- - --------------------------------------------------------------------------------
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, 1998 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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) 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. /X/
Based on the closing sales price of the Common Stock on March 8, 1999, the
aggregate market value of the voting stock of registrant held by non-affiliates
was $ 3,192,586.
The registrant has one class of Common Stock with 12,061,991 shares
outstanding as of March 8, 1999.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the proxy statement for the Registrant's Annual Meeting of
Stockholders to be held June 7, 1999, are incorporated into Part III of this
report.
================================================================================
<PAGE>
AG-BAG INTERNATIONAL LIMITED
TABLE OF CONTENTS
PAGE
PART I ............................................................1
Item 1. Business....................................................1
Item 2. Properties..................................................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....................................14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................16
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk.............................................23
Item 8. Financial Statements and Supplemental Data.................23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.....................23
PART III ...........................................................23
Items 10. and 11. Directors and Executive Officers of
Registrant and Executive Compensation...................23
Item 12. Security Ownership of Certain Beneficial Owners
and Management..........................................24
Item 13. Certain Relationships and Related Transactions.............24
PART IV ...........................................................25
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.....................................25
i
<PAGE>
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 500 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 following table identifies the revenue from each product line that
accounted for more than 15% of total revenue over the last three years:
<TABLE>
<CAPTION>
(in thousands)
Product 1996 1997 1998
--------- ---- ---- ----
<S> <C> <C> <C>
Bags $13,294 $12,355 $14,439
Machines $ 8,199 $ 6,236 $10,433
Other $ 1,492 $ 1,702 $ 2,838
------- ------- -------
Net Sales $22,985 $20,293 $27,710
</TABLE>
The Company expects the use of bagging as a means of silage storage to
continue to play a major role in the future 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 offered a
custom bagging service on a fee per metric tonne basis in the United Kingdom. In
1997, the Company's Board of Directors approved a strategic realignment of the
Company. The realignment involved the sale of the Company's United Kingdom
subsidiary which had not been performing at a profitable level due to the
continued escalation of the BSE (Mad Cow) problem within the British farming
industry.
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,
Western and Central Europe and Puerto Rico.
1
<PAGE>
The Company is developing other uses for its bagging technology. In 1993,
it established an environmental division focused on composting technologies and
a grain bagging division. In late 1997, the Company dissolved its grain bagging
division and moved that product line back into its silage business. The Company
has adapted its bagging machines to permit bagging of compostable organic matter
in the Company's recyclable Tri-Dura-REGISTERED TRADEMARK- plastic bags. 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.
SEASONAL NATURE OF BUSINESS
- - ---------------------------
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.
Approximately 95% of the Company's business is concentrated in the Northern
Hemisphere resulting in between 66-75% of the Company's revenue being generated
during the spring and summer (2nd and 3rd Quarters). The following table
outlines the percentage of revenue over the past three years by quarter:
<TABLE>
<CAPTION>
Quarter 1996 1997* 1998
------- ---- ---- ----
<S> <C> <C> <C>
1st 17% 14% 17%
2nd 30% 40% 35%
3rd 36% 35% 35%
4th 17% 11% 13%
* In addition to seasonal factors, revenues which normally would have occurred
in the first quarter of 1997 were not earned until the second quarter due to the
delay in the start up of the Company's new production facility in Blair,
Nebraska.
</TABLE>
FARM EQUIPMENT AND PRODUCTS
- - ---------------------------
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.
2
<PAGE>
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
$70,000 to $145,000.
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 500 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 are
available with optional diesel engines made by Caterpillar or Deere & Company.
The retail price for the larger machines ranges from approximately $135,000 to
$230,000.
In response to a competitor's introduction of a cable-less machine in early
1995, the Company began research and development on its own cable-less machine
in early 1996. The Company began production of its own cable-less machine in
1997. In 1998, the Company introduced its own cable-less bagging machine called
the HFC (Hydraulic Finger Controlled) Silage Bagger. The introduction of this
machine was in response to what the Company felt was a change in direction of
the industry towards the cable-less machine design and the latest in bagging
technology. The company offers the HFC model in small, medium-sized and large
bagging machines. The retail price for the HFC machines range from approximately
$42,500 to $250,000
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
$7,000 to $17,000. 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-REGISTERED TRADEMARK- 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 assembles and sells the Ag-Bag-REGISTERED TRADEMARK- Pro-Grain
Bagger, which retails for between $26,000 and $27,000. 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.
3
<PAGE>
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 the Mighty Bite-REGISTERED
TRADEMARK- in sizes ranging from one-half cubic yard to two cubic yards with a
retail price ranging from $3,000 to $4,500.
The Company assembles and sells a separate line of related equipment called
the Square Bale Bagger which retails for between $22,500 and $28,000. 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 6, 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 500 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.
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 $1,300. 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 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
composting in its environmental division.
Bags and machines each account for more than 30% of the Company's revenue
and have done so for the last three years.
4
<PAGE>
MARKET SIZE
- - -----------
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
1997, over 556,000,000 tons of corn, alfalfa, and sorghum silage were made by
United States farmers according to the AG IQ Handbook XII published in 1998 by
Agricom, Inc. (the "AG Handbook"). Based on AG Handbook statistics, the Company
estimates that there are approximately 140,000 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 7-9% 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, Western and Central Europe, Australia, Japan,
Thailand, New Zealand, Puerto Rico, and England where the Company currently
sells and distributes its products, and there is a large potential market in
other countries into which the Company may expand.
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 of or eliminating the
large number of organics from landfills The Company's primary focus is currently
directed towards municipalities, private composters, military bases and zoos.
The Company currently estimates the size of the compost market within North
America to be over $1 billion a year. In the composting area, the Company sold 7
bagging systems in 1998 compared to 2 in 1997, placed 6 sublicense agreements
and commenced 9 pilot projects in 1998. The Company also has 2 ongoing
university research studies in process as well. 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
- - ---------
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, 1998, there were 140 dealers serviced
by a combined total of 20 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, 1998, the Company had
2 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.
Prior to December 31, 1997, the Company offered a custom bagging service
through its subsidiary Ag-Bag Europe PLC in the United Kingdom. It retained
ownership of the bagging machines, provided bags
5
<PAGE>
to the customer, and filled the bags with the customer's forage on a
fee-per-metric tonne basis. This business was sold on December 31, 1997. The
Company's former operations director in England purchased the business, and
continues to operate a custom bagging service in the United Kingdom and is an
international dealer of Ag-Bag products.
The Company formed an environmental 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 further
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.
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, HFC (Cable-less) 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 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.
AG-BAG-REGISTERED TRADEMARK- INOCULANTS. The liquid inoculant and compost
inoculant is purchased by the Company on the open market. The Company believes
that the liquid and compost 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- rolls from a
company owned by Steven G. Ross ("Supplier") pursuant to a supply agreement.
Steven G. Ross is a 14.9% stockholder in the Company and owner of a company
which competes with the Company's Tri-Dura-REGISTERED TRADEMARK- bags. The
supply agreement provides that the Company is obligated to purchase all of its
plastic rolls, with certain exceptions, from Supplier through January 1, 2004.
Thereafter, either the Company or Supplier may terminate the supply agreement
upon two years' prior written notice. The Company may purchase plastic rolls
from other suppliers to the extent Supplier is unable to supply plastic rolls
under the supply agreement.
The Company considers its relationship with Supplier as good. The Company
believes there are adequate alternative suppliers available in the event
Supplier is unable to provide rolls.
6
<PAGE>
The structural components of the Company's farm equipment are manufactured
in Oregon, Nebraska and Iowa by several 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 and compost inoculant from a supplier, who mixes
the inoculants to the Company's specifications. The Company believes there are
various other alternative sources of supply.
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 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 environmental (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, which generally cost 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.
7
<PAGE>
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 1999, backlog orders were 5.6% higher than 1998. The dollar amount of
backlog orders of the Company that are believed to be firm, as of March 1, 1999,
was approximately $3,800,000, compared to $3,600,000 on March 1, 1998. This
backlog is seasonal and is reasonably expected to be filled within the current
fiscal year.
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, 1998.
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, 1998, the Company had 110 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
---------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Sales to unaffiliated customers:
United States $ 17,133 $ 16,501 $ 23,795
Canada 1,788 1,380 2,030
Germany 1,951 1,276 1,113
Latin America/Mexico 1,392 726 478
Other foreign countries 668 341 285
----------- ----------- -----------
$ 22,932 $ 20,224 $ 27,701
Sales to affiliated customers:
Officers and Directors 53 69 9
----------- ----------- -----------
Total $ 22,985 $ 20,293 $ 27,710
=========== =========== ===========
Sales or transfers between United States
and United Kingdom: $ 237 $ 165 $ *
=========== =========== ===========
*The Company sold its United Kingdom subsidiary, Ag-Bag Europe, PLC, on December
31, 1997. Sales to the United Kingdom are now included in Sales to Unaffiliated
customers; Other foreign countries.
</TABLE>
Reference is also made to the Selected Financial Data at Item 6.
ITEM 2. PROPERTIES
- - -------------------
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 its smaller bagging machines and
warehouses products. During 1996, the Company began consolidating its Blair,
Nebraska, operations into a newly constructed facility which consists of three
buildings comprising approximately 70,000 square feet. Construction was
completed on all facilities and the Company fully occupied its new buildings in
early 1997. The Blair, Nebraska, facilities are subject to a mortgage in the
amount of $1,319,009. Management estimates that manufacturing at the Blair
facility is currently at approximately 65% of capacity.
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 "Hunt Case"). 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. Michael A.
Hunt filed for bankruptcy under Chapter 7 of the federal bankruptcy laws. The
Company has filed a motion to dismiss the case. The Company has also made an
offer to purchase the claim from the bankruptcy trustee for $25,000.
