Back to GetFilings.com
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, 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 July 29, 2004.
1
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AG-BAG INTERNATIONAL LIMITED
CONDENSED BALANCE SHEETS
ASSETS
June 30 December 31
(Unaudited)
2004 2003 2003
---------- ---------- ----------
Current assets:
Cash and cash equivalents $ 199,884 $ 275,956 $ 167,528
Accounts receivable 1,979,620 2,395,522 1,226,390
Inventories 5,419,782 7,223,000 5,781,345
Other current assets 293,859 325,775 251,808
Deferred income tax - 392,000 -
---------- ---------- ----------
Total current assets 7,893,145 10,612,253 7,427,071
Deferred income tax - 717,000 -
Intangible assets, less
accumulated amortization 10,113 20,019 15,066
Property, plant and equipment
less accumulated depreciation 2,821,553 3,585,951 3,233,673
BAW Joint-venture - 266,520 376,974
Other assets 478,117 476,417 491,513
--------- ---------- ----------
Total assets $11,202,928 $15,678,160 $11,544,297
========== ========== ==========
(Continued)
2
AG-BAG INTERNATIONAL LIMITED
CONDENSED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30 December 31
(Unaudited)
2004 2003 2003
---------- ---------- ----------
Current liabilities:
Notes payable to bank $ 1,406,449 $ 1,871,328 $ 2,090,448
Current portion of long term
debt and capital lease
obligations 126,335 201,810 182,706
Accounts payable 1,279,837 2,129,440 936,953
Accrued expenses and other
current liabilities 1,671,926 1,318,430 961,731
Income tax payable 2,210 2,210 2,210
---------- ---------- ----------
Total current liabilities 4,486,757 5,523,218 4,174,048
Long-term debt and capital
lease obligation, less
current portion 1,028,088 1,156,659 1,071,488
---------- ---------- ----------
Total liabilities 5,514,845 6,679,877 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 (4,307,247) (997,047) (3,696,569)
---------- ---------- ----------
Total shareholders' equity 5,688,083 8,998,283 6,298,761
---------- ---------- ----------
Total liabilities and
shareholders' equity $11,202,928 $15,678,160 $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
Preferred stock dividends (29,580) (29,580)
Net loss (172,150) (172,150)
------- ------- ---------- ------- -------- ------- --------- --------- -----------
Balance June 30, 2004 174,000 $696,000 12,061,991 $120,619 105,000 ($31,500) $9,210,211 $(4,307,247) $ 5,688,083
======= ======= ========== ======= ======== ======= ========= ========= ===========
See Notes to Condensed Financial Information
4
AG-BAG INTERNATIONAL LIMITED
CONDENSED STATEMENTS OF OPERATIONS
Three Months
Ended June 30
(Unaudited)
----------------------
2004 2003
---- ----
Net sales $ 5,607,389 $ 5,780,508
Cost of sales 4,721,304 4,737,946
--------- ---------
Gross profit from operations 886,085 1,042,562
Selling expenses 552,384 675,230
Administrative expenses 649,506 773,627
Gain on sale of assets ( 80,921) (172,919)
Research and development expenses 34,908 67,051
--------- ---------
Loss from operations (269,792) (300,427)
Other income (expense):
Interest income - -
Interest expense ( 69,661) ( 63,953)
Miscellaneous 167,303 285,894
--------- ---------
Loss before provision for income taxes (172,150) (78,486)
Benefit for income taxes - (44,000)
--------- ---------
Net loss and comprehensive loss $ (172,150) $ (34,486)
========= =========
Basic and diluted net loss
per common share $ (.02) $ .00
========= =========
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 OPERATIONS
Six Months
Ended June 30
(Unaudited)
----------------------
2004 2003
---- ----
Net sales $ 9,813,087 $12,648,809
Cost of sales 8,105,067 10,396,586
--------- ---------
Gross profit from operations 1,708,020 2,252,223
Selling expenses 1,050,855 1,354,925
Administrative expenses 1,342,499 1,430,268
Gain on sale of assets ( 80,921) (172,919)
Research and development expenses 85,476 90,118
--------- ---------
Loss from operations (689,889) (450,169)
Other income (expense):
Interest income - -
Interest expense (140,479) (111,454)
Miscellaneous 249,270 381,850
--------- ---------
Loss before provision for income taxes (581,098) (179,773)
Benefit for income taxes - (96,000)
--------- ---------
Net loss and comprehensive loss $ (581,098) $ (83,773)
========= =========
Basic and diluted net loss
per common share $ (.05) $ (.01)
========= =========
Basic and diluted weighted average
number of common shares outstanding 11,956,991 11,956,991
========== ==========
See Notes to Condensed Financial Information
6
AG-BAG INTERNATIONAL LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 30
