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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 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. _
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: $1,717,292.
The registrant has one class of Common Stock with 11,956,991 shares
outstanding as of March 15, 2004.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the proxy statement for the Registrant's Annual Meeting of
Stockholders to be held June 7, 2004, are incorporated by reference into Part
III of this report.
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AG-BAG INTERNATIONAL LIMITED
TABLE OF CONTENTS
PAGE
PART I ..........................................................................................2
Item 1. Business..................................................................................2
Item 2. Properties...............................................................................11
Item 3. Legal Proceedings........................................................................12
Item 4. Submission of Matters to a Vote of Security Holders......................................12
Executive Officers of the Registrant..................................................................13
PART II .........................................................................................14
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ...................14
Item 6. Selected Financial Data..................................................................16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.............................................................................17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...............................31
Item 8. Financial Statements and Supplementary Data..............................................31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.....................................................................31
Item 9A. Controls and Procedures..................................................................31
PART III .........................................................................................31
Items 10. and 11. Directors and Executive Officers of Registrant and Executive
Compensation.............................................................................31
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters......................................................................32
Item 13. Certain Relationships and Related Transactions...........................................32
Item 14. Principal Accountant Fees and Services...................................................32
PART IV .........................................................................................33
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........................33
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; optimism in increased milk prices
within the U.S. farm economy throughout 2004; 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 Pre-Season order program for 2004; the availability of trade
credit and working capital; the availability of third party financing sources;
the availability of the Company's line of credit; 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.
2
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 2001 2002 2003
------- ----------- ---------- -----------
Bags 48% 48% 49%
Machines 43% 44% 40%
Other 9% 8% 11%
----------- ---------- -----------
Net Sales 100% 100% 100%
The Company expects the use of bagging as a means of silage storage to
continue to play a major role in the future because the quality of stored feed
is better than other known competitive methods, allowing farmers to be more
efficient and to produce dairy, beef, sheep and pork products at a lower price.
The Company believes the concept of bagging is one way in which farmers can be
more profitable by reducing, or completely eliminating, the purchase of feed and
grain from outside sources. Bagging enables the farmer to produce and store the
feed on the farm and provides easier access to the silage, thereby allowing the
farmer to choose the quality of silage to feed at any given time. The bagged
feed has shown high quality, allowing for higher production.
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, and Western and Central Europe. Export sales from the Company's
United States operations were 6.2% of net sales for the year ended December 31,
2003.
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
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The core business of the Company is historically seasonal due to the
harvest seasons in North America and Europe. The Company's machinery tends to be
purchased in anticipation of the next harvest season, so most of the sales of
machinery occur in the spring and summer. This requires the Company to carry
significant amounts of inventory to meet rapid delivery requirements of
customers. Bag sales tend to occur as the harvest season approaches in the
summer, and during the harvest season in the fall. The Company took steps to
counteract some of this seasonality by generating sales in Latin America
beginning in 1994 and in Australia and New Zealand in 1996. In September 2002,
the Company took additional steps to counteract seasonality by developing and
introducing a pre-season ordering program, whereby the Company's dealers place
their next year's annual product requirements order in advance and utilize one
of the Company's third party financing sources. The pre-season program has
allowed the Company to know in advance its production mix which in turn has
provided the Company with the ability to level its production and flexibility in
customer shipments. During 2003, the Company expanded this program by allowing
dealers to finance through their local bank, rather than requiring them to
utilize one of the Company's third party financing programs. This however, has
brought seasonality back into play for the Company, as shipments under the
dealer bank program are at the timing of the dealer rather than the Company
under the terms of the program. The pre-season order program is
3
a program under which the Company pays the flooring interest for dealers and
pays volume discounts to dealers based upon a sliding scale for the volume of
orders placed by the dealer under the program.
Approximately 95% of the Company's business is concentrated in the Northern
Hemisphere resulting in between 53-70% 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 2001 2002 2003
-------
----------- ---------- -----------
First 15% 18% 32%
Second 35% 37% 27%
Third 35% 32% 26%
Fourth 15% 13% 15%
As a result of the introduction in September 2002 and modification in 2003 of
the Company's Pre-Season order program, these historical revenue percentages may
not be indicative of future revenue percentage by quarter.
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 250 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
$19,900 to $53,000.
4
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 $80,000 to $228,500.
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. These machines are primarily used by dairymen with herds
ranging from 300 to 2,000 head, by cattlemen with herds ranging from 800 to
15,000 head, and by custom operators. A super 12-foot Ag-Bagger(R) was developed
in 1989 and enhanced in 1995. 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
$155,000 to $325,000.
In response to a competitor's introduction of a cable-less machine in early
1995, the Company began research and development on its own cable-less machine
in early 1996. The Company began production of its own cable-less machine in
1997. In 1998, the Company introduced its own cable-less bagging machine called
the HFC (Hydraulic Finger Controlled) Silage Bagger. The introduction of this
machine was in response to what the Company felt was a change in direction of
the industry towards the cable-less machine design and the latest in bagging
technology. In 1999, the Company continued to develop and improve its cable-less
bagging machine by developing the Powered Anchor Control (PAC) system, and in
2000 introduced its latest version of the cable-less bagging machine, the
HYPAC(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 $53,000 to
$325,000.
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. Beginning 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 $33,500. 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
5
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 $52,500 to $137,000.
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
$136 to $2,150. The manufactured plastic rolls are shipped to the Company's
plant in Blair, Nebraska, where they are folded and packed for sale using
proprietary folding techniques. The proprietary bag folding techniques reduce
bag folding time and allow the bags to uniformly unfold when being filled, which
thereby reduces operational delays.
Ag-Bag(R) Inoculant. The Company markets a liquid inoculant and a dry
powder inoculant under the trade name Ag-Bag Plus!(R). The inoculant is added to
the forage or the round or square bales during bagging. It enhances the
fermentation process for making silage in bags, bunkers, pits and silos by
substantially shortening the time necessary for the creation of the silage. A
liquid inoculant was developed in 1989 by a Company supplier and introduced into
the market in 1990. The dry inoculant is produced from a proprietary formula
owned by the Company and developed by Larry R. Inman and Walter L. Jay. See
"Executive Officers of the Registrant." The Company also markets an inoculant
designed specifically for composting.
MARKET SIZE
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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 2002, over 250 million tons of corn,
alfalfa, sorghum, silage, and hay were harvested by United States farmers
according to the AG IQ Handbook XX published in 2003 by Agricom, Inc. (the "AG
Handbook"). Based on 2000 United States Department of Agriculture (USDA)
statistics, the Company estimates that there are approximately 105,000 dairies,
and 150,000 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, and Asia, 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.
6
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, 2003, there were
62 dealers serviced by a combined total of 16 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 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. As a
result of this program's success, the Company continued the Pre-Season Order
Program for its 2003-04 season with minor modifications.
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 also 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.
In late 2003, BSE (Mad Cow) was discovered in the United States. Based upon
the quick response of the USDA and their findings to date, the Company does not
feel that BSE (Mad Cow) will impact its operations as its customer base is
largely focused on dairy farming rather than the beef industry.
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
7
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 bagging machines for distribution within Europe.
The Company assembles all of its machines in order to better control the
quality of the farm equipment. This method also permits the Company to offer
customized assembly for the end user of its equipment. The Company can acquire
and install name brand manufactured components specified by the customer in lieu
of those ordinarily installed by the Company.
Ag-Bag Tri-Dura(R) Storage Bags. All of the three-ply Tri-Dura(R) storage
bags are manufactured for the Company by a single manufacturer. The bags are
manufactured to the Company's specifications using a stabilizer that protects
the plastic from becoming brittle due to exposure to weather and the sun's
ultraviolet light rays. The Tri-Dura(R) plastic bags are made in various
diameters based on bag orders received by the Company. The bags are shipped in
roll form to the Company's plant in Blair, Nebraska, where they are folded and
packaged for shipment.
Ag-Bag(R) Inoculants. The 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 partially 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.
8
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 manufacturers 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 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 $1.1 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, large farm
co-operatives, 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.
9
BACKLOG
- -------
The dollar amount of backlog orders of the Company that are believed to be
firm as of March 1, 2004, was approximately $9,300,000, compared to $12,400,000
on March 1, 2003, a 25 % decrease. Backlog for 2004 is lower than 2003 as a
result of the depressed U.S. milk prices. Under the Company's pre-season order
program, the Company's dealers place their next year's annual product
requirements order in advance by each October 31st. Due to the depressed U.S.
milk prices during 2003, dealers did not sell out of all their 2002 pre-season
ordered product and consequently were conservative with their 2003-04 pre-season
orders. The Company introduced this new program in September 2002 for the
2002-03-ordering season and continued the program for the 2003-04 ordering
season as well. (See "Seasonal Nature of Business") 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 2003, 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, 2003.
PATENTS AND TRADEMARKS
- ----------------------
The Company has basic and improvement patents in the U.S., as well as a
number of patents pending, that encompass machines, bags and systems for silage
bagging, grain bagging, and hay/straw bale bagging. Corresponding applications
have or will be filed in selected foreign countries. In addition, proprietary
rights in the bagging of compost have been and are being developed in the U.S
and in selected foreign countries.
The Company's patents on its basic bagging machine have been found to be
valid and have been successfully defended in prior litigation. The Company
believes that it has developed its position in the industry partially as a
result of protection provided by these patents. The Company also owns the
proprietary formula for making the dry inoculant marketed under the trade name
Ag-Bag Plus!(R), which was developed by Larry R. Inman and Walter L. Jay. (See
"Executive Officers of the Registrant")
The names Ag-Bag(R), Ag-Bag Plus!(R), Bale-Bag(R), Flex-a-Tuber(R),
Flex-a-Tube(R), ABCTI System(R), Mighty Bite(R), Tri-Dura(R), and the symbol
"AB"(R) are all registered as trademarks with the United States Patent and
Trademark Office.
The Company believes that its color scheme and trademarks are well known in
the industry, are an important part of its business, and give the Company a
competitive advantage.
10
EMPLOYEES
- ---------
On December 31, 2003, the Company had 84 full-time employees. The Company
employs approximately 110 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
----------------------
2001 2002 2003
---- ---- ----
Sales to unaffiliated customers:
United States $26,888 $25,445 $20,165
Canada 1,030 1,148 861
Germany 445 275 273
Latin America/Mexico 89 113 31
Other foreign countries 248 202 168
--------- ---------- ----------
$28,700 $27,183 $21,498
Sales to affiliated customers:
Officers and Directors 8 6 5
--------- ---------- ----------
Total $28,708 $27,189 $21,503
========= ========== ==========
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
comprising approximately 70,000 square feet. Management estimates that
manufacturing at the Blair facility is currently at approximately 65-70% of
capacity.
11
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is a defendant in alleged patent infringement lawsuits, Versa
Corporation v. Ag-Bag International Ltd., filed October 30, 2000 and March 19,
2003 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; RE38020 and 5,452,562 relating to a bag pan, density
control and adjustable anchor wing patent for an agricultural feed bagging
machine and composting method patents. Plaintiff seeks monetary damages. On
February 6, 2004, the bag pan, density control and composting method patent
matters were settled and the cases dismissed in their entirety, thereby
concluding these three matters. On January 28, 2004, the court ruled, in the
remaining adjustable anchor wing patent matter, that the Company does not
infringe upon Versa's RE38020 patent. The Company previously filed for summary
judgment for non-infringement of Versa's patent and filed a motion for summary
judgment for Versa's patent invalidity of the RE38020 patent. This matter is
currently pending before the court. The Company believes that the outcome of the
litigation will not have a material adverse impact on its financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
During the fourth quarter of 2003, no matters were submitted to a vote of
security holders.
12
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
The executive officers of the Company, their respective ages as of March 1,
2004, 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 53 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 53 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 39 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 64 Vice President, Sales (since 1991); Treasurer of the
Company (1990-1991) and Treasurer (1983-1991) of
Ag-Bag Corporation (former subsidiary).
Lou Ann Tucker 50 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 43 Vice President, Manufacturing (since 1989);
Manager of Blair, Nebraska Plant (since 1980);
KW Trucking (1984-1987).
13
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, 2004, there were approximately 331 holders of record of
the Company's Common Stock. The Company estimates there are approximately 1,300
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 2003 as reported on the OTC
Bulletin Board:
Calendar Year High Bid Low Bid
- ------------- -------- -------
2002:
- -----
First quarter $.33 $.17
Second quarter $.58 $.30
Third quarter $.51 $.32
Fourth quarter $.32 $.18
2003:
- -----
First quarter $.29 $.20
Second quarter $.35 $.20
Third quarter $.42 $.26
Fourth quarter $.50 $.30
- ---------------------------
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.
14
UNREGISTERED SECURITIES
- -----------------------
The Company has issued the following unregistered securities during the
year ended December 31, 2003:
- ------------------------------ -- ------------------------ -- ------------------ -- -------------------- ---------------------
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
- ------------------------------ -- ------------------------ -- ------------------ -- -------------------- ---------------------
June 2, 2003 40,000 Options for N/A Non-employee $0
Common Stock/$.34 per Directors
share(1)
- ------------------------------ -- ------------------------ -- ------------------ -- -------------------- ---------------------
The above-unregistered securities were granted in reliance on an exemption
from the registration requirements of the Securities Act of 1933, as amended
("Act") under Section 4(2) of the Act and/or under the "bonus stock/no sale"
interpretive position of the Securities and Exchange Commission.
- -------------------------
(1) Granted under Non-employee Director Stock Option Plan. Options vest
according to terms of plan
15
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, 1999, 2000,
2001, 2002 and 2003. 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 Operation" included elsewhere in this report on Form 10-K.
