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, 2004
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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
YES [ ] NO [ X ]
The registrant has one class of Common Stock with 11,956,991 shares
outstanding as of May 3, 2004.
1
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AG-BAG INTERNATIONAL LIMITED
CONDENSED BALANCE SHEETS
ASSETS
March 31 December 31
(Unaudited)
2004 2003 2003
---------- ---------- ----------
Current assets:
Cash and cash equivalents $ 58,319 $ 774 $ 167,528
Accounts receivable 1,783,848 3,271,349 1,226,390
Inventories 5,437,531 5,276,021 5,781,345
Other current assets 355,764 389,338 251,808
Deferred income tax - 374,000 -
---------- ---------- ----------
Total current assets 7,635,462 9,311,482 7,427,071
Deferred income tax - 691,000 -
Intangible assets, less
accumulated amortization 12,590 9,666 15,066
Property, plant and equipment
less accumulated depreciation 3,067,915 3,781,674 3,233,673
BAW Joint-venture 398,589 409,438 376,974
Other assets 449,446 458,917 491,513
--------- ---------- ----------
Total assets $11,564,002 $14,662,177 $11,544,297
========== ========== ==========
(Continued)
2
AG-BAG INTERNATIONAL LIMITED
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31 December 31
(Unaudited)
2004 2003 2003
---------- ---------- ----------
Current liabilities:
Notes payable to bank $ 1,951,375 $ 941,145 $ 2,090,448
Current portion of long term
debt and capital lease
obligations 167,742 315,386 182,706
Accounts payable 1,446,170 1,593,120 936,953
Accrued expenses and other
current liabilities 1,056,756 1,375,476 961,731
Income tax payable 2,210 2,210 2,210
----------- ----------- -----------
Total current liabilities 4,624,253 4,227,337 4,174,048
Long-term debt and capital
lease obligation, less
current portion 1,049,936 1,387,281 1,071,488
--------- ---------- ----------
Total liabilities 5,674,189 5,614,618 5,245,536
--------- ---------- ----------
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)
Accumulated deficit (4,105,517) (947,771) (3,696,569)
--------- --------- ----------
Total shareholders' equity 5,889,813 9,047,559 6,298,761
--------- --------- ----------
Total liabilities and
shareholders' equity $11,564,002 $14,662,177 $11,544,297
========== ========== ==========
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 Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------ ------ ------- -------- -----------
Balance December 31, 2003 174,000 $696,000 12,061,991 $120,619 105,000 ($31,500) $9,210,211 $(3,696,569) $ 6,298,761
Net loss (408,948) (408,948)
------- ------- ---------- ------- -------- ------- --------- --------- -----------
Balance March 31, 2004 174,000 $696,000 12,061,991 $120,619 105,000 ($31,500) $9,210,211 $(4,105,517) $ 5,889,813
======= ======= ========== ======= ======== ======= ========= ========= ===========
See Notes to Condensed Financial Information
4
AG-BAG INTERNATIONAL LIMITED
CONDENSED STATEMENTS OF OPERATIONS
Three Months
Ended March 31
(Unaudited)
----------------------
2004 2003
---- ----
Net sales $ 4,205,698 $ 6,868,301
Cost of sales 3,383,763 5,658,640
--------- ---------
Gross profit from operations 821,935 1,209,661
Selling expenses 498,471 679,695
Administrative expenses 692,993 656,641
Research and development expenses 50,568 23,068
--------- ---------
Loss from operations (420,097) (149,743)
Other income (expense):
Interest expense ( 70,818) ( 47,500)
Miscellaneous 81,967 95,956
--------- ---------
Loss before provision for
income taxes (408,948) (101,287)
Benefit for income taxes - 52,000
--------- ---------
Net loss and comprehensive loss $ (408,948) $ ( 49,287)
========= =========
Basic and diluted net loss
per common share $ (.03) $ (.01)
========= =========
Basic and diluted weighted average
number of common shares outstanding 11,956,991 11,956,991
========== ==========
See Notes to Condensed Financial Information
5
AG-BAG INTERNATIONAL LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended March 31
(Unaudited)
-----------
2004 2003
---- ----
Cash flows from operating activities:
Net loss $ (408,948) $ ( 49,287)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 167,350 202,121
Deferred income taxes - (52,000)
Proceeds from sale of assets 3,253 -
Changes in assets and liabilities:
Accounts receivable (557,458) (2,112,422)
Inventories 343,814 775,699
Other current assets (103,956) (190,461)
Accounts payable 509,217 689,811
Accrued expenses and other current
liabilities 95,025 239,868
Other assets 20,452 20,211
---------- ----------
Net cash provided(used) in operating
activities 68,749 ( 476,460)
---------- -----------
Cash flows from investing activities:
Capital expenditures ( 2,369) ( 23,477)
--------- ---------
Net cash used in investing activities ( 2,369) ( 23,477)
--------- ---------
Cash flows from financing activities:
Net proceeds from (payments on) line
of credit (139,073) 556,420
Principal payments on debt ( 36,516) (108,445)
Payment of preferred dividends - (14,790)
--------- ---------
Net cash provided(used) by financing
activities (175,589) 433,185
---------- ---------
Net increase/(decrease) in cash (109,209) ( 66,752)
Cash and cash equivalents at beginning
of period 167,528 67,526
--------- -------
Cash and cash equivalents at end of period $ 58,319 $ 774
========= ==========
See Notes to Condensed Financial Information
6
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, 2003. 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
March 31, 2004 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004.
