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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 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 20, 1998, the
aggregate market value of the voting stock of registrant held by non-affiliates
was $4,967,321.
The registrant has one class of Common Stock with 12,061,991 shares
outstanding as of March 20, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the proxy statement for the Registrant's Annual Meeting of
Stockholders to be held June 1, 1998, are incorporated into Part III of this
report.
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<PAGE>
AG-BAG INTERNATIONAL LIMITED
TABLE OF CONTENTS
PAGE
PART I ............................................................1
Item 1. Business....................................................1
Item 2. Property....................................................9
Item 3. Legal Proceedings..........................................10
Item 4. Submission of Matters to a Vote of Security Holders........10
Executive Officers of the Registrant....................................10
PART II ...........................................................11
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................11
Item 6. Selected Financial Data....................................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..............................................22
Item 8. Financial Statements and Supplemental Data.................22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................22
PART III ...........................................................22
Items 10. and 11. Directors and Executive Officers of Registrant
and Executive Compensation...............................22
Item 12. Security Ownership of Certain Beneficial Owners
and Management...........................................22
Item 13. Certain Relationships and Related Transactions.............23
PART IV ...........................................................23
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K..............................................23
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PART I
------
ITEM 1. BUSINESS
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GENERAL
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Ag-Bag International Limited (the "Company") was incorporated as a New York
corporation in 1989. The primary operating company, Ag-Bag Corporation, a
Nebraska corporation, was incorporated in 1978. The Company changed its name in
1990 from AB Holding Group, Inc. to Ag-Bag International Limited. In 1994, in an
effort to streamline and save administrative expenses, two of the Company's
operating subsidiaries, A.B. Rental, Inc. and Ag-Bag Corporation were merged
into the Delaware subsidiary, ABVIN Merging Corp. On January 1, 1995, the
Company was merged into its Delaware subsidiary resulting in the reincorporation
of the Company in Delaware and a change in its name to Ag-Bag International
Limited.
The Company has pioneered an alternate method of storing feed for
livestock. Traditional methods of storing feed have included placing it in
bunkers, pits, and silos or baling and stacking it. The Company's method is to
store the feed in huge plastic bags of up to 250 feet in length and up to 12
feet in diameter by tightly stuffing the feed into the bag. The Company
assembles the machines for stuffing the feed into the bags. It has the bags
manufactured to its specifications and then folds and distributes the bags
through its dealer network. The benefits of bagging the feed include reduced
cost, additional flexibility in harvesting and storing the feed, enhanced feed
quality, and relatively small capital requirements. The Company also sells
ancillary products which complement the Company's main line of bagging machines
and bags.
The following table identifies the revenue from each product line that
accounted for more than 15% of total revenue over the last three years:
Product 1995 1996 1997
--------- ---- ---- ----
Bags $10,932 $13,294 $12,355
Machines $ 5,380 $ 8,199 $ 6,236
Other $ 1,347 $ 1,492 $ 1,702
------- ------- --------
Net Sales $17,659 $22,985 $20,293
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.
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In 1994, the Company shipped its first orders to dealers in Japan, Latin
America and Germany. The Company also sells in Thailand, Australia, New Zealand,
Spain, France, Italy, Central Europe and Puerto Rico.
The Company is developing other uses for its bagging technology. In 1993,
it established an environmental division focused on composting technologies and
a grain bagging division. In late 1997, the Company dissolved its grain bagging
division. 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
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The core business of the Company is historically seasonal due to the
harvest seasons in North America and Europe. The Company's machinery tends to be
purchased in anticipation of the next harvest season, so most of the sales of
machinery occur in the spring and summer. This requires the Company to carry
significant amounts of inventory to meet rapid delivery requirements of
customers. Bag sales tend to occur as the harvest season approaches in the
summer, and during the harvest season in the fall. In 1994, the Company began to
counteract some of its seasonality by generating sales in Latin America, and in
1996 expanded into Australia, in addition to expanding into the compost market.
Approximately 95% of the Company's business is concentrated in the Northern
Hemisphere resulting in between 60-75% 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:
Quarter 1995 1996 1997*
------- ---- ---- ----
1st 26% 17% 14%
2nd 33% 30% 40%
3rd 30% 36% 35%
4th 11% 17% 11%
* 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.
FARM EQUIPMENT AND PRODUCTS
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INTRODUCTION. Silage is made using the Ag-Bag-REGISTERED TRADEMARK- system
by storing forage crops, such as corn, sorghum, or alfalfa, under anaerobic
(without oxygen) conditions in sealed Ag-Bag Tri-Dura-REGISTERED TRADEMARK-
storage bags. The traditional methods for making silage involve storing it in
bunkers, pits or silos. Using traditional methods, there is a nutrient loss
resulting from a reduction in the moisture content of the forage before storage.
The moisture content must be reduced to compensate for the high oxygen content
of the forage which results from the inability to pack the forage tightly
enough. When the forage is not packed sufficiently, the silage fermentation
process produces too much heat resulting in an even greater loss of nutrient
value that would occur if the moisture content were not reduced. The loss of
nutrient value results in the need for additional food supplements or an
increased volume of feed.
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The Ag-Bag-REGISTERED TRADEMARK- system is an alternative to bunkers, pits
and silos. The Ag-Bag-REGISTERED TRADEMARK- bagging machines push the forage
into huge recyclable plastic film Tri-Dura-REGISTERED TRADEMARK- bags with
sufficient compaction to minimize the amount of oxygen in the bag which is then
sealed tightly when filled. As a result, the forage can be stored with
significantly higher moisture content. The ability to store the forage in this
manner also reduces the time required to cut and store the forage thus reducing
the loss of nutrients.
AG-BAG-REGISTERED TRADEMARK- FARM EQUIPMENT. The Company's principal line
of farm equipment is marketed under the trade name "Ag-Bagger-REGISTERED
TRADEMARK-." The Ag-Bagger-REGISTERED TRADEMARK- is available in three versions
with a number of optional features.
The smallest version consists of machines used to load forage into Ag-Bag
Tri-Dura-REGISTERED TRADEMARK- storage bags ranging in size from 8 to 10 feet in
diameter and 100 to 200 feet in length. This version was first introduced by the
Company in 1987. It is used primarily in smaller dairy and cattle feeding
operations by dairymen with herds averaging about 50 head and by cattlemen
feeding up to about 300 head of feeder cattle. Most of these machines are
powered by the power take-off unit of a farm tractor and moved by a tractor or
other farm vehicle. The retail price for this machine ranges from approximately
$20,000 to $45,000.
In 1992, the Company introduced a medium-sized machine which can be
operated by the power take-off unit of a farm tractor or operated independently
with an optional diesel engine made by Caterpillar or Deere & Company. This
machine allows farmers to load forage into Ag-Bag Tri-Dura-REGISTERED TRADEMARK-
storage bags ranging in size from 9 to 10 feet in diameter and 100 to 250 feet
in length. This machine is primarily suitable for use by dairymen with herds
ranging from 150 to 300 head and by cattlemen feeding between 300 and 800 head
of feeder cattle. The retail price for this machine ranges from approximately
$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 250 feet in length. These machines are used primarily by
dairymen with herds ranging from 300 to 2,000 head, by cattlemen with herds
ranging from 800 to 15,000 head, and by custom operators. A super 12-foot
Ag-Bagger-REGISTERED TRADEMARK- was developed in 1989 and enhanced in 1995 for
use by very large dairy and custom operators and by cattle feeding operations
with herds ranging from 15,000 to 25,000 head of cattle. The larger machines are
available with optional diesel engines made by Caterpillar or Deere & Company.
The retail price for the larger machines ranges from approximately $180,000 to
$230,000.
A wide range of optional features are offered by the Company on its bagging
machines in order to meet the budget needs of the farmer.
