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 which 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:
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 also sells in Thailand, Australia, New Zealand, Western and Central Europe and Puerto Rico.
The Company is developing other uses for its bagging technology. In 1993, it established an environmental division focused on composting technologies and a grain bagging division. In late 1997, the Company dissolved its grain bagging division and moved that product line back into its silage business. The Company has adapted its bagging machines to permit bagging of compostable organic matter in the Company's recyclable Tri-Dura-REGISTERED TRADEMARK- plastic bags. The Company has developed plastic bag bailers which enable the Company to bail and pick up the recyclable Tri-Dura-REGISTERED TRADEMARK- plastic bags from 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. In 1994, the Company began to counteract some of its seasonality by generating sales in Latin America, and in 1996 expanded into Australia, in addition to expanding into the compost market.
Approximately 95% of the Company's business is concentrated in the Northern Hemisphere resulting in between 66-75% 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:
FARM EQUIPMENT AND PRODUCTS - - ---------------------------
INTRODUCTION. Silage is made using the Ag-Bag-REGISTERED TRADEMARK- system by storing forage crops, such as corn, sorghum, or alfalfa, under anaerobic (without oxygen) conditions in sealed Ag-Bag Tri-Dura-REGISTERED TRADEMARK- 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 that 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-REGISTERED TRADEMARK- system is an alternative to bunkers, pits and silos. The Ag-Bag-REGISTERED TRADEMARK- bagging machines push the forage into huge recyclable plastic film Tri-Dura-REGISTERED TRADEMARK- 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 and store the forage thus reducing the loss of nutrients.
AG-BAG-REGISTERED TRADEMARK- FARM EQUIPMENT. The Company's principal line of farm equipment is marketed under the trade name "Ag-Bagger-REGISTERED TRADEMARK-." The Ag-Bagger-REGISTERED TRADEMARK- is available in three versions with a number of optional features.
The smallest version consists of machines used to load forage into Ag-Bag Tri-Dura-REGISTERED TRADEMARK- 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 $20,000 to $45,000.
In 1992, the Company introduced a medium-sized machine which 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-REGISTERED TRADEMARK- 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 $70,000 to $145,000.
The largest version consists of machines that can be used to load Ag-Bag Tri-Dura-REGISTERED TRADEMARK- 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-REGISTERED TRADEMARK- 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 $135,000 to $230,000.
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. The company offers the HFC model in small, medium-sized and large bagging machines. The retail price for the HFC machines range from approximately $42,500 to $250,000
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 Company assembles and sells a separate line of related equipment called the Ag-Bag Flex-a-Tuber-REGISTERED TRADEMARK- with a retail price ranging from $7,000 to $17,000. The Flex-a-Tuber-REGISTERED TRADEMARK- permits farmers to store round-baled alfalfa, sorghum, and other forage in Ag-Bag Tri-Dura-REGISTERED TRADEMARK- storage bags. The round bale Flex-a-Tubers-REGISTERED TRADEMARK- 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-REGISTERED TRADEMARK- storage bags up to 200 feet in length.
The Company assembles and sells the Ag-Bag-REGISTERED TRADEMARK- Pro-Grain Bagger, which retails for between $26,000 and $27,000. This machine is similar in design to the smallest Ag-Bagger-REGISTERED TRADEMARK- 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-REGISTERED TRADEMARK- 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-REGISTERED TRADEMARK- front-end load bucket. This revolutionary bucket replaces the conventional bucket. Hydraulically operated, the Mighty Bite-REGISTERED TRADEMARK- closes tightly around material, thus eliminating spillage and increasing load capacity due to compaction. The Company manufactures the Mighty Bite-REGISTERED TRADEMARK- in sizes ranging from one-half cubic yard to two cubic yards with a retail price ranging from $3,000 to $4,500.
The Company assembles and sells a separate line of related equipment called the Square Bale Bagger which retails for between $22,500 and $28,000. The Square Bale Bagger permits farmers to store square bales of alfalfa, sorghum and other forage, two bales high in Ag-Bag Tri-Dura-REGISTERED TRADEMARK- flex storage bags. The Square Bale Bagger permits the bagging of the bales in Ag-Bag Tri-Dura-REGISTERED TRADEMARK- flex storage bags of 6, 8 and 9 feet in diameter and up to 200 feet in length.
The Company has adapted its Ag-Bag-REGISTERED TRADEMARK- bagging machines for use in large scale "in-vessel" composting of organic matter. The bagging machine is combined with a shredder that shreds the organic material which is then fed into the bagging machine which bags the compostable matter into huge Ag-Bag Tri-Dura-REGISTERED TRADEMARK- storage bags. An air blower is attached to the bag and circulates air through the bag during the composting process. The Ag-Bag compost bagging machines retail for between $50,000 and $250,000.
AG-BAG TRI-DURA-REGISTERED TRADEMARK- STORAGE BAGS. The Ag-Bag Tri-Dura-REGISTERED TRADEMARK- 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 Company then converts the rolls into bags by cutting the rolls into the various bag lengths and folding the bags for use on the Company's bagging machines. 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-REGISTERED TRADEMARK- 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-REGISTERED TRADEMARK- 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 $1,300. 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-REGISTERED TRADEMARK- INOCULANT. The Company markets a liquid inoculant and a dry powder inoculant under the trade name Ag-Bag Plus!-REGISTERED TRADEMARK-. 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 in its environmental division.
Bags and machines each account for more than 30% of the Company's revenue and have done so for the last three years.
MARKET SIZE - - -----------
The market for Ag-Bag-REGISTERED TRADEMARK- machinery and Ag-Bag Tri-Dura-REGISTERED TRADEMARK- 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 1997, over 556,000,000 tons of corn, alfalfa, and sorghum silage were made by United States farmers according to the AG IQ Handbook XII published in 1998 by Agricom, Inc. (the "AG Handbook"). Based on AG Handbook statistics, the Company estimates that there are approximately 140,000 dairy, beef, hog, and sheep farms in the United States which are potential customers for Ag-Bag-REGISTERED TRADEMARK- farm equipment and Tri-Dura-REGISTERED TRADEMARK- storage bags; and that only about 7-9% of this group are actually using storage bags made by the Company and its competitors. It further estimates that about 55% of the customers using silage storage bags purchase them from the Company. In addition to the U.S., the Company believes there is a large population of such farms in Canada, Latin America, Germany, Western and Central Europe, Australia, Japan, Thailand, New Zealand, Puerto Rico, 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 has also developed a system for "in-vessel" composting which is designed to eliminate odors and control leachate which is 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 and zoos. The Company currently estimates the size of the compost market within North America to be over $1 billion a year. In the composting area, the Company sold 7 bagging systems in 1998 compared to 2 in 1997, placed 6 sublicense agreements and commenced 9 pilot projects in 1998. The Company also has 2 ongoing university research studies in process as well. 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-REGISTERED TRADEMARK- farm equipment, Tri-Dura-REGISTERED TRADEMARK- storage bags, Ag-Bag Plus!-REGISTERED TRADEMARK- and other inoculants primarily through a network of United States, Canadian, and international dealers. As of December 31, 1998, there were 140 dealers serviced by a combined total of 20 regional and territorial Company-employed managers. Most of the dealers market the entire Ag-Bag-REGISTERED TRADEMARK- line of farm equipment and products; however, some dealers sell only the farm equipment and others sell only the Ag-Bag-REGISTERED TRADEMARK- inoculants. The Company also sells farm equipment, Tri-Dura-REGISTERED TRADEMARK- storage bags, and inoculant directly to large customers in the states of California, New Mexico, Washington, and in the New England area.
