United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999 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 (I.R.S. Employer
of 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 February 14, 2000,
the aggregate market value of the voting stock of registrant held by
non-affiliates was $ 4,190,824.
The registrant has one class of Common Stock with 12,061,991 shares
outstanding as of February 14, 2000.
Documents Incorporated By Reference:
Portions of the proxy statement for the Registrant's Annual Meeting of
Stockholders to be held June 5, 2000, are incorporated into Part III of this
report.
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AG-BAG INTERNATIONAL LIMITED
TABLE OF CONTENTS
PAGE
PART I ...........................................................2
Item 1. Business...................................................2
Item 2. Properties................................................10
Item 3. Legal Proceedings.........................................10
Item 4. Submission of Matters to a Vote of Security Holders.......11
Executive Officers of the Registrant...................................11
PART II ..........................................................12
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ....................................12
Item 6. Selected Financial Data...................................14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................16
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk.............................................23
Item 8. Financial Statements and Supplemental Data................23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.....................23
PART III ..........................................................23
Items 10. and 11. Directors and Executive Officers of Registrant
and Executive Compensation..............................23
Item 12. Security Ownership of Certain Beneficial Owners
and Management..........................................23
Item 13. Certain Relationships and Related Transactions............23
PART IV ..........................................................24
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................24
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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 500 feet in length and up to 12
feet in diameter by tightly stuffing the feed into the bag. The Company
assembles the machines for stuffing the feed into the bags. It has the bags
manufactured to its specifications and then folds and distributes the bags
through its dealer network. The benefits of bagging the feed include reduced
cost, additional flexibility in harvesting and storing the feed, enhanced feed
quality, and relatively small capital requirements. The Company also sells
ancillary products which complement the Company's main line of bagging machines
and bags.
The following table identifies the revenue from each product line that
accounted for more than 15% of total revenue over the last three years:
Product 1997 1998 1999
--------- ---- ---- ----
Bags 61% 52% 52%
Machines 31% 38% 41%
Other 8% 10% 7%
---- ---- ----
Net Sales 100% 100% 100%
The Company expects the use of bagging as a means of silage storage to
continue to play a major role in the future because the quality of stored feed
is better than other known competitive methods, allowing farmers to be more
efficient and to produce dairy, beef, sheep and pork products at a lower price.
The Company believes the concept of bagging is one way in which farmers can be
more profitable by reducing, or completely eliminating, the purchase of feed and
grain from outside sources. Bagging enables the farmer to produce and store the
feed on the farm and provides easier access to the silage thereby allowing the
farmer to choose the quality of silage to feed at any given time. The bagged
feed has shown high quality, allowing for higher production.
The Company expanded its operations into Europe in 1989 where it offered a
custom bagging service on a fee per metric tonne basis in the United Kingdom. In
1997, the Company's Board of Directors approved a strategic realignment of the
Company. The realignment involved the sale of the Company's United Kingdom
subsidiary which had not been performing at a profitable level due to the
continued escalation of the BSE (Mad Cow) problem within the British farming
industry.
In 1994, the Company shipped its first orders to dealers in Japan, Latin
America and Germany. The Company also sells in Thailand, Australia, New Zealand,
Western and Central Europe and Puerto Rico.
The Company is developing other uses for its bagging technology. In 1993,
the Company adapted its bagging machines to permit bagging of compostable
organic matter in the Company's recyclable
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Tri-Dura(R) plastic bags. The Company also has developed mobile plastic recovery
units which enable the Company to bail and pick up the recyclable Tri-Dura(R)
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. The Company took steps to
counteract some of this seasonality by generating sales in Latin America
beginning in 1994 and in Australia and New Zealand in 1996.
Approximately 95% of the Company's business is concentrated in the Northern
Hemisphere resulting in between 70-75% 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 1997* 1998 1999
------- ----- ---- ----
1st 14% 17% 15%
2nd 40% 35% 33%
3rd 35% 35% 39%
4th 11% 13% 13%
* In addition to seasonal factors, revenues which normally would have occurred
in the first quarter of 1997 were not earned until the second quarter due to the
delay in the start up of the Company's new production facility in Blair,
Nebraska.
Farm Equipment and Products
- ---------------------------
Introduction. Silage is made using the Ag-Bag(R) system by storing forage
crops, such as corn, sorghum, or alfalfa, under anaerobic (without oxygen)
conditions in sealed Ag-Bag Tri-Dura(R) storage bags. The traditional methods
for making silage involve storing it in bunkers, pits or silos. Using
traditional methods, there is a nutrient loss resulting from a reduction in the
moisture content of the forage before storage. The moisture content must be
reduced to compensate for the high oxygen content of the forage which results
from the inability to pack the forage tightly enough. When the forage is not
packed sufficiently, the silage fermentation process produces too much heat
resulting in an even greater loss of nutrient value that would occur if the
moisture content were not reduced. The loss of nutrient value results in the
need for additional food supplements or an increased volume of feed.
The Ag-Bag(R) system is an alternative to bunkers, pits and silos. The
Ag-Bag(R) bagging machines push the forage into huge recyclable plastic film
Tri-Dura(R) 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, prepare and store
the forage thus reducing the loss of nutrients and providing higher quality feed
for production within the farmers herds.
Ag-Bag(R) Farm Equipment. The Company's principal line of farm equipment is
marketed under the trade name "Ag-Bagger(R)." The Ag-Bagger(R) is available in
three versions with a number of optional features. 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.
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The smallest version consists of machines used to load forage into Ag-Bag
Tri-Dura(R) 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(R) 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(R) storage bags ranging in size from 9 to 12 feet in diameter and 150
to 500 feet in length. These machines are used primarily by dairymen with herds
ranging from 300 to 2,000 head, by cattlemen with herds ranging from 800 to
15,000 head, and by custom operators. A super 12-foot Ag-Bagger(R) was developed
in 1989 and enhanced in 1995 for use by very large dairy and custom operators
and by cattle feeding operations with herds ranging from 15,000 to 25,000 head
of cattle. The larger machines are available with optional diesel engines made
by Caterpillar or Deere & Company. The retail price for the larger machines
ranges from approximately $135,000 to $250,000.
In response to a competitor's introduction of a cable-less machine in early
1995, the Company began research and development on its own cable-less machine
in early 1996. The Company began production of its own cable-less machine in
1997. In 1998, the Company introduced its own cable-less bagging machine called
the HFC (Hydraulic Finger Controlled) Silage Bagger. The introduction of this
machine was in response to what the Company felt was a change in direction of
the industry towards the cable-less machine design and the latest in bagging
technology. In 1999, the Company continued to develop and improve its cable-less
bagging machine by developing the Powered Anchor Control (PAC) system, and in
2000 introduced its latest version of the cable-less bagging machine, the HYPAC
(Hydraulic Powered Anchor Control) system. The company offers the PAC model in
small, medium-sized and large bagging machines. The retail price for the PAC
machines range from approximately $45,000 to $250,000.
The Company assembles and sells a separate line of related equipment called
the Ag-Bag Flex-a-Tuber(R) with a retail price ranging from $7,000 to $17,000.
The Flex-a-Tuber(R) permits farmers to store round-baled alfalfa, sorghum, and
other forage in Ag-Bag Tri-Dura(R) storage bags. The round bale Flex-a-Tubers(R)
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(R) storage bags up to 200 feet in length.
The Company assembles and sells the Ag-Bag(R) Pro-Grain Bagger, which
retails for between $25,000 to $30,000. This machine is similar in design to the
smallest Ag-Bagger(R) machines but has been adapted to permit the storage of
grains, such as corn, rice, wheat and soybeans, as well as other products in
Ag-Bag Tri-Dura(R) storage bags. The machine permits the grain to be bagged
without damaging the kernel. After the grain is bagged and sealed, it will
retain the necessary quality for human consumption.
The Company also assembles and sells the Mighty Bite(R) front-end load
bucket. This revolutionary bucket replaces the conventional bucket.
Hydraulically operated, the Mighty Bite(R) closes tightly around material, thus
eliminating spillage and increasing load capacity due to compaction. The Company
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manufactures the Mighty Bite(R) in sizes ranging from one-half cubic yard to two
cubic yards with a retail price ranging from $3,000 to $4,500.
The Company assembles and sells a separate line of related equipment called
the Square Bale Bagger which retails for between $18,000 to $25,000. The Square
Bale Bagger permits farmers to store square bales of alfalfa, sorghum and other
forage, two bales high in Ag-Bag Tri-Dura(R) flex storage bags. The Square Bale
Bagger permits the bagging of the bales in Ag-Bag Tri-Dura(R) flex storage bags
of 7 to 10 feet in diameter and up to 200 feet in length.
The Company adapted its Ag-Bag(R) 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(R) 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 $40,000 to $250,000.
Ag-Bag Tri-Dura(R) Storage Bags. The Ag-Bag Tri-Dura(R) disposable storage
bags range in size from 8 to 12 feet in diameter and 100 to 500 feet in length
and are made of extruded plastic. Rolls of plastic are manufactured to the
Company's specifications. The 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(R) 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(R)
three-ply bags with a white exterior and black interior intended for storage of
silage up to 24 months. The retail price of the bags ranges from approximately
$225 to $1,300. The manufactured plastic rolls are shipped to the Company's
plant in Blair, Nebraska, where they are folded and packed for sale using
proprietary folding techniques. The proprietary bag folding techniques reduce
bag folding time and allow the bags to uniformly unfold when being filled, which
thereby reduces operational delays.
Ag-Bag(R) Inoculant. The Company markets a liquid inoculant and a dry
powder inoculant under the trade name Ag-Bag Plus!(R). The inoculant is added to
the forage or the round or square bales during bagging. It enhances the
fermentation process for making silage in bags, bunkers, pits and silos by
substantially shortening the time necessary for the creation of the silage. A
liquid inoculant was developed in 1989 by a Company supplier and introduced into
the market in 1990. The dry inoculant is produced from a proprietary formula
owned by the Company and developed by Larry R. Inman and Walter L. Jay. See
"Executive Officers of the Registrant." The Company also markets an inoculant
designed specifically for composting.
Market Size
- -----------
The market for Ag-Bag(R) machinery and Ag-Bag Tri-Dura(R) recyclable
storage bags is primarily in the dairy and beef cattle industries. Silage is
used most often as dairy and beef animal feed. It is also used by farmers to a
lesser extent to feed hogs and sheep. In 1997, over 556,000,000 tons of corn,
alfalfa, and sorghum silage were made by United States farmers according to the
AG IQ Handbook XII published in 1998 by Agricom, Inc. (the "AG Handbook"). Based
on AG Handbook statistics, the Company estimates that there are approximately
140,000 dairy, beef, hog, and sheep farms in the United States which are
potential customers for Ag-Bag(R) farm equipment and Tri-Dura(R) storage bags;
and that only about 7-9% of this group are actually using storage bags made by
the Company and its competitors. It further estimates that about 55-60% of the
customers using silage storage bags purchase them from the Company. In addition
to the U.S., the Company believes there is a large population of such farms in
Canada, Latin America, Germany, Western and Central Europe, Australia, Japan,
Thailand, New Zealand, Puerto Rico, and England where the Company currently
sells and distributes its products, and there is a large potential market in
other countries into which the Company may expand.