The Company assembles and sells a separate line of related equipment called
the Ag-Bag Flex-a-Tuber-REGISTERED TRADEMARK- with a retail price ranging from
$6,000 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 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
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manufactures them in sizes ranging from one-half cubic yard to two cubic yards
with a retail price ranging from $3,000 to $4,500.
In 1996, the Company developed and introduced the Square Bale Bagger which
retails for between $22,500 and $26,000. 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 250 feet in length and are made of extruded
plastic. Rolls of plastic are manufactured to the Company's specifications. The
Company then converts the rolls into bags by cutting the rolls into the various
bag lengths and folding the bags for use on the Company's bagging machines. The
plastic contains special stabilizers to protect the bags from deterioration due
to exposure to weather and the sun's ultraviolet rays. Once a
Tri-Dura-REGISTERED TRADEMARK- bag is used, it may be recycled or disposed of in
another manner, but may not be reused.
The Company contracts for the manufacture of, and sells Tri-Dura-REGISTERED
TRADEMARK- three-ply bags with a white exterior and black interior intended for
storage of silage up to 24 months. The retail price of the bags ranges from
approximately $225 to $950. The manufactured plastic rolls are shipped to the
Company's plant in Blair, Nebraska, where they are folded and packed for sale
using proprietary folding techniques. The proprietary bag folding techniques
reduce bag folding time and allow the bags to uniformly unfold when being
filled, which thereby reduces operational delays.
AG-BAG-REGISTERED TRADEMARK- INOCULANT. The Company markets a liquid
inoculant and a dry powder inoculant under the trade name Ag-Bag
Plus!-REGISTERED TRADEMARK-. The inoculant is added to the forage or the round
or square bales during bagging. It enhances the fermentation process for making
silage in bags, bunkers, pits and silos by substantially shortening the time
necessary for the creation of the silage. A liquid inoculant was developed in
1989 by a Company supplier and introduced into the market in 1990. The Company
has experienced an increase in the sales of liquid inoculant since June 1990.
The dry inoculant is produced from a proprietary formula owned by the Company
and developed by Larry R. Inman and Walter L. Jay. See "Executive Officers of
the Registrant." The Company also markets an inoculant designed specifically for
bunkers, pits and storage of high moisture grain.
Bags and machines each account for more than 30% of the Company's
consolidated revenue and have done so for the last three years.
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MARKET SIZE
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The market for Ag-Bag-REGISTERED TRADEMARK- machinery and Ag-Bag
Tri-Dura-REGISTERED TRADEMARK- recyclable storage bags is primarily in the dairy
and beef cattle industries. Silage is used most often as dairy and beef animal
feed. It is also used by farmers to a lesser extent to feed hogs and sheep. In
1996, over 170,000,000 tons of corn, alfalfa, and sorghum silage were made by
United States farmers according to the AG IQ Handbook X published in 1997 by
Agricom, Inc. (the "AG Handbook"). Based on AG Handbook statistics, the Company
estimates that there are approximately 150,000 dairy, beef, hog, and sheep farms
in the United States which are potential customers for Ag-Bag-REGISTERED
TRADEMARK- farm equipment and Tri-Dura-REGISTERED TRADEMARK- storage bags; and
that only about 5-7% of this group are actually using storage bags made by the
Company and its competitors. It further estimates that about 55% of the
customers using silage storage bags purchase them from the Company. In addition
to the U.S., the Company believes there is a large population of such farms in
Canada, Latin America, Germany, Central Europe, Australia, Spain, France, Japan,
Thailand, New Zealand, Puerto Rico, and the United Kingdom where the Company
currently operates, and there is a large potential market in other countries
into which the Company may expand.
The Company 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 $1 billion a year. In the composting area, the Company sold 2
bagging systems in 1997 compared to 4 in 1996, placed 2 sublicense agreements
and commenced 5 pilot projects in 1997. 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
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The Company markets its Ag-Bag-REGISTERED TRADEMARK- farm equipment,
Tri-Dura-REGISTERED TRADEMARK- storage bags, Ag-Bag Plus!-REGISTERED TRADEMARK-
and other inoculants primarily through a network of United States, Canadian, and
international dealers. As of December 31, 1997, there were 150 dealers serviced
by a combined total of 17 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, 1997, the Company had
5 machines available for rent. The Company also sells Tri-Dura-REGISTERED
TRADEMARK- storage bags in bulk to several custom farming operations in the
state of California which own Ag-Bag-REGISTERED TRADEMARK- bagging equipment.
These operators place their private labels on the bags and bag forage for
customers on a fee-per-bag basis.
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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 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.
The Company has 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, Square Bale Baggers, and
Flex-a-Tubers-REGISTERED TRADEMARK- are all assembled at the Company's
headquarters facility in Warrenton, Oregon. The smaller machines are assembled
both at the Warrenton facility and at the Company's Blair, Nebraska plant.
The Company assembles all of its machines in order to better control the
quality of the farm equipment. This method also permits the Company to offer
customized assembly for the end user of its equipment. The Company can acquire
and install name brand manufactured components specified by the customer in lieu
of those ordinarily installed by the Company.
AG-BAG TRI-DURA-REGISTERED TRADEMARK- STORAGE BAGS. All of the three-ply
Tri-Dura-REGISTERED TRADEMARK- bonded storage bags are manufactured for the
Company by a single manufacturer. The bags are manufactured to the Company's
specifications using a stabilizer which protects the plastic from becoming
brittle due to exposure to weather and the sun's ultraviolet light rays. The
Tri-Dura-REGISTERED TRADEMARK- plastic bags are made in various diameters based
on bag orders received by the Company. The bags are shipped in uncut rolls to
the Company's plant in Blair, Nebraska, where they are cut to the proper lengths
and folded for shipment to the Company's dealers or directly to large customers,
such as feedlots.
AG-BAG-REGISTERED TRADEMARK- INOCULANTS. The liquid inoculant is purchased
by the Company on the open market. The Company believes that the liquid
inoculant will be reasonably available for purchase on the open market in the
foreseeable future. The dry inoculant is produced by the Company at the Blair,
Nebraska plant pursuant to a proprietary formula owned by the Company and
developed by Larry R. Inman and Walter L. Jay. See "Executive Officers of the
Registrant."
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PRINCIPAL SUPPLIERS AND MANUFACTURERS
- -------------------------------------
The Company purchases its Tri-Dura-REGISTERED TRADEMARK- bags from one
supplier and the Company considers its relationship with the supplier as good.
The Company believes there are adequate alternative suppliers available in the
event the supplier is unable to provide bags.
The structural components of the Company's farm equipment are manufactured
in Oregon under agreements with two manufacturing companies. The Company
believes that alternative sources of supply are readily available at competitive
prices if the present sources of supply should become unavailable. The Company
is not aware of any raw materials shortages or problems with these suppliers
which would adversely affect the operations of the Company's business.
The Company mixes the dry inoculant at its Blair, Nebraska facility. It
purchases the ingredients for the dry inoculant from a variety of suppliers. The
Company purchases the liquid inoculant from a supplier, who mixes the inoculants
to the Company's specifications. The Company believes there are various other
alternative sources of supply.
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
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and requiring no turning or watering. There are approximately 50 manufacturers
of turners. In addition, the Company also competes with about five companies
which manufacture "in-vessel" systems, such as burners and incinerators for
large projects, generally ranging from $1 to $15 million.
In addition to the current competition, national competitors may emerge if
the bagging equipment and storage bag markets continue to grow. These potential
competitors include large farm equipment manufacturers and large chemical
companies who might decide to manufacture and sell the storage bags.
The Company competes in its product markets primarily on the basis of
product quality, warranty protection, and customer service. Some of its
competitors are larger and have greater financial, marketing, technical, and
other resources than the Company.
BACKLOG
- -------
In 1998, backlog orders were 10% less than 1997. The dollar amount of
backlog orders of the Company that are believed to be firm, as of March 1, 1998,
was approximately $3,600,000, compared to $4,000,000 on March 1, 1997. 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, 1997.
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."
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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.
