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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2000 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 March 6, 2001, the
aggregate market value of the voting stock of registrant held by non-affiliates
was $ 2,795,610.
The registrant has one class of Common Stock with 12,061,991 shares
outstanding as of March 6, 2001.
Documents Incorporated By Reference:
Portions of the proxy statement for the Registrant's Annual Meeting of
Stockholders to be held June 4, 2001, are incorporated by reference into Part
III of this report.
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
PART I
------
When used in this Annual Report, the words "believes," "anticipates" and
"intends" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. See
"Factors Affecting Forward-Looking Statements." Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to publicly release any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Readers are urged, however, to review the factors set
forth in reports the Company files from time to time with the Securities and
Exchange Commission.
Item 1. Business
- -----------------
General
- -------
Ag-Bag International Limited (the "Company") was incorporated as a New York
corporation in 1989. The primary operating company, Ag-Bag Corporation, a
Nebraska corporation, was incorporated in 1978. The Company changed its name in
1990 from AB Holding Group, Inc. to Ag-Bag International Limited. In 1994, in an
effort to streamline and save administrative expenses, two of the Company's
operating subsidiaries, A.B. Rental, Inc. and Ag-Bag Corporation were merged
into the Delaware subsidiary, ABVIN Merging Corp. On January 1, 1995, the
Company was merged into its Delaware subsidiary resulting in the reincorporation
of the Company in Delaware and a change in its name to Ag-Bag International
Limited.
The Company has pioneered an alternate method of storing feed for
livestock. Traditional methods of storing feed have included placing it in
bunkers, pits, and silos or baling and stacking it. The Company's method is to
store the feed in huge plastic bags of up to 500 feet in length and up to 12
feet in diameter by tightly stuffing the feed into the bag. The Company
assembles the machines for stuffing the feed into the bags. It has the bags
manufactured to its specifications and then folds and distributes the bags
through its dealer network. The benefits of bagging the feed include reduced
cost, additional flexibility in harvesting and storing the feed, enhanced feed
quality, and relatively small capital requirements. The Company also sells
ancillary products that 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 1998 1999 2000
--------- ---- ---- ----
Bags 52% 52% 53%
Machines 38% 41% 39%
Other 10% 7% 8%
--- ---- ----
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
2
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 continues to sell worldwide in Asia, Australia,
New Zealand, Western and Central Europe and the Caribbean. Export sales from the
Company's United States operations were 6.5% of net sales for the year ended
December 31, 2000.
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 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
- ---------------------------
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 65-72% 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 1998 1999 2000
------- ---- ---- ----
1st 17% 15% 21%
2nd 35% 33% 31%
3rd 35% 39% 34%
4th 13% 13% 14%
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 than 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.
3
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.
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 $23,000 to $45,000.
In 1992, the Company introduced a medium-sized machine that 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 $175,000.
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 $100,000 to $260,000.
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 HYPAC model in
small, medium-sized and large bagging machines. The retail price for the HYPAC
machines range from approximately $45,000 to $260,000.
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 $11,000 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 a separate line of related equipment called
the Square Bale Bagger which retails for between $23,000 to $30,000. 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.
4
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
manufactures the Mighty Bite(R) in sizes ranging from one-half cubic yard to two
cubic yards with a retail price ranging from $2,500 to $4,500.
The Company adapted its Ag-Bag(R) bagging machines for use in large scale
"in-vessel" composting of organic matter. The bagging machine is used in
conjunction with a shredder that shreds the organic material, which is then fed
into the bagging machine that bags the compostable matter into 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 $45,000 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
$220 to $1,200. 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.
5
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 1999, over 249,350,000 tons of corn,
alfalfa, and sorghum silage were made by United States farmers according to the
AG IQ Handbook XIII published in 2000 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
that are potential customers for Ag-Bag(R) farm equipment and Tri-Dura(R)
storage bags; and that only about 7-10% of this group are actually using storage
bags made by the Company and its competitors. It further estimates that about
55-60% of the bagging industry customers purchase silage storage bags from the
Company. In addition to the U.S., the Company believes there is a large
population of such farms in Canada, Latin America, Western and Central Europe,
Australia, New Zealand, Asia, the Caribbean, and England where the Company
currently sells and distributes its products, and there is a large potential
market in other countries into which the Company may expand.
The Company 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
- ---------
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, 2000, there were
68 dealers serviced by a combined total of 26 regional and territorial
Company-employed managers and sales support coordinators. 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. The Company also sells Tri-Dura(R) storage bags in bulk to several
custom farming operations in the state of California that 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. The Company sold
its subsidiary that had not been performing at a profitable level due to the BSE
(Mad Cow) problem within the British farming industry on December 31, 1997.
6
The Company markets its composting system through a sublicense that allows
the end user to use the Ag-Bag(R) compost technology. The Company plans to
establish a composting dealer network and develop a regional and territorial
sales force that will have expertise in composting. The timing for these plans
will depend on the pace of market acceptance of the Company's composting system.
The Company is not dependent on any single customer or a few customers. The
loss of any single customer would not have a material adverse effect on the
Company's financial condition or results of operations.
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, HYPAC (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. The Company has licensed its German dealer to manufacture the
mid-sized bagging machines for distribution within Europe.
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 that 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 and
packaged for shipment.
Ag-Bag(R) Inoculants. The liquid 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 for 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
7
Company is not aware of any raw materials shortages or problems with these
suppliers that would adversely affect the Company's operations.
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
- -----------
As the Company's corporate slogan, the "Complete One," indicates, the
Company is the industry leader in the manufacture and sale of complete sealed
feed farm bagging systems. 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.
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. These 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.
8
Backlog
- -------
In 2001, backlog orders were 16.7% lower than 2000. The dollar amount of
backlog orders of the Company that are believed to be firm as of March 1, 2001,
was approximately $3,250,000, compared to $3,900,000 on March 1, 2000. Backlog,
however, may not be a meaningful indicator of future sales. This backlog is
seasonal and is reasonably expected to be filled within the current fiscal year.
Research and Development
- ------------------------
During 2000, the Company focused research and development expenditures on
new silage and compost machine development. The Company also completed research
on various projects undertaken regarding new silage and nutritional studies of
bagged feed and their effects on animal production during the year.
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, 2000.
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" and "Item 3. Legal Proceedings.")
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, are an important part of its business, and give the Company a
competitive advantage.
Employees
- ---------
On December 31, 2000, the Company had 101 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.
