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, 2002 COMMISSION FILE NUMBER: 0-18259
AG-BAG INTERNATIONAL LIMITED
(Exact name of registrant as specified in its charter)
DELAWARE 93-1143627
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes _ No |X|
State the aggregate market value of the voting and non-voting equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter: $3,159,817.
The registrant has one class of Common Stock with 11,956,991 shares
outstanding as of March 5, 2003.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the proxy statement for the Registrant's Annual Meeting of
Stockholders to be held June 2, 2003, 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........................................................................11
Item 4. Submission of Matters to a Vote of Security Holders......................................11
Executive Officers of the Registrant..................................................................12
PART II .........................................................................................13
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ...................13
Item 6. Selected Financial Data..................................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...............................27
Item 8. Financial Statements and Supplemental Data...............................................27
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.....................................................................27
PART III .........................................................................................28
Items 10. and 11. Directors and Executive Officers of Registrant and Executive
Compensation.............................................................................28
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters......................................................................28
Item 13. Certain Relationships and Related Transactions...........................................28
Item 14. Controls and Procedures..................................................................29
PART IV .........................................................................................30
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........................30
1
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.
Forward-looking statements contained in this Form 10-K relate to the
Company's plans and expectations as to: timing of demand for bagging machines
and bags; reductions in U.S. milk prices; availability of credit in the farming
sector; potential purchases of the Company's bagging machines, bags and
composting systems; anticipated inventory production; the level of acceptance of
the Company's new pre-season order program for 2003; the availability of trade
credit and working capital; consumer sentiment and health of the U.S. and global
economy; the Company's dependence on the dairy industry; and the outcome of
pending litigation against the Company. 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
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GENERAL
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Ag-Bag International Limited (the "Company" or "Ag-Bag") 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 14
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 and directly in an area where a dealer is not
present. 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 2000 2001 2002
------- ---- ---- ----
Bags 53% 48% 48%
Machines 39% 43% 44%
Other 8% 9% 8%
---- ---- ----
Net Sales 100% 100% 100%
2
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.
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 6.4% of net sales for the year ended
December 31, 2002.
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 folds and distributes silage bags to the Company's German and European
dealers.
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 and stationary plastic recovery units which enable the
Company to bail and pick up the recyclable Tri-Dura(R) plastic bags as a service
to 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. In September 2002,
the Company took additional steps to counteract seasonality by developing and
introducing a pre-season ordering program, whereby the Company's dealer's place
their next year's annual product requirements order in advance. This allows the
Company to know in advance its production mix which in turn allows leveling of
production and flexibility in customer shipments.
Approximately 95% of the Company's business is concentrated in the Northern
Hemisphere resulting in between 65-70% 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 2000 2001 2002
------- ---- ---- ----
1st 21% 15% 18%
2nd 31% 35% 37%
3rd 34% 35% 32%
4th 14% 15% 13%
3
FARM EQUIPMENT AND PRODUCTS
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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.
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. Wide ranges 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. The Company first introduced this version in 1987.
Dairymen use it primarily in smaller dairy and cattle feeding operations 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. In late 2002, the
Company introduced its most basic model of its smaller bagging machine, the
"Personal Bagger". The retail price for these machines range from approximately
$19,500 to $49,000.
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 $74,000 to $209,500.
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 14 feet in diameter and 150
to 500 feet in length. Primarily dairymen use these machines 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. In 2002, the Company introduced its 14-foot version of the
Ag-Bagger(R) 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.
The retail price for the larger machines range from approximately $110,000 to
$310,000.
4
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(R) (Hydraulic Powered Anchor Control) system. The Company offers the
HYPAC(R) model in small, medium-sized and large-sized bagging machines. The
retail price for the HYPAC(R) machines range from approximately $49,000 to
$310,000.
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 $11,500 to $18,000.
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. In 2002,
the Company began manufacturing this line of equipment on a made-to-order basis.
The Company assembles and sells a separate line of related equipment called
the Square Bale Bagger, which retails for approximately $23,500 to $31,000. 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. In 2002, the
Company began manufacturing this line of equipment on a made-to-order basis.
The Company assembles and sells the Ag-Bag(R) Pro-Grain Bagger, which
retails for approximately $31,000. 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 $3,300 to $4,900.
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(R) compost bagging
machines retail for between $49,500 to $130,000.
AG-BAG TRI-DURA(R) STORAGE BAGS. The Ag-Bag Tri-Dura(R) disposable storage
bags range in size from 8 to 14 feet in diameter and 100 to 500 feet in length
and are made of extruded plastic. Rolls of plastic are manufactured to the
Company's specifications. The plastic contains special stabilizers to protect
the bags from deterioration due to exposure to weather and the sun's ultraviolet
rays. Once a Tri-Dura(R) bag is used, it may be recycled or disposed of in
another manner, but may not be reused.
The Company contracts for the manufacture of, and sells Tri-Dura(R)
three-ply bags with a white exterior and black interior intended for storage of
silage up to 24 months. The retail price of the bags ranges from approximately
$225 to $2,100. The manufactured plastic rolls are shipped to the Company's
5
plant in Blair, Nebraska, where they are folded and packed for sale using
proprietary folding techniques. The proprietary bag folding techniques reduce
bag folding time and allow the bags to uniformly unfold when being filled, which
thereby reduces operational delays.
AG-BAG(R) INOCULANT. The Company markets a liquid inoculant and a dry
powder inoculant under the trade name Ag-Bag Plus!(R). The inoculant is added to
the forage or the round or square bales during bagging. It enhances the
fermentation process for making silage in bags, bunkers, pits and silos by
substantially shortening the time necessary for the creation of the silage. A
liquid inoculant was developed in 1989 by a Company supplier and introduced into
the market in 1990. The dry inoculant is produced from a proprietary formula
owned by the Company and developed by Larry R. Inman and Walter L. Jay. See
"Executive Officers of the Registrant." The Company also markets an inoculant
designed specifically for composting.
MARKET SIZE
- -----------
The market for Ag-Bag(R) machinery and Ag-Bag Tri-Dura(R) recyclable
storage bags is primarily in the dairy and beef cattle industries. Silage is
used most often as dairy and beef animal feed. It is also used by farmers to a
lesser extent to feed hogs and sheep. In 2001, over 253 million tons of corn,
alfalfa, sorghum, silage, and hay were harvested by United States farmers
according to the AG IQ Handbook XIX published in 2002 by Agricom, Inc. (the "AG
Handbook"). Based on AG Handbook statistics, the Company estimates that there
are approximately 150,000 dairy, beef, hog, and sheep farms in the United States
that are potential customers for Ag-Bag(R) farm equipment and Tri-Dura(R)
storage bags; and that only about 8-12% of this group are actually using storage
bags made by the Company or its competitors. It further estimates that about
50-55% 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, and the Caribbean, 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 $2 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, 2002, there were
59 dealers serviced by a combined total of 22 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(R) dealers. Beginning in 2002, the Company began focusing its marketing
efforts more on dealer development and expanding its dealer network rather than
a focus towards direct selling. In September 2002, the Company also introduced
its new pre-season ordering program for its products, whereby the Company's
dealers place their next year's annual product requirements order in advance.
6
The Company offers customers the opportunity to finance the purchase of
Ag-Bag(R) farm equipment through unaffiliated third parties who offer
lease-purchase and wholesale financing.
The Company rents used Ag-Bag(R) bagging machines to farmers in various
areas of the United States. The rental charge is based on the number of bags
purchased and filled with forage.
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.
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.
WEBSITE
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The Company maintains a website for use by its customers, containing
information about the Company, its products, and educational materials regarding
their use. The website address for Ag-Bag is http://www.ag-bag.com
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(R) (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. In 1999, the Company 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.
7
AG-BAG(R) INOCULANTS. The Company purchases on the open market the liquid
and compost inoculant. 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.
Several manufacturing companies manufacture the structural components of
the Company's farm and composting equipment in Oregon, Nebraska and Iowa. The
Company believes that alternative sources of supply are readily available at
competitive prices if the present sources of supply should become unavailable.
The Company is not aware of any raw materials shortages or problems with these
suppliers 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 1(R)," indicates, the
Company believes it 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 three 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 and fixed 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
8
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 windrow turner manufacturers in
composting. Windrow 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 windrow turner manufacturers, the Company competes
with several companies that manufacture "in-vessel" systems, such as burners and
incinerators for large projects, which generally cost from $1 to $15 million.
In addition to the current competition, national competitors may emerge if
the bagging equipment and storage bag markets continue to grow. These potential
competitors include large farm equipment manufacturers and large chemical
companies who might decide to manufacture and sell the storage bags.
The Company competes in its product markets primarily on the basis of
product quality, warranty protection, and customer service. Some of its
competitors are larger and have greater financial, marketing, technical, and
other resources than the Company.
BACKLOG
- -------
The dollar amount of backlog orders of the Company that are believed to be
firm as of March 1, 2003, was approximately $12,400,000, compared to $3,400,000
on March 1, 2002, a 264.71% increase. Backlog for 2003 is considerably higher
than 2002 as a result of the introduction of the Company's new pre-season order
program, whereby the Company's dealers place their next year's annual product
requirements order in advance by each October 1st. The Company introduced this
new program in September 2002 for the 2003-ordering season. 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 2002, the Company focused research and development expenditures on
testing a newer design of its larger-sized silage-bagging machine, in addition
to further compost machine modification and 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. The Company also continues with ongoing research and testing in this
area as well.
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, 2002.
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.
9
The Company's patents on its basic bagging machine have been found to be
valid and have been successfully defended in prior litigation. The Company
believes that it has developed its position in the industry partially as a
result of protection provided by these patents. The Company also owns the
proprietary formula for making the dry inoculant marketed under the trade name
Ag-Bag Plus!(R), which was developed by Larry R. Inman and Walter L. Jay. (See
"Executive Officers of the Registrant")
The names Ag-Bag(R), Ag-Bag Plus!(R), Bale-Bag(R), Flex-a-Tuber(R),
Flex-a-Tube(R), ABCTI System(R), Mighty Bite(R), Tri-Dura(R), and the symbol
"AB"(R) are all registered as trademarks with the United States Patent and
Trademark Office.
The Company believes that its color scheme and trademarks are well known in
the industry, are an important part of its business, and give the Company a
competitive advantage.
EMPLOYEES
- ---------
On December 31, 2002, the Company had 91 full-time employees. The Company
employs approximately 130 people during its busy season. None of the Company's
employees are represented by a union, and the Company believes that its employee
relations are good.
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
- ----------------------------------------------------------------------------
(In thousands)
Year Ended December 31
2000 2001 2002
---- ---- ----
Sales to unaffiliated customers:
United States $29,421 $26,888 $25,445
Canada 1,280 1,030 1,148
Germany 441 445 275
Latin America/Mexico 195 89 113
Other foreign countries 109 248 202
------- ------- -------
$31,446 $28,700 $27,183
Sales to affiliated customers:
Officers and Directors 5 8 6
------- ------- -------
Total $31,451 $28,708 $27,189
------- ------- -------
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 that 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. The Blair, Nebraska facility consists of three buildings
10
comprising approximately 70,000 square feet. Management estimates that
manufacturing at the Blair facility is currently at approximately 70% 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. Class certification
has been denied in the S&S Forage case. The defendants briefed and argued
motions for summary judgment in both cases, which the court denied under both
cases. In June 2002, the U.S. District Court for the District of Minnesota
dismissed, in its entirety, the Mr. and Mrs. Donald L. Steward v. Up North
Plastics, Inc. et al. case based upon the plaintiffs' request to the court.
Furthermore, the plaintiffs in the remaining S&S Forage individual claim filed a
motion before the court appealing the May 2000 denial of class certification.
The defendants responded accordingly to the court. In November 2002, the U.S.
District Court for the District of Minnesota denied the plaintiffs' motion. 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 remaining plaintiffs' individual claim has no merit, and the Company is
vigorously defending itself against this claim. The Company continues to believe
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
alleged breach of contract and breach of product warranty relating to a bagging
machine purchased by the plaintiff and sought monetary damages. The Company
settled with the plaintiff May 1, 2002; which settlement is currently pending
before the Court of Queen's Bench of Alberta, Canada. (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 Nos. 5,799,472; 5,894,713; 5,345,744;
5,426,910; and 5,452,562 relating to a bag pan and density control patent for an
agricultural feed bagging machine and composting method patents. Plaintiff seeks
monetary damages. On April 2, 2002, the defendant was granted its motion for
summary judgment in the bag pan matter. The court concluded that there was no
infringement. Plaintiff has appealed this decision, which is currently before
the United States District Court for the District of Oregon. The density control
matter currently remains in settlement negotiations. In the composting method
patent matter, the Company counter-claimed for a determination that Versa's
patents are invalid and for infringement of the Company's U.S. Patent No.
5,461,843. Versa recently filed a formal stipulation with the court conceding it
cannot prove infringement under the court's patent claim construction, and is
seeking leave to appeal that decision. This matter is scheduled for trial in
June 2003 and further pre-trial procedures are pending. 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 2002, no matters were submitted to a vote of
security holders.
11
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
The executive officers of the Company, their respective ages as of March 1,
2003, business experience, and the period for which they have served are set
forth below. The Board of Directors at the first meeting following the start of
the new calendar year elects the executive officers annually. Officers serve at
the discretion of the Board of Directors. Beginning in 2003, the Board of
Directors voted to separate the position of Chief Executive Officer and Chairman
of the Board. As a result, Michael J. Schoville was promoted to Chief Executive
Officer from his former position of Chief Operating Officer.
NAME AGE POSITION
---- --- --------
Michael J. Schoville 52 Chief Executive Officer (since
2003); Chief Operating Officer
(2002); Credit Development Manager,
John Deere Credit (1986-2001);
Sales Manager, John Deere Company
(1973-1986).
Larry R. Inman 52 Chairman of the Board (1990-2000;
since 2002); President of the
Company (since 1993); Chief
Executive Officer (1990-2002);
President of Ag-Bag Corporation
(1984-1989) and Chairman
(1989-1994) of Ag-Bag Corporation
(former subsidiary).
Michael R. Wallis 38 Chief Financial Officer (since
1993) and Vice President of Finance
(since 1992), Treasurer (since
1996); Manager, Yergen and Meyer
(regional accounting firm,
1986-1992).
Arthur P. Schuette 63 Vice President, Sales (since 1991);
Treasurer of the Company
(1990-1991) and Treasurer
(1983-1991) of Ag-Bag Corporation
(former subsidiary).
Lou Ann Tucker 49 Secretary (since 1996), Vice
President, Administration (since
1989), and Treasurer (1991-1996);
Executive Treasurer (1988-1994) of
Ag-Bag Corporation (former
subsidiary); co-owner of LGJ
Livestock, Astoria, Oregon (horse
and cattle ranch, since 1980).