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The Company also markets a system for "in-vessel" composting which is
designed to eliminate odors and control leachate 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, zoos and the
Company's dairy and beef customers. The Company currently estimates the size of
the compost market within North America to be over $1 billion a year. 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(R) farm equipment, Tri-Dura(R) storage bags,
Ag-Bag Plus!(R) and other inoculants primarily through a network of United
States, Canadian, and international dealers. As of December 31, 1999, there were
115 dealers serviced by a combined total of 24 regional and territorial
Company-employed managers. Most of the dealers market the entire Ag-Bag(R) line
of farm equipment and products; however, some dealers sell only the farm
equipment and others sell only the Ag-Bag(R) inoculants. The Company also sells
farm equipment, Tri-Dura(R) storage bags, and inoculant directly to large
customers in states where there are no nearby Ag-Bag dealers.
The Company offers customers the opportunity to finance the purchase of
Ag-Bag(R) farm equipment through unaffiliated third parties who offer
lease-purchase financing.
The Company rents Ag-Bag(R) bagging machines to farmers in several western
states. The rental charge is based on the number of bags purchased and filled
with forage. As of December 31, 1999, the Company had 2 machines available for
rent. The Company also sells Tri-Dura(R) storage bags in bulk to several custom
farming operations in the state of California which own Ag-Bag(R) bagging
equipment. These operators place their private labels on the bags and bag forage
for customers on a fee-per-bag basis.
Prior to December 31, 1997, the Company offered a custom bagging service
through its subsidiary Ag-Bag Europe PLC in the United Kingdom. It retained
ownership of the bagging machines, provided bags 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.
The Company markets its composting system through a sublicense which allows
the end user to use the Ag-Bag(R) compost technology. The Company intends to
establish a composting dealer network. In addition, the Company expects to
further develop a regional and territorial sales force which will have expertise
in composting.
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(R) Farm Equipment. The Company buys some of its components for its
bagging machines from various manufacturers, manufactures the remaining
components, and assembles the machines itself. The medium and large sized
machines, composting machines, PAC (Cable-less) machines, Square Bale Baggers,
and Flex-a-Tubers(R) are all assembled at the Company's headquarters facility in
Warrenton, Oregon. The smaller machines are assembled at the Company's Blair,
Nebraska plant.
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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(R) Storage Bags. All of the three-ply Tri-Dura(R) 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(R) plastic bags are made in various
diameters based on bag orders received by the Company. The bags are shipped in
roll form to the Company's plant in Blair, Nebraska, where they are folded for
shipment.
Ag-Bag(R) Inoculants. The liquid inoculant and compost inoculant is
purchased by the Company on the open market. The Company believes that the
liquid and compost inoculant will be reasonably available for purchase on the
open market in the foreseeable future. The dry inoculant is produced by the
Company at the Blair, Nebraska plant pursuant to a proprietary formula owned by
the Company and developed by Larry R. Inman and Walter L. Jay. See "Executive
Officers of the Registrant."
Principal Suppliers and Manufacturers
- -------------------------------------
The Company purchases its Tri-Dura(R) rolls from a company owned by
Steven G. Ross ("Supplier") pursuant to a supply agreement. Steven G. Ross is a
14.9% stockholder in the Company and owner of a company which competes with the
Company's Tri-Dura(R) bags. The supply agreement provides that the Company
purchase all of its plastic rolls, with certain exceptions, from Supplier
through at least December 31, 2007. Thereafter, either the Company or Supplier
may terminate the Supply Agreement upon two years' prior written notice. The
Company may purchase plastic rolls from other suppliers to the extent Supplier
is unable to supply plastic rolls under the Supply Agreement. The Company has a
good relationship with Supplier, and there are alternative suppliers available
in the event Supplier is unable to provide rolls.
The structural components of the Company's farm equipment are manufactured
in Oregon, Nebraska and Iowa by several manufacturing companies. The Company
believes that alternative sources of supply are readily available at competitive
prices if the present sources of supply should become unavailable. The Company
is not aware of any raw materials shortages or problems with these suppliers
which would adversely affect the operations of the Company's business.
The Company mixes the dry inoculant at its Blair, Nebraska facility. It
purchases the ingredients for the dry inoculant from a variety of suppliers. The
Company purchases the liquid and compost inoculant from a supplier, who mixes
the inoculants to the Company's specifications. The Company believes there are
various other alternative sources of supply.
Competition
- -----------
The Company 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 that manufactures the full line of
equipment, bags, and other accessories for sealed feed farm management. There
are two competitors within the United States that manufacture similar silage
bagging machines. There are also a number of competitors that manufacture bale
wrapping machines, which compete with the Company's Flex-a-Tuber(R). The Company
distinguishes itself in the market place from other manufactures by providing a
top quality product, better warranty protection, and customer service
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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 of the U.S., a
recycling service for used Ag-Bag Tri-Dura(R) 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.
The Company competes primarily with wind row turner manufacturers in
composting. 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 composting
systems offer the advantage of being self-contained, thus reducing odor and
requiring no turning or watering. There are approximately 50 manufacturers of
turners. In addition to the wind row turner manufacturers, the Company competes
with several companies that manufacture "in-vessel" systems, such as burners and
incinerators for large projects, which generally cost from $1 to $15 million.
In addition to the current competition, national competitors may emerge if
the bagging equipment and storage bag markets continue to grow. These potential
competitors include large farm equipment manufacturers and large chemical
companies who might decide to manufacture and sell the storage bags.
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
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In 2000, backlog orders were 2.6% higher than 1999. The dollar amount of
backlog orders of the Company that are believed to be firm, as of March 1, 2000,
was approximately $3,900,000, compared to $3,800,000 on March 1, 1999. This
backlog is seasonal and is reasonably expected to be filled within the current
fiscal year.
Research and Development
- ------------------------
During 1999, the Company focused research and development expenditures on
new silage and compost machine development in addition to silage and nutritional
studies of bagged feed and their effects on animal production.
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, 1999.
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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. In addition, proprietary
rights in the bagging of compost have been and are being developed in the U.S
and in selected foreign countries.
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!(R) which was developed by Larry R. Inman and Walter L. Jay. See
"Executive Officers of the Registrant."
The names Ag-Bag(R), Ag-Bag Plus!(R), Bale-Bag(R), Flex-a-Tuber(R),
Flex-a-Tube(R), ABCTI System(R), Mighty Bite(R), Tri-Dura(R), and the symbol
"AB"(R) 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, 1999, the Company had 116 full-time employees. The Company
employs approximately 170 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
- ------------
(In thousands)
Year Ended December 31
1997 1998 1999
---- ---- ----
Sales to unaffiliated customers:
United States $ 16,501 $ 23,795 $ 29,878
Canada 1,380 2,030 1,889
Germany 1,276 1,113 495(1)
Latin America/Mexico 726 478 260
Other foreign countries 341 285 161
----------- ----------- -----------
$ 20,224 $ 27,701 $ 32,683
Sales to affiliated customers:
Officers and Directors 69 9 4
----------- ----------- -----------
Total $ 20,293 $ 27,710 $ 32,687
=========== =========== ===========
Sales or transfers between
United States and United Kingdom: $ 165 $ * $ *
=========== =========== ===========
*The Company sold its United Kingdom subsidiary, Ag-Bag Europe, PLC, on December
31, 1997. Sales to the United Kingdom are now included in Sales to Unaffiliated
customers; Other foreign countries. (1)Beginning in 1999, the Company started
manufacturing its mid-sized bagging machinery directly in Germany.
Reference is also made to the Selected Financial Data at Item 6.
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Item 2. Properties
- -------------------
In early 1990, the Company began occupying its 30,000 square foot facility
located in Warrenton, Oregon. This facility serves as a warehouse and houses the
major portion of its silage bagging equipment manufacturing. The Company's
administrative offices are also located there. Management estimates that the
manufacturing at the Warrenton plant is currently at approximately 65% 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(R) feed storage bags; prepares and packages its
proprietary inoculant; and, assembles its smaller bagging machines and
warehouses products. During 1996, the Company began consolidating its Blair,
Nebraska, operations into a newly constructed facility which consists of three
buildings comprising approximately 70,000 square feet. Construction was
completed on all facilities and the Company fully occupied its new buildings in
early 1997. Management estimates that manufacturing at the Blair facility is
currently at approximately 75% of capacity.
Item 3. Legal Proceedings
- --------------------------
The Michael A. Hunt v. Up North Plastics, Inc., et al. litigation has
been resolved by settlement in the bankruptcy court. The named plaintiff in this
purported class action, alleging price fixing and customer allocation in the
silage bag market, went into bankruptcy in late 1997. His claim then became the
property of the bankruptcy estate. The litigation itself was dismissed without
prejudice in July 1999, and the Company settled Mr. Hunt's individual claim with
the trustee in bankruptcy.
The Company is one of three defendants named in two purported class
action lawsuits, S&S Forage & Equipment Co., Inc. v. Up North Plastics, et al.
and Mr. and Mrs. Donald L. Steward v. Up North Plastics, Inc. et al., both
alleging conspiracy to fix prices and sales quotas involving silage bag
manufacturers and vendors. Both cases are pending before the U.S. District Court
for the District of Minnesota. No class has been certified in either matter. The
plaintiffs currently estimate their damages at $3 million, with the possibility
of treble punitive damages plus attorneys' fees. If the plaintiffs were to
obtain a judgment against the three companies, the Company could be held jointly
and severally liable. The Company believes that the plaintiffs' claims have no
merit, and the Company is vigorously defending itself against these claims. The
Company believes that the outcome of the litigation will not have a material
adverse impact on its financial condition or results of operations. (See Risk
Factors.)
10
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
During the fourth quarter of 1999, 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 February
14, 2000, business experience, and the period for which they have served are set
forth below. The executive officers are elected annually by the Board of
Directors at its meeting following the annual meeting of stockholders. Officers
serve at the discretion of the Board of Directors.
DATE OF
NAME AGE ELECTION POSITION
---- --- -------- --------
Larry R. Inman 49 1990 Chairman of the Board and Chief Exec-
utive Officer (since 1990); President
of the Company since 1993; President
of Ag-Bag Corporation (1984-1989) and
Chairman (1989-1994) of Ag-Bag
Corporation (former subsidiary).
Michael R. Wallis 35 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 60 1990 Vice President, Sales (since 1991);
Treasurer of the Company (1990-1991)
and (1983-1991) Ag-Bag Corporation
(former subsidiary).
Lou Ann Tucker 46 1990 Secretary (since 1996), Vice Presi-
dent, Administration (1989-1999), 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 39 1990 Vice President, Manufacturing (since
1989); Manager of Blair, Nebraska
Plant (since 1980); KW Trucking
(1984-1987).
11
<PAGE>
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The Company's Common Stock began trading publicly on January 17, 1990,
and was approved for quotation on Nasdaq on April 24, 1990, under the symbol
"AGBG." In 1997, the Nasdaq listing requirements were substantially expanded.
The Company does not currently qualify under the more stringent requirements
because the price at which its Common Stock is trading is below the $1 per share
minimum. The Company was formally notified on January 13, 1999 that its Common
Stock was delisted from quotation on the Nasdaq inter-dealer quotation system
for failure to meet the new listing requirements. The company's Common Stock is
now traded on the OTC Bulletin Board.
