UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended: September 30, 1998
Commission file Number: 0-18259
AG-BAG INTERNATIONAL LIMITED
(Exact name of registrant as specified in its charter)
Delaware 93-1143627
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2320 SE Ag-Bag Lane, Warrenton OR 97146
(Address of principal executive offices) (Zip Code)
(503)861-1644
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.01 par value per share - 12,061,991 shares outstanding as of
November 1, 1998
1
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AG-BAG INTERNATIONAL LIMITED
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30 December 31
(Unaudited)
1998 1997 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 656 $ 656 $ 656
Accounts receivable 5,961,768 6,952,358 2,191,682
Inventories 5,900,008 6,861,528 5,528,239
Other current assets 433,183 480,632 2,168,123
---------- ----------- ----------
Total current assets 12,295,615 14,295,174 9,888,700
Deferred income tax 638,666 2,000 638,666
Intangible assets, less
accumulated amortization 86,536 1,551,841 104,547
Property, plant and equipment
less accumulated depreciation 4,017,744 4,976,869 4,378,444
Long-term inventories - 1,269,334 -
Other assets 363,383 213,558 179,973
---------- ---------- ----------
Total assets $17,401,944 $22,308,776 $15,190,330
========== ========== ==========
(Continued)
2
<PAGE>
AG-BAG INTERNATIONAL LIMITED
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
September 30 December 31
(Unaudited)
1998 1997 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current liabilities:
Notes payable to bank $1,290,035 $ 3,501,274 $ 1,717,263
Current portion of long term
debt and capital lease
obligations $ 365,394 525,803 444,985
Current portion of notes
payable to shareholders' 15,876 14,344 15,876
Accounts payable 1,453,722 1,861,533 949,373
Accrued expenses and other
current liabilities 1,560,358 1,005,755 1,040,471
Income tax payable 860,379 217,816 39,636
---------- ---------- ----------
Total current liabilities 5,545,764 7,126,525 4,207,604
Long term debt and capital
lease obligation, less
current portion 2,289,005 2,691,211 2,666,552
Notes payable to shareholders'
less current portion 12,329 29,113 23,884
---------- ---------- ----------
Total liabilities 7,847,098 9,846,849 6,898,040
---------- ---------- ----------
Commitments
Shareholders' equity:
Preferred stock, $4LV 8 1/2%
nonvoting 696,000 696,000 696,000
Common stock, $.01 par value 120,619 120,619 120,619
Additional paid-in capital 9,210,211 9,210,211 9,210,211
Retained earnings(deficit) (471,984) 2,487,490 (1,734,540)
Accumulated other comprehensive
income:
Foreign currency translation
adjustment - (52,393) -
---------- ---------- ---------
Total shareholders' equity 9,554,846 12,461,927 8,292,290
---------- ---------- ----------
Total liabilities and
shareholders' equity $17,401,944 $22,308,776 $15,190,330
========== ========== ==========
</TABLE>
See Notes to Condensed Financial Information
3
<PAGE>
AG-BAG INTERNATIONAL LIMITED
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Other
Preferred Stock Common Stock Paid-In Retained Comprehensive
Shares Amount Shares Amount Capital Earnings Income Total
------ ------ ------ ------ ------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1997 174,000 $696,000 12,061,991 $120,619 $9,210,211 $(1,734,540) $ - $8,292,290
Preferred stock dividends (14,790) (14,790)
Net income 25,003
25,003
Other comprehensive income,
Net of tax - -
------- ------- ---------- ------- --------- --------- ---------- ----------
Balance March 31, 1998 174,000 696,000 12,061,991 120,619 9,210,211 (1,724,327) - 8,302,503
Preferred stock dividends (14,790) (14,790)
Net income 766,304
766,304
Other comprehensive income,
Net of tax - -
------- ------- ---------- ------- --------- --------- ---------- ----------
Balance June 30, 1998 174,000 696,000 12,061,991 120,619 9,210,211 (972,813) - 9,054,017
Preferred stock dividends (14,790) (14,790)
Net income 515,619 515,619
Other comprehensive income,
Net of tax - -
------- ------- ---------- ------- --------- --------- ---------- ----------
Balance September 30, 1998 174,000 $696,000 12,061,991 $120,619 $9,210,211 $ (471,984) $ - $9,554,846
======= ======= ========== ======= ========= ========== ========== =========
</TABLE>
See Notes to Condensed Financial Information
4
<PAGE>
AG-BAG INTERNATIONAL LIMITED
