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, 2000
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 24, 2000
1
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
AG-BAG INTERNATIONAL LIMITED
CONDENSED BALANCE SHEETS
ASSETS
March 31 December 31
(Unaudited)
2000 1999 1999
---------- ---------- ----------
Current assets:
Cash and cash equivalents $ 156,274 $ 9,990 $ 511,910
Accounts receivable 4,373,010 4,069,423 1,875,777
Inventories 8,419,410 7,105,327 7,168,740
Other current assets 568,711 945,633 426,289
Income tax refund receivable 5,348 - -
---------- ---------- ----------
Total current assets 13,522,753 12,130,373 9,982,716
Deferred income tax - 41,000 -
Intangible assets, less
accumulated amortization 30,922 50,089 35,562
Property, plant and equipment
less accumulated depreciation 4,208,490 4,144,635 4,162,992
Other assets 428,541 358,803 393,969
---------- ---------- ----------
Total assets $18,190,706 $16,724,900 $14,575,239
========== ========== ==========
(Continued)
2
<PAGE>
AG-BAG INTERNATIONAL LIMITED
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31 December 31
(Unaudited)
2000 1999 1999
---------- ---------- ----------
Current liabilities:
Notes payable to bank $ 2,640,279 $ 2,247,360 $ -
Current portion of long term
debt and capital lease
obligations 345,579 346,712 378,568
Current portion of notes
payable to shareholders' 1,844 15,876 6,523
Accounts payable 2,048,634 1,910,384 1,133,994
Accrued expenses and other
current liabilities 1,370,926 1,207,498 1,295,745
Income tax payable - 39,636 12,652
---------- ---------- ----------
Total current liabilities 6,407,262 5,767,466 2,827,482
Long term debt and capital
lease obligation, less
current portion 2,197,151 2,110,786 2,113,817
Notes payable to shareholders'
less current portion - 3,992 -
Deferred income taxes 7,000 - 7,000
---------- ---------- ----------
Total liabilities 8,611,413 7,882,244 4,948,299
---------- ---------- ----------
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) (447,537) (1,184,174) (399,890)
---------- ---------- ----------
Total shareholders' equity 9,579,293 8,842,656 9,626,940
---------- ---------- ----------
Total liabilities and
shareholders' equity $18,190,706 $16,724,900 $14,575,239
========== ========== ==========
See Notes to Condensed Financial Information
3
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BAG INTERNATIONAL LIMITED
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
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, 1999 174,000 $696,000 12,061,991 $120,619 $9,210,211 $ ( 399,890) $ - $9,626,940
Preferred stock dividends (14,790) (14,790)
Net loss (32,857) (32,857)
Other comprehensive income,
Net of tax - -
------- ------- ---------- ------- --------- ---------- ---------- ---------
Balance March 31, 2000 174,000 $696,000 12,061,991 $120,619 $9,210,211 $ ( 447,537) $ - $9,579,293
======= ======= ========== ======= ========= ========== ========== =========
</TABLE>
See Notes to Condensed Financial Information
4
<PAGE>
AG-BAG INTERNATIONAL LIMITED
CONDENSED STATEMENTS OF OPERATIONS
Three Months
Ended March 31
(Unaudited)
----------------------
2000 1999
---- ----
Net sales $ 6,691,777 $ 4,745,592
Cost of sales 5,268,860 3,700,988
--------- ---------
Gross profit from operations 1,422,917 1,044,604
Selling expenses 807,557 753,572
Administrative expenses 608,677 588,216
Research and development expenses 62,151 23,487
--------- ---------
Loss from operations ( 55,468) (320,671)
Other income (expense):
Interest income 5,092 -
Interest expense ( 62,615) ( 53,653)
Miscellaneous 62,134 67,241
--------- ---------
Loss before provision for
income taxes ( 50,857) (307,083)
Benefit for income taxes 18,000 127,000
--------- ---------
Net loss $ ( 32,857) $ (180,083)
Other comprehensive income, net of tax: - -
--------- ---------
Total comprehensive loss $ ( 32,857) $ (180,083)
========= =========
Basic and diluted net loss
per common share $ .00 $ (.01)
========= =========
Basic and diluted weighted average
number of common shares outstanding 12,061,991 12,061,991
========== ==========
See Notes to Condensed Financial Information
5
<PAGE>
AG-BAG INTERNATIONAL LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended March 31
(Unaudited)
2000 1999
---- ----
Cash flows from operating activities:
Net income(loss) $ ( 32,857) $ (180,083)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 152,263 136,563
(Gain)loss on disposition of fixed assets (100) 723
Changes in assets and liabilities:
Accounts receivable (2,497,233) (1,735,511)
Inventories (1,250,670) (1,320,038)
Other current assets (142,422) (190,941)
Accounts payable 914,640 1,078,462
Accrued expenses and other current
liabilities 75,181 (112,512)
Other assets (34,572) 40,622
Income tax payable (18,000) -
----------- -----------
Net cash used in operating activities (2,833,770) (2,282,715)