Due to the filing for bankruptcy by Michael A. Hunt, a civil class-action
was filed in the Federal District Court of Minnesota, 4th Division on January
30, 1998 by S & S Forage & Equipment Co. Inc., on behalf of bag customers
against the Company, UpNorth Plastics, Inc. and Poly America, Inc. (the "S & S
Case"). The S & S Case alleges substantially the same claims as the Hunt Case
and also does not specify an amount of alleged damages. The Company has filed a
motion to dismiss the S & S Case.
The outcome of the foregoing litigation is not expected to have a material
adverse effect on the results of operations, financial condition or liquidity of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - ------------------------------------------------------------
During the fourth quarter of 1998, 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 8,
1999, 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.
<TABLE>
<CAPTION>
DATE OF
NAME AGE ELECTION POSITION
---- --- -------- --------
<S> <C> <C> <C>
Larry R. Inman 48 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 34 1992 Chief Financial Officer (since 1993) and Vice President of Finance (since
1992), Treasurer (since 1996); Manager, Yergen & Meyer (regional accounting
firm, 1986-1992).
Arthur P. Schuette 59 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 45 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 38 1990 Vice President, Manufacturing (since 1989); Manager of Blair, Nebraska Plant
(since 1980); KW Trucking (1984-1987).
</TABLE>
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."
In 1997, the Nasdaq listing requirements were substantially expanded. The
Company does not currently qualify under the more stringent requirements because
the price at which its Common Stock is trading is below the $1 per share
minimum. The company was formally notified on January 13, 1999, that its Common
Stock was delisted from quotation on the Nasdaq inter-dealer quotation system
for failure to meet the new listing requirements. The Company's Common Stock is
now traded on the OTC Bulletin Board.
As of March 8, 1999, there were approximately 340 holders of record of
Common Stock. The Company estimates there are approximately 2,400 beneficial
holders of the Common Stock.
11
<PAGE>
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
1998:
Calendar Year High Bid Low Bid
- - ------------- -------- -------
1997:
- - ----
First quarter $1.375 $.813
Second quarter $.875 $.563
Third quarter $1.00 $.625
Fourth quarter $1.00 $.484
1998:
- - ----
First quarter $.688 $.406
Second quarter $.75 $.453
Third quarter $.813 $.406
Fourth quarter $.594 $.375
- - ------------------------
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 pay
dividends on Common Stock pursuant to certain loan agreements, or while it is in
arrears in dividends on its preferred stock.
12
<PAGE>
UNREGISTERED SECURITIES
- - -----------------------
The following unregistered securities have been issued by the Company
during the last three fiscal years:
<TABLE>
<CAPTION>
- - ----------------------------- ----------------------- ------------------ ------------------- -------------------
Name of
Principal
Title and Amount of Underwriter/ Name or Class of
Securities Underwriting Persons who
Granted/Exercise Discounts or Received Consideration
Date of Grant Price if Applicable Commissions Securities Received
- - ----------------------------- ----------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
300,000 Options for
Common Stock/$1.0625 Nonemployee
November 11, 1996 per share(1) N/A Directors $0
- - ----------------------------- ----------------------- ------------------ ------------------- -------------------
50,000 Options for
Common Stock/$1.0625
November 11, 1996 per share(2) N/A Officers $0
- - ----------------------------- ----------------------- ------------------ ------------------- -------------------
For consulting
6,788 Options for services; value of
Common Stock/$.6875 services estimated
February 17, 1997 per share(3) N/A Patrick Meunier to be $5,000
- - ----------------------------- ----------------------- ------------------ ------------------- -------------------
10,000 Options for
Common Stock/$.6875
February 17, 1997 per share(4) N/A Udo Weber $0
- - ----------------------------- ----------------------- ------------------ ------------------- -------------------
20,000 Options for
Common Stock/$.6875
July 17, 1997 per share(3) N/A Officers $0
- - ----------------------------- ----------------------- ------------------ ------------------- -------------------
8,240 Shares of
August 26, 1997 Common Stock(5) N/A Employees $0
- - ----------------------------- ----------------------- ------------------ ------------------- -------------------
50,000 Options for
Common Stock/$.563 Nonemployee
June 8, 1998 per share(1) N/A Directors $0
- - ----------------------------- ----------------------- ------------------ ------------------- -------------------
The above unregistered securities 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 and/or under the "bonus stock/no sale"
interpretive position of the Securities and Exchange Commission.
- - -----------------------------
<FN>
<F1> Granted under Nonemployee Director Stock Option Plan. Options vest according to terms of plan.
<F2> Granted under the Incentive Stock Option Plan. Options vest immediately.
<F3> Issued pursuant to a nontransferable option agreement which provides for vesting as follows: 40% vest and become exercisable
six months after the grant date, another 40% vest and become exercisable two years after the grant date, and the remaining
20% vest and become exercisable three years after the grant date.
<F4> Issued pursuant to a nontransferable option agreement which provides for vesting as follows: 100% vested after two years from
date of grant.
<F5> Granted under the 1991 Employee Stock Plan.
</FN>
</TABLE>
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- - --------------------------------
The following table sets forth financial data derived from the audited
financial statements of the Company for the years ended December 31, 1994, 1995,
1996, 1997 and 1998. This selected financial data should be read in conjunction
with the audited 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,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net Sales $ 20,707 $ 17,659 $ 22,985 $ 20,293 $ 27,710
Cost of Sales 14,833 12,679 17,791 18,493 20,800
---------- -------- --------- --------- --------
Gross Profit from Operations 5,874 4,980 5,194 1,800 6,910
Selling and Administrative Expenses 4,490 4,219 4,739 5,035 5,470
Research and Development Expenses 60 68 59 87 150
Unusual Charge 980
---------- -------- --------- --------- --------
Income (Loss) from Operations 1,324 693 396 (4,302) 1,290
Other Income (Expense) (362) (214) 174 (290) (64)
---------- -------- --------- --------- --------
Income (Loss) before Provision for
Income Taxes, and Discontinued Operations 962 479 570 (4,592) 1,226
Provision (Benefit) for Income Taxes 429 286 257 (1,650) 422
---------- -------- --------- --------- --------
Income (Loss) before Discontinued
Operations 533 193 313 (2,942) 804
Discontinued Operations-income (loss)
from operations (86) 50 (449)
Discontinued Operations-loss on disposal
of Ag-Bag Europe, PLC (less income tax
benefit of $24,500) (424)
---------- -------- --------- --------- --------
Net Income (Loss) $ 533 $ 107 $ 363 $ (3,815) $ 804
========== ======== ========= ========= ========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
(In thousands, except per share data)
Year Ended December 31,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Basic Earnings per Share:
Income (Loss) before Discontinued
Operations $ 0.04 $ 0.02 $ 0.03 $ (.24) $ .06
Discontinued Operations (.01) (.08)
---------- -------- --------- --------- --------
$ 0.04 $ 0.01 $ 0.03 $ (.32) $ .06
========== ======== ========= ========= ========
Diluted Earnings per Share:
Income (Loss) before Discontinued
Operations $ 0.04 $ 0.02 $ 0.03 $ (.24) $ .06
Discontinued Operations (.01) (.08) $
---------- -------- --------- --------- --------
$ 0.04 $ 0.01 $ 0.03 $ (.32) $ .06
========== ======== ========= ========= ========
Weighted Average Shares:
Basic 11,645 12,062 12,096 12,056 12,062
========== ======== ========= ========= ========
Diluted 11,645 12,062 12,096 12,056 12,062
========== ======== ========= ========= ========
Balance Sheet Data:
December 31,
--------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Working Capital $ 5,334 $ 6,078 $ 6,090 $ 5,681 $ 6,818
Current Assets 8,445 9,379 8,746 9,889 9,391
Total Assets 15,546 16,297 16,903 15,190 13,820
Current Liabilities(1) 3,111 3,301 2,656 4,208 2,573
Long-term Debt(1) 1,056 1,237 2,061 2,690 2,210
Total Stockholders' Equity(2) 11,379 11,759 12,186 8,292 9,037
- - -------------------------------
<FN>
<F1> Includes loans from shareholders and deferred taxes.
<F2> Includes $696 of preferred stock.
</FN>
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- - --------------------------------------------------------------------------------
The information set forth below relating to matters that are not historical
facts are "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934 and involve risks and uncertainties which could
cause actual results to differ materially from those set forth below. Such risks
and uncertainties include, but are not limited to, the following:
* - The economic health of the U.S. dairy industry including milk and
grain feed prices and the ability of the dairy farmers to make
capital expenditures
* - Adverse weather conditions which affect farmers' crops and reduce
demand for the Company's products
* - Market acceptance of the Company's composting system and technology
* - Consolidations within the farming sector and reduction in the
number dairy cows
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,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales 100% 100% 100% 100% 100%
Costs and Expenses:
Cost of Sales 72% 72% 77% 91% 75%
Selling and Administration 22% 24% 21% 25% 20%
Research and Development --- --- --- --- ---
Unusual Charge --- --- --- 5% ---
Income (Loss) From Operations 6% 4% 2% (21%) 5%
---- ---- ---- ----- ----
</TABLE>
STRATEGIC REALIGNMENT
- - ---------------------
On December 5, 1997, the Company's Board of Directors approved a strategic
realignment of the Company.
The realignment involved the sale of the Company's U.K. subsidiary (see
discussion below on Discontinued Operations) which had not been performing at a
profitable level due to the BSE (Mad Cow) problem within the British farming
industry. The U.K. subsidiary sold several of its bagging machines in its rental
fleet early in 1997 with the anticipation of improving the ongoing operations
through increased concentration on more profitable custom work. This proved
unsuccessful due in large part to the poor weather conditions experienced
throughout the traditionally busy spring and summer months in England and the
continued escalation during the year of the BSE problem within the British
farming industry depressing the custom work. The results of Ag-Bag Europe, PLC
are shown as discontinued operations for the years ended December 31, 1997, 1996
and 1995. The sale was effective December 31, 1997.
