AG Growth Income Fund
TSX : AFN.UN

AG Growth Income Fund

August 14, 2006 08:35 ET

Ag Growth Income Fund Reports Results for the Three and Six Months Ended June 30, 2006

WINNIPEG, MANITOBA--(CCNMatthews - Aug. 14, 2006) - Ag Growth Income Fund (TSX:AFN.UN) today reported its financial results for the three and six-month periods ended June 30, 2006.

Results for the Six Months Ended June 30, 2006

For the six months ended June 30, 2006, the Fund reported sales of $42.3 million and earnings before interest, taxes, depreciation, and amortization of $11.8 million. This compares to sales of $40.4 million and EBITDA of $12.0 million for the six months ended June 30, 2005.

Results for the Three Months Ended June 30, 2006

For the three months ended June 30, 2006, the Fund reported sales of $22.6 million and earnings before interest, taxes, depreciation, and amortization of $6.4 million. This compares to sales of $24.4 million and EBITDA of $7.7 million for the three months ended June 30, 2005.

Distributions

During the three and six-month periods ended June 30, 2006, the Fund made distributions at an annualized rate of $1.68 per unit, and recorded payout ratios of 81% and 88% respectively. For the period from the Fund's initial public offering on May 18, 2004 to June 30, 2006, the Fund has declared distributions of $37.5 million, or 87.0% of the $43.0 million total distributable cash generated in that period.

Overview of Results

Operating results for the three and six month periods ended June 30, 2006 compare favourably to the very strong results recorded in the first half of 2005. Sales in the first half of any fiscal year are largely a function of the strength of the preceding year's crop, and accordingly sales in the first half of 2005 were the highest ever recorded by the Fund as they built on the momentum of the record U.S. crop of 2004.

Sales, EBITDA, and the Fund's payout ratio remained strong in 2006 despite the further appreciation of the Canadian dollar, which management estimates reduced sales by $1.1 million and $1.9 million in the three and six month periods. For the six-month period ended June 30, 2006, sales and EBITDA were positively impacted by the acquisition of the Edwards Group on April 8, 2005, as results included Edwards for the entire period.

"Our performance thus far has met expectations," said Gary Anderson, President of Ag Growth Income Fund. "Internally we had allowed for a correction from the record results of the first half of 2005, especially in light of the further appreciation of the Canadian dollar. We have been able to achieve our targets despite pockets of stress in the marketplace. Although demand in the second half of 2006 will fluctuate from region to region as a result of varying crop conditions, the geographic diversification of our network should provide a stabilizing influence on overall performance."

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.

Company Profile

Ag Growth is a leading manufacturer and distributor of portable grain handling equipment, including augers, belt conveyors and numerous other grain handling accessories, which are distributed through 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.

Forward-Looking Statements

The statements contained in this news release that are forward-looking are based on current expectations, and are subject to a number of uncertainties and risks, and actual results may differ materially. These uncertainties and risks include, but are not limited to, the dependence of Ag Growth Income Fund on the operations and assets currently owned by Ag Growth Industries Limited Partnership, the degree to which Ag Growth Industries Limited Partnership and its affiliates are leveraged, the fact that cash distributions are not guaranteed and will fluctuate with Ag Growth Industries Limited Partnership's financial performance, dilution, restrictions on potential future growth, the risk of unitholder liability, competitive pressures (including price competition), changes in market activity, the cyclicality of the farm equipment industry, seasonality of the business, poor weather conditions, international operations and foreign currency fluctuations, legal proceedings, commodity price and raw material exposure, dependence on key personnel, and environmental, health and safety and other regulatory requirements. 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
AUGUST 14, 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 six-month periods ended June 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 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. 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 have participated pro rata in the distributions of net earnings. In the three-month period ended June 30, 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 effect of the exchange of Class C units to Class B units, and the exchange of Class B units to trust units of the Fund, for the period ending August 14, 2006. The total number of units that participate in the distribution of net earnings has not changed.



Class B Class C
Trust Units Units Units Total

December 31, 2005 9,129,022 169,978 1,926,000 11,225,000
Exchange of Class C
units for Class B
units 0 1,926,000 (1,926,000) 0
Exchange of Class B
units for Trust
units 1,959,893 (1,959,893) 0 0
------------ ------------ ------------ ------------

June 30 and August
14, 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 Six Months Ended
June 30 June 30
2006 2005 2006 2005

Sales $22,571,529 $24,363,985 $42,276,540 $40,377,423
Cost of sales 12,735,177 13,011,411 23,617,587 21,592,574
------------ ------------ ------------ ------------
Gross margin 9,836,352 11,352,574 18,658,953 18,784,849
------------ ------------ ------------ ------------

General and
administration 3,066,678 3,508,376 6,430,272 6,401,006
Professional fees 89,119 134,707 157,106 257,559
Long term incentive
plan 213,500 26,192 427,000 26,192
Research and
development 239,942 155,137 393,234 367,069
Capital taxes 67,349 42,963 152,349 125,000
Gain on foreign
exchange (120,997) (115,822) (321,998) (335,842)
Other income (149,574) (68,946) (411,177) (78,523)
------------ ------------ ------------ ------------
Total operating
expenses 3,406,017 3,682,607 6,826,786 6,762,461
------------ ------------ ------------ ------------

EBITDA (1) 6,430,335 7,669,967 11,832,167 12,022,388

Amortization 956,249 1,102,105 2,000,135 1,721,309
Interest expense 257,421 223,834 478,182 436,866
------------ ------------ ------------ ------------
Earnings before tax 5,216,665 6,334,028 9,353,850 9,864,213
Tax expense 59,600 89,000 81,200 160,000
------------ ------------ ------------ ------------
Net earnings $ 5,157,065 $ 6,255,028 $ 9,272,650 $ 9,704,213
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

Net earnings per
unit $ 0.46 $ 0.56 $ 0.83 $ 0.94
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

(1) See discussion of non-GAAP measures.


