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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, 2001 Commission File Number: 0-18259
AG-BAG INTERNATIONAL LIMITED
(Exact name of registrant as specified in its charter)
Delaware 93-1143627
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2320 SE AG-BAG LANE
Warrenton, Oregon 97146
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 861-1644
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No _
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __
Based on the closing sales price of the Common Stock on February 28, 2002,
the aggregate market value of the voting stock of registrant held by
non-affiliates was $ 1,383,791.
The registrant has one class of Common Stock with 11,956,991 shares
outstanding as of March 8, 2002.
Documents Incorporated By Reference:
Portions of the proxy statement for the Registrant's Annual Meeting of
Stockholders to be held June 3, 2002, are incorporated by reference into Part
III of this report.
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AG-BAG INTERNATIONAL LIMITED
TABLE OF CONTENTS
PAGE
PART I ........................................................................... 2
Item 1. Business................................................................... 2
Item 2. Properties................................................................. 10
Item 3. Legal Proceedings.......................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders........................ 11
Executive Officers of the Registrant.................................................... 12
PART II ........................................................................... 13
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ..... 13
Item 6. Selected Financial Data.................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................. 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................. 25
Item 8. Financial Statements and Supplemental Data................................. 25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................... 25
PART III ........................................................................... 26
Items 10. and 11. Directors and Executive Officers of Registrant and Executive
Compensation............................................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 26
Item 13. Certain Relationships and Related Transactions............................. 26
PART IV ........................................................................... 27
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 27
PART I
When used in this Annual Report, the words "believes," "anticipates"
and "intends" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. See
"Factors Affecting Forward-Looking Statements." Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to publicly release any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Forward-looking statements contained in this Form 10-K relate to the
Company's plans and expectations as to: timing of demand for bagging machines
and bags; reductions in U.S. milk prices; availability of credit in the farming
sector; potential purchases of the Company's bagging machines, bags and
composting systems; anticipated inventory production; the availability of trade
credit and working capital; and the Company's dependence on the dairy industry.
Readers are urged, however, to review the factors set forth in reports the
Company files from time to time with the Securities and Exchange Commission.
Item 1. Business
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General
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Ag-Bag International Limited (the "Company") was incorporated as a New York
corporation in 1989. The primary operating company, Ag-Bag Corporation, a
Nebraska corporation, was incorporated in 1978. The Company changed its name in
1990 from AB Holding Group, Inc. to Ag-Bag International Limited. In 1994, in an
effort to streamline and save administrative expenses, two of the Company's
operating subsidiaries, A.B. Rental, Inc. and Ag-Bag Corporation were merged
into the Delaware subsidiary, ABVIN Merging Corp. On January 1, 1995, the
Company was merged into its Delaware subsidiary resulting in the reincorporation
of the Company in Delaware and a change in its name to Ag-Bag International
Limited.
The Company has pioneered an alternate method of storing feed for
livestock. Traditional methods of storing feed have included placing it in
bunkers, pits, and silos or baling and stacking it. The Company's method is to
store the feed in huge plastic bags of up to 500 feet in length and up to 12
feet in diameter by tightly stuffing the feed into the bag. The Company
assembles the machines for stuffing the feed into the bags. It has the bags
manufactured to its specifications and then folds and distributes the bags
through its dealer network. The benefits of bagging the feed include reduced
cost, additional flexibility in harvesting and storing the feed, enhanced feed
quality, and relatively small capital requirements. The Company also sells
ancillary products that complement the Company's main line of bagging machines
and bags.
The following table identifies the revenue from each product line that
accounted for more than 15% of total revenue over the last three years:
Product 1999 2000 2001
--------- ---- ---- ----
Bags 52% 53% 48%
Machines 41% 39% 43%
Other 7% 8% 9%
---- ---- ----
Net Sales 100% 100% 100%
The Company expects the use of bagging as a means of silage storage to
continue to play a major role in the future because the quality of stored feed
is better than other known competitive methods, allowing farmers to be more
efficient and to produce dairy, beef, sheep and pork products at a lower price.
The Company believes the concept of bagging is one way in which farmers can be
more profitable by reducing,
2
or completely eliminating, the purchase of feed and grain from outside sources.
Bagging enables the farmer to produce and store the feed on the farm and
provides easier access to the silage, thereby allowing the farmer to choose the
quality of silage to feed at any given time. The bagged feed has shown high
quality, allowing for higher production.
The Company expanded its operations into Europe in 1989 where it offered a
custom bagging service on a fee per metric tonne basis in the United Kingdom. In
1997, the Company's Board of Directors approved a strategic realignment of the
Company. The realignment involved the sale of the Company's United Kingdom
subsidiary, which had not been performing at a profitable level due to the
continued escalation of the BSE (Mad Cow) problem within the British farming
industry.
In 1994, the Company shipped its first orders to dealers in Japan, Latin
America and Germany. The Company continues to sell worldwide in Asia, Australia,
New Zealand, Western and Central Europe and the Caribbean. Export sales from the
Company's United States operations were 6.3% of net sales for the year ended
December 31, 2001.
In 1997, the Company formed a German joint venture in which the Company
owns a 50% interest and its German dealer owns the remaining 50%. The joint
venture folds and distributes silage bags to the Company's German and European
dealers.
The Company is developing other uses for its bagging technology. In 1993,
the Company adapted its bagging machines to permit bagging of compostable
organic matter in the Company's recyclable Tri-Dura(R) plastic bags. The Company
also has developed mobile plastic recovery units which enable the Company to
bail and pick up the recyclable Tri-Dura(R) plastic bags as a service to its
customers.
Seasonal Nature of Business
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The core business of the Company is historically seasonal due to the
harvest seasons in North America and Europe. The Company's machinery tends to be
purchased in anticipation of the next harvest season, so most of the sales of
machinery occur in the spring and summer. This requires the Company to carry
significant amounts of inventory to meet rapid delivery requirements of
customers. Bag sales tend to occur as the harvest season approaches in the
summer, and during the harvest season in the fall. The Company took steps to
counteract some of this seasonality by generating sales in Latin America
beginning in 1994 and in Australia and New Zealand in 1996.
Approximately 95% of the Company's business is concentrated in the Northern
Hemisphere resulting in between 65-72% of the Company's revenue being generated
during the spring and summer (2nd and 3rd Quarters). The following table
outlines the percentage of revenue over the past three years by quarter:
Quarter 1999 2000 2001
------- ---- ---- ----
1st 15% 21% 15%
2nd 33% 31% 35%
3rd 39% 34% 35%
4th 13% 14% 15%
3
Farm Equipment and Products
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Introduction. Silage is made using the Ag-Bag(R) system by storing forage
crops, such as corn, sorghum, or alfalfa, under anaerobic (without oxygen)
conditions in sealed Ag-Bag Tri-Dura(R) storage bags. The traditional methods
for making silage involve storing it in bunkers, pits or silos. Using
traditional methods, there is a nutrient loss resulting from a reduction in the
moisture content of the forage before storage. The moisture content must be
reduced to compensate for the high oxygen content of the forage which results
from the inability to pack the forage tightly enough. When the forage is not
packed sufficiently, the silage fermentation process produces too much heat
resulting in an even greater loss of nutrient value than would occur if the
moisture content were not reduced. The loss of nutrient value results in the
need for additional food supplements or an increased volume of feed.
The Ag-Bag(R) system is an alternative to bunkers, pits and silos. The
Ag-Bag(R) bagging machines push the forage into huge recyclable plastic film
Tri-Dura(R) bags with sufficient compaction to minimize the amount of oxygen in
the bag, which is then sealed tightly when filled. As a result, the forage can
be stored with significantly higher moisture content. The ability to store the
forage in this manner also reduces the time required to cut, prepare and store
the forage thus reducing the loss of nutrients and providing higher quality feed
for production within the farmers' herds.
Ag-Bag(R) Farm Equipment. The Company's principal line of farm equipment is
marketed under the trade name "Ag-Bagger(R)." The Ag-Bagger(R) is available in
three versions with a number of optional features. A wide range of optional
features are offered by the Company on its bagging machines in order to meet the
budget needs of the farmer.
The smallest version consists of machines used to load forage into Ag-Bag
Tri-Dura(R) storage bags ranging in size from 8 to 10 feet in diameter and 100
to 200 feet in length. This version was first introduced by the Company in 1987.
It is used primarily in smaller dairy and cattle feeding operations by dairymen
with herds averaging about 50 head and by cattlemen feeding up to about 300 head
of feeder cattle. Most of these machines are powered by the power take-off unit
of a farm tractor and moved by a tractor or other farm vehicle. The retail price
for this machine ranges from approximately $24,000 to $48,000.
In 1992, the Company introduced a medium-sized machine that can be operated
by the power take-off unit of a farm tractor or operated independently with an
optional diesel engine made by Caterpillar or Deere & Company. This machine
allows farmers to load forage into Ag-Bag Tri-Dura(R) storage bags ranging in
size from 9 to 10 feet in diameter and 100 to 250 feet in length. This machine
is primarily suitable for use by dairymen with herds ranging from 150 to 300
head and by cattlemen feeding between 300 and 800 head of feeder cattle. The
retail price for this machine ranges from approximately $74,000 to $203,000.