----------- -----------
Cash flows from investing activities:
Capital expenditures (196,021) (192,674)
Proceeds from disposition of fixed assets 3,000 5,000
----------- -----------
Net cash used in investing activities (193,021) (187,674)
----------- -----------
Cash flows from financing activities:
Net Proceeds from line of credit 2,640,279 2,247,360
Principal payments on debt (105,655) (109,578)
Proceeds from issuance of debt 156,000 -
Payment of shareholders' notes (4,679) (4,227)
Payment of preferred dividends (14,790) (14,790)
----------- -----------
Net cash provided by financing activities 2,671,155 2,118,765
----------- -----------
Net decrease in cash (355,636) (351,624)
Cash and cash equivalents at beginning
of period 511,910 361,614
----------- -----------
Cash and cash equivalents at end of period $ 156,274 $ 9,990
========== ===========
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, 1999 included in the Company's annual report on Form 10-K filed
with the Securities and Exchange Commission on March 29, 2000.
Inventories
- -----------
Inventories consist of the following:
March 31 December 31
(Unaudited)
2000 1999 1999
---------- ---------- ----------
Finished goods $7,003,652 $5,550,237 $5,992,377
Work in process $1,135,820 $1,166,131 $1,131,439
Raw materials $ 279,938 $ 388,959 $ 44,924
---------- ---------- ----------
Total $8,419,410 $7,105,327 $7,168,740
========== ========== ==========
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.
Risk Factors
- ------------
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 We are dependent on the Dairy Industry
More than 75% of our revenues come from the dairy industry.
o A downturn in the dairy industry could cause a reduction in the Company's
revenues.
The Company's sales are highly correlated with the price of milk
products and revenues of the dairy industry. When dairy farmers make
money, they buy the Company's products. When dairy farmers are not
making money, the Company's sales decline.
o The Company's revenues are seasonal and dependent on weather conditions.
The core business of the Company is dependent on weather conditions
during the harvest seasons in North America and Europe. Adverse weather
conditions affect farmers' crops and reduce demand for the Company's
products. Approximately 70%-75% of the Company's revenue is generated in
the second and third quarters.
o The Company may lose one or both of the two class action lawsuits pending
against it.
Two class action lawsuits, both alleging antitrust violations, have been
filed against the Company and others. If the Company's efforts to
dismiss or favorably resolve the suits fails, the Company could incur
additional and significant litigation costs and experience a drain on
management and other resources. If the plaintiffs succeed in
establishing liability and obtain a judgment for damages, the award
could exceed the Company's entire net worth.
8
<PAGE>
o The Company's intellectual property protection may not be adequate.
The Company has patents on its basic bagging machines and patents
pending on additional machines, bags and systems for silage bagging,
grain bagging and hay/straw bale bagging. The Company may not obtain
these patents and our patents may not withstand litigation challenges.
If the Company's patents do not withstand litigation challenges, the
Company's rights in its bag and machine technology could be diminished
or eliminated. Moreover, the issuance of patents covering any of the
Company's products may be insufficient to prevent competitors from
duplicating the Company's products. The patent laws of other countries
may differ from those of the United States as to the patentability of
the Company's products and processes, and the degree of protection
afforded by foreign patents may be different from that in the United
States.
o The Company relies on one principal supplier for its bags.
The Company purchases nearly all of its bags from one supplier under a
long-term requirements contract. Any disruption of the manufacturing
process could affect that company's ability to supply the Company's
needs, and could adversely affect the Company's sales.
o The Company's pricing is dependent on the price of resin.
The prices that the Company pays for bags, which account for
approximately half of our annual sales, are fixed annually in advance
and are tied directly to the price of resin. Resin prices have
historically been subject to significant price volatility. Increases in
the price of bags could adversely affect our profit margins if we are
unable to pass along the price increase, and would likely affect our
revenues if alternatives to our product become more attractive because
of the price increases.
o The Company's stock is traded on the OTC Bulletin Board, which may make the
stock more difficult to sell.