(Unaudited)
-----------
2004 2003
---- ----
Cash flows from operating activities:
Net loss $ (581,098) $ (83,773)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 313,691 407,317
Inventory obsolescence reserves - 60,000
Deferred income taxes - (96,000)
(Gain) on sale of assets ( 80,921) (172,919)
Changes in assets and liabilities:
Accounts receivable ( 753,230) (1,236,595)
Inventories 361,563 (1,279,701)
Other current assets ( 42,051) (126,898)
Accounts payable 342,884 1,226,131
Accrued expenses and other current
liabilities 710,195 182,822
Other assets (73,068) (27,289)
Income tax payable - -
---------- -----------
Net cash provided by/(used in) operating
activities 197,965 (1,146,905)
---------- -----------
Cash flows from investing activities:
Capital expenditures ( 2,369) ( 38,313)
Intangible assets - ( 12,532)
Proceeds from sale of assets 650,110 401,800
---------- -----------
Net cash provided by investing
activities 647,741 350,955
---------- -----------
Cash flows from financing activities:
Net proceeds/(repayments on)
line of credit (683,999) 1,486,603
Principal payments on debt ( 99,771) (452,643)
Payment of preferred dividends (29,580) (29,580)
---------- -----------
Net cash provided by/(used in) financing
activities ( 813,350) 1,004,380
---------- -----------
Net increase in cash 32,356 208,430
Cash and cash equivalents at beginning
of period 167,528 67,526
---------- -----------
Cash and cash equivalents at end of period $ 199,884 $ 275,956
========= ==========
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, 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
June 30, 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 half 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 the remainder of 2004 and
into 2005 continue to show milk prices higher than the historically low levels
seen for many of the previous years and the Company expects operating results to
improve slowly as dairy farmers begin to see increases in their disposable
income through stabilizing milk prices. The Company's management also feels that
dealers were 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 continue having the need to re-order additional product during
the next quarter as a result of the improved milk prices, which should help the
Company's dealers sell out of their remaining inventories. The Company has
experienced some of this during the second quarter of 2004. If this continues to
happen, 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 and
therefore receiving a lower volume discount on their re-orders. As dealer's
inventories become depleted, they will need to increase the size of their next
8
pre-season order (2004-05) to take full advantage of the various sales
incentives and to maximize their volume discounts.
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 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, or take a policy loan against
the life insurance policies currently in force in which the Company is the
beneficiary. On August 13, 2004, the Company entered into an Asset Purchase
Agreement to sell substantially all of the Company's operating assets, including
the Ag-Bag name, to Miller St. Nazianz, Inc., a Wisconsin corporation who will
integrate the operations of Ag-Bag into their current farm equipment
manufacturing business operations. The Company estimates this transaction to be
valued at approximately $8-9 million in cash, subject to adjustments for assets
and inventory actually acquired at closing under the agreement. The transaction,
which has been approved by the Company's Board of Directors, is subject to
stockholder approval and other customary closing conditions, and is anticipated
to close within the next ninety days. However, no assurance can be given that
the Company will be successful in accomplishing any of these objectives.
Because it is unclear whether the Company will be successful in
accomplishing any of 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:
June 30 December 31
(Unaudited)
2004 2003 2003
---------- ---------- ----------
Finished goods $4,521,193 $5,747,958 $4,846,358
Work in process $ 848,042 $1,279,196 $ 880,687
Raw materials $ 50,547 $ 195,846 $ 54,300
---------- ---------- ----------
Total $5,419,782 $7,223,000 $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.
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
9
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 six-month results
may not be indicative of the estimated results for a full fiscal year.