9
Financial Information Relating to Foreign and Domestic Operations and Export
- ----------------------------------------------------------------------------
Sales
- -----
(In thousands)
Year Ended December 31
----------------------
1998 1999 2000
---- ---- ----
Sales to unaffiliated customers:
United States $23,795 $29,878 $29,421
Canada 2,030 1,889 1,280
Germany 1,113 495(1) 441(1)
Latin America/Mexico 478 260 195
Other foreign countries 285 161 109
------- ------- -------
$27,701 $32,683 $31,446
Sales to affiliated customers:
Officers and Directors 9 4 5
------- ------- -------
Total $27,710 $32,687 $31,451
======= ======= =======
(1)Beginning in 1999, the Company licensed its German dealer to manufacture the
mid-sized bagging machines for distribution within Europe.
Substantially all the Company's assets are located in the United States.
Reference is also made to the Selected Financial Data at Item 6.
Item 2. Properties
- -------------------
In early 1990, the Company began occupying its 30,000 square foot facility
located in Warrenton, Oregon. This facility serves as a warehouse and houses the
major portion of its silage bagging equipment manufacturing. The Company's
administrative offices are also located there. Management estimates that the
manufacturing at the Warrenton plant is currently at approximately 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 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., filed
February 5, 1998, and Mr. and Mrs. Donald L. Steward v. Up North Plastics, Inc.
et al., filed September 29, 1999, 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. Class
certification has been denied in the S&S Forage case and no class has been
certified in the Steward case. The plaintiffs and the defendants are currently
in settlement negotiations on both the S&S Forage and Steward cases to have the
cases dismissed and bring the proceedings to a close. 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
"Factors Affecting Forward-Looking Statements.")
10
The Company is one of three defendants named in a counterclaim to a
purported product warranty lawsuit, Andrew Magyar and Leslie Magyar v. Alberta
Ag-Bag Ltd., Ag-Bag International Ltd., and Jim Rakai, filed January 21, 2000.
The plaintiffs in the counterclaim allege breach of product warranty,
merchantability and fitness for the particular purpose relating to a bagging
machine purchased by the plaintiffs and seek monetary damages. This case is
pending before the Court of Queen's Bench of Alberta, Canada. The Company
believes that the claims alleged by the plaintiffs 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 "Factors Affecting
Forward-Looking Statements.")
The Company is one of three defendants named in a purported breach of
contract and product warranty lawsuit, Kevin Sustrik v. Alberta Ag-Bag Ltd.,
Ag-Bag International Ltd., and Jim Rakai, filed June 7, 2000. The plaintiff
alleges breach of contract and breach of product warranty relating to a bagging
machine purchased by the plaintiff and seek monetary damages. This case is
pending before the Court of Queen's Bench of Alberta, Canada. The Company
believes that the plaintiff's allegations 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 "Factors Affecting
Forward-Looking Statements.")
The Company is a defendant in an alleged patent infringement lawsuit, Versa
Corporation v. Ag-Bag International Ltd., filed October 30, 2000 in the United
States District Court for the District of Oregon. The claim alleges patent
infringement upon Versa's U.S. Patent No. 5,799,472 relating to a bag pan for an
agricultural feed bagging machine and seeks monetary damages. The case is in the
early discovery phase. The Company denies Versa's allegations and is vigorously
defending itself against the claim. 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 "Factors Affecting Forward-Looking Statements.")
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
During the fourth quarter of 2000, no matters were submitted to a vote of
security holders.
Executive Officers of the Registrant
- ------------------------------------
The executive officers of the Company, their respective ages as of March 6,
2001, 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.
NAME AGE POSITION
---- --- --------
Larry R. Inman 50 Chief Executive Officer (since 1990); President of the
Company (since 1993); Chairman of the Board (1990-2000);
President of Ag-Bag Corporation (1984-1989) and Chairman
(1989-1994) of Ag-Bag Corporation (former subsidiary).
Michael R. Wallis 36 Chief Financial Officer (since 1993) and Vice President of
Finance (since 1992), Treasurer (since 1996); Manager,
Yergen and Meyer (regional accounting firm, 1986-1992).
11
Arthur P. Schuette 61 Vice President, Sales (since 1991); Treasurer of the Company
(1990-1991) and Treasurer (1983-1991) of Ag-Bag Corporation
(former subsidiary).
Lou Ann Tucker 47 Secretary (since 1996), Vice President, 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 40 Vice President, Manufacturing (since 1989);
Manager of Blair, Nebraska Plant (since 1980);
KW Trucking (1984-1987).
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The Company's Common Stock began trading publicly on January 17, 1990,
and was approved for quotation on Nasdaq on April 24, 1990, under the symbol
"AGBG." 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 SmallCap Market for failure to
meet the new listing requirements. The Company's Common Stock is now quoted on
the OTC Bulletin Board.
As of March 6, 2001, there were approximately 325 holders of record of the
Company's Common Stock. The Company estimates there are approximately 2,100
beneficial holders of the Company's 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 2000 as reported on the OTC
Bulletin Board:
Calendar Year High Bid Low Bid
- ------------- -------- -------
1999:
First quarter $.50 $.344
Second quarter $.422 $.328
Third quarter $.391 $.359
Fourth quarter $.438 $.359
2000:
First quarter $.813 $.375
Second quarter $.594 $.375
Third quarter $.50 $.328
Fourth quarter $.375 $.313
- ----------
The quotations reflect inter-dealer prices, without retail markups, markdowns,
or commissions and do not necessarily represent actual transactions.
12
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 year ended December 31, 2000:
- --------------------------------------------------------------------------------
Title and Amount of Name 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
- --------------- ------------------------ ----------------- -------------------- -------------
June 5, 2000 50,000 Options for N/A Nonemployee $0
Common Stock/$.385 Directors
per share 1
- --------------- ------------------------ ----------------- -------------------- -------------
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 Granted under Nonemployee Director Stock Option Plan. Options vest according
to terms of plan.
13
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, 1996, 1997,
1998, 1999 and 2000. This selected financial data should be read in conjunction
with the audited financial statements of the Company and the related notes
thereto and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this report on Form 10-K.
