awards (“Share Awards”) to employees
or officers of Ag Growth or any affiliates of the Company or
consultants or other service providers to the Company and its
affiliates (“Service Providers”). Share Awards may not be granted
to non-management Directors.

Under the terms of the Share Award Incentive Plan (the “Share
Award Plan”), any Service Provider may be granted Share Awards.
Each Share Award will entitle the holder to be issued the number
of common shares designated in the Share Award, upon payment
of an exercise price of $0.10 per common share and the common
shares 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 Directors. In
lieu of receiving common shares, the holder, with the consent
of Ag Growth, may elect to be paid cash for the market value
of the common shares in excess of the exercise price of the
common shares. The Share Award Plan provides for immediate
vesting of the Share Awards in the event of retirement, death,
termination without cause or in the event the Service Provider
becomes disabled.

The shareholders reserved for issuance 220,000 common shares,
subject to adjustment in lieu of dividends, if applicable. The
aggregate number of Share Awards granted to any single Service
Provider shall not exceed 5% of the issued and outstanding
common shares of Ag Growth. In addition:

(a) The number of common shares issuable to insiders at any time,
under all security based compensation arrangements of the
Company, shall not exceed 10% of the issued and common
shares of Ag Growth; and

(b) The number of common shares issued to insiders, within

any one-year period, under all security based compensation
arrangements of the Company, shall not exceed 10% of the
issued and outstanding common shares of Ag Growth.

220,000 Share Awards have been granted and remain outstanding
as at December 31, 2009. For the year ended December 31, 2009,
Ag Growth recorded an expense of $3,794 for the Share Awards
(2008 – $670).

23. DIRECTORS’ DEFERRED COMPENSATION PLAN
On May 8, 2008, the shareholders of Ag Growth approved the
adoption by the Company of the Directors’ Deferred Compensation
Plan (the “Plan”), which provides that a minimum of 20% of the
remuneration of non-management Directors be payable in common
shares of the Company. The principal purpose of the Plan is to
encourage non-management Director ownership of common
shares. A Director will not be entitled to receive the common
shares granted for three years from the date of grant or until the
Director ceases to be a Director, whichever is earlier. Director
remuneration under the Plan will be expensed over the three-year
vesting period of the share grants. For the year ended December 31,
2009, Ag Growth recorded an expense of $47 (2008 – nil) for the
share grants, and a corresponding amount has been recorded to
contributed surplus.

The price to be used for determining the number of common
shares to be granted will be the weighted average trading price of
common shares for the ten trading days preceding the Company’s
financial quarter. The total number of common shares issuable
pursuant to the Plan shall not exceed 35,000, subject to adjustment
in lieu of dividends, if applicable. Mandatory participation in the
Plan commenced January 1, 2009. As at December 31, 2009, a total
of 8,419 common shares had been granted under the Plan and no
common shares had been issued.

24. COMMITMENTS
Ag Growth has entered into various operating leases for office
and manufacturing equipment, warehouse facilities and vehicles.
Future minimum annual lease payments required in aggregate are
as follows:

2010

2011

2012

2013

2014

1,305

680

208

114

104

2,411

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4
5

(In thousands of dollars, except where otherwise noted and per share data)

The Company has entered into commitments of $16.2 million
in relation to building and equipment which will be incurred
throughout 2010.

25. RELATED PARTY TRANSACTION
Burnet, Duckworth & Palmer LLP provides legal services to the
Company and a Director of Ag Growth is a partner of Burnet,
Duckworth & Palmer LLP. The total cost of these legal services
related to the Conversion and the debenture offering during the
year ended December 31, 2009 was $0.9 million (2008 – nil) and
are included in transaction and financing costs payable. These
transactions are measured at the exchange amount and were
incurred during the normal course of business on similar terms and
conditions to those entered into with unrelated parties.

26. STOCK OPTION PLAN
On June 3, 2009, the shareholders of Ag Growth approved a stock
option plan (the “Option Plan”) under which options may be granted
to officers, employees and other eligible service providers in order
to provide an opportunity for these individuals to increase their
proprietary interest in Ag Growth’s long-term success.

