Item 1. Business - -----------------
General - -------
Ag-Bag International Limited (the "Company") was incorporated as a New York corporation in 1989. The primary operating company, Ag-Bag Corporation, a Nebraska corporation, was incorporated in 1978. The Company changed its name in 1990 from AB Holding Group, Inc. to Ag-Bag International Limited. In 1994, in an effort to streamline and save administrative expenses, two of the Company's operating subsidiaries, A.B. Rental, Inc. and Ag-Bag Corporation were merged into the Delaware subsidiary, ABVIN Merging Corp. On January 1, 1995, the Company was merged into its Delaware subsidiary resulting in the reincorporation of the Company in Delaware and a change in its name to Ag-Bag International Limited.
The Company has pioneered an alternate method of storing feed for livestock. Traditional methods of storing feed have included placing it in bunkers, pits, and silos or baling and stacking it. The Company's method is to store the feed in huge plastic bags of up to 500 feet in length and up to 12 feet in diameter by tightly stuffing the feed into the bag. The Company assembles the machines for stuffing the feed into the bags. It has the bags manufactured to its specifications and then folds and distributes the bags through its dealer network. The benefits of bagging the feed include reduced cost, additional flexibility in harvesting and storing the feed, enhanced feed quality, and relatively small capital requirements. The Company also sells ancillary products that complement the Company's main line of bagging machines and bags.
The following table identifies the revenue from each product line that accounted for more than 15% of total revenue over the last three years:
Product 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,
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 - ---------------------------
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%
Farm Equipment and Products - ---------------------------
Introduction. Silage is made using the Ag-Bag(R) system by storing forage crops, such as corn, sorghum, or alfalfa, under anaerobic (without oxygen) conditions in sealed Ag-Bag Tri-Dura(R) storage bags. The traditional methods for making silage involve storing it in bunkers, pits or silos. Using traditional methods, there is a nutrient loss resulting from a reduction in the moisture content of the forage before storage. The moisture content must be reduced to compensate for the high oxygen content of the forage which results from the inability to pack the forage tightly enough. When the forage is not packed sufficiently, the silage fermentation process produces too much heat resulting in an even greater loss of nutrient value than would occur if the moisture content were not reduced. The loss of nutrient value results in the need for additional food supplements or an increased volume of feed.
The Ag-Bag(R) system is an alternative to bunkers, pits and silos. The Ag-Bag(R) bagging machines push the forage into huge recyclable plastic film Tri-Dura(R) bags with sufficient compaction to minimize the amount of oxygen in the bag, which is then sealed tightly when filled. As a result, the forage can be stored with significantly higher moisture content. The ability to store the forage in this manner also reduces the time required to cut, prepare and store the forage thus reducing the loss of nutrients and providing higher quality feed for production within the farmers' herds.
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.
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.
The proprietary bag folding techniques reduce bag folding time and allow the bags to uniformly unfold when being filled, which thereby reduces operational delays.
Ag-Bag(R) Inoculant. The Company markets a liquid inoculant and a dry powder inoculant under the trade name Ag-Bag Plus!(R). The inoculant is added to the forage or the round or square bales during bagging. It enhances the fermentation process for making silage in bags, bunkers, pits and silos by substantially shortening the time necessary for the creation of the silage. A liquid inoculant was developed in 1989 by a Company supplier and introduced into the market in 1990. The dry inoculant is produced from a proprietary formula owned by the Company and developed by Larry R. Inman and Walter L. Jay. See "Executive Officers of the Registrant." The Company also markets an inoculant designed specifically for composting.
Market Size - -----------
The market for Ag-Bag(R) machinery and Ag-Bag Tri-Dura(R) recyclable storage bags is primarily in the dairy and beef cattle industries. Silage is used most often as dairy and beef animal feed. It is also used by farmers to a lesser extent to feed hogs and sheep. In 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.
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."
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
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.")
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.
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.
Item 3.
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.
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.
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).
PART II -------
Item 5.
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.
Unregistered Securities - -----------------------
The following unregistered securities have been issued by the Company during the year ended December 31, 2001:
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.
Item 6.
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.
- ----------
1 Includes deferred taxes. 2 Includes loans from shareholders and deferred taxes. 3 Includes $696 of preferred stock.
Item 7.
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
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
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
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.
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.
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.
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.
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.
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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk - --------------------------------------------------------------------
The Company does not invest in market risk sensitive instruments.
Item 8.
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.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure - --------------------
None.
PART III
Items 10 and 11. Directors and Executive Officers of the Registrant and - ------------------------------------------------------------------------ Executive Compensation - ----------------------
A definitive proxy statement for the 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.
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.
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.
PART IV -------
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
Page
AG-BAG INTERNATIONAL LIMITED
Independent Auditor's Report
Financial Information
Balance Sheets
Statements of Income and Comprehensive Income
Statements of Shareholders' Equity
Statements of Cash Flows
Notes to Financial Statements
Supplemental Information
Independent Auditor's Report on Supplemental Information
Valuation and Qualifying Accounts
BAW
Independent Auditor's Report Balance sheet at December 31, 2001
Profit and loss account at December 31, 2001
A. Mandate and execution of the mandate
B. Voluntary group accounts
C. Legal structure of the group
D. Group accounts as of December 31, 2001
E. Audit Certificate
F. Explanatory notes
G. Reconciliation of German GAAP to U.S. GAAP
Exhibit I - Composition and development of tangible assets
Exhibit 2 - Deutche Mark exchange rate table
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
AG-BAG INTERNATIONAL LIMITED BALANCE SHEETS - --------------------------------------------------------------------------------
See accompanying notes. - --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - --------------------------------------------------------------------------------
See accompanying notes. - --------------------------------------------------------------------------------
See accompanying notes. - --------------------------------------------------------------------------------
See accompanying notes. - --------------------------------------------------------------------------------
AG-BAG INTERNATIONAL LIMITED NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business - Ag-Bag International Limited (the Company) is a Delaware corporation. The Company's primary operations include the manufacturing and sale of machines and related bags used in the agriculture industry to store feed for livestock, grain and other products. The Company also manufactures machines and bags for composting. The Company's primary market is North America; however, it sells products worldwide.
The Company's common stock began trading publicly on January 17, 1990, and was approved for quotation on Nasdaq on April 24, 1990, under the symbol "AGBG." In 1997, the Nasdaq listing requirements were substantially expanded. The Company does not currently qualify under the more stringent requirements because the price at which its common stock is trading is below the $1 per share minimum bid price. The Company was formally notified on January 13, 1999, that its common stock was delisted from quotation on the Nasdaq inter-dealer quotation system for failure to meet the new listing requirements. The Company's common stock is now traded on the OTC Bulletin Board.
Statements of cash flows - For purposes of the statements of cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
The Company transferred $476,214, $139,432, and $71,236 in 2001, 2000, and 1999, respectively, from rental equipment to inventory held for sale. In 2001 and 2000, the Company transferred $697,849 and $111,863, respectively, from inventory held for sale to rental equipment.
Accounts receivable - Accounts receivable are from distributors and customers of the Company's products. The Company performs periodic credit evaluations of its customers and maintains allowances for potential credit losses. Also, to reduce the risk of credit loss, the Company requires letters of credit from foreign customers with which no credit history has been established.
Inventories - Inventories are stated at the lower of cost or market (net realizable value). The Company determines cost on the first-in, first-out (FIFO) basis. The Company's estimates of market value incorporate projections of future sales volume by product class. In estimating the market value of parts inventory items, the Company reviews current inventory levels in relation to sales forecasts and adjusts the valuation reserve accordingly. For the remaining categories of inventory, the Company establishes a reserve balance based on the aging of the specific inventory items.