(In thousands, except per share data)
Year Ended December 31,
-----------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Statement of Operations Data:
Net Sales $ 22,985 $ 20,293 $ 27,710 $ 32,687 $ 31,451
Cost of Sales 17,791 18,493 20,800 25,085 24,800
-------- -------- -------- -------- --------
Gross Profit from Operations 5,194 1,800 6,910 7,602 6,651
Selling and Administrative Expenses 4,739 5,035 5,470 6,273 5,878
Research and Development Expenses 59 87 150 324 136
Unusual Charge 980
-------- -------- -------- -------- --------
Income (Loss) from Operations 396 (4,302) 1,290 1,005 637
Other Income (Expense) 174 (290) (64) (30) (123)
-------- -------- -------- -------- --------
Income (Loss) before Provision for
Income Taxes, and Discontinued Operations 570 (4,592) 1,226 975 514
Provision (Benefit) for Income Taxes 257 (1,650) 422 327 (8)
-------- -------- -------- -------- --------
Income (Loss) before Discontinued
Operations 313 (2,942) 804 648 522
Discontinued Operations-income (loss)
from operations 50 (449)
Discontinued Operations-loss on disposal of
Ag-Bag Europe, PLC (less income tax benefit of
$24,500) (424)
-------- -------- -------- -------- --------
Net Income (Loss) $ 363 $ (3,815) $ 804 $ 648 $ 522
======== ======== ======== ======== ========
14
(In thousands, except per share data)
Year Ended December 31,
-----------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Basic Earnings per Share:
Income (Loss) before Discontinued
Operations $ 0.03 $ (.24) $ .06 $ .05 $ .04
Discontinued Operations (.08)
-------- -------- -------- -------- --------
$ 0.03 $ (.32) $ .06 $ .05 $ .04
======== ======== ======== ======== ========
Diluted Earnings per Share:
Income (Loss) before Discontinued
Operations $ 0.03 $ (.24) $ .06 $ .05 $ .04
Discontinued Operations (.08)
-------- -------- -------- -------- --------
$ 0.03 $ (.32) $ .06 $ .05 $ .04
======== ======== ======== ======== ========
Weighted Average Shares:
Basic 12,096 12,056 12,062 12,062 12,062
======== ======== ======== ======== ========
Diluted 12,096 12,056 12,062 12,062 12,062
======== ======== ======== ======== ========
Balance Sheet Data:
December 31,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Working Capital $ 6,090 $ 5,681 $ 6,818 $ 7,155 $ 7,387
Current Assets1 8,746 9,889 9,391 9,983 10,758
Total Assets1 16,903 15,190 13,820 14,575 15,727
Current Liabilities2 2,656 4,208 2,573 2,827 3,371
Long-term Debt2 2,061 2,690 2,210 2,121 2,266
Total Stockholders' Equity3 12,186 8,292 9,037 9,627 10,090
- --------
1 Includes deferred taxes.
2 Includes loans from shareholders and deferred taxes.
3 Includes $696 of preferred stock.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Results of Operations
- ---------------------
The following table sets forth for the periods indicated certain items
reflected in the Company's statements of operations as a percentage of revenue:
Percentage of Total Revenue
---------------------------
Year Ended December 31,
-----------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Net Sales 100% 100% 100% 100% 100%
Costs and Expenses:
Cost of Sales 77% 91% 75% 77% 79%
Selling and Administration 21% 25% 20% 19% 19%
Research and Development --- --- --- 1% --
Unusual Charge --- 5% --- --- --
Income (Loss) From Operations 2% (21%) 5% 3% 2%
---- ---- ---- ---- ----
Years Ended December 31, 2000 and 1999
- --------------------------------------
For the year ended December 31, 2000, net sales decreased 3.78% to
$31,451,150 compared to $32,686,832 for the year ended December 31, 1999. Sales
for the year were down as a result of record low U.S. milk prices, despite
supplemental grain feed costs remaining low, which helped farmers continue to
have farm operating funds available. Additionally, competition in the silage bag
and machine market has continued to increase as farmers look to the most
economic bag or machine, not considering overall quality, customer service and
recycling of the used plastic offered by the Company. Additionally, with the
tightening of credit by financial institutions (especially in the U.S. farming
sector) coupled with the rising interest rates of 2000, farmers have become
cautions on purchases of farm machinery and equipment until there is clear
upward movement in U.S. milk prices.
Machine sales for the year were down 7.87% and bag sales were down
1.10% compared to 1999. 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 twelve composting
systems during the year ended December 31, 2000 (generating approximately $1.2
million in revenue) compared to five systems sold for the year ended December
31, 1999 (generating approximately $380,000 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 32-37% of total
sales. The Company expects its sales mix to begin to favor more direct sales in
the future, especially if the Company decides to offer e-commerce as a method of
ordering the Company's products. The Company is currently evaluating whether it
will sell via e-commerce. The gross margin realized on the Company's direct
sales are typically within 2-3 percent of those sales realized through
16
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 2000 were down in comparison to
1999 due to continued poor economic conditions in the Latin American/Mexico
market. In 1999, the Company's German dealer began manufacturing mid-sized
bagging machines in Germany under a license from the Company. Therefore, the
Company no longer sells mid-sized machines directly to its German dealer.
Instead, the Company receives a royalty fee for each mid-sized machine sold by
its German dealer, 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 earnings from the joint
venture are reported as other income and are accounted for using the equity
method. Approximately $2.3 million in bag sales were distributed through the
venture during 2000, an increase of 35%, compared to approximately $1.7 million
in bag sales for 1999.
Gross profit as a percentage of sales declined 2.11% for the year ended
December 31, 2000 compared to the same period in 1999. The decline resulted from
lower margins on bags in certain highly competitive, high volume geographic
areas. The decline was also the result of lower overall margins on machinery as
a result of machine competition (particularly in the larger-sized bagging
machines) in certain areas of the U.S., coupled with the mix of machine models
sold during the year. (See "Item 1. Business - Farm Equipment and Products.")
Selling expenses for the year ended December 31, 2000 decreased 6.85%
to $3,329,880 compared to $3,574,830 for the year ended December 31, 1999. The
decrease for the year was the result of lower sales commissions and volume
discounts due to lower sales for the year, partially offset by increased travel
and advertising and promotional expenses.
Administrative expenses for the year ended December 31, 2000 decreased
5.57% to $2,548,446 compared to $2,698,658 for the year ended December 31, 1999.
The decrease for the year was the result of lower overall general and
administrative operating overheads and professional fees related to ongoing
litigation which were offset by increases in insurance expense, employee benefit
costs and higher directors' fees.
Research and development expenses for the year ended December 31, 2000
decreased 57.97% to $136,186 compared to $323,997 for the year ended December
31, 1999. The decrease for the year was the result of completed research on
various projects undertaken regarding new silage and nutritional studies of
bagged feed and their effects on animal production. The Company continues its
ongoing research related to new silage and compost machine development.
Interest expense for the year ended December 31, 2000 increased 36.91%
to $456,158 in comparison to $333,170 for the year ended December 31, 1999. The
increase for the year was the result of the Company utilizing a larger portion
of its credit facilities during seasonal production periods to meet seasonal
inventory demands, coupled with higher interest rates and some extended term
sales offered during the year to remain competitive.