Walter L. Jay 42 Vice President, Manufacturing
(since 1989); Manager of Blair,
Nebraska Plant (since 1980); KW
Trucking (1984-1987).
12
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 1, 2003, there were approximately 320 holders of record of
the Company's Common Stock. The Company estimates there are approximately 1,700
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 2002 as reported on the OTC
Bulletin Board:
Calendar Year High Bid Low Bid
- ------------- -------- -------
2001:
- ----
First quarter $.39 $.30
Second quarter $.40 $.23
Third quarter $.38 $.21
Fourth quarter $.32 $.20
2002:
- ----
First quarter $.33 $.17
Second quarter $.58 $.30
Third quarter $.51 $.32
Fourth quarter $.32 $.18
- ----------------------------------
The quotations reflect inter-dealer prices, without retail markups, markdowns,
or commissions and do not necessarily represent actual transactions.
DIVIDENDS
- ---------
The Company has not paid any dividends on its Common Stock since its
inception, and the Board of Directors does not anticipate declaring any cash
dividends on its Common Stock in the foreseeable future. The Company currently
intends to utilize any earnings in its business. The Company may not pay
dividends on Common Stock pursuant to certain loan agreements, or while it is in
arrears in dividends on its preferred stock.
13
UNREGISTERED SECURITIES
- -----------------------
The Company has issued the following unregistered securities during the
year ended December 31, 2002:
- ------------------------------ -- ------------------------ -- ------------------ -- -------------------- ---------------------
Name of
Title and Amount of Principal
Securities Underwriter/ Name or Class of
Granted/Exercise Price Underwriting Persons who
if Applicable Discounts or Received Securities Consideration
Date of Grant Commissions Received
- ------------------------------ -- ------------------------ -- ------------------ -- -------------------- ---------------------
January 22, 2002 30,000 Options for N/A Mike Schoville $0
Common Stock/$.25 per
share(1)
- ------------------------------ -- ------------------------ -- ------------------ -- -------------------- ---------------------
January 22, 2002 100,000 Options for N/A Non-employee $0
Common Stock/$.25 per Directors
share(2)
- ------------------------------ -- ------------------------ -- ------------------ -- -------------------- ---------------------
June 3, 2002 20,000 Options for N/A Non-employee $0
Common Stock/$.49 per Directors
share(2)
- ------------------------------ -- ------------------------ -- ------------------ -- -------------------- ---------------------
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 Incentive Stock Option Plan. Option vests 10,000 shares
1/22/03, 10,000 shares 1/22/04 and remaining 10,000 shares 01/22/05.
(2) Granted under Non-employee Director Stock Option Plan. Options vest
according to terms of plan.
14
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, 1998, 1999,
2000, 2001 and 2002. 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,
-----------------------
1998 1999 2000 2001 2002
Statement of Operations Data: ---- ---- ---- ---- ----
Net Sales $ 27,710 $ 32,687 $ 31,451 $ 28,708 $ 27,189
Cost of Sales 20,800 25,085 24,800 22,947 22,121
------ ------ ------ ------ ------
Gross Profit from Operations 6,910 7,602 6,651 5,761 5,068
Selling and Administrative Expenses 5,470 6,273 5,878 6,067 6,237
Research and Development Expenses 150 324 136 214 220
------ ------ ------ ------ ------
Income (Loss) from Operations 1,290 1,005 637 (520) (1,389)
Other Income (Expense) (64) (30) (123) 123 189
------ ------ ------ ------ ------
Income (Loss) before Provision for
Income Taxes 1,226 975 514 (397) (1,200)
Provision (Benefit) for Income Taxes 422 327 (8) (233) (536)
------ ------ ------ ------ ------
Net Income (Loss) $ 804 $ 648 $ 522 $ (164) $ (664)
------ ------ ------ ------ ------
(In thousands, except per share data)
Year Ended December 31,
-----------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Basic Earnings per Share:
Net Income (Loss) $ .06 $ .05 $ .04 $(.02) $(.06)
----- ----- ----- ------ ------
Diluted Earnings per Share:
Net Income (Loss) $ .06 $ .05 $ .04 $(.02) $(.06)
----- ----- ----- ------ ------
Weighted Average Shares:
Basic 12,062 12,062 12,062 12,002 11,957
====== ====== ====== ====== ======
Diluted 12,062 12,062 12,062 12,002 11,957
====== ====== ====== ====== ======
15
(In thousands, except per share data)
Year Ended December 31,
-----------------------
Balance Sheet Data:
December 31,
-------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Working Capital $ 6,818 $ 7,156 $ 7,387 $ 6,456 $ 5,087
Current Assets(1) 9,391 9,983 10,758 9,795 7,865
Total Assets(1) 13,820 14,575 15,727 14,996 13,349
Current Liabilities(2) 2,573 2,827 3,371 3,339 2,778
Long-term Debt(2) 2,210 2,121 2,266 1,822 1,459
Total Stockholders' Equity(3) 9,037 9,627 10,090 9,835 9,112
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Company's significant accounting policies are described in Note 1 to
the financial statements included in Item 15 of this form 10-K. The Company
believes its most critical accounting policies include inventory obsolescence
reserves, allowance for doubtful accounts, accounting for warranty reserves and
accounting for income taxes.
The $731,322 estimate for inventory obsolescence reserves was developed
using inventory-aging reports for finished goods, combined with historical
usage, and forecasted usage and inventory shelf life. 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. As trends in these variables change, the percentages applied to
the inventory aging categories are updated.
The $203,595 estimate of allowance for doubtful accounts is comprised of a
specific account analysis and a general reserve. Accounts where specific
information indicates a potential loss may exist are reviewed and a specific
reserve against amounts due is recorded. As additional information becomes
available such specific account reserves are updated. Additionally, a general
reserve is applied based upon historical collection and write-off experience. As
trends in historical collection and write-offs change, the general reserve is
updated.
The $177,384 estimate for warranty reserve is developed based upon the
estimated future costs to be incurred under the provisions of the Company's
warranty agreements on its bags and machines. The Company reviews its historical
warranty expense and current sales trends in specific products covered under
warranty, and reserves are updated as trends in these variables change.
- --------------------------------
(1) Includes deferred taxes.
(2) Includes loans from shareholders and deferred taxes.
(3) Includes $696 of preferred stock.
16
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.
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,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Net Sales 100% 100% 100% 100% 100%
Costs and Expenses:
Cost of Sales 75% 77% 79% 80% 81%
Selling and Administration 20% 19% 19% 21% 23%
Research and Development -- 1% -- -- 1%
---- ---- ---- ---- ----
Income (Loss) From Operations 5% 3% 2% (1%) (5%)
==== ==== ==== ==== ====
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------
For the year ended December 31, 2002, net sales decreased 5.29% to
$27,189,140 compared to $28,708,233 for the year ended December 31, 2001. Sales
were down for the year as a result of drought weather conditions experienced in
much of the Midwest and upper-Midwestern United States that greatly reduced the
summer alfalfa harvest for 2002. Additionally, milk prices continued their steep
decline, which began during the second quarter of 2002, to record low levels,
causing farmers to become cautious on purchasing capital equipment. Also
contributing to the decline was continued tightening in agricultural credit
availability, as a result of the depressed U.S. milk prices, coupled with rising
supplemental grain feed costs during the third quarter of 2002 brought on by the
drought conditions in the U.S.
This is a shift from the positive trends that could be seen moving into
the first quarter of 2002. These positive trends included stabilizing milk
prices, continued optimism that milk prices in the U.S. would remain above the
record low levels of the year 2000 throughout 2002 and continued easing of
credit by financial institutions for the farming sector that, coupled with the
interest rate reductions of 2001, allowed farmers to be more optimistic and
resume capital expenditures. Sales were down for the year despite this positive
sentiment seen during the first quarter of 2002, which began eroding during the
second quarter and continued throughout the remainder of 2002. Supplemental
grain feed costs remained low during the first two quarters of 2002, which
tended to improve the availability of farm operating funds. However, this trend
reversed during the third quarter as discussed above. Throughout 2002, strong
competition in the silage bag market continued, as farmers look for the most
economical bag, with lesser consideration to overall quality, customer service
and recycling of the used plastic silage bags offered by the Company.
17
Machine sale revenue for the year declined 3.61% and bag sale revenue
declined 5.54% compared to 2001. Machine sale revenue for the year declined as a
result of a decrease in the Company's smaller unit bagging machine sales during
the second and third quarters of 2002 compared to 2001, resulting from the
drought and milk price conditions previously discussed. As a percentage of total
revenue for the year 2002, machine and bag revenue was unchanged. (See "Item 1.
Business - General.") Machine sales are directly tied to farmers' income and
therefore their ability to purchase new equipment. The total number of bagging
machines that are in the marketplace drives the Company's bag and parts sales.
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.
For the year ended December 31, 2002, the Company sold four composting
systems in addition to compost bag sales, generating approximately $592,000 in
revenue, compared to ten systems sold and compost bag sales for the year ended
December 31, 2001, generating approximately $1.3 million in revenue. Compost
sales were down for the year as a result of current economic conditions and
tight budgetary constraints for the Company's potential end users in the U.S.
Although the Company sells its products 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 that direct sales make up between 33-38% of
total sales. The gross margin realized on the Company's direct sales are
typically within 1-3% 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. The Company anticipates its sales mix to begin
to favor more dealer sales in the future as a result of its change of sales
focus during the later half of 2002. (See "Item 1. - Business - Marketing.")
The Company continued evaluating selling its bagging machines via
e-commerce and concluded that e-commerce is not currently a viable distribution
avenue for its machinery. This is due to the complexity and required
understanding of the end user's needs and farming operation, which requires
discussion in an individual setting with a Company sales representative. The
Company however, will continue to evaluate whether to offer some of its other
products via e-commerce at some point in the future.
International sales for the Company in 2002 were down in comparison to
2001 due to continued economic uncertainty affecting the international farm
economy. International sales to Canada and Latin America saw a slight increase
in 2002, while sales to Germany saw a decline for the year. 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 $3.7 million
in bag sales were distributed through the venture during 2002, an increase of
12%, compared to approximately $3.3 million in bag sales for 2001.
Gross profit as a percentage of sales decreased 1.43% for the year ended
December 31, 2002 compared to 2001. The decrease for the year was the result of
1) lower sales volumes to cover fixed operating overheads, 2) higher machine
warranty costs (related largely to the Company's large-sized bagging machines),
3) lower margins on the Company's used equipment sold during the year, and, 4)
lower margins on bags in certain highly competitive, high volume geographic
areas. The decrease was partially offset by improved margins on the Company's
"core" smaller bagging machines from production improvements made during 2002.
Also contributing to the decline for the year was the mix of machine
18
models sold during the year, which saw a 16% increase in unit sales of the
Company's larger-sized bagging machines. Larger-sized bagging machines generate
a lower overall margin for the Company than its "core" small sized bagging
machine. (See "Item 1. Business - Farm Equipment and Products.")
Selling expenses for the year ended December 31, 2002 increased 1.61% to
$3,496,672 compared to $3,441,197 for the year ended December 31, 2001. The
increase for the year was the result of increased advertising, promotion,
meeting, and dealer incentive costs, partially offset by lower personnel,
benefit, and travel costs associated with sales personnel reductions made in
2002 in connection with the shift more towards selling through the Company's
dealer network (See "Item 1. - Business - Marketing."), coupled with lower
commissions from lower sales volumes for the year.
Administrative expenses for the year ended December 31, 2002 increased
4.32% to $2,739,811 compared to $2,626,268 for the year ended December 31, 2001.
The increase for the year was the result of higher professional fees related to
ongoing patent litigation and increases in administrative salary, general
office, annual meeting and insurance expense, partially offset by lower bad
debt, employee benefit, and director fee expenses.
Research and development expenses for the year ended December 31, 2002
increased 2.91% to $219,980 compared to $213,757 for the year ended December 31,
2001. The increase for the year was the result of new research and development
on testing a newer design of the Company's larger-sized silage-bagging machine,
in addition to further compost machine modification and 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, and is continuing research and testing in this area as well.
Interest expense for the year ended December 31, 2002 decreased 11.70% to
$314,068 compared to $355,686 for the year ended December 31, 2001. The decrease
for the year was the result of lower interest rates on the Company's credit
line, partially offset by the Company utilizing a larger portion of its credit
facilities through the third quarter of 2002.
Joint venture equity and royalty income for the year ended December 31,
2002 increased 5.39% to $315,196 compared to $299,065 for the year ended
December 31, 2001. The increase for the year was the result of increased sales
from the joint venture during the year (see the international sales discussion
above) coupled with a slight increase in folding royalties, as plastic tonnage
folded in 2002 by the German joint venture increased approximately 12% from 2001
tonnage folded. (See "Item 8. Financial Statements and Supplemental Data".)
The Company's effective tax rate for the year ended December 31, 2002
was (45%). This was due to 1) the fact the Company incurred a net loss for the
year, 2) the recognition of research and development credits associated with its
2002 activities, 3) the fact the Company's income from its German joint venture
is not taxable in the United States, and 4) the extraterritorial income
exclusion provisions of the current United States tax code. In 2002, the Company
generated net general business tax credit benefits of approximately $9,000.
Net loss for the year ended December 31, 2002 was $663,988 compared to a
net loss of $164,150 for the year ended December 31, 2001. The decline for the
year was the result of lower sales, lower gross profit resulting from
competition and mix of bagging machinery sold during the year, coupled with
increased selling, administrative, and research expense, partially offset by
higher income from the Company's German joint venture and lower interest costs.
19
YEARS ENDED DECEMBER 31, 2001 AND 2000
- --------------------------------------
For the year ended December 31, 2001, net sales decreased 8.72% to
$28,708,233 compared to $31,451,150 for the year ended December 31, 2000. Sales
were down for the year, in spite of several positive trends that were starting
to be seen towards the latter half of the year. During the first quarter of the
year, milk prices in the U.S. continued at very low levels coupled with
continued tightening of credit, especially in the U.S. farming sector, which
caused farmers to remain cautious about purchasing farm machinery and equipment
into the first half of the year, in spite of declining interest rates during
this period. Continued intense competition in the silage bag and machine market
was seen during the year, as farmers look for the most economical bag or
machine, without considering overall quality, customer service and recycling of
the used bags offered by the Company. Positive trends that began to emerge in
the second half of the year included stabilizing milk prices, continued optimism
that milk prices in the U.S. will remain above last year's record low levels
through 2002 and continued easing of credit by financial institutions for the
farming sector that, coupled with the interest rate reductions of 2001, allowed
farmers to be more optimistic and resume capital expenditures and purchase farm
equipment. Throughout 2001, supplemental grain feed costs also remained low,
which tends to improve the availability of farm operating funds.