As of February 14, 2000, there were approximately 340 holders of record
of Common Stock. The Company estimates there are approximately 2,400 beneficial
holders of the Common Stock. 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 1999:
Calendar Year High Bid Low Bid
- ------------- -------- -------
1998:
- -----
First quarter $.688 $.406
Second quarter $.75 $.453
Third quarter $.813 $.406
Fourth quarter $.594 $.375
1999:
- -----
First quarter $.50 $.344
Second quarter $.422 $.328
Third quarter $.391 $.359
Fourth quarter $.438 $.359
- -------------------------------
The quotations reflect inter-dealer prices, without retail markups, markdowns,
or commissions and do not necessarily represent actual transactions.
12
<PAGE>
Dividends
- ---------
The Company has not paid any dividends on its Common Stock since its
inception, and the Board of Directors does not anticipate declaring any cash
dividends on its Common Stock in the foreseeable future. The Company currently
intends to utilize any earnings in its business. The Company may not pay
dividends on Common Stock pursuant to certain loan agreements, or while it is in
arrears in dividends on its preferred stock.
Unregistered Securities
The following unregistered securities have been issued by the Company
during the last three fiscal years:
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------ ------------------------ ------------------ -------------------- ---------------------
Name of
Title and Amount of Principal
Securities Underwriter/ Name or Class of
Granted/Exercise Price Underwriting Persons who
if Applicable Discounts or Received Securities Consideration
Date of Grant Commissions Received
- ------------------------------ ------------------------ ------------------ -------------------- ---------------------
February 17, 1997 6,788 Options for N/A Patrick Meunier For consulting
Common Stock/$.6875 services; value of
per share (1) services estimated
to be $55,000
- ------------------------------ ------------------------ ------------------ -------------------- ---------------------
February 17, 1997 10,000 Options for N/A Udo Weber $0
Common Stock/$.6875
per share (2)
- ------------------------------ ------------------------ ------------------ -------------------- ---------------------
July 17, 1997 20,000 Options for N/A Officers $0
Common Stock/$.6875
per share (3)
- ------------------------------ ------------------------ ------------------ -------------------- ---------------------
August 26, 1997 8,240 Shares of N/A Employees $0
Common Stock (4)
- ------------------------------ ------------------------ ------------------ -------------------- ---------------------
June 8, 1998 50,000 Options for N/A Nonemployee $0
Common Stock/$.563 per Directors
share (5)
- ------------------------------ ------------------------ ------------------ -------------------- ---------------------
</TABLE>
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.
- ------------------------------
1 Issued pursuant to a nontransferable option agreement which provides for
vesting as follows: 100% vested on date of grant.
2 Issued pursuant to a nontransferable option agreement which provides for
vesting as follows: 100% vested after two years from date of grant.
3 Granted under the Incentive Stock Option Plan. Options vest immediately.
4 Granted under the 1991 Employee Stock Plan.
5 Granted under Nonemployee Director Stock Option Plan. Options vest according
to terms of plan.
13
<PAGE>
Item 6. Selected Financial Data
- --------------------------------
The following table sets forth financial data derived from the audited
financial statements of the Company for the years ended December 31, 1995, 1996,
1997, 1998 and 1999. 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>
(In thousands, except per share data)
Year Ended December 31,
-----------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Statement of Operations Data:
Net Sales $ 17,659 $ 22,985 $ 20,293 $ 27,710 $ 32,687
Cost of Sales 12,679 17,791 18,493 20,800 25,085
---------- ---------- ---------- ---------- ----------
Gross Profit from Operations 4,980 5,194 1,800 6,910 7,602
Selling and Administrative Expenses 4,219 4,739 5,035 5,470 6,273
Research and Development Expenses 68 59 87 150 324
Unusual Charge 980
---------- ---------- ---------- ---------- ----------
Income (Loss) from Operations 693 396 (4,302) 1,290 1,005
Other Income (Expense) (214) 174 (290) (64) (30)
---------- ---------- ---------- ---------- ----------
Income (Loss) before Provision for
Income Taxes, and Discontinued Operations 479 570 (4,592) 1,226 975
Provision (Benefit) for Income Taxes 286 257 (1,650) 422 327
---------- ---------- ---------- ---------- ----------
Income (Loss) before Discontinued
Operations 193 313 (2,942) 804 648
Discontinued Operations-income (loss)
from operations (86) 50 (449)
Discontinued Operations-loss on disposal of
Ag-Bag Europe, PLC (less income tax benefit of
$24,500) (424)
Net Income (Loss) $ 107 $ 363 $ (3,815) $ 804 $ 648
========== ========== ========== ========== ==========
</TABLE>
14
<PAGE>
<TABLE>
(In thousands, except per share data)
Year Ended December 31,
-----------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Basic Earnings per Share:
Income (Loss) before Discontinued
Operations $ 0.02 $ 0.03 $ (.24) $ .06 $ .05
Discontinued Operations (.01) (.08)
---------- ---------- ---------- ---------- ----------
$ 0.01 $ 0.03 $ (.32) $ .06 $ .05
========== ========== ========== ========== ==========
Diluted Earnings per Share:
Income (Loss) before Discontinued
Operations $ 0.02 $ 0.03 $ (.24) $ .06 $ .05
Discontinued Operations (.01) (.08)
---------- ---------- ---------- ---------- ----------
$ 0.01 $ 0.03 $ (.32) $ .06 $ .05
========== ========== ========== ========== ==========
Weighted Average Shares:
Basic 12,062 12,096 12,056 12,062 12,062
========== ========== ========== ========== ==========
Diluted 12,062 12,096 12,056 12,062 12,062
========== ========== ========== ========== ==========
Balance Sheet Data:
December 31,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Working Capital $ 6,078 $ 6,090 $ 5,681 $ 6,818 $ 7,155
Current Assets 9,379 8,746 9,889 9,391 9,983
Total Assets 16,297 16,903 15,190 13,820 14,575
Current Liabilities(1) 3,301 2,656 4,208 2,573 2,827
Long-term Debt(1) 1,237 2,061 2,690 2,210 2,121
Total Stockholders' Equity(2) 11,759 12,186 8,292 9,037 9,627
</TABLE>
(1) Includes loans from shareholders and deferred taxes.
(2) Includes $696 of preferred stock.
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
- ---------------------
Risk Factors
- ------------
The information set forth below relating to matters that are not historical
facts are "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934 and involve risks and uncertainties which could
cause actual results to differ materially from those set forth below. Such risks
and uncertainties include, but are not limited to, the following:
The Company is dependent on the dairy industry.
More than 70% of the Company's revenues come from the dairy industry.
A downturn in the dairy industry could cause a reduction in the Company's
revenues.
The Company's sales are highly correlated with the price of milk
products and revenues of the dairy industry. When dairy farmers make money, they
buy the Company's products. When dairy farmers are not making money, the
Company's sales decline.
The Company's revenues are seasonal and dependent on weather conditions.
The core business of the Company is dependent on weather conditions
during the harvest seasons in North America and Europe. Adverse weather
conditions affect farmers' crops and reduce demand for the Company's products.
Approximately 70%-75% of the Company's revenue is generated in the second and
third quarters.
The Company may lose one or both of the two class action lawsuits pending
against it.
Two class action lawsuits alleging antitrust violations have been filed
against the Company and others. If the Company's efforts to dismiss or favorably
resolve the suits fail, the Company could incur additional and significant
litigation costs and experience a drain on management and other resources. If
the plaintiffs succeed in establishing liability and obtain a judgment for
damages, the award could exceed the Company's net worth.
The Company's intellectual property protection may not be adequate.
The Company has patents on its basic bagging machines and patents
pending on additional machines, bags and systems for silage bagging, grain
bagging and hay/straw bale bagging. The Company may not obtain these patents and
our patents may not withstand litigation challenges. If the Company's patents do
not withstand litigation challenges, the Company's rights in its bag and machine
technology could be diminished or eliminated. Moreover, the issuance of patents
covering any of the Company's products may be insufficient to prevent
competitors from duplicating the Company's products. The patent laws of other
countries may differ from those of the United States as to the patentability of
the Company's products and processes, and the degree of protection afforded by
foreign patents may be different from that in the United States.
The Company relies on one principal supplier for its bags.
The Company purchases nearly all of its bags from one supplier, Up
North Plastics, Inc., under a long-term requirements contract. Approximately 50%
of the Company's revenue comes from the sale of bags. Any disruption of the
manufacturing process could affect that company's ability to supply the
Company's needs, and could adversely affect the Company's sales.
16
<PAGE>
The Company's pricing is dependent on the price of resin.
The prices that the Company pays for bags, which account for
approximately half of our sales, fixed annually in advance and are tied directly
to the price of resin. Resin prices have historically been subject to
significant price volatility. Increases in the price of bags could adversely
affect our profit margins if we are unable to pass along the price increase, and
would likely affect our revenues if alternatives to our product become more
attractive because of the price increases.
The Company's stock is traded on the OTC Bulletin Board, which may make the
stock more difficult to sell.
The Company does not satisfy the criteria for quotation on The Nasdaq
SmallCap Market. The Company's stock is, instead, traded on the OTC Bulletin
Board. As a result, the Company's shareholders may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, the
Company's common stock, and the market price for the Company's common stock may
decline.
Trading in the Company's common stock is subject to the requirements of
Rule 15g-9 promulgated under the Securities Exchange Act of 1934. Under this
rule, broker/dealers who recommend low-priced securities to persons other than
established customers and accredited investors must satisfy special sales
practice requirements, including a requirement that they make an individualized
written suitability determination for the purchaser and receive the purchaser's
written consent prior to the transaction. The Securities Enforcement Remedies
and Penny Stock Reform Act of 1990 also requires additional disclosure in
connection with any trades involving a stock defined as a penny stock (generally
any equity security not traded on an exchange or quoted on Nasdaq that has a
market price of less than $5.00 per share, subject to certain exceptions),
including the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated with the
penny stock market. These requirements could severely limit the market liquidity
of the Company's common stock and the ability of the Company's shareholders to
dispose of their shares, particularly in a declining market.
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>
Percentage of Total Revenue
Year Ended December 31,
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Net Sales 100% 100% 100% 100% 100%
Costs and Expenses:
Cost of Sales 72% 77% 91% 75% 77%
Selling and Administration 24% 21% 25% 20% 19%
Research and Development --- --- --- --- 1%
Unusual Charge --- --- 5% --- ---
Income (Loss) From Operations 4% 2% (21%) 5% 3%
---- ---- ---- ---- ----
</TABLE>
Years Ended December 31, 1999 and 1998
17
<PAGE>
For the year ended December 31, 1999, net sales increased 17.96% to
$32,686,832 compared to $27,710,514 for the year ended December 31, 1998. Sales
for the year were up as a result of the slightly higher U.S. BFP (Basic Formula
Price) for milk during the main harvest season months, despite the first and
fourth quarters sharp decline in BFP. In addition, continued low supplemental
grain feed costs have spurred farmer's capital expenditures for machinery and
equipment. The Company believes recent independent university research articles
published on the benefits of bagging over the use of bunkers and silos have also
helped to increase sales, as farmers are realizing the benefits of bagging their
feed instead of storing it in bunkers or silos.