The Company's effective tax rate for the year ended December 31, 2000
was (1%). This was primarily due to the recognition of research and development
credits. In 2000, the Company underwent a study with a consulting firm to
determine if costs associated with the Company's research and development
activities were eligible for research and development tax credits in its open
tax years. The Company completed the study and filed the necessary forms for its
1996 through 1999 tax years during the year 2000, generating net general
business tax credit benefits of approximately $270,000. Excluding the benefit of
the general business tax credits, the effective income tax rate would have been
34% for the year ended December 31, 2000.
17
Net income for the year ended December 31, 2000 decreased 19.54% to
$521,814 compared to $648,571 for the year ended December 31, 1999. The decline
for the year was the result of lower sales caused by continued low U.S. milk
prices, lower gross profit from increased competition and product mix of
machinery models sold, and higher interest costs incurred, partially offset by
lower selling, administrative, research and income tax expense.
Years Ended December 31, 1999 and 1998
- --------------------------------------
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.
18
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.
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.
Recent Accounting Pronouncements
- --------------------------------
Statement of Financial Accounting Standards (SFAS) 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, and SFAS 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, is effective for the
Company as of July 1, 2000. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities measured at fair value. The
accounting for changes in the fair value of a derivative depends on the use of
the derivative. The Company does not believe that adoption of SFAS 133 will have
a material impact on its financial statement.
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements, in December
1999. The SAB summarizes certain of the SEC staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB 101B, which delays the implementation date of
SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. The Company does not believe that adoption of this SAB
will have a material impact on its financial statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation (FIN) 44, Accounting for Certain Transactions involving
Stock Compensation, which clarifies the application of APB 25 for certain
issues. The interpretation is effective July 1, 2000, except for the provisions
that relate to modifications that directly or indirectly reduce the exercise
price of an award and the definition of an employee, which are effective after
December 15,1998. The Company does not believe that adoption of FIN 44 will have
a material impact on its financial statements.
19
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.
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". The year 2000 transitional issues
had no 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 increased 56.81% at December 31, 2000 to $2,941,379
compared to $1,875,777 at December 31, 1999. The increase for the year was the
result of collections slowing due to the tightening credit in the U.S. farm
sector of the economy, coupled with the fact the Company offered some extended
term sales during the fourth quarter to remain competitive. The Company has
established adequate reserves ($247,690 at December 31, 2000 compared to
$147,024 at December 31, 1999) against accounts receivable in the event that
some accounts become uncollectable.
Inventory increased 3.12% at December 31, 2000 to $7,392,557 compared
to $7,168,740 at December 31, 1999. The increase in inventory resulted from
continued production during the latter part of the third 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 during the fourth quarter. However, with continued tightening credit
within the U.S. economy during the fourth quarter, the Company did not move the
quantity of inventory that it had anticipated. To counteract this, the Company
delayed production for its 2001 season to reduce its current inventory levels,
while fulfilling current demands.
Intangible assets at December 31, 2000 decreased to $21,506 compared to
$35,562 at December 31, 1999. The decrease was the result of normal amortization
expense for the year.
20
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, 2000,
$1,224,638 had been drawn under the credit line. On January 3, 2000, the Company
obtained a $500,000 equipment acquisition line of credit for the purchase of new
business equipment for the year 2000. The equipment line of credit is secured by
a fixed asset blanket lien. As of December 31, 2000, $500,000 had been drawn
under this equipment acquisition line of credit. Management believes that, funds
generated from operations and the Company's operating line of credit will be
sufficient to meet the Company's cash requirements through 2001.
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 SmallCap Market for failure to
meet the new listing requirements. The Company's Common Stock is now quoted on
the OTC Bulletin Board. The removal from quotation on the Nasdaq SmallCap Market
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. As of December 31,
2000, this engagement was completely terminated.
Factors Affecting Forward-Looking Statements
- --------------------------------------------
You should carefully consider the following factors regarding forward-looking
statements and other information included in this Annual Report. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not currently known to us or that we currently deem immaterial
also may impair our business operations. If any of the following risks actually
occur, our business, financial condition and operating results could be
materially adversely affected.
o We are dependent on the Dairy Industry
More than 75% of our revenues come from the dairy industry.
o A downturn in the dairy industry could cause a reduction in our revenues.
Our sales are highly correlated with the price of milk products and
revenues of the dairy industry. When dairy farmers make money, they buy
our products. When dairy farmers are not making money, our sales
decline.
o Our revenues are seasonal and dependent on weather conditions.
Our core business is dependent on weather conditions during the harvest
seasons in North America and Europe. Adverse weather conditions affect
farmers' crops and reduce demand for our products. Approximately
65%-72% of our revenue is generated in the second and third quarters.
o We may lose one or both of the two class action lawsuits pending against
us.
Two class action lawsuits, both alleging antitrust violations, have
been filed against us and others. If our efforts to dismiss or
favorably resolve the suits fail, we 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 our entire
net worth.
21
o We may lose one or both of the two product warranty lawsuits pending
against us.
Two product warranty lawsuits, have been filed against us and others.
If our efforts to dismiss or favorably resolve the suits fail, we could
incur additional and significant litigation costs and experience a
drain on management and other resources.
o We may lose the alleged patent infringement lawsuit pending against us.
An alleged patent infringement lawsuit has been filed against us. If
our effort to dismiss or favorably resolve the suit fails, we could
incur additional and significant litigation costs and experience a
drain on management and other resources.
o Our intellectual property protection may not be adequate.
We have patents on our basic bagging machines and patents pending for
additional machines, bags and systems for silage bagging, grain bagging
and hay/straw bale bagging. We may not obtain these patents and our
patents may not withstand litigation challenges. If our patents do not
withstand litigation challenges, our rights in its bag and machine
technology could be diminished or eliminated. Moreover, the issuance of
patents covering any of our products may be insufficient to prevent
competitors from duplicating our products. The patent laws of other
countries may differ from those of the United States as to the
patentability of our products and processes, and the degree of
protection afforded by foreign patents may be different from that in
the United States.
o We rely on one principal supplier for our bags.
We purchase nearly all of our bags from one supplier under a long-term
requirements contract. Any disruption of the manufacturing process
could affect that company's ability to supply our needs, and could
adversely affect our sales.
o Our pricing is dependent on the price of resin.
The prices that we pay for bags, which account for approximately half
of our annual sales, are 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.
o Our stock is quoted on the OTC Bulletin Board, which may make the stock
more difficult to sell.
We no longer satisfy the criteria for continued quotation on The Nasdaq
SmallCap Market. Our stock is, instead, quoted on the OTC Bulletin
Board. As a result, our shareholders may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of,
our common stock, and the market price for our common stock may
decline. Trading in our 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
22
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 our
common stock and the ability of our shareholders to dispose of their
shares, particularly in a declining market.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
The Company does not invest in market risk sensitive instruments.