The Company offers customers the opportunity to finance the purchase of Ag-Bag-REGISTERED TRADEMARK- farm equipment through unaffiliated third parties who offer lease-purchase financing.
The Company rents Ag-Bag-REGISTERED TRADEMARK- bagging machines to farmers located in the state of California. The rental charge is based on the number of bags purchased and filled with forage. As of December 31, 1998, the Company had 2 machines available for rent. The Company also sells Tri-Dura-REGISTERED TRADEMARK- storage bags in bulk to several custom farming operations in the state of California which own Ag-Bag-REGISTERED TRADEMARK- 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. It retained ownership of the bagging machines, provided bags
to the customer, and filled the bags with the customer's forage on a fee-per-metric tonne basis. This business was sold on December 31, 1997. The Company's former operations director in England purchased the business, and continues to operate a custom bagging service in the United Kingdom and is an international dealer of Ag-Bag products.
The Company formed an environmental division to market its "in-vessel" composting system. The Company intends to establish and market this system through a composting dealer network. In addition, the Company expects to further develop a regional and territorial sales force which will have expertise in composting and environmental recovery. The Company markets its composting system through a sublicense which allows the end user to use the Ag-Bag-REGISTERED TRADEMARK- compost technology.
The Company is not dependent on any single customer or a few customers. The loss of any customer would not have a material adverse effect on the Company.
ASSEMBLY AND MANUFACTURING - - --------------------------
AG-BAG-REGISTERED TRADEMARK- FARM EQUIPMENT. The Company buys most of its components for its bagging machines from various other manufacturers, manufactures the remaining components, and assembles the machines itself. The medium and large sized machines, composting machines, HFC (Cable-less) machines, Square Bale Baggers, and Flex-a-Tubers-REGISTERED TRADEMARK- are all assembled at the Company's headquarters facility in Warrenton, Oregon. The smaller machines are assembled at the Company's Blair, Nebraska plant.
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-REGISTERED TRADEMARK- STORAGE BAGS. All of the three-ply Tri-Dura-REGISTERED TRADEMARK- bonded storage bags are manufactured for the Company by a single manufacturer. The bags are manufactured to the Company's specifications using a stabilizer which protects the plastic from becoming brittle due to exposure to weather and the sun's ultraviolet light rays. The Tri-Dura-REGISTERED TRADEMARK- plastic bags are made in various diameters based on bag orders received by the Company. The bags are shipped in uncut rolls to the Company's plant in Blair, Nebraska, where they are cut to the proper lengths and folded for shipment.
AG-BAG-REGISTERED TRADEMARK- INOCULANTS. The liquid inoculant 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 in 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-REGISTERED TRADEMARK- 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-REGISTERED TRADEMARK- bags. The supply agreement provides that the Company is obligated to purchase all of its plastic rolls, with certain exceptions, from Supplier through January 1, 2004. 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 as good. The Company believes there are adequate alternative suppliers available in the event Supplier is unable to provide rolls.
The structural components of the Company's farm 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 which would adversely affect the operations of the Company's business.
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 - - -----------
The Company believes it is the industry leader in the manufacture and sale of complete sealed feed farm bagging systems, hence, the Company's corporate slogan, the "Complete One." Ag-Bag is the only company which manufactures the full line of equipment, bags, and other accessories for sealed feed farm management. There are two competitors within the United States which manufacture similar silage bagging machines. There are also a number of competitors which manufacture bale wrapper machines, which compete with the Company's Flex-a-Tuber-REGISTERED TRADEMARK-. The Company believes that it 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 in the U.S., a recycling service for used Ag-Bag Tri-Dura-REGISTERED TRADEMARK- bags.
The Company also competes with companies constructing bunkers and pits, and to a lesser extent silos. The 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.
In the environmental (compost) area, the Company competes primarily with wind row turner manufacturers. 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 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, the Company also competes with about five companies which 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 - - -------
In 1999, backlog orders were 5.6% higher than 1998. The dollar amount of backlog orders of the Company that are believed to be firm, as of March 1, 1999, was approximately $3,800,000, compared to $3,600,000 on March 1, 1998. This backlog is seasonal and is reasonably expected to be filled within the current fiscal year.
RESEARCH AND DEVELOPMENT - - ------------------------
The amounts spent on research and development are not material.
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, 1998.
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. More recently, the bagging of compost has been added to the Company's product line and proprietary rights in this new market have been and are being developed.
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!-REGISTERED TRADEMARK- which was developed by Larry R. Inman and Walter L. Jay. See "Executive Officers of the Registrant."
The names Ag-Bag-REGISTERED TRADEMARK-, Ag-Bag Plus!-REGISTERED TRADEMARK-, Bale-Bag-REGISTERED TRADEMARK-, Flex-a-Tuber-REGISTERED TRADEMARK-, Flex-a-Tube-REGISTERED TRADEMARK-, ABCTI System-REGISTERED TRADEMARK-, Mighty Bite-REGISTERED TRADEMARK-, Tri-Dura-REGISTERED TRADEMARK-, and the symbol "AB"-REGISTERED TRADEMARK- 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 and are an important part of its business, which give it a competitive advantage.
EMPLOYEES - - ---------
On December 31, 1998, the Company had 110 full-time employees. The Company employs approximately 150 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 - - ----------------------------------------------------------------------------
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 60% of capacity. The Company occupies the land pursuant to a lease which expires in 2015.
The Company owns facilities in Blair, Nebraska, where the Company folds and packages its Tri-Dura-REGISTERED TRADEMARK- feed storage bags; prepares and packages its proprietary inoculant; assembles its smaller bagging machines and warehouses products. During 1996, the Company began consolidating its Blair, Nebraska, operations into a newly constructed facility which consists of three buildings comprising approximately 70,000 square feet. Construction was completed on all facilities and the Company fully occupied its new buildings in early 1997. The Blair, Nebraska, facilities are subject to a mortgage in the amount of $1,319,009. Management estimates that manufacturing at the Blair facility is currently at approximately 65% of capacity.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - - --------------------------
A civil class-action suit was filed in the Federal District Court of Minnesota, 4th Division, on January 8, 1996 by Michael A. Hunt, on behalf of bag customers, against the Company, UpNorth Plastics, Inc. and Poly America, Inc. (the "Hunt Case"). The civil suit alleges that the Company conspired with UpNorth Plastics, Inc. and Poly America, Inc. to fix bag prices in violation of federal law. The suit does not specify an amount of alleged damages. Michael A. Hunt filed for bankruptcy under Chapter 7 of the federal bankruptcy laws. The Company has filed a motion to dismiss the case. The Company has also made an offer to purchase the claim from the bankruptcy trustee for $25,000.
