UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: March 31, 1999
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
April 15, 1999
1
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AG-BAG INTERNATIONAL LIMITED
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31 December 31
(Unaudited)
1999 1998 1998
---------- ---------- -----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 656 $ 656 $ 361,614
Accounts receivable 4,069,423 4,357,279 2,333,912
Inventories 7,105,327 6,043,490 5,940,289
Other current assets 945,633 1,346,755 754,692
---------- ----------- ----------
Total current assets 12,121,039 11,748,180 9,390,507
Deferred income tax 41,000 638,666 41,000
Intangible assets, less
accumulated amortization 50,089 98,715 54,954
Property, plant and
equipment less accumulated
depreciation 4,144,635 4,327,638 3,934,382
Other assets 358,147 119,839 399,425
---------- ----------- ----------
Total assets $16,714,910 $16,933,038 $13,820,268
========== ========== ==========
</TABLE>
(Continued)
2
<PAGE>
AG-BAG INTERNATIONAL LIMITED
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31 December 31
(Unaudited)
1999 1998 1998
---------- ---------- -----------
<S> <C> <C> <C>
Current liabilities:
Notes payable to bank $ 2,237,370 $ 2,880,521 $ -
Current portion of long term
debt and capital lease
obligations 346,712 428,531 365,688
Current portion of notes
payable to shareholders' 15,876 15,876 15,876
Accounts payable 1,910,384 1,666,753 831,922
Accrued expenses and other
current liabilities 1,207,498 1,013,245 1,320,010
Income tax payable 39,636 39,636 39,636
---------- ---------- ----------
Total current liabilities 5,757,476 6,044,562 2,573,132
Long term debt and capital
lease obligation, less
current portion 2,110,786 2,565,709 2,201,388
Notes payable to shareholders'
less current portion 3,992 20,264 8,219
---------- ---------- ----------
Total liabilities 7,872,254 8,630,535 4,782,739
---------- ---------- ----------
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) (1,184,174) (1,724,327) (989,301)
---------- ---------- ----------
Total shareholders' equity 8,842,656 8,302,503 9,037,529
---------- ---------- ----------
Total liabilities and
shareholders' equity $16,714,910 $16,933,038 $13,820,268
========== ========== ==========
</TABLE>
See Notes to Condensed Financial Information
3
<PAGE>
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, 1998 174,000 $696,000 12,061,991 $120,619 $9,210,211 $ ( 989,301) $ - $9,037,529
Preferred stock dividends (14,790) (14,790)
Net loss ( 180,083) ( 180,083)
Other comprehensive income,
Net of tax - -
------- ------- ---------- ------- --------- ---------- ---------- ---------
Balance March 31, 1999 174,000 $696,000 12,061,991 $120,619 $9,210,211 $(1,184,174) $ - $8,842,656
======= ======= ========== ======= ========= ========== ========== ==========
</TABLE>
See Notes to Condensed Financial Information
4
<PAGE>
AG-BAG INTERNATIONAL LIMITED
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months
Ended March 31
(Unaudited)
----------------------
1999 1998
---- ----
<S> <C> <C>
Net sales $ 4,745,592 $ 4,770,296
Cost of sales 3,700,988 3,599,672
--------- ---------
Gross profit from operations 1,044,604 1,170,624
Selling expenses 753,572 657,716
Administrative expenses 588,216 417,902
Research and development expenses 23,487 26,993
--------- ---------
Income(loss) from operations (320,671) 68,013
Other income (expense):
Interest income 22,462
Interest expense ( 53,653) ( 99,245)
Miscellaneous 67,241 45,773
--------- ---------
Income(loss) before provision for
income taxes (307,083) 37,003
(Provision) benefit for income taxes 127,000 (12,000)
--------- ---------
Net income (loss) $ (180,083) $ 25,003
Other comprehensive income, net of tax: - -
--------- ---------
Total comprehensive income (loss) $ (180,083) $ 25,003
========= =========
Basic and diluted net income(loss)
per common share $ (.01) $ .00
========= =========
Basic and diluted weighted average
number of common shares outstanding 12,061,991 12,061,991
========== ==========
</TABLE>
See Notes to Condensed Financial Information
5
<PAGE>
AG-BAG INTERNATIONAL LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31
(Unaudited)
---------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income(loss) $ (180,083) $ 25,003
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 136,563 131,675
(Gain)loss on disposition of fixed assets 723 10,768
Changes in assets and liabilities:
Accounts receivable (1,735,511) (2,165,597)
Inventories (1,320,038) (515,251)
Other current assets (190,941) 821,368
Accounts payable 1,078,462 717,384
Accrued expenses and other current
liabilities (112,512) (27,226)
Other assets 41,278 60,134
---------- ----------
Net cash used in operating activities (2,282,059) (941,742)
---------- ----------
Cash flows from investing activities:
Capital expenditures (192,674) (168,812)
Proceeds from disposition of fixed assets 5,000 83,004
---------- ----------
Net cash used in investing activities (187,674) (85,808)
---------- ----------
Cash flows from financing activities:
Net Proceeds from line of credit 2,237,370 1,163,258
Principal payments on debt (109,578) (117,298)
Payment of shareholders' notes (4,227) (3,620)
Payment of preferred dividends (14,790) (14,790)
---------- ----------
Net cash provided by financing activities 2,108,775 1,027,550
---------- ----------
Net decrease in cash (360,958) - 0 -
Cash and cash equivalents at beginning
of period 361,614 656
---------- ----------
Cash and cash equivalents at end of period $ 656 $ 656
========== ==========
</TABLE>
See Notes to Condensed Financial Information
6
<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 reflect 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 three-month period should be
read in conjunction with the financial statements and notes thereto for the year
ended December 31, 1998 included in the Company's annual report on Form 10-K
filed with the Securities and Exchange Commission on March 31, 1999.