AG-BAG INTERNATIONAL LIMITED NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Property, plant, and equipment - Property, plant and equipment are stated at cost and are depreciated on the straight-line method over their estimated useful lives which range from five to seven years for equipment and twenty to thirty years for buildings.
Expenditures for additions and major improvements are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred.
Intangible assets - Intangible assets consist of licenses and patents. The cost of the licenses and patents are amortized over the lesser of the terms of the related agreement or the estimated useful lives of the respective asset, ranging from three to twelve years.
Revenue recognition - Revenue is recognized when all of the following have taken place. The customer has placed an order for the product, the product is delivered or shipped to the customer, the sales price has been determined and collection is reasonably assured. The Company includes revenues earned on shipping costs billed to customers in Net Sales. Costs to ship products are included in Cost of Sales.
Warranty - At the time of sale, the Company accrues a liability for the estimated future costs to be incurred under the provisions of its warranty agreements.
Stock option plan - The Company applies Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plan. Accordingly, compensation expense related to grants to employees would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Had compensation cost for the Company's stock option plan been determined based upon the fair value at grant date for awards under the plan consistent with the methodology prescribed under Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," additional compensation expense would have been recognized as described in Note 10.
Income taxes - The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established to reduce potential deferred tax assets when it is more likely than not that all or some portion of potential deferred tax assets will not be realized.
AG-BAG INTERNATIONAL LIMITED NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Advertising costs - The Company expenses advertising costs as they are incurred. Advertising expenses for the years ended December 31, 2001, 2000, and 1999 were $573,945, $532,573, and $466,270, respectively.
Net income per common share - In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128 establishes standards for computing and presenting earnings per share (EPS). It simplifies the standards in APB No. 15 (Earnings per Share) for computing EPS by replacing primary EPS with basic EPS and altering the calculation of diluted EPS, which replaces fully diluted EPS.
Basic net income per share is calculated using the weighted average number of common shares outstanding during each year. Preferred stock dividends were considered in the computation. The calculation of diluted net income per share excludes the effect of potentially dilutive common stock equivalents because their impact, when calculated using the Treasury stock method, is antidilutive.
Segment information - The Financial Accounting Standards Board (FASB) issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. The Company has analyzed the reporting requirements of the standard and has determined that its operations are within a single operating segment.
Disclosure of fair value of financial instruments - The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, and accounts payable approximated fair value as of December 31, 2001 and 2000 because of the relatively short maturity of these instruments. The carrying value of notes payable approximated fair value as of December 31, 2001 and 2000 based upon interest rates and terms available for the same or similar loans.
Management estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications - Certain reclassifications have been made to the 2000 financial statements to conform with the 2001 presentation.
AG-BAG INTERNATIONAL LIMITED NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Recently issued accounting standards - The Financial Accounting Standards Board (FASB) has recently issued statements relating to impairment of long-lived assets, asset retirement obligations, business combinations, goodwill and other intangible assets. 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.
NOTE 2 - INVENTORIES
Inventories consist of the following: December 31 -------------------------------------- 2001 2000 ------------------ ------------------
Parts and subassembly $ 2,565,876 $ 2,462,987 Work in process and raw materials 1,275,202 1,056,673 Machines 1,655,157 2,092,610 Bags and other finished goods 1,199,659 1,780,287 ------------------ ------------------ $ 6,695,894 $ 7,392,557 ================== ==================
NOTE 3 - INTANGIBLE ASSETS, NET
Intangible assets, net, consist of the following: December 31 -------------------------------------- 2001 2000 ------------------ ------------------
License and patent costs $ 617,113 $ 612,845
Less accumulated amortization 598,220 591,339 ------------------ ------------------
$ 18,893 $ 21,506 ================== ==================
Amortization expense for the years ended December 31, 2001, 2000, and 1999, was $6,880, $14,056, and $19,392, respectively.
AG-BAG INTERNATIONAL LIMITED NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Certain property, plant and equipment serve as collateral for short- and long-term debt obligations. The Company leases certain assets under capital lease agreements. At December 31, 2001 and 2000, gross amount of equipment under lease was $84,622 and $144,287, respectively. Accumulated depreciation related to those capital leases was $73,984 and $105,785 at December 31, 2001 and 2000, respectively.
Depreciation expense for the years ended December 31, 2001, 2000, and 1999 was $755,510, $598,789, and $545,930, respectively.
NOTE 5 - LINE OF CREDIT
The Company has an operating line of credit (LOC) with a bank for up to $5,000,000 at December 31, 2001 and 2000. The line of credit is secured by accounts receivable, inventories, fixed asset blanket and general intangibles, and bears interest at the bank's prime rate plus 1/4% at December 31, 2001 and prime rate plus 1/2% at December 31, 2000 (5.0% at December 31, 2001 and 10.0% at December 31, 2000). As of December 31, 2001 and 2000, $1,287,855 and $1,224,638 were outstanding under the operating line of credit. The line of credit is subject to certain net worth and EBITDA covenants, and an annual capital expenditure limit.
AG-BAG INTERNATIONAL LIMITED NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
NOTE 6 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Future maturities of long-term debt and capital lease obligations are summarized as follows:
NOTE 7 - NOTE PAYABLE TO SHAREHOLDER AND RELATED PARTY
The Company had a note payable to a shareholder of the Company. The note included interest at 10% and required monthly principal and interest payments of $1,600 through April 30, 2000, at which time the note was paid off. Interest expense related to shareholders and related parties amounted to $135 and $1,628 in 2000 and 1999, respectively.
AG-BAG INTERNATIONAL LIMITED NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
The provision (benefit) for income taxes consists of the following:
AG-BAG INTERNATIONAL LIMITED NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES - (CONTINUED)
At December 31, 2001, the Company had a federal net operating loss of approximately $497,000 that is available to offset future federal taxable income through 2021.
At December 31, 2001, the Company has research tax credit carryforwards for federal income tax purposes of approximately $243,000 that are available to offset future federal income. These credits can be carried forward through 2021. The Company has a gross capital loss carryforward of $886,431 available to offset future capital gains through 2002.
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:
2001 2000 1999 ------ ------ ------
Statutory federal income tax rate (34%) 34% 34% General business credits (20) (35) - Nondeductible and non-taxable items (2) 1 2 Other (3) (1) (2) ------ ------ ------
Effective tax rates (59%) (1%) 34% ====== ====== ======
The Company underwent a study with a consulting firm to determine if costs associated with the Company's research and development activities were eligible for research and development tax credits in its open tax years. The Company completed the study and filed the necessary forms for its 1996 through 1999 tax years during the year 2000 generating net tax credit benefits of approximately $270,000.
NOTE 9 - SUPPLEMENTAL DISCLOSURES REGARDING CASH FLOWS
Supplemental disclosure of cash flow information: Year ended December 31 ---------------------------------------- 2001 2000 1999 ------------ ------------ ------------
Cash paid during year for: Interest $ 355,686 $ 456,158 $ 333,170 Income taxes $ 90,800 $ 10,516 $ 145,084
AG-BAG INTERNATIONAL LIMITED NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
NOTE 10 - SHAREHOLDERS' EQUITY
Treasury stock - During 2001, the Company repurchased 105,000 shares of its common stock from a retiring director for $31,500.
Preferred stock - The Preferred Stock is redeemable solely at the option of the Company. The Company maintains life insurance on the owner of the Preferred Stock and, in the event of the stockholder's death, currently intends to use the proceeds of that insurance to redeem all outstanding shares of Preferred Stock.
Stock awards - The Company has a 1991 Employee Stock Plan (the Plan) and has reserved 133,575 shares of common stock for issuance under the Plan. Under terms of the Plan, stock is awarded to employees at the sole discretion of the Board of Directors. No awards were granted under the Plan for 2001, 2000, and 1999. At December 31, 2001, there were 125,335 shares available for grant under the Employee Stock Plan.
