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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER: 0-18259
AG-BAG INTERNATIONAL LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 93-1143627
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
2320 SE AG-BAG LANE
WARRENTON, OREGON 97146
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (503) 861-1644
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF
THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF
THE ACT:
Common Stock, par value $.01 per share
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Based on the closing sales price of the Common Stock on March 12, 1997, the
aggregate market value of the voting stock of registrant held by non-affiliates
was $8,527,894.
The registrant has one class of Common Stock with 12,053,751 shares
outstanding as of March 12, 1997.
DOCUMENTS INCORPORATED BY REFERENCE:
The proxy statement for the Registrant's Annual Meeting of Stockholders to
be held June 2, 1997, is incorporated into Part III of this report.
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AG-BAG INTERNATIONAL LIMITED
TABLE OF CONTENTS
PAGE
PART I ....................................................... 1
Item 1. Business............................................... 1
Item 2. Property............................................... 9
Item 3. Legal Proceedings...................................... 10
Item 4. Submission of Matters to a Vote of Security Holders.... 10
Executive Officers of the Registrant................................ 10
PART II ....................................................... 11
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ................................... 11
Item 6. Selected Financial Data................................ 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 14
Item 8. Financial Statements and Supplemental Data............. 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 20
PART III ....................................................... 20
Items 10. and 11. Directors and Executive Officers of Registrant
and Executive Compensation............................. 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................. 20
Item 13. Certain Relationships and Related Transactions......... 21
PART IV ....................................................... 21
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................ 21
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PART I
------
ITEM 1. BUSINESS
- -----------------
GENERAL
- -------
Ag-Bag International Limited (the "Company") was incorporated as a New York
corporation in 1989. The primary operating company, Ag-Bag Corporation, a
Nebraska corporation, was incorporated in 1978. The Company changed its name in
1990 from AB Holding Group, Inc. to Ag-Bag International Limited. In 1994, in an
effort to streamline and save administrative expenses, two of the Company's
operating subsidiaries, A.B. Rental, Inc. and Ag-Bag Corporation were merged
into the Delaware subsidiary, ABVIN Merging Corp. On January 1, 1995, the
Company was merged into its Delaware subsidiary resulting in the reincorporation
of the Company in Delaware and a change in its name to Ag-Bag International
Limited.
The Company has pioneered an alternate method of storing feed for
livestock. Traditional methods of storing feed have included placing it in
bunkers, pits, and silos or baling and stacking it. The Company's method is to
store the feed in huge plastic bags of up to 250 feet in length and up to 12
feet in diameter by tightly stuffing the feed into the bag. The Company
assembles the machines for stuffing the feed into the bags. It has the bags
manufactured to its specifications and then folds and distributes the bags
through its dealer network. The benefits of bagging the feed include reduced
cost, additional flexibility in harvesting and storing the feed, enhanced feed
quality, and relatively small capital requirements. The Company also sells
ancillary products which complement the Company's main line of bagging machines
and bags.
The Company expects the use of bagging as a means of silage storage to
continue to play a major role in the 1990's because the quality of stored feed
is better than other known competitive methods, allowing farmers to be more
efficient and to produce dairy, beef, sheep and pork products at a lower price.
The Company believes the concept of bagging is one way in which farmers can be
more profitable by reducing, or completely eliminating, the purchase of feed and
grain from outside sources. Bagging enables the farmer to produce and store the
feed on the farm and provides easier access to the silage thereby allowing the
farmer to choose the quality of silage to feed at any given time. The bagged
feed has shown high quality, allowing for higher production.
The Company expanded its operations into Europe in 1989 where it offers a
custom bagging service on a fee per metric tonne basis in the United Kingdom. In
1994, the Company shipped its first orders to dealers in Japan, Latin America
and Germany. The Company also sells in Thailand, Australia, New Zealand, Spain,
France, Italy, Central Europe and Puerto Rico.
The Company is developing other uses for its bagging technology. In 1993,
it established a grain bagging division and a composting division. The Company
assembles and sells grain bagging machines which enable farmers to store whole
grains as well as other products in the Company's recyclable Tri-Dura<REGISTERED
TRADEMARK>> plastic bags and has adapted its bagging machines to permit bagging
of compostable organic matter. The Company has developed plastic bag bailers
which enable the Company to bail and pick up the recyclable Tri-Dura<REGISTERED
TRADEMARK>> plastic bags from its customers.
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SEASONAL NATURE OF BUSINESS
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The core business of the Company is historically seasonal due to the
harvest seasons in North America and Europe. The Company's machinery tends to be
purchased in anticipation of the next harvest season, so most of the sales of
machinery occur in the spring and summer. This requires the Company to carry
significant amounts of inventory to meet rapid delivery requirements of
customers. Bag sales tend to occur as the harvest season approaches in the
summer, and during the harvest season in the fall. In 1994, the Company began to
counteract some of its seasonality by generating sales in Latin America, and in
1996 expanded into Australia, in addition to expanding into the compost market.
FARM EQUIPMENT AND PRODUCTS
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Introduction
------------. Silage is made using the Ag-Bag<REGISTERED TRADEMARK> system
by storing forage crops, such as corn, sorghum, or alfalfa, under anaerobic
(without oxygen) conditions in sealed Ag-Bag Tri-Dura<REGISTERED TRADEMARK>
storage bags. The traditional methods for making silage involve storing it in
bunkers, pits or silos. Using traditional methods, there is a nutrient loss
resulting from a reduction in the moisture content of the forage before storage.
The moisture content must be reduced to compensate for the high oxygen content
of the forage which results from the inability to pack the forage tightly
enough. When the forage is not packed sufficiently, the silage fermentation
process produces too much heat resulting in an even greater loss of nutrient
value that would occur if the moisture content were not reduced. The loss of
nutrient value results in the need for additional food supplements or an
increased volume of feed.
The Ag-Bag<REGISTERED TRADEMARK> system is an alternative to bunkers, pits
and silos. The Ag-Bag<REGISTERED TRADEMARK> bagging machines push the forage
into huge recyclable plastic film Tri-Dura<REGISTERED TRADEMARK> bags with
sufficient compaction to minimize the amount of oxygen in the bag which is then
sealed tightly when filled. As a result, the forage can be stored with
significantly higher moisture content. The ability to store the forage in this
manner also reduces the time required to cut and store the forage thus reducing
the loss of nutrients.
Ag-Bag<REGISTERED TRADEMARK> Farm Equipment
-------------------------------------------. The Company's principal line
of farm equipment is marketed under the trade name "Ag-Bagger<REGISTERED
TRADEMARK>." The Ag-Bagger<REGISTERED TRADEMARK> is available in three versions
with a number of optional features.
The smallest version consists of machines used to load forage into Ag-Bag
Tri-Dura<REGISTERED TRADEMARK> storage bags ranging in size from 8 to 10 feet in
diameter and 100 to 200 feet in length. This version was first introduced by the
Company in 1987. It is used primarily in smaller dairy and cattle feeding
operations by dairymen with herds averaging about 50 head and by cattlemen
feeding up to about 300 head of feeder cattle. Most of these machines are
powered by the power take-off unit of a farm tractor and moved by a tractor or
other farm vehicle. The retail price for this machine ranges from approximately
$20,000 to $45,000.
In 1992, the Company introduced a medium-sized machine which can be
operated by the power take-off unit of a farm tractor or operated independently
with an optional diesel engine made by Caterpillar or Deere & Company. This
machine allows farmers to load forage into Ag-Bag Tri-Dura<REGISTERED TRADEMARK>
storage bags ranging in size from 9 to 10 feet in diameter and 100 to 250 feet
in length. This machine is primarily suitable for use by dairymen with herds
ranging from 150 to 300 head and by cattlemen feeding between 300 and 800 head
of feeder cattle. The retail price for this machine ranges from approximately
$65,000 to $110,000.
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The largest version consists of machines that can be used to load Ag-Bag
Tri-Dura<REGISTERED TRADEMARK> storage bags ranging in size from 9 to 12 feet in
diameter and 150 to 250 feet in length. These machines are used primarily by
dairymen with herds ranging from 300 to 2,000 head, by cattlemen with herds
ranging from 800 to 15,000 head, and by custom operators. A super 12-foot
Ag-Bagger<REGISTERED TRADEMARK> was developed in 1989 and enhanced in 1995 for
use by very large dairy and custom operators and by cattle feeding operations
with herds ranging from 15,000 to 25,000 head of cattle. The larger machines
come with optional diesel engines made by Caterpillar or Deere & Company. The
retail price for the larger machines ranges from approximately $178,500 to
$230,000.
A wide range of optional features are offered by the Company on its bagging
machines in order to meet the budget needs of the farmer.
The Company assembles and sells a separate line of related equipment called
the Ag-Bag Flex-a-Tuber<REGISTERED TRADEMARK> with a retail price ranging from
$4,000 to $15,000. The Flex-a-Tuber<REGISTERED TRADEMARK> permits farmers to
store round-baled alfalfa, sorghum, and other forage in Ag-Bag
Tri-Dura<REGISTERED TRADEMARK> storage bags. The round bale Flex-a-Tubers are
made in two sizes to permit the bagging of 4 and 5 foot bales. The bales can be
stored in Ag-Bag Tri-Dura<REGISTERED TRADEMARK> storage bags up to 200 feet in
length.
The Company developed the Ag-Bag<REGISTERED TRADEMARK> Grain Bagger, which
retails for between $13,000 and $45,000. This machine is similar in design to
the smallest Ag-Bagger<REGISTERED TRADEMARK> machines but has been adapted to
permit the storage of grains, such as corn, rice, wheat and soybeans, as well as
other products, in Ag-Bag Tri-Dura<REGISTERED TRADEMARK> storage bags. The
machine permits the grain to be bagged without damaging the kernel. After the
grain is bagged and sealed, it will retain the necessary quality for human
consumption.
The Company also assembles and sells the Mighty Bite<REGISTERED TRADEMARK>
front-end load bucket. This revolutionary bucket replaces the conventional
bucket. Hydraulically operated, the Mighty Bite<REGISTERED TRADEMARK> closes
tightly around material, thus eliminating spillage and increasing load capacity
due to compaction. The Company manufactures them in sizes ranging from one-half
cubic yard to two cubic yards with a retail price ranging from $3,000 to $4,500.
In 1996, the Company developed and introduced the Square Bale Bagger with a
retail price of $25,000. The Square Bale Bagger permits farmers to store square
bales of alfalfa, sorghum and other forage, two bales high in Ag-Bag
Tri-Dura<REGISTERED TRADEMARK> flex storage bags. The Square Bale Bagger permits
the bagging of the bales in Ag-Bag Tri-Dura<REGISTERED TRADEMARK> flex storage
bags of 8 and 9 feet in diameter and up to 200 feet in length.
The Company has adapted its Ag-Bag<REGISTERED TRADEMARK> bagging machines
for use in large scale "in-vessel" composting of organic matter. The bagging
machine is combined with a shredder that shreds the organic material which is
then fed into the bagging machine which bags the compostable matter into huge
Ag-Bag Tri-Dura<REGISTERED TRADEMARK> storage bags. An air blower is attached to
the bag and circulates air through the bag during the composting process. The
Ag-Bag compost bagging machines retail for between $50,000 and $250,000.
Ag-Bag Tri-Dura<REGISTERED TRADEMARK> Storage Bags
--------------------------------------------------. The Ag-Bag
Tri-Dura<REGISTERED TRADEMARK> disposable storage bags range in size from 8 to
12 feet in diameter and 100 to 250 feet in length and are made of extruded
plastic. Rolls of plastic are manufactured to the Company's specifications. The
Company then converts the rolls into bags by cutting the rolls into the various
bag lengths and folding the bags for use on the Company's bagging machines. The
plastic contains special stabilizers to protect the bags from deterioration due
to exposure to weather and the sun's ultraviolet rays. Once a
Tri-Dura<REGISTERED TRADEMARK> bag is used, it may be recycled or disposed of in
another manner, but may not be reused.
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The Company contracts for the manufacture of, and sells Tri-Dura<REGISTERED
TRADEMARK> three-ply bags with a white exterior and black interior intended for
storage of silage up to 24 months. The retail price of the bags ranges from
approximately $225 to $950. The manufactured plastic rolls are shipped to the
Company's plant in Blair, Nebraska, where they are folded and packed for sale
using proprietary folding techniques. The proprietary bag folding techniques
reduce bag folding time and allow the bags to uniformly unfold when being
filled, which thereby reduces operational delays.
Ag-Bag<REGISTERED TRADEMARK> Inoculant
--------------------------------------. The Company markets a liquid
inoculant and a dry powder inoculant under the trade name Ag-Bag
Plus!<REGISTERED TRADEMARK>. The inoculant is added to the forage or the round
or square bales during bagging. It enhances the fermentation process for making
silage in bags, bunkers, pits and silos by substantially shortening the time
necessary for the creation of the silage. A liquid inoculant was developed in
1989 by a Company supplier and introduced into the market in 1990. The Company
has experienced an increase in the sales of liquid inoculant since June 1990.
The dry inoculant is produced from a proprietary formula owned by the Company
and developed by Larry R. Inman and Walter L. Jay. See "Executive Officers of
the Registrant." The Company also markets an inoculant designed specifically for
bunkers, pits and storage of high moisture grain.
Bags and machines each account for more than 30% of the Company's
consolidated revenue and have done so for the last three years.
MARKET SIZE
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The market for Ag-Bag<REGISTERED TRADEMARK> machinery and Ag-Bag
Tri-Dura<REGISTERED TRADEMARK> recyclable storage bags is primarily in the dairy
and beef cattle industries. Silage is used most often as dairy and beef animal
feed. It is also used by farmers to a lesser extent to feed hogs and sheep. In
1995, over 173,000,000 tons of corn, alfalfa, and sorghum silage were made by
United States farmers according to the AG IQ Handbook X published in 1996 by
Agricom, Inc. (the "AG Handbook"). Based on AG Handbook statistics, the Company
estimates that there are approximately 155,000 dairy, beef, hog, and sheep farms
in the United States which are potential customers for Ag-Bag<REGISTERED
TRADEMARK> farm equipment and Tri-Dura<REGISTERED TRADEMARK> storage bags; and
that only about 5-7% of this group are actually using storage bags made by the
Company and its competitors. It further estimates that about 55% of the
customers using silage storage bags purchase them from the Company. In addition
to the U.S., the Company believes there is a large population of such farms in
Canada, Latin America, Germany, Central Europe, Australia, Spain, France, Japan,
Thailand, New Zealand, Puerto Rico and the United Kingdom, where the Company
currently operates, and there is a large potential market in other countries
into which the Company may expand.
The Company also markets the Ag-Bag<REGISTERED TRADEMARK> Grain Bagger,
which is used to bag grain for animal and human consumption as well as other
products. The amount of grains stored for animal and human consumption in the
North American, South American, Australian and European markets in which the
Company presently markets its bagging machines and equipment is very large.
However, since the Grain Bagger has only recently been introduced, the Company
is uncertain whether it will continue to gain acceptance in the marketplace as
an alternative to present methods of grain storage. Until further marketing
efforts have been made, the Company cannot estimate with any certainty the
likely size of the market for the Grain Bagger and no assurance can be given
that the grain bagging concept will continue to be accepted in the marketplace.
The Company completed 14 sales in 1996 of its Pro-Grain bagger bagging machine,
up 55.5% over 1995.
The Company has also developed a system for "in-vessel" composting which is
designed to eliminate odors and control leachate which is inherent with
composting. Composting is an alternative for disposing
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of or eliminating the large number of organics from landfills. The Company's
primary market is cities, counties, and municipal waste companies. The Company
currently estimates the size of the compost market within North America to be $1
billion a year. In the composting area, the Company sold 4 bagging systems, up
50% over 1995, placed 4 sublicense agreements and commenced 5 pilot projects in
1996. Until further marketing efforts are made outside North America, the
Company cannot estimate with any certainty the foreign market size. However, the
Company believes that there is a large potential market in other countries into
which it may expand. No assurance can be given that the "in-vessel" composting
system will be accepted in either the domestic or foreign marketplace.
MARKETING
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The Company markets its Ag-Bag<REGISTERED TRADEMARK> farm equipment,
Tri-Dura<REGISTERED TRADEMARK> storage bags, Ag-Bag Plus!<REGISTERED TRADEMARK>
and other inoculants primarily through a network of United States, Canadian, and
international dealers. As of December 31, 1996, there were 150 dealers serviced
by a combined total of 19 regional and territorial Company-employed managers.
Most of the dealers market the entire Ag-Bag<REGISTERED TRADEMARK> line of farm
equipment and products; however, some dealers sell only the farm equipment and
others sell only the Ag-Bag<REGISTERED TRADEMARK> inoculants. The Company also
sells farm equipment, Tri-Dura<REGISTERED TRADEMARK> storage bags, and inoculant
directly to large customers in the states of California, New Mexico, Washington,
and in the New England area.
The Company offers customers the opportunity to finance the purchase of
Ag-Bag<REGISTERED TRADEMARK> farm equipment through unaffiliated third parties
who offer lease-purchase financing.
The Company rents Ag-Bag<REGISTERED TRADEMARK> bagging machines to farmers
located in the state of California. The rental charge is based on the number of
bags purchased and filled with forage. As of December 31, 1996, the Company had
5 machines available for rent. The Company also sells Tri-Dura<REGISTERED
TRADEMARK> storage bags in bulk to several custom farming operations in the
state of California which own Ag-Bag<REGISTERED TRADEMARK> bagging equipment.
These operators place their private labels on the bags and bag forage for
customers on a fee-per-bag basis.
The Company offers a custom bagging service through its subsidiary Ag-Bag
Europe PLC in the United Kingdom. It retains ownership of the bagging machines,
provides bags to the customer, and fills the bags with the customer's forage on
a fee-per-metric tonne basis. In the United Kingdom, K.W. Agriculture Ltd. was
the exclusive sales and marketing agent for the Company. Beginning in 1995, the
relationship was no longer exclusive and the Company began utilizing its
existing sales and marketing force to more fully exploit the UK market.
The Company has formed a grain bagging division and is beginning to market
its grain bagging system. The Company markets its grain bagging equipment
through its dealer network and also through grain co-ops and governmental
agencies. In 1993, the Company received the U.S. Department of Agriculture's
approval for commodities stored in the Company's systems to be used as
collateral for Commodity Credit Corp. loans. Commodity Credit Corp. provides
low-interest loans to farmers who store grain in approved storage structures.
The Company has sold the Ag-Bag<REGISTERED TRADEMARK> Grain Bagger in the United
States, Canada, South America, Australia, Germany, Turkey, Thailand, and North
Africa.
The Company also formed a composting division to market its "in-vessel"
composting system. The Company intends to establish and market this system
through a composting dealer network. In addition, the Company expects to develop
a regional and territorial sales force which will have expertise in composting
and environmental recovery. The Company markets its composting system through a
sublicense which allows the end user to use the Ag-Bag<REGISTERED TRADEMARK>
compost technology.
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The Company is not dependent on any single customer or a few customers. The
loss of any customer would not have a material adverse effect on the Company.
ASSEMBLY AND MANUFACTURING
- --------------------------
Ag-Bag<REGISTERED TRADEMARK> Farm Equipment. The Company buys most of its
components for its bagging machines from various other manufacturers,
manufactures the remaining components, and assembles the machines itself. The
medium and large sized machines, composting machines, Square Bale Baggers, and
Flex-a-Tubers<REGISTERED TRADEMARK> are all assembled at the Company's
headquarters facility in Warrenton, Oregon. The smaller machines are assembled
both at the Warrenton facility and at the Company's Blair, Nebraska plant and
the Pro-Grain Baggers are assembled at the Company's Blair, Nebraska plant.
