AG Growth Income Fund
TSX : AFN.UN

AG Growth Income Fund

November 10, 2006 08:06 ET

Ag Growth Income Fund Announces 2006 Third Quarter Results

WINNIPEG, MANITOBA--(CCNMatthews - Nov. 10, 2006) - Ag Growth Income Fund (TSX:AFN.UN) today reported its financial results for the three and nine-month periods ended September 30, 2006.

Nine Months Ended September 30, 2006

For the nine months ended September 30, 2006, the Fund generated distributable cash of $17.2 million and declared distributions of $14.1 million, resulting in a surplus of $ 3.1 million that equates to a year-to-date payout ratio of 82%. Sales for the period were $64.3 million, compared to $67.1 million in the prior year, a decrease of approximately 4%. The Fund reported EBITDA of $18.9 million for the nine-month period in 2006, a decrease of approximately 6% from EBITDA of $20.1 million reported in the prior year.

Results for the nine-month period ended September 30, 2006 were negatively impacted by the continuing strength of the Canadian dollar, which resulted in a decrease in recorded sales of $3.5 million, and hot and dry weather in western Canada that led to low in-season demand for aeration equipment. It is important to note that sales and EBITDA in 2005 were the highest ever recorded by the Fund and its predecessors, primarily due to the size of the 2004 and 2005 U.S. corn and soybean crops. Adjusting for the impact of foreign exchange, and excluding the Edwards division as it was included in results only subsequent to its April 8, 2005 acquisition date, sales increased $0.7 million over 2005, a reflection of the Fund's strong and sustained market share in its key U.S. markets.

Three Months Ended September 30, 2006

For the three months ended September 30, 2006, the Fund generated distributable cash of $6.5 million and declared distributions of $4.7 million, resulting in a surplus of $1.8 million that equates to a payout ratio of 72% for the quarter. Sales and EBITDA for the three-month period in 2006 were $22.0 million and $7.1 million respectively, compared to $26.8 million and $8.1 million for the same period in 2005.

Sales at the Edwards division, a manufacturer of aeration equipment, decreased significantly compared to the third quarter of 2005 due to low in-season demand that resulted from hot and dry weather in its regional western Canadian market. The Edwards product line remains geared towards the western Canadian market and accordingly the division is exposed to regional weather conditions. New products designed for the U.S. market were recently introduced, however the new product line has not yet impacted results. The Fund was also negatively impacted by the continuing strength of the Canadian dollar, which management estimates reduced consolidated sales by $1.5 million in the third quarter compared to the third quarter of 2005.

Distributions

During the three and nine-month periods ended September 30, 2006, the Fund made distributions at an annualized rate of $1.68 per unit. Total distributions in 2005, including special distributions, were $1.73 per unit. For the period from the Fund's initial public offering on May 18, 2004 to September 30, 2006, the Fund has declared distributions of $42.2 million, or 85.2% of the $49.5 million total distributable cash generated in that period.

Overview of Results

"Once again we have capitalized on favourable conditions in the U.S. corn-belt", said Gary Anderson, President of Ag Growth Income Fund, "this is our largest market and our performance in 2006 provides evidence that we have been able to sustain our market share gains of the last few years. Overall our results were mixed, due to the appreciation of the Canadian dollar and the impact of poor conditions in western Canada. Although activity at our Edwards division will likely remain subdued for the next several quarters, we remain cautiously optimistic heading into 2007 due to positive industry fundamentals in the U.S., including crop planting intentions and storage trends."

Distribution Policy

The Fund's policy is to make monthly distributions to holders of both Fund units and Class B Exchangeable limited partnership units. The Fund's Declaration of Trust requires that it distribute all taxable income earned in its fiscal period ending December 31. It may be necessary for the Fund to estimate special distributions to achieve this requirement. The Fund's Board of Trustees reviews financial performance and other factors when assessing the Fund's distribution levels. An adjustment to distribution levels will be made at such time as the Board determines the adjustment is sustainable and in the long-term best interest of the Fund and its unitholders.

Board of Trustees

The Fund announced that effective today the number of Trustees of the Fund has been increased by one for a total of nine. Mr. Bill Maslechko, a partner at the law firm of Burnet, Duckworth & Palmer LLP, has been appointed a Trustee of the Fund.

Company Profile

Ag Growth is a leading manufacturer of portable grain handling and conditioning equipment, including augers, belt conveyors, grain handling accessories and grain aeration equipment. Ag Growth's sales, marketing, and distribution system includes approximately 1,400 dealers and distributors in 48 states and nine provinces.

Non-GAAP measures

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

Distributable cash is a non-GAAP measure generally used by Canadian income funds as an indicator of financial performance. The Fund defines distributable cash as EBITDA less interest expense, maintenance capital expenditures, and current taxes. Distributable cash is not a financial measure recognized by Canadian generally accepted accounting principles ("GAAP") and does not have a standardized meaning prescribed by GAAP. The method of calculating the Fund's distributable cash may differ from similar computations as reported by similar entities and, accordingly, may not be comparable to distributable cash as reported by such entities.

Forward-Looking Statements

The statements contained in this news release may contain forward-looking statements that reflect our expectations regarding the future growth, results of operations, performance and business prospects, and opportunities of the Fund. Forward-looking statements contain such words as "anticipate", "believe", "continue", "could", "expects", "intend", "plans" or similar expressions suggesting future conditions or events. Such forward-looking statements reflect our current beliefs and are based on information currently available to us. Forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results to differ materially from results discussed in the forward-looking statements, including changes in national and local business conditions, decreased crop yields, industry cyclicality, and competition. These risks and uncertainties are fully described in our 2005 Annual Report and our Annual Information Form dated March 16, 2006. Further information about these and other risks and uncertainties can be found in the disclosure documents filed by Ag Growth Income Fund with the securities regulatory authorities, available at www.sedar.com.



AG GROWTH INCOME FUND
MANAGEMENT'S DISCUSSION AND ANALYSIS
NOVEMBER 9, 2006


This Management's Discussion and Analysis should be read in conjunction with the unaudited interim consolidated financial statements and accompanying notes ("Interim Financial Statements") of Ag Growth Income Fund for the three and nine-month periods ended September 30, 2006, and the audited consolidated financial statements and accompanying notes of Ag Growth Income Fund for the year ended December 31, 2005. Results are reported in Canadian dollars unless otherwise stated and have been prepared in accordance with Canadian generally accepted accounting principles.

FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis may contain forward-looking statements that reflect our expectations regarding the future growth, results of operations, performance, business prospects, and opportunities of the Fund. Forward-looking statements contain such words as "anticipate", "believe", "continue", "could", "expects", "intend", "plans" or similar expressions suggesting future conditions or events. Such forward-looking statements reflect our current beliefs and are based on information currently available to us. Forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results to differ materially from results discussed in the forward-looking statements, including changes in national and local business conditions, decreased crop yields, crop conditions, seasonality, industry cyclicality, volatility of production costs, commodity prices, foreign exchange rates, and competition. These risks and uncertainties are fully described in our 2005 Annual Report and our Annual Information Form dated March 16, 2006. Although the forward-looking statements contained in this MD&A are based on what we believe to be reasonable assumptions, we cannot assure readers that actual results will be consistent with these forward-looking statements and we undertake no obligation to update such statements.

OVERVIEW OF THE FUND

Ag Growth Income Fund (the "Fund") is an unincorporated, open-ended, limited purpose trust established under the laws of the Province of Ontario by a Declaration of Trust made as at March 24, 2004. The Fund holds indirectly all of the securities and assets of Ag Growth Industries Inc. ("Ag Growth"), which conducts business in the grain handling, storage, and conditioning market.

The previous owners of Ag Growth were issued Class B Exchangeable units and Class C Exchangeable Subordinated units of AGX Holdings Limited Partnership ("AGHLP"), a wholly owned subsidiary of the Fund, as partial consideration for the Fund's acquisition of Ag Growth. The units of the Fund and the Class B and Class C units of AGHLP participate pro rata in distributions. In June 2006, AGHLP exchanged all Class C units to Class B units on a one-for-one basis upon the occurrence of the subordination end date. The Class B units are exchangeable for trust units of the Fund at the option of the holder on a one-for-one basis at any time.

The following table illustrates the June 2006 exchange of Class C units to Class B units, and exchanges of Class B units to trust units of the Fund. The total number of units that participate in the distribution of net earnings has not changed.



Trust Class B Class C
Units Units Units Total

December 31, 2005 9,129,022 169,978 1,926,000 11,225,000
Exchange of Class C
for Class B units 0 1,926,000 (1,926,000) 0
Exchange of Class B
for Trust units 1,959,893 (1,959,893) 0 0
---------- ----------- ----------- -----------
September 30 and
November 9, 2006 11,088,915 136,085 0 11,225,000
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------

Special Voting
Units (1) 0 136,085 0 136,085

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

The Fund's units trade on the Toronto Stock Exchange under the symbol
AFN.UN.

OPERATING RESULTS
Three Months Ended Nine Months Ended
September 30 September 30
2006 2005 2006 2005
Sales $ 22,049,541 $ 26,755,797 $ 64,326,081 $ 67,133,220
Cost of sales 12,275,594 13,747,630 35,893,181 35,340,204
------------- ------------- ------------- -------------
Gross margin 9,773,947 13,008,167 28,432,900 31,793,016
------------- ------------- ------------- -------------
General and
administration 2,870,697 3,672,395 9,300,969 10,073,401
Professional fees 95,260 95,758 252,366 353,317
Long term incentive
plan 213,500 660,625 640,500 686,817
Research and
development 372,766 125,237 766,000 492,306
Capital taxes 72,420 97,358 224,769 222,358
Loss (gain) on
foreign exchange (1,102,119) 274,763 (1,424,117) (61,079)
Other expense
(income) 198,545 (36,238) (212,632) (114,761)
------------- ------------- ------------- -------------
Total operating
expenses 2,721,069 4,889,898 9,547,855 11,652,359
------------- ------------- ------------- -------------

EBITDA (a) 7,052,878 8,118,269 18,885,045 20,140,657

Amortization 909,198 1,152,334 2,909,333 2,873,643
Interest expense 287,102 330,378 765,284 767,244
------------- ------------- ------------- -------------
Earnings before tax 5,856,578 6,635,557 15,210,428 16,499,770
Tax expense 85,440 68,000 166,640 228,000
------------- ------------- ------------- -------------
Net earnings $ 5,771,138 $ 6,567,557 $ 15,043,788 $ 16,271,770
------------- ------------- ------------- -------------
Net earnings per
unit $ 0.51 $ 0.59 $ 1.34 $ 1.53
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------

(a) See discussion of non-GAAP measures.