The Company no longer satisfies the criteria for continued quotation on
The Nasdaq SmallCap Market. The Company's stock
9
<PAGE>
is, instead, traded on the OTC Bulletin Board. As a result, the
Company's shareholders may find it more difficult to dispose of, or to
obtain accurate quotations as to the market value of, the Company's
common stock, and the market price for the Company's common stock may
decline. Trading in the Company's common stock is subject to the
requirements of Rule 15g-9 promulgated under the Securities Exchange Act
of 1934. Under this rule, broker/dealers who recommend low-priced
securities to persons other than established customers and accredited
investors must satisfy special sales practice requirements, including a
requirement that they make an individualized written suitability
determination for the purchaser and receive the purchaser's written
consent prior to the transaction. The Securities Enforcement Remedies
and Penny Stock Reform Act of 1990 also requires additional disclosure
in connection with any trades involving a stock defined as a penny stock
(generally any equity security not traded on an exchange or quoted on
Nasdaq that has a market price of less than $5.00 per share, subject to
certain exceptions), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market
and the risks associated with the penny stock market. These requirements
could severely limit the market liquidity of the Company's common stock
and the ability of the Company's shareholders to dispose of their
shares, particularly in a declining market.
Results of Operations
- ---------------------
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, 1999, 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, 2000, compared to the results of operations for the three-month period
ended March 31, 1999, and to changes in the Company's financial condition from
December 31, 1999 to March 31, 2000.
10
<PAGE>
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.
11
<PAGE>
Approximately 95% of the Company's business is concentrated in the Northern
Hemisphere resulting in between 70-75% 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:
Quarter 1997* 1998 1999
------- ----- ---- ----
1st 14% 17% 15%
2nd 40% 35% 33%
3rd 35% 35% 39%
4th 11% 13% 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.
Sales for the quarter ended March 31, 2000 increased 41.01% to $6,691,777
compared to $4,745,592 for the quarter ended March 31, 1999. Sales for the
quarter were up despite the continued low milk prices, as supplemental grain
feed costs remained low which helped farmers' continue to have funds available
to purchase machinery and equipment. New independent university research
articles published on the benefits of bagging in national dairy industry
publications also helped to increase sales. The U.S. dairy farmer needs to
operate more cost effectively given the current economic situation and recent
independent 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.
Bag sale revenue for the first quarter of 2000 was up over 26% and machine
sale revenue increased over 57% compared to the first quarter of 1999. Machine
sales are directly tied to farmers' income and therefore their ability to
purchase new equipment. The Company's bag and parts sales are driven by the
total number of bagging machines that are in the marketplace. However, there is
not a perfect correlation between the Company's bag sales and machine sales, as
the Company's and competitors' bags are interchangeable on all bagging machinery
in the industry.
Although the Company sells its product primarily through a worldwide dealer
network, certain sales are made directly to large volume customers when a dealer
is not present in the customer's geographic market. For each of the last 3
years, the Company estimates direct sales at between 30-35% of total sales and
the Company expects this historical sales mix to continue in the
12
<PAGE>
future. The gross margins 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 as a percentage of sales declined .75% for the quarter ended
March 31, 2000 compared to the same period in 1999. The decline resulted from
lower margins on bags in certain geographic, highly competitive, high volume
areas. The decline was also the result of lower margins on machinery during the
quarter as a result of the mix of machines sold.
Selling expenses for the quarter ended March 31, 2000 increased 7.16% to
$807,557 compared to $753,572 for the quarter ended March 31, 1999. The increase
for the quarter was the result of increased advertising expenses, and increased
sales commissions and related benefits due to increased sales for the quarter.
Administrative expenses for the quarter ended March 31, 2000 increased
3.48% to $608,677 compared to $588,216 for the period ended March 31, 1999. The
increase for the quarter was the result of increased general and administrative
operating overhead coupled with higher directors fees which were offset by lower
professional fees.
Research and development expenses for the quarter ended March 31, 2000
increased 264.62% to $62,151 compared to $23,487 for the quarter ended March 31,
1999. The increase for the quarter was the result of increased research costs
related to new silage and environmental machine development, coupled with new
silage inoculant and nutritional studies of bagged feed and their effects on
animal production.
Interest expense for the quarter ended March 31, 2000 increased 16.70% to
$62,615 compared to $53,653 for the period ended March 31, 1999. The increase
for the quarter was the result of the Company utilizing a larger portion of its
credit facilities from increased production for seasonal inventory demands.
