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: June 30, 2002
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 - 11,956,991 shares outstanding as of
July 22, 2002.
1
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
AG-BAG INTERNATIONAL LIMITED
CONDENSED BALANCE SHEETS
ASSETS
June 30 December 31
(Unaudited)
2002 2001 2001
---------- ---------- ----------
Current assets:
Cash and cash equivalents $ 106,393 $ 206,295 $ 164,526
Accounts receivable 6,084,715 4,851,165 2,433,842
Inventories 7,994,519 7,673,321 6,695,894
Other current assets 285,755 433,837 225,544
Deferred income tax 305,000 158,000 275,000
---------- ---------- ----------
Total current assets 14,776,382 13,322,618 9,794,806
Deferred income tax 161,000 89,000 200,000
Intangible assets, less
accumulated amortization 15,202 18,174 18,893
Property, plant and equipment
less accumulated depreciation 4,327,335 4,562,992 4,227,852
BAW Joint-venture 305,438 167,938 272,938
Other assets 458,513 377,162 481,704
--------- ---------- ----------
Total assets $20,043,870 $18,537,884 $14,996,193
========== ========== ==========
(Continued)
2
AG-BAG INTERNATIONAL LIMITED
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30 December 31
(Unaudited)
2002 2001 2001
---------- ---------- ----------
Current liabilities:
Notes payable to bank $ 4,187,082 $ 2,622,241 $ 1,287,855
Current portion of long term
debt and capital lease
obligations 390,812 341,210 402,477
Accounts payable 2,530,549 2,343,767 672,563
Accrued expenses and other
current liabilities 1,081,200 974,952 976,302
Income tax payable 126,535 57,144 -
----------- ----------- -----------
Total current liabilities 8,316,178 6,339,314 3,339,197
Long term debt and capital
lease obligation, less
current portion 1,631,906 2,076,868 1,822,212
--------- ---------- ----------
Total liabilities 9,948,084 8,416,182 5,161,409
--------- ---------- ----------
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
Treasury stock ( 31,500) (31,500) ( 31,500)
Retained earnings(deficit) 100,456 126,372 (160,546)
--------- --------- ----------
Total shareholders' equity 10,095,786 10,121,702 9,834,784
--------- --------- ----------
Total liabilities and
shareholders' equity $20,043,870 $18,537,884 $14,996,193
========== ========== ==========
See Notes to Condensed Financial Information
3
AG-BAG INTERNATIONAL LIMITED
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Preferred Stock Common Stock Treasury Stock Paid-In Retained
Shares Amount Shares Amount Shares Amount Capital Earnings Total
------ ------ ------ ------ ------ ------ ------- -------- -----------
Balance December 31, 2001 174,000 $696,000 12,061,991 $120,619 105,000 ($31,500) $9,210,211 $ (160,546) $ 9,834,784
Preferred stock dividends (14,790) (14,790)
Net loss (251,428) (251,428)
------- ------- ---------- ------- -------- ------- --------- --------- -----------
Balance March 31, 2002 174,000 696,000 12,061,991 120,619 105,000 ( 31,500) 9,210,211 ( 426,764) 9,568,566
Preferred stock dividends (14,790) (14,790)
Net income 542,010 542,010
------- ------- ---------- ------- -------- ------- --------- --------- -----------
Balance June 30, 2002 174,000 $696,000 12,061,991 $120,619 105,000 ($31,500) $9,210,211 $ 100,456 $10,095,786
======= ======= ========== ======= ======== ======= ========= ========= ===========
See Notes to Condensed Financial Information
4
AG-BAG INTERNATIONAL LIMITED
CONDENSED STATEMENTS OF OPERATIONS
Three Months
Ended June 30
(Unaudited)
----------------------
2002 2001
---- ----
Net sales $ 9,929,227 $10,159,090
Cost of sales 7,355,322 7,780,057
--------- ---------
Gross profit from operations 2,573,905 2,379,033
Selling expenses 983,153 861,194
Administrative expenses 767,335 751,656
Research and development expenses 43,672 100,775
--------- ---------
Income from operations 779,745 665,408
Other income (expense):
Interest income 16,778 53
Interest expense ( 91,194) (100,136)
Miscellaneous 123,681 158,272
--------- ---------
Income before provision for
income taxes 829,010 723,597