September 30, 2006 September 30, 2005

Total assets $ 142,192,264 $ 147,535,726
Total liabilities $ 30,513,192 $ 32,391,992


The Edwards Group Acquisition

Effective April 8, 2005, the Fund acquired substantially all of the assets of The Edwards Group of Companies. The inclusion of Edwards significantly impacts the comparison of operating results for the nine months ended September 30, 2006 to the same period in 2005. The timing of the Edwards acquisition does not impact the comparability of results for the three-month periods ended September 30, 2006 and September 30, 2005.

Distributable Cash and Distributions

For the three and nine-month periods ended September 30, 2006, the Fund generated distributable cash of $0.58 and $1.53 per unit respectively (2005 - $0.69 and $1.73) and declared cash distributions of $0.42 and $1.26 per unit for the periods then ended (2005 - $0.38 and $1.05). The table below summarizes the distributions declared for trust units of the Fund and for Class B Exchangeable limited partnership units and Class C Subordinated limited partnership units of AGHLP. The Fund's distribution policy is described in the "Distributions" section of this document. Distributable cash is a non-GAAP measure and is described and reconciled to cash flow from operating activities under the sections "Distributions" and "Non-GAAP Measures" below.



Three Months Ended Nine Months Ended
September 30 September 30
2006 2005 2006 2005

Trust units $ 4,657,344 $ 3,469,028 $ 12,600,108 $ 8,989,661
Class B units 57,156 64,592 195,192 177,032
Class C units 0 731,880 1,348,200 2,005,929
----------- ----------- ------------ ------------
Distributions Declared $ 4,714,500 $ 4,265,500 $ 14,143,500 $ 11,172,622
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Distributable Cash
Generated $ 6,469,388 $ 7,699,251 $ 17,188,248 $ 18,451,203
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------


The Class C Exchangeable Subordinated units were exchanged for Class B Exchangeable units upon the subordination end date in June 2006. Accordingly, there were no Class C distributions declared in the three-month period ending September 30, 2006.

As a result of a number of distribution rate increases, per unit distributions for the three and nine months ended September 30, 2006 have increased 11% and 21% over the same periods in 2005. Accordingly, the Fund has distributed cash to unitholders earlier in the year compared to 2005. For the three and nine-month periods ended September 30, 2006, the Fund has made regular monthly distributions at an annualized rate of $1.68 per unit. In the year ended December 31, 2005, the Fund distributed $1.43 per unit via regular monthly distributions and $0.30 per unit via special distributions, for a total annual per unit distribution of $1.73.

Overall Performance

EBITDA for the three and nine-month periods ended September 30, 2006 was $7.1 million and $18.9 million respectively. This compares to $8.1 million and $20.1 million for the same periods in 2005. Compared to 2005, EBITDA in 2006 was negatively impacted by a stronger Canadian dollar, as the rate of exchange for the three and nine-month periods ended September 30, 2006 increased 9% and 7% respectively. Also, hot and dry weather conditions in western Canada led to reduced in-season demand for aeration and grain drying equipment. These negative factors were partially offset by strong sales in the U.S., as sales denominated in U.S. dollars slightly increased over the record results recorded in the nine months ended September 30, 2005. Also, operating expenses decreased significantly in 2006, the result of both lower general and administrative expenses and a higher gain on foreign exchange.

Sales

Sales for the nine-month period ended September 30, 2006 were $64.3 million, compared to $67.1 million for the same period in 2005. The decrease of $2.8 million was largely the result of the following:

- As discussed under Foreign Exchange, the appreciation of the Canadian dollar resulted in a decrease in recorded sales of $3.5 million compared to the nine-month period ended September 30, 2005. Excluding the impact of foreign exchange, sales increased $0.7 million over the same period in 2005.

- Sales at the Edwards division were severely impacted by unusually hot and dry weather in western Canada. The Edwards division was acquired on April 8, 2005, with a product line focused primarily on the regional western Canadian market. Subsequent to the acquisition a product line was developed for the U.S. corn-belt, however the new products were only recently introduced and have not impacted fiscal 2006. Sales in 2006 therefore remained vulnerable to regional weather conditions, and as a result, for the nine months ended September 30, 2006, sales at Edwards decreased $0.3 million compared to the exceptional results recorded for the 176-day period ended September 30, 2005.

- The Fund's sales denominated in US dollars increased slightly over the strong results recorded in 2005. Robust sales in the key U.S. corn-belt were partially offset by drought conditions in certain Great Plains states.

Sales for the three-month period ended September 30, 2006 were $22.0 million, compared to $26.8 million for the same period in 2005. The decrease of $4.8 million is largely due to the following:

- Sales at the Edwards division were negatively impacted by unfavourable weather conditions in western Canada. The poor conditions in the current year contrast sharply with the excellent environment of 2005, and as a result third quarter sales at Edwards decreased $2.5 million compared to the three months ended September 30, 2005.

- As discussed under Foreign Exchange, the appreciation of the Canadian dollar resulted in a decrease in recorded sales of $1.5 million compared to the three-month period ended September 30, 2005.

- Sales denominated in US dollars decreased slightly compared to the third quarter of 2005, due primarily to adverse weather conditions in certain Great Plains states and a slightly delayed harvest in certain corn-belt states.

Foreign Exchange

Sales and expenses are recorded at the monthly rate of exchange. For the three and nine-month periods ended September 30, 2006, Ag Growth generated 69% and 64% of its sales in US dollars (2005 - 68% and 66%). Historically, US dollar denominated expenses have equated to approximately 15% to 20% of sales. As a result of this imbalance, the negative impact on sales from a stronger Canadian dollar is only partially offset by the benefit of US dollar expenses.

The average rates of exchange used by Ag Growth for the three and nine-month periods ended September 30, 2006 were $1.12 and $1.13 respectively, compared to $1.22 for both periods in 2005. Had the exchange rates experienced in 2005 been in effect in 2006, sales for the three and nine-month periods ended September 30, 2006 would have increased $1.5 million and $3.5 million respectively.

Gains or losses on the Fund's foreign currency hedging instruments are included in operating expenses. The impact of foreign currency hedges has been included, along with the gain or loss on the translation of US dollar working capital, in operating expenses as a gain or loss on foreign exchange. Ag Growth's foreign currency hedging instruments impact the sales line on the income statement only to the extent that the contract premium is amortized to sales. This amortization to sales for the three and nine-month periods ended September 30, 2006 amounted to $46,327 and $191,160 respectively.

The Fund's foreign currency hedging instruments that mature in 2006 are at contract rates similar to those realized in fiscal 2005. As the actual foreign exchange rate in the current year is lower than 2005, the spread between the contract rate and the actual rate is greater, the result of which is a higher gain on foreign exchange compared to the prior year (see "Expenses").

Gains or losses related to foreign currency hedging are recorded primarily in the quarter in which the contracts mature. Contracts totalling USD $9.4 million matured in the nine months ended September 30, 2006. An additional USD $12.1 million will mature in the fourth quarter of 2006.

Expenses

Gross margin as a percentage of sales for the three and nine-months ended September 30, 2006 was 44.3% and 44.2% respectively, compared to 48.6% and 47.4% in 2005. The decline in gross margin percentage is largely due to the strengthening of the Canadian dollar. As discussed under Foreign Exchange, the Fund's USD sales greatly exceed its USD purchases, and as a result a stronger Canadian dollar pressures the Fund's gross margin percentage. Had the exchange rates experienced in 2005 been in effect in 2006, gross margin for the three and nine-month periods ended September 30, 2006 would have been 46.9% and 45.9% respectively. Low sales volumes at the Edwards division have also negatively impacted gross margin in the current year. The Fund implemented a price increase of 2% to 3% on most products on July 1, 2006, the impact of which should be largely realized in the fourth quarter of 2006. The Fund expects to implement an additional price increase in January 2007.

For the nine months ended September 30, 2006, total operating expenses were $9.5 million, compared to $11.7 million in 2005, a decrease of $2.2 million. Excluding Edwards, as its 2005 operating expenses were included in results only subsequent to its April 8, 2005 acquisition date, total operating expenses decreased $2.7 million compared to 2005. The $2.7 million decrease is primarily due to the following:

- General and administrative expenses have decreased $1.3 million from 2005, due primarily to a $0.3 million decrease in commission expense, largely the result of the rationalization of the Fund's distribution network, a $0.3 million decrease in repairs and maintenance expense due to paint-line repairs in 2005, and a $0.6 million decrease in salary expense that resulted primarily from a significantly lower accrual for performance based bonuses compared to same period in 2005.

- Gain on foreign exchange increased from $0.1 million in 2005 to $1.4 million in 2006, as the spread between the Fund's average foreign exchange contract rate and the actual foreign exchange spot rate increased as the Canadian dollar strengthened.

- Research and development expense increased $0.2 million. The increase is the result of costs related to the Fund's new research and development facility, as well as increased activity at the Edwards division related to expanding its product line beyond its current geographical limitations.

- A number of smaller miscellaneous items accounted for the remaining change.