The Company assembles all of its machines in order to better control the
quality of the farm equipment. This method also permits the Company to offer
customized assembly for the end user of its equipment. The Company can acquire
and install name brand manufactured components specified by the customer in lieu
of those ordinarily installed by the Company.
Ag-Bag Tri-Dura<REGISTERED TRADEMARK> Storage Bags
--------------------------------------------------. All of the three-ply
Tri-Dura<REGISTERED TRADEMARK> bonded storage bags are manufactured for the
Company by a single manufacturer. The bags are manufactured to the Company's
specifications using a stabilizer which protects the plastic from becoming
brittle due to exposure to weather and the sun's ultraviolet light rays. The
Tri-Dura<REGISTERED TRADEMARK> plastic bags are made in various diameters based
on bag orders received by the Company. The bags are shipped in uncut rolls to
the Company's plant in Blair, Nebraska, where they are cut to the proper lengths
and folded for shipment to the Company's dealers or directly to large customers,
such as feedlots.
Ag-Bag<REGISTERED TRADEMARK> Inoculants
---------------------------------------. The liquid inoculant is purchased
by the Company on the open market. The Company believes that the liquid
inoculant will be reasonably available for purchase on the open market in the
foreseeable future. The dry inoculant is produced by the Company at the Blair,
Nebraska plant pursuant to a proprietary formula owned by the Company and
developed by Larry R. Inman and Walter L. Jay. See "Executive Officers of the
Registrant."
PRINCIPAL SUPPLIERS AND MANUFACTURERS
- -------------------------------------
The Company purchases its Tri-Dura<REGISTERED TRADEMARK> bags from one
supplier and the Company considers its relationship with the supplier as good.
The Company believes there are adequate alternative suppliers available in the
event the supplier is unable to provide bags.
The structural components of the Company's farm equipment are manufactured
in Oregon under agreements with two manufacturing companies. The Company
believes that alternative sources of supply are readily available at competitive
prices if the present sources of supply should become unavailable. The Company
is not aware of any raw materials shortages or problems with these suppliers
which would adversely affect the operations of the Company's business.
The Company mixes the dry inoculant at its Blair, Nebraska facility. It
purchases the ingredients for the dry inoculant from a variety of suppliers. The
Company purchases the liquid inoculant from a supplier, who mixes the inoculants
to the Company's specifications. The Company believes there are various other
alternative sources of supply.
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COMPETITION
- -----------
The Company believes it is the industry leader in the manufacture and sale
of complete sealed feed farm bagging systems, hence, the Company's corporate
slogan, the "Complete One." Ag-Bag<REGISTERED TRADEMARK> is the only Company
which manufactures the full line of equipment, bags, and other accessories for
sealed feed farm management. There are two competitors within the United States
which manufacture similar silage bagging machines. There are also a number of
competitors which manufacture bale wrapper machines, which compete with the
Company's Flex-a-Tuber<REGISTERED TRADEMARK>. The Company believes that it
distinguishes itself in the market place from other manufactures by providing a
top quality product, better warranty protection, and customer service.
The bag market is highly competitive. The Company competes in the bag
market by providing what the Company believes to be a superior product and
better warranty protection at a competitive price. The Company is also offering,
through central pickup locations in selected geographic areas in the U.S., a
recycling service for used Ag-Bag Tri-Dura<REGISTERED TRADEMARK> bags.
The Company also competes with companies constructing bunkers and pits, and
to a lesser extent silos. The competitors are mostly smaller companies that
build the bunkers and pits for the farmer, which the farmer then fills with
forage using available or rented farm equipment otherwise used in the farming
operation. While these methods do not require bags or special equipment to fill
the bags, the use of these alternatives involves a significant loss of
flexibility in storing and harvesting the feed and an overall loss of feed
quality. Flexibility is lost since structures must be permanently placed and
significant capital requirements are necessary to expand them. The feed quality
is inferior because of the amount of oxygen remaining after the forage is placed
in the pits or bunkers.
In the compost area, the Company competes primarily with wind row turner
manufacturers. Wind row turners compost by turning and watering static piles
weekly and require containment of odor and leachate. These turners are
comparable in price to the Company's compost machines. However, the Company's
systems offer the advantage of being self-contained thus reducing odor and
requiring no turning or watering. There are approximately 50 manufacturers of
turners. In addition, the Company also competes with about five companies which
manufacture "in-vessel" systems, such as burners and incinerators for large
projects, generally ranging from $1 to $15 million.
In addition to the current competition, national competitors may emerge if
the bagging equipment and storage bag markets continue to grow. These potential
competitors include large farm equipment manufacturers and large chemical
companies who might decide to manufacture and sell the storage bags.
The Company competes in its product markets primarily on the basis of
product quality, warranty protection, and customer service. Some of its
competitors are larger and have greater financial, marketing, technical, and
other resources than the Company.
BACKLOG
- -------
In 1997, the orders were comparable to 1996. The dollar amount of backlog
orders of the Company that are believed to be firm, as of March 1, 1997, was
approximately $4,000,000, compared to $3,806,600 on March 1, 1996. This backlog
is seasonal and is reasonably expected to be filled within the current fiscal
year.
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RESEARCH AND DEVELOPMENT
- ------------------------
The amounts spent on research and development are not material.
ENVIRONMENTAL MATTERS
- ---------------------
Compliance with federal, state and local laws and regulations regulating
the discharge of materials into the environment, or otherwise relating to the
protection of the environment, had no material effect upon capital expenditures,
earnings, or competitive positions of the Company during the year ended December
31, 1996. Except for the possible effect of regulations in the United Kingdom,
as described below, no material effect is anticipated for the year ending
December 31, 1997.
Effective September 1, 1991, separate pollution control regulations were
adopted concerning silage slurry or run off by Scotland, England and Wales. The
Scottish regulations specifically permit the Ag-Bag<REGISTERED TRADEMARK> system
of bagging. The regulations adopted by England and Wales, although subject to
interpretation, may require that farmers using Ag-Bag Tri-Dura<REGISTERED
TRADEMARK> bags for storing high-moisture content silage build a concrete
structure under the bags to control possible run off. It is estimated that the
cost of such structures would be approximately 16,000 pounds sterling
(approximately US$27,400). Currently, the Company has been permitted to bag low
and medium moisture silage in England and Wales without using concrete
structures so long as the bags were placed on sites that were relatively firm
and away from streams and other water courses.
PATENTS AND TRADEMARKS
- ----------------------
The Company has basic and improvement patents in the U.S. as well as a
number of patents pending that encompass machines, bags and systems for silage
bagging, grain bagging, and hay/straw bale bagging. Corresponding applications
have or will be filed in selected foreign countries. More recently, the bagging
of compost has been added to the Company's product line and proprietary rights
in this new market have been and are being developed.
The Company's patents on its basic bagging machine have been found to be
valid and have been successfully defended in prior litigation. The Company
believes that it has developed its position in the industry partially as a
result of protection provided by these patents. The Company also owns the
proprietary formula for making the dry inoculant marketed under the trade name
Ag-Bag Plus!<REGISTERED TRADEMARK> which was developed by Larry R. Inman and
Walter L. Jay. See "Executive Officers of the Registrant."
The names Ag-Bag<REGISTERED TRADEMARK>, Ag-Bag Plus!<REGISTERED TRADEMARK>,
Bale-Bag<REGISTERED TRADEMARK>, Flex-a-Tuber<REGISTERED TRADEMARK>,
Flex-a-Tube<REGISTERED TRADEMARK>, ABCTI System<REGISTERED TRADEMARK>, Mighty
Bite<REGISTERED TRADEMARK>, Tri-Dura<REGISTERED TRADEMARK>, and the symbol
"AB"<REGISTERED TRADEMARK> are all registered as trademarks with the United
States Patent and trademark Office.
The Company believes that its color scheme and trademarks are well known in
the industry and are an important part of its business, which give it a
competitive advantage.
8
<PAGE>
EMPLOYEES
- ---------
On December 31, 1996, the Company had 84 full-time employees. The Company
employs approximately 150 people during its busy season. None of the Company's
employees are represented by a union, and the Company believes that its employee
relations are good.
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
- ----------------------------------------------------------------------------
SALES
- -----
<TABLE>
<CAPTION>
(In thousands)
Year Ended December 31
----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Sales to unaffiliated customers:
United States $ 14,931 $ 13,352 $ 16,879
Canada 1,156 1,418 1,788
United Kingdom 1,886 1,796 1,818
Other foreign countries 2,637 2,615 4,011
----------- --------- ----------
$ 20,610 $ 19,181 $ 24,496
Sales to affiliated customers:
Officers and Directors 97 117 53
----------- --------- ----------
Total $ 20,707 $ 19,298 $ 24,549
=========== ========= ==========
Sales or transfers between United States
and United Kingdom: $ 374 $ 329 $ 237
=========== ========= ==========
</TABLE>
Reference is also made to the Selected Financial Data at Item 6.
ITEM 2. PROPERTY
- -----------------
In early 1990, the Company began occupying its 30,000 square foot facility
located in Warrenton, Oregon. This facility serves as a warehouse and houses the
major portion of its silage bagging equipment manufacturing. The Company's
administrative offices are also located there. Management estimates that the
manufacturing at the Warrenton plant is currently at approximately 60% of
capacity. The Company occupies the land pursuant to a lease which expires in
2015.
The Company owns facilities in Blair, Nebraska, where the Company folds and
packages its Tri-Dura<REGISTERED TRADEMARK>> feed storage bags; prepares and
packages its proprietary inoculant; assembles some of its smaller bagging
machines and warehouses products. During 1996, the Company began consolidating
its Blair, Nebraska operations into a newly constructed facility which will
consist of three buildings comprising approximately 70,000 square feet when
completed. The Company is currently occupying two of the new buildings and plans
to be fully moved in by mid-1997. The Company sold two of its old buildings in
1996 and has the remaining parcel currently for sale.
9
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
A civil class-action suit was filed in the Federal District Court of
Minnesota, 4th Division, on January 8, 1996 by Michael A. Hunt, on behalf of bag
customers, against the Company, UpNorth Plastics, Inc. and Poly America, Inc.
The civil suit alleges that the Company conspired with UpNorth Plastics, Inc.
and Poly America, Inc. to fix bag prices in violation of federal law. The suit
does not specify an amount of alleged damages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
During the fourth quarter of 1996, no matters were submitted to a vote of
security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
The executive officers of the Company, their respective ages as of March
12, 1997, business experience, and the period for which they have served are set
forth below. The executive officers are elected annually by the Board of
Directors at its meeting following the annual meeting of stockholders. Officers
serve at the discretion of the Board of Directors.
DATE OF
NAME AGE ELECTION POSITION
---- --- -------- --------
Larry R. Inman 46 1990 Chairman of the Board and
Chief Executive Officer
(since 1990); President of
the Company since 1993;
President of Ag-Bag
Corporation (1984-1989) and
Chairman (1989-1994) of
Ag-Bag Corporation (former
subsidiary)
Michael R. Wallis 32 1992 Chief Financial Officer
(since 1993) and Vice
President of Finance (since
1992), Treasurer (since 1996);
Manager, Yergen & Meyer
(regional accounting firm,
1986-1992)
Lemuel E. Cunningham 75 1990 Vice President (1990-1996);
owner/operator of Post Oaks
Ranch and Cunningham Cattle
and Feed Company (since 1958)
Roy I. Anderson 77 1990 Secretary (1990-1996); sole
practitioner (legal, 1949 to
present)
Arthur P. Schuette 57 1990 Vice President, Sales (since
1991); Treasurer of the
Company (1990-1991) and
(1983-1991) Ag-Bag
Corporation (former
subsidiary)
10
<PAGE>
Lou Ann Tucker 43 1990 Secretary (since 1996), Vice
President, Administration
(since 1989), and Treasurer
(1991-1996); Executive
Treasurer (1988-1994) of
Ag-Bag Corporation (former
subsidiary); co-owner of LGJ
Livestock, Astoria, Oregon
(horse and cattle ranch, since
1980)
Walter L. Jay 36 1990 Vice President, Manufacturing
(since 1989); Manager of Blair
Nebraska Plant (since 1980);
KW Trucking (1984-1987)
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The Company's Common Stock began trading publicly on January 17, 1990, and
was approved for quotation on Nasdaq on April 24, 1990, under the symbol "AGBG."
On December 31, 1996, there were approximately 370 holders of record of Common
Stock. The Company estimates there are approximately 2,500 beneficial holders of
the Common Stock. The closing price for the Common Stock on March 12, 1997, as
reported by Nasdaq was $1 1/32 per share.
The following table sets forth the range of high and low bid prices of the
Company's Common Stock for the quarters indicated through the fourth quarter of
1996:
Calendar Year High Bid Low Bid
- ------------- -------- -------
1995:
- ----
First quarter 1-15/16 1-1/4
Second quarter 1-13/16 1-1/4
Third quarter 2 1-1/4
Fourth quarter 1-7/16 1-1/8
1996:
- ----
First quarter 1-15/32 1-1/8
Second quarter 1-47/64 1-3/16
Third quarter 1-5/16 11/16
Fourth quarter 1-1/8 25/32
- ----------------------
The quotations reflect inter-dealer prices, without retail markups, markdowns,
or commissions and do not necessarily represent actual transactions.
DIVIDENDS
- ---------
The Company has not paid any dividends on its Common Stock since its
inception, and the Board of Directors does not anticipate declaring any cash
dividends on its Common Stock in the foreseeable future. The Company currently
intends to utilize any earnings in its business. The Company may not
11
<PAGE>
pay dividends on Common Stock pursuant to certain loan agreements, or while it
is in arrears in dividends on its preferred stock.
UNREGISTERED STOCK
- ------------------
On November 11, 1996, the Company granted options to purchase 350,000
shares of Common Stock to officers and directors of the Company pursuant to the
Incentive Stock Option Plan and the Nonemployee Director Stock Option Plan. The
options were granted in reliance on an exemption from the registration
requirements of the Securities Act of 1933, as amended ("Act") under Section
4(2) of the Act. No consideration was received by the Company upon grant of the
options. Subject to the vesting schedules and limitations on exercise contained
in the Incentive Stock Option Plan and the Nonemployee Director Stock Option
Plan, the options are exercisable at the fair market value of the Common Stock
on the date of grant which was $1 1/16.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following table sets forth financial data derived from the audited
consolidated financial statements of the Company for the years ended December
31, 1992, 1993, 1994, 1995 and 1996. This selected consolidated financial data
should be read in conjunction with the audited consolidated financial statements
of the Company and the related notes thereto included elsewhere in this report
on Form 10-K and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
(In thousands, except per share data)
Year Ended December 31,
-----------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net Sales $ 17,881 $ 18,617 $ 20,707 $ 19,298 $ 24,549
Cost of Sales 14,286 13,089 14,833 13,916 18,941
---------- ---------- ---------- -------- ---------
Gross Profit from Operations 3,595 5,528 5,874 5,382 5,608
Selling and Administrative Expenses 5,509 4,285 4,490 4,681 5,155
Research and Development Expenses 86 123 60 68 59
Reorganization 1,696
Income (Loss) from Operations (3,696) 1,120 1,324 633 394
Other Income (Expense) (784) (243) (362) (240) 226
----------- ---------- ---------- -------- ---------
Income (Loss) before Provision for
Income Taxes and Extraordinary Item (4,480) 877 962 393 620
Provision (Benefit) for Income Taxes (1,156) 181 429 286 257
----------- ---------- ---------- -------- ---------
Income (Loss) before Extraordinary
Items (3,324) 696 533 107 363
Extraordinary Item-Gain on
Extinguishment of Debt (Less Income
Taxes of $78,200) 152
---------- ---------- ---------- -------- ---------
Net Income (Loss) $ (3,324) $ 848 $ 533 $ 107 $ 363
=========== ========== ========== ======== =========
Primary Earnings per Share:
Income (Loss) before Extraordinary
Item $ (0.40) $ 0.06 $ 0.04 $ 0.01 $ 0.03
Extraordinary Item $ 0.01
---------- ---------- ---------- -------- ---------
$ (0.40) $ 0.07 $ 0.04 $ 0.01 $ 0.03
=========== ========== ========== ======== =========
Fully Diluted Earnings per Share:
Income (Loss) before Extraordinary
Item $ (0.40) $ 0.06 $ 0.04 $ 0.01 $ 0.03
Extraordinary Item $ 0.01
---------- ---------- ---------- -------- ---------
$ (0.40) $ 0.07 $ 0.04 $ 0.01 $ 0.03
=========== ========== ========== ======== =========
Primary Weighted Average Number of
Common Stock and Common Stock
Equivalent Shares Outstanding 8,427 10,581 11,645 12,062 12,096
========== ========== ========== ======== =========
Fully Diluted Weighted Average
Number of Common and Common Stock
Equivalent Shares Outstanding 8,427 10,581 11,645 12,062 12,096
========== ========== ========== ======== =========
13
<PAGE>
Balance Sheet Data:
December 31,
------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Working Capital $ 5,405 $ 5,566 $ 5,334 $ 6,078 $ 6,090
Current Assets 9,923 8,905 8,445 9,379 8,746
Total Assets 17,561 15,633 15,546 16,297 16,903
Current Liabilities(1) 4,518 3,339 3,111 3,301 2,656
Long-term Debt(1) 4,319 2,263 1,056 1,237 2,061
Total Stockholders' Equity(2) 8,723 10,031 11,379 11,759 12,186
- ------------------------
<FN>
<F1> Includes loans from shareholders and deferred taxes.
<F2> Includes $696 of preferred stock.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth for the periods indicated certain items
reflected in the Company's statements of operations as a percentage of revenue:
<TABLE>
<CAPTION>
Percentage of Total Revenue
---------------------------
Year Ended December 31,
-----------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales 100% 100% 100% 100% 100%
Costs and Expenses:
Cost of Sales 80% 70% 72% 72% 77%
Selling and Administration 31% 23% 22% 25% 21%
Research and Development --- 1% --- --- ---
Reorganization 10% --- --- --- ---
Income (Loss) From Operations (21%) 6% 6% 3% 2%
------- ----- ---- ---- ----
</TABLE>
14
<PAGE>
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------
Consolidated Operations
-----------------------. For the year ended December 31, 1996, net sales
increased 27.21% to $24,548,765 compared to $19,297,962 for the year ended
December 31, 1995. The increase for the year was the result of increased capital
expenditures by U.S. farmers due to continued improvement in milk and beef
prices, in addition to the Company's international sales continuing to grow
along with sales of its Pro-Grain bagger and composting systems. The
introduction of the new Square Bale Bagger also added to the increase in sales
for 1996 with the sale of 20 of these new units.
Gross profit from sales for the year ended December 31, 1996 increased
4.20% to $5,607,818 compared to $5,381,930 for the year ended December 31, 1995.
The increase for the year was the result of increased sales volumes, being
offset by intense competition in certain areas of the North American market,
lower margins on used equipment and increased transportation costs.
Selling expenses for the year ended December 31, 1996 increased 8.58% to
$2,606,453 compared to $2,400,387 for the year ended December 31, 1995. The
increase in selling expenses was the result of increased commissions resulting
from increased sales, coupled with increased sales and marketing activities in
the Company's domestic and international markets as well as its grain and
compost divisions.