16
<PAGE>
The Board of Directors decided to implement additional realignment of the
Company by re-focusing the Company's sales efforts back to its core business
products. As a result, certain non-core, long-term inventory was written down to
fair market value or abandoned. The non-core products that were discontinued and
abandoned as a result of the strategic realignment were both new and used older
style tuber, feed table and grain bagging machines along with general accessory
machinery products such as mixer wagons, bale feeders, airvents, unloaders and
parts. During 1995, 1996 and 1997, sales of inventory which was later determined
to be non-core products as a result of the strategic realignment were $719,408,
$760,497 and $514,556, respectively. In addition, in 1997, the Company refined
its policy for establishing inventory valuation reserves. In 1997, in connection
with the strategic realignment and resultant refocusing of the Company's sales
efforts and in accordance with the refined policy for valuation reserves, the
Company reassessed and revised its estimates of fair market value resulting in
an inventory write-down charge totaling $2,418,778, of which $2,088,223 relates
to non-core products and $330,555 relates to core products.
In addition to the strategic realignment, certain patent rights were
determined during the year to be obsolete, due to recent technological
improvements in the Company's and industry's bagging machinery. As a result,
certain patent rights were written-off during the year resulting in a charge to
earnings. This action resulted in an unusual charge of $979,762 during the
fourth quarter of 1997. Beginning in 1996, the Company and its competitors
instituted minor machine design changes involving the processes covered by the
patent. In the Company's view, these design changes were minor and did not
significantly diminish the prospects for sales of machines which incorporate the
processes covered by the patent.
In response to a competitor's introduction of a cable-less machine in early
1995, the Company began research and development on its own cable-less machine
in early 1996. The Company began production of its own cable-less machine in
1997. The cable-less machines do not use the processes covered by the patent,
accordingly, in 1997, the Company reevaluated the value of the patent. In its
evaluation, the Company determined that the new cable-less machines demonstrated
a change in direction for the industry which impaired the future value of the
rights covered by the patent. Accordingly, the value of the patent, $979,762 was
written off during 1997.
YEARS ENDED DECEMBER 31, 1998 AND 1997
- - --------------------------------------
For the year ended December 31, 1998, net sales increased 36.55% to
$27,710,514 compared to $20,292,959 for the year ended December 31, 1997. Sales
for the year were up as a result of continued improving milk prices and lower
grain feed costs in the U.S. which spurred capital expenditures for machinery
and equipment. The Company believes recent university research articles
published on the benefits of bagging over the use of bunkers have also helped to
increase sales, as farmers are realizing the benefits of bagging their feed
instead of storing it in bunkers or silos.
Machine sales for the year were up 67.3% and bag sales were up over 16.9%
compared to 1997. Machine sales of the Company are directly tied to farmers'
income and therefore their ability to purchase new equipment. In addition, the
Company introduced its next generation (hydraulic finger controlled) silage
bagger during the first quarter of 1998, representing the latest in bagging
technology. The Company's bag and parts sales are driven by the total number of
bagging machines that are in the marketplace. However, there is not a perfect
correlation between the Company's bag sales and machine sales, as the Company's
and competitors' bags are interchangeable on all bagging machinery in the
industry. The Company cannot estimate with any certainty the total number of
machines or bags used in the industry.
In addition to compost bag sales, the Company sold seven composting systems
during the year ended December 31, 1998, (generating approximately $550,000 in
revenue) compared to two systems sold
17
<PAGE>
for the year ended December 31, 1997 (generating approximately $100,000 in
revenue). This reflects continued successes in pilot projects and what the
Company believes is a growing interest in Ag-Bag's composting system and
technology.
The Company sells its product primarily through a worldwide dealer network,
however, some sales are made directly to large volume customers because a dealer
is not present in the customer's geographic market. For each of the last three
years, the Company estimates direct sales at between 30-33% of total sales and
the Company expects this historical sales mix to continue in the future. The
gross margin realized on the Company's direct sales are typically within 200-300
basis points of those sales realized through the Company's dealer network.
However, various economic, volume and market factors in the geographic area
impact the ultimate margin.
International sales for the Company in 1998 were down in comparison to 1997
due to poor economic conditions in the Latin American/Mexico market coupled with
slight declines in machine sales into the European market. In 1997, the Company
formed a German partnership ("Partnership") in which the Company owns a 50%
interest and its German dealer owns the remaining 50%. The partnership
distributes bags to the Company's German and European dealers. The Company's
equity in earnings of the Partnership are reported as other income.
Approximately $1.5 million in bag sales were distributed through the Partnership
during 1998, an increase of 25%, compared to approximately $1.2 million in bag
sales for 1997.
Gross profit from sales for the year ended December 31, 1998 increased
283.79% to $6,910,073 compared to $1,800,440 for the year ended December 31,
1997. The increase for the year was largely the result of an inventory
write-down charge in 1997 which totaled $2,418,778. In addition, increased sales
volumes in 1998 helped cover fixed operating overheads which were offset by
lower margins as a result of strong competition in certain areas of the U.S.
market in both bags and machines. Additionally, the Company incurred higher
transportation costs in 1997 caused by the new bag folding facility construction
delays.
Selling expenses for the year ended December 31, 1998 increased 13.16% to
$3,025,642 compared to $2,673,587 for the year ended December 31, 1997. The
increase was the result of increased meeting and travel expenses, coupled with
increased commissions from higher sales volumes and increased advertising
expenses related to the Company's new image and product advertising campaign.
Administrative expenses for the year ended December 31, 1998 increased
3.47% to $2,444,060 compared to $2,361,940 for the year ended December 31, 1997.
The increase for the year was the result of higher personnel costs and general
administrative overheads, which were offset by lower amortization expense as a
result of the fourth quarter 1997 write-off of certain patent rights.
Research and development expenses for the year ended December 31, 1998
increased 72.26% to $150,058 compared to $87,112 for the year ended December 31,
1997. The increase for the year was the result of the Company continuing to
develop and modify its HFC (Cable-less machine) and its smaller compost bagging
machine.
Interest expense for the year ended December 31, 1998 decreased 7.85% to
$437,803 compared to $475,056 for the year ended December 31, 1997. The decrease
for the year was the result of the Company utilizing a smaller portion of its
credit facility as a result of increased collection efforts which were offset by
the fact that some extended term sales were offered during the year to remain
competitive.
During 1997 the Company recorded a loss from discontinued operations of
its U.K. subsidiary Ag-Bag Europe, PLC in the amount of $448,832. The loss for
the year was the result of lower sales due to the continued BSE (Mad Cow)
problem within the British farming industry. Additionally, the U.K.
18
<PAGE>
subsidiary sold several of its bagging machines in its rental fleet early in
1997 with the anticipation of improving the ongoing operations through increased
concentration on more profitable custom work. This proved unsuccessful due in
large part to the poor weather conditions experienced throughout the
traditionally busy spring and summer months in England, which prevented some
bagging and custom work from being completed. The U.K. subsidiary also
experienced increased warranty costs on the rental machines sold to custom
operators in addition to increased maintenance costs on its remaining custom
equipment. The U.K. subsidiary also experienced increased bad debt expense due
to a customer filing bankruptcy as well as increased legal and professional
costs related to the sale of the business. The Company recorded a loss on the
disposal of Ag-Bag Europe, PLC of $424,064, net of income tax benefit of
$24,500.
Net income for the year ended December 31, 1998 was $804,399 compared to a
net loss of $3,815,119 for the year ended December 31, 1997. The increase in net
income for the year was the result of an improved U.S. dairy industry coupled
with the fact the Company incurred a special one-time charge during 1997 related
to a strategic realignment and re-focusing of the Company which included
revaluation and abandonment of certain non-core, long term inventory totaling
$2,418,778. In addition, in 1997, the Company incurred a loss from operations
from its former U.K. subsidiary, Ag-Bag Europe, PLC in the amount of $448,832
and a loss on disposal of the subsidiary in the amount of $424,064. The Company
also incurred an unusual charge related to a patent right write-off in 1997
equaling $979,762. Increased sales volumes in 1998 helped cover fixed operating
overheads but were offset by lower margins and increased selling and
administrative expenses. The increase in net income was also due to decreased
interest expense.
YEARS ENDED DECEMBER 31, 1997 AND 1996
- - --------------------------------------
For the year ended December 31, 1997, net sales decreased 11.72% to
$20,292,959 compared to $22,985,293 for the year ended December 31, 1996.
Machine sales for the year were down as a result of continued low U.S. milk
prices which have delayed capital expenditures for many farmers until there is
upward movement in milk prices. Machine sales of the Company are directly tied
to farmers' income and therefore their ability to purchase new equipment. The
Company's bag and parts sales are driven by the total number of bagging machines
that are in the marketplace. However, there is not a perfect correlation between
the Company's bag sales and machine sales, as the Company's and competitors'
bags are interchangeable on all bagging machinery in the industry. The Company
cannot estimate with any certainty the total number of machines or bags used in
the industry.
The Company sells its product primarily through a worldwide dealer network,
however, some sales are made directly to large volume customers because a dealer
is not present in the customer's geographic market. For each of the last 2
years, the Company estimates direct sales at between 30-33% of total sales and
the Company expects this historical sales mix to continue in the future. The
gross margin realized on the Company's direct sales are typically within 200-300
basis points of those sales realized through the Company's dealer network.
However, various economic, volume and market factors in the geographic area
impact the ultimate margin.
International sales for the Company in 1997 continued to be strong but were
down in comparison to 1996 as a result of the formation of a German partnership
("Partnership") during 1997 in which the Company owns a 50% interest and its
German dealer owns the remaining 50%. Bag sales which were previously sold by
the Company to its German and European dealers are now being sold through the
Partnership to the dealers. Consequently, the Company's equity in earnings of
the Partnership are reported as other income. Approximately $1.2 million in bag
sales were distributed through the Partnership during 1997. The Company sold
$750,000 in bags in 1996 to the Company's German and European dealers.