For the three months ended September 30, 2006, total operating expenses were $2.7 million compared to $4.9 million for the same period in 2005, a decrease of $2.2 million. The decrease is primarily due to the following:

- For the three months ended September 30, 2006, the Fund recorded a gain on foreign exchange of $1.1 million, compared to a loss of $0.3 million for the same period in 2005. The Fund's gain on its foreign exchange contracts was higher than the previous year due to the further strengthening of the Canadian dollar. In 2005, the Fund's gain on its foreign exchange contracts was offset by a loss on translation of U.S. dollar working capital.

- General and administrative expenses decreased $0.8 million, due largely to a $0.6 million decrease in salary expense as discussed above.

- Long-term incentive plan expense decreased $0.4 million, largely because of higher accruals in the first and second quarters of the current year compared to 2005.

- Research and development expense increased $0.2 million as discussed above.

- Other income decreased $0.2 million, as the Fund recorded an expense related to the unrealized gain on its interest rate swap.

- A number of smaller miscellaneous items accounted for the remaining change.

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

EBITDA for the three and nine-months ended September 30, 2006 was $7.1 million and $18.9 million, compared to $8.1 million and $20.1 million for the same periods in 2005. The comparison to 2005 was most significantly impacted by weather conditions in western Canada and the further appreciation of the Canadian dollar.

The Fund's credit facility includes term debt of $20 million and an operating facility of $15 million, increasing to $18 million for the period May 31 to September 30 each year. Both facilities bear interest at rates based on performance calculations. For the three and nine-months ended September 30, 2006, the Fund's effective interest rate on its term debt was 6.0% and 5.7% respectively (2005 - 4.5% and 4.5%), and after consideration of the effect of the Fund's interest rate swap (see "Financial Instruments") was 4.7% (2005 - 4.5% and 4.4%).

Amortization for the three months ended September 30, 2006 was $0.9 million, compared to $1.2 for the same period in 2005. Amortization for the three months ended September 30, 2006 includes the amortization of intangible assets of $0.4 million and the amortization of property, plant and equipment of $0.5 million. The decrease in amortization compared to 2005 is primarily the result of deferred financing fees becoming fully amortized during the second quarter of 2006.

Amortization for the nine months ended September 30, 2006 was $2.9 million, unchanged from 2005. Amortization for the nine months ended September 30, 2006 includes the amortization of intangible assets of $1.2 million, the amortization of deferred financing costs of $0.1 million, and the amortization of property, plant and equipment of $1.6 million. Compared to 2005, the increase in amortization of property, plant and equipment and intangibles is largely the result of the timing of the acquisition of the Edwards Group.

The Fund is a mutual fund trust for income tax purposes and therefore is not subject to tax on income distributed to unitholders. The manufacturing business operations of the Fund are carried out within a limited partnership. Income from the limited partnership is not subject to tax but flows through to the holders of the partnership units, which includes the Fund. The Fund's distributions are taxable in the hands of the unitholders. As a result of the Fund's structure, tax expense is recorded only for the Fund's subsidiary corporations. The recorded tax expense of $25,940 and $38,440 for the three and nine-month periods ended September 30, 2006 represents primarily tax payable on the net income and taxable capital primarily allocated to Ag Growth and its subsidiaries through its ownership in Ag Growth Industries Limited Partnership after deductions for interest expense, financing fees and capital taxes.

Net earnings for the three and nine-month periods ended September 30, 2006 were $5.8 million and $15.0 million respectively (2005 - $6.6 million and $16.3 million). Earnings per basic and diluted unit for the three and nine-month periods were $0.51 and $1.34 respectively (2005 - $0.59 and $1.53).



Quarterly Financial Information

---------------------------------------------------------------------------
2006
---------------------------------------------------------------------------
Q4 Q3 Q2 Q1
---------------------------------------------------------------------------
Total sales $ 22,049,541 $ 22,571,529 $ 19,705,011
---------------------------------------------------------------------------
Gain (loss) on foreign
exchange $ 1,102,119 $ 120,997 $ 201,001
---------------------------------------------------------------------------
Net earnings $ 5,771,138 $ 5,157,065 $ 4,115,585
---------------------------------------------------------------------------
Basic and diluted
net earnings per
unit $ 0.51 $ 0.46 $ 0.37
---------------------------------------------------------------------------

---------------------------------------------------------------------------
2005
---------------------------------------------------------------------------
Q4 Q3 Q2 Q1
---------------------------------------------------------------------------
Total sales $ 16,900,725 $ 26,755,797 $ 24,363,985 $ 16,013,438
---------------------------------------------------------------------------
Gain (loss) on
foreign exchange $ 1,294,912 $ (274,763) $ 115,822 $ 220,020
---------------------------------------------------------------------------
Net earnings $ 3,380,300 $ 6,567,557 $ 6,255,028 $ 3,449,185
---------------------------------------------------------------------------
Basic and diluted
net earnings per
unit $ 0.31 $ 0.59 $ 0.56 $ 0.36
---------------------------------------------------------------------------

---------------------------------------------------------------------------
2004
---------------------------------------------------------------------------
Q4 Q3 Q2(2) Q1(1)
---------------------------------------------------------------------------
Total sales $ 13,911,771 $ 21,780,593 $ 7,855,520 N/A
---------------------------------------------------------------------------
Gain (loss) on
foreign exchange $ 3,552 $ (626,254) $ (520,596) N/A
---------------------------------------------------------------------------
Net earnings $ 1,798,911 $ 5,483,492 $ 1,441,006 N/A
---------------------------------------------------------------------------
Basic and diluted
net earnings per
unit $ 0.19 $ 0.57 $ 0.15 N/A
---------------------------------------------------------------------------

(1) Prior to IPO date of May 18, 2004.
(2) Includes results of operations only for the 44-day period May 18 to
June 30, 2004.
(3) Certain comparative figures have been reclassified to conform to the
current period's presentation.


Interim period revenues and earnings historically reflect some seasonality. The third quarter is typically the strongest primarily due to high in-season demand at the farm level. Distributable cash generated per unit will also typically be highest in the third quarter. The following factors impact comparability between quarters in the table above:

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

- The third quarter of 2006 was adversely affected by hot and dry weather conditions in western Canada that severely impacted sales of grain drying and aeration equipment.

- The second, third, and fourth quarters of 2005, and the first quarter of 2006, compared to the same periods in the previous year, were significantly impacted by the April 8, 2005 acquisition of the Edwards Group.

- The first and second quarters of 2005 were exceptionally strong due to demand that resulted from the record 2004 U.S. harvest.

- The second quarter of 2004 reflects the operations of Ag Growth for only the 44-day period from the date of the Fund's May 18, 2004 IPO to the quarter-end date.

NON-GAAP MEASURES

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

Distributable cash is a non-GAAP measure generally used by Canadian income funds as an indicator of financial performance. The Fund defines distributable cash as EBITDA less interest expense, capital expenditures, and current taxes. Distributable cash is not a financial measure recognized by Canadian generally accepted accounting principles ("GAAP") and does not have a standardized meaning prescribed by GAAP. The method of calculating the Fund's distributable cash may differ from similar computations as reported by similar entities and, accordingly, may not be comparable to distributable cash as reported by such entities.



CASHFLOW AND LIQUIDITY

The table below reconciles net income to cash flow from operations for the
three and nine months ended September 30, 2006 and 2005.

Three Months Ended Nine Months Ended
September 30 September 30
2006 2005 2006 2005

Net earnings $ 5,771,138 $ 6,567,557 $ 15,043,788 $ 16,271,770
Add charges
(deduct credits) to
operations not
requiring a current
cash payment:
Amortization 909,198 1,152,334 2,909,333 2,873,643
Future income taxes 59,500 53,000 128,200 183,000
Deferred foreign
exchange loss 183,545 (350,703) (72,265) (467,451)
Gain on sale of
property, plant &
equipment (7,752) 0 (37,546) (10,082)
----------- ------------ ------------ -------------


Net change in non-
cash working
capital balances
related to
operations: 6,915,629 7,422,188 17,971,510 18,850,880
----------- ------------ ------------ -------------

Accounts receivable (224,645) (1,164,955) (7,796,887) (11,809,514)
Inventory 702,965 529,215 (527,146) (1,314,070)
Prepaid expenses and
other assets (30,901) 103,879 242,353 484,542
Accounts payable and (742,725) 1,167,374 16,052 1,779,059
accrued liabilities
Long term incentive
plan 213,500 394,837 (292,501) 421,029
Customer deposits 149,486 184,880 (2,061,487) (2,792,954)
Income taxes payable 7,200 15,000 (41,774) 395,420
------------ ------------- ------------- --------------

Cash provided by
operations $ 6,990,509 $ 8,652,418 $ 7,510,120 $ 6,014,392
------------ ------------- ------------- --------------
------------ ------------- ------------- --------------


The Fund generated significant cash from operations for the three months ended September 30, 2006 and 2005. The decrease in 2006 compared to 2005 is due primarily to lower net earnings and a decrease in the change in non-cash working capital. For the nine months ended September 30, 2006, cash provided by operations increased over the same period in 2005 as lower net earnings were more than offset by a smaller change in non-cash working capital.

Working Capital

Interim period working capital requirements typically reflect some seasonality. The Fund's collections of accounts receivable are weighted towards the third and fourth quarters. This collection pattern, combined with seasonally high sales in the third quarter, result in accounts receivable levels increasing throughout the year and peaking in the third quarter. In order to ensure the Fund has adequate supply throughout its distribution network in advance of in-season demand, inventory levels must be gradually increased throughout the year. Accordingly, inventory levels typically increase in the first and second quarters and then begin to decline in the third or fourth quarter as sales levels exceed production. As a result of these working capital movements, historically, Ag Growth begins to draw on its bank revolver in the first or second quarter. The revolver balance typically peaks in the second or third quarter and normally begins to decline later in the third quarter as collections of accounts receivable increase. Ag Growth has generally fully repaid its revolver balance by early in the fourth quarter. Results in 2006 have generally reflected these expectations, and it is anticipated that working capital movement for the balance of 2006 will follow historical patterns.