Machine sales for the year were flat and bag sales were down 18.43%
compared to 2000. The positive trends discussed above can be seen in machine
sales during the second half of 2001. Machine sales at September 30, 2001 were
down 3% for the year in comparison to 2000. This difference was made up during
the last quarter of 2001 to bring machine sales flat for the year in comparison
to 2000. As a percentage of total revenue however, machine sales for 2001
increased 4% and bag sales for 2001 decreased 5% compared to 2000. (See "Item 1.
Business - General.") Machine sales are directly tied to farmers' income and
therefore their ability to purchase new equipment. Bag sales for the year were
down largely due to intense competition in key dairy states, as farmers utilize
the most economical bag available without considering quality of the Company's
products and its recycling program. 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 ten composting systems during the year ended
December 31, 2001 (generating approximately $1.3 million in revenue) compared to
twelve systems sold for the year ended December 31, 2000 (generating
approximately $1.2 million in revenue).
Although the Company sells its products 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 that direct sales make up between 33-38% of
total sales. The Company expects its sales mix to begin to favor more direct
sales in the future, especially if the Company begins to offer e-commerce as a
method for ordering the Company's products. The Company continues to evaluate
methods for selling its products via e-commerce and anticipates beginning to
offer e-commerce as a purchase method sometime during 2002. The gross margin
realized on the Company's direct sales are typically within 2-4% 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 2001 were down in comparison to
2000 due to continued poor economic conditions affecting the farm economy 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%.
20
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 $3.3 million in bag
sales were distributed through the venture during 2001, an increase of 32%,
compared to approximately $2.5 million in bag sales for 2000.
Gross profit as a percentage of sales declined 5.12% for the year ended
December 31, 2001 compared to the same period in 2000. The decline resulted from
lower sales volumes to cover fixed operating overheads, coupled with 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, which saw a 12% increase in unit sales of larger-sized bagging
machines. Larger sized bagging machines generate a lower overall margin for the
Company than its "core" small sized bagging machine. (See "Item 1. Business -
Farm Equipment and Products.")
Selling expenses for the year ended December 31, 2001 increased 3.34% to
$3,441,197 compared to $3,329,880 for the year ended December 31, 2000. The
increase for the year was the result of increases in personnel, benefit,
commission, advertising and promotional expenses, partially offset by lower
volume discounts due to lower sales volumes for the year.
Administrative expenses for the year ended December 31, 2001 increased
3.05% to $2,626,268 compared to $2,548,446 for the year ended December 31, 2000.
The increase for the year was the result of increased depreciation from the
Company's implementation of a new computer system, coupled with higher
professional fees related to ongoing litigation and increases in employee
benefit costs and insurance expenses, that were offset by the Company canceling
a discretionary matching annual benefit.
Research and development expenses for the year ended December 31, 2001
increased 56.96% to $213,757 compared to $136,186 for the year ended December
31, 2000. The increase for the year was the result of new research on silage and
nutritional studies of bagged feed and their effects on animal production,
coupled with ongoing research and testing related to silage bagging and compost
machine development.
Interest expense for the year ended December 31, 2001 decreased 22.03% to
$355,686 compared to $456,158 for the year ended December 31, 2000. The decrease
for the year was the result of the Company utilizing a smaller portion of its
credit facilities and from lower interest rates on its borrowings.
Joint venture equity and royalty income for the year ended December 31,
2001 increased 66.42% to $299,065 compared to $179,703 for the year ended
December 31, 2000. The increase for the year was the result of increased sales
from the joint venture during the year (see the international sales discussion
above) coupled with increased folding royalties, as plastic tonnage folded in
2001 by the joint venture increased approximately 46% from 2000 tonnage folded.
(See "Item 8. Financial Statements and Supplemental Data".)
The Company's effective tax rate for the year ended December 31, 2001 was
(59%). This was due to the fact the Company incurred a net loss for the year
coupled with the recognition of research and development credits associated with
its 2001 activities. In 2001, the Company generated net general business tax
credit benefits of approximately $75,000. 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 (39%) for the year ended December 31, 2001.
21
Net loss for the year ended December 31, 2001 was $164,150 compared to net
income of $521,814 for the year ended December 31, 2000. The decline for the
year was the result of lower sales, lower gross profit resulting from
competition and product mix sold during the year, coupled with increased
selling, administrative, and research expense, partially offset by higher income
from the Company's German joint venture and lower interest costs.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 148, "Accounting
for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123." This Statement amends FASB Statement No. 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company's management intends to continue using the intrinsic value method for
stock-based employee compensation arrangements and therefore does not expect
that the application provisions of this statement will have a material impact on
the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The statement
is effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. The Company's management does not
expect that the application of the provisions of this statement will have a
material impact on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." This Statement also rescinds FASB Statement No. 44, "Accounting
for Intangible Assets of Motor Carriers." This Statement amends FASB Statement
No. 13, "Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
Company's management does not expect that the application of the provisions of
this statement will have a material impact on the Company's financial
statements.
22
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses the accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 will be effective for the
Company in the first quarter of 2003. The Company's management does not expect
that the application of the provisions of this statement will have a material
impact on the Company's financial statements.
In January 2003, FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities." This interpretation clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," and
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse risks
among parties involved. The Company's management does not expect that the
application of the provisions of this interpretation will have a material impact
on the Company's financial statements.
In November 2002, FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing a
guarantee. The Company has complied with the disclosure requirements of FIN 45.
The initial recognition and initial measurement provisions shall be applied on a
prospective basis to guarantees issued or modified after December 31, 2002. The
Company's management does not expect that the application of the provisions of
this interpretation will have a material impact on the Company's financial
statements.
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 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.
The Company relies on its suppliers to provide trade credit to enable the
Company to build its inventory. The Company's suppliers have provided sufficient
trade credit to meet the demand to date and management believes this will
continue. No assurance can be given that suppliers will continue to provide
sufficient trade credit in the future.
Accounts receivable decreased 52.38% at December 31, 2002 to $1,158,927
compared to $2,433,842 at December 31, 2001. The decrease for the year was the
result of the Company changing its collection methods during the fourth quarter
of 2002 whereby the Company's customers no longer have open account terms. For
new purchases, the Company's customers now have the option to pay in advance for
their order, utilize their own established credit, or utilize one of the
Company's third-party financing sources or programs offered for their purchases.
The Company has established adequate reserves ($203,595 at December 31, 2002
compared to $203,350 at December 31, 2001) against accounts receivable in the
event that some of the remaining accounts become uncollectable.
Inventory decreased 9.62% at December 31, 2002 to $6,051,720 compared to
$6,695,894 at December 31, 2001. The decrease in inventory resulted from the
Company's continued efforts to streamline its inventory and more closely match
its production with planned inventory requirements.
23
Contributing to these efforts was the implementation of the Company's new
pre-season ordering program introduced in September 2002. (See Item 1. -
"Business - Marketing.")
Other current assets decreased 11.82% at December 31, 2002 to $198,877
compared to $225,544 at December 31, 2001. The decrease was the result of a
decrease in deposits and prepaid expenses.
Intangible assets at December 31, 2002 decreased to $11,511 compared to
$18,893 at December 31, 2001. The decrease was the result of normal amortization
expense for the year.
Other assets increased 1.85% at December 31, 2002 to $490,628 compared to
$481,704 at December 31, 2001. The increase for the year was the result of an
increase in the cash surrender value of life insurance policies maintained by
the Company under which it is the beneficiary.
The Company has an operating line of credit with a limit of $5,000,000,
secured by accounts receivable, inventory, fixed asset blanket and general
intangibles, and bears interest at the bank's prime rate plus 1/4%. As of
December 31, 2002, $384,725 had been drawn under the credit line. The line of
credit is subject to certain net worth and EBITDA covenants, and an annual
capital expenditure limit. Subsequent to year-end, the Company reduced its line
of credit to $2,500,000 and the interest rate was adjusted to the bank's prime
rate plus 1 1/4%. 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 2003. The Company's line of credit is subject to
annual renewal at June 1.
On December 18, 2000, the Company entered into an agreement with Dresdner
Bank to guarantee up to 511,292 Euro ($535,987 US) as security for an additional
cash credit facility of the Company's German joint venture. There was -0- Euro
outstanding under this additional cash credit facility at December 31, 2002.
Accounts payable increased 34.31% at December 31, 2002 to $903,309
compared to $672,563 at December 31, 2001. The increase for the year was the
result of the Company continuing its manufacturing process during the fourth
quarter (resulting from the Company's new pre-season order program whereby the
Company is trying to level out its production process), coupled with some
extended term payables provided by some of the Company's principal suppliers.
Accrued expenses and other current liabilities in total increased 16.32%
at December 31, 2002 to $1,135,608 compared to $976,302 at December 31, 2001.
The increase in total accrued expenses and other current liabilities for the
year was the result of increased dealer incentives and volume rebate expense
resulting from the Company's new pre-season order program coupled with higher
machine warranty costs, which were offset by lower payroll and benefit costs
from sales staff reductions, in addition to lower general accruals resulting
from lower sales for the year.
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.
24
The following table outlines the Company's future contractual obligations
by type:
Payments due by period
-------------------------------------------------------------------------
Contractual Less than More than
Obligations Total 1 year 1-3 years 3-5 years 5 years
-------------------------------------------------------------------------
Long-term debt $1,773,459 $314,321 $469,197 $157,181 $832,760
Capital lease obligation 37,653 37,653
Operating leases 277,613 18,264 40,181 43,834 175,334
Purchase obligations 0
-------------------------------------------------------------------------
Total $2,088,725 $370,238 $509,378 $201,015 $1,008,094
=========================================================================
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 A sharp decline in the health of the farming sector of the U.S. economy
could cause a reduction in our revenue.
If a reduction in availability of credit in the farming sector occurs,
or, interest rates begin to rise, our sales may decline as farmers will
find it more difficult to purchase capital equipment and may become
more cautious on incurring additional farm debt.
o Our revenues are historically 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%-70% of our revenue is historically generated in the second and
third quarters. In September 2002 however, the Company took steps to
begin to counteract some of this seasonality with the introduction of
its pre-season order program.
25
o We may not gain market acceptance of our new pre-season order program.
The Company introduced a new pre-season order program in September 2002
for use by the Company's dealers in placing their entire anticipated
next year's product order. This is the first time the Company has
introduced such a comprehensive program and no assurance can be given
that it will be fully accepted in the marketplace.
o We may lose the class action lawsuit pending against us.
A class action lawsuit alleging antitrust violations has been filed
against others and 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. If the
plaintiffs succeed in establishing liability and obtain a judgment for
damages, the award could exceed our entire net worth.
o We may lose the product warranty lawsuit pending against us.
A product warranty lawsuit was filed against others and 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 We may lose the alleged Versa 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 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 patent
ability 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.
26
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 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
- --------------------------------------------------------------------
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which the Company is exposed is interest rates.
The Company's exposure to changes in interest rates is minimal.
Primarily all of the Company's long-term debt is fixed rate. The Company's line
of credit is based on the prime rate plus 1 1/4% and one long-term debt
instrument is based on the prime rate plus 3/4%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
- ---------------------------------------------------
Reference is made to the financial statements and related notes and
supplemental data under Item 15 filed with this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
None.
27
PART III
--------
ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND
EXECUTIVE COMPENSATION
- ------------------------------------------------------------------------
A definitive proxy statement for the 2003 Annual Meeting of Stockholders
of Ag-Bag International Limited to be held on June 2, 2003 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 AND
RELATED STOCKHOLDER MATTERS
- ----------------------------------------------------------------------------
Part of the information required is set forth under the caption "Security
Ownership of Beneficial Owners" in the Proxy Statement and is incorporated
herein by reference.
EQUITY COMPENSATION PLAN INFORMATION
- --------------------------------- ---------------------------- ----------------------- ----------------------------------
PLAN CATEGORY NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE NUMBER OF SECURITIES REMAINING
ISSUED UPON EXERCISE OF EXERCISE PRICE OF AVAILABLE FOR FUTURE ISSUANCE
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER EQUITY COMPENSATION PLANS
WARRANTS AND RIGHTS WARRANTS AND RIGHTS (EXCLUDING SECURITIES REFLECTED
(A) (B) IN COLUMN (A))(C)
- --------------------------------- ---------------------------- ----------------------- ----------------------------------
Equity compensation plans
approved by security holders - - -
- --------------------------------- ---------------------------- ----------------------- ----------------------------------
Equity compensation plans not
approved by security holders 500,000 $.64 810,335
- --------------------------------- ---------------------------- ----------------------- ----------------------------------
Total 500,000 $.64 810,335
- --------------------------------- ---------------------------- ----------------------- ----------------------------------
The Company has an Employee Stock Plan, Incentive Stock Plan and Non-employee
Director Stock Option Plan, which have not been approved by security holders.
Information on the plans are contained in Note 10 to the Company's Financial
Statements for the year ended December 31, 2002 and 2001. These plans have
previously been filed as exhibits to the Company's public filings. (See -
"Exhibit Index")
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.
28
ITEM 14. CONTROLS AND PROCEDURES
- ---------------------------------
(a) Evaluation of disclosure controls and procedures.
The Company's chief executive officer and chief financial officer,
after evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c)
and 15d-14(c)) as of a date (the "Evaluation Date") within 90 days before the
filing date of this annual report, have concluded that as of the Evaluation
Date, the Company's disclosure controls and procedures were effective and
designed to ensure that material information relating to the Company and the
Company's consolidated subsidiaries would be made known to them by others within
those entities.
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect those controls subsequent to
the Evaluation Date.
29
PART IV
-------
ITEM 15. 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.................................................................. 34
Independent Auditor's Report................................................................... F-1
Balance Sheets at December 31, 2002 and 2001................................................... F-2
Statements of Operations and Comprehensive Income (Loss) for the years ended
December 31, 2002, 2001 and 2000........................................................... F-4
Statement of Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000........................................................... F-5
Statement of Cash Flows for the years ended December 31,
2002, 2001 and 2000........................................................................ 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 15:
Independent Auditor's Report on Supplemental Information....................................... F-30
Schedule of Valuation and Qualifying Accounts.................................................. F-31
Audited Financial Statements of BAW group as of December 31, 2002, 2001 and 2000............... F-32
(Considered a significant 50% owned equity investee as defined
under SEC Regulation S-X 3-09)
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............................................... 35
(b) No reports on Form 8-K were required to be filed during the last
quarter of the period covered by this report.