Due to the filing for bankruptcy by Michael A. Hunt, a civil class-action was filed in the Federal District Court of Minnesota, 4th Division on January 30, 1998 by S & S Forage & Equipment Co. Inc., on behalf of bag customers against the Company, UpNorth Plastics, Inc. and Poly America, Inc. (the "S & S Case"). The S & S Case alleges substantially the same claims as the Hunt Case and also does not specify an amount of alleged damages. The Company has filed a motion to dismiss the S & S Case.
The outcome of the foregoing litigation is not expected to have a material adverse effect on the results of operations, financial condition or liquidity of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - - ------------------------------------------------------------
During the fourth quarter of 1998, 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 8, 1999, 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 its meeting following the annual meeting of stockholders. Officers serve at the discretion of the Board of Directors.
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 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.
As of March 8, 1999, there were approximately 340 holders of record of Common Stock. The Company estimates there are approximately 2,400 beneficial holders of the 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 1998:
Calendar Year High Bid Low Bid - - ------------- -------- -------
1997: - - ----
First quarter $1.375 $.813 Second quarter $.875 $.563 Third quarter $1.00 $.625 Fourth quarter $1.00 $.484
1998: - - ----
First quarter $.688 $.406 Second quarter $.75 $.453 Third quarter $.813 $.406 Fourth quarter $.594 $.375 - - ------------------------
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 last three fiscal years:
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, 1994, 1995, 1996, 1997 and 1998. This selected financial data should be read in conjunction with the audited financial statements of the Company and the related notes thereto included elsewhere in this report on Form 10-K and with "Management's Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - --------------------------------------------------------------------------------
The information set forth below relating to matters that are not historical facts are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934 and involve risks and uncertainties which could cause actual results to differ materially from those set forth below. Such risks and uncertainties include, but are not limited to, the following:
* - The economic health of the U.S. dairy industry including milk and grain feed prices and the ability of the dairy farmers to make capital expenditures * - Adverse weather conditions which affect farmers' crops and reduce demand for the Company's products * - Market acceptance of the Company's composting system and technology * - Consolidations within the farming sector and reduction in the number dairy cows
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:
STRATEGIC REALIGNMENT - - ---------------------
On December 5, 1997, the Company's Board of Directors approved a strategic realignment of the Company.
The realignment involved the sale of the Company's U.K. subsidiary (see discussion below on Discontinued Operations) which had not been performing at a profitable level due to the BSE (Mad Cow) problem within the British farming industry. The U.K. subsidiary sold several of its bagging machines in its rental fleet early in 1997 with the anticipation of improving the ongoing operations through increased concentration on more profitable custom work. This proved unsuccessful due in large part to the poor weather conditions experienced throughout the traditionally busy spring and summer months in England and the continued escalation during the year of the BSE problem within the British farming industry depressing the custom work. The results of Ag-Bag Europe, PLC are shown as discontinued operations for the years ended December 31, 1997, 1996 and 1995. The sale was effective December 31, 1997.
The Board of Directors decided to implement additional realignment of the Company by re-focusing the Company's sales efforts back to its core business products. As a result, certain non-core, long-term inventory was written down to fair market value or abandoned. The non-core products that were discontinued and abandoned as a result of the strategic realignment were both new and used older style tuber, feed table and grain bagging machines along with general accessory machinery products such as mixer wagons, bale feeders, airvents, unloaders and parts. During 1995, 1996 and 1997, sales of inventory which was later determined to be non-core products as a result of the strategic realignment were $719,408, $760,497 and $514,556, respectively. In addition, in 1997, the Company refined its policy for establishing inventory valuation reserves. In 1997, in connection with the strategic realignment and resultant refocusing of the Company's sales efforts and in accordance with the refined policy for valuation reserves, the Company reassessed and revised its estimates of fair market value resulting in an inventory write-down charge totaling $2,418,778, of which $2,088,223 relates to non-core products and $330,555 relates to core products.
In addition to the strategic realignment, certain patent rights were determined during the year to be obsolete, due to recent technological improvements in the Company's and industry's bagging machinery. As a result, certain patent rights were written-off during the year resulting in a charge to earnings. This action resulted in an unusual charge of $979,762 during the fourth quarter of 1997. Beginning in 1996, the Company and its competitors instituted minor machine design changes involving the processes covered by the patent. In the Company's view, these design changes were minor and did not significantly diminish the prospects for sales of machines which incorporate the processes covered by the patent.
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. The cable-less machines do not use the processes covered by the patent, accordingly, in 1997, the Company reevaluated the value of the patent. In its evaluation, the Company determined that the new cable-less machines demonstrated a change in direction for the industry which impaired the future value of the rights covered by the patent. Accordingly, the value of the patent, $979,762 was written off during 1997.
YEARS ENDED DECEMBER 31, 1998 AND 1997 - - --------------------------------------
For the year ended December 31, 1998, net sales increased 36.55% to $27,710,514 compared to $20,292,959 for the year ended December 31, 1997. Sales for the year were up as a result of continued improving milk prices and lower grain feed costs in the U.S. which spurred capital expenditures for machinery and equipment. The Company believes recent university research articles published on the benefits of bagging over the use of bunkers have also helped to increase sales, as farmers are realizing the benefits of bagging their feed instead of storing it in bunkers or silos.
Machine sales for the year were up 67.3% and bag sales were up over 16.9% compared to 1997. Machine sales of the Company are directly tied to farmers' income and therefore their ability to purchase new equipment. In addition, the Company introduced its next generation (hydraulic finger controlled) silage bagger during the first quarter of 1998, representing the latest in bagging technology. 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 seven composting systems during the year ended December 31, 1998, (generating approximately $550,000 in revenue) compared to two systems sold
for the year ended December 31, 1997 (generating approximately $100,000 in revenue). This reflects continued successes in pilot projects and what the Company believes is a growing interest in Ag-Bag's composting system and technology.