Item 8. Financial Statements and Supplemental Data
- ---------------------------------------------------
Reference is made to the financial statements and related notes and
supplemental data under Item 14 filed with this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
PART III
--------
Items 10 and 11. Directors and Executive Officers of the Registrant and
- ------------------------------------------------------------------------
Executive Compensation
- ----------------------
A definitive proxy statement for the 2001 Annual Meeting of Stockholders
of Ag-Bag International Limited to be held on June 4, 2001 will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the Company's fiscal year ("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
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
Page
1. Index to Financial Statements...................................................... 26
Independent Auditor's Report....................................................... F-1
Balance Sheets at December 31, 2000 and 1999....................................... F-2
Statements of Income and Comprehensive Income for the years ended
December 31, 2000, 1999 and 1998............................................... F-4
Statement of Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998............................................... F-5
Statement of Cash Flows for the years ended December 31,
2000, 1999 and 1998............................................................ F-6
Notes to Financial Statements...................................................... F-7
2. Financial statement schedules required to be filed by Item 8 and paragraph (d)
of this Item 14:
Independent Auditor's Report on Supplemental Information........................... F-20
Schedule of Valuation and Qualifying Accounts...................................... F-21
All other schedules are omitted because they are not applicable or
the required information is shown in the 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.
24
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 15, 2001 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 15, 2001 By: /s/ Stanley W. Vinson
-------------------------------------------
Stanley W. Vinson, Chairman, Board of
Directors, Director
Date: March 15, 2001 By: /s/ Larry R. Inman
-------------------------------------------
Larry R. Inman, Chief Executive Officer,
President and Director (Principal Executive
Officer)
Date: March 15, 2001 By: /s/ Michael R. Wallis
-------------------------------------------
Michael R. Wallis, Chief Financial
Officer and Vice President, Finance
(Principal Financial and Accounting Officer)
Date: March 15, 2001 By: /s/ Lemuel E. Cunningham
-------------------------------------------
Lemuel E. Cunningham, Director
Date: March 15, 2001 By: /s/ Michael W. Foster
-------------------------------------------
Michael W. Foster, Director
Date: March 15, 2001 By: /s/ Michael B. Leahy
-------------------------------------------
Michael B. Leahy, Director
Date: March 15, 2001 By: /s/ Arthur P. Schuette
-------------------------------------------
Arthur P. Schuette, Director
Date: March 15, 2001 By: /s/ Rolf E. Soderstrom
-------------------------------------------
Rolf E. Soderstrom, Director
Date: March 15, 2001 By: /s/ Robert N. Thurston
-------------------------------------------
Robert N. Thurston, Director
25
TABLE OF CONTENTS
Page
INDEPENDENT AUDITOR'S REPORT F-1
FINANCIAL INFORMATION
Balance Sheets F-2
Statements of Income and Comprehensive Income F-4
Statements of Shareholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
SUPPLEMENTAL INFORMATION
Independent Auditor's Report on Supplemental Information F-20
Valuation and Qualifying Accounts F-21
26
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)*
10.2 Form of Change of Control Agreement between the Company and each of its
executive officers and key employees*
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
* 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
AG-BAG INTERNATIONAL LIMITED
---------------
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
(with supplemental information)
---------------
Years Ended December 31, 2000 and 1999
CONTENTS
- --------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITOR'S REPORT F-1
FINANCIAL STATEMENTS
Balance Sheets F-2
Statements of Income and Comprehensive Income F-4
Statements of Shareholders' Equity F-5
Statements of Cash Flows F-6
Notes to the Financial Statements F-7
SUPPLEMENTAL INFORMATION
Independent Auditor's Report on Supplemental Information F-20
Valuation and Qualifying Accounts F-21
Moss Adams LLP
222 SW Columbia St., Suite 400
Portland, OR 97201-6642
INDEPENDENT AUDITOR'S 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, 2000 and 1999, and the related statements of income and
comprehensive income, shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 2000. These financial statements are
the responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 2000 and 1999, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2000, in
conformity with generally accepted accounting principles.
/s/ Moss Adams LLP
Portland, Oregon
February 22, 2001
F-1
AG-BAG INTERNATIONAL LIMITED
BALANCE SHEETS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
ASSETS
2000 1999
------------------ ------------------
CURRENT ASSETS
Cash $ 23,894 $ 511,910
Accounts receivable, less allowance for doubtful
accounts of $247,690 and $147,024 at 2000
and 1999, respectively 2,941,379 1,875,777
Inventories 7,392,557 7,168,740
Prepaid expenses and other current assets 191,738 305,289
Deferred income taxes 209,000 121,000
------------------ ------------------
Total Current Assets 10,758,568 9,982,716
------------------ ------------------
PROPERTY, PLANT AND EQUIPMENT, net 4,346,141 4,162,992
------------------ ------------------
OTHER ASSETS
Deferred income taxes 59,000 -
Intangible assets, net 21,506 35,562
Other assets 541,412 393,969
------------------ ------------------
Total Other Assets 621,918 429,531
------------------ ------------------
TOTAL $ 15,726,627 $ 14,575,239
================== ==================
F-2
AG-BAG INTERNATIONAL LIMITED
BALANCE SHEETS
December 31, 2000 and 1999
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
2000 1999
------------------ ------------------
CURRENT LIABILITIES
Bank line of credit $ 1,224,638 $ -
Note payable to shareholder and related party - 6,523
Current portion of long-term debt and capital
lease obligations 341,221 378,568
Accounts payable 605,828 1,133,994
Accrued payroll and payroll taxes 451,042 504,786
Dealer deposits 49,100 199,169
Warranty reserve 190,162 175,000
Accrued expenses and other current liabilities 333,984 416,790
Income taxes payable 175,130 12,652
------------------ ------------------
Total Current Liabilities 3,371,105 2,827,482
------------------ ------------------
NONCURRENT LIABILITIES
Long-term debt and capital lease obligations,
less current portion 2,265,928 2,113,817
Deferred income taxes - 7,000
------------------ ------------------
Total Noncurrent Liabilities 2,265,928 2,120,817
------------------ ------------------
Total Liabilities 5,637,033 4,948,299
------------------ ------------------
COMMITMENTS AND CONTINGENCIES (see note 13)
SHAREHOLDERS' EQUITY
Preferred stock, $4 liquidation value per share, 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 120,619 120,619
Additional paid-in capital 9,210,211 9,210,211
Retained earnings (deficit) 62,764 (399,890)
------------------ ------------------
Total shareholders' equity 10,089,594 9,626,940
------------------ ------------------
TOTAL $ 15,726,627 $ 14,575,239
================= ==================
See independent auditor's report and accompanying notes.