30
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 14, 2003 By: \s\ MICHAEL J. SCHOVILLE
---------------------------------------
Michael J. Schoville, Chief Executive Officer
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 14, 2003 By: \s\ LARRY R. INMAN
---------------------------------------
Larry R. Inman, Chairman, Board of
Directors and President
Date: March 14, 2003 By: \s\ MICHAEL J. SCHOVILLE
---------------------------------------
Michael J. Schoville, Chief Executive Officer
(Principal Executive Officer)
Date: March 14, 2003 By: \s\ MICHAEL R. WALLIS
---------------------------------------
Michael R. Wallis, Chief Financial
Officer and Vice President, Finance
(Principal Financial and Accounting
Officer)
Date: March 14, 2003 By: \s\ LEMUEL E. CUNNINGHAM
---------------------------------------
Lemuel E. Cunningham, Director
Date: March 14, 2003 By: \s\ MICHAEL W. FOSTER
---------------------------------------
Michael W. Foster, Director
Date: March 14, 2003 By: \s\ JIM DEMATTEO
---------------------------------------
Jim DeMatteo, Director
Date: March 14, 2003 By: \s\ ARTHUR P. SCHUETTE
---------------------------------------
Arthur P. Schuette, Director
Date: March 14, 2003 By: \s\ UDO WEBER
---------------------------------------
Udo Weber, Director
31
Certifications
I, Michael J. Schoville, certify that:
1. I have reviewed this annual report on Form 10-K of Ag-Bag International
Limited;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operation and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 14, 2003
\s\ MICHAEL J. SCHOVILLE
- ----------------------------
Chief Executive Officer
32
I, Michael R. Wallis, certify that:
1. I have reviewed this annual report on Form 10-K of Ag-Bag International
Limited;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operation and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 14, 2003
\s\ MICHAEL R. WALLIS
- ----------------------------------
Chief Financial Officer, Treasurer
and Vice President of Finance
33
TABLE OF CONTENTS
Page
AG-BAG INTERNATIONAL LIMITED
- ----------------------------
Independent Auditor's Report F-1
Financial Information
Balance Sheets F-2
Statements of Operations and Comprehensive Income (Loss) 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-30
Valuation and Qualifying Accounts F-31
BAW
- ---
Independent Auditor's Report F-32
Balance Sheets F-33
Statements of Income and Comprehensive Income F-35
Statement of Shareholders' Equity F-36
Statements of Cash Flows F-38
Notes to Financial Statements F-39
Reconciliation of German GAAP to U.S. GAAP F-56
Exhibit I - Composition and development of tangible assets F-57
Exhibit 2 - Euro exchange rate table F-58
34
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(4)*
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 Non-employee Director Stock Option Plan(3)*
11 Statement re computation of earnings per share
12 Statement re computation of ratios
21 Subsidiaries of Registrant
99.1 Certification of Michael J. Schoville, Chief Executive Officer of
Ag-Bag International Limited, as required pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.2 Certification of Michael R. Wallis, Chief Financial Officer,
Treasurer and Vice President of Finance of Ag-Bag International
Limited, as required pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
* 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
(4)Filed as exhibit to the Form 10-K for the fiscal year ended December 31,
2000
35
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Year Ended December 31,
------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Basic earnings per share:
Net income (loss) $ 804,399 $ 648,571 $ 521,817 $ (164,150) $ (663,988)
Preferred stock dividends (59,160) (59,160) (59,160) (59,160) (59,160)
----------- ----------- ----------- ----------- -----------
745,239 589,411 462,654 (223,310) (723,148)
Basic weighted average number
of shares outstanding (1) 12,061,991 (1) 12,061,991 (1) 12,061,991 (1) 12,001,868 (1) 11,956,991
=========== =========== =========== =========== ===========
Basic earnings per share
Net income (loss) $ .06 $ .05 $ .04 $ (.02) $ (.06)
----------- ----------- ----------- ----------- -----------
Diluted earnings per share:
Net income (loss) $ 804,399 $ 648,571 $ 521,817 $ (164,150) $ (663,988)
Preferred stock dividends (59,160) (59,160) (59,160) (59,160) (59,160)
----------- ----------- ----------- ----------- -----------
745,239 589,411 462,654 (223,310) (723,148)
=========== =========== =========== =========== ===========
Diluted weighted average number
of shares outstanding (1) 12,061,991 (1) 12,061,991 (1) 12,061,991 (1) 12,001,868 (1) 11,956,991
=========== =========== =========== =========== ===========
Diluted earnings per share
Net income (loss) $ .06 $ .05 $ .04 $ (.02) $ (.06)
=========== =========== =========== =========== ===========
(1) See Note 1 to the financial statements
36
EXHIBIT 12
STATEMENT RE COMPUTATION OF RATIOS
Year Ended December 31,
------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Pretax earnings (losses) $ 1,226,399 $ 975,571 $ 513,814 $ (397,217) $ (1,199,778)
Interest expense 437,803 333,170 456,158 355,686 314,068
-------------- -------------- -------------- -------------- --------------
Subtotal (A) 1,664,202 1,308,741 969,972 (41,531) (885,710)
-------------- -------------- -------------- -------------- --------------
Interest expense 437,803 333,170 456,158 355,686 314,068
Preferred stock dividend
requirements 89,636 89,636 59,160 144,293 107,564
-------------- -------------- -------------- -------------- --------------
Subtotal (B) $ 527,439 $ 422,806 $ 515,318 $ 499,979 $ 421,632
-------------- -------------- -------------- -------------- --------------
(A) divided by (B) 3.16 3.10 1.88 (.83)(1) (2.10)(1)
-------------- -------------- -------------- -------------- --------------
(1) Due to net loss for the year
37
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
None.
38
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Ag-Bag International Limited (the
"Company") on Form 10-K for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
March 14, 2003 \s\ MICHAEL J. SCHOVILLE Chief Executive Officer
------------------------
(Michael J. Schoville)
39
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Ag-Bag International Limited (the
"Company") on Form 10-K for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(3) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(4) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
March 14, 2003 \s\ MICHAEL R. WALLIS Chief Financial Officer, Vice
------------------------ President of Finance, and Treasurer
(Michael R. Wallis)
40
AG-BAG INTERNATIONAL LIMITED
-------------
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
(WITH SUPPLEMENTAL INFORMATION)
-------------
YEARS ENDED DECEMBER 31, 2002 AND 2001
CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITOR'S REPORTS F-1
FINANCIAL STATEMENTS
Balance sheets F-2 - F-3
Statements of operations and comprehensive income (loss) F-4
Statements of shareholders' equity F-5
Statements of cash flows F-6
Notes to financial statements F-7 - F-29
SUPPLEMENTAL INFORMATION
Independent auditor's report on supplemental information F-30
Valuation and qualifying accounts F-31
- --------------------------------------------------------------------------------
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, 2002 and 2001, and the related statements of operations and
comprehensive income (loss), shareholders' equity, and cash flows for each of
the years in the three-year period ended December 31, 2002. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and 2001, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
\s\ Moss Adams LLP
Portland, Oregon
February 18, 2003
F-1
AG-BAG INTERNATIONAL LIMITED
BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS
DECEMBER 31,
-----------------------------------------------
2002 2001
-------------------- ---------------------
CURRENT ASSETS
Cash $ 67,526 $ 164,526
Accounts receivable, less allowance for doubtful
accounts of $203,595 and $203,350
at 2002 and 2001, respectively 1,158,927 2,433,842
Inventories 6,051,720 6,695,894
Prepaid expenses and other current assets 198,877 225,544
Deferred income taxes 388,000 275,000
-------------------- ---------------------
Total current assets 7,865,050 9,794,806
-------------------- ---------------------
PROPERTY, PLANT, AND EQUIPMENT, NET 3,958,473 4,227,852
-------------------- ---------------------
OTHER ASSETS
Deferred income taxes 625,000 200,000
Intangible assets, net 11,511 18,893
BAW Joint-venture 397,938 272,938
Other assets 490,628 481,704
-------------------- ---------------------
Total other assets 1,525,077 973,535
-------------------- ---------------------
TOTAL ASSETS $ 13,348,600 $ 14,996,193
==================== =====================
F-2
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
BALANCE SHEETS
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31,
-----------------------------------------------
2002 2001
-------------------- ---------------------
CURRENT LIABILITIES
Bank line of credit $ 384,725 $ 1,287,855
Current portion of long-term debt and capital
lease obligations 351,974 402,477
Accounts payable 903,309 672,563
Accrued payroll and payroll taxes 307,935 420,477
Dealer deposits 78,038 82,234
Warranty reserve 177,384 124,482
Accrued expenses and other current liabilities 572,251 349,109
Income taxes payable 2,210 -
-------------------- ---------------------
Total current liabilities 2,777,826 3,339,197
-------------------- ---------------------
NONCURRENT LIABILITIES
Long-term debt and capital lease obligations,
less current portion 1,459,138 1,822,212
-------------------- ---------------------
Total liabilities 4,236,964 5,161,409
-------------------- ---------------------
COMMITMENTS AND CONTINGENCIES (NOTE 13)
SHAREHOLDERS' EQUITY
Preferred stock, $4 liquidiation value per share, 8.5%
cumulative dividend, nonvoting, 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 120,619 120,619
Additional paid-in capital 9,210,211 9,210,211
Treasury stock (31,500) (31,500)
Accumulated deficit (883,694) (160,546)
-------------------- ---------------------
Total shareholders' equity 9,111,636 9,834,784
-------------------- ---------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 13,348,600 $ 14,996,193
==================== =====================
See accompanying notes. F-3
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
2002 2001 2000
----------------- ----------------- -----------------
NET SALES $ 27,189,140 $ 28,708,233 $ 31,451,150
COST OF SALES 22,121,346 22,947,604 24,799,690
----------------- ----------------- -----------------
Gross profit from operations 5,067,794 5,760,629 6,651,460
OTHER OPERATING EXPENSES
Selling expenses 3,496,672 3,441,197 3,329,880
Administrative expenses 2,739,811 2,626,268 2,548,446
Research and development expenses 219,980 213,757 136,186
----------------- ----------------- -----------------
Income (loss) from operations (1,388,669) (520,593) 636,948
OTHER INCOME (EXPENSE)
Interest income 45,828 30,714 42,996
Interest expense (314,068) (355,686) (456,158)
Joint venture equity and royalties 315,196 299,065 179,703
Other 141,935 149,283 110,325
----------------- ----------------- -----------------
Income (loss) before income taxes (1,199,778) (397,217) 513,814
Provision (benefit) for income taxes (535,790) (233,067) (8,000)
----------------- ----------------- -----------------
NET INCOME (LOSS) AND COMPREHENSIVE
INCOME (LOSS) $ (663,988) $ (164,150) $ 521,814
================= ================= =================
Basic and diluted net income (loss) per common
share $ (0.06) $ (0.02) $ 0.04
================= ================= =================
Basic and diluted weighted average common
shares outstanding 11,956,991 12,001,868 12,061,991
================= ================= =================
F-4 See accompanying notes
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Retained
Preferred Stock Common Stock Treasury Stock Additional Earnings Total
------------------- -------------------- --------------------- Paid-In (Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount Capital Deficit) Equity
--------- --------- ---------- --------- --------- ----------- ------------- -------------- --------------
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
Purchase of common stock - - - - 105,000 (31,500) - - (31,500)
Preferred stock dividends - - - - - - - (59,160) (59,160)
Net loss - - - - - - - (164,150) (164,150)
--------- --------- ---------- --------- --------- ----------- ------------- -------------- --------------
BALANCE,
December 31, 2001 174,000 696,000 12,061,991 120,619 105,000 (31,500) 9,210,211 (160,546) 9,834,784
Preferred stock dividends - - - - - - - (59,160) (59,160)
Net loss - - - - - - - (663,988) (663,988)
--------- --------- ---------- --------- --------- ----------- ------------- -------------- --------------
BALANCE,
December 31, 2002 174,000 $ 696,000 12,061,991 $ 120,619 105,000 $ (31,500) $ 9,210,211 $ (883,694) $9,111,636
========= ========= ========== ========= ========= =========== ============= ============== ==============
See accompanying notes. F-5
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------------
2002 2001 2000
----------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (663,988) $ (164,150) $ 521,814
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 816,262 762,390 612,845
Change in inventory reserve 79,000 77,500 256,000
(Gain) loss on disposition of equipment (500) 8,648 (100)
Deferred income taxes (538,000) (207,000) (154,000)
Equity in joint venture earnings (125,000) (131,200) (65,000)
Change in assets and liabilities:
Accounts receivable 1,274,915 507,537 (1,065,602)
Inventories 233,448 397,528 (452,248)
Prepaid expenses and other current assets 26,667 (33,806) 113,551
Other assets (8,924) (82,030) (82,443)
Accounts payable 230,746 66,735 (528,166)
Accrued expenses and other current liabilities 159,306 (47,986) (271,457)
Income taxes payable 2,210 (175,130) 162,478
----------------- ----------------- -----------------
Net cash from operating activities 1,486,142 979,036 (952,328)
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (207,775) (427,984) (330,208)
Construction in progress - - (482,199)
Acquisition of intangible assets - (4,267) -
Proceeds from disposition of equipment 500 3,750 3,000
----------------- ----------------- -----------------
Net cash from investing activities (207,275) (428,501) (809,407)
----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit 12,053,903 13,068,243 11,749,880
Principal payments on line of credit (12,957,033) (13,005,026) (10,525,242)
Proceeds on issuance of debt - - 500,000
Principal payments on debt (413,577) (382,460) (385,236)
Payment of shareholders' notes - - (6,523)
Purchase of common stock - (31,500) -
Dividends paid (59,160) (59,160) (59,160)
----------------- ----------------- -----------------
Net cash from financing activities (1,375,867) (409,903) 1,273,719
----------------- ----------------- -----------------
NET INCREASE (DECREASE) IN CASH (97,000) 140,632 (488,016)
CASH, beginning of year 164,526 23,894 511,910
----------------- ----------------- -----------------
CASH, end of year $ 67,526 $ 164,526 $ 23,894
================= ================= =================
F-6 See accompanying notes
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO 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 is
traded on the OTC Bulletin Board, under the symbol "AGBG".
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 $476,214, and $139,432 in 2001, and 2000, respectively,
from rental equipment to inventory held for sale. In 2002, 2001 and 2000 the
Company transferred $331,726, $697,849 and $111,863, respectively, 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.
Receivables are presented at the aggregate unpaid principle balance amounts, net
of an allowance for doubtful accounts. The allowance for doubtful accounts is
established through a provision for bad debts expense. Receivables are charged
against the allowance for bad debt when management believes the collectibility
of an account is unlikely. The allowance is an amount that management believes
will be adequate to absorb future losses on existing receivables that may become
uncollectible based upon overall receivable quality, review of specific problem
accounts, current economic conditions, and prior charge-off experience. The
uncollectible portion of a customer's unpaid principle balance is charged-off
after the Company initiates the collection process, investigates the
circumstances of the past due balance, and determines an amount considered
uncollectible. Generally, the Company considers receivables from import
shipments past due after 15 days; export and air freight shipments past due
after 30 days; and shipments utilizing a foreign agent past due after 60 days.