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.
7
<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. Such risks
and uncertainties include, but are not limited to, the
following:
o 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
o Adverse weather conditions which affect farmers' crops and reduce
demand for the Company's products
o Market acceptance of the Company's composting system and technology
o Consolidations within the farming sector and reduction in the number
of dairy cows
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, 1998, 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
March 31, 1999, compared to the results of operations for the three-month period
ended March 31, 1998, and to changes in the Company's financial condition from
December 31, 1998 to March 31, 1999.
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.
8
<PAGE>
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:
<TABLE>
<CAPTION>
Quarter 1996 1997* 1998
------- ---- ---- ----
<S> <C> <C> <C>
1st 17% 14% 17%
2nd 30% 40% 35%
3rd 36% 35% 35%
4th 17% 11% 13%
* 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.
</TABLE>
Sales for the quarter ended March 31, 1999 decreased .52% to $4,745,592
compared to $4,770,296 for the quarter ended March 31, 1998. Bag Sales for the
first quarter of 1999 were up over 25% compared to the first quarter of 1998.
Machine sales for the first quarter of 1999 decreased 20% compared to the first
quarter of 1998. Overall sales for the quarter were flat and machine sales for
the quarter were down as a result of the recent sharp decline in milk prices
within the U.S. dairy industry, which caused farmers to be cautious on their
capital expenditures for machinery and equipment. The recent decline in the BFP
(Basic Formula Price) for milk has fallen below the average farmer's break-even
level and is anticipated to rise slowly during the remainder of the year. The
U.S. dairy farmer needs to operate more cost effectively given the current
situation and recent university research articles published on the benefits of
bagging over the use of bunkers have helped farmers realize the benefits of
bagging their feed instead of storing it in bunkers or silos.
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 March 31, 1999 decreased
10.77% to $1,044,604 compared to $1,170,624 for the quarter ended March 31,
1998. The decrease for the quarter was the result of lower margins on machines
and bags in certain geographic areas of the U.S. market.
9
<PAGE>
Selling expenses for the quarter ended March 31, 1999 increased 14.57% to
$753,572 compared to $657,716 for the quarter ended March 31, 1998. The increase
for the quarter was the result of increased sales personnel costs, commissions
and related benefits, coupled with increased travel and meeting expenses.
Administrative expenses for the quarter ended March 31, 1999 increased
40.75% to $588,216 compared to $417,902 for the period ended March 31, 1998. The
increase for the quarter was the result of increased general and administrative
operating overhead coupled with higher professional fees relating to ongoing
litigation.
Interest expense for the quarter ended March 31, 1999 decreased 45.94% to
$53,653 compared to $99,245 for the period ended March 31, 1998. The decrease
for the quarter was the result of the Company utilizing a smaller portion of its
credit facilities from increased collection efforts on accounts receivable.
Net loss for the quarter ended March 31, 1999 was $180,083 compared to net
income of $25,003 for the period ended March 31, 1998. The decrease for the
quarter was the result of lower margins and increased selling and administrative
expenses, which were offset by lower interest costs.
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.
10
<PAGE>
The Company's approach to the Year 2000 issue 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 87% 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
11
<PAGE>
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 decreased 6.61% at March 31, 1999 to $4,069,423
compared to $4,357,279 at March 31, 1998. The decrease in accounts receivable is
the result of lower sales volumes for the quarter coupled with the fact that
collections on accounts receivable were strong during the quarter.
Inventory increased 17.57% at March 31, 1999 to $7,105,327 compared to
$6,043,490 at March 31, 1998. The increase in inventory resulted from increased
production during the quarter in order to have inventory available for the
seasonal demands and new seasonal ordering programs.
12
<PAGE>
Other current assets decreased at March 31, 1999 to $945,633 compared to
$1,346,755 at March 31, 1998. 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.
Intangible assets at March 31, 1999 decreased to $50,089 compared to
$98,715 at March 31, 1998. 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 at December 31, 1998, coupled with normal
amortization expense for the quarter.
The Company has a domestic operating line of credit with a limit of
$5,000,000, secured by accounts receivable and inventory. As of March 31, 1999,
$2,237,370 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.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 27, Financial Data Schedule.
(b) No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AG-BAG INTERNATIONAL LIMITED,
a Delaware corporation
(Registrant)
Date: April 28, 1999 By: /s/ Michael R. Wallis
----------------------------------------------
Michael R. Wallis
Chief Financial Officer and
Vice President
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000842289
<NAME> Ag-Bag International Limited
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 656
<RECEIVABLES> 4,309,446
<ALLOWANCES> 240,023
<INVENTORY> 7,105,327
<CURRENT-ASSETS> 12,121,039
<PP&E> 8,298,628
<DEPRECIATION> 4,153,993
<TOTAL-ASSETS> 16,714,910
<CURRENT-LIABILITIES> 5,757,476
<BONDS> 2,114,778
0
696,000
<COMMON> 120,619
<OTHER-SE> 8,026,037
<TOTAL-LIABILITY-AND-EQUITY> 16,714,910
<SALES> 4,745,592
<TOTAL-REVENUES> 4,812,833
<CGS> 3,700,988
<TOTAL-COSTS> 1,365,275
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,653
<INCOME-PRETAX> (307,083)
<INCOME-TAX> 127,000
<INCOME-CONTINUING> (180,083)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (180,083)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