Administrative expenses for the year ended December 31, 1996 increased
11.76% to $2,548,803 compared to $2,280,690 for the year ended December 31,
1995. The increase in administrative expenses was the result of higher
professional fees coupled with increased retirement plan expense and general
operating overhead required to support international expansion and the grain and
compost divisions.
Interest expense for the year ended December 31, 1996 increased 1.32% to
$419,632 compared to $414,145 for the year ended December 31, 1995. The increase
in interest expense was the result of the Company using a larger portion of its
U.S. credit facility resulting from an inventory build-up in late 1995, coupled
with the fact that the Company had to offer extended terms to some customers to
remain competitive.
Net income for the year ended December 31, 1996 was $363,458 compared to
$107,193 for the year ended December 31, 1995. The increase for the year was the
result of increased sales resulting from continued favorable milk and beef
prices in the U.S., coupled with increased international, grain and compost
sales, which were offset by tightening margins, higher transportation costs and
increased selling and administrative expenses. In addition, the Company
recognized an after-tax gain of $182,892 on the sale of two of its facilities in
Blair, Nebraska.
United States Operations
------------------------. Net sales for the year ended December 31, 1996
increased 29.88% to $22,731,034 compared to $17,501,687 for the year ended
December 31, 1995. The increase for the year was the result of increased capital
expenditures by farmers due to continued improvement in milk and beef prices, in
addition to the Company's international sales continuing to grow with further
expansion into South America, Australia and Europe, along with sales of its
Pro-Grain bagger and composting systems. The introduction of the new Square Bale
Bagger also added to the increase in sales for 1996 with the sale of 20 of these
new units.
Gross profit from sales for the year ended December 31, 1996 increased
3.36% to $5,116,652 compared to $4,950,201 for the year ended December 31, 1995.
The increase for the year was the result of increased sales volumes, being
offset by lower margins on used equipment, lower bag margins as a result of
intense competition in certain areas of the United States and increased
transportation costs.
15
<PAGE>
Selling expenses for the year ended December 31, 1996 increased 10.48% to
$2,465,276 compared to $2,231,408 for the year ended December 31, 1995. The
increase in selling expenses was the result of increased commissions resulting
from increased sales, coupled with increases in sales and marketing activities
in the Company's domestic and international markets as well as its grain and
compost divisions.
Administrative expenses for the year ended December 31, 1996 increased
14.39% to $2,273,548 compared to $1,987,452 for the year ended December 31,
1995. The increase in administrative expenses was the result of higher
professional fees coupled with increased retirement plan expense and general
operating overhead necessary to support international expansion and the grain
and compost divisions.
Interest expense for the year ended December 31, 1996 increased 4.77% to
$376,341 compared to $359,202 for the year ended December 31, 1995. The increase
in interest expense was the result of the Company using a larger portion of its
credit facility resulting from an inventory build-up in late 1995, coupled with
the fact that the Company had to offer extended terms to some customers to
remain competitive.
Net income after tax and before adjustments for intercompany support and
eliminations for the year ended December 31, 1996 was $312,922 compared to
$192,746 for the year ended December 31, 1995. The increase for the year was the
result of increased sales resulting from continued favorable milk and beef
prices, coupled with increased international, grain and compost sales, and a
gain from the sale of property, including two of the Company's facilities in
Blair, Nebraska, which were offset by tightening margins, higher transportation
costs and increased selling, administrative and interest expenses.
Ag-Bag Europe, PLC Operations
-----------------------------. Net sales for the year ended December 31,
1996 increased 1.19% to $1,817,731 compared to $1,796,275 for the year ended
December 31, 1995. The increase in sales was the result of increased custom work
coupled with a slight increase in the value of the British pound against the US
dollar, as the tonnage yield in the UK remained comparable with 1995.
Gross profit from sales for the year ended December 31, 1996 increased
13.77% to $491,166 compared to $431,729 for the year ended December 31, 1995.
The increase in gross profit for the year was the result of lower maintenance
costs associated with the rental bagging machines and custom operations, coupled
with lower contracting, personnel and operator costs.
Selling expenses for the year ended December 31, 1996 decreased 16.45% to
$141,177 compared to $168,979 for the year ended December 31, 1995. The decrease
in selling expenses for the year was the result of reduced commissions and
marketing expense from the Company changing its strategy of using an exclusive
marketing agent to using its own sales force.
Administrative expenses for the year ended December 31, 1996 decreased
6.13% to $275,255 compared to $293,238 for the year ended December 31, 1995. The
decrease for the year was the result of lower general office operating overheads
coupled with a reduction in administrative staff.
Interest expense for the year ended December 31, 1996 decreased 21.21% to
$43,291 compared to $54,943 for the year ended December 31, 1995. The decrease
for the year was the result of increased collection efforts and reduced use of
the Company's UK credit facility.
Net income (loss) after tax and before adjustments for intercompany
support and eliminations for the year ended December 31, 1996 was $50,536
compared to ($85,553) for the year ended December 31, 1995. The increase for the
year was the result of increased custom work coupled with the slight increase in
value of the British pound against the US dollar. Also contributing to the
increase for the year was
16
<PAGE>
lower operating costs and selling expenses, in
addition to reduced office operating overheads and lower interest costs for the
year.
YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------
Consolidated Operations
-----------------------. For the year ended December 31, 1995, net sales
decreased 6.80% to $19,297,962 compared to $20,706,738 for the year ended
December 31, 1994. The decrease in sales primarily resulted from adverse global
weather conditions in geographical areas where the Company markets its products.
U.S. sales were lower due to an early winter freeze in mid-september which
limited bagging of corn silage in the midwest. U.K. sales were reduced due to
the hot summer which eliminated second cuttings of some crops and greatly
reduced the yield on fall corn silage. In addition, late spring cold, wet
weather in the southern hemisphere delayed the growing season and also delayed
the shipments of equipment into that region. Additionally, milk and beef prices
continued their downward trend in 1995 which caused U.S. farmers to be cautious
on capital expenditures for new equipment.
Gross profit from sales for the year ended December 31, 1995 decreased
8.38% to $5,381,930 compared to $5,874,125 for the year ended December 31, 1994.
The decrease in gross profit resulted from reduced sales volumes, decreased
gross margins and increases in production labor, transportation and material
costs.
Selling expenses for the year ended December 31, 1995 increased 10.73% to
$2,400,387 compared to $2,167,865 for the year ended December 31, 1994. The
increase in selling expenses was the result of increased sales and marketing
activities in the Company's domestic and international market as well as its
grain and compost divisions.
Administrative expenses for the year ended December 31, 1995 decreased
1.78% to $2,280,690 compared to $2,322,085 for the year ended December 31, 1994.
The decrease in administrative expenses was the result of reductions in
administrative depreciation and amortization related to the converted
debentures.
Interest expense for the year ended December 31, 1995 decreased 11.08% to
$414,145 compared to $465,743 for the year ended December 31, 1994. The decrease
was the result of conversion of the debentures into common stock. Additionally,
the Company completed early repayment on a 15% interest bearing note in early
1995.
Net income for the year ended December 31, 1995 was $107,193 compared to
$533,427 for the same period in 1994. The decrease was the result of adverse
global weather conditions which eliminated the harvest of certain crops in
addition to the reluctance of U.S. farmers to purchase capital items in light of
depressed milk and beef prices. Additional causes include decreased sales
volumes and gross margins and increased selling expenses to handle the Company's
expansion in the domestic, international, grain and compost markets. A higher
effective tax rate due to nondeductible items also contributed to the decrease
in net income. The decrease was partially offset by lower interest costs and
administrative expenses.
United States Operations
------------------------. Net sales for the year ended December 31, 1995
decreased 7.00% to $17,501,687 compared to $18,820,395 for the same period in
1994. The decrease for the year was the result of an early winter freeze in
mid-september which limited bagging of corn silage in the midwest.
In addition, late spring, cold wet weather in the southern hemisphere delayed
the growing season and
17
<PAGE>
delayed shipments into that region. Additionally, milk and beef prices continued
their downward trend in 1995 which caused farmers to be cautious on capital
expenditures for new equipment.
Gross profit from sales for the year ended December 31, 1995 decreased
5.95% to $4,950,201 compared to $5,263,581 for the same period in 1994. The
decrease in gross profit for the year was the result of reduced sales volumes
with decreased gross margins, coupled with increases in production labor,
transportation and material costs.
Selling expenses for the year ended December 31, 1995 increased 15.62% to
$2,231,408 compared to $1,929,923 for the same period in 1994. The increase in
selling expenses was the result of increased sales and marketing activities in
the Company's domestic and international market as well as its grain and compost
divisions.
Administrative expenses for the year ended December 31, 1995 decreased
3.18% to $1,987,452 compared to $2,052,680 for the same period in 1994. The
decrease was the result of reduced administrative depreciation and amortization
related to the converted debenture, coupled with reduced deferred compensation
expense.
Interest expense for the year ended December 31, 1995 decreased 16.40% to
$359,202 compared to $429,663 for the same period in 1994. The decrease was the
result of conversion of the debentures into common stock. Additionally, the
Company completed early repayment on a 15% interest bearing note in early 1995.
Net income after tax and before adjustments for intercompany support and
eliminations for the year ended December 31, 1995 was $192,746 compared to
$450,625 for the same period in 1994. The decrease was the result of the early
winter freeze which limited the bagging of corn silage, coupled with the late
spring cold, wet weather in the southern hemisphere, which delayed the growing
season and decreased the demand for equipment in that region. Additionally, milk
and beef prices continued their downward trend causing farmers to be cautious
with respect to capital expenditures. These factors combined with decreased
sales volumes and gross margins and increased selling expenses and a higher
effective tax rate caused a decrease in net income in 1995 from 1994. The
decrease was partially offset by lower administrative and interest costs.
Ag-Bag Europe, PLC Operations
-----------------------------. Net sales for the year ended December 31,
1995 decreased 4.77% to $1,796,275 compared to $1,886,343 for the same period in
1994. The decrease in sales was the result of the hot, dry summer which
eliminated second cuttings of some crops and greatly reduced the yield on fall
corn silage. The value of the british pound against the US dollar has remained
relatively stable compared to 1994.
Gross profit from sales for the year ended December 31, 1995 decreased
29.29% to $431,729 compared to $610,544 for the same period in 1994. The
decrease in gross profit is largely due to increased maintenance costs
associated with the rental bagging machines coupled with higher
contracting/operator costs.
Selling expenses for the year ended December 31, 1995 decreased 28.98% to
$168,979 compared to $237,942 for the same period in 1994. The decrease in
selling expenses for the year was the result of reduced commissions due to
reduced sales. In addition, the Company changed its marketing strategy in 1995
from using K.W. Agriculture, Ltd. as its exclusive marketing agent, to using the
Company's own existing sales force. This led to further reductions in commission
fees paid.
18
<PAGE>
Administrative expenses for the year ended December 31, 1995 increased
8.85% to $293,238 compared to $269,405 for the same period in 1994. The increase
for the year was the result of an increase in general operating overhead of the
European operation coupled with the addition of office staff to handle certain
administrative operations previously handled by the exclusive marketing agent.
Interest expense for the year ended December 31, 1995 increased 52.28% to
$54,943 compared to $36,080 for the same period in 1994. The increase in
interest expense for the year was the result of slower accounts receivable
collections and not having bi-weekly collections from the former exclusive
marketing agent.
Net income (loss) after tax and before adjustments for intercompany
support and eliminations for the year ended December 31, 1995 was ($85,553)
compared to $82,802 for the same period in 1994. The decrease for the year was
the result of the hot, dry summer which eliminated the second cuttings of some
crops and reduced the yield of fall corn silage, coupled with higher maintenance
costs, administrative expenses and interest costs. The decrease in net income
was partially offset by reductions in selling expenses caused by changing the
Company's marketing strategy to utilize more of its existing sales force rather
than using an exclusive marketing agent.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The seasonal nature of the northern hemisphere farming industry, the
production time for equipment and the time required to prepare bags for use
requires the Company to manufacture and carry high inventories to meet rapid
delivery requirements. In particular, the Company must maintain a significant
level of bags during the spring and early summer to meet the sales demands
during the harvest season. The Company uses working capital and trade credit to
increase its inventory so that it has sufficient inventory levels available to
meet its sales demands through the spring and early summer.
The Company relies on its suppliers to provide trade credit to enable the
Company to build its inventory. The Company's suppliers have provided sufficient
trade credit to meet the demand to date and management believes this will
continue. No assurance can be given that suppliers will continue to provide
sufficient trade credit in the future.
Accounts receivable increased 38.37% at December 31, 1996 to $2,962,600
compared to $2,140,992 at December 31, 1995. The increase in accounts receivable
is the result of certain large sales occurring in the fourth quarter of 1996 and
increased sales in the Latin American region during the fourth quarter of 1996,
coupled with the fact that the company had to offer extended terms to certain
customers to remain competitive.
Inventory decreased 17.34% at December 31, 1996 to $6,636,993 compared to
$8,029,106 at December 31, 1995. The decrease in inventory resulted from
managements' decision to begin reducing equipment inventory which had been
built-up in anticipation of the production downtime associated with the move to
the new production facilities in Blair, Nebraska. Inventory was further reduced
by certain large sales that took place during the fourth quarter of 1996
compared to 1995.
The Company has a domestic operating line of credit with a limit of
$4,000,000, secured by accounts receivable and inventory. This line was
increased to $5,000,000 effective March 15 thru October 31, 1996. In addition,
the Company has a $200,000 equipment acquisition line. As of December 31, 1996,
$203,844 had been taken under the credit line and $145,600 had been taken under
the equipment acquisition line. The Company also has a revolving credit facility
denominated in pounds sterling for its
19
<PAGE>
UK operation with a limit of 400,000 pounds sterling. As of December 31, 1996,
borrowings under the foreign operating line were $29,762 US dollars out of an
available $685,000 US dollars. Management believes that, along with funds
generated from operations and its credit facilities, it will be able to meet the
Company's cash requirements through 1997.
In 1996, the Company began to consolidate the operations at its Blair,
Nebraska facility onto one location. Previously, the Company utilized three
buildings at different locations for its bag, proprietary inoculant and machine
assembly operations. The Company sold two of its existing production and
warehouse facilities and has its other production facility currently for sale.
The new facilities will consist of three buildings located on one site.
Construction of the new facilities began in 1996 and they are scheduled to be
completed in mid-1997. In November 1996, the Company began occupying one if its
new production, office and warehouse facilities. The new facility has been
financed with the sale proceeds of its old buildings and a loan secured by the
new facility. The sale of the remaining old facility and the completion of
construction of the new facilities will not have a material effect on the
Company's liquidity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
- ---------------------------------------------------
Reference is made to the consolidated financial statements and related
notes and supplemental data under Item 14 filed with this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
PART III
--------
ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND
- ------------------------------------------------------------------------
EXECUTIVE COMPENSATION
- ----------------------
A definitive proxy statement for the 1997 Annual Meeting of Stockholders
of Ag-Bag International Limited to be held on June 2, 1997 will be filed not
later than 120 days after the end of the fiscal year with the Securities and
Exchange Commission ("Proxy Statement"). The information set forth in the Proxy
Statement under "Election of Directors," "Executive Compensation," and "Section
16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by
reference. Executive officers of Ag-Bag International Limited are listed under
the heading "Executive Officers of the Registrant" in this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information required is set forth under the caption "Security Ownership of
Beneficial Owners" in the Proxy Statement and is incorporated herein by
reference.
20
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information required is set forth under the caption "Certain Relationships
and Related Transactions" in the Proxy Statement and is incorporated herein by
reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
Page
1. Index to Consolidated Financial Statements................. 24
Independent Auditors' Report............................... F - 1
Consolidated Balance Sheets at December 31, 1996 and 1995.. F - 2
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994......................... F - 3
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994............. F - 4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994......................... F - 5
Notes to Consolidated Financial Statements................. F - 6
Independent Auditors' Report............................... F - 20
2. Financial statement schedules required to be filed by
Item 8 and paragraph (d) of this Item 14:
Schedule of Valuation and Qualifying Accounts.............. F - 21
All other schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial
statements or notes thereto.
3. The exhibits are listed in the index of exhibits........... 25
(b) No reports on Form 8-K were required to be filed during the last
quarter of the period covered by this report.