Capital Expenditures

The Fund had capital expenditures of $0.3 million and $0.9 million in the three and nine-month periods ended September 30, 2006 (2005 - $0.1 million and $0.9 million). Capital expenditures in the three and nine-months ended September 30, 2006 relate primarily to purchases of a semi tractor unit and trailer, a building addition, and manufacturing equipment. The Fund anticipates total maintenance capital expenditures in 2006 will approximate the amounts expended in 2005, and that all 2006 capital expenditures will be funded through operations.

The Fund defines maintenance capital expenditures as cash outlays required to maintain plant and equipment at current operating capacity and efficiency levels. Non-maintenance capital expenditures are defined as cash outlays required to increase operating capacity or improve operating efficiency. The Fund has commenced a capacity improvement initiative at its Westfield facility that will be categorized as a non-maintenance capital expenditure. In addition to anticipated capacity enhancements, the initiative is expected to improve the quality and finish of the Westfield product through the implementation of a new paint system. The total cost of the project is expected to be approximately $3.5 million and will be financed through working capital.

The Fund's bank covenants provide that the deduction for capital expenditures be reduced by the amount of availability under the Fund's revolver facility. The Fund expects to have sufficient availability in its revolver facility to significantly reduce or eliminate the financial covenant impact of the non-maintenance capital expenditure.

Cash Balance

For the three and nine-month periods ended September 30, 2006, the Fund's cash balance decreased $nil and $8.1 million respectively, which was in line with management expectations for the reasons discussed above under "Working Capital". Consistent with prior years, management expects the Fund will fully repay its revolver facility early in the fourth quarter.



CONTRACTUAL OBLIGATIONS

Total 2006 2007 2008 2009 2010 +

Long-term debt 20,023,469 5,876 11,689 5,005,904 15,000,000 0
Operating leases 1,302,110 132,876 491,881 329,945 205,530 141,878
---------- ------- ------- --------- ---------- --------
Total obligations 21,325,579 138,752 503,570 5,335,849 15,205,530 141,878
---------- ------- ------- --------- ---------- --------
---------- ------- ------- --------- ---------- --------


The term loan of $20 million included in long-term debt matures August 31, 2007 and is extendible annually for an additional one-year term at the lender's option. Under the terms of the credit facility agreement, if the bank elects to not extend the operating and term loan facilities beyond the current August 31, 2007 maturity date, all amounts outstanding under the facilities become repayable in four equal quarterly instalments of principal, commencing November 30, 2008. The operating leases relate to vehicle, equipment, and warehouse facility leases entered into in the normal course of business.

The Fund has issued purchase invoices totalling $2.4 million for equipment related to the Westfield capacity initiative (see "Capital Expenditures"). Delivery and payment is expected to occur primarily in the fourth quarter of 2006.

DISTRIBUTIONS

The Fund declared distributions to public unitholders of $4.7 million and $12.6 million for the three and nine-months ended September 30, 2006 (2005 - $3.5 million and $9.0 million). Furthermore, consistent with the Fund's prospectus dated May 5, 2004, the Fund declared distributions to Ag Growth's previous owners of $0.1 million and $1.5 million for the three and nine-months ended September 30, 2006 (2005 - $0.8 million and $2.2 million). The amounts declared to Ag Growth's previous owners have decreased as a number of exchangeable units were exchanged for publicly traded units of the Fund (see "Overview of the Fund").

The Fund's policy is to make monthly distributions to holders of both Trust units and Class B Exchangeable limited partnership units. Furthermore, in accordance with the terms of the Fund's prospectus, holders of Class C Subordinated Exchangeable limited partnership units received distributions quarterly. The Fund's Declaration of Trust requires that it distribute all taxable income earned in its fiscal period ending December 31. It may be necessary for the Fund to estimate one or more special distributions to achieve this requirement, however management does not currently anticipate that excess taxable income will result in a special distribution for 2006.

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

Distributable cash is defined as EBITDA, less capital expenditures, interest, and cash income tax expense. The objective of presenting this measure is to calculate the amount that is available for distribution to unitholders and exchangeable unitholders. The distributable cash definition excludes changes in working capital as they are necessary to drive organic growth and are expected to be financed by the Fund's operating facility (See "Capital Resources"). Distributable cash should not be construed as an alternative to cash flows from operating, investing, and financing activities as a measure of the Fund's liquidity and cash flows. Distributable cash can be reconciled to cash provided by operating activities as follows:



Three Months Ended Nine Months Ended
September 30 September 30
2006 2005 2006 2005

Cash provided by
operating
activities $ 6,990,509 $ 8,652,418 $ 7,510,120 $ 6,014,392
Change in non-cash
working capital (74,880) (1,230,230) 10,461,390 12,836,488
Interest expense 287,102 330,378 765,284 767,244
Current tax expense 25,940 15,000 38,440 45,000
Deferred foreign
exchange loss (183,545) 350,703 72,265 467,451
Gain on sale of
property, plant
and equipment 7,752 0 37,546 10,082
------------- ------------- ------------- -------------
EBITDA(a) 7,052,878 8,118,269 18,885,045 20,140,657
Interest expense (287,102) (330,378) (765,284) (767,244)
Net capital
expenditures (270,448) (73,640) (893,073) (877,210)
Current income taxes (25,940) (15,000) (38,440) (45,000)
------------- ------------- ------------- -------------
Distributable
cash (a) $ 6,469,388 $ 7,699,251 $ 17,188,248 $ 18,451,203
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------

Weighted average
units outstanding 11,225,000 11,225,000 11,225,000 10,658,278
Distributable cash
generated per
unit (a) $ 0.5763 $ 0.6859 $ 1.5312 $ 1.7312
Distributions
declared per unit $ 0.4200 $ 0.3800 $ 1.2600 $ 1.0483
Distribution
percentage 72.9% 55.4% 82.3% 60.6%

(a) See discussion of non-GAAP measures below.


Distributions declared per unit for the three and nine-months ended September 30, 2006 equate to a per unit monthly rate of $0.14 in both periods, which represents per unit distribution increases of 11% and 21% over the same periods in 2005, and a 29% increase over the per unit distribution disclosed in the Fund's 2004 prospectus. Distributions for the three and nine-months ended September 30, 2006 and 2005 were funded entirely through operations.

Historical distributable cash generated per unit and distributions declared as a percentage of distributable cash generated is as follows:



---------------------------------------------------------------------------
2006
---------------------------------------------------------------------------
Specials (1) Q4 Q3 Q2 Q1
---------------------------------------------------------------------------

---------------------------------------------------------------------------
Distributable cash
generated $ 0.5763 $ 0.5214 $ 0.4335
---------------------------------------------------------------------------
Distributions
declared $ 0.4200 $ 0.4200 $ 0.4200
---------------------------------------------------------------------------
Distribution
percentage 72.9% 80.6% 96.9%
---------------------------------------------------------------------------
YTD distribution
percentage 82.3% 88.0% 96.9%
---------------------------------------------------------------------------

---------------------------------------------------------------------------
2005
---------------------------------------------------------------------------
Specials (1) Q4 Q3 Q2 Q1
---------------------------------------------------------------------------

---------------------------------------------------------------------------
Distributable cash
generated N/A $ 0.3722 $ 0.6859 $ 0.6271 $ 0.3936
---------------------------------------------------------------------------
Distributions
declared $ 0.3000 $ 0.3900 $ 0.3800 $ 0.3403 $ 0.3249
---------------------------------------------------------------------------
Distribution
percentage N/A 104.8% 55.4% 54.3% 82.6%
---------------------------------------------------------------------------
YTD distribution
percentage 83.6% 68.7% 60.6% 64.2% 82.6%
---------------------------------------------------------------------------

---------------------------------------------------------------------------
2004
---------------------------------------------------------------------------
Specials (1) Q4 Q3 Q2(3) Q1(2)
---------------------------------------------------------------------------
Distributable cash
generated N/A $ 0.1987 $ 0.6421 $ 0.1775 N/A
---------------------------------------------------------------------------
Distributions
declared $ 0.1380 $ 0.3249 $ 0.3249 $ 0.1581 N/A
---------------------------------------------------------------------------
Distribution percentage N/A 163.5% 51.6% 88.8% N/A
---------------------------------------------------------------------------
YTD distribution
percentage 94.0% 80.3% 59.8% 88.8% N/A
---------------------------------------------------------------------------

(1) Special distributions declared in excess of the regular monthly
distributions.

(2) Before IPO date of May 18, 2004.

(3) Includes Ag Growth's operations only for the 44-day period May 18 to
June 30, 2004.

---------------------------------------------------------------------------
Distributable Cash Summary
---------------------------------------------------------------------------
Distributable Distributions Payout
Cash Generated Declared (1) Ratio

228-day Period Ended December 31,
2004 $ 9,686,147 $ 9,109,017 94.0%
Year Ended December 31, 2005 22,628,723 18,917,872 83.6%
Nine months ended September 30,
2006 17,188,248 14,143,500 82.3%
------------- ------------- -----
Cumulative since inception $ 49,503,118 $ 42,170,389 85.2%
------------- ------------- -----
------------- ------------- -----

(1) Distributions declared include special distributions of $1,328,940 in
2004, $3,367,500 in 2005, and $nil for the nine months ended September
30, 2006.


The Fund's Declaration of Trust requires that it distribute all taxable income earned in its fiscal periods ending December 31. Due to a number of tax deductions available to the Fund and its subsidiary entities, since inception the Fund has retained $7.3 million for internal purposes. The amounts retained have been used primarily to further strengthen the Fund's financial position and to allow for future strategic or expansionary capital expenditures.