The Company sells its product primarily through a worldwide dealer network, however, some sales are made directly to large volume customers because 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 30-33% of total sales and the Company expects this historical sales mix to continue in the future. The gross margin realized on the Company's direct sales are typically within 200-300 basis points 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 1998 were down in comparison to 1997 due to poor economic conditions in the Latin American/Mexico market coupled with slight declines in machine sales into the European market. In 1997, the Company formed a German partnership ("Partnership") in which the Company owns a 50% interest and its German dealer owns the remaining 50%. The partnership distributes bags to the Company's German and European dealers. The Company's equity in earnings of the Partnership are reported as other income. Approximately $1.5 million in bag sales were distributed through the Partnership during 1998, an increase of 25%, compared to approximately $1.2 million in bag sales for 1997.
Gross profit from sales for the year ended December 31, 1998 increased 283.79% to $6,910,073 compared to $1,800,440 for the year ended December 31, 1997. The increase for the year was largely the result of an inventory write-down charge in 1997 which totaled $2,418,778. In addition, increased sales volumes in 1998 helped cover fixed operating overheads which were offset by lower margins as a result of strong competition in certain areas of the U.S. market in both bags and machines. Additionally, the Company incurred higher transportation costs in 1997 caused by the new bag folding facility construction delays.
Selling expenses for the year ended December 31, 1998 increased 13.16% to $3,025,642 compared to $2,673,587 for the year ended December 31, 1997. The increase was the result of increased meeting and travel expenses, coupled with increased commissions from higher sales volumes and increased advertising expenses related to the Company's new image and product advertising campaign.
Administrative expenses for the year ended December 31, 1998 increased 3.47% to $2,444,060 compared to $2,361,940 for the year ended December 31, 1997. The increase for the year was the result of higher personnel costs and general administrative overheads, which were offset by lower amortization expense as a result of the fourth quarter 1997 write-off of certain patent rights.
Research and development expenses for the year ended December 31, 1998 increased 72.26% to $150,058 compared to $87,112 for the year ended December 31, 1997. The increase for the year was the result of the Company continuing to develop and modify its HFC (Cable-less machine) and its smaller compost bagging machine.
Interest expense for the year ended December 31, 1998 decreased 7.85% to $437,803 compared to $475,056 for the year ended December 31, 1997. The decrease for the year was the result of the Company utilizing a smaller portion of its credit facility as a result of increased collection efforts which were offset by the fact that some extended term sales were offered during the year to remain competitive.
During 1997 the Company recorded a loss from discontinued operations of its U.K. subsidiary Ag-Bag Europe, PLC in the amount of $448,832. The loss for the year was the result of lower sales due to the continued BSE (Mad Cow) problem within the British farming industry. Additionally, the U.K.
subsidiary sold several of its bagging machines in its rental fleet early in 1997 with the anticipation of improving the ongoing operations through increased concentration on more profitable custom work. This proved unsuccessful due in large part to the poor weather conditions experienced throughout the traditionally busy spring and summer months in England, which prevented some bagging and custom work from being completed. The U.K. subsidiary also experienced increased warranty costs on the rental machines sold to custom operators in addition to increased maintenance costs on its remaining custom equipment. The U.K. subsidiary also experienced increased bad debt expense due to a customer filing bankruptcy as well as increased legal and professional costs related to the sale of the business. The Company recorded a loss on the disposal of Ag-Bag Europe, PLC of $424,064, net of income tax benefit of $24,500.
Net income for the year ended December 31, 1998 was $804,399 compared to a net loss of $3,815,119 for the year ended December 31, 1997. The increase in net income for the year was the result of an improved U.S. dairy industry coupled with the fact the Company incurred a special one-time charge during 1997 related to a strategic realignment and re-focusing of the Company which included revaluation and abandonment of certain non-core, long term inventory totaling $2,418,778. In addition, in 1997, the Company incurred a loss from operations from its former U.K. subsidiary, Ag-Bag Europe, PLC in the amount of $448,832 and a loss on disposal of the subsidiary in the amount of $424,064. The Company also incurred an unusual charge related to a patent right write-off in 1997 equaling $979,762. Increased sales volumes in 1998 helped cover fixed operating overheads but were offset by lower margins and increased selling and administrative expenses. The increase in net income was also due to decreased interest expense.
YEARS ENDED DECEMBER 31, 1997 AND 1996 - - --------------------------------------
For the year ended December 31, 1997, net sales decreased 11.72% to $20,292,959 compared to $22,985,293 for the year ended December 31, 1996. Machine sales for the year were down as a result of continued low U.S. milk prices which have delayed capital expenditures for many farmers until there is upward movement in milk prices. Machine sales of the Company 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.
The Company sells its product primarily through a worldwide dealer network, however, some sales are made directly to large volume customers because a dealer is not present in the customer's geographic market. For each of the last 2 years, the Company estimates direct sales at between 30-33% of total sales and the Company expects this historical sales mix to continue in the future. The gross margin realized on the Company's direct sales are typically within 200-300 basis points 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 1997 continued to be strong but were down in comparison to 1996 as a result of the formation of a German partnership ("Partnership") during 1997 in which the Company owns a 50% interest and its German dealer owns the remaining 50%. Bag sales which were previously sold by the Company to its German and European dealers are now being sold through the Partnership to the dealers. Consequently, the Company's equity in earnings of the Partnership are reported as other income. Approximately $1.2 million in bag sales were distributed through the Partnership during 1997. The Company sold $750,000 in bags in 1996 to the Company's German and European dealers.
Gross profit from sales for the year ended December 31, 1997 decreased 65.34% to $1,800,440 compared to $5,193,654 for the year ended December 31, 1996. The decrease for the year was primarily the result of the inventory write down in connection with the strategic realignment, coupled with lower sales volumes to cover fixed overheads and lower margins on sales of used equipment and bags in certain highly competitive areas. Additionally, the Company also incurred higher transportation costs to deliver product during the year caused by the new bag folding facility construction delays.
Selling expenses for the year ended December 31, 1997 increased 8.45% to $2,673,587 compared to $2,465,276 for the year ended December 31, 1996. The increase for the year was the result of increased commissions, meeting and travel expenses, environmental division promotions, and increased advertising with the unveiling of the Company's new image and product advertising campaign.
Administrative expenses for the year ended December 31, 1997 increased 3.89% to $2,361,940 compared to $2,273,548 for the year ended December 31, 1996. Administrative expenses increased for the year as a result of increased professional fees and administrative support personnel costs, in addition to increased travel costs related to the sale of the Company's U.K. subsidiary.
Interest expense for the year ended December 31, 1997 increased 26.23% to $475,056 compared to $376,341 for the year ended December 31, 1996. The increase for the year was the result of the Company utilizing a larger portion of its credit facility due to the fact that some extended term sales were offered to remain competitive. The Company has also added a long-term construction and equipment loan to finance its new Blair, Nebraska facilities.