(c) The index of exhibits and required exhibits..................... 25
21
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AG-BAG INTERNATIONAL LIMITED,
a Delaware corporation
Date: March 27, 1997 By: /s/ Larry R. Inman
---------------------------------------
Larry R. Inman, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Date: March 27, 1997 By: /s/ Larry R. Inman
---------------------------------------
Larry R. Inman, Chairman, Board of
Directors; Chief Executive Officer
and President (Principal Executive
Officer)
Date: March 27, 1997 By: /s/ Michael R. Wallis
---------------------------------------
Michael R. Wallis, Chief Financial
Officer and Vice President, Finance
(Principal Financial and Accounting
Officer)
Date: March 27, 1997 By: /s/ Roy I. Anderson
---------------------------------------
Roy I. Anderson, Director
Date: March 27, 1997 By: /s/ Lemuel E. Cunningham
---------------------------------------
Lemuel E. Cunningham, Director
Date: March 27, 1997 By: /s/ Michael W. Foster
---------------------------------------
Michael W. Foster, Director
Date: March 27, 1997 By: /s/ Michael B. Leahy
---------------------------------------
Michael B. Leahy, Director
Date: March 27, 1997 By: /s/ Arthur P. Schuette
---------------------------------------
Arthur P. Schuette, Director
Date: March 27, 1997 By: /s/ Rolf E. Soderstrom
---------------------------------------
Rolf E. Soderstrom, Director
Date: March 27, 1997 By: /s/ Robert N. Thurston
---------------------------------------
Robert N. Thurston, Director
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
23
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report F - 1
Consolidated Balance Sheets F - 2
Consolidated Statements of Operations F - 3
Consolidated Statements of Shareholders' Equity F - 4
Consolidated Statements of Cash Flows F - 5
Notes to Consolidated Financial Statements F - 6
Independent Auditors' Report F - 20
Schedule of Valuation and Qualifynig Accounts F - 21
24
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
Ag-Bag International Limited:
We have audited the accompanying consolidated balance sheets of Ag-Bag
International Limited and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ag-Bag International
Limited and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
March 13, 1997
F - 1
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash $ 656 656
Accounts receivable, less allowance for doubtful
accounts of $248,824 and $234,913 at 1996
and 1995, respectively (note 7) 2,962,600 2,140,992
Inventories (notes 3 and 7) 5,235,866 6,748,272
Other current assets 546,567 488,875
------------ ------------
Total current assets 8,745,689 9,378,795
Deferred income tax (note 10) 2,000 12,301
Intangible assets, net (note 4) 1,702,576 1,960,997
Property, plant and equipment, net (notes 5, 7 and 8) 4,848,076 3,520,252
Long-term inventories (notes 3 and 7) 1,401,127 1,280,834
Other assets 203,654 144,272
------------ ------------
$ 16,903,122 16,297,451
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Notes payable to banks (note 7) 379,206 1,478,886
Note payable to shareholder and related party (note 9) 14,343 12,635
Current portion of long-term debt and capital lease obligations (note 8) 547,222 421,462
Accounts payable 699,191 474,128
Accrued expenses and other current liabilities (note 6) 1,016,140 766,711
Income taxes payable -- 146,998
------------ ------------
Total current liabilities 2,656,102 3,300,820
Long-term debt and capital lease obligations, less current
portion (note 8) 2,020,890 1,183,114
Note payable to shareholder and related party, less
current portion (note 9) 39,733 54,420
------------ ------------
4,716,725 4,538,354
------------ ------------
Commitments (notes 8 and 11)
Shareholders' equity (note 11):
Preferred stock, $4 liquidation value, 8.5% cumulative dividend,
non-voting, 5,000,000 shares authorized,
174,000 shares issued and outstanding 696,000 696,000
Common stock, $.01 par value, 25,000,000 shares
authorized, 12,053,751 shares issued and outstanding
at December 31, 1996 and 1995 120,537 120,537
Additional paid-in capital 9,201,796 9,201,796
Retained earnings 2,139,739 1,835,441
Foreign currency translation adjustment 28,325 (94,677)
------------ ------------
Total shareholders' equity 12,186,397 11,759,097
------------ ------------
$ 16,903,122 16,297,451
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F - 2
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales (note 2) $ 24,548,765 19,297,962 20,706,738
Cost of sales 18,940,947 13,916,032 14,832,613
------------ ------------ ------------
Gross profit from operations 5,607,818 5,381,930 5,874,125
Selling expenses 2,606,453 2,400,387 2,167,865
Administrative expenses 2,548,803 2,280,690 2,322,085
Research and development expenses 58,808 68,165 60,257
------------ ------------ ------------
Income from operations 393,754 632,688 1,323,918
Other income (expense):
Interest income 38,144 44,639 45,826
Interest expense (419,632) (414,145) (465,743)
Loss on joint venture (note 12) -- -- (140,741)
Other (note 12) 608,493 130,411 199,084
------------ ------------ ------------
Income before income taxes 620,759 393,593 962,344
Income tax expense (note 10) 257,301 286,400 428,917
------------ ------------ ------------
Net income $ 363,458 107,193 533,427
============ ============ ============
Net income per common share $ .03 .01 .04
============ ============ ============
Weighted average common shares outstanding 12,095,751 12,062,019 11,644,785
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F - 3
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Foreign
Additional currency Total
Preferred stock Common stock paid-in Retained translation
shareholders'
----------------- ----------------------
Shares Amount Shares Amount capital earnings adjustment equity
------ ------ ------ ------ ------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 174,000 $ 696,000 10,627,228 $ 106,272 8,098,366 1,313,141 (182,286) 10,031,493
Stock issued in connection with
exercise of options - - 7,500 75 10,925 - - 11,000
Stock issued in connection with
conversion of debentures - - 1,010,667 10,106 731,822 - - 741,928
Stock issued in connection with
employee stock plan - - 9,978 100 12,400 - - 12,500
Foreign currency translation - - - - - - 107,585 107,585
Preferred stock dividends - - - - - (59,160) - (59,160)
Net income - - - - - 533,427 - 533,427
------- --------- ---------- --------- --------- --------- ------- ----------
Balance, December 31, 1994 174,000 696,000 11,655,373 116,553 8,853,513 1,787,408 (74,701) 11,378,773
Stock issued in connection with
exercise of warrant - - 137,500 1,375 149,875 - - 151,250
Stock issued in connection with
conversion of debentures - - 250,667 2,507 182,224 - - 184,731
Stock issued in connection with
employee stock plan - - 10,211 102 16,184 - - 16,286
Foreign currency translation - - - - - - (19,976) (19,976)
Preferred stock dividends - - - - - (59,160) - (59,160)
Net income - - - - - 107,193 - 107,193
------- --------- ---------- --------- --------- --------- ------ ----------
Balance, December 31, 1995 174,000 696,000 12,053,751 120,537 9,201,796 1,835,441 (94,677) 11,759,097
Foreign currency translation - - - - - - 123,002 123,002
Preferred stock dividends - - - - - (59,160) - (59,160)
Net income - - - - - 363,458 - 363,458
------- --------- ---------- --------- --------- --------- ------- ----------
Balance, December 31, 1996 174,000 $ 696,000 12,053,751 $ 120,537 9,201,796 2,139,739 28,325 12,186,397
======= ========= ========== ========= ========= ========= ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 363,458 107,193 533,427
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 955,344 1,029,874 1,097,314
Issuance of stock under employee stock plan -- 16,286 12,500
(Gain) loss on disposition of fixed assets (326,013) (54,919) 6,140
Loss on investment in joint venture -- -- 140,741
Deferred income taxes 10,301 (45,000) (126,559)
Change in assets and liabilities:
Accounts receivable (821,608) 285,043 (984,200)
Inventories 1,110,995 (2,153,915) (365,485)
Other current assets (37,121) (172,348) 164,653
Other assets (59,382) (21,123) (116,252)
Accounts payable 225,063 (165,261) 201,644
Accrued expenses and other current liabilities 249,429 86,537 75,669
Income taxes payable (167,569) (163,002) 191,707
----------- ----------- ----------
Net cash provided by (used in) operating activities 1,502,897 (1,250,635) 831,299
----------- ----------- ----------
Cash flows from investing activities:
Capital expenditures (2,337,974) (641,846) (992,521)
Proceeds from disposition of fixed assets 929,590 125,656 11,763
Intangible assets (9,232) (14,433) (8,495)
Investment in joint venture -- -- 45,890
----------- ----------- ----------
Net cash used in investing activities (1,417,616) (530,623) (943,363)
----------- ----------- ----------
Cash flows from financing activities:
Proceeds from line of credit 25,784,004 21,425,761 --
Principal payments on line of credit (26,883,684) (20,077,631) --
Proceeds on issuance of debt 1,570,335 714,616 812,049
Principal payments on debt (606,799) (769,794) (1,579,808)
Proceeds from issuance of shareholders' notes -- 75,000 --
Payment of shareholders' notes (12,979) (382,945) (251,652)
Exercise of employee options -- -- 11,000
Dividends paid (59,160) (59,160) (59,160)
----------- ----------- ------------
Net cash provided by (used in) financing activities (208,283) 925,847 (1,067,571)
----------- ----------- ------------
Effect of foreign currency translation 123,002 (19,976) 107,585
----------- ----------- ------------
Net decrease in cash -- (875,387) (1,072,050)
Cash and cash equivalents at beginning of year 656 876,043 1,948,093
----------- ----------- ------------
Cash and cash equivalents at end of year $ 656 656 876,043
=========== =========== ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 419,600 414,100 465,700
Cash paid for income taxes 414,500 494,400 320,000
</TABLE>
See accompanying notes to consolidated financial statements.
F - 5
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(1) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
(a) Description of Business
-----------------------
Ag-Bag International Limited (the Company) is a Delaware corporation. The
Company's operations include the manufacturing and sale of machines and
related bags used in the agriculture industry to store feed for
livestock, grain and other products.
(b) Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Ag-Bag Europe, plc. All significant
intercompany transactions have been eliminated in consolidation.
(c) Statements of Cash Flows
------------------------
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or
less to be cash equivalents.
The Company transferred $281,118, $163,910 and $312,208 in 1996, 1995 and
1994, respectively, from rental equipment to inventory held for sale.
The Company received cancellation of a note payable in the amount of
$151,250 during 1995 as consideration for the exercise of a warrant for
137,500 shares at $1.10 per share.
(d) Accounts Receivable
-------------------
Accounts receivable are from distributors and customers of the Company's
products. The Company performs periodic credit evaluations of its
customers and maintains allowances for potential credit losses. Also to
reduce the risk of credit loss, the Company requires letters of credit
from foreign customers with which no credit history has been established.
(e) Inventories
-----------
Inventories are stated at the lower-of-cost or market (net realizable
value). The Company determines cost on the first-in, first-out (FIFO)
basis.
(Continued)
F - 6
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(f) Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost and are depreciated on
the straight-line method over their estimated useful lives which range
from three to twenty-five years.
Expenditures for additions and major improvements are capitalized.
Expenditures for repairs and maintenance are charged to income as
incurred.
(g) Intangible Assets
-----------------
Intangible assets consist primarily of licenses, goodwill, patents and
non-compete agreements. The cost of the licenses, patents and noncompete
agreements are amortized over the lesser of the terms of the related
agreement or the estimated useful lives of the respective asset, ranging
from three to seventeen years.
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on the straight-line basis over the
expected period to be benefited, fifteen years. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the
acquired operation. The assessment of the recoverability of goodwill will
be impacted if estimated future operating cash flows are not achieved.
(h) Stock Option Plan
-----------------
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation", which permits
entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income disclosure for employee
stock option grants as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
(Continued)
F - 7
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(i) Income Taxes
------------
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled.
(j) Advertising Expenses
--------------------
Advertising expenses are charged to expense as incurred, except for
advertising supplies, and were $390,831, $238,998, and $200,212 for 1996,
1995 and 1994, respectively. Advertising supplies are capitalized and
amortized over one year.
(k) Net Income Per Common Share
---------------------------
Net income per common share is computed based on the weighted average
number of shares of common stock and common stock equivalents (if
dilutive) outstanding during the year.
(l) Foreign Currency Translation
----------------------------
The financial statements of the Company's European subsidiary have been
translated into U.S. dollars from their functional currency, British
pounds sterling, in the accompanying statements. Balance sheet amounts
have been translated at the exchange rate on the balance sheet date and
statement of operations amounts have been translated at average exchange
rates in effect during the period. The net translation adjustment is
carried as a component of stockholders' equity. Realized and unrealized
gains and losses on foreign currency transactions are included in other
expense (income), net.
(m) Management Estimates
--------------------
The preparation of financial statements in conformity with 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 amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(Continued)
F - 8
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Foreign Operations
------------------
Summarized data for the Company's foreign operation (Ag-Bag Europe, plc) in
Europe are as follows:
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales - unaffiliated customers $ 1,817,731 1,796,275 1,886,343
Income (loss) from operations 50,536 (85,553) 82,802
Identifiable assets 1,592,429 1,689,594 1,789,366
</TABLE>
Export sales from the Company's United States operations are as follows:
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Latin America/Mexico $ 1,392,000 613,000 956,000
Canada 1,788,000 1,418,000 1,156,000
Germany 1,951,000 1,680,000 783,000
Other 668,000 322,000 898,000
------------ ------------ ------------
$ 5,799,000 4,033,000 3,793,000
============ ============ ============
</TABLE>
(3) Inventories
-----------
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31
---------------------
1996 1995
---- ----
<S> <C> <C>
Parts and subassembly - current $ 1,169,384 1,451,669
Work in process 725,858 652,930
Bags and machines 3,340,624 4,643,673
------------ ------------
5,235,866 6,748,272
Parts and subassembly (long-term) 1,401,127 1,280,834
------------ ------------
$ 6,636,993 8,029,106
============ ============
</TABLE>
(Continued)
F - 9
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1996, some portion of the $6,636,993 of inventory of the
Company was in excess of current requirements based on the recent level of
production and sales. Management is developing a plan to reduce this
inventory to desired levels through either disposal or utilization of parts
in new machinery models. Management believes no loss will be incurred on
the utilization or disposition of these inventories.
Management has also classified certain parts which may not be sold or used
in production within the course of one year as long-term inventories.
Management believes the cost of these long-term inventories is fully
recoverable.
(4) Intangible Assets, Net
----------------------
Intangible assets, net consist of the following:
<TABLE>
<CAPTION>
December 31
---------------------
1996 1995
---- ----
<S> <C> <C>
Licenses $ 1,886,314 1,886,314
Goodwill 668,612 668,612
Patent costs 667,971 658,739
Covenant not to compete 393,263 393,263
----------- -----------
3,616,160 3,606,928
Less accumulated amortization 1,913,584 1,645,931
----------- -----------
$ 1,702,576 1,960,997
=========== ===========
</TABLE>
(Continued)
F - 10
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Property, Plant and Equipment, Net
----------------------------------
Property, plant and equipment, net consist of the following:
<TABLE>
<CAPTION>
December 31
--------------------
1996 1995
---- ----
<S> <C> <C>
Land $ $ 263,326 281,326
Buildings 1,569,658 1,238,391
Vehicles 444,060 439,328
Office furniture, fixtures and equipment 1,735,423 1,540,627
Plant equipment 1,755,104 1,580,528
Rental equipment 2,384,357 2,288,050
Leasehold improvements 54,515 54,515
----------- -----------
8,206,443 7,422,765
Construction in progress 957,417 -
Less accumulated depreciation and
amortization 4,315,784 3,902,513
----------- -----------
$ 4,848,076 3,520,252
=========== ===========
</TABLE>
Certain property, plant and equipment serve as collateral for short and
long-term debt obligations. The Company leases certain assets under capital
lease agreements. At December 31, 1996 and 1995, the net book value of the
equipment under these leases was approximately $496,738 and $536,222,
respectively.
(6) Accrued Expenses and Other Current Liabilities
----------------------------------------------
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
December 31
-------------------
1996 1995
---- ----
<S> <C> <C>
Salaries and other compensation $ 371,194 223,733
Other 644,946 542,978
----------- ----------
$ 1,016,140 766,711
=========== ==========
</TABLE>
(Continued)
F - 11
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Notes Payable to Banks
----------------------
The Company has a note payable to a bank in the amount of $29,762 and
$178,388 at December 31, 1996 and 1995, respectively, under a line of
credit agreement (LOC Agreement). The LOC Agreement is for a maximum of
400,000 English pounds ($685,000 and $621,200 at December 31, 1996 and
1995, respectively), bears interest at 7.75% (8.25% at December 31, 1995)
which is subject to renewal by the bank in June 1997. The LOC Agreement is
secured by all assets of Ag-Bag Europe plc. and is subject to certain
covenants.
In addition, the Company has a domestic line of credit with a bank for up
to $4,000,000 at December 31, 1996 and 1995. The domestic line of credit is
secured by accounts receivable and inventories, bears interest at the
bank's prime rate plus 1/2% (8.75% at December 31, 1996 and 9.0% at
December 31, 1995). The Company also has an equipment line of credit with
the bank for $200,000 at December 31, 1996 and 1995 which bears interest at
the bank's prime rate plus 1.0% (9.0% at December 31, 1996 and 9.5% at
December 31, 1995) and is secured by equipment purchased subject to the
line. Both lines are subject to certain covenants and are subject to annual
renewal by the bank each June 30. As of December 31, 1996 and 1995,
$203,844 and $1,300,498 were outstanding under the operating line of credit
and $145,600 and $-0- was outstanding under the equipment line,
respectively.
(Continued)
F - 12
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Long-term Debt and Capital Lease Obligations
--------------------------------------------
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
December 31
------------------
1996 1995
---- ----
<S> <C> <C>
Note payable in monthly installments of $2,638, plus interest at prime
plus 1.75% (10.25% at December 31,
1996), through 2000, secured by building $ 109,523 141,173
Note payable in monthly installments of $2,436, including
interest at 8.32%, through 2005, secured by certain equipment,
office furniture and fixtures and personal guarantees of certain
shareholders, subordinate to
building loan and certain equipment loans 177,779 191,482
Note payable in monthly installments of $3,567, including
interest at 8% through 1999, secured by real property 241,869 263,981
Note payable in monthly installments of $4,183, including
interest at 9% through 1999, secured by certain
equipment 114,248 152,020
Note payable in monthly installments of $2,360, plus
interest at prime plus 1.25% (9.75% at December 31,
1996) 98,989 127,421
Note payable in monthly installments of $1,474 plus
interest at 9.5% 64,339 -
Note payable, monthly payments of interest only at 9%,
convertible to term debt April 1997 with repayment
terms through June 2026, secured by real
property 1,218,026 -
----------- ----------
2,024,773 876,077
Less current portion 297,753 133,597
----------- ----------
$ 1,727,020 742,480
=========== ==========
</TABLE>
(Continued)
F - 13
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Future maturities of long-term debt and capital lease obligations are
summarized as follows:
<TABLE>
<CAPTION>
Long-term Capital lease obligations
-----------------------------------------
debt excluding Minimum Amount
capital lease lease representing
obligations payments interest Principal
----------- -------- -------- ---------
<S> <C> <C> <C> <C>
Year ending December 31:
1997 $ 297,753 281,502 32,033 249,469
1998 160,756 173,735 22,902 150,833
1999 311,425 97,557 18,737 78,820
2000 63,739 72,307 9,435 62,872
2001 29,466 2,347 1,002 1,345
Thereafter 1,161,634 - - -
------------ --------- --------- ----------
$ 2,024,773 627,448 84,109 543,339
============ ========= ========= ==========
</TABLE>
(9) Note Payable to Shareholder and Related Party
---------------------------------------------
The Company has a note payable to a shareholder of the Company. The note
bears interest at 10% and requires monthly principal and interest payments
of $1,600 through April 30, 2000. Interest expense related to shareholders
and related parties amounted to $6,222, $29,188 and $58,000 in 1996, 1995
and 1994, respectively.
(10) Income Taxes
------------
The domestic and foreign components of income before income taxes are as
follows:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Domestic $ 570,223 479,146 879,542
Foreign 50,536 (85,553) 82,802
---------- ---------- -----------
$ 620,759 393,593 962,344
========== ========== ===========
</TABLE>
(Continued)
F - 14
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 211,996 290,781 546,193
State 35,004 40,619 9,283
---------- ---------- ----------
247,000 331,400 555,476
---------- ---------- ----------
Deferred:
Federal 4,351 (49,047) (110,120)
State 5,950 4,047 (16,439)
---------- ---------- ----------
10,301 (45,000) (126,559)
---------- ---------- ----------
Total income tax expense $ 257,301 286,400 428,917
========== ========== ==========
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
December 31
-------------------
1996 1995
---- ----
<S> <C> <C>
Net operating loss carryforwards:
Foreign $ 176,550 216,933
State - 5,545
Expenses not currently deductible 105,505 100,702
---------- ----------
Gross deferred tax asset 282,055 323,180
Valuation allowance (176,550) (216,933)
---------- ----------
Net deferred tax asset 105,505 106,247
Gross deferred tax liability-depreciation 103,505 93,946
---------- ----------
Net deferred tax asset $ 2,000 12,301
========== ==========
</TABLE>
(Continued)
F - 15
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax
rate to pre-tax income as a result of the following differences:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34% 34% 34%
Foreign losses providing no current
income tax benefit - 7 -
Realized benefit from foreign net
operating losses (3) - (3)
Nondeductible items 4 11 5
Tax settlement - 16 -
Other 6 5 9
--- --- ---
Effective tax rates 41% 73% 45%
== == ==
</TABLE>
At December 31, 1996, the Company has available foreign operating loss
carryforwards for income tax purposes of approximately $535,000 which have
no expiration date. Such carryforwards are available to offset foreign
taxable income.
(11) Shareholders' Equity
--------------------
Stock Warrants
--------------
In connection with offerings of common stock and notes payable, the Company
has issued various warrants for the purchase of the Company's common stock.
As of December 31, 1996, the following warrants with respective exercise
price per share and date of expiration were outstanding and exercisable:
Number Price per Expiration
Party of shares share date
----- --------- ----- ----
Underwriters 240,000 $4.06 May 1997
Note holder 137,500 $1.10 February 2001
-------
377,500
=======
(Continued)
F - 16
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock Awards
------------
The Company has an 1991 Employee Stock Plan (the Plan) and has reserved
133,575 shares of common stock for issuance under the Plan. Under terms of
the Plan, stock is awarded to employees at the sole discretion of the Board
of Directors. Awards under the Plan amounted to -0-, 10,211 and 9,978
shares for 1996, 1995 and 1994, respectively, with related compensation
expense of $-0-, $16,286 and $12,500, respectively.