The Company’s Board of Directors or a Committee thereof shall
administer the Option Plan and designate the individuals to whom
options may be granted and the number of common shares to be
optioned to each. The maximum number of common shares issuable
on exercise of outstanding options at any time may not exceed
7.5% of the aggregate number of issued and outstanding common
shares, less the number of common shares issuable pursuant to
all other security based compensation agreements. The number of
common shares reserved for issuance to any one individual may not
exceed 5% of the issued and outstanding common shares.

Options will vest and be exercisable as to one-third of the total
number of common shares subject to the options on each of the
first, second and third anniversaries of the date of the grant. The
exercise price of the options shall be fixed by the Board of Directors
or a Committee thereof on the date of the grant and may not be
less than the market price of the common shares on the date of the
grant. The options must be exercised within five years of the date
of the grant.

As at December 31, 2009, a total of 970,319 options are available
for grant. No options have been granted as at December 31, 2009.

27. SUPPLEMENTAL ExPENSE INFORMATION

(a) Interest expense

Interest on short-term debt

Interest on long-term debt

Interest on redeemable preferred shares

Interest on convertible unsecured subordinated debentures

(b) Amortization

Amortization of property, plant and equipment

Amortization of intangible assets

2009
$

116

2,719

195

1,773

4,803

2009
$

5,388

2,966

8,354

2008
$

262

2,471

–

2,733

2008
$

5,545

2,980

8,525

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5
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(In thousands of dollars, except where otherwise noted and per share data)

28. NET EARNINGS PER SHARE

Net earnings available to common shareholders

Add back: interest on convertible unsecured subordinated debentures

Numerator for diluted earnings per share

Basic weighted average number of shares

Dilutive effect of convertible unsecured subordinated debentures

Dilutive effect of directors’ deferred compensation plan

Dilutive effect of share award incentive plan

Diluted weighted average number of shares

Basic earnings per share

Diluted earnings per share

2009
$

45,303

1,137

46,440

2008
$

21,212

–

21,212

12,835,166

12,938,988

462,306

6,700

155,549

–

13,459,721

12,938,988

$3.53

$3.45

9
0

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6
5

29. 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:

Decrease (increase) in current assets

Accounts receivable

Inventory

Prepaid expenses and other assets

Income taxes recoverable

Increase (decrease) in current liabilities

Accounts payable and accrued liabilities

Customer deposits

Income taxes payable

Long-term incentive plan

2009
$

310

3,900

(671)

275

3,814

2,141

(3,775)

–

(20)

(1,654)

2,160

$1.64

2008
$

(14,182)

(13,155)

304

(873)

(27,906)

(359)

(1,444)

(369)

(2,081)

(29,987)

30. DIVIDENDS
Ag Growth’s current dividend policy is to pay cash dividends on
or about the 30th of each month to shareholders of record on the
last business day of the previous month. Ag Growth’s predecessor,
Ag Growth Income Fund, was required by its Declaration of Trust to
distribute all of its distributable cash in a fiscal year and as a result
in the year ended December 31, 2008 declared a special distribution
of $0.24 per trust unit.

For the year ended December 31, 2009, Ag Growth declared
dividends to public security holders of $26,307, which equated to
$2.05 basic weighted average per share (2008 – $26,701 and $2.07
basic weighted average per share). Dividends of $9 were declared
to holders of the preferred shares.

31. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to
conform to the current year’s presentation.

Officers

Rob Stenson, Chief Executive Officer and Director

Gary Anderson, President, Chief Operating Officer and Director

Steve Sommerfeld, CA, Chief Financial Officer

Dan Donner, Vice President Sales and Marketing

Paul Franzmann, CA, Vice President Corporate Development, Southern Business Group

Doug Weinbender, Vice President Operations, Western Business Group

Ron Braun, Vice President and General Manager, Westfield Industries

Eric Lister, Q.C., Counsel

Directors

Rob Stenson

Gary Anderson

John R. Brodie, FCA, Audit Committee Chairman

Bill Lambert, Board of Directors Chairman

Bill Maslechko, Governance Committee Chairman

David White, CA

Additional information relating to the Company, including all public filings,

is available on SEDAR (www.sedar.com).

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AG GROWTH INTERNATIONAL