F-3
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2000, 1999, and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
---------------- --------------- ----------------
NET SALES $ 31,451,150 $ 32,686,832 $ 27,710,514
COST OF SALES 24,799,690 25,084,577 20,800,441
---------------- --------------- ----------------
Gross profit from operations 6,651,460 7,602,255 6,910,073
OTHER OPERATING EXPENSES
Selling expenses 3,329,880 3,574,830 3,025,642
Administrative expenses 2,548,446 2,698,658 2,444,060
Research and development expenses 136,186 323,997 150,058
---------------- --------------- ----------------
Income from operations 636,948 1,004,770 1,290,313
OTHER INCOME (EXPENSE)
Interest income 42,996 7,185 69,607
Interest expense (456,158) (333,170) (437,803)
Other 290,028 296,786 304,282
---------------- --------------- ----------------
Income before income taxes 513,814 975,571 1,226,399
Provision (benefit) for income taxes (8,000) 327,000 422,000
----------------- --------------- ----------------
NET INCOME AND COMPREHENSIVE INCOME 521,814 648,571 804,399
================ =============== ================
Basic and diluted net income per common share $ 0.04 $ 0.05 $ 0.06
================ =============== ================
Basic and diluted weighted average common
shares outstanding 12,061,991 12,061,991 12,061,991
================ =============== ================
See independent auditor's report and accompanying notes.
F-4
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2000,1999 and 1998
- --------------------------------------------------------------------------------
Preferred Stock Common Stock Additional Retained Total
------------------- -------------------- paid-in earnings shareholders'
Shares Amount Shares Amount capital (deficit) equity
--------- --------- ---------- --------- ---------- ------------ ------------
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
Preferred stock dividends (59,160) (59,160)
Net Income 521,814 521,814
--------- --------- ---------- --------- ---------- ------------ ------------
Balance, December 31, 2000 174,000 $ 696,000 12,061,991 $ 120,619 $9,210,211 $ 62,764 $ 10,089,594
========= ======== ========== ========= ========== ============ ============
See independent auditor's report and accompanying notes.
F-5
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
---------------- --------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 521,814 $ 648,571 $ 804,399
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 612,845 565,322 580,639
Inventory write-down and obsolescence 256,000 346,500 135,000
(Gain) loss on disposition of fixed assets (100) 3,239 1,269
Deferred income taxes (154,000) 221,000 422,000
Change in assets and liabilities:
Accounts receivable (1,065,602) 458,135 (142,230)
Inventories (452,248) (1,798,281) (361,187)
Prepaid expenses and other current assets 113,551 155,403 1,589,097
Other assets (147,443) 5,456 (219,452)
Accounts payable (528,166) 302,072 (117,450)
Accrued expenses and other current liabilities (271,457) (24,265) 279,539
Income taxes payable 162,478 (26,984) -
---------------- ---------------- ----------------
Net cash provided by (used in) operating activities (952,328) 856,168 2,971,624
----------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (330,208) (484,267) (299,662)
Construction in progress (482,199) (78,682) -
Proceeds from disposition of fixed assets 3,000 8,500 10,000
Intangible assets - - 15,545
---------------- -------------- ----------------
Net cash used in investing activities (809,407) (554,449) (274,117)
----------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 11,749,880 22,902,233 27,341,354
Principal payments on line of credit (10,525,242) (22,902,233) (29,058,617)
Proceeds on issuance of debt 500,000 286,752 29,517
Principal payments on debt (385,236) (361,443) (573,978)
Payment of shareholders' notes (6,523) (17,572) (15,665)
Dividends paid (59,160) (59,160) (59,160)
----------------- ---------------- ----------------
Net cash provided by (used in) financing activities 1,273,719 (151,423) (2,336,549)
---------------- ---------------- ----------------
NET (DECREASE) INCREASE IN CASH (488,016) 150,296 360,958
CASH, beginning of year 511,910 361,614 656
---------------- --------------- ----------------
CASH, end of year $ 23,894 $ 511,910 $ 361,614
=============== =============== ================
See independent auditor's report and accompanying notes.
F-6
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Ag-Bag International Limited (the Company) is a
Delaware corporation. The Company's primary operations include the manufacturing
and sale of machines and related bags used in the agriculture industry to store
feed for livestock, grain and other products. The Company also manufactures
machines and bags for composting. The Company's primary market is North America;
however, it sells products worldwide.
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 on the OTC Bulletin Board.
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 $139,432, $71,236, and $185,863 in 2000, 1999, and 1998,
respectively, from rental equipment to inventory held for sale. In 2000, the
Company transferred $111,863 from inventory held for sale to rental equipment.
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-7
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 of licenses and patents. The cost
of the licenses and patents 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 - The Company accounts 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. The Company has also adopted the disclosure only
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation."
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, 2000, 1999, and 1998 were
$532,573, $466,270, and $490,495, respectively.
F-8
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
continued
NET INCOME 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.
Basic net income 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 per share
excludes the effect of potentially dilutive common stock equivalents because
their impact, when calculated using the Treasury stock method, is antidilutive.
SEGMENT INFORMATION - 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 changed the way public
companies reported 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 has
fully implemented SFAS No. 131 and determined that it has no reportable
segments.
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of
financial instruments including cash and cash equivalents and accounts
receivable approximated fair value as of December 31, 2000 and 1999 because of
the relatively short maturity of these instruments. The carrying value of notes
payable approximated fair value as of December 31, 2000 and 1999 based upon
interest rates and terms available for the same or similar loans.