Common Stock Options
--------------------
The Company has an Incentive Stock Option Plan (the Incentive Plan) and has
reserved 185,000 shares of common stock for issuance under the Incentive
Plan. Options under the Incentive Plan are to be issued to officers and
employees of the Company and all option grants will be at the market value
of the stock at the date of grant. Vesting of stock options are determined
for each grant by the Board of Directors.
During 1996, under the aforementioned Plan, the Company granted 50,000
options with an exercise price of $1.06. The options were 100% vested at
grant date. None of the options were exercised during the current year.
Also during 1996, the Company adopted a Nonemployee Director Stock Option
Plan (the Director Plan) and has reserved 1,000,000 shares of common stock
for issuance under the Director Plan. The Director Plan grants 50,000
options to each member of the Board of Directors who are not employees of
the Company. Forty percent of the 50,000 options vest and become
exercisable six months after the grant date, another 40% of the options
vest and become exercisable two years after the grant date, and the
remaining portion of the options vest and become exercisable three years
after the grant date. In total 300,000 options were granted in 1996 with an
exercise price of $1.06.
The Company has computed, for pro forma disclosure purposes, the value of
all options granted during 1996 and 1995 using the Black-Scholes pricing
model as prescribed under SFAS 123. No options were granted in 1994 and as
a result no valuation is necessary. The following assumptions were made for
grants made in 1996 and 1995: risk-free interest rate of 6.1%, expected
life of 3 years, dividend rate of zero percent, and expected volatility
over expected life of 70%.
(Continued)
F - 17
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
If the Company had accounted for the value of the options granted during
1996 and 1995 in accordance with SFAS No. 123, the Company's net income
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
Net income As reported $ 363,458 107,193 533,427
Pro forma 335,458 102,193 533,427
Net income per share As reported 0.03 0.01 0.04
Pro forma 0.03 0.01 0.04
</TABLE>
Pro forma net income reflects only options granted in 1996 and 1995
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period and compensation cost for options granted prior to
January 1, 1994 is not considered.
The resulting pro forma compensation costs may not be representative of
that expected in future years.
Subordinated Convertible Debentures
-----------------------------------
All Subordinated Convertible Debentures (the Debentures) were converted to
common stock as of December 31, 1995. The Debentures bore interest at 10%
and were convertible into shares of the Company's common stock at a
conversion rate of $.75 per share. The Debentures were subordinated to
other senior indebtedness of the Company. Conversion of debentures into
common stock were $188,000 and $758,000 in 1995 and 1994, respectively.
Cost related to the conversions amounted to $3,269 and $16,072,
respectively.
(Continued)
F - 18
<PAGE>
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Transactions and other information relating to stock options for the three
years ended December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
Weighted
average
Number exercise
of shares price
--------- -----
<S> <C> <C>
Options outstanding at December 31, 1993 149,500 $ 2.60
Options granted - -
Options expired (32,000) 1.31
Options exercised (7,500) 1.48
---------- -----
Options outstanding at December 31, 1994 110,000 3.02
Options granted 10,000 1.68
Options expired - -
Options exercised - -
---------- -----
Options outstanding at December 31, 1995 120,000 3.02
Options granted 350,000 1.06
Options expired (10,000) 3.00
Options exercised - -
---------- -----
Options outstanding at December 31, 1996 460,000 $ 1.53
========== =====
</TABLE>
At December 31, 1996, the Company had outstanding options of 460,000 with a
weighted average life expectancy of 7 years and an exercise price range of
$1.06 - 3.50. Of the 460,000 options outstanding, 160,000 were exercisable
at December 31, 1996 at a weighted average exercise price of $2.62.
The weighted-average fair value of options granted during 1996 and 1995 was
$1.06 and $1.68, respectively.
(12) Other Income
------------
Other income includes gross profit from rentals of machinery and equipment
of $77,002, $30,120 and $86,531 for 1996, 1995 and 1994, respectively. In
1996, other income also includes a gain on the sale of a warehouse and
related land of approximately $309,000.
The Company had a 42% investment in Silage Packing Technology B.V. (the
Joint Venture) until 1994 wherein the Joint Venture was dissolved. In 1994
the Company recorded a loss of $140,741 related to the dissolution of the
Joint Venture.
F - 19
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
Ag-Bag International Limited:
Under date of March 13, 1996, we reported on the consolidated balance sheets of
Ag-Bag International Limited and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996, as contained in the annual report on Form 10-K for the year 1996. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in the accompanying index as related to amounts as of and for
the years ended December 31, 1996, 1995 and 1994. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Portland, Oregon
March 13, 1997
F - 20
<PAGE>
Schedule II
-----------
AG-BAG INTERNATIONAL LIMITED
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Charged to Charged Write-offs, Balance
beginning costs and to other net of at end
Description of period expenses accounts recoveries of period
----------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31:
1996:
Allowance for doubtful accounts $ 234,913 105,423 -- (91,512) 248,824
Warranty reserve 50,000 222,972 -- (197,339) 75,633
1995:
Allowance for doubtful accounts 157,263 183,813 -- (106,163) 234,913
Warranty reserve 25,061 57,127 -- (32,188) 50,000
1994:
Allowance for doubtful accounts 107,485 66,689 -- (16,911) 157,263
Warranty reserve 23,693 102,975 -- (101,607) 25,061
</TABLE>
F - 21
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.1 Restated Certificate of Incorporation(2)
3.2 Bylaws of the Company(2)
4.1 Form of Common Stock Certificate(1)
4.2 Form of Underwriter's Warrants dated May 9, 1992(1)
4.3 Warrant dated February 13, 1995, to Norwood Venture Corp.(2)
4.4 Stock Option dated September 6, 1995, to Doug Hoag(3)*
10.1 Employment Contract of Larry R. Inman(1)*
10.3 1991 Employee Stock Plan, as amended effective November 1, 1996*
10.4 Incentive Stock Option Plan, as amended effective November 1, 1996*
10.5 Nonemployee Director Stock Option Plan*
11 Statement re computation of earnings per share
12 Statement re computation of ratios
21 Subsidiaries of the Registrant(3)
23 Reference is made to the financial reports of KPMG Peat Marwick LLP
containing opinions with respect to the financial statements and
the financial statement schedule.
27 Financial Data Schedule (Filed with EDGAR version only)
* Management contract or compensatory plan
(1) Filed as exhibit to the Form S-1 Registration No.33-46115.
(2) Filed as exhibit to the Form 10-K for the fiscal year ended December
31, 1994.
(3) Filed as exhibit to the Form 10-K, filed on April 1, 1996, for the
fiscal year ended December 31, 1995.
25
EXHIBIT 10.3
AG-BAG INTERNATIONAL LIMITED
1991 EMPLOYEE STOCK PLAN
ARTICLE 1
---------
ESTABLISHMENT AND PURPOSE
1.1 This Plan, known as the Ag-Bag International Limited 1991 Employee
Stock Plan, was originally implemented on August 1, 1991. The Plan is hereby
amended effective November 1, 1996.
1.2 The purpose of this Plan is to further the long-term growth in
earnings of Ag-Bag International Limited and its subsidiary corporations by
offering additional long-term incentives to employees of the Company and its
subsidiaries in order to enable the Company to attract and retain the best
available personnel.
ARTICLE 2
---------
DEFINITIONS
2.1 "Board of Directors" shall mean the board of directors of the
Company.
2.2 "Committee" shall mean a committee established in Section 4.1 to
administer the Plan.
2.3 "Company" shall mean Ag-Bag International Limited, a Delaware
corporation, and its Subsidiaries.
2.4 "Director" shall mean any person serving on the Board of Directors
of the Company.
2.5 "Employee" shall mean any person employed by the Company, either as
a commission sales employee or other employee, including any officer of the
Company.
2.6 "Non-Employee Director" shall mean a Director who:
(1) Is not currently an officer of the Company or a
parent or subsidiary of the Company, or otherwise currently
employed by the Company or a parent or subsidiary of the
Company;
(2) Does not receive compensation, either directly or
indirectly, from the Company or a parent or subsidiary of the
Company, for services rendered as a consultant or in any
capacity other than as a
Page 1 - 1991 EMPLOYEE STOCK PLAN
<PAGE>
Director, except for an amount that does not exceed the dollar
amount for which disclosure would be required pursuant to Item
404(a) of Regulation S-K;
(3) Does not possess an interest in any other
transaction for which disclosure would be required pursuant to
Item 404(a) of Regulation S-K; and
(4) Is not engaged in a business relationship for
which disclosure would be required pursuant to Item 404(b) of
Regulation S-K.
2.7 "Participant" shall mean any Employee eligible to participate in
the Plan in accordance with Article 3.
2.8 "Plan" shall mean this Ag-Bag International Limited 1991 Employee
Stock Plan.
2.9 "Plan Year" shall mean the twelve (12) month period beginning
January 1 and ending December 31.
2.10 "Shares" shall mean the Common Shares of Ag-Bag International
Limited.
2.11 "Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain owns stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock in one
of the other corporations in such chain.
2.12 "Year of Service" shall mean at least six (6) months of service
with the Company during any Plan Year for a commissioned Sales Employee, or at
least 1500 hours of service with the Company during any Plan Year for all other
Employees.
ARTICLE 3
---------
ELIGIBILITY
All Employees shall be eligible to participate in the Plan on the first
date in which the Employee has completed two (2) Years of Service.
Page 2 - 1991 EMPLOYEE STOCK PLAN
<PAGE>
ARTICLE 4
---------
ADMINISTRATION OF THE PLAN
4.1 The Plan shall be administered by the Board of Directors. The Board
of Directors may, by resolution, delegate part or all of its administrative
powers with respect to the Plan to a Committee comprised solely of two (2) or
more Non-Employee Directors.
4.2 The Board of Directors or the Committee shall be responsible for
adopting policies, procedures, rules and regulations for the Plan and shall be
responsible for the proper administration of the Plan in accordance with the
policies, procedures, rules and regulations adopted by it.
4.3 The Board of Directors or the Committee shall determine the
Employees eligible to participate under this Plan, determine which Employees
within the eligible group are to receive discretionary points for any given Plan
Year, and compute the total number of points each Employee is to receive.
4.4 In administering the Plan, the Board of Directors or the Committee
shall have full power and authority to construe and interpret the provisions of
the Plan, and propose amendments relating to the Plan. The Board of Directors or
the Committee's interpretation and construction of the provisions of the Plan
and related agreements by the Board of Directors or the Committee shall be final
and conclusive. The Board of Directors or the Committee may correct any defect
or supply any omission or reconcile any inconsistency in the Plan or in any
related agreement in the manner and to the extent it shall deem expedient to
carry the Plan into effect, and it shall be the sole and final judge of such
expediency.
4.5 The Board of Directors may from time to time remove or appoint
members of the Committee in substitution for members previously appointed by the
Board of Directors. The Committee may select one of its members as its chairman
and shall hold its meetings at such times and places as it shall deem advisable.
All actions of the Committee shall be taken by a unanimous vote of its members.
Any action may be taken by a written instrument signed by all Committee members,
and all actions so taken shall be fully effective as if it had been taken by a
vote of the members at a meeting duly called and held.
ARTICLE 5
---------
AWARDS OF SHARES
5.1 Each Participant who is employed by the Company on the last day of
the Plan Year shall receive points for years of service with the Company and for
job performance. Each
Page 3 - 1991 EMPLOYEE STOCK PLAN
<PAGE>
Participant shall receive five points for the first two Years of Service and one
point for each additional Year of Service. In order to be eligible to receive
Shares under this Plan, a Participant must be either a commission sales employee
or have worked at least 1,500 hours during the Plan Year for the Company or one
of its subsidiaries. Job performance points shall be awarded in accordance with
Section 4.3. The maximum annual points the Board of Directors or the Committee
can award for job performance shall be ten (10) per Employee.
5.2 The Board of Directors or the Committee shall determine the number
of Shares per point to be issued. The number of Shares granted to each Employee
shall be determined by the total number of points earned by each Employee for
that fiscal year as compared to the total number of points earned by all
Employees for that fiscal year. For example, an Employee with two Years of
Service will receive five points and if the Employee's job performance is equal
to five points, the Employee will have ten (10) points for the year. If the
Board of Directors or the Committee decides that one (1) Share is given per
point for that year, the Employee will receive ten (10) Shares.
5.3 All rights to any benefits payable under the terms of this Plan
shall be immediately forfeited if the Employee engages in any act which, in the
opinion of the Board of Directors or the Committee, is not in the best interests
of the Company, including, but not limited to, fraud, embezzlement,
nonproductivity or disloyalty. The judgment of the Board of Directors or the
Committee shall be final as to the determination of the nature of any acts
performed by the Employee which are subject to this Section. The Board of
Directors or the Committee, in its sole discretion, may interpret and decide
upon the nature of such acts. The forfeiture shall not apply to Shares
previously issued.
5.4 The total number of Shares which can be issued under this Plan,
including all predecessor Employee Stock Plans, is 133,575.
ARTICLE 6
---------
ISSUANCE OF SHARES
6.1 The Shares shall be issued to each eligible Participant within
thirty (30) days after the final determination is made by the Board of Directors
or the Committee as to the number to be issued.
6.2 The Shares, when issued, shall be Restricted Stock as that term is
defined by the rules and regulations promulgated under the Securities Act of
1933 and, with respect to resale, the Employee shall comply with all applicable
federal and state securities laws. Shares issued under the Plan shall be subject
Page 4 - 1991 EMPLOYEE STOCK PLAN
<PAGE>
to the terms, conditions and restrictions determined by the Board of Directors
or the Committee. The restrictions may include restrictions concerning
transferability and repurchase by the Company. All Shares issued pursuant to
this Plan shall be subject to an agreement, which shall be executed by the
Company and the prospective recipient of the shares prior to the delivery of
certificates representing such Shares of the recipient. The agreement may
contain any terms, conditions, restrictions, representations and warranties
reasonably required by the Board of Directors or the Committee. The certificates
representing the Shares shall bear the legend specified in Article 8.
6.3 The Company may require any recipient of Restricted Stock to pay to
the Company in cash upon demand amounts necessary to satisfy any applicable
federal, state or local tax withholding requirements. If the recipient fails to
pay the amount demanded, the Company may withhold that amount from other amounts
payable by the Company to the recipient, including salary, subject to applicable
law. With the consent of the Board of Directors or the Committee, a recipient
may deliver Common Stock to the Company to satisfy this withholding obligation.
Upon the issuance of Restricted Stock, the number of Shares reserved for
issuance under the Plan shall be reduced by the number of Shares issued, less
the number of Shares surrendered in payment of the Restricted Stock or
surrendered or withheld to satisfy withholding obligations.
ARTICLE 7
---------
EMPLOYEE'S RESPONSIBILITIES
In consideration for the benefits payable under the Plan, each covered
Employee shall agree that during the period of Employee's employment, the
Employee will devote his or her full time, skill, diligence and attention to the
Company's business and will not actively engage, either directly or indirectly,
in any business or other activity which is or may be deemed to be in any way
competitive with or adverse to the best interests of the business of the
Company.
ARTICLE 8
---------
ISSUANCE OF CERTIFICATES
Unless the stock is registered under the Securities Act of 1933, all
certificates representing any of the Shares issued pursuant to this Plan shall
have endorsed thereon the following legend, together with any other legends
required by applicable state law:
The securities represented by this certificate have been
acquired for investment and not with a view
Page 5 - 1991 EMPLOYEE STOCK PLAN
<PAGE>
to or in connection with the sale or distribution thereof. No sale or
distribution shall be effected without an effective registration
statement related thereof or an opinion of counsel satisfactory to the
Company that such registration is not required under the Securities Act
of 1933.
ARTICLE 9
---------
RELATIONSHIP BETWEEN THE PARTIES
9.1 Nothing contained in this Plan and no action taken pursuant to the
provisions of this Plan shall create or be construed to create a trust of any
kind or a fiduciary relationship between the Company and any Employee, his or
her beneficiaries or any other person. Any Shares which may be subject to the
provisions of this Plan shall continue for all purposes to be the Shares of the
Company until issued. No person other than the Company shall have any interest
in such Shares by virtue of this Plan.
9.2 The rights of any Employee to benefits under this Plan shall be
solely those of an unsecured creditor of the Company. Any assets acquired or
held by the Company in connection with the liabilities assumed by it pursuant to
this Plan shall not be deemed to be held under any trust for the benefit of any
Employee, a beneficiary of any Employee, any Employee's estate, or to be
security for the performance of the obligations of the Company, but shall be a
general, unpledged and unrestricted asset of the Company.
9.3 Any benefit under this Plan shall not be deemed salary or other
compensation of any Employee for the purpose of computing benefits to which the
Employee may be entitled under any pension plan or other arrangement of the
Company for the benefit of its Employees.
9.4 The benefits under this Plan shall be independent of and in
addition to any other agreement relating to any Employee's employment that may
exist from time to time between the parties hereto, or any other compensation
payable by the Company to any Employee, whether salary, bonus or otherwise.
9.5 This Plan shall not be deemed to constitute a contract of
employment between the Company and any Employee, nor shall any provision of this
Plan be interpreted to restrict the right of the Company to discharge any
Employee or restrict the right of any Employee to terminate his employment.
9.6 Transfer of any Employee from employment by the Company to
employment by a Subsidiary of the Company or the transfer of any Employee from
employment by a Subsidiary to the Company shall not be deemed a termination of
employment.
Page 6 - 1991 EMPLOYEE STOCK PLAN
<PAGE>
9.7 The Shares issuable under this Plan shall not be subject to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
charge. Any attempt to anticipate, alienate, transfer, assign, pledge, encumber
or charge the same shall be void and shall terminate the Employee's rights
hereunder, whereupon the Company shall have no further liability to such
Employee.
9.8 Each Employee shall file with the Company a written designation of
one or more persons as beneficiary who shall be entitled to receive the shares,
if any, which are payable under the Plan but have not been issued, upon the
death of the Employee. An Employee may revoke or change such beneficiary
designation by filing a new designation with the Company. The last such
designation received by the Company shall be controlling, provided, however,
that no designations shall be effective unless received by the Company prior to
the Employee's death and in no event shall it be effective as of a date prior to
such receipt. Beneficiary designations of Employees who are residents of
community property states must also be executed by the Employee's spouse, if
any.
9.9 If no such beneficiary designation is in effect at the time of an
Employee's death, or if no designated beneficiary survives the Employee, or if
such designation conflicts with law, the Employee's estate shall be deemed to
have been designated his beneficiary and shall receive the shares issuable, if
any, under the Plan upon the Employee's death. If the Company is in doubt as to
the right of any person to receive such Shares, the Company may retain such
Shares, without liability for any interest thereon, until the rights thereto are
determined, or the Company may deposit such Shares into any court of appropriate
jurisdiction and such deposit shall be a complete discharge of the liability of
the Plan and the Company therefor.
9.10 Each Employee shall execute an Employee's statement substantially
in the same form as Exhibit A.
9.11 For accounting purposes, any rights, amounts or grants which are
forfeited under this Plan shall be treated as if they were returned to the
Company and other Employees shall have no rights in or to said forfeited
amounts.
