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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, 2004 COMMISSION FILE NUMBER: 0-18259
AB HOLDING GROUP INC.
(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: $4,446,022
The registrant has one class of Common Stock with 11,976,991 shares
outstanding as of March 1, 2005.
AB HOLDING GROUP INC.
TABLE OF CONTENTS
PAGE
PART I ..........................................................................................2
Item 1. Business..................................................................................2
Item 2. Properties...............................................................................12
Item 3. Legal Proceedings........................................................................12
Item 4. Submission of Matters to a Vote of Security Holders......................................14
Executive Officers of the Registrant..................................................................15
PART II .........................................................................................16
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ...................16
Item 6. Selected Financial Data..................................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.............................................................................18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...............................35
Item 8. Financial Statements and Supplementary Data..............................................35
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.....................................................................35
Item 9A. Controls and Procedures..................................................................35
Item 9B. Other Information........................................................................35
PART III .........................................................................................36
Items 10. and 11. Directors and Executive Officers of Registrant and Executive
Compensation.............................................................................36
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters......................................................................42
Item 13. Certain Relationships and Related Transactions...........................................44
Item 14. Principal Accountant Fees and Services...................................................45
PART IV .........................................................................................46
Item 15. Exhibits and Financial Statement Schedules...............................................46
1
PART I
------
When used in this Annual Report, the words "believes," "anticipates,"
"hopes" 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 and ability of the Company to
convert its remaining assets into cash; clean its remaining non-operating public
shell; either dissolve and liquidate the corporation or sell the remaining
non-operating public shell to another party by merger or another method, the
ability to find a potential merger candidate for the remaining non-operating
public shell; the availability of trade credit and working capital for the
remaining non-operating public shell; 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
- -----------------
RECENT DEVELOPMENTS
- -------------------
On November 30, 2004, Ag-Bag International Limited (now known as AB Holding
Group Inc.), (the "Company") completed the sale of substantially all its
operating assets (the "Asset Sale") to Miller St. Nazianz Inc., ("Miller") and
Miller assumed certain liabilities relating to the purchased assets and the
operation of our business arising after the closing. The assets acquired by
Miller consisted of substantially all of the operating assets of the Company
including: Inventory; Equipment; and Intangible assets.
Some of the Company's assets were excluded from the Asset Sale. Because Miller
is an existing company with its own manufacturing facilities, Miller did not
need to purchase the Company's real estate, paint booths and systems, or Visual
computer system. The excluded assets consisted of:
o cash;
o accounts receivable;
o real estate;
o paint booths and systems;
o Visual computer system;
o corporate minute and stock record books and corporate seal, general
accounting records and books of original entries, checkbooks and
cancelled checks, and tax returns, reports and related records of the
Company ("CORPORATE RECORDS"); and
o rights and interest in and to any contracts not assumed by Miller, if
any; and
o a plastics supply agreement with UpNorth ("UpNorth").
The Asset Sale resulted in the elimination of the Company's historical farm feed
management and composting system operations with a corresponding elimination of
substantially all of the Company's operating revenue and related expenses. The
Company's only operations currently consist of converting its remaining assets
into cash and corporate administrative expenses of winding down and remaining a
non-operating public shell, until the Company can either dissolve and liquidate
or sell the remaining non-operating public shell to another party
2
by merger or another method. Therefore, except as otherwise specifically set
forth in this report, the results of operations of the historical business set
forth in this report, do not reflect the effects on the Company's operations
which resulted from the closing of the Asset Sale.
The taxable gain generated as a result of the Asset Sale, will be offset by the
utilization of net operating loss carry forwards.
GENERAL
- -------
AB Holding Group, Inc., formerly known as Ag-Bag International Limited (the
"Company") was incorporated as a New York corporation in 1989. The primary
operating company, Ag-Bag Corporation, a Nebraska corporation, was incorporated
in 1978. The Company changed its name in 1990 from AB Holding Group, Inc. to
Ag-Bag International Limited. In 1994, in an effort to streamline and save
administrative expenses, two of the Company's operating subsidiaries, A.B.
Rental, Inc. and Ag-Bag Corporation were merged into the Delaware subsidiary,
ABVIN Merging Corp. On January 1, 1995, the Company was merged into its Delaware
subsidiary resulting in the reincorporation of the Company in Delaware and a
change in its name to Ag-Bag International Limited. On December 7, 2004, in
connection with the Asset Sale, the Company changed its name back to AB Holding
Group, Inc.
Prior to the closing of the Asset Sale, the Company had pioneered an
alternate method of storing feed for livestock. Traditional methods of storing
feed included placing it in bunkers, pits, and silos or baling and stacking it.
The Company's method was 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 assembled the machines for stuffing the feed into the bags.
It had the bags manufactured to its specifications and then folded and
distributed the bags through its dealer network and directly in an area where a
dealer was not present. The benefits of bagging the feed included reduced cost,
additional flexibility in harvesting and storing the feed, enhanced feed
quality, and relatively small capital requirements. The Company also sold
ancillary products that complemented the Company's main line of bagging machines
and bags.
The following table identified the revenue from each product line that
accounted for more than 15% of total revenue over the last three years:
Product 2002 2003 2004
-------
----------- ---------- -----------
Bags 48% 49% 40%
Machines 44% 40% 34%
Parts 5% 6% 21%
Other 3% 5% 5%
----------- ---------- -----------
Net Sales 100% 100% 100%
The Company expected 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
was 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 believed the concept of bagging was one way in which farmers could
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.
3
Prior to the closing of the Asset Sale, in 2004, the Company shipped its
first orders to Russia. The Company continued to sell worldwide in Asia, Japan,
Latin America, Australia, New Zealand, and Western and Central Europe. Export
sales from the Company's United States operations were 10.81% of net sales for
the year ended December 31, 2004.
In 1997, the Company formed a German joint venture in which the Company
owned a 50% interest and its former German dealer owned the remaining 50%. The
joint venture folded and distributed silage bags to the Company's German and
European dealers. On April 27, 2004, the Company sold its investment in this
joint venture to its former German dealer, to provide the Company with working
capital.
The Company was developing other uses for its bagging technology prior to
the closing of the Asset Sale to Miller. 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 developed mobile
and stationary plastic recovery units which enabled the Company to bail and pick
up the recyclable Tri-Dura(R) plastic bags as a service to its customers.
SEASONAL NATURE OF BUSINESS
- ---------------------------
Prior to the closing of the Asset Sale, the core business of the Company
was historically seasonal due to the harvest seasons in North America and
Europe. The Company's machinery tended to be purchased in anticipation of the
next harvest season, so most of the sales of machinery occurred in the spring
and summer. This required the Company to carry significant amounts of inventory
to meet rapid delivery requirements of customers. Bag sales tended to occur as
the harvest season approached in the summer, and during the harvest season in
the fall. The Company previously took steps to counteract some of its
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 its
pre-season ordering program, whereby the Company's dealers placed their next
year's annual product requirements order in advance and utilized one of the
Company's third party financing sources. This pre-season program allowed the
Company to know in advance its production mix which in turn 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, brought seasonality back
into play for the Company, as shipments under the dealer bank program were at
the timing of the dealer rather than the Company. The pre-season order program
was a program under which the Company paid the flooring interest for its dealers
and paid volume discounts to its dealers based upon a sliding scale for the
volume of orders placed by and shipped to, the dealer under the program. The
Company terminated the pre-season order program upon the closing of the Asset
Sale.
Prior to the closing of the Asset Sale, approximately 95% of the Company's
business was concentrated in the Northern Hemisphere resulting in between 53-69%
of the Company's revenue being generated during the spring and summer (2nd and
3rd fiscal quarters). The following table outlines the percentage of revenue
over the past three years by quarter:
4
Quarter 2002 2003 2004
-------
----------- ---------- --------------
First 18% 32% 20%
Second 37% 27% 27%
Third 32% 26% 22%
Fourth 13% 15% 31% *
*As a result of the Asset Sale.
As a result of the closing of the Asset Sale, these historical revenue
percentages are not indicative of future revenue percentages by quarter.
FARM EQUIPMENT AND PRODUCTS
- ---------------------------
INTRODUCTION. Prior to the closing of the Asset Sale, silage was 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 involved storing it in bunkers,
pits or silos. Using traditional methods, there was a nutrient loss resulting
from a reduction in the moisture content of the forage before storage. The
moisture content needed to be reduced to compensate for the high oxygen content
of the forage, which resulted from the inability to pack the forage tightly
enough. When the forage was not packed sufficiently, the silage fermentation
process produced too much heat resulting in an even greater loss of nutrient
value than would normally occur if the moisture content was not reduced. The
loss of nutrient value resulted in the need for additional food supplements or
an increased volume of feed.
The Ag-Bag(R) system was an alternative to bunkers, pits and silos. The
Ag-Bag(R) bagging machines pushed the forage into huge recyclable plastic film
Tri-Dura(R) bags with sufficient compaction to minimize the amount of oxygen in
the bag, which was then sealed tightly when filled. As a result, the forage
could be stored with significantly higher moisture content. The ability to store
the forage in this manner also reduced the time required to cut, prepare and
store the forage thus reducing the loss of nutrients and provided higher quality
feed for production within the farmers' herds. As a result of the Asset Sale,
Miller now manufactures, operates, and sells the Ag-Bag(R) line of farm
equipment, bags and composting systems.
AG-BAG(R) FARM EQUIPMENT. Prior to the closing of the Asset Sale, the
Company's principal line of farm equipment was marketed under the trade name
"Ag-Bagger(R)", which is now owned by Miller. The Ag-Bagger(R) was available in
three versions with a number of optional features. Wide ranges of optional
features were offered by the Company on its bagging machines in order to meet
the budget needs of the farmer.
The smallest version consisted 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 used 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 were 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 a basic model of its smaller bagging machine, the "Personal
Bagger". The retail price for these machines ranged from approximately $19,900
to $53,000.
In 1992, the Company introduced a medium-sized machine that was operated by
the power take-off unit of a farm tractor or could be operated independently
with an optional diesel engine. This machine allowed 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 was primarily used 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 ranged from
approximately $80,000 to $228,500.
5
The largest version consisted of machines that could 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 were 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 were available with optional diesel engines. The
retail price for the larger machines ranged 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 and developed the Powered Anchor Control (PAC) system, and in
2000 introduced the latest version of the cable-less bagging machine, the
HYPAC(R) (Hydraulic Powered Anchor Control) system. The Company offered the
HYPAC(R) model in small, medium-sized and large-sized bagging machines. The
retail price for the HYPAC(R) machines ranged from approximately $53,000 to
$325,000.
The Company assembled and sold a separate line of related equipment called
the Ag-Bag Flex-a-Tuber(R) with a retail price that ranged from $11,500 to
$18,000. The Flex-a-Tuber(R) permitted 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) were made in two sizes to permit the bagging of 4 and 5 foot
bales. The bales could 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 assembled and sold a separate line of related equipment called
the Square Bale Bagger, which retailed for approximately $23,500 to $31,000. The
Square Bale Bagger permitted 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 permitted 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 assembled and sold the Ag-Bag(R) Pro-Grain Bagger, which
retailed for approximately $33,500. This machine was similar in design to the
smallest Ag-Bagger(R) machines but had 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 permitted the grain to be bagged
without damaging the kernel. After the grain was bagged and sealed, it retained
the necessary quality for human consumption.
The Company also assembled and sold the Mighty Bite(R) front-end load
bucket. This revolutionary bucket replaced the conventional bucket.
Hydraulically operated, the Mighty Bite(R) closed tightly around material, thus
eliminating spillage and increasing load capacity due to compaction. The Company
manufactured the Mighty Bite(R) in sizes ranging from one-half cubic yard to two
cubic yards with a retail price that ranged 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 was used in
conjunction with a shredder that shredded the organic material, which was then
fed into the bagging machine that bagged the compostable matter into Ag-Bag
6
Tri-Dura(R) storage bags. An air blower was attached to the bag and circulated
air through the bag during the composting process. The Ag-Bag(R) compost bagging
machines retailed for between $52,500 to $137,000.
AG-BAG TRI-DURA(R) STORAGE BAGS. Prior to the closing of the Asset Sale,
the Company folded and sold Ag-Bag Tri-Dura(R) disposable storage bags that
ranged in size from 8 to 14 feet in diameter and 100 to 500 feet in length that
were made of extruded plastic. Rolls of plastic were manufactured to the
Company's specifications. The plastic contained special stabilizers which
protected the bags from deterioration due to exposure to weather and the sun's
ultraviolet rays. Once a Tri-Dura(R) bag was used, it had to be recycled or
disposed of in another manner, but could not be reused.
The Company contracted for the manufacture of, and sold 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 ranged from approximately
$136 to $2,150. The manufactured plastic rolls were shipped to the Company's
plant in Blair, Nebraska, where they were folded and packed for sale using
proprietary folding techniques. The proprietary bag folding techniques reduced
bag folding time and allowed the bags to uniformly unfold while being filled,
thereby reducing operational delays. As a result of the Asset Sale, Miller now
owns the bag folding equipment and sells the Tri-Dura(R) bags.
AG-BAG(R) INOCULANT. Prior to the closing of the Asset Sale, the Company
marketed a liquid and dry powder inoculant under the trade name Ag-Bag Plus!(R).
The inoculant was added to the forage or the round or square bales during
bagging. It enhanced 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 former
Company supplier and introduced into the market in 1990. The dry inoculant was
produced from a proprietary formula owned by the Company and developed by Larry
R. Inman and former executive Walter L. Jay. See "Executive Officers of the
Registrant." The Company also marketed an inoculant designed specifically for
composting. As a result of the Asset Sale, Miller now sells the Ag-Bag(R)
inoculants and owns the proprietary formula.
MARKET SIZE
- -----------
Prior to the closing of the Asset Sale, the market for Ag-Bag(R) machinery
and Ag-Bag Tri-Dura(R) recyclable storage bags was primarily in the dairy and
beef cattle industries. Silage was used most often as dairy and beef animal
feed. It was 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 estimated that there
were approximately 105,000 dairies, and 150,000 beef, hog, and sheep farms in
the United States that were potential customers for Ag-Bag(R) farm equipment and
Tri-Dura(R) storage bags; and that only about 8-12% of this group actually used
storage bags made by the Company or its competitors. Prior to the closing of the
Asset Sale, the Company estimated that about 45-50% of the bagging industry
customers purchased silage storage bags from the Company. In addition to the
U.S., the Company believed there was a large population of such farms in Canada,
Latin America, Western and Central Europe, Australia, New Zealand, and Asia,
where the Company sold and distributed its products, and that there was a large
potential market in other countries where the Company may have expanded.
Prior to the closing of the Asset Sale, the Company also marketed a system
for "in-vessel" composting which was designed to eliminate odors and control
leachate inherent with composting. Composting was an alternative for disposing
of or eliminating the large number of organics from landfills. The Company's
primary focus was directed towards municipalities, private composters, military
bases, zoos and the Company's former dairy and beef customers. The Company
estimated the size of the compost market within North America to be over $2
billion a year. Until further marketing efforts were made outside North America,
the Company could
7
not estimate with any certainty the foreign market size. However, the Company
believed that there was a large potential market in other countries into which
it may have expanded. No assurance could be given that the "in-vessel"
composting system would be accepted in either the domestic or foreign
marketplace.
MARKETING
- ---------
Prior to the closing of the Asset Sale, the Company marketed 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; that were serviced by Company-employed regional and territorial
managers and sales support coordinators. With the closing of the Asset Sale,
these employee positions were eliminated. Most of the dealers marketed the
entire Ag-Bag(R) line of farm equipment and products; however, some dealers sold
only the farm equipment and others sold only the Ag-Bag(R) inoculants. The
Company also sold farm equipment, Tri-Dura(R) storage bags, and inoculant
directly to large customers in states where there were 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 focusing
towards direct selling. In September 2002, the Company introduced its pre-season
ordering program for its products, whereby the Company's dealers placed 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 the
2003-04 season with minor modifications. The Company's pre-season order program
ceased with the closing of the Asset Sale.
Prior to the closing of the Asset Sale, the Company offered customers the
opportunity to finance the purchase of Ag-Bag(R) farm equipment through
unaffiliated third parties who offered lease-purchase and wholesale financing.
Additionally, the Company rented used Ag-Bag(R) bagging machines to farmers in
various areas of the United States and charged a rental 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 at the time, the Company felt
that BSE (Mad Cow) would have little impact on its operations as its customer
base was largely focused on dairy farming rather than the beef industry.
Prior to the closing of the Asset Sale, the Company marketed its composting
system through a sublicense that allowed the end user to use the Ag-Bag(R)
compost technology. The Company planned to establish a composting dealer network
and develop a regional and territorial sales force that would have expertise in
composting in the future. As a result of the Asset Sale, Miller now owns all the
rights to the compost technology.
Prior to the closing of the Asset Sale, the Company was not dependent on
any single customer or a few customers. The loss of any single customer did not
have a material adverse effect on the Company's financial condition or results
of operations.
WEBSITE
- -------
AB Holding Group Inc., no longer maintains a website. Prior to the closing of
the Asset Sale, the Company maintained a website for use by its customers that
contained information about the Company, its products, and educational materials
regarding their use. The website address for Ag-Bag was http://www.ag-bag.com.
8
ASSEMBLY AND MANUFACTURING
- --------------------------
AG-BAG(R) FARM EQUIPMENT. Prior to the closing of the Asset Sale, the
Company bought some of its components for its bagging machines from various
manufacturers, manufactured the remaining components, and assembled the machines
itself. The medium and large sized machines, composting machines, HYPAC(R)
(cable-less) machines, Square Bale Baggers, and Flex-a-Tubers(R) were all
assembled at the Company's headquarters facility in Warrenton, Oregon. The
smaller machines were assembled at the Company's Blair, Nebraska plant. In 1999,
the Company licensed its former German dealer to manufacture bagging machines
for distribution within Europe. This license was transferred to Miller as part
of the Asset Sale.