EMPLOYEES
- ---------
On December 31, 1997, the Company had 97 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
----------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Sales to unaffiliated customers:
United States $13,509 $17,133 $16,501
Canada 1,418 1,788 1,380
Germany 1,680 1,951 1,276
Latin America/Mexico 613 1,392 726
Other foreign countries 322 668 341
------- ------- -------
$17,542 $22,932 $20,224
Sales to affiliated customers:
Officers and Directors 117 53 69
------- ------- -------
Total $17,659 $22,985 $20,293
======= ======= =======
Sales or transfers between United States
and United Kingdom: ........................ $ 329 $ 237 $ 165
======= ======= =======
</TABLE>
Reference is also made to the Selected Financial Data at Item 6.
ITEM 2. PROPERTY
- -----------------
In early 1990, the Company began occupying its 30,000 square foot facility
located in Warrenton, Oregon. This facility serves as a warehouse and houses the
major portion of its silage bagging equipment manufacturing. The Company's
administrative offices are also located there. Management estimates that the
manufacturing at the Warrenton plant is currently at approximately 60% of
capacity. The Company occupies the land pursuant to a lease which expires in
2015.
The Company owns facilities in Blair, Nebraska, where the Company folds and
packages its Tri-Dura-REGISTERED TRADEMARK- feed storage bags; prepares and
packages its proprietary inoculant; assembles some of its smaller bagging
9
<PAGE>
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 $1,348,267. Management estimates that manufacturing at the Blair
facility is currently at approximately 65% of capacity.
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
recently filed for bankruptcy under Chapter 7 of the federal bankruptcy laws.
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 is currently
negotiating with the trustee in bankruptcy for Michael A. Hunt to dismiss the
Hunt Case with prejudice. 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 1997, 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
20, 1998, 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 47 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).
10
<PAGE>
Michael R. Wallis 33 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 58 1990 Vice President, Sales (since 1991);
Treasurer of the Company (1990-1991) and
(1983-1991) Ag-Bag Corporation (former
subsidiary).
Lou Ann Tucker 44 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 37 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 February 27, 1998 that its Common
Stock will be removed from quotation on the Nasdaq inter-dealer quotation system
on May 28,1998 if the Company continues to not qualify under the new Nasdaq
listing requirements. In the event the Company's common Stock is removed from
quotation on the Nasdaq, the Company anticipates the Common Stock would be
traded in the over-the-counter market (bulletin board system).
On December 31, 1997, there were approximately 350 holders of record of
Common Stock. The Company estimates there are approximately 2,500 beneficial
holders of the Common Stock. The closing price for the Common Stock on March 20,
1998, as reported by Nasdaq was $.625 per share.
The following table sets forth the range of high and low bid prices of the
Company's Common Stock for the quarters indicated through the fourth quarter of
1997:
<TABLE>
<CAPTION>
Calendar Year High Bid Low Bid
<S> <C> <C>
1996:
First quarter 1-15/32 1-1/8
Second quarter 1-47/64 1-3/16
Third quarter 1-5/16 11/16
11
<PAGE>
Fourth quarter 1-1/8 25/32
1997:
First quarter 1-3/8 13/16
Second quarter 7/8 9/16
Third quarter 1 5/8
Fourth quarter 1 31/64
- ------------------------
</TABLE>
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>
10,211 Shares of
April 6, 1995 Common Stock(1) N/A Employees $0
- ----------------------------- ----------------------- ------------------ ------------------- ---------------------
300,000 Options for
Common Stock/$1.0625 Nonemployee
November 11, 1996 per share(2) N/A Directors $0
- ----------------------------- ----------------------- ------------------ ------------------- ---------------------
50,000 Options for
Common Stock/$1.0625
November 11, 1996 per share(3) N/A Officers $0
- ----------------------------- ----------------------- ------------------ ------------------- ---------------------
For consulting
6,788 Options for services; value of
Common Stock/$.6875 services estimated
February 17, 1997 per share(4) N/A Patrick Meunier to be $5,000
- ----------------------------- ----------------------- ------------------ ------------------- ---------------------
10,000 Options for
Common Stock/$.6875
February 17, 1997 per share(5) 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(1) N/A Employees $0
- ----------------------------- ----------------------- ------------------ ------------------- ---------------------
<FN>
<F1> Granted under the 1991 Employee Stock Plan.
<F2> Granted under Nonemployee Director Stock Option Plan. Options vest according to terms of plan.
<F3> Granted under the Incentive Stock Option Plan. Options vest immediately.
<F4> Issued pursuant to 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.
<F5> Issued pursuant to a nontransferable option agreement which provides for vesting as follows:
100% vested after two years from date of grant.
</FN>
</TABLE>
13
<PAGE>
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.
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, 1993, 1994,
1995, 1996 and 1997. 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,
---------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net Sales $ 18,617 $ 20,707 $ 17,659 $ 22,985 $ 20,293
Cost of Sales 13,089 14,833 12,679 17,791 18,493
-------- -------- -------- -------- --------
Gross Profit from Operations 5,528 5,874 4,980 5,194 1,800
Selling and Administrative Expenses 4,285 4,490 4,219 4,739 5,035
Research and Development Expenses 123 60 68 59 87
Unusual Charge 980
-------- -------- -------- -------- --------
Income (Loss) from Operations 1,120 1,324 693 396 (4,302)
Other Income (Expense) (243) (362) (214) 174 (290)
-------- -------- -------- -------- --------
Income (Loss) before Provision for
Income Taxes, Discontinued Operations
and Extraordinary Item 877 962 479 570 (4,592)
Provision (Benefit) for Income Taxes 181 429 286 257 (1,650)
-------- -------- -------- -------- --------
Income (Loss) before Discontinued
Operations and Extraordinary Item 696 533 193 313 (2,942)
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)
-------- -------- -------- -------- --------
Income(Loss) before Extraordinary
Item 696 533 107 363 (3,815)
Extraordinary Item-Gain on
Extinguishment of Debt (Less Income
Taxes of $78,200) 152
-------- -------- -------- -------- --------
Net Income (Loss) $ 848 $ 533 $ 107 $ 363 $ (3,815)
======== ======== ======== ======== ========
14
<PAGE>
<CAPTION>
(In thousands, except per share data)
Year Ended December 31,
---------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Basic Earnings per Share:
Income (Loss) before Discontinued
Operations and Extraordinary Item $ 0.06 $ 0.04 $ 0.02 $ 0.03 $ (.24)
Discontinued Operations (.01) (.08)
Extraordinary Item $ 0.01
-------- -------- -------- -------- --------
$ 0.07 $ 0.04 $ 0.01 $ 0.03 $ (0.32)
======== ======== ======== ======== ========
Diluted Earnings per Share:
Income (Loss) before Discontinued
Operations and Extraordinary Item $ 0.06 $ 0.04 $ 0.02 $ 0.03 $ (.24)
Discontinued Operations (.01) (.08)
Extraordinary Item $ 0.01
-------- -------- -------- -------- --------
$ 0.07 $ 0.04 $ 0.01 $ 0.03 $ (.32)
======== ======== ======== ======== ========
Weighted Average Shares:
Basic 10,581 11,645 12,062 12,096 12,056
======== ======== ======== ======== ========
Diluted 10,581 11,645 12,062 12,096 12,056
======== ======== ======== ======== ========
Balance Sheet Data:
December 31,
---------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Working Capital $ 5,566 $ 5,334 $ 6,078 $ 6,090 $ 5,681
Current Assets 8,905 8,445 9,379 8,746 9,889
Total Assets 15,633 15,546 16,297 16,903 15,190
Current Liabilities(1) 3,339 3,111 3,301 2,656 4,208
Long-term Debt(1) 2,263 1,056 1,237 2,061 2,690
Total Stockholders' Equity(2) 10,031 11,379 11,759 12,186 8,292
- -------------------------------
<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
- --------------------------------------------------------------------------------
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,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales 100% 100% 100% 100% 100%
Costs and Expenses:
Cost of Sales 70% 72% 72% 77% 91%
Selling and Administration 23% 22% 24% 21% 25%
Research and Development 1% --- --- --- ---
Unusual Charge --- --- --- --- 5%
Income (Loss) From Operations 6% 6% 4% 2% (21%)
---- ---- ---- ---- ----
</TABLE>
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------
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 year ended December 31, 1997 and
are not consolidated, as the sale was effective December 31, 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 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
16
<PAGE>
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.