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months
Ended September 30
(Unaudited)
----------------------
1998 1997
---- ----
<S> <C> <C>
Net sales $ 9,678,591 $ 7,173,158
Cost of sales 7,148,347 5,309,887
--------- ---------
Gross profit from operations 2,530,244 1,863,271
Selling expenses 888,644 695,900
Administrative expenses 681,267 660,995
Research and development expenses 64,175 9,971
--------- ---------
Income from operations 896,158 496,405
Other income (expense):
Interest income 12,232 221
Interest expense (117,070) (160,371)
Miscellaneous 68,299 102,427
--------- ---------
Income from continuing
operations before provision for
income taxes 859,619 438,682
Provision for income taxes 344,000 (102,000)
--------- ---------
Income from continuing
operations 515,619 336,682
Discontinued operations
Loss from operations of discontinued
Ag-Bag Europe PLC - (138,444)
--------- ---------
Net income $ 515,619 $ 198,238
Other comprehensive income, net of tax:
Foreign currency translation adjustments - (46,511)
--------- ---------
Other comprehensive income - (46,511)
--------- ---------
Total comprehensive income 515,619 151,727
========= =========
Basic and diluted net income
per common share
Continuing operations $ .04 $ .03
Discontinued operations $ .00 $ (.01)
--------- ---------
$ .04 $ .02
========= =========
Basic and diluted weighted average
number of common shares outstanding 12,061,991 12,060,052
========== ==========
</TABLE>
See Notes to Condensed Financial Information
5
<PAGE>
AG-BAG INTERNATIONAL LIMITED
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months
Ended September 30
(Unaudited)
----------------------
1998 1997
---- ----
<S> <C> <C>
Net sales $24,172,073 $18,028,046
Cost of sales 17,814,256 13,529,966
---------- ----------
Gross profit from operations 6,357,817 4,498,080
Selling expenses 2,338,666 1,920,682
Administrative expenses 1,721,057 1,749,306
Research and development expenses 111,110 46,628
---------- ----------
Income from operations 2,186,984 781,464
Other income (expense):
Interest income 59,101 9,152
Interest expense (350,989) (347,593)
Miscellaneous 238,030 264,457
---------- ----------
Income from continuing
operations before provision for
income taxes 2,133,126 707,480
Provision for income taxes 826,200 (179,680)
---------- ----------
Income from continuing
operations 1,306,926 527,800
Discontinued operations
Loss from operations of discontinued
Ag-Bag Europe PLC - (135,680)
---------- ----------
Net income $ 1,306,926 $ 392,120
Other comprehensive income, net of tax:
Foreign currency translation adjustments - (80,718)
---------- ----------
Other comprehensive income - (80,718)
---------- ----------
Total comprehensive income $ 1,306,926 $ 311,402
========== ==========
Basic and diluted net income
per common share
Continuing operations $ .10 $ .04
Discontinued operations $ .00 $ (.01)
---------- ----------
$ .10 $ .03
========== ==========
Basic and diluted weighted average
number of common shares outstanding 12,061,991 12,061,505
========== ==========
</TABLE>
See Notes to Condensed Financial Information
6
<PAGE>
AG-BAG INTERNATIONAL LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Ended September 30
(Unaudited)
--------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,306,926 $ 392,120
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 430,382 809,617
Inventory obsolescence reserves 75,000 240,000
Loss on disposition of fixed assets 769 1,443
Issuance of stock under employee plan 8,497
Changes in assets and liabilities:
Accounts receivable (3,770,086) (3,989,758)
Inventories (252,024) (1,733,869)
Other current assets 1,734,940 65,935
Accounts payable 504,349 1,162,342
Accrued expenses and other current
liabilities 519,887 (10,385)
Income tax payable 820,743 217,816
Other assets (183,410) (9,904)
----------- -----------
Net cash provided(used) in operating
activities 1,187,476 (2,846,146)
----------- -----------
Cash flows from investing activities:
Capital expenditures (257,185) (789,117)
Proceeds from disposition of fixed assets 10,000 -
----------- -----------
Net cash used in investing activities (247,185) (789,117)
----------- -----------
Cash flows from financing activities:
Net borrowings(payments) on
line of credit (427,228) 3,122,068
Principal payments on debt (486,655) (243,829)
Proceeds from issuance of debt 29,517 892,731
Payment of shareholders' notes (11,555) (10,619)