The Company assembled all of its machines in order to better control the
quality of the farm equipment. This method also permitted the Company to offer
customized assembly for the end user of its equipment. The Company could 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. Prior to the closing of the Asset Sale,
all of the three-ply Tri-Dura(R) storage bags were manufactured for the Company
by a single manufacturer. The bags were manufactured to the Company's
specifications using a stabilizer that protected the plastic from becoming
brittle due to exposure to weather and the sun's ultraviolet light rays. The
Tri-Dura(R) plastic bags were made in various diameters based on bag orders
received by the Company. The bags were shipped in roll form to the Company's
plant in Blair, Nebraska, where they were folded and packaged for shipment.
AG-BAG(R) INOCULANTS. Prior to the closing of the Asset Sale, the Company
purchased on the open market the liquid and compost inoculant. The Company
believed that the liquid and compost inoculant would be reasonably available for
purchase on the open market for the foreseeable future. The dry inoculant was
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 former
executive Walter L. Jay. The proprietary formula was sold as part of the Asset
Sale. See "Executive Officers of the Registrant."
PRINCIPAL SUPPLIERS AND MANUFACTURERS
- -------------------------------------
Prior to the closing of the Asset Sale, the Company purchased its
Tri-Dura(R) rolls from a company (the "Supplier") partially owned by Steven G.
Ross pursuant to a supply agreement (the "Supply Agreement"). Steven G. Ross is
a 15.03% stockholder in the Company and President of a company which competed
with the Company's Tri-Dura(R) bags. The Supply Agreement provided 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 could terminate the Supply Agreement upon two years' prior written
notice. The Company could purchase plastic rolls from other suppliers to the
extent Supplier was unable to supply plastic rolls under the Supply Agreement.
Since the Company's Asset Sale, the Company no longer has any requirements for
plastic rolls under this Supply Agreement. On February 9, 2005, in settlement
with supplier, the Supply Agreement was terminated. (See "Item 3. - Legal
Proceedings")
Prior to the closing of the Asset Sale, several manufacturing companies
manufactured the structural components of the Company's farm and composting
equipment in Oregon, Nebraska and Iowa. The Company believed that alternative
sources of supply were readily available at competitive prices in the event the
Company's sources of supply became unavailable.
Prior to the closing of the Asset Sale, the Company mixed the dry inoculant
at its Blair, Nebraska facility. It purchased the ingredients for the dry
inoculant from a variety of suppliers. The Company purchased the liquid and
compost inoculant from a supplier, who mixed the inoculants to the Company's
specifications. The
9
Company believed there were various other alternative sources of supply
available in the event that it became necessary to purchase inoculant from other
suppliers.
COMPETITION
- -----------
Prior to the closing of the Asset Sale, as the Company's former corporate
slogan, the "Complete 1(R)," indicated, the Company believed it was the industry
leader in the manufacture and sale of complete sealed feed farm bagging systems.
Ag-Bag International Limited was the only company that manufactured the full
line of equipment, bags, and other accessories for sealed feed farm management.
There were three competitors within the United States that manufactured similar
silage bagging machines. There were also a number of competitors that
manufactured bale wrapping machines, which competed with the Company's
Flex-a-Tuber(R). The Company distinguished itself in the market place from other
manufacturers by providing a top quality product, better warranty protection,
and customer service.
The bag market was highly competitive. The Company competed in the bag
market by providing what the Company believed to be a superior product and
better warranty protection at a competitive price. The Company also offered,
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 competed with companies constructing bunkers and pits and,
to a lesser extent, silos. These competitors were mostly smaller companies that
built the bunkers and pits for the farmer, which the farmer filled with forage
using available or rented farm equipment otherwise used in the farming
operation. While these methods did not require bags or special equipment to fill
the bags, the use of these alternatives involved a significant loss of
flexibility in storing and harvesting the feed and an overall loss of feed
quality. Flexibility was lost since structures had to be permanently placed and
significant capital requirements were necessary to expand them. The feed quality
was inferior because of the amount of oxygen remaining after the forage was
placed in the pits or bunkers.
The Company competed primarily with windrow turner manufacturers in
composting. Windrow turners composted by turning and watering static piles
weekly and required containment of odor and leachate. These turners were
comparable in price to the Company's compost machines. However, the Company's
composting systems offered the advantage of being self-contained, thus reducing
odor and requiring no turning or watering. There were approximately 50
manufacturers of turners. In addition to the windrow turner manufacturers, the
Company competed with several companies that manufactured "in-vessel" systems,
such as burners and incinerators for large projects, which generally cost from
$1.5 to $15 million.
The Company competed in its product markets primarily on the basis of
product quality, warranty protection, and customer service. Some of its
competitors were larger and had greater financial, marketing, technical, and
other resources than the Company.
BACKLOG
- -------
As a result of the closing of the Asset Sale, the Company no longer has any
operations, and therefore no longer has any backlog of orders.
10
RESEARCH AND DEVELOPMENT
- ------------------------
Prior to the closing of the Asset Sale, during 2004, the Company focused
research and development expenditures on ongoing testing newer designs of its
larger-sized silage-bagging machine, in addition to further compost machine
modification and recycling 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 continued 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, 2004.
PATENTS AND TRADEMARKS
- ----------------------
Prior to the closing of the Asset Sale, the Company had basic and
improvement patents in the U.S., as well as a number of patents pending, that
encompassed machines, bags and systems for silage bagging, grain bagging, and
hay/straw bale bagging. Corresponding applications were filed in selected
foreign countries. In addition, proprietary rights in the bagging of compost had
been and were being developed in the U.S and in selected foreign countries.
Miller acquired the rights and ownership of all our patents and trademarks,
including those in process, in the Asset Sale.
The Company's patents on its basic bagging machine were found to be valid
and were successfully defended in prior litigation. The Company believed that it
developed its position in the industry partially as a result of protection
provided by these patents. The Company also owned 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 former executive Walter L. Jay. The
proprietary formula was sold as part of the Asset Sale. (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, and were sold as part of the Asset Sale.
The Company believed that its color scheme and trademarks were well known
in the industry, were an important part of its business, and gave the Company a
competitive advantage.
EMPLOYEES
- ---------
On December 31, 2004, the Company had 5 full-time employees. The Company
employed approximately 84 people during its busy season in fiscal 2004 prior to
the Asset Sale. None of the Company's employees are represented by a union, and
the Company believes that its employee relations are good.
11
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
- ----------------------------------------------------------------------------------
(In thousands)
Year Ended December 31
2002 2003 2004
---- ---- ----
Sales to unaffiliated customers:
United States $25,445 $20,165 $18,573
Canada 1,148 861 874
Germany 275 273 395
Latin America/Mexico 113 31 41
Russia - - 741
Other foreign countries 202 168 202
---------- ---------- -----------
$27,183 $21,498 $20,826
Sales to affiliated customers:
Officers and Directors 6 5 14
---------- ---------- -----------
Total $27,189 $21,503 $20,840
========== ========== ===========
All the Company's remaining 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 (the "Oregon Facility"). The Company's
administrative offices are located there. The Company occupies the land pursuant
to a lease that expires in 2014. The Company still owns the Warrenton, Oregon
real estate, as this was not sold as part of the Asset Sale. The Oregon Facility
is currently held for sale and the Company hopes to find a buyer for this
facility in the near term. Prior to the closing of the Asset Sale, this Oregon
Facility served as a warehouse and housed a major portion of the Company's
silage bagging equipment manufacturing.
The Company owns a facility in Blair, Nebraska (the "Nebraska Facility").
The Nebraska Facility consists of three buildings comprising approximately
70,000 square feet. The Company still owns the Blair, Nebraska real estate, as
this was an excluded asset not sold as part of the Asset Sale. The facility is
currently held for sale and the Company hopes to find a buyer for this facility
in the near term Prior to the closing of the Asset Sale, the Company folded and
packaged their Tri-Dura(R) feed storage bags; prepared and packaged their
proprietary inoculant; and, assembled their smaller bagging machines and
warehoused product at the Nebraska Facility.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company was 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
alleged 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 sought monetary damages. On
February 6, 2004, the bag pan, density control and composting method patent
claims were settled and dismissed in their entirety. On January 28, 2004, the
court ruled, in the remaining adjustable anchor wing patent claim, that the
Company did 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.
On December 15, 2004, the anchor wing patent matter was settled and the case
dismissed in its entirety, thereby concluding the final Versa litigation matter.
On December 14, 2004, the United States Court of Appeals for the Federal Circuit
ruled on Versa's appeal (collectively called the "544 Litigation"), and reversed
the District Courts decision that Ag-Bag did not infringe
12
relative to the use of flutes in the `910 composting method patent. Pursuant to
the settlement reached February 6, 2004 between the parties, as a result of this
reversal, the Company is required to pay a royalty on compost bags sold from the
date of the appeal decision forward, over the life of the `744 patent. As a
result of the Asset Sale, since Miller is the owner of all of the Ag-Bag patents
and trademarks, these future royalty payments will be borne by Miller. All Versa
litigation is now dismissed and concluded.
The Company was a defendant in an alleged breach of contract lawsuit,
UpNorth Plastics, Inc., v. Ag-Bag International Ltd., Civil Action No.
3:04-CV-1946-L filed September 8, 2004 in the United States District Court,
Northern District of Texas, Dallas Division. The claim alleged breach of the
"no-shop" provision of the letter of intent dated February 27, 2004 between the
parties. The Company denied the allegations and vigorously defended itself
against the lawsuit. On October 12, 2004, the Company filed a motion to dismiss
the complaint for failure to state a claim upon which relief could be granted,
and on November 22, 2004 filed an additional motion to stay discovery pending a
ruling on the motion to dismiss. Additionally, on December 9, 2004, the Company
filed a motion for protective order pending rulings on the motions to stay
discovery and dismiss. Prior to the court's ruling on any of the pending
motions, the parties reached a settlement agreement dated February 9, 2005.
Pursuant to the parties' settlement, the court entered an order dismissing the
case with prejudice on February 17, 2005. UpNorth Plastics Inc.'s President,
Steven G. Ross, is a 15.03% shareholder of the Company.
The Company was a defendant in an arbitration proceeding in an alleged
breach of contract proceeding, UpNorth Plastics, Inc., v. Ag-Bag International
Limited, American Arbitration Association, Case No. 65-181-Y-00441-04 filed
November 29, 2004 before the American Arbitration Association, in the State of
Minnesota. The claim alleged breach of the supply agreement between the parties.
The Company denied the allegations and vigorously defended itself against this
arbitration proceeding. Prior to the arbitration, the parties reached a
settlement agreement dated February 9, 2005, thereby dismissing this arbitration
proceeding in its entirety. UpNorth Plastics Inc.'s, President, Steven G. Ross,
is a 15.03% shareholder of the Company.
Additionally, on November 29, 2004, UpNorth Plastics, Inc., filed an
application for a Temporary Restraining Order and Temporary and Permanent
Injunctions, UpNorth Plastics, Inc., v. Ag-Bag International Limited, in the
Washington County District Court, 10th District, State of Minnesota, seeking to
block the Asset Sale to Miller, preventing the Company from distributing a
portion of the sales proceeds from the then pending Asset Sale, and compelling
the Company to continue to perform its obligations under the supply agreement
with UpNorth. On November 29, 2004, the court ruled upon and denied UpNorth's
motion for a Temporary Restraining Order and Temporary and Permanent Injunctions
against the Company which concluded this matter. UpNorth Plastics Inc.'s,
President, Steven G. Ross, is a 15.03% shareholder of the Company.
The Company is a defendant in an alleged lawsuit, Case Credit Ltd, v.
Artomda Farms Ltd, Tom's Custom Services Ltd.; Thomas Stoker, and Ag-Bag
International Ltd, filed September 24, 2003 in the Court of Queen's Bench of
Alberta Judicial District of Calgary. The claim alleges improper assignment of a
third party financing Company retail installment contract for a bagging machine
sold by the Company to Thomas Stoker. Mr. Stoker subsequently defaulted with the
third party finance Company, and the bagging machine was subsequently
repossessed by Case Credit Ltd., and, sold for a greatly reduced value, without
first allowing the Company to repurchase said bagging machine per its Dealer
agreement with the third party finance Company. Plaintiff seeks monetary
damages. The Company denies all allegations of this claim and is vigorously
defending itself against this claim. Depositions continue and discovery is
ongoing in this matter. The Company's defense costs in this matter are being
handled through its insurer.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The Company held its annual meeting of shareholders on November 30, 2004,
at which the shareholders voted in favor of three matters: (1) the Asset Sale
proposal pursuant to which Ag-Bag International Limited sold substantially all
of its operating assets to Miller; (2) a name change proposal under which Ag-Bag
International Limited changed its name to AB Holding Group Inc., and (3) the
election of two Class III Directors. Upon motion duly made and seconded at the
meeting, Roy F. Cunningham was appointed to stand for election in place of
Lemuel E. Cunningham, who is deceased, and the proxies cast votes accordingly.
The Class III Directors joined the Class I Directors Michael W. Foster and Udo
Weber, and the Class II Directors Arthur P. Schuette and James C. DeMatteo, who
remain on the Board of Directors. There were 8,243,631 shares of Ag-Bag's common
stock represented at the annual meeting in person or by proxy, which is
approximately 68% of the shares of common stock outstanding and entitled to vote
based on the October 28, 2004 record date for the annual meeting. The results of
the votes, as certified by the inspector of elections, were as follows:
PROPOSAL 1- ASSET SALE PROPOSAL:
- ------------------------------- ---------------------------- ----------------------------
NO. OF SHARES VOTING FOR NO. OF SHARES VOTING NO. OF SHARES ABSTAINING
AGAINST
- ------------------------------- ---------------------------- ----------------------------
Common Common Common
- ------------------------------- ---------------------------- ----------------------------
6,112,281 2,032,700 98,650
- ------------------------------- ---------------------------- ----------------------------
PROPOSAL 2 - NAME CHANGE PROPOSAL:
- ------------------------------- ---------------------------- ----------------------------
NO. OF SHARES VOTING FOR NO. OF SHARES VOTING NO. OF SHARES ABSTAINING
AGAINST
- ------------------------------- ---------------------------- ----------------------------
Common Common Common
- ------------------------------- ---------------------------- ----------------------------
6,113,881 2,032,100 97,650
- ------------------------------- ---------------------------- ----------------------------
PROPOSAL 3 - ELECTION OF DIRECTORS:
LARRY R. INMAN
- ------------------------------- ---------------------------- ----------------------------
NO. OF SHARES VOTING FOR NO. OF SHARES VOTING NO. OF SHARES ABSTAINING
AGAINST
- ------------------------------- ---------------------------- ----------------------------
Common Common Common
- ------------------------------- ---------------------------- ----------------------------
6,100,106 2,138,450 5,075
- ------------------------------- ---------------------------- ----------------------------
ROY F. CUNNINGHAM
- ------------------------------- ---------------------------- ----------------------------
NO. OF SHARES VOTING FOR NO. OF SHARES VOTING NO. OF SHARES ABSTAINING
AGAINST
- ------------------------------- ---------------------------- ----------------------------
Common Common Common
- ------------------------------- ---------------------------- ----------------------------
6,097,410 2,141,146 5,075
- ------------------------------- ---------------------------- ----------------------------
14
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
The executive officers of the Company, their respective ages as of March 1,
2005, 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. After the closing of the Asset Sale,
several of the Company's officers were terminated. The officers terminated were
Messrs. Walter L. Jay, Vice President of Manufacturing and Arthur P. Schuette,
Vice President of Sales and Mrs. Lou Ann Tucker, Vice President of
Administration. Mrs. Tucker currently serves as Secretary on an un-compensated
basis. Upon the resignation of Michael J. Schoville as Chief Executive Officer
effective December 1, 2004, Larry R. Inman became acting Chief Executive
Officer, and was officially appointed Chief Executive Officer which became
official at the Board of Directors first meeting in January 2005.
NAME AGE POSITION
---- --- --------
Larry R. Inman 54 Chairman of the Board (1990-2000; since 2002); President
of the Company (since 1993); Chief Executive Officer
(1990-2002; since 12/01/2004); President of Ag-Bag
Corporation (1984-1989) and Chairman (1989-1994) of
Ag-Bag Corporation (former subsidiary).
Michael R. Wallis 40 Chief Financial Officer (since 1993) and Vice President
of Finance (since 1992), Treasurer (since 1996); Manager,
Yergen and Meyer (regional accounting firm, 1986-1992).
Lou Ann Tucker 51 Secretary (since 1996), Vice President, Administration
(1989- 2004), 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).
15
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. Effective January 24, 2005, as a result of the Company's
name change back to AB Holding Group Inc., which was approved by the Company's
shareholders, the Company's new trading symbol became "ABHG."
As of March 1, 2005, there were approximately 305 holders of record of the
Company's Common Stock. The Company estimates there are approximately 1,100
beneficial holders of the Company's Common Stock. The following table sets forth
the range of high and low bid prices of the Company's Common Stock for the
quarters indicated through the fourth quarter of 2004 as reported on the OTC
Bulletin Board:
Calendar Year High Bid Low Bid
- ------------- -------- -------
2003:
- -----
First quarter $.29 $.20
Second quarter $.35 $.20
Third quarter $.42 $.26
Fourth quarter $.50 $.30
2004:
- -----
First quarter $.51 $.37
Second quarter $.56 $.29
Third quarter $.53 $.41
Fourth quarter $.50 $.34
- ------------------------
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. The Board of Directors is considering whether to declare a cash
dividend on its Common Stock during 2005. The Company has not previously paid
any dividends on its Common Stock pursuant to certain former loan agreements.