Machine sales for the year were up 27.94% and bag sales were up 17.53%
compared to 1998. Machine sales 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. In addition to compost bag sales, the Company sold five composting
systems during the year ended December 31, 1999 (generating approximately
$380,000 in revenue) compared to seven systems sold for the year ended December
31, 1998 (generating approximately $550,000 in revenue).
Although the Company sells its product primarily through a worldwide
dealer network, certain sales are made directly to large volume customers when a
dealer is not present in the customer's geographic market. For each of the last
three years, the Company estimates direct sales at between 30-35% 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 1999 were down in comparison to
1998 due to continued poor economic conditions in the Latin American/Mexico
market. Additionally, the Company's mid-sized bagging machines are now
manufactured in Germany and not sold directly to its German dealer. As a result,
the Company now receives a royalty fee for each machine produced which is
recorded as other income. In 1997, the Company formed a German joint venture in
which the Company owns a 50% interest and its German dealer owns the remaining
50%. The joint venture distributes bags to the Company's German and European
dealers. The Company's equity in earnings of the venture are reported as other
income. Approximately $1.7 million in bag sales were distributed through the
venture during 1999, an increase of 13%, compared to approximately $1.5 million
in bag sales for 1998.
Gross profit as a percentage of sales declined for the year ended
December 31, 1999 compared to the same period in 1998. The decline resulted from
lower margins on bags in certain geographic, highly competitive, high volume
areas. The decline was also the result of lower margins on machinery during the
first and fourth quarters of 1999 which were offset by improved margins on
machinery resulting from increased production efficiencies being realized from
seasonal machine production ramp-up in the second and third quarters of the
year.
Selling expenses for the year ended December 31, 1999 increased 18.15%
to $3,574,830 compared to $3,025,642 for the year ended December 31, 1998. The
increase for the year was the result of increased sales personnel costs,
commissions and related benefits and volume discounts resulting from the higher
sales volumes.
Administrative expenses for the year ended December 31, 1999 increased
10.42% to $2,698,658 compared to $2,444,060 for the year ended December 31,
1998. The increase for the year was the result of increased general and
administrative operating overheads coupled with higher professional fees
relating to ongoing litigation.
18
<PAGE>
Research and development expenses for the year ended December 31, 1999
increased 115.91% to $323,997 compared to $150,058 for the year ended December
31, 1998. The increase for the year was the result of increased research costs
related to new silage and compost machine development, coupled with new silage
and nutritional studies of bagged feed and their effects on animal production.
Interest expense for the year ended December 31, 1999 decreased 23.90%
to $333,170 compared to $437,803 for the year ended December 31, 1998. The
decrease for the year was the result of the Company utilizing a smaller portion
of its credit facilities due to accelerated collections of accounts receivable.
Net income for the year ended December 31, 1999 decreased 19.37% to
$648,571 compared to $804,399 for the year ended December 31, 1998. The decrease
for the year was the result of lower bag margins in certain high volume areas
coupled with lower machine margins during the first and fourth quarters. In
addition, increased selling, administrative and research expenses contributed to
the decline for the year, which were partially offset by increased sales volumes
and lower interest costs.
Years Ended December 31, 1998 and 1997
- ---------------------------------------
For the year ended December 31, 1998, net sales increased 36.55% to
$27,710,514 compared to $20,292,959 for the year ended December 31, 1997. Sales
for the year were up as a result of continued improving milk prices and lower
grain feed costs in the U.S. which spurred capital expenditures for machinery
and equipment. The Company believes recent university research articles
published on the benefits of bagging over the use of bunkers have also helped to
increase sales, as farmers are realizing the benefits of bagging their feed
instead of storing it in bunkers or silos.
Machine sales for the year were up 67.3% and bag sales were up over
16.9% compared to 1997. Machine sales of the Company are directly tied to
farmers' income and therefore their ability to purchase new equipment. In
addition, the Company introduced its next generation (hydraulic finger
controlled) silage bagger during the first quarter of 1998, representing the
latest in bagging technology. The Company's bag and parts sales are driven by
the total number of bagging machines that are in the marketplace. However, there
is not a perfect correlation between the Company's bag sales and machine sales,
as the Company's and competitors' bags are interchangeable on all bagging
machinery in the industry. The Company cannot estimate with any certainty the
total number of machines or bags used in the industry. In addition to compost
bag sales, the Company sold seven composting systems during the year ended
December 31, 1998 (generating approximately $550,000 in revenue) compared to two
systems sold for the year ended December 31, 1997 (generating approximately
$100,000 in revenue).
The Company sells its product primarily through a worldwide dealer
network, however, some sales are made directly to large volume customers because
a dealer is not present in the customer's geographic market. For each of the
last three years, the Company estimates direct sales at between 30-33% of total
sales and the Company expects this historical sales mix to continue in the
future. The gross margin realized on the Company's direct sales are typically
within 200-300 basis points of those sales realized through the Company's dealer
network. However, various economic, volume and market factors in the geographic
area impact the ultimate margin.
International sales for the Company in 1998 were down in comparison to
1997 due to poor economic conditions in the Latin American/Mexico market coupled
with slight declines in machine sales into the European market. In 1997, the
Company formed a German joint venture in which the Company owns a 50% interest
and its German dealer owns the remaining 50%. The joint venture distributes bags
to the Company's German and European dealers. The Company's equity in earnings
of the venture are reported as other income. Approximately $1.5 million in bag
sales were distributed through the venture during 1998, an increase of 25%,
compared to approximately $1.2 million in bag sales for 1997.
19
<PAGE>
Gross profit from sales for the year ended December 31, 1998
increased 283.79% to $6,910,073 compared to $1,800,440 for the year ended
December 31, 1997. The increase for the year was largely the result of an
inventory write-down charge in 1997 which totaled $2,418,778. In addition,
increased sales volumes in 1998 helped cover fixed operating overheads which
were offset by lower margins as a result of strong competition in certain areas
of the U.S. market in both bags and machines. Additionally, the Company incurred
higher transportation costs in 1997 caused by the new bag folding facility
construction delays.
Selling expenses for the year ended December 31, 1998 increased 13.16%
to $3,025,642 compared to $2,673,587 for the year ended December 31, 1997. The
increase was the result of increased meeting and travel expenses, coupled with
increased commissions from higher sales volumes and increased advertising
expenses related to the Company's new image and product advertising campaign.
Administrative expenses for the year ended December 31, 1998 increased
3.47% to $2,444,060 compared to $2,361,940 for the year ended December 31, 1997.
The increase for the year was the result of higher personnel costs and general
administrative overheads, which were offset by lower amortization expense as a
result of the fourth quarter 1997 write-off of certain patent rights.
Research and development expenses for the year ended December 31, 1998
increased 72.26% to $150,058 compared to $87,112 for the year ended December 31,
1997. The increase for the year was the result of the Company continuing to
develop and modify its HFC (Cable-less machine) and its smaller compost bagging
machine.
Interest expense for the year ended December 31, 1998 decreased 7.85%
to $437,803 compared to $475,056 for the year ended December 31, 1997. The
decrease for the year was the result of the Company utilizing a smaller portion
of its credit facility as a result of increased collection efforts which were
offset by the fact that some extended term sales were offered during the year to
remain competitive.
During 1997 the Company recorded a loss from discontinued operations of
its U.K. subsidiary Ag-Bag Europe, PLC in the amount of $448,832. The loss for
the year was the result of lower sales due to the continued BSE (Mad Cow)
problem within the British farming industry. Additionally, the U.K. subsidiary
sold several of its bagging machines in its rental fleet early in 1997 with the
anticipation of improving the ongoing operations through increased concentration
on more profitable custom work. This proved unsuccessful due in large part to
the poor weather conditions experienced throughout the traditionally busy spring
and summer months in England, which prevented some bagging and custom work from
being completed. The U.K. subsidiary also experienced increased warranty costs
on the rental machines sold to custom operators in addition to increased
maintenance costs on its remaining custom equipment. The U.K. subsidiary also
experienced increased bad debt expense due to a customer filing bankruptcy as
well as increased legal and professional costs related to the sale of the
business. The Company recorded a loss on the disposal of Ag-Bag Europe, PLC of
$424,064, net of income tax benefit of $24,500.
Net income for the year ended December 31, 1998 was $804,399 compared
to a net loss of $3,815,119 for the year ended December 31, 1997. The increase
in net income for the year was the result of an improved U.S. dairy industry
coupled with the fact the Company incurred a special one-time charge during 1997
related to a strategic realignment and re-focusing of the Company which included
revaluation and abandonment of certain non-core, long term inventory totaling
$2,418,778. In addition, in 1997, the Company incurred a loss from operations
from its former U.K. subsidiary, Ag-Bag Europe, PLC in the amount of $448,832
and a loss on disposal of the subsidiary in the amount of $424,064. The Company
also incurred an unusual charge related to a patent right write-off in 1997
equaling $979,762. Increased sales volumes in 1998 helped cover fixed operating
overheads but were offset by lower margins and increased selling and
administrative expenses. The increase in net income was also due to decreased
interest expense.
20
<PAGE>
Strategic Realignment
- ---------------------
On December 5, 1997, the Company's Board of Directors approved a
strategic realignment of the Company. The realignment involved the sale of the
Company's U.K. subsidiary (see discussion below on Discontinued Operations)
which had not been performing at a profitable level due to the BSE (Mad Cow)
problem within the British farming industry. The U.K. subsidiary sold several of
its bagging machines in its rental fleet early in 1997 with the anticipation of
improving the ongoing operations through increased concentration on more
profitable custom work. This proved unsuccessful due in large part to the poor
weather conditions experienced throughout the traditionally busy spring and
summer months in England and the continued escalation during the year of the BSE
problem within the British farming industry depressing the custom work. The
results of Ag-Bag Europe, PLC are shown as operations for the years ended
December 31, 1997, 1996 and 1995. 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 resulting in
an inventory write-down charge totaling $2,418,778, of which $2,088,223 related
to non-core products and $330,555 related 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.
Recent Accounting Pronouncements
- --------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general purpose financial statements. The company fully
implemented SFAS No. 130 during 1998.
21
<PAGE>
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure about
Segments of an Enterprise and Related Information", which changes the way public
companies report information about operating segments. SFAS No. 131 is based on
the management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers and the material countries in which
the entity holds assets and reports revenue. The company fully implemented SFAS
No. 131 during 1998 and determined that it has no reportable segments.
Year 2000
- ---------
The Company did not experience any computer system transitional
problems as a result of the Year 2000 "bug". Management does not expect any year
2000 transitional issues to have a material impact on the operations, cash flows
or financial condition of the Company.
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 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 19.63% at December 31, 1999 to $1,875,777
compared to $2,333,912 at December 31, 1998. The decrease for the year was the
result of strong collection efforts coupled with third party financing plans
offered by the Company that its customers took advantage of during the fourth
quarter.