Common stock options - The Company has an Incentive Stock Option Plan (the Incentive Plan) and has reserved 185,000 shares of common stock for issuance under the Incentive Plan. Options under the Incentive Plan are issuable to officers and employees of the Company and all option grants will be at the market value of the stock at the date of grant. Vesting of stock options is determined for each grant by the Board of Directors. At December 31, 2001, there were 145,000 shares available for grant under the Incentive Stock Option Plan.
During 1996, the Company adopted a Non-employee Director Stock Option Plan ( the Director Plan) and has reserved 1,000,000 shares of common stock for issuance under the Director Plan. The Director Plan grants 50,000 options to each member of the Board of Directors who is not an employee of the Company. Forty percent of the 50,000 options vest and become exercisable six months after the grant date, another 40% of the options vest and become exercisable two years after the grant date, and the remaining portion of the options vest and become exercisable three years after the grant date. Beginning with the annual meeting in 2000, those directors who have served a three (3) year period, receive an annual grant of 10,000 options which become exercisable six months after the grant date. At December 31, 2001, there were 610,000 shares available for grant under the Non-Employee Director Stock Option Plan.
AG-BAG INTERNATIONAL LIMITED NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
NOTE 10 - SHAREHOLDERS' EQUITY - (CONTINUED)
The Company has computed, for pro forma disclosure purposes, the value of all options granted during 2001 and 2000, using the Black-Scholes pricing model as prescribed under SFAS 123. The following assumptions were made for grants in 2001 and 2000: risk-free interest rate of 4.41% and 6.10% respectively, expected life of seven years and three years respectively, and dividend rate of zero percent. For 2001 and 2000, the expected volatility over the expected lives of the grants was assumed to be 7.8% and 7.5% respectively. The weighted average fair value of the options granted was estimated to be $.34 in 2001 and $.29 in 2000.
If the Company had accounted for the value of the options granted during 2001, 2000, and 1999, in accordance with SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
2001 2000 1999 ------------ ------------ ------------
Net income (loss): As reported $ (164,150) $ 521,814 $ 648,571 Pro forma $ (178,023) $ 510,023 $ 618,739
Net income (loss) per share: As reported (.02) .04 .05 Pro forma (.02) .04 .05
The resulting pro forma compensation costs may not be representative of that expected in future years.
AG-BAG INTERNATIONAL LIMITED NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
NOTE 10 - SHAREHOLDERS' EQUITY - (CONTINUED)
Transactions and other information relating to the Company's stock option plans for the three years ended December 31, 2001, are summarized as follows:
AG-BAG INTERNATIONAL LIMITED NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
NOTE 10 - SHAREHOLDERS' EQUITY - (CONTINUED)
At December 31, 2001, the Company had outstanding options for the purchase of 430,000 shares of common stock as follows: Average Number of Options Price Range Remaining Life ----------------- ----------- -------------- 260,000 options $1.00-$1.06 5 years 60,000 options $0.56-$0.69 1 year 110,000 options $0.33-$0.39 7 years
NOTE 11 - FOREIGN SALES ACTIVITY
Export sales from the Company's United States operations are as follows:
Year Ended December 31 ---------------------------------------- 2001 2000 1999 ------------ ------------ ------------
Latin America/Mexico $ 88,864 $ 194,947 $ 259,825 Canada 1,030,174 1,280,096 1,888,781 Germany 444,767 441,188 495,049 Other 248,183 109,272 161,689 ------------ ------------ ------------
$ 1,811,988 $ 2,025,503 $ 2,805,344 ============ ============ ============
AG-BAG INTERNATIONAL LIMITED NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
NOTE 12 - BAW JOINT-VENTURE
On February 27, 1997, the Company entered into a Joint Venture Agreement with Budissa Agroservice Gesellschaft and formed BAW (Budissa Agrodienstleistungen und Warenhandels). The Company has a 50% interest in BAW which is accounted for under the equity method. BAW folds and distributes silage bags throughout Europe.
2001 2000 -------------- -------------
Investment, beginning of year $ 141,738 $ 76,738
Share of income for the year 131,200 65,000 -------------- -------------
Investment, end of year $ 272,938 $ 141,738 ============== =============
On February 27, 1997, BAW also entered into a lease agreement with Ag-Bag International Limited for the use of a folding machine. Royalties are earned by the Company based upon the poundage folded by BAW. In 2001, 2000, and 1999 income from this agreement was $168,000, $115,000 and $110,000, respectively.
On December 18, 2000, Ag-Bag International Limited 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 BAW. There was -0-DM outstanding under this additional cash credit facility at December 31, 2001 and 2000 guaranteed by the Company.
AG-BAG INTERNATIONAL LIMITED NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
NOTE 12 - BAW JOINT-VENTURE - (CONTINUED)
The condensed balance sheets have been translated from the German Mark to the U.S. dollar at the exchange rate in effect at December 31 of each year. The exchange rates used at December 31, 2001, 2000, and 1999 for the balance sheets were $.45, $.48, and $.51 respectively. The condensed income statements have been translated from the German Mark to the U.S. dollar at the average exchange rate in effect for the years ended December 31. The average exchange rates used at December 31, 2001, 2000, and 1999 for the income statements were $.47, $.50, and $.55 respectively.
AG-BAG INTERNATIONAL LIMITED NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Commitments - The Company purchases its Tri-Dura(R) rolls from a company owned by Steven G. Ross (Supplier) pursuant to a supply agreement. Steven G. Ross is a 14.9% stockholder in the Company and owner of a company which competes with the Company's Tri-Dura(R) bags. The supply agreement provides that the Company purchase all of its plastic rolls, with certain exceptions, from Supplier through at least December 31, 2007. Thereafter, either the Company or Supplier may terminate the supply agreement upon two years' prior written notice. The Company may purchase plastic rolls from other suppliers to the extent Supplier is unable to supply plastic rolls under the supply agreement. The Company considers its relationship with Supplier to be good. The Company believes there are adequate alternative suppliers available in the event Supplier is unable to provide rolls.
Contingencies - The Company is involved in litigation matters that are in the normal course of business. Management is of the opinion that these matters will not have a material effect on the accompanying financial statements. Accordingly, no provision for these matters is included in the financial statements for the year ended December 31, 2001.
NOTE 14 - CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk consist of cash and receivables. The Company's cash balances are with federally insured banks and periodically exceed insured limits.
NOTE 15 - PROFIT SHARING PLAN
The Company has a qualified profit sharing plan covering all full-time personnel with at least one year of continuous service. Contributions to the plan are at the discretion of the Company's management. Although no contributions were made to the profit sharing plan in 2001, the Company made contributions to the plan of $119,930, and $98,708 for the years ended December 31, 2000, and 1999, respectively.
AG-BAG INTERNATIONAL LIMITED NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
NOTE 16 - QUARTERLY FINANCIAL DATA - (UNAUDITED)
SUPPLEMENTAL INFORMATION
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL INFORMATION
To the Board of Directors and Shareholders Ag-Bag International Limited
Under date of February 20, 2002, we reported on the balance sheets of Ag-Bag International Limited as of December 31, 2001 and 2000, and the related statements of income, shareholders' equity, and cash flows for the years ended December 31, 2001, 2000, and 1999 as contained in the annual report on Form 10-K for the year 2001. In connection with our audits of the aforementioned financial statements, we also audited the related schedule of Valuation and Qualifying Accounts. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audit.