The largest version consists of machines that can be used to load Ag-Bag
Tri-Dura(R) storage bags ranging in size from 9 to 12 feet in diameter and 150
to 500 feet in length. These machines are used primarily by dairymen with herds
ranging from 300 to 2,000 head, by cattlemen with herds ranging from 800 to
15,000 head, and by custom operators. A super 12-foot Ag-Bagger(R) was developed
in 1989 and enhanced in 1995 for use by very large dairy and custom operators
and by cattle feeding operations with herds ranging from 15,000 to 25,000 head
of cattle. The larger machines are available with optional diesel engines made
by Caterpillar or Deere & Company. The retail price for the larger machines
ranges from approximately $110,000 to $278,000.
4
In response to a competitor's introduction of a cable-less machine in early
1995, the Company began research and development on its own cable-less machine
in early 1996. The Company began production of its own cable-less machine in
1997. In 1998, the Company introduced its own cable-less bagging machine called
the HFC (Hydraulic Finger Controlled) Silage Bagger. The introduction of this
machine was in response to what the Company felt was a change in direction of
the industry towards the cable-less machine design and the latest in bagging
technology. In 1999, the Company continued to develop and improve its cable-less
bagging machine by developing the Powered Anchor Control (PAC) system, and in
2000 introduced its latest version of the cable-less bagging machine, the
HYPAC(R) (Hydraulic Powered Anchor Control) system. The Company offers the
HYPAC(R) model in small, medium-sized and large bagging machines. The retail
price for the HYPAC(R) machines range from approximately $48,000 to $278,000.
The Company assembles and sells a separate line of related equipment called
the Ag-Bag Flex-a-Tuber(R) with a retail price ranging from $11,500 to $18,000.
The Flex-a-Tuber(R) permits farmers to store round-baled alfalfa, sorghum, and
other forage in Ag-Bag Tri-Dura(R) storage bags. The round bale Flex-a-Tubers(R)
are made in two sizes to permit the bagging of 4 and 5 foot bales. The bales can
be stored in Ag-Bag Tri-Dura(R) storage bags up to 200 feet in length.
The Company assembles and sells a separate line of related equipment called
the Square Bale Bagger which retails for between $23,500 to $31,000. The Square
Bale Bagger permits farmers to store square bales of alfalfa, sorghum and other
forage, two bales high in Ag-Bag Tri-Dura(R) flex storage bags. The Square Bale
Bagger permits the bagging of the bales in Ag-Bag Tri-Dura(R) flex storage bags
of 7 to 10 feet in diameter and up to 200 feet in length.
The Company assembles and sells the Ag-Bag(R) Pro-Grain Bagger, which
retails for between $28,000 to $31,000. This machine is similar in design to the
smallest Ag-Bagger(R) machines but has been adapted to permit the storage of
grains, such as corn, rice, wheat and soybeans, as well as other products, in
Ag-Bag Tri-Dura(R) storage bags. The machine permits the grain to be bagged
without damaging the kernel. After the grain is bagged and sealed, it will
retain the necessary quality for human consumption.
The Company also assembles and sells the Mighty Bite(R) front-end load
bucket. This revolutionary bucket replaces the conventional bucket.
Hydraulically operated, the Mighty Bite(R) closes tightly around material, thus
eliminating spillage and increasing load capacity due to compaction. The Company
manufactures the Mighty Bite(R) in sizes ranging from one-half cubic yard to two
cubic yards with a retail price ranging from $2,500 to $4,500.
The Company adapted its Ag-Bag(R) bagging machines for use in large scale
"in-vessel" composting of organic matter. The bagging machine is used in
conjunction with a shredder that shreds the organic material, which is then fed
into the bagging machine that bags the compostable matter into Ag-Bag
Tri-Dura(R) storage bags. An air blower is attached to the bag and circulates
air through the bag during the composting process. The Ag-Bag(R) compost bagging
machines retail for between $49,500 to $130,000.
Ag-Bag Tri-Dura(R) Storage Bags. The Ag-Bag Tri-Dura(R) disposable storage
bags range in size from 8 to 12 feet in diameter and 100 to 500 feet in length
and are made of extruded plastic. Rolls of plastic are manufactured to the
Company's specifications. The plastic contains special stabilizers to protect
the bags from deterioration due to exposure to weather and the sun's ultraviolet
rays. Once a Tri-Dura(R) bag is used, it may be recycled or disposed of in
another manner, but may not be reused.
The Company contracts for the manufacture of, and sells Tri-Dura(R)
three-ply bags with a white exterior and black interior intended for storage of
silage up to 24 months. The retail price of the bags ranges from approximately
$225 to $1,350. The manufactured plastic rolls are shipped to the Company's
plant in Blair, Nebraska, where they are folded and packed for sale using
proprietary folding techniques.
5
The proprietary bag folding techniques reduce bag folding time and allow the
bags to uniformly unfold when being filled, which thereby reduces operational
delays.
Ag-Bag(R) Inoculant. The Company markets a liquid inoculant and a dry
powder inoculant under the trade name Ag-Bag Plus!(R). The inoculant is added to
the forage or the round or square bales during bagging. It enhances the
fermentation process for making silage in bags, bunkers, pits and silos by
substantially shortening the time necessary for the creation of the silage. A
liquid inoculant was developed in 1989 by a Company supplier and introduced into
the market in 1990. The dry inoculant is produced from a proprietary formula
owned by the Company and developed by Larry R. Inman and Walter L. Jay. See
"Executive Officers of the Registrant." The Company also markets an inoculant
designed specifically for composting.
Market Size
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The market for Ag-Bag(R) machinery and Ag-Bag Tri-Dura(R) recyclable
storage bags is primarily in the dairy and beef cattle industries. Silage is
used most often as dairy and beef animal feed. It is also used by farmers to a
lesser extent to feed hogs and sheep. In 2000, over 249 million tons of corn,
alfalfa, and sorghum silage were made by United States farmers according to the
AG IQ Handbook XIX published in 2001 by Agricom, Inc. (the "AG Handbook"). Based
on AG Handbook statistics, the Company estimates that there are approximately
135,000 dairy, beef, hog, and sheep farms in the United States that are
potential customers for Ag-Bag(R) farm equipment and Tri-Dura(R) storage bags;
and that only about 8-12% of this group are actually using storage bags made by
the Company or its competitors. It further estimates that about 50-55% of the
bagging industry customers purchase silage storage bags from the Company. In
addition to the U.S., the Company believes there is a large population of such
farms in Canada, Latin America, Western and Central Europe, Australia, New
Zealand, Asia, the Caribbean, and England where the Company currently sells and
distributes its products, and there is a large potential market in other
countries into which the Company may expand.
The Company also markets a system for "in-vessel" composting which is
designed to eliminate odors and control leachate inherent with composting.
Composting is an alternative for disposing of or eliminating the large number of
organics from landfills. The Company's primary focus is currently directed
towards municipalities, private composters, military bases, zoos and the
Company's dairy and beef customers. The Company currently estimates the size of
the compost market within North America to be over $1.5 billion a year. Until
further marketing efforts are made outside North America, the Company cannot
estimate with any certainty the foreign market size. However, the Company
believes that there is a large potential market in other countries into which it
may expand. No assurance can be given that the "in-vessel" composting system
will be accepted in either the domestic or foreign marketplace.
Marketing
- ---------
The Company markets its Ag-Bag(R) farm equipment, Tri-Dura(R) storage bags,
Ag-Bag Plus!(R) and other inoculants primarily through a network of United
States, Canadian, and international dealers. As of December 31, 2001, there were
79 dealers serviced by a combined total of 25 regional and territorial
Company-employed managers and sales support coordinators. Most of the dealers
market the entire Ag-Bag(R) line of farm equipment and products; however, some
dealers sell only the farm equipment and others sell only the Ag-Bag(R)
inoculants. The Company also sells farm equipment, Tri-Dura(R) storage bags, and
inoculant directly to large customers in states where there are no nearby
Ag-Bag(R) dealers.
The Company offers customers the opportunity to finance the purchase of
Ag-Bag(R) farm equipment through unaffiliated third parties who offer
lease-purchase and wholesale financing.
6
The Company rents used Ag-Bag(R) bagging machines to farmers in various
areas of the United States. The rental charge is based on the number of bags
purchased and filled with forage. The Company also sells Tri-Dura(R) storage
bags in bulk to several custom farming operations in the state of California
that own Ag-Bag(R) bagging equipment. These operators place their private labels
on the bags and bag forage for customers on a fee-per-bag basis.
Prior to December 31, 1997, the Company offered a custom bagging service
through its subsidiary Ag-Bag Europe PLC in the United Kingdom. The Company sold
its subsidiary that had not been performing at a profitable level due to the BSE
(Mad Cow) problem within the British farming industry on December 31, 1997.
The Company markets its composting system through a sublicense that allows
the end user to use the Ag-Bag(R) compost technology. The Company plans to
establish a composting dealer network and develop a regional and territorial
sales force that will have expertise in composting. The timing for these plans
will depend on the pace of market acceptance of the Company's composting system.
The Company is not dependent on any single customer or a few customers. The
loss of any single customer would not have a material adverse effect on the
Company's financial condition or results of operations.