Inventory increased 20.68% at December 31, 1999 to $7,168,740 compared
to $5,940,289 at December 31, 1998. The increase in inventory resulted from
increased production during the fourth quarter to maintain production
efficiencies on the Company's smaller bagging machines and to have inventory
available for pre-season flooring and early order programs offered by the
Company.
Other current assets decreased at December 31, 1999 to $126,982
compared to $344,172 at December 31, 1998. The decrease was the result of lower
current deferred taxes.
Intangible assets at December 31, 1999 decreased to $35,562 compared to
$54,954 at December 31, 1998. The decrease was the result of normal amortization
expense for the year.
The Company has an operating line of credit with a limit of $5,000,000,
secured by accounts receivable and inventory. As of December 31, 1999, $-0- had
been drawn under the credit line. Beginning January 3, 2000, the Company
obtained a $500,000 equipment acquisition line for the purchase of new business
equipment for the year 2000. The equipment line is secured by a fixed asset
blanket lien. Management believes that, along with funds generated from
operations, its operating line of credit, and equipment acquisition line of
credit, it will be able to meet the Company's cash requirements through 2000.
22
<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 January 13, 1999, that its common
stock was delisted from quotation on the Nasdaq inter-dealer quotation system
for failure to meet the new listing requirements. The company's common stock is
now traded on the OTC Bulletin Board. The removal from quotation on Nasdaq could
have a material adverse effect on the Company's ability to raise additional
equity capital in a public stock offering should that become necessary.
In December of 1998, the Company announced that it retained Pacific
Crest Securities and Columbia Financial Advisors, Inc. as their investment
banking representatives to explore strategic alternatives. To date, the Company
has not entered into any arrangements and continues to explore its alternatives.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
Not applicable.
Item 8. Financial Statements and Supplemental Data
- ---------------------------------------------------
Reference is made to the financial statements and related notes and
supplemental data under Item 14 filed with this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
As of September 1, 1999, the Company's accountants, Yergen and Meyer, LLP,
merged with Moss Adams LLP. Moss Adams LLP will, therefore, serve as the
Company's independent certified public accountants going forward.
PART III
--------
Items 10 and 11. Directors and Executive Officers of the Registrant and
- ------------------------------------------------------------------------
Executive Compensation
- ----------------------
A definitive proxy statement for the 2000 Annual Meeting of Stockholders
of Ag-Bag International Limited to be held on June 5, 2000 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.
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.
23
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
Page
1. Index to Financial Statements.......................................25
Independent Auditors' Reports......................................F-1
Balance Sheets at December 31, 1999 and 1998.......................F-3
Statements of Operations and Comprehensive Income for the
years ended December 31, 1999, 1998 and 1997...................F-5
Statement of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997...............................F-6
Statement of Cash Flows for the years ended December 31,
1999, 1998 and 1997............................................F-7
Notes to Financial Statements......................................F-8
Independent Auditors' Reports.....................................F-23
2. Financial statement schedules required to be filed by Item 8
and paragraph (d) of this Item 14:
Schedule of Valuation and Qualifying Accounts.....................F-25
All other schedules are omitted because they are not applicable or
the required information is shown in the financial statements
or notes thereto.
3. The exhibits are listed in the index of exhibits....................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
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AG-BAG INTERNATIONAL LIMITED,
a Delaware corporation
Date: March 29, 2000 By: /s/ Larry R. Inman
-------------------------------------
Larry R. Inman, Chief Executive
Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Date: March 29, 2000 By: /s/ Larry R. Inman
-------------------------------------
Larry R. Inman, Chairman, Board of
Directors; Chief Executive Officer
and President(Principal Executive
Officer)
Date: March 29, 2000 By: /s/ Michael R. Wallis
-------------------------------------
Michael R. Wallis, Chief Financial
Officer and Vice President, Finance
(Principal Financial and Accounting
Officer)
Date: March 29, 2000 By: /s/ Lemuel E. Cunningham
-------------------------------------
Lemuel E. Cunningham, Director
Date: March 29, 2000 By: /s/ Michael W. Foster
-------------------------------------
Michael W. Foster, Director
Date: March 29, 2000 By: /s/ Michael B. Leahy
-------------------------------------
Michael B. Leahy, Director
Date: March 29, 2000 By: /s/ Arthur P. Schuette
-------------------------------------
Arthur P. Schuette, Director
Date: March 29, 2000 By: /s/ Rolf E. Soderstrom
-------------------------------------
Rolf E. Soderstrom, Director
Date: March 29, 2000 By: /s/ Robert N. Thurston
-------------------------------------
Robert N. Thurston, Director
Date: March 29, 2000 By: /s/ Stan Vinson
-------------------------------------
Stan Vinson, Director
25
<PAGE>
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORTS F-1
FINANCIAL INFORMATION
Balance Sheets F-3
Statements of Operations and Comprehensive Income F-5
Statements of Shareholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8
SUPPLEMENTARY INFORMATION
Independent Auditors' Reports on Supplementary Information F-23
Valuation and Qualifying Accounts F-25
26
<PAGE>
AG-BAG INTERNATIONAL LIMITED
FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
Years Ended December 31, 1999 and 1998
<PAGE>
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORTS F-1
FINANCIAL STATEMENTS
Balance Sheets F-3
Statements of Operations and Comprehensive Income F-5
Statements of Shareholders' Equity F-6
Statements of Cash Flows F-7
Notes to the Financial Statements F-8
SUPPLEMENTARY INFORMATION
Independent Auditors' Reports on Supplementary
Information F-23
Valuation and Qualifying Accounts F-25
<PAGE>
Moss Adams LLP (Letterhead)
222 SW Columbia, Suite 400
Portland, OR 97201
INDEPENDENT AUDITORS' REPORT
To 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, 1999 and 1998, and the related statements of operations and
comprehensive income, shareholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
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, 1999 and 1998, and the results of its operations and its cash
flows for the years ended December 31, 1999 and 1998, in conformity with
generally accepted accounting principles.
/s/Moss Adams LLP
Portland, Oregon
February 15, 2000
F-1
<PAGE>
KPMG Peat Marwick LLP (Letterhead)
Suite 2000
1211 South West Fifth Avenue
Portland, OR 97204
Independent Auditors' Report
The Board of Directors and Shareholders
Ag-Bag International Limited:
We have audited the accompanying statements of operations, shareholders' equity,
and cash flows of Ag-Bag International Limited for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of its operations and its cash flows for the
year ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/KPMG Peat Marwick LLP
Portland, Oregon
March 8, 2000
F-2
<PAGE>
AG-BAG INTERNATIONAL LIMITED
BALANCE SHEETS
December 31, 1999 and 1998
ASSETS
1999 1998
------------ ------------
CURRENT ASSETS
Cash $ 511,910 $ 361,614
Accounts receivable, less allowance for
doubtful accounts of $147,024 and
$327,510 at 1999 and 1998, respectively 1,875,777 2,333,912
Inventories 7,168,740 5,940,289
Other current assets 126,982 344,172
Prepaid expenses 299,307 410,520
------------ ------------
Total Current Assets 9,982,716 9,390,507
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, net 4,162,992 3,934,382
------------ ------------
OTHER ASSETS
Deferred income taxes - 41,000
Intangible assets, net 35,562 54,954
Other assets 393,969 399,425
------------ ------------
Total Other Assets 429,531 495,379
------------ ------------
TOTAL $ 14,575,239 $ 13,820,268
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
1999 1998
------------ ------------
CURRENT LIABILITIES
Note payable to shareholder and related party $ 6,523 $ 15,876
Current portion of long-term debt and capital
lease obligations 378,568 365,688
Accounts payable 1,133,994 831,922
Accrued payroll and payroll taxes 504,786 484,458
Dealer deposits 199,169 225,418
Warranty reserve 175,000 140,000
Accrued expenses and other current liabilities 416,790 470,134
Income taxes payable 12,652 39,636
------------ ------------
Total Current Liabilities 2,827,482 2,573,132
------------ ------------
NONCURRENT LIABILITIES
Long-term debt and capital lease obligations,
less current portion 2,113,817 2,201,388
Note payable to shareholder and related party,
less current portion - 8,219
Deferred income taxes 7,000 -
------------ ------------
Total Noncurrent Liabilities 2,120,817 2,209,607
------------ ------------
Total Liabilities 4,948,299 4,782,739
------------ ------------
COMMITMENTS AND CONTINGENCIES (see notes)
SHAREHOLDERS' EQUITY
Preferred stock, $4 liquidation value, 8.5%
cumulative dividend, non-voting, 5,000,000 shares
authorized, 174,000 shares issued and outstanding 696,000 696,000
Common stock, $.01 par value, 25,000,000 shares
authorized, 12,061,991 shares issued and
outstanding at December 31, 1999 and 1998 120,619 120,619
Additional paid in capital 9,210,211 9,210,211
Retained earnings (deficit) (399,890) (989,301)
------------ ------------
Total Shareholders' Equity 9,626,940 9,037,529
------------ ------------
TOTAL $ 14,575,239 $ 13,820,268
============ ============
F-4
<PAGE>
<TABLE>
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the Years Ended December 31, 1999, 1998 and 1997
<S> <C> <C> <C>
1999 1998 1997
------------ ------------ ------------
NET SALES $ 32,686,832 $ 27,710,514 $ 20,292,959
COST OF SALES 25,084,577 20,800,441 18,492,519
------------ ------------ ------------
Gross profit from operations 7,602,255 6,910,073 1,800,440
OTHER OPERATING EXPENSES
Selling expenses 3,574,830 3,025,642 2,673,587
Administrative expenses 2,698,658 2,444,060 2,361,940
Research and development expenses 323,997 150,058 87,112
Unusual charge - - 979,762
------------ ------------ ------------
Income (loss) from operations 1,004,770 1,290,313 (4,301,961)
OTHER INCOME (EXPENSE)
Interest income 7,185 69,607 39,494
Interest expense (333,170) (437,803) (475,056)
Other 296,786 304,282 145,300
------------ ------------ ------------
Income (Loss) from Continuing
Operations Before Income Taxes 975,571 1,226,399 (4,592,223)
Provision (benefit) for income taxes 327,000 422,000 (1,650,000)
------------ ------------ ------------
Income (loss) from continuing operations 648,571 804,399 (2,942,223)
DISCONTINUED OPERATIONS
Loss from operations of discontinued
Ag-Bag Europe PLC - - (448,832)
Loss on disposal of Ag-Bag Europe PLC,
plus applicable income tax benefit of $24,500 - - (424,064)
------------ ------------ ------------
NET INCOME (LOSS) 648,571 804,399 (3,815,119)
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency translation adjustments - - (28,325)
------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME (LOSS) $ 648,571 $ 804,399 $ (3,843,444)
============ ============ ============
Basic and diluted net income (loss) per common share:
Continuing operations $ 0.05 $ 0.06 $ (0.24)
Discontinued operations - - (0.08)
------------ ------------ ------------
Total income (loss) per common share $ 0.05 $ 0.06 $ (0.32)
Basic and diluted weighted average common
shares outstanding 12,061,991 12,061,991 12,056,641
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
Accumulated
Additional Retained other Total
Preferred Stock Common Stock paid-in earnings comprehensive shareholders'
Shares Amount Shares Amount capital (deficit) income equity
------ ------ ------ ------ ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 174,000 $696,000 12,053,751 $120,537 $9,201,796 $ 2,139,739 $ 28,325 $12,186,397
Stock issued in connection with
employee stock plan 8,240 82 8,415 8,497
Foreign currency translation (28,325) (28,325)
Preferred stock dividends (59,160) (59,160)
Net (Loss) (3,815,119) (3,815,119)
------- -------- ---------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1997 174,000 696,000 12,061,991 120,619 9,210,211 (1,734,540) - 8,292,290
Preferred stock dividends (59,160) (59,160)
Net Income 804,399 - 804,399