June 30, June 30,
2006 2005

Total assets $143,521,480 $148,351,641
Total liabilities $ 32,899,046 $ 35,478,912


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 six months ended June 30, 2006 to the same period in 2005. The timing of the Edwards acquisition did not meaningfully impact the comparability of results for the three-month periods ended June 30, 2006 and June 30, 2005.

Distributable Cash and Distributions

For the three and six-month periods ended June 30, 2006, the Fund generated distributable cash of $0.52 and $0.95 per unit respectively (2005 - $0.63 and $1.04) and declared cash distributions of $0.42 and $0.84 per unit for the periods then ended (2005 - $0.34 and $0.67). 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 under the sections "Distributions" and "Non-GAAP Measures" below.



Three Months Ended Six Months Ended
June 30 June 30
2006 2005 2006 2005

Trust units $ 4,108,574 $ 3,072,828 7,942,763 $ 5,520,633
Class B units 66,646 57,215 138,037 112,440
Class C units 539,280 648,292 1,348,200 1,274,049
------------ ------------ ------------ ------------
$ 4,714,500 $ 3,778,335 $ 9,429,000 $ 6,907,122
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

Distributable Cash
Generated $ 5,853,324 $ 6,962,038 $10,718,860 $10,751,952
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------


As a result of a number of per unit distribution increases, total distributions for the three and six months ended June 30, 2006 have increased 25% and 37% over the same periods in 2005. Accordingly, the Fund has distributed cash earlier in the year compared to the prior period. For the three and six month periods ended June 30, 2006, the Fund has made regular monthly distributions at an annualized rate of $1.68 per unit. In fiscal 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 six-month periods ended June 30, 2006 was $6.4 million and $11.8 million respectively. This compares to $7.7 million and $12.0 million in 2005. Operating results for the periods ended June 30, 2006 compare favourably to 2005, as EBITDA in the three and six-months ended June 30, 2005 were the highest ever recorded by the Fund due to the impact of the record harvest in the U.S. in 2004. Results for the six months ended June 30, 2006 were positively impacted by the acquisition of the Edwards Group on April 8, 2005. The timing of the Edwards acquisition did not meaningfully impact the comparability of results for the three months ended June 30, 2006 and June 30, 2005.

Sales

For the three months ended June 30, 2006, sales decreased $1.8 million or 7.4% from 2005. As discussed under Foreign Exchange, the impact of the stronger Canadian dollar resulted in a decrease in recorded sales of approximately $1.1 million compared to the same period in 2005. Accordingly, for the three-month period ended June 30, 2006, foreign exchange adjusted sales decreased $0.7 million or 3.0% from the same period in 2005. This decrease related primarily to lower sales in western Canada, the result of unusually hot and dry conditions in certain areas. Sales in the three and six-month periods ended June 30, 2005 were exceptional due to the record harvest in the US in 2004. It is important to consider this when comparing the second quarter and year to date results for the Fund to 2005.

For the six months ended June 30, 2006, sales increased $1.9 million or 4.7% over the same period in 2005. Excluding Edwards, which is included in 2005 results only subsequent to the acquisition date of April 8, 2005, sales decreased $0.3 million or 0.8% from the same period in 2005. As discussed under Foreign Exchange, the impact of the stronger Canadian dollar resulted in a decrease in recorded sales of approximately $1.9 million ($1.8 million excluding Edwards) compared to the same period in 2005. Allowing for the foreign exchange impact, sales excluding Edwards for the six-month period increased $1.5 million or 3.9% over 2005. The increase was due primarily to robust sales in the U.S. corn-belt, which resulted from favourable growing conditions and strong market share, offset by lower sales in western Canada as conditions in certain areas deteriorated due to unusually hot and dry weather.

Foreign Exchange

Sales and expenses are recorded at the monthly rate of exchange. For the three and six month periods ended June 30, 2006, Ag Growth generated 61% and 62% of its sales in US dollars (2005 - 64% and 65% respectively). A much lower proportion of the Fund's expenses are US dollar denominated. Historically, US dollar denominated purchases have equated to approximately 20% to 25% of the total of Cost of Sales and Selling, General and Administration expenses. As a result of this imbalance, only a portion of the negative impact on sales that results from a stronger Canadian dollar is offset by the benefit related to US dollar purchases.

The average rates of exchange used by Ag Growth for the three and six-month periods ended June 30, 2006 were $1.13 and $1.14 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 six-month periods ended June 30, 2006 would have increased $1.1 million and $1.9 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 six month periods ended June 30, 2006 amounted to $128,124 and $144,843 respectively.

Gains or losses related to foreign currency hedging are recorded primarily in the quarter in which the contracts mature, and as a result Ag Growth will realize the majority of its foreign exchange gain or loss in the third and fourth quarters of 2006.