Payment of preferred dividends (44,370) (44,370)
----------- -----------
Net cash provided(used) in financing
activities (940,291) 3,715,981
----------- -----------
Effect of foreign currency translation - (80,718)
----------- -----------
Net decrease in cash - 0 - - 0 -
Cash and cash equivalents at beginning
of period 656 656
----------- -----------
Cash and cash equivalents at end of period $ 656 $ 656
=========== ===========
</TABLE>
See Notes to Condensed Financial Information
7
<PAGE>
AG-BAG INTERNATIONAL LIMITED
Notes to Condensed Financial Information
(Unaudited)
Note 1 - Description of Business and Summary of Significant Accounting Policies
- -------------------------------------------------------------------------------
The Company's financial statements reflects all adjustments which, in the
opinion of management, are necessary for a fair statement of the results of
operations for the periods presented. Due to the seasonal nature of the
business, the operating results of the Company's quarterly financial information
should not be taken as indicative of the results of its operations for a full
year. The financial statements presented for the nine-month period should be
read in conjunction with the financial statements and notes thereto for the year
ended December 31, 1997 included in the Company's annual report on Form 10-K
filed with the Securities and Exchange Commission on March 31, 1998.
Reclassifications
- -----------------
Certain reclassifications have been made to the financial statements for the
periods presented from amounts previously reported to conform with
classifications currently adopted. Such reclassifications had no effect on
previously reported shareholders' equity or results of operations.
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 has adopted SFAS No. 130 for
its current fiscal year, and has restated 1997 amounts (net of tax) to comply
with SFAS No. 130 on a comparative basis.
In June 1997, the FASB issued 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, which 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 has
adopted SFAS No. 131 for its current fiscal year. The Company has analyzed its
operations and determined that it has no reportable segments.
8
<PAGE>
ITEM 2. 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.
Reference is made to Item 7 of "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in the Company's annual
report on Form 10-K for the year ended December 31, 1997, on file with the
Securities and Exchange Commission. The following discussion and analysis
pertains to the Company's results of operations for the three-month period ended
September 30, 1998, compared to the results of operations for the three-month
period ended September 30, 1997, and to the results of operations for the
nine-month period ended September 30, 1998, compared to the results of
operations for the nine-month period ended September 30, 1997, and to changes in
the Company's financial condition from December 31, 1997 to September 30, 1998.
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 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
quarter and nine-month period ended September 30, 1997.
9
<PAGE>
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.
10
<PAGE>
The core business of the Company is historically seasonal due to the
harvest seasons in the northern hemisphere. Approximately 95% of the Company's
business is concentrated in the Northern Hemisphere resulting in between 60 to
75% of the Company's revenue occurring during the spring and summer (2nd and 3rd
Quarters). The following table outlines the percentage of revenue over the past
3 years by quarter:
-----------------------------------------------------------------
Quarter 1995 1996 1997*
-----------------------------------------------------------------
1st 26% 17% 14%
---------------- --------------- ---------------- ---------------
2nd 33% 30% 40%
---------------- --------------- ---------------- ---------------
3rd 30% 36% 35%
---------------- --------------- ---------------- ---------------
4th 11% 17% 11%
---------------- --------------- ---------------- ---------------
* In addition to seasonal factors, revenues which normally would have occurred
in the first quarter of 1997 were not earned until the second quarter due to the
delay in the start up of the Company's new production facility in Blair,
Nebraska.