19
<PAGE>
Gross profit from sales for the year ended December 31, 1997 decreased
65.34% to $1,800,440 compared to $5,193,654 for the year ended December 31,
1996. The decrease for the year was primarily the result of the inventory write
down in connection with the strategic realignment, coupled with lower sales
volumes to cover fixed overheads and lower margins on sales of used equipment
and bags in certain highly competitive areas. Additionally, the Company also
incurred higher transportation costs to deliver product during the year caused
by the new bag folding facility construction delays.
Selling expenses for the year ended December 31, 1997 increased 8.45% to
$2,673,587 compared to $2,465,276 for the year ended December 31, 1996. The
increase for the year was the result of increased commissions, meeting and
travel expenses, environmental division promotions, and increased advertising
with the unveiling of the Company's new image and product advertising campaign.
Administrative expenses for the year ended December 31, 1997 increased
3.89% to $2,361,940 compared to $2,273,548 for the year ended December 31, 1996.
Administrative expenses increased for the year as a result of increased
professional fees and administrative support personnel costs, in addition to
increased travel costs related to the sale of the Company's U.K. subsidiary.
Interest expense for the year ended December 31, 1997 increased 26.23% to
$475,056 compared to $376,341 for the year ended December 31, 1996. The increase
for the year was the result of the Company utilizing a larger portion of its
credit facility due to the fact that some extended term sales were offered to
remain competitive. The Company has also added a long-term construction and
equipment loan to finance its new Blair, Nebraska facilities.
During 1997 the Company recorded a loss from discontinued operations of
its U.K. subsidiary Ag-Bag Europe, PLC in the amount of $448,832. The loss for
the year was the result of lower sales due to the continued BSE (Mad Cow)
problem within the British farming industry. Additionally, the U.K. subsidiary
sold several of its bagging machines in its rental fleet early in 1997 with the
anticipation of improving the ongoing operations through increased concentration
on more profitable custom work. This proved unsuccessful due in large part to
the poor weather conditions experienced throughout the traditionally busy spring
and summer months in England, which prevented some bagging and custom work from
being completed. The U.K. subsidiary also experienced increased warranty costs
on the rental machines sold to custom operators in addition to increased
maintenance costs on its remaining custom equipment. The U.K. subsidiary also
experienced increased bad debt expense due to a customer filing bankruptcy as
well as increased legal and professional costs related to the sale of the
business. The Company recorded a loss on the disposal of Ag-Bag Europe, PLC of
$424,064, net of income tax benefit of $24,500.
Net loss for the year ended December 31, 1997 was $3,815,119 compared to
net income of $363,548 for the year ended December 31, 1996. The loss for the
year was the result of the one time charges related to the strategic realignment
of the Company and loss from the operation and disposal of the Company's U.K.
subsidiary, coupled with continued low milk prices in the U.S. delaying many
farmer's expenditures for capital equipment. In addition, lower sales volumes to
cover fixed overhead, lower margins on used equipment sales and on bags in
certain highly competitive areas of the U.S., higher transportation costs
coupled with increased selling, administrative, and interest costs contributed
to the loss for the year. In addition, net income for the year ended December
31, 1996 included an after-tax gain on the sale of a building in the amount of
$182,892.
RECENT ACCOUNTING PRONOUNCEMENTS
- - --------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and
20
<PAGE>
losses) in a full set of general purpose financial statements. The company fully
implemented SFAS No. 130 during 1998.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure about
Segments of an Enterprise and Related Information", which changes the way public
companies report information about operating segments. SFAS No. 131 is based on
the management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers and the material countries in which
the entity holds assets and reports revenue. The company fully implemented SFAS
No. 131 during 1998 and determined that it has no reportable segments.
YEAR 2000
- - ---------
The Year 2000 issue exists because many computer programs use two digit
date fields to define the applicable year rather than four digit date fields.
Because of this, computer equipment and software (sometimes referred to as
"information technology" or "IT") and devices with embedded technology
(sometimes referred to as "non-IT") that are time-sensitive may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, production delays or breakdowns, a temporary inability to
process transactions, send invoices, or engage in other normal business
activity. Incomplete or untimely resolution of the Year 2000 issue by the
Company or important suppliers or customers of the Company could have a
materially adverse effect on the Company's business, financial condition or
results of operations.
The Company's approach to the Year 2000 issued is discussed below. In
discussing the Year 2000 issue, the Company necessarily makes certain forward
looking statements. There can be no assurance that actual results will not
differ materially from the projections contained in the forward looking
statements. Factors which may cause actual results to differ materially include,
but are not limited to:
o failure of Company personnel and outside consultants to properly assess and
address the Company's Year 2000 issues,
o inaccurate or incomplete responses to questionnaires sent to third parties
or inaccurate disclosure by third parties regarding the Year 2000 issue,
o failure to address Year 2000 issue with all vendors, including utility
vendors, and customers,
o infrastructure failures, such as disruptions in the supply of electricity,
gas, water or communications services, or major institutions, such as the
government and banking systems, and
o failure of the Company to accurately predict the costs to address the Year
2000 issue or the lost revenues related to interruption in the Company's or
its customers' businesses.
State of Readiness. The Company, in conjunction with outside consultants,
has made an assessment of the effect of the Year 2000 issue on its IT and non-IT
systems. The Company has identified certain modifications to its IT systems
which are necessary to address the Year 2000 issue and has fully implemented
those modifications. The Company has determined there are no necessary
modifications to its non-IT systems. Based on this assessment and implementation
of the modifications discussed above, the Company believes its IT systems and
non-IT systems will properly recognize calendar dates beginning in the year
2000.
In addition, the Company has evaluated, through conversations and
questionnaires sent to its critical vendors and customers, the IT systems of
most of its outside vendors and customers. The Company has
21
<PAGE>
not evaluated its vendors and customers non-IT systems. The Company has received
responses from approximately 95% of its vendors and 85% of its customers. The
Company has, however, received replies from what the Company considers to be its
critical vendors and customers. Based on the responses received to date, the
Company does not believe the Year 2000 issue will have a material adverse
effect.
Costs to Address Year 2000 Issue. To date, the Company has incurred costs
of approximately $40,000 and the Company estimates its total cost to become Year
2000 compliant will be approximately $45,000. Accordingly, the Company expects
the costs to address the Year 2000 issue will not have a material adverse
financial impact on the Company's financial condition or results of operations.
However, there can be no assurance that additional remediation and costs will
not be identified, especially since the Company has not received responses from
all third parties.
Risks of the Company's Year 2000 Issue. The most reasonably likely worst
case scenario for the Company would involve an extended shutdown in production
and/or lost revenue caused by interruption in the Company's customers'
businesses. The Company is unable to quantify the effect of such a scenario.
However, the Company has identified its critical vendors and customers and does
not believe that any such vendors or customers represent a significant risk. In
addition, the first month of the fiscal year is not a critical production period
or period of customer demand and therefore the Company believes it would be able
to recover from a temporary interruption without a material adverse effect on
the Company's operations.
Company's Contingency Plan. Based on the Company's assessment of the Year
2000 issue, the Company has not developed and does not intend to develop a
contingency plan to address the reasonably likely worst case scenario.
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 6.48% at December 31, 1998 to $2,333,912
compared to $2,191,682 at December 31, 1997. The increase in accounts receivable
is the result of the majority of the Company's fourth quarter sales occurring
during the last month of the quarter coupled with the fact the Company made some
sales on extended terms during the fall that are not yet due.
Inventory increased 7.45% at December 31, 1998 to $5,940,289 compared to
$5,528,239 at December 31, 1997. The increase in inventory resulted from
increased production during the fourth quarter in order to have inventory
available for the pre-season flooring program.
Other current assets decreased at December 31, 1998 to $344,172 compared
to $2,013,684 at December 31, 1997. The decrease was the result of the
collection of the business sale receivable of the
22
<PAGE>
Company's U.K. subsidiary sold in December of 1997, coupled with collection of a
tax receivable and a receivable for the sale of a parcel of land the Company
sold in the fall of 1997.
Intangible assets at December 31, 1998 decreased to $54,954 compared to
$104,547 at December 31, 1997. The decrease was the result the of the Company's
implementation of SOP (Statement of Position) 98-5 requiring unamortized
start-up costs to be written-off, coupled with normal amortization expense for
the year.
The Company has a domestic operating line of credit with a limit of
$5,000,000, secured by accounts receivable and inventory. As of December 31,
1998, $-0- had been drawn under the credit line. Management believes that, along
with funds generated from operations and its operating line of credit, it will
be able to meet the Company's cash requirements through 1999.
In 1997, the Nasdaq listing requirements were substantially expanded. The
Company does not currently qualify under the more stringent requirements because
the price at which its Common Stock is trading is below the $1 per share
minimum. The company was formally notified on January 13, 1999, that its common
stock was delisted from quotation on the Nasdaq inter-dealer quotation system
for failure to meet the new listing requirements. The company's common stock is
now traded on the OTC Bulletin Board. The removal from quotation on Nasdaq could
have a material adverse effect on the Company's ability to raise additional
equity capital in a public stock offering should that become necessary.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- - --------------------------------------------------------------------
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
- - ---------------------------------------------------
Reference is made to the 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
- - ------------------------------------------------------------------------
Reference is made to the Form 8-K filed by the Company on June 12, 1998.
PART III
--------
ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND
EXECUTIVE COMPENSATION
- - ------------------------------------------------------------------------
A definitive proxy statement for the 1999 Annual Meeting of Stockholders
of Ag-Bag International Limited to be held on June 7, 1999 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.
23
<PAGE>
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.
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.
24
<PAGE>
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 Financial Statements............................... 28
Independent Auditors' Reports............................... F-1
Balance Sheets at December 31, 1998 and 1997................ F-3
Statements of Operations and Comprehensive Income for
for the years ended December 31, 1998, 1997 and 1996.... F-5
Statement of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996........................ F-6
Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996........................ F-7
Notes to Financial Statements............................... F-8
Independent Auditors' Reports............................... F-23
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-25
All other schedules are omitted because they are not
applicable or the required information is shown
in the financial statements or notes thereto.