(In thousands, except per share data)
Year Ended December 31,
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Statement of Operations Data:
Net Sales $ 32,687 $ 31,451 $ 28,708 $ 27,189 $ 21,503
Cost of Sales 25,085 24,800 22,947 22,121 18,357
------------ ------------ ------------ ------------ ------------
Gross Profit from Operations 7,602 6,651 5,761 5,068 3,146
Selling and Administrative Expenses 6,273 5,878 6,067 6,237 5,440
(Gain)/Loss on sale of assets 3 - 9 (1) (185)
Research and Development Expenses 324 136 214 220 139
------------ ------------ ------------ ------------ ------------
Income (Loss) from Operations 1,002 637 (529) (1,388) (2,248)
Other Income (Expense) (27) (123) 132 188 300
------------ ------------ ------------ ------------ ------------
Income (Loss) before Provision for
Income Taxes 975 514 (397) (1,200) (1,948)
Provision (Benefit) for Income Taxes 327 (8) (233) (536) 806
------------ ------------ ------------ ------------ ------------
Net Income (Loss) $ 648 $ 522 $ (164) $ (664) $ (2,754)
============ ============ ============ ============ ============
(In thousands, except per share data)
Year Ended December 31,
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Basic Earnings per Share:
Net Income (Loss) $ .05 $ .04 $ ( 02) $ (.06) $ (.24)
============ ============ ============ ============ ============
Diluted Earnings per Share:
Net Income (Loss) $ .05 $ .04 $ (.02) $ (.06) $ (.24)
============ ============ ============ ============ ============
Weighted Average Shares:
Basic 12,062 12,062 12,002 11,957 11,957
============ ============ ============ ============ ============
Diluted 12,062 12,062 12,002 11,957 11,957
============ ============ ============ ============ ============
16
(In thousands, except per share data)
Year Ended December 31,
Balance Sheet Data:
December 31,
------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Working Capital $ 7,156 $ 7,387 $ 6,456 $ 5,087 $ 3,253
Current Assets(1) 9,983 10,758 9,975 7,865 7,427
Total Assets(1) 14,575 15,727 14,996 13,349 11,544
Current Liabilities(2) 2,827 3,371 3,339 2,778 4,174
Long-term Debt(2) 2,121 2,266 1,822 1,459 1,071
Total Stockholders' Equity(3) 9,627 10,090 9,838 9,112 6,299
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
- --------------------------------------------------------------------------------
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,
accounting for pre-season order flooring interest, recourse obligation reserves
and accounting for income taxes.
The $1,021,322 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 $204,081 estimate of allowance for doubtful accounts is comprised of a
specific account analysis which addresses accounts over 90 days past due and a
general reserve of $10,000, which is deemed appropriate for the level of
receivables carried by the Company. 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.
- -----------------------
(1) Includes deferred taxes.
(2) Includes loans from shareholders and deferred taxes.
(3) Includes $696 of preferred stock.
The $74,453 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
17
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.
The Company estimates the future interest that will be incurred by the
Company associated with current sales under its dealer pre-season order program.
At the time of sale, the Company reduces sales revenue and accrues a liability
for the estimated future interest obligation. The Company estimates its future
interest obligation pursuant to the terms of its pre-season order program and
the shipping periods defined therein. The Company estimates that machinery
shipped between October and May of each year, will be sold at the dealer level
by the end of May and accrues an estimated future interest liability accordingly
(ranging from 30 to 210 days). For machinery shipped after May, the Company
estimates (since bagging season is in full swing) that it will incur interest
for approximately 30 days, and accrues an estimated liability accordingly. For
all other products, the company accrues an estimated future interest liability
(ranging from 30 to 180 days) under the assumptions that the product will be
sold at the dealer level by the end of the respective shipping periods as
defined in the pre-season order program. For additional products ordered and
shipped outside the defined shipping periods, the Company accrues an estimated
future interest liability of approximately 30 days, which according to the
pre-season order program, the Company pays interest through the end of the month
of shipment. The Company had accrued an estimated liability of $73,266 under
this program at December 31, 2003.
The Company periodically assigns some of its trade accounts receivable to
various third-party financing sources. These accounts can be assigned with or
without recourse depending on the specific accounts assigned. The Company
reviews on a monthly basis, those accounts assigned with recourse to determine
their payment history with the third-party financing source and estimates if any
accrual is necessary for potential future recourse obligations. At December 31,
2003, the balance of assigned accounts with recourse was $3,155,990. The Company
has determined, that at December 31, 2003, no accrual was necessary for
potential future recourse obligations with its third-party financing sources.
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. The Company has established a $1,577,772 valuation allowance against
its tax assets as of December 31, 2003.
18
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,
-----------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
Net Sales 100% 100% 100% 100% 100%
Costs and Expenses:
Cost of Sales 77% 79% 80% 81% 85%
Selling and Administration 19% 19% 21% 23% 24%
Research and Development 1% - - 1% 1%
------ ----- ----- ----- -----
Income (Loss) From Operations 3% 2% (1)% (5%) (10%)
====== ===== ===== ===== =====
YEARS ENDED DECEMBER 31, 2003 AND 2002
- --------------------------------------
For the year ended December 31, 2003, net sales decreased 20.91% to
$21,502,654 compared to $27,189,140 for the year ended December 31, 2002. Sales
were down for the year as a result of the slow U.S. farm economy which resulted
from the lowest U.S. milk prices seen since 2000. Milk prices were at record
lows for the first half of the year and saw some improvement in the third
quarter of 2003, but began to fall off again during the fourth quarter of 2003.
The outlook for 2004 indicates that milk prices will remain above the record low
levels seen during early 2003 of $9.11 and are anticipated to reach the $14-$15
range over the summer of 2004. Farmers began seeing increases in their monthly
milk checks during the third quarter of 2003, but continued to remain cautious,
despite continued low interest rates, on increasing their capital expenditures.
Management believes that once sustained, prolonged upward movement in U.S. milk
prices are seen, farmers will be able to repay their existing obligations which
mounted from the persistently low milk prices over the last year. 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 brought on by the summer drought conditions in the
U.S.. In addition, increased volume discounts from the implementation of the
Company's pre-season order program coupled with continued strong competition in
the silage bag market, as farmers look for the most economically priced bag,
without considering quality and customer service, contributed to the decline.
19
[GRAPHIC OMITTED - TABULAR DATA SET FORTH BELOW]
Historical Milk Price Table Indicating Prices From 1980 to 2003
YR'S
Year Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Avg.
---- --- --- --- --- --- ---- ---- --- ---- --- --- --- ----
1980 11.37 11.35 11.59 11.70 11.66 11.68 11.73 11.86 12.07 12.42 12.52 12.61 11.88
1981 12.64 12.66 12.67 12.64 12.61 12.59 12.53 12.47 12.46 12.52 12.52 12.56 12.57
1982 12.55 12.46 12.45 12.45 12.43 12.42 12.42 12.44 12.46 12.56 12.56 12.62 12.49
1983 12.62 12.59 12.53 12.51 12.51 12.50 12.50 12.48 12.48 12.52 12.56 12.11 12.49
1984 12.05 12.06 12.08 12.07 12.08 12.09 12.17 12.30 12.64 12.64 12.72 12.52 12.29
1985 12.40 12.21 11.95 11.62 11.46 11.20 11.10 11.08 11.12 11.21 11.19 11.18 11.48
1986 11.12 11.04 11.02 10.98 10.98 11.00 11.06 11.33 11.55 11.69 11.91 11.88 11.30
1987 11.70 11.27 11.03 11.00 11.00 11.07 11.17 11.27 11.42 11.35 11.34 11.12 11.23
1988 10.91 10.60 10.43 10.33 10.34 10.34 10.52 10.98 11.48 11.88 12.23 12.27 11.03
1989 11.90 11.26 10.98 11.09 11.12 11.33 11.76 12.37 13.10 13.87 14.69 14.93 12.37
1990 13.94 12.22 12.02 12.32 12.78 13.28 13.43 13.09 12.50 10.48 10.25 10.19 12.21
1991 10.13 10.04 10.02 10.04 10.23 10.58 10.99 11.50 12.02 12.50 12.48 12.10 11.05
1992 11.71 11.21 10.98 11.46 12.06 12.46 12.59 12.54 12.28 12.05 11.84 11.34 11.88
1993 10.89 10.74 11.02 12.15 12.52 12.03 11.42 11.17 11.90 12.46 12.75 12.51 11.80
1994 12.41 12.41 12.77 12.99 11.51 11.25 11.41 11.73 12.04 12.29 11.86 11.38 12.00
1995 11.35 11.79 11.89 11.16 11.12 11.42 11.23 11.55 12.08 12.61 12.87 12.91 11.83
1996 12.73 12.59 12.70 13.09 13.77 13.92 14.49 14.94 15.37 14.13 11.61 11.34 13.39
1997 11.94 12.46 12.49 11.44 10.70 10.74 10.86 12.07 12.79 12.83 12.96 13.29 12.05
1998 13.25 13.32 12.81 12.01 10.88 13.10 14.77 14.99 15.10 16.04 16.84 17.34 14.20
1999 16.27 10.27 11.62 11.81 11.26 11.42 13.59 15.79 16.26 11.49 9.79 9.63 12.43
2000 10.05 9.54 9.54 9.41 9.37 9.46 10.66 10.13 10.76 10.02 8.57 9.37 9.74
2001 9.99 10.27 11.42 12.06 13.83 15.02 15.46 15.55 15.90 14.60 11.31 11.80 13.10
2002 11.87 11.63 10.65 10.85 10.82 10.09 9.33 9.54 9.92 10.72 9.84 9.74 10.42
2003 9.78 9.66 9.11 9.41 9.71 9.75 11.78 13.80 14.30 14.39 13.47 11.87 11.42
Source: USDA Basic Formula Price (BFP)
PAGE BREAK REQUIRED DUE TO EDGAR PAGE SIZE.
Machine sale revenue for the year declined 23.55% and bag sale revenue
declined 17.15% compared to 2002. Machine sale revenue for the year declined as
a result of the U.S. milk price and farm economic conditions previously
discussed. As a percentage of total revenue for the year 2003, machine revenue
declined 3% and bag revenue increased 1%. (See "Item 1. Business - General.")
The following table identifies the number of machines sold by size by the
Company in 2003 compared to 2002:
Units Sold Units Sold
Machine Size 2003 2002
------------ ---- ----
Small 134 158
Medium 5 6
Large 25 36
---------------- ------------------
Total 164 200
================ ==================
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, 2003, the Company sold two composting
systems in addition to compost bag sales, generating approximately $524,000 in
revenue, compared to four systems sold and compost bag sales for the year ended
December 31, 2002, generating approximately $592,000 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 30-35% 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.")
20
International sales for the Company in 2003 were down in comparison to
2002 as a result of drought weather conditions in international dairy areas
where the Company has a large portion of its international customer base,
coupled with continued economic uncertainty affecting the international farm
economy, resulting largely from BSE (mad cow) concerns. International sales to
Germany remained constant compared to the prior 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 $4.7 million in bag sales
and service were distributed through the venture during 2003, an increase of
27%, compared to approximately $3.7 million in bag sales and service for 2002.
Gross profit as a percentage of sales decreased 21.51% for the year ended
December 31, 2003 compared to 2002. The decrease for the year was the result of
lower sales volumes to cover fixed operating overheads, coupled with lower
margins on the Company's used equipment sold during the year and increases
incurred in the Company's inventory reserves. The decrease was partially offset
by improved margins on the Company's "core" smaller bagging machines from
production improvements made during 2002, in addition to lower warranty costs as
a result of the Company passing on more of its warranty costs to its suppliers,
coupled with lower freight costs for the year resulting largely from the Company
streamlining its warehouse locations during 2002 to help in improving overall
margins. (See "Item 1. Business - Farm Equipment and Products.") Also
contributing to the decline for the year was an increase in volume discounts
(which are recorded as a reduction in net sales) from the Company's
implementation of its pre-season order program, as 2003 was the first full year
for this program and the related discount.
Selling expenses for the year ended December 31, 2003 decreased 24.82% to
$2,628,971 compared to $3,496,672 for the year ended December 31, 2002. The
decrease in selling expenses for the year was the result of lower commissions
and third party financing fees from lower sales volumes, lower overall
advertising costs, coupled with lower personnel, benefit, and travel costs
associated with sales personnel reductions made in late 2002 in connection with
the shift more towards selling through the Company's dealer network, partially
offset by increased dealer incentive costs.
Administrative expenses for the year ended December 31, 2003 increased
2.59% to $2,810,904 compared to $2,739,811 for the year ended December 31, 2002.
The increase for the year was the result of increased insurance expense and
higher professional fees related to public company compliance with the
Sarbanes-Oxley Act of 2002, in addition to slightly higher patent costs, which
were partially offset by lower bad debt, general office and administrative
personnel expenses.
During the year ended December 31, 2003, the Company recorded a gain from
the sale of assets of $185,358. The gain largely resulted from depreciated
folding equipment that was sold to its German joint venture during the second
quarter of 2003, in addition to the sale of fully depreciated miscellaneous
manufacturing equipment and vehicles which occurred during the third quarter of
2003. During the second quarter of 2003, the Company recorded a gain from the
sale of assets of $345,837. However, under the equity method of accounting with
the Company's 50% ownership in the German joint venture, the Company's share of
the gain of $172,918 was deferred and will be recognized as the German joint
venture depreciates the folding equipment over its useful life. During the year
ended December 31, 2003, $86,454 of the deferred gain was recognized as joint
venture income.
Research and development expenses for the year ended December 31, 2003
decreased 36.74% to $139,160 compared to $219,980 for the year ended December
31, 2002. The decrease in research and development expenses for the year was the
result of completed research on various projects undertaken
21
regarding new silage and nutritional studies of bagged feed and their effects on
animal production, offset by continued research and testing in this area as
well. Additionally, the Company continued testing on the newer design of the
Company's larger-sized silage-bagging machines, and compost machine modification
and development.
Interest expense for the year ended December 31, 2003 decreased 21.78% to
$245,656 compared to $314,068 for the year ended December 31, 2002. The decrease
for the year was the result of the Company utilizing a smaller credit facility
as a 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, which was partially offset by increased interest rates on the facility
during the year. 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.