BAW Joint Venture
- -----------------
On April 27, 2004, the Company sold its investment in the BAW Joint Venture
(Budissa Agrodienstleistungen Und Warenhandels) to its German dealer, BAG
(Budissa Agroservice) for $500,000 in cash, payable 30 days from closing, to
provide the Company with working capital. The Company received the $500,000 on
May 26, 2004. The Company recognized $36,562 of gain from this sale. Prior to
this date, the Company had a 50% interest in the BAW Joint Venture which was
accounted for under the equity method of accounting. The condensed income
statement for the Company's former BAW Joint Venture in Germany was as follows:
(Dollars in 000's)
Six-Months Ended June 30
(Unaudited)
------------------------------------
2004 2003
---- ----
Net sales $ - $ 1,178
Cost of goods sold - (1,029)
------------------------------------
Gross profit - 149
Selling & administrative expenses - (165)
Other income - 33
Income tax expense - (6)
------------------------------------
Net income* $ - $ 11
====================================
* Attributed to other shareholders $ - $ 1
The condensed income statement has been translated from the Euro to the U.S.
dollar at average exchange rates in effect for the period ended June 30, 2003.
The average exchange rate used at June 30, 2003 was $1.10.
10
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 international royalties and the extraterritorial income exclusion.
In addition, management has established a valuation allowance of $1,867,772 to
fully reserve against its deferred tax assets at June 30, 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:
June 30, June 30,
2004 2003
--------------- ---------------
Balance, beginning of the year
$ 74,753 $177,384
Charged to expense 6,757 70,400
Warranty costs incurred during the period (17,237) (84,142)
--------------- ---------------
Balance, end of period $ 64,273 $163,642
=============== ===============
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.
11
The Company has computed the value of all options granted during the six-month
periods ended June 30, 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:
June 30, June 30,
2004 2003
-------------------- --------------------
Net loss:
As reported $ (581,098) $ ( 83,773)
Pro forma $ (582,707) $ ( 90,053)
Net income (loss) per share:
As reported (.05) (.01)
Pro forma (.05) (.01)
Supplemental Disclosures Regarding Cash Flows
- ---------------------------------------------
Supplemental disclosure of cash flow information:
2004 2003
---- ----
Cash paid during the six-month period ended June 30:
Interest $ 140,479 $ 111,454
Income taxes $ 2,350 $ 3,375
Recently Issued Accounting Standards
- ------------------------------------
In June 2003, the Financial Accounting Standards Board ("FASB") issued
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.
12
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 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 was associated with a potential variable interest entity through its
investment in BAW, prior to its sale in April 2004. Management determined that
BAW was a variable interest entity, but concluded that the Company was not the
primary beneficiary.
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 June 30, 2004, compared to the results of operations for the
three-month period ended June 30, 2003, and to the results of operations for the
six-month period ended June 30, 2004, compared to the results of operations for
the six-month period ended June
13
30, 2003, and to changes in the Company's financial condition from December 31,
2003 to June 30, 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 $182,903 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 $5,000, 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.
The $64,273 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
14
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 $7,071
under this program at June 30, 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 June 30, 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 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 $1,867,772 valuation allowance against
its deferred tax assets as of June 30, 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,
15
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 the remainder 2004 and into 2005 above
record lows in 2000; availability of credit in the farming sector and rising
interest rates; 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 and the upcoming 2004-05
program; the availability of trade credit and working capital; the availability
of third party financing sources; the Company's plan on September 30, 2004, to
begin accepting charges for only preferred customers using the John Deere Credit
Farmplan program as a third party financing source and discontinue accepting
merchant authorized charges; 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 inability of customers'/dealers' to qualify for preferred status using the
John Deere Farmplan third party financing program; 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 raw material costs; and an
adverse outcome in any of the pending litigation against the Company.
Overview
- --------
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
16
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.
17
The following chart outlines historical yearly average milk prices as
published by the USDA.
Source: USDA Basic Formula Price (BFP) annualized average
The outlook for the remainder of 2004 and into 2005 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 July 2004 as published by the U.S. Department of
Agriculture (USDA).
Source: USDA Basic Formula Price (BFP) monthly
18
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 and breakeven
yearly milk price averages of above $12 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. However,
recently the milk prices have begun falling off their highs of May 2004, and end
users seem to believe that milk prices will settle back to below breakeven
levels for them, despite recent forecasts indicating milk prices averaging over
$12 for 2004.