Going Concern
- -------------
As a result of the Company incurring net losses during the previous three
years and during the first quarter of 2004, and its negative cash flows from
operations for the prior year, there is uncertainty about the Company's ability
to continue as a going concern. The Company's management believes the Company's
weak operating results have been primarily due to the depressed milk prices in
the agriculture sector, which have a direct impact on the disposable income of
its dairy farm customers, who account for approximately 75% of the Company's
business. The Company further believes that dairy farmers have been delaying or
eliminating capital expenditures due to their uncertainties regarding milk
prices and their disposable income. Predictions for 2004 continue to show milk
prices significantly higher than the historically low levels seen for many of
the previous years and the Company expects operating results to improve as dairy
farmers begin to see increases in their disposable income through stabilizing
milk prices. The Company's management also feels that dealers have been
conservative on their pre-season orders for 2003-04 as a result of the
prolonged, depressed milk price situation. It is management's feeling that some
dealers will have the need to re-order additional product during the year as a
result of the forecasted improving milk prices, which should help the Company's
dealers sell out of their remaining inventories. If this happens, there is a
potential for higher gross margins for the Company, as the dealers would be
re-ordering outside of the pre-season order program terms which provide for a
lower volume discount on their re-orders.
To help provide positive cash flow for the Company, management implemented
an expense reduction plan in late 2003. Specifically,
7
management implemented staff reductions and reduced salaries of senior
management. Nonessential capital expenditures, travel and other expenses have
either been eliminated or postponed. Management also continues considering other
changes to the Company's business model such as opportunities to sell the
business, refinance the Warrenton, Oregon facility (which has only a small
economic development loan outstanding against this collateral), consolidate or
dispose of manufacturing facilities or other tangible or intangible assets,
including selling the Company's 50% interest in its joint venture, or a policy
loan against the life insurance policies currently in force in which the Company
is the beneficiary. However, no assurance can be given that the Company will be
successful in accomplishing these objectives.
Because it is unclear whether the Company will be successful in
accomplishing these objectives, there is uncertainty about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern.
Inventories
- -----------
Inventories consist of the following:
March 31 December 31
(Unaudited)
2004 2003 2003
---------- ---------- ----------
Finished goods $4,750,820 $4,329,800 $4,846,358
Work in process $ 617,318 $ 663,119 $ 880,687
Raw materials $ 69,393 $ 283,102 $ 54,300
---------- ---------- ----------
Total $5,437,531 $5,276,021 $5,781,345
========== ========== ==========
Inventories are stated at the lower of cost or market (net realizable value).
The Company determines cost on the first-in, first-out (FIFO) basis.
8
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 53-70% of the Company's revenue being generated
during the spring and summer (2nd and 3rd Quarters). In September 2002, the
Company took additional steps to counteract seasonality by developing and
introducing a pre-season ordering program, whereby the Company's dealer's place
their next year's annual product requirements order in advance. This allows the
Company to know in advance its production mix which in turn allows leveling of
production and flexibility in customer shipments. During 2003, the Company
expanded this program by allowing dealers to finance through their local bank,
rather than requiring them to utilize one of the Company's third party financing
programs. This however, has brought seasonality back into play for the Company,
as shipments under the dealer bank program are at the timing of the dealer
rather than the Company under the terms of the program. The three-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)
Quarter Ended March 31
(Unaudited)
--------------------------------------
2004 2003
---- ----
Net sales $ 198 $ 225
Cost of goods sold (200) (161)
--------------------------------------
Gross profit (2) 64
Selling & administrative expenses (90) (87)
Other income (expense) (4) (1)
Income tax benefit 38 9
--------------------------------------
Net (loss)* $ (58) $ (15)
======================================
* Attributed to other shareholders $ (4) $ (1)
The condensed income statements have been translated from the Euro to the U.S.
dollar at average exchange rates in effect for the periods ended March 31, 2004
and 2003. The average exchange rates used at March 31, 2004 and 2003 were $1.24
and $1.06 respectively.
9
Income Taxes
- ------------
Income taxes are lower than the expected statutory rates due to the Company's
recognition of the tax benefits of the research and development tax credit and
the non-taxability of income from the Company's investment in its BAW Joint
Venture and the extraterritorial income exclusion. In addition, management has
established a valuation allowance of $1,740,772 to fully reserve against its
deferred tax assets at March 31, 2004.