In our opinion, the schedule of Valuation and Qualifying Accounts, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
\s\ Moss Adams LLP Portland, Oregon February 20, 2002
AG-BAG INTERNATIONAL LIMITED VALUATION AND QUALIFYING ACCOUNTS - --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders Ag-Bag International Limited
We have audited the accompanying balance sheet of BAW group as of December 31, 2001, and the related statements of operating results and cash flows, for the year then ended, which, as described in Note B to the financial statements have been prepared on the basis of accounting principles generally accepted in Germany. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America and in Germany. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BAW group as of December 31, 2001, and the results of its operations and its cash flows for the year ended December 31, 2001, in conformity with accounting principles generally accepted in Germany.
\s\Dipl. Ing. Martin Steinebach 02625 Bautzen January 24, 2002
A. Mandate and execution of the mandate - ---------------------------------------------
The managing director of BAW Budissa Agrodienstleistungen und Warenhandels GmbH, registered office at 02694 MALSCHWITZ; Ortsteil Kleinbautzen,, ordered us, on the basis of the shareholder resolution adopted January 30, 2001, to audit the voluntary annual accounts of the group for the period from January 1, 2001 to December 31, 2001 including the balance sheet, the profit and loss account, the notes to the financial statement and the report on the economic position..
The audit of the annual accounts of the group was based on the provisions of HGB (Commercial Code) and the GmbH Law (Law concerning limited liability companies), in particular, the general rule stipulated under ss. 300 Commercial Law.
The order was executed in the month of January 2002.
The execution of the order - also concerning the relationship to third parties - is based on the general contract terms for auditors and auditing companies as amended on 01.01.2002, a copy of which is attached to this statement
The following statement is made on the results:
B. Voluntary group accounts - ---------------------------------
The Company established the annual accounts of the group as of December 31, 2001 voluntarily pursuant to the shareholder resolution adopted January 30, 2001. The limits of ss. 293 Commercial Code were not exceeded. The annual accounts of the group were prepared on the basis of the rules concerning the commercial law. It is a statement of annual accounts purely based on the commercial law. Any tax voting rights were not exercised (see, in particular, item D.III.).
C. Legal structure of the group - -------------------------------------
The group structure complies with ss. 290 sub-clause 1 HGB. The parent company of the group is BAW Budissa Agrodienstleistungen und Warenhandels GmbH, registered office at Niederkaina. The subsidiaries of BAW Budissa Agrodienstleistungen und Warenhandels GmbH, AG-BAG HUNGARIA KFT and "AG BAG Polska" sp.zo.o. are affiliated companies pursuant to ss. 271 sub-clause 2 HGB and to ss. 290 sub-clause 2 HGB, respectively.
The company AG-BAG HUNGARIA KFT was incorporated on February 11, 1999 in Gyor (Hungary) by cash subscription. Having paid an initial contribution of Forint 6,300,000.-- , BAW Budissa Agrodienstleistungen und Warenhandels GmbH holds 90% of the shares in the Company. Mr. Szocs Csaba holds 10% of the shares in the company having paid an initial contribution of Forint 700,000.--. In the business year the capital was increased from Forint 3,000,000.--by Forint 4,000,000.--to Forint 7,000,000.--.
C. Legal structure of the group - (continued) - ---------------------------------------------------
"AG BAG Polska" Sp.zo.o. was incorporated on 08.19.1999 in Szelejewo Drugie (Republic of Poland) by cash subscription. Having paid an initial contribution of Zloty 80,000. --, BAW Budissa Agrodienstleistungen und Warenhandels GmbH holds 80 % of the shares of the company. Mr. Karol Benedykt Glapiak and Mrs. Marta Kashyna hold 10 % of the shares in the company, each, having paid an initial contribution of Zloty 10,000. --, each.
Both subsidiaries are registered in the corresponding Commercial Register.
D. Group accounts as of December 31, 2001 - -----------------------------------------------
I. Cut-off date and deferred valuation of the consolidated companies -----------------------------------------------------------------
BAW Budissa Agrodienstleistungen und Warenhandels GmbH as the parent company of the group as well as the subsidiaries AG-BAG HUNGARIA KFT and "AG BAG Polska Sp.zo.o. were included in the group accounts. December 31, 2001 is the cut-off date of the group accounts. Both the parent company as well as the included subsidiaries prepared regular annual accounts as of this cut-off date.
II. Regularity of the special accounts included in the group accounts ------------------------------------------------------------------- (ss.317 sub-par. 2 HGB) -----------------------
The annual accounts included in the group accounts were duly prepared on the basis of the national commercial laws. For the annual accounts as of 12.31.2001 of BAW Budissa Agrodienstleistungen und Warenhandels GmbH the unquaified audit certificate was issued on January 23, 2002 and for the annual accounts of AG BAG Polska Sp.zo.o. on 01.15..2002. On 01.28.2002 the annual statement of accounts of "AG BAG Polska" Sp.zo.o. will presumably be established.
For the annual accounts of the Hungarian subsidiary as of 12.31.2001 an auditor's report dated 01.15.2002 was submitted to us. The annual statement of accounts of AG BAG UNGARIA KFT will presumably be by the shareholders on 01.28.2002.
III. Breakdown of the group accounts and valuation principles --------------------------------------------------------
The balance sheet of the group as well as the profit and loss account were stated and classified pursuant to the provisions of the commercial law for Companies. The requirements of ss.ss. 297 ff HGB were paid due regard to.
Since the company is a joint venture we had to come to an agreement concerning uniform valuation regulations in the group accounts. Since the parent company has its registered office and management in Germany we agreed to use the German valuation regulations for these group accounts without having taken into consideration any tax privileges pursuant to German, Polish or Hungarian tax laws.
III. Breakdown of the group accounts and valuation principles - ----------------------------------------------------------- (continued) -----------
The consequence was that for the individual accounts a trade balance II (see Tz. 26 concerning ss. 300 Commercial Law in "Beck'scher Bilanzkommentar, 4th edition) had to be established pursuant to ss. 300 (2) Commercial Law. In this trade balance II all tax privileges were eliminated and uniform valuation principles were applied. The conversion of the individual accounts was made according to the concept of the functional currency. According to this concept the balance sheet had to be converted on the basis of the current rate and the profit and loss account on the basis of the average rate.
Poland Hungary ------ -------
Current rate 1 PLZ = DM 0.5559 1 HUF = DM 0.007960 Average rate 1 PLZ = DM 0.5290 1 HUF = DM 0.007662
The capital assets were estimated on the basis of the initial costs minus a linear pro rata temporis degressive depreciation.
The stock was estimated on the basis of the manufacturing costs and the strict lowest value principle. For raw materials and supplies a fixed value was formed pursuant to ss. 256 HGB in connection with R 31 sub-clause 4 ESTR (German Individual Income Tax Law).
The accounts receivable and other assets are estimated on the basis of their nominal values.
The special item including reserves was shown pursuant to the recommendations of the HFA comment 1/1984 of the Institut der Wirtschaftsprufer (Institute of Auditors).
The reserves take into account all risks seen today. The payables were estimated on the basis of the repayable amount.
General information on accounting and valuation methods (pursuant to ss.ss.313, - ------------------------------------------------------------------------------- 314 Commerical Code) - -----------------------
The fixed assets were assessed on the basis of the initial costs minus the linear p.r.t. or degressive depreciation pursuant to ss. 253 par. 2 Commercial Code. No special depreciation was used.
The stock was assessed on the basis of manufacturing costs or according to the strict lowest value principle. The raw materials and supplies were assessed on the basis of a fixed value pursuant to ss. 256 Commercial Code in connection with R 31 par. 4 Income Tax Law.
The receivables and other assets were assessed on the basis of the nominal value.
The special item including reserves was assessed pursuant to the suggestions of the HFA comment 1/1984 of the Institut der Wirtschaftsprufer.
The reserves take into account all risks seen today. The liabilities were assessed on the basis of the repayable amounts.