The Company no longer has any loan agreement restrictions on paying dividends on
its Common Stock.
16
UNREGISTERED SECURITIES
- -----------------------
The Company issued no unregistered securities during the year ended
December 31, 2004.
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, 2000, 2001,
2002, 2003 and 2004. Due to the sale of substantially all of the assets of the
Company in 2004, the Company has reported all operations during fiscal year 2004
as discontinued operations. In addition, the financial statements included in
this Form 10-K for fiscal year 2003 and 2002 have been restated to reflect all
operations as discontinued. 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,
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
Statement of Discontinued Operations Data:
Net Sales $ 31,451 $ 28,708 $ 27,189 $ 21,503 $ 20,840
Cost of Sales 24,800 22,947 22,121 18,357 19,665
----------- ----------- ----------- ----------- -----------
Gross Profit from Discontinued Operations 6,651 5,761 5,068 3,146 1,175
Selling and Administrative Expenses 5,878 6,067 6,237 5,440 6,827
(Gain)/Loss on sale of assets - 9 (1) (185) (1380)
Research and Development Expenses 136 214 220 139 143
----------- ----------- ----------- ----------- -----------
Income (Loss) from Discontinued Operations 637 (529) (1,388) (2,248) (4,415)
Other Income (Expense) (123) 132 188 300 65
----------- ----------- ----------- ----------- -----------
Income (Loss) from Discontinued Operations
before Provision for Income taxes 514 (397) (1,200) (1,948) (4,350)
Provision (Benefit) for Income Taxes (8) (233) (536) 806 -
----------- ----------- ----------- ----------- -----------
Income (Loss) from Discontinued Operations
before Extraordinary Item 522 (164) (664) (2,754) (4,350)
Extraordinary Item - - - - 37
----------- ----------- ----------- ----------- -----------
Net Income (Loss) from
Discontinued Operations $ 522 $ (164) $ (664) $ (2,754) $ (4,313)
=========== =========== =========== =========== ===========
(In thousands, except per share data)
Year Ended December 31,
-----------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
Basic and Diluted Earnings (Loss) per Share:
From Discontinued Operations $ .04 $ (.02) $ (.06) $ (.24) $ (.36)
From Extraordinary Item - - - - -
----------- ----------- ----------- ----------- -----------
$ .04 $ (.02) $ (.06) $ (.24) $ (.36)
=========== =========== =========== =========== ===========
Weighted Average Shares:
Basic & Diluted 12,062 12,002 11,957 11,957 11,977
=========== =========== =========== =========== ===========
17
(In thousands, except per share data)
Year Ended December 31,
-----------------------
Balance Sheet Data:
December 31,
------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
Working Capital $ 7,387 $ 6,456 $ 5,087 $ 3,253 $ 1,627
Current Assets(1) 10,758 9,975 7,865 7,427 5,438
Total Assets(1) 15,727 14,996 13,349 11,544 5,438
Current Liabilities(2) 3,371 3,339 2,778 4,174 3,811
Long-term Debt(2) 2,266 1,822 1,459 1,071 -
Total Stockholders' Equity(3) 10,090 9,838 9,112 6,299 1,627
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, held for sale assets valuation reserves, allowance for doubtful
accounts, accounting for warranty reserves, accounting for income taxes,
recourse obligation reserves and previously accounting for pre-season order
flooring interest. Most of these policies related to the Company's historical
silage bagging operations and certain of the policies, may not necessarily apply
to, or have the same impact on, the Company's current or future operations.
The $87,560 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.
Prior to the closing of the Asset Sale, in estimating the market value of parts
inventory items, the Company reviewed current inventory levels in relation to
sales forecasts and adjusted the valuation reserve accordingly. For the
remaining categories of inventory, the Company established a reserve balance
based on the aging of the specific inventory items. As trends in those variables
changed, the percentages applied to the inventory aging categories were updated.
The $174,326 estimate for assets held for sale valuation reserves was
developed using the Company's fixed asset report, combined with estimates of
fair market value, marketability, usability/specialization of the asset by a
potential purchaser, and asset life of those remaining assets held for sale. As
trends in these variables change, the assets held for sale valuation reserve is
updated.
- ----------------------------------
1 Includes deferred taxes.
2 Includes loans from shareholders and deferred taxes.
3 Includes $696 of preferred stock (2000-2003)
18
The $163,468 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
remaining receivables carried by the Company from its former operations. Prior
to the closing of the Asset Sale, accounts where specific information indicated
a potential loss may exist were reviewed and a specific reserve against amounts
due was recorded. As additional information became available, such specific
account reserves were updated. Additionally, a general reserve was applied based
upon historical collection and write-off experience. As trends in historical
collection and write-offs changed, the general reserve was updated.
The $13,430 estimate for warranty reserve was developed based upon the
estimated future costs to be incurred under the provisions of the Company's
warranty agreements on its bags and machines. As a result of the Asset Sale,
Miller has assumed all warranty obligations for items sold after November 30,
2004, the date of closing. Prior to the closing of the Asset Sale, the Company
reviewed its historical warranty expense and current sales trends in specific
products covered under warranty and reserves were updated as trends in those
variables changed.
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 $3,045,000 valuation allowance against
its tax assets as of December 31, 2004
Prior to the closing of the Asset Sale, the Company estimated its future
interest that would be incurred by the Company associated with sales under its
dealer pre-season order program. At the time of sale, the Company reduced sales
revenue and accrued a liability for the estimated future interest obligation.
The Company estimated its future interest obligation pursuant to the terms of
its pre-season order program and the shipping periods defined therein. The
Company estimated that machinery shipped between October and May of each year,
would be sold at the dealer level by the end of May and accrued an estimated
future interest liability accordingly (ranging from 30 to 210 days). For
machinery shipped after May, the Company estimated (since bagging season was in
full swing) that it would incur interest for approximately 30 days, and accrued
an estimated liability accordingly. For all other products, the Company accrued
an estimated future interest liability (ranging from 30 to 180 days) under the
assumptions that the product would 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 accrued an estimated future interest liability of approximately 30
days, which according to the pre-season order program, the Company paid interest
through the end of the month of shipment. This program and the Company's
obligation for interest ceased with the Asset Sale on November 30, 2004.
Prior to the closing of the Asset Sale, the Company periodically assigned
some of its trade accounts receivable to various third-party financing sources.
These accounts were assigned with or without recourse depending on the specific
accounts assigned. The Company reviewed on a monthly basis, those accounts
assigned with recourse to determine their payment history with the third-party
financing source and estimated if any accrual was necessary for potential future
recourse obligations. At December 31, 2004, the balance of assigned accounts
with recourse was $377,465. The Company determined that at December 31, 2004, no
accrual was necessary for potential future recourse obligations with its
third-party financing sources.
19
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth for the periods indicated certain items
reflected in the Company's financial statements and notes thereto as a
percentage of revenue. Due to the Asset Sale in fiscal year 2004, all operations
are considered discontinued.
Percentage of Total Revenue
Year Ended December 31,
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
Net Sales 100% 100% 100% 100% 100%
Costs and Expenses:
Cost of Sales 79% 80% 81% 85% 94%
Selling and Administration 19% 21% 23% 25% 33%
(Gain) Loss on Sale of Assets - - - (1%) (7%)
Research and Development - - 1% 1% 1%
------- ------- ------- ------- -------
Income (Loss) From Discontinued Operations 2% (1)% (5)% (10%) (21%)
======= ======= ======= ======= =======
OVERVIEW
- --------
As discussed in the Recent Developments section, substantially all of the
operating assets of the Company, which accounted for all of the operations of
the Company, were sold to Miller on November 30, 2004. Following the Asset Sale,
the Company had no ongoing rights to any benefits derived from its former
operations. The Company's operations and the gain on the sale recorded during
the year ended December 31, 2004, are not indicative of the Company's operating
results going forward.
Prior to the closing of the Asset Sale, the core business of the Company
was historically seasonal due to the harvest seasons in North America and
Europe. The Company's machinery tended to be purchased in anticipation of the
next harvest season, so most of the sales of machinery occurred in the spring
and summer. This required the Company to carry significant amounts of inventory
to meet rapid delivery requirements of customers. Bag sales tended to occur as
the harvest season approached in the summer, and during the harvest season in
the fall. In September 2002, the Company took steps to counteract seasonality by
developing and introducing its pre-season ordering program, whereby the
Company's dealers placed their next year's annual product requirements order in
advance and utilized one of the Company's third party financing sources. The
pre-season program allowed the Company to know in advance its production mix
which in turn 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, brought seasonality back into play for the Company, as shipments
under the dealer bank program were at the timing of the dealer rather than the
Company. The Company's trade-off with shipment flexibility however, was lower
overall financing costs under the dealer bank program. Approximately 50% of the
Company's dealers used the local dealer bank financing program option. The
pre-season order program was a program under which the Company paid the flooring
interest for its dealers and paid a volume discount to its dealers based upon a
sliding scale for the volume of orders placed by and shipped to the dealer under
the program.
20
The following chart outlined the historical yearly average milk prices as
published by the USDA.
Source: USDA basic Formula Price (BFP) annualized average
Prior to the closing of the Asset Sale, the outlook for the remainder of
the year and into 2005 indicated that milk prices would remain above the record
low levels seen during early 2003 of $9.11, and were forecast to settle above
$12. The following chart outlines the historical monthly milk prices from
January 2003 through November 2004 as published by the U.S. Department of
Agriculture (USDA).
 |
Source: USDA basic Formula Price (BFP) monthly
Dairy farmers began seeing increases in their monthly milk checks during
the first quarter of 2004, but continued to remain cautious during 2004, despite
continued low interest rates, on increasing their capital expenditures, as milk
prices fell off the highs seen earlier during 2004 and began settling back down
to a forecasted level of between $12-$13 into 2005. Management believed that
once sustained, prolonged upward movement in U.S. milk prices and breakeven
yearly milk price averages of above $12 were seen, farmers would be able to
repay their existing, older obligations which had mounted from the persistently
low milk prices over the last several years, and purchase the Company's
products. However, during the second quarter of 2004, milk prices began falling
off their highs of May 2004, and end users seemed to believe that milk prices
would settle back to below breakeven levels for them, despite forecasts
indicating milk prices averaging over $12 into 2005. As a result, farmers became
over cautious again on their capital expenditures and were conserving their
operating cash.
21
YEARS ENDED DECEMBER 31, 2004 AND 2003
- --------------------------------------
Net sales for the year ended December 31, 2004 decreased 3.08% to
$20,839,980 compared to $21,502,654 for the year ended December 31, 2003. Net
sales were down for the year as a result of the Asset Sale, coupled with
continued, guarded customer buying attitudes resulting from the prolonged,
depressed U.S. milk price situation in the dairy industry. Further contributing
to the decline in sales for the year was the fact that dealers' were uncertain
about Ag-Bag's future and the then pending Asset Sale, as dealers were waiting
to see the transition plans of Miller, relative to their dealer operations and
programs for sales of the Company's products before ordering additional
products. Additionally, the Company's dealers were conservative when placing
orders under the pre-season order program for 2003-04 resulting from carryover
of inventory at the dealer level from the prior year. Some of the Company's
dealers had to re-order machinery during the year, outside of the pre-season
order program, which helped to partially offset some of the sales decline for
the year.
Also contributing to the decline in sales for the year was increased
incentive programs offered by the Company, prior to its Asset Sale, to increase
market share during the second and third quarters of 2004, coupled with
continued strong competition in the silage bag market, as farmers looked for the
most economically priced bag, with lesser consideration for quality and customer
service.
Net machine sale revenue for the year decreased 8.70% and bag sale revenue
declined 10.09% compared to the same period of 2003. Net machine and bag sale
revenue declined for the year as a result of dealers being cautious on new
capital expenditures with the milk prices beginning to fall during the second
quarter, coupled with dealer uncertainty about Ag-Bag's future with the
announcement of the pending Asset Sale on August 16, 2004. Dealers appeared to
wait to see the transition plans of Miller, relative to their dealer operations
and programs for sales of the Company's products. This decline was slightly
offset by dealers ordering additional machines outside of the pre-season order
program from their conservative orders placed a year ago under the 2003-04
pre-season order program, and by the fact the Company had a large international
machine sale that occurred during the second quarter of 2004. As a percentage of
total revenue for the year 2004, machine revenue declined 6% and bag revenue
declined 9%. (See "Item 1. Business - General.") The following table identifies
the number of machines sold by size by the Company in 2004, prior to the closing
of the Asset Sale, compared to 2003:
Units Sold Units Sold
Machine Size 2004 2003
------------ ---- ----
Small 103 134
Medium 7 5
Large 6 25
---------------- ------------------
Total 116 164
================ ==================
Machine sales were directly tied to farmers' income and therefore their
ability to purchase new equipment. The total number of bagging machines that
were in the marketplace drove the Company's bag and parts sales. However, there
was not a perfect correlation between the Company's bag sales and machine sales,
as the Company's and competitors' bags were interchangeable on all bagging
machinery in the industry. The Company could not estimate with any certainty the
total number of machines or bags used in the industry.
For the year ended December 31, 2004, the Company sold five composting
systems in addition to compost bag sales, generating approximately $820,000 in
revenue, compared to two systems sold and compost bag sales for the year ended
December 31, 2003, generating approximately $524,000 in revenue. Compost sales
were up for the year as a result of system sales expanding to the Company's
silage dealers for dual purpose use in their dairy operations, and for use by a
Canadian dealer in a Canadian Government
22
funded composting project, coupled with increased compost bag usage from
previous systems sold into the marketplace.
Although the Company sold its products primarily through a worldwide dealer
network, certain sales were made directly to large volume customers when a
dealer was not present in the customer's geographic market. For each of the last
three years, the Company estimated that direct sales made up between 10-15% of
total sales. The gross margin realized on the Company's direct sales were
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 impacted the ultimate margin. Beginning in late 2002, the Company began
focusing its marketing efforts more on dealer development and expanding its
dealer network rather than a focus towards direct selling. As a result of this
shift, the Company's sales mix began to favor more dealer sales prior to the
Asset Sale.
International sales for the Company in 2004 were up in comparison to 2003
as a result of a large sale to a customer in Russia, despite drought weather
conditions in international dairy areas where the Company had 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 were up for the year as a result of
strong machine demand from customers of the Company's former German dealer. In
1999, the Company's former German dealer began manufacturing mid-sized bagging
machines in Germany under a license from the Company. As a result, the Company
no longer sold mid-sized machines directly to its former German dealer. Instead,
the Company received a royalty fee for each mid-sized machine sold by its former
German dealer, which was recorded as other income. In 1997, the Company formed a
German joint venture in which the Company owned a 50% interest and its former
German dealer owned the remaining 50%. The joint venture distributed bags to the
Company's German and European dealers. On April 27, 2004, the Company sold its
investment in its German joint venture to its former German dealer to provide
the Company with working capital. The Company recognized $36,562 as an
extraordinary gain from this sale. Previously, the Company's earnings from the
joint venture were reported as other income and were accounted for using the
equity method.
Gross profit as a percentage of sales decreased 61.45% for the year ended
December 31, 2004 compared to the same period in 2003. The decrease for the year
was the result of the Asset Sale, coupled with a slowdown in factory utilization
at the Company's production facilities where manufacturing costs were not fully
absorbed, resulting from dealer caution and uncertainty, and placing machine
orders, as a result of the impending Asset Sale, which was announced during the
peak of the Company's normally busy third quarter. As a result, the Company's
facilities were running only at approximately 55%-60% capacity during normal
peak times. The decline was partially offset by some dealers ordering additional
product outside of their 2003-04 pre-season order which yielded the Company
slightly higher margins as a result of reduced discounts, coupled with improved
margins on sales of some of the Company's used equipment sold during the year,
in addition to stable margins on the Company's "core" smaller-sized bagging
machines, resulting from cost reductions implemented during late 2003 to lower
the Company's fixed manufacturing overheads.
Selling expenses for the year ended December 31, 2004 decreased 33.31% to
$1,753,339 compared to $2,628,971 for the year ended December 31, 2003. The
decrease for the year was the result of lower commissions and third-party
financing fees caused by lower sales volumes, lower overall advertising costs,
and lower personnel, benefit, and travel costs associated with cost reductions
implemented late in 2003 which were fully in place during 2004.
Administrative expenses for the year ended December 31, 2004 increased
80.51% to $5,073,867 compared to $2,810,904 for the year ended December 31,
2003. The increase for the year was the result of recording discontinued
operational costs from the Asset Sale, coupled with increases in insurance,
annual meeting, and bad debt expense and patent development costs, which were
partially offset by decreases in administrative salaries and general office
expenses.
23
During the year ended December 31, 2004, the Company recorded a gain from
the sale of assets of $1,380,383. The gain resulted from the sale of fixed
assets and intangibles to Miller on November 30, 2004 pursuant to the Asset
Sale, coupled with fully depreciated miscellaneous manufacturing equipment sold
throughout the year, in addition to the sale of a parcel of vacant land owned by
the Company during the second quarter of 2004.
Research and development expenses for the year ended December 31, 2004
increased 3.03% to $143,389 compared to $139,160 for the year ended December 31,
2003. The increase for the year was the result of ongoing research and continued
development and testing newer designs of the Company's larger-sized silage
bagging machine and compost machine modifications and recycling development, in
addition to continuing ongoing research regarding new silage and nutritional
studies of bagged feed and their effects on animal production. As a result of
the Asset Sale, Miller absorbed all ongoing research activities and their
related costs after the closing of the Asset Sale on November 30, 2004.