3. The exhibits are listed in the index of exhibits............ 29
(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...................... 29
25
<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 30, 1999 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 30, 1999 By: /s/ Larry R. Inman
---------------------------------------
Larry R. Inman, Chairman, Board of
Directors; Chief Executive Officer and
President (Principal Executive Officer)
Date: March 30, 1999 By: /s/ Michael R. Wallis
---------------------------------------
Michael R. Wallis, Chief Financial
Officer and Vice President, Finance
(Principal Financial and Accounting
Officer)
Date: March 30, 1999 By: /s/ Roy I. Anderson
---------------------------------------
Roy I. Anderson, Director
Date: March 30, 1999 By: /s/ Lemuel E. Cunningham
---------------------------------------
Lemuel E. Cunningham, Director
Date: March 30, 1999 By: /s/ Michael W. Foster
---------------------------------------
Michael W. Foster, Director
Date: March 30, 1999 By: /s/ Michael B. Leahy
---------------------------------------
Michael B. Leahy, Director
Date: March 30, 1999 By: /s/ Arthur P. Schuette
---------------------------------------
Arthur P. Schuette, Director
Date: By: _______________________________________
Rolf E. Soderstrom, Director
Date: March 30, 1999 By: /s/ Robert N. Thurston
---------------------------------------
Robert N. Thurston, Director
Date: March 30, 1999 By: /s/ Stan Vinson
---------------------------------------
Stan Vinson, Director
26
<PAGE>
AG-BAG INTERNATIONAL LIMITED
FINANCIAL STATEMENTS
Supplementary Information
Years Ended December 31, 1998 and 1997
27
<PAGE>
TABLE OF CONTENTS
Page
----
INDEPENDENT AUDITORS' REPORTS F-1
FINANCIAL STATEMENTS
Balance Sheets F-3
Statements of Operations and Comprehensive Income F-5
Statements of Shareholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8
SUPPLEMENTARY INFORMATION
Independent Auditors' Reports on Supplementary Information F-23
Valuation and Qualifying Accounts F-25
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Ag-Bag International Limited
We have audited the accompanying balance sheet of Ag-Bag International Limited
as of December 31, 1998, and the related statements of operations and
comprehensive income, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of Ag-Bag International
Limited as of December 31, 1997 and 1996, were audited by other auditors whose
report dated February 25, 1998, expressed an unqualified opinion on those
statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 financial statements referred to above present fairly,
in all material respects, the financial position of Ag-Bag International Limited
as of December 31, 1998, and the results of its operations and its cash flows
for the year ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Yergen & Meyer LLP
Portland, Oregon
February 19, 1999
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Ag-Bag International Limited:
We have audited the accompanying balance sheet of Ag-Bag International Limited
as of December 31, 1997, and the related statements of operations, shareholders'
equity, and cash flows for the years ended December 31, 1997 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of Ag-Bag International Limited as
of December 31, 1997, and the results of its operations and its cash flows for
the years ended December 31, 1997 and 1996 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
February 25, 1998
F-2
<PAGE>
AG-BAG INTERNATIONAL LIMITED
BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS
1998 1997
------------------ ------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 361,614 $ 656
Accounts receivable, less allowance for doubtful
accounts of $327,510 and $200,000 at 1998
and 1997, respectively 2,333,912 2,191,682
Inventories 5,940,289 5,528,239
Other current assets 344,172 2,013,684
Prepaid expenses 410,520 154,439
------------------ ------------------
Total Current Assets 9,390,507 9,888,700
------------------ ------------------
PROPERTY, PLANT AND EQUIPMENT, NET 3,934,382 4,378,444
------------------ ------------------
OTHER ASSETS
Deferred income taxes 41,000 638,666
Intangible assets, net 54,954 104,547
Other assets 399,425 179,973
------------------ ------------------
Total Other Assets 495,379 923,186
------------------ ------------------
TOTAL $ 13,820,268 $ 15,190,330
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997
------------------ ------------------
<S> <C> <C>
CURRENT LIABILITIES
Lines of credit $ - $ 1,717,263
Note payable to shareholder and related party 15,876 15,876
Current portion of long-term debt and capital
lease obligations 365,688 444,985
Accounts payable 831,922 949,373
Accrued payroll and payroll taxes 484,458 324,545
Dealer deposits 225,418 128,922
Warranty reserve 140,000 125,000
Accrued expenses and other current liabilities 470,134 462,004
Income taxes payable 39,636 39,636
------------------ ------------------
Total Current Liabilities 2,573,132 4,207,604
------------------ ------------------
NONCURRENT LIABILITIES
Long-term debt and capital lease obligations,
less current portion 2,201,388 2,666,552
Note payable to shareholder and related party,
less current portion 8,219 23,884
------------------ ------------------
Total Noncurrent Liabilities 2,209,607 2,690,436
------------------ ------------------
Total Liabilities 4,782,739 6,898,040
------------------ ------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
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, 12,061,991 shares issued and outstanding
at December 31, 1998 and 1997 120,619 120,619
Additional paid in capital 9,210,211 9,210,211
Retained earnings (deficit) (989,301) (1,734,540)
------------------ ------------------
Total Shareholders' Equity 9,037,529 8,292,290
------------------ ------------------
TOTAL $ 13,820,268 $ 15,190,330
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ----------------
<S> <C> <C> <C>
NET SALES $ 27,710,514 $ 20,292,959 $ 22,985,293
COST OF SALES 20,800,441 18,492,519 17,791,639
---------------- --------------- ----------------
Gross profit from operations 6,910,073 1,800,440 5,193,654
OTHER OPERATING EXPENSES
Selling expenses 3,025,642 2,673,587 2,465,276
Administrative expenses 2,444,060 2,361,940 2,273,548
Research and development expenses 150,058 87,112 58,808
Unusual charge - 979,762 -
---------------- --------------- ----------------
Income (loss) from operations 1,290,313 (4,301,961) 396,022
OTHER INCOME (EXPENSE)
Interest income 69,607 39,494 38,144
Interest expense (437,803) (475,056) (376,341)
Other 304,282 145,300 512,398
---------------- --------------- ----------------
Income (Loss) from Continuing
Operations Before Income Taxes 1,226,399 (4,592,223) 570,223
Provision (benefit) for income taxes 422,000 (1,650,000) 257,301
---------------- --------------- ----------------
Income (loss) from continuing operations 804,399 (2,942,223) 312,922
DISCONTINUED OPERATIONS
Loss from operations of discontinued
Ag-Bag Europe PLC - (448,832) 50,536
Loss on disposal of Ag-Bag Europe PLC,
plus applicable income tax benefit of
$24,500 - (424,064) -
---------------- --------------- ----------------
NET INCOME (LOSS) 804,399 (3,815,119) 363,458
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency translation adjustments - (28,325) 123,002
---------------- --------------- ----------------
TOTAL COMPREHENSIVE INCOME (LOSS) $ 804,399 $ (3,843,444) $ 486,460
================ =============== ================
Basic and diluted net income (loss) per common share:
Continuing operations $ 0.06 $ (0.24) $ 0.03
Discontinued operations - (0.08) -
---------------- --------------- ----------------
Total income (loss) per common share $ 0.06 $ (0.32) $ 0.03
================ =============== ================
Basic and diluted weighted average common
shares outstanding 12,061,991 12,056,641 12,095,751
================ =============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common Stock Additional Retained other Total
---------------- ------------------ paid-in earnings comprehensive shareholders'
Shares Amount Shares Amount capital (deficit) income equity
------ ------ ------ ------ ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Stock issued in connection
with employee stock plan 8,240 82 8,415 8,497
Foreign currency translation (28,325) (28,325)
Preferred stock dividends (59,160) (59,160)
Net (Loss) (3,815,119) (3,815,119)
--------- --------- ---------- --------- ----------- ----------- -------- ------------
Balance, December 31, 1997 174,000 696,000 12,061,991 120,619 9,210,211 (1,734,540) - 8,292,290
Preferred stock dividends (59,160) (59,160)
Net Income 804,399 - 804,399
--------- --------- ---------- --------- ----------- ----------- -------- ------------
Balance, December 31, 1998 174,000 $ 696,000 12,061,991 $ 120,619 $ 9,210,211 $ (989,301) $ - $ 9,037,529
========= ========= ========== ========= =========== =========== ======== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 804,399 $ (3,815,119) $ 363,458
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 580,639 865,671 955,344
Issuance of stock under employee stock plan - 8,497 -
Inventory write-down and obsolescence 135,000 2,171,278 308,500
Write-down of intangible asset - 979,762 -
Loss on disposal of Ag-Bag Europe PLC - 424,064 -
(Gain) loss on disposition of fixed assets 1,269 (69,903) (326,013)
Deferred income taxes 422,000 (755,000) 10,301
Change in assets and liabilities
Accounts receivable (142,230) 556,877 (821,608)
Inventories (361,187) (1,244,485) 802,495
Other current assets 1,589,097 (1,442,717) (37,121)
Other assets (219,452) 23,681 (59,382)
Accounts payable (117,450) 303,349 225,063
Accrued expenses and other current liabilities 279,539 64,383 249,429
Income taxes payable - 39,636 (167,569)
---------------- --------------- ----------------
Net cash provided by (used in) operating
activities 2,971,624 (1,890,026) 1,502,897
---------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (299,662) (1,346,527) (2,337,974)
Proceeds from disposition of fixed assets 10,000 574,013 929,590
Intangible assets 15,545 (31,503) (9,232)
Cash provided by sale of Ag-Bag Europe PLC - 795,739 -
---------------- --------------- ----------------
Net cash used in investing activities (274,117) (8,278) (1,417,616)
---------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit 27,341,354 22,466,810 25,784,004
Principal payments on line of credit (29,058,617) (21,016,517) (26,883,684)
Proceeds on issuance of debt 29,517 1,041,093 1,570,335
Principal payments on debt (573,978) (425,088) (606,799)
Payment of shareholders' notes (15,665) (14,316) (12,979)
Dividends paid (59,160) (59,160) (59,160)
---------------- --------------- ----------------
Net cash provided by (used in) financing activities (2,336,549) 1,992,822 (208,283)
---------------- --------------- ----------------
Effect of foreign currency translation - (94,518) 123,002
---------------- --------------- ----------------
NET INCREASE (DECREASE) IN CASH 360,958 - -
CASH AT BEGINNING OF YEAR 656 656 656
---------------- --------------- ----------------
CASH AT END OF YEAR $ 361,614 $ 656 $ 656
================ =============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Ag-Bag International Limited (the company) is a
Delaware corporation. The company's primary 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. The company also manufactures
machines and bags for composting. The company's primary market is North America;
however, it also sells products in Europe and Latin America. As discussed in
Note 15, in December 1997 the company sold its subsidiary, Ag-Bag Europe PLC.