Expenses

Gross margin as a percentage of sales for the three and six-months ended June 30, 2006 was 43.6% and 44.1% respectively, compared to 46.6% and 46.5% in 2005. Excluding Edwards, gross margin for the six months ended June 30, 2006 was 44.4%. The decline in gross margin percentage is primarily due to the strengthening of the Canadian dollar, partially offset by the benefit of lower input costs compared to the prior year. The Fund implemented a price increase of 2% to 3% on most products on July 1, 2006, the impact of which is expected to be realized later in the third quarter.

For the three months ended June 30, 2006, total operating expenses were $3.4 million compared to $3.7 million for the same period in 2005, a decrease of $0.3 million or 7.5%. The $0.3 million decrease from 2005 is primarily due to the following:

- General and administrative expenses have decreased $0.4 million, due to a $0.2 million decrease in repairs and maintenance expenses, as paint-line repairs incurred in the second quarter of 2005 inflated the expense in that period, and a $0.2 million decrease in salary expenses, the result of a lower accrual for performance based bonuses in the quarter compared to same period in 2005.

- Long-term incentive plan expense has increased $0.2 million. This expense is based on the amount by which monthly distributions exceed $0.1083 per unit. For the three-month period ended June 30, 2006, the Fund made monthly distributions of $0.14 per unit and as a result the LTIP expense for the period was based on distributions in all three months. . In the three month period ended June 30, 2005, the monthly distribution level exceeded $0.1083 per unit only in the month of June. Accordingly, the LTIP expense at June 30, 2005 reflected the excess over the LTIP threshold for the month of June only.

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

For the six months ended June 30, 2006, total operating expenses were $6.8 million, unchanged from the prior year. Excluding Edwards, total operating expenses decreased $0.5 million. The decrease is primarily due to the following:

- General and administrative expenses have decreased $0.4 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, and the $0.2 million decrease in repairs and maintenance expense discussed above.

- Other income increased $0.3 million, primarily due to the inclusion in 2006 of $0.2 million related to the change in fair value of the Fund's interest rate swap.

- Long-term incentive plan expense has increased $0.4 million. This expense is based on the amount by which monthly distributions exceed $0.1083 per unit. For the six-month period ended June 30, 2006, the Fund made monthly distributions of $0.14 per unit and as a result the LTIP expense for the period was based on distributions in all six months. In the six-month period ended June 30, 2005, the monthly distribution level exceeded $0.1083 per unit only in the month of June. Accordingly, the LTIP expense at June 30, 2005 reflected the excess over the LTIP threshold for the month of June only.

- 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 six months ended June 30, 2006 was $6.4 million and $11.8 million, compared to $7.7 million and $12.0 million for the same periods in 2005. The comparison to 2005 was most significantly impacted by the Edwards acquisition, the strength of the record results recorded in the first half of 2005, 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 six months ended June 30, 2006, the Fund's effective interest rate on its term debt was 5.8% and 5.5% respectively (2005 - 4.5%), and after consideration of the effect of the Funds interest rate swap (see "Financial Instruments") was 4.7% (2005 - 4.3%).

Amortization for the three months ended June 30, 2006 was $1.0 million, compared to $1.1 for the same period in 2005. Amortization for the three months ended June 30, 2006 includes the amortization of intangible assets of $0.4 million, the amortization of deferred financing costs of $0.1 million, and the amortization of property, plant and equipment of $0.5 million.

Amortization for the six months ended June 30, 2006 was $2.0 million, an increase of $0.3 over the same period in 2005. Amortization for the six months ended June 30, 2006 includes the amortization of intangible assets of $0.8 million, the amortization of deferred financing costs of $0.2 million, and the amortization of property, plant and equipment of $1.0 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 $59,600 and $81,200 for the three and six month periods ended June 30, 2006 represents primarily income taxes and large corporation tax payable on the net income and taxable capital primarily allocated to Ag Growth and its subsidiaries through its ownership in AGLP after deductions for interest expense, financing fees and capital taxes.

Net earnings for the three and six-month periods ended June 30, 2006 were $5.2 million and $9.3 million respectively (2005 - $6.3 million and $9.7 million). Earnings per basic and diluted unit for the three and six-month periods were $0.46 and $0.83 respectively (2005 - $0.56 and $0.94).



Quarterly Financial Information

------------------------------------------------------------------------
2006
------------------------------------------------------------------------
Q4 Q3 Q2 Q1
------------------------------------------------------------------------

------------------------------------------------------------------------
Total sales $22,571,529 $19,705,011
------------------------------------------------------------------------
Gain (loss) on
foreign exchange $ 120,997 $ 201,001
------------------------------------------------------------------------
Net earnings $ 5,157,065 $ 4,115,585
------------------------------------------------------------------------
Basic and diluted
net earnings per
unit $ 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 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 gain on foreign exchange in the fourth quarter of 2005 was largely the result of gains realized on the Fund's foreign exchange contracts. A similar gain was not recorded in the fourth quarter of 2004, as the Fund's contract rates were more similar to prevailing market rates.

- The first and second quarters of 2005 were 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.