Joint venture equity and royalty income for the year ended December 31,
2003 increased 34.23% to $423,074 compared to $315,196 for the year ended
December 31, 2002. The increase for the year was the result of increased income
from the joint venture as a result of the recognition of deferred folder sale
gain (see discussion of gain from sale of assets above), coupled with a special
one-time folding royalty received from the Company's joint venture upon the sale
of the folding equipment to the joint venture which occurred during the second
quarter of 2003. (See "Item 8. Financial Statements and Supplementary Data.")
The Company's effective tax rate for the year ended December 31, 2003 was
41%. The effective tax rate was an expense during the year due to the fact the
Company established a $1,577,772 valuation allowance against its deferred tax
assets in respect to the Company's ability to utilize its Net Operating Loss
carryforwards and research tax credits, which was offset by the fact the
Company's income from its German joint venture is not taxable in the United
States, and the extraterritorial income exclusion provisions of the current
United States tax code.
Net loss for the year ended December 31, 2003 was $2,753,715 compared to a
net loss of $663,988 for the year ended December 31, 2002. The net loss for the
year was the result of lower sales and gross margins, lower miscellaneous
income, increased administrative expenses, and the establishment of a deferred
tax valuation allowance on its deferred tax assets, partially offset by
decreased selling, research and development, and interest expenses and increased
joint venture equity and royalty income and gain from the sale of assets.
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 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
22
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.
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)
23
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 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 Supplementary 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,
24
administrative, and research expense, partially offset by higher income from the
Company's German joint venture and lower interest costs.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In June 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity." This statement establishes standards regarding classification and
measurement of certain financial instruments with characteristics of both
liabilities and equity. It requires financial instruments within the scope of
this statement to be classified as liabilities (or an asset in some
circumstances). Many of these financial instruments were previously classified
as equity. This statement is effective for financial instruments entered into or
modified after May 31, 2003, and was otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. For financial instruments
created before the issuance date of this statement and still existing at the
beginning of the interim period of adoption, transition is achieved by reporting
the cumulative effect of a change in an accounting principle by initially
measuring the financial instruments at fair value. 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 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." 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, the 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. This interpretation explains
how to identify variable interest entities and how an enterprise assesses its
interests in a variable interest entity to decide whether to consolidate that
entity. In December 2003, FASB made revisions and delayed implementation of
certain provisions of FIN 46. As a public entity that is not a "Small Business
Issuer," the Company is now required to apply FIN 46 to all unconsolidated
variable interest entities no later than March 31, 2004, with the exception of
unconsolidated special-purpose entities, which had an implementation deadline of
December 31, 2003.
Special-purpose entities for this provision are expected to include entities
whose activities are primarily related to securitizations or other forms of
asset-backed financings or single-lessee leasing arrangements. The Company is
associated with a potential variable interest entity through their investment in
BAW as described in Note 12 to the Financial Statements. Management determined
that BAW is a variable interest entity, but concluded that the Company is not
the primary beneficiary. 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
25
levels available to meet its sales demands. Although the Company's pre-season
ordering program provides it with some flexibility in production, the Company
must maintain adequate inventory levels for those customers, both old and new,
who order or re-order product outside of this program throughout the year.
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 have been flexible with their
payment terms (including extended payment arrangements) provided to the Company
and management believes this will continue. However, no assurance can be given
that suppliers will continue to provide sufficient trade credit in the future.
As a result of the Company incurring net losses during the previous three
years and its negative cash flows from operations for the current year, there is
uncertainty about the Company's ability to continue as a going concern. The
Company's management believes the Company's weak operating results have been
primarily due to the depressed milk prices in the agriculture sector, which has
a direct impact on the disposable income of its dairy farm customers, who
account for 75% of the Company's business. The Company further believes that
dairy farmers have been delaying or eliminating capital expenditures due to
their uncertainties regarding milk prices and their disposable income. Early
predictions for 2004 show milk prices significantly higher than the historically
low levels seen for many of the previous years and the Company expects operating
results to improve as dairy farmers begin to see increases in their disposable
income through stabilizing milk prices. The Company's management also feels that
dealers have been conservative on their pre-season orders for 2003-04 as a
result of the prolonged, depressed milk price situation. It is management's
feeling that some dealers will have the need to re-order additional product
during the year as a result of the forecasted improving milk price, which should
help the Company's dealers sell out of their remaining inventories. If this
happens, there is a potential for higher gross margins for the Company, as the
dealers would be re-ordering outside of the pre-season order program terms which
provide for a lower volume discount on their re-orders. (See "Results of
Operation" discussion.)
To help provide positive cash flow for the Company, management has
implemented an expense reduction plan. Specifically, management has implemented
staff reductions and reduced salaries of senior management. Nonessential capital
expenditures, travel and other expenses have either been eliminated or
postponed. Management has also been considering other changes to the Company's
business model such as opportunities to sell the business, refinance the
Warrenton, Oregon facility (which has only a small economic development loan
outstanding against this collateral), consolidate or dispose of manufacturing
facilities or other tangible or intangible assets, including selling the
Company's 50% interest in its joint venture, or take out a policy loan against
the life insurance policies currently in force in which the Company is the
beneficiary. However, no assurance can be given that the Company will be
successful in accomplishing these objectives.
Accounts receivable increased 5.82% at December 31, 2003 to $1,226,390
compared to $1,158,927 at December 31, 2002. The increase for the year was a
result of several large machine sales occurring during December where the
Company did not receive funding from its third party financing sources prior to
the end of December. The Company received payment during the first quarter of
2004. (See "Item 8. Financial Statements and Supplementary Data.") As a 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, the
Company generally receives funding from its third party financing sources within
10 days of invoice processing. For new purchases, the Company's customers 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 ($204,081 at December 31, 2003 compared to $203,595 at December 31,
2002) against accounts receivable in the event that some of the remaining
accounts become uncollectible.
The Company relies on its third-party financing sources and the dealers'
own established credit with their local banks, to provide funding for the
Company's dealers and retail customers for their purchases under the pre-season
order program. The Company's third party financing sources and dealers' local
banks
26
have provided sufficient credit to the Company's dealers to date for the
Company to obtain payment for their purchases and management believes this will
continue. However, no assurance can be given that the Company's third-party
financing sources and dealers' local banks will continue to provide the Company
with dealer and end user financing programs designed for the Company.
Inventory decreased 4.47% at December 31, 2003 to $5,781,345 compared to
$6,051,720 at December 31, 2002. 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. Contributing to these
efforts was the implementation of the Company's pre-season ordering program
introduced in September 2002 for the 2002-03 season which the Company continued
in October 2003 for the 2003-04 season. (See Item 1.
"Business - Marketing.")
Prepaid expenses and other current assets increased 26.61% at December 31,
2003 to $251,808 compared to $198,877 at December 31, 2002. The increase was the
result of an increase in trade show deposits and prepaid insurance expense.
Deferred income taxes decreased to $-0- at December 31, 2003 compared to
$1,013,000 at December 31, 2002. The decrease was the result of the Company
establishing a valuation allowance of $1,577,772 against its deferred tax assets
during 2003.
Intangible assets at December 31, 2003 increased to $15,066 compared to
$11,511 at December 31, 2002. The increase was the result of new patents
developed on the Company's bagging machine technology, offset by normal
amortization expense.
The BAW joint venture asset decreased to $376,974 at December 31, 2003
compared to $397,938 at December 31, 2002. The decrease was the result of the
deferred gain under the equity method of accounting, of the Company's share of
gain from the sale of folding equipment sold to the German joint venture in the
second quarter of 2003, which was offset by the Company's share of income for
the year. During the year ended December 31, 2003, $86,454 of deferred gain was
recognized.
Other assets were flat at December 31, 2003 at $491,513 compared to
$490,628 on December 31, 2002.
The Company has a revolving operating line of credit with a limit of
$3,000,000, secured by accounts receivable, inventory, fixed asset blanket and
general intangibles, and bears interest at the bank's prime rate plus 4 3/4 %.
As of December 31, 2003, $2,090,448 had been drawn under the credit line. The
line of credit will fluctuate based upon production needs and the timing of
collection of receivable balances. Additionally, the Company's borrowing base
fluctuates as receivables and inventory change. The borrowing base is equal to
(1) the lesser of the maximum line amount or (2) the sum of 70% of eligible
accounts receivable plus the lesser of 40% of eligible inventory or $2 million.
The line of credit is subject to certain net worth and earnings covenants, and
an annual capital expenditure limit. The Company was not in compliance with the
net worth and earnings covenants at December 31, 2003 and has received a waiver
for these violations. The Company's covenants have been reset for 2004 to
provide the Company with the ability to operate under its financial plan
submitted to its primary lender. Management believes that funds generated from
operations, management's implemented expense reduction plan and other changes
being considered to the Company's business model (as discussed above and in Note
2 to the Company's Financial Statements), and the Company's operating line of
credit, will be sufficient to meet the Company's cash requirements through 2004.
The Company's line of credit is subject to renewal in May 2006.
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. In August 2003, the
guarantee was reduced by Dresdner Bank to 250,000 Euro ($312,500 US). There
27
was -0- Euro outstanding and guaranteed by the Company under this additional
cash credit facility at December 31, 2003.
Accounts payable increased 3.72% at December 31, 2003 to $936,953 compared
to $903,309 at December 31, 2002. The increase for the year was the result of
the Company continuing its manufacturing process during the fourth quarter
(resulting from the Company's pre-season order program whereby the Company is
trying to level out its production process), coupled with some extended term
payment arrangements provided by some of the Company's principal suppliers. (See
"trade credit" discussion above.)
Accrued expenses and other current liabilities in total decreased 15.31%
at December 31, 2003 to $961,731 compared to $1,135,608 at December 31, 2002.
The decrease in total accrued expenses and other current liabilities for the
year was the result of decreased payroll & benefit accruals from personnel
reductions during the year, coupled with decreased dealer deposits from the
Company's change in its customer payment options implemented in late 2002, in
addition to lower accrued warranty expenses resulting from the Company passing
on more warranty costs to its principal suppliers. This was offset by increases
in volume discounts from the Company's pre-season order program, coupled with
increased general and pre-season order flooring interest accruals.
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.
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 $1,254,194 $182,706 $161,744 $159,265 $750,479
Operating leases 259,349 18,264 43,834 43,834 153,417
Purchase obligations - - - - -
-------------------------------------------------------------------------
Total $1,513,543 $200,970 $205,578 $203,099 $903,896
=========================================================================
OFF-BALANCE SHEET ARRANGEMENTS
- ------------------------------
As of December 31, 2003, we did not have any significant off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
28
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 and government subsidies of the farming
sector of the U.S. economy could cause a reduction in our revenue.
If a reduction in availability of credit or government subsidies 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
53%-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 which it continued for the 2003-04 season
with some modifications.
o We may not continue to gain market acceptance of our pre-season order
program.
The Company introduced a new pre-season order program in September
2002, which was modified in October 2003, 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 our third-party financing sources.
The Company is dependent upon its relationships with its independent
third-party financing sources and dealers' local banks, which provide
both wholesale and retail financing to the Company's dealers and end
users. If the Company's independent third-party financing sources, or
dealers' local banks, were unable to offer their current programs or
provide the level of credit to the Company's dealers, alternative
sources would have to be found. This may cause a delay in the Company's
ability to ship product under the terms of its pre-season order
program.
29
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.
o Our bag 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.
30
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 4 3/4%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY 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.
ITEM 9A. CONTROLS AND PROCEDURES
- ---------------------------------
As of December 31, 2003, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and the Company's Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on the evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in the reports it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and forms.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls including any corrective
actions with regard to significant deficiencies and material weaknesses
subsequent to the date the Company completed its evaluation.
PART III
--------
ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND
EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
A definitive proxy statement for the 2004 Annual Meeting of Stockholders
of Ag-Bag International Limited to be held on June 7, 2004 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.
The Company has not adopted a Code of Ethics, within the meaning of
applicable SEC rules, relating to the conduct of its officers and directors. The
Company has identified the need for a Code of Ethics but has been unable to
adopt one yet because of other management focus and time constraints. The
Company's board of directors is currently reviewing this requirement and intends
to develop a Code of Ethics during 2004.
31
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 350,000 $.64 960,335
- --------------------------------- ---------------------------- ----------------------- ----------------------------------
Total 350,000 $.64 960,335
- --------------------------------- ---------------------------- ----------------------- ----------------------------------
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. 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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- ------------------------------------------------
Information required is set forth under the caption "Audit Committee
Report" in the Proxy Statement and is incorporated herein by reference.