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". In
1997, the Nasdaq listing requirements were substantially expanded. The company
does not currently qualify under the more stringent requirements because the
price at which its common stock is trading is below the $1 per share minimum bid
price. The company was formally notified on January 13, 1999, that its common
stock was delisted from quotation on the Nasdaq inter-dealer quotation system
for failure to meet the new listing requirements. The company's common stock is
now traded in the OTC Bulletin Board.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
financial statements of Ag-Bag International Limited and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation. Investments in 20% to 50% owned partnerships are
not consolidated and are instead accounted for on the equity method.
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 $185,863, $132,865 and $281,118 in 1998, 1997 and 1996,
respectively, from rental equipment to inventory held for sale.
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 letter of credit from foreign
customers with which no credit history has been established.
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. The company's estimates of market value incorporate projections of future
sales volume by product class.
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 five to seven years for equipment and twenty to thirty
years for buildings.
Expenditures for additions and major improvements are capitalized. Expenditures
for repairs and maintenance are charged to expense as incurred.
F-8
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
INTANGIBLE ASSETS - Intangible assets consist primarily of licenses, patents and
non-compete agreements. The cost of the licenses, patents and non-compete
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
twelve years.
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 for expense related to grants to
employees 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 Statement of Financial Accounting Standards (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. (See Note 11)
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. Valuation
allowances are established to reduce potential deferred tax assets when it is
more likely than not that all or some portion of potential deferred tax assets
will not be realized.
ADVERTISING COSTS - The company expenses advertising costs as they are incurred.
Advertising expenses for the years ended December 31, 1998, 1997, and 1996 were
$490,495, $497,617 and $390,831, respectively.
NET INCOME (LOSS) PER COMMON SHARE - In February 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share". SFAS No. 128 establishes statdards for computing
and presenting earnings per share (EPS). It simplifies the standards in APB No.
15 (Earnings per Share) for computing EPS by replacing primary EPS with basic
EPS and altering the calculation of diluted EPS, which replaces fully diluted
EPS. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. The company fully
implemented SFAS No. 128 during 1997. Prior years' EPS's have been restated to
comply with SFAS No. 128.
Basic net income (loss) per share is calculated using the weighted average
number of common shares outstanding during each year. The calculation of diluted
net income (loss) per share excludes the effect of potentially dilutive common
stock equivalents because their impact, when calculated using the Treasury stock
method, is antidilutive.
F-9
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
CONTINUED
COMPREHENSIVE INCOME - In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income", which establishes standards for reporting and
display of comprehensive income and its components (revenue, expenses, gains and
losses) in a full set of general purpose financial statements. The company fully
implemented SFAS No. 130 during 1998. Prior years' general purpose financial
statements have been restated to comply with SFAS No. 130.
FOREIGN CURRENCY TRANSLATION - The financial statements of the company's former
U.K. 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 shareholders' equity. The net amount of realized and unrealized
gains and losses on foreign currency transactions are included in other expense
(income).
SEGMENT INFORMATION - In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosure about Segments of an Enterprise and Related Information", which
changes the way public companies report information about operating segments.
SFAS No. 131 is based on the management approach to segment reporting,
establishes requirements to report selected segment information quarterly and to
report entity-wide disclosures about products and services, major customers and
the material countries in which the entity holds assets and reports revenue. The
company fully implemented SFAS No. 131 during 1998 and determined that it has no
reportable segments.
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.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1997 and
1996 financial statements to conform with the 1998 presentation.
REVENUE RECOGNITION - Revenue on machine and bag sales is recognized at the time
the product is shipped to the customer.
WARRANTY - At the time of sale, the company accrues a liability for the
estimated future costs to be incurred under the provisions of its warranty
agreements.
F-10
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2 - UNUSUAL CHARGE
Because of a change in the direction of the industry to the cable-less machine
design, the company determined that the prospects for sales of machines which
incorporate the processes covered by a patent have substantially diminished,
thereby impairing the value of the patent itself. As a result, the value of the
patent, $979,762 was written off during 1997.
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31
--------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Parts and subassembly $ 1,825,990 $ 1,348,323
Work in process and raw materials 857,283 1,030,113
Bags and machines 3,257,016 3,149,803
------------------ ------------------
$ 5,940,289 $ 5,528,239
================== ==================
</TABLE>
In the fourth quarter of 1997, the Board of Directors decided to implement
additional realignment of the company by re-focusing the company's sales efforts
back to its core business products. As a result, certain non-core, long-term
inventory was written down to fair market value or abandoned. The non-core
products that were discontinued and abandoned as a result of the strategic
realignment were both new and used older style tuber, feed table and grain
bagging machines along with general accessory machinery products such as mixer
wagons, bale feeders, airvents, unloaders and parts. During 1996 and 1997, sales
of inventory which was later determined to be non-core products as a result of
the strategic realignment were $760,497 and $514,556, respectively. In addition,
in 1997, the company refined its policy for establishing inventory valuation
reserves. In 1997, in connection with the strategic realignment and resultant
refocusing of the company's sales efforts and in accordance with the refined
policy for valuation reserves, the company reassessed and revised its estimates
of fair market value resulting in an inventory write-down charge totaling
$2,418,778, of which $2,088,223 relates to non-core products and $330,555
relates to core products.
F-11
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4 - INTANGIBLE ASSETS, NET
Intangible assets, net consist of the following:
<TABLE>
<CAPTION>
December 31
--------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
BAW Partnership $ - $ 31,503
License and patent costs 707,845 707,845
Covenant not to compete - 393,263
------------------ ------------------
707,845 1,132,611
Less accumulated amortization 652,891 1,028,064
------------------ ------------------
$ 54,954 $ 104,547
================== ==================
</TABLE>
The covenant not to compete was fully amortized and no longer in effect at
December 31, 1998. This intangible asset, along with the related accumulated
amortization, was relieved from the company's accounts. See Note 2 regarding
1997 fourth quarter write-off of patents.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
<TABLE>
<CAPTION>
December 31
--------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Land $ 160,826 $ 160,826
Buildings 2,589,229 2,624,299
Vehicles 370,141 372,063
Office furniture, fixtures and equipment 1,786,897 1,758,834
Plant equipment 2,744,327 2,457,417
Rental equipment 249,326 596,927
Leasehold improvements 70,014 66,127
------------------ ------------------
7,970,760 8,036,493
Less accumulated depreciation and amortization 4,036,378 3,658,049
------------------ ------------------
$ 3,934,382 $ 4,378,444
================== ==================
</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, 1998 and 1997, gross amount of equipment under
lease was $535,502 and $523,331, respectively. Accumulated depreciation related
to those capital leases was $439,285 and $402,608 at December 31, 1998 and 1997.
F-12
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
NOTE 6 - LINES OF CREDIT
The company has a domestic operating line of credit (LOC) with a bank for up to
$5,000,000 at December 31, 1998, and had a $4,000,000 LOC at December 31, 1997.
The domestic line of credit is secured by accounts receivable and inventories,
and bears interest at the bank's prime rate plus 1/2% (8.25% at December 31,
1998). The 1997 LOC bore interest at the bank's prime rate plus 1 1/2% (10% at
December 31, 1997). As of December 31, 1998 and 1997, $-0- and $1,717,263 were
outstanding under the operating line of credit. The line of credit is subject to
certain covenants. At December 31, 1997, the company was not in compliance with
certain covenants due to the unusual charge the company incurred. The company
obtained a waiver for these violations.
The company had a line of credit agreement (LOC Agreement) for a maximum of
400,000 English pounds ($685,000 at December 31, 1996), bearing interest at
7.75% at December 31, 1996, and was subject to renewal by the bank in June 1997.
The LOC Agreement was secured by all assets of the former Ag-Bag Europe PLC and
was subject to certain covenants. This agreement was renewed in June of 1997.
With the sale of Ag-Bag Europe PLC in December of 1997, this note payable no
longer exists.