CASHFLOW AND LIQUIDITY

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

Three Months Ended Six Months Ended
June 30 June 30
2006 2005 2006 2005

Net income $ 5,157,065 $ 6,255,028 $ 9,272,650 $ 9,704,213
Add charges (deduct
credits) to
operations not
requiring a current
cash payment:
Amortization 956,249 1,102,105 2,000,135 1,721,309
Future income taxes 68,100 74,000 68,700 130,000
Deferred foreign
exchange loss (345,394) (73,722) (255,810) (116,748)
Gain on sale of
property, plant
& equipment (2,469) (10,082) (29,794) (10,082)
------------ ------------ ------------ ------------

5,833,551 7,347,329 11,055,881 11,428,692
------------ ------------ ------------ ------------
Net change in
non-cash working
capital balances
related to
operations:

Accounts receivable (3,966,944) (6,642,512) (7,572,242) (10,644,559)
Inventory (3,578) (209,216) (1,230,111) (1,843,285)
Prepaid expenses
and other assets (61,277) 186,847 273,254 380,663
Accounts payable
and accrued
liabilities 497,716 (122,400) 758,777 611,685
Long term incentive
plan 213,500 26,192 (506,001) 26,192
Customer deposits (1,900,154) (1,182,685) (2,210,973) (2,977,834)
Income taxes
payable (11,900) (19,609) (48,974) 380,420
------------ ------------ ------------ ------------

Cash provided by
(used in)
operations $ 600,914 $ (616,054) $ 519,611 $(2,638,026)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------


The Fund generated positive cash flow from operations in both the three and six-month periods ended June 30, 2006, compared to negative cash flow in the same periods in 2005. The positive comparison to 2005 is primarily the result of a lower change in non-cash working capital.

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

The Fund had capital expenditures of $0.3 million and $0.6 million in the three and six-month periods ended June 30, 2006 (2005 - $0.5 million and $0.8 million). Capital expenditures in the three and six-months ended June 30, 2006 relate primarily to purchases of a semi tractor unit and trailer, and manufacturing equipment. The Fund anticipates total capital expenditures in 2006 will approximate the amounts expended in 2005, and that all 2006 capital expenditures will be funded through operations.

For the three and six-month periods ended June 30, 2006, the Fund's cash balance decreased $1.2 million and $8.1 million respectively, which was in line with management expectations for the reasons discussed above. Consistent with prior years, management expects working capital requirements will lessen in the third quarter and the Fund will begin to repay its revolver facility.



CONTRACTUAL OBLIGATIONS

Total 2006 2007 2008 2009 2010 +

Long-term debt 20,029,343 11,750 11,689 5,005,904 15,000,000 0
Operating
leases 1,405,171 253,203 475,558 329,002 205,530 141,878
---------- ------- ------- --------- ---------- -------
Total
obligations 21,434,514 264,953 487,247 5,334,906 15,205,530 141,878
---------- ------- ------- --------- ---------- -------
---------- ------- ------- --------- ---------- -------


The term loan of $20 million included in long-term debt above 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.

DISTRIBUTIONS

The Fund declared distributions to public unitholders of $4.1 million and $7.9 million for the three and six-months ended June 30, 2006 (2005 - $3.1 million and $5.5 million). Furthermore, consistent with the Fund's prospectus dated May 5, 2004, the Fund declared distributions to Ag Growth's previous owners of $0.6 million and $1.5 million for the three and six-months ended June 30, 2006 (2005 - $0.7 million and $1.4 million).

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.

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



Distributable cash generated for the three and six-months ended June 30,
2006 and 2005 is calculated as follows:

Three Months ended Six Months ended
June 30 June 30
2006 2005 2006 2005

Net income for the
period $ 5,157,065 $ 6,255,028 $ 9,272,650 $ 9,704,213
Add: Amortization 956,249 1,102,105 2,000,135 1,721,309
Interest
expense 257,421 223,834 478,182 436,866
Tax expense 59,600 89,000 81,200 160,000
------------ ------------ ------------ ------------
EBITDA (1) 6,430,335 7,669,967 11,832,167 12,022,388
Less: Interest
expense 257,421 223,834 478,182 436,866
Net capital
expenditures 328,090 469,095 622,625 803,570
Current income
taxes (8,500) 15,000 12,500 30,000
------------ ------------ ------------ ------------
Distributable
cash (1) $ 5,853,324 $ 6,962,038 $10,718,860 $10,751,952
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

Weighted average
units outstanding 11,225,000 11,102,308 11,225,000 10,370,221
Distributable cash
generated per
unit (1) $ 0.5214 $ 0.6271 $ 0.9549 $ 1.0368
Distributions
declared per unit $ 0.4200 $ 0.3403 $ 0.8400 $ 0.6661
Distribution
percentage 80.6% 54.3% 88.0% 64.3%

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


Distributions declared per unit for the three and six-months ended June 30, 2006 equate to a per unit monthly rate of $0.14 in both periods, which represents per unit distribution increases of 25% and 27% 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 six-months ended June 30, 2006 and 2005 were funded entirely through operations, and no portion of the distribution represents a return of capital.



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 $0.5214 $0.4335
------------------------------------------------------------------------
Distributions
declared $0.4200 $0.4200
------------------------------------------------------------------------
Distribution
percentage 80.6% 96.9%
------------------------------------------------------------------------
YTD distribution
percentage 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%
Six months ended June 30, 2006 10,718,860 9,429,000 88.0%
-------------- -------------- --------
Cumulative since inception $ 43,033,730 $ 37,455,889 87.0%
-------------- -------------- --------
-------------- -------------- --------

(1) Distributions declared include special distributions of $1,328,940
in 2004, $3,367,500 in 2005, and $nil for the six months ended June
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 $5.6 million for internal purposes. A portion of the cash retained in the Fund has been directed towards maintenance and strategic capital expenditures, which have totalled $2.7 million since inception. The remaining $2.9 million has been retained primarily to further strengthen the Fund's financial position, and in effect represents cash generated in excess of the Fund's capital expenditure and distribution requirements.