------- -------- ---------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1998 174,000 696,000 12,061,991 120,619 9,210,211 (989,301) - 9,037,529
Preferred stock dividends (59,160) (59,160)
Net Income 648,571 648,571
------- -------- ---------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1999 174,000 $696,000 12,061,991 $120,619 $9,210,211 $ (399,890) $ - $ 9,626,940
======= ======== ========== ======== ========== ========== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
<TABLE>
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
<S> <C> <C> <C>
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 648,571 $ 804,399 $ (3,815,119)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 565,322 580,639 865,671
Issuance of stock under employee stock plan - - 8,497
Inventory write-down and obsolescence 346,500 135,000 2,171,278
Write-down of intangible asset - - 979,762
Loss on disposal of Ag-Bag Europe PLC - - 424,064
(Gain) loss on disposition of fixed assets 3,239 1,269 (69,903)
Deferred income taxes 221,000 422,000 (755,000)
Change in assets and liabilities:
Accounts receivable 458,135 (142,230) 556,877
Inventories (1,798,281) (361,187) (1,244,485)
Other current assets 155,403 1,589,097 (1,442,717)
Other assets 5,456 (219,452) 23,681
Accounts payable 302,072 (117,450) 303,349
Accrued expenses and other current liabilities (24,265) 279,539 64,383
Income taxes payable (26,984) - 39,636
------------ ------------ ------------
Net cash provided by (used in) operating
activities 856,168 2,971,624 (1,890,026)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (484,267) (299,662) (1,346,527)
Construction in progress (78,682) - -
Proceeds from disposition of fixed assets 8,500 10,000 574,013
Intangible assets - 15,545 (31,503)
Cash provided by sale of Ag-Bag Europe PLC - - 795,739
------------ ------------ ------------
Net cash used in investing activities (554,449) (274,117) (8,278)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 22,902,233 27,341,354 22,466,810
Principal payments on line of credit (22,902,233) (29,058,617) (21,016,517)
Proceeds on issuance of debt 286,752 29,517 1,041,093
Principal payments on debt (361,443) (573,978) (425,088)
Payment of shareholders' notes (17,572) (15,665) (14,316)
Dividends paid (59,160) (59,160) (59,160)
------------ ------------ ------------
Net cash provided by (used in)financing activities (151,423) (2,336,549) 1,992,822
------------ ------------ ------------
Effect of foreign currency translation - - (94,518)
------------ ------------ ------------
NET INCREASE IN CASH 150,296 360,958 -
CASH AT BEGINNING OF YEAR 361,614 656 656
------------ ------------ ------------
CASH AT END OF YEAR $ 511,910 $ 361,614 $ 656
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Ag-Bag International Limited (the Company) is a
Delaware corporation. The Company's primary operations include the manufacturing
and sale of machines and related bags used in the agriculture industry to store
feed for livestock, grain and other products. The Company also manufactures
machines and bags for composting. The Company's primary market is North America;
however, it also sells products in Europe and Latin America. As discussed in
Note 15, in December 1997 the Company sold its subsidiary, Ag-Bag Europe PLC.
The Company's common stock began trading publicly on January 17, 1990, and was
approved for quotation on Nasdaq on April 24, 1990, under the symbol "AGBG." In
1997, the Nasdaq listing requirements were substantially expanded. The Company
does not currently qualify under the more stringent requirements because the
price at which its common stock is trading is below the $1 per share minimum bid
price. The Company was formally notified on January 13, 1999, that its common
stock was delisted from quotation on the Nasdaq inter-dealer quotation system
for failure to meet the new listing requirements. The Company's common stock is
now traded in the OTC Bulletin Board.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
financial statements of Ag-Bag International Limited and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation. Investments in 20% to 50% owned joint ventures are
not consolidated and are instead accounted for on the equity method. (See Note
16)
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 $71,236, $185,863 and $132,865 in 1999, 1998 and 1997,
respectively, from rental equipment to inventory held for sale.
ACCOUNTS RECEIVABLE - Accounts receivable are from distributors and customers of
the Company's products. The Company performs periodic credit evaluations of its
customers and maintains allowances for potential credit losses. Also, to reduce
the risk of credit loss, the Company requires letters of credit from foreign
customers with which no credit history has been established.
INVENTORIES - Inventories are stated at the lower of cost or market (net
realizable value). The Company determines cost on the first-in, first-out (FIFO)
basis. The Company's estimates of market value incorporate projections of future
sales volume by product class. In estimating the market value of parts inventory
items, the Company reviews current inventory levels in relation to sales
forecasts and adjusts the valuation reserve accordingly. For the remaining
categories of inventory, the Company establishes a reserve balance based on the
aging of the specific inventory items.
F-8
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, continued
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.
INTANGIBLE ASSETS - Intangible assets consist primarily of licenses, patents and
non-compete agreements. The cost of the licenses, patents and non-compete
agreements are amortized over the lesser of the terms of the related agreement
or the estimated useful lives of the respective asset, ranging from three to
twelve years.
STOCK OPTION PLAN - Prior to January 1, 1996, the Company accounted for its
stock option plan in accordance with the provisions of Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. As such, compensation expense related to grants to
employees would be recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price. On January 1, 1996,
the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
disclosure for employee stock option grants as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123 (see Note 11).
INCOME TAXES - The Company accounts for income taxes under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Valuation
allowances are established to reduce potential deferred tax assets when it is
more likely than not that all or some portion of potential deferred tax assets
will not be realized.
ADVERTISING COSTS - The Company expenses advertising costs as they are incurred.
Advertising expenses for the years ended December 31, 1999, 1998 and 1997 were
$466,270, $490,495 and $497,617, respectively.
F-9
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, continued
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 altering the calculation of diluted EPS, which replaces fully diluted
EPS. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. The Company fully
implemented SFAS No. 128 during 1997. Prior years' EPSs 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. Preferred stock dividends
were considered in the computation. 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.
COMPREHENSIVE INCOME - In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components (revenue, expenses, gains and
losses) in a full set of general purpose financial statements. The Company fully
implemented SFAS No. 130 during 1998. Prior years' general purpose financial
statements have been restated to comply with SFAS No. 130.
FOREIGN CURRENCY TRANSLATION - The financial statements of the Company's former
U.K. subsidiary have been translated into U.S. dollars from their functional
currency, British pounds sterling, in the accompanying statements. Balance sheet
amounts have been translated at the exchange rate on the balance sheet date, and
statement of operations amounts have been translated at average exchange rates
in effect during the period. The net translation adjustment is carried as a
component of shareholders' equity. The net amount of realized and unrealized
gains and losses on foreign currency transactions are included in other expense
(income).
SEGMENT INFORMATION - In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosure about Segments of an Enterprise and Related Information," which
changes the way public companies report information about operating segments.
SFAS No. 131 is based on the management approach to segment reporting,
establishes requirements to report selected segment information quarterly and to
report entity-wide disclosures about products and services, major customers and
the material countries in which the entity holds assets and reports revenue. The
Company fully implemented SFAS No. 131 during 1998 and determined that it has no
reportable segments.
F-10
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES, continued
MANAGEMENT ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1998
financial statements to conform with the 1999 presentation.
REVENUE RECOGNITION - Revenue on machine and bag sales is recognized at the time
the product is shipped to the customer.
WARRANTY - At the time of sale, the Company accrues a liability for the
estimated future costs to be incurred under the provisions of its warranty
agreements.
NOTE 2 - UNUSUAL CHARGE
Because of a change in the direction of the industry to the cable-less machine
design, the Company determined that the prospects for sales of machines which
incorporate the processes covered by a patent have substantially diminished,
thereby impairing the value of the patent itself. As a result, the value of the
patent, $979,762, was written off during 1997.
F-11
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
NOTE 3 - INVENTORIES
Inventories consist of the following:
December 31
---------------------------
1999 1998
------------ ------------
Parts and subassembly $ 2,451,510 $ 1,825,990
Work in process and raw materials 1,176,363 857,283
Bags and machines 3,540,867 3,257,016
------------ ------------
$ 7,168,740 $ 5,940,289
============ ============
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 1997, sales of
inventory, which were later determined to be non-core products as a result of
the strategic realignment, were $514,556. In addition, in 1997, the Company
refined its policy for establishing inventory valuation reserves. In 1997, in
connection with the strategic realignment and resultant refocusing of the
Company's sales efforts and in accordance with the refined policy for valuation
reserves, the Company reassessed and revised its estimates of fair market value
resulting in an inventory write-down charge totaling $2,418,778, of which
$2,088,223 relates to non-core products and $330,555 relates to core products.
NOTE 4 - INTANGIBLE ASSETS, NET
Intangible assets, net, consist of the following:
December 31
---------------------------
1999 1998
------------ ------------
License and patent costs $ 657,845 $ 707,845
Less accumulated amortization 622,283 652,891
------------ ------------
$ 35,562 $ 54,954
============ ============
During 1999, a license became fully amortized. In 1998, a covenant not to
compete was fully amortized and no longer in effect at December 31, 1998. These
intangible assets, along with the related accumulated amortization, were
relieved from the Company's accounts. See Note 2 regarding 1997 fourth quarter
write-off of patents.
F-12
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consist of the following:
December 31
---------------------------
1999 1998
------------ ------------
Land $ 160,826 $ 160,826
Buildings 2,805,958 2,589,229
Vehicles 330,844 370,141
Office furniture, fixtures and equipment 1,837,303 1,786,897
Plant equipment 2,901,077 2,744,327
Rental equipment 407,561 249,326
Leasehold improvements 70,014 70,014
------------ ------------
8,513,583 7,970,760
Construction in progress 78,682 -
Less accumulated depreciation and amortization 4,429,273 4,036,378
------------ ------------
$ 4,162,992 $ 3,934,382
============ ============
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, 1999 and 1998, gross amount of equipment under
lease was $281,039 and $535,502, respectively. Accumulated depreciation related
to those capital leases was $83,440 and $439,285 at December 31, 1999 and 1998,
respectively.
NOTE 6 - LINE OF CREDIT
The Company has an operating line of credit (LOC) with a bank for up to
$5,000,000 at December 31, 1999 and 1998. The line of credit is secured by
accounts receivable, inventories, fixed asset blanket and general intangibles,
and bears interest at the bank's prime rate plus 1/2% (9.0% at December 31, 1999
and 8.25% at December 31, 1998). As of December 31, 1999 and 1998, $-0-and $-0-
were outstanding under the operating line of credit. The line of credit is
subject to certain covenants. At December 31, 1997, the Company was not in
compliance with certain covenants due to the unusual charge the Company
incurred. The Company obtained a waiver for these violations.