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 & 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 & European dealers.
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 above mentioned
inventory write down coupled with lower sales volumes to cover fixed
17
<PAGE>
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.
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------
UNITED STATES OPERATIONS. Net sales for the year ended December 31, 1996
increased 30.16% to $22,985,293 compared to $17,658,894 for the year ended
December 31, 1995. The increase for the year was the result of increased capital
expenditures by farmers due to continued improvement in milk and beef prices, in
addition to the Company's international sales continuing to grow with further
expansion into
18
<PAGE>
South America, Australia and Europe, along with sales of its Pro-Grain bagger
and composting systems. The introduction of the new Square Bale Bagger also
added to the increase in sales for 1996 with the sale of 20 of these new units.
Gross profit from sales for the year ended December 31, 1996 increased
4.28% to $5,193,654 compared to $4,980,321 for the year ended December 31, 1995.
The increase for the year was the result of increased sales volumes, being
offset by lower margins on used equipment, lower bag margins as a result of
intense competition in certain areas of the United States and increased
transportation costs.
Selling expenses for the year ended December 31, 1996 increased 10.48% to
$2,465,276 compared to $2,231,408 for the year ended December 31, 1995. The
increase in selling expenses was the result of increased commissions resulting
from increased sales, coupled with increases in sales and marketing activities
in the Company's domestic and international markets as well as its grain and
compost divisions.
Administrative expenses for the year ended December 31, 1996 increased
14.39% to $2,273,548 compared to $1,987,452 for the year ended December 31,
1995. The increase in administrative expenses was the result of higher
professional fees coupled with increased retirement plan expense and general
operating overhead necessary to support international expansion and the grain
and compost divisions.
Interest expense for the year ended December 31, 1996 increased 4.77% to
$376,341 compared to $359,202 for the year ended December 31, 1995. The increase
in interest expense was the result of the Company using a larger portion of its
credit facility resulting from an inventory build-up in late 1995, coupled with
the fact that the Company had to offer extended terms to some customers to
remain competitive.
Net income after tax and before adjustments for intercompany support and
eliminations for the year ended December 31, 1996 was $312,922 compared to
$192,746 for the year ended December 31, 1995. The increase for the year was the
result of increased sales resulting from continued favorable milk and beef
prices, coupled with increased international, grain and compost sales, and a
gain from the sale of property, including two of the Company's facilities in
Blair, Nebraska, which were offset by tightening margins, higher transportation
costs and increased selling, administrative and interest expenses.
AG-BAG EUROPE, PLC OPERATIONS. Net sales for the year ended December 31,
1996 increased 1.19% to $1,817,731 compared to $1,796,275 for the year ended
December 31, 1995. The increase in sales was the result of increased custom work
coupled with a slight increase in the value of the British pound against the US
dollar, as the tonnage yield in the UK remained comparable with 1995.
Gross profit from sales for the year ended December 31, 1996 increased
13.77% to $491,166 compared to $431,729 for the year ended December 31, 1995.
The increase in gross profit for the year was the result of lower maintenance
costs associated with the rental bagging machines and custom operations, coupled
with lower contracting, personnel and operator costs.
Selling expenses for the year ended December 31, 1996 decreased 16.45% to
$141,177 compared to $168,979 for the year ended December 31, 1995. The decrease
in selling expenses for the year was the result of reduced commissions and
marketing expense from the Company changing its strategy of using an exclusive
marketing agent to using its own sales force.
19
<PAGE>
Administrative expenses for the year ended December 31, 1996 decreased
6.13% to $275,255 compared to $293,238 for the year ended December 31, 1995. The
decrease for the year was the result of lower general office operating overheads
coupled with a reduction in administrative staff.
Interest expense for the year ended December 31, 1996 decreased 21.21% to
$43,291 compared to $54,943 for the year ended December 31, 1995. The decrease
for the year was the result of increased collection efforts and reduced use of
the Company's UK credit facility.
Net income (loss) after tax and before adjustments for intercompany
support and eliminations for the year ended December 31, 1996 was $50,536
compared to ($85,553) for the year ended December 31, 1995. The increase for the
year was the result of increased custom work coupled with the slight increase in
value of the British pound against the US dollar. Also contributing to the
increase for the year was lower operating costs and selling expenses, in
addition to reduced office operating overheads and lower interest costs for the
year.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued 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 will adopt Statement of Financial Accounting Standards
(SFAS) No. 130 in its fiscal year 1998.
In June 1997, the FASB issued 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, which 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. Management has not yet evaluated
the effects of this change on its reporting of segment information. The Company
will adopt SFAS No. 131 in its fiscal year 1998.
YEAR 2000
- ---------
The Company has made an assessment of the effect of the Year 2000 issue on
its systems, equipment and software. Based on this assessment and consultation
with outside consultants, the Company believes its systems, equipment and
software will properly recognize calendar dates beginning in the year 2000,
without any significant changes. The Company intends to evaluate the information
systems and software of its outside vendors in connection with the Year 2000
issue, but anticipates any potential modification to its systems and software
will not materially effect the Company's future financial results. Accordingly,
the Company expects the Year 2000 issue will not have a material adverse
financial impact on the Company.
20
<PAGE>
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 decreased 24.43% at December 31, 1997 to $2,191,682
compared to $2,900,314 at December 31, 1996. The decrease in accounts receivable
is the result of the Company selling its U.K. subsidiary and no longer
consolidating its year end balance sheet to include the assets of its former
subsidiary.
Inventory decreased 16.70% at December 31, 1997 to $5,528,239 compared to
$6,636,993 at December 31, 1996. The decrease in inventory resulted from the
revaluation of non-core, long-term inventories coupled with the sale of the
Company's U.K. subsidiary.
Other current assets increased at December 31, 1997 to $2,013,684 compared
to $273,503 at December 31, 1996. The increase was the result of the business
sale receivable of the Company's U.K. subsidiary, coupled with a tax receivable
and a receivable for the sale of a parcel of land the Company sold.
Intangible assets at December 31, 1997 decreased to $104,547 compared to
$1,702,576 at December 31, 1996. The decrease was the result the sale of the
Company's U.K. subsidiary and the goodwill and intangibles associated with that
investment equaling $431,420, coupled with certain patent rights that were
written off during the year equaling $979,762 and amortization expense for the
year equaling $186,847.
The Company has a domestic operating line of credit with a limit of
$4,000,000, secured by accounts receivable and inventory. As of December 31,
1997, $1,717,263 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 1998.
At December 31, 1997, the Company was not in compliance with certain of
its financial covenants contained in its domestic line of credit as a result of
the strategic realignment and the unusual charge the Company incurred. The
Company has obtained a written waiver for this violation. The Company is
currently negotiating a new line of credit with a different lender. The new line
of credit is expected to be finalized in April 1998 and contains terms similar
to the existing domestic line of credit. There is no assurance that the Company
will be able to establish a new domestic line of credit or that the Company will
be in compliance under its existing line of credit in the future.
21
<PAGE>
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 February 27, 1998 that its Common
Stock will be removed from quotation on the Nasdaq inter-dealer quotation system
on May 28, 1998 if the Company continues to not qualify under the new Nasdaq
listing requirements.
In the event the Company's common Stock is removed from quotation on the
Nasdaq, the Company anticipates the Common Stock would be traded in the
over-the-counter market (bulletin board system). 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
- --------------------------------------------------------------------
None.
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
- ------------------------------------------------------------------------
None.