32
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........................................................... 36
Independent Auditor's Report............................................................ F-1
Balance Sheets at December 31, 2003 and 2002............................................ F-2
Statements of Operations and Comprehensive Loss for the years ended
December 31, 2003, 2002 and 2001.................................................... F-4
Statements of changes in Shareholders' Equity for the years ended
December 31, 2003, 2002 and 2001.................................................... F-5
Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001................................................................. 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-29
Schedule of Valuation and Qualifying Accounts........................................... F-30
Audited Financial Statements of BAW group as of December 31, 2003, 2002 and 2001........ F-31
(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........................................ 37
(b) No reports on Form 8-K were required to be filed during the last
quarter of the period covered by this report.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AG-BAG INTERNATIONAL LIMITED,
a Delaware corporation
Date: March 29, 2004 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 29, 2004 By: \s\ LARRY R. INMAN
--------------------------------------------
Larry R. Inman, Chairman, Board of
Directors and President
Date: March 29, 2004 By: \s\ MICHAEL J. SCHOVILLE
--------------------------------------------
Michael J. Schoville, Chief Executive
Officer (Principal Executive Officer)
Date: March 29, 2004 By: \s\ MICHAEL R. WALLIS
--------------------------------------------
Michael R. Wallis, Chief Financial
Officer and Vice President, Finance
(Principal Financial and Accounting
Officer)
Date: March 29, 2004 By: \s\ LEMUEL E. CUNNINGHAM
--------------------------------------------
Lemuel E. Cunningham, Director
Date: March 29, 2004 By: \s\ MICHAEL W. FOSTER
--------------------------------------------
Michael W. Foster, Director
Date: March 29, 2004 By: \s\ JIM DEMATTEO
--------------------------------------------
Jim DeMatteo, Director
Date: March 29, 2004 By: \s\ ARTHUR P. SCHUETTE
--------------------------------------------
Arthur P. Schuette, Director
Date: March 29, 2004 By: \s\ UDO WEBER
--------------------------------------------
Udo Weber, Director
34
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 Loss F-4
Statements of changes in 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-29
Valuation and Qualifying Accounts F-30
BAW
- ---
Independent Auditor's Report F-31
Balance Sheets F-32
Statements of Income and Comprehensive Income F-34
Statement of Shareholders' Equity F-35
Statements of Cash Flows F-37
Notes to Financial Statements F-38
Reconciliation of German GAAP to U.S. GAAP F-54
Exhibit I - Composition and development of tangible assets F-55
Exhibit 2 - Euro exchange rate table F-56
35
CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITOR'S REPORT F-1
FINANCIAL STATEMENTS
Balance sheets F-2 - F-3
Statements of operations and comprehensive loss F-4
Statements of changes in shareholders' equity F-5
Statements of cash flows F-6
Notes to financial statements F-7 - F-28
SUPPLEMENTAL INFORMATION
Independent auditor's report on supplemental information F-29
Valuation and qualifying accounts F-30
- --------------------------------------------------------------------------------
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, 2003 and 2002, and the related statements of operations and
comprehensive loss, changes in shareholders' equity, and cash flows for each of
the years in the three-year period ended December 31, 2003. 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. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ag-Bag International Limited as
of December 31, 2003 and 2002, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations,
has a retained deficit, negative cash flows from operations and is out of
compliance with its bank covenants, which raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters also are described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Medford, Oregon
February 20, 2004
F-1
AG-BAG INTERNATIONAL LIMITED
BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS
DECEMBER 31,
---------------------------------
2003 2002
--------------- ---------------
CURRENT ASSETS
Cash $ 167,528 $ 67,526
Accounts receivable, less allowance for doubtful
accounts of $204,081 and $203,595
at 2003 and 2002, respectively 1,226,390 1,158,927
Inventories 5,781,345 6,051,720
Prepaid expenses and other current assets 251,808 198,877
Deferred income taxes - 388,000
--------------- ---------------
Total current assets 7,427,071 7,865,050
--------------- ---------------
PROPERTY, PLANT, AND EQUIPMENT, NET 3,233,673 3,958,473
--------------- ---------------
OTHER ASSETS
Deferred income taxes - 625,000
Intangible assets, net 15,066 11,511
BAW joint venture 376,974 397,938
Other assets 491,513 490,628
--------------- ---------------
Total other assets 883,553 1,525,077
--------------- ---------------
TOTAL ASSETS $ 11,544,297 $ 13,348,600
=============== ===============
F-2
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
BALANCE SHEETS
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
--------------------------------
2003 2002
--------------- ---------------
CURRENT LIABILITIES
Line of credit $ 2,090,448 $ 384,725
Current portion of long-term debt and capital
lease obligations 182,706 351,974
Accounts payable 936,953 903,309
Accrued payroll and payroll taxes 206,514 307,935
Dealer deposits - 78,038
Warranty reserve 74,753 177,384
Volume discounts 205,984 168,500
Accrued expenses and other current liabilities 474,480 403,751
Income taxes payable 2,210 2,210
--------------- ---------------
Total current liabilities 4,174,048 2,777,826
--------------- ---------------
NONCURRENT LIABILITIES
Long-term debt and capital lease obligations,
net of current portion 1,071,488 1,459,138
--------------- ---------------
Total liabilities 5,245,536 4,236,964
--------------- ---------------
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
Treasury stock (31,500) (31,500)
Additional paid-in capital 9,210,211 9,210,211
Accumulated deficit (3,696,569) (883,694)
--------------- ---------------
Total shareholders' equity 6,298,761 9,111,636
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 11,544,297 $ 13,348,600
=============== ===============
See accompanying notes. F-3
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
- --------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------------
2003 2002 2001
----------------- ----------------- -----------------
NET SALES $ 21,502,654 $ 27,189,140 $ 28,708,233
COST OF SALES 18,357,038 22,121,346 22,947,604
----------------- ----------------- -----------------
Gross profit from operations 3,145,616 5,067,794 5,760,629
OTHER OPERATING EXPENSES
Selling expenses 2,628,971 3,496,672 3,441,197
Administrative expenses 2,810,904 2,739,811 2,626,268
(Gain) loss on sale of assets (185,358) (500) 8,648
Research and development expenses 139,160 219,980 213,757
----------------- ----------------- -----------------
Loss from operations (2,248,061) (1,388,169) (529,241)
OTHER INCOME (EXPENSE)
Interest income - 45,828 30,714
Interest expense (245,656) (314,068) (355,686)
Joint venture equity and royalties 423,074 315,196 299,065
Other 123,202 141,435 157,931
----------------- ----------------- -----------------
Loss before income taxes (1,947,441) (1,199,778) (397,217)
Provision (benefit) for income taxes 806,274 (535,790) (233,067)
----------------- ----------------- -----------------
NET LOSS AND COMPREHENSIVE LOSS $(2,753,715) $ (663,988) $ (164,150)
================= ================= =================
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (0.24) $ (0.06) $ (0.02)
================= ================= =================
BASIC AND DILUTED WEIGHTED-AVERAGE
COMMON SHARES OUTSTANDING 11,956,991 11,956,991 12,001,868
================= ================= =================
F-4 See accompanying notes.
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF CHANGES IN 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, 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 and comprehensive 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 and comprehensive 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
Preferred stock dividends - - - - - - - (59,160) (59,160)
Net loss and comprehensive loss - - - - - - - (2,753,715) (2,753,715)
------- --------- ---------- --------- ------- ---------- ------------- ------------- -------------
BALANCE,
December 31, 2003 174,000 $ 696,000 12,061,991 $ 120,619 105,000 $ (31,500) $ 9,210,211 $(3,696,569) $ 6,298,761
======= ========= ========== ========= ======= ========== ============= ============= =============
See accompanying notes. F-5
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------------
2003 2002 2001
----------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,753,715) $ (663,988) $ (164,150)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 775,980 816,262 762,390
Change in inventory reserve 290,000 79,000 77,500
(Gain) loss on disposition of equipment (185,358) (500) 8,648
Deferred income taxes 1,013,000 (538,000) (207,000)
Equity in joint venture earnings (151,954) (125,000) (131,200)
Change in assets and liabilities:
Accounts receivable (67,463) 1,274,915 507,537
Inventories (68,046) 233,448 397,528
Prepaid expenses and other current assets (52,931) 26,667 (33,806)
Other assets (885) (8,924) (82,030)
Accounts payable 33,644 230,746 66,735
Accrued expenses and other current liabilities (173,877) 159,306 (47,986)
Income taxes payable - 2,210 (175,130)
----------------- ----------------- -----------------
Net cash from operating activities (1,341,605) 1,486,142 979,036
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (49,745) (207,775) (427,984)
Acquisition of intangible assets (12,532) - (4,267)
Proceeds from disposition of equipment 414,239 500 3,750
----------------- ----------------- -----------------
Net cash from investing activities 351,962 (207,275) (428,501)
----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit 21,834,727 12,053,903 13,068,243
Principal payments on line of credit (20,404,004) (12,957,033) (13,005,026)
Principal payments on debt (281,918) (413,577) (382,460)
Purchase of common stock - - (31,500)
Dividends paid (59,160) (59,160) (59,160)
----------------- ----------------- -----------------
Net cash from financing activities 1,089,645 (1,375,867) (409,903)
----------------- ----------------- -----------------
NET INCREASE (DECREASE) IN CASH 100,002 (97,000) 140,632
CASH, beginning of year 67,526 164,526 23,894
----------------- ----------------- -----------------
CASH, end of year $ 167,528 $ 67,526 $ 164,526
================= ================= =================
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Long-term debt extinguished through
additional line of credit advances $ 275,000 $ - $ -
================= ================= =================
F-6 See accompanying notes
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION - 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 $135,490 in 2003 from rental equipment to inventory
held-for-sale. In 2003, 2002, and 2001 the Company transferred $183,911,
$331,726, and $697,849, 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 to be
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 uncollectible.
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, the Company reviews current inventory levels in relation to sales
forecasts and adjusts the valuation reserve accordingly. For the remaining
categories of inventory, the Company establishes a reserve balance based on the
aging of the specific inventory items.
F-7
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment are stated at
cost and are depreciated on the straight-line method over their estimated useful
lives which range from 5 to 7 years for equipment, and 20 to 30 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 7 to 12 years.
THIRD-PARTY FINANCING ARRANGEMENTS - The Company assigns some of its trade
accounts receivable to various third-party financing sources with discount rates
ranging from .75% to 1.5% at December 31, 2003. The accounts can be assigned
with or without recourse depending on the specific account being assigned. At
December 31, 2003, the balance of assigned accounts with recourse was
$3,155,990. Management has reviewed the accounts with recourse at December 31,
2003, and determined that no accrual is necessary for potential future recourse
obligations.
PRE-SEASON ORDER FLOORING - During 2002, the Company implemented a Pre-Season
Order Program under which the Company pays the flooring interest for dealers who
make purchases from the Company under specific provisions of the Pre-Season
Order Program. The Company estimates their future obligations under this program
at the time of sale, reduces sales revenues, and accrues a liability for the
estimated future interest obligation. Total dealer flooring interest was
$344,870 and $113,534 for the years ended December 31, 2003 and 2002,
respectively.
VOLUME DISCOUNTS - Under the same Pre-Season Order Program, the Company pays
volume discounts to dealers based upon a sliding scale for the volume of orders
placed by dealers. The Company estimates their future obligations under this
program at the time of sale, reduces sales revenues, and accrues a liability for
the estimated future volume discount obligation. Total volume discounts were
$732,458, $182,765 and $71,635 for years ended December 31, 2003, 2002 and 2001,
respectively.
REVENUE RECOGNITION - Revenue is recognized when the customer has placed an
order for the product, the product is delivered or shipped to the customer, the
sale's price has been determined, and collection is reasonably assured. The
Company includes revenues earned on shipping costs billed to customers in "Net
Sales," and costs to ship products are included in "Cost of Sales."
ADVERTISING COSTS - The Company expenses advertising costs as they are incurred.
Advertising expenses for the years ended December 31, 2003, 2002, and 2001 were
$412,047, $504,060, and $573,945, respectively.
F-8
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
WARRANTY RESERVE - 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. Warranty activity for the years ended December 31, 2003
and 2002 was as follows:
2003 2002
-------------- --------------
Balance, beginning of year $ 177,384 $ 124,482
Charged to expense 93,330 328,041
Warranty costs incurred during the year (195,961) (275,139)
-------------- --------------
Balance, end of year $ 74,753 $ 177,384
============== ==============
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 the Financial Accounting
Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation," additional compensation expense
would have been recognized.
The Company has computed, for pro forma disclosure purposes, the value of all
options granted during 2003, 2002, and 2001 using the Black-Scholes pricing
model as prescribed under SFAS No. 123. The following assumptions were made for
grants in 2003, 2002, and 2001: risk-free interest rate of 2.94%, 4.41%, and
4.41%, respectively, expected life of seven years, and dividend rates of 0%. For
2003, 2002, and 2001 the expected volatility over the expected lives of the
grants was assumed to be 102.52%, 77.04%, and 77.92%, respectively. The
weighted-average fair value of the options granted was estimated to be $.34 in
2003, $.20 in 2002, and $.34 in 2001.
F-9
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
If the Company had accounted for the value of the options granted during 2003,
2002, and 2001, in accordance with SFAS No. 123, the Company's net loss would
have been increased to the pro forma amounts indicated below:
2003 2002 2001
---------------- -------------- ---------------
Net loss:
As reported $ (2,753,715) $(663,988) $(164,150)
Pro forma $ (2,766,083) $(673,278) $(178,023)
Net loss per share:
As reported $ (0.24) $ (0.06) $ (0.02)
Pro forma $ (0.24) $ (0.06) $ (0.02)
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.
The Company has recorded a deferred tax asset of $1,577,772 and $1,013,000 as of
December 31, 2003 and 2002, respectively. Management has established a valuation
allowance of $1,577,772 against these deferred tax assets.
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.
F-10
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
SEGMENT INFORMATION -the 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, 2003 and 2002,
because of the relatively short maturity of these instruments. The carrying
value of notes payable approximated fair value as of December 31, 2003 and 2002,
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. Accordingly, actual results could differ from those
estimates. Significant estimates used in preparing these financial statements
include allowances for doubtful accounts receivable, inventory obsolescence
reserves, depreciation methods for property, plant and equipment, valuation
allowances for deferred tax assets and reserves for recourse obligations,
warranty obligations, and Pre-Season Order flooring interest obligations.
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 2003, the FASB issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." This statement establishes standards regarding
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. It requires financial
instruments within the scope of this statement to be classified as liabilities
(or assets in some circumstances). Many of these financial instruments were
previously classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and was otherwise
effective at the beginning of the first interim period beginning after June 15,
2003. For financial instruments created before the issuance date of this
statement and still existing at the beginning of the interim period of adoption,
transition is achieved by reporting the cumulative effect of a change in an
accounting principle by initially measuring the financial instruments at fair
value. Management does not expect that the application of the provisions of this
statement will have a material impact on the Company's financial statements.
F-11
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." 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, the 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. This interpretation explains how to identify variable
interest entities and how an enterprise assesses its interests in a variable
interest entity to decide whether to consolidate that entity. In December 2003,
FASB made revisions and delayed implementation of certain provisions of FIN 46.
As a public entity that is not a "Small Business Issuer," the Company is now
required to apply FIN 46 to all unconsolidated variable-interest entities no
later than March 31, 2004, with the exception of unconsolidated special-purpose
entities, which had an implementation deadline of December 31, 2003.
Special-purpose entities for this provision are expected to include entities
whose activities are primarily related to securitizations or other forms of
asset-backed financings or single-lessee leasing arrangements. The Company is
associated with a potential variable-interest entity through their investment in
BAW as described in Note 12. Management determined that BAW is a
variable-interest entity but concluded that the Company is not the primary
beneficiary. Management does not expect that the application of the provisions
of this interpretation will have a material impact on the Company's financial
statements.