ARTICLE 10
----------
CLAIMS PROCEDURE
10.1 If an Employee is denied all or a portion of an expected benefit
under the terms of this Plan for any reason, the Company shall notify the
claimant within 60 days of his or her submission of claim, in writing, of
allowance or denial of the claim. The notice shall be in writing, sent by mail
to the
Page 7 - 1991 - EMPLOYEE STOCK PLAN
<PAGE>
claimant's last known address and must contain the following information:
(a) The specific reasons for the denial;
(b) Specific reference to pertinent provisions of this Plan on
which the denial is based; and
(c) If applicable, a description of any additional information
or material necessary to perfect the claim, an explanation of why such
information or material is necessary and an explanation of the claims review
procedure.
10.2 Within sixty (60) days of receipt of the claimant's request for
review, the Company shall allow or deny the claim. The decision shall be made in
writing to the claimant. The decision shall recite the facts and reasons for
denial, with specific reference to the pertinent provisions of this Plan.
10.3 A claimant is entitled to request a review of any denial of his or
her claim by the Company. The request for review must be submitted in writing
within sixty (60) days of the claimant's receipt of the notice of the denial.
Absent a request for review within the 60-day period, the claim will be deemed
to be conclusively denied. The claimant or his or her representative shall be
entitled to review all pertinent documents and to submit issues and comments in
writing.
ARTICLE 11
----------
MISCELLANEOUS
11.1 Accounting
----------. All accounting issues arising due to the existence of
this Plan shall be determined in accordance with generally accepted accounting
principles.
11.2 Amendment or Termination
------------------------. This Plan may be amended or terminated
at any time and from time to time by the Board of Directors except that no such
amendment shall divest any Employee of his or her previously vested rights.
11.3 Required Shareholder Approval
-----------------------------. No action of the Board of Directors
or the Committee to amend the Plan in any one of the following respects shall be
effective unless authorized at a meeting of shareholders by the vote of the
holders of a majority of all outstanding shares entitled to vote thereon: (i) to
materially increase the number of shares which may be issued under the Plan or
(ii) to materially increase the benefits accruing to participants under the Plan
or (iii) to materially modify the requirements as to eligibility for
participation in the Plan.
Page 8 - 1991 EMPLOYEE STOCK PLAN
<PAGE>
11.4 Securities Laws
---------------. The Board of Directors shall be responsible for
being sure that all applicable federal and state securities laws are complied
with and that the Employees are fully aware of the restricted nature of their
shares.
ARTICLE 12
----------
EXECUTION
This Restated Plan was adopted on the ____ day of ________, 1996,
effective November 1, 1996, and shall replace the Employee Stock Plan maintained
by the Company prior to November 1, 1996.
AG-BAG INTERNATIONAL LIMITED
By: ___________________________________
Larry R. Inman, President
By: ___________________________________
Lou Ann Tucker, Secretary
Page 9 - 1991 EMPLOYEE STOCK PLAN
<PAGE>
EXHIBIT A
PARTICIPANT'S STATEMENT
I have read the Ag-Bag International Limited Employee Stock Plan and
understand that it sets forth my rights in the Employee Stock Plan of Ag-Bag
International Limited and that I have no other rights except as set forth
therein. I understand this is a discretionary Plan, which may be terminated by
the Company at any time.
Dated this ____ day of _________, 19__.
---------------------------------------
Participant
Page 1 - PARTICIPANT'S STATEMENT, EXHIBIT A TO EMPLOYEE STOCK PLAN
<PAGE>
EXHIBIT B
BENEFICIARY DESIGNATION
Pursuant to the provisions of the Ag-Bag International Limited Employee
Stock Plan, I hereby designate the following as my beneficiary or beneficiaries
to whom any interest I may then have in the Plan shall be paid in the event of
my death, it being specifically understood that I reserve such rights as may be
available to me under said Plan to change this beneficiary designation.
PRIMARY BENEFICIARY SECONDARY BENEFICIARY
_________________________________ __________________________________
_________________________________ __________________________________
_________________________________ __________________________________
_________________________________ __________________________________
Note: Give full name, address, social security number and
relationship of beneficiary or beneficiaries. Attach additional designations,
if necessary.
Dated this ___ day of _________, 19__.
---------------------------------------
Participant
The foregoing form was received by Ag-Bag International Limited on the
_____ day of _____________, 19__.
AG-BAG INTERNATIONAL LIMITED
By: ___________________________________
Page 1 - BENEFICIARY DESIGNATION, EXHIBIT B TO EMPLOYEE STOCK PLAN
EXHIBIT 10.4
AG-BAG INTERNATIONAL LIMITED
INCENTIVE STOCK OPTION PLAN
ARTICLE 1
---------
ESTABLISHMENT AND PURPOSE
1.1 Plan
----. This Plan, known as the Ag-Bag International Limited
Incentive Stock Option Plan, was originally implemented on January 17, 1990 and
was amended on July 13, 1991. The Plan is hereby amended a second time effective
November 1, 1996.
1.2 Purpose
-------. The purpose of the Plan is to give key employees of the
Company an opportunity to purchase common Shares of the Company pursuant to
options which qualify as "incentive stock options" under Code Section 422. The
Plan is adopted in the belief that providing key employees with a stake in the
Company's successful operation will act as an incentive to them to expand and
improve the profit position of the Company and will materially aid the Company
in obtaining and retaining key employees of outstanding ability.
ARTICLE 2
---------
DEFINITIONS
2.1 "Board of Directors" shall mean the board of directors of the
Company.
2.2 "Code" shall mean the Internal Revenue Code of 1986, as amended.
2.3 "Committee" shall mean a committee established by Article 5 to
administer the Plan.
2.4 "Company" shall mean Ag-Bag International Limited, a Delaware
corporation, and its Subsidiaries.
2.5 "Director" shall mean any person serving on the Board of Directors
of the Company.
2.6 "Employee" shall mean any person employed by the Company, either as
a Commission Sales Employee or other Employee, including all officers of the
Company who performs more than 1,500 hours of service for the Company during the
Plan Year.
2.7 "Fair Market Value" shall have the meaning set forth in Article 8.
2.8 "Key Employees" shall mean any Employee of the Company who, in the
judgment of the Board of Directors or the Committee,
PAGE 1 - INCENTIVE STOCK OPTION PLAN
<PAGE>
renders those types of services which tend to contribute materially to the
success of the Company or which may reasonably be anticipated to contribute
materially to the future success of the Company.
2.9 "Non-Employee Director" shall mean a Director who:
(1) Is not currently an officer of the
Company or a parent or subsidiary of the Company, or otherwise
currently employed by the Company or a parent or subsidiary of
the Company;
(2) Does not receive compensation, either directly or
indirectly, from the Company or a parent or subsidiary of the
Company, for services rendered as a consultant or in any
capacity other than as a Director, except for an amount that
does not exceed the dollar amount for which disclosure would
be required pursuant to Item 404(a) of Regulation S-K;
(3) Does not possess an interest in any other
transaction for which disclosure would be required pursuant to
Item 404(a) of Regulation S-K; and
(4) Is not engaged in a business relationship for
which disclosure would be required pursuant to Item 404(b) of
Regulation S-K.
2.10 "Participant" shall mean any Employee eligible to participate in
the Plan in accordance with Section 3.1.
2.11 "Plan" shall mean this Ag-Bag International Limited Incentive
Stock Option Plan.
2.12 "Plan Year" shall mean the twelve (12) month period beginning
January 1 and ending December 31.
2.13 "Shares" shall mean the Common Shares of Ag-Bag International
Limited.
2.14 "Start Date" shall mean the date the option becomes effective as
designated by the Board of Directors or the Committee.
2.15 "Subsidiary" shall mean any corporation in any unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain owns stock possessing fifty percent
(50%) or more of the
PAGE 2 - INCENTIVE STOCK OPTION PLAN
<PAGE>
total combined voting power of all classes of stock in one of the other
corporations in such chain.
ARTICLE 3
---------
SHARES SUBJECT TO THE PLAN
3.1 Aggregate Shares Available
--------------------------. Options may be granted under the Plan
to purchase an aggregate of not more than 185,000 shares of the Company,
including all options to purchase Shares previously issued under the Plan.
Shares subject to the unexercised portion of an expired option which are
surrendered or for any other reason cease to be exercisable may again be made
subject to option under the Plan.
3.2 Change in Corporate Structure
-----------------------------. If there is any change in the Shares
through merger, consolidation, reorganization, recapitalization,
reincorporation, stock dividend or other change in the corporate structure of
the Company, appropriate adjustments shall be made by the Board of Directors in
the aggregate number of shares subject to the Plan and the number of shares and
the price per share subject to outstanding options, to preserve, but not to
increase, the benefits of the optionees. If the Company is not the surviving
corporation in any merger, consolidation or reorganization, every option
outstanding under the Plan shall terminate as of the effective date of such
merger, consolidation or reorganization, unless the surviving corporation
(subject to applicable provisions of the Code) issues a new option therefor or
assumes (with appropriate changes) the existing option.
ARTICLE 4
---------
ELIGIBILITY
The Board of Directors or the Committee shall designate those Key
Employees of the Company and its Subsidiaries who shall be granted options under
the Plan.
ARTICLE 5
---------
ADMINISTRATION OF THE PLAN
5.1 Board of Directors and Committee
--------------------------------. The Plan shall be administered by
the Board of Directors. The Board of Directors may, by resolution, delegate part
or all of its administrative powers with respect to the Plan to a Committee
comprised solely of two (2) or more Non-Employee Directors.
5.2 Duties and Powers
-----------------. The Board of Directors shall have full power to
grant options, construe and interpret the Plan,
PAGE 3 - INCENTIVE STOCK OPTION PLAN
<PAGE>
prescribe, amend and rescind rules and regulations relating to the Plan and make
all other determinations necessary or advisable for administration of the Plan.
The interpretation and construction of the provisions of the Plan and related
agreements by the Board of Directors shall be final and conclusive. The Board of
Directors may correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any related agreement in the manner and to the
extent it shall deem expedient to carry the Plan into effect, and it shall be
the sole and final judge of such expediency. The Board of Directors shall
exercise its powers only in a manner consistent with the treatment of options
granted hereunder as "incentive stock options" within the meaning of Code
Section 422. If a Committee is appointed, all decisions, determinations and
interpretations of the Committee shall be by a unanimous vote of its members and
shall be binding on all optionees.
ARTICLE 6
---------
TERMS AND CONDITIONS OF OPTIONS
6.1 Written Agreement
-----------------. Each option granted pursuant to the Plan shall
be evidenced by a written agreement executed by the Company and the optionee,
which shall be in a form substantially similar to the Stock Option Plan
Agreement attached hereto and shall be consistent with the terms of the Plan.
The attached Stock Option Plan Agreement, including the terms and conditions
attached thereto, are incorporated herein by reference and made a part hereof.
6.2 Period of Grant
---------------. Any options under this Plan must be granted within
ten (10) years from the date the Plan was originally adopted (or from the date
the Plan is approved by the Shareholders, if earlier).
6.3 Period of Exercise
------------------. An option shall be exercisable only by the
optionee during the lifetime of the optionee. The Board of Directors or the
Committee shall specify a period during which the option may be exercised (the
"Option Period"), which option period shall not extend for more than ten (10)
years from the date such option is granted. If at the time such option is
granted, the optionee holds more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company, such option period shall
not extend for more than five (5) years from the date such option is granted.
6.4 Limit on Options Issued
-----------------------. The aggregate fair market value
(determined pursuant to Article 8 at the time of grant) of all options granted
during all years to any one employee which are exercisable for the first time by
the employee during any calendar year under all plans of the Company shall not
exceed $100,000.
PAGE 4 - INCENTIVE STOCK OPTION PLAN
<PAGE>
6.5 Exercise Price
--------------. The exercise price of an option shall be not less
than the fair market value of the Shares covered by such option on the date such
option is granted. However, if at the time an option is granted the optionee
holds more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company, the purchase price of such option shall be not
less than one hundred ten percent (110%) of the fair market value of the Shares
covered by such option on the date such option is granted.
6.6 Assignment
----------. Each option granted under the Plan by its terms shall
be nonassignable and nontransferable by the optionee, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution of
the state or country of the optionee's domicile at the time of death and each
option by its terms shall be exercisable during the optionee's lifetime only by
the optionee.
ARTICLE 7
---------
EXERCISE OF OPTION
7.1 Terms and Conditions
--------------------. Upon the exercise of any stock option, the
optionee shall comply with the terms and conditions of the Stock Option Plan
Agreement.
7.2 Payment Upon Exercise
---------------------. With the consent of the Board of Directors
or the Committee, an optionee may request the Company to apply automatically the
Shares to be received upon the exercise of a portion of a stock option (even
though stock certificates have not yet been issued) to satisfy the purchase
price for additional portions of the option. Each optionee who has exercised an
option shall immediately upon notification of the amount due, if any, pay to the
Company in cash amounts necessary to satisfy any applicable federal, state and
local tax withholding requirements. If additional withholding is or becomes
required beyond any amount deposited before delivery of the certificates, the
optionee shall pay such amount to the Company on demand. If the optionee fails
to pay the amount demanded, the Company may withhold that amount from other
amounts payable by the Company to the optionee, including salary, subject to
applicable law. With the consent of the Board of Directors or the Committee, an
optionee may satisfy this obligation, in whole or in part, by having the Company
withhold from the shares to be issued upon the exercise that number of shares
that would satisfy the withholding amount due or by delivering to the Company
common stock to satisfy the withholding amount. Upon the exercise of an option,
the number of Shares reserved for issuance under the Plan, shall be reduced by
the number of shares issued upon exercise of the option, less the number of
shares surrendered in payment of the option exercised or surrendered or withheld
to satisfy withholding obligations.
PAGE 5 - INCENTIVE STOCK OPTION PLAN
<PAGE>
7.3 Written Request for Exercise
----------------------------. Subject to the limitations stated in
Section 6.3, during the Option Period the Optionee may exercise the Option with
respect to all or any part of the Option Shares, by delivering the following to
the Company:
(a) A written notice in a form acceptable to the Company
specifying the number of whole Option Shares being purchased;
(b) A check payable to the order of the Company equal to the
number of Option Shares being purchased multiplied by the price per Share. Any
Shares delivered to the Company shall be free of restrictions other than
securities laws restrictions and a right of first refusal on sale or transfer in
favor of the Company;
(c) A check payable to the order of the Company equal to the
amount of any taxes the Company is required by law to withhold with respect to
such exercise; and
(d) A signed copy of Exhibit "A".
7.4 Limitations on Exercise
-----------------------. Notwithstanding any provision of this
Section or any other Section of this Agreement to the contrary, following the
end of the Option Period the option shall expire and no longer be exercisable.
The exercisability of the option during the Option Period shall be further
subject to the following limitations:
(a) If the optionee's employment with the Company terminates
within one (1) year of the Start Date, for any reason, the option shall
terminate as of the date of termination of employment.
(b) If the optionee's employment is terminated for cause, the
option shall terminate as of the date of termination of employment. The
optionee's employment shall be deemed to have been terminated for cause if the
optionee is determined by the Board of Directors to have committed an act of
embezzlement, fraud, dishonesty or deliberate disregard of the rules of the
Company which resulted in loss, damage or injury to the Company, or if the
optionee makes any unauthorized disclosure of any of the trade secrets or
confidential information of the Company, engages in any conduct which
constitutes unfair competition with the Company, or induces any customer of the
Company to break any contract with the Company.
(c) If the optionee's employment with the Company terminates
after the first anniversary of the Start Date:
(i) For any reason other than cause, disability or
death, the option may be exercised by the optionee, but only to the extent that
it was exercisable on the date of termination of employment, until the option
terminates at the end of the
PAGE 6 - INCENTIVE STOCK OPTION PLAN
<PAGE>
three (3) month period which commences with the date of termination of
employment.
(ii) Due to the optionee's permanent and total
disability [within the meaning of Code Section 105(c)], the option may be
exercised by the optionee, but only to the extent that it was exercisable on the
date of termination of employment, until the option terminates at the end of the
one (1) year period which commences with the date of termination of employment.
(iii) Due to the optionee's death, the option may be
exercised by the optionee's executor or administrator, or by the person or
persons to whom the optionee's rights under the option pass by will or by the
applicable laws of descent and distribution, but only to the extent that the
option was exercisable by the optionee at the time of the optionee's death,
until the option terminates at the end of the one (1) year period which
commences with the date of death.
(d) In the event the Company is not the surviving corporation
in any merger, consolidation or reorganization, the option shall terminate as of
the effective date of such merger, consolidation or reorganization, unless the
surviving corporation issues a substitute option or assumes the option.
ARTICLE 8
---------
FAIR MARKET VALUE
8.1 For purposes of this Agreement and the Plan, the fair market value
of the Company's Shares for a given date shall be deemed to be:
(a) The mean between the lowest and highest reported sale
prices reported on the principal stock exchange on which the Shares are then
listed or admitted to trading on such date or if no sale takes place on such
date on such principal stock exchange, then the closing asked price of the
Shares on such exchange on such date; or
(b) If the Shares are not listed or admitted to trading on a
principal stock exchange but a market for the Shares is then being made, the
mean between the lowest reported bid price and highest reported asked price for
Shares on such date as reported by any publication of general circulation
selected by the Board of Directors which regularly reports the market price of
the Shares in such market; or
(c) If the Shares are not listed or admitted to trading on a
principal stock exchange and no market for the Shares is then being made, the
latest preceding reported sales price for Shares then known to have resulted
from a purchase and sale negotiated in an arm's-length transaction, adjusted as
the
PAGE 7 - INCENTIVE STOCK OPTION PLAN
<PAGE>
Board of Directors deems appropriate for events occurring subsequent to such
sale, or if there is no such transaction, then as determined in good faith by
the Board of Directors.
ARTICLE 9
---------
USE OF PROCEEDS
Proceeds realized from the sale of Stock upon exercise of options
granted under the Plan shall constitute general funds of the Company.
ARTICLE 10
----------
ISSUANCE OF CERTIFICATES
10.1 Unless the stock is registered under the Securities Act of 1933,
all certificates representing any of the Option Shares issued pursuant to this
Plan shall have endorsed thereon the following legend, together with any other
legends required by applicable state law:
The securities represented by this certificate have been
acquired for investment and not with a view to or in connection with
the sale or distribution thereof. No sale or distribution shall be
effected without an effective registration statement related thereof or
an opinion of counsel satisfactory to the Company that such
registration is not required under the Securities Act of 1933.
ARTICLE 11
----------
SUSPENSION, AMENDMENT OR TERMINATION OF THE PLAN
11.1 Board Authority; Plan Duration
------------------------------. Except as provided in Section
11.2, the Board of Directors may suspend, terminate or amend the Plan except
with respect to options then outstanding under the Plan. Termination shall not
affect any outstanding options. No option may be granted under the Plan during
any suspension or after the termination of the Plan. The Plan shall continue in
effect until all Shares available for issuance under the Plan have been issued
and all restrictions on such Shares have lapsed.
11.2 Shareholder Approval
--------------------. No action of the Board of Directors to amend
the Plan in any of the following respects shall be effective unless authorized
at a meeting of shareholders by the vote of the holders of a majority of all
outstanding shares entitled to vote thereon:
PAGE 8 - INCENTIVE STOCK OPTION PLAN
<PAGE>
(a) To materially increase the maximum number of shares which
may be issued under the Plan or to materially modify the requirements as to
eligibility for participation in the Plan or to materially increase the benefits
accruing to Participants under the Plan; or
(b) To make any change in the Plan, the effect of which would
be to disqualify options granted under the Plan from favorable tax treatment as
"incentive stock options" under the Code.
