10-Q 1 ab_q203.txt FORM 10-Q, 3-31-2002 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, 2002 Commission file Number: 0-18259 AG-BAG INTERNATIONAL LIMITED (Exact name of registrant as specified in its charter) Delaware 93-1143627 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2320 SE Ag-Bag Lane, Warrenton OR 97146 (Address of principal executive offices) (Zip Code) (503)861-1644 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $.01 par value per share - 11,956,991 shares outstanding as of April 22, 2002 1 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. AG-BAG INTERNATIONAL LIMITED CONDENSED BALANCE SHEETS ASSETS March 31 December 31 (Unaudited) 2002 2001 2001 ---------- ---------- ---------- Current assets: Cash and cash equivalents $ 1,988 $ 34,905 $ 164,526 Accounts receivable 4,307,960 3,810,643 2,433,842 Inventories 7,138,711 6,522,689 6,695,894 Other current assets 271,912 282,769 225,544 Deferred income tax 268,000 189,000 275,000 Income taxes recoverable 148,465 182,056 - ---------- ---------- ---------- Total current assets 12,137,036 11,022,062 9,794,806 Deferred income tax 210,000 81,000 200,000 Intangible assets, less accumulated amortization 17,047 19,806 18,893 Property, plant and equipment less accumulated depreciation 4,131,814 4,680,983 4,227,852 BAW Joint-venture 272,938 141,738 272,938 Other assets 446,275 357,167 481,704 --------- ---------- ---------- Total assets $17,215,110 $16,302,756 $14,996,193 ========== ========== ========== (Continued) 2 AG-BAG INTERNATIONAL LIMITED CONDENSED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY March 31 December 31 (Unaudited) 2002 2001 2001 ---------- ---------- ---------- Current liabilities: Notes payable to bank $ 2,629,754 $ 1,196,046 $ 1,287,855 Current portion of long term debt and capital lease obligations 402,478 341,221 402,477 Accounts payable 1,917,366 1,373,124 672,563 Accrued expenses and other current liabilities 973,543 1,508,550 976,302 ----------- ----------- ----------- Total current liabilities 5,923,141 4,418,941 3,339,197 Long term debt and capital lease obligation, less current portion 1,723,403 2,176,420 1,822,212 --------- ---------- ---------- Total liabilities 7,646,544 6,595,361 5,161,409 --------- ---------- ---------- Commitments Shareholders' equity: Preferred stock, $4LV 8 1/2% nonvoting 696,000 696,000 696,000 Common stock, $.01 par value 120,619 120,619 120,619 Additional paid-in capital 9,210,211 9,210,211 9,210,211 Treasury stock ( 31,500) - ( 31,500) Retained deficit (426,764) (319,435) (160,546) --------- --------- ---------- Total shareholders' equity 9,568,566 9,707,395 9,834,784 --------- --------- ---------- Total liabilities and shareholders' equity $17,215,110 $16,302,756 $14,996,193 ========== ========== ========== See Notes to Condensed Financial Information 3
AG-BAG INTERNATIONAL LIMITED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) Preferred Stock Common Stock Treasury Stock Paid-In Retained Shares Amount Shares Amount Shares Amount Capital Earnings Total ------ ------ ------ ------ ------ ------ ------- ---------- ----------- Balance December 31, 2001 174,000 $696,000 12,061,991 $120,619 105,000 ($31,500) $9,210,211 $(160,546) $9,834,784 Preferred stock dividends (14,790) (14,790) Net loss (251,428) (251,428) ------- ------- ---------- ------- -------- ------- --------- ---------- ---------- Balance March 31, 2002 174,000 $696,000 12,061,991 $120,619 105,000 ($31,500) $9,210,211 $(426,764) $9,568,566 ======= ======= ========== ======= ======== ======= ========= ========== ==========
See Notes to Condensed Financial Information 4 AG-BAG INTERNATIONAL LIMITED CONDENSED STATEMENTS OF OPERATIONS Three Months Ended March 31 (Unaudited) ---------------------- 2002 2001 ---- ---- Net sales $ 4,807,485 $ 4,149,208 Cost of sales 3,761,615 3,376,880 --------- --------- Gross profit from operations 1,045,870 772,328 Selling expenses 803,128 730,743 Administrative expenses 631,150 575,258 Research and development expenses 22,935 20,298 --------- --------- Loss from operations (411,343) (553,971) Other income (expense): Interest income 9,216 6,436 Interest expense ( 66,134) ( 65,465) Miscellaneous 65,368 35,591 --------- --------- Loss before provision for income taxes (402,893) (577,409) Benefit for income taxes 151,465 210,000 --------- --------- Net loss and comprehensive loss $ (251,428) $ (367,409) ========= ========= Basic and diluted net loss per common share $ (.02) $ (.03) ========= ========= Basic and diluted weighted average number of common shares outstanding 11,956,991 12,061,991 ========== ========== See Notes to Condensed Financial