CAPITAL RESOURCES

The Fund's credit facility includes term debt of $20 million and an operating facility of $15 million, increasing to $18 million for the period May 31 to September 30 each year. Both facilities bear interest at rates based on performance calculations. For the three and nine-months ended September 30, 2006, the Fund's effective interest rate on its term debt was 6.0% and 5.7% respectively (2005 - 4.5% and 4.5%), and after consideration of the effect of the Funds interest rate swap (see "Financial Instruments") was 4.7% (2005 - 4.5% and 4.4%). The term loan matures August 31, 2007 and is extendible annually at the lender's option. At September 30, 2006, the Fund's bank indebtedness was $1.7 million (September 30, 2005 - $1.0 million). Under the terms of the credit facility agreement, if the bank elects to not extend the operating loan and term loan facilities beyond the current August 31, 2007 maturity date, all amounts outstanding under the facilities become repayable in four equal quarterly instalments of principal, commencing November 30, 2008. In addition, under the terms of the facility agreement, the operating and term loan facilities will bear interest at prime plus 0.0%, 0.50%, or 1.00% per annum based on performance calculations. The Fund is party to an interest rate swap agreement to mitigate the impact of fluctuating interest rates on its term loan.

OFF-BALANCE SHEET ARRANGEMENTS

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

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. The Fund believes the accounting policies that are critical to its business relate to the use of estimates regarding the recoverability of accounts receivable and the valuation of inventory, intangibles, and goodwill. Due to the nature of Ag Growth's business and the credit terms it provides to its customers, estimates and judgments are inherent in the on-going assessment of the recoverability of accounts receivable. In addition, assessments and judgments are inherent in the determination of the net realizable value of inventories and the fair value of goodwill and intangible assets. Goodwill and indefinite life intangible assets are tested for impairment at least annually. In the normal course of its operations, the Fund may become involved in various legal actions. The Fund maintains, and regularly updates on a case-by-case basis, provisions when the expected loss is both likely and can be reasonably estimated. While management has applied judgment based on assumptions believed to be reasonable in the circumstances, actual results can vary from these assumptions. It is possible that materially different results would be reported using different assumptions.

FINANCIAL INSTRUMENTS

Risk from foreign exchange arises as a result of variations in exchange rates between the Canadian and the U.S. Dollar. Historically, over 60% of Ag Growth's sales are denominated in US Dollars while a much smaller proportion of its expenses are denominated in this currency. The Fund has entered into foreign exchange contracts with a Canadian chartered bank to hedge its foreign currency exposure on anticipated U.S. dollar sales transactions and the collection of the related accounts receivable. At September 30, 2006, the Fund had outstanding the following foreign exchange contracts:



---------------------------------------------------------------------------
Forward Foreign Exchange Contracts
---------------------------------------------------------------------------
Face Amount Average Rate Unrealized Gain
Settlement Dates USD CDN (Loss) CDN
October - December 2006 $ 12,100,000 $ 1.3210 $ 2,423,356
March - December 2007 4,625,000 $ 1.2357 615,161
------------- -------------- ------------------
Total $ 16,725,000 $ 1.2974 $ 3,038,517
------------- -------------- ------------------
------------- -------------- ------------------


---------------------------------------------------------------------------
Currency Options
---------------------------------------------------------------------------
Unrealized
Face Amount Call Rate Put Rate Gain
Settlement Dates USD CND CDN (Loss) CDN
March - December 2007 $ 4,625,000 $ 1.1363 $ 1.2985 $ 179,243
March - December 2007 4,625,000 $ 1.1300 $ 1.1975 106,394
March - December 2007 9,250,000 $ 1.1363 $ 1.2410 303,787
January - December 2008 7,800,000 $ 1.0700 $ 1.2115 (95,110)
------------- ----------- ---------- -------------
Total $ 26,300,000 N/A N/A $ 494,314
------------- -------------
------------- -------------


As at September 30, 2006, the Fund has recorded a deferred foreign exchange loss of $85,625 with respect to its hedged accounts receivable.

The Fund is subject to risks associated with fluctuating interest rates on its long-term debt. To manage this risk, the Fund has entered into an interest rate swap transaction with a Canadian chartered bank. The swap transaction expires on May 4, 2008 and involves the exchange of the underlying floating interest rate for an effective fixed interest rate of 3.68%, resulting in interest charges to the Fund of 3.68% plus a variable rate based on performance calculations. The notional amount of the swap transaction at September 30, 2006 was $20.0 million. At September 30, 2006, the fair value of the interest rate swap contract was $139,268, and this amount has been recorded in prepaid expenses and other assets.

CHANGES IN ACCOUNTING POLICIES

The Canadian Institute of Chartered Accountants has issued three new accounting standards; Hedges, Financial Instruments - Recognition and Measurement, and Comprehensive Income. These standards are effective for the Fund beginning in fiscal 2007. The impact of implementing these new standards on the Consolidated Financial Statements is not yet determinable as it will be dependant on our outstanding positions and their fair values at the time of transition.

The new standard for Hedges specifies the criteria under which hedge accounting can be applied and how hedge accounting can be executed for each of the permitted hedging strategies. For cash flow hedges where the Fund is hedging the variability in cash flows related to anticipated sales to customers in the United States and the collection of the related accounts receivable, the effective portion of the changes in the fair values of the derivative instruments will be recorded through other comprehensive income until the hedged items are recognized in the Consolidated Statement of Operations.

The Financial Instruments - Recognition and Measurement standard will require financial assets to be classified as available for sale, held to maturity, trading or loans and receivables.

The Comprehensive Income standard will require a new component of unitholders' equity on the Consolidated Balance Sheet. The major component will be the changes in the fair value of the effective portion of cash flow hedging instruments.

RISKS AND UNCERTAINTIES

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

Industry Cyclicality

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

Seasonality of Business

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

Risk of Decreased Crop Yields

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

Potential Volatility of Production Costs

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

Commodity Prices, International Trade and Political Uncertainty

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

Competition

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

Business Interruption

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

Litigation

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

Dependence on Key Personnel

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

Distribution, Sales Representative and Supply Contracts

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

Foreign Exchange Risk

Ag Growth generates a majority of its sales in US dollars, but a materially smaller proportion of its expenses are denominated in US dollars. As a result, a significant strengthening of the Canadian dollar against the US dollar will negatively impact the return from US dollar sales revenue. To mitigate the effects of exchange rate fluctuation, management has implemented a hedging strategy of purchasing foreign exchange contracts. Ag Growth has entered into a series of hedging arrangements to mitigate the potential effect of fluctuating exchange rates through December 2008. To the extent that Ag Growth does not adequately hedge its foreign exchange risk, changes in the exchange rate between the Canadian dollar and the US dollar may have a material adverse effect on Ag Growth's results of operations, business, prospects and financial condition.

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.

Taxation of Income Trusts

There can be no assurance that Canadian federal income tax laws or the judicial interpretation thereof or the administrative and/or assessing practices of the Canada Revenue Agency and/or the treatment of mutual fund trusts will not be changed in a manner that adversely affects the holders of Trust Units.

OUTLOOK

Demand in the fourth quarter of 2006, excluding Edwards, is expected to approximate historical levels. Management expects that the Edwards division will for the next several quarters continue to be adversely impacted by the unfavourable conditions experienced in 2006. Looking forward to 2007, excluding Edwards, demand in the first half is expected to approximate 2006 levels. The implementation of the capacity improvement initiative, scheduled for the first quarter of 2007, will result in a brief plant slowdown at the Westfield division and may result in the deferral of some sales until later in the year. Consistent with prior years, demand in 2007, particularly in the second half, will be influenced by crop conditions, crop mix, and storage practices.

The higher value of the Canadian dollar relative to its U.S. counterpart will continue to impact the comparability of results between 2006 and 2005. Gains or losses related to foreign currency hedging are reflected primarily in the quarter in which the contracts mature, and as a result Ag Growth will realize a significant proportion of its 2006 foreign exchange gain or loss in the fourth quarter. The Fund's foreign currency hedging instruments in place for fiscal 2007 are at rates less favourable than the 2006 contracts. Accordingly, management does not expect the gain on its hedging instruments in 2007 will be as large as the gain expected to be realized in 2006.

On October 31, 2006, the federal government announced a proposal to disallow as a tax deduction the distributions made by most income trusts. If the proposal is implemented, taxable income generated by most income trusts will be subject to tax at a special rate based on the federal-provincial corporate tax rates. Unitholders will be taxed on such distributions as if they have received a taxable dividend paid by a taxable Canadian corporation. There will be a transitional period so that existing income trusts and their investors will not be subject to the proposed tax until 2011.

Any change to the rules relating to the taxation of income trusts could have a material adverse effect on the Fund, its ability to pay distributions and the market value of its units. The Fund will monitor developments in connection with the proposed changes.