Warranty
- --------
At the time of sale, the Company accrues a liability for the estimated future
costs to be incurred under the provisions of its warranty agreements. The
Company reviews its historical warranty expense and current sales trends in
products covered under warranty, and adjusts its warranty reserves accordingly.
The activity in that account for the quarters ended was as follows:
March 31, March 31,
2004 2003
---------------- ----------------
Balance, beginning of the year $ 74,753 $177,384
Charged to expense 29,781 19,373
Warranty costs incurred during the quarter (22,646) (24,815)
---------------- ----------------
Balance, end of quarter $ 81,888 $171,942
================ ================
Stock option plan
- -----------------
The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock option plan. Accordingly, compensation expense related
to grants to employees would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. Had
compensation cost for the Company's stock option plan been determined based upon
the fair value at grant date for awards under the plan consistent with the
methodology prescribed under Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation," additional compensation
expense would have been recognized.
10
The Company has computed the value of all options granted during the quarters
ended March 31, 2004 and 2003 using the Black-Scholes pricing model as
prescribed under SFAS No. 123. The pro-forma effect on net loss of options
granted is as follows:
March 31, March 31,
2004 2003
--------------------- -------------------
Net income (loss):
As reported $(408,948) $( 49,287)
Pro forma $(409,748) $( 50,691)
Net income (loss) per share:
As reported (.03) (.01)
Pro forma (.03) (.01)
Recently Issued Accounting Standards
- ------------------------------------
In June 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity." This statement establishes standards regarding classification and
measurement of certain financial instruments with characteristics of both
liabilities and equity. It requires financial instruments within the scope of
this statement to be classified as liabilities (or an asset in some
circumstances). Many of these financial instruments were previously classified
as equity. This statement is effective for financial instruments entered into or
modified after May 31, 2003, and was otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. For financial instruments
created before the issuance date of this statement and still existing at the
beginning of the interim period of adoption, transition is achieved by reporting
the cumulative effect of a change in an accounting principle by initially
measuring the financial instruments at fair value. The implementation of this
statement did not have a material impact on the Company's financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The implementation of this statement did not have a
material impact on the Company's financial statements.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." This interpretation clarifies the
application of Accounting Research
11
Bulletin No. 51, "Consolidated Financial Statements," and requires existing
unconsolidated variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among parties
involved. This interpretation explains how to identify variable interest
entities and how an enterprise assesses its interests in a variable interest
entity to decide whether to consolidate that entity. In December 2003, FASB made
revisions and delayed implementation of certain provisions of FIN 46. As a
public entity that is not a "Small Business Issuer," the Company is now required
to apply FIN 46 to all unconsolidated variable interest entities no later than
March 31, 2004, with the exception of unconsolidated special-purpose entities,
which had an implementation deadline of December 31, 2003. Special-purpose
entities for this provision are expected to include entities whose activities
are primarily related to securitizations or other forms of asset-backed
financings or single-lessee leasing arrangements. The Company is associated with
a potential variable interest entity through its investment in BAW. Management
determined that BAW is a variable interest entity, but concluded that the
Company is not the primary beneficiary.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
- -------
Reference is made to Item 7, "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, 2003, on file with the
Securities and Exchange Commission ("SEC"). The following discussion and
analysis pertains to the Company's results of operations for the three-month
period ended March 31, 2004, compared to the results of operations for the
three-month period ended March 31, 2003, and to changes in the Company's
financial condition from December 31, 2003 to March 31, 2004.
Critical Accounting Policies
- ----------------------------
The Company's significant accounting policies are described in Note 1 to
the financial statements included in Item 15 of the Annual Report on Form 10-K,
filed with the SEC for the year ended December 31, 2003. The Company believes
its most critical accounting policies include inventory obsolescence reserves,
allowance for doubtful accounts, accounting for warranty reserves, accounting
for pre-season order flooring interest, recourse obligation reserves and
accounting for income taxes.
The $1,021,322 estimate for inventory obsolescence reserves was developed
using inventory-aging reports for finished goods, combined with historical
usage, and forecasted usage and inventory shelf life. The Company's estimates of
market value incorporate projections of future sales volume by product class. In
estimating the market value of parts inventory items, the Company reviews
current inventory levels in relation to sales forecasts and adjusts the
valuation reserve accordingly. For the remaining categories of inventory, the
Company establishes a reserve balance based on the aging of the specific
inventory items. As trends in these variables change, the percentages applied to
the inventory aging categories are updated.
The $187,901 estimate of allowance for doubtful accounts is comprised
of a specific account analysis which addresses accounts over 90 days past due
and a general reserve of $10,000, which is deemed appropriate for the level of
receivables carried by the Company. Accounts where specific information
indicates a potential loss may exist are reviewed and a specific reserve against
amounts due is recorded. As additional information becomes available such
specific account reserves are updated. Additionally, a general reserve is
applied based upon historical collection and write-off experience. As trends in
historical collection and write-offs change, the general reserve is updated.