Interest expense for the year ended December 31, 2004 increased 2.90% to
$252,786 compared to $245,656 for the year ended December 31, 2003. The increase
for the year was the result of the Company utilizing a larger portion of its
credit line, coupled with an increase in the interest rate on its line of credit
as a result of an amendment to the Company's credit agreement during the first
quarter of 2004 and implementation by Wells Fargo Business Credit of an
additional interest rate premium of 2 1/4% during the third quarter of 2004, as
a result of a default by the Company of two of its financial covenants. The
Company's operating line of credit with Wells Fargo Business Credit was paid off
on December 2, 2004, with a portion of the proceeds from the Asset Sale.
Joint venture equity and royalty income for the year ended December 31,
2004 decreased 48.04% to $219,849 compared to $423,074 for the year ended
December 31, 2003. The decrease for the year was the result of decreased income
from the joint venture as a result of the Company selling its 50% interest in
the joint venture to its former German Dealer on April 27, 2004, and recognizing
an extraordinary gain from the sale on its investment of $36,562, coupled with
the fact in 2003, the Company received a special one-time folding royalty from
the Company's former joint venture upon the sale of depreciated folding
equipment to the joint venture which occurred during the second quarter of 2003.
(See "Item 8. Financial Statements and Supplementary Data.") This year's
decrease was partially offset by increased machine royalties received in 2004.
(See "International Sales" discussion above.) With the Asset Sale, Miller will
receive all future royalties that were previously received by the Company.
The Company's effective income tax rate for the year ended December 31,
2004 was zero compared to 41.40% for the year ended December 31, 2003. The
effective tax rate was zero for the year due to the fact the Company established
an additional $1,467,228 valuation allowance during the year against its
deferred tax assets. The valuation allowance was established because of the
Company's expected inability to utilize its net operating loss carryforwards and
research tax credits, which was partially offset by the fact the Company's
income from its international royalties are not taxable in the United States,
the extraterritorial income exclusion provisions of the current United States
tax code, and as a result of the Company having no ongoing business operations
due to the Asset Sale which closed on November 30, 2004.
The Company recorded an extraordinary gain from the sale of its German
joint venture of $36,562 for the year ended December 31, 2004. On April 27,
2004, the Company sold its investment in the BAW Joint Venture (Budissa
Agrodienstleistungen Und Warenhandels) to its former German dealer, BAG (Budissa
Agroservice), to provide the Company with working capital. Prior to this date,
the Company had a 50% interest in the BAW Joint Venture which was accounted for
under the equity method of accounting. (See "Joint Venture Equity and Royalty"
discussion above.)
24
Net loss from discontinued operations for the year ended December 31, 2004
was $4,313,027 compared to $2,753,715 for the year ended December 31, 2003. The
decrease for the year was the result of lower sales and gross profit, increased
interest, administrative, and research and development expenses resulting from
the Company discontinuing operations as a result of the Asset Sale, coupled with
lower joint venture equity and royalty income, which was partially offset by
decreases in selling and an increased gain on sale of assets due to the Asset
Sale.
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.
|
 |
Source: USDA Basic Formula Price (BFP)
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
================ ==================
25
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.")
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
26
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 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
27
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.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 153, "Exchanges of Non-monetary Assets, an Amendment of APB Opinion No.
29." The guidance in APB Opinion No. 29, "Accounting for Non-monetary
Transactions," is based on the principle that exchanges of non-monetary assets
should be measured based on the fair value of the assets exchanged. The guidance
in APB Opinion No. 29, however, included certain exceptions to that principle.
SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for
non-monetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of non-monetary assets that do not have
commercial substance. A non-monetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS No. 153 is effective for non-monetary asset exchanges in
fiscal periods beginning after June 15, 2005. The implementation of this
statement is not expected to have a material impact on the Company's financial
statements.
In December 2004, the FASB issued SFAS No. 123R (revised 2004),
"Share-Based Payment," which is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123R supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and amends SFAS No. 95, "Statement
of Cash Flows." Generally, the approach in Statement 123R is similar to the
approach described in SFAS 123, however, SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma
disclosures seen in Note 2 to the Consolidated Financial Statements, "Summary of
Accounting Principles - Stock Option Plans," will no longer be an alternative.
SFAS No. 123R is effective for interim periods beginning after June 15, 2005.
The implementation of this statement is not expected to have a material impact
on the Company's financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
Amendment of ARB No. 43, Chapter 4." SFAS No. 151 amends ARB 43, Chapter 4, to
clarify that the abnormal amounts of idle facility expense, freight, handling
costs and wasted materials (spoilage) be recognized as current period charges.
It also requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
No. 151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The implementation of this statement is not expected to
have a material impact on the Company's financial statements.
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 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. The implementation of this statement did
not 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
28
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The implementation of this statement did not 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 was associated with a potential variable interest entity through its
investment in BAW, prior to its sale in April 2004. Management determined that
BAW was a variable interest entity, but concluded that the Company was not the
primary beneficiary.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Prior to the closing of the Asset Sale, the seasonal nature of the northern
hemisphere farming industry, the production time for equipment and the time
required to prepare bags for use, required the Company to manufacture and carry
high inventories to meet rapid delivery requirements. In particular, the Company
needed to maintain a significant level of bags during the spring and summer to
meet the sales demands during the harvest season. The Company used working
capital and trade credit to increase its inventory so that it had sufficient
inventory levels available to meet its sales demands. Although the Company's
pre-season ordering program provided it with some flexibility in production, the
Company needed to maintain adequate inventory levels for those customers, both
old and new, who ordered or re-ordered product outside of this program
throughout the year.
Prior to the Asset Sale, the Company relied on its suppliers to provide
trade credit to enable the Company to build its inventory. The Company's
suppliers previously provided sufficient trade credit to meet the demand and
were flexible with their payment terms (including extended payment arrangements)
provided to the Company. However, as a result Asset Sale, no assurance can be
given that creditors will continue to provide sufficient trade credit in the
future for the Company's ongoing corporate administrative expenses of remaining
a non-operating public shell, until it can either dissolve and liquidate or sell
the remaining public shell to another party by merger or another method.
At December 31, 2004, the Company had cash and cash equivalents of
$2,982,728. The increase in cash and cash equivalents was the result of the
proceeds received from the Asset Sale.
Accounts receivable decreased 48.46% at December 31, 2004 to $632,132
compared to $1,226,390 at December 31, 2003. The decrease was the result of the
Asset Sale, in addition to lower sales for the last quarter of the year as a
result of the uncertainty about Ag-Bag from the announcement of a pending Asset
Sale in August 2004. At December 31, 2004, the Company still had some
receivables outstanding from its former operations under its old collection
method of providing terms for certain customers. The Company has subsequently
collected on its receivables outstanding, and as of February 28, 2005, had net
receivables of approximately $190,000 remaining. The Company has established
adequate reserves ($163,468 at December 31, 2004 compared to $204,081 at
December 31, 2003) against accounts receivable in the event that some of the
remaining accounts become uncollectible.
29
Prior to the closing of the Asset Sale, the Company relied 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'
purchases under the pre-season order program. The Company's third-party
financing sources and dealers' local banks previously provided sufficient credit
to the Company's dealers for the Company to receive payment. As of September 30,
2004, the Company began processing charges for its customers/dealers who used
John Deere Credit's Farmplan program, on a preferred customer basis only and no
longer accepted charges for those who were merchant authorized. Farmplan
preferred was more advantageous to the customer/dealer as they received better
interest rates and payment options than under the merchant program.
Additionally, this reduced the Company's potential recourse liability in the
event the customer/dealer failed to pay their account under the Farmplan program
terms. (See "Critical Accounting Policies.") With the Asset Sale, the Company no
longer relies on its third-party financing sources, as it no longer has any
operating activities requiring such financing.
Inventory decreased 100% at December 31, 2004 to a net value of $-0-
compared to $5,781,345 at December 31, 2003. The decrease in inventory resulted
from the Asset Sale. (See Item 1. "Business - Recent Developments.")
Prepaid expenses and other current assets decreased 47.95% at December 31,
2004 to $131,074 compared to $251,808 at December 31, 2003. The decrease was the
result of the Asset Sale and discontinuing its operating activities. The
remaining other current assets represent the cash surrender value on life
insurance policies owned by the Company in which it is the beneficiary, which
will be converted into cash during 2005. Prior to the Asset Sale, this remaining
asset was classified as a long term other asset, but was reclassified to a
current asset, as a result of the Asset Sale.
Held for sale property, plant and equipment, net at December 31, 2004, was
$1,692,103. The Company's remaining property, plant and equipment from the Asset
Sale, was reclassified to a current asset as a result of the Asset Sale. The
Company currently has its remaining assets not acquired by Miller for sale, and
anticipates converting these assets to cash during 2005, so it can either
dissolve and liquidate or sell the remaining public shell to another party by
merger or another method. The Company established a reserve against its held for
sale assets at December 31, 2004 in the amount of $174,326.
Intangible assets at December 31, 2004 decreased to $-0- compared to
$15,066 at December 31, 2003. The decrease was the result of the sale of the
Company's intangible assets to Miller in the Asset Sale, and by normal
amortization expense for the year.
The BAW joint venture asset decreased to $-0- at December 31, 2004 compared
to $376,974 at December 31, 2003. The decrease was the result of the sale of the
Company's investment in its German joint venture during the second quarter of
2004, and recognizing the balance 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. The balance of
deferred gain from the folding equipment recognized for the year ended December
31, 2004 was $86,464, which occurred prior to the end of the second quarter.
(See "Joint Venture Equity and Royalty" discussion.)
Other assets decreased 100% at December 31, 2004 to $-0- compared to
$491,513 at December 31, 2003. The decrease was the result of a decrease in the
cash surrender value of insurance on policies maintained by the Company, in
which the Company was the beneficiary, by redeeming the Company's outstanding
preferred stock with the life insurance policy the Company maintained on the
owner of the preferred stock during the third quarter of 2004, and reclassifying
the remaining cash surrender value asset on the life insurance policies owned by
the Company, to a current asset, as the Company intends to convert its remaining
policies into cash during 2005. (See "Prepaid Expenses and Other Current Assets"
discussion above.)
The Company paid off its operating line of credit on December 2, 2004, from
a portion of the proceeds of the Asset Sale. Pursuant to its agreement with
Wells Fargo Business Credit, as a result of the early termination
30
of the Company's line of credit, the Company incurred $60,000 in early
termination fees in 2004. (See "Item 8. Financial Statements and Supplementary
Data.") The line was subject to renewal on May 14, 2006. Prior to December 2,
2004, the Company had 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 bore interest at the bank's prime rate plus 4 3/4%. The
line of credit fluctuated based upon production needs and the timing of
collection of the Company's receivable balances. Additionally, the Company's
borrowing base fluctuated as receivables and inventory changed. The borrowing
base was equal to (1) the lesser of the maximum line amount or (2) the sum of
70% of eligible accounts receivable plus the lesser of (i) 40% of eligible
inventory or (ii) $2 million. The line of credit was subject to certain net
worth and earnings covenants, and an annual capital expenditure limit. From June
30, 2004 until payoff on December 2, 2004, the Company was in default with two
of its financial covenants under its revolving operating line of credit with its
primary lender, Wells Fargo Business Credit. The Company was not in compliance
with the net worth and earnings before taxes covenants, for its fiscal quarters
ended June 30, 2004 and September 30, 2004. These defaults were cured with the
payoff of the facility.
Management believes that funds generated from the Asset Sale, and the
anticipated sales of the remaining property, plant and equipment held for sale,
and other current assets to be converted into cash, will be sufficient to meet
the Company's cash requirements of remaining a public shell through 2005, until
the Company can either dissolve and liquidate or sell the remaining public shell
to another party by merger or another method.
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 former German joint venture. In August
2003, the guarantee was reduced by Dresdner Bank to 250,000 Euro ($312,500 US).
On April 27, 2004, upon the sale of the Company's German joint venture, the
Company was relieved of its bank guarantee with Dresdner Bank, and has no
further guarantees or obligations outstanding with Dresdner Bank.
The current portion of long-term debt at December 31, 2004 was $1,071,488
compared to $182,706 at December 31, 2003. The increase in the Company's current
portion of long-term debt was the result of the reclassification of the debt
from long-term to current, as a result of the Asset Sale. Additionally, the
underlying security for the debt is secured by the Company's held for sale
property, plant and equipment remaining.
Accounts payable decreased 72.85% at December 31, 2004 to $254,406 compared
to $936,953 at December 31, 2003. The decrease was the result of the Asset Sale.
Prior to the closing of the Asset Sale, as previously disclosed in the Company's
public filings, the Company slowed its manufacturing process during the third
quarter of 2004, resulting from dealer uncertainty for equipment orders due to
the pending Asset Sale, and market conditions stemming from declines in milk
prices. The decline was partially offset by extended term payment arrangements
provided by some of the Company's principal suppliers. (See "Trade Credit"
discussion above.)
Discontinued operational costs payable as of December 31, 2004, were
$2,124,662. These costs were the result of the closing of the Asset Sale, and
reflect the Company's estimate of remaining costs associated with the
discontinuance and winding down of its operations. (See "Item 8. Financial
Statements and Supplementary Data.")
Accrued expenses and other current liabilities (excluding discontinued
operational costs payable) in total decreased 62.76% at December 31, 2004, to
$358,170 compared to $961,731 at December 31, 2003. The decrease in total
accrued expenses and other current liabilities for the year was the result of
the Asset Sale, coupled with decreased payroll, commission and benefit accruals
from personnel terminations resulting
31
from the Asset Sale. Additionally, since the Company no longer has a pre-season
order program resulting from the Asset Sale, it no longer has any requirements
to accrue volume discounts, program incentives or flooring interest accruals,
which, along with lower accrued warranty from the Company no longer having any
operations, also helped to decrease total accrued expenses.
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 Obligations $1,071,488 $1,071,488 - - -
Operating leases 225,480 20,496 40,992 40,992 123,000
Purchase Obligations - - - - -
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet Under GAAP - - - - -
-----------------------------------------------------------------------
Total $1,296,968 $1,091,984 $40,992 $40,992 $123,000
=======================================================================
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2004, we did not have any significant off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
32
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 financial results could be
materially adversely affected.
o We may be unable to sell our remaining held for sale property, plant and
equipment.
The Company is actively looking for purchasers of its remaining held
for sale property, plant and equipment that was not acquired by Miller
in the asset purchase agreement. However, we may be unable to find a
buyer for our remaining Warrenton, Oregon and Blair, Nebraska real
estate, paint booths and visual computer system that remains, to
convert these assets to cash, so that we can either dissolve and
liquidate or sell the remaining public shell to another party by merger
or another method.
o We may be unable to find a candidate to sell or merge the remaining
non-operating public shell with.
The Company is actively working to convert its remaining assets into
cash to clean the non-operating public shell in anticipation of finding
a potential purchaser or merger candidate. However, we may be unable to
clean the non-operating public shell and find a potential candidate for
its sale or merger.
o We may be unable to retain key management and personnel as a result of the
Asset Sale.
The Asset Sale may adversely impact our ability to retain key
management and personnel who are involved in our business, and assist
with the winding down and sale of the Company's remaining assets and
non-operating public shell.
o The Company no longer has any source of operating revenues and may be
unable to obtain financing or credit.
With the Asset Sale, the Company no longer has any ongoing rights or
benefits derived from its former operations. Should the need arise for
the remaining non-operating public shell to acquire financing or
credit; it may be unable to do so, since it no longer has any source of
operating revenues.
o We may lose the improper assignment of an installment contract lawsuit
pending against us.
An improper assignment of a third-party finance Company installment
contract lawsuit was filed against us and others. If our efforts to
dismiss or favorably resolve this suit fails, we could incur additional
and significant litigation costs and experience a drain on the
remaining Company resources and value of the remaining non-operating
public shell, or be a cause for a potential merger candidate not to
acquire our remaining non-operating public shell as a result of this
litigation.
o The Asset Purchase Agreement with Miller has exposed us to contingent
liabilities.
Under the terms of the Asset Purchase Agreement with Miller, we have
agreed to indemnify Miller for a number of matters including the breach
of our representations, warranties and covenants contained in the Asset
Purchase Agreement.
33
o Our affiliates and their transferees may not be able to sell our common
stock as a result of the Asset Sale, unless we file a registration
statement, which we are not required to do.
In general, our affiliates and their transferees could sell shares of
our common stock pursuant to SEC Rule 144. However, as a result of the
Asset Sale, we may be considered a "blank check company" and therefore
subject, along with our affiliates and their transferees, to additional
restrictions with respect to the sale of our common stock.
Specifically, the SEC takes the position that affiliates and their
transferees will generally not be able to rely on Rule 144 for resale's
and will only be able to transfer securities pursuant to an effective
registration statement filed under the Securities Act of 1933. We are
not obligated to file a registration statement and therefore our
affiliates and their transferees may not be able to resell their common
stock following the Asset Sale.
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.
34
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, as all of
the Company's long-term debt is fixed rate.
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
-----------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of December 31, 2004, 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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There has been no change in the Company's internal control over financial
reporting that occurred during the three months ended December 31, 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
-----------------
None.
35
PART III
ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND
---------------------------------------------------------------
EXECUTIVE COMPENSATION
----------------------
Executive officers of AB Holding Group Inc., are listed under the heading
"Executive Officers of the Registrant" in this Form 10-K.
DIRECTORS
CLASS I - DIRECTORS UP FOR ELECTION IN 2005 FOR TERMS EXPIRING IN 2008
o MICHAEL W. FOSTER, 64, President of Astoria Pacific Industries,
Inc., an investment company, (since 1989); President of Astoria
High School Scholarships, Inc., a nonprofit foundation, (since
1990); educator (1976-1996); executive director of Clatsop
Community College Foundation, a nonprofit foundation (1999-2003).