RECLASSIFICATIONS - Certain reclassifications have been made to the 2002
financial statements to conform with the 2003 presentation.
F-12
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - GOING CONCERN
As shown in the accompanying financial statements, the Company incurred net
losses of $2,753,715, $663,988, and $164,150 during the previous three years and
has an accumulated deficit of $3,696,569 at December 31, 2003. The Company also
had negative cash flows from operations of $1,341,605 for the current period.
The Company is out of compliance with its net worth and earnings covenants under
their line of credit agreement with its primary lender, Wells Fargo Business
Credit.
Management believes their recent weak operating results have been primarily due
to depressed milk prices in the agricultural sector, which has a direct impact
on the disposable income of their dairy farmer customers. Management estimates
that over 75% of their end users are dairy farmers. Management believes that
dairy farmers have been delaying or eliminating capital expenditures due to
their uncertainties regarding milk prices and their disposable income.
Management further believes that early predictions for 2004 show milk prices
significantly higher than the historically low levels seen for much of the
previous years and expects operating results to improve as dairy farmers begin
to see increases in their disposable income through stabilizing milk prices.
Management also feels that its dealers have been conservative on their
pre-season orders for 2003-04 as a result of the prolonged, depressed milk price
situation. It is managements feeling that some of its dealers will have the need
to re-order additional product during the year as a result of the forecasted
improving milk price, which should help them sell out of their remaining
inventories currently in their dealer stock. If this happens, there is a
potential for higher gross margins for the Company, as the dealer would be
re-ordering outside of the pre-season order program terms which provide for a
lower volume discount on their re-orders. In addition, management has
implemented an expense reduction plan. Specifically, management has implemented
staff reductions and reduced salaries of senior management. Nonessential capital
expenditures, travel and other expenses have either been eliminated or
postponed. Management has also been considering other changes to their business
model such as opportunities to sell the business, refinance its Warrenton,
Oregon facility (which has only a small economic development loan outstanding
against this collateral), consolidate or dispose of manufacturing facilities, or
other tangible or intangible assets, including selling the Company's 50%
interest in its joint venture, or take out a policy loan against the life
insurance policies currently in force in which the Company is the beneficiary,
to provide positive cash flows to the Company.
Because it is unclear whether the Company will be successful in accomplishing
these objectives, there is uncertainty about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments that
might be necessary should the Company be unable to continue as a going concern.
F-13
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - INVENTORIES
Inventories consist of the following:
2003 2002
-------------- --------------
Parts and subassembly $ 1,878,102 $ 2,314,476
Work-in-process and raw materials 934,986 1,221,388
Machines 2,249,183 1,690,710
Bags and other finished goods 719,074 825,146
-------------- --------------
$ 5,781,345 $ 6,051,720
============== ==============
NOTE 4 - INTANGIBLE ASSETS, NET
Intangible assets, net, consist of the following:
2003 2002
-------------- --------------
License and patent costs $ 629,645 $ 617,113
Less accumulated amortization (614,579) (605,602)
-------------- --------------
$ 15,066 $ 11,511
============== ==============
Intangible assets are being amortized over their estimated useful lives ranging
from 7 to 12 years. Amortization expense for the years ended December 31, 2003,
2002, and 2001, was $8,977, $7,382, and $6,880, respectively.
F-14
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following:
2003 2002
-------------- --------------
Land $ 160,826 $ 160,826
Buildings 2,858,539 2,853,400
Vehicles 319,133 369,931
Office furniture, fixtures, and equipment 2,336,346 2,317,425
Plant equipment 3,324,125 3,580,758
Rental equipment 857,238 841,948
Leasehold improvements 80,399 80,399
-------------- --------------
Total property, plant, and equipment 9,936,606 10,204,687
Less accumulated depreciation and amortization (6,702,933) (6,246,214)
-------------- --------------
Property, plant, and equipment, net $ 3,233,673 $ 3,958,473
============== ==============
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, 2003 and 2002, the gross amount of equipment
under lease was $84,622. Accumulated depreciation related to those capital
leases was $84,622 at December 31, 2003 and 2002, respectively.
Depreciation expense for the years ended December 31, 2003, 2002, and 2001 was
$767,003, $808,880, and $755,510, respectively.
NOTE 6 - LINE OF CREDIT
The Company has an operating line of credit with a bank for up to $3,000,000 at
December 31, 2003, and up to $5,000,000 at December 31, 2002. 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 4-3/4 % at
December 31, 2003, and prime plus 1/4% December 31, 2002 (8.75% at December 31,
2003 and 4.5% at December 31, 2002). As of December 31, 2003 and 2002,
$2,090,448 and $384,725 were outstanding under the operating line of credit. The
line of credit is subject to certain net worth and income covenants, and an
annual capital expenditure limit. The Company was not in compliance with the net
worth and income covenants at December 31, 2003. The Company has received a
waiver for these covenant violations at December 31, 2003. In addition, the line
is subject to borrowing base restrictions. The borrowing base is equal to the
lessor of the maximum line amount or the sum of 70% of eligible accounts
receivable plus the lessor of 40% of eligible inventory or $2,000,000. The line
is subject to renewal on May 14, 2006.
F-15
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt is comprised of the following:
2003 2002
------------ ------------
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 $ 48,544 $ 68,765
Note payable, monthly payments of $6,724,
including interest at 6.84% through August 2014,
secured by real property 607,836 644,939
Note payable in monthly installments of
$4,969, including interest at 6.62% through
November 2017, secured by real property 503,566 525,041
Note payable in monthly principal install-
ments of $5,833, plus interest at prime
plus .75% (5.0% at December 31, 2002)
through April 2003, secured by fixed-asset
blanket - 23,333
Note payable in monthly installments of
$8,333, plus interest at 8.38% through
January 2006, secured by certain equipment.
This note was repaid in May 2003 - 308,333
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 58,723 134,996
F-16
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS - (continued)
2003 2002
-------------- --------------
Note payable in monthly installments of
$3,105, including interest at 8.75%
through December 2004, secured by
certain equipment $ 35,525 $ 68,052
-------------- --------------
Total long-term debt and capital lease obligations 1,254,194 1,773,459
Less current portion (182,706) (314,321)
-------------- --------------
Long-term debt and capital lease obligations, net $ 1,071,488 $ 1,459,138
============== ==============
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, 2004 $ 182,706 $ - $ - $ -
2005 89,855 - - -
2006 71,889 - - -
2007 76,959 - - -
2008 82,306 - - -
Thereafter 750,479 - - -
-------------------- --------------- ---------------- ---------------
$ 1,254,194 $ - $ - $ -
==================== =============== ================ ===============
F-17
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
The provision (benefit) for income taxes consists of the following:
2003 2002 2001
------------------- ----------------- ------------------
Current:
Federal $ - $ - $ -
Suspended general business
credits utilized - - (27,150)
State 2,210 2,210 1,083
------------------- ----------------- ------------------
2,210 2,210 (26,067)
------------------- ----------------- ------------------
Deferred:
Federal (692,703) (342,368) (195,000)
State (81,005) (60,000) (12,000)
------------------- ----------------- ------------------
(773,708) (402,368) (207,000)
------------------- ----------------- ------------------
Valuation allowance 1,577,772 (135,632) -
------------------- ----------------- ------------------
Income tax expense (benefit) $ 806,274 $ (535,790) $ (233,067)
=================== ================= ==================
F-18
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES - (continued)
Deferred tax assets and liabilities consist of the following:
2003 2002
------------- -------------
State net operating loss carryforward $ 214,000 $ 138,000
Federal net operating loss carryforward 1,016,000 660,000
General business credit carryforward 436,000 252,000
Alternative minimum tax credit carryforward - 21,000
Other expenses not currently deductible 41,772 92,000
------------- -------------
Gross deferred tax asset 1,707,772 1,163,000
Valuation allowance (1,577,772) -
------------- -------------
Net deferred tax assets 130,000 1,163,000
Gross deferred tax liability, primarily
due to differences in depreciation (130,000) (150,000)
------------- -------------
Net deferred tax assets $ - $ 1,013,000
============= =============
At December 31, 2003, the Company had a federal net operating loss of
approximately $2,990,000 available to offset future federal taxable income
through 2022. At December 31, 2003, the Company had state net operating loss of
approximately $3,045,000 available to offset future state taxable income through
2012. The Company has established a valuation allowance of $1,577,772 against
its deferred tax assets at December 31, 2003.
At December 31, 2003, the Company has research tax credit carryforwards for
federal income tax purposes of approximately $436,000 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 in 2002.
F-19
- --------------------------------------------------------------------------------
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:
2003 2002 2001
---------------- -------------- ---------------
Statutory federal income tax rate (34%) (34%) (34%)
General business credits - (1) (20)
Other nondeductible and nontaxable
items - - 9
Nontaxable earnings of foreign
joint venture (1) (4) (11)
Other 1 (6) (3)
Valuation allowance 75 - -
---------------- -------------- ---------------
Effective tax rates 41% (45%) (59%)
================ ============== ===============
NOTE 9 - SUPPLEMENTAL DISCLOSURES REGARDING CASH FLOWS
Supplemental disclosure of cash flow information:
2003 2002 2001
---------------- -------------- ---------------
Cash paid during year for:
Interest $ 245,656 $ 314,068 $ 355,686
Income taxes $ 3,385 $ 4,280 $ 90,800
F-20
- --------------------------------------------------------------------------------
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 the 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 2003, 2002, and 2001. At
December 31, 2003, 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 2003, there were no
options granted by the Company. At December 31, 2003, 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
2003, the Company granted 40,000 options under the annual grant. Additionally,
the Company had 190,000 options expire during 2003. At December 31, 2003, there
were 700,000 shares available for grant under the Non-Employee Director Stock
Option Plan.
F-21
- --------------------------------------------------------------------------------
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, 2003, 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, 2000 70,000 $ 1.00 350,000 $ 0.91 420,000
Options granted 20,000 $ - 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 granted - $ - 40,000 $ 0.34 40,000
Options expired - $ - (190,000) $ 0.78 (190,000)
------------- -------------- ---------------
Options outstanding at
December 31, 2003 50,000 $ 0.28 300,000 $ 0.56 350,000
============= ============== ===============
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
============= ============== ===============
Options exercisable at
December 31, 2003 30,000 $ 0.30 240,000 $ 0.64 270,000
============= ============== ===============
F-22
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - SHAREHOLDERS' EQUITY - (continued)
At December 31, 2003, the Company had outstanding options for the purchase of
350,000 shares of common stock as follows:
Weighted- Weighted-
Average Average
Number of Options Exercise Number of Options Exercise Average
Outstanding Price Exercisable Price Price Range Remaining Life
- -------------------------- --------------- ------------------------ ------------- ------------------- ------------------------
100,000 options $ 1.06 100,000 options $ 1.06 $1.00 - $1.06 3 years
40,000 options $ 0.44 40,000 options $ 0.44 $0.37 - $0.49 8 years
210,000 options $ 0.27 130,000 options $ 0.31 $0.25 - $0.35 7 years
NOTE 11 - FOREIGN SALES ACTIVITY
Export sales from the Company's operations are as follows:
2003 2002 2001
-------------- --------------- ---------------
Latin America/Mexico $ 30,540 $ 112,956 $ 88,864
Canada 861,195 1,147,872 1,030,174
Germany 273,303 275,415 444,767
Other 168,481 202,008 248,183
-------------- --------------- ---------------
$1,333,519 $ 1,738,251 $ 1,811,988
============== =============== ===============
F-23
- --------------------------------------------------------------------------------
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 (Joint
Venture) with Budissa Agroservice Gesellschaft and formed Budissa
Agrodienstleistungen und Warenhandels (BAW). The Company has a 50% interest in
BAW which is accounted for under the equity method. BAW folds and distributes
silage bags throughout Europe. The Company's accumulated deficit has been
reduced by undistributed equity earnings from BAW of $441,229 as of December 31,
2003.
2003 2002
------------- -------------
Initial investment $ 22,209 $ 22,209
Accumulated earnings, beginning of year 375,729 250,729
Deferred folder sale gain (86,464) -
Share of income for the year 65,500 125,000
------------- -------------
Investment, end of year $ 376,974 $ 397,938
============= =============
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 2003, 2002, and 2001,
income from this agreement was $200,000, $190,000 and $168,000, respectively. On
June 30, 2003, the Company sold the depreciated folding machine to the Joint
Venture for $400,000, which terminated this folding lease agreement. The sale
resulted in a gain of $345,836, of which $172,918 was deferred. The deferred
gain is being recognized over the estimated useful life of the asset on BAW's
books. At December 31, 2003, the remaining deferred gain is $86,464.
On December 18, 2000, Ag-Bag International Limited entered into an agreement
with Dresdner Bank to guarantee up to 511,292 Euro ($535,987 USD) as security
for an additional cash credit facility of BAW. On August 5, 2003, the guarantee
was reduced by Dresdner Bank to 250,000 Euro ($312,500 USD). There was no Euro
outstanding under this additional cash credit facility at December 31, 2003 and
2002, respectively. Upon modification of the agreement during 2003, management
estimated the fair value of the guarantee to be $15,000. The Company has
recorded an accrued a liability of $15,000 at December 31, 2003.