CAPITAL RESOURCES

The term loan matures August 31, 2007 and is extendible annually at the lender's option. The Fund also has available a $15 million operating facility, increasing to $18 million for the period May 31 to September 30. At June 30, 2006, the Fund's bank indebtedness was $3.2 million (June 30, 2005 - $5.3 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 US dollar sales transactions and the collection of the related accounts receivable. At June 30, 2006, the Fund had outstanding the following foreign exchange contracts:



------------------------------------------------------------------------
Forward Foreign Exchange Contracts
------------------------------------------------------------------------
Unrealized
Settlement Dates Face Amount Average Rate Gain
USD CDN (Loss) CDN
July - December 2006 $20,100,000 $ 1.3020 $ 3,751,588
March - December 2007 4,625,000 $ 1.2357 579,683
------------ ------------ ------------
Total $24,725,000 $ 1.2896 $ 4,331,271
------------ ------------ ------------
------------ ------------ ------------


------------------------------------------------------------------------
Currency Options
------------------------------------------------------------------------
Unrealized
Settlement Dates Face Amount Call Rate Put Rate Gain
USD CND CDN (Loss) CDN
March
- December 2007 $ 4,625,000 $ 1.1363 $ 1.2985 $ 210,393
March
- December 2007 4,625,000 $ 1.1300 $ 1.1975 125,555
March
- December 2007 9,250,000 $ 1.1363 $ 1.2410 345,564
January
- December 2008 7,800,000 $ 1.0700 $ 1.2115 (116,033)
------------ ------------ ------------ ------------
Total $26,300,000 N/A N/A $ 565,479
------------ ------------
------------ ------------


As at June 30, 2006, the Fund has recorded a deferred foreign exchange loss of $269,170 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 June 30, 2006 was $20.0 million. At June 30, 2006, the fair value of the interest rate swap contract was $363,193, and this amount has been recorded in prepaid expenses and other assets.

CHANGES IN ACCOUNTING POLICIES

In an effort to harmonize Canadian GAAP with US GAAP, the Canadian Accounting Standards Board has issued the following sections:

- 1530, Comprehensive Income;

- 3855, Financial Instruments-Recognition and Measurement; and

- 3865, Hedges.

Under these new standards, all financial assets should be measured at fair value with the exception of loans, receivables and investments that are intended to be held to maturity and certain equity investments, which should be measured at cost. Similarly, all financial liabilities should be measured at fair value when they are held for trading or they are derivatives. Gains and losses on financial instruments measured at fair value will be recognized in the income statement in the periods they arise with the exception of gains and losses arising from:

- Financial assets held for sale, for which unrealized gains and losses are deferred in other comprehensive income until sold or impaired; and

- Certain financial instruments that qualify for hedge accounting.

Sections 3855 and 3865 of the CICA Handbook make use of "other comprehensive income". Other comprehensive income comprises revenues, expenses, gains and losses that are recognized in comprehensive income, but are excluded from net income. Unrealized gains and losses on qualifying hedging instruments, translation of self-sustaining foreign operations, and unrealized gains or losses on financial instruments held for sale will be included in other comprehensive income and reclassified to net income when realized. Comprehensive income and its components will be a required disclosure under the new standard. These new standards are effective for fiscal years beginning on or after October 1, 2006 and early adoption is permitted. Management has not yet determined the impact of the adoption of these standards on the presentation of the Fund's results from operations or financial position.

RISKS AND UNCERTAINTIES

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

Industry Cyclicality

The performance of the farm equipment industry is cyclical, with sales depending on the performance of the agricultural sector. To the extent that the agricultural sector declines or experiences a downturn, this is likely to have a negative impact on the farm equipment industry 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 second half of 2006 will be impacted by crop conditions. Strong sales should result from favourable conditions and significant market share in the Fund's primary market, the U.S. corn belt. However, drought patterns in certain areas of the U.S. Great Plains as well as a decline in crop conditions in western Canada will likely temper demand in those regions.

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. Although a large portion of the effect of a stronger currency has been addressed in 2006 through foreign currency hedging, a further strengthening of the dollar will continue to pressure gross margins. 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 the majority of its foreign exchange gain or loss in the third and fourth quarters of 2006.

NON-GAAP MEASURES

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

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

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
June 30, 2006


Ag Growth Income Fund

UNAUDITED INTERIM CONSOLIDATED BALANCE SHEETS

As at As at
June 30, December 31,
2006 2005
$ $
------------------------------------------------------------------------

ASSETS (notes 10 and 11)
Current
Cash and cash equivalents - 8,148,634
Accounts receivable 14,878,051 7,305,809
Inventory (note 6) 21,343,444 20,113,333
Prepaid expenses and other assets 1,129,745 1,402,999
Future tax assets 200,600 221,000
------------------------------------------------------------------------
Total current assets 37,551,840 37,191,775
Property, plant and equipment (note 7) 11,483,003 11,913,442
Goodwill 35,970,059 35,970,059
Intangible assets (note 8) 58,104,708 58,923,988
Deferred financing costs (note 9) - 149,188
Future tax assets 142,700 191,000
Deferred foreign exchange loss 269,170 13,360
------------------------------------------------------------------------
143,521,480 144,352,812
------------------------------------------------------------------------
------------------------------------------------------------------------