Mr. Foster has been a director of the Company since 1990.
o UDO WEBER, 41, Managing director of BAG-Budissa an agriculture
company, (since 1994); Managing director of BAW, a bag
distribution company (former joint venture with the Company)
(since 1997); Managing director of Ag-Bag Polska, an Ag-Bag
distribution company (a subsidiary of BAW) (since 1999). Mr. Weber
has been a director of the Company since 2002.
CLASS II - DIRECTORS REMAINING IN OFFICE UNTIL 2006
o ARTHUR P. SCHUETTE, 66, Territory Sales Manager of Miller St.
Nazianz, Inc., a farm equipment manufacturer, (since 2004); Vice
President of Sales of the Company (1991-2004); Treasurer of the
Company (1990-1999); Treasurer of Ag-Bag Corporation (1983-1991)
(former subsidiary of the Company). Mr. Schuette has been a
director of the Company since 1990.
o JAMES C. DEMATTEO, 48, General Manager of Cargill, Inc., an
agricultural supply/feed-nutrition company, (since 2004); Manager
of dairy business development, Cargill Animal Nutrition Western
Business Unit, a nutrition group of Cargill, (1999-2004); Dairy
nutritionist, Cargill Animal Nutrition (1994-1999); Director,
Dairy Vision Group, a dairy business group of Cargill, (since
2001); Member, Applied Dairy Technology Team, a technical and
scientific advisory group within Cargill Animal Nutrition, a
nutrition group of Cargill, (since 1994). Mr. DeMatteo has been a
director of the Company since 2002.
CLASS III - DIRECTORS REMAINING IN OFFICE UNTIL 2007
o LARRY R. INMAN, 54, Chief Executive Officer of the Company
(1990-2002; 2004 to present); Chairman of the Board (1990-2000;
2002 to present); President of the Company (since 1993); President
of Ag-Bag Corporation (1984-1989) (former subsidiary of the
Company) and Chairman (1989-1994). Mr. Inman has been a director
of the Company since 1990.
o ROY F. CUNNINGHAM, 42, Supervisor, Knex, Inc., a fiber optic
company (1999-2004); Director, Seminole Lake golf course (since
2003); Sales representative, Ag-Bag Corporation (1992-1995)
(former subsidiary of the Company); Security officer, Bealls
Department Stores (1996-1999); Farm Manager, Post Oak Ranch, a
beef cattle operation (1990-1992). Mr. Cunningham has been a
director of the Company since 2004 and replaced his father, Lemuel
E. Cunningham, who is deceased.
36
Audit Committee Financial Expert
Under rules adopted by the SEC, the Company is required to disclose whether
it has an "Audit Committee Financial Expert" serving on its Audit Committee.
Although management believes that at least one member of the Audit Committee
would qualify as an Audit Committee Financial Expert, the Company's Board of
Directors has not designated any particular member of the Audit Committee as the
Audit Committee Financial Expert under the SEC's rules. Management believes that
at least one member of the Audit Committee is capable of: (i) understanding
generally accepted accounting principles and financial statements; (ii)
assessing the general application these principles in connection with the
accounting for estimates, accruals and reserves; (iii) analyzing and evaluating
the Company's consolidated financial statements; (iv) understanding internal
control over financial reporting; and (v) understanding audit committee
functions. All directors serving on the Audit Committee are "independent" as
defined in the NASD Marketplace Rule 4200(a)15. During 2004, the Audit Committee
held two meetings.
PERFORMANCE GRAPH
The following performance graph compares cumulative total return for
Company stockholders over the past five years against the cumulative total
return of the Standard & Poor's 500 Stock Index, and against the Standard &
Poor's Machinery Group Index. (The Company, since it had eleven months of its
operations as an equipment manufacturing concern, felt the S&P Machinery Group
Index was the best available peer group index to use for comparison purposes.)
The graph assumes $100 is invested in Company stock and each of the other two
indices at the closing market quotation on December 31, 1999 and dividends are
reinvested. The stock price performance shown on the graph is not necessarily
indicative of future price performance.
|
 |
1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ----
AB Holding $ 100.00 $ 84.64 $ 51.70 $ 54.16 $ 86.16 $ 83.70
S&P 500 $ 100.00 $ 90.97 $ 80.19 $ 62.57 $ 80.32 $ 88.94
S&P Mach. $ 100.00 $ 96.94 $ 104.61 $ 102.07 $ 153.48 $ 184.42
Although the companies included in the Standard & Poor's Machinery Group
Index generally have a larger market capitalization than the Company and its
former operations, such companies were believed to provide the closest peer
group representation with respect to the industry formerly served by the
Company.
This performance graph shall not be deemed to be incorporated by reference
into any filing by the Company under either the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, except to the
extent that the Company specifically incorporates the same by reference.
37
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The underlying objectives of the Company's compensation strategy are to
attract and retain the best possible executive talent, to motivate those
executives to achieve optimum operating performance for the Company, to link
executive and stockholder interests through equity-based plans and to provide a
compensation package that recognizes individual contributions as well as overall
business results. There are three components to the Company's executive
compensation: base salary, long-term incentives in the form of stock options,
and incentive (bonus) payments. The incentive (bonus) payments are only paid in
the event the Company is profitable as they are based on a percentage of net
income.
Base Salary. Base salary for each executive officer, other than for Larry R.
Inman, was subjectively determined by an assessment of his or her sustained
performance, advancement potential, experience, responsibility, scope and
complexity of the position, and current salary in relation to salary levels for
comparable positions in the industry, based on the Company's general awareness
of such salary levels.
Long-Term Incentives. Stock options are periodically granted to the Chief
Executive Officer and other executive officers to encourage management of the
Company from the perspective of an owner with an equity interest in the Company.
Vesting is used to encourage key employees to continue in the employ of the
Company.
Annual Incentives. The Company's executive officers receive an annual bonus from
the Company under their employment agreements. There were no bonus payments made
in the fiscal year ended December 31, 2004.
Chief Executive Officer. Prior to his resignation on December 1, 2004, Mr.
Schoville's compensation was based on his employment arrangement with the
Company, which provided for a base salary and had a bonus provision of 2.5% of
the net income of the Company. Since the Company was not profitable for 2004,
there was no bonus paid to Mr. Schoville. Mr. Schoville's compensation as set
forth in his employment arrangement was derived from the value of his industry
expertise and the compensation of comparable industry executives. Mr. Inman's
compensation, who became CEO upon the resignation of Mr. Schoville, is based on
his employment contract with the Company, which provides for a base salary and
has a bonus provision of 2.5% of the net income of the Company. Since the
Company was not profitable for 2004, there was no bonus paid to Mr. Inman. Mr.
Inman's compensation as set forth in his employment contract was derived from
the value of his industry expertise and the compensation of comparable industry
executives.
The Company does not have any "Excessive Employee Remuneration" as defined in
section 162(m) of the Internal Revenue Code.
This report shall not be deemed to be incorporated by reference into any filing
by the Company under either the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, except to the extent that the
Company specifically incorporates the same by reference.
Michael W. Foster, Chairman
Roy F. Cunningham
38
EXECUTIVE COMPENSATION
The following table sets forth certain information for each of the years
ended December 31, 2004, 2003 and 2002, regarding compensation accrued or paid
by the Company to (1) the Company's Chief Executive Officer, and (2) each
executive officer of the Company who accrued or was paid compensation in excess
of $100,000 in the year ended December 31, 2004 (the "Named Executive
Officers"):
- ---------------------------- -------- ----------------------------------------- -------------- ---------------- -------------------
SUMMARY COMPENSATION TABLE
- ---------------------------- -------- ----------------------------------------- ------------------------------- -------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------------------------- -------------------------------
OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION STOCK UNDERLYING COMPENSATION
YEAR ($) ($) ($) AWARDS OPTIONS ($)
- ---------------------------- -------- ----------- ---------- ------------------ --------------- --------------- -------------------
Michael J. Schoville, 2004 99,917 - - - - -
CEO (until 12/01/2004) 2003 110,000 - - - - 810 (3)
2002 91,667 - - - 30,000 810 (3)
- ---------------------------- -------- ----------- ---------- ------------------ --------------- --------------- -------------------
Larry R. Inman, 2004 123,581 - - - - -
CEO (after 12/01/2004) 2003 133,138 - - - - -
& President 2002 108,000 - 14,400 (1) - - -
- ---------------------------- -------- ----------- ---------- ------------------ --------------- --------------- -------------------
Michael R. Wallis, 2004 91,015 - - - - -
CFO & VP of Finance 2003 99,350 - - - - -
2002 90,000 - 4,800 (2) - - -
- ---------------------------- -------- ----------- ---------- ------------------ --------------- --------------- -------------------
(1) Included a $4,800 automobile expense allowance and a $9,600
farm-related expense allowance.
(2) Automobile expense allowance.
(3) Dollar value of term life insurance premium paid on behalf of Mr.
Schoville.
39
No stock appreciation rights or stock options were granted to the Company's
executive officers during the last fiscal year. Mr. Schoville exercised his
outstanding option during the last fiscal year, prior to his resignation on
December 1, 2004.
- ------------------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
------------------------------------ --------------------------------
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS/SARS AT MONEY OPTIONS/SARS AT
- ------------------------------- ---------------- -------------
SHARES ACQUIRED VALUE DECEMBER 31,2004 (#) DECEMBER 31,2003 ($)
NAME ON EXERCISE (#) REALIZED ($) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
- ------------------------------- ---------------- ------------- ------------------------------------ --------------------------------
Michael J. Schoville (1) 20,000 $3,200 (2) 0/0 $0/$0
- ------------------------------- ---------------- ------------- ------------------------------------ --------------------------------
Larry R. Inman 0 0 0/0 $0/$0
- ------------------------------- ---------------- ------------- ------------------------------------ --------------------------------
Michael R. Wallis 0 0 0/0 $0/$0
- ------------------------------- ---------------- ------------- ------------------------------------ --------------------------------
(1) - Mr. Schoville resigned from his position as Chief Executive Officer
effective December 1, 2004.
(2) - Calculated based upon the closing market price of the Company's Common
Stock at November 29, 2004 of $.41, the exercise date, and the grant price
of $.25 for the option.
DIRECTOR COMPENSATION
Of our current Board members, Mr. Inman is a salaried employee of the
Company. In 2004, Mr. Schuette was a salaried employee of the Company prior to
his termination as a result of the Asset Sale. Board members that are not
salaried employees of the Company receive separate compensation for Board
service. For 2005, that compensation includes:
- --------------------------------------------------------------------------------
ATTENDANCE FEES: $1,000 for each in-person Board meeting
$ 500 for each Board committee meeting
Expenses related to attendance
- --------------------------------------------------------------------------------
STOCK OPTIONS: Per Non-Employee Director Stock Option Plan*
- --------------------------------------------------------------------------------
*Pursuant to the Company's Non-Employee Director Stock Option Plan, adopted in
1996, each non-employee director receives an initial option to purchase 50,000
shares of the Company's Common Stock, ("Common Stock"), which vest over a three
year period at the rate of 40% after six months, 40% after two years and 20%
after three years. At each annual meeting, directors who have served a
three-year term receive an annual option to purchase 10,000 shares of Common
Stock exercisable six months after the grant date. The exercise price for the
options granted to non-employee directors is equal to the fair market value of
the Common Stock on the date of grant. During 2004 as a result of the Asset Sale
to Miller, all options outstanding under this plan were accelerated and became
exercisable 15 days prior to the closing of the Asset Sale or they expired. No
options were exercised during this acceleration period and all 300,000 options
previously outstanding, expired and went back into the plan for future use. No
annual grant occurred in 2004. There were no options outstanding under this
Non-Employee Director Stock Option Plan at December 31, 2004.
40
EMPLOYMENT AGREEMENTS
The Company has employment agreements with executive officers Messrs.
Inman, and Wallis, which are automatically renewed on a yearly basis, unless
terminated by the death or disability of the employee, or upon at least six
months written notification by either party. The employment agreements provide
for base compensation, bonus compensation and participation in the employee
benefit plans offered by the Company. Prior to the closing of the Asset Sale,
Mr. Jay and Mrs. Tucker previously had employment agreements with the Company
which were terminated upon the closing of the Asset Sale.
On April 11, 2000, the Company entered into Change of Control Agreements
with its current and former executive officers, Messrs Inman, Jay, Wallis and
Schuette, and Mrs. Tucker and other key personnel. These agreements provide for
payments to the executive officer or key employee of the Company, of one year's
annual base salary, and a bonus of $5,000 for each year of Company service in
excess of five years, in addition to outplacement services and continued Company
employee benefit coverage for a one year period, in the event that such officer
is terminated without cause within the period governed by the agreement. As a
result of the change of control from the closing of the Asset Sale, and the
termination of employment by the Company, these agreements became effective for
former executive officers Jay, Schuette, and Tucker, and other key personnel,
and pursuant to the terms of the agreements, the Company began making payments
under these agreements. (See "Item 8. Financial Statements and Supplementary
Data.")
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Lemuel E. Cunningham, who is deceased and who served on the Compensation
Committee of the board of directors of the Company during the fiscal year ended
December 31, 2004, was a Vice President of the Company from 1990-1996.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires that the Company's officers, directors or persons who
own more than 10% of the Common Stock of the Company file with the Securities
and Exchange Commission (the "SEC") initial reports of beneficial ownership on
Form 3 and reports of changes in beneficial ownership of Common Stock and other
equity securities of the Company on Form 4 and Form 5. Officers, directors and
holders of more than 10% of the Common Stock are required by SEC regulations to
furnish to the Company copies of all Section 16(a) reports that they file. Based
solely on a review of the copies of such reports furnished to the Company and
written representations with respect to the fiscal year ended December 31, 2004,
Mr. Roy F. Cunningham filed a late Form 3 to report his initial holdings upon
becoming a director of the Company.
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
anticipates developing a Code of Ethics during 2005.
41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
-----------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 1, 2005, by (i) each director,
director nominee and named executive officer; (ii) each person known to the
Company to be a beneficial owner of more than 5% of the outstanding Common
Stock; and (iii) all directors and executive officers as a group. Except as
otherwise indicated in the notes below, each person whose ownership is reported
has sole voting power and sole dispositive power as to the number of shares
shown.
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF CLASS
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OUTSTANDING
Steven G. Ross 1,800,000 15.03%
2000 West Marshall Dr.
Grand Prairie, TX 75051
Roy F. Cunningham 659,090 (1) 5.50%
332 N. McGowan Ave.
Crystal River, FL 34429
Director
Peter Cundill & Associates (Bermuda) Ltd. 812,000 6.78%
Peter Cundill Holdings (Bermuda) Ltd.
The Peter Cundill Trust
15 Alton Hill
Southampton SN01
Bermuda
Larry R. Inman 996,881 8.32%
2320 SE Ag-Bag Lane
Warrenton, OR 97146
Chief Executive Officer, Chairman of the Board,
Director, & President
Michael W. Foster 224,260 (2) 1.87%
1636 Irving St.
Astoria, OR 97103
Director
Arthur P. Schuette 267,959 (3) 2.24%
513 Porters Neck Rd.
Wilmington, NC 28411
Director
Michael R. Wallis 44,057 *
2320 SE Ag-Bag Lane
Warrenton, OR 97146
Chief Financial Officer & Vice President of Finance
42
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF CLASS
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OUTSTANDING
Udo Weber 10,000 (4) *
Birnenalle 10
OT Kleinbautzen
02694 Malschwitz
Germany
Director
James C. DeMatteo - -
100 County Road 43
Big Lake, MN 55309
Director
Amy R. White 656,289 (5) 5.48%
6486 W. Seven Rivers Dr.
Crystal River, FL 34429
Harvey Houtkin 738,618 (6) 6.17%
160 Summit Avenue
Montvale, NJ 07645
All directors and officers as a group (8 persons) 2,438,659 (7) 20.34%
- -------------------------------------------------------------------------------
* less than 1%
(1) Includes 216,290 shares held by Roy F. Cunningham Trust, 220,000 shares
held by Morgan Nicole Cunningham Trust, and 220,000 shares held by
Victoria E. Cunningham Trust, of which Mr. Cunningham is the trustee.
(2) Includes 5,118 shares owned by Astoria Pacific Industries, Inc., of which
Mr. Foster is the President.
(3) Includes 266,979 shares held jointly with Mr. Schuette's wife.
(4) Includes 10,000 shares of Common Stock issuable upon exercise of option
granted under the Incentive Stock Option Plan.
(5) Includes 448,710 shares held by Amy Cunningham Trust, and 207,579 shares
held by Brandy Lynn White Trust, of which Ms. White is trustee.
(6) Includes 163,618 shares owned by Domestic Securities, Inc., of which Mr.
Houtkin is CEO, 125,000 shares owned by Mr. Houtkin's wife, 100,000
shares owned by Stuart Houtkin, 100,000 shares owned by Michael Houtkin,
and 100,000 shares owned by Brad Houtkin, all of whom are Mr. Houtkin's
sons.
(7) Includes 10,000 shares issuable upon exercise of option granted under the
Incentive Stock Option Plan.
43
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 20,000 $.33 1,290,335
- --------------------------------- ---------------------------- ----------------------- ----------------------------------
Total 20,000 $.33 1,290,335
- --------------------------------- ---------------------------- ----------------------- ----------------------------------
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
----------------------------------------------
On September 30, 2004, the Company redeemed all 174,000 shares of preferred
stock outstanding owned by the Lemuel E. Cunningham Trust and by members of Mr.
Cunningham's family. The Company maintained life insurance on the life of Mr.
Cunningham in the amount of $1,000,000, and exchanged the life insurance policy
owned by the Company with a value on September 30, 2004, of $363,633, for all of
the outstanding shares of the preferred stock, with a book value of $696,000.
Current Director Roy F. Cunningham is the son of Lemuel E. Cunningham, who is
deceased.