The Company accrues interest on past due accounts and continues to accrue
interest until the Company considers the receivable uncollectable.
F-7
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - (continued)
RECEIVABLE SALES - The Company assigns some of its trade accounts receivable to
a third party financing source with a 12 month rolling average discount rate of
1.50% at December 31, 2002. The accounts assigned can be assigned with or
without recourse depending on specific accounts assigned. At December 31, 2002,
the balance of assigned accounts with recourse was $519,727.
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.
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.
F-8
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - (continued)
REVENUE RECOGNITION - Revenue is recognized when all of the following have taken
place. The customer has placed an order for the product, the product is
delivered or shipped to the customer, the sales price has been determined and
collection is reasonably assured. The Company includes revenues earned on
shipping costs billed to customers in Net Sales. Costs to ship products are
included in Cost of Sales.
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. The Company reviews its historical warranty expense and current
sales trends in products covered under warranty, and adjusts its warranty
reserves accordingly.
The activity in that account for the years ended was as follows:
2002 2001
----------------- ------------------
Balance, beginning of the year $ 124,482 $ 190,162
Charged to expense 328,041 159,597
Warranty costs incurred during the year (275,139) (225,277)
----------------- ------------------
Balance, end of year $ 177,384 $ 124,482
================= ==================
STOCK OPTION PLAN - The Company applies Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock option plan. Accordingly,
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. Had compensation cost for the Company's stock option plan
been determined based upon the fair value at grant date for awards under the
plan consistent with the methodology prescribed under Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
additional compensation expense would have been recognized.
F-9
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - (continued)
STOCK OPTION PLAN (continued) - The Company has computed, for pro forma
disclosure purposes, the value of all options granted during 2002, 2001, and
2000 using the Black-Scholes pricing model as prescribed under SFAS 123. The
following assumptions were made for grants in 2002, 2001, and 2000: risk-free
interest rate of 4.41%, 4.41% and 6.10% respectively, expected life of seven
years, seven years, and three years respectively, and dividend rates of zero
percent. For 2002, 2001, and 2000 the expected volatility over the expected
lives of the grants was assumed to be 77.04%, 77.92%, and 75.64% respectively.
The weighted average fair value of the options granted was estimated to be $.20
in 2002, $.34 in 2001, and $.29 in 2000.
If the Company had accounted for the value of the options granted during 2002,
2001, and 2000, in accordance with SFAS No. 123, the Company's net income would
have been reduced to the pro forma amounts indicated below:
2002 2001 2000
--------------- --------------- ---------------
Net income (loss):
As reported $ (663,988) $ (164,150) $ 521,814
Pro forma $ (673,278) $ (178,023) $ 510,023
Net income (loss) per share:
As reported (.06) (.02) .04
Pro forma (.06) (.02) .04
The resulting pro forma compensation costs may not be representative of that
expected in future years.
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.
F-10
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - (continued)
INCOME TAXES (continued) - The Company has recorded a deferred tax asset of
$1,013,000 and $475,000 as of December 31, 2002 and 2001, respectively. Although
the realization is not assured, management believes it is more likely than not
that all of the deferred tax asset will be realized. The amount of the deferred
tax asset considered to be realizable, however, could be reduced in the near
future if facts surrounding the estimates of the deferred tax asset change.
ADVERTISING COSTS - The Company expenses advertising costs as they are incurred.
Advertising expenses for the years ended December 31, 2002, 2001, and 2000 were
$504,060, $573,945, and $532,573, respectively.
NET INCOME PER COMMON SHARE - 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
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas and major customers. The Company has analyzed the
reporting requirements of the standard and has determined that its operations
are within a single operating segment.
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of
financial instruments including cash and cash equivalents, accounts receivable,
and accounts payable approximated fair value as of December 31, 2002 and 2001,
because of the relatively short maturity of these instruments. The carrying
value of notes payable approximated fair value as of December 31, 2002 and 2001,
based upon interest rates and terms available for the same or similar loans.
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.
F-11
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - (continued)
RECLASSIFICATIONS - Certain reclassifications have been made to the 2001
financial statements to conform with the 2002 presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS - In December 2002, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standard ("SFAS") No. 148, "Accounting for Stock-Based Compensation--Transition
and Disclosure--an amendment of FASB Statement No. 123." This Statement amends
FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company's management intends to continue
using the intrinsic value method for stock-based employee compensation
arrangements and therefore does not expect that the application provisions of
this statement will have a material impact on the Company's financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The statement
is effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. The Company's management does not
expect that the application of the provisions of this statement will have a
material impact on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, FASB Statement No.
64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds FASB Statement No. 44.
F-12
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES - (continued)
RECENTLY ISSUED ACCOUNTING STANDARDS (continued) -"Accounting for Intangible
Assets of Motor Carriers." This Statement amends FASB Statement No. 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
Company's management does not expect that the application of the provisions of
this statement will have a material impact on the Company's financial
statements.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses the accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 will be effective for the
Company in the first quarter of 2003. The Company's management does not expect
that the application of the provisions of this statement will have a material
impact on the Company's financial statements.
In January 2003, FASB issued Interpretation No. 46 (FIN 46), "Consolidation of
Variable Interest Entities." This interpretation clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," and
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse risks
among parties involved. The Company's management does not expect that the
application of the provisions of this interpretation will have a material impact
on the Company's financial statements.
In November 2002, FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing a
guarantee. The Company has complied with the disclosure requirements of FIN 45.
The initial recognition and initial measurement provisions shall be applied on a
prospective basis to guarantees issued or modified after December 31, 2002. The
Company's management does not expect that the application of the provisions of
this interpretation will have a material impact on the Company's financial
statements.
F-13
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - INVENTORIES
Inventories consist of the following:
2002 2001
----------------- ------------------
Parts and subassembly $ 2,314,476 $ 2,565,876
Work-in-process and raw materials 1,221,388 1,275,202
Machines 1,690,710 1,655,157
Bags and other finished goods 825,146 1,199,659
----------------- ------------------
$ 6,051,720 $ 6,695,894
================= ==================
NOTE 3 - INTANGIBLE ASSETS, NET
Intangible assets, net, consist of the following:
2002 2001
----------------- ------------------
License and patent costs $ 617,113 $ 617,113
Less accumulated amortization 605,602 598,220
----------------- ------------------
$ 11,511 $ 18,893
================= ==================
Amortization expense for the years ended December 31, 2002, 2001, and 2000, was
$7,382, $6,880, and $14,056, respectively.
F-14
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, consist of the following:
2002 2001
----------------- ------------------
Land $ 160,826 $ 160,826
Buildings 2,853,400 2,853,400
Vehicles 369,931 353,928
Office furniture, fixtures, and equipment 2,317,425 2,263,420
Plant equipment 3,580,758 3,468,013
Rental equipment 841,948 507,656
Leasehold improvements 80,399 70,014
----------------- ------------------
10,204,687 9,677,257
Less accumulated depreciation and amortization (6,246,214) (5,449,405)
----------------- ------------------
$ 3,958,473 $ 4,227,852
================= ==================
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, 2002 and 2001, the gross amount of equipment
under lease was $84,622. Accumulated depreciation related to those capital
leases was $84,622 and $73,984 at December 31, 2002 and 2001, respectively.
Depreciation expense for the years ended December 31, 2002, 2001, and 2000 was
$808,880, $755,510, and $598,789, respectively.
F-15
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - LINE OF CREDIT
The Company has an operating line of credit with a bank for up to $5,000,000 at
December 31, 2002 and 2001. 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 1/4% at December 31, 2002 and December
31, 2001 (4.5% at December 31, 2002 and 5.0% at December 31, 2001). As of
December 31, 2002 and 2001, $384,725 and $1,287,855 were outstanding under the
operating line of credit. The line of credit is subject to certain net worth and
EBITDA covenants, and an annual capital expenditure limit. Subsequent to
year-end, the Company reduced its line of credit to $2,500,000 and the interest
rate was adjusted to the bank's prime rate plus 1-1/4%. The line is subject to
annual renewal at June 1, 2003.
NOTE 6 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt is comprised of the following:
2002 2001
-------------- --------------
Note payable in monthly installments of
$2,436, including interest at 8.32%, through
July 2005, secured by certain equipment,
office furniture and fixtures, and personal
guarantees of certain shareholders, sub-
ordinate to building loan and certain equip-
ment loans $ 68,765 $ 90,291
Note payable, monthly payments of $6,724,
including interest at 6.84% through August 2014,
secured by real property 644,939 670,976
Note payable in monthly installments of
$4,969, including interest at 6.62% through
November 2017, secured by real
property 525,041 545,136
F-16
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS - (continued)
2002 2001
-------------- --------------
Note payable in monthly principal install-
ments of $5,833, plus interest at prime
plus .75% (5.0% at December 31,
2002 and 5.50% at December 31,
2001) through April 2003, secured by
fixed asset blanket $ 23,333 $ 93,333
Note payable in monthly installments of
$8,333, plus interest at 8.38% through
January 2006, secured by certain equip-
ment 308,333 408,333
Note payable with the City of Blair,
Nebraska, with monthly installments of
$6,607, including interest at 3% through
September 2004, secured by Blair plant
and equipment 134,996 209,018
Note payable in monthly installments of
$3,105, including interest at 8.75%
through December 2004, secured by
certain equipment 68,052 97,827
-------------- --------------
1,773,459 2,114,914
Less current portion 314,321 335,385
-------------- --------------
$ 1,459,138 $ 1,779,529
============== ==============
F-17
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS - (continued)
Future maturities of long-term debt and capital lease obligations are summarized
as follows:
Capital Lease Obligations
Long-Term ------------------------------------------------
Debt Excluding Minimum Amount
Capital Lease Lease Representing
Obligations Payments Interest Principal
-------------------- --------------- ---------------- ---------------
Year ending December 31, 2003 $ 314,321 $ 40,729 $ 3,076 $ 37,653
2004 282,706 - - -
2005 186,491 - - -
2006 80,222 - - -
2007 76,959 - - -
Thereafter 832,760 - - -
-------------------- --------------- ---------------- ---------------
$ 1,773,459 $ 40,729 $ 3,076 $ 37,653
==================== =============== ================ ===============
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, at which time the note was paid off. Interest
expense related to shareholders and related parties amounted to $135 in 2000.
F-18
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
The provision (benefit) for income taxes consists of the following:
2002 2001 2000
----------------- ----------------- -----------------
Current:
Federal $ - $ - $ 226,000
Suspended general business
credits utilized - (27,150) -
General business credits utilized - - (82,000)
State 2,210 1,083 16,000
Net operating loss utilized - - (14,000)
----------------- ----------------- -----------------
2,210 (26,067) 146,000
----------------- ----------------- -----------------
Deferred:
Federal (478,000) (195,000) (164,000)
State (60,000) (12,000) 10,000
----------------- ----------------- -----------------
(538,000) (207,000) (154,000)
----------------- ----------------- -----------------
$(535,790) $(233,067) $ (8,000)
================= ================= =================
F-19
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES - (continued)
Deferred tax assets and liabilities consist of the following:
2002 2001
----------------- ------------------
State net operating loss carryforward $ 138,000 $ 80,000
Federal net operating loss carryforward 660,000 169,000
General business credit carryforward 252,000 243,000
Alternative minimum tax credit carryforward 21,000 21,000
Capital loss carryforward - 135,632
Other expenses not currently deductible 92,000 73,000
----------------- ------------------
Gross deferred tax asset 1,163,000 721,632
Valuation allowance - (135,632)
----------------- ------------------
Net deferred tax assets 1,163,000 586,000
Gross deferred tax liability, primarily
due to differences in depreciation (150,000) (111,000)
----------------- ------------------
Net deferred tax assets $ 1,013,000 $ 475,000
================= ==================
At December 31, 2002, the Company had a federal net operating loss of
approximately $1,942,000 that is available to offset future federal taxable
income through 2022.
At December 31, 2002, the Company has research tax credit carryforwards for
federal income tax purposes of approximately $252,000 that are available to
offset future federal income. These credits can be carried forward through 2022.
The Company had a capital loss carryforward of $886,431, which expired unused in
2002. The $135,632 deferred tax asset and the $135,632 valuation allowance have
been eliminated upon the expiration of this capital loss carryforward.
F-20
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES - (continued)
The provision for income taxes differs from the amount of income tax determined
by applying the applicable U.S. statutory federal income tax rate to pretax
income as a result of the following differences:
2002 2001 2000
----------------- ----------------- -----------------
Statutory federal income tax rate (34%) (34%) 34%
General business credits (1) (20) (35)
Other nondeductible and nontaxable
items - 9 5
Nontaxable earnings of foreign
joint venture (4) (11) (4)
Other (6) (3) (1)
----------------- ----------------- -----------------
Effective tax rates (45%) (59%) (1%)
================= ================= =================
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 tax credit benefits of approximately
$270,000.
NOTE 9 - SUPPLEMENTAL DISCLOSURES REGARDING CASH FLOWS
Supplemental disclosure of cash flow information:
2002 2001 2000
----------------- ----------------- -----------------
Cash paid during year for:
Interest $ 314,068 $ 355,686 $ 456,158
Income taxes $ 4,280 $ 90,800 $ 10,516
F-21
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - SHAREHOLDERS' EQUITY
TREASURY STOCK - During 2001, the Company repurchased 105,000 shares of its
common stock from a retiring director for $31,500.
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 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 2002, 2001, and 2000. At
December 31, 2002, there were 125,335 shares available for grant under the
Employee Stock Plan.
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 2002, the Company
granted 30,000 options and had 20,000 options expire. At December 31, 2002,
there were 135,000 shares available for grant under the Incentive Stock Option
Plan.
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-year period, receive an annual grant of
10,000 options which become exercisable six months after the grant date. During
2002, the Company granted 100,000 in initial options and 20,000 options under
the annual grant. Additionally, the Company had 60,000 options expire during
2002. At December 31, 2002, there were 550,000 shares available for grant under
the Non-Employee Director Stock Option Plan.