A deferred taxation had to be applied pursuant to ss.274 Commercial Code and ss.306 Commercial Code.
III. Breakdown of the group accounts and valuation principles - ----------------------------------------------------------- (continued) -----------
The full consolidation is applied as a consolidation method.
The capital consolidation is made pursuant to the book value method pursuant to ss. 301 par. 1, sentence 2, no.1 Commercial Code. The first balance-sheet deadline of the group following the incorporation of the subsidiaries is the date for the offset of the shares with the equity capital of the subsidiaries.
IV. Explanation of the consolidation method - ------------------------------------------------
The full consolidation was applied pursuant to ss. 300 HGB.
Specification of the consolidation method (pursuant to ss.ss.313, 314 - --------------------------------------------------------------------- Commercial Code
The mutual debts and liabilities were offset within the framework of debt consolidation pursuant to ss.303 par.1 Commerical code.
The expenditure and proceeds (internal group turnover) based on mutual supplies and services were consolidated.
1. Consolidation of funds ----------------------
For the consolidation of funds the book value method (ss. 301 sub-clause 1 no. 1 HGB) was applied, that is, the valuation of the shares in the subsidiaries was offset against the subsidiaries' equity falling to these shares which corresponds to the book value of the assets and debts to be included in the group accounts. The difference amounting to DM 7,964.68 was - not as required by ss. 301 par. 3 Commercial Code - not activated as an enterprise value but was written off the group equity since these are only incorporation costs. The shares of the other shareholders shown pursuant to ss. 307 Commercial Code were taken into consideration.
2. Consolidation of debts ----------------------
According to the standard theory the mutual accounts receivable and accounts payable existing between the companies included in the group accounts were offset on the basis of ss. 303 sub-clause 1 HGB. The total amount of the mutual accounts receivable and accounts payable that were offset is ThDM 230.6. DM 1,690.34 had to be taken out of the books as expenses.
3. Interim result elimination --------------------------
We carried out an elimination of the interim results, as we did last year, in the financial year 2001, see ss.304 par. 3 Commercial Law.
A total of DM 52,845.01 was debited to the account of the expenditure for raw materials and supplies. This was necessary for the conversion of the valuation of the finished products and goods to the group-uniform manufacturing costs.
IV. Explanation of the consolidation method - (continued) - --------------------------------------------------------------
4. Expenditure and income consolidation ------------------------------------
The expenses and income resulting from the transactions of mutual deliveries of goods and provision of services were mutually offset by an amount of Th DM 1,179.9.
5. Deferred taxation -----------------
Pursuant to ss. 274 HGB and ss. 306 Commercial Law a deferred taxation was made as follows:
a) In the trade balance II of BAW Budissa Agrodienstleistungen und Warenhandels GmbH the tax privilege of voting pursuant to ss.7 g Income Tax Law was eliminated (ss.300 par. 2 Commercial Code).
b) The item of potential taxes was currently adjusted in the year under report starting from 01.01.2001 (See Note F - Explanatory notes).
c) National differences in the tax rate were maintained.
V. Analysis of the group accounts ------------------------------
1. Analysis of the operating results ---------------------------------
The group showed a year's profit in the financial year 2001 amounting to DM 622,001.47.
The year's profit of the group can be shown in the following structure:
* DM 65,990.63 of this amount is attributable to other shareholders
V. Analysis of the group accounts - (continued) - -----------------------------------------------------
2. Analysis of the status ----------------------
The status is shown by a comparison of assets and debts as of the balance-sheet cut-off date and compared to the two previous years as follows:
* 40 % (in the previous year 50%) of the special item including reserves was considered as borrowed capital.
3. Analysis of the financial position ----------------------------------
We analyzed the financial position of the group by means of the static and dynamic liquidity analysis as compared to the two previous years:
a) Static liquidity analysis 2001 2000 1999 Ratio % % % ----- ---- ---- ----
Equity ratio (equity*100: balance sheet total) 34.40 33.08 27.35
Investment recovery I (equity*100: fixed assets) 82.24 110.75 54.05
3. Analysis of the financial position - (continued) ------------------------------------------------
2001 2000 1999 Ratio % % % ----- ---- ---- ----
Investment recovery II (equity+long-term borrowed capital*100:fixed assets) 154.63 184.80 113.54
Liquidity I (currency medium*100:short-term borrowed capital) 122.58 86.67 30.40
Liquidity II (currency medium+short-term debts*100:short-term borrowed capital) 308.87 311.39 93.75
Liquidity III (currency medium+short-term debts+stock*100:short-term borrowed capital) 399.63 373.99 269.76
b) Dynamic liquidity analysis by cash flow presentation
2001 2000 1999 ThDM ThDM ThDM ---- ---- ----
Year's profit 622.0 + 272.2 + 98.5 Depreciation 296.2 + 168.4 + 139.9 ----- ----- ----- Cash flow (after tax) 918.2 + 440.6 + 238.4 Plus taxes 210.6 + 293.2 + 107.1 ----- ----- ----- Cash flow (pre-tax) 1,128.8 + 733.8 + 345.5 ======= ===== =====
VI. Accountancy of the group ------------------------
Accounting of BAW Budissa Agrodienstleistungen und Warenhandels GmbH is done mechanically by Budissa Agrarprodukte Aktiengesellschaft Niederkaina as a service. The data processing program DB-Soft is used.
Accounting of AG-BAG Hungaria KFT is done mechanically by the local tax adviser in Hungary.
Accounting of "AG BAG Polska" Sp.zo.o. is done mechanically by the local tax adviser in Poland.
The group account is established on the basis of transitional accounts in Niederkaina.
VII. Notes to the financial statement of the group and report on ----------------------------------------------------------- the situation -------------
The notes to the financial statements of the group are in agreement with the group accounts. (See Note F - Explanatory notes)
E. Audit certificate -----------------
We audited the group accounts including the accounting and the report on the situation of the BAW group for the business year ending on December 31, 2001 with a balance-sheet total of DM 3,759,898.30 and a year's profit of DM 622,001.47.
The management of the companies are responsible for the accounting and the preparation of the group accounts and the report on the situation of the group according to the regulations of the commercial law (and the supplementary regulations in the partnership agreement). It is our task to give our opinion on the group accounts and the report on the situation of the group on the basis of the audit carried out by us.
We carried out our audit of the group accounts pursuant to ss. 317 Commercial Law considering the principles of regular audits established by the Institut der Wirtschaftsprufer (IDW). Accordingly, the audit must be planned and carried out such that one can assess safely enough whether the accounting, the group accounts and the report on the situation of the group are free of any essential deficiencies.
Within the framework of the audit we assess the records for the data in accounting, the groups accounts and the report on the financial position of the group on the basis of samples. The audit includes the assessment of the applied accounting axioms and essential assessments of the management as well as the appreciation of the total presentation of the group accounts and the report on the situation of the group. We think that our audit forms a sufficient basis for our assessment. Our audit did not result in any objections.
We think that the group accounts considering the principles of good accounting gives a picture of the status, financial situation and profit situation of the group that reflects the actual situation. The report on the situation of the group gives a correct idea of the position of the group and shows risks of the future development correctly.
02625 Bautzen, January 24, 2002
Treuhand-Gesellschaft Dr. Steinebach & Partner GmbH Wirtschaftsprufungsgesellschaft
\s\ Dipl.Ing. Martin Steinebach Dipl.Ing. Martin Steinebach Auditor
F. Explanatory notes -----------------
I. Breakdown and explanation of the items of the balance sheet - --------------------------------------------------------------------
1. Tangible assets - DM 1,572,520.52 (prev. year ThDM 543.3) ---------------------------------------------------------
The composition and development of the tangible assets are listed in Exhibit 1.