PART III
--------
ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND
EXECUTIVE COMPENSATION
- ------------------------------------------------------------------------
A definitive proxy statement for the 1998 Annual Meeting of Stockholders
of Ag-Bag International Limited to be held on June 1, 1998 will be filed not
later than 120 days after the end of the fiscal year with the Securities and
Exchange Commission ("Proxy Statement"). The information set forth in the Proxy
Statement under "Election of Directors," "Executive Compensation," and "Section
16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by
reference. Executive officers of Ag-Bag International Limited are listed under
the heading "Executive Officers of the Registrant" in this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information required is set forth under the caption "Security Ownership of
Beneficial Owners" in the Proxy Statement and is incorporated herein by
reference.
22
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information required is set forth under the caption "Certain Relationships
and Related Transactions" in the Proxy Statement and is incorporated herein by
reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
Page
1. Index to Financial Statements.............................. 26
Independent Auditors' Report............................... F-1
Balance Sheets at December 31, 1997 and 1996............... F-2
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995...................... F-3
Statement of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995...................... F-4
Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995...................... F-5
Notes to Financial Statements.............................. F-6
Independent Auditors' Report............................... F-22
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-23
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........... 27
(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..................... 27
23
<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 amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
AG-BAG INTERNATIONAL LIMITED,
a Delaware corporation
Date: February 16, 1999 By: /s/ Larry R. Inman
--------------------------------
Larry R. Inman, Chief Executive
Officer and President
24
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
25
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Index to Financial Statements
Page
----
Independent Auditors' Report F - 1
Balance Sheets F - 2
Statements of Operations F - 3
Statements of Shareholders' Equity F - 4
Statements of Cash Flows F - 5
Notes to Financial Statements F - 6
Independent Auditors' Report F - 23
Schedule of Valuation and Qualifying Accounts F - 24
26
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Ag-Bag International Limited:
We have audited the accompanying balance sheets of Ag-Bag International Limited
as of December 31, 1997 and 1996, and the related statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. 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 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
February 25, 1998
F - 1
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Current assets:
Cash $ 656 656
Accounts receivable, less allowance for doubtful
accounts of $200,000 and $248,824 at 1997
and 1996, respectively (note 7) 2,191,682 2,900,314
Inventories (notes 3 and 7) 5,528,239 5,235,866
Other current assets (note 14) 2,013,684 273,503
Prepaid expenses 154,439 335,350
------------- -------------
Total current assets 9,888,700 8,745,689
Deferred income taxes (note 10) 638,666 2,000
Intangible assets, net (note 4) 104,547 1,702,576
Property, plant and equipment, net (notes 5, 7 and 8) 4,378,444 4,848,076
Long-term inventories (notes 3 and 7) - 1,401,127
Other assets 179,973 203,654
------------- -------------
$ 15,190,330 16,903,122
============= =============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Lines of credit (note 7) 1,717,263 379,206
Note payable to shareholder and related party (note 9) 15,876 14,343
Current portion of long-term debt and capital lease
obligations (note 8) 444,985 547,222
Accounts payable 949,373 699,191
Accrued expenses and other current liabilities (note 6) 1,040,471 1,016,140
Income taxes payable 39,636 -
------------- -------------
Total current liabilities 4,207,604 2,656,102
Long-term debt and capital lease obligations, less current
portion (note 8) 2,666,552 2,020,890
Note payable to shareholder and related party, less
current portion (note 9) 23,884 39,733
------------- -------------
6,898,040 4,716,725
Commitments (note 8)
Shareholders' equity (note 11):
Preferred stock, $4 liquidation value, 8.5% cumulative dividend,
non-voting, 5,000,000 shares authorized,
174,000 shares issued and outstanding 696,000 696,000
Common stock, $.01 par value, 25,000,000 shares authorized,
12,061,991 and 12,053,751 shares issued and outstanding
at December 31, 1997 and 1996, respectively 120,619 120,537
Additional paid-in capital 9,210,211 9,201,796
Retained earnings (deficit) (1,734,540) 2,139,739
Foreign currency translation adjustment - 28,325
------------- -------------
Total shareholders' equity 8,292,290 12,186,397
------------- -------------
$ 15,190,330 16,903,122
============= =============
</TABLE>
See accompanying notes to financial statements.
F - 2
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales (note 13) $ 20,292,959 22,985,293 17,658,894
Cost of sales (note 3) 18,492,519 17,791,639 12,678,573
` ----------------- ---------- ----------
Gross profit from operations 1,800,440 5,193,654 4,980,321
Selling expenses 2,673,587 2,465,276 2,231,408
Administrative expenses 2,361,940 2,273,548 1,987,452
Research and development expenses 87,112 58,808 68,165
Unusual charge (note 2) 979,762 - -
----------------- ---------- ----------
Income (loss) from operations (4,301,961) 396,022 693,296
Other income (expense):
Interest income 39,494 38,144 44,639
Interest expense (475,056) (376,341) (359,202)
Other (notes 12 and 16) 145,300 512,398 100,413
----------------- ---------- ----------
Income (loss) from continuing
operations before income taxes (4,592,223) 570,223 479,146
Provision (benefit) for income taxes (note 10) (1,650,000) 257,301 286,400
----------------- ---------- ----------
Income (loss) from continuing operations (2,942,223) 312,922 192,746
Discontinued operations (note 15):
Income(loss) from operations of discontinued
Ag-Bag Europe PLC (448,832) 50,536 (85,553)
Loss on disposal of Ag-Bag Europe PLC,
plus applicable income tax benefit of
$24,500 (424,064) - -
----------------- ---------- ----------
Net income (loss) $ (3,815,119) 363,458 107,193
================= ========== ==========
Basic and diluted net income (loss) per common share:
Continuing operations $ (.24) .03 .02
Discontinued operations (.08) - (.01)
----------------- ---------- ----------
Total income (loss) per common share $ (.32) .03 .01
================= ========== ==========
Basic and diluted weighted average common shares
outstanding 2,056,641 12,095,751 12,062,019
================ ========== ==========
</TABLE>
See accompanying notes to financial statements.
F - 3
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Statements of Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Foreign
Additional Retained Currency
Preferred stock Common stock Paid-in Earnings Translation Shareholders' Total
Shares Amount Shares Amount Capital (deficit) Adjustment Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 174,000 $ 696,000 11,655,373 $ 116,553 8,853,513 1,787,408 (74,701) 11,378,773
Stock issued in connection with
exercise of warrant - - 137,500 1,375 149,875 - - 151,250
Stock issued in connection with
conversion of debentures - - 250,667 2,507 182,224 - - 184,731
Stock issued in connection with
employee stock plan - - 10,211 102 16,184 - - 16,286
Foreign currency translation - - - - - - (19,976) (19,976)
Preferred stock dividends - - - - - (59,160) - (59,160)
Net income - - - - - 107,193 - 107,193
------- --------- ---------- --------- --------- ---------- ------- ----------
Balance, December 31, 1995 174,000 696,000 12,053,751 120,537 9,201,796 1,835,441 (94,677) 11,759,097
Foreign currency translation - - - - - - 123,002 123,002
Preferred stock dividends - - - - - (59,160) - (59,160)
Net income - - - - - 363,458 - 363,458
------- --------- ---------- --------- --------- ---------- ------- ----------
Balance, December 31, 1996 174,000 696,000 12,053,751 120,537 9,201,796 2,139,739 28,325 12,186,397
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
======= ========= ========== ========= ========= ========== ======= ==========
</TABLE>
See accompanying notes to financial statements.