Results of Operations
- ---------------------
Net sales for the quarter ended June 30, 2004 decreased 2.99% to
$5,607,389 compared to $5,780,508 for the quarter ended June 30, 2003. Net sales
for the six-month period ended June 30, 2004 decreased 22.42% to $9,813,087
compared to $12,648,809 for the six-month period ended June 30, 2003. Net sales
were down for the quarter as a result of continued, guarded customer buying
attitudes in the near term from the prolonged, depressed U.S. milk price
situation in the dairy industry, despite the recent increases in milk prices.
Additionally, the Company's dealers were conservative when placing orders under
the pre-season order program for 2003-04 resulting from carryover of inventory
at the dealer level from the prior year. Some of the Company's dealers had to
re-order machinery during the quarter, outside of the pre-season order program,
which helped to partially offset some of the sales decline.
Net sales for the six-month period were down as a result of the above
mentioned factors, coupled with the expansion of the Company's pre-season order
program to the dealers' local bank level in late 2003. As a result, seasonality
has begun to enter the Company's operations again, as shipment of product is at
the discretion of the dealer instead of the Company. Several of the Company's
dealers did not have their financing in place in the first quarter of 2004 and
as a result, the Company could not ship product to those dealers in the first
quarter.
Also contributing to the decline in sales for the quarter and six
month-period was increased volume discounts from the Company's pre-season order
program and other incentive programs offered to increase market share during the
second quarter of 2004, 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.
19
The following table identifies revenue from each product line that
accounted for more that 15% of total revenue for the quarter and six-month
period as compared to the same quarter and six-month period in the prior year:
2nd Quarter 2nd Quarter Six-Months Ended Six-Months Ended
Product 2004 2003 June 30, 2004 June 30, 2003
---------------- ---------------- ----------------- -------------------- ---------------------
Machines 48% 31% 43% 44%
Bags 48% 57% 46% 43%
Other 4% 12% 11% 13%
---------------- ----------------- -------------------- ---------------------
Net Sales 100% 100% 100% 100%
Net machine sale revenue for the quarter increased 42.64% and bag sale
revenue declined 21.59% compared to the same period of 2003. Net machine sale
revenue for the six-month period declined 26.99% and bag sale revenue declined
19.76% compared to the same period of 2003. Net machine sale revenue increased
for the quarter as a result of dealers ordering additional machines outside of
the pre-season order program, coupled with the fact the Company had a large
international machine sale which occurred during the quarter. Net bag sale
revenue for the quarter and net machine and bag sale revenue for the six-month
period 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 second quarter and six-month period of 2004 compared to
2003:
Units Sold Units Sold Units Sold Units Sold
2nd Quarter 2nd Quarter Six-Months Ended Six-Months Ended
Product 2004 2003 June 30, 2004 June 30, 2003
-------------------- ------------ ------------ ------------------- --------------------
Small 44 32 66 75
Medium 1 1 4 4
Large 4 5 7 18
------------ ------------ ------------------- --------------------
Total 49 38 77 97
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.
20
The Company sold one composting system in addition to compost bag sales
during the quarter ended June 30, 2004, generating approximately $215,000 in
revenue, compared to the quarter ended June 30, 2003 in which only compost bags
were sold, generating approximately $32,000 in revenue. For the six-month period
ended June 30, 2004, the Company sold three composting systems in addition to
compost bag sales, generating approximately $378,000 in revenue, compared to the
six-month period ended June 30, 2003 in which only compost bags were sold,
generating approximately $132,000 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 made up between 15-20% 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 decreased 12.37% for the quarter
ended June 30, 2004 compared to the same period in 2003. Gross profit as a
percentage of sales decreased 2.25% for the six-month period ended June 30, 2004
compared to the same period in 2003. The decrease for the quarter was the result
of a slowdown in factory utilization at the Company's production facilities
where manufacturing costs were not fully absorbed, due to the fact the Company
is trying to more closely match its production requirements to demands in the
marketplace. As a result, the Company's facilities were running only at
approximately 60% capacity for the quarter. The decrease for the six-month
period was the result of the above mentioned factors, which were offset by
stable margins on the Company's "core" smaller-sized bagging machines, coupled
with cost reductions implemented during late 2003 and continuing during the
six-month period to lower the Company's fixed manufacturing overheads once
utilization increases.