Assembly and Manufacturing
- --------------------------
Ag-Bag(R) Farm Equipment. The Company buys some of its components for its
bagging machines from various manufacturers, manufactures the remaining
components, and assembles the machines itself. The medium and large sized
machines, composting machines, HYPAC(R) (cable-less) machines, Square Bale
Baggers, and Flex-a-Tubers(R) are all assembled at the Company's headquarters
facility in Warrenton, Oregon. The smaller machines are assembled at the
Company's Blair, Nebraska plant. In 1999, the Company licensed its German dealer
to manufacture the mid-sized bagging machines for distribution within Europe.
The Company assembles all of its machines in order to better control the
quality of the farm equipment. This method also permits the Company to offer
customized assembly for the end user of its equipment. The Company can acquire
and install name brand manufactured components specified by the customer in lieu
of those ordinarily installed by the Company.
Ag-Bag Tri-Dura(R) Storage Bags. All of the three-ply Tri-Dura(R) storage
bags are manufactured for the Company by a single manufacturer. The bags are
manufactured to the Company's specifications using a stabilizer that protects
the plastic from becoming brittle due to exposure to weather and the sun's
ultraviolet light rays. The Tri-Dura(R) plastic bags are made in various
diameters based on bag orders received by the Company. The bags are shipped in
roll form to the Company's plant in Blair, Nebraska, where they are folded and
packaged for shipment.
Ag-Bag(R) Inoculants. The liquid and compost inoculant is purchased by the
Company on the open market. The Company believes that the liquid and compost
inoculant will be reasonably available for purchase on the open market for the
foreseeable future. The dry inoculant is produced by the Company at the Blair,
Nebraska plant pursuant to a proprietary formula owned by the Company and
developed by Larry R. Inman and Walter L. Jay. See "Executive Officers of the
Registrant."
7
Principal Suppliers and Manufacturers
- -------------------------------------
The Company purchases its Tri-Dura(R) rolls from a company owned by
Steven G. Ross ("Supplier") pursuant to a supply agreement. Steven G. Ross is a
14.9% stockholder in the Company and owner of a company which competes with the
Company's Tri-Dura(R) bags. The supply agreement provides that the Company
purchase all of its plastic rolls, with certain exceptions, from Supplier
through at least December 31, 2007. Thereafter, either the Company or Supplier
may terminate the Supply Agreement upon two years' prior written notice. The
Company may purchase plastic rolls from other suppliers to the extent Supplier
is unable to supply plastic rolls under the Supply Agreement. The Company has a
good relationship with Supplier, and there are alternative suppliers available
in the event Supplier is unable to provide rolls.
The structural components of the Company's farm and composting equipment
are manufactured in Oregon, Nebraska and Iowa by several manufacturing
companies. The Company believes that alternative sources of supply are readily
available at competitive prices if the present sources of supply should become
unavailable. The Company is not aware of any raw materials shortages or problems
with these suppliers that would adversely affect the Company's operations.
The Company mixes the dry inoculant at its Blair, Nebraska facility. It
purchases the ingredients for the dry inoculant from a variety of suppliers. The
Company purchases the liquid and compost inoculant from a supplier, who mixes
the inoculants to the Company's specifications. The Company believes there are
various other alternative sources of supply.
Competition
- -----------
As the Company's corporate slogan, the "Complete 1(R)," indicates, the
Company believes it is the industry leader in the manufacture and sale of
complete sealed feed farm bagging systems. Ag-Bag is the only company that
manufactures the full line of equipment, bags, and other accessories for sealed
feed farm management. There are two competitors within the United States that
manufacture similar silage bagging machines. There are also a number of
competitors that manufacture bale wrapping machines, which compete with the
Company's Flex-a-Tuber(R). The Company distinguishes itself in the market place
from other manufactures by providing a top quality product, better warranty
protection, and customer service.
The bag market is highly competitive. The Company competes in the bag
market by providing what the Company believes to be a superior product and
better warranty protection at a competitive price. The Company is also offering,
through central pickup locations in selected geographic areas of the U.S., a
recycling service for used Ag-Bag Tri-Dura(R) bags.
The Company also competes with companies constructing bunkers and pits and,
to a lesser extent, silos. These competitors are mostly smaller companies that
build the bunkers and pits for the farmer, which the farmer then fills with
forage using available or rented farm equipment otherwise used in the farming
operation. While these methods do not require bags or special equipment to fill
the bags, the use of these alternatives involves a significant loss of
flexibility in storing and harvesting the feed and an overall loss of feed
quality. Flexibility is lost since structures must be permanently placed and
significant capital requirements are necessary to expand them. The feed quality
is inferior because of the amount of oxygen remaining after the forage is placed
in the pits or bunkers.
The Company competes primarily with wind row turner manufacturers in
composting. Wind row turners compost by turning and watering static piles weekly
and require containment of odor and leachate. These turners are comparable in
price to the Company's compost machines. However, the Company's composting
systems offer the advantage of being self-contained, thus reducing odor and
requiring no
8
turning or watering. There are approximately 50 manufacturers of turners. In
addition to the wind row turner manufacturers, the Company competes with several
companies that manufacture "in-vessel" systems, such as burners and incinerators
for large projects, which generally cost from $1 to $15 million.
In addition to the current competition, national competitors may emerge if
the bagging equipment and storage bag markets continue to grow. These potential
competitors include large farm equipment manufacturers and large chemical
companies who might decide to manufacture and sell the storage bags.
The Company competes in its product markets primarily on the basis of
product quality, warranty protection, and customer service. Some of its
competitors are larger and have greater financial, marketing, technical, and
other resources than the Company.
Backlog
- -------
The dollar amount of backlog orders of the Company that are believed to be
firm as of March 1, 2002, was approximately $3,400,000, compared to $3,250,000
on March 1, 2001, a 4.62% increase. Backlog, however, may not be a meaningful
indicator of future sales. This backlog is seasonal and is reasonably expected
to be filled within the current fiscal year.
Research and Development
- ------------------------
During 2001, the Company focused research and development expenditures on
new silage and compost machine development. The Company also completed research
on various projects undertaken regarding new silage and nutritional studies of
bagged feed and their effects on animal production during the year.
Environmental Matters
- ---------------------
Compliance with federal, state and local laws and regulations regulating
the discharge of materials into the environment, or otherwise relating to the
protection of the environment, had no material effect upon capital expenditures,
earnings, or competitive positions of the Company during the year ended December
31, 2001.
Patents and Trademarks
- ----------------------
The Company has basic and improvement patents in the U.S., as well as a
number of patents pending, that encompass machines, bags and systems for silage
bagging, grain bagging, and hay/straw bale bagging. Corresponding applications
have or will be filed in selected foreign countries. In addition, proprietary
rights in the bagging of compost have been and are being developed in the U.S
and in selected foreign countries.
The Company's patents on its basic bagging machine have been found to be
valid and have been successfully defended in prior litigation. The Company
believes that it has developed its position in the industry partially as a
result of protection provided by these patents. The Company also owns the
proprietary formula for making the dry inoculant marketed under the trade name
Ag-Bag Plus!(R), which was developed by Larry R. Inman and Walter L. Jay. (See
"Executive Officers of the Registrant" and "Item 3. Legal Proceedings.")
9
The names Ag-Bag(R), Ag-Bag Plus!(R), Bale-Bag(R), Flex-a-Tuber(R),
Flex-a-Tube(R), ABCTI System(R), Mighty Bite(R), Tri-Dura(R), and the symbol
"AB"(R) are all registered as trademarks with the United States Patent and
Trademark Office.
The Company believes that its color scheme and trademarks are well known in
the industry, are an important part of its business, and give the Company a
competitive advantage.
Employees
- ---------
On December 31, 2001, the Company had 91 full-time employees. The Company
employs approximately 170 people during its busy season. None of the Company's
employees are represented by a union, and the Company believes that its employee
relations are good.
Financial Information Relating to Foreign and Domestic Operations and Export
- ----------------------------------------------------------------------------
Sales
- -----
(In thousands)
Year Ended December 31
----------------------
1999 2000 2001
---- ---- ----
Sales to unaffiliated customers:
United States $29,878 $29,421 $26,888
Canada 1,889 1,280 1,030
Germany 495 441 445
Latin America/Mexico 260 195 89
Other foreign countries 161 109 248
-------- -------- -------
$32,683 $31,446 $28,700
Sales to affiliated customers:
Officers and Directors 4 5 8
-------- ---------- -------
Total $32,687 $31,451 $28,708
======= ======= =======
Substantially all the Company's assets are located in the United States.
Reference is also made to the Selected Financial Data at Item 6.
Item 2. Properties
- -------------------
In early 1990, the Company began occupying its 30,000 square foot facility
located in Warrenton, Oregon. This facility serves as a warehouse and houses the
major portion of its silage bagging equipment manufacturing. The Company's
administrative offices are also located there. Management estimates that the
manufacturing at the Warrenton plant is currently at approximately 65% of
capacity. The Company occupies the land pursuant to a lease that expires in
2015.
The Company owns facilities in Blair, Nebraska, where the Company: folds
and packages its Tri-Dura(R) feed storage bags; prepares and packages its
proprietary inoculant; and, assembles its smaller bagging machines and
warehouses products. The Blair, Nebraska facility consists of three buildings
comprising approximately 70,000 square feet. Management estimates that
manufacturing at the Blair facility is currently at approximately 70% of
capacity.