The Company purchased its Tri-Dura(R) rolls from a company owned by Steven
G. Ross "Supplier" pursuant to a supply agreement. Steven G. Ross is a 15.03%
stockholder in the Company and President of a company which competed with the
Company's Tri-Dura(R) bags. The supply agreement provided 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
could terminate the supply agreement upon two years' prior written notice. The
Company could purchase plastic rolls from other suppliers to the extent Supplier
was unable to supply plastic rolls under the supply agreement. Since the closing
of the Asset Sale, the Company no longer has any requirements for plastic rolls
under this supply agreement. On February 9, 2005 in a settlement with supplier,
the supply agreement was terminated. Total purchases from Steven G. Ross for the
years ended December 31, 2004, 2003, and 2002, were in excess of $6 million
annually.
44
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------------------------------------
Fees billed by our auditors' during the last two fiscal years were as
follows:
------------------- -------------------
2004 2003
- ---------------------------------------------- ------------------- -------------------
Audit Fees(1) $81,977 $102,928
- ---------------------------------------------- ------------------- -------------------
Audit-related Fees $6,750 $9,000
- ---------------------------------------------- ------------------- -------------------
Tax Fees $17,250 $22,565
- ---------------------------------------------- ------------------- -------------------
All other fees(2) $4,848 -
- ---------------------------------------------- ------------------- -------------------
(1) Financial Statement Audit and Quarterly Reviews of Forms 10-Q (including
expenses)
(2) Includes reviews of Form 8-K, and proxy (including expenses)
Prior to the resignation of Moss Adams LLP on October 25, 2004, and the engaging
of Semple & Cooper LLP on January 12, 2005, as the Company's independent
accountants, as reported on the Form 8-K filed by the Company on October 27,
2004, (and amended on November 4, 2004, November 9, 2004, and November 19, 2004)
and to the Form 8-K filed by the Company on January 14, 2005, all services,
whether for audit or non-audit services, were pre-approved by the Audit
Committee. The Audit Committee pre-approves annually the engagement letter from
its independent accountants, which details the specific services to be
performed. Those pre-approved services include the annual audit and 10-K review,
quarterly 10-Q reviews, assistance with adoption of new accounting
pronouncements or auditing and disclosure requirements, internal control reviews
and assistance with internal control reporting requirements, tax compliance, tax
planning, preparation and related tax services and assistance and consultation
on questions raised by taxing or regulatory agencies. Any additional engagement
that does not fit within the definition of the pre-approved service contained in
the annual engagement letter may be presented to the Audit Committee for
consideration at its next scheduled meeting, or if earlier consideration is
required, to the committee chairman.
45
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
Page
1. Index to Financial Statements.................................................................. 48
Independent Auditor's Reports.................................................................. F-1
Balance Sheets at December 31, 2004 and 2003................................................... F-3
Statements of Operations and Comprehensive Loss for the years ended
December 31, 2004, 2003 and 2002........................................................... F-5
Statements of changes in Shareholders' Equity for the years ended
December 31, 2004, 2003 and 2002........................................................... F-6
Statements of Cash Flows for the years ended December 31,
2004, 2003 and 2002........................................................................ F-7
Notes to Financial Statements.................................................................. F-8
2. Financial statement schedules required to be filed by Item 8 and
paragraph (d) of this Item 15:
Independent Auditor's Reports on Supplemental Information...................................... F-35
Schedule of Valuation and Qualifying Accounts.................................................. F-37
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............................................... 49
46
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.
AB HOLDING GROUP INC.,
a Delaware corporation
Date: March 29, 2005 By: \s\ LARRY R. INMAN
--------------------------------------------
Larry R. Inman, 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, 2005 By: \s\ LARRY R. INMAN
---------------------------------------------
Larry R. Inman, Chairman, Board of Directors,
Chief Executive Officer (Principal Executive
Officer) and President
Date: March 29, 2005 By: \s\ MICHAEL R. WALLIS
---------------------------------------------
Michael R. Wallis, Chief Financial
Officer and Vice President, Finance
(Principal Financial and Accounting
Officer)
Date: March 29, 2005 By: \s\ ROY F. CUNNINGHAM
---------------------------------------------
Roy F. Cunningham, Director
Date: March 29, 2005 By: \s\ MICHAEL W. FOSTER
---------------------------------------------
Michael W. Foster, Director
Date: March 29, 2005 By: \s\ JIM DEMATTEO
---------------------------------------------
Jim DeMatteo, Director
Date: March 29, 2005 By: \s\ ARTHUR P. SCHUETTE
---------------------------------------------
Arthur P. Schuette, Director
Date: March 29, 2005 By: \s\ UDO WEBER
---------------------------------------------
Udo Weber, Director
47
TABLE OF CONTENTS
Page
----
AB HOLDING GROUP INC.
- ---------------------
Independent Auditor's Reports F-1
Financial Information
Balance Sheets F-3
Statements of Operations and Comprehensive Loss F-5
Statements of changes in Shareholders' Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8
Supplemental Information
Independent Auditor's Reports on Supplemental Information F-35
Valuation and Qualifying Accounts F-37
48
AB HOLDING GROUP INC.
(FKA: AG-BAG INTERNATIONAL LIMITED)
----------
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
(WITH SUPPLEMENTAL INFORMATION)
----------
DECEMBER 31, 2004 AND 2003
CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITOR'S REPORTS F-1 - F-2
FINANCIAL STATEMENTS
Balance sheets F-3 - F-4
Statements of operations and comprehensive loss F-5
Statements of changes in shareholders' equity F-6
Statements of cash flows F-7
Notes to financial statements F-8 - F-34
SUPPLEMENTAL INFORMATION
Independent auditor's reports on supplemental information F-35 - F-36
Valuation and qualifying accounts F-37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
AB Holding Group Inc. (fka: Ag-Bag International Limited)
We have audited the accompanying balance sheet of AB Holding Group Inc., (fka:
Ag-Bag International Limited) as of December 31, 2004, and the related
statements of operations and comprehensive loss, changes in shareholders'
equity, and cash flows for the year ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). 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
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 AB Holding Group Inc., (fka:
Ag-Bag International Limited) as of December 31, 2004, and the results of its
operations and its cash flows for the year ended December 31, 2004, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Semple & Cooper, LLP
February 3, 2005
Phoenix, Arizona
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
AB Holding Group Inc. (fka: Ag-Bag International Limited)
We have audited the accompanying balance sheet of AB Holding Group Inc., (fka:
Ag-Bag International Limited) as of December 31, 2003, and the related
statements of operations and comprehensive loss, changes in shareholders'
equity, and cash flows for each of the years ended December 31, 2003, and 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). 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 AB Holding Group Inc., (fka:
Ag-Bag International Limited) as of December 31, 2003, and the results of its
operations and its cash flows for each of the years ended December 31, 2003, and
2002, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company would continue as a going concern. As discussed in Note 17 to the
financial statements, the Company had suffered recurring losses from operations,
had an accumulated deficit, negative cash flows from operations and was out of
compliance with its bank covenants, which raised substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters are described in Note 17. The financial statements do not include any
adjustments that might have resulted from the outcome of this uncertainty.
/s/ Moss Adams, LLP
February 20, 2004
Medford, Oregon
F-2
AB HOLDING GROUP INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS
December 31,
-----------------------------------------------
2004 2003
-------------------- --------------------
CURRENT ASSETS
Cash $ 2,982,728 $ 167,528
Accounts receivable, less allowance for doubtful
accounts of $163,468 and $204,081
at 2004 and 2003, respectively 632,132 1,226,390
Inventories - 5,781,345
Prepaid expenses and other current assets 131,074 251,808
Held for sale (property, plant & equipment, net) 1,692,103 -
-------------------- --------------------
Total current assets 5,438,037 7,427,071
-------------------- --------------------
PROPERTY, PLANT, AND EQUIPMENT, net - 3,233,673
-------------------- --------------------
OTHER ASSETS
Intangible assets, net - 15,066
BAW joint venture - 376,974
Other assets - 491,513
-------------------- --------------------
Total other assets - 883,553
-------------------- --------------------
TOTAL ASSETS $ 5,438,037 $ 11,544,297
==================== ====================
F-3 See accompanying notes.
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
-----------------------------------------------
2004 2003
-------------------- --------------------
CURRENT LIABILITIES
Line of credit $ - $ 2,090,448
Current portion of long-term debt
(on assets held for sale) 1,071,488 182,706
Accounts payable 254,406 936,953
Accrued payroll and payroll taxes 105,150 206,514
Warranty reserve 13,430 74,753
Discontinued operational costs payable 2,124,662 -
Volume discounts - 205,984
Accrued expenses and other current liabilities 239,590 474,480
Income taxes payable 2,210 2,210
-------------------- --------------------
Total current liabilities 3,810,936 4,174,048
-------------------- --------------------
NONCURRENT LIABILITIES
Long-term debt, net of current portion - 1,071,488
-------------------- --------------------
Total liabilities 3,810,936 5,245,536
-------------------- --------------------
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY
Preferred stock, $4 liquidiation value per share, 8.5%
cumulative dividend, nonvoting, 5,000,000 shares
authorized; -0- and 174,000 shares issued and
outstanding at December 31, 2004 and 2003,
respectively - 696,000
Common stock, $.01 par value, 25,000,000 shares
authorized; 12,081,991 and 12,061,991 shares issued
at December 31, 2004 and 2003, respectively 120,819 120,619
Treasury stock, at cost (31,500) (31,500)
Additional paid-in capital 9,547,378 9,210,211
Accumulated deficit (8,009,596) (3,696,569)
-------------------- --------------------
Total shareholders' equity 1,627,101 6,298,761
-------------------- --------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 5,438,037 $ 11,544,297
==================== ====================
See accompanying notes. F-4
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
- --------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------------------
2004 2003 2002
------------------ ----------------- -----------------
LOSS FROM DISCONTINUED OPERATIONS $ (4,349,589) $ (2,753,715) $ (663,988)
BEFORE EXTRAORDINARY ITEM
EXTRAORDINARY ITEM
Gain from sale of BAW joint venture,
(net of income tax) 36,562 - -
------------------ ----------------- -----------------
NET LOSS AND COMPREHENSIVE LOSS
FROM DISCONTINUED OPERATIONS $ (4,313,027) $ (2,753,715) $ (663,988)
================== ================= =================
BASIC AND DILUTED NET LOSS PER
COMMON SHARE
From discontinued operations $ (0.36) $ (0.24) $ (0.06)
From extraordinary item - - -
------------------ ----------------- -----------------
$ (0.36) $ (0.24) $ (0.06)
================== ================= =================
BASIC AND DILUTED WEIGHTED-AVERAGE
COMMON SHARES OUTSTANDING 11,976,991 11,956,991 11,956,991
================== ================= =================
F-5 See accompanying notes.
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
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, 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
from discontinued operations - - - - - - - (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
from discontinued operations - - - - - - - (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
Exercise of common stock options - - 20,000 200 - - 4,800 - 5,000
Retirement of Preferred stock (174,000) (696,000) - - - - 332,367 - (363,633)
Net loss and comprehensive loss
from discontinued operations - - - - - - - (4,313,027) (4,313,027)
--------- --------- ---------- -------- -------- ---------- ----------- ------------ --------------
BALANCE,
December 31, 2004 - $ - 12,081,991 $120,819 105,000 $(31,500) $9,547,378 $(8,009,596) $ 1,627,101
========= ========= ========== ======== ======== ========== =========== ============ ==============
F-6 See accompanying notes.
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------------
2004 2003 2002
----------------- ----------------- ----------------
CASH FLOWS FROM DISCONTINUED OPERATING ACTIVITIES
Net loss from discontinued operations $ (4,349,589) $ (2,753,715) $ (663,988)
Gain from extraordinary item 36,562 - -
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 540,959 775,980 816,262
Change in inventory reserve (933,762) 290,000 79,000
Change in equipment held for sale reserve 174,326 - -
(Gain) loss on disposition of equipment (1,380,382) (185,358) (500)
Deferred income taxes - 1,013,000 (538,000)
Equity in joint venture earnings (123,026) (151,954) (125,000)
Change in assets and liabilities:
Accounts receivable 594,258 (67,463) 1,274,915
Inventories 7,187,043 (68,046) 233,448
Prepaid expenses and other current assets 251,808 (52,931) 26,667
Other assets (3,192) (885) (8,924)
Accounts payable (682,547) 33,644 230,746
Accrued expenses and other current liabilities 1,521,101 (173,877) 159,306
Income taxes payable - - 2,210
----------------- ----------------- ----------------
Net cash from discontinued operating activities 2,833,559 (1,341,605) 1,486,142
----------------- ----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (2,369) (49,745) (207,775)
Acquisition of intangible assets - (12,532) -
Proceeds from disposition of equipment & intangibles 2,252,164 414,239 500
----------------- ----------------- ----------------
Net cash from discontinued investing activities 2,249,795 351,962 (207,275)
----------------- ----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit 19,336,799 21,834,727 12,053,903
Principal payments on line of credit (21,427,247) (20,404,004) (12,957,033)
Principal payments on debt (182,706) (281,918) (413,577)
Issuance of common stock 5,000 - -
Dividends paid - (59,160) (59,160)
----------------- ----------------- ----------------
Net cash from discontinued financing activities (2,268,154) 1,089,645 (1,375,867)
----------------- ----------------- ----------------
NET INCREASE (DECREASE) IN CASH 2,815,200 100,002 (97,000)
CASH, beginning of year 167,528 67,526 164,526
----------------- ----------------- ----------------
CASH, end of year $ 2,982,728 $ 167,528 $ 67,526
================= ================= ================
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Long-term debt extinguished through
additional line of credit advances $ - $ 275,000 $ -
================= ================= ================
Preferred stock redeemed through exchange
of life insurance policy $ 363,633 $ - $ -
================= ================= ================
See accompanying notes. F-7
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - AB Holding Group Inc., (formerly known as Ag-Bag International
Limited) is a Delaware corporation. As a result of the sale on November 30, 2004
of the Company's operating assets and equipment to Miller St. Nazianz Inc., of
Wisconsin, the Company became a non-operating public company shell without any
operating activities, holding only those assets not purchased by Miller St.
Nazianz Inc. The Company changed its name back to AB Holding Group Inc.,
effective December 7, 2004. Prior to November 30, 2004, Ag-Bag International
Limited's primary operations included the manufacturing and sale of machines and
related bags used in the agriculture industry to store feed for livestock,
grain, and other products. Additionally, the Company manufactured machines and
bags for composting. Ag-Bag International Limited's primary market was North
America; however, it sold products worldwide.
The Company is currently in the process of winding down its operations and
selling its remaining assets so the Company can either dissolve and liquidate or
sell the remaining non-operating public shell company to another party by merger
or another method.
The Company's common stock began trading publicly on January 17, 1990, and is
traded on the OTC Bulletin Board under the symbol "ABHG".
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 $471,937 and $135,490 in 2004 and 2003 respectively from
rental equipment to inventory held-for-sale. In 2003 and 2002, the Company
transferred $183,911, and $331,726, respectively, from inventory held-for-sale
to rental equipment.
ACCOUNTS RECEIVABLE - Accounts receivable are from distributors and customers of
Ag-Bag International Limited's products that were sold prior to the sale to
Miller St. Nazianz, Inc., and from AB Holding Group, Inc. billings to Miller for
subsequent bills invoiced to the Company during the transition. The Company
performed periodic credit evaluations of its customers and maintained allowances
for potential credit losses. Also, to reduce the risk of credit loss, the
Company required letters of credit from foreign customers with which no credit
history had been established.
The non-operating public company shell continues to collect its remaining
receivables through Company personnel, and through the use of third party
collection agencies, which the Company has previously used.
F-8
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
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 reviewed current inventory levels in relation to sales
forecasts and adjusted the valuation reserve accordingly. For the remaining
categories of inventory, the Company established a reserve balance based on the
aging of the specific inventory items.
PROPERTY, PLANT, AND EQUIPMENT - Property, plant and equipment have been
reclassified to held for sale assets as of December 31, 2004, and are recorded
at the lower of cost or market. Previously, property, plant, and equipment was
stated at cost and depreciated on the straight-line method over their estimated
useful lives which ranged from 5 to 7 years for equipment, and 20 to 30 years
for buildings.
Expenditures for additions and major improvements were capitalized. Expenditures
for repairs and maintenance are charged to expense as incurred.
INTANGIBLE ASSETS - Intangible assets consisted of licenses and patents. The
cost of the licenses and patents were 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 previously assigned some of its
trade accounts receivable to various former third-party financing sources with
discount rates ranging from .75% to 1.58% at December 31, 2004. The accounts
could be assigned with or without recourse depending on the specific account
being assigned. Effective September 30, 2004, the Company no longer accepted
accounts to be assigned with recourse. At December 31, 2004, the balance of
previously assigned accounts with recourse was $377,465. Management has reviewed
the remaining accounts with recourse at December 31, 2004, and determined that
no accrual is necessary for potential future recourse obligations. At January
31, 2005, the balance of previously assigned accounts with recourse had
decreased to $315,585, as customers made their regular payments to the third
party finance company.
F-9
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
PRE-SEASON ORDER FLOORING - During 2002, the Company implemented its former
Pre-Season Order Program under which the Company paid the flooring interest for
its former dealers who made purchases from the Company under specific provisions
of the Pre-Season Order Program. The Company estimated their future obligations
under this former program at the time of sale, reduced sales revenues, and
accrued a liability for the estimated future interest obligation. This program
and the Company's obligation for interest ceased with the sale to Miller St.
Nazianz, Inc. on November 30, 2004. Total dealer flooring interest was $109,851,
$344,870, and $113,534 for the years ended December 31, 2004, 2003, and 2002,
respectively.