F - 4
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,815,119) 363,458 107,193
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 865,671 955,344 1,029,874
Issuance of stock under employee stock plan 8,497 - 16,286
Inventory write-down and obsolescence 2,171,278 308,500 64,000
Write-down of intangible asset 979,762 - -
Loss on disposal of Ag-Bag Europe PLC 424,064 - -
Gain on disposition of fixed assets (69,903) (326,013) (54,919)
Deferred income taxes (755,000) 10,301 (45,000)
Change in assets and liabilities:
Accounts receivable 556,877 (821,608) 285,043
Inventories (1,244,485) 802,495 (2,217,915)
Other current assets (1,442,717) (37,121) (172,348)
Other assets 23,681 (59,382) (21,123)
Accounts payable 303,349 225,063 (165,261)
Accrued expenses and other current liabilities 64,383 249,429 86,537
Income taxes payable 39,636 (167,569) (163,002)
------------ ----------- -----------
Net cash provided by (used in) operating activities (1,890,026) 1,502,897 (1,250,635)
------------ ----------- -----------
Cash flows from investing activities:
Capital expenditures (1,346,527) (2,337,974) (641,846)
Proceeds from disposition of fixed assets 574,013 929,590 125,656
Intangible assets (31,503) (9,232) (14,433)
Cash provided by sale of Ag-Bag Europe PLC 795,739 - -
------------ ----------- -----------
Net cash used in investing activities (8,278) (1,417,616) (530,623)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds from line of credit 22,466,810 25,784,004 21,425,761
Principal payments on line of credit (21,016,517) (26,883,684) (20,077,631)
Proceeds on issuance of debt 1,041,093 1,570,335 714,616
Principal payments on debt (425,088) (606,799) (769,794)
Proceeds from issuance of shareholders' notes - - 75,000
Payment of shareholders' notes (14,316) (12,979) (382,945)
Dividends paid (59,160) (59,160) (59,160)
------------ ----------- -----------
Net cash provided by (used in) financing activities 1,992,822 (208,283) 925,847
------------ ----------- -----------
Effect of foreign currency translation (94,518) 123,002 (19,976)
------------ ----------- -----------
Net decrease in cash - - (875,387)
Cash and cash equivalents at beginning of year 656 656 876,043
------------ ----------- -----------
Cash and cash equivalents at end of year $ 656 656 656
============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 511,686 419,600 414,100
Cash paid for income taxes 426 414,500 494,400
</TABLE>
See accompanying notes to financial statements.
F - 5
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Financial Statements
December 31, 1997 and 1996
(1) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
(a) Description of Business
-----------------------
Ag-Bag International Limited (the Company) is a Delaware corporation. The
Company's 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. The Company was formally
notified on February 27 1998 that its common stock will be removed from
quotation on the Nasdaq inter-dealer quotation system on May 28, 1998 if
the Company continues to not qualify under the new Nasdaq listing
requirements. In the event the Company's common stock is removed from
quotation on the Nasdaq, the Company anticipates the common stock would
be traded in the over-the-counter market (bulletin board system).
(b) 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.
(c) Statements of Cash Flows
------------------------
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or
less to be cash equivalents.
The Company transferred $132,865, $281,118 and $163,910 in 1997, 1996 and
1995, respectively, from rental equipment to inventory held for sale.
The Company received cancellation of a note payable in the amount of
$151,250 during 1995 as consideration for the exercise of a warrant for
137,500 shares at $1.10 per share.
(Continued)
F - 6
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Financial Statements
(d) Accounts Receivable
-------------------
Accounts receivable are from distributors and customers of the Company's
products. The Company performs periodic credit evaluations of its
customers and maintains allowances for potential credit losses. Also to
reduce the risk of credit loss, the Company requires letters of credit
from foreign customers with which no credit history has been established.
(e) Inventories
-----------
Inventories are stated at the lower-of-cost or market (net realizable
value). The Company determines cost on the first-in, first-out (FIFO)
basis. The Company's estimates of market value incorporate projections of
future sales volume by product class.
(f) Property, Plant and Equipment
-----------------------------
Property, plant and equipment are stated at cost and are depreciated on
the straight-line method over their estimated useful lives which range
from 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.
(g) Intangible Assets
-----------------
Intangible assets consist primarily of licenses, goodwill, patents and
non-compete agreements. The cost of the licenses, patents and noncomplete
agreements are amortized over the lesser of the terms of the related
agreement or the estimated useful lives of the respective asset, ranging
from three to seventeen years.
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on the straight-line basis over the
expected period to be benefited, fifteen years.
(Continued)
F - 7
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Financial Statements
(h) Stock Option Plan
-----------------
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense 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.)
(i) Income Taxes
------------
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. 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.
(j) Advertising Expenses
--------------------
Advertising expenses are charged to expense as incurred, except for
advertising supplies, and were $497,617, $390,831 and $238,998 for 1997,
1996 and 1995, respectively. Advertising supplies are capitalized and
amortized over one year.
(Continued)
F - 8
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Financial Statements
(k) 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 standards 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 by 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 has fully implemented SFAS No. 128 during 1997.
Prior year's 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.
(l) Foreign Currency Translation
----------------------------
The financial statements of the Company's European subsidiary have been
translated into U.S. dollars from their functional currency, British
pounds sterling, in the accompanying statements. Balance sheet amounts
have been translated at the exchange rate on the balance sheet date and
statement of operations amounts have been translated at average exchange
rates in effect during the period. The net translation adjustment is
carried as a component of stockholders' equity. Realized and unrealized
gains and losses on foreign currency transactions are included in other
expense (income), net.
(m) Management Estimates
--------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(n) Reclassifications
-----------------
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform with the 1997 presentation.
(o) Revenue Recognition
-------------------
Revenue on machine and bag sales is recognized at the time the product is
shipped to the customer.
(Continued)
F - 9
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Financial Statements
(p) 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.
(2) Unusual Charge
--------------
Because of a change in the direction of the industry to the cable-less
machine design, the Company has 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.
(3) Inventories
-----------
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31
---------------------
1997 1996
---- ----
<S> <C> <C>
Parts and subassembly - current $ 1,348,323 1,169,384
Work in process 1,030,113 725,858
Bags and machines 3,149,803 3,340,624
---------------- ---------
5,528,239 5,235,866
Parts and subassembly (long-term) - 1,401,127
---------------- ---------
$ 5,528,239 6,636,993
================ =========
</TABLE>
Management has classified certain parts which may not be sold or used in
production within the course of one year as long-term inventories.
(Continued)
F - 10
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Financial Statements
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
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 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.
(4) Intangible Assets, Net
----------------------
Intangible assets, net consist of the following:
<TABLE>
<CAPTION>
December 31
---------------------
1997 1996
---- ----
<S> <C> <C>
Start-up costs $ 31,503 -
License and patent costs 707,845 2,554,285
Goodwill - 668,612
Covenant not to compete 393,263 393,263
---------------- ---------
1,132,611 3,616,160
Less accumulated amortization 1,028,064 1,913,584
---------------- ---------
$ 104,547 1,702,576
================ =========
</TABLE>
See note 2 regarding fourth quarter write-off of patents.
(Continued)
F - 11
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Financial Statements
(5) Property, Plant and Equipment, Net
----------------------------------
Property, plant and equipment, net consist of the following:
<TABLE>
<CAPTION>
December 31
---------------------
1997 1996
---- ----
<S> <C> <C>
Land $ 160,826 263,326
Buildings 2,624,299 1,569,658
Vehicles 372,063 444,060
Office furniture, fixtures and equipment 1,758,834 1,735,423
Plant equipment 2,457,417 1,755,104
Rental equipment 596,927 2,384,357
Leasehold improvements 66,127 54,515
----------- ---------
8,036,493 8,206,443
Construction in progress - 957,417
Less accumulated depreciation and
amortization 3,658,049 4,315,784
----------- ---------
$ 4,378,444 4,848,076
=========== =========
</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, 1997 and 1996, the net book value of the
equipment under lease was $120,723 and $496,738, respectively.