ADDITIONAL INFORMATION

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



INVESTOR RELATIONS

Steve Sommerfeld
#3, 59 Scurfield Blvd, Winnipeg, MB R3Y 1V2
Phone: (204) 489-1855
Email: steve@aggrowth.com

Unaudited Interim Consolidated Financial Statements

Ag Growth Income Fund
September 30, 2006


UNAUDITED INTERIM CONSOLIDATED BALANCE SHEETS

As at As at
September 30, December 31,
2006 2005
$ $
---------------------------------------------------------------------------
ASSETS (notes 10 and 11)
Current
Cash and cash equivalents - 8,148,634
Accounts receivable 15,102,696 7,305,809
Inventory (note 6) 20,640,479 20,113,333
Prepaid expenses and other assets 1,160,646 1,402,999
Future tax assets 188,000 221,000
---------------------------------------------------------------------------
Total current assets 37,091,821 37,191,775
Property, plant and equipment (note 7) 11,222,641 11,913,442
Goodwill 35,970,059 35,970,059
Intangible assets (note 8) 57,726,318 58,923,988
Deferred financing costs (note 9) - 149,188
Future tax assets 95,800 191,000
Deferred foreign exchange loss 85,625 13,360
---------------------------------------------------------------------------
142,192,264 144,352,812
---------------------------------------------------------------------------
---------------------------------------------------------------------------

LIABILITIES AND UNITHOLDERS' EQUITY
Current
Bank indebtedness (note 10) 1,745,508 -
Accounts payable and accrued liabilities 4,979,000 4,962,948
Customer deposits 1,041,915 3,103,402
Income taxes payable 511,300 553,074
Distributions payable 1,571,500 3,980,510
Long-term incentive plan (note 15) 640,500 933,001
Current portion of long-term debt (note 11) 17,816 23,502
---------------------------------------------------------------------------
Total current liabilities 10,507,539 13,556,437
Long-term debt (note 11) 20,005,653 20,017,591
---------------------------------------------------------------------------
Total liabilities 30,513,192 33,574,028
Commitments (notes 16 and 18)
Unitholders' equity 111,679,072 110,778,784
---------------------------------------------------------------------------
142,192,264 144,352,812
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes


On behalf of the Board of Trustees:

Rod Senft, Trustee John R. Brodie, FCA, Trustee


Ag Growth Income Fund

UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF EARNINGS

Three-month period ended Nine-month period ended
-----------------------------------------------------
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
$ $ $ $
---------------------------------------------------------------------------
Sales 22,049,541 26,755,797 64,326,081 67,133,220
Cost of goods
sold 12,275,594 13,747,630 35,893,181 35,340,204
---------------------------------------------------------------------------
Gross margin 9,773,947 13,008,167 28,432,900 31,793,016
---------------------------------------------------------------------------
Expenses
Selling, general
and administration 2,870,697 3,672,395 9,300,969 10,073,401
Professional
fees 95,260 95,758 252,366 353,317
Long-term
incentive plan 213,500 660,625 640,500 686,817
Research and
development 372,766 125,237 766,000 492,306
Capital taxes 72,420 97,358 224,769 222,358
Loss (gain) on
foreign exchange (1,102,119) 274,763 (1,424,117) (61,079)
Other expense
(income) 198,545 (36,238) (212,632) (114,761)
---------------------------------------------------------------------------
2,721,069 4,889,898 9,547,855 11,652,359
---------------------------------------------------------------------------
Earnings before
the following 7,052,878 8,118,269 18,885,045 20,140,657
---------------------------------------------------------------------------
Interest expense
Short-term debt 52,178 87,298 75,396 99,908
Long-term debt 234,924 243,080 689,888 667,336
---------------------------------------------------------------------------
287,102 330,378 765,284 767,244
---------------------------------------------------------------------------
Earnings before
amortization and
income taxes 6,765,776 7,787,891 18,119,761 19,373,413
---------------------------------------------------------------------------
Amortization of
property, plant
and equipment 530,808 536,693 1,562,475 1,301,870
Amortization of
deferred financing
costs - 174,751 149,188 339,993
Amortization of
intangible
assets 378,390 440,890 1,197,670 1,231,780
---------------------------------------------------------------------------
909,198 1,152,334 2,909,333 2,873,643
---------------------------------------------------------------------------
Earnings before
provision for
income taxes 5,856,578 6,635,557 15,210,428 16,499,770
---------------------------------------------------------------------------
Provision for
income taxes
(note 13)
Current 25,940 15,000 38,440 45,000
Future 59,500 53,000 128,200 183,000
---------------------------------------------------------------------------
85,440 68,000 166,640 228,000
---------------------------------------------------------------------------
Net earnings for
the period 5,771,138 6,567,557 15,043,788 16,271,770
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Basic and
diluted net
earnings per
unit $ 0.51 $ 0.59 $ 1.34 $ 1.53
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Basic and
diluted weighted
average number of
units outstanding 11,225,000 11,225,000 11,225,000 10,658,278
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes


Ag Growth Income Fund

UNAUDITED INTERIM CONSOLIDATED STATEMENT OF UNITHOLDERS' EQUITY

Nine-month period ended September 30, 2006

Unitholders' Accumulated Accumulated
capital earnings distributions Total
$ $ $ $
---------------------------------------------------------------------------
(note 12)
Balance,
December 31, 2005 110,430,194 28,375,479 (28,026,889) 110,778,784
Net earnings for the
period - 15,043,788 - 15,043,788
Distributions declared - - (14,143,500) (14,143,500)
---------------------------------------------------------------------------
Balance,
September 30, 2006 110,430,194 43,419,267 (42,170,389) 111,679,072
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Nine-month period ended September 30, 2005 and year ended December 31,
2005

Unitholders' Accumulated Accumulated
capital earnings distributions Total
$ $ $ $
---------------------------------------------------------------------------
(Note 12)

Balance,
December 31, 2004 89,954,248 8,723,409 (9,109,017) 89,568,640
Net earnings for the
period - 16,271,770 - 16,271,770
Distributions declared - - (11,172,622) (11,172,622)
Issuance of Units
during the nine-month
period ended
September 30, 2005
(note 5) 21,532,500 - - 21,532,500
Issuance costs during
the nine month period
ended September 30,
2005 (note 5) (1,056,554) - - (1,056,554)
---------------------------------------------------------------------------
Balance, September 30,
2005 110,430,194 24,995,179 (20,281,639) 115,143,734
Net earnings for the
three month period
ended December 31,
2005 - 3,380,300 - 3,380,300
Distributions declared
during the three-month
period ended
December 31, 2005 - - (7,745,250) (7,745,250)
---------------------------------------------------------------------------
Balance, December 31,
2005 110,430,194 28,375,479 (28,026,889) 110,778,784
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes


Ag Growth Income Fund

UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

Three-month period ended Nine-month period ended
-----------------------------------------------------
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
$ $ $ $
---------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings for the
period 5,771,138 6,567,557 15,043,788 16,271,770
Add charges (deduct
credits) to
operations not
requiring a cash
payment
Amortization 909,198 1,152,334 2,909,333 2,873,643
Future income taxes 59,500 53,000 128,200 183,000
Deferred foreign
exchange loss 183,545 (350,703) (72,265) (467,451)
Gain on sale of
property, plant
and equipment (7,752) - (37,546) (10,082)
---------------------------------------------------------------------------
6,915,629 7,422,188 17,971,510 18,850,880
---------------------------------------------------------------------------
Net change in
non-cash working
capital balances
related to
operations
Accounts receivable (224,645) (1,164,955) (7,796,887) (11,809,514)
Inventory 702,965 529,215 (527,146) (1,314,070)
Prepaid expenses and
other assets (30,901) 103,879 242,353 484,542
Accounts payable
and accrued
liabilities (742,725) 1,167,374 16,052 1,779,059
Long-term incentive
plan 213,500 394,837 (292,501) 421,029
Income taxes payable 7,200 15,000 (41,774) 395,420
Customer deposits 149,486 184,880 (2,061,487) (2,792,954)
---------------------------------------------------------------------------
74,880 1,230,230 (10,461,390) (12,836,488)
---------------------------------------------------------------------------
Cash provided by
operating
activities 6,990,509 8,652,418 7,510,120 6,014,392
---------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of
property, plant and
equipment (270,448) (73,640) (893,073) (877,210)
Acquisition of assets
of the Edwards Group
of Companies - 2,672 - (21,685,743)
Cash held in trust
related to
acquisition of the
Edwards Group of
Companies - 406,133 - -
Proceeds from sale of
property, plant and
equipment 7,754 - 58,945 10,500
Pre-existing Fund
structure tax
credits received - - - 240,000
---------------------------------------------------------------------------
Cash provided by
(used in)
investing activities (262,694) 335,165 (834,128) (22,312,453)
---------------------------------------------------------------------------


Three-month period ended Nine-month period ended
-----------------------------------------------------
September September September September
30, 2006 30, 2005 30, 2006 30, 2005
$ $ $ $
---------------------------------------------------------------------------

FINANCING ACTIVITIES
Increase (decrease)
in bank
indebtedness (1,468,161) (4,725,236) 1,745,508 1,000,222
Repayment of
long-term debt (5,874) (8,374) (17,624) (25,123)
Distributions paid (5,253,780) (4,088,921) (16,552,510) (12,020,913)
Issuance of units,
net of expenses - (31,052) - 20,475,946
Increase in deferred
financing costs
on long-term debt - (134,000) - (134,000)
---------------------------------------------------------------------------
Cash provided by
(used in) financing
activities (6,727,815) (8,987,583) (14,824,626) 9,296,132
---------------------------------------------------------------------------

Net decrease in cash
and cash equivalents
during the period - - (8,148,634) (7,001,929)
Cash and cash
equivalents,
beginning of period - - 8,148,634 7,001,929
---------------------------------------------------------------------------
Cash and cash
equivalents,
end of period - - - -
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Supplemental cash
flow information
Interest paid 287,667 301,170 777,751 748,864
Income taxes paid
(recovered) 26,990 - 21,004 (339,970)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

See accompanying notes


Ag Growth Income Fund

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2006

1. ORGANIZATION AND NATURE OF BUSINESS

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

2. BASIS OF PRESENTATION

The Fund prepares its consolidated financial statements in accordance with Canadian generally accepted accounting principles. The unaudited interim consolidated financial statements should be read in conjunction with the Fund's annual consolidated financial statements as at and for the year ended December 31, 2005.

Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature to present fairly the consolidated financial position of the Fund as at September 30, 2006.

3. SEASONALITY OF BUSINESS

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. The Fund's collections of accounts receivable are weighted towards the third and fourth quarters. This collection pattern, combined with seasonally high sales in the third quarter, result in accounts receivable levels increasing throughout the year and normally peaking in the third quarter. As a result of these working capital movements, historically, the Fund's use of its bank revolver is typically highest in the first and second quarters. The revolver balance begins to decline in the third quarter as collections of accounts receivable increase. In prior years, the Fund has repaid its revolver in the fourth quarter.

4. SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies are summarized below:

Principles of consolidation

The consolidated financial statements include the accounts of the Fund and its wholly-owned subsidiaries Ag Growth Operating Trust, AGX Holdings Inc., AGX Holdings Limited Partnership ("AGHLP"), Ag Growth Industries Limited Partnership, Ag Growth, Westfield Distributing Ltd. and Westfield Distributing (North Dakota) Inc. All material intercompany balances and transactions have been eliminated.

Cash and cash equivalents

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

Inventory

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

Property, plant and equipment

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



Buildings 4% - 5% declining balance
Furniture and fixtures 20% declining balance
Automotive equipment 20% - 30% declining balance
Computer equipment 30% declining balance
Manufacturing equipment 20% - 30% declining balance
Leasehold improvements 20% straight line


Goodwill

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

Intangible assets

Intangible assets are comprised of brand names, which are considered to have an indefinite life, distribution networks, which are being amortized over 25 years on a straight-line basis, and a patent acquired from the Edwards Group which is being amortized over a one year period. Indefinite life intangible assets are tested for impairment at least annually by comparing their estimated fair values to their carrying values. The carrying value of an indefinite life intangible asset is written down to its estimated fair value if its carrying value exceeds its estimated fair value.

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

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

Deferred financing costs

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

Income taxes

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

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

Foreign currency translation

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

Revenue recognition

The Fund recognizes revenue at the time product is shipped, free on board shipping point, and title passes and there is evidence a sales arrangement exists, the sales price is fixed and determinable and collectibility is reasonably assured. For products on consignment, revenue is recognized upon the sale of the product by the consignee. Provision is made at the time revenue is recognized for estimated product returns and warranties based on historical experience.

Research and development

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

Leases

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

Net earnings per unit

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

Long-term incentive plan

Under the terms of the long-term incentive plan ("LTIP"), the Fund establishes an amount to be allocated to eligible participants based on 10% to 20% of cash distributions in excess of an established threshold. The cost is accrued as an expense in the period when it is determined an amount payable under the LTIP is likely.

Derivative financial instruments

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

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

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

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

The Fund uses foreign currency swap agreements to manage its cash positions. The Fund's foreign currency swap agreements do not qualify for hedge accounting. The Fund also enters into interest rate swaps in order to reduce the impact of fluctuating interest rates on its long-term debt. These swap agreements require the periodic exchange of payments without the exchange of the notional principal amount on which the payments are based. In the prior fiscal year, the terms of the interest rate swap were changed and it no longer qualifies for hedge accounting. These swaps are measured at their fair value and included in prepaid expenses and other assets on the consolidated balance sheet. Changes in the fair value of the foreign currency swaps and interest rate swaps are recognized in earnings and are included in loss (gain) on foreign exchange and other income, respectively, in the corresponding period.

Employee benefit plans

The Fund contributes to a group retirement savings plan subject to maximum limits per employee. Payments to this defined contribution plan are recorded as an expense in the period in which the contributions are earned. The expense recorded for the three-month and nine-month periods ended September 30, 2006 was $110,297 and $308,835 (three-month and nine-month periods ended September 30, 2005 - $78,626 and $233,355 respectively).

Use of estimates

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

5. ISSUANCE OF FUND UNITS AND ACQUISITION

Effective April 8, 2005, the Fund acquired substantially all of the assets of The Edwards Group of Companies ("the Edwards Group"), a leading manufacturer of agricultural aeration equipment, for cash consideration in the amount of $21,685,743. In conjunction with the acquisition, the Fund completed a private placement of 1,595,000 Trust Units priced at $13.50 per unit for gross proceeds of $21,532,500. The Fund recorded expenses in connection with the offering, including commissions payable to the underwriters, of $1,056,554.

The acquisition was accounted for by the purchase method with the results of the Edwards Group's operations included in the Fund's earnings from the date of acquisition of April 8, 2005. The assets and liabilities of the Edwards Group were recorded in the consolidated financial statements at their estimated fair values, as follows:



$
---------------------------------------------------------------------------
Net assets acquired
Accounts receivable 1,348,830
Inventory 3,672,603
Prepaid expenses and other assets 174,246
Property, plant and equipment 6,992,000
Intangible assets
Brand name 4,363,000
Distribution network 2,839,000
Patent 250,000
Goodwill 3,406,168
Accounts payable and accrued liabilities (1,360,104)
---------------------------------------------------------------------------
21,685,743
---------------------------------------------------------------------------
---------------------------------------------------------------------------


6. INVENTORY

September 30, December 31,
2006 2005
$ $
---------------------------------------------------------------------------
Raw materials 8,253,811 6,019,628
Finished goods 12,386,668 14,093,705
---------------------------------------------------------------------------
20,640,479 20,113,333
---------------------------------------------------------------------------
---------------------------------------------------------------------------


7. PROPERTY, PLANT AND EQUIPMENT

September 30, 2006
--------------------------------------
Accumulated Net book
Cost amortization value
$ $ $
---------------------------------------------------------------------------

Land 861,315 - 861,315
Buildings 5,335,041 462,008 4,873,033
Furniture and fixtures 144,072 43,494 100,578
Automotive equipment 1,715,728 709,891 1,005,837
Computer equipment 671,672 262,869 408,803
Manufacturing equipment 6,407,071 2,449,633 3,957,438
Leasehold improvements 16,167 530 15,637
---------------------------------------------------------------------------
15,151,066 3,928,425 11,222,641
---------------------------------------------------------------------------
---------------------------------------------------------------------------


December 31, 2005
--------------------------------------
Accumulated Net book
Cost amortization value
$ $ $
---------------------------------------------------------------------------

Land 861,315 - 861,315
Buildings 5,177,931 287,744 4,890,187
Furniture and fixtures 121,047 26,282 94,765
Automotive equipment 1,438,283 480,185 958,098
Computer equipment 565,714 159,442 406,272
Manufacturing equipment 6,127,774 1,424,969 4,702,805
Leasehold improvements - - -
---------------------------------------------------------------------------
14,292,064 2,378,622 11,913,442
---------------------------------------------------------------------------
---------------------------------------------------------------------------


8. INTANGIBLE ASSETS

September 30, 2006
--------------------------------------
Accumulated Net book
Cost amortization value
$ $ $
---------------------------------------------------------------------------

Distribution network 37,839,000 3,475,682 34,363,318
Brand name 23,363,000 - 23,363,000
Patent 250,000 250,000 -
---------------------------------------------------------------------------
61,452,000 3,725,682 57,726,318
---------------------------------------------------------------------------
---------------------------------------------------------------------------


December 31, 2005
--------------------------------------
Accumulated Net book
Cost amortization value
$ $ $
---------------------------------------------------------------------------

Distribution network 37,839,000 2,340,512 35,498,488
Brand name 23,363,000 - 23,363,000
Patent 250,000 187,500 62,500
---------------------------------------------------------------------------
61,452,000 2,528,012 58,923,988
---------------------------------------------------------------------------
---------------------------------------------------------------------------


9. DEFERRED FINANCING COSTS

September 30, 2006 December 31, 2005
-------------------------------- --------------------------------
Accumulated Net book Accumulated Net book
Cost amortization value Cost amortization value
$ $ $ $ $ $
---------------------------------------------------------------------------

795,011 795,011 - 795,011 645,823 149,188
---------------------------------------------------------------------------
---------------------------------------------------------------------------


10. BANK INDEBTEDNESS

The Fund has an operating facility of $15 million, increasing to $18 million for the period May 31 to September 30. The facility bears interest at a rate of prime to prime plus 1.0% per annum based on performance calculations. The effective interest rate during the three-month and nine-month periods ended September 30, 2006 was 6.00% and 5.68% (three-month and nine-month periods ended September 30, 2005 -- 4.50%) . At September 30, 2006, $1,745,508 was outstanding under this facility (December 31, 2005 - $Nil). Collateral for the operating facility includes a general security agreement over all assets and first position collateral mortgages on land and buildings.



11. LONG-TERM DEBT

September 30, December 31,
2006 2005
$ $
---------------------------------------------------------------------------

Term loan, interest payable monthly at prime to
prime plus 1% per annum based on performance
calculations. As described in note 16, the Fund
has entered into a swap contract
that manages fluctuations of the term loans
variable rate by setting a fixed interest rate
of 3.68%, plus 1.0%, 1.5%, or 2.0% per annum
based on performance calculations until expiry
of the swap contract on May 4, 2008. The
effective interest rate during the three-month
and nine-month periods ended September 30, 2006
would have been 6.00% and 5.68% (three-month
and nine-month periods
ended September 30, 2005 - 4.50% and 4.50%) and
after consideration of the effect of the
interest rate swap was 4.68% for both periods
(three-month and nine-month periods ended
September 30, 2005 - 4.54% and 4.40%) 20,000,000 20,000,000
GMAC loans, 0% maturing in 2007 and 2008, with
monthly payments of $1,958. Vehicles financed
are pledged as collateral 23,469 41,093
---------------------------------------------------------------------------
20,023,469 20,041,093
Less current portion 17,816 23,502
---------------------------------------------------------------------------
20,005,653 20,017,591
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Under the agreement for the term loan, the Fund is required to maintain certain financial covenants. As at September 30, 2006, the Fund was in compliance with the applicable financial covenant terms. Collateral for the term loan and operating facility (note 10) includes a general security agreement over all assets and first position collateral mortgages on land and buildings.

The term loan matures August 31, 2007 and is extendible annually for an additional one-year term at the lender's option. Under the terms of the credit facility agreement, if the bank elects to not extend the operating loan and term loan facilities beyond the current August 31, 2007 maturity date, all amounts outstanding under the facilities become repayable in four equal quarterly instalments of principal, commencing on November 30, 2008.