VOLUME DISCOUNTS - Under the same former Pre-Season Order Program, the Company
paid volume discounts to its former dealers based upon a sliding scale for the
volume of orders placed by, and shipped to dealers. The Company estimated their
future obligations under this former program at the time of sale, reduced sales
revenues, and accrued a liability for the estimated future volume discount
obligation. This program ceased with the sale to Miller St. Nazianz, Inc. on
November 30, 2004. Total volume discounts were $567,606, $732,458 and $182,765
for years ended December 31, 2004, 2003 and 2002, respectively.
REVENUE RECOGNITION - Prior to the sale to Miller St. Nazianz, Inc., on November
30, 2004, revenue was recognized when the customer had placed an order for the
product, the product was delivered or shipped to the customer, the sales price
had been determined, and collection was reasonably assured. The Company included
revenues earned on shipping costs billed to customers in "Net Sales," and costs
to ship products were included in "Cost of Sales." Since the Company sold its
operating assets on November 30, 2004, it no longer has any source of operating
revenue.
ADVERTISING COSTS - The Company expensed advertising costs as they were
incurred. Advertising expenses for the years ended December 31, 2004, 2003, and
2002 were $221,603, $412,047, and $504,060, respectively.
WARRANTY RESERVE - Prior to the sale to Miller St. Nazianz, Inc., on November
30, 2004, at the time of sale, the Company accrued a liability for the estimated
future costs to be incurred under the provisions of its warranty agreements. The
Company reviewed its historical warranty expense and current sales trends in
products covered under warranty, and adjusted its warranty reserves accordingly.
Warranty activity for the years ended December 31, 2004, and 2003 was as
follows:
2004 2003
----------------- -----------------
Balance, beginning of year $ 74,753 $ 177,384
Charged to expense 63,813 93,330
Warranty costs incurred during the year (125,136) (195,961)
----------------- -----------------
Balance, end of year $ 13,430 $ 74,753
================= =================
F-10
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
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 and 2002 using the Black-Scholes pricing model as
prescribed under SFAS No. 123. There were no options granted in 2004. The
following assumptions were made for grants in 2003 and 2002: risk-free interest
rate of 2.94% and 4.41%, respectively, expected life of seven years, and
dividend rates of 0%. For 2003 and 2002 the expected volatility over the
expected lives of the grants was assumed to be 102.52% and 77.04%, respectively.
The weighted-average fair value of the options granted was estimated to be $.34
in 2003 and $.20 in 2002.
If the Company had accounted for the value of the options granted during 2003
and 2002, in accordance with SFAS No. 123, the Company's net loss from
discontinued operations would have been increased to the pro forma amounts
indicated below:
2004 2003 2002
------------------- ------------------ -----------------
Net loss from discontinued operations:
As reported $ (4,313,027) $ (2,753,715) $ (663,988)
Pro forma $ (4,313,027) $ (2,766,083) $ (673,278)
Net loss from discontinued
operations per share:
As reported $ (0.36) $ (0.24) $ (0.06)
Pro forma $ (0.36) $ (0.24) $ (0.06)
The resulting pro forma compensation costs may not be representative of that
expected in future years.
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. The potentially antidilutive shares at December 31,
2004 and 2003, were 1,257 and 6,437 respectively.
F-11
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
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 $3,045,000 and $1,577,772 as of
December 31, 2004 and 2003, respectively. Management has established a valuation
allowance of $3,045,000 and $1,577,772 against these deferred tax assets at
December 31, 2004 and 2003, respectively.
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 were 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, 2004 and 2003,
because of the relatively short maturity of these instruments. The carrying
value of notes payable approximated fair value as of December 31, 2004 and 2003,
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
included allowances for doubtful accounts receivable, inventory obsolescence
reserves, depreciation methods for property, plant and equipment, valuation
allowance for held for sale assets, valuation allowances for deferred tax assets
and reserves for recourse obligations, warranty obligations, and Pre-Season
Order flooring interest obligations.
F-12
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
RECENTLY ISSUED ACCOUNTING STANDARDS - In December 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 153, "Exchanges of
Non-monetary Assets, an Amendment of APB Opinion No. 29." The guidance in APB
Opinion No. 29, "Accounting for Non-monetary Transactions," is based on the
principle that exchanges of non-monetary assets should be measured based on the
fair value of the assets exchanged. The guidance in APB Opinion No. 29, however,
included certain exceptions to that principle. SFAS No. 153 amends APB Opinion
No. 29 to eliminate the exception for non-monetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
non-monetary assets that do not have commercial substance. A non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS No. 153 is
effective for non-monetary asset exchanges in fiscal periods beginning after
June 15, 2005. The implementation of this statement is not expected to have a
material impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 123R (revised 2004), "Share-Based
Payment," which is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123R supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and amends SFAS No. 95, "Statement of Cash Flows."
Generally, the approach in Statement 123R is similar to the approach described
in SFAS 123, however, SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosures seen in Note 2 to
the Consolidated Financial Statements, "Summary of Accounting Principles - Stock
Option Plans," will no longer be an alternative. SFAS No. 123R is effective for
interim periods beginning after June 15, 2005. The implementation of this
statement is not expected to have a material impact on the Company's financial
statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an Amendment
of ARB No. 43, Chapter 4." SFAS No. 151 amends ARB 43, Chapter 4, to clarify
that the abnormal amounts of idle facility expense, freight, handling costs and
wasted materials (spoilage) be recognized as current period charges. It also
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
No. 151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The implementation of this statement is not expected to
have a material impact on the Company's financial statements.
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 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
F-13
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - (continued)
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. The implementation of this
statement did not 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." The implementation of this statement did not 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 was
associated with a potential variable interest entity through its investment in
BAW, prior to its sale in April 2004. Management determined that BAW was a
variable interest entity, but concluded that the Company was not the primary
beneficiary.
RECLASSIFICATIONS - Certain reclassifications have been made to the 2003
financial statements to conform with the 2004 presentation.
F-14
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - DISCONTINUED OPERATIONS
On August 13, 2004, the Company entered into an Asset Purchase Agreement to sell
substantially all of the Company's operating assets to Miller St. Nazianz, Inc.,
a Wisconsin corporation who will integrate the operations of Ag-Bag into their
current farm equipment manufacturing business operations. On November 30, 2004,
the Company's shareholders approved the transaction and the Company closed the
Asset Purchase Agreement dated August 13, 2004. Upon the closing, Ag-Bag sold
Miller substantially all of our operating assets (inventory, equipment, and
patents), and Miller assumed certain liabilities relating to the purchased
assets and the operations of our business arising after the closing. Certain of
our assets were excluded. Miller assumed liabilities relating to the purchased
assets and business that arose after the closing, and paid us net cash
consideration in the amount of $6,427,889.
The following schedule outlines the components of the asset sale to Miller:
Inventory $ 4,926,889
Fixed assets 1,276,000
Intangible assets 300,000
-------------
Subtotal 6,502,889
Less: Warranty (75,000)
-------------
Net Proceeds $ 6,427,889
=============
As a result of the sale to Miller St. Nazianz Inc., the Company terminated most
of its employees, paid termination benefits and began making payments pursuant
to change of control agreements, during the fourth quarter of 2004.
On April 11, 2000, the Company entered into Change of Control Agreements with
its current and former executive officers, Messrs Inman, Jay, Wallis and
Schuette, and Mrs. Tucker and key personnel. These agreements provide for
payments to the executive officer or key employee of the Company, of one year's
annual base salary, and a bonus of $5,000 for each year of Company service in
excess of five years, in addition to outplacement services and continued Company
employee benefit coverage for a one year period, in the event that such officer
is terminated without cause within the period governed by the agreement. As a
result of the change of control from the closing of the asset sale to Miller,
and the termination of employment by the Company, these agreements became
effective for former executive officers Jay, Schuette, and Tucker, and key
personnel.
The total number of employees terminated pursuant to the sale to Miller St.
Nazianz Inc., which consisted of office, customer service and manufacturing
personnel was 66 through December 31, 2004. The Company currently estimates that
4-5 employees will remain to run the limited operations and wind-down of the
Company and that those employees will be terminated as their jobs are completed
or upon the final distribution and liquidation of the Company.
F-15
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - DISCONTINUED OPERATIONS - (continued)
The following table outlines these anticipated expenses and amounts accrued or
incurred through December 31, 2004:
Amount accrued Amount accrued
or incurred or incurred
during three-month for the year
Amount expected period ended ended
to be incurred Dec. 31, 2004 Dec. 31, 2004
----------------- -------------------- -----------------
One-time termination benefits $ 130,500 $ 130,601 $ 130,601
Change of control agreements 1,200,000 1,204,151 1,204,151
Payment of unused sick/vacation benefits 46,000 34,294 34,294
Contract termination costs 10,500 10,500 10,500
Other costs 60,000 60,000 60,000
----------------- -------------------- -----------------
Total $ 1,447,000 $ 1,439,546 $ 1,439,546
================= ==================== =================
F-16
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - DISCONTINUED OPERATIONS - (continued)
Following is a statement of discontinued operations as of December 31, 2004,
2003 and 2002, resulting from the sale of the Company's operating assets and
equipment to Miller St. Nazianz Inc.:
Years Ended December 31,
------------------------------------------------------------
2004 2003 2002
------------------ ----------------- -----------------
NET SALES $ 20,839,980 $ 21,502,654 $ 27,189,140
COST OF SALES 19,664,830 18,357,038 22,121,346
------------------ ----------------- -----------------
Gross profit from discontinued operations 1,175,150 3,145,616 5,067,794
OTHER OPERATING EXPENSES
Selling expenses 1,753,339 2,628,971 3,496,672
Administrative expenses 5,073,867 2,810,904 2,739,811
(Gain) loss on sale of assets (1,380,383) (185,358) (500)
Research and development expenses 143,389 139,160 219,980
------------------ ----------------- -----------------
Loss from discontinued operations (4,415,062) (2,248,061) (1,388,169)
OTHER INCOME (EXPENSE)
Interest income 6,103 - 45,828
Interest expense (252,786) (245,656) (314,068)
Joint venture equity and royalties 219,849 423,074 315,196
Other 92,307 123,202 141,435
------------------ ----------------- -----------------
Loss from discontinued operations
before income taxes (4,349,589) (1,947,441) (1,199,778)
Provision (benefit) for income taxes - 806,274 (535,790)
------------------ ----------------- -----------------
LOSS FROM DISCONTINUED OPERATIONS
BEFORE EXTRAORDINARY ITEM (4,349,589) (2,753,715) (663,988)
EXTRAORDINARY ITEM
Gain from sale of BAW joint venture,
(net of income tax) 36,562 - -
------------------ ----------------- -----------------
NET LOSS AND COMPREHENSIVE LOSS
FROM DISCONTINUED OPERATIONS $ (4,313,027) $ (2,753,715) $ (663,988)
================== ================= =================
F-17
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - DISCONTIUED OPERATIONS - (continued)
The following table outlines the expense categories in the condensed statement
of discontinued operations as of December 31, 2004, where the costs accrued or
incurred have been recorded:
Cost of Selling Administrative
Goods Sold Expenses Expenses
-------------- ------------ ------------------
One-time termination benefits $ 102,973 $ 15,139 $ 12,489
Change of control agreements $ - $ - $ 1,204,151
Payment of unused sick/vacation benefits $ 22,116 $ 7,744 $ 4,434
Contract termination costs $ - $ - $ 10,500
Other costs $ - $ - $ 60,000
-------------- ------------ ------------------
Total $ 125,089 $ 22,883 $ 1,291,574
============== ============ ==================
The following table identifies the discontinued operational costs payable that
have been recorded as a result of the sale to Miller St. Nazianz Inc., and the
activity related to those accruals during the period ended December 31, 2004:
Change of Professional Personnel &
Control & Public Asset Employee
Liability Transitional Reporting Maintenance Benefit
Total & Taxes Costs Costs Costs Costs
---------------- ------------- -------------- -------------- ------------- -------------
Balance December 31, 2003 $ - $ - $ - $ - $ - $ -
Costs accrued during the period 2,182,694 1,343,709 100,000 305,000 32,208 401,777
Payments made during the period (58,032) (39,406) (18,626) - - -
---------------------------------------------------------------------------------------------
Balance December 31, 2004 $ 2,124,662 $ 1,304,303 $ 81,374 $ 305,000 $ 32,208 $ 401,777
================ ============= ============== ============== ============= =============
F-18
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - INVENTORIES
Inventories consist of the following:
2004 2003
----------------- -----------------
Parts and subassembly $ 51,306 $ 2,363,838
Work-in-process and raw materials - 934,986
Machines - 2,784,769
Bags and other finished goods 36,254 719,074
----------------- -----------------
Total Inventory 87,560 6,802,667
Less: Valuation allowance (87,560) (1,021,322)
----------------- -----------------
Inventory, net $ - $ 5,781,345
================= =================
NOTE 4 - INTANGIBLE ASSETS, NET
Intangible assets, net, consist of the following:
2004 2003
----------------- -----------------
License and patent costs $ - $ 629,645
Less accumulated amortization - (614,579)
----------------- -----------------
$ - $ 15,066
================= =================
Intangible assets were being amortized over their estimated useful lives ranging
from 7 to 12 years. Amortization expense for the years ended December 31, 2004,
2003, and 2002, was $9,080, $8,977, and $7,382, respectively.
F-19
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - HELD FOR SALE - PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment has been reclassified as held for sale, and is
carried at the lower of cost or market as of December 31, 2004. The Company
established a valuation allowance on its held for sale assets at December 31,
2004, in the amount of $174,326. Held for sale net property, plant and equipment
at December 31, 2004, consists of the following:
2004 2003
------------------- ------------------
Land $ 58,326 $ -
Buildings 1,617,737 -
Office furniture, fixtures and equipment 174,326
Leasehold improvements 16,040 -
------------------- ------------------
Total held for sale property, plant and equipment $ 1,866,429
Less: Valuation allowance (174,326)
------------------- ------------------
Held for sale property, plant, and equipment, net $ 1,692,103 $ -
=================== ==================
Certain property, plant, and equipment serve as collateral for term debt
obligations.
2004 2003
----- ----
Current portion of long-term debt
collateralized by held for sale assets $ 1,071,488 $ -0-
============ =============
Property, plant, and equipment at December 31, 2004 and 2003, respectively,
consisted of the following:
2004 2003
-------------- --------------
Land $ - $ 160,826
Buildings - 2,858,539
Vehicles - 319,133
Office furniture, fixtures, and equipment - 2,336,346
Plant equipment - 3,324,125
Rental equipment - 857,238
Leasehold improvements - 80,399
-------------- --------------
Total property, plant, and equipment - 9,936,606
Less accumulated depreciation and amortization - (6,702,933)
-------------- --------------
Property, plant, and equipment, net $ - $ 3,233,673
============== ==============
F-20
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - HELD FOR SALE - PROPERTY, PLANT, AND EQUIPMENT - (continued)
The Company previously leased certain assets under capital lease agreements. At
December 31, 2004 and 2003, the gross amount of equipment under capital leases
was $ -0-, and $84,622, respectively. Accumulated depreciation related to items
previously leased was $ -0-, and $84,622, at December 31, 2004 and 2003,
respectively.
Depreciation expense for the years ended December 31, 2004, 2003, and 2002 was
$531,879, $767,003, and $808,880, respectively.
NOTE 6 - LINE OF CREDIT
The Company paid off its operating line of credit on December 2, 2004 from a
portion of the proceeds of its sale to Miller St. Nazianz Inc. Pursuant to its
agreement with Wells Fargo Business Credit, as a result of the early termination
of the Company's line of credit, the Company incurred $60,000 in early
termination fees in 2004. The line was subject to renewal on May 14, 2006. Prior
to December 2, 2004, the Company had an operating line of credit with Wells
Fargo Business Credit for up to $3,000,000. The line of credit was secured by
accounts receivable, inventories, fixed-asset blanket and general intangibles,
and bore interest at the bank's prime rate plus 4-3/4 % at December 31, 2003
(8.75% at December 31, 2003). As of December 31, 2003, $2,090,448 was
outstanding under the operating line of credit. The line of credit was 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, and received a waiver for these covenant violations at
December 31, 2003. In addition, the line was subject to borrowing base
restrictions. The borrowing base was equal to the lesser of the maximum line
amount or the sum of 70% of eligible accounts receivable plus the lesser of 40%
of eligible inventory or $2,000,000.