During 1997 the Company recorded a loss from discontinued operations of its U.K. subsidiary Ag-Bag Europe, PLC in the amount of $448,832. The loss for the year was the result of lower sales due to the continued BSE (Mad Cow) problem within the British farming industry. Additionally, the U.K. subsidiary sold several of its bagging machines in its rental fleet early in 1997 with the anticipation of improving the ongoing operations through increased concentration on more profitable custom work. This proved unsuccessful due in large part to the poor weather conditions experienced throughout the traditionally busy spring and summer months in England, which prevented some bagging and custom work from being completed. The U.K. subsidiary also experienced increased warranty costs on the rental machines sold to custom operators in addition to increased maintenance costs on its remaining custom equipment. The U.K. subsidiary also experienced increased bad debt expense due to a customer filing bankruptcy as well as increased legal and professional costs related to the sale of the business. The Company recorded a loss on the disposal of Ag-Bag Europe, PLC of $424,064, net of income tax benefit of $24,500.
Net loss for the year ended December 31, 1997 was $3,815,119 compared to net income of $363,548 for the year ended December 31, 1996. The loss for the year was the result of the one time charges related to the strategic realignment of the Company and loss from the operation and disposal of the Company's U.K. subsidiary, coupled with continued low milk prices in the U.S. delaying many farmer's expenditures for capital equipment. In addition, lower sales volumes to cover fixed overhead, lower margins on used equipment sales and on bags in certain highly competitive areas of the U.S., higher transportation costs coupled with increased selling, administrative, and interest costs contributed to the loss for the year. In addition, net income for the year ended December 31, 1996 included an after-tax gain on the sale of a building in the amount of $182,892.
RECENT ACCOUNTING PRONOUNCEMENTS - - --------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components (revenue, expenses, gains and
losses) in a full set of general purpose financial statements. The company fully implemented SFAS No. 130 during 1998.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure about Segments of an Enterprise and Related Information", which changes the way public companies report information about operating segments. SFAS No. 131 is based on the management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report entity-wide disclosures about products and services, major customers and the material countries in which the entity holds assets and reports revenue. The company fully implemented SFAS No. 131 during 1998 and determined that it has no reportable segments.
YEAR 2000 - - ---------
The Year 2000 issue exists because many computer programs use two digit date fields to define the applicable year rather than four digit date fields. Because of this, computer equipment and software (sometimes referred to as "information technology" or "IT") and devices with embedded technology (sometimes referred to as "non-IT") that are time-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, production delays or breakdowns, a temporary inability to process transactions, send invoices, or engage in other normal business activity. Incomplete or untimely resolution of the Year 2000 issue by the Company or important suppliers or customers of the Company could have a materially adverse effect on the Company's business, financial condition or results of operations.
The Company's approach to the Year 2000 issued is discussed below. In discussing the Year 2000 issue, the Company necessarily makes certain forward looking statements. There can be no assurance that actual results will not differ materially from the projections contained in the forward looking statements. Factors which may cause actual results to differ materially include, but are not limited to:
o failure of Company personnel and outside consultants to properly assess and address the Company's Year 2000 issues, o inaccurate or incomplete responses to questionnaires sent to third parties or inaccurate disclosure by third parties regarding the Year 2000 issue, o failure to address Year 2000 issue with all vendors, including utility vendors, and customers, o infrastructure failures, such as disruptions in the supply of electricity, gas, water or communications services, or major institutions, such as the government and banking systems, and o failure of the Company to accurately predict the costs to address the Year 2000 issue or the lost revenues related to interruption in the Company's or its customers' businesses.
State of Readiness. The Company, in conjunction with outside consultants, has made an assessment of the effect of the Year 2000 issue on its IT and non-IT systems. The Company has identified certain modifications to its IT systems which are necessary to address the Year 2000 issue and has fully implemented those modifications. The Company has determined there are no necessary modifications to its non-IT systems. Based on this assessment and implementation of the modifications discussed above, the Company believes its IT systems and non-IT systems will properly recognize calendar dates beginning in the year 2000.
In addition, the Company has evaluated, through conversations and questionnaires sent to its critical vendors and customers, the IT systems of most of its outside vendors and customers. The Company has
not evaluated its vendors and customers non-IT systems. The Company has received responses from approximately 95% of its vendors and 85% of its customers. The Company has, however, received replies from what the Company considers to be its critical vendors and customers. Based on the responses received to date, the Company does not believe the Year 2000 issue will have a material adverse effect.
Costs to Address Year 2000 Issue. To date, the Company has incurred costs of approximately $40,000 and the Company estimates its total cost to become Year 2000 compliant will be approximately $45,000. Accordingly, the Company expects the costs to address the Year 2000 issue will not have a material adverse financial impact on the Company's financial condition or results of operations. However, there can be no assurance that additional remediation and costs will not be identified, especially since the Company has not received responses from all third parties.
Risks of the Company's Year 2000 Issue. The most reasonably likely worst case scenario for the Company would involve an extended shutdown in production and/or lost revenue caused by interruption in the Company's customers' businesses. The Company is unable to quantify the effect of such a scenario. However, the Company has identified its critical vendors and customers and does not believe that any such vendors or customers represent a significant risk. In addition, the first month of the fiscal year is not a critical production period or period of customer demand and therefore the Company believes it would be able to recover from a temporary interruption without a material adverse effect on the Company's operations.
Company's Contingency Plan. Based on the Company's assessment of the Year 2000 issue, the Company has not developed and does not intend to develop a contingency plan to address the reasonably likely worst case scenario.
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 early 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 increased 6.48% at December 31, 1998 to $2,333,912 compared to $2,191,682 at December 31, 1997. The increase in accounts receivable is the result of the majority of the Company's fourth quarter sales occurring during the last month of the quarter coupled with the fact the Company made some sales on extended terms during the fall that are not yet due.
Inventory increased 7.45% at December 31, 1998 to $5,940,289 compared to $5,528,239 at December 31, 1997. The increase in inventory resulted from increased production during the fourth quarter in order to have inventory available for the pre-season flooring program.
Other current assets decreased at December 31, 1998 to $344,172 compared to $2,013,684 at December 31, 1997. The decrease was the result of the collection of the business sale receivable of the
Company's U.K. subsidiary sold in December of 1997, coupled with collection of a tax receivable and a receivable for the sale of a parcel of land the Company sold in the fall of 1997.
Intangible assets at December 31, 1998 decreased to $54,954 compared to $104,547 at December 31, 1997. The decrease was the result the of the Company's implementation of SOP (Statement of Position) 98-5 requiring unamortized start-up costs to be written-off, coupled with normal amortization expense for the year.
The Company has a domestic operating line of credit with a limit of $5,000,000, secured by accounts receivable and inventory. As of December 31, 1998, $-0- had been drawn under the credit line. Management believes that, along with funds generated from operations and its operating line of credit, it will be able to meet the Company's cash requirements through 1999.
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 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. The removal from quotation on Nasdaq 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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - - --------------------------------------------------------------------
Not applicable.
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 - - ------------------------------------------------------------------------
Reference is made to the Form 8-K filed by the Company on June 12, 1998.