Principal repayments due within the next four fiscal years, if the term loan is not further renewed and is repayable commencing November 30, 2008, are as follows:



$
---------------------------------------------------------------------------

2006 (October 1 - December 31) 5,876
2007 11,689
2008 5,005,904
2009 15,000,000
---------------------------------------------------------------------------
20,023,469
---------------------------------------------------------------------------
---------------------------------------------------------------------------


12. UNITHOLDERS' CAPITAL

Unitholders' capital is comprised of the following:

Class B Class C
Fund Exchangeable Exchangeable Total
Trust units of units of Unitholders'
units AGHLP AGHLP capital
$ $ $ $
---------------------------------------------------------------------------

Balance, December
31, 2004 68,883,378 1,810,870 19,260,000 89,954,248
Issuance of units,
net of costs 20,475,946 - - 20,475,946
Exchange of units 111,090 (111,090) - -
---------------------------------------------------------------------------
Balance, December
31, 2005 89,470,414 1,699,780 19,260,000 110,430,194
Exchange of units-
Class C units for
Class B units - 19,260,000 (19,260,000) -
Exchange of units -
Class B units for
Fund Trust units 19,598,930 (19,598,930) - -
---------------------------------------------------------------------------
Balance, September
30, 2006 109,069,344 1,360,850 - 110,430,194
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Class C
Class B Subordinated
Fund Exchangeable Exchangeable
Trust units of units of
units AGHLP AGHLP
# # #
---------------------------------------------------------------------------

Balance, December 31, 2004 7,522,913 181,087 1,926,000
Issuance of units (note 5) 1,595,000 - -
Exchange of units 11,109 (11,109) -
---------------------------------------------------------------------------
Balance, December 31, 2005 9,129,022 169,978 1,926,000
Exchange of units - Class C units
for Class B units - 1,926,000 (1,926,000)
Exchange of units - Class B units
for Fund Trust units 1,959,893 (1,959,893) -
---------------------------------------------------------------------------
Balance, September 30, 2006 11,088,915 136,085 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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

The Fund Declaration of Trust also provides for the issuance of an unlimited number of Special Voting Units. The Special Voting Units are only issuable for the purpose of providing voting rights to the holders of exchangeable LP units. Each unit is entitled to one vote on matters related to the Fund. The Special Voting Units are not entitled to any interest or share in the Fund or in any distribution from the Fund. There is no value attached to these units. At September 30, 2006, there were 136,085 Special Voting Units outstanding (December 31, 2005 -- 2,095,978), which were attached to the outstanding Class B Exchangeable LP Units of AGHLP and the Class C Subordinated Exchangeable LP Units of AGHLP.

The Class C Subordinated Exchangeable Units of AGHLP are exchangeable on a one-for-one basis for Class B Exchangeable LP Units of AGHLP on the subordination end date. The subordination end date occurred in June 2006 and accordingly all 1,926,000 Class C Subordinated Exchangeable Units of AGHLP were exchanged for Class B Exchangeable LP Units of AGHLP. These units were then exchanged for Trust units of the Fund as noted below.

The Class B Exchangeable LP Units of AGHLP are exchangeable for trust units of the Fund at the option of the holder on a one-for-one basis at any time. In the nine-month period ended September 30, 2006, 1,959,893 Class B Exchangeable LP Units of AGHLP, with a value of $19,598,930, were exchanged into 1,959,893 units of the Fund. During the year ended December 31, 2005, 11,109 Class B Exchangeable LP Units of AGHLP, with a value of $111,090, were exchanged into 11,109 units of the Fund.

13. INCOME TAXES

Income tax obligations relating to distributions from the Fund are the obligations of the unitholders and accordingly, no provision for income taxes on the income of the Fund has been made. A provision for income taxes is recognized for the corporate subsidiaries of the Fund, which are subject to tax.

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



Three-month period ended Nine-month period ended
-------------------------------------------------------------
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
-------------------------------------------------------------
$ % $ % $ % $ %
---------------------------------------------------------------------------
Earnings
before income
taxes 5,856,578 6,635,557 15,210,428 16,499,770
Temporary
differences
and non-tax
deductible
expenses 201,237 189,104 (507,963) 159,913
Earnings
subject to
tax in the
hands of
unitholders/
limited
partners (5,879,309) (6,685,353) (14,179,365) (16,183,525)
---------------------------------------------------------------------------
Income of
subsidiary
companies
subject to tax 178,506 139,308 523,100 476,158
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Provision for
income taxes 85,440 48 53,000 38 213,540 41 183,000 38
Large corporation
tax - - 15,000 11 45,000 9
Benefit of
donations
not
previously
recorded and
other amounts - - (54,500) (10) -
Affect of
change in
substantively
enacted tax rates - - 7,600 1 -
---------------------------------------------------------------------------
Income tax
provision 85,440 48 68,000 49 166,640 32 228,000 47
---------------------------------------------------------------------------
---------------------------------------------------------------------------


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

September 30, December 31,
2006 2005
$ $
---------------------------------------------------------------------------

Future tax assets
Financing costs 52,000 116,500
Non-capital losses 231,800 295,500
---------------------------------------------------------------------------
283,800 412,000
---------------------------------------------------------------------------
---------------------------------------------------------------------------

The non-capital losses expire as follows:
$
---------------------------------------------------------------------------

2014 197,800
2015 34,000


14. DISTRIBUTIONS TO UNITHOLDERS

For the three-month and nine-month periods ended September 30, 2006, the Fund made distributions of $4,714,500 and $14,143,500 which equated to $0.42 and $1.26 per unit respectively. For the three-month and nine-month periods ended September 30, 2005, the Fund made distributions of $4,265,500 and $11,172,622 which equated to $0.38 and $1.05 respectively.

15. LONG TERM INCENTIVE PLAN

Key senior management of the Fund are eligible to participate in the Fund's LTIP. The purpose of the LTIP is to provide eligible participants with compensation opportunities that encourage ownership of units of the Fund, enhance the Fund's ability to attract, retain and motivate key personnel and reward key senior management for significant performance and associated growth in distributions. Pursuant to the LTIP, the Fund establishes the amount to be allocated to eligible participants based upon the amount by which the Fund's distributions exceed cash distribution thresholds (as defined in the LTIP plan documents). The LTIP is administered by the Corporate Governance and Compensation Committee.

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

The Fund has a recorded liability with respect to the fiscal 2006 LTIP at September 30, 2006 of $640,500 (fiscal 2005 LTIP at December 31, 2005 - $933,001).

16. FINANCIAL INSTRUMENTS

The Fund has the following financial instruments: cash and cash equivalents, accounts receivable, bank indebtedness, accounts payable and accrued liabilities, customer deposits, distributions payable, income taxes payable, long-term incentive plan, long-term debt, an interest rate swap arrangement, foreign exchange contracts and foreign currency swap agreements. It is management's opinion that the Fund is not exposed to significant credit risks arising from these financial instruments.

Currency exposures

Risk from foreign exchange arises as a result of variations in exchange rates between the Canadian and the U.S. dollar. The Fund has entered into foreign exchange contracts to hedge its foreign currency exposure on anticipated U.S. dollar sales transactions and the collection of the related accounts receivable.

At September 30, 2006, the Fund had outstanding forward foreign exchange contracts as follows:



Settlement dates Face value Average rate
$U.S. $Cdn
---------------------------------------------------------------------------
October 2006 to December 2006 12,100,000 1.3210
March 2007 to December 2007 4,625,000 1.2357
---------------------------------------------------------------------------
---------------------------------------------------------------------------

At September 30, 2006, the Fund had outstanding a series of foreign
exchange call and put options as follows:


Settlement dates Face value Call Put
$U.S. $Cdn $Cdn
---------------------------------------------------------------------------
March 2007 to December 2007 4,625,000 1.1363 1.2985
March 2007 to December 2007 4,625,000 1.1300 1.1975
March 2007 to December 2007 9,250,000 1.1363 1.2410
January 2008 to December 2008 7,800,000 1.0700 1.2115
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Interest rate exposures

The Fund is subject to risks associated with fluctuating interest rates on its long-term debt. To manage this risk, the Fund has entered into an interest rate swap transaction with a Canadian chartered bank. The swap transaction expires on May 4, 2008. The swap transaction involves the exchange of the underlying floating interest rate of prime to prime plus 1.00% per annum for an effective fixed interest rate of 3.68% plus 1.00% to 2.00% per annum based on performance calculations. The notional amount of the swap transaction at September 30, 2006 and December 31, 2005 was $20,000,000. At September 30, 2006, the fair value of the interest rate swap contract was $139,268 and this amount has been recorded in prepaid expenses and other assets.

Fair value

At September 30, 2006, the carrying value of the Fund's financial instruments approximates their fair value with the exception of foreign exchange contracts. The unrealized gain on foreign exchange contracts was $3,589,825 at September 30, 2006 (December 31, 2005 - $3,384,312). Upon maturity of the foreign exchange contracts, any gain/loss would be recognized in sales and/or realized foreign exchange gain/loss in the consolidated statement of earnings.

17. SEGMENTED DISCLOSURE

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



Revenues
-------------------------------------------------------
Three-month period ended Nine-month period ended
September 30, September 30, September 30, September 30,
-------------------------------------------------------
2006 2005 2006 2005
$ $ $ $
--------------------------------------------------------------------------
Canada 6,123,190 7,418,355 20,292,406 19,895,045
United States 15,176,800 18,181,660 41,425,384 44,568,780
International 749,551 1,155,782 2,608,291 2,669,395
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22,049,541 26,755,797 64,326,081 67,133,220
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Property, plant and equipment
and intangible assets at
------------------------------
September 30, December 31,
2006 2005
$ $
---------------------------------------------------------------------------
Canada 104,688,339 106,577,247
United States 230,679 230,242
International - -
---------------------------------------------------------------------------
104,919,018 106,807,489
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18. COMMITMENTS

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



$
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2006 (October 1 to December 31) 132,876
2007 491,881
2008 329,945
2009 205,530
2010 and forward 141,878
---------------------------------------------------------------------------
1,302,110
---------------------------------------------------------------------------
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Contact Information

  • Ag Growth Income Fund
    Steve Sommerfeld
    Investor Relations
    (204) 489-1855
    Email: steve@aggrowth.com