F-21
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt is comprised of the following:
2004 2003
----------------- -----------------
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 $ 22,702 $ 48,544
Note payable, monthly payments of $6,724,
including interest at 6.84% through August 2014,
secured by real property 568,170 607,836
Note payable in monthly installments of
$4,969, including interest at 6.62% through
November 2017, secured by real property 480,616 503,566
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
Note payable in monthly installments of
$3,105, including interest at 8.75%
through December 2004, secured by
certain equipment $ - $ 35,525
----------------- -----------------
Total long-term debt and capital lease obligations 1,071,488 1,254,194
Less current portion (1,071,488)* (182,706)
----------------- -----------------
Long-term debt and capital lease obligations, net $ - $ 1,071,488
================= =================
* - on held for sale assets
F-22
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS - (continued)
Future maturities of long-term debt and capital lease obligations are summarized
as follows:
Capital Lease Obligations
Long-term -------------------------------------------------
Debt Excluding Minimum Amount
Capital Lease Lease Representing
Obligations Payments Interest Principal
-------------------- --------------- ----------------- ---------------
Year ending December 31, 2005 $ 1,071,488 $ - $ - $ -
2006 - - - -
2007 - - - -
2008 - - - -
2009 - - - -
Thereafter - - - -
-------------------- --------------- ----------------- ---------------
$ 1,071,488 $ - $ - $ -
==================== =============== ================= ===============
NOTE 8 - INCOME TAXES
The provision (benefit) for income taxes consists of the following:
2004 2003 2002
------------------- ------------------ -----------------
Current:
Federal $ - $ - $ -
State 2,210 2,210 2,210
------------------- ------------------ -----------------
2,210 2,210 2,210
------------------- ------------------ -----------------
Deferred:
Federal (1,216,105) (692,703) (342,368)
State (253,333) (81,005) (60,000)
------------------- ------------------ -----------------
(1,469,438) (773,708) (402,368)
------------------- ------------------ -----------------
Valuation allowance 1,467,228 1,577,772 (135,632)
------------------- ------------------ -----------------
Income tax expense (benefit) $ - $ 806,274 $ (535,790)
=================== ================== =================
F-23
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES - (continued)
Deferred tax assets and liabilities consist of the following:
2004 2003
----------------- -----------------
State net operating loss carryforward $ 260,000 $ 214,000
Federal net operating loss carryforward 1,519,000 1,016,000
General business credit carryforward 436,000 436,000
Other expenses not currently deductible 842,000 41,772
----------------- -----------------
Gross deferred tax asset 3,057,000 1,707,772
Valuation allowance (3,045,000) (1,577,772)
----------------- -----------------
Net deferred tax assets 12,000 130,000
Gross deferred tax liability, primarily
due to differences in depreciation (12,000) (130,000)
----------------- -----------------
Net deferred tax assets $ - $ -
================= =================
At December 31, 2004, the Company had a federal net operating loss of
approximately $4,500,000 available to offset future federal taxable income which
begins expiring in 2021. At December 31, 2004, the Company had state net
operating losses of approximately $3,700,000 available to offset future state
taxable income which begin expiring in 2006 and expire in various years through
2019. The Company has established a valuation allowance of $ 3,045,000 and
$1,577,772 against its deferred tax assets at December 31, 2004 and 2003,
respectively.
At December 31, 2004, 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.
F-24
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
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:
2004 2003 2002
------------------- ------------------ -----------------
Statutory federal income tax rate (34%) (34%) (34%)
General business credits - - (1)
Nontaxable earnings of foreign
joint venture (1) (1) (4)
Other 1 1 (6)
Valuation allowance 34 75 -
------------------- ------------------ -----------------
Effective tax rates 0% 41% (45%)
=================== ================== =================
NOTE 9 - SUPPLEMENTAL DISCLOSURES REGARDING CASH FLOWS
Supplemental disclosure of cash flow information:
2004 2003 2002
------------------- ------------------ -----------------
Cash paid during year for:
Interest $ 252,786 $ 245,656 $ 314,068
Income taxes $ 12,955 $ 3,385 $ 4,280
F-25
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
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 - During 2004, the Company redeemed all 174,000 shares of the
preferred stock outstanding. The Company maintained life insurance on the owner
of the preferred stock and exchanged the life insurance policy owned by the
Company, valued at $363,633, for all of the outstanding shares of the preferred
stock, with a book value of $696,000.
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 2004, 2003, and 2002. At
December 31, 2004, 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 2004, there were no
options granted by the Company, 20,000 shares were exercised and 10,000
unexercised options went back into the plan for future use. At December 31,
2004, there were 145,000 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
2004 as a result of the sale to Miller St. Nazianz Inc., all options outstanding
under this plan were accelerated and became exercisable 15 days prior to the
close of the sale to Miller or they expired. No options were exercised during
this acceleration period and 300,000 options previously outstanding, expired and
went back into the plan for future use. No annual grant occurred in 2004. At
December 31, 2004, there were 1,000,000 shares available for grant under the
Non-Employee Director Stock Option Plan.
F-26
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
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, 2004, 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, 2001 40,000 $ 0.60 390,000 $ 0.84 430,000
Options granted 30,000 $ 0 120,000 $ 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 granted - $ - - $ - -
Options exercised (20,000) $ 0.25 (20,000)
Options expired (10,000) $ 0.25 (300,000) $ 0.56 (310,000)
------------- --------------- ---------------
Options outstanding at
December 31, 2004 20,000 $ 0.33 - $ - 20,000
============= =============== ===============
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
============= =============== ===============
Options exercisable at
December 31, 2004 20,000 $ 0.33 - $ - 20,000
============= =============== ===============
F-27
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - SHAREHOLDERS' EQUITY - (continued)
At December 31, 2004, the Company had outstanding options for the purchase of
20,000 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
- -------------------------- --------------- ------------------------- -------------- ------------------ -------------------------
20,000 options $ 0.33 20,000 options $ 0.33 $0.30 - $0.35 2 years
NOTE 11 - FOREIGN SALES ACTIVITY
Export sales from the Company's operations are as follows:
2004 2003 2002
------------------- ------------------ -----------------
Latin America/Mexico $ 40,942 $ 30,540 $ 112,956
Canada 873,902 861,195 1,147,872
Germany 394,748 273,303 275,415
Russia 741,335 - -
Other 201,740 168,481 202,008
------------------- ------------------ -----------------
$ 2,252,667 $ 1,333,519 $ 1,738,251
=================== ================== =================
F-28
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
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). On April 27, 2004, the Company sold
its investment in the BAW Joint Venture (Budissa Agrodienstleistungen Und
Warenhandels) to its former German dealer, BAG (Budissa Agroservice) for
$500,000 in cash, payable 30 days from closing, to provide the Company with
working capital. BAW had no operating income during the period ending April 27,
2004. The Company received the $500,000 on May 26, 2004. The Company recognized
$36,562 as an extraordinary gain from this sale. Prior to this date, the Company
had a 50% interest in BAW which was accounted for under the equity method. BAW
folds and distributes silage bags throughout Europe. The Company's accumulated
deficit was reduced by undistributed equity earnings from BAW in the amount of
$441,229 as of December 31, 2003.
2004 2003
----------------- -----------------
Initial investment $ 22,209 $ 22,209
Accumulated earnings, beginning of year 441,229 375,729
Sale of BAW investment (500,000) -
Extraordinary gain recognized on sale of investment 36,562 -
Deferred folder sale gain - (86,464)
Share of income for the year - 65,500
----------------- -----------------
Investment, end of year $ - $ 376,974
================= =================
On February 27, 1997, BAW also entered into a lease agreement with the Company
for the use of a folding machine. Royalties were 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 was being
recognized over the estimated useful life of the asset on BAW's books. At
December 31, 2004, the remaining deferred gain was $ -0-, as the investment was
sold in 2004.
On December 18, 2000, the Company 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). Upon the sale of BAW in 2004, the
Company was relieved of its guarantee with Dresdner Bank. There was no Euro
outstanding under this additional cash credit facility at December 31, 2003.
Upon modification of the agreement during 2003, management estimated the fair
value of the guarantee to be $15,000. The Company had recorded an accrued a
liability of $15,000 at December 31, 2003, which was relieved upon cancellation
of the guarantee in 2004.
F-29
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - BAW JOINT VENTURE - (continued)
Condensed financial statements for the Company's Joint Venture in Germany were
as follows:
2004 2003 2002
------------------- ------------------ -----------------
(Dollars in thousands)
Current assets $ - $ 1,438 $ 1,265
Property, plant, and equipment, net - 1,301 842
Other assets - 28 8
------------------- ------------------ -----------------
Total assets $ - $ 2,767 $ 2,115
=================== ================== =================
Current liabilities $ - $ 547 $ 377
Long-term liabilities - 1,052 797
------------------- ------------------ -----------------
Total liabilities - 1,599 1,174
------------------- ------------------ -----------------
Shareholders' equity - 1,075 869
Minority interest - 93 72
------------------- ------------------ -----------------
Total shareholders' equity - 1,168 941
------------------- ------------------ -----------------
Total liabilities and shareholders'
equity $ - $ 2,767 $ 2,115
=================== ================== =================
Net sales $ - $ 4,718 $ 3,758
Cost of goods sold - (3,362) (2,591)
------------------- ------------------ -----------------
Gross profit - 1,356 1,167
Selling and administrative
expenses - (1,130) (687)
Other income (expense) - (25) (29)
Income taxes - (96) (163)
------------------- ------------------ -----------------
Net income (*) $ - $ 105 $ 288
=================== ================== =================
*Attributed to other shareholders $ - $ 8 $ 15
=================== ================== =================
F-30
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - BAW JOINT VENTURE - (continued)
The condensed balance sheets were translated from the Euro to the U.S. Dollar at
the exchange rate in effect at December 31, 2003 and 2002. The exchange rates
used at December 31, 2003, and 2002, for the balance sheets were $1.25, and
$1.05, respectively. The condensed income statements were translated from the
Euro to the U.S. Dollar at the average exchange rate in effect at December 31,
2003 and 2002. The average exchange rates used at December 31, 2003, and 2002,
for the income statements were $1.13, and $.95, respectively.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS - The Company purchased its Tri-Dura(R) rolls from a
company owned by Steven G. Ross (Supplier) pursuant to a supply agreement.
Steven G. Ross is a 15.03% stockholder in the Company and President of a company
which competed with the Company's Tri-Dura(R) bags. The supply agreement
provided 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 could terminate the supply agreement upon two years'
prior written notice. The Company could purchase plastic rolls from other
suppliers to the extent Supplier was unable to supply plastic rolls under the
supply agreement. Since the Company's sale of its operating assets and equipment
to Miller St. Nazianz Inc., the Company no longer had any requirements for
plastic rolls under this supply agreement. On February 9, 2005 in settlement
with supplier, the supply agreement was terminated. Total purchases from Steven
G. Ross for the years ended December 31, 2004, 2003, and 2002, were in excess of
$6 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,
2004, 2003, and 2002, totaled $20,496, $60,036 and $66,361, respectively.
Future minimum lease payments under noncancellable operating leases are as
follows:
Years ending December 31, 2005 $ 20,496
2006 20,496
2007 20,496
2008 20,496
2009 20,496
Thereafter 123,000
-----------------
$ 225,480
=================
F-31
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES - (continued)
REAL ESTATE LISTING COMMITMENT - The Company entered into a Commercial Brokers
Association exclusive sale listing agreement in 2004 for the sale of its
Warrenton, Oregon property. The agreement provides for a 5% brokerage commission
to be paid based upon the gross sales price of the property. This exclusive
listing agreement expires on June 30, 2005, with a six-month tail on brokerage
commission if the property is subsequently sold to a party contacted during the
engagement. Any commission earned on this commitment will be paid out of the
proceeds of the sale.
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, 2004.
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's invested
cash balances are with Wells Fargo Brokerage Services, LLC, in floating rate
money market and par municipal general obligation bonds, which are not federally
insured.
The Company has outstanding accounts receivable balances with two customers
totaling approximately $604,790 at December 31, 2004. These balances represent
78% of the accounts receivable balance at December 31, 2004 and were largely
comprised of amounts owing from the sale to Miller St. Nazianz, Inc.
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 2004 or 2003. The
Company's eligible employees made contributions to the plan of $147,607 and
$196,292 for the years ended December 31, 2004 and 2003 respectively. As a
result of the sale to Miller St. Nazianz Inc., and the ensuing employee
terminations, the Company's 401(k) plan incurred a partial plan termination
during 2004.
F-32
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 - QUARTERLY FINANCIAL DATA - (UNAUDITED)
2004 2003
---------------------------------------- -------------------------------------------
Q-1 Q-2 Q-3 Q-4 Q-1 Q-2 Q-3 Q-4
--------- --------- --------- ---------- ---------- --------- ---------- ----------
(Dollars in thousands) (Dollars in thousands)
Loss from discontinued operations
before extraordinary items
as previously reported $ (409) $ (172) $ (385) $ (3,347) $ (49) $ (34) $ (317) $ (2,354)
Extraordinary item - Gain on sale
of BAW investment - (36) - - - - - -
--------- --------- --------- ---------- ---------- --------- ---------- ----------
Loss from discontinued operations
before extraordinary items $ (409) $ (208) $ (385) $ (3,347) $ (49) $ (34) $ (317) $ (2,354)
========= ========= ========= ========== ========== ========= ========== ==========
Extraordinary item - Gain on sale
of BAW investment $ - $ 36 $ - $ - $ - $ - $ - $ -
========= ========= ========= ========== ========== ========= ========== ==========
Net loss from discontinued
operations $ (409) $ (172) $ (385) $ (3,347) $ (49) $ (34) $ (317) $ (2,354)
========= ========= ========= ========== ========== ========= ========== ==========
Basic and diluated net loss
per common share:
Discontinued operations $ (0.03) $ (0.02) $ (0.03) $ (0.28) $ (0.01) $ - $ (0.03) $ (0.20)
Extraordinary item - - - - - - - -
--------- --------- --------- ---------- ---------- --------- ---------- ----------
$ (0.03) $ (0.02) $ (0.03) $ (0.28) $ (0.01) $ - $ (0.03) $ (0.20)
========= ========= ========= ========== ========== ========= ========== ==========
The gain from the sale of the Company's BAW investment was previously reported
as a gain from the sale of assets for second quarter financial reporting
purposes included in loss from discontinued operations before extraordinary
items. This gain has been reclassified as an extraordinary item for annual
financial reporting purposes at December 31, 2004. The effect on loss from
discontinued operations before extraordinary items as previously reported is
reflected above.
F-33
- --------------------------------------------------------------------------------
AB HOLDING GROUP INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17 - 2003 GOING CONCERN
The Company incurred net losses of $2,753,715, $663,988, and $164,150 during the
years ended December 31, 2001-2003, and had 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 year ended December 31, 2003. The Company was out of
compliance with their net worth and earnings covenants under the line of credit
agreement with their primary lender, Wells Fargo Business Credit.
Management believed their recent weak operating results were primarily due to
depressed milk prices in the agricultural sector, which had a direct impact on
the disposable income of their dairy farmer customers. Management estimated that
over 75% of their end users were dairy farmers. Management believed that dairy
farmers were delaying or eliminating capital expenditures due to their
uncertainties regarding milk prices and their disposable income. Management
further believed that early predictions for 2004 showed milk prices
significantly higher than the historically low levels seen for much of the
previous years and expected operating results to improve as dairy farmers began
to see increases in their disposable income through stabilizing milk prices.
Management also felt that its dealers were conservative on their pre-season
orders for 2003-04 as a result of the prolonged, depressed milk price situation.
It was managements feeling that some of its dealers would have the need to
re-order additional product during the year as a result of the forecasted
improving milk price, which would help them sell out of their remaining
inventories currently in their dealer stock. If this happened, there was 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 provided for a
lower volume discount on their re-orders. In addition, management had
implemented an expense reduction plan. Specifically, management had implemented
staff reductions and reduced salaries of senior management. Nonessential capital
expenditures, travel and other expenses were either eliminated or postponed.
Management had also been considering other changes to their business model such
as opportunities to sell the business, refinance its Warrenton, Oregon facility
(which had 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
that were in force in which the Company was the beneficiary, to provide positive
cash flows to the Company.
Because it was unclear whether the Company would be successful in accomplishing
these objectives, there was uncertainty about the Company's ability to continue
as a going concern. The financial statements did not include any adjustments
that might be necessary should the Company be unable to continue as a going
concern.
F-34
- --------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON SUPPLEMENTAL INFORMATION
To the Board of Directors and Shareholders
AB Holding Group Inc.
Under date of February 3, 2005, we reported on the balance sheet of AB Holding
Group Inc., (fka: Ag-Bag International Limited) as of December 31, 2004, and the
related statement of operations and comprehensive loss, changes in shareholders'
equity, and cash flows for the year ended December 31, 2004, as contained in the
annual report on Form 10-K for the year 2004. In connection with our audit of
the aforementioned financial statements, we also audited the related schedule of
Valuation and Qualifying Accounts. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audit.
In our opinion, the schedule of Valuation and Qualifying Accounts, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ Semple & Cooper, LLP
February 3, 2005
Phoenix, Arizona
F-35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON SUPPLEMENTAL INFORMATION
To the Board of Directors and Shareholders
AB Holding Group Inc., (fka: Ag-Bag International Limited)
Under date of February 20, 2004, we reported on the balance sheet of AB Holding
Group Inc., (fka: Ag-Bag International Limited) as of December 31, 2003, and the
related statements of operations and comprehensive loss, changes in
shareholders' equity, and cash flows for the years ended December 31, 2003, and
2002, 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 pertaining to the
years ended December 31, 2003, and 2002, set forth therein.
/s/ Moss Adams, LLP
February 20, 2004
Medford, Oregon
F-36
AB HOLDING GROUP INC.
VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
Beginning Costs and Net of End of
Description of Year Expenses Recoveries Year
- --------------------------------------------- --------------- -------------- ------------- ---------------
Year ended December 31, 2004:
Allowance for doubtful accounts $ 204,081 $ 26,581 $ (67,194) $ 163,468
Warranty reserve $ 74,753 $ 63,813 $ (125,136) $ 13,430
Inventory valuation reserve $ 1,021,322 $ - $ (933,762) $ 87,560
Tax asset valuation reserve $ 1,577,772 $ 1,467,228 $ - $ 3,045,000
Held for sale assets valuation reserve $ - $ 174,326 $ - $ 174,326
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) $ -
F-37
- --------------------------------------------------------------------------------
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.1 Restated Certificate of Incorporation(2)(8)
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(5)
10.7 First Amendment to Credit and Security Agreement(5)
10.8 Second Amendment to Credit and Security Agreement(5)
10.9 Third Amendment to Credit and Security Agreement(6)
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 and Chief Financial Officer
99.1 Press Release dated August 16, 2004(7)
99.2 Asset Purchase Agreement dated August 13, 2004(7)
* 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
(5) Filed as exhibit to the Form 10-K for the fiscal year ended December 31,
2003
(6) Filed as exhibit to the Form 10-Q for the quarter ended March 31, 2004
(7) Filed as exhibit to the Form 10-Q for the quarter ended June 30, 2004
(8) Filed as exhibit to the Form 10-K for the fiscal year ended December 31,
2004
49