F-22
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - SHAREHOLDERS' EQUITY - (continued)
Transactions and other information relating to the Company's stock option plans
for the three years ended December 31, 2002, 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, 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 (50,000) $ 1.06 (56,788)
------------- ------------- --------------
Options outstanding at
December 31, 2000 70,000 $ 1.00 350,000 $ 0.91 420,000
Options granted 20,000 $ 0.33 40,000 $ 0.35 60,000
Options expired (50,000) $ 1.06 - $ - (50,000)
------------- ------------- --------------
Options outstanding at
December 31, 2001 40,000 $ 0.60 390,000 $ 0.84 430,000
Options granted 30,000 $ 0.25 120,000 $ 0.29 150,000
Options expired (20,000) $ 0.86 (60,000) $ 0.95 (80,000)
------------- ------------- --------------
Options outstanding at
December 31, 2002 50,000 $ 0.28 450,000 $ 0.68 500,000
============= ============= ==============
Options exercisable at
December 31, 2000 70,000 $ 1.00 350,000 $ 0.91 420,000
============= ============= ==============
Options exercisable at
December 31, 2001 40,000 $ 0.60 390,000 $ 0.84 430,000
============= ============= ==============
Options exercisable at
December 31, 2002 20,000 $ 0.33 390,000 $ 0.64 410,000
============= ============= ==============
F-23
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - SHAREHOLDERS' EQUITY - (continued)
At December 31, 2002, the Company had outstanding options for the purchase of
500,000 shares of common stock as follows:
Number of Options Number of Options Average
Outstanding Exercisable Price Range Remaining Life
------------------------- -------------------------- ------------------- ----------------------
200,000 options 200,000 options $1.00 - $1.06 4 years
50,000 options 50,000 options $0.56 - $0.69 1 year
60,000 options 60,000 options $0.39 - $0.49 9 years
190,000 options 100,000 options $0.25 - $0.35 7 years
NOTE 11 - FOREIGN SALES ACTIVITY
Export sales from the Company's operations are as follows:
2002 2001 2000
----------------- ----------------- -----------------
Latin America/Mexico $ 112,956 $ 88,864 $ 194,947
Canada 1,147,872 1,030,174 1,280,096
Germany 275,415 444,767 441,188
Other 202,008 248,183 109,272
----------------- ----------------- -----------------
$ 1,738,251 $ 1,811,988 $ 2,025,503
================= ================= =================
F-24
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - BAW JOINT-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 BAW which is accounted for
under the equity method. BAW folds and distributes silage bags throughout
Europe.
2002 2001
----------------- ------------------
Investment, beginning of year $ 272,938 $ 141,738
Share of income for the year 125,000 131,200
----------------- ------------------
Investment, end of year $ 397,938 $ 272,938
================= ==================
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 earned by
the Company based upon the poundage folded by BAW. In 2002, 2001, and 2000,
income from this agreement was $190,000, $168,000 and $115,000, respectively.
On December 18, 2000, Ag-Bag International Limited entered into an agreement
with Dresdner Bank to guarantee up to 511,292 Euro ($535,987 US) as security for
an additional cash credit facility of BAW. There was -0- Euro outstanding under
this additional cash credit facility at December 31, 2002 and 2001, guaranteed
by the Company.
F-26
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - BAW JOINT-VENTURE - (continued)
Condensed financial statements for the Company's BAW Joint Venture in Germany
are as follows:
2002 2001 2000
----------------- ----------------- -----------------
(Dollars in 000's)
Current assets $ 1,265 $ 967 $ 604
Property, plant, and equipment, net 842 707 262
Other assets 8 18 10
----------------- ----------------- -----------------
Total assets $ 2,115 $ 1,692 $ 876
================= ================= =================
Current liabilities $ 377 $ 511 $ 380
Long-term liabilities 797 552 191
----------------- ----------------- -----------------
Total liabilities 1,174 1,063 571
----------------- ----------------- -----------------
Shareholders' equity 869 577 291
Minority interest 72 52 14
----------------- ----------------- -----------------
Total shareholders' equity 941 629 305
----------------- ----------------- -----------------
Total liabilities and shareholders'
equity $ 2,115 $ 1,692 $ 876
================= ================= =================
Net sales $ 3,758 $ 3,357 $ 2,548
Cost of goods sold (2,591) (2,350) (1,816)
----------------- ----------------- -----------------
Gross profit 1,167 1,007 732
Selling and administrative
expenses (687) (511) (478)
Other income (expense) (29) (31) (14)
Income taxes (163) (123) (125)
----------------- ----------------- -----------------
Net income (*) $ 288 $ 342 $ 115
================= ================= =================
*Attributed to other shareholders $ 15 $ 36 $ 9
F-26
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - BAW JOINT-VENTURE - (continued)
The condensed balance sheets have been translated from the Euro to the U.S.
Dollar at the exchange rate in effect at December 31, 2002 and from the German
Mark to the U.S. dollar at the exchange rates in effect at December 31, 2001 and
2000. The exchange rates used at December 31, 2002, 2001, and 2000, for the
balance sheets were $1.05, $.45, and $.48 respectively. The condensed income
statements have been translated from the Euro to the U.S. Dollar at the average
exchange rate in effect at December 31, 2002 and from the German Mark to the
U.S. dollar at the average exchange rates in effect at December 31, 2001 and
2000. The average exchange rates used at December 31, 2002, 2001, and 2000, for
the income statements were $.95 $.47, and $.50, respectively.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
PURCHASE 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.
F-27
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES - (continued)
LEASE COMMITMENTS - The Company leases land under a noncancellable operating
lease. This lease requires monthly payments with terms that expire through 2014.
Total rent expense under all operating leases for the years ended December 31,
2002, 2001 and 2000 totaled $66,361, $59,418 and $59,773, respectively.
Future minimum lease payments under noncancellable operating leases are as
follows:
Years ending December 31, 2003 $ 18,264
2004 18,264
2005 21,917
2006 21,917
2007 21,917
Thereafter 175,334
------------------
$ 277,613
==================
CONTINGENCIES - The Company is involved in litigation matters that 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, 2002.
NOTE 14 - 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. The Company has
outstanding accounts receivable balances with three customers totaling
approximately $642,000 at December 31, 2002. These three balances represent 47%
of the accounts receivable balance at December 31, 2002.
F-28
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - 401(K) PROFIT SHARING PLAN
The Company has a qualified 401(k) profit sharing plan covering all full-time
personnel with at least one year of continuous service. Employer contributions
to the plan are at the discretion of the Company's management. No contributions
were made by the Company to the 401(k) profit sharing plan in 2002 or 2001. The
Company's eligible employees made contributions to the plan of $230,652 and
$239,131 for the years ended December 31, 2002 and 2001, respectively.
NOTE 16 - QUARTERLY FINANCIAL DATA - (UNAUDITED)
2002 2001
--------------------------------------------- ---------------------------------------------
Q-1 Q-2 Q-3 Q-4 Q-1 Q-2 Q-3 Q-4
---------- ----------- ---------- ----------- ---------- ----------- ---------- ----------
(Dollars in thousands) (Dollars in thousands)
Net sales $ 4,807 $ 9,929 $ 8,817 $ 3,636 $ 4,149 $ 10,159 $ 10,156 $ 4,244
Gross profit from operations 1,046 2,574 1,623 (176) 772 2,379 2,316 294
Income (loss) before extraordinary
items and cumulative effect
of a change in accounting (251) 542 124 (1,079) (367) 461 385 (643)
---------- ----------- ---------- ----------- ---------- ----------- ---------- ----------
Net income (loss) $ (251) $ 542 $ 124 $ (1,079) $ (367) $ 461 $ 385 $ (643)
========== =========== ========== =========== ========== =========== ========== ==========
Basic and diluated net income
(loss) per common share $ (0.02) $ 0.04 $ 0.01 $ (0.09) $ (0.03) $ 0.04 $ 0.03 $ (0.06)
========== =========== ========== =========== ========== =========== ========== ==========
F-29
- --------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL INFORMATION
To the Board of Directors and Shareholders
Ag-Bag International Limited
Under date of February 18, 2003, we reported on the balance sheets of Ag-Bag
International Limited as of December 31, 2002 and 2001, and the related
statements of income, shareholders' equity, and cash flows for the years ended
December 31, 2002, 2001, and 2000, as contained in the annual report on Form
10-K for the year 2002. 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 18, 2003
F-30
AG-BAG INTERNATIONAL LIMITED
VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------------------------- ------------ ------------ ------------- ------------
Balance at Charged to Write-offs, Balance at
Beginning Costs and Net of End of
Description of Year Expenses Recoveries Year
- --------------------------------------------- ------------ ------------ ------------- ------------
Year ended December 31:
2002:
Allowance for doubtful accounts $203,350 $ 73,000 $ (72,755) $203,595
Warranty reserve $124,482 $328,041 $ (275,139) $177,384
Inventory valuation reserve $652,322 $179,000 $ (100,000) $731,322
2001:
Allowance for doubtful accounts $247,690 $ 25,000 $ (69,340) $203,350
Warranty reserve $190,162 $159,597 $ (225,277) $124,482
Inventory valuation reserve $718,951 $ 77,500 $ (144,129) $652,322
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
F-31
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Ag-Bag International Limited
We have audited the accompanying balance sheets of BAW group as of December 31,
2002, 2001 and 2000 and the related statements of operating results and cash
flows, for the years then ended, which, as described in Note 1 to the financial
statements have been prepared on the basis of accounting principles generally
accepted in Germany. 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 auditing standards generally accepted
in the United States of America and in Germany. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BAW group as of December 31,
2002, 2001 and 2000, and the results of its operations and its cash flows for
the years ended December 31, 2002, 2001 and 2000, in conformity with accounting
principles generally accepted in Germany.
02625 Bautzen, January 24, 2003
Treuhand-Gesellschaft
Dr. Steinebach & Partner GmbH
Wirtschaftsprufungsgesellschaft
\s\ Martin Steinebach
---------------------
Dipl.Ing. Martin Steinebach
Auditor
F-32
BAW GROUP
BALANCE SHEETS
December 31,
----------------------------
2002 2001 2000
EUR TEUR TEUR
---------- -------- --------
A. FIXED ASSETS
II. TANGIBLE ASSETS
1. Real estate and buildings 570,341.29 494.3 0.0
2. Technical equipment
and machinery 209,221.18 288.4 260.0
3. Other equipment, tools,
furniture and fixtures 21,787.76 21.3 16.4
4. Plants under construction -.- 0.0 1.4
---------- ----- -----
801,350.23 804.0 277.8
========== ===== =====
B. LIQUID ASSETS
I. STOCK
1. Raw materials and supplies 11,143.50 4.1 4.2
3. Finished products + goods 205,931.80 245.1 108.9
4. Advance payments made 955.84 0.1 0.0
---------- ----- -----
218,031.14 249.3 113.1
---------- ----- -----
II. ACCOUNTS RECEIVABLE AND OTHER ASSETS
1. Trade accounts receivable 347,329.33 446.8 243.3
3. Accounts receivable from
shareholders -.- 51.1 129.2
4. Other assets 18,410.01 14.1 8.7
---------- ----- -----
365,739.34 512.0 381.2
---------- ----- -----
IV. CHECKS, CASH, FEDERAL RESERVE
BANK AND POSTBANK BALANCE,
CASH IN BANKS 621,327.82 336.9 147.1
---------- ----- -----
Liquid assets total 1,205,098.30 1,098.2 641.4
============ ======= =====
C. DEFERRED ITEM 3,345.91 9.0 11.1
======== === ====
D. ACTIVE DEFERRED TAXES 4,143.97 11.2 0.0
======== ==== ===
TOTAL ASSETS 2,013,938.41 1,922.4 930.3
============ ======= =====
F-33
BAW GROUP
BALANCE SHEETS
December 31,
----------------------------
2002 2001 2000
EUR TEUR TEUR
A. EQUITY ---------- -------- --------
I. SUBSCRIBED CAPITAL 75,000.-- 75.0 75.0
III. OTHER SURPLUS RESERVES 223,819.86 80.5 0.0
IV. PROFIT CARRYFORWARD 254,685.66 116.3 69.1
V. YEAR'S PROFIT 287,233.54 284.3 127.7
---------- ----- -----
Subtotal 840,739.06 556.1 271.8
VI. CONVERSION ./. 12,835.89 24.7 10.2
VII. SHARES OF OTHER SHAREHOLDERS 68,434.39 53.0 17.6
---------- ----- -----
Equity capital total 896,337.56 633.8 299.6
========== ===== =====
B. SPECIAL ITEM INCL RESERVES 141,711.75 134.1 51.5
========== ===== ====
C. RESERVES
1. Passive deferred taxes 59,755.05 61.4 177.9
2. Tax reserves 91,338.63 166.6 0.0
4. Other reserves 46,290.67 47.7 30.5
---------- ----- -----
Reserves total 197,384.35 275.7 208.4
========== ===== =====
D. PAYBLES
2. Liabilities to credit
institutions 433,226.54 466.6 101.9
3. Advance payments received 9,480.79 0.0 0.0
4. Trade accounts payable 21,412.25 29.7 220.6
6. Liabilities to shareholders 294,196.87 344.5 0.0
8. Other liabilities 14,185.45 16.0 35.4
of this from taxes EUR 5,302.79
of this within the framework of
social security EUR 3,101.85
---------- ----- -----
Payables total 772,501.90 856.8 357.9
========== ===== =====
E. DEFERED ITEM 6,002.85 22.0 12.9
======== ==== ====
TOTAL LIABILITIES AND EQUITY 2,013,938.41 1,922.4 930.3
============ ======= =====
F-34
BAW GROUP
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31,
---------------------------------------
2002 2001 2000
EUR TEUR TEUR
------------- ------------ ------------
1. Sales proceeds 3,893,954.40 3,411.6 2,543.5
2. Change in stock ./. 39,166.60 + 136.2 ./. 176.6
4. Other business proceeds 100,799.62 263.1 76.1
5. Material costs
a) Costs for raw materials
+ supplies ./. 2,262,513.94 ./. 2,282.7 ./. 1,444.5
b) Costs for services
received ./. 465,212.35 ./. 425.6 ./. 246.1
------------ ------- -------
GROSS PROFIT 1,227,861.13 1,102.6 752.4
6. Personnel costs
a) Wages + salaries 160,558.18 138.9 95.8
b) Social contributions 36,139.50 31.0 22.9
7. Depreciation
a) on tangible assets 144,758.89 151.5 86.1
8. Other operating
expenses 381,450.74 320.0 243.4
11. Other interest and
similar income + 8,368.51 + 6.0 + 2.9
13. Interest and similar
expenses 35,414.79 39.5 17.6
---------- ----- -----
14. RESULTS OF REGULAR
OPERATIONS + 477,907.54 + 427.7 + 289.5
18. Taxes from income
and revenue ./. 172,044.25 ./. 107.7 ./. 149.9
19. Other taxes 3,143.80 2.0 0.4
---------- ----- -----
20. YEAR'S PROFIT + 302,719.49 + 318.0 + 139.2
including for other
shareholders 15,485.95 33.7 11.5
---------- ----- -----
21. YEAR'S PROFIT WITHOUT
OTHER SHAREHOLDERS 287,233.54 284.3 127.7
========== ===== =====
F-35
BAW GROUP
STATEMENT OF SHAREHOLDERS' EQUITY
DECEMBER 31, 2002
01/01/2002 additions retirements 12/31/2002
EUR EUR EUR EUR
--- --- --- ---
Subscribed
capital 75,000.-- -.- -.- 75,000.--
Revenue reserve 80,497.49 143,322.37 U -.- 223,819.86
Profit carried
forward 116,304.94 284,283.83 U 143,322.37 U
2,580.74(2) 254,685.66
Year's profit 284,283.83 287,233.54(1) 284,283.83 U 287,233.54
---------- ---------- ---------- ----------
Subtotal 556,086.26 714,839.74 430,186.94 840,739.06
Shares of other 53,027.63 15,485.95(1)
shareholders 565.99(3) 645.18(2) 68,434.39*
Balance from
conversion 24,669.85 -.- 37,505.74 ./. 12,835.89
---------- ---------- ---------- ----------
Total
equity 633,783.74 730,891.68 468,337.86 896,337.56
========== ========== ========== ==========
U = transfer from one account to another
(1) Year's profit EUR 302,719.49 = EUR 287,233.54 + EUR 15,485.95
(2) Capital adjustment due to exterior tax audit in Poland
(3) Adjusted value see audit report of the previous year
F-36
BAW GROUP
STATEMENT OF SHAREHOLDERS' EQUITY
DECEMBER 31, 2002
EQUITY OF OTHER SHAREHOLDERS'
- ----------------------------
01/01/2002 additions retirement 12/31/2002
EUR EUR EUR EUR
--- --- --- ---
"AG BAG POLSKA" SP.ZO.O.