10
Item 3. Legal Proceedings
- --------------------------
The Company is one of three defendants named in two purported class action
lawsuits, S&S Forage & Equipment Co., Inc. v. Up North Plastics, et al., filed
February 5, 1998, and Mr. and Mrs. Donald L. Steward v. Up North Plastics, Inc.
et al., filed September 29, 1999, both alleging conspiracy to fix prices and
sales quotas involving silage bag manufacturers and vendors. Both cases are
pending before the U.S. District Court for the District of Minnesota. Class
certification has been denied in the S&S Forage case and no class has been
certified in the Steward case. The defendants have briefed and argued motions
for summary judgment in both cases. The court currently has the motions under
advisement. If the plaintiffs were to obtain a judgment against the three
companies, the Company could be held jointly and severally liable. The Company
believes that the plaintiffs' claims have no merit, and the Company is
vigorously defending itself against these claims. The Company believes that the
outcome of the litigation will not have a material adverse impact on its
financial condition or results of operations. (See "Factors Affecting
Forward-Looking Statements.")
The Company is one of three defendants named in a counterclaim to a
purported product warranty lawsuit, Andrew Magyar and Leslie Magyar v. Alberta
Ag-Bag Ltd., Ag-Bag International Ltd., and Jim Rakai, filed January 21, 2000.
The plaintiffs in the counterclaim allege breach of product warranty,
merchantability and fitness for the particular purpose relating to a bagging
machine purchased by the plaintiffs and seek monetary damages. This case is
pending before the Court of Queen's Bench of Alberta, Canada. The Company
believes that the claims alleged by the plaintiffs have no merit and the Company
is vigorously defending itself against these claims. The Company believes that
the outcome of the litigation will not have a material adverse impact on its
financial condition or results of operations. (See "Factors Affecting
Forward-Looking Statements.")
The Company is one of three defendants named in a purported breach of
contract and product warranty lawsuit, Kevin Sustrik v. Alberta Ag-Bag Ltd.,
Ag-Bag International Ltd., and Jim Rakai, filed June 7, 2000. The plaintiff
alleges breach of contract and breach of product warranty relating to a bagging
machine purchased by the plaintiff and seeks monetary damages. This case is
pending before the Court of Queen's Bench of Alberta, Canada. The Company
believes that the plaintiff's allegations have no merit and the Company is
vigorously defending itself against these claims. The Company believes that the
outcome of the litigation will not have a material adverse impact on its
financial condition or results of operations. (See "Factors Affecting
Forward-Looking Statements.")
The Company is a defendant in an alleged patent infringement lawsuit, Versa
Corporation v. Ag-Bag International Ltd., filed October 30, 2000 in the United
States District Court for the District of Oregon. The claim alleges patent
infringement upon Versa's U.S. Patent No. 5,799,472; 5,894,713; 5,345,744;
5,426,910; and 5,452.562 relating to a bag pan for an agricultural feed bagging
machine and seeks monetary damages. The case is in the discovery phase. The
Company denies Versa's allegations and is vigorously defending itself against
the claim. The Company believes that the outcome of the litigation will not have
a material adverse impact on its financial condition or results of operations.
(See "Factors Affecting Forward-Looking Statements.")
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
During the fourth quarter of 2001, no matters were submitted to a vote of
security holders.
11
Executive Officers of the Registrant
- ------------------------------------
The executive officers of the Company, their respective ages as of March 1,
2002, business experience, and the period for which they have served are set
forth below. The executive officers are elected annually by the Board of
Directors at the first meeting following the start of the new calendar year.
Officers serve at the discretion of the Board of Directors.
NAME AGE POSITION
---- --- --------
Larry R. Inman 51 Chief Executive Officer (since 1990);
President of the Company (since 1993);
Chairman of the Board (1990-2000;
2002-present); President of Ag-Bag
Corporation (1984-1989) and Chairman
(1989-1994) of Ag-Bag Corporation (former
subsidiary).
Michael R. Wallis 37 Chief Financial Officer (since 1993) and
Vice President of Finance (since 1992),
Treasurer (since 1996); Manager, Yergen
and Meyer (regional accounting firm,
1986-1992).
Michael J. Schoville 51 Chief Operating Officer (since 2002);
Credit Development Manager, John Deere
Credit (1986-2001); Sales Manager, John
Deere Company (1973-1986).
Arthur P. Schuette 62 Vice President, Sales (since 1991);
Treasurer of the Company (1990-1991) and
Treasurer (1983-1991) of Ag-Bag
Corporation (former subsidiary).
Lou Ann Tucker 48 Secretary (since 1996), Vice President,
Administration (1989-1999), and Treasurer
(1991-1996); Executive Treasurer
(1988-1994) of Ag-Bag Corporation (former
subsidiary); co-owner of LGJ Livestock,
Astoria, Oregon (horse and cattle ranch,
since 1980).
Walter L. Jay 41 Vice President, Manufacturing (since
1989); Manager of Blair, Nebraska Plant
(since 1980); KW Trucking (1984-1987).
12
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The Company's Common Stock began trading publicly on January 17, 1990,
and was approved for quotation on Nasdaq on April 24, 1990, under the symbol
"AGBG." In 1997, the Nasdaq listing requirements were substantially expanded.
The Company does not currently qualify under the more stringent requirements
because the price at which its Common Stock is trading is below the $1 per share
minimum. The Company was formally notified on January 13, 1999 that its Common
Stock was delisted from quotation on The Nasdaq SmallCap Market for failure to
meet the new listing requirements. The Company's Common Stock is now quoted on
the OTC Bulletin Board.
As of March 1, 2002, there were approximately 325 holders of record of
the Company's Common Stock. The Company estimates there are approximately 1,800
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 2001 as reported on the OTC
Bulletin Board:
Calendar Year High Bid Low Bid
- ------------- -------- --------
2000:
- ----
First quarter $.81 $.38
Second quarter $.59 $.38
Third quarter $.50 $.33
Fourth quarter $.38 $.31
2001:
- ----
First quarter $.39 $.30
Second quarter $.40 $.23
Third quarter $.38 $.21
Fourth quarter $.32 $.20
The quotations reflect inter-dealer prices, without retail markups, markdowns,
or commissions and do not necessarily represent actual transactions.
Dividends
- ---------
The Company has not paid any dividends on its Common Stock since its
inception, and the Board of Directors does not anticipate declaring any cash
dividends on its Common Stock in the foreseeable future. The Company currently
intends to utilize any earnings in its business. The Company may not pay
dividends on Common Stock pursuant to certain loan agreements, or while it is in
arrears in dividends on its preferred stock.
13
Unregistered Securities
- -----------------------
The following unregistered securities have been issued by the Company
during the year ended December 31, 2001:
- ----------------------- ------------------------ ------------ -------------------- -------------
Name of
Title and Amount of Principal
Securities Underwriter/ Name or Class of
Granted/Exercise Price Underwriting Persons who
if Applicable Discounts or Received Securities Consideration
Date of Grant Commissions Received
- ----------------------- ------------------------ ------------ -------------------- -------------
March 29, 2001 10,000 Options for N/A Officers $0
Common Stock/$.33 per
share (1)
- ----------------------- ------------------------ ------------ -------------------- -------------
March 29, 2001 10,000 Options for N/A Udo Weber $0
Common Stock/$.33 per
share (2)
- ----------------------- ------------------------ ------------ -------------------- -------------
June 4, 2001 40,000 Options for N/A Nonemployee $0
Common Stock/$.35 per Directors
share (3)
- ----------------------- ------------------------ ------------ -------------------- -------------
The above unregistered securities were granted in reliance on an exemption
from the registration requirements of the Securities Act of 1933, as amended
("Act") under Section 4(2) of the Act and/or under the "bonus stock/no sale"
interpretive position of the Securities and Exchange Commission.
- ----------
1 Granted under Incentive Stock Option Plan. Options vest immediately.
2 Issued pursuant to a non-transferable option agreement which provides for
immediate vesting.
3 Granted under Non-employee Director Stock Option Plan. Options vest according
to terms of plan.
14
Item 6. Selected Financial Data
- --------------------------------
The following table sets forth financial data derived from the audited
financial statements of the Company for the years ended December 31, 1997, 1998,
1999, 2000 and 2001. This selected financial data should be read in conjunction
with the audited financial statements of the Company and the related notes
thereto and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this report on Form 10-K.