(6) Accrued Expenses and Other Current Liabilities
----------------------------------------------
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
December 31
---------------------
1997 1996
---- ----
<S> <C> <C>
Salaries and other compensation $ 324,545 371,194
Other 715,926 644,946
----------- ---------
$ 1,040,471 1,016,140
=========== =========
</TABLE>
(Continued)
F - 12
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Financial Statements
(7) Lines of Credit
---------------
The Company had a note payable to a bank in the amount of $29,762 at
December 31, 1996 under a line of credit agreement (LOC Agreement). The LOC
Agreement was 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 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,
this note payable no longer exists.
In addition, the Company has a domestic operating line of credit with a
bank for up to $4,000,000 at December 31, 1997 and 1996. The domestic line
of credit is secured by accounts receivable and inventories, and bears
interest at 10% at December 31, 1997 and the bank's prime rate plus 1/2% in
1996 (9% at December 31, 1996). As of December 31, 1997 and 1996,
$1,717,263 and $203,844 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 has obtained a waiver for
these violations.
The Company also had an equipment line of credit with the bank for $200,000
at December 31, 1996 which bore interest at 9% and was secured by equipment
purchased subject to the line. As of December 31, 1997 and 1996, $-0- and
$145,600 was outstanding under the equipment line of credit.
(Continued)
F - 13
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Financial Statements
(8) Long-term Debt and Capital Lease Obligations
--------------------------------------------
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
December 31
---------------------
1997 1996
---- ----
<S> <C> <C>
Note payable in monthly installments of $2,638, plus interest at prime
plus 1.75% (10.25% at December 31, 1997 and 1996), through 2000,
secured by building $ 77,873 109,523
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 162,890 177,779
Note payable in monthly installments of $3,567,
including interest at 8% with a balloon payment
in 1999, secured by real property 217,798 241,869
Note payable in monthly installments of $4,183,
including interest at 9% through 1999, secured
by certain equipment 72,851 114,248
Note payable in monthly installments of $2,360, plus
interest at prime plus 1.25% (9.75% at December 31,
1997 and 1996), secured by certain equipment 70,671 98,989
Note payable in monthly installments of $1,474, plus
interest at 9.5%, secured by certain equipment 52,322 64,339
Note payable, monthly payments of $6,724 at 9%
through June 2017, secured by real property 734,866 1,218,026
Note payable in monthly installments of $4,816
including interest at 7.5% through 2017,
secured by real property 613,401 -
Note payable in monthly installments of $4,186 plus
interest at 9%, secured by fixed asset blanket 186,513 -
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 483,891 -
---------------- ---------
2,673,076 2,024,773
Less current portion 288,574 297,753
---------------- ---------
$ 2,384,502 1,727,020
================ =========
</TABLE>
(Continued)
F - 14
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Financial Statements
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:
1998 $ 288,574 187,438 31,027 156,411
1999 447,624 141,072 25,989 115,083
2000 207,399 125,885 17,484 108,401
2001 181,900 39,716 7,639 32,077
2002 162,285 32,561 6,072 26,489
Thereafter 1,385,294 - - -
--------------- ------- ------- -------
$ 2,673,076 526,672 88,211 438,461
=============== ======= ======= =======
</TABLE>
(9) Note Payable to Shareholder and Related Party
---------------------------------------------
The Company has a note payable to a shareholder of the Company. The note
bears interest at 10% and requires monthly principal and interest payments
of $1,600 through April 30, 2000. Interest expense related to shareholders
and related parties amounted to $4,883, $6,222 and $29,188 in 1997, 1996
and 1995, respectively.
(10) Income Taxes
------------
The income tax expense (benefit) from continuing operations consists of the
following:
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ (896,500) 211,996 290,781
State 1,500 35,004 40,619
---------------- ------- -------
(895,000) 247,000 331,400
---------------- ------- -------
Deferred:
Federal (638,000) 4,351 (49,047)
State (117,000) 5,950 4,047
---------------- ------- -------
(755,000) 10,301 (45,000)
---------------- ------- -------
Total income tax expense (benefit) $ (1,650,000) 257,301 286,400
================ ======= =======
</TABLE>
(Continued)
F - 15
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Financial Statements
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
December 31
------------------
1997 1996
---- ----
<S> <C> <C>
Net operating loss carryforwards:
Foreign $ - 176,550
Federal - -
Capital loss carryforward 135,632 -
Inventory write-downs 721,742 -
Expenses not currently deductible 178,865 105,505
---------------- --------
Gross deferred tax asset 1,036,239 282,055
Valuation allowance (135,632) (176,550)
---------------- --------
Net deferred tax asset 900,607 105,505
Gross deferred tax liability, primarily
due to differences in depreciation 143,607 103,505
---------------- --------
Net deferred tax asset (liability) $ 757,000 2,000
================ ========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1997 was
$176,550. The total valuation allowance decreased $40,918 and $40,383 for
the years ended December 31, 1997 and 1996, respectively. At December 31,
1997, the Company has net capital loss carryforwards for federal income tax
purposes of approximately $350,000 which are available to offset future
federal capital gain income, if any, through 2002.
(Continued)
F - 16
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Financial Statements
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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate (34)% 34% 34%
Foreign losses providing no current
income tax benefit - - 7
Realized benefit from foreign net
operating losses - (3) -
Nondeductible items 1 4 11
Tax settlement - - 16
Other (3) 6 5
--- -- --
Effective tax rates (36)% 41% 73%
=== == ==
</TABLE>
(11) Shareholders' Equity
--------------------
Stock Warrants
--------------
In connection with offerings of common stock and notes payable, the Company
has issued various warrants for the purchase of the Company's common stock.
As of December 31, 1997, 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 8,240, -0- and 10,211
shares for 1997, 1996 and 1995, respectively, with related compensation
expense of $8,497, $-0- and $16,286, respectively.
(Continued)
F - 17
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Financial Statements
Common Stock Options
--------------------
The Company has an Incentive Stock Option Plan (the Incentive Plan) and has
reserved 185,000 shares of common stock for issuance under the Incentive
Plan. Options under the Incentive Plan are to be issued to officers and
employees of the Company and all option grants will be at the market value
of the stock at the date of grant. Vesting of stock options is determined
for each grant by the Board of Directors.
During 1997 and 1996, under the aforementioned 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 1997.
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.
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 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 1997, 1996 and 1995 using the Black-Scholes
pricing model as prescribed under SFAS 123. No options were granted in 1994
and as a result no valuation is necessary. The following assumptions were
made for grants made in 1997, 1996 and 1995: risk-free interest rate of
6.1%, expected life of three years, dividend rate of zero percent. For 1996
and 1995, the expected volatility over the expected life of the grant was
assumed to be 70%. In 1997, the volatility was assumed to be 62%.
(Continued)
F - 18
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Financial Statements
If the Company had accounted for the value of the options granted during
1997, 1996 and 1995 in accordance with SFAS No. 123, the Company's
net income would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income (loss):
As reported $ (3,815,119) 363,458 107,193
Pro forma (3,876,586) 342,458 102,193
Net income (loss) per share:
As reported (0.32) 0.03 0.01
Pro forma (0.32) 0.03 0.01
</TABLE>
The resulting pro forma compensation costs may not be representative of
that expected in future years.
Pro forma net income reflects only options granted in 1997, 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period and compensation cost for options granted prior to
January 1, 1995 is not considered.
(Continued)
F - 19
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Financial Statements
Transactions and other information relating to the Company's stock option
plans for the three years ended December 31, 1997 are summarized as
follows:
<TABLE>
<CAPTION>
Weighted
average
Number exercise
of shares price
--------- --------
<S> <C> <C>
Options outstanding at December 31, 1994 110,000 $ 3.02
Options granted 10,000 1.68
--------
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
======== =========
</TABLE>
At December 31, 1997, the Company had outstanding options of 386,788 with a
weighted average life expectancy of seven years and an exercise price range
of $.68 - 1.06. Of the 386,788 options outstanding, 196,778 were
exercisable at December 31, 1997 at a weighted average exercise price of
$1.02.
The weighted-average fair value of options granted during 1997, 1996 and
1995 were $.46, $.53 and $.85, respectively.
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.