Provision for income taxes 287,000 263,000
--------- ---------
Net income and comprehensive income $ 542,010 $ 460,597
========= =========
Basic and diluted net income
per common share $ .04 $ .04
========= =========
Basic and diluted weighted average
number of common shares outstanding 11,963,589 12,038,754
========== ==========
See Notes to Condensed Financial Information
5
AG-BAG INTERNATIONAL LIMITED
CONDENSED STATEMENTS OF OPERATIONS
Six Months
Ended June 30
(Unaudited)
----------------------
2002 2001
---- ----
Net sales $14,736,712 $14,308,298
Cost of sales 11,116,937 11,156,937
--------- ---------
Gross profit from operations 3,619,775 3,151,361
Selling expenses 1,786,281 1,591,937
Administrative expenses 1,398,485 1,326,914
Research and development expenses 66,607 121,073
--------- ---------
Income from operations 368,402 111,437
Other income (expense):
Interest income 25,994 6,489
Interest expense (157,328) (165,601)
Miscellaneous 189,049 193,863
--------- ---------
Income before provision for
income taxes 426,117 146,188
Provision for income taxes 135,535 53,000
--------- ---------
Net income and comprehensive income $ 290,582 $ 93,188
========= =========
Basic and diluted net income
per common share $ .02 $ .01
========= =========
Basic and diluted weighted average
number of common shares outstanding 11,957,409 12,055,361
========== ==========
See Notes to Condensed Financial Information
6
AG-BAG INTERNATIONAL LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 30
(Unaudited)
-----------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 290,582 $ 93,188
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 402,903 339,852
Inventory obsolescence reserves (40,000) (116,630)
Deferred income taxes 9,000 21,000
(Gain)/loss on disposition of
equipment (500) 6,981
Changes in assets and liabilities:
Accounts receivable (3,650,873) (1,909,786)
Inventories (1,590,351) (366,041)
Other current assets ( 60,211) (242,099)
Accounts payable 1,857,986 1,737,939
Accrued expenses and other current
liabilities 104,898 (49,336)
Other assets (9,309) (3,688)
Income tax payable 126,535 (117,986)
---------- ----------
Net cash used in
operating activities (2,559,340) (606,606)
----------- -----------
Cash flows from investing activities:
Capital expenditures (166,969) (358,445)
Proceeds from disposition of equipment 500 -
--------- -----------
Net cash used in investing activities (166,469) (358,445)
--------- ---------
Cash flows from financing activities:
Net proceeds from line of credit 2,899,227 1,397,603
Principal payments on debt (201,971) (189,071)
Purchase of common stock - ( 31,500)
Payment of preferred dividends (29,580) (29,580)
--------- ---------
Net cash provided by
financing activities 2,667,676 1,147,452
--------- ---------
Net increase/(decrease) in cash ( 58,133) 182,401
Cash and cash equivalents at beginning
of period 164,526 23,894
------- ------
Cash and cash equivalents at end of period $ 106,393 $ 206,295
========= ==========
See Notes to Condensed Financial Information
7
AG-BAG INTERNATIONAL LIMITED
Notes to Condensed Financial Information
(Unaudited)
Note 1 - Description of Business and Summary of Significant
Accounting Policies
- --------------------------------------------------------------------------------
The accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions to Form 10-Q. They do not include all
information and footnotes necessary for a fair presentation of financial
position and results of operations and cash flows in conformity with accounting
principles generally accepted in the United States of America. These condensed
financial statements should be read in conjunction with the financial statements
and related notes contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001. In the opinion of management, all adjustments of a
normal recurring nature that are considered necessary for a fair presentation
have been included in the interim period. Operating results for the period ended
June 30, 2002 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2002.