Sales for the quarter ended September 30, 1998 increased 34.93% to
$9,678,591 compared to $7,173,158 for the quarter ended September 30, 1997.
Sales for the nine-month period ended September 30, 1998 increased 34.08% to
$24,172,073 compared to $18,028,046 for the nine-month period ended September
30, 1997. Sales for the quarter were up as a result of continued improving milk
prices and lower grain feed costs in the U.S. which has spurred capital
expenditures for machinery and equipment. Recent university research articles
published on the benefits of bagging over the use of bunkers has 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 third quarter were up over 68% and bag sales were up
over 28% compared to the third quarter of 1997. 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. Additionally, Ag-Bag Environmental sold another composting system
during the third quarter of 1998(generating $100,000 in revenue) where as none
were sold in the third quarter of 1997. This reflects what the company believes
is a growing interest in Ag-Bag's composting system and technology coupled with
continued successes in pilot projects.
11
<PAGE>
Sales for the nine-month period were up as a result of the above mentioned
factors coupled with the Company's introduction of its next generation
(hydraulic finger controlled) silage bagger during the first quarter of 1998.
Machine sales for the nine-month period were up over 43% compared to the same
period in 1997 and bag sales were up over 25% compared to the same period in
1997. Additionally, sales of composting systems for the nine-month period were
over $550,000 compared to $10,000 for the same period in 1997.
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 to
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.
Gross profit from sales for the quarter ended September 30, 1998 increased
35.80% to $2,530,244 compared to $1,863,271 for the quarter ended September 30,
1997. Gross profit from sales for the nine-month period ended September 30, 1998
increased 41.35% to $6,357,817 compared to $4,498,080 for the nine-month period
ended September 30, 1997. The increases for the quarter and nine-month periods
were the result of increased sales volumes to cover fixed operating overheads
which were offset by lower margins as a result of intense competition in certain
areas of the U.S. market.
Selling expenses for the quarter ended September 30, 1998 increased 27.70%
to $888,644 compared to $695,900 for the quarter ended September 30, 1997.
Selling expenses for the nine-month period ended September 30, 1998 increased
21.76% to $2,338,666 compared to $1,920,682 for the nine-month period ended
September 30, 1997. The increases for the quarter and nine-month periods were
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 quarter ended September 30, 1998 increased
3.07% to $681,267 compared to $660,995 for the period ended September 30, 1997.
Administrative expenses for the nine-month period ended September 30, 1998
decreased 1.61% to $1,721,057
12
<PAGE>
in comparison to $1,749,306 for the nine-month period ended September 30, 1997.
The increase for the quarter 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. The decrease for the nine-month period was the result of the above
mentioned factors coupled with lower professional fees.
Interest expense for the quarter ended September 30, 1998 decreased 27.00%
to $117,070 in comparison to $160,371 for the period ended September 30, 1997.
Interest expense for the nine-month period ended September 30, 1998 increased
.94% to $350,989 compared to $347,593 for the nine-month period ended September
30, 1997. The decrease for the quarter was the result of reduced usage of the
Company's line of credit which was offset by additional interest expense from
the new long-term construction and equipment loans taken out in July, 1997 to
finance the Company's new Blair, Nebraska facilities. The slight increase for
the nine-month period was the result of the Company utilizing a larger portion
of its credit facilities during the first quarter of the year as a result of
extended term sales offered during the fourth quarter of 1997. Additionally, the
Company added a long-term construction and equipment loan in July, 1997 to
finance its new Blair, Nebraska facilities.