(Continued)
F - 20
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Financial Statements
(12) Other Income
------------
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.
(13) Foreign Sales Activity
----------------------
Export sales from the Company's United States operations are as follows:
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Latin America/Mexico $ 726,000 1,392,000 613,000
Canada 1,380,000 1,788,000 1,418,000
Germany (see note 16) 1,276,000 1,951,000 1,680,000
Other 341,000 668,000 322,000
--------------- --------- ---------
$ 3,723,000 5,799,000 4,033,000
=============== ========= =========
</TABLE>
(14) Other Current Assets
--------------------
Other current assets consist of the following:
<TABLE>
<CAPTION>
December 31
---------------------
1997 1996
---- ----
<S> <C> <C>
Income tax receivable $ 921,000 -
Deferred income tax 118,334 -
Receivable from sale of Ag-Bag Europe PLC 647,800 -
Receivable from sale of land 182,500 -
Other 144,050 273,503
--------------- -------
$ 2,013,684 273,503
=============== =======
</TABLE>
(Continued)
F - 21
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Financial Statements
(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 1995
---- ---- ----
<S> <C> <C> <C>
Net sales - unaffiliated customers $ 1,456,795 1,817,731 1,796,275
Income (loss) from operations (448,832) 50,536 (85,553)
Identifiable assets 840,661 1,592,429 1,689,594
Total liabilities 284,636 503,059 776,297
</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.
(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 loss of the Partnership for the year ended
December 31, 1997 was insignificant.
On February 27, 1997, the Partnership BAW also entered into a lease
agreement with Ag-Bag International for the rental of a folding machine.
Rent is paid based upon the poundage folded by BAW. In 1997, rental revenue
to the Company was insignificant.
(Continued)
F - 22
<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 sheets of Ag-Bag
International Limited as of December 31, 1997 and 1996, and the related
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997, as contained in the
annual report on Form 10-K/A for the year 1997. In connection with our audits of
the aforementioned financial statements, we also audited the related financial
statement schedule as listed in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements 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 - 23
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Valuation and Qualifying Accounts
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Charged to Charged Write-offs, Balance
beginning costs and to other net of at end
Description of period expenses accounts recoveries of period
----------- ---------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31:
1997:
Allowance for doubtful accounts $ 248,824 211,822 (52,246)* (208,400) 200,000
Inventory obsolescence reserve 372,500 422,400 - (669,900) 125,000
Warranty reserve 75,633 253,308 - (203,941) 125,000
1996:
Allowance for doubtful accounts 234,913 105,423 - (91,512) 248,824
Inventory obsolescence reserve 64,000 308,500 - - 372,500
Warranty reserve 50,000 222,972 - (197,339) 75,633
1995:
Allowance for doubtful accounts 157,263 183,813 - (106,163) 234,913
Inventory obsolescence reserve - 64,000 - - 64,000
Warranty reserve 25,061 57,127 - (32,188) 50,000
</TABLE>
*Due to sale of subsidiary.
F - 24
<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
23 Reference is made to the financial reports of KPMG Peat Marwick LLP
containing opinions with respect to the financial statements
27.1 Financial Data Schedule for fiscal year 1997
27.2 Restated Financial Data Schedule for fiscal years 1995 and 1996
* 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
27
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Basic earnings per share:
Net income (loss) $ 847,887 $ 533,427 $ 107,193 $ 363,458 $(3,815,119)
Preferred stock dividends (59,160) (59,160) (59,160) (59,160) (59,160)
Debenture interest 42,944
------------- ------------- ------------ ----------- -----------
788,727 517,211 48,033 304,298 (3,874,279)
============= ============= ============ =========== ===========
Basic weighted average number
of shares outstanding (1)10,581,092 (1)11,644,785 (1)12,062,019 (1)12,095,751 (1)12,056,641
============= ============= ============ =========== ===========
Basic earnings per share
Income (loss) before
discontinued operations and
extraordinary item $ .06 $ .04 $ .02 $ .03 $ (.24)
Discontinued operations (.01) (.08)
Extraordinary item .01
------------- ------------- ------------ ----------- -----------
$ .07 $ .04 $ .01 $ .03 $ (.32)
Diluted earnings per share:
Net income (loss) $ 847,887 $ 533,427 $ 107,193 $ 363,458 $ (3,815,119)
Preferred stock dividends (59,160) (59,160) (59,160) (59,160) (59,160)
Debenture interest 42,944
------------- ------------- ------------ ----------- ------------
788,727 517,211 48,033 304,298 (3,874,279)
============= ============= ============ =========== ============
Diluted weighted average
number of shares outstanding (1)10,581,092 (1)11,644,785 (1)12,062,019 (1)12,095,751 (1)12,056,641
============= ============= ============ =========== ============
Diluted earnings per share
Income (loss) before
discontinued operations and
extraordinary item $ .06 $ 04 $ .02 $ .03 $ (.24)
Discontinued operations (.01) (.08)
Extraordinary item .01
------------- ------------- ------------ ----------- ------------
$ .07 $ .04 $ .01 $ .03 $ (.32)
============= ============= ============ =========== ============
<FN>
<F1> See Note 1 to the financial statements
</FN>
</TABLE>
EXHIBIT 12
STATEMENT RE COMPUTATION OF RATIOS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Pretax earnings (losses) $ 876,982(1) $ 962,344 $ 479,146 $ 570,223 $(4,592,223)
Interest expense 607,012 465,743 359,202 376,341 475,056
------------- ------------- ------------- ------------ ------------
Subtotal (A) 1,483,944 1,428,087 838,348 946,564 (4,117,167)
------------- ------------- ------------- ------------ -------------
Interest expense 607,012 465,743 359,202 376,341 475,056
Preferred stock dividend
requirements 76,830 107,564 219,111 100,271 92,438
------------- ------------- ------------- ------------ ------------
Subtotal (B) $ 683,842 $ 573,307 $ 578,313 $ 476,612 $ 567,494
------------- ------------- ------------- ------------ -----------
(A) divided by (B) 2.17 2.49 1.45 1.99 (7.25)(2)
==== ==== ==== ==== =========
<FN>
<F1> Before extraordinary item
<F2> 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, 1997, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000842289
<NAME> Ag-Bag International Limited
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<EXCHANGE-RATE> 1 1 1
<CASH> 0 0 0
<SECURITIES> 656 656 656
<RECEIVABLES> 2,391,682 3,149,138 2,375,905
<ALLOWANCES> 200,000 248,824 234,913
<INVENTORY> 5,528,239 6,636,993 8,029,106
<CURRENT-ASSETS> 9,888,700 8,745,689 9,378,795
<PP&E> 8,036,493 9,163,860 7,422,765
<DEPRECIATION> 3,658,049 4,315,784 3,902,513
<TOTAL-ASSETS> 15,190,330 16,903,122 16,297,451
<CURRENT-LIABILITIES> 4,207,604 2,656,102 3,300,820
<BONDS> 0 0 0
0 0 0
696,000 696,000 696,000
<COMMON> 120,619 120,537 120,537
<OTHER-SE> 7,475,671 11,369,860 10,942,560
<TOTAL-LIABILITY-AND-EQUITY> 15,190,330 16,903,122 16,297,451
<SALES> 20,292,959 22,985,293 17,658,894
<TOTAL-REVENUES> 20,477,753 23,535,835 17,803,946
<CGS> 18,492,519 17,791,639 12,678,573
<TOTAL-COSTS> 24,594,920 22,589,271 16,965,598
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 475,056 376,341 359,202
<INCOME-PRETAX> (4,592,223) 570,223 479,146
<INCOME-TAX> (1,650,000) 257,301 286,400
<INCOME-CONTINUING> (2,942,223) 312,922 192,746
<DISCONTINUED> (872,896) 50,536 (85,553)
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (3,815,119) 363,458 107,193
<EPS-PRIMARY> (.32) .03 .01
<EPS-DILUTED> (.32) .03 .01
</TABLE>