13
The $81,888 estimate for warranty reserve is developed based upon the
estimated future costs to be incurred under the provisions of the Company's
warranty agreements on its bags and machines. The Company reviews its historical
warranty expense and current sales trends in specific products covered under
warranty and reserves are updated as trends in these variables change.
The Company estimates the future interest that will be incurred by the
Company associated with current sales under its dealer pre-season order program.
At the time of sale, the Company reduces sales revenue and accrues a liability
for the estimated future interest obligation. The Company estimates its future
interest obligation pursuant to the terms of its pre-season order program and
the shipping periods defined therein. The Company estimates that machinery
shipped between October and May of each year, will be sold at the dealer level
by the end of May and accrues an estimated future interest liability accordingly
(ranging from 30 to 210 days). For machinery shipped after May, the Company
estimates (since bagging season is in full swing) that it will incur interest
for approximately 30 days, and accrues an estimated liability accordingly. For
all other products, the company accrues an estimated future interest liability
(ranging from 30 to 180 days) under the assumptions that the product will be
sold at the dealer level by the end of the respective shipping periods as
defined in the pre-season order program. For additional products ordered and
shipped outside the defined shipping periods, the Company accrues an estimated
future interest liability of approximately 30 days, which according to the
pre-season order program, the Company pays interest through the end of the month
of shipment. The Company had accrued an estimated liability of $55,308 under
this program at March 31, 2004.
The Company periodically assigns some of its trade accounts receivable
to various third-party financing sources. These accounts can be assigned with or
without recourse depending on the specific accounts assigned. The Company
reviews on a monthly basis, those accounts assigned with recourse to determine
their payment history with the third-party financing source and estimates if any
accrual is necessary for potential future recourse obligations. The Company has
determined, that at March 31, 2004, no accrual was necessary for potential
future recourse obligations with its third-party financing sources.
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Valuation allowances are
established to reduce potential deferred
14
tax assets when it is more likely than not that all or some portion of potential
deferred tax assets will not be realized. The Company has established a
$1,740,772 valuation allowance against its deferred tax assets as of March 31,
2004.
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, 2003.
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; optimism in increased milk prices
within the U.S. farm economy throughout 2004; availability of credit in the
farming sector; potential purchases of the Company's bagging machines, bags and
composting systems; anticipated inventory production; the level of acceptance of
the Company's pre-season order program for 2004; the availability of trade
credit and working capital; the availability of third party financing sources;
the availability of the Company's line of credit; consumer sentiment and health
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 or the Company's third party financing sources;
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.
15
Results of Operations
- ---------------------
The core business of the Company is historically seasonal due to the
harvest seasons in North America and Europe. The Company's machinery tends to be
purchased in anticipation of the next harvest season, so most of the sales of
machinery occur in the spring and summer. This requires the Company to carry
significant amounts of inventory to meet rapid delivery requirements of
customers. Bag sales tend to occur as the harvest season approaches in the
summer, and during the harvest season in the fall. In September 2002, the
Company took steps to counteract seasonality by developing and introducing a
pre-season ordering program, whereby the Company's dealers place their next
year's annual product requirements order in advance and utilize one of the
Company's third party financing sources. The pre-season program has allowed the
Company to know in advance its production mix which in turn has provided the
Company with the ability to level its production and flexibility in customer
shipments. During 2003, the Company expanded this program by allowing dealers to
finance through their local bank, rather than requiring them to utilize one of
the Company's third party financing programs. This however, has brought
seasonality back into play for the Company, as shipments under the dealer bank
program are at the timing of the dealer rather than the Company under the terms
of the program. The Company's trade-off with shipment flexibility however, is
lower overall financing costs under the dealer bank program. Approximately 50%
of the Company's dealers use the local dealer bank financing program option. The
pre-season order program is a program under which the Company pays the flooring
interest for dealers and pays volume discounts to dealers based upon a sliding
scale for the volume of orders placed by the dealer under the program.
Approximately 95% of the Company's business is concentrated in the Northern
Hemisphere resulting in between 53-70% 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 2001 2002 2003
------- ---------- ---------- ----------
First 15% 18% 32%
Second 35% 37% 27%
Third 35% 32% 26%
Fourth 15% 13% 15%
As a result of the introduction in September 2002 and modification in 2003 of
the Company's pre-season order program, these historical revenue percentages may
not be indicative of future revenue percentage by quarter.
Sales for the quarter ended March 31, 2004 decreased 38.77% to
$4,205,698 compared to $6,868,301 for the quarter ended March 31, 2003. Sales
were down for the quarter as a result of the Company's
16
dealers placing conservative orders under the pre-season order program for
2003-04 resulting from carryover of inventory at the dealer level from the prior
year, coupled with anticipated end use customer reluctance to make retail
purchases in the near term until their balance sheets improve from the
prolonged, depressed U.S. milk price situation in the dairy industry.