Inventories
- -----------
Inventories consist of the following:
June 30 December 31
(Unaudited)
2002 2001 2001
---------- ---------- ----------
Finished goods $6,561,272 $6,338,071 $5,420,692
Work in process 1,030,998 975,481 1,228,308
Raw materials 402,249 359,769 46,894
--------- --------- ---------
Total $7,994,519 $7,673,321 $6,695,894
========== ========== ==========
Statement of Cash Flows
- -----------------------
The Company transferred $331,726 from inventory held for sale to rental
equipment during 2002.
The Company transferred $350,238 from inventory held for sale to rental
equipment during 2001 and transferred $148,331 from rental equipment to
inventory held for sale during 2001.
8
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.
Seasonal Fluctuations
- ---------------------
The core business of the Company is historically seasonal due to the harvest
seasons in North America and Europe. The seasonal nature of the Company's
operations results in between 65-72% of the Company's revenue being generated
during the spring and summer (2nd and 3rd Quarters). The six-month results may
not be indicative of the estimated results for a full fiscal year.
BAW Joint Venture
- ----------------
The Company has a 50% interest in the BAW (Budissa Agrodienstleistungen Und
Warenhandels) venture which is accounted for under the equity method. Condensed
income statements for the Company's BAW Joint Venture in Germany are as follows:
(Dollars in 000's)
Six Months Ended June 30
(Unaudited)
----------------------------
2002 2001
----------- ------------
Net sales $ 897 $ 1,086
Cost of goods sold (748) ( 934)
----------- ------------
Gross profit 149 152
Selling & administrative expenses (107) (112)
Other income (expense) 68 70
Income tax expense (44) (44)
------------- ------------
Net income* $ 66 $ 66
============= ===========
* Attributed to other shareholders $ 7 $ 7
The condensed income statements have been translated from the Euro to the U.S.
Dollar at average exchange rates in effect for the period ended June 30, 2002,
and from the German Mark to the U.S. Dollar at average exchange rates in effect
for the period ended June 30, 2001. The average exchange rates used at June 30,
2002 and 2001 were $.94 and $.46 respectively.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
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, 2001, 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
June 30, 2002, compared to the results of operations for the three-month period
ended June 30, 2001, and to the results of operations for the six-month period
ended June 30, 2002, compared to the results of operations for the six-month
period ended June 30, 2001 and to changes in the Company's financial condition
from December 31, 2001 to June 30, 2002.
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 may require 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.
Approximately 95% of the Company's business is concentrated in the Northern
Hemisphere resulting in between 65-72% of the Company's revenue being generated
during the spring and summer (2nd and 3rd Quarters). The following table
outlines the percentage of revenue over the past three years by quarter:
Quarter 1999 2000 2001
------- ---- ---- ----
1st 15% 21% 15%
2nd 33% 31% 35%
3rd 39% 34% 35%
4th 13% 14% 15%
Sales for the quarter ended June 30, 2002 decreased 2.26% to $9,929,227
compared to $10,159,090 for the quarter ended June 30, 2001. Sales for the
six-month period ended June 30, 2002 increased 2.99% to $14,736,712 compared to
$14,308,298 for the six month period ended June 30, 2001.
Sales were down for the quarter as a result of wet spring weather in
much of the Midwest and upper-Midwestern United States that has slowed and
shortened the growing season for the current year. Additionally, milk prices
began falling during the 2nd quarter of 2002 to near record low levels, which
have caused farmers to become cautious again on purchasing capital equipment.
10
Also contributing to the quarterly decline was some tightening in agricultural
credit availability, as a result of the depressed U.S. milk prices.
This is a shift from the positive trends that could be seen towards the
latter half of 2001 and coming into the first quarter of 2002. These positive
trends included stabilizing milk prices, continued optimism that milk prices in
the U.S. would remain above the record low levels of the year 2000 through 2002
and continued easing of credit by financial institutions for the farming sector
that, coupled with the interest rate reductions of 2001, allowed farmers to be
more optimistic and resume capital expenditures. Sales were up for the six-month
period of 2002 as a result of this positive sentiment seen during the first
quarter of 2002. Additionally, supplemental grain feed costs continued to remain
low during the quarter and six-month period, which tends to improve the
availability of farm operating funds. During the quarter and six-month period,
strong competition in the silage bag market continued, as farmers look for the
most economical bag, without considering overall quality, customer service and
recycling of the used plastic silage bags offered by the Company.