Net income for the quarter ended September 30, 1998 increased 260.10% to
$515,619 compared to $198,238 for the period ended September 30, 1997. Net
income for the nine-month period ended September 30, 1998 increased 330.30% to
$1,306,926 compared to $392,120 for the nine-month period ended September 30,
1997. The increase for the quarter was the result of increased sales coupled
with lower interest costs, which were offset by tighter margins and higher
selling and administrative costs. The increase for the nine-month period was the
result of the increased sales which were offset by tighter margins and higher
selling costs. The Company recorded a loss from discontinued operations of its
U.K. subsidiary, Ag-Bag Europe, PLC, in the amount of $138,444 during the third
quarter of 1997 and $135,680 for the nine-month period ended September 30, 1997.
The Company sold Ag-Bag Europe, PLC in December 1997.
13
<PAGE>
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 available to meet its
sales demands through the spring and summer months.
The Company relies on its suppliers to provide trade credit to enable the
Company to build its inventory. The Company's suppliers have provided sufficient
trade credit to meet the demand to date and management believes this will
continue. No assurance can be given that suppliers will continue to provide
sufficient trade credit in the future.
Accounts receivable decreased 14.25% as of September 30, 1998 to $5,961,768
from the September 30, 1997 level of $6,952,358. The decrease in accounts
receivable was the result of increased collection efforts coupled with tighter
credit terms.
Inventory at September 30, 1998 was $5,900,008, which was 27.44% lower than
inventory at September 30, 1997 of $8,130,862. The decrease in inventory
resulted from increased sales volumes. In addition, certain noncore, long-term
inventory was written down to fair market value in accordance with the Company's
refined policy for valuation reserves or abandoned as part of the strategic
realignment of the Company in December of 1997.
Intangible assets at September 30, 1998 decreased to $86,536 compared to
$1,551,841 at September 30, 1997. The decrease was the result of the sale of the
Company's U.K. subsidiary and the goodwill and intangibles associated with that
investment equaling $431,420, coupled with certain patent rights that were
written off at December 31, 1997 equaling $979,762 and related accumulated
amortization.
The Company entered into a new long-term $5,000,000 operating line of
credit on April 20, 1998. The new line of credit, which is with a new lender,
replaced the old line of credit and is secured by accounts receivable, inventory
and other assets of the Company. As of September 30, 1998, the outstanding
balance under the line
14
<PAGE>
of credit was $1,290,035. Management believes that, along with funds generated
from operations and its credit facility, it will be able to meet the Company's
cash requirements through 1998.
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 February 27, 1998 that its Common
Stock will be removed from quotation on the Nasdaq inter-dealer quotation system
on May 28, 1998 if the Company continues to not qualify under the new Nasdaq
listing requirements. On May 29, 1998 the Company was formally notified that its
stock would be delisted within 5 days unless it submitted a formal plan and
written request for exemption from the new listing requirements. On June 4, 1998
the Company submitted information to Nasdaq requesting an exemption from this $1
per share minimum bid price requirement. On July 13, 1998 the Company received
notification that its request for exemption had been denied. The Company
appealed this decision and was notified on October 27, 1998 that it had been
granted a temporary exemption to the minimum bid price requirement until January
8, 1999, at which time if the Company is not in compliance with the minimum bid
price requirement, its Common Stock will be delisted.
In the event the Company's Common Stock is removed from quotation on the
Nasdaq, the Company anticipates the Common Stock would be traded in the
over-the-counter market (bulletin board system). 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.
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.
15
<PAGE>
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
80% of its vendors and 45% of its customers and expects that the remaining
responses will be received by December 31, 1998. 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.
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Costs to Address Year 2000 Issue. To date, the Company has incurred costs of
approximately $30,000 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 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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 27, Financial Data Schedule (Edgar Only) (Filed as exhibit to
Form 10-Q for the quarter ended September 30, 1998.)
(b) No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this amended report to be signed on its
behalf by the undersigned thereunto duly authorized.
AG-BAG INTERNATIONAL LIMITED,
a Delaware corporation
(Registrant)
Date: February 16, 1998 By: /s/ Michael R. Wallis
-------------------------------------
Michael R. Wallis
Chief Financial Officer and
Vice President, Finance
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