Additionally, the Company's pre-season order program expanded to the dealers'
local bank level in late 2003. Consequently, seasonality is beginning to enter
the Company's operations again, as shipment of product is at the discretion of
the dealer instead of the Company. The Company's dealers benefit from their
local bank relationships and usually receive a lower financing rate than a
national third party company would provide, without up-front financing fees.
Consequently, this helps to lower the overall financing costs for the Company
with dealers using this option. Several of the Company's dealers however, did
not have their financing in place during the first quarter and as a result, the
Company could not ship product to those dealers.
The outlook for 2004 still indicates that milk prices will remain above
the record low levels seen during early 2003 of $9.11. The following chart
outlines the historical monthly milk prices from January 2003 through March 2004
as published by the U.S. Department of Agriculture (USDA).
[GRAPHIC OMITTED]
[2003-04 MONTHLY MILK PRICE CHART - SEE FOLLOWING TABLE]
Milk Price Table
YR'S
Year Jan-03 Feb Mar Apr May June July Aug Sept Oct Nov Dec Jan-04 Feb Mar Avg.
---- ------ --- --- --- --- ---- ---- --- ---- --- --- --- ------ --- --- ----
2003 $9.78 $9.66 $9.11 $9.41 $9.71 $9.75 $11.78 $13.80 $14.30 $14.39 $13.47 $11.87 $11.61 $11.89 $14.49 $ 11.42
2004 11.61 11.89 14.49 $12.66
Source: USDA Basic Formula Price (BFP) monthly
Dairy farmers began seeing increases in their monthly milk checks
during the first quarter of 2004, but continued to remain cautious, despite
continued low interest rates, on increasing their capital expenditures.
Management believes that once sustained, prolonged upward movement in U.S. milk
prices are seen, farmers will be able to repay their existing obligations which
mounted from the persistently low milk prices over the last year and a half and
purchase the Company's products. Also contributing to the decline
17
in sales was increased volume discounts from the implementation of the Company's
pre-season order program coupled with continued strong competition in the silage
bag market, as farmers look for the most economically priced bag, with lesser
consideration for quality and customer service, contributed to the decline.
[GRAPHIC OMITTED]
[HISTORICAL MILK PRICE CHART - SEE FOLLOWING TABLE]
Milk Price Table
YR'S
Year Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Avg.
---- --- --- --- --- --- ---- ---- --- ---- --- --- --- ----
1980 11.37 11.35 11.59 11.70 11.66 11.68 11.73 11.86 12.07 12.42 12.52 12.61 $ 11.88
1981 12.64 12.66 12.67 12.64 12.61 12.59 12.53 12.47 12.46 12.52 12.52 12.56 $ 12.57
1982 12.55 12.46 12.45 12.45 12.43 12.42 12.42 12.44 12.46 12.56 12.56 12.62 $12.49
1983 12.62 12.59 12.53 12.51 12.51 12.50 12.50 12.48 12.48 12.52 12.56 12.11 $12.49
1984 12.05 12.06 12.08 12.07 12.08 12.09 12.17 12.30 12.64 12.64 12.72 12.52 $12.29
1985 12.40 12.21 11.95 11.62 11.46 11.20 11.10 11.08 11.12 11.21 11.19 11.18 $ 11.48
1986 11.12 11.04 11.02 10.98 10.98 11.00 11.06 11.33 11.55 11.69 11.91 11.88 $ 11.30
1987 11.70 11.27 11.03 11.00 11.00 11.07 11.17 11.27 11.42 11.35 11.34 11.12 $ 11.23
1988 10.91 10.60 10.43 10.33 10.34 10.34 10.52 10.98 11.48 11.88 12.23 12.27 $ 11.03
1989 11.90 11.26 10.98 11.09 11.12 11.33 11.76 12.37 13.10 13.87 14.69 14.93 $ 12.37
1990 13.94 12.22 12.02 12.32 12.78 13.28 13.43 13.09 12.50 10.48 10.25 10.19 $ 12.21
1991 10.13 10.04 10.02 10.04 10.23 10.58 10.99 11.50 12.02 12.50 12.48 12.10 $ 11.05
1992 11.71 11.21 10.98 11.46 12.06 12.46 12.59 12.54 12.28 12.05 11.84 11.34 $ 11.88
1993 10.89 10.74 11.02 12.15 12.52 12.03 11.42 11.17 11.90 12.46 12.75 12.51 $ 11.80
1994 12.41 12.41 12.77 12.99 11.51 11.25 11.41 11.73 12.04 12.29 11.86 11.38 $12.00
1995 11.35 11.79 11.89 11.16 11.12 11.42 11.23 11.55 12.08 12.61 12.87 12.91 $ 11.83
1996 12.73 12.59 12.70 13.09 13.77 13.92 14.49 14.94 15.37 14.13 11.61 11.34 $13.39
1997 11.94 12.46 12.49 11.44 10.70 10.74 10.86 12.07 12.79 12.83 12.96 13.29 $ 12.05
1998 13.25 13.32 12.81 12.01 10.88 13.10 14.77 14.99 15.10 16.04 16.84 17.34 $14.20
1999 16.27 10.27 11.62 11.81 11.26 11.42 13.59 15.79 16.26 11.49 9.79 9.63 $12.43
2000 10.05 9.54 9.54 9.41 9.37 9.46 10.66 10.13 10.76 10.02 8.57 9.37 $ 9.74
2001 9.99 10.27 11.42 12.06 13.83 15.02 15.46 15.55 15.90 14.60 11.31 11.80 $ 13.10
2002 11.87 11.63 10.65 10.85 10.82 10.09 9.33 9.54 9.92 10.72 9.84 9.74 $10.42
2003 9.78 9.66 9.11 9.41 9.71 9.75 11.78 13.80 14.30 14.39 13.47 11.87 $ 11.42
2004 11.61 11.89 14.49 $12.66
Source: USDA Basic Formula Price (BFP) annualized average