PART III --------
ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND EXECUTIVE COMPENSATION - - ------------------------------------------------------------------------
A definitive proxy statement for the 1999 Annual Meeting of Stockholders of Ag-Bag International Limited to be held on June 7, 1999 will be filed not later than 120 days after the end of the fiscal year with the Securities and Exchange Commission ("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 -------
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - - --------------------------------------------------------------------------
(a) The following documents are filed as part of this report: Page
1. Index to Financial Statements............................... 28
Independent Auditors' Reports...............................
Balance Sheets at December 31, 1998 and 1997................
Statements of Operations and Comprehensive Income for for the years ended December 31, 1998, 1997 and 1996....
Statement of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996........................
Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996........................
Notes to Financial Statements...............................
Independent Auditors' Reports...............................
2. Financial statement schedules required to be filed by Item 8 and paragraph (d) of this Item 14:
Schedule of Valuation and Qualifying Accounts...............
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. The exhibits are listed in the index of exhibits............ 29
(b) No reports on Form 8-K were required to be filed during the last quarter of the period covered by this report.
(c) The index of exhibits and required exhibits...................... 29
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 30, 1999 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 30, 1999 By: /s/ Larry R. Inman --------------------------------------- Larry R. Inman, Chairman, Board of Directors; Chief Executive Officer and President (Principal Executive Officer)
Date: March 30, 1999 By: /s/ Michael R. Wallis --------------------------------------- Michael R. Wallis, Chief Financial Officer and Vice President, Finance (Principal Financial and Accounting Officer)
Date: March 30, 1999 By: /s/ Roy I. Anderson --------------------------------------- Roy I. Anderson, Director
Date: March 30, 1999 By: /s/ Lemuel E. Cunningham --------------------------------------- Lemuel E. Cunningham, Director
Date: March 30, 1999 By: /s/ Michael W. Foster --------------------------------------- Michael W. Foster, Director
Date: March 30, 1999 By: /s/ Michael B. Leahy --------------------------------------- Michael B. Leahy, Director
Date: March 30, 1999 By: /s/ Arthur P. Schuette --------------------------------------- Arthur P. Schuette, Director
Date: By: _______________________________________ Rolf E. Soderstrom, Director
Date: March 30, 1999 By: /s/ Robert N. Thurston --------------------------------------- Robert N. Thurston, Director
Date: March 30, 1999 By: /s/ Stan Vinson --------------------------------------- Stan Vinson, Director
AG-BAG INTERNATIONAL LIMITED
FINANCIAL STATEMENTS
Supplementary Information
Years Ended December 31, 1998 and 1997
Page ----
INDEPENDENT AUDITORS' REPORTS
FINANCIAL STATEMENTS
Balance Sheets
Statements of Operations and Comprehensive Income
Statements of Shareholders' Equity
Statements of Cash Flows
Notes to Financial Statements
SUPPLEMENTARY INFORMATION
Independent Auditors' Reports on Supplementary Information
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 Ag-Bag International Limited as of December 31, 1998, and the related statements of operations and comprehensive income, shareholders' equity, and cash flows for the year then ended. 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. The financial statements of Ag-Bag International Limited as of December 31, 1997 and 1996, were audited by other auditors whose report dated February 25, 1998, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards. 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 1998 financial statements referred to above present fairly, in all material respects, the financial position of Ag-Bag International Limited as of December 31, 1998, and the results of its operations and its cash flows for the year ended December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Yergen & Meyer LLP
Portland, Oregon February 19, 1999
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders Ag-Bag International Limited:
We have audited the accompanying balance sheet of Ag-Bag International Limited as of December 31, 1997, and the related statements of operations, shareholders' equity, and cash flows for the years ended December 31, 1997 and 1996. 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 generally accepted auditing standards. 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 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, 1997, and the results of its operations and its cash flows for the years ended December 31, 1997 and 1996 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Portland, Oregon February 25, 1998
AG-BAG INTERNATIONAL LIMITED BALANCE SHEETS December 31, 1998 and 1997
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
AG-BAG INTERNATIONAL LIMITED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME For the Years Ended December 31, 1998, 1997 and 1996
The accompanying notes are an integral part of these financial statements.
AG-BAG INTERNATIONAL LIMITED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended December 31, 1998, 1997 and 1996
The accompanying notes are an integral part of these financial statements.
AG-BAG INTERNATIONAL LIMITED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1998, 1997 and 1996
The accompanying notes are an integral part of these financial statements.
AG-BAG INTERNATIONAL LIMITED NOTES TO THE 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 also sells products in Europe and Latin America. As discussed in Note 15, in December 1997 the company sold its subsidiary, Ag-Bag Europe PLC.
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 in the OTC Bulletin Board.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the financial statements of Ag-Bag International Limited and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Investments in 20% to 50% owned partnerships are not consolidated and are instead accounted for on the equity method.
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 $185,863, $132,865 and $281,118 in 1998, 1997 and 1996, respectively, from rental equipment to inventory held for sale.
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 letter 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.
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.
AG-BAG INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INTANGIBLE ASSETS - Intangible assets consist primarily of licenses, patents and non-compete agreements. The cost of the licenses, patents and non-compete agreements 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.
STOCK OPTION PLAN - Prior to January 1, 1996, the company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation for 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. On January 1, 1996, the company adopted Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income disclosure for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. The company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (See Note 11)
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.
ADVERTISING COSTS - The company expenses advertising costs as they are incurred. Advertising expenses for the years ended December 31, 1998, 1997, and 1996 were $490,495, $497,617 and $390,831, respectively.
NET INCOME (LOSS) 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 statdards 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. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The company fully implemented SFAS No. 128 during 1997. Prior years' EPS's have been restated to comply with SFAS No. 128.
Basic net income (loss) per share is calculated using the weighted average number of common shares outstanding during each year. The calculation of diluted net income (loss) per share excludes the effect of potentially dilutive common stock equivalents because their impact, when calculated using the Treasury stock method, is antidilutive.
AG-BAG INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
COMPREHENSIVE INCOME - In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general purpose financial statements. The company fully implemented SFAS No. 130 during 1998. Prior years' general purpose financial statements have been restated to comply with SFAS No. 130.
FOREIGN CURRENCY TRANSLATION - The financial statements of the company's former U.K. subsidiary have been translated into U.S. dollars from their functional currency, British pounds sterling, in the accompanying statements. Balance sheet amounts have been translated at the exchange rate on the balance sheet date and statement of operations amounts have been translated at average exchange rates in effect during the period. The net translation adjustment is carried as a component of shareholders' equity. The net amount of realized and unrealized gains and losses on foreign currency transactions are included in other expense (income).