Selling expenses for the quarter ended June 30, 2004 decreased 18.19%
to $552,384 compared to $675,230 for the quarter ended June 30, 2003. Selling
expenses for the six-month period ended June 30, 2004 decreased 22.44% to
$1,050,855 compared to $1,354,925 for the six-month period ended June 30, 2003.
The decrease for the quarter and six-month period 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
21
associated with cost reductions implemented late in 2003 which were fully in
place during the first six-months of 2004.
Administrative expenses for the quarter ended June 30, 2004 decreased
16.04% to $649,506 compared to $773,627 for the quarter ended June 30, 2003.
Administrative expenses for the six-month period ended June 30, 2004 decreased
6.14% to $1,342,499 compared to $1,430,268 for the six-month period ended June
30, 2003. The decrease for the quarter was the result of decreases in
professional fees as a result of concluded ongoing patent litigation, coupled
with lower administrative salaries and general office expenses, partially offset
by increased insurance expense and patent development costs. The decrease for
the six-month period was the result of the above mentioned factors, with the
exception of higher professional fees that were incurred during the first
quarter of 2004 as a result of the ongoing patent litigation coming to a
conclusion.
During the second quarter of 2004, the Company recorded a gain from the
sale of assets of $80,921. The gain resulted from the sale of a parcel of vacant
land owned by the Company in addition to the Company recognizing a gain from the
sale of its entire investment in the Company's German joint venture. During the
second quarter of 2003, the Company recorded a gain from the sale of assets of
$345,837. The gain largely resulted from depreciated folding equipment that was
sold to its German joint venture. Under the equity method of accounting with the
Company's 50% ownership in the German joint venture, the Company's share of the
gain of $172,918 was deferred and recognized as the German joint venture
depreciated the folding equipment over its useful life.
Research and development expenses for the quarter ended June 30, 2004
decreased 47.94% to $34,908 compared to $67,051 for the quarter ended June 30,
2003. Research and development expenses for the six-month period ended June 30,
2004 decreased 5.15% to $85,476 compared to $90,118 for the six-month period
ended June 30, 2003. The decrease for the quarter and six-month period was the
result of reduced new machine and recycling development, partially offset by
ongoing research and continued development and testing of the newer design of
the Company's larger-sized silage bagging machine and compost machine
modifications, 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 June 30, 2004 increased 8.93% to
$69,661 compared to $63,953 for the quarter ended June 30, 2003. Interest
expense for the six-month period ended June 30, 2004 increased 26.04% to
$140,479 compared to $111,454 for the six-month period ended June 30, 2003. The
increase for the quarter and six-month period was the result of the Company
utilizing a larger portion of its credit line, coupled with an increase in the
22
interest rate on its line of credit as a result of an amendment to the Company's
credit agreement during the first quarter of 2004.
Miscellaneous income for the quarter ended June 30, 2004 decreased
41.48% to $167,303 compared to $285,894 for the quarter ended June 30, 2003.
Miscellaneous income for the six-month period ended June 30, 2004 decreased
34.72% to $249,270 compared to $381,850 for the six-month period ended June 30,
2003. The decrease for the quarter was the result of lower joint venture income
as a result of the sale of the Company's investment in its German joint venture
and the reduction in folding fees paid by the joint venture upon the sale of the
folding equipment during the second quarter of 2003, in which the Company
received a special one-time folding royalty, which was offset by the deferred
gain on the sale of the folding equipment of $64,849 for the quarter. The
decrease for the six-month period was the result of the above mentioned factors
coupled with lower general miscellaneous income, partially offset by increased
machine royalty income and total deferred gain on the sale of the folding
equipment recognized of $86,464 during the first half of 2004.