LIABILITIES AND UNITHOLDERS' EQUITY
Current
Bank indebtedness (note 10) 3,213,669 -
Accounts payable and accrued liabilities 5,721,725 4,962,948
Customer deposits 892,429 3,103,402
Income taxes payable 504,100 553,074
Distributions payable 2,110,780 3,980,510
Long-term incentive plan (note 15) 427,000 933,001
Current portion of long-term debt (note 11) 20,300 23,502
------------------------------------------------------------------------
Total current liabilities 12,890,003 13,556,437
Long-term debt (note 11) 20,009,043 20,017,591
------------------------------------------------------------------------
Total liabilities 32,899,046 33,574,028
Commitments (notes 16 and 18)
Unitholders' equity 110,622,434 110,778,784
------------------------------------------------------------------------
143,521,480 144,352,812
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes

On behalf of the Board of Trustees:

(signed) Rod Senft (signed) John R. Brodie, FCA
Trustee Trustee


Ag Growth Income Fund

UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF EARNINGS

Three-month period ended Six-month period ended
-------------------------- ------------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
$ $ $ $
------------------------------------------------------------------------
Sales 22,571,529 24,363,985 42,276,540 40,377,423
Cost of goods sold 12,735,177 13,011,411 23,617,587 21,592,574
------------------------------------------------------------------------
Gross margin 9,836,352 11,352,574 18,658,953 18,784,849
------------------------------------------------------------------------
Expenses
Selling, general and
administration 3,066,678 3,508,376 6,430,272 6,401,006
Professional fees 89,119 134,707 157,106 257,559
Long-term incentive
plan 213,500 26,192 427,000 26,192
Research and
development 239,942 155,137 393,234 367,069
Capital taxes 67,349 42,963 152,349 125,000
Gain on foreign
exchange (120,997) (115,822) (321,998) (335,842)
Other income (149,574) (68,946) (411,177) (78,523)
------------------------------------------------------------------------
3,406,017 3,682,607 6,826,786 6,762,461
------------------------------------------------------------------------
Earnings before the
following 6,430,335 7,669,967 11,832,167 12,022,388
------------------------------------------------------------------------
Interest expense
Short-term debt 18,258 8,092 23,218 12,610
Long-term debt 239,163 215,742 454,964 424,256
------------------------------------------------------------------------
257,421 223,834 478,182 436,866
------------------------------------------------------------------------
Earnings before
amortization and
income taxes 6,172,914 7,446,133 11,353,985 11,585,522
------------------------------------------------------------------------
Amortization of
property, plant
and equipment 528,047 578,599 1,031,667 765,177
Amortization of
deferred financing
costs 49,812 82,616 149,188 165,242
Amortization of
intangible assets 378,390 440,890 819,280 790,890
------------------------------------------------------------------------
956,249 1,102,105 2,000,135 1,721,309
------------------------------------------------------------------------
Earnings before
provision for
income taxes 5,216,665 6,344,028 9,353,850 9,864,213
------------------------------------------------------------------------
Provision for income
taxes (note 13)
Current (8,500) 15,000 12,500 30,000
Future 68,100 74,000 68,700 130,000
------------------------------------------------------------------------
59,600 89,000 81,200 160,000
------------------------------------------------------------------------
Net earnings for the
period 5,157,065 6,255,028 9,272,650 9,704,213
------------------------------------------------------------------------
------------------------------------------------------------------------
Basic and diluted net
earnings per unit 0.46 0.56 0.83 0.94
------------------------------------------------------------------------
------------------------------------------------------------------------
Basic and diluted
weighted average
number of units
outstanding 11,225,000 11,102,308 11,225,000 10,370,221
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes


Ag Growth Income Fund

UNAUDITED INTERIM CONSOLIDATED STATEMENT OF UNITHOLDERS' EQUITY

Six-month period ended June 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 - 9,272,650 - 9,272,650
Distributions
declared - - (9,429,000) (9,429,000)
------------------------------------------------------------------------
Balance, June 30,
2006 110,430,194 37,648,129 (37,455,889) 110,622,434
------------------------------------------------------------------------
------------------------------------------------------------------------