Subscribed
capital 4,254.61 565.99(1) -,- 4,820.60
Profit carried
forward 12,467.17 33,137.77 U 645.18(2) 44,959.76
Year's profit 33,137.77 13,416.17 33,137.77 U 13,416.17
--------- --------- --------- ---------
49,859.55 47,119.93 33,782.95 63,196.53
--------- --------- --------- ---------
AG-BAG HUNGARIA KFT
Subscribed
capital 2,898.92 -,- -,- 2,898.92
Profit carried
forward ./. 333.54 602.70 U -,- + 269.16
Year's profit 602.70 2,069.78 602.70 U 2,069.78
-------- -------- ------ --------
3,168.08 2,672.48 602.70 5,237.86
-------- -------- ------ --------
53,027.63 49,792.41 34,385.65 68,434.39
========= ========= ========= =========
(1) Adjustment of capital stock based on the determination of historical
Exchange rates (see audit report of the previous year)
(2) Capital adjustment from investigation by tax authorities
F-37
BAW GROUP
STATEMENTS OF CASH FLOWS
Years ended December 31,
------------------------
2002 2001 2000
TEUR TEUR TEUR
---- ---- ----
I. OPERATING RESULTS
Sales proceeds 3,894.0 3,411.6 2,543.5
Changes in stock ./. 39.2 + 136.2 ./. 176.6
Other operating
results 100.8 263.1 76.1
Costs for material ./. 2,727.7 ./.2,708.3 ./.1,690.6
------- ------- -------
Gross proceeds 1,227.9 1,102.6 752.4
minus
personel costs 196.7 169.9 118.7
Depreciation
(without special
depr.for wear + tear) 144.8 151.5 86.1
Other expenditure 381.5 320.0 243.4
Other taxes 3.1 2.0 0.4
----- ----- -----
Operating results + 501.8 + 459.2 + 303.8
===== ===== =====
II. FINANCIAL RESULT
Income from interest 8.3 + 6.0 + 2.9
Interest paid ./. 35.4 ./. 39.5 ./. 17.6
---- ---- ----
./. 27.1 ./. 33.5 ./. 14.7
==== ==== ====
III. TAXES FROM INCOME
AND REVENUE ./. 172.0 ./. 107.7 ./. 149.9
===== ===== =====
IV. SUMMARY OF THE RESULTS FOR THE YEAR
Operating results + 501.8 + 459.2 + 303.8
Financial result ./. 27.1 ./. 33.5 ./. 14.7
Taxes from income and
revenue ./. 172.0 ./. 107.7 ./. 149.9
----- ----- -----
Results for the year + 302.7* + 318.0** + 139.2***
===== ===== =====
* Of this TEUR 15,5 are allocated to other shareholders
** Of this TEUR 33,7 are allocated to other shareholders
*** Of this TEUR 11,5 are allocated to other shareholders
DYNAMIC LIQUIDITY ANALYSIS BY CASH FLOW PRESENTATION:
Years ended December 31,
------------------------
2002 2001 2000
TEUR TEUR TEUR
---- ---- ----
Year's profit + 302.7 + 318.0 + 139.2
Depreciation + 144.8 + 151.5 + 86.1
----- ----- -----
Cash flow (after tax) + 447.5 + 469.5 + 225.3
plus taxes + 172.0 + 107.7 + 149.9
----- ----- -----
Cash flow (pre-tax) + 619.5 + 577.2 + 375.2
===== ===== =====
F-38
BAW GROUP
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
- -----------------------------------------------------------
LEGAL STRUCTURE OF THE GROUP
The group structure complies with ss. 290 sub-clause 1 HGB. The parent company
of the group is BAW Budissa Agrodienstleistungen und Warenhandels GmbH,
registered office at Malschwitz. The subsidiaries of BAW Budissa
Agrodienstleistungen und Warenhandels GmbH, AG-BAG HUNGARIA KFT and "AG BAG
Polska" Sp.zo.o. are affiliated companies pursuant to ss. 271 sub-clause 2 HGB
and to ss. 290 sub-clause 2 HGB, respectively.
The company AG-BAG HUNGARIA KFT was incorporated on February 11, 1999 in Gyor
(Hungary) by cash subscription. Having paid an initial contribution of Forint
6,300,000.-- , BAW Budissa Agrodienstleistungen und Warenhandels GmbH holds 90 %
of the shares in the Company. Mr. Szocs Csaba holds 10 % of the shares in the
company having paid an initial contribution of Forint 700,000.--. In the
business year the capital was increased from Forint 3,000,000.-- by Forint
4,000,000.-- to Forint 7,000,000.--.
"AG BAG Polska" Sp.zo.o. was incorporated on 08/19/1999 in Szelejewo Drugie
(Republic of Poland) by cash subscription. Having paid an initial contribution
of Zloty 80,000.--, BAW Budissa Agrodienstleistungen und Warenhandels GmbH holds
80 % of the shares of the company. Mr. Karol Benedykt Glapiak and Mrs. Marta
Kashyna hold 10 % of the shares in the company, each, having paid an initial
contribution of Zloty 10,000.--, each.
Both subsidiaries are registered in the corresponding Commercial Register. The
average number of the employees employed during the business year was 10 people
(p.y. 8).
F-39
PRINCIPLES OF CONSOLIDATION
a) Voluntary group accounts
The Company established the annual accounts of the group as of December 31, 2002
voluntarily pursuant to the shareholder resolution adopted January 29, 2002. The
limits of ss. 293 Commercial Code were not exceeded. The annual accounts of the
group were prepared on the basis of the rules concerning the commercial law. It
is a statement of annual accounts purely based on the commercial law. Any tax
rights of choice were not exercised.
b) Cut-off Date and deferred valuation of the consolidated companies
BAW Budissa Agrodienstleistungen und Warenhandels GmbH as the parent company of
the group as well as the subsidiaries AG-BAG HUNGARIA KFT and "AG BAG Polska"
Sp.zo.o. were included in the group accounts. December 31, 2002 is the cut-off
date of the group accounts. Both the parent company as well as the included
subsidiaries prepared regular annual accounts as of this cut-off date.
c) Breakdown of the group accounts and valuation principles
The balance sheet of the group as well as the profit and loss account were
stated and classified pursuant to the provisions of the commercial law for
Companies. The requirements of ss.ss. 297 ff HGB were paid due regard to.
Since the company is a joint venture we had to come to an agreement concerning
uniform valuation regulations in the group accounts.
Since the parent company has its registered office and management in Germany we
agreed to use the German valuation regulations for these group accounts without
having taken into consideration any tax privileges pursuant to German, Polish or
Hungarian tax laws.
F-40
The balancing and valuation rights of choice were newly exercised, pursuant to
ss. 300 subp. 2 Commercial Code, such that they meet the accounting standards of
the United States of America, (US-GAAP).
The consequence was that for the individual accounts a trade balance II (see Tz.
26 concerning ss. 300 Commercial Law in Beck'scher Bilanzkommentar, 4th edition)
had to be established pursuant to ss. 300 par. 2 Commercial Law. In this trade
balance II all tax privileges were eliminated and uniform valuation principles
were applied. The conversion of the individual accounts was made according to
the concept of the functional currency. According to this concept the balance
sheet had to be converted on the basis of the current rate and the profit and
loss account on the basis of the average rate.
Poland Hungary
Current rate 1 PLZ = EUR 0.24840 1 HUF = EUR 0.004244
Average rate 1 PLZ = EUR 0.26631 1 HUF = EUR 0.004157
The capital assets were estimated on the basis of the initial costs minus a
linear pro rata temporis degressive depreciation.
The stock was estimated on the basis of the manufacturing costs and the strict
lowest value principle. For raw materials and supplies a fixed value was formed
pursuant to ss. 256 HGB in connection with R.31 sub-clause 4 EStR (German
Individual Income Tax Law).
The accounts receivable and other assets are estimated on the basis of their
nominal values.
The special item including reserves was shown pursuant to the recommendations of
the HFA comment 1/1984 of the Institut der Wirtschaftsprufer (Institute of
Auditors).
F-41
The reserves take into account all risks seen today. The payables were estimated
on the basis of the repayable amount.
d) Consolidation of Funds
For the consolidation of funds the book value method (ss. 301 sub-clause 1 no. 1
HGB) was, applied, that is, the valuation of the shares in the subsidiaries was
offset against the subsidiaries' equity falling to these shares which
corresponds to the book value of the assets and debts to be included in the
group accounts. The difference amounting to EUR 4,072.28 was - not as required
by ss. 301 par. 3 Commercial Code - not activated as an enterprise value but was
written off the group equity since these are only incorporation costs. The
shares of the other shareholders shown pursuant to ss. 307 Commercial Code were
taken into consideration.
e) Consolidation of Debts
According to the standard theory the mutual accounts receivable and accounts
payable existing between the companies included in the group accounts were
offset on the basis of ss. 303 sub-clause 1 HGB. The total amount of the mutual
accounts receivable and accounts payable that were offset is TEUR 8.1. TEUR 12.9
had to be taken out of the books as expenses.
F-42
f) Interim result elimination
We carried out an elimination of the interim results, as we did last year, in
the financial year 2002, see ss. 304 par. 3 Commercial Law. A total of EUR
10,359.92 was debited to the account of the expenditure for raw materials and
supplies. This was necessary for the conversion of the valuation of the finished
products and goods to the group-uniform manufacturing costs.
g) Expenditure and Income Consolidation
The expenses and income resulting from the transactions of mutual deliveries of
goods and provision of services were mutually offset by an amount of TEUR 535.4.
h) Deferred taxation
a) In the trade balance II of BAW Budissa Agrodienstleistungen und Warenhandels
GmbH the tax privilege of voting pursuant to ss. 7 g Income Tax Law was
eliminated (ss. 300 par. 2 Commercial Code).
b) The item of potential taxes was currently adjusted in the year under report
starting from 01/01/2002.
c) National differences in the tax rate were maintained.
F-43
LISTING OF THE SUBSIDIARIES OF THE GROUP
The following subsidiaries were included in the group accounts:
Name + reg. share of capital result of the business year
office parent stock in national
company trade balance II
in % in DM currency in EUR
AG-BAG HUNGARIA KFT
registered office at
Mosonmagyarovar
(Ungarn) 90 *56.698,-- + 4.979.012,38 HUF + 20.697,75
"AG BAG Polska" Sp.zo.o.
registered office at
Szelejewo Drugie
(Republik Polen) 80 *47.140,-- + 251.890,05 zl. + 67.080,84
* historic exchange rate
The subsidiaries did not acquire any shares in the parent company in the year
under report.
F-44
NOTE 2 - COMMITMENTS AND CONTINGENCIES
- -----------------------------
Contingent Liabilities and other Financial Obligations:
There are no contingent liabilities and other obligations.
NOTE 3 - BREAKDOWN AND EXPLANATION OF THE ITEMS OF THE BALANCE SHEET
- -----------------------------------------------------------
(1) Fixed assets - EUR 801,350.23
- ------------------------------------
The composition and development of the fixed assets are listed in Exhibit 1.
(2) Raw materials and supplies - EUR 11,143.50
- ----------------------------------------------
Breakdown:
Company Valuation
EUR p.y.EUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 11,143.50 4.1
========= ===
An interim profit elimination was not necessary since in this item no
group-internal supplies are included.
F-45
(3) Finished products and goods - EUR 205,931.80
- ------------------------------------------------
Breakdown: EUR p.y.TEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 41,148.24 28.5
"AG BAG Polska" sp.zo.o. 154,638.63 196.8
AG-BAG HUNGARIA KFT 10,144.93 19.8
---------- -----
205,931.80 245.1
========== =====
In the stock an interim profit elimination totaling EUR 10,359.92 was carried
out. This includes EUR 3,226.52 for stocks in Hungary and EUR 7,133.40 for
stocks in Poland.
(4) Trade accounts receivable - EUR 347,329.33
- ----------------------------------------------
Breakdown: EUR p.y.TEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 22,374.93 57.8
"AG BAG Polska" Sp.zo.o. 229,980.16* 369.4
AG-BAG HUNGARIA KFT 94,974.24 19.6
---------- -----
347,329.33 446.8
========== =====
* Management has established a reserve against accounts receivable of 31.4 TEUR
of the gross amount of outstanding receivables. Management has deemed this
31.4 TEUR uncollectable.
(5) Receivables from shareholders - EUR zero
- --------------------------------------------
These are trade accounts receivable from BAG Budissa Agroservice Gesellschaft
mbH (residual amount of an invoice). It was repaid in 2002.
F-46
(6) Other assets - EUR 18,410.01
- --------------------------------
Breakdown: EUR p.Y.TEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 3,079.93 4.9
"AG BAG Polska" Sp.zo.o. 15,330.08 8.0
AG-BAG HUNGARIA KFT -.- 1.2
--------- ----
18,410.01 14.1
========= ====
This is specified as follows:
EUR
Refund of turnover tax (G) 1,791.48
Refund of turnover tax (PL) 14,336.48
---------
Total refunds 16,127.96
Guarantee (PL) 993.60
Interest limitation premium (G) 1,288.45
---------
Total 18,410.01
=========
(7) Checks, cash, Federal Reserve Bank and Postbank balance, cash in banks - EUR
621,327.82
- ------------------------------------------------------------
Breakdown:
BAW Budissa Agro- "AG BAG AG-BAG Group
dienstleistungen Polska" HUNGARIA
und Warenhandels sp.zo.o. KFT
GmbH in EUR EUR EUR EUR p.y.TEUR
522,311.98 74,860.51 24,155.33 621,327.82 336.9
========== ========= ========= ========== =====
F-47
(8) Deferred item - EUR 3,345.91
- --------------------------------
Breakdown: EUR p.yTEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 2,010.37 7.5
"AG BAG Polska" Sp.zo.o. 685.83 1.3
AG-BAG HUNGARIA KFT 649.71 0.2
-------- ---
3,345.91 9.0
======== ===
For all companies these are financing expenses paid in advance for technical
equipment and motor vehicles.