(In thousands, except per share data)
Year Ended December 31,
-----------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Statement of Operations Data:
Net Sales $ 20,293 $ 27,710 $ 32,687 $ 31,451 $ 28,708
Cost of Sales 18,493 20,800 25,085 24,800 22,947
----------- ----------- ----------- ----------- -----------
Gross Profit from Operations 1,800 6,910 7,602 6,651 5,761
Selling and Administrative Expenses 5,035 5,470 6,273 5,878 6,067
Research and Development Expenses 87 150 324 136 214
Unusual Charge 980
----------- ----------- ----------- ----------- -----------
Income (Loss) from Operations (4,302) 1,290 1,005 637 (520)
Other Income (Expense) (290) (64) (30) (123) 123
----------- ----------- ----------- ----------- -----------
Income (Loss) before Provision for
Income Taxes, and Discontinued Operations (4,592) 1,226 975 514 (397)
Provision (Benefit) for Income Taxes (1,650) 422 327 (8) (233)
----------- ----------- ----------- ----------- -----------
Income (Loss) before Discontinued
Operations (2,942) 804 648 522 (164)
Discontinued Operations-loss
from operations (449)
Discontinued Operations-loss on disposal of
Ag-Bag Europe, PLC (less income tax benefit of
$24,500) (424)
----------- ----------- ----------- ----------- -----------
Net Income (Loss) $ (3,815) $ 804 $ 648 $ 522 $ (164)
=========== =========== =========== =========== ===========
15
(In thousands, except per share data)
Year Ended December 31,
-----------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Basic Earnings per Share:
Income (Loss) before Discontinued
Operations $ (.24) $ .06 $ .05 $ .04 $ (.02)
Discontinued Operations (.08)
----------- ----------- ----------- ----------- -----------
$ (.32) $ .06 $ .05 $ .04 $ (.02)
=========== =========== =========== =========== ===========
Diluted Earnings per Share:
Income (Loss) before Discontinued
Operations $ (.24) $ .06 $ .05 $ .04 $ (.02)
Discontinued Operations (.08)
----------- ----------- ----------- ----------- -----------
$ (.32) $ .06 $ .05 $ .04 $ (.02)
=========== =========== =========== =========== ===========
Weighted Average Shares:
Basic 12,056 12,062 12,062 12,062 12,002
=========== =========== =========== =========== ===========
Diluted 12,056 12,062 12,062 12,062 12,002
=========== =========== =========== =========== ===========
Balance Sheet Data:
December 31,
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Working Capital $ 5,681 $ 6,818 $ 7,156 $ 7,387 $ 6,456
Current Assets1 9,889 9,391 9,983 10,758 9,795
Total Assets1 15,190 13,820 14,575 15,727 14,996
Current Liabilities2 4,208 2,573 2,827 3,371 3,339
Long-term Debt2 2,690 2,210 2,121 2,266 1,822
Total Stockholders' Equity3 8,292 9,037 9,627 10,090 9,835
- ----------
1 Includes deferred taxes.
2 Includes loans from shareholders and deferred taxes.
3 Includes $696 of preferred stock.
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Results of Operations
- ---------------------
The following table sets forth for the periods indicated certain items
reflected in the Company's statements of operations as a percentage of revenue:
Percentage of Total Revenue
---------------------------
Year Ended December 31,
-----------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Net Sales 100% 100% 100% 100% 100%
Costs and Expenses:
Cost of Sales 91% 75% 77% 79% 80%
Selling and Administration 25% 20% 19% 19% 21%
Research and Development --- --- 1% --- --
Unusual Charge 5% --- --- --- --
Income (Loss) From Operations (21%) 5% 3% 2% (1%)
---- ---- ---- ---- ----
Years Ended December 31, 2001 and 2000
- --------------------------------------
For the year ended December 31, 2001, net sales decreased 8.72% to
$28,708,233 compared to $31,451,150 for the year ended December 31, 2000. Sales
were down for the year, in spite of several positive trends that were starting
to be seen towards the latter half of the year. During the first quarter of the
year, milk prices in the U.S. continued at very low levels coupled with
continued tightening of credit, especially in the U.S. farming sector, which
caused farmers to remain cautious about purchasing farm machinery and equipment
into the first half of the year, in spite of declining interest rates during
this period. Continued intense competition in the silage bag and machine market
was seen during the year, as farmers look for the most economical bag or
machine, without considering overall quality, customer service and recycling of
the used bags offered by the Company. Positive trends that began to emerge in
the second half of the year included stabilizing milk prices, continued optimism
that milk prices in the U.S. will remain above last year's record low levels
through 2002 and continued easing of credit by financial institutions for the
farming sector that, coupled with the interest rate reductions of 2001, allowed
farmers to be more optimistic and resume capital expenditures and purchase farm
equipment. Throughout 2001, supplemental grain feed costs also remained low,
which tends to improve the availability of farm operating funds.
Machine sales for the year were flat and bag sales were down 18.43%
compared to 2000. The positive trends discussed above can be seen in machine
sales during the second half of 2001. Machine sales at September 30, 2001 were
down 3% for the year in comparison to 2000. This difference was made up during
the last quarter of 2001 to bring machine sales flat for the year in comparison
to 2000. As a percentage of total revenue however, machine sales for 2001
increased 4% and bag sales for 2001 decreased 5% compared to 2000. (See "Item 1.
Business - General.") Machine sales are directly tied to farmers' income and
therefore their ability to purchase new equipment. Bag sales for the year were
down largely due to intense competition in key dairy states, as farmers utilize
the most economical bag available without considering quality of the Company's
products and its recycling program. The Company's bag and parts sales are driven
by the total number of bagging machines that are in the
17
marketplace. However, there is not a perfect correlation between the Company's
bag sales and machine sales, as the Company's and competitors' bags are
interchangeable on all bagging machinery in the industry. The Company cannot
estimate with any certainty the total number of machines or bags used in the
industry. In addition to compost bag sales, the Company sold ten composting
systems during the year ended December 31, 2001 (generating approximately $1.3
million in revenue) compared to twelve systems sold for the year ended December
31, 2000 (generating approximately $1.2 million in revenue).
Although the Company sells its products primarily through a worldwide
dealer network, certain sales are made directly to large volume customers when a
dealer is not present in the customer's geographic market. For each of the last
three years, the Company estimates that direct sales make up between 33-38% of
total sales. The Company expects its sales mix to begin to favor more direct
sales in the future, especially if the Company begins to offer e-commerce as a
method for ordering the Company's products. The Company continues to evaluate
methods for selling its products via e-commerce and anticipates beginning to
offer e-commerce as a purchase method sometime during 2002. The gross margin
realized on the Company's direct sales are typically within 2-4% of those sales
realized through the Company's dealer network. However, various economic, volume
and market factors in the geographic area impact the ultimate margin.
International sales for the Company in 2001 were down in comparison to
2000 due to continued poor economic conditions affecting the farm economy in the
Latin American/Mexico market. In 1999, the Company's German dealer began
manufacturing mid-sized bagging machines in Germany under a license from the
Company. Therefore, the Company no longer sells mid-sized machines directly to
its German dealer. Instead, the Company receives a royalty fee for each
mid-sized machine sold by its German dealer, which is recorded as other income.
In 1997, the Company formed a German joint venture in which the Company owns a
50% interest and its German dealer owns the remaining 50%. The joint venture
distributes bags to the Company's German and European dealers. The Company's
earnings from the joint venture are reported as other income and are accounted
for using the equity method. Approximately $3.3 million in bag sales were
distributed through the venture during 2001, an increase of 32%, compared to
approximately $2.5 million in bag sales for 2000.
Gross profit as a percentage of sales declined 5.12% for the year ended
December 31, 2001 compared to the same period in 2000. The decline resulted from
lower sales volumes to cover fixed operating overheads, coupled with lower
margins on bags in certain highly competitive, high volume geographic areas. The
decline was also the result of lower overall margins on machinery as a result of
machine competition (particularly in the larger-sized bagging machines) in
certain areas of the U.S., coupled with the mix of machine models sold during
the year, which saw a 12% increase in unit sales of larger-sized bagging
machines. Larger sized bagging machines generate a lower overall margin for the
Company than its "core" small sized bagging machine. (See "Item 1.
Business - Farm Equipment and Products.")
Selling expenses for the year ended December 31, 2001 increased 3.34%
to $3,441,197 compared to $3,329,880 for the year ended December 31, 2000. The
increase for the year was the result of increases in personnel, benefit,
commission, advertising and promotional expenses, partially offset by lower
volume discounts due to lower sales volumes for the year.
Administrative expenses for the year ended December 31, 2001 increased
3.05% to $2,626,268 compared to $2,548,446 for the year ended December 31, 2000.
The increase for the year was the result of increased depreciation from the
Company's implementation of a new computer system, coupled with higher
professional fees related to ongoing litigation and increases in employee
benefit costs and insurance expenses, that were offset by the Company canceling
a discretionary matching annual benefit.
Research and development expenses for the year ended December 31, 2001
increased 56.96% to $213,757 compared to $136,186 for the year ended December
31, 2000. The increase for the year was the result of new research on silage and
nutritional studies of bagged feed and their effects on animal
18
production, coupled with ongoing research and testing related to silage bagging
and compost machine development.
Interest expense for the year ended December 31, 2001 decreased 22.03%
to $355,686 compared to $456,158 for the year ended December 31, 2000. The
decrease for the year was the result of the Company utilizing a smaller portion
of its credit facilities and from lower interest rates on its borrowings.
Joint venture equity and royalty income for the year ended December 31,
2001 increased 66.42% to $299,065 compared to $179,703 for the year ended
December 31, 2000. The increase for the year was the result of increased sales
from the joint venture during the year (see the international sales discussion
above) coupled with increased folding royalties, as plastic tonnage folded in
2001 by the joint venture increased approximately 46% from 2000 tonnage folded.
(See "Item 8. Financial Statements and Supplemental Data".)