The following table identifies revenue from each product line that
accounted for more that 15% of total revenue for the quarter as compared to the
same quarter in the prior year:
Product 2004 2003
------- ---- ----
Bags 44% 31%
Machines 38% 56%
Other 18% 13%
--- ---
Net Sales 100% 100%
Machine sale revenue for the quarter declined 57.78% and bag sale
revenue declined 13.39% compared to the same period of 2003. Machine and bag
sale revenue declined as a result of the sales factors previously discussed. The
following table identifies the number of machines sold by size by the Company
for the first quarter of 2004 compared to 2003:
Units Sold Units Sold
Machine Size 2004 2003
------------ ---- ----
Small 22 43
Medium 3 3
Large 3 13
---------------- ---------------
Total 28 59
================ ===============
18
Machine sales are directly tied to farmers' income and therefore their
ability to purchase new equipment. The total number of bagging machines that are
in the marketplace drives the Company's bag and parts sales. However, there is
not a perfect correlation between the Company's bag sales and machine sales, as
the Company's and competitors' bags are interchangeable on all bagging machinery
in the industry. The Company cannot estimate with any certainty the total number
of machines or bags used in the industry.
The Company sold two composting systems in addition to compost bag
sales during the quarter ended March 31, 2004, generating approximately $163,000
in revenue, compared to the quarter ended March 31, 2003 in which one system was
sold, in addition to compost bags, generating approximately $150,000 in revenue.
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 30-35% of
total sales. The gross margin realized on the Company's direct sales are
typically within 1-3% 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. Beginning in late 2002, the Company began
focusing its marketing efforts more on dealer development and expanding its
dealer network rather than a focus towards direct selling. As a result of this
shift, the Company anticipates its sales mix to begin to favor more dealer sales
in the future.
Gross profit as a percentage of sales increased 10.96% for the quarter
ended March 31, 2004 compared to the same period in 2003. The increase for the
quarter was the result of stable margins on the Company's "core" smaller-sized
bagging machines, coupled with cost reductions implemented during late 2003 and
during the first quarter of 2004 to lower the Company's fixed manufacturing
overheads and improve the Company's overall margins.
Selling expenses for the quarter ended March 31, 2004 decreased 22.66%
to $498,471 compared to $679,695 for the quarter ended March 31, 2003. The
decrease for the quarter was the result of lower commissions and third party
financing fees caused by lower sales volumes, lower overall advertising costs,
and lower personnel, benefit, and travel costs associated with cost reductions
implemented late in 2003 which were fully in place during the first quarter of
2004.
Administrative expenses for the quarter ended March 31, 2004 increased
5.54% to $692,993 compared to $656,641 for the quarter ended March 31, 2003. The
increase for the quarter was the result of higher professional fees from the
conclusion of the ongoing
19
patent litigation and patent development costs, and increases in insurance
expense, partially offset by lower administrative salaries, employee benefit
expenses and general office expenses.
Research and development expenses for the quarter ended March 31, 2004
were $50,568 compared to $23,068 for the quarter ended March 31, 2003. Research
for the quarter focused on continued development and testing of the newer design
of the Company's larger-sized silage bagging machine and compost machine
modification, in addition to continuing ongoing research regarding new silage
and nutritional studies of bagged feed and its effects on animal production.
Interest expense for the quarter ended March 31, 2004 increased 49.01%
to $70,818 compared to $47,500 for the quarter ended March 31, 2003. The
increase for the quarter was the result of the Company utilizing a larger
portion of its credit line, coupled with an increase in the interest rate on its
line of credit as a result of an amendment to the Company's credit agreement
with its primary lender during the quarter.
Miscellaneous income for the quarter ended March 31, 2004 decreased
14.58% to $81,967 compared to $95,956 for the quarter ended March 31, 2003. The
decrease for the quarter was the result of lower general miscellaneous income,
offset by increased royalty income.