Six-month period ended June 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 - 9,704,213 - 9,704,213
Distributions
declared - - (6,907,122) (6,907,122)
Issuance of Units
during the
six-month period
ended June 30,
2005 (note 5) 21,532,500 - - 21,532,500
Issuance costs
during the six
month period
ended June 30,
2005 (note 5) (1,025,502) - - (1,025,502)
------------------------------------------------------------------------
Balance, June
30, 2005 110,461,246 18,427,622 (16,016,139) 112,872,729
Net earnings for
the six-month
period ended
December 31,
2005 - 9,947,857 - 9,947,857
Distributions
declared during
the six-month
period ended
December 31,
2005 - - (12,010,750) (12,010,750)
Issuance costs
during the six
month period
ended December
31, 2005
(note 5) (31,052) - - (31,052)
------------------------------------------------------------------------
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 Six-month period ended
-------------------------- ------------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
$ $ $ $
------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings for the
period 5,157,065 6,255,028 9,272,650 9,704,213
Add charges to
operations not
requiring a current
cash payment
Amortization 956,249 1,102,105 2,000,135 1,721,309
Future income taxes 68,100 74,000 68,700 130,000
Deferred foreign
exchange loss (345,394) (73,722) (255,810) (116,748)
Gain on sale of
property, plant
and equipment (2,469) (10,082) (29,794) (10,082)
------------------------------------------------------------------------
5,833,551 7,347,329 11,055,881 11,428,692
------------------------------------------------------------------------
Net change in
non-cash working
capital balances
related to
operations
Accounts receivable (3,966,944) (6,642,512) (7,572,242) (10,644,559)
Inventory (3,578) (209,216) (1,230,111) (1,843,285)
Prepaid expenses and
other assets (61,277) 186,847 273,254 380,663
Accounts payable and
accrued liabilities 497,716 (122,400) 758,777 611,685
Long-term incentive
plan 213,500 26,192 (506,001) 26,192
Income taxes payable (11,900) (19,609) (48,974) 380,420
Customer deposits (1,900,154) (1,182,685) (2,210,973) (2,977,834)
------------------------------------------------------------------------
(5,232,637) (7,963,383) (10,536,270) (14,066,718)
------------------------------------------------------------------------
Cash provided by
(used in) operating
activities 600,914 (616,054) 519,611 (2,638,026)
------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of
property, plant
and equipment (328,090) (469,095) (622,625) (803,570)
Acquisition of assets
of the Edwards Group
of Companies - (21,241,746) - (21,688,415)
Cash held in trust
related to
acquisition of
the Edwards Group
of Companies - (406,133) - (406,133)
Transfer to
restricted cash
for long-term
incentive plan - (26,192) - (26,192)
Proceeds from sale of
property, plant and
equipment 5,525 10,500 51,191 10,500
Pre-existing Fund
structure tax
credits received - 240,000 - 240,000
------------------------------------------------------------------------
Cash used in
investing activities (322,565) (21,892,666) (571,434) (22,673,810)
------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in bank
indebtedness 3,213,669 6,017,438 3,213,669 6,017,438
Repayment of
long-term debt (5,875) (8,374) (11,750) (16,749)
Distributions paid (4,714,500) (4,129,105) (11,298,730) (7,931,992)
Issuance of units,
net of expenses - 20,506,998 - 20,506,998
------------------------------------------------------------------------
Cash provided by
(used in)
financing activities (1,506,706) 22,386,957 (8,096,811) 18,575,695
------------------------------------------------------------------------

Net decrease in cash
and cash equivalents
during the period (1,228,357) (121,763) (8,148,634) (6,736,141)
Cash and cash
equivalents,
beginning of period 1,228,357 121,763 8,148,634 6,736,141
------------------------------------------------------------------------
Cash and cash
equivalents,
end of period - - - -
------------------------------------------------------------------------
------------------------------------------------------------------------

Supplemental cash
flow information
Interest paid 259,093 228,307 490,084 447,694
Income taxes paid
(recovered) 3,400 (205,393) (5,986) (339,970)
------------------------------------------------------------------------
------------------------------------------------------------------------

See accompanying notes


Ag Growth Income Fund

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

June 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 June 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. The Fund would expect to repay its revolver in the fourth quarter of each year.

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 appears likely.

Derivative financial instruments

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

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

The Fund purchases foreign exchange contracts to hedge anticipated sales to customers in the United States and the collection of the related accounts receivable. 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 six-month periods ended June 30, 2006 was $95,293 and $198,538 (three-month and six-month periods ended June 30, 2005 - $76,965 and $154,728).

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 initially 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

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

Raw materials 7,107,684 6,019,628
Finished goods 14,235,760 14,093,705
------------------------------------------------------------------------
21,343,444 20,113,333
------------------------------------------------------------------------
------------------------------------------------------------------------


7. PROPERTY, PLANT AND EQUIPMENT

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

Land 861,315 - 861,315
Buildings 5,171,295 401,887 4,769,408
Furniture and fixtures 144,072 37,756 106,316
Automotive equipment 1,692,629 627,204 1,065,425
Computer equipment 610,132 223,714 386,418
Manufacturing equipment 6,385,303 2,107,215 4,278,088
Leasehold improvements 16,166 133 16,033
------------------------------------------------------------------------
14,880,912 3,397,909 11,483,003
------------------------------------------------------------------------
------------------------------------------------------------------------


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

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

Distribution network 37,839,000 3,097,292 34,741,708
Brand name 23,363,000 - 23,363,000
Patent 250,000 250,000 -
------------------------------------------------------------------------
61,452,000 3,347,292 58,104,708
------------------------------------------------------------------------
------------------------------------------------------------------------


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

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

795,011 795,011 -
------------------------------------------------------------------------
------------------------------------------------------------------------


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

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 six-month periods ended June 30, 2006 was 5.79% and 5.52% (three-month and six-month periods ended June 30, 2005 - 4.50%). At June 30, 2006, $3,213,669 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

June 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 effectively fixes the Fund's
interest rate at 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
six-month periods ended June 30, 2006 would
have been 5.79% and 5.52% (three-month and
six-month periods ended June 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 six-month
periods ended June 30, 2005 - 4.32%) 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 29,343 41,093
------------------------------------------------------------------------
20,029,343 20,041,093
Less current portion 20,300 23,502
------------------------------------------------------------------------
20,009,043 20,017,591
------------------------------------------------------------------------
------------------------------------------------------------------------