11.3 Effect of Amendment
-------------------. No amendment, suspension or termination of
the Plan shall, without the optionee's consent, alter or impair any rights or
obligations under any option previously granted under the Plan.
ARTICLE 12
----------
MISCELLANEOUS PROVISIONS
12.1 No Contractual Relationship
---------------------------. The establishment of this Plan shall
not be construed as creating any contract of employment between the Company and
any Employee. Nothing herein contained shall give any Employee of the Company
the right to inspect the books of the Company or to interfere with the right of
the Company to discharge any Employee at any time; nor shall it give the Company
the right to require any Employee to remain in its employ; nor shall it
interfere with any Employee's right to terminate his or her employment at any
time.
12.2 Participant's Rights
--------------------. No individual shall have any rights or
interests in Shares except as expressly set forth herein.
12.3 Conflict of Laws Provisions
---------------------------. This Plan shall be governed by and
construed in accordance with the laws (excluding the law of conflict of laws) of
the State of Delaware as applied to agreements between Delaware residents
entered into and to be performed entirely within Delaware.
ARTICLE 13
----------
CLAIMS PROCEDURE
13.1 If an Employee is denied all or a portion of an expected benefit
under the terms of this Plan for any reason, the Company shall notify the
claimant within sixty (60) days of his or her submission of claim, in writing,
of allowance or denial of the claim. The notice shall be in writing, sent by
mail to the claimant's last known address and must contain the following
information:
PAGE 9 - INCENTIVE STOCK OPTION PLAN
<PAGE>
(a) The specific reasons for the denial;
(b) Specific reference to pertinent provisions of this Plan on
which the denial is based; and
(c) If applicable, a description of any additional information
or material necessary to perfect the claim, an explanation of why such
information or material is necessary and an explanation of the claims review
procedure.
13.2 Within sixty (60) days of receipt of the claimant's request for
review, the Company shall allow or deny the claim. The decision shall be made in
writing to the claimant. The decision shall recite the facts and reasons for
denial, with specific reference to the pertinent provisions of this Plan.
13.3 A claimant is entitled to request a review of any denial of his or
her claim by the Company. The request for review must be submitted in writing
within sixty (60) days of the claimant's receipt of the notice of the denial.
Absent a request for review within the 60-day period, the claim will be deemed
to be conclusively denied. The claimant or his or her representative shall be
entitled to review all pertinent documents and to submit issues and comments in
writing.
AG-BAG INTERNATIONAL LIMITED
By: ___________________________________
Larry R. Inman, President
By: ___________________________________
Lou Ann Tucker, Secretary
PAGE 10 - INCENTIVE STOCK OPTION PLAN
<PAGE>
AG-BAG INTERNATIONAL LIMITED
STOCK OPTION PURCHASE AGREEMENT
This Agreement, including the attached Terms and Conditions,
is made as of ___________________, 19____ (the "Grant Date") by and between
Ag-Bag International Limited, a Delaware corporation (the "Company") and:
--------------------------------------------
(Name) ("Optionee")
--------------------------------------------
(Address)
--------------------------------------------
--------------------------------------------
(Social Security Number)
Pursuant to the Company's Incentive Stock Option Plan, which
is incorporated herein by reference, and subject to the attached Terms and
Conditions, the Company hereby grants to the Optionee an option (the "Option")
to purchase the number of shares of Common Stock of the Company (the "Option
Shares") during the period (the "Option Period") beginning on the start date and
ending on the close of business on the expiration date stated below, as follows:
"Number of Shares" __________________________________________
"Price Per Share" __________________________________________
"Start Date" __________________________________________
"Expiration Date" __________________________________________
The Optionee hereby accepts the Option and acknowledges that
the same is subject to the attached Terms and Conditions.
Optionee AG-BAG INTERNATIONAL LIMITED
By: ___________________________________
PAGE 1 - STOCK OPTION PURCHASE AGREEMENT, EXHIBIT TO INCENTIVE STOCK OPTION PLAN
<PAGE>
AG-BAG INTERNATIONAL LIMITED
STOCK OPTION PURCHASE AGREEMENT
TERMS AND CONDITIONS
1. EXERCISE OF OPTION
------------------
Subject to the limitations stated in Section 2, during the Option
Period the Optionee may exercise the Option with respect to all or any part of
the Option Shares, by delivery of the following to the Company:
(a) A written notice in a form acceptable to the Company
specifying the number of whole Option Shares being purchased;
(b) A check payable to the order of the Company equal to the
number of Option Shares being purchased multiplied by the price per Share. Any
shares delivered to the Company shall be free of restrictions other than
securities laws restrictions and a right of first refusal on sale or transfer in
favor of the Company;
(c) A check payable to the order of the Company equal to the
amount of any taxes the Company is required by law to withhold with respect to
such exercise; and
(d) A signed copy of Exhibit A.
2. LIMITATIONS ON EXERCISE
-----------------------
Notwithstanding any provision of this Section or any other Section of
this Agreement to the contrary, following the end of the Option Period the
Option shall expire and no longer be exercisable. The exercisability of the
Option during the Option Period shall be further subject to the following
limitations:
(a) If the Optionee's employment with the Company terminates
within one (1) year of the Start Date, for any reason, the Option shall
terminate as of the date of termination of employment.
(b) If the Optionee's employment is terminated for cause, the
Option shall terminate as of the date of termination of employment. The
Optionee's employment shall be deemed to have been terminated for cause if the
Optionee is determined by the Board of Directors to have committed an act of
embezzlement, fraud, dishonesty or deliberate disregard of the rules of the
Company which resulted in loss, damage or injury to the Company, or if the
Optionee makes any unauthorized disclosure of any of the trade secrets or
confidential information of the Company, engages in any conduct which
constitutes unfair competition with
PAGE 1 - TERMS AND CONDITIONS OF STOCK OPTION PURCHASE AGREEMENT EXHIBIT TO
INCENTIVE STOCK OPTION PLAN
<PAGE>
the Company, or induces any customer of the Company to break any contract with
the Company.
(c) If the Optionee's employment with the Company terminates
after the first anniversary of the Start Date:
(i) For any reason other than cause, disability or
death, the Option may be exercised by the Optionee, but only to the extent that
it was exercisable on the date of termination of employment, until the Option
terminates at the end of the three (3) month period which commences with the
date of termination of employment.
(ii) Due to the Optionee's permanent and total
disability (within the meaning of Section 105(c) of the Internal Revenue Code of
1986, as amended), the Option may be exercised by the Optionee, but only to the
extent that it was exercisable on the date of termination of employment, until
the Option terminates at the end of the one (1) year period which commences with
the date of termination of employment.
(iii) Due to the Optionee's death, the Option may be
exercised by the Optionee's executor or administrator, or by the person or
persons to whom the Optionee's rights under the Option pass by will or by the
applicable laws of descent and distribution, but only to the extent that the
Option was exercisable by the Optionee at the time of the Optionee's death,
until the Option terminates at the end of the one (1) year period which
commences with the date of death.
(d) In the event the Company is not the surviving corporation
in any merger, consolidation or reorganization, the Option shall terminate as of
the effective date of such merger, consolidation or reorganization, unless the
surviving corporation issues a substitute option or assumes the Option.
3. FAIR MARKET VALUE
-----------------
For purposes of this Agreement and the Plan, the fair market value of
the Company's shares for a given date shall be deemed to be:
(a) The mean between the lowest and highest reported sale
prices reported on the principal stock exchange on which the Shares are then
listed or admitted to trading on such date or if no sale takes place on such
date on such principal stock exchange, then the closing asked price of the
Shares on such exchange on such date; or
(b) If the Shares are not listed or admitted to trading on a
principal stock exchange but a market for the Shares is then being made, the
mean between the lowest reported bid price and highest reported asked price for
Shares on such date as reported by any publication of general circulation
selected by
PAGE 2 - TERMS AND CONDITIONS OF STOCK OPTION PURCHASE AGREEMENT EXHIBIT TO
INCENTIVE STOCK OPTION PLAN
<PAGE>
the Company which regularly reports the market price of the Shares in such
market; or
(c) If the Shares are not listed or admitted to trading on a
principal stock exchange and no market for the Shares is then being made, the
latest preceding reported sales price for Shares then known to have resulted
from a purchase and sale negotiated in an arm's-length transaction, adjusted as
the Board of Directors deems appropriate for events occurring subsequent to such
sale, or if there is no such transaction, then as determined in good faith by
the Board of Directors.
4. CHANGES TO OUTSTANDING SECURITIES
---------------------------------
If there is any conversion or stock split of or stock dividend relative
to the Shares, or any merger, consolidation or reorganization of the Company,
then any and all new, substituted or additional securities to which Optionee is
entitled by reason of Optionee's ownership of the Option Shares shall be
adjusted appropriately.
5. LEGENDS
-------
Unless the stock is registered under the Securities Act of 1933, all
certificates representing any of the Option Shares shall have endorsed thereon
the following legend, together with any other legends required by applicable
state law:
The securities represented by this certificate have been
acquired for investment and not with a view to or in connection with
the sale or distribution thereof. No sale or distribution shall be
effected without an effective registration statement related thereto or
an opinion of counsel satisfactory to the Company that such
registration is not required under the Securities Act of 1933.
6. EMPLOYMENT
----------
This Agreement is not an employment contract. Nothing in this Agreement
shall affect in any manner whatsoever the right or power of the Company to
terminate the Optionee's employment for any reason.
7. SHAREHOLDER'S RIGHTS
--------------------
Neither the Optionee nor any person entitled to exercise the Optionee's
rights in the event of the Optionee's death shall have any of the rights of a
shareholder with respect to the Option Shares except to the extent the
certificates for such shares have been issued upon the exercise of the Option.
PAGE 3 - TERMS AND CONDITIONS OF STOCK OPTION PURCHASE AGREEMENT EXHIBIT TO
INCENTIVE STOCK OPTION PLAN
<PAGE>
8. PARENTS AND SUBSIDIARIES
------------------------
For purposes of this Agreement, employment with the Company shall
include employment with the parent and any subsidiary of the Company.
9. FURTHER INSTRUMENTS
-------------------
The parties agree to execute such further instruments and to take such
further actions as reasonably may be required to carry out the intent of this
Agreement.
10. NOTICES
-------
Any notice required or permitted under this Agreement shall be in
writing and shall be sent by registered or certified mail, postage prepaid and
return receipt requested, addressed to the Company at its principal place of
business and to the Optionee at the address shown in this Agreement or at any
other address the Optionee indicates by notice to the Company.
11. ASSIGNABILITY
-------------
The options represented by and this agreement itself shall be
non-assignable and non-transferable by that optionee, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution of
the state or country of the optionee's domicile at the time of death. This
Agreement shall be binding upon and inure to the benefit of the successors and
assigns of the Company and shall be binding upon and inure to the benefit of the
Optionee and the Optionee's heirs, executors, administrators, successors and
assigns. (To the extent an Assignment is not void.)
12. ENTIRE AGREEMENT
----------------
This Agreement, including the Plan and the Exhibits, constitutes the
entire agreement of the parties with respect to the subject matter hereof. In
the event of a conflict between the Plan and this Agreement, the Plan shall
prevail.
13. AMENDMENTS
----------
No representation or promise relating to and no amendment of this
Agreement shall be binding unless in writing and signed by all of the parties.
14. GOVERNING LAW
-------------
This Agreement shall be governed by and construed in accordance with
the laws (excluding the law of conflict of laws) of the State of Delaware as
applied to agreements between Delaware residents entered into and to be
performed entirely within Delaware.
PAGE 4 - TERMS AND CONDITIONS OF STOCK OPTION PURCHASE AGREEMENT EXHIBIT TO
INCENTIVE STOCK OPTION PLAN
<PAGE>
EXHIBIT "A"
Ag-Bag International Limited
2320 SE Ag-Bag Lane
Warrenton, Oregon 97146
Gentlemen:
In connection with the exercise of my Option to purchase Option Shares,
as those terms are defined in the Terms and Conditions to which this letter is
an exhibit, between Ag-Bag International Limited, a Delaware corporation (the
"Company") and me, I hereby agree, represent and warrant as follows:
1. Purchase Entirely for Own Account
---------------------------------. I am purchasing the Option Shares
solely for my own account for investment and not with a view to or for sale or
distribution of the Option Shares or any portion thereof and not with any
present intention of selling, offering to sell, or otherwise disposing of or
distributing the Option Shares or any portion thereof.
2. Information Concerning Company
------------------------------. I have had the opportunity to
discuss the Company and its plans, operations and financial condition with its
officers, and I have received all information which I deem necessary and
appropriate to enable me or my professional advisor to evaluate the financial
risk inherent in making an investment in the Option Shares.
3. Economic Risk
-------------. I realize that my purchase of the Option Shares will
be a speculative investment, and I am able, without impairing my financial
condition, to hold the Option Shares for an indefinite period of time or to
suffer a complete loss on my investment.
4. Restricted Securities
---------------------. The Company has hereby disclosed to me in
writing that:
(a) The sale of the Option Shares has not been registered
under the Securities Act of 1933, as amended (the "Act"), and the Option Shares
must be held indefinitely unless a transfer of the Option Shares is subsequently
registered under the Act or an exemption from such registration is available;
(b) Any share certificates representing the option Shares will
be endorsed with the legends restricting transfer specified in the Stock Option
and Purchase Agreement; and
(c) The Company will make a notation in its records of the
restrictions on transfer.
5. Disposition Under Rule 144
--------------------------. I understand that the Option Shares are
restricted securities within the meaning of Rule 144 promulgated under the Act;
that the exemption from
PAGE 1 - EXHIBIT "A" TO INCENTIVE STOCK OPTION PLAN
<PAGE>
registration provided by Rule 144 will not be available in any event for at
least two years from the date of sale of the Option Shares to me, and even then
will not be available unless adequate information concerning the Company is then
available to the public and other terms and conditions of Rule 144 are complied
with; and that any sale of the Option Shares may be made by me only in
accordance with such terms and conditions.
Without in any way limiting my representations set forth
above, I further agree that I will in no event make any disposition of all or
any portion of the Option Shares unless and until:
(a) There is then in effect a registration statement under the
Act and any applicable state securities laws covering such proposed disposition
and such disposition is made in accordance with such registration statement; or
(b) (i) I have notified the Company of the proposed
disposition and have furnished the Company with a detailed statement of the
circumstances surrounding the proposed disposition; (ii) I have furnished the
Company with an opinion of my own counsel to the effect that such disposition
will not require registration of such shares under the Act and any applicable
state securities laws; and (iii) such opinion of my counsel has been concurred
in by counsel for the Company and the Company has advised me of such
concurrence.
DATED this _____ day of _______________, 19_____.
Very truly yours,
---------------------------------------
PAGE 2 - EXHIBIT "A" TO INCENTIVE STOCK OPTION PLAN
EXHIBIT 10.5
AG-BAG INTERNATIONAL LIMITED
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
1. Purpose
-------
The purpose of the Ag-Bag International Limited Nonemployee Director Stock
Option Plan (the "Plan") is to secure for Ag-Bag International Limited (the
"Company") and its stockholders the benefits of the long-term incentives
inherent in increased common stock ownership by the members of the Board of
Directors (the "Board") of the Company who are not employees of the Company or
its Affiliates, by strengthening the identification of Nonemployee Directors
with the interests of all Ag-Bag International Limited stockholders.
2. Definitions
-----------
The terms defined in this Section 2 shall have the following meanings, unless
the context otherwise requires.
a. Acceleration Event
------------------ shall mean an event specified in Section 11 which
results in each Option then outstanding under the Plan becoming exercisable in
accordance with the terms of Section 11.
b. Affiliate
--------- shall mean any corporation, partnership, joint venture or
other entity in which the Company holds an equity, profit or voting interest of
more than fifty percent (50%).
c. Annual Meeting
-------------- of Stockholders shall mean the annual meeting of
stockholders of the Company held each calendar year.
d. Code
---- shall mean the Internal Revenue Code of 1986, as amended to
date and as it may be amended from time to time.
e. Company
------- shall mean Ag-Bag International Limited, a Delaware
corporation.
f. Effective Date
-------------- shall mean the date specified in Section 14.
g. Employee
-------- shall mean an employee of the Company or an Affiliate and
shall not include a person engaged for periodic consulting assignments for the
Company or an Affiliate.
h. ERISA
----- shall mean the Employee Retirement Income Security Act of
1974, as amended to date and as it may be amended from time to time.
i. Exercise Price
-------------- shall mean the Fair Market Value per share of the
Option Shares on the date an Option is granted times the number of Option Shares
with respect to which such Option is exercised.
Page 1 - AG-BAG INTERNATIONAL LIMITED NONEMPLOYEE
DIRECTOR STOCK OPTION PLAN
<PAGE>
j. Fair Market Value per Share
--------------------------- shall mean as of any day
(1) The fair market value of a share of the Company's common
stock is the last sale price reported by Nasdaq on the business day immediately
preceding the date as of which fair market value is being determined or, if
there were no sales of shares of the Company's common stock reported by Nasdaq
on such day, on the most recently preceding day on which there were sales, or
(2) if the shares of the Company's stock are not listed or
admitted to trading on Nasdaq on the day as of which the determination is made,
the amount determined by the Board or its delegate to be the fair market value
of a share on such day.
k. Nonemployee Director
-------------------- shall mean a member of the Board of Directors
of the Company who is not also an officer or other employee of the Company or an
Affiliate.
l. Nonstatutory Stock Option ("NSO")
--------------------------------- shall mean a stock option, which
does not qualify for special tax treatment under Sections 421 or 422 of the
Internal Revenue Code.
m. Option
------ shall mean either a First Option or an Annual Option granted
pursuant to the provisions of Section 4 of this Plan.
n. Option Shares
------------- shall mean the number of shares of the Company's
common stock which the Participant may acquire by exercise of an Option.
o. Participant
----------- shall mean any person who holds an Option granted under
this Plan.
p. Plan
---- shall mean this Ag-Bag International Limited Nonemployee
Director Stock Option Plan.
q. Withholding Taxes
----------------- shall mean all income taxes, FICA, FUTA, or
similar employment taxes and any other taxes or assessments payable by the
Company as the result of an exercise of the Option.
3. Administration
--------------
a. The Plan shall be administered by the Board. The Board may, by
resolution, delegate part or all of its administrative powers with respect to
the Plan.
Page 2 - AG-BAG INTERNATIONAL LIMITED NONEMPLOYEE
DIRECTOR STOCK OPTION PLAN
<PAGE>
b. The Board shall have all of the powers vested in it by the terms of
the Plan, such powers to include the authority, within the limits prescribed
herein, to establish the form of the agreement embodying grants of Options made
under the Plan.
c. The Board shall, subject to the provisions of the Plan, have the
power to construe the Plan, to determine all questions arising thereunder and to
adopt and amend such rules and regulations for the administration of the Plan as
it may deem desirable, such administrative decisions of the Board to be final
and conclusive.
d. The Board shall have no discretion to select the Nonemployee
Directors to receive Option grants under the Plan, to determine the number of
shares of the Company's common stock subject to the Plan or to each grant, nor
the exercise price of the Options granted pursuant to the Plan.
e. The Board may authorize any one or more of their number or the
Secretary or any other officer of the Company to execute and deliver documents
on behalf of the Board. The Board hereby authorizes the Secretary to execute and
deliver all documents to be delivered by the Board pursuant to the Plan.
f. Except as otherwise provided herein, the expenses of the Plan shall
be borne by the Company.