2. Raw materials and supplies - DM 8,000.-- (prev. year ThDM 8.2) --------------------------------------------------------------
Breakdown:
Company Designation Valuation - ------- ----------- ----------------------- DM prev.y. ThDM -- ------------
BAW Budissa Agrodienst- Fixed value for packaging leistungen und Warenhandels material and small items 8,000. -- 8.0 GmbH
"AG BAG Polska" sp.zo.o. Small items -.- 0.2 ------- --- 8,000.-- 8.2 ======== ===
An interim profit elimination was not necessary since in this item no group-internal supplies are included.
3. Finished products and goods - DM 479,370.81 (prev. year ThDM ------------------------------------------------------------------- 213.0) ------
DM prev.y. ThDM Breakdown:
BAW Budissa Agrodienstleistungen und Warenhandels GmbH 55,676.- - 21.5
"AG BAG Polska" sp.zo.o. 384,924.76 165.5
AG-BAG HUNGARIA KFT 38,770.03 26.0 ---------- ----- 479,370.81 213.0 ========== =====
In the stock an interim profit elimination totaling DM 52,845.01 was carried out. This includes DM 16,833.43 for stocks in Hungary and DM 36,011.58 for stocks in Poland.
I. Breakdown and explanation of the items of the balance sheet - ------------------------------------------------------------------ (continued) -----------
3. Finished products and goods - DM 479,370.81 (prev. year ThDM ------------------------------------------------------------------- 213.0) - (continued) --------------------
The stock is specified as follows:
DM
(1) Finished products of BAW Budissa Agrodienstleistungen und Warenhandels GmbH AG BAG Plastic bags 55,676.-- ========== (2) Finished products of AG-BAG HUNGARIA KFT AG BAG plastic bags 31,165.50 Other finished products 7,604.55 ---------- Total AG BAG HUNGARIA KFT 38,770.05 ========== (3) Finished products of "AG BAG Polska" Sp.zo.o. AG BAG plastic bags 66,593.14 Machinery 301,587.67 Other finished products 16,743.95 ---------- Total "AG BAG Polska" Sp.zo.o. 384,924.76 ---------- Total of finished products and goods 479,370.81 ===========
4. Advance payments made - DM 93.25 (prev.y. ThDM zero) --------------------------------------------------------
This is an advance payment amounting to DM 93.25 of "AG BAG Polska" Sp.zo.o.
5. Trade accounts receivable - DM 873,901.51 (p.y. ThDM 475.8) -------------------------------------------------------------
Breakdown: DM prev.y. ThDM -- ------------
BAW Budissa Agrodienstleistungen und Warenhandels GmbH 113,104.30 52.7
"AG BAG Polska" Sp.zo.o. 722,454.82 406.8
AG-BAG HUNGARIA KFT 38,342.39 16.3 ---------- ----- 873,901.51 475.8 ========== =====
The value of the accounts receivable in Hungary and Poland can't be finally assessed at the moment. The company dispensed with the formation of value adjustments.
I. Breakdown and explanation of the items of the balance sheet - - ---------------------------------------------------------------------------- (continued) -----------
6. Receivables from shareholders - DM 100,000.- - (p.y. ThDM 252.8) -----------------------------------------------------------------
These are trade accounts receivable from BAG Budissa Agroservice Gesellschaft mbH which were still outstanding at the time of the audit (residual amount of an invoice).
7. Other assets - DM 27,570.21 (p.y. ThDM 17.0) --------------------------------------------
Breakdown DM prev.y. ThDM -- ------------ BAW Budissa Agrodienstleistungen und Warenhandels GmbH 9,578.70 0.0
"AG BAG Polska" Sp.zo.o. 15,613.01 6.8
AG-BAG HUNGARIA KFT 2,378.50 10.2 --------- ---- 27,570.21 17.0 ========= ====
This is specified as follows:
DM --
Refund of corporate income tax (H) 1,122.36 Refund of trade tax (H) 76.96 Refund of turnover tax (H) 734.41 Refund of turnover tax (G) 6,218.70 Refund of turnover tax (PL) 14,859.76 Refund of wage tax and social contributions (PL) 753.25 --------- Total of refunds 23,765.44
Interest limitation premium (G) 3,360.-- Advance leasing payment (H) 444.77 --------- Total 27,570.21 =========
I. Breakdown and explanation of the items of the balance sheet - - ---------------------------------------------------------------------------- (continued) -----------
8. Checks, cash, Federal Reserve Bank and Postbank balance, cash in ----------------------------------------------------------------- banks - DM 659,001.91 (p.y. ThDM 287.6) -----------------------------------------
Breakdown:
BAW Budissa "AG BAG AG-BAG group Agrodienstl. Polska" HUNGARIA u. Warenhandels sp.zo.o. KFT GmbH in DM DMDM DM DM p.y. THDM ---------- --------- -------- ----- ---------- Cash in Banks 483,066.45 72,643.75 93,947.75 649,657.95 285.0
Cash 2,888.22 5,890.98 564.76 9,343.96 2.6 ---------- --------- --------- ---------- ----- 485,954.67 78,534.73 94,512.51 659,001.91 287.6 ========== ========= ========= ========== =====
9. Deferred item - DM 17,625.95 (p.y. ThDM 21.7) ----------------------------------------------
Breakdown DM p.y. ThDM -- --------- BAW Budissa Agrodienstleistungen und Warenhandels GmbH 14,682.47 21.1
"AG BAG Polska" Sp.zo.o. 2,556.71 0.3
AG-BAG HUNGARIAKFT 386.77 0.3 --------- ---- 17,625.95 21.7 ========= ====
For all companies these are financing expenses paid in advance for technical equipment and motor vehicles.
10. Active deferred taxes - DM 21,814.14 (prev.y. ThDM zero) --------------------------------------------------------
Active deferred taxes for:
DM Interim result elimination DM 52,845.01 21,138.--
Profit-effective balancing of an account receivable of BAW GmbH from AG-BAG HUNGARIA KFT DM 1,690.34 676.14 --------- 21,814.14 =========
I. Breakdown and explanation of the items of the balance sheet - - ---------------------------------------------------------------------------- (continued) -----------
11. Development of equity - DM 1,239.573.25 (p.y. ThDM 585.9) ----------------------------------------------------------
Breakdown and development
U = transfer from one account to another (1) Year's profit DM 622,001.47 = DM 556,010.84 + DM 65,990.63 (2) Capital increase of outside shareholders in Hungary
I. Breakdown and explanation of the items of the balance sheet - - ---------------------------------------------------------------------------- (continued) -----------
11. Development of equity - DM 1,239.573.25 (p.y. ThDM 585.9) - ------------------------------------------------------------------- (continued) -----------
The item of shares of other shareholders developed as follows:
As of Capital addition As of 01.01.2001 increase (release) 12.31.2001 ---------- ---------- ---------- ---------- U = transfer DM DM DM DM
Capital stock 10,627.99 3,363.10 -.- 13,991.09
Profit carried forward 1,287.83 -.- 22,443.49 U 23,731.32
Year's profit 22,443.49 -.- (22,443.49)U 65,990.63 65,990.63 ---------- ---------- ---------- ---------- 34,359.31 3,363.10 65,990.63 103,713.04 ========== ========== ========== ==========
As of Proratable Capital As of 01.01.2001 profit increase 12.31.2001 ---------- ---------- ---------- ----------
"AG BAG Polska" Sp.zo.o.