F-13
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt is comprised of the following:
December 31
---------------------------
1999 1998
------------ ------------
Note payable in monthly installments of
$2,638, plus interest at prime plus 1.75%
(10.25% at December 31, 1999 and 9.5% at
December 31, 1998), through June 2000,
secured by building $ 14,091 $ 45,741
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 131,232 147,765
Note payable in monthly installments of
$3,567, including interest at 8% with a
balloon payment in 1999, secured by real
property - 23,334
Note payable, monthly payments of $6,724,
including interest at 9% through July 2017,
secured by real property 705,832 721,013
Note payable in monthly installments of
$4,650, including interest at 6.7% through
May 2017, secured by real property 581,533 597,996
Note payable in monthly principal
installments of $5,833, plus interest at
prime plus .75% (9.25% at December 31, 1999
and 8.5% at December 31, 1998), secured by
fixed asset blanket 233,333 303,333
Note payable with the City of Blair,
Nebraska, with monthly installments of
$6,607, including interest at 3% through
September 2003, secured by Blair Plant and
Equipment 350,571 418,229
Note payable in monthly installments of
$3,105, including interest at 8.75% through
December 2004, secured by certain equipment.
150,000 -
------------ ------------
2,166,592 2,257,411
Less: Current portion 229,467 241,699
------------ ------------
$ 1,937,125 $ 2,015,712
============ ============
F-14
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, continued
Future maturities of long-term debt and capital lease obligations are summarized
as follows:
<TABLE>
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: 2000 $ 229,467 $ 171,573 $ 22,472 $ 149,101
2001 225,765 79,325 12,406 66,919
2002 235,384 76,981 6,202 70,779
2003 199,071 40,729 1,735 38,994
2004 167,014 - - -
Thereafter 1,109,891 - - -
-------------- -------------- -------------- --------------
$ 2,166,592 $ 368,608 $ 42,815 $ 325,793
============== ================ ============== ==============
</TABLE>
NOTE 8 - NOTE PAYABLE TO SHAREHOLDER AND RELATED PARTY
The Company has a note payable to a shareholder of the Company. The note bears
interest at 10% and requires monthly principal and interest payments of $1,600
through April 30, 2000. Interest expense related to shareholders and related
parties amounted to $1,628, $3,336 and $4,883 in 1999, 1998 and 1997,
respectively.
F-15
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
NOTE 9 - INCOME TAXES
The income tax expense (benefit) from continuing operations consists of the
following:
<TABLE>
Year ended December 31
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal $ 369,000 $ 487,000 $ (896,500)
Net operating loss utilized (263,000) (487,000) -
State 25,000 43,414 1,500
Net operating loss utilized (25,000) (43,414) -
------------ ------------ ------------
106,000 - (895,000)
------------ ------------ ------------
Deferred:
Federal 196,000 442,220 (638,000)
State 25,000 (20,220) (117,000)
------------ ------------ ------------
221,000 422,000 (755,000)
------------ ------------ ------------
Total income tax expense (benefit) $ 327,000 $ 422,000 $ (1,650,000)
============ ============ ============
</TABLE>
Deferred tax assets and liabilities consist of the following:
December 31
---------------------------
1999 1998
------------ ------------
Net operating loss carryforwards:
Federal $ - $ 263,000
State 75,000 81,000
Alternative minimum tax credit carryforward 98,000 -
Capital loss carryforward 135,632 135,632
Expenses not currently deductible 71,000 111,000
------------ ------------
Gross deferred tax asset 379,632 590,632
Valuation allowance (135,632) (135,632)
------------ ------------
Net deferred tax asset 244,000 455,000
Gross deferred tax liability, primarily
due to differences in depreciation 130,000 120,000
------------ ------------
Net deferred tax asset (liability) $ 114,000 $ 335,000
============ ============
The valuation allowance for deferred tax assets as of January 1, 1997, was
$176,550. The total valuation allowance decreased $40,918 for the year ended
December 31, 1997.
At December 31, 1999, the Company has altermative minimum tax credit
carryforwards for federal income tax purposes of approximately $98,000 which are
available to offset future federal income. These credits can be carried forward
indefinitely. The Company has a gross capital loss carryforward of $886,431
available to offset future capital gains through 2002.
F-16
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
NOTE 9 - INCOME TAXES, continued
The Company has under gone a study with a consulting firm in order to determine
if the Company's prior research and development expenses may be eligible for
research and development tax credits. The Company is in the process of analyzing
its expenses from 1996 through 1999. The Company currently estimates that these
credits may have a future tax benefit of $180,000. No provision for these
potential credits has been included in the Company's 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:
1999 1998 1997
------------ ------------ ------------
Statutory federal income tax rate 34% 34% (34%)
Nondeductible items 2 1 1
Other (2) (1) (3)
------------ ------------ ------------
Effective tax rates 34% 34% (36%)
============ ============ ============
NOTE 10 - SUPPLEMENTAL DISCLOSURES REGARDING CASH FLOWS
Supplemental disclosure of cash flow information:
Year ended December 31
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash paid during year for:
Interest $ 333,170 $ 437,803 $ 511,686
Income taxes 145,084 800 426
NOTE 11 - SHAREHOLDERS' EQUITY
PREFERRED STOCK - The Preferred Stock is redeemable solely at the option of the
Company. The Company maintains life insurance on the owner of the Preferred
Stock and, in the event of the stockholder's death, currently intends to use the
proceeds of that insurance to redeem all outstanding shares of Preferred Stock.
STOCK WARRANTS - In connection with offerings of common stock and notes payable,
the Company has issued various warrants for the purchase of the Company's common
stock. As of December 31, 1999, the following warrants with respective exercise
price per share and date of expiration were outstanding and exercisable:
Number Price per Expiration
Party of shares share date
------------- ------------- ------------- -------------
Note holder 137,500 $ .563 February 2001
F-17
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
NOTE 11 - SHAREHOLDERS' EQUITY, continued
STOCK AWARDS - The Company has a 1991 Employee Stock Plan (the Plan) and has
reserved 133,575 shares of common stock for issuance under the Plan. Under terms
of the Plan, stock is awarded to employees at the sole discretion of the Board
of Directors. Awards under the Plan amounted to -0-, -0-, and 8,240 shares for
1999, 1998 and 1997, respectively, with related compensation expense of $-0-,
$-0- and $8,497, respectively.
COMMON STOCK OPTIONS - The Company has an Incentive Stock Option Plan (the
Incentive Plan) and has reserved 185,000 shares of common stock for issuance
under the Incentive Plan. Options under the Incentive Plan are issuable to
officers and employees of the Company and all option grants will be at the
market value of the stock at the date of grant. Vesting of stock options is
determined for each grant by the Board of Directors.
During 1997, under the aforementioned Incentive Plan, the Company granted 20,000
options with an exercise price of $.6875. The options were 100% vested at grant
date. None of the options were exercised during 1998 or 1999; however, 10,000
options expired during 1999.
Also in 1997, the company granted 16,788 options under a non-transferable option
agreement with an exercise price of $1.03. Ten thousand 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, 50,000 options were granted in 1998
with an exercise price of $.563 and 300,000 options were granted in 1996 with an
exercise price of $1.06. Beginning with the annual meeting in 2000, those
directors who have served a three (3) year period, receive an annual grant of
10,000 options which become exercisable six months after the grant date. The
exercise price of the options will be valued at the date of grant.
The Company has computed, for pro forma disclosure purposes, the value of all
options granted during 1999, 1998, and 1997, using the Black-Scholes pricing
model as prescribed under SFAS 123. The following assumptions were made for
grants made in 1998 and 1997: risk-free interest rate of 5.5% and 6.1%,
respectively, expected life of three years, dividend rate of zero percent. For
1997, the expected volatility over the expected life of the grant was assumed to
be 62%. In 1999 and 1998, the volatility was assumed to be 56%.
F-18
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
NOTE 11 - SHAREHOLDERS' EQUITY, continued
If the Company had accounted for the value of the options granted during 1999,
1998, and 1997, in accordance with SFAS No. 123, the Company's net income would
have been reduced to the pro forma amounts indicated below:
1999 1998 1997
------------ ------------ ------------
Net income (loss):
As reported $ 648,571 $ 804,399 $ (3,815,119)
Pro forma 618,739 796,534 (3,876,586)
Net income (loss) per share:
As reported .05 .06 (0.32)
Pro forma .05 .06 (0.32)
The resulting pro forma compensation costs may not be representative of that
expected in future years.
Pro forma net income (loss) reflects only options granted in 1999, 1998, and
1997. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income (loss)
amounts presented above because compensation cost is reflected over the options'
vesting periods.
Transactions and other information relating to the Company's stock option plans
for the three years ended December 31, 1999, are summarized as follows:
Weighted
Number average
of shares exercise price
---------- --------------
Options outstanding at December 31, 1996 460,000 1.53
Options granted 36,788 .84
Options expired (110,000) 2.90
-----------
Options outstanding at December 31, 1997 386,788 1.02
Options granted 50,000 .56
Options expired - -
-----------
Options outstanding at December 31, 1998 436,788 .98
Options granted -
Options expired (10,000) .84
-----------
Options outstanding at December 31, 1999 426,788 $ .99
=========== ===========
At December 31, 1999, the Company had outstanding options of 426,788 with a
weighted average life expectancy of six years and an exercise price range of
$.56-1.06. Of the 426,788 options outstanding, 396,788 were exercisable at
December 31, 1999, at a weighted average exercise price of $1.03.
F-19
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
NOTE 11 - SHAREHOLDERS' EQUITY, continued
At December 31, 1998, the Company had outstanding options of 436,788 with a
weighted average life expectancy of seven years and an exercise price range of
$.56 - 1.06. Of the 436,788 options outstanding, 316,788 were exercisable at
December 31, 1998, at a weighted average exercise price of $.98.
The weighted-average fair value of options granted during 1999, 1998 and 1997,
were $-0-, $.41, and $.46, respectively.
NOTE 12 - OTHER INCOME
In 1999 and 1998, other income includes income from the Company's German Venture
(see Note 16).
In 1997, other income includes a loss on the sale of land of approximately
$37,220.
NOTE 13 - FOREIGN SALES ACTIVITY
Export sales from the Company's United States operations are as follows:
Year ended December 31
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Latin America/Mexico $ 259,825 $ 478,000 $ 726,000
Canada 1,888,781 2,030,000 1,380,000
* Germany (see Note 16) 495,049 1,113,000 1,276,000
Other 161,689 285,000 341,000
------------ ------------ ------------
$ 2,805,344 $ 3,906,000 $ 3,723,000
============ ============ ============
* Beginning in 1999, the Company started manufacturing its mid-sized bagging
machinery directly in Germany.
NOTE 14 - OTHER CURRENT ASSETS
Other current assets consist of the following:
Year Ended December 31
---------------------------
1999 1998
------------ ------------
Deferred income tax $ 121,000 $ 294,000
Other 5,982 50,172
------------ ------------
$ 126,982 $ 344,172
============ ============
F-20
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
NOTE 15 - DISCONTINUED OPERATIONS
In December 1997, the Board of Directors approved the sale of Ag-Bag Europe PLC.