F-13
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
December 31
--------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Note payable in monthly installments of $2,638, plus interest at prime
plus 1.75% (9.5% at December 31, 1998 and 10.25% at December 31, 1997),
through 2000, secured by building $ 45,741 $ 77,873
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 147,765 162,890
Note payable in monthly installments of $3,567, including interest at
8% with a balloon payment in 1999, secured by real property 23,334 217,798
Note payable in monthly installments of $4,183, including interest at
9%, secured by certain equipment - 72,851
Note payable in monthly installments of $2,360, plus interest at prime
plus 1.25% (9.75% at December 31, 1997), secured by certain equipment - 70,671
Note payable in monthly installments of $1,474, plus interest at
9.5%, secured by certain equipment - 52,322
Note payable, monthly payments of $6,724, including interest at 9%
through June 2017, secured by real property 721,013 734,866
Note payable in monthly installments of $4,650 including interest at
6.7% through 2017, secured by real property 597,996 613,401
Note payable in monthly installments of $4,186 plus interest at 9%,
secured by fixed asset blanket - 186,513
Note payable in monthly principal installments of $5,833 plus interest
at prime plus .75% (8.50% at December 31, 1998), secured by fixed
asset blanket 303,333 -
Note payable with the City of Blair, Nebraska with monthly installments
of $6,607 including interest at 3% through September 2003, secured by
Blair Plant and Equipment 418,229 483,891
------------------ ------------------
2,257,411 2,673,076
Less: Current portion 241,699 288,574
------------------ ------------------
$ 2,015,712 $ 2,384,502
================== ==================
</TABLE>
F-14
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, CONTINUED
Future maturities of long-term debt and capital lease obligations are summarized
as follows:
<TABLE>
<CAPTION>
Capital lease obligations
Long-term ---------------------------------------------------------
debt excluding Minimum Amount
capital lease lease representing
obligations payments interest Principal
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Year ending December 31: 1999 $ 241,699 $ 148,995 $ 25,006 $ 123,989
2000 201,224 142,173 19,999 122,174
2001 187,625 40,591 6,087 34,504
2002 188,117 29,541 4,056 25,485
2003 141,942 4,339 826 3,513
Thereafter 1,296,804 - - -
----------------- ----------------- ------------------ ------------------
$ 2,257,411 $ 365,639 $ 55,974 $ 309,665
================= ================= ================== ==================
</TABLE>
NOTE 8 - 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 $3,336, $4,883 and $6,222 in 1998, 1997 and 1996,
respectively.
NOTE 9 - INCOME TAXES
The income tax expense (benefit) from continuing operations consists of the
following:
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------------
1998 1997 1996
----------------- ------------------ ------------------
<S> <C> <C> <C>
Current:
Federal $ 487,000 $ (896,500) $ 211,996
Net operating loss utilized (487,000) - -
State 43,414 1,500 35,004
Net operating loss utilized (43,414) - -
----------------- ------------------ ------------------
- (895,000) 247,000
----------------- ------------------ ------------------
Deferred:
Federal 442,220 (638,000) 4,351
State (20,220) (117,000) 5,950
----------------- ------------------ ------------------
422,000 (755,000) 10,301
----------------- ------------------ ------------------
Total income tax expense (benefit) $ 422,000 $ (1,650,000) $ 257,301
================= ================== ==================
</TABLE>
F-15
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES, CONTINUED
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
December 31
--------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Net operating loss carryforwards:
Federal $ 263,000 $ -
State 81,000 -
Capital loss carryforward 135,632 135,632
Inventory write-downs - 721,742
Expenses not currently deductible 111,000 178,865
------------------ ------------------
Gross deferred tax asset 590,632 1,036,239
Valuation allowance (135,632) (135,632)
------------------ ------------------
Net deferred tax asset 455,000 900,607
Gross deferred tax liability, primarily
due to differences in depreciation 120,000 143,607
------------------ ------------------
Net deferred tax asset (liability) $ 335,000 $ 757,000
================== ==================
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1997, was
$176,550. The total valuation allowance decreased $40,918 for the year ended
December 31, 1997.
At December 31, 1998, the company has net operating loss carryforwards for
federal income tax purposes of approximately $773,000 which are available to
offset future federal income, through 2012.
The provision for income taxes from continuing operations 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>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Statutory federal income tax rate 34% (34%) 34%
Realized benefit from foreign net
operating losses - - ( 3 )
Nondeductible items 1 1 4
Other ( 1 ) ( 3 ) 6
------------- ------------- -------------
Effective tax rates 34% (36%) 41%
============= ============= =============
</TABLE>
F-16
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
NOTE 10 - SUPPLEMENTAL DISCLOSURES REGARDING CASH FLOWS
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------------
1998 1997 1996
----------------- ------------------ ------------------
<S> <C> <C> <C>
Cash paid during year for:
Interest $ 437,803 $ 511,686 $ 417,600
Income taxes 800 426 414,500
</TABLE>
NOTE 11 - SHAREHOLDERS' EQUITY
PREFERRED STOCK - The Preferred Stock is redeemable solely at the option of the
company. The company maintains life insurance on the owner of the Preferred
Stock and, in the event of the stockholder's death, currently intends to use the
proceeds of that insurance to redeem all outstanding shares of Preferred Stock.
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, 1998, the following warrants with respective exercise
price per share and date of expiration were outstanding and exercisable:
<TABLE>
<CAPTION>
Number Price per Expiration
Party of shares share date
----------- --------- --------------- -------------
<S> <C> <C> <C>
Note holder 137,500 $ 1.10 February 2001
</TABLE>
STOCK AWARDS - The company has a 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-, 8,240 and $-0- shares for
1998, 1997 and 1996, respectively, with related compensation expense of $-0-,
$8,497 and $-0-, 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 issuable 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 is
determined for each grant by the Board of Directors.
During 1997 and 1996, under the aforementioned incentive plan, the company
granted 20,000 and 50,000 options with an exercise price of $.6875 and $1.06,
respectively. The options were 100% vested at grant date. None of the options
were exercised during 1998.
Also in 1997, the company granted 16,788 options under a non-transferable option
agreement with an exercise price of $1.03. 10,000 options become 100% vested
after two years and 6,788 options were 100% vested at the grant date. None of
the options were exercised during the current year.
F-17
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
NOTE 11 - SHAREHOLDERS' EQUITY, CONTINUED
During 1996, the company adopted a Non-Employee 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 is not an employee 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, 50,000 options were granted in 1998
with an exercise price of $.563 and 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 1998, 1997, and 1996, using the Black-Scholes pricing
model as prescribed under SFAS 123. The following assumptions were made for
grants made in 1998, 1997 and 1996: risk-free interest rate of 5.5%, 6.1% and
6.1%, respectively, expected life of three years, dividend rate of zero percent.
For 1996, the expected volatility over the expected life of the grant was
assumed to be 70%. In 1997, the volatility was assumed to be 62% and in 1998 was
56%.
If the company had accounted for the value of the options granted during 1998,
1997 and 1996, in accordance with SFAS No. 123, the company's net income would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ------------------ ------------------
<S> <C> <C> <C>
Net income (loss):
As reported $ 804,399 $ (3,815,119) $ 363,458
Pro forma 796,534 (3,876,586) 342,485
Net income (loss) per share:
As reported .06 (0.32) 0.03
Pro forma .06 (0.32) 0.03
</TABLE>
The resulting pro forma compensation costs may not be representative of that
expected in future years.
Pro forma net income (loss) reflects only options granted in 1998, 1997, and
1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income (loss)
amounts presented above because compensation cost is reflected over the options'
vesting periods.
F-18
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
NOTE 11 - SHAREHOLDERS' EQUITY, CONTINUED
Transactions and other information relating to the company's stock option plans
for the three years ended December 31, 1998, are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Number average
of shares exercise price
------------------ ------------------
<S> <C> <C>
Options outstanding at December 31, 1995 120,000 3.02
Options granted 350,000 1.06
Options expired (10,000) 3.00
------------------
Options outstanding at December 31, 1996 460,000 1.53
Options granted 36,788 .84
Options expired (110,000) 2.90
-----------------
Options outstanding at December 31, 1997 386,788 1.02
Options granted 50,000 .56
Options expired - -
------------------
Options outstanding at December 31, 1998 436,788 $ .98
================== ==================
</TABLE>
At December 31, 1998, the company had outstanding options of 436,788 with a
weighted average life expectancy of seven years and an exercise price range of
$.56 - 1.06. Of the 436,788 options outstanding, 316,788 were exercisable at
December 31, 1998, at a weighted average exercise price of $.98.
The weighted-average fair value of options granted during 1998, 1997 and 1996,
were $.41, $.46 and, $.53, respectively.
NOTE 12 - OTHER INCOME
In 1998, other income includes income from the company's German Venture. (See
Note 16) In 1997, other income includes a loss on the sale of land of
approximately $37,220. In 1996, other income includes a gain on the sale of a
building of approximately $310,000.
F-19
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
NOTE 13 - FOREIGN SALES ACTIVITY
Export sales from the company's United States operations are as follows:
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------------------
1998 1997 1996
----------------- ------------------ ------------------
<S> <C> <C> <C>
Latin America/Mexico $ 478,000 $ 726,000 $ 1,392,000
Canada 2,030,000 1,380,000 1,788,000
Germany (see Note 16) 1,113,000 1,276,000 1,951,000
Other 285,000 341,000 668,000
----------------- ------------------ ------------------
$ 3,906,000 $ 3,723,000 $ 5,799,000
================= ================== ==================
</TABLE>
NOTE 14 - OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Income tax receivable $ - $ 921,000
Deferred income tax 294,000 118,334
Receivable from sale of Ag-Bag Europe PLC - 647,800
Receivable from sale of land - 182,500
Other 50,172 144,050
------------------ ------------------
$ 344,172 $ 2,013,684
================== ==================
</TABLE>
NOTE 15 - DISCONTINUED OPERATIONS
In December 1997, the Board of Directors approved the sale of Ag-Bag Europe PLC.
The operation was sold by the end of December 1997 for $647,800 in cash. The
loss on the sale of $424,064, net of tax benefit, represents the operation's
activities through December 1997, and the net loss on disposal of the operation
at the end of December 1997.
Summarized data for Ag-Bag Europe PLC are as follows:
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------
1997 1996
------------------ ------------------
<S> <C> <C>
Net sales - unaffiliated customers $ 1,456,795 $ 1,817,731
Income (loss) from operations (448,832) 50,536
Identifiable assets 840,661 1,592,429
Total liabilities 248,636 503,059
</TABLE>
No assets or liabilities remained at December 31, 1997. Intangible assets having
a net value of $6,212 were sold with the sale of Ag-Bag Europe PLC. In addition,
the company wrote off goodwill of $668,612 and related accumulated amortization
which related to Ag-Bag Europe PLC.
F-20
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
NOTE 16 - GERMAN VENTURE
On February 27, 1997, the company entered into a General Partnership Agreement
with Budissa Agroservice Gesellschaft and formed the Partnership BAW (Budissa
Agrodienstleistungen und Warenhandels). The company has a 50% interest in the
Partnership. The Partnership folds and distributes silage bags throughout
Europe. The net income (loss) of the Partnership for the years ended December
31, 1998 and 1997 was insignificant.