Capital stock 8,321.29* -.- -.- 8,321.29
Profit carries forward 24,383.66 -.- -.- 24,383.66
Year's profit -.- 64,811.85 -.- 64,811.85 ---------- ---------- ---------- ---------- 32,704.95 64,811.85 -.- 97,516.80 ========== ========== ========== ==========
AG-BAG HUNGARIA KFT
Capital stock 2,306.70 -.- 3,363.10 5,669.80
Profit carries forward ./. 652.34 -.- -.- ./. 652.34
Year's profit -.- 1,178.78 -.- 1,178.78 ---------- ---------- ---------- ---------- 1,654.36 1,178.78 3,363.10 6,196.24 ========== ========== ========== ========== 34,359.31 65,990.63 3,363.10 103,713.04 ========== ========== ========== ==========
* Must be adjusted to DM 9,428.28 in the following year (Historic exchange rate in August 1999).
12. Special item including reserves - DM 262,346.62 (p.y. ThDM 100.7) ------------------------------------------------------------------- Breakdown and development: As of addition As of 12.31.2000 (release) 12.31.2001 ---------- --------- ---------- DM DM
Investment grants 208,000.-- 100,744.68 (46,398.06) 262,346.62 ========== ========== ==========
These are subsidies of the Sachsische Aufbaubank (GA-Fordermittel).
I. Breakdown and explanation of the items of the balance sheet - - ---------------------------------------------------------------------------- (continued) - --------------------
13. Passive deferred taxes - DM 120,000.- - (p.y. ThDM 347.9) -----------------------------------------------------------
Development:
DM
As of 12.31.2000 347,859.50
Minus Transfer in tax reserve ./. 149,335.35
Release of tax adjustment Poland (from 2000) in trade balance II ./. 51,640.02
Release of BAW due to tax rate decrease for Tax on income in Germany ./. 26,884.13 ---------- 120,000.-- ==========
The reserves for deferred taxation were booked pursuant to ss. 306 HGB.
14. Reserves for potential taxes - DM 325,920.86 (p.y. ThDM zero) --------------------------------------------------------------
Breakdown and development::
As of addition As of 12.31.2000 (consumption) 12.31.2001 ---------- ------------- ---------- U = transfer from one account to another ----------------- DM DM DM
Trade income tax 2000 ./. U 50,867.-- 50,867.-- Trade income tax 2001 ./. 87,888.-- 87,888.-- Corporate income tax 2000 ./. U 93,335.-- 93,335.-- Corporate income tax 2001 ./. 63,002.-- 83,002.-- Re-unification charge 2000 ./. U 5,133.35 5,133.35 Re-unification charge 2001 ./. 5,695.51 5,695.51 ---------- ------------- ----------- 176,585.51 ./. U 149,335.35 325,920.86 ========== ============= ===========
For the group accounts as of 12.31.2001 the corresponding national tax rates were used.
I. Breakdown and explanation of the items of the balance sheet - - ---------------------------------------------------------------------------- (continued) -----------
15. Other reserves - DM 93,302.- - (p.y. ThDM 59.7) ------------------------------------------------
The other reserves are only reserves of BAW Budissa Agrodienstleistungen und Warenhandels GmbH for expenses for guarantees/warranties, preparation and auditing of the annual statement of accounts and taxes, Fees for the Chamber of Industry and Commerce and Trade Association as well as vacation still outstanding.
16. Accounts payable to credit institutions - DM 912,609.78 -------------------------------------------------------- (p.y. ThDM 199.2) -----------------
Breakdown: DM p.y. ThDM -- --------- BAW Budissa Agrodienstleistungen und Warenhandels GmbH 896,285.39 170.1
"AG BAG Polska" Sp.zo.o. 11,693.91 16.1
AG-BAG HUNGARIA KFT 4,630.48 13.0 ---------- ----- 912,609.78 199.2 ========== =====
17. Accounts payable for purchases and deliveries - DM 58,004.21 ------------------------------------------------------------------- (p.y. ThDM 431.4)
Breakdown: DM p.y. ThDM -- ---------
BAW Budissa Agrodienstleistungen und Warenhandels GmbH 3,694.-- 9.1 "AG BAG Polska" Sp.zo.o. 54,310.21 289.0*
AG-BAG HUNGARIA KFT ./. 133.3* ---------- ----- 58,004.21 431.4
* In the previous year payables to BAG-Budissa Agroservice Gesellschaft mbH amounting to ThDM 406.5 (= 273.2 ThDM + 133.3 ThDM) are also included.
18. Payables to shareholders - DM 673,795.21 (p.y. ThDM zero) ---------------------------------------------------------
These are payables to BAG Budissa Agroservice Gesellschaft mbH.
Breakdown: DM --
"AG BAG Polska" Sp.zo.o. 543,268.96
AG-BAG HUNGARIA KFT 130,526.25 ---------- 673,795.21 ==========
I. Breakdown and explanation of the items of the balance sheet - - ---------------------------------------------------------------------------- (continued) -----------
19. Other liabilities - DM 31,383.36 (p.Y. ThDM 69.3) ----------------------------------------------------
Breakdown: DM p.y. ThDM -- ---------
BAW Budissa Agrodienstleistungen und Warenhandels GmbH 11,738.87 40.8
"AG BAG Polska" Sp.zo.o. 16,607.32 24.9
AG-BAG HUNGARIA KFT 3,037.17 3.6 ---------- ----- 31,383.36 69.3 ========= =====
This includes the following special items: DM
Wages payable 7,728.55 Social insurance 7,047.49 Tax Poland 16,607.32 --------- 31,383.36 =========
20. Notes to liabilities
Liabilities total amount breakdown according to periods - ----------- DM ------------------------------ up to 1 y. 1 to 5 y. more than 5 y. DM DM DM -- -- --
to credit institutions 912,609.78 200,782.39 370,231.39 341,596.--
accounts payable for purchases + deliveries 58,004.21 58,004.21 -.- -.-
to shareholders 673,795.21 247,460.92 426,334.29 -.-
Other* 31,383.36 31,383.36 -.- -.- ------------ ---------- ---------- ---------- Total amount 1,675,792.56 537,630.88 796,565.68 341,596.-- ============ ========== ========== ==========
* Of this from taxes DM 1,761.98 Of this within the framework of social security DM 21,761.28
I. Breakdown and explanation of the items of the profit and loss - ---------------------------------------------------------------------------- account -------
1. Sales proceeds - DM 6,672,571.60 (p.y. ThDM 4,974.7) ----------------------------------------------------
Breakdown:
BAW Budissa Agro- "AG BAG AG-BAG Dienstleistungen Polska" HUNGARIA und Warenhandels sp.zo.o. KFT Group GmbH in DM DM DM DM --------------- ------------- ------------- -------------
Proceeds from sales of goods 3,615,978.16 2,094,026.52 613,120.95 6,323,125.63
Proceeds from services ./. 303,084.53 11,645.48 314,730.01
Other proceeds 31,159.76 3,556.20 ./. 34,715.96 --------------- ------------- ------------- ------------- 3,647,137.92 2,400,667.25 624,766.43 6,672,571.60 =============== ============= ============= =============
2. Change in stock - DM 266,415.44 (p.y. ./. ThDM 345.5) --------------------------------------------------------
Breakdown Stock Stock Change in As of 12.31.2000 As of 12.31.2001 stock ---------------- ---------------- ---------- Finished products and goods 212,955.37 479,370.81 266,415.44 ========== ========== ==========
3. Other operating results - DM 514,562.73 (p.y. ThDM 148.8) ---------------------------------------------------------
Breakdown DM -- BAW Budissa Agrodienstleistungen und Warenhandels GmbH (minus savings reserve amounting to DM 300.0) 445,332.68
"AG BAG Polska" Sp.zo.o. 58,147.06
AG-BAG HUNGARIA KFT 11,082.99 ---------- 514,562.73 ==========
4. Expenses for raw materials and supplies - DM 4,464,570.81 (p.y. ----------------------------------------------------------------- ThDM 2,825.3)
Breakdown DM -- BAW Budissa Agrodienstleistungen und Warenhandels GmbH 3,261,590.11*
"AG BAG Polska" Sp.zo.o. 969,372.77
AG-BAG HUNGARIA KFT 233,607.93 ------------ 4,464,570.81 ============ * It includes expenses for merchandise, packaging and energy costs.