The Company's effective tax rate for the year ended December 31, 2001
was (59%). This was due to the fact the Company incurred a net loss for the year
coupled with the recognition of research and development credits associated with
its 2001 activities. In 2001, the Company generated net general business tax
credit benefits of approximately $75,000. In 2000, the Company underwent a study
with a consulting firm to determine if costs associated with the Company's
research and development activities were eligible for research and development
tax credits in its open tax years. The Company completed the study and filed the
necessary forms for its 1996 through 1999 tax years during the year 2000,
generating net general business tax credit benefits of approximately $270,000.
Excluding the benefit of the general business tax credits, the effective income
tax rate would have been (39%) for the year ended December 31, 2001.
Net loss for the year ended December 31, 2001 was $164,150 compared to
net income of $521,814 for the year ended December 31, 2000. The decline for the
year was the result of lower sales, lower gross profit resulting from
competition and product mix sold during the year, coupled with increased
selling, administrative and research expense, partially offset by higher income
from the Company's German joint venture and lower interest costs.
Years Ended December 31, 2000 and 1999
- --------------------------------------
For the year ended December 31, 2000, net sales decreased 3.78% to
$31,451,150 compared to $32,686,832 for the year ended December 31, 1999. Sales
for the year were down as a result of record low U.S. milk prices, despite
supplemental grain feed costs remaining low, which helped farmers continue to
have farm operating funds available. Additionally, competition in the silage bag
and machine market has continued to increase as farmers look to the most
economic bag or machine, not considering overall quality, customer service and
recycling of the used plastic offered by the Company. Additionally, with the
tightening of credit by financial institutions (especially in the U.S. farming
sector) coupled with the rising interest rates of 2000, farmers have become
cautious about purchasing farm machinery and equipment until there is clear
upward movement in U.S. milk prices.
Machine sales for the year were down 7.87% and bag sales were down
1.10% compared to 1999. Machine sales are directly tied to farmers' income and
therefore their ability to purchase new equipment. The Company's bag and parts
sales are driven by the total number of bagging machines that are in the
marketplace. However, there is not a perfect correlation between the Company's
bag sales and machine sales, as the Company's and competitors' bags are
interchangeable on all bagging machinery in the industry. The Company cannot
estimate with any certainty the total number of machines or bags used in the
industry. In addition to compost bag sales, the Company sold twelve composting
systems during the year ended December 31, 2000 (generating approximately $1.2
million in
19
revenue) compared to five systems sold for the year ended December 31, 1999
(generating approximately $380,000 in revenue).
Although the Company sells its product primarily through a worldwide
dealer network, certain sales are made directly to large volume customers when a
dealer is not present in the customer's geographic market. For each of the last
three years, the Company estimates direct sales at between 32-37% of total
sales. The Company expects its sales mix to begin to favor more direct sales in
the future, especially if the Company decides to offer e-commerce as a method of
ordering the Company's products. The Company is currently evaluating whether it
will sell via e-commerce. The gross margin realized on the Company's direct
sales are typically within 2-3% of those sales realized through the Company's
dealer network. However, various economic, volume and market factors in the
geographic area impact the ultimate margin.
International sales for the Company in 2000 were down in comparison to
1999 due to continued poor economic conditions in the Latin American/Mexico
market. In 1999, the Company's German dealer began manufacturing mid-sized
bagging machines in Germany under a license from the Company. Therefore, the
Company no longer sells mid-sized machines directly to its German dealer.
Instead, the Company receives a royalty fee for each mid-sized machine sold by
its German dealer, which is recorded as other income. In 1997, the Company
formed a German joint venture in which the Company owns a 50% interest and its
German dealer owns the remaining 50%. The joint venture distributes bags to the
Company's German and European dealers. The Company's earnings from the joint
venture are reported as other income and are accounted for using the equity
method. Approximately $2.5 million in bag sales were distributed through the
venture during 2000, an increase of 39%, compared to approximately $1.8 million
in bag sales for 1999.
Gross profit as a percentage of sales declined 2.11% for the year ended
December 31, 2000 compared to the same period in 1999. The decline resulted from
lower margins on bags in certain highly competitive, high volume geographic
areas. The decline was also the result of lower overall margins on machinery as
a result of machine competition (particularly in the larger-sized bagging
machines) in certain areas of the U.S., coupled with the mix of machine models
sold during the year. (See "Item 1. Business -Farm Equipment and Products.")
Selling expenses for the year ended December 31, 2000 decreased 6.85%
to $3,329,880 compared to $3,574,830 for the year ended December 31, 1999. The
decrease for the year was the result of lower sales commissions and volume
discounts due to lower sales for the year, partially offset by increased travel
and advertising and promotional expenses.
Administrative expenses for the year ended December 31, 2000 decreased
5.57% to $2,548,446 compared to $2,698,658 for the year ended December 31, 1999.
The decrease for the year was the result of lower overall general and
administrative operating overheads and professional fees related to ongoing
litigation which were offset by increases in insurance expense, employee benefit
costs and higher directors' fees.
Research and development expenses for the year ended December 31, 2000
decreased 57.97% to $136,186 compared to $323,997 for the year ended December
31, 1999. The decrease for the year was the result of completed research on
various projects undertaken regarding new silage and nutritional studies of
bagged feed and their effects on animal production. The Company continues its
ongoing research related to new silage and compost machine development.
Interest expense for the year ended December 31, 2000 increased 36.91%
to $456,158 in comparison to $333,170 for the year ended December 31, 1999. The
increase for the year was the result of the Company utilizing a larger portion
of its credit facilities during seasonal production periods to meet seasonal
inventory demands, coupled with higher interest rates and some extended term
sales offered during the year to remain competitive.
20
The Company's effective tax rate for the year ended December 31, 2000
was (1%). This was primarily due to the recognition of research and development
credits. In 2000, the Company underwent a study with a consulting firm to
determine if costs associated with the Company's research and development
activities were eligible for research and development tax credits in its open
tax years. The Company completed the study and filed the necessary forms for its
1996 through 1999 tax years during the year 2000, generating net general
business tax credit benefits of approximately $270,000. Excluding the benefit of
the general business tax credits, the effective income tax rate would have been
34% for the year ended December 31, 2000.
Net income for the year ended December 31, 2000 decreased 19.54% to
$521,814 compared to $648,571 for the year ended December 31, 1999. The decline
for the year was the result of lower sales caused by continued low U.S. milk
prices, lower gross profit from increased competition and product mix of
machinery models sold, and higher interest costs incurred, partially offset by
lower selling, administrative, research and income tax expense.
Recent Accounting Pronouncements
- --------------------------------
In 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets", No, 143, "Accounting for Asset
Retirement Obligations, No. 142, "Goodwill and Other Intangible Assets" and No.
141 "Business Combinations". The Company's management has considered these new
statements and does not expect the application of the provisions of these
statements will have a material impact on the Company's financial statements.
Statement of Financial Accounting Standards (SFAS) 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, and SFAS 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, is effective for the
Company as of July 1, 2000. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities measured at fair value. The
accounting for changes in the fair value of a derivative depends on the use of
the derivative. The Company does not believe that adoption of SFAS 133 will have
a material impact on its financial statement.
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements, in December
1999. The SAB summarizes certain of the SEC staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB 101B, which delays the implementation date of
SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning
after December 15, 1999. The Company does not believe that adoption of this SAB
will have a material impact on its financial statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation (FIN) 44, Accounting for Certain Transactions involving
Stock Compensation, which clarifies the application of APB 25 for certain
issues. The interpretation is effective July 1, 2000, except for the provisions
that relate to modifications that directly or indirectly reduce the exercise
price of an award and the definition of an employee, which are effective after
December 15,1998. The Company does not believe that adoption of FIN 44 will have
a material impact on its financial statements.
21
Year 2000
- ---------
The Company did not experience any computer system transitional
problems as a result of the Year 2000 "bug". The year 2000 transitional issues
had no material impact on the operations, cash flows or financial condition of
the Company.
Liquidity and Capital Resources
- -------------------------------
The seasonal nature of the northern hemisphere farming industry, the
production time for equipment and the time required to prepare bags for use
requires the Company to manufacture and carry high inventories to meet rapid
delivery requirements. In particular, the Company must maintain a significant
level of bags during the spring and early summer to meet the sales demands
during the harvest season. The Company uses working capital and trade credit to
increase its inventory so that it has sufficient inventory levels available to
meet its sales demands through the spring and summer.
The Company relies on its suppliers to provide trade credit to enable
the Company to build its inventory. The Company's suppliers have provided
sufficient trade credit to meet the demand to date and management believes this
will continue. No assurance can be given that suppliers will continue to provide
sufficient trade credit in the future.
Accounts receivable decreased 17.26% at December 31, 2001 to $2,433,842
compared to $2,941,379 at December 31, 2000. The decrease for the year was the
result of lower sales for the year coupled with increased collections of
accounts receivable during the fourth quarter resulting from customers taking
advantage of third-party incentive financing programs offered by the Company.
The Company has established adequate reserves ($203,350 at December 31, 2001
compared to $247,690 at December 31, 2000) against accounts receivable in the
event that some accounts become uncollectable.
Inventory decreased 9.42% at December 31, 2001 to $6,695,894 compared
to $7,392,557 at December 31, 2000. The decrease in inventory resulted from the
Company's continued efforts to streamline its inventory and more closely match
its seasonal production with seasonal inventory demands.