The Company's effective income tax rate for the quarter ended June 30,
2004 was zero compared to (56.06%) for the quarter ended June 30, 2003. The
Company's effective income tax rate for the six-month period ended June 30, 2004
was zero compared to (53.40%) for the six-month period ended June 30, 2003. The
effective tax rate was zero during the quarter and six-month period due to the
fact the Company established an additional $127,000 valuation allowance during
the second quarter, and a total of an additional $290,000 valuation allowance
for the six-month period 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 partially offset by the fact the Company's income from
its international royalties are 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 June 30, 2004 was $172,150 compared to
$34,486 for the quarter ended June 30, 2003. Net loss for the six-month period
ended June 30, 2004 was $581,098 compared to $83,773 for the six-month period
ended June 30, 2003. The decrease for the quarter and six-month period was the
result of lower sales, lower gross profit, increased interest expense, lower
miscellaneous income, and reduced gain on sale of assets, and no tax benefit
being realized from the losses due to establishment of a valuation allowance
against the deferred tax assets generated during the quarter and six-month
period, partially offset by decreases in selling, administrative and research
expenses.
23
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 six-months 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 the balance of 2004 and into
2005 continue to show milk prices higher than the historically low levels seen
for many of the previous years and the Company expects operating results to
slowly improve as dairy farmers begin to see increases in their disposable
income through stabilizing milk prices. The Company's management also feels that
dealers were 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 continue having the need to re-order additional product during
the next quarter as a result of the improved milk prices, which should help the
Company's dealers sell out of their remaining inventories. If this continues to
happen, 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 and
therefore receiving a lower volume discount on their re-orders. Additionally,
with dealers' inventories at low levels, the Company anticipates that their
2004-05 pre-season orders will be higher so they can take full advantage
24
of the incentives under the program when restocking their dealer inventories.
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 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, or a policy loan against the
life insurance policies currently in force in which the Company is the
beneficiary. See Part II, Item 5 regarding the Company's plans to sell
substantially all of its operating assets. However, no assurance can be given
that the Company will be successful in accomplishing any of these objectives. In
April of 2004, the Company was successful in selling its German joint venture to
generate operating cash in the amount of $500,000.
Accounts receivable decreased 17.36% at June 30, 2004 to $1,979,620
compared to $2,395,522 at June 30, 2003. The decrease was the result of lower
sales for the quarter. At June 30, 2004, 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 now 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 generally receives funding from its third party financing
sources within 10 days of invoice processing. The Company has established
adequate reserves ($182,903 at June 30, 2004 compared to $160,571 at June 30,
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. Effective September 30, 2004,
the Company will begin processing charges for its customers/dealers who use John
Deere Credits Farmplan program on a preferred customer basis only and will no
longer accept charges for those who are merchant authorized. Farmplan preferred
is more advantageous to the customer/dealer as they receive better interest
rates and payment options than under the merchant program. Additionally, this
will reduce the Company's potential recourse liability in the event the
customer/dealer fails to pay their account under the Farmplan program terms.
(See critical accounting policies.)
25
Inventory decreased 24.96% at June 30, 2004 to $5,419,782 compared to
$7,223,000 at June 30, 2003. The decrease in inventory was the result of the
Company's continued efforts to streamline its inventory and more closely match
its production with planned inventory requirements and market conditions.
However, as a result of the Company's pre-season order program being expanded to
include a dealers' local bank financing component, the Company's dealers control
more of the timing of their product shipments and usually take their product
closer to season, which has brought a seasonality component back into the
Company's business.
Other current assets decreased 9.80% at June 30, 2004 to $293,859 compared
to $325,775 at June 30, 2003. The decrease was the result of a decrease in trade
show deposits and other prepaid expenses.
Deferred income taxes decreased to $-0- at June 30, 2004 compared to
$1,109,000 at June 30, 2003. The decrease was the result of the Company
establishing a valuation allowance of $1,867,772 against its deferred tax assets
at June 30, 2004.
Intangible assets at June 30, 2004 decreased 49.48% to $10,113 compared to
$20,019 at June 30, 2003. The decrease was the result of normal amortization
expense.
The BAW joint venture asset decreased to $-0- at June 30, 2004 compared to
$266,520 at June 30, 2003. The decrease was the result of the sale of the
Company's investment in its joint venture during the quarter and recognizing the
balance 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. The balance of deferred gain from
the folding equipment recognized during the quarter upon the sale of the joint
venture was $64,849 and the total deferred gain recognized for the six-month
period ended June 30, 2004 was $86,464.