Machine sales for the quarter were down 8.45% and bag sales were up
5.85% compared to the same period of 2001. Machine sales for the six-month
period were flat and bag sales were up 8.76% compared to the same period of
2001. As a percentage of total revenue for the second quarter of 2002, machine
sales decreased approximately 3% and bag sales increased approximately 4%
compared to the second quarter of 2001. As a percentage of total revenue for the
six-month period of 2002, machine sales decreased approximately 1% and bag sales
increased approximately 3% compared to the six-month period of 2001. Machine
sales are directly tied to farmers' income and therefore their ability to
purchase new equipment. The Company's bag and parts sales are driven by the
total number of bagging machines that are in the marketplace. However, there is
not a perfect correlation between the Company's bag sales and machine sales, as
the Company's and competitors' bags are interchangeable on all bagging machinery
in the industry. The Company cannot estimate with any certainty the total number
of machines or bags used in the industry.
In addition to compost bag sales, the Company sold one composting
system during the quarter ended June 30, 2002 (generating approximately $275,000
in revenue) compared to four systems sold during the quarter ended June 30, 2001
(generating approximately $480,000 in revenue). For the six-month period ended
June 30, 2002, the Company sold four composting systems in addition to compost
bag sales (generating approximately $525,000 in revenue) compared to six systems
sold for the six-month period ended June 30, 2001 (generating approximately
$800,000 in revenue).
11
Although the Company sells its products primarily through a worldwide
dealer network, certain sales are made directly to large volume customers when a
dealer is not present in the customer's geographic market. For each of the last
three years, the Company estimates that direct sales make up between 33-38% of
total sales. The gross margin realized on the Company's direct sales are
typically within 2-4% of those sales realized through the Company's dealer
network. However, various economic, volume and market factors in the geographic
area impact the ultimate margin. The Company evaluated selling its mainline,
core bagging machines via e-commerce and concluded that e-commerce is not
currently a viable distribution avenue for its machinery. This is due to the
complexity and understanding needed of the end user's needs and farming
operation, which requires discussion in an individual setting with a Company
sales representative. The Company however, will continue to evaluate whether to
offer some of its other products via e-commerce at some point in the future.
Gross profit as a percentage of sales increased 10.67% for the quarter
ended June 30, 2002 compared to the same period in 2001. Gross profit as a
percentage of sales increased 11.53% for the six-month period ended June 30,
2002 compared to the same period in 2001. The increase for the quarter and
six-month period resulted from improved margins on the Company's bagging
machines and production efficiencies realized, partially offset by lower margins
on bags in certain highly competitive, high volume geographic areas.
Selling expenses for the quarter ended June 30, 2002 increased 14.16%
to $983,153 compared to $861,194 for the quarter ended June 30, 2001. Selling
expenses for the six-month period ended June 30, 2002 increased 12.21% to
$1,786,281 compared to $1,591,937 for the six month period ended June 30, 2001.
The increase for the quarter and six-month period was the result of increases in
personnel, benefit, travel, advertising, promotion and dealer incentives,
partially offset by lower sales meeting expenses.
Administrative expenses for the quarter ended June 30, 2002 increased
2.09% to $767,335 compared to $751,656 for the quarter ended June 30, 2001.
Administrative expenses for the six-month period ended June 30, 2002 increased
5.39% to $1,398,485 compared to $1,326,914 for the six-month period ended June
30, 2001. The increase for the quarter and six-month period was the result of
higher professional fees related to ongoing patent litigation and increases in
administrative salaries, employee benefit, annual meeting and insurance expense,
partially offset by lower bad debt and director fee expenses.