Other current assets increased 17.63% at December 31, 2001 to $225,544
compared to $191,738 at December 31, 2000. The increase was the result of an
increase in deposits and prepaid expenses.
Intangible assets at December 31, 2001 decreased to $18,893 compared to
$21,506 at December 31, 2000. The decrease was the result of normal amortization
expense for the year.
Other assets increased 20.52% at December 31, 2001 to $481,704 compared
to $399,674 at December 31, 2000. The increase for the year was the result of an
increase in the cash surrender value of life insurance policies maintained by
the Company under which it is the beneficiary.
The Company has an operating line of credit with a limit of $5,000,000,
secured by accounts receivable, inventory, fixed asset blanket and general
intangibles, and bears interest at the bank's prime rate plus 1/4%. As of
December 31, 2001, $1,287,855 had been drawn under the credit line. Management
believes that funds generated from operations and the Company's operating line
of credit will be sufficient to meet the Company's cash requirements through
2002. The Company's line of credit is subject to annual renewal at June 30.
On December 18, 2000, the Company entered into an agreement with
Dresdner Bank to guarantee up to 1,000,000DM ($452,903 US) as security for an
additional cash credit facility of the Company's German joint venture. There was
- -0-DM outstanding under this additional cash credit facility at December 31,
2001.
22
Accounts payable increased 11.01% at December 31, 2001 to $672,563
compared to $605,828 at December 31, 2000. The increase for the year was the
result of extended term payables provided by some of the Company's principal
suppliers.
Accrued expenses and other current liabilities in total, decreased
4.68% at December 31, 2001 to $976,302 compared to $1,024,288 at December 31,
2000. The decrease in total accrued expenses and other current liabilities for
the year was the result of lower payroll costs due to seasonal staff reductions
and lower accruals due to lower sales for the year, coupled with lower warranty
accrual as a result of the Company passing more warranty costs onto its
principal suppliers.
In 1997, the Nasdaq listing requirements were substantially expanded.
The Company does not currently qualify under the more stringent requirements
because the price at which its Common Stock is trading is below the $1 per share
minimum. The Company was formally notified on January 13, 1999, that its Common
Stock was delisted from quotation on The Nasdaq SmallCap Market for failure to
meet the new listing requirements. The Company's Common Stock is now quoted on
the OTC Bulletin Board. The removal from quotation on the Nasdaq SmallCap Market
could have a material adverse effect on the Company's ability to raise
additional equity capital in a public stock offering should that become
necessary.
In December of 1998, the Company announced that it retained Pacific
Crest Securities and Columbia Financial Advisors, Inc. as their investment
banking representatives to explore strategic alternatives. As of December 31,
2000, this engagement was completely terminated.
Factors Affecting Forward-Looking Statements
- --------------------------------------------
You should carefully consider the following factors regarding forward-looking
statements and other information included in this Annual Report. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not currently known to us or that we currently deem immaterial
also may impair our business operations. If any of the following risks actually
occur, our business, financial condition and operating results could be
materially adversely affected.
o We are dependent on the Dairy Industry
More than 75% of our revenues come from the dairy industry.
o A downturn in the dairy industry could cause a reduction in our revenues.
Our sales are highly correlated with the price of milk products and
revenues of the dairy industry. When dairy farmers make money, they buy
our products. When dairy farmers are not making money, our sales
decline.
o A sharp decline in the health of the farming sector of the U.S. economy
could cause a reduction in our revenue.
If a reduction in availability of credit in the farming sector occurs,
or, interest rates begin to rise, our sales may decline as farmers will
find it more difficult to purchase capital equipment and may become
more cautious on incurring additional farm debt.
23
o Our revenues are seasonal and dependent on weather conditions.
Our core business is dependent on weather conditions during the harvest
seasons in North America and Europe. Adverse weather conditions affect
farmers' crops and reduce demand for our products. Approximately
65%-72% of our revenue is generated in the second and third quarters.
o We may lose one or both of the two class action lawsuits pending against
us.
Two class action lawsuits, both alleging antitrust violations, have
been filed against us and others. If our efforts to dismiss or
favorably resolve the suits fail, we could incur additional and
significant litigation costs and experience a drain on management and
other resources. If the plaintiffs succeed in establishing liability
and obtain a judgment for damages, the award could exceed our entire
net worth.
o We may lose one or both of the two product warranty lawsuits pending
against us.
Two product warranty lawsuits, have been filed against us and others.
If our efforts to dismiss or favorably resolve the suits fail, we could
incur additional and significant litigation costs and experience a
drain on management and other resources.
o We may lose the alleged patent infringement lawsuit pending against us.
An alleged patent infringement lawsuit has been filed against us. If
our effort to dismiss or favorably resolve the suit fails, we could
incur additional and significant litigation costs and experience a
drain on management and other resources.
o Our intellectual property protection may not be adequate.
We have patents on our basic bagging machines and patents pending for
additional machines, bags and systems for silage bagging, grain bagging
and hay/straw bale bagging. We may not obtain these patents and our
patents may not withstand litigation challenges. If our patents do not
withstand litigation challenges, our rights in its bag and machine
technology could be diminished or eliminated. Moreover, the issuance of
patents covering any of our products may be insufficient to prevent
competitors from duplicating our products. The patent laws of other
countries may differ from those of the United States as to the
patentability of our products and processes, and the degree of
protection afforded by foreign patents may be different from that in
the United States.
o We rely on one principal supplier for our bags.
We purchase nearly all of our bags from one supplier under a long-term
requirements contract. Any disruption of the manufacturing process
could affect that company's ability to supply our needs, and could
adversely affect our sales.
24
o Our pricing is dependent on the price of resin.
The prices that we pay for bags, which account for approximately half
of our annual sales, are fixed annually in advance and are tied
directly to the price of resin. Resin prices have historically been
subject to significant price volatility. Increases in the price of bags
could adversely affect our profit margins if we are unable to pass
along the price increase, and would likely affect our revenues if
alternatives to our product become more attractive because of the price
increases.
o Our stock is quoted on the OTC Bulletin Board, which may make the stock
more difficult to sell.
We no longer satisfy the criteria for continued quotation on The Nasdaq
SmallCap Market. Our stock is, instead, quoted on the OTC Bulletin
Board. As a result, our shareholders may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of,
our common stock, and the market price for our common stock may
decline. Trading in our common stock is subject to the requirements of
Rule 15g-9 promulgated under the Securities Exchange Act of 1934. Under
this rule, broker/dealers who recommend low-priced securities to
persons other than established customers and accredited investors must
satisfy special sales practice requirements, including a requirement
that they make an individualized written suitability determination for
the purchaser and receive the purchaser's written consent prior to the
transaction. The Securities Enforcement Remedies and Penny Stock Reform
Act of 1990 also requires additional disclosure in connection with any
trades involving a stock defined as a penny stock (generally any equity
security not traded on an exchange or quoted on Nasdaq that has a
market price of less than $5.00 per share, subject to certain
exceptions), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market
and the risks associated with the penny stock market. These
requirements could severely limit the market liquidity of our common
stock and the ability of our shareholders to dispose of their shares,
particularly in a declining market.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
The Company does not invest in market risk sensitive instruments.
Item 8. Financial Statements and Supplemental Data
- ---------------------------------------------------
Reference is made to the financial statements and related notes and
supplemental data under Item 14 filed with this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
25
PART III
Items 10 and 11. Directors and Executive Officers of the Registrant and
- ------------------------------------------------------------------------
Executive Compensation
- ----------------------
A definitive proxy statement for the 2002 Annual Meeting of Stockholders
of Ag-Bag International Limited to be held on June 3, 2002 will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the Company's fiscal year ("Proxy Statement"). The information set forth in the
Proxy Statement under "Election of Directors," "Executive Compensation," and
"Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein
by reference. Executive officers of Ag-Bag International Limited are listed
under the heading "Executive Officers of the Registrant" in this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Information required is set forth under the caption "Security Ownership of
Beneficial Owners" in the Proxy Statement and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Information required is set forth under the caption "Certain Relationships
and Related Transactions" in the Proxy Statement and is incorporated herein by
reference.
26
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
Page
1. Index to Financial Statements..................................................... 29
Independent Auditor's Report...................................................... F-1
Balance Sheets at December 31, 2001 and 2000...................................... F-2
Statements of Income and Comprehensive Income for the years ended
December 31, 2001, 2000 and 1999.............................................. F-4
Statement of Shareholders' Equity for the years ended
December 31, 2001, 2000 and 1999.............................................. F-5
Statement of Cash Flows for the years ended December 31,
2001, 2000 and 1999........................................................... F-6
Notes to Financial Statements..................................................... F-7
2. Financial statement schedules required to be filed by Item 8 and paragraph (d)
of this Item 14:
Independent Auditor's Report on Supplemental Information.......................... F-24
Schedule of Valuation and Qualifying Accounts..................................... F-25
Audited Financial Statements of BAW group as of December 31, 2001................. F-26
(Considered a significant 50% owned equity investee as defined
under SEC Regulation S-X 3-09)
All other schedules are omitted because they are not applicable or
the required information is shown in the financial statements
or notes thereto.
3. The exhibits are listed in the index of exhibits.................................. 31
(b) No reports on Form 8-K were required to be filed during the last
quarter of the period covered by this report.