Net loss for the quarter ended March 31, 2000 was $32,857 compared to
$180,083 for the period ended March 31, 1999, a 548.08% improvement. The
decrease in net loss for the quarter was the result of increased sales which
were offset by lower gross profit due to competition and product mix sold during
the quarter, and increased selling, administrative, research and interest costs.
13
<PAGE>
Year 2000
- ---------
The Company did not experience any computer system transitional problems as
a result of the Year 2000 "bug". Management does not expect any year 2000
transitional issues to have a material impact on the operations, cash flows or
financial condition of the Company.
Liquidity and Capital Resources
- -------------------------------
The seasonal nature of the northern hemisphere farming industry, the
production time for equipment and the time required to prepare bags for use
requires the Company to manufacture and carry high inventories to meet rapid
delivery requirements. In particular, the Company must maintain a significant
level of bags during the spring and early summer to meet the sales demands
during the harvest season. The Company uses working capital and trade credit to
increase its inventory so that it has sufficient inventory levels available to
meet its sales demands through the spring and 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 7.46% at March 31, 2000 to $4,373,010
compared to $4,069,423 at March 31, 1999. The increase in accounts receivable
was the result of increased sales for the quarter which were offset by heavier
collections of accounts receivable during the quarter resulting from customers
taking advantage of pre-season ordering and third party financing programs
offered by the Company.
Inventory increased 18.49% at March 31, 2000 to $8,419,410 compared to
$7,105,327 at March 31, 1999. The increase in inventory resulted from increased
production during the quarter to maintain production efficiencies on the
Company's smaller bagging machines and to have inventory available to meet
seasonal demands.
14
<PAGE>
Other current assets decreased 39.86% at March 31, 2000 to $568,711
compared to $945,633 at March 31, 1999. The decrease was the result of lower
current deferred taxes and prepaid expenses.
Intangible assets at March 31, 2000 decreased 38.27% to $30,922 compared to
$50,089 at March 31, 1999. The decrease was the result of normal amortization
expense.
The Company has a domestic operating line of credit with a limit of
$5,000,000, secured by accounts receivable, inventory, fixed asset blanket and
general intangibles. As of March 31, 2000, $2,640,279 had been drawn under the
credit line. On January 3, 2000, the Company obtained a $500,000 equipment
acquisition line for the purchase of new business equipment for the year 2000.
The equipment line is secured by a fixed asset blanket lien. As of March 31,
2000, $156,000 had been drawn under this equipment acquisition line. Management
believes that, along with funds generated from operations and its operating line
of credit, and equipment line of credit, it will be able to meet the Company's
cash requirements through 2000.
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.
15
<PAGE>
Moss Adams LLP [LETTERHEAD]
222 SW Columbia St., Suite 400
Portland, OR 97201-6642
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Shareholders
Ag-Bag International Limited
We have reviewed the accompanying condensed balance sheet of Ag-Bag
International Limited as of March 31, 2000, and the related condensed
statements of operations, shareholders' equity, and cash flows for the
three-month period ended March 31, 2000. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Ag-Bag International limited as of December
31, 1999, and the related statements of operations, shareholders' equity,
and cash flows for the year then ended not presented herein; and in our
report dated February 15, 2000, we expressed an unqualified opinion on
those financial statements. In our opinion, the information set forth in
the accompanying condensed balance sheet as of December 31, 1999, is fairly
presented, in all material respects, in relation to the balance sheet from
which it has been derived.
/s/Moss Adams LLP
Portland, Oregon
May 8, 2000
16
<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, 2000.
<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: May 10, 2000 By: /s/ Michael R. Wallis
---------------------
Michael R. Wallis
Chief Financial Officer and
Vice President of Finance
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 156,274
<SECURITIES> 0
<RECEIVABLES> 4,544,041
<ALLOWANCES> 171,031
<INVENTORY> 8,419,410
<CURRENT-ASSETS> 13,517,405
<PP&E> 8,785,386
<DEPRECIATION> 4,576,896
<TOTAL-ASSETS> 18,185,358
<CURRENT-LIABILITIES> 6,401,914
<BONDS> 2,197,151
<COMMON> 120,619
0
696,000
<OTHER-SE> 8,762,674
<TOTAL-LIABILITY-AND-EQUITY> 18,185,358
<SALES> 6,691,777
<TOTAL-REVENUES> 6,759,003
<CGS> 5,268,860
<TOTAL-COSTS> 6,747,245
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,615
<INCOME-PRETAX> (50,857)
<INCOME-TAX> 18,000
<INCOME-CONTINUING> (32,857)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,857)
<EPS-BASIC> .00
<EPS-DILUTED> .00
</TABLE>