Research and development expenses for the quarter ended June 30, 2002
decreased 56.66% to $43,672 compared to $100,775 for the quarter ended June 30,
2001. Research and development expenses for the six-month period ended June 30,
2002 decrease 44.99% to $66,607
12
compared to $121,073 for the six-month period ended June 30, 2001. The decrease
for the quarter and six-month period was the result of completed silage and
nutritional studies of bagged feed and their effects on animal production, which
was partially offset by ongoing research and testing related to silage bagging
and compost machine development.
Interest expense for the quarter ended June 30, 2002 decreased 8.93% to
$91,194 compared to $100,136 for the quarter ended June 30, 2001. Interest
expense for the six-month period ended June 30, 2002 decreased 5.0% to $157,328
compared to $165,601 for the six-month period ended June 30, 2001. The decrease
for the quarter and six-month period was the result of lower interest rates on
the Company's credit line offset by the Company using a larger portion of its
credit facilities during the quarter and six-month period.
Miscellaneous income for the quarter ended June 30, 2002 decreased
21.86% to $123,681 compared to $158,272 for the quarter ended June 30, 2001.
Miscellaneous income for the six-month period ended June 30, 2002 decreased
2.48% to $189,049 compared to $193,863 for the six-month period ended June 30,
2001. The decrease for the quarter and six-month period was the result of
decreased machine royalties partially offset by increased folding royalties and
income from the Company's German joint venture.
Net income for the quarter ended June 30, 2002 increased 17.68% to
$542,010 compared to $460,597 for the quarter ended June 30, 2001. Net income
for the six-month period ended June 30, 2002 increased 211.82% to $290,582
compared to $93,188 for the six-month period ended June 30, 2001. The
improvement for the quarter was the result of improving gross profit, lower
research and interest expenses offset by lower sales combined with increased
selling and administrative expenses. The improvement for the six-month period
was the result of higher sales, improving gross profit, lower research and
interest expenses, offset by increased selling and administrative expenses.
Liquidity and Capital Resources
- -------------------------------
The seasonal nature of the northern hemisphere farming industry, the
production time for equipment and the time required to prepare bags for use
requires the Company to manufacture and carry high inventories to meet rapid
delivery requirements. In particular, the Company must maintain a significant
level of bags during the spring and early summer to meet the sales demands
during the harvest season. The Company uses working capital and trade credit to
increase its inventory so that it has sufficient inventory levels available to
meet its sales demands through the spring and summer.
13
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 25.43% at June 30, 2002 to $6,084,715
compared to $4,851,165 at June 30, 2001. The increase was the result of the
company offering some extended term sales during the quarter to remain
competitive coupled with slower collections of accounts receivable during April
and May resulting from of the overall weakness and uncertainty in the U.S.
economy, partially offset by increased customer use, during the latter part of
the quarter, of third-party incentive financing programs offered by the Company.
Additionally, due to the Company's seasonality, approximately $3.7 million of
the quarterly sales occurred during the last month of the quarter.
Inventory increased 4.19% at June 30, 2002 to $7,994,519 compared to
$7,673,321 at June 30, 2001. The increase in inventory resulted from increased
machine production during the latter half of the quarter to meet the Company's
upcoming seasonal demands and benefit from production efficiencies.
Other current assets decreased 34.13% at June 30, 2002 to $285,755
compared to $433,837 at June 30, 2001. The decrease was the result of a decrease
in deposits and prepaid expenses.
Intangible assets at June 30, 2002 decreased to $15,202 compared to
$18,174 at June 30, 2001. The decrease was the result of normal amortization
expense.
Other assets increased 21.57% at June 30, 2002 to $458,513 compared to
$377,162 at June 30, 2001. The increase was the result of an increase in the
cash surrender value of life insurance policies maintained by the Company under
which it is the beneficiary.
The Company has an operating line of credit with a limit of $5,000,000,
secured by accounts receivable, inventory, fixed asset blanket and general
intangibles, and bears interest at the bank's prime rate plus 1/4%. As of June
30, 2002, $4,187,082 had been drawn under the credit line. Management believes
that funds generated from operations and the Company's operating line of credit
will be sufficient to meet the Company's cash requirements through 2002. The
Company's line of credit is subject to annual renewal at August 15.