On February 27, 1997, the Partnership BAW also entered into a lease agreement
with Ag-Bag International Limited for the use of a folding machine. Royalties
are paid based upon the poundage folded by BAW. In 1998, income from this
agreement was $92,000. In 1997, revenue to the company was insignificant.
NOTE 17 - COMMITMENTS
The company has entered into an agreement with an investment banking firm. The
firm will represent Ag-Bag International Limited in exploring strategic
financial alternatives. Fees are contingent upon completion of a transaction.
The ultimate fee will range from 3% to 6% of the transaction value depending
upon the nature of the transaction. The company has already prepaid $80,000
towards this fee.
The company purchases its Tri-Dura-REGISTERED TRADEMARK- rolls from a company
owned by Steven G. Ross ("supplier") pursuant to a supply agreement. Steven G.
Ross is a 14.9% stockholder in the company and owner of a company which competes
with the company's Tri-Dura-REGISTERED TRADEMARK- bags. The supply agreement
provides that the company is obligated to purchase all of its plastic rolls,
with certain exceptions, from supplier through at least January 1, 2004.
Thereafter, either the company or supplier may terminate the supply agreement
upon two years' prior written notice. The company may purchase plastic rolls
from other suppliers to the extent supplier is unable to supply plastic rolls
under the supply agreement.
The company considers its relationship with supplier as good. The company
believes there are adequate alternative suppliers available in the event
supplier is unable to provide rolls.
NOTE 18 - NON CASH INVESTING AND FINANCING ACTIVITIES
During 1998, the company issued a new note payable in the amount of $350,000,
the proceeds of which were used to pay-off existing long-term debt.
NOTE 19 - CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the company to credit risk
consist of cash and receivables. The company's cash balances are with reputable
banks and periodically exceed insured limits.
F-21
<PAGE>
NOTE 20 - YEAR 2000 COMPLIANCE
Recognizing the need to ensure its operations will not be adversely impacted by
Year 2000 failures, the company has developed a proactive plan for minimizing
its risk and ensuring its computer hardware, software, vendors and business
partners are Year 2000 compliant. The company has completed its assessment of
the effect of the Year 2000 issues and implemented the modifications which were
identified. The company is also working with its vendors and customers to
identify any Year 2000 problems which might arise. The company believes that any
remaining compliance issues will be resolved in the near term and that any
related costs will not have a material impact on the operations, cash flows or
financial condition of the company.
F-22
<PAGE>
- - --------------------------------------------------------------------------------
SUPPLEMENTARY INFORMATION
- - --------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITORS' REPORT ON
SUPPLEMENTARY INFORMATION
To the Board of Directors and Shareholders
Ag-Bag International Limited
Under date of February 19, 1999, we reported on the balance sheet of Ag-Bag
International Limited as of December 31, 1998, and the related statements of
operations, shareholders' equity, and cash flows for the year ended December 31,
1998, as contained in the annual report on Form 10-K for the year 1998. In
connection with our audit of the aforementioned financial statements, we also
audited the related schedule of Valuation and Qualifying Accounts. This schedule
is the responsibility of the company's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audit.
In our opinion, the schedule of Valuation and Qualifying Accounts, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The basic financial statements of Ag-Bag International Limited for the years
ended December 31, 1997 and 1996, were audited by other auditors whose report
dated February 25, 1998, expressed an unqualified opinion on those financial
statements. Their report, as of the same date, on the related financial
statement schedule as listed in the table of contents, stated that, in their
opinion, such information was fairly stated in all material respects in relation
to the basic financial statements for the years ended December 31, 1997 and
1996, taken as a whole.
/s/ Yergen & Meyer LLP
Portland, Oregon
February 19, 1999
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Ag-Bag International Limited:
Under date of February 25, 1998, we reported on the balance sheet of Ag-Bag
International Limited as of December 31, 1997, and the related statements of
operations, shareholders' equity, and cash flows for the years ended December
31, 1997 and 1996, as contained in the annual report on Form 10-K for the year
1998. In connection with our audits of the aforementioned financial statements,
we also audited the related schedule of valuation and qualifying accounts for
the years ended December 31, 1997 and 1996. 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, the schedule of valuation and qualifying accounts for the years
ended December 31, 1997 and 1996, when considered in relation to the basic
financial statements for the years ended December 31, 1997 and 1996 taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
February 25, 1998
F-24
<PAGE>
AG-BAG INTERNATIONAL LIMITED
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- - -------------------------------------- ------------- -------------- ------------- --------------
Balance at Charged to Charged to Write-offs, Balance
beginning costs and other net of at end
Description of period expenses accounts recoveries of period
- - -------------------------------------- ------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31:
1998:
Allowance for doubtful accounts 200,000 170,000 (42,490) 327,510
Warranty reserve 125,000 263,849 (248,849) 140,000
Inventory valuation reserve 125,000 135,000 (13,265) 246,735
1997:
Allowance for doubtful accounts 248,824 211,822 (52,246)* (208,400) 200,000
Warranty reserve 75,633 253,308 (203,941) 125,000
Inventory valuation reserve 372,500 422,400 (669,900) 125,000
1996:
Allowance for doubtful accounts 234,913 105,423 (91,512) 248,824
Warranty reserve 50,000 222,972 (197,339) 75,633
Inventory valuation reserve 64,000 308,500 372,500
*DUE TO SALE OF SUBSIDIARY.
</TABLE>
F-25
<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)
4.3 Warrant dated February 13, 1995, to Norwood Venture Corp.(2)
10.1 Employment Contract of Larry R. Inman(1)*
10.3 1991 Employee Stock Plan, as amended effective November 1, 1996(3)*
10.4 Incentive Stock Option Plan, as amended effective November 1, 1996(3)*
10.5 Nonemployee Director Stock Option Plan(3)*
11 Statement re computation of earnings per share
12 Statement re computation of ratios
21 Subsidiaries of the Registrant
27 Financial Data Schedule for fiscal year 1998
* 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 for the fiscal year ended
December 31, 1996
29
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Basic earnings per share:
Net income (loss) $ 533,427 $ 107,193 $ 363,458 $(3,815,119) $ 804,399
Preferred stock dividends (59,160) (59,160) (59,160) (59,160) (59,160)
Debenture interest 42,944
------------- ------------- ------------ ----------- -------------
517,211 48,033 304,298 (3,874,279) 745,239
============= ============= ============ =========== =============
Basic weighted average number
of shares outstanding (1)11,644,785 (1)12,062,019 (1)12,095,751 (1)12,056,641 (1)12,061,991
============= ============= ============= ============= =============
Basic earnings per share
Income (loss) before
discontinued operations $ .04 $ .02 $ .03 $ (.24) $ .06
Discontinued operations (.01) (.08)
------------- ------------- ------------- ------------- -------------
$ .04 $ .01 $ .03 $ (.32) $ .06
============= ============= ============= ============= =============
Diluted earnings per share:
Net income (loss) $ 533,427 $ 107,193 $ 363,458 $ (3,815,119) $ 804,399
Preferred stock dividends (59,160) (59,160) (59,160) (59,160) (59,160)
Debenture interest 42,944
------------- ------------- ------------- ------------ -------------
517,211 48,033 304,298 (3,874,279) 745,239
============= ============= ============= ============ =============
Diluted weighted average
number of shares outstanding (1)11,644,785 (1)12,062,019 (1)12,095,751 (1)12,056,641 (1)12,061,991
============= ============= ============= ============ =============
Diluted earnings per share
Income (loss) before
discontinued operations $ .04 $ .02 $ .03 $ (.24) $ .06
Discontinued operations (.01) (.08)
------------- ------------- ------------- ------------ -------------
$ .04 $ .01 $ .03 (.32) $ .06
============= ============= ============= ============ =============
<FN>
<F1> See Note 1 to the financial statements
</FN>
</TABLE>
EXHIBIT 12
STATEMENT RE COMPUTATION OF RATIOS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Pretax earnings (losses) $ 962,344 $ 479,146 $ 570,223 $(4,592,223) $ 1,226,399
Interest expense 465,743 359,202 376,341 475,056 437,803
------------- ------------- ------------ ----------- -------------
Subtotal (A) 1,428,087 838,348 946,564 (4,117,167) 1,664,202
------------- ------------- ------------ ----------- -------------
Interest expense 465,743 359,202 376,341 475,056 437,803
Preferred stock dividend
requirements 107,564 219,111 100,271 92,438 89,636
------------- ------------- ------------ ----------- -------------
Subtotal (B) $ 573,307 $ 578,313 $ 476,612 $ 567,494 $ 527,439
------------- ------------- ------------ ----------- -------------
(A) divided by (B) 2.49 1.45 1.99 (7.25)(1) 3.16
==== ==== ==== ========= ====
<FN>
<F1> Due to unusual charge
</FN>
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
None.
<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, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000842289
<NAME> Ag-Bag International Limited
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 360,958
<SECURITIES> 656
<RECEIVABLES> 2,661,422
<ALLOWANCES> 327,510
<INVENTORY> 5,940,289
<CURRENT-ASSETS> 9,390,507
<PP&E> 7,970,760
<DEPRECIATION> 4,036,378
<TOTAL-ASSETS> 13,820,268
<CURRENT-LIABILITIES> 2,573,132
<BONDS> 0
0
696,000
<COMMON> 120,619
<OTHER-SE> 8,220,910
<TOTAL-LIABILITY-AND-EQUITY> 13,820,268
<SALES> 27,710,514
<TOTAL-REVENUES> 28,084,403
<CGS> 20,800,441
<TOTAL-COSTS> 26,420,201
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 437,803
<INCOME-PRETAX> 1,226,399
<INCOME-TAX> 422,000
<INCOME-CONTINUING> 804,399
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 804,399
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