F-24
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - BAW JOINT VENTURE - (continued)
Condensed financial statements for the Company's Joint Venture in Germany are as
follows:
2003 2002 2001
------------------- ----------------- ------------------
(Dollars in thousands)
Current assets $ 1,438 $ 1,265 $ 967
Property, plant, and equipment, net 1,301 842 707
Other assets 28 8 18
------------------- ----------------- ------------------
Total assets $ 2,767 $ 2,115 $ 1,692
=================== ================= ==================
Current liabilities $ 547 $ 377 $ 511
Long-term liabilities 1,052 797 552
------------------- ----------------- ------------------
Total liabilities 1,599 1,174 1,063
------------------- ----------------- ------------------
Shareholders' equity 1,075 869 577
Minority interest 93 72 52
------------------- ----------------- ------------------
Total shareholders' equity 1,168 941 629
------------------- ----------------- ------------------
Total liabilities and shareholders'
equity $ 2,767 $ 2,115 $ 1,692
=================== ================= ==================
Net sales $ 4,718 $ 3,758 $ 3,357
Cost of goods sold (3,362) (2,591) (2,350)
------------------- ----------------- ------------------
Gross profit 1,356 1,167 1,007
Selling and administrative
expenses (1,130) (687) (511)
Other income (expense) (25) (29) (31)
Income taxes (96) (163) (123)
------------------- ----------------- ------------------
Net income (*) $ 105 $ 288 $ 342
=================== ================= ==================
*Attributed to other shareholders $ 8 $ 15 $ 36
------------------- ----------------- ------------------
F-25
- --------------------------------------------------------------------------------
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, 2003 and 2002, and from
the German Mark to the U.S. Dollar at the exchange rates in effect at December
31, 2001. The exchange rates used at December 31, 2003, 2002, and 2001, for the
balance sheets were $1.25, $1.05, and $.45, 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, 2003 and 2002, and from the German Mark
to the U.S. Dollar at the average exchange rates in effect at December 31, 2001.
The average exchange rates used at December 31, 2003, 2002, and 2001, for the
income statements were $1.13, $.95, and $.47, 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 believes there are adequate alternative suppliers
available in the event Supplier is unable to provide rolls. Total purchases from
Steven G. Ross for the years ended December 31, 2003, 2002, and 2001, were in
excess of $7 million annually.
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,
2003, 2002, and 2001, totaled $60,036, $66,361 and $59,418, respectively.
F-26
- --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES - (continued)
Future minimum lease payments under noncancellable operating leases are as
follows:
Years ending December 31, 2004 $ 18,264
2005 21,914
2006 21,917
2007 21,917
2008 21,917
Thereafter 153,417
-----------------
$ 259,346
=================
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, 2003.
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 four customers totaling
approximately $760,217 at December 31, 2003. These four balances represent 54%
of the accounts receivable balance at December 31, 2003.
F-27
- --------------------------------------------------------------------------------
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 2003 or 2002. The
Company's eligible employees made contributions to the plan of $196,292 and
$230,652 for the years ended December 31, 2003 and 2002, respectively.
NOTE 16 - QUARTERLY FINANCIAL DATA - (UNAUDITED)
2003 2002
--------------------------------------------- ---------------------------------------------
Q-1 Q-2 Q-3 Q-4 Q-1 Q-2 Q-3 Q-4
---------- ----------- ---------- ----------- ---------- ----------- ---------- ----------
(Dollars in thousands) (Dollars in thousands)
Net sales as previously reported $ 7,166 $ 5,960 $ 5,711 $ 4,807 $ 9,929 $ 8,817 $ 3,636
Volume discounts (297) (179) (19) - - - -
---------- ----------- ---------- ---------- ----------- ---------- ----------
Net sales $ 6,869 $ 5,781 $ 5,692 $ 3,161 $ 4,807 $ 9,929 $ 8,817 $ 3,636
========== =========== ========== =========== ========== =========== ========== ==========
Gross profit from operations as
previously reported $ 1,507 $ 1,222 $ 851 $ 1,046 $ 2,574 $ 1,623 $ (176)
Volume discounts (297) (179) (19) - - - -
---------- ----------- ---------- ---------- ----------- ---------- ----------
Gross profit from operations $ 1,210 $ 1,043 $ 832 $ 61 $ 1,046 $ 2,574 $ 1,623 $ (176)
========== =========== ========== =========== ========== =========== ========== ==========
Income (loss) before extraordinary
items and cumulative effect
of a change in accounting $ (49) $ (34) $ (317) $ (2,354) $ (251) $ 542 $ 124 $ (1,079)
========== =========== ========== =========== ========== =========== ========== ==========
Net income (loss) $ (49) $ (34) $ (317) $ (2,354) $ (251) $ 542 $ 124 $ (1,079)
========== =========== ========== =========== ========== =========== ========== ==========
Basic and diluated net income
(loss) per common share $ (0.01) $ - $ (0.03) $ (0.20) $ (0.02) $ 0.04 $ 0.01 $ (0.09)
========== =========== ========== =========== ========== =========== ========== ==========
Volume discounts offered to dealers under the Company's Pre-Season Order Program
were previously reported as selling expenses for quarterly financial reporting
purposes. The rebates have been reclassified as a reduction of net sales for
annual financial reporting purposes at December 31, 2003. The effect on net
sales and gross profits from operations as reported previously is reflected
above.
F-28
- --------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL INFORMATION
To the Board of Directors and Shareholders
Ag-Bag International Limited
Under date of February 20, 2004, we reported on the balance sheets of Ag-Bag
International Limited as of December 31, 2003 and 2002, and the related
statements of income, changes in shareholders' equity, and cash flows for the
years ended December 31, 2003, 2002, and 2001, as contained in the annual report
on Form 10-K for the year 2003. 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 audits.
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.
Medford, Oregon
February 20, 2004
F-29
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, 2003:
Allowance for doubtful accounts $203,595 $ 32,579 $ (32,093) $ 204,081
Warranty reserve $177,384 $ 93,330 $ (195,961) $ 74,753
Inventory valuation reserve $731,322 $ 290,000 $ - $1,021,322
Tax asset valuation reserve $ - $ 1,577,772 $ - $1,577,772
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
Tax asset valuation reserve $135,632 $ - $ (135,632) $ -
Year ended December 31, 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
Tax asset valuation reserve $135,632 $ - $ - $ 135,632
F-30
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS REPORT
-------------------------------
We have audited the accompanying balance sheets of BAW group as of December 31,
2003, 2002 and 2001 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,
2003, 2002 and 2001, and the results of its operations and its cash flows for
the years ended December 31, 2003, 2002 and 2001, in conformity with accounting
principles generally accepted in Germany.
02625 Bautzen, January 23, 2004
Treuhand-Gesellschaft
Dr. Steinebach & Partner GmbH
Wirtschaftsprufungsgesellschaft
/s/ MARTIN STEINEBACH
---------------------
Dipl.Ing. Martin Steinebach
Auditor
F-31
BAW GROUP
BALANCE SHEETS
December 31,
--------------------------------
2003 2002 2001
EUR ThEUR ThEUR
A. FIXED ASSETS ------------- -------- ---------
II. TANGIBLE ASSETS
1. Land and buildings 714,733.95 570.4 494.3
2. Technical equipment
and machines 309,160.89 209.2 288.4
3. Other systems, equipment
and devices 14,684.43 21.8 21.3
4. Buildings under construction 2,597.42 0.0 0.0
------------- -------- ---------
1,041,176.69 801.4 804.0
============= ======== =========
B. REVOLVING ASSETS I. STOCKS AND INVENTORIES
1. Raw materials and supplies 10,157.-- 11.1 4.1
2. Unfinished products and goods 77,740.84 0.0 0.0
3. Finished products and goods 442,855.85 205.9 245.1
4. Advance payments made -.- 1.0 0.1
------------- -------- ---------
530,753.69 218.0 249.3
------------- -------- ---------
II. ACCOUNTS RECEIVABLE AND OTHER ASSETS
1. Accounts receivable for
goods and services 382,745.29 347.3 446.8
3. Accounts receivable from
shareholders -.- 0.0 51.1
4. Other assets 72,837.13 18.4 14.1
------------- -------- ---------
455,582.42 365.7 512.0
------------- -------- ---------
IV. CHEQUES, CASH IN HAND, BALANCES AT
BUNDESBANK AND POSTBANK, BALANCES
AT FINANCIAL INSTITUTIONS 163,720.99 621.3 336.9
------------- -------- ---------
Total revolving assets 1,150,057.10 1,205.0 1,098.2
============= ======== =========
C. TRANSITORY ITEMS 13,902.67 3.4 9.0
============= ======== =========
D. DEFERRED TAXES 8,765.30 4.1 11.2
============= ======== =========
TOTAL ASSETS 2,213,901.76 2,013.9 1,922.4
============= ======== =========
F-32
BAW GROUP
BALANCE SHEETS
December 31,
--------------------------------
2003 2002 2001
EUR ThEUR ThEUR
-------------- --------- ---------
A. CAPITAL
I. CAPITAL STOCK 75,000.-- 75.0 75.0
III. OTHER PROFIT RESERVES 431,510.88 223.8 80.5
IV. PROFIT BROUGHT FORWARD 332,312.20 254.7
116.3
V. ANNUAL SURPLUS 85,847.57 287.2 284.3
-------------- --------- ---------
Subtotal 924,670.65 840.7 556.1
VI. CURRENCY CONVERSION ./. 64,556.27 ./. 12.8 24.7
VII. SHARES OF OTHER SHAREHOLDERS 74,612.65 68.4 53.0
-------------- --------- ---------
Total capital 934,727.03 896.3 633.8
============== ========= =========
B. SPECIAL ITEM INCLUDING RESERVES 172,353.92 141.7 134.1
============== ========= =========
C. RESERVES
1. Deferred taxes -.- 59.8 61.4
2. Tax reserves 44,372.89 91.3 166.6
4. Other reserves 49,342.84 46.3 47.7
-------------- --------- ---------
Total reserves 93,715.73 197.4 275.7
============== ========= =========
D. ACCOUNTS PAYABLE
2. Accounts payable to
financial institutions 558,468.04 433.2 466.6
3. Advance payments received -,- 9.5 0.0
4. Accounts payable for
goods and services 8,507.74 21.4 29.7
6. Accounts payable to
shareholders 431,533.78 294.2 344.5
8. Other accounts payable 14,595.52 14.2 16.0
of which from taxes EUR 2,085.54
of which for
social insurance EUR 5,470.61
-------------- --------- ---------
Total accounts payable 1,013,105.08 772.5 856.8
============== ========= =========
E. TRANSITORY ITEMS -.- 6.0 22.0
============== ========= =========
TOTAL LIABILITIES AND EQUITY 2,213,901.76 2,013.9 1,922.4
============== ========= =========
F-33
BAW GROUP
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31,
----------------------------------------
2003 2002 2001
EUR ThEUR ThEUR
-------------- --------- ---------
1. Turnover 4,175,003.54 3,894.0 3,411.6
2. changes in stocks and
inventories + 314,664.89 ./. 39.2 + 136.2
4. Other operational earnings 112,289.09 100.8 263.1
5. Material expenditure
a) Expenditure on raw materials
auxiliaries and media ./. 2,955,079.19 ./. 2,262.5 ./. 2,282.7
b) Expenditure on outsourced
services ./. 446,825.71 ./. 465.2 ./. 425.6
-------------- --------- ---------
GROSS PROFIT 1,200,052.62 1,227.9 1,102.6
6. Personnel expenditure
a) Wages and salaries 183,318.20 160.6 138.9
b) Social expenses 43,873.18 36.1 31.0
7. Depreciation
a) on tangible assets 299,462.17 144.8 151.5
8. Other operational
expenditure 473,488.92 381,5 320.0
11. Other interest and
similar earnings + 4,915.44 + 8.4 + 6.0
13. Interest and similar
expenditure 27,387.48 35.4 39.5
-------------- --------- ---------
14. PROFIT FROM NORMAL
BUSINESS ACTIVITIES + 177,438.11 + 477.9 + 427.7
18. Tax on income
and earnings ./. 81,461.99 ./. 172.0 ./. 107.7
19. Other taxes 3,471.29 3.2 2.0
-------------- --------- ---------
20. ANNUAL SURPLUS + 92,504.83 + 302.7 + 318.0
including for
other shareholders 6,657.26 15.5 33.7
-------------- --------- ---------
21. ANNUAL SURPLUS WITHOUT
OTHER SHAREHOLDERS 85,847.57 287.2 284.3
============== ========= =========
F-34
BAW GROUP
STATEMENT OF SHAREHOLDERS' EQUITY
DECEMBER 31, 2003
01.01.2003 addition deduction 12.31.2003
EUR EUR EUR EUR
---------- ----------- ----------- ------------
Capital stock 75,000.-- -.- -.- 75,000.--
Profit reserves 223,819.86 207,691.02 U -.- 431,510.88
Profit carry
forward 254,685.66 287,233.54 U 207,691.02 U
1,915.98 2) 332,312.20
Annual surplus 287,233.54 85,847.57 1) 287,233.54 U 85,847.57
---------- ----------- ----------- ------------
Subtotal 840,739.06 85,847.57 1,915.98 924,670.65
Shares of other
shareholders 68,434.39 6,657.26 1) 479.-- 2) 74,612.65*
Difference from
conversion of
currency ./. 12,835.89 -.- 51,720.38 ./. 64,556.27
---------- ----------- ----------- ------------
Total
equity 896,337.56 92,504.83 54,115.36 934,727.03
========== =========== =========== ============
U = transfer
1) Annual surplus EUR 92,504.83 = EUR 85,847.57 + EUR 6,657.26
2) Capital adjustment due to government tax audit in Poland
* Breakdown and development equity of other shareholder
F-35
BAW GROUP
STATEMENT OF SHAREHOLDERS' EQUITY
DECEMBER 31, 2003
EQUITY OF OTHER SHAREHOLDERS'
- -----------------------------
CONSOLIDATED 01.01.2003 (deductions) 12.31.2003
U=transfers
EUR EUR EUR
--- --- ---
Subscribed capital 7,719.52 -.- 7,719.52
Profit carry forward 45,228.92 15,485.95 U
(479.--) 2) 60,235.87
Annual surplus 15,485.95 (15,485.95) U
6,657.26 6,657.26
----------- ----------- -----------
68,434.39 6,657.26
(479.--) 74,612.65
=========== =========== ===========
01.01.2003 additions deductions 12.31.2003
EUR EUR EUR EUR
----------- ----------- ----------- -----------
"AG BAG POLSKA" SP.ZO.O.