II. Breakdown and explanation of the items of the profit and loss - ---------------------------------------------------------------------------- account - (continued) ---------------------
5. Expenses for services received - DM 832,366.58 (p.y. ThDM 481.3) -----------------------------------------------------------------
Breakdown DM -- BAW Budissa Agrodienstleistungen und Warenhandels GmbH 611,587.79
"AG BAG Polska" Sp.zo.o. 187,520.70
AG-BAG HUNGARIA KFT 33,258.09 ------------ 832,366.58 ============
It includes expenses for rents, means of production, transportation and other services.
6. Personnel costs - DM 332,315.29 (p.y. ThDM 232.1)
Breakdown: DM -- a) Wages and salaries
BAW Budissa Agrodienstleistungen und Warenhandels GmbH 150,012.50
"AG BAG Polska" Sp.zo.o. 95,997.09 AG-BAG HUNGARIA KFT 25,681.34 ------------ Subtotal of wages and salaries 271,690.93 ------------ b) Social contributions
BAW Budissa Agrodienstleistungen und Warenhandels GmbH 33,233.74
"AG BAG Polska" Sp.zo.o. 18,454.09 AG-BAG HUNGARIA KFT 8,936.53 ------------ Subtotal of wages and salaries 60,624.36 ------------ Total personnel costs 332,315.29 ============
II. Breakdown and explanation of the items of the profit and loss - ---------------------------------------------------------------------------- account - (continued)
7. Depreciation on tangible assets - DM 296,255.30 (p.y. ThDM 168.4 -----------------------------------------------------------------
Breakdown: DM -- BAW Budissa Agrodienstleistungen und Warenhandels GmbH 240,287.81
"AG BAG Polska" Sp.zo.o. 27,754.68 AG-BAG HUNGARIA KFT 28,212.81 ------------ 296,255.30 ============
An exact classification is included in the list of tangible assets in Exhibit 1.
8. Other operating expenses - DM 625,908.68 (p.y. ThDM 476.0) -----------------------------------------------------------
Breakdown: DM -- BAW Budissa Agrodienstleistungen und Warenhandels GmbH 475,978.77
"AG BAG Polska" Sp.zo.o. 117,367.72 AG-BAG HUNGARIA KFT 30,871.85
Change in the group accounts (from consolidation) 1,690.34 ------------ 625,908.68 ============
9. Other interest and similar income - DM 11,771.10 (p.y. ThDM 5.7) -----------------------------------------------------------------
Breakdown: DM -- BAW Budissa Agrodienstleistungen und Warenhandels GmbH 8,019.07
"AG BAG Polska" Sp.zo.o. 2,748.96 AG-BAG HUNGARIA KFT 1,003.07 ------------ 11,771.10 ============
It includes interest earnings from time deposit accounts, current accounts and other interest.
II. Breakdown and explanation of the items of the profit and loss - ---------------------------------------------------------------------------- account - (continued) ---------------------
10. Interest and similar expenses - DM 77,353.77 (p.y. ThDM 34.4) -------------------------------------------------------------
Breakdown: DM -- BAW Budissa Agrodienstleistungen und Warenhandels GmbH 59,343.43
"AG BAG Polska" Sp.zo.o. 9,385.02 AG-BAG HUNGARIA KFT 8,625.32 ------------ 77,353.77 ============
11. Taxes from income and proceeds - DM 210,643.92 (p.y. ThDM 293.2) -----------------------------------------------------------------
Breakdown: DM -- BAW Budissa Agrodienstleistungen und Warenhandels GmbH 199,147.39
"AG BAG Polska" Sp.zo.o. 111,597.31 AG-BAG HUNGARIA KFT 237.51 ------------ Subtotal of national taxes 310,982.21 ------------ minus
active deferred taxes ./. 21,814.14
Balancing of deferred taxes "AG BAG Polska" Sp.zo.o. in trade balance II ./. 51,640.02
Balancing of deferred taxes BAW-GmbH because of tax reduction in trade balance II ./. 26,884.13 ------------ 210,643.92 ============
12. Other taxes - DM 3,905.05 (p.y. ThDM 0.8)
Breakdown: DM -- BAW Budissa Agrodienstleistungen und Warenhandels GmbH 2,002.40
"AG BAG Polska" Sp.zo.o. 1,902.65 ------------ 3,905.05 ============ It includes property tax and motor vehicle tax.
III. Notes to group accounts pursuant to ss.ss. 313, 314 Commercial Code
I. Listing of the subsidiaries of the group
The following subsidiaries were included in the group accounts:
* Historic exchange rate
The subsidiaries did not acquire any shares in the parent company in the year under report.
II. Other obligatory information pursuant to ss. 314 Commercial Code ----------------------------------------------------------------
1. Contingent liabilities and other financial obligations ------------------------------------------------------
There are no contingent liabilities and other obligations.
2. Employees ---------
The average number of the employees employed during the business year was 8 people (p.y. 7).
3. Emoluments, advance money, credits and contingent liabilities of ------------------------------------------------------------------- and to members of the management --------------------------------
No data.
IV. Final remark
Referring to the audit certificate for the group accounts of BAW Budissa Agrodienstleistungen und Warenhandels GmbH, registered office at 02594 Malschwitz, Ortsteil Kleinbautzen, as of 12.31.2001 we finally declare that we have prepared the report submitted herewith on the basis of the statements made by us and the information given to us to the best of our knowledge and belief.
Malschwitz, OT Kleinbautzen, January 24, 2002
G. Reconciliation of German GAAP to U.S. GAAP
The primary difference between the generally accepted accounting principles (GAAP) of Germany and the United States is that German GAAP allows for the special reserve for a company's economic development plans. This reserve, and related tax impact, would not be recognized under U.S. GAAP. The following is a reconciliation of affected balance sheet and profits and loss accounts for the differences between German GAAP and U.S. GAAP:
BAW Exhibit 2 Deutche Mark Exchange Rate
Rate at High Low December During During Average 31, Year Year Rate - ------------------------------------------------------------------------- 2001 .4530 .4907 .4266 .4672 2000 .4817 .5327 .4206 .4974 1999 .5137 .6115 .5106 .5454 1998 .5967 .6301 .5385 .5693 1997 .5583 .6503 .5285 .5779
EXHIBIT INDEX
Exhibit Number Description of Exhibit - ----- ----------------------
3.1 Restated Certificate of Incorporation(2)
3.2 Bylaws of the Company(2)
4.1 Form of Common Stock Certificate(1)
4.3 Warrant dated February 13, 1995, to Norwood Venture Corp.(2)
10.1 Employment Contract of Larry R. Inman(1)*
10.2 Form of Change of Control Agreement between the Company and each of its executive officers and key employees(4)
10.3 1991 Employee Stock Plan, as amended effective November 1, 1996(3)*
10.4 Incentive Stock Option Plan, as amended effective November 1, 1996(3)*
10.5 Non-employee Director Stock Option Plan(3)*
11 Statement re computation of earnings per share
12 Statement re computation of ratios
* Management contract or compensatory plan (1) Filed as exhibit to the Form S-1 Registration No. 33-46115 (2) Filed as exhibit to the Form 10-K for the fiscal year ended December 31, (3) Filed as exhibit to the Form 10-K for the fiscal year ended December 31, (4) Filed as exhibit to the Form 10-K for the fiscal year ended December 31,