27
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AG-BAG INTERNATIONAL LIMITED,
a Delaware corporation
Date: March 15, 2002 By: \s\ Larry R. Inman
----------------------------------------
Larry R. Inman, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Date: March 15, 2002 By: \s\ Larry R. Inman
----------------------------------------
Larry R. Inman, Chief Executive Officer;
President, Director and Chairman of the
Board(Principal Executive Officer)
Date: March 15, 2002 By: \s\ Michael R. Wallis
----------------------------------------
Michael R. Wallis, Chief Financial
Officer and Vice President, Finance
(Principal Financial and Accounting
Officer)
Date: March 15, 2002 By: \s\ Lemuel E. Cunningham
----------------------------------------
Lemuel E. Cunningham, Director
Date: March 15, 2002 By: \s\ Michael W. Foster
----------------------------------------
Michael W. Foster, Director
Date: March 15, 2002 By: \s\ Jim DeMatteo
----------------------------------------
Jim DeMatteo, Director
Date: March 15, 2002 By: \s\ Arthur P. Schuette
----------------------------------------
Arthur P. Schuette, Director
Date: March 15, 2002 By: \s\ Udo Weber
----------------------------------------
Udo Weber, Director
28
TABLE OF CONTENTS
Page
AG-BAG INTERNATIONAL LIMITED
Independent Auditor's Report F-1
Financial Information
Balance Sheets F-2
Statements of Income and Comprehensive Income F-4
Statements of Shareholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
Supplemental Information
Independent Auditor's Report on Supplemental Information F-24
Valuation and Qualifying Accounts F-25
BAW
Independent Auditor's Report F-26
Balance sheet at December 31, 2001 F-27
Profit and loss account at December 31, 2001 F-29
A. Mandate and execution of the mandate F-30
B. Voluntary group accounts F-30
C. Legal structure of the group F-30
29
D. Group accounts as of December 31, 2001 F-31
E. Audit Certificate F-38
F. Explanatory notes F-39
G. Reconciliation of German GAAP to U.S. GAAP F-53
Exhibit I - Composition and development of tangible assets F-54
Exhibit 2 - Deutche Mark exchange rate table F-55
30
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Ag-Bag International Limited
We have audited the accompanying balance sheets of Ag-Bag International Limited
as of December 31, 2001 and 2000, and the related statements of income and
comprehensive income, shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 2001. These financial statements are
the responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ag-Bag International Limited as
of December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2001, in
conformity with auditing standards generally accepted in the United States of
America.
\s\ Moss Adams LLP
Portland, Oregon
February 20, 2002
F-1
AG-BAG INTERNATIONAL LIMITED
BALANCE SHEETS
- --------------------------------------------------------------------------------
ASSETS
December 31,
--------------------------------------
2001 2000
------------------ ------------------
CURRENT ASSETS
Cash $ 164,526 $ 23,894
Accounts receivable, less allowance for doubtful
accounts of $203,350 and $247,690 at 2001
and 2000, respectively 2,433,842 2,941,379
Inventories 6,695,894 7,392,557
Prepaid expenses and other current assets 225,544 191,738
Deferred income taxes 275,000 209,000
------------------ ------------------
Total current assets 9,794,806 10,758,568
------------------ ------------------
PROPERTY, PLANT AND EQUIPMENT, net 4,227,852 4,346,141
------------------ ------------------
OTHER ASSETS
Deferred income taxes 200,000 59,000
Intangible assets, net 18,893 21,506
BAW Joint-venture 272,938 141,738
Other assets 481,704 399,674
------------------ ------------------
Total other assets 973,535 621,918
------------------ ------------------
TOTAL ASSETS $ 14,996,193 $ 15,726,627
================== ==================
F-2
AG-BAG INTERNATIONAL LIMITED
BALANCE SHEETS
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
--------------------------------------
2001 2000
------------------ ------------------
CURRENT LIABILITIES
Bank line of credit $ 1,287,855 $ 1,224,638
Current portion of long-term debt and capital
lease obligations 402,477 341,221
Accounts payable 672,563 605,828
Accrued payroll and payroll taxes 420,477 451,042
Dealer deposits 82,234 49,100
Warranty reserve 124,482 190,162
Accrued expenses and other current liabilities 349,109 333,984
Income taxes payable - 175,130
------------------ ------------------
Total current liabilities 3,339,197 3,371,105
------------------ ------------------
NONCURRENT LIABILITIES
Long-term debt and capital lease obligations,
less current portion 1,822,212 2,265,928
------------------ ------------------
Total liabilities 5,161,409 5,637,033
------------------ ------------------
COMMITMENTS AND CONTINGENCIES (see Note 13)
SHAREHOLDERS' EQUITY
Preferred stock, $4 liquidation value per share, 8.5% cumulative
dividend, nonvoting, 5,000,000 shares authorized,
174,000 shares issued and outstanding 696,000 696,000
Common stock, $.01 par value, 25,000,000 shares
authorized, 12,061,991 shares issued 120,619 120,619
Additional paid-in capital 9,210,211 9,210,211
Treasury stock (31,500) -
Retained earnings (deficit) (160,546) 62,764
------------------- ------------------
Total shareholders' equity 9,834,784 10,089,594
------------------ ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,996,193 $ 15,726,627
================== ==================
See accompanying notes.
- --------------------------------------------------------------------------------
F-3
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------
2001 2000 1999
---------------- --------------- ----------------
NET SALES $ 28,708,233 $ 31,451,150 $ 32,686,832
COST OF SALES 22,947,604 24,799,690 25,084,577
---------------- --------------- ----------------
Gross profit from operations 5,760,629 6,651,460 7,602,255
OTHER OPERATING EXPENSES
Selling expenses 3,441,197 3,329,880 3,574,830
Administrative expenses 2,626,268 2,548,446 2,698,658
Research and development expenses 213,757 136,186 323,997
---------------- --------------- ----------------
Income (loss) from operations (520,593) 636,948 1,004,770
OTHER INCOME (EXPENSE)
Interest income 30,714 42,996 7,185
Interest expense (355,686) (456,158) (333,170)
Joint venture equity and royalties 299,065 179,703 134,402
Other 149,283 110,325 162,384
---------------- --------------- ----------------
Income (loss) before income taxes (397,217) 513,814 975,571
Provision (benefit) for income taxes (233,067) (8,000) 327,000
----------------- ---------------- ----------------
NET INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS) $ (164,150) $ 521,814 $ 648,571
================= =============== ================
Basic and diluted net income (loss) per common share $ (0.02) $ 0.04 $ 0.05
================ =============== ===============
Basic and diluted weighted average common
shares outstanding 12,001,868 12,061,991 12,061,991
================ =============== ================
See accompanying notes.
- --------------------------------------------------------------------------------
F-4
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Preferred Stock Common Stock Treasury Stock Additional Retained Total
------------------ ----------------------- ----------------------- paid-in earnings shareholders'
Shares Amount Shares Amount Shares Amount capital (deficit) equity
-------- --------- ----------- ----------- ----------- ----------- ---------- ----------- -------------
Balance, December 31, 1998 174,000 $696,000 12,061,991 $ 120,619 - - $9,210,211 $(989,301) $9,037,529
Preferred stock dividends (59,160) (59,160)
Net Income 648,571 648,571
-------- --------- ----------- ----------- ----------- ----------- ---------- ----------- -------------
Balance, December 31, 1999 174,000 696,000 12,061,991 120,619 - - 9,210,211 (399,890) 9,626,940
Preferred stock dividends (59,160) (59,160)
Net Income 521,814 521,814
-------- --------- ----------- ----------- ----------- ----------- ---------- ----------- -------------
Balance, December 31, 2000 174,000 696,000 12,061,991 120,619 - - 9,210,211 62,764 10,089,594
Purchase of common stock 105,000 (31,500) (31,500)
Preferred stock dividends (59,160) (59,160)
Net loss (164,150) (164,150)
-------- --------- ----------- ----------- ----------- ----------- ---------- ----------- -------------
Balance, December 31, 2001 174,000 $696,000 12,061,991 $ 120,619 105,000 $ (31,500) $9,210,211 $ (160,546) $ 9,834,784
======== ========= =========== =========== =========== =========== ========== =========== =============
See accompanying notes.
- --------------------------------------------------------------------------------
F-5
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------
2001 2000 1999
---------------- --------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (164,150) $ 521,814 $ 648,571
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 762,390 612,845 565,322
Inventory write-down and obsolescence 77,500 256,000 346,500
(Gain) loss on disposition of equipment 8,648 (100) 3,239
Deferred income taxes (207,000) (154,000) 221,000
Equity in joint venture earnings (131,200) (65,000) (24,239)
Change in assets and liabilities:
Accounts receivable 507,537 (1,065,602) 458,135
Inventories 397,528 (452,248) (1,798,281)
Prepaid expenses and other current assets (33,806) 113,551 155,403
Other assets (82,030) (82,443) 29,695
Accounts payable 66,735 (528,166) 302,072
Accrued expenses and other current liabilities (47,986) (271,457) (24,265)
Income taxes payable (175,130) 162,478 (26,984)
----------------- --------------- -----------------
Net cash from operating activities 979,036 (952,328) 856,168
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (427,984) (330,208) (484,267)
Construction in progress - (482,199) (78,682)
Acquisition of intangible assets (4,267) -