SEGMENT INFORMATION - In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure about Segments of an Enterprise and Related Information", which changes the way public companies report information about operating segments. SFAS No. 131 is based on the management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report entity-wide disclosures about products and services, major customers and the material countries in which the entity holds assets and reports revenue. The company fully implemented SFAS No. 131 during 1998 and determined that it has no reportable segments.
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 1997 and 1996 financial statements to conform with the 1998 presentation.
REVENUE RECOGNITION - Revenue on machine and bag sales is recognized at the time the product is shipped to the customer.
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.
AG-BAG INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS
NOTE 2 - UNUSUAL CHARGE
Because of a change in the direction of the industry to the cable-less machine design, the company determined that the prospects for sales of machines which incorporate the processes covered by a patent have substantially diminished, thereby impairing the value of the patent itself. As a result, the value of the patent, $979,762 was written off during 1997.
NOTE 3 - INVENTORIES
Inventories consist of the following:
In the fourth quarter of 1997, the Board of Directors decided to implement additional realignment of the company by re-focusing the company's sales efforts back to its core business products. As a result, certain non-core, long-term inventory was written down to fair market value or abandoned. The non-core products that were discontinued and abandoned as a result of the strategic realignment were both new and used older style tuber, feed table and grain bagging machines along with general accessory machinery products such as mixer wagons, bale feeders, airvents, unloaders and parts. During 1996 and 1997, sales of inventory which was later determined to be non-core products as a result of the strategic realignment were $760,497 and $514,556, respectively. In addition, in 1997, the company refined its policy for establishing inventory valuation reserves. In 1997, in connection with the strategic realignment and resultant refocusing of the company's sales efforts and in accordance with the refined policy for valuation reserves, the company reassessed and revised its estimates of fair market value resulting in an inventory write-down charge totaling $2,418,778, of which $2,088,223 relates to non-core products and $330,555 relates to core products.
AG-BAG INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS
NOTE 4 - INTANGIBLE ASSETS, NET
Intangible assets, net consist of the following:
The covenant not to compete was fully amortized and no longer in effect at December 31, 1998. This intangible asset, along with the related accumulated amortization, was relieved from the company's accounts. See Note 2 regarding 1997 fourth quarter write-off of patents.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
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, 1998 and 1997, gross amount of equipment under lease was $535,502 and $523,331, respectively. Accumulated depreciation related to those capital leases was $439,285 and $402,608 at December 31, 1998 and 1997.
AG-BAG INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS
NOTE 6 - LINES OF CREDIT
The company has a domestic operating line of credit (LOC) with a bank for up to $5,000,000 at December 31, 1998, and had a $4,000,000 LOC at December 31, 1997. The domestic line of credit is secured by accounts receivable and inventories, and bears interest at the bank's prime rate plus 1/2% (8.25% at December 31, 1998). The 1997 LOC bore interest at the bank's prime rate plus 1 1/2% (10% at December 31, 1997). As of December 31, 1998 and 1997, $-0- and $1,717,263 were outstanding under the operating line of credit. The line of credit is subject to certain covenants. At December 31, 1997, the company was not in compliance with certain covenants due to the unusual charge the company incurred. The company obtained a waiver for these violations.
The company had a line of credit agreement (LOC Agreement) for a maximum of 400,000 English pounds ($685,000 at December 31, 1996), bearing interest at 7.75% at December 31, 1996, and was subject to renewal by the bank in June 1997. The LOC Agreement was secured by all assets of the former Ag-Bag Europe PLC and was subject to certain covenants. This agreement was renewed in June of 1997. With the sale of Ag-Bag Europe PLC in December of 1997, this note payable no longer exists.
AG-BAG INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt is comprised of the following:
AG-BAG INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, CONTINUED
Future maturities of long-term debt and capital lease obligations are summarized as follows:
NOTE 8 - NOTE PAYABLE TO SHAREHOLDER AND RELATED PARTY
The company has a note payable to a shareholder of the company. The note bears interest at 10% and requires monthly principal and interest payments of $1,600 through April 30, 2000. Interest expense related to shareholders and related parties amounted to $3,336, $4,883 and $6,222 in 1998, 1997 and 1996, respectively.
NOTE 9 - INCOME TAXES
The income tax expense (benefit) from continuing operations consists of the following:
AG-BAG INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES, CONTINUED
Deferred tax assets and liabilities consist of the following:
The valuation allowance for deferred tax assets as of January 1, 1997, was $176,550. The total valuation allowance decreased $40,918 for the year ended December 31, 1997.
At December 31, 1998, the company has net operating loss carryforwards for federal income tax purposes of approximately $773,000 which are available to offset future federal income, through 2012.
The provision for income taxes from continuing operations differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pre-tax income as a result of the following differences:
AG-BAG INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS
NOTE 10 - SUPPLEMENTAL DISCLOSURES REGARDING CASH FLOWS
Supplemental disclosure of cash flow information:
NOTE 11 - SHAREHOLDERS' EQUITY
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 WARRANTS - In connection with offerings of common stock and notes payable, the company has issued various warrants for the purchase of the company's common stock. As of December 31, 1998, the following warrants with respective exercise price per share and date of expiration were outstanding and exercisable:
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. Awards under the plan amounted to $-0-, 8,240 and $-0- shares for 1998, 1997 and 1996, respectively, with related compensation expense of $-0-, $8,497 and $-0-, respectively.
COMMON STOCK OPTIONS - The company has an Incentive Stock Option Plan (the incentive plan) and has reserved 185,000 shares of common stock for issuance under the incentive plan. Options under the incentive plan are issuable to officers and employees of the company and all option grants will be at the market value of the stock at the date of grant. Vesting of stock options is determined for each grant by the Board of Directors.
During 1997 and 1996, under the aforementioned incentive plan, the company granted 20,000 and 50,000 options with an exercise price of $.6875 and $1.06, respectively. The options were 100% vested at grant date. None of the options were exercised during 1998.
Also in 1997, the company granted 16,788 options under a non-transferable option agreement with an exercise price of $1.03. 10,000 options become 100% vested after two years and 6,788 options were 100% vested at the grant date. None of the options were exercised during the current year.
AG-BAG INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS
NOTE 11 - SHAREHOLDERS' EQUITY, CONTINUED
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. In total, 50,000 options were granted in 1998 with an exercise price of $.563 and 300,000 options were granted in 1996 with an exercise price of $1.06.
The company has computed, for pro forma disclosure purposes, the value of all options granted during 1998, 1997, and 1996, using the Black-Scholes pricing model as prescribed under SFAS 123. The following assumptions were made for grants made in 1998, 1997 and 1996: risk-free interest rate of 5.5%, 6.1% and 6.1%, respectively, expected life of three years, dividend rate of zero percent. For 1996, the expected volatility over the expected life of the grant was assumed to be 70%. In 1997, the volatility was assumed to be 62% and in 1998 was 56%.