The operation was sold by the end of December 1997 for $647,800 in cash. The
loss on the sale of $424,064, net of tax benefit, represents the operation's
activities through December 1997, and the net loss on disposal of the operation
at the end of December 1997.
Summarized data for Ag-Bag Europe PLC are as follows:
December 31,1997
------------------
Net sales - unaffiliated customers $ 1,456,795
Income (loss) from operations (448,832)
Identifiable assets 840,661
Total liabilities 248,636
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.
NOTE 16 - GERMAN VENTURE
On February 27, 1997, the Company entered into a Joint Venture Agreement with
Budissa Agroservice Gesellschaft and formed BAW (Budissa Agrodienstleistungen
und Warenhandels). The Company has a 50% interest in the Venture. BAW folds and
distributes silage bags throughout Europe.
1999 1998
---- ----
Investment, beginning of year $ 25,544 $ 25,917
Share of income(loss) for the year 24,239 10,000
Unamortized portion of start up costs (10,373)
Capital investment 26,955 -
------ ------
Investment, end of year $ 76,738 $ 25,544
====== ======
On February 27, 1997, BAW also entered into a lease agreement with Ag-Bag
International Limited for the use of a folding machine. Royalties are paid based
upon the poundage folded by BAW. In 1999 and 1998, income from this agreement
was $110,000 and $92,000 respectively. In 1997, revenue to the Company was
insignificant.
NOTE 17 - COMMITMENTS
The Company has entered into an agreement with an investment banking firm. The
firm represents Ag-Bag International Limited in exploring strategic financial
alternatives. Fees are contingent upon completion of a transaction. The ultimate
fee will range from 3% to 6% of the transaction value depending upon the nature
of the transaction. The Company has already prepaid $80,000 towards this fee.
F-21
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
NOTE 17 - COMMITMENTS, continued
The Company has entered into an agreement with a consulting firm. The firm will
represent Ag-Bag International Limited in the evaluation, selection and
implementation of enhanced data processing equipment.
The Company purchases its Tri-Dura(R) rolls from a company owned by Steven G.
Ross (Supplier) pursuant to a supply agreement. Steven G. Ross is a 14.9%
stockholder in the Company and owner of a company which competes with the
Company's Tri-Dura(R) bags. The supply agreement provides that the Company
purchase all of its plastic rolls, with certain exceptions, from Supplier
through at least December 31, 2007. Thereafter, either the Company or Supplier
may terminate the supply agreement upon two years' prior written notice. The
Company may purchase plastic rolls from other suppliers to the extent Supplier
is unable to supply plastic rolls under the supply agreement.
The Company considers its relationship with Supplier to be good. The Company
believes there are adequate alternative suppliers available in the event
Supplier is unable to provide rolls.
NOTE 18 - NON CASH INVESTING AND FINANCING ACTIVITIES
During 1998, the Company issued a new note payable in the amount of $350,000,
the proceeds of which were used to pay-off existing long-term debt.
NOTE 19 - CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk
consist of cash and receivables. The Company's cash balances are with reputable
banks and periodically exceed insured limits.
NOTE 20 - YEAR 2000 COMPLIANCE
All computer systems utilized by the Company were fully Year 2000 compliant and
did not experience transition issues. Management does not expect on-going Year
2000 transition issues will have a material impact on the operations, cash flows
or financial condition of the Company, as all aspects of the system have been
designed to accurately handle Year 2000 issues.
F-22
<PAGE>
SUPPLEMENTARY INFORMATION
<PAGE>
Moss Adams LLP (Letterhead)
222 SW Columbia, Suite 400
Portland, OR 97201
INDEPENDENT AUDITORS' REPORT ON
SUPPLEMENTARY INFORMATION
To the Board of Directors and Shareholders
Ag-Bag International Limited
Under date of February 15, 2000, we reported on the balance sheets of Ag-Bag
International Limited as of December 31, 1999 and 1998, and the related
statements of operations, shareholders' equity, and cash flows for the years
ended December 31, 1999 and 1998, as contained in the annual report on Form 10-K
for the year 1999. In connection with our audit of the aforementioned financial
statements, we also audited the related schedule of Valuation and Qualifying
Accounts. This schedule is the responsibility of the company's management. Our
responsibility is to express an opinion on the financial statement schedule
based on our audit.
In our opinion, the schedule of Valuation and Qualifying Accounts, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The basic financial statements of Ag-Bag International Limited for the year
ended December 31, 1997, were audited by other auditors whose report dated
February 25, 1998, expressed an unqualified opinion on those financial
statements. Their report, as of the same date, on the related financial
statement schedule as listed in the table of contents, stated that, in their
opinion, such information was fairly stated in all material respects in relation
to the basic financial statements for the year ended December 31, 1997, taken as
a whole.
/s/Moss Adams LLP
Portland, Oregon
February 15, 2000
F-23
<PAGE>
KPMG Peat Marwick LLP (Letterhead)
Suite 2000
1211 South West Fifth Avenue
Portland, OR 97204
Independent Auditors' Report
The Board of Directors and Shareholders
Ag-Bag International Limited:
Under date of February 25, 1998, we reported on the statements of operations,
shareholders' equity, and cash flows of Ag-Bag International Limited for the
year 1999. In connection with our audits of the aforementioned financial
statements, we also audited the related schedule of valuation and qualifying
accounts for the year ended December 31, 1997. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audits.
In our opinion, the schedule of valuation and qualifying accounts for the year
ended December 31, 1997, when considered in relation to the basic financial
statements for the year ended December 31, 1997 taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/KPMG Peat Marwick LLP
Portland, Oregon
March 8, 2000
F-24
<PAGE>
AG-BAG INTERNATIONAL LIMITED
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
Column A Column B Column C Column D Column E
- -------------------------------------- ------------- ------------- ------------- -------------
Balance at Charged to Charged to Write-offs, Balance
beginning costs and other net of at end
Description of period expenses accounts recoveries of period
- -------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31:
1999:
Allowance for doubtful accounts 327,510 175,000 (355,486) 147,024
Warranty reserve 140,000 368,410 (333,410) 175,000
Inventory valuation reserve 246,735 346,500 (105,644) 487,591
1998:
Allowance for doubtful accounts 200,000 170,000 (42,490) 327,510
Warranty reserve 125,000 263,849 (248,849) 140,000
Inventory valuation reserve 125,000 135,000 (13,265) 246,735
1997:
Allowance for doubtful accounts 248,824 211,822 (52,246)* (208,400) 200,000
Warranty reserve 75,633 253,308 (203,941) 125,000
Inventory valuation reserve 372,500 422,400 (669,900) 125,000
</TABLE>
*Due to sale of subsidiary.
F-25
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
3.1 Restated Certificate of Incorporation(2)
3.2 Bylaws of the Company(2)
4.1 Form of Common Stock Certificate(1)
4.3 Warrant dated February 13, 1995, to Norwood Venture Corp.(2)
10.1 Employment Contract of Larry R. Inman(1)*
10.3 1991 Employee Stock Plan, as amended effective November 1, 1996(3)*
10.4 Incentive Stock Option Plan, as amended effective November 1, 1996(3)*
10.5 Nonemployee Director Stock Option Plan(3)*
11 Statement re computation of earnings per share
12 Statement re computation of ratios
21 Subsidiaries of the Registrant
27 Financial Data Schedule for fiscal year 1999
* 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
<PAGE>
<TABLE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Year Ended December 31,
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Basic earnings per share:
Net income (loss) $ 107,193 $ 363,458 $ (3,815,119) $ 804,399 $ 648,571
Preferred stock dividends (59,160) (59,160) (59,160) (59,160) (59,160)
------------- ------------- ------------- ------------- -------------
48,033 304,298 (3,874,279) 745,239 589,411
============= ============= ============= ============= =============
Basic weighted average number
of shares outstanding (1)12,062,019 (1)12,095,751 (1)12,056,641 (1)12,061,991 (1)12,061,991
============= ============= ============= ============= =============
Basic earnings per share
Income (loss) before
discontinued operations $ .02 $ .03 $ (.24) $ .06 $ .05
Discontinued operations (.01) (.08)
------------- ------------- ------------- ------------- -------------
$ .01 $ .03 $ (.32) $ .06 $ .05
============= ============= ============= ============= =============
Diluted earnings per share:
Net income (loss) $ 107,193 $ 363,458 $ (3,815,119) $ 804,399 $ 648,571
Preferred stock dividends (59,160) (59,160) (59,160) (59,160) (59,160)
------------- ------------- ------------- ------------- -------------
48,033 304,298 (3,874,279) 745,239 589,411
============= ============= ============= ============= =============
Diluted weighted average
number of shares outstanding (1)12,062,019 (1)12,095,751 (1)12,056,641 (1)12,061,991 (1)12,061,991
============= ============= ============= ============= =============
Diluted earnings per share
Income (loss) before
discontinued operations $ .02 $ .03 $ (.24) $ .06 $ .05
Discontinued operations (.01) (.08)
------------- ------------- ------------- ------------- -------------
$ .01 $ .03 $ (.32) $ .06 $ .05
============= ============= ============= ============= =============
</TABLE>
(1) See Note 1 to the financial statements
<PAGE>
<TABLE>
EXHIBIT 12
STATEMENT RE COMPUTATION OF RATIOS
Year Ended December 31,
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Pretax earnings (losses) $ 479,146 $ 570,223 $ (4,592,223) $ 1,226,399 $ 975,571
Interest expense 359,202 376,341 475,056 437,803 333,170
------------- ------------- ------------- ------------- -------------
Subtotal (A) 838,348 946,564 (4,117,167) 1,664,202 1,308,741
------------- ------------- ------------- ------------- -------------
Interest expense 359,202 376,341 475,056 437,803 333,170
Preferred stock dividend
requirements 219,111 100,271 92,438 89,636 89,636
------------- ------------- ------------- ------------- -------------
Subtotal (B) $ 578,313 $ 476,612 $ 567,494 $ 527,439 $ 422,806
------------- ------------- ------------- ------------- -------------
(A) divided by (B) 1.45 1.99 (7.25)(1) 3.16 3.10
==== ==== ========= ==== ====
(1) Due to unusual charge
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
None.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial
information extracted from financial statements
and supplementary information for the years ended
December 31, 1999 and 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 511,910
<SECURITIES> 0
<RECEIVABLES> 2,022,801
<ALLOWANCES> 147,024
<INVENTORY> 7,168,740
<CURRENT-ASSETS> 9,982,716
<PP&E> 8,592,265
<DEPRECIATION> 4,429,273
<TOTAL-ASSETS> 14,575,239
<CURRENT-LIABILITIES> 2,827,482
<BONDS> 2,113,817
<COMMON> 120,619
0
696,000
<OTHER-SE> 8,810,321
<TOTAL-LIABILITY-AND-EQUITY> 14,575,239
<SALES> 32,686,832
<TOTAL-REVENUES> 32,990,803
<CGS> 25,084,577
<TOTAL-COSTS> 31,682,062
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 333,170
<INCOME-PRETAX> 975,571
<INCOME-TAX> 327,000
<INCOME-CONTINUING> 648,571
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 648,571
<EPS-BASIC> .05
<EPS-DILUTED> .05
</TABLE>