The Company's effective income tax rate for the quarter ended March 31,
2004 was zero compared to (51.34%) for the quarter ended March 31, 2003. The
effective tax rate was zero during the quarter due to the fact the Company
established an additional $163,000 valuation allowance against its deferred tax
assets in respect to the Company's ability to utilize its Net Operating Loss
carryforwards and research tax credits, which was offset by the fact the
Company's income from its German joint venture is not taxable in the United
States, and the extraterritorial income exclusion provisions of the current
United States tax code.
Net loss for the quarter ended March 31, 2004 was $408,948 compared to
$49,287 for the quarter ended March 31, 2003. The decrease for the quarter was
the result of lower sales, increased administrative and interest expenses, in
addition to lower miscellaneous income and no tax benefit being realized from
the quarterly loss due to establishment of a valuation allowance against the
deferred tax assets generated during the quarter, partially offset by increases
in the Company's gross profit as a percentage of sales, and lower selling
expenses.
20
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 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. Although the Company's pre-season ordering program provides it
with some flexibility in production, the Company must maintain adequate
inventory levels for those customers, both old and new, who order or re-order
product outside of this program throughout the year.
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 have been flexible with their
payment terms (including extended payment arrangements) provided to the Company
and management believes this will continue. However, no assurance can be given
that suppliers will continue to provide sufficient trade credit in the future.
As a result of the Company incurring net losses during the previous three
years and during the first quarter of 2004, and its negative cash flows from
operations for the prior year, there is uncertainty about the Company's ability
to continue as a going concern. The Company's management believes the Company's
weak operating results have been primarily due to the depressed milk prices in
the agriculture sector, which have a direct impact on the disposable income of
its dairy farm customers, who account for approximately 75% of the Company's
business. The Company further believes that dairy farmers have been delaying or
eliminating capital expenditures due to their uncertainties regarding milk
prices and their disposable income. Predictions for 2004 continue to show milk
prices significantly higher than the historically low levels seen for many of
the previous years and the Company expects operating results to improve as dairy
farmers begin to see increases in their disposable income through stabilizing
milk prices. The Company's management also feels that dealers have been
conservative on their pre-season orders for 2003-04 as a result of the
prolonged, depressed milk price situation. It is management's feeling that some
dealers will have the need to re-order additional product during the year as a
result of the forecasted improving milk prices, which should help the Company's
dealers sell out of their remaining inventories. If this happens, there is a
potential for higher gross margins for the Company, as the dealers would be
re-ordering outside of the pre-season order program terms which provide for a
lower volume discount on their re-orders.
To help provide positive cash flow for the Company, management implemented
an expense reduction plan in late 2003. Specifically, management implemented
staff reductions and reduced salaries of
21
senior management. Nonessential capital expenditures, travel and other expenses
have either been eliminated or postponed. Management also continues considering
other changes to the Company's business model such as opportunities to sell the
business, refinance the Warrenton, Oregon facility (which has only a small
economic development loan outstanding against this collateral), consolidate or
dispose of manufacturing facilities or other tangible or intangible assets,
including selling the Company's 50% interest in its joint venture, or a policy
loan against the life insurance policies currently in force in which the Company
is the beneficiary. However, no assurance can be given that the Company will be
successful in accomplishing these objectives.
Accounts receivable decreased 45.47% at March 31, 2004 to $1,783,848
compared to $3,271,349 at March 31, 2003. The decrease was the result of lower
sales for the quarter coupled with the Company changing its collection methods
during the fourth quarter of 2002, whereby the Company's customers no longer
have open account terms and the Company generally receives funding from its
third party financing sources within 10 days of invoice processing. At March 31,
2003, the Company still had some receivables outstanding under its previous
collection method of providing terms for its customers. For new purchases, the
Company's customers have the option to pay in advance for their order, utilize
their own established credit, or utilize one of the Company's third-party
financing sources or programs offered for their purchases. The Company has
established adequate reserves ($187,901 at March 31, 2004 compared to $169,886
at March 31, 2003) against accounts receivable in the event that some of the
remaining accounts become uncollectible.
The Company relies on its third-party financing sources and the dealers'
own established credit with their local banks, to provide funding for the
Company's dealers' and retail customers' purchases under the pre-season order
program. The Company's third party financing sources and dealers' local banks
have provided sufficient credit to the Company's dealers to date for the Company
to receive payment and management believes this will continue. However, no
assurance can be given that the Company's third-party financing sources and
dealers' local banks will continue to provide the Company with dealer and end
user financing programs designed for the Company.
Inventory increased 3.06% at March 31, 2004 to $5,437,531 compared to
$5,276,021 at March 31, 2003. The small increase in inventory resulted from the
Company's dealers controlling more of the timing of their product shipments to
be closer to season, as a result of the local dealer bank financing component of
the Company's pre-season order program and the Company's production on those
orders. The Company continues its efforts to streamline inventory and more
closely match its production with planned inventory requirements.