Subscribed
capital 4,820.60 -.- -.- 4,820.60
Profit carry
forward 44,959.76 13,416.17 U (479.--) 2) 57,896.93
Annual surplus 13,416.17 5,897.77 13,416.17 U 5,897.77
----------- ----------- ----------- -----------
63,196.53 5,897.77 (479.--) 68,615.30
----------- ----------- ----------- -----------
AG-BAG HUNGARIA KFT
Subscribed
capital 2,898.92 -.- -.- 2,898.92
Profit carry
forward + 269.16 2,069.78 U -.- + 2,338.94
Annual surplus 2,069.78 759.49 2,069.78 U 759.49
----------- ----------- ----------- -----------
5,237.86 759.49 -.- 5,997.35
----------- ----------- ----------- -----------
Total 68,434.39 6,657.26 (479.--) 74,612.65
=========== =========== =========== ===========
2) capital adjustment from investigation by tax authorities
F-36
BAW GROUP
STATEMENTS OF CASH FLOWS
Years ended December 31,
----------------------------------
2003 2002 2001
ThEUR ThEUR ThEUR
---------- --------- ---------
I. OPERATING RESULTS
Turnover 4,175.0 3,894.0 3,411.6
Changes in stocks and
Inventories + 314.7 ./. 39.2 + 136.2
Other operational
earnings 112.3 100.8 263.1
Material expenditure ./. 3,401.9 ./. 2,727.7 ./. 2,708.3
---------- --------- ---------
Gross profit 1,200.1 1,227.9 1,102.6
less
Personnel expenditure 227.1 196.7 169.9
Depreciation
(without special depr.) 299.5 144.8 151.5
Other expenditure 473,5 381.5 320.0
Other taxes 3.5 3.2 2.0
---------- --------- ---------
Operating results + 196.5 + 501.7 + 459.2
========== ========= =========
II. FINANCIAL RESULTS
Interest income 4.9 + 8.4 + 6.0
Interest expense ./. 27.4 ./. 35.4 ./. 39.5
---------- --------- ---------
./. 22.5 ./. 27.0 ./. 33.5
========== ========= =========
III. TAXES ON INCOME
AND EARNINGS ./. 81.5 ./. 172.0 ./. 107.7
========== ========= =========
IV. SUMMARY OF THE YEAR-END RESULT
Operating result + 196.5 + 501.7 + 459.2
Financial result ./. 22.5 ./. 27.0 ./. 33.5
Taxes on income
and earnings ./. 81.5 ./. 172.0 ./. 107.7
---------- --------- ---------
Results for the year + 92.5* + 302.7**+ 318.0***
========== ========= =========
* Of which for other shareholders 6.7 ThEUR.
** Of which for other shareholders 15.5 ThEUR.
*** Of which for other shareholders 33.7 ThEUR.
B) DYNAMIC LIQUIDITY ANALYSIS BY CASH FLOW PRESENTATION
Years ended December 31,
----------------------------------
2003 2002 2001
ThEUR ThEUR ThEUR
---------- --------- ---------
Annual surplus + 92.5 + 302.7 + 318.0
Depreciation + 299.5 + 144.8 + 151.5
---------- --------- ---------
Cash flow (after tax) + 392.0 + 447.5 + 469.5
Plus taxes + 81.5 + 172.0 + 107.7
---------- --------- ---------
Cash flow (before tax) + 473.5 + 619.5 + 577.2
========== ========= =========
F-37
BAW GROUP
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
- --------------------------------------------------
LEGAL STRUCTURE OF THE GROUP
The legal structure of the group complies with ss. 290 sub-p. 1 HGB. The parent
company of the group is BAW Budissa Agrodienstleistungen und Warenhandels GmbH
having its registered office at Malschwitz, Ortsteil Kleinbautzen. The
subsidiaries of BAW Budissa Agrodienst-leistungen und Warenhandels GmbH - AG-BAG
HUNGARIA KFT and "AG BAG Polska" Sp.zo.o. - are affiliated companies pursuant to
ss. 271 sub-p. 2 HGB or, respectively, to ss. 290 sub-p. 2 HGB.
AG-BAG HUNGARIA KFT was incorporated February 11, 1999 in Gyor (Hungary) by cash
subscription. BAW Budissa Agrodienstleistungen und Warenhandels GmbH holds 90 %
of the shares of the corporation with a paid initial contribution of
6,300,000.--Forint. Mr. Csaba Szocs holds 10 % of the shares of the corporation
with a paid initial contribution of 700,000.--Forint. In 2001 the capital was
increased from 3,000,000.-- Forint by 4,000,000.-- Forint to 7,000,000.--
Forint.
"AG BAG Polska" Sp.zo.o. was incorporated on 08.19.1999 in Szelejewo Drugie
(Republic of Poland) by cash subscription. BAW Budissa Agrodienstleistungen und
Warenhandels GmbH holds 80 % of the shares of the corporation with a paid
initial contribution of 80,000.-- Zloty. Mr. Karol Benedykt Glapiak and Ms Marta
Kashyna paid an initial contribution of 10,000.-- Zloty each, and each of them
holds 10 % of the shares of the corporation.
Both subsidiaries are registered in the respective Commercial Register. The
average number of the employers during the business years was 13 people (p.y.
10).
F-38
PRINCIPLES OF CONSOLIDATION
a) Voluntary group accounts
Pursuant to the resolution adopted by the shareholders January 29, 2003 the
corporation prepared the group accounts voluntarily as per December 31, 2003.
The limits of ss. 293 HGB are not exceeded. The group accounts were prepared on
the basis of the provisions of the commercial law. These are group accounts
according to the commercial law only. Tax options were not used.
b) Cut-off Date and deferred valuation of the consolidated companies
BAW Budissa Agrodienstleistungen und Warenhandels GmbH as the parent company and
the subsidiaries AG-BAG HUNGARIA KFT and "AG BAG Polska" Sp.zo.o. were included
in the group accounts. The group accounts date is December 31, 2003. Both the
parent company and the included subsidiaries prepared proper annual financial
statements as of this cut-off date.
c) Breakdown of the group accounts and valuation principles
The group accounts and the group profit and loss account are shown and
classified pursuant to the provisions of the commercial law regarding
corporations. The requirements of ss.ss. 297 ff HGB were complied with.
Since the corporation is a joint venture, uniform valuation regulations had to
be agreed for the group accounts.
Since the parent company has its registered office and its management in
Germany, they agreed to use German valuation regulations for the present group
accounts without considering tax privileges according to the German, Polish or
Hungarian tax laws.
F-39
The balancing and valuation options were executed pursuant to ss. 300 sub-p. 2
HGB such that they meet the accounting standards of the USA (US GAAP).
As a result, pursuant to ss. 300 sub-p. 2 HGB a commercial balance sheet II had
to be drawn up for the individual financial statements to be included (see Tz.
26 to ss. 300 HGB in Beck'scher Bilanzkommentar, 4. edition). In this commercial
balance sheet II tax privileges were eliminated and uniform valuation principles
were used. The currencies of the foreign individual financial statements were
converted according to the concept of the functional currency.
Pursuant to this concept the balance sheet had to be converted at the exchange
rate date - except the equity which was valued at the historical rate - and the
profit and loss account at the average rate.
Poland Hungary
Current rate 1 PLZ = 0.21228 EUR 1 HUF = 0.003831 EUR
Average rate 1 PLZ = 0.23034 EUR 1 HUF = 0.004035 EUR
Fixed assets were valued on the basis of the initial costs less a linear pro
rata temporis or degressive depreciation, respectively.
Stocks and inventories are valued at group manufacturing costs or cost prices
considering the lowest value principle.
Accounts receivable and other assets are valued at their nominal value minus
potential allowances for losses on individual bank loan accounts or retirements
of accounts receivable.
Transitory items were shown pursuant to ss. 250 HGB.
F-40
The special item including reserves (allowances) was shown pursuant to the
recommendations of the HFA-Stellungnahme 1/1984 of the Institut der
Wirtschaftsprufer in Deutschland e.V.
Reserves take into account all risks apparent at the time. Accounts payable are
shown at their repayment value.
d) Consolidation of Funds
For the capital consolidation the book-value method (ss. 301 sub-p. 1 no. 1 HGB)
was applied, that is the valuation of the shares in the subsidiaries were set
off against the equity of the subsidiaries, allocated to these shares, that
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 capitalized as
goodwill - different from what is required by ss. 301 sub-p. 3 HGB - but was
deducted from the group capital (profit carry forward), since it includes only
the costs for incorporation. The shares of other shareholders shown pursuant to
ss. 307 HGB were taken into account.
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 set
off pursuant to ss. 303 sub-p. 1 HGB. The total amount of the mutual accounts
receivable and accounts payable that were set off amounts to 164.6 ThEUR. 11.0
ThEUR was shown as money being transferred (from Hungary to Germany).
F-41
f) Interim result elimination
In the financial year 2003, like in the previous years, interim results were
eliminated, see ss. 304 sub-p. 1 HGB. A total of EUR 21,913.25 was debited as
expenditure. This was necessary for the readjustment of the valuation of the
finished products and goods to group-uniform manufacturing costs.
g) Expenditure and Income Consolidation
The expenditure and earnings from the mutual supply and service transactions
were set off against one another amounting to 736.5 ThEUR.
h) Deferred taxation
Deferred taxation was made according to ss. 274 HGB and ss. 306 HGB as follows:
a) In the commercial balance sheet II of BAW Budissa Agrodienstleistungen
und Warenhandels GmbH the tax option was eliminated pursuant to ss. 7 g
EStG (ss. 300 sub-p. 2 HGB).
b) The item of deferred taxes in the group accounts was currently adjusted
in the year under review starting from 01.01.2003.
c) National differences in the tax rates were kept.
F-42
LISTING OF THE SUBSIDIARIES OF THE GROUP
The following subsidiaries were included in the group accounts:
Name and reg.office Share Capital Results for the financial year
of Stock
parent in national
company trade balance II
in % in EUR currency in EUR
AG-BAG HUNGARIA KFT
registered office at
Mosonmagyarovar
(Hungary) 90 *28,989.23 + 1,881,095.45 HUF + 7,594.92
"AG BAG Polska" Sp.zo.o.
registered office at
Szelejewo Drugie
(Republic of Poland) 80 *24,102.-- + 128,023.07 zl. + 29,488.84
* historical exchange rate
The subsidiaries have not acquired shares in the parent company in the year
under report.
F-43
NOTE 2 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Contingent Liabilities and other Financial Obligations:
There are no contingent liabilities or other financial obligations.
NOTE 3 - BREAKDOWN AND EXPLANATION OF THE ITEMS OF THE BALANCE SHEET
- --------------------------------------------------------------------
1. FIXED ASSETS - EUR 1,041,176.69
- ----------------------------------
The composition and development of fixed assets are listed in Exhibit 1.
2. RAW MATERIALS, AUXILIARIES AND MEDIA - EUR 10,157.
- ----------------------------------------------------
Classification:
Company Valuation
EUR p.y.ThEUR
BAW Budissa Agrodienst-
leistungen und Waren- packaging material
handels GmbH and small parts 10,157.-- 11.1
=========== ===========
An interim profit elimination was not necessary since no intra- group deliveries
are included.
F-44
3. UNFINISHED PRODUCTS AND GOODS - EUR 77,740.84
- ------------------------------------------------
Classification: EUR p.y.ThEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 77,740.84 0.0
=========== ===========
Unfinished products were valued at manufacturing costs. An interim result
elimination was not necessary.
4. FINISHED PRODUCTS AND GOODS - EUR 442,855.85
- -----------------------------------------------
Classification: EUR p.y.ThEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH -.- 41.2
"AG BAG Polska" Sp.zo.o. 353,958.73 154.6
AG-BAG HUNGARIA KFT 88,897.12 10.1
---------- -----
442,855.85 205.9
========== =====
For stocks and inventories an interim result elimination of a total of EUR
21,913.25 was made, of which EUR 5,657.-- include stocks and inventories in
Hungary and EUR 16,256.25 in Poland.
5. ACCOUNTS RECEIVABLE FROM GOODS AND SERVICES - EUR 382,745.29
- --------------------------------------------------------------
Classification: EUR p.y.ThEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 81,944.85 22.4
"AG BAG Polska" Sp.zo.o. 253,537.58 230.0
AG-BAG HUNGARIA KFT 47,262.86 94.9
---------- -----
382,745.29 347.3
========== =====
The reserve from last year ThEUR 31.0 was utilized during the current year.
F-45
6. OTHER ASSETS - EUR 72,837.13
- -------------------------------
Classification: EUR p.y.ThEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 8,779.72 3.1
"AG BAG Polska" Sp.zo.o. 59,234.84 15.3
AG-BAG HUNGARIA KFT 4,822.57 0.0
--------- ----
72,837.13 18.4
========= ====
Specified as follows: EUR
Repayment of turnover tax (D) 7,920.76
Repayment of turnover tax (P) 51,556.80
Repayment of corporate tax(P) 6,838.39
Repayment of turnover tax (H) 3,246.26
Repayment of corporate tax (H) 1,183.79
Repayment of trade tax(H) 392.52
---------
Total repayments 71,138.52
Interest limitation premium (D) 858.96
Insurance fund (P) 839.65
---------
Total 72,837.13
=========
7. CHEQUES, CASH IN HAND, BALANCES AT BUNDESBANK AND
POSTBANK, BALANCES AT FINANCIAL INSTITUTIONS -
EUR 163,720.99
- ----------------------------------------------------
Classification:
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.ThEUR
Cash in bank 125,735.56 8,262.64 14,849.52 148,847.72 604.4
Cash on hand 821.15 2,548.74 503.38 3,873.27 3.9
Transfers within
the group -.- -.- 11,000.-- 11,000.-- 13.0
---------- --------- --------- ---------- -----
126,556.71 10,811.38 26,352.90 163,720.99 621.3
========== ========= ========= ========== =====
F-46
8. DEFERRED ITEMS - EUR 13,902.67
- ---------------------------------
Classification: EUR p.y.ThEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 12,904.25 2.0
"AG BAG Polska" Sp.zo.o. 772.46 0.7
AG-BAG HUNGARIA KFT 225.96 0.7
--------- ---
13,902.67 3.4
========= ===
For all companies these items include advance financial expenditures for
technical equipment and vehicles as well as loan fees.