Other assets were flat at $478,117 on June 30, 2004 compared to $476,417
at June 30, 2003.
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 June 30, 2004, $1,406,449 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
26
expenditure limit. The Company was in default at June 30, 2004 with the net
worth and earnings covenants and is currently working with its primary lender to
cure the default and reset the covenants. 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 ($617,743 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 ($302,050 US). On April
27, 2004, upon the sale of the Company's German joint venture, the Company was
relieved of its bank guarantee with Dresdner Bank and has no further guarantees
or obligations outstanding with Dresdner Bank.
Accounts payable decreased 39.90% at June 30, 2004 to $1,279,837 compared
to $2,129,440 at June 30, 2003. The decrease was the result of the Company
slowing its manufacturing process during the period (resulting from the
Company's local bank pre-season order program option and market conditions),
offset with extended term payment arrangements provided by some of the Company's
principal suppliers.
Accrued expenses and other current liabilities increased 26.81% at June
30, 2004 to $1,671,926 compared to $1,318,430 at June 30, 2003. The increase was
the result of increases in volume discounts from the Company's pre-season order
program and other short-term customer incentive accruals offered during seasonal
demand periods. These increases were partially offset by decreased payroll and
benefit accruals from personnel reductions, 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.
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.
27
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 $1,154,423 $126,335 $149,118 $159,265 $719,705
Operating leases 250,217 9,132 43,834 43,834 153,417
Purchase obligations - - - - -
------------------------------------------------------------------------------------
Total $1,404,640 $135,467 $192,952 $203,099 $873,122
====================================================================================
Off-Balance Sheet Arrangements
- ------------------------------
As of June 30, 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%.
28
ITEM 4. CONTROLS AND PROCEDURES.
As of June 30, 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 3. DEFAULTS UPON SENIOR SECURITIES.
The Company was in default at June 30, 2004 with two of its financial
covenants under its revolving operating line of credit with its primary lender,
Wells Fargo Business Credit and the default has not been cured as of the date of
filing of this report. The Company was not in compliance with the net worth and
earnings before taxes covenant, and is currently working with Wells Fargo
Business Credit to waive the default and amend its financial covenants for the
balance of the year. The amount outstanding under the revolving line of credit
was $1,406,449 at June 30, 2004.
ITEM 5. OTHER INFORMATION.
On August 13, 2004, the Company entered into an Asset Purchase
Agreement to sell substantially all of the Company's operating assets, including
the Ag-Bag name, to Miller St. Nazianz, Inc., a Wisconsin corporation who will
integrate the operations of Ag-Bag into their current farm equipment
manufacturing business operations. The Company estimates this transaction to be
valued at approximately $8-9 million in cash, subject to adjustments for assets
and inventory actually acquired at closing under the agreement. The transaction,
which has been approved by the Company's Board of Directors, is subject to
stockholder approval and other customary closing conditions, and is anticipated
to close within the next ninety days. In addition, the Company is actively
looking to sell its real estate and other assets not being sold to Miller St.
Nazianz, Inc., to enable the Company to make a liquidating distribution to its
stockholders. The press release relating to the Asset Purchase Agreement is
attached as exhibit 99.1 and the Asset Purchase Agreement is attached as exhibit
99.2.
29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
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
99.1 Press Release
99.2 Asset Purchase Agreement dated August 13, 2004.*
*Certain Exhibits and Schedules to this Exhibit are omitted. A list of
omitted Exhibits is provided in the Exhibit and the Registrant agrees to
furnish to the SEC as a supplement a copy of any omitted Exhibits or
Schedules upon request.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 2004.
30
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: August 13, 2004 By: /s/ MICHAEL R. WALLIS
---------------------------
Michael R. Wallis
Chief Financial Officer and
Vice President of Finance
(duly authorized and principal
financial officer)
31
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
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
99.1 Press Release
99.2 Asset Purchase Agreement dated August 13, 2004.*
*Certain Exhibits and Schedules to this Exhibit are omitted. A list of
omitted Exhibits is provided in the Exhibit and the Registrant agrees to
furnish to the SEC as a supplement a copy of any omitted Exhibits or
Schedules upon request.
32