4. Automatic Grants to Nonemployee Directors
-----------------------------------------
a. As of the date of adoption of this Plan by the Board of Directors of
the Company, each Nonemployee Director shall be granted an option to purchase
Fifty Thousand (50,000) shares of the Company's common stock under the Plan (the
"First Option"). Thereafter, at the close of business at each Annual Meeting of
Stockholders beginning with the 3rd Annual Meeting of Stockholders following the
grant of the First Option, each Nonemployee Director of the Board who has served
as a Director for at least 3 years, shall be granted an additional option to
purchase Ten Thousand (10,000) shares of the Company's common stock under the
Plan (the "Annual Option"); provided, however, that a Nonemployee Director who
has not previously been elected as a member of the Board of Directors of the
Company shall be granted a First Option; i.e., an option to purchase Fifty
Thousand (50,000) shares of the Company's common stock under the Plan, on the
first business day of the Nonemployee Director's election to the Board,
including election by the Board of Directors to fill an opening on the Board,
whether such opening is the result of a vacancy or an increase in the number of
directors.
b. The automatic grants to Nonemployee Directors shall not be subject
to the discretion of any person.
Page 3 - AG-BAG INTERNATIONAL LIMITED NONEMPLOYEE
DIRECTOR STOCK OPTION PLAN
<PAGE>
c. Each Option granted under the Plan shall be evidenced by a written
Agreement. Each Agreement shall be subject to, and incorporate, by reference or
otherwise, the applicable terms of this Plan.
d. During the lifetime of a Participant, each Option shall be
exercisable only by the Participant. No Option granted under the Plan shall be
assignable or transferable by the Participant, except by will or by the laws of
descent and distribution or pursuant to a qualified domestic relations order (as
defined by the Code or ERISA).
5. Shares of Stock Subject to the Plan
-----------------------------------
a. Subject to adjustment as provided in Section 13 of the Plan, an
aggregate of One Million (1,000,000) shares of the Company's common stock shall
be available for issuance to Nonemployee Directors under the Plan. No fractional
shares shall be issued.
b. First Option Grants and Annual Option Grants shall reduce the shares
available for issuance under the Plan by the number of shares subject thereto.
The shares deliverable upon exercise of any First Option Grant or Annual Option
Grant may be made available from authorized but unissued shares or shares
reacquired by the Company, including shares purchased in the open market or in
private transactions. If any unexercised First Option Grant or Annual Option
Grant shall terminate for any reason, the shares subject to, but not delivered
under, such First Option Grant or Annual Option Grant shall be available for
other First Option Grants or Annual Option Grants.
6. Nonstatutory Options
--------------------
All Options granted to Nonemployee Directors pursuant to the Plan shall
be NSOs.
7. Exercise Price; Exercise
------------------------
a. The price per share of the shares of the Company's common stock
which may be purchased upon exercise of an Option shall be one hundred percent
(100%) of the Fair Market Value per Share on the date the Option is granted and
shall be paid in full at the time the Option is exercised in accordance with
Section 9.
b. The Exercise Price per Share shall be subject to adjustment as
provided in Section 13 hereof.
c. To the extent that it is exercisable, an Option shall be exercised
by written notice to the Company stating the number of shares with respect to
which the Option is being exercised. The date that the written notice is
received by the Company shall be the exercise date.
d. Any person or persons exercising an Option on behalf of a
Participant shall be required to furnish to the Company appropriate
documentation that such person or persons
Page 4 - AG-BAG INTERNATIONAL LIMITED NONEMPLOYEE
DIRECTOR STOCK OPTION PLAN
<PAGE>
have the full legal right and power to exercise the Option on behalf of and for
the Participant.
8. Taxes
-----
Any Option granted hereunder shall provide for payment by the Participant on
exercise of all federal, state, local or other Withholding Taxes payable by the
Company incident to exercise of an Option. The amount of such taxes, if any,
required to be paid by the Company shall be determined by the Company and shall
apply such flat percentage rate as may then be authorized for supplemental
payments.
9. Payment by Participant
----------------------
Payment by the Participant of the Exercise Price and any Withholding Taxes
required to be withheld on his behalf incident to exercise of the Option shall
at the election of the Participant be in cash, common stock of the Company or by
cancellation of that maximum whole number of Option Shares having a Fair Market
Value on the date the Option is exercised equal to the sum of (a) the Exercise
Price for (i) the shares purchased by the Participant's exercise of the Option
and (ii) the number of Option Shares cancelled in accordance with this Section 9
incident to such exercise of the Option, and (b) any Withholding Taxes payable
by the Company incident to the exercise. The remainder of (1) the Exercise Price
for the shares purchased by exercise of the Option and for the Option Shares
cancelled and (2) any Withholding Taxes payable by the Company shall be paid by
the Participant to the Company in cash at the time the Option is exercised.
The cancellation of the Option Shares in accordance with this Section 9 shall be
treated for all purposes by the Company and the Participant as the purchase of
the cancelled shares by exercise of the Option, the simultaneous redemption of
such shares by the Company for a price equal to the Fair Market Value per Share
on the date the Option is exercised, and the simultaneous payment of the
redemption proceeds by the Participant to the Company in satisfaction (i) of the
Exercise Price for the Option Shares exercised and the number of Option Shares
cancelled, and (ii) of the Participant's obligation to pay all Withholding Taxes
resulting from exercise of the Option.
10. Duration and Vesting of Options
-------------------------------
a. The term of each Option granted to a Nonemployee Director shall be
for ten (10) years from the date of grant, unless terminated earlier pursuant to
the provisions of Section 12 hereof.
b. Each Option shall vest and become exercisable according to the
following schedule:
(1) forty percent (40%) of the total number of shares of the
First Option shall become exercisable beginning six (6) months after the date of
grant of the Option;
Page 5 - AG-BAG INTERNATIONAL LIMITED NONEMPLOYEE
DIRECTOR STOCK OPTION PLAN
<PAGE>
(2) forty percent (40%) of the total number of shares covered
by the First Option shall become exercisable beginning with the second
anniversary date of the grant of the Option;
(3) thereafter twenty percent (20%) of the total number of
shares covered by the First Option shall become exercisable on the third
anniversary date of the grant of the First Option; and
(4) one hundred percent (100%) of each Annual Option shall
become exercisable beginning six (6) months after the date of grant of the
Option.
11. Acceleration of Options
-----------------------
a. In the event that the Company or its stockholders enter into one or
more agreements to dispose of all or substantially all of the assets of the
Company or fifty percent (50%) or more of the outstanding capital stock of the
Company by means of sale (whether as a result of a tender offer or otherwise),
merger, reorganization or liquidation in one or a series of related transactions
("Acceleration Event"), then each Option outstanding under the Plan shall become
exercisable during the fifteen (15) days immediately prior to the scheduled
consummation of the Acceleration Event with respect to the full number of shares
for which such Option has been granted; provided, however, that no such
Acceleration Event shall occur in the event that (i) the primary purpose of the
transaction is to change the Company's domicile solely within the United States,
(ii) the terms of the agreement(s) require as a prerequisite for the
consummation of the transaction that each such Option shall either be assumed by
the successor corporation or parent thereof or be replaced with a comparable
Option to purchase shares of capital stock of the successor corporation or
parent thereof, or (iii) the transaction is approved by a majority of the
members of the Board of Directors of the Company who had either been in office
for more than twelve months prior to such transaction or had been elected, or
nominated for election by the Company's stockholders, by the vote of
three-fourths of the directors then still in office who were directors at the
beginning of such twelve-month period; and provided further that any such
exercise of an Option during such fifteen (15) day period shall be conditioned
upon the consummation of such transaction and shall be effective only
immediately before such consummation, except to the extent that an electing
Participant may indicate, in writing, that such exercise is unconditional with
regard to all or part of the unaccelerated portion of the Option. Upon
consummation of the Acceleration Event contemplated by said agreement, all
outstanding Options, whether or not accelerated, shall expire and cease to be
exercisable, unless assumed by the successor corporation or parent thereof. The
provisions of this subsection a. shall be subject, with respect to any
particular Participant, to any provisions of such Participant's employment
agreement providing for any Options becoming exercisable at an earlier date as a
result of events set forth in such employment agreement.
b. The grant of Options under the Plan shall in no way affect the right
of the Company to adjust, reclassify, reorganize or otherwise change its capital
or business
Page 6 - AG-BAG INTERNATIONAL LIMITED NONEMPLOYEE
DIRECTOR STOCK OPTION PLAN
<PAGE>
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.
12. Effect of Termination of Membership on the Board
------------------------------------------------
a. The right to exercise an Option granted to a Nonemployee Director
shall be limited as follows, provided the actual date of exercise is in no event
after the expiration of the term of the Option:
(1) If a Nonemployee Director ceases being a director of the
Company for any reason other than the reasons identified in subparagraph (2) of
this Section 12, the Nonemployee Director shall have the right to exercise the
Options as follows, subject to the condition that no Option shall be exercisable
after the expiration of the term of the Option:
(a) If the Nonemployee Director was a member of the
Board of Directors of the Company for three (3) or more years, all outstanding
Options become immediately exercisable upon the date the Nonemployee Director
ceases being a director. The Nonemployee Director may exercise the Options for a
period of twelve months (12) from the date the Nonemployee Director ceased being
a director, provided that if the Nonemployee Director dies before the twelve
(12) month period has expired, the Options may be exercised by the Nonemployee
Director's legal representative or any person who acquires the right to exercise
an Option by reason of the Nonemployee Director's death for a period of six (6)
months from the date of the Nonemployee Director's death.
(b) If the Nonemployee Director was a member of the
Board of Directors of the Company for less than three (3) years, the Nonemployee
Director may exercise the Options, to the extent they were exercisable at the
date the Nonemployee Director ceases being a member of the Board, for a period
of sixty (60) days following the date the Nonemployee Director ceased being a
director, provided that, if the Nonemployee Director dies before the sixty (60)
day period has expired, the Options may be exercised by the Nonemployee
Director's legal representative, or any person who acquires the right to
exercise an Option by reason of the Nonemployee Director's death, for a period
of six (6) months from the date of the Nonemployee Director's death.
(c) If the Nonemployee Director dies while a member
of the Board, the Options, to the extent exercisable by the Nonemployee Director
at the date of death, may be exercised by the Nonemployee Director's legal
representative, or any person who acquires the right to exercise an Option by
reason of the Nonemployee Director's death, for a period of six (6) months from
the date of the Nonemployee Director's death.
(d) In the event any Option is exercised by the
executors, administrators, legatees, or distributees of the estate of a deceased
optionee, the Company shall be under no obligation to issue stock thereunder
unless and until the Company is satisfied that the person or persons exercising
the Option are the duly appointed legal representatives of the deceased
optionee's estate or the proper legatees or distributees thereof.
Page 7 - AG-BAG INTERNATIONAL LIMITED NONEMPLOYEE
DIRECTOR STOCK OPTION PLAN
<PAGE>
(2) If a Nonemployee Director ceases being a director of the
Company due to an act of
(a) fraud or intentional misrepresentation or
(b) embezzlement, misappropriation or conversion of
assets or opportunities of the Company or any Affiliate of the Company or
(c) any other gross or willful misconduct
as determined by the Board, in its sole and conclusive discretion, all Options
granted to such Nonemployee Director shall immediately be forfeited as of the
date of the misconduct.
13. Adjustments and Changes in the Stock
------------------------------------
a. If there is any change in the common stock of the Company by reason
of any stock dividend, stock split, spin-off, split-up, merger, consolidation,
recapitalization, reclassification, combination or exchange of shares, or any
other similar corporate event, the aggregate number of shares available under
the Plan, and the number and the price of shares of common stock subject to
outstanding Options shall be appropriately adjusted automatically.
b. No right to purchase fractional shares shall result from any
adjustment in Options pursuant to this Section 13. In case of any such
adjustment, the shares subject to the Option shall be rounded down to the
nearest whole share.
c. Notice of any adjustment shall be given by the Company to each
Participant which shall have been so adjusted and such adjustment (whether or
not such notice is given) shall be effective and binding for all purposes of the
Plan.
14. Effective Date of the Plan
--------------------------
a. The Plan shall become effective on the date it is approved by the
Board of Directors of the Company.
b. Any amendment to the Plan shall become effective when adopted by the
Board of Directors unless specified otherwise, but no Option granted under any
increase in shares authorized to be issued under this Plan shall be exercisable
until the increase is approved in the manner prescribed in Section 15 of this
Plan.
15. Amendment of the Plan
---------------------
a. It is intended that the Plan meet the requirements of Rule 16b-3 or
any successor thereto promulgated by the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended.
Page 8 - AG-BAG INTERNATIONAL LIMITED NONEMPLOYEE
DIRECTOR STOCK OPTION PLAN
<PAGE>
b. Rights and obligations under any Option granted before any amendment
of this Plan shall not be materially and adversely affected by amendment of the
Plan, except with the consent of the person who holds the Option, which consent
may be obtained in any manner that the Board or its delegate deems appropriate.
16. Termination of the Plan
-----------------------
a. The Plan, unless sooner terminated, shall terminate at the end of
ten (10) years from the Effective Date. No Option may be granted under the Plan
while the Plan is suspended or after it is terminated.
b. Rights or obligations under any Option granted while the Plan is in
effect, including the maximum duration and vesting provisions, shall not be
altered or impaired by suspension or termination of the Plan, except with the
consent of the person who holds the Option, which consent may be obtained in any
manner that the Board or its delegate deems a appropriate.
17. Registration, Listing, Qualification, Approval of Stock and Options
-------------------------------------------------------------------
a. If the Board shall determine, in its discretion, that it is
necessary or desirable that the shares of common stock subject to any Option
(1) be registered, listed or qualified on any securities
exchange or Nasdaq or under any a applicable law, or
(2) be approved by any governmental regulatory body, or
(3) be approved by the stockholders of the Company, as a
condition of, or in connection with, the granting of such Option, or the
issuance or purchase of shares upon exercise of the Option, the Option may not
be exercised in whole or in part unless such registration, listing,
qualification or approval has been obtained free of any condition not acceptable
to the Board of Directors.
18. Nontransferability of Options
-----------------------------
No Option granted under this Plan may be sold, transferred, pledged, assigned or
otherwise alienated or hypotheticated, other than by will or by the laws of
descent and distribution or pursuant to a qualified domestic relations order (as
defined by the Code or ERISA). Further, all Options granted to a Participant
under this Plan shall be exercisable during his or her lifetime only by such
Participant.
19. No Right to Option or as Stockholder
------------------------------------
a. No Nonemployee Director or other person shall have any claim or
right to be granted an Option under the Plan, except as expressly provided
herein. Neither the Plan nor
Page 9 - AG-BAG INTERNATIONAL LIMITED NONEMPLOYEE
DIRECTOR STOCK OPTION PLAN
<PAGE>
any action taken hereunder shall be construed as giving any Nonemployee Director
any right to be retained in the service of the Company.
b. Neither a Nonemployee Director, the Nonemployee Director's legal
representative, nor any person who acquires the right to exercise an Option by
reason of the Nonemployee Director's death shall be, or have any of the rights
or privileges of, a stockholder of the Company in respect of any shares of
common stock receivable upon the exercise of any Option granted under this Plan,
in whole or in part, unless and until certificates for such shares shall have
been issued.
20. Governing Law
-------------
The validity, construction, interpretation, administration and effect of this
Plan and any rules, regulations and actions relating to this Plan will be
governed by and construed exclusively in accordance with the laws of the State
of Delaware.
Page 10 - AG-BAG INTERNATIONAL LIMITED NONEMPLOYEE
DIRECTOR STOCK OPTION PLAN
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Primary earnings per share:
Net income (loss) $ (3,324,288) $ 847,887 $ 533,427 $ 107,193 $ 363,458
Preferred stock dividends (59,160) (59,160) (59,160) (59,160) (59,160)
Debenture interest 42,944
------------- ------------- ------------- ------------- -------------
(3,383,448) 788,727 517,211 48,033 304,298
============== ============= ============= ============= =============
Primary weighted average number
of common and common stock
outstanding 8,426,853(1) 10,581,092(1) 11,644,785(1) 12,062,019(1) 12,095,751(1)
============= ============= ============= ============= =============
Primary earnings per share
Income (loss) before
extraordinary item $ (.40) $ .06 $ .04 $ .01 $ .03
Extraordinary item .01
------------- ------------ ------------ ------------ -------------
$ (.40) $ .07 $ .04 $ .01 $ .03
Fully diluted earnings per share:
Net income (loss) $ (3,324,288) $ 847,887 $ 533,427 $ 107,193 $ 363,458
Preferred stock dividends (59,160) (59,160) (59,160) (59,160) (59,160)
Debenture interest 42,944
------------- ------------ ------------ ------------ -------------
(3,383,488) 788,727 517,211 48,033 304,298
============== ============ ============ ============ =============
Fully diluted weighted average
number of common and common
stock equivalent shares
outstanding 8,426,853(1) 10,581,092(1) 11,644,785(1) 12,062,019(1) 12,095,751(1)
============= ============ ============ ============ =============
Fully diluted earnings per share
Income (loss) before
extraordinary item $ (.40) $ .06 $ .04 $ .01 $ .03
Extraordinary item .01
------------- ------------ ------------ ----------- -------------
$ (.40) $ .07 $ .04 $ .01 $ .03
============= ============ ============ =========== =============
<FN>
<F1> See Note 1 to the consolidated financial statements.
</FN>
</TABLE>
EXHIBIT 12
STATEMENT RE COMPUTATION OF RATIOS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Pretax earnings (losses) $ (4,479,733) $ 876,982(1) $ 962,344 $ 393,593 $ 620,759
Interest expense 985,000 607,012 465,743 414,145 419,632
------------- ------------- ------------- ------------ ------------
Subtotal (A) (3,494,733) 1,483,944 1,428,087 807,738 1,040,391
-------------- ------------- ------------- ------------ ------------
Interest expense 985,000 607,012 465,743 414,145 419,632
Preferred stock dividend
requirements 79,945 76,830 107,564 219,111 100,271
------------- ------------- ------------- ------------ ------------
Subtotal (B) $ 1,064,945 $ 683,842 $ 573,307 $ 633,256 $ 519,903
------------- ------------- ------------- ------------ ------------
(A) divided by (B) (3.28)(2) 2.17 2.49 1.28 2.00
========= ===== ==== ==== ====
<FN>
<F1> Before extraordinary item.
<F2> Due to reorganization.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S REPORT ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 656
<RECEIVABLES> 3,385,939
<ALLOWANCES> 248,824
<INVENTORY> 6,636,993
<CURRENT-ASSETS> 8,745,689
<PP&E> 9,163,860
<DEPRECIATION> 4,315,784
<TOTAL-ASSETS> 16,903,122
<CURRENT-LIABILITIES> 2,656,102
<BONDS> 0
0
696,000
<COMMON> 120,537
<OTHER-SE> 11,369,860
<TOTAL-LIABILITY-AND-EQUITY> 16,903,122
<SALES> 24,548,765
<TOTAL-REVENUES> 25,195,402
<CGS> 18,940,947
<TOTAL-COSTS> 24,155,011
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 419,632
<INCOME-PRETAX> 620,759
<INCOME-TAX> 257,301
<INCOME-CONTINUING> 363,458
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 363,458
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