On December 18, 2000, the Company entered into an agreement with
Dresdner Bank to guarantee up to 1,000,000DM ($507,250 US) as security for an
additional cash credit facility of the Company's
14
German joint venture. There was -0-DM outstanding under this additional cash
credit facility at June 30, 2002.
Accounts payable increased 7.97% at June 30, 2002 to $2,530,549
compared to $2,343,767 at June 30, 2001. The increase was the result of
increased inventory production to meet seasonal sales demands coupled with
extended term payables provided by some of the Company's principal suppliers.
Accrued expenses and other current liabilities increased 10.90% at June
30, 2002 to $1,081,200 compared to $974,952 at June 30, 2001. The increase in
accrued expenses and other current liabilities was the result of higher dealer
deposits from special incentive order programs, coupled with higher general
operating accruals.
In 1997, the Nasdaq listing requirements were substantially expanded.
The Company does not currently qualify under the more stringent requirements
because the price at which its Common Stock is trading is below the $1 per share
minimum. The Company was formally notified on January 13, 1999, that its Common
Stock was delisted from quotation on The Nasdaq SmallCap Market for failure to
meet the new listing requirements. The Company's Common Stock is now quoted on
the OTC Bulletin Board. The removal from quotation on the Nasdaq SmallCap Market
could have a material adverse effect on the Company's ability to raise
additional equity capital in a public stock offering should that become
necessary.
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements in this Form 10-Q contain "forward-looking"
information (as defined in Section 27A of the Securities Act of 1933, as
amended) that involves risks and uncertainties that may cause actual results to
differ materially from those predicted in the forward-looking statements.
Forward-looking statements can be identified by their use of such verbs as
expects, anticipates, believes or similar verbs or conjugations of such verbs.
If any of the Company's assumptions on which the forward-looking statements are
based prove incorrect or should unanticipated circumstances arise, the Company's
actual results could differ materially from those anticipated by such
forward-looking statements. The differences could be caused by a number of
factors or combination of factors including, but not limited to, the factors
listed below and the risks detailed in the Company's Securities and Exchange
Commission filings, including the Company's Form 10-K for the fiscal year ended
December 31, 2001.
Forward-looking statements contained in this Form 10-Q relate to the
Company's plans and expectations as to: timing of demand for bagging machines
and bags; reductions in U.S. milk prices;
15
availability of credit in the farming sector; potential purchases of the
Company's bagging machines, bags and composting systems; anticipated inventory
production; the availability of trade credit and working capital; consumer
sentiment of the U.S. and global economy; the Company's dependence on the dairy
industry; and the outcome of pending litigation against the Company.
The following factors, among others, could cause actual results to
differ from those indicated in the forward-looking statements: a downturn in the
dairy industry; a sharp decline in U.S. milk prices; a reduction in availability
of credit in the farming sector; an increase in interest rates; adverse weather
conditions; a sharp decline in the health of the farming sector of the U.S.
economy; a sharp decline in government subsidies to the farming sector;
disruption of the manufacturing process of our sole bag manufacturer; increases
in the price of bags; and an adverse outcome in any of the pending litigation
against the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which the Company is exposed is interest rates.
The Company's exposure to changes in interest rates is minimal.
Primarily all of the Company's long-term debt is fixed rate. The Company's line
of credit is based on the prime rate plus 1/4% and one long-term debt instrument
is based on the prime rate plus 3/4%.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is one of three defendants named in two purported class
action lawsuits, S&S Forage & Equipment Co., Inc. v. Up North Plastics, et al.,
filed February 5, 1998, and Mr. and Mrs. Donald L. Steward v. Up North Plastics,
Inc. et al., filed September 29, 1999, both alleging conspiracy to fix prices
and sales quotas involving silage bag manufacturers and vendors. Class
certification has been denied in the S&S Forage case. The defendants briefed and
argued motions for summary judgment in both cases, which the court denied under
both cases. In recent developments, the U.S. District Court for the District of
Minnesota has dismissed, in its entirety, the Mr. and Mrs. Donald L. Steward v.