9. SPECIAL ITEM INCLUDING RESERVES - EUR 172,353.92
- ---------------------------------------------------
Classification and development:
as per allocation as per
12.31.2002 (reversal) 12.31.2003
EUR EUR EUR
Investment grant 141,711.75 54,000.--
(23,357.83) 172,353.92
========== ========= ==========
These are subsidies provided by Sachsische Aufbaubank (GA-Fordermittel) paid out
to BAW Budissa Agrodienstleistungen und Warenhandels GmbH.
10. DEFERRED TAXES - EUR ZERO
- -----------------------------
Development: EUR
As of 12.31.2002 59,755.05
Minus: Transfer in tax reserves ./. 59,755.05
---------
-.-
=====
In the previous year the deferred taxation corresponded to 40 % of the tax-free
reserves pursuant to ss. 7g EStG at BAW GmbH. The formation of this item was
made in HB II. In the current year the reserve was completely reversed. For this
reason the deferred taxes were reversed.
F-47
11. TAX RESERVES - EUR 44,372.89
- --------------------------------
Classification and development:
as per allocation as of
12.31.2002 (consumption) 12.31.2003
(release)*
Trade income tax EUR EUR EUR
2001 44,936.42 (44,936.42) -.-
2002 19,032.-- -.- 19,032.--
2003 -.- 2,746.-- 2,746.--
Corporate tax
2001 3,825.49 (4,373.09)
U 547.60 -.-
2002 21,569.92 (4,375.--) 17,194.92
2003 -.- 4,221.88 4,221.88
Reunification charge
2001 788.37 (240.55)
U (547.60)
(0.22)* -.-
2002 1,186.43 (240.62) 945.81
2003 -.- 232.28 232.28
--------- --------- ---------
91,338.63 7,200.16
(54,165.68)
(0.22)* 44,372.89
========= ========= =========
For the group accounts as per 12.31.2003 the respective national tax rates were
used. The tax reserve applies only to BAW GmbH.
12. OTHER RESERVES - EUR 49,342.84
- ----------------------------------
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 discernable risks and
obligations.
F-48
13. LIABILITIES - EUR 1,013,105.08
- ----------------------------------
Accounts payable Total Breakdown according to periods
------------------------------
amount up to 1 y. up to 5 y. 5 y.+ more
EUR EUR EUR EUR
to credit
institutions 558,468.04 144,386.26 325,335.45 88,746.33
for goods
and services 8,507.74 8,507.74 -.- -.-
to
shareholders 431,533.78 176,425.03 255,108.75 -.-
Other* 14,595.52 14,595.52 -.- -.-
------------ ---------- ---------- ---------
Total 1,013,105.08 343,914.55 580,444.20 88,746.33
============ ========== ========== =========
* of which from taxes EUR 2,085.54
of which for
social insurance EUR 5,470.61
NOTE 4 - BREAKDOWN AND EXPLANATION OF THE INCOME STATEMENT ITEMS
- ---------------------------------------------------------------
1. TURNOVER - EUR 4,175,003.54 (P.Y. 3.894.0 THEUR)
- -------------------------------------------------------
Classification:
BAW Budissa Agro- "AG BAG AG-BAG
dienstleistungen Polska" HUNGARIA
und Warenhandels Sp.zo.o. KFT group
GmbH in EUR EUR EUR EUR
Proceeds from sale
of goods 1,910,268.32 1,434,235.50 378,580.87 3,723,084.69
Proceeds from
Services -.- 437,457.19 13,485.26 450,942.45
Other turnover 976.40 -.- -.- 976.40
------------ ------------ ---------- ------------
1,911,244.72 1,871,692.69 392,066.13 4,175,003.54
============ ============ ========== ============
F-49
2. OTHER OPERATIONAL EARNINGS - EUR 112,289.09
- ----------------------------------------------
Classification:
BAW Budissa Agro- "AG BAG AG-BAG
dienstleistungen Polska" HUNGARIA
und Warenhandels Sp.zo.o. KFT group
GmbH in EUR EUR EUR EUR
77,534.92 28,134.33 6,619.84 112,289.09
========= ========= ======== ==========
3. EXPENDITURE ON RAW MATERIALS, AUXILIARIES AND MEDIA - EUR 2,955,079.19
- ---------------------------------------------------------
Classification:
BAW Budissa Agro- "AG BAG AG-BAG
dienstleistungen Polska" HUNGARIA
und Warenhandels Sp.zo.o. KFT group
GmbH in EUR EUR EUR EUR
1,713,451.72 1,047,946.30 193,681.17 2,955,079.19
============ ============ ========== ============
4. EXPENDITURE ON OUTSOURCED SERVICES - EUR 446,825.71
- -----------------------------------------------------
Classification:
BAW Budissa Agro- "AG BAG AG-BAG
dienstleistungen Polska" HUNGARIA
und Warenhandels Sp.zo.o. KFT group
GmbH in EUR EUR EUR EUR
270,102.05 168,280.62 8,443.04 446,825.71
========== ========== ======== ==========
5. PERSONNEL EXPENDITURE - EUR 227,191.38
- -----------------------------------------
Classification: EUR p.y.ThEUR
a) Wages and salaries
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 98,427.91 82.7
"AG BAG Polska" Sp.zo.o. 61,626.59 56.0
AG-BAG HUNGARIA KFT 23,263.70 21.9
---------- -----
Subtotal
wages and salaries 183,318.20 160.6
---------- -----
F-50
5. PERSONNEL EXPENDITURE - EUR 227,191.38 (CONTINUED)
- -----------------------------------------------------
EUR p.y.ThEUR
b) Social security contributions
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 22,974.44 17.9
"AG BAG Polska" Sp.zo.o. 12,944.26 10.9
AG-BAG HUNGARIA KFT 7,954.48 7.3
--------- ----
Subtotal
Social security contributions 43,873.18 36.1
--------- ----
Total personnel expenditure 227,191.38 196.7
========== =====
6. DEPRECIATION ON TANGIBLE ASSETS - EUR 299,462.17
- --------------------------------------------------
Classification: EUR p.y.ThEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 272,531.89 111.6
"AG BAG Polska" Sp.zo.o. 12,433.75 18.2
AG-BAG HUNGARIA KFT 14,496.53 15.0
---------- -----
299,462.17 144.8
========== =====
An exact specification is shown in Exhibit 1, List of Fixed Assets.
7. OTHER OPERATIONAL EXPENDITURE - EUR 473,488.92
- -------------------------------------------------
Classification:
BAW Budissa Agro- "AG BAG AG-BAG
dienstleistungen Polska" HUNGARIA
und Warenhandels Sp.zo.o. KFT group
GmbH in EUR EUR EUR EUR
244,518.84 186,026.30 42,943.78 473,488.92
========== ========== ========= ==========
F-51
8. OTHER INTEREST AND SIMILAR EARNINGS - EUR 4,915.44
- ----------------------------------------------------
Classification: EUR p.y.ThEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 4,177.09 2.8
"AG BAG Polska" Sp.zo.o. 629.03 4.1
AG-BAG HUNGARIA KFT 109.32 1.5
-------- ---
4,915.44 8.4
======== ===
These are interest earnings from time deposit accounts, current accounts and
other interest.
9. INTEREST AND SIMILAR EXPENDITURE - EUR 27,387.48
- ---------------------------------------------------
Classification: EUR p.y.ThEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 27,262.11 28.1
"AG BAG Polska" Sp.zo.o. 125.37 3.8
AG-BAG HUNGARIA KFT -.- 3.5
--------- ----
27,387.48 35.4
========= ====
10. TAX ON INCOME AND EARNINGS - EUR 81,461.99
- ----------------------------------------------
Classification: EUR p.y.ThEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 112,758.52 130.5
"AG BAG Polska" Sp.zo.o. 30,221.30 29.3
AG-BAG HUNGARIA KFT 2,858.55 6.8
---------- -----
Subtotal national taxes 145,838.37 166.6
less: Retirement of deferred taxes
BAW-GmbH for reversal of
savings reserve (p.y. for
tax reductions) in CBS II ./. 59,755.05 ./. 1.6
less: New formation of
deferred taxes ./. 4,621.33 + 7.0
--------- -----
81,461.99 172.0
========= =====
F-52
11. OTHER TAXES - EUR 3,471.29
- ------------------------------
Classification: EUR p.y.ThEUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH 1,596.03 1.6
"AG BAG Polska" Sp.zo.o. 1,864.67 1.5
AG-BAG HUNGARIA KFT 10.59 0.0
-------- ---
3,471.29 3.1
======== ===
This item includes property and motor vehicle tax.
F-53
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 2003 2002 2001
- --------------------------------------- ---- ---- ----
Total liabilities (non US GAAP) 1,279,175 1,117.6 1,288.6
Special item including reserves (172,354) (141.7) (134.1)
Tax reserve 68,942 56.7 53.7
------------------ -------------- -----------------
Adjusted total liabilities (for US GAAP) 1,175,763 1,032.6 1,208.2
------------------ -------------- -----------------
Total equity (non US GAAP) 934,727 896.3 633.8
Equity affect of prior year's reconcilation 65,412 80.5 25.8
Current year reversal of special item depreciation/income (23,358) (25.1) 82.6
Current year taxes on increased/decreased net income 9,343 10.1 (27.9)
------------------ -------------- -----------------
Adjusted equity capital (for US GAAP) 986,124 961.8 714.3
------------------ -------------- -----------------
PROFIT AND LOSS ACCOUNT RECONCILIATION TO US GAAP
Result of regular operations (non US GAAP) 177,438 477.9 427.7
(Reduction)/increase in other operating proceeds (23,358) (25.1) -
(Reduction)/increase in other operating expenses - - (82.6)
-------------- -----------------
------------------
Adjusted result of regular operations (for US GAAP) 154,080 452.8 510.3
------------------ -------------- -----------------
Taxes from income and revenue (non US GAAP) (81,462) (172.0) (107.7)
(Additional)/reduction in taxes from income and revenue 9,343 10.1 (27.9)
------------------ -------------- -----------------
Taxes from income and revenue (for US GAAP) (72,119) (161.9) (135.6)
------------------ -------------- -----------------
Year's profit (non US GAAP) 92,505 302.7 318.0
(Reduction)/increase in other operating proceeds (23,358) (25.1) -
(Reduction)/increase in other operating expenses - - (82.6)
(Additional)/reduction in taxes from income and revenue 9,343 10.1 (27.9)
------------------ -------------- -----------------
Year's profit (for US GAAP) 78,490 287.7 372.7
------------------ -------------- -----------------
Year's profit including to other shareholders (non US GAAP) 6,657 15.5 33.7
(Reduction)/increase in other operating proceeds (1,682) (1.3) -
(Reduction)/increase in other operating expenses - - (8.8)
(Additional)/reduction in taxes from income and revenue 673 0.5 (3.0)
------------------ -------------- -----------------
Year's profit including to other shareholders (for US GAAP) 5,648 14.7 39.5
------------------ -------------- -----------------
Year's profit without other shareholders (non US GAAP) 85,848 287.2 284.3
(Reduction)/increase in other operating proceeds (21,676) (23.8) -
(Reduction)/increase in other operating expenses - - (73.8)
(Additional)/reduction in taxes from income and revenue 8,670 9.5 (24.9)
------------------ -------------- -----------------
Year's profit without other shareholders (for US GAAP) 72,842 272.9 333.2
------------------ -------------- -----------------
F-54
BAW GROUP
EXHIBIT 1
LIST OF FIXED ASSSETS
- ------------------- ------------ ------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
HISTORICAL ADDITIONS HISTORICAL ACCUMULATED DEPRECIATION ACCUMULATED CURRENCY NET NET
COST RETIREMENTS COST DEPRECIATION 2003 DEPRECIATION CONVERSION BOOK VALUE BOOK VALUE
12.31.2002 12.31.2003 12.31.2002 12.31.2003 DIFFERENCES 12.31.2003 12.31.2002
EUR EUR EUR EUR EUR EUR EUR EUR EUR
- ------------------- ------------ ------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
Land, land-type
rights
and buildings
on sites owned
by third parties 626,872.96 180,857.42 807,730.38 56,531.67 36,464.76 92,996.43 0.00 714,733.95 570,341.29
- ------------------- ------------ ------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
Technical equipment
and machines 674,800.32 391,711.74 1,035,570.58 471,444.07 253,517.47 724,961.54 -1,448.15 309,160.89 209,221.18
-30,941.48
- ------------------- ------------ ------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
Equipment and 44,848.09 3,021.78 46,700.86 24,080.73 8,304.76 32,385.49 369.06 14,684.43 21,787.76
devices -1,169.01
- ------------------- ------------ ------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
Low-value
assets 19,850.72 1,130.87 20,981.59 19,896.02 1,175.18 21,071.20 89.62 0.00 0.00
- ------------------- ------------ ------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
Advance payments
made
Systems under
construction 0.00 2,597.42 2,597.42 0.00 0.00 0.00 2,597.42 0.00
- ------------------- ------------ ------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
TANGIBLE ASSETS 1,366,372.08 579,319.23 1,913,580.83 571,952.49 299,462.17 871,414.66 -989.47 1,041,176.69 801,350.23
-32,110.49
- ------------------- ------------ ------------ ------------ ----------- ------------ ----------- ------------ ----------- -----------
F-55
BAW GROUP
EXHIBIT 2
EURO EXCHANGE RATE
High Low
Rate at During During Average
Year December, 31, Year Year Rate
- ---- ------------- ------ ------ -------
2003 1.2552 1.2562 1.0333 1.1321
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-56
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)*
10.6 Credit and Security Agreement with Wells Fargo Credit, Inc.
effective May 13, 2003
10.7 First Amendment to Credit and Security Agreement
10.8 Second Amendment to Credit and Security Agreement
11 Statement re computation of earnings per share
12 Statement re computation of ratios
21 Subsidiaries of Registrant
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
* 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
36