Under the agreement for the term loan, the Fund is required to maintain certain financial covenants. As at June 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 matured in July 2006, subsequent to which the Fund renegotiated certain terms of its credit facility arrangement including an extension of the term loan to August 31, 2007. Under the amended terms of the credit facility agreement, if the bank elects to not extend the operating loan and term loan facilities beyond the revised 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 (July 1 - December 31) 11,750
2007 11,689
2008 5,005,904
2009 15,000,000
------------------------------------------------------------------------
20,029,343
------------------------------------------------------------------------
------------------------------------------------------------------------


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,
June 30, 2006 109,069,344 1,360,850 - 110,430,194
------------------------------------------------------------------------
------------------------------------------------------------------------


Class B Class C
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, June 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 or Subordinated LP Units. Each unit is entitled to one vote on matters related to the Fund. The Special Voting Units are not entitled to any interest or share in the Fund or in any distribution from the Fund. There is no value attached to these units. At June 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 Exchangeable Subordinated 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 six-month period ended June 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, including large corporation tax.

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



Three-month Three-month
period ended period ended
June 30, June 30,
2006 2005
--------------------------------
$ % $ %
------------------------------------------------------------------------

Earnings before income taxes 5,216,665 6,344,028
Temporary differences and non-tax
deductible expenses (424,914) (104,003)
Earnings subject to tax in the hands of
unitholders/limited partners (4,609,923) (6,050,787)
------------------------------------------------------------------------
Income of subsidiary companies subject
to tax 181,828 189,238
------------------------------------------------------------------------
------------------------------------------------------------------------

Provision for income taxes 67,000 37 74,000 39
Large corporation tax (15,000) (8) 15,000 8
Benefits of donations not previously
recorded and other - -
Affect of change in substantively
enacted tax rates 7,600 4 -
------------------------------------------------------------------------
Income tax provision 59,600 33 89,000 47
------------------------------------------------------------------------
------------------------------------------------------------------------


Six-month Six-month
period ended period ended
June 30, June 30,
2006 2005
--------------------------------
$ % $ %
------------------------------------------------------------------------

Earnings before income taxes 9,353,850 9,864,213
Temporary differences and non-tax
deductible expenses (709,200) (29,191)
Earnings subject to tax in the hands of
unitholders/limited partners (8,300,056) (9,498,172)
------------------------------------------------------------------------
Income of subsidiary companies subject
to tax 344,594 336,850
------------------------------------------------------------------------
------------------------------------------------------------------------

Provision for income taxes 128,100 37 130,000 39
Large corporation tax - 30,000 9
Benefits of donations not previously
recorded and other (54,500) (16) -
Affect of change in substantively
enacted tax rates 7,600 2 -
------------------------------------------------------------------------
Income tax provision 81,200 23 160,000 48
------------------------------------------------------------------------
------------------------------------------------------------------------


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

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

Future tax assets
Financing costs 73,000 116,500
Non-capital losses 270,300 295,500
------------------------------------------------------------------------
343,300 412,000
------------------------------------------------------------------------
------------------------------------------------------------------------


The non-capital losses expire as follows:

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

2014 236,300
2015 34,000


14. DISTRIBUTIONS TO UNITHOLDERS

For the three-month and six-month periods ended June 30, 2006, the Fund made distributions of $4,714,500 and $9,429,000 which equated to $0.42 and $0.84 per unit respectively. For the three-month and six-month periods ended June 30, 2005, the Fund made distributions of $3,778,335 and $6,907,122 which equated to $0.3403 and $0.6661 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 June 30, 2006 of $427,000 (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 June 30, 2006, the Fund had outstanding forward foreign exchange
contracts as follows:

Settlement dates Face value Average rate
$U.S. $Cdn
------------------------------------------------------------------------

July 2006 to December 2006 20,100,000 1.3020
March 2007 to December 2007 4,625,000 1.2357
------------------------------------------------------------------------
------------------------------------------------------------------------


At June 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 June 30, 2006 and December 31, 2005 was $20,000,000. At June 30, 2006, the fair value of the interest rate swap contract was $363,193 and this amount has been recorded in prepaid expenses and other assets.

Fair value

At June 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 $4,896,750 at June 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 Three-month Six-month Six-month
period ended period ended period ended period ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
$ $ $ $
------------------------------------------------------------------------
Canada 7,633,831 8,035,598 14,169,216 12,468,208
United States 13,856,280 15,487,232 26,248,584 26,395,602
International 1,081,418 841,155 1,858,740 1,513,613
------------------------------------------------------------------------
22,571,529 24,363,985 42,276,540 40,377,423
------------------------------------------------------------------------
------------------------------------------------------------------------


Property, plant and
equipment, goodwill
and intangible assets at
---------------------------
June 30, December 31,
2006 2005
$ $
------------------------------------------------------------------------
Canada 105,324,401 106,577,247
United States 233,369 230,242
International - -
------------------------------------------------------------------------
105,557,770 106,807,489
------------------------------------------------------------------------
------------------------------------------------------------------------


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:


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

2006 (July 1 to December 31) 253,203
2007 475,558
2008 329,002
2009 205,530
2010 and forward 141,878
------------------------------------------------------------------------
1,405,171
------------------------------------------------------------------------
------------------------------------------------------------------------



Contact Information

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