F-9
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 1999
financial statements to conform with the 2000 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 - INVENTORIES
Inventories consist of the following:
December 31
--------------------------------
2000 1999
--------------- ---------------
Parts and subassembly $ 2,462,987 $ 2,451,510
Work in process and raw materials 1,056,673 1,176,363
Bags and machines 3,872,897 3,540,867
--------------- ---------------
$ 7,392,557 $ 7,168,740
=============== ===============
F-10
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - INTANGIBLE ASSETS, NET
Intangible assets, net, consist of the following:
December 31
--------------------------------------
2000 1999
------------------ ------------------
License and patent costs $ 612,845 $ 657,845
Less accumulated amortization 591,339 622,283
------------------ ------------------
$ 21,506 $ 35,562
================== ==================
During 2000 and 1999, a license became fully amortized. These intangible assets,
along with the related accumulated amortization, were relieved from the
Company's accounts. Amortization expense for the years ended December 31, 2000,
1999, and 1998, was $14,056, $19,392, and $22,815, respectively.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consist of the following:
December 31
--------------------------------------
2000 1999
------------------ ------------------
Land $ 160,826 $ 160,826
Buildings 2,850,270 2,805,958
Vehicles 353,928 330,844
Office furniture, fixtures and equipment 1,847,346 1,837,303
Plant equipment 3,224,736 2,901,077
Rental equipment 364,483 407,561
Leasehold improvements 70,014 70,014
------------------ ------------------
8,871,603 8,513,583
Construction in progress 482,199 78,682
Less accumulated depreciation and amortization (5,007,661) (4,429,273)
------------------ ------------------
$ 4,346,141 $ 4,162,992
================== ==================
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, 2000 and 1999, gross amount of equipment under
lease was $144,287 and $281,039, respectively. Accumulated depreciation related
to those capital leases was $105,785 and $83,440 at December 31, 2000 and 1999,
respectively.
Depreciation expense for the years ended December 31, 2000, 1999, and 1998 was
$598,789, $545,930, and $557,824, respectively.
F-11
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - LINE OF CREDIT
The Company has an operating line of credit (LOC) with a bank for up to
$5,000,000 at December 31, 2000 and 1999. 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% (10.0% at December 31,
2000 and 9.00% at December 31, 1999). As of December 31, 2000 and 1999,
$1,224,638 and $-0- were outstanding under the operating line of credit. The
line of credit is subject to certain covenants.
NOTE 6 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt is comprised of the following:
December 31
--------------------------------------
2000 1999
------------------ ------------------
Note payable in monthly installments of $2,638, plus interest
at prime plus 1.75% (10.25% at December 31, 1999), through
June 2000, secured by building $ - $ 14,091
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 111,058 131,232
Note payable, monthly payments of $6,724, including interest
at 9% through July 2017, secured by real property 689,200 705,832
Note payable in monthly installments of $4,650, including
interest at 6.7% through May 2017, secured by real property 563,883 581,533
Note payable in monthly principal installments of $5,833, plus
interest at prime plus .75% (10.25% at December 31, 2000 and
9.25% at December 31, 1999) through April 2003,
secured by fixed asset blanket 163,333 233,333
Note payable in monthly installments of $8,333, plus interest
at 8.38% through January 2006, secured by certain equipment 500,000 -
F-12
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - LONG TERM DEBT AND CAPITAL LEASE OBLIGATIONS (continued)
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 280,855 350,571
Note payable in monthly installments of $3,105, including
interest at 8.75% through December 2004, secured by certain
equipment
125,083 150,000
------------------ ------------------
2,433,412 2,166,592
Less: Current portion 274,321 229,467
------------------ ------------------
$ 2,159,091 $ 1,937,125
================== ==================
Future maturities of long-term debt and capital lease obligations are summarized
as follows:
Long-term Capital lease obligations
---------------------------------------------------
debt excluding Minimum Amount
capital lease lease representing
obligations payments interest Principal
--------------- ---------------- --------------- ----------------
Year ending December 31: 2001 $ 274,321 $ 79,325 $ 12,425 $ 66,900
2002 291,074 73,192 6,098 67,094
2003 295,424 40,728 985 39,743
2004 244,030 - - -
2005 155,019 - - -
Thereafter 1,173,544 - - -
--------------- ---------------- --------------- ----------------
$ 2,433,412 $ 193,245 $ 19,508 $ 173,737
=============== ================ =============== ================
NOTE 7 - NOTE PAYABLE TO SHAREHOLDER AND RELATED PARTY
The Company had a note payable to a shareholder of the Company. The note
included interest at 10% and required monthly principal and interest payments of
$1,600 through April 30, 2000. Interest expense related to shareholders and
related parties amounted to $135, $1,628, and $3,336 in 2000, 1999, and 1998,
respectively.
F-13
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
The income tax expense (benefit) from operations consists of the following:
Year ended December 31
---------------------------------------------------------
2000 1999 1998
----------------- ------------------ ------------------
Current:
Federal $ 226,000 $ 369,000 $ 487,000
Net operating loss utilized - (263,000) (487,000)
General business credits utilized (82,000) - -
State 16,000 25,000 43,414
Net operating loss utilized (14,000) (25,000) (43,414)
------------------ ------------------- ------------------
146,000 106,000 -
----------------- ------------------ ------------------
Deferred:
Federal (164,000) 196,000 442,220
State 10,000 25,000 (20,220)
----------------- ------------------ ------------------
(154,000) 221,000 422,000
------------------ ------------------ ------------------
Total income tax expense (benefit) $ (8,000) $ 327,000 $ 422,000
================== ================== ==================
Deferred tax assets and liabilities consist of the following:
December 31
--------------------------------------
2000 1999
------------------ ------------------
State net operating loss carryforward $ 66,000 $ 75,000
General business credit carryforward 212,000 98,000
Capital loss carryforward 135,632 135,632
Expenses not currently deductible 112,000 71,000
------------------ ------------------
Gross deferred tax asset 525,632 379,632
Valuation allowance (135,632) (135,632)
------------------- -------------------
Net deferred tax asset 390,000 244,000
Gross deferred tax liability, primarily
due to differences in depreciation (122,000) (130,000)
------------------- -------------------
Net deferred tax asset $ 268,000 $ 114,000
================== ==================
At December 31, 2000, the Company has research tax credit carryforwards for
federal income tax purposes of approximately $212,000 which are available to
offset future federal income. These credits can be carried forward through 2020.
The Company has a gross capital loss carryforward of $886,431 available to
offset future capital gains through 2002.
F-14
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES, continued
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:
2000 1999 1998
----------- ----------- -----------
Statutory federal income tax rate 34% 34% 34%
General business credit ( 35 ) - -
Nondeductible items 1 2 1
Other ( 1 ) ( 2 ) ( 1 )
----------- ----------- -----------
Effective tax rates (1%) 34% 34%
=========== =========== ===========
The Company has undergone a study with a consulting firm to determine if costs
associated with the Company's research and development activities were eligible
for research and development tax credits in its open tax years. The Company
completed the study and filed the necessary forms for its 1996 through 1999 tax
years during the year 2000 generating net tax credit benefits of approximately
$270,000.
NOTE 9 - SUPPLEMENTAL DISCLOSURES REGARDING CASH FLOWS
Supplemental disclosure of cash flow information:
Year ended December 31
-------------------------------------------
2000 1999 1998
------------- -------------- ------------
Cash paid during year for:
Interest $ 456,158 $ 333,170 $ 437,803
Income taxes $ 10,516 $ 145,084 $ 800
NOTE 10 - 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, 2000, the following warrants with respective exercise
price per share and date of expiration were outstanding and exercisable:
Exercise
Number price per Expiration
Party of shares share date
------------------ ------------- ------------- ---------------
Note holder 137,500 $ .385 February 2001
F-15
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - 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. No awards were granted under the Plan for 2000, 1999, and 1998.