(9) Active deferred taxes - EUR 4,143.97
- ----------------------------------------
Active deferred taxes for: EUR
As of 01/01/2002 11,153.39
Release ./. 7,009.42
---------
Interim result elimination
EUR 10,359.92* (40 %) 4,143.97
========
* Hungary 3,226.52 Euro and Poland 7,133.40 Euro
(10) Special item including reserves - EUR 141,711.75
- -----------------------------------------------------
Breakdown and development:
as of addition as of
12/31/2001 (release) 12/31/2002
EUR EUR EUR
Investment grants 134,135.71 32,722.68
(25,146.64) 141,711.75
========== ========= ==========
These are subsidies of the Sachsische Aufbaubank (GA-Fordermittel) only for BAW.
F-48
(11) Passive deferred taxes - EUR 59,755.05
- -------------------------------------------
Development: EUR
As of 12/31/2001 61,355.05
minus
Transfer from one account
to another in tax reserves ./. 1,600.--
---------
59,755.05
=========
The deferred taxation of EUR 59,755.05 is equivalent to 40 % of the tax-free
reserve, pursuant to ss. 7g EstG (Income Tax Law, of BAW GmbH. The formation of
this item was made in HB II.
(12) Reserves for potential taxes - EUR 91,338.63
- -------------------------------------------------
Breakdown and development:
as of additions as of
12/31/2001 (consumption) 12/31/2002
(release)*
EUR EUR EUR
Trade income tax
2000 26,007.88 (26,004.31)
(3.57)* -.-
2001 44,936.42 -.- 44,936.42
2002 -.- 19,032.-- 19,032.--
corporate income tax
2000 47,721.43 (47,721.43) -.-
2001 42,438.25 (38,612.76) 3,825.49
2002 -.- 21,569.92 21,569.92
Re-unification charge
2000 2,624.64 (2,624.64) -.-
2001 2,912.07 (2,123.70) 788.37
2002 -.- 1,186.43 1,186.43
---------- ---------- ---------
166,640.69 41,788.35
(117,086.84)
(3.57)* 91,338.63
========== ========== =========
For the group accounts as of 12/31/2002 the respective national tax rates were
used. The tax reserve applies only to BAW GmbH.
F-49
(13) Other reserves - EUR 46,290.67
- -----------------------------------
The other reserves include expenses for guaranties/warranties, drawing up and
auditing of the annual statement of accounts, fees to IHK and trade associations
as well as backlog of vacation. These reserves cover all decernable risks and
obligations.
(14) Liabilities - EUR 772,501.90
- ---------------------------------
Total Breakdown according to periods
amount up to 1 y. 1 to 5 y. 5 y.+ more
EUR EUR EUR EUR
to credit inst. 433,226.54 90,869.73 210,655.88 131,700.93
advance payments
received 9,480.79 9,480.79 -.- -.-
from purchases
and deliveries 21,412.25 21,412.25 -.- -.-
to shareholders 294,196.87 222,942.65 71,254.22 -.-
Other* 14,185.45 14,185.45 -.- -.-
---------- ---------- ---------- ----------
Total amount 772,501.90 358,890.87 281,910.10 131,700.93
========== ========== ========== ==========
* of this from taxes DM 5.302,79
of this within the framework
of social security DM 3.101,85
F-50
NOTE 4 - BREAKDOWN AND EXPLANATION OF THE INCOME STATEMENT ITEMS
- -------------------------------------------------------------
(1) Sales proceeds - 3,893,954.40
- ---------------------------------
Breakdown:
BAW Budissa Agro- "AG BAG AG-BAG
Dienstleistungen Polska" HUNGARIA
und Warenhandels Sp.zo.o. KFT Group
GmbH in EUR EUR EUR EUR
2,101,606.85 1,308,323.29 484,024.26 3,893,954.40
============ ============ ========== ============
(2) Other operating results - EUR 100,799.62
- --------------------------------------------
Breakdown:
BAW Budissa Agro- "AG BAG AG-BAG
dienstleistungen Polska" HUNGARIA
und Warenhandels Sp.zo.o. KFT Group
GmbH in EUR EUR EUR EUR
80,973.88 16,106.47 3,719.27 100,799.62
========= ========= ======== ==========
(3) Expenses for raw materials and supplies - EUR 2,262,513.94
- --------------------------------------------------------------
Breakdown:
BAW Budissa Agro- "AG BAG AG-BAG
dienstleistungen Polska" HUNGARIA
und Warenhandels Sp.zo.o. KFT Group
GmbH in EUR EUR EUR EUR
1,672,221.84 419,924.56 170,367.54 2,262,513.94
============ ========== ========== ============
F-51
(4) Expenses for services received - EUR 465,212.35
- ---------------------------------------------------
Breakdown:
BAW Budissa Agro- "AG BAG AG-BAG
dienstleistungen Polska" HUNGARIA
und Warenhandels Sp.zo.o. KFT Group
GmbH in EUR EUR EUR EUR
293,862.80 154,397.99 16,951.56 465,212.35
========== ========== ========= ==========
(5) Personnel costs - EUR 196,697.68
- ------------------------------------
Breakdown: EUR p.y.TEUR
a) Wages + salaries
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 82,717.52 76.7
"AG BAG Polska" Sp.zo.o. 55,972.92 49.1
AG-BAG HUNGARIA KFT 21,867.74 13.1
---------- -----
Subtotal
Wages and salaries 160,558.18 138.9
---------- -----
b) Social contributions
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 17,949.95 17.0
"AG BAG Polska" Sp.zo.o. 10,854.55 9.4
AG-BAG HUNGARIA KFT 7,335.-- 4.6
--------- ----
Subtotal
Social contributions 36,139.50 31.0
--------- ----
Total personnel costs 196,697.68 169.9
========== =====
F-52
(6) Depreciation on tangible assets - EUR 144,758.89
- ----------------------------------------------------
Breakdown: EUR p.y.TEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 111,539.57 122.9
"AG BAG Polska" Sp.zo.o. 18,210.65 14.2
AG-BAG HUNGARIA KFT 15,008.67 14.4
---------- -----
144,758.89 151.5
========== =====
An exact specification is prepared in Exhibit 1, List of fixed assets.
(7) Other operating expenses - EUR 381,450.74
- ---------------------------------------------
Breakdown:
BAW Budissa Agro- "AG BAG AG-BAG
dienstleistungen Polska" HUNGARIA
und Warenhandels sp.zo.o. KFT Group
GmbH in EUR EUR EUR EUR
191,262.10 158,573.48 31,615.16 381,450.74
========== ========== ========= ==========
(8) Other interest and similar income - EUR 8,368.51
- ----------------------------------------------------
Breakdown: EUR p.y.TEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 2,800.57 4.1
"AG BAG Polska" Sp.zo.o. 4,035.20 1.4
AG-BAG HUNGARIA KFT 1,532.74 0.5
-------- ---
8,368.51 6.0
======== ===
This includes income from interest from fixed-time deposits, running accounts
and other interest.
F-53
(9) Interest and similar expenses - EUR 35,414.79
- -------------------------------------------------
Breakdown: EUR p.y.TEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 28,128.52 30.4
"AG BAG Polska" Sp.zo.o. 3,842.91 4.7
AG-BAG HUNGARIA KFT 3,443.36 4.4
--------- ----
35,414.79 39.5
========= ====
(10) Taxes from income and proceeds - EUR 172,044.25
- ----------------------------------------------------
Breakdown: EUR p.y.TEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 130,467.70 101.8
"AG BAG Polska" Sp.zo.o. 29,349.23 57.1
AG-BAG HUNGARIA KFT 6,817.90 0.1
---------- -----
Subtotal national taxes 166,634.83 159.0
minus
Retirement of deferred taxes
"AG BAG Polska" Sp.zo.o.
in HB II -.- ./. 26.4
Retirement of deferred taxes
BAW-GmbH because of release of
Saving reserve (previous year
Because of tax reduction)
in HB II ./. 1,600.-- ./. 13.7
plus
Release of active
deferred taxes + 7,009.42 ./. 11.2
---------- -----
172,044.25 107.7
========== =====
F-54
(11) Other taxes - EUR 3,143.80
- -------------------------------
Breakdown: EUR p.y.TEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 1,598.53 1.0
"AG BAG Polska" Sp.zo.o. 1,523.65 1.0
AG-BAG HUNGARIA KFT 21.62 0.0
-------- ---
3,143.80 2.0
======== ===
This includes property and motor vehicle tax.
F-55
RECONCILIATION OF GERMAN GAAP TO U.S. GAAP
- ------------------------------------------
The primary difference between the generally accepted accounting principles
(GAAP) of Germany and the United States is that German GAAP allows for the
special reserve for a company's economic development plans. This reserve, and
related tax impact, would not be recognized under U.S. GAAP. The following is a
reconciliation of affected balance sheet and profits and loss accounts for the
differences between German GAAP and U.S. GAAP:
EUR TEUR TEUR
BALANCE SHEET RECONCILIATION TO US GAAP 2002 2001 2000
- --------------------------------------- ---- ---- ----
Total liabilities (non US GAAP) 1,117,600 1,288.6 630.7
Special item including reserves (141,712) (134.1) (51.5)
Tax reserve 56,685 53.7 25.7
------------------ -------------- -----------------
Adjusted total liabilities (for US GAAP) 1,032,573 1,208.2 604.9
------------------ -------------- -----------------
Total equity (non US GAAP) 896,338 633.8 299.6
Equity affect of prior year's reconcilation 80,500 25.8 46.9
Current year reversal of special item depreciation/income (25,147) 82.6 (42.2)
Current year taxes on increased/decreased net income 10,059 (27.9) 21.1
------------------ -------------- -----------------
Adjusted equity capital (for US GAAP) 961,750 714.3 325.4
------------------ -------------- -----------------
PROFIT AND LOSS ACCOUNT RECONCILIATION TO US GAAP
Result of regular operations (non US GAAP) 477,908 427.7 289.5
(Reduction)/increase in other business proceeds (25,147) - -
(Reduction)/increase in other operating expenses - (82.6) 42.2
------------------ -------------- -----------------
Adjusted result of regular operations (for US GAAP) 452,761 510.3 247.3
------------------ -------------- -----------------
Taxes from income and revenue (non US GAAP) (172,044) (107.7) (149.9)
(Additional)/reduction in taxes from income and revenue 10,059 (27.9) 21.1
------------------ -------------- -----------------
Taxes from income and revenue (for US GAAP) (161,985) (135.6) (128.8)
------------------ -------------- -----------------
Year's profit (non US GAAP) 302,720 318.0 139.2
(Reduction)/increase in other business proceeds (25,147) - -
(Reduction)/increase in other operating expenses - (82.6) 42.2
(Additional)/reduction in taxes from income and revenue 10,059 (27.9) 21.1
------------------ -------------- -----------------
Year's profit (for US GAAP) 287,632 372.7 202.5
------------------ -------------- -----------------
Year's profit including to other shareholders (non US GAAP) 15,486 33.7 11.5
(Reduction)/increase in other business proceeds (1,283) - -
(Reduction)/increase in other operating expenses - (8.8) 3.4
(Additional)/reduction in taxes from income and revenue 513 (3.0) 1.7
------------------ -------------- -----------------
Year's profit including to other shareholders (for US GAAP) 14,716 39.5 16.6
------------------ -------------- -----------------
Year's profit without other shareholders (non US GAAP) 287,234 284.3 127.7
(Reduction)/increase in other business proceeds (23,864) - -
(Reduction)/increase in other operating expenses - (73.8) 38.8
(Additional)/reduction in taxes from income and revenue 9,546 (24.9) 19.4
------------------ -------------- -----------------
Year's profit without other shareholders (for US GAAP) 272,916 333.2 185.9
------------------ -------------- -----------------
F-56
BAW GROUP
EXHIBIT 1
GROUP ACCOUNTS AS OF DECEMBER 31, 2002
LIST OF FIXED ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
HISTORICAL ADDITIONS HISTORICAL ACCUMULATED DEPRECIATION ACCUMULATED CONVERSION NET BOOK NET BOOK
COST RETIREMENTS COST DEPRECIATION 2002 DEPRECIATION DIFFERENCES VALUE VALUE
12/31/2001 12/31/2002 12/31/2001 12/31/2002 12/31/2002 12/31/2001
EUR EUR EUR EUR EUR EUR EUR EUR EUR
- ----------------------- ---------- ----------- ------------ ------------ ------------ ------------ ----------- ---------- ----------
Real estate, leasehold
rights and buildings
incl. buildings on
real estate 519,823.86 107,049.10
of another 626,872.96 25,538.06 30,993.61 56,531.67 0.00 570,341.29 494,285.80
- ----------------------- ---------- ----------- ------------ ------------ ------------ ------------ ----------- ---------- ----------
Technical equipment and
machinery 645,931.76 28,868.56
674,800.32 367,342.14 104,101.93 471,444.07 5,864.93 209,221.18 288,372.41
- ----------------------- ---------- ----------- ------------ ------------ ------------ ------------ ----------- ---------- ----------
Tools, furniture and 7,897.65
fittings 36,950.44 44,848.09 16,307.49 7,773.24 24,080.73 1,020.40 21,787.76 21,358.76
- ----------------------- ---------- ----------- ------------ ------------ ------------ ------------ ----------- ---------- ----------
Low-value
assets 18,005.91 1,844.81 19,850.72 18,005.91 1,890.11 19,896.02 45.30 0.00 0.00
- ----------------------- ---------- ----------- ------------ ------------ ------------ ------------ ----------- ---------- ----------
Advance payments made
Plants under construction 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
- ----------------------- ---------- ----------- ------------ ------------ ------------ ------------ ----------- ---------- ----------
145,660.12
TOTAL FIXED ASSETS 1,220,711.97 0.00 1,366,372.09 427,193.60 144,758.89 571,952.49 6,930.63 801,350.23 804,016.97
- ------------------------------------------------------------------------------------------------------------------------------------
F-57
BAW GROUP
EXHIBIT 2
EURO EXCHANGE RATE
High Low
Rate at During During Average
December 31, Year Year Rate
------------ ------ ------ ------
2002 1.0481 1.0497 0.8560 0.9459
2001 0.8858 0.9597 0.8344 0.9138
2000 0.9416 1.0419 0.8226 0.9728
1999 1.0040 1.1960 0.9986 1.0667
1998 1.1669 1.2324 1.0532 1.1135
F-58