22
Other current assets decreased 8.62% at March 31, 2004 to $355,764
compared to $389,338 at March 31, 2003. The decrease was the result of a
decrease in trade show deposits and other prepaid expenses.
Deferred income taxes decreased to $-0- at March 31, 2004 compared to
$1,065,000 at March 31, 2003. The decrease was the result of the Company
establishing a valuation allowance of $1,740,772 against its deferred tax assets
at March 31, 2004.
Intangible assets at March 31, 2004 increased to $12,590 compared to
$9,666 at March 31, 2003. The increase was the result of new patents developed
on the Company's bagging machine technology, offset by normal amortization
expense.
The BAW joint venture asset decreased to $398,589 at March 31, 2004
compared to $409,438 at March 31, 2003. The decrease was the result of the
deferred gain under the equity method of accounting, of the Company's share of
gain from the sale of folding equipment sold to the German joint venture in the
second quarter of 2003, which was offset by the Company's share of income for
the quarter. During the quarter ended March 31, 2004, $21,615 of deferred gain
was recognized.
Other assets decreased to $449,446 at March 31, 2004 compared to $458,917
at March 31, 2003. The decrease was due to changes in the cash surrender value
of life insurance policies maintained by the Company under which it is the
beneficiary.
The Company has a revolving operating line of credit with a limit of
$3,000,000, secured by accounts receivable, inventory, fixed asset blanket and
general intangibles, and bears interest at the bank's prime rate plus 4 3/4%. As
of March 31, 2004, $1,951,375 was outstanding under the credit line. The line of
credit will fluctuate based upon production needs and the timing of collection
of receivable balances. Additionally, the Company's borrowing base fluctuates as
receivables and inventory change. The borrowing base is equal to (1) the lesser
of the maximum line amount or (2) the sum of 70% of eligible accounts receivable
plus the lesser of 40% of eligible inventory or $2 million. The line of credit
is subject to certain net worth and earnings covenants, and an annual capital
expenditure limit. Management believes that funds generated from operations,
management's implemented expense reduction plan and other changes being
considered to the Company's business model, and the Company's operating line of
credit, will be sufficient to meet the Company's cash requirements through 2004.
The Company's line of credit is subject to renewal in May 2006.
On December 18, 2000, the Company entered into an agreement with Dresdner
Bank to guarantee up to 511,292 Euro ($622,396 US) as security for an additional
cash credit facility of the Company's German joint venture. In August 2003, the
guarantee was reduced by Dresdner Bank to 250,000 Euro ($304,325 US). There was
250,000 Euro
23
($304,325 US) outstanding and guaranteed by the Company under this additional
cash credit facility at March 31, 2004.
Accounts payable decreased 9.22% at March 31, 2004 to $1,446,170 compared
to $1,593,120 at March 31, 2003. The decrease for the quarter was the result of
the Company slowing its manufacturing process during the first month of the
quarter (resulting from the Company's local bank pre-season order program
option), offset with extended term payment arrangements provided by some of the
Company's principal suppliers.
Accrued expenses and other current liabilities decreased 23.17% at March
31, 2004 to $1,056,756 compared to $1,375,476 at March 31, 2003. The decrease in
accrued expenses and other current liabilities for the quarter was the result of
decreased payroll and benefit accruals from personnel reductions occurring
during the later part of 2003 and during the quarter, decreased dealer deposits
from the Company's change in its customer payment options implemented in late
2002, and lower accrued warranty expenses resulting from the Company passing on
more warranty costs to its principal suppliers. These were partially offset by
increases in volume discounts from the Company's pre-season order program,
coupled with increased general and pre-season order flooring interest 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.
24
The following table outlines the Company's future contractual obligations
by type:
Payments due by period
--------------------------------------------------------------------------------
Contractual Less than More than
Obligations Total 1 year 1-3 years 3-5 years 5 years
--------------------------------------------------------------------------------
Long-term debt $1,217,678 $167,742 $155,503 $159,265 $735,168
Operating leases 254,783 13,698 43,834 43,834 153,417
Purchase obligations - - - - -
--------------------------------------------------------------------------------
Total $1,472,461 $181,440 $199,337 $203,099 $888,585
================================================================================
Off-Balance Sheet Arrangements
- ------------------------------
As of March 31, 2004, we did not have any significant off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
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 4 3/4%.
25
ITEM 4. CONTROLS AND PROCEDURES.
As of March 31, 2004, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and the Company's Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on the evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in the reports it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and forms.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls including any corrective
actions with regard to significant deficiencies and material weaknesses
subsequent to the date the Company completed its evaluation.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.9 Third Amendment to Credit and Security Agreement
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 2004.
26
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 13, 2004 By: /s/ Michael R. Wallis
---------------------------
Michael R. Wallis
Chief Financial Officer and
Vice President of Finance
(duly authorized and principal
financial officer)
27
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.9 Third Amendment to Credit and Security Agreement
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
28