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 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. 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 Company has computed, for pro forma disclosure purposes, the value of all
options granted during 2000 and 1998, using the Black-Scholes pricing model as
prescribed under SFAS 123. The following assumptions were made for grants in
2000 and 1998: risk-free interest rate of 6.1% and 5.5% respectively, expected
life of seven years and three years respectively, and dividend rate of zero
percent. For 2000 and 1998, the expected volatility over the expected lives of
the grants was assumed to be 75% and 56% for 2000 and 1998 respectively. The
weighted average fair value of the options granted was estimated to be $.29 in
2000 and $.41 in 1998.
F-16
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - SHAREHOLDERS' EQUITY, continued
If the Company had accounted for the value of the options granted during 2000,
1999, and 1998, in accordance with SFAS No. 123, the Company's net income would
have been reduced to the pro forma amounts indicated below:
2000 1999 1998
--------- --------- ---------
Net income :
As reported $ 521,814 $ 648,571 $ 804,399
Pro forma $ 510,023 $ 618,739 $ 796,534
Net income per share:
As reported .04 .05 .06
Pro forma .04 .05 .06
The resulting pro forma compensation costs may not be representative of that
expected in future years.
Transactions and other information relating to the Company's stock option plans
for the three years ended December 31, 2000, are summarized as follows:
The Incentive Plan The Director Plan
--------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise Combined
Shares Price Shares Price Shares
------------------------------ ------------------------------ ---------------
Options outstanding at December 31, 1997 86,788 $ 0.97 300,000 $ 1.06 386,788
Options granted - $ - 50,000 $ 0.56 50,000
----------------- ----------------- ---------------
Options outstanding at December 31, 1998 86,788 $ 0.97 350,000 $ 0.99 436,788
Options expired (10,000) $ 0.69 - $ - (10,000)
----------------- ----------------- ---------------
Options outstanding at December 31, 1999 76,788 $ 1.01 350,000 $ 0.99 426,788
Options granted - $ - 50,000 $ 0.39 50,000
Options expired (6,788) $ 1.03 - $ - (6,788)
----------------- ----------------- ---------------
Options outstanding at December 31, 2000 70,000 $ 1.00 400,000 $ 0.91 470,000
================= ================= ===============
Options exercisable at December 31, 1998 76,788 $ 0.96 240,000 $ 1.06 316,788
================= ================= ===============
Options exercisable at December 31, 1999 76,788 $ 1.01 320,000 $ 1.03 396,788
================= ================= ===============
Options exercisable at December 31, 2000 70,000 $ 1.00 390,000 $ 0.92 460,000
================= ================= ===============
F-17
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - SHAREHOLDERS' EQUITY, continued
At December 31, 2000, the Company had outstanding options for the purchase of
470,000 shares of common stock with a weighted average remaining contractual
life of six years and an exercise price range of $.39-1.06.
NOTE 11 - FOREIGN SALES ACTIVITY
Export sales from the Company's United States operations are as follows:
Year ended December 31
------------------------------------------
2000 1999 1998
------------ ------------- -------------
Latin America/Mexico $ 194,947 $ 259,825 $ 478,000
Canada 1,280,096 1,888,781 2,030,000
* Germany (see Note 12) 441,188 495,049 1,113,000
Other 109,272 161,689 285,000
------------ ------------- -------------
$ 2,025,503 $ 2,805,344 $ 3,906,000
============ ============= =============
* Beginning in 1999, the Company started manufacturing its mid-sized bagging
machinery directly in Germany.
NOTE 12 - 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 and is
accounted for under the equity method. BAW folds and distributes silage bags
throughout Europe.
2000 1999
---- ----
Investment, beginning of year
(included in other assets) $ 76,738 $ 25,544
Share of income for the year
(included in other income) 65,000 24,239
Capital investment - 26,955
----------- -----------
Investment, end of year (included
in other assets) $ 141,738 $ 76,738
=========== ===========
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 2000, 1999, and 1998 income from this
agreement was $112,000, $110,000 and $92,000 respectively.
On December 18, 2000, Ag-Bag International entered into an agreement with
Dresdner Bank to guarantee up to 1,000,000DM ($483,091 US) as security for an
additional cash credit facility of BAW. There was -0-DM outstanding under this
additional cash credit facility at December 31, 2000 guaranteed by the Company.
F-18
AG-BAG INTERNATIONAL LIMITED
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Commitments- 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.
Contingencies- The Company is involved in litigation matters which are in the
normal course of business. Management is of the opinion that these matters will
not have a material effect on the accompanying financial statements.
Accordingly, no provision for these matters is included in the financial
statements for the year ended December 31, 2000.
NOTE 14 - 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 15 - 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 federally
insured banks and periodically exceed insured limits.
NOTE 16 - PROFIT SHARING PLAN
The Company has a qualified profit sharing plan covering all full-time personnel
with at least one year of continuous service. Contributions to the plan are at
the discretion of the Company's management. The contribution to the profit
sharing plan was $119,930, $98,708, and $84,055 for the years ended December 31,
2000, 1999, and 1998.
F-19
- --------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION
Moss Adams LLP
222 SW Columbia St., Suite 400
Portland, OR 97201-6642
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL INFORMATION
To the Board of Directors and Shareholders
Ag-Bag International Limited
Under date of February 22, 2001, we reported on the balance sheets of Ag-Bag
International Limited as of December 31, 2000 and 1999, and the related
statements of income, shareholders' equity, and cash flows for the years ended
December 31, 2000, 1999, and 1998 as contained in the annual report on Form 10-K
for the year 2000. In connection with our audits 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.
/s/ Moss Adams LLP
Portland, Oregon
February 22, 2001
F-20
AG-BAG INTERNATIONAL LIMITED
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2000, 1999, and 1998
Column A Column B Column C Column D Column E
- --------------------------------- ---------- ---------- ------------ -----------
Balance at Charged to Write-offs, Balance
beginning costs and net of at end
Description of period expenses recoveries of period
- --------------------------------- ---------- ---------- ----------- -----------
Year ended December 31:
2000:
Allowance for doubtful accounts $147,024 $175,000 ($74,334) $247,690
Warranty reserve $175,000 $319,541 ($304,379) $190,162
Inventory valuation reserve $487,591 $256,000 ($24,640) $718,951
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
F-21