Up North Plastics, Inc. et al. case based upon the plaintiffs' request to the
court. Furthermore, the plaintiffs' in the remaining S&S Forage individual
claim, have filed a motion before the court appealing the May 2000 denial of
class certification. The defendants have responded accordingly to the court.
This motion is currently pending before the U.S. District Court for the District
of Minnesota. If the plaintiffs were to obtain a judgment against the three
companies, the Company could be held jointly and severally liable. The Company
believes that the plaintiffs' claim has no merit, and the Company is vigorously
defending itself against this remaining claim. The Company continues to believe
that the outcome of the litigation will not have a material adverse impact on
its financial condition or results of operations. (See "Forward-Looking
Statements")
The Company is one of three defendants named in a purported breach of
contract and product warranty lawsuit, Kevin Sustrik v. Alberta Ag-Bag Ltd.,
Ag-Bag International Ltd., and Jim Rakai, filed June 7, 2000. The plaintiff
alleged breach of contract and breach of product warranty relating to a bagging
machine purchased by the plaintiff and sought monetary damages. The Company
settled with the plaintiff May 1, 2002; which settlement is currently pending
before the Court of Queen's Bench of Alberta, Canada. (See "Forward-Looking
Statements")
The Company is a defendant in an alleged patent infringement lawsuit,
Versa Corporation v. Ag-Bag International Ltd., filed October 30, 2000 in the
United States District Court for the District of Oregon. The claim alleges
patent infringement upon Versa's U.S. Patent No. 5,799,472; 5,894,713;
5,345,744; 5,426,910; and 5,452.562 relating to a bag pan and density control
for an agricultural feed bagging machine and composting method patents.
Plaintiff seeks monetary damages. On April 2, 2002, the defendant was granted
their motion for summary judgment in the bag pan matter. The court concluded
that there was no infringement. Plaintiff has appealed this decision, which is
currently before the United States District Court for the District of Oregon.
The density control matter currently remains in settlement negotiations. The
composting
17
method patent matter continues in the discovery phase. The Company denies
Versa's allegations and is vigorously defending itself against the claim. The
Company believes that the outcome of the litigation will not have a material
adverse impact on its financial condition or results of operations. (See
"Forward-Looking Statements")
The Company is one of three defendants named in a counterclaim to a
purported product warranty lawsuit, Andrew Magyar and Leslie Magyar v. Alberta
Ag-Bag Ltd., Ag-Bag International Ltd., and Jim Rakai, filed January 21, 2000.
The plaintiffs in the counterclaim allege breach of product warranty,
merchantability and fitness for the particular purpose relating to a bagging
machine purchased by the plaintiff's and seek monetary damages. In recent
developments, the plaintiff's have filed for bankruptcy and defendants have
asked the Court of Queen's Bench of Alberta, Canada for dismissal. The Company
believes that the claims alleged by the plaintiffs have no merit and the Company
is vigorously defending itself against these claims. The Company believes that
the outcome of the litigation will not have a material adverse impact on its
financial condition or results of operations. (See "Forward-Looking Statements")
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
An Annual Meeting of Stockholders was held on June 3, 2002.
Michael W. Foster and Udo Weber were elected by plurality as directors
of the Company. Messrs. Inman, Cunningham, DeMatteo and Schuette continued to
serve as Directors after the meeting. The Board of Directors' appointment of
Moss Adams LLP as the Company's independent public accountants was ratified.
The results of the election were as follows:
Votes
Nominee Votes For Against Abstentions
------- --------- ------- -----------
Michael W. Foster 9,512,107 198 224,663
Udo Weber 9,512,305 -0- 224,663
Votes Broker
------
Votes For Against Abstentions Non-Votes
--------- ------- ----------- ---------
Ratify Appointment 9,722,577 3,910 10,481 -0-
of Moss Adams LLP
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 2002.
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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: July 22, 2002 By: /s/ MICHAEL R. WALLIS
---------------------------
Michael R. Wallis
Chief Financial Officer and
Vice President of Finance
(duly authorized and principal
financial officer)
20