Information 5 AG-BAG INTERNATIONAL LIMITED CONDENSED STATEMENTS OF CASH FLOWS Three Months Ended March 31 (Unaudited) 2002 2001 ---- ---- Cash flows from operating activities: Net loss $ (251,428) $ (367,409) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 197,368 155,085 Inventory obsolescence reserves (100,000) (144,129) Deferred income taxes (3,000) (2,000) Changes in assets and liabilities: Accounts receivable (1,874,118) (869,264) Inventories (342,817) 848,909 Other current assets ( 46,368) ( 91,031) Accounts payable 1,244,803 767,296 Accrued expenses and other current liabilities (2,759) 484,262 Other assets 35,429 42,507 Income taxes recoverable (148,465) - Income tax payable - (357,186) ---------- ---------- Net cash provided by (used in) operating activities (1,291,355) 467,040 ----------- ----------- Cash flows from investing activities: Capital expenditures ( 99,484) (200,325) Construction in progress - (122,814) --------- --------- Net cash used in investing activities ( 99,484) (323,139) -------- --------- Cash flows from financing activities: Net proceeds from (payments on) line of credit 1,341,899 (28,592) Principal payments on debt (98,808) ( 89,508) Payment of preferred dividends (14,790) (14,790) --------- --------- Net cash provided by (used in) financing activities 1,228,301 (132,890) --------- ---------- Net increase/(decrease) in cash (162,538) 11,011 Cash and cash equivalents at beginning of period 164,526 23,894 ------- ------ Cash and cash equivalents at end of period $ 1,988 $ 34,905 ========= ========== 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, 2001. In the opinion of management, all adjustments of a normal recurring nature that are considered necessary for a fair presentation have been included in the interim period. Operating results for the period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. Inventories ----------- Inventories consist of the following: March 31 December 31 (Unaudited) 2002 2001 2001 ---------- ---------- ---------- Finished goods $5,729,478 $5,486,777 $5,420,692 Work in process $1,350,410 $ 934,071 $1,228,308 Raw materials $ 58,823 $ 101,841 $ 46,894 ---------- ---------- ---------- Total $7,138,711 $6,522,689 $6,695,894 ========== ========== ========== Statement of Cash Flows ----------------------- The Company transferred $165,088 from inventory held for sale to rental equipment during the period ended March 31, 2001. Reclassifications ----------------- Certain reclassifications have been made to the financial statements for the periods presented from amounts previously reported to conform with classifications currently adopted. Such reclassifications had no effect on previously reported shareholders' equity or results of operations. 7 Seasonal Fluctuations --------------------- The core business of the Company is historically seasonal due to the harvest seasons in North America and Europe. The seasonal nature of the Company's operations results in between 65-72% of the Company's revenue being generated during the spring and summer (2nd and 3rd Quarters). The first quarter 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) ------------------------- 2002 2001 ---- ---- Net sales $ 102 $ 54 Cost of goods sold (139) (70) ---------- ---------- Gross profit (37) (16) Selling & administrative expenses (54) (38) Other income (expense) 32 - Income tax benefit 24 22 ------------ ---------- Net (loss)* $ (35) $ (32) ========== ========== * Attributed to other shareholders' $ (4) $ (3) The condensed income statements have been translated from the Euro to the U.S. dollar at average exchange rates in effect for the period ended March 31, 2002, and from the German Mark to the U.S. Dollar at average exchange rates in effect for the period ended March 31, 2001. The average exchange rates used at March 31, 2002 and 2001 were $.88 and $.47 respectively. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Results of Operations --------------------- Reference is made to Item 7 of "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001, on file with the Securities and Exchange Commission. The following discussion and analysis pertains to the Company's results of operations for the three-month period ended March 31, 2002, compared to the results of operations for the three-month period ended March 31, 2001, and to changes in the Company's financial condition from December 31, 2001 to March 31, 2002. The core business of the Company is historically seasonal due to the harvest seasons in North America and Europe. The Company's machinery tends to be purchased in anticipation of the next harvest season, so most