If the company had accounted for the value of the options granted during 1998, 1997 and 1996, in accordance with SFAS No. 123, the company's net income would have been reduced to the pro forma amounts indicated below:
The resulting pro forma compensation costs may not be representative of that expected in future years.
Pro forma net income (loss) reflects only options granted in 1998, 1997, and 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income (loss) amounts presented above because compensation cost is reflected over the options' vesting periods.
AG-BAG INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS
NOTE 11 - SHAREHOLDERS' EQUITY, CONTINUED
Transactions and other information relating to the company's stock option plans for the three years ended December 31, 1998, are summarized as follows:
At December 31, 1998, the company had outstanding options of 436,788 with a weighted average life expectancy of seven years and an exercise price range of $.56 - 1.06. Of the 436,788 options outstanding, 316,788 were exercisable at December 31, 1998, at a weighted average exercise price of $.98.
The weighted-average fair value of options granted during 1998, 1997 and 1996, were $.41, $.46 and, $.53, respectively.
NOTE 12 - OTHER INCOME
In 1998, other income includes income from the company's German Venture. (See Note 16) In 1997, other income includes a loss on the sale of land of approximately $37,220. In 1996, other income includes a gain on the sale of a building of approximately $310,000.
AG-BAG INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS
NOTE 13 - FOREIGN SALES ACTIVITY
Export sales from the company's United States operations are as follows:
NOTE 14 - OTHER CURRENT ASSETS
Other current assets consist of the following:
NOTE 15 - DISCONTINUED OPERATIONS
In December 1997, the Board of Directors approved the sale of Ag-Bag Europe PLC. The operation was sold by the end of December 1997 for $647,800 in cash. The loss on the sale of $424,064, net of tax benefit, represents the operation's activities through December 1997, and the net loss on disposal of the operation at the end of December 1997.
Summarized data for Ag-Bag Europe PLC are as follows:
No assets or liabilities remained at December 31, 1997. Intangible assets having a net value of $6,212 were sold with the sale of Ag-Bag Europe PLC. In addition, the company wrote off goodwill of $668,612 and related accumulated amortization which related to Ag-Bag Europe PLC.
AG-BAG INTERNATIONAL LIMITED NOTES TO THE FINANCIAL STATEMENTS
NOTE 16 - GERMAN VENTURE
On February 27, 1997, the company entered into a General Partnership Agreement with Budissa Agroservice Gesellschaft and formed the Partnership BAW (Budissa Agrodienstleistungen und Warenhandels). The company has a 50% interest in the Partnership. The Partnership folds and distributes silage bags throughout Europe. The net income (loss) of the Partnership for the years ended December 31, 1998 and 1997 was insignificant.
On February 27, 1997, the Partnership BAW also entered into a lease agreement with Ag-Bag International Limited for the use of a folding machine. Royalties are paid based upon the poundage folded by BAW. In 1998, income from this agreement was $92,000. In 1997, revenue to the company was insignificant.
NOTE 17 - COMMITMENTS
The company has entered into an agreement with an investment banking firm. The firm will represent Ag-Bag International Limited in exploring strategic financial alternatives. Fees are contingent upon completion of a transaction. The ultimate fee will range from 3% to 6% of the transaction value depending upon the nature of the transaction. The company has already prepaid $80,000 towards this fee.
The company purchases its Tri-Dura-REGISTERED TRADEMARK- 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-REGISTERED TRADEMARK- bags. The supply agreement provides that the company is obligated to purchase all of its plastic rolls, with certain exceptions, from supplier through at least January 1, 2004. 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 as good. The company believes there are adequate alternative suppliers available in the event supplier is unable to provide rolls.
NOTE 18 - NON CASH INVESTING AND FINANCING ACTIVITIES
During 1998, the company issued a new note payable in the amount of $350,000, the proceeds of which were used to pay-off existing long-term debt.
NOTE 19 - 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 reputable banks and periodically exceed insured limits.
NOTE 20 - YEAR 2000 COMPLIANCE
Recognizing the need to ensure its operations will not be adversely impacted by Year 2000 failures, the company has developed a proactive plan for minimizing its risk and ensuring its computer hardware, software, vendors and business partners are Year 2000 compliant. The company has completed its assessment of the effect of the Year 2000 issues and implemented the modifications which were identified. The company is also working with its vendors and customers to identify any Year 2000 problems which might arise. The company believes that any remaining compliance issues will be resolved in the near term and that any related costs will not have a material impact on the operations, cash flows or financial condition of the company.
- - --------------------------------------------------------------------------------
SUPPLEMENTARY INFORMATION
- - --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION
To the Board of Directors and Shareholders Ag-Bag International Limited
Under date of February 19, 1999, we reported on the balance sheet of Ag-Bag International Limited as of December 31, 1998, and the related statements of operations, shareholders' equity, and cash flows for the year ended December 31, 1998, as contained in the annual report on Form 10-K for the year 1998. In connection with our audit of the aforementioned financial statements, we also audited the related schedule of Valuation and Qualifying Accounts. This schedule is the responsibility of the company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audit.
In our opinion, the schedule of Valuation and Qualifying Accounts, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
The basic financial statements of Ag-Bag International Limited for the years ended December 31, 1997 and 1996, were audited by other auditors whose report dated February 25, 1998, expressed an unqualified opinion on those financial statements. Their report, as of the same date, on the related financial statement schedule as listed in the table of contents, stated that, in their opinion, such information was fairly stated in all material respects in relation to the basic financial statements for the years ended December 31, 1997 and 1996, taken as a whole.
/s/ Yergen & Meyer LLP
Portland, Oregon February 19, 1999
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders Ag-Bag International Limited:
Under date of February 25, 1998, we reported on the balance sheet of Ag-Bag International Limited as of December 31, 1997, and the related statements of operations, shareholders' equity, and cash flows for the years ended December 31, 1997 and 1996, as contained in the annual report on Form 10-K for the year 1998. In connection with our audits of the aforementioned financial statements, we also audited the related schedule of valuation and qualifying accounts for the years ended December 31, 1997 and 1996. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits.
In our opinion, the schedule of valuation and qualifying accounts for the years ended December 31, 1997 and 1996, when considered in relation to the basic financial statements for the years ended December 31, 1997 and 1996 taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Portland, Oregon February 25, 1998
AG-BAG INTERNATIONAL LIMITED VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1998, 1997 and 1996
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)*
10.3 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 Nonemployee Director Stock Option Plan(3)*
11 Statement re computation of earnings per share
12 Statement re computation of ratios
21 Subsidiaries of the Registrant
27 Financial Data Schedule for fiscal year 1998
* Management contract or compensatory plan (1) Filed as exhibit to the Form S-1 Registration No.33-46115 (2) Filed as exhibit to the Form 10-K for the fiscal year ended December 31, 1994 (3) Filed as exhibit to the Form 10-K for the fiscal year ended December 31, 1996