of the sales of machinery occur in the spring and summer. This may require the Company to carry significant amounts of inventory to meet rapid delivery requirements of customers. Bag sales tend to occur as the harvest season approaches in the summer, and during the harvest season in the fall. Approximately 95% of the Company's business is concentrated in the Northern Hemisphere resulting in between 65-72% of the Company's revenue being generated during the spring and summer (2nd and 3rd Quarters). The following table outlines the percentage of revenue over the past three years by quarter: Quarter 1999 2000 2001 ------- ---- ---- ---- 1st 15% 21% 15% 2nd 33% 31% 35% 3rd 39% 34% 35% 4th 13% 14% 15% For the quarter ended March 31, 2002, net sales increased 15.87% to $4,807,485 compared to $4,149,208 for the quarter ended March 31, 2001. Sales were up for the quarter as a result of increased equipment and bag sales resulting from several positive trends that could be seen towards the latter half of 2001. These positive trends included stabilizing milk prices, continued optimism that milk prices in the U.S. will remain above the record low levels of the year 2000 through 2002 and continued easing of credit by financial institutions for the farming sector that, coupled with the interest rate reductions of 2001, allowed farmers to be more optimistic and resume capital expenditures and purchase farm equipment. Additionally, supplemental grain feed costs also remained low during the quarter, which tend to improve the availability of farm operating funds. During the quarter, strong competition continued in the silage bag market as farmers look for 9 the most economical bag, without considering overall quality, customer service and recycling of the used plastic silage bags offered by the Company. Machine sales for the quarter were up 19.46% and bag sales were up 21.16% compared to 2001. As a percentage of total revenue for the first quarter of 2002, machine sales increased approximately 2% and bag sales increased approximately 1% compared to the first quarter of 2001. Machine sales are directly tied to farmers' income and therefore their ability to purchase new equipment. The Company's bag and parts sales are driven by the total number of bagging machines that are in the marketplace. However, there is not a perfect correlation between the Company's bag sales and machine sales, as the Company's and competitors' bags are interchangeable on all bagging machinery in the industry. The Company cannot estimate with any certainty the total number of machines or bags used in the industry. In addition to compost bag sales, the Company sold three composting systems during the quarter ended March 31, 2002 (generating approximately $250,000 in revenue) compared to three systems sold for the quarter ended March 31, 2001 (generating approximately $320,000 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 33-38% of total sales. The gross margin realized on the Company's direct sales are typically within 2-4% of those sales realized through the Company's dealer network. However, various economic, volume and market factors in the geographic area impact the ultimate margin. The Company continues to evaluate methods for selling its products via e-commerce and anticipates beginning to offer e-commerce as a purchase method sometime during 2002. With e-commerce as a purchase method, the Company anticipates its sales mix may begin to favor more direct sales, depending upon the products offered by the Company via the e-commerce purchase method. Gross profit as a percentage of sales increased 3.14% for the quarter ended March 31, 2002 compared to the same period in 2001. The increase resulted from higher sales volumes for the quarter to cover fixed operating overheads, coupled with improved margins on the Company's larger-sized bagging machines sold during the quarter (which saw a 50% increase in unit sales of the larger-sized bagging machines over the first quarter of 2001). This improvement was partially offset by lower margins on bags in certain highly competitive, high volume geographic areas. Selling expenses for the quarter ended March 31, 2002 increased 9.90% to $803,128 compared to $730,743 for the quarter ended March 31, 2001. The increase for the quarter was the result of increases in personnel, benefit, travel and incentive discounts, 10 partially offset by lower advertising, promotion and meeting expense for the quarter. Administrative expenses for the quarter ended March 31, 2002 increased 9.72% to $631,150 compared to $575,258 for the quarter ended March 31, 2001. The increase for the quarter was the result of increased depreciation from the Company's implementation of a new computer system occurring in April 2001, coupled with higher professional fees related to ongoing patent litigation and increases in administrative salaries, employee benefit and insurance expense, partially offset by lower bad debt and director fee expenses. Research and development expenses for the quarter ended March 31, 2002 increased 12.99% to $22,935 compared to $20,298 for the quarter ended March 31, 2001. The increase for the quarter was the result of ongoing silage and nutritional studies of bagged feed and their effects on animal production, coupled with ongoing research and testing related to silage bagging and compost machine development. Interest expense for the quarter ended March 31, 2002 increased 1.02% to $66,134 compared to $65,465 for the quarter ended March 31, 2001. This minimal increase for the quarter was the result of the Company utilizing a larger portion of its credit facilities, offset by lower interest rates. Miscellaneous income for the quarter ended March 31, 2002 increased 83.66% to $65,368 compared to $35,591 for the quarter ended March 31, 2001. The increase was the result of increased folding royalties from the Company's German joint venture. Net loss for the quarter ended March 31, 2002 was $251,428 compared to $367,409 for the quarter ended March 31, 2001. The improvement for the quarter was the result of higher sales, improving gross profit, and increased folding royalties from the Company's German joint venture, partially offset by increased selling, administrative, research and interest expense. Even though the Company has a loss in the first quarter of 2002, management projects the Company will be profitable for the year and accordingly has recognized a $151,465 tax benefit relating to the first quarter loss. For the first quarter of 2001 a tax benefit of $210,000 was recognized. 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 11 during the spring and early summer to meet the sales demands during the harvest season. The Company uses working capital and trade credit to increase its inventory so that it has sufficient inventory levels available to meet its sales demands through the spring and summer. The Company relies on its suppliers to provide trade credit to enable the Company to build its inventory. The Company's suppliers have provided sufficient trade credit to meet the demand to date and management believes this will continue. No assurance can be given that suppliers will continue to provide sufficient trade credit in the future. Accounts receivable increased 13.05% at March 31, 2002 to $4,307,960 compared to $3,810,643 at March 31, 2001. The increase was the result of higher sales for the quarter partially offset by increased collections of accounts receivable during the quarter resulting from customers taking advantage of third-party incentive financing programs offered by the Company. Inventory increased 9.44% at March 31, 2002 to $7,138,711 compared to $6,522,689 at March 31, 2001. The increase in inventory resulted from increased machine production during the latter half of the quarter to meet the Company's upcoming seasonal demands and benefit from production efficiencies. Other current assets decreased 3.84% at March 31, 2002 to $271,912 compared to $282,769 at March 31, 2001. The decrease was the result of a decrease in deposits and prepaid expenses. Intangible assets at March 31, 2002 decreased to $17,047 compared to $19,806 at March 31, 2001. The decrease was the result of normal amortization expense. Other assets increased 24.95% at March 31, 2002 to $446,275 compared to $357,167 at March 31, 2001. The increase was the result of an increase in the cash surrender value of life insurance policies maintained by the Company under which it is the beneficiary. The Company has an operating line of credit with a limit of $5,000,000, secured by accounts receivable, inventory, fixed asset blanket and general intangibles, and bears interest at the bank's prime rate plus 1/4%. As of March 31, 2002, $2,629,754 had been drawn under the credit line. Management believes that funds generated from operations and the Company's operating line of credit will be sufficient to meet the Company's cash requirements through 2002. The Company's line of credit is subject to annual renewal at June 30. On December 18, 2000, the Company entered into an agreement with Dresdner Bank to guarantee up to 1,000,000DM ($444,920 US) as security for an additional cash credit facility of the Company's 12 German joint venture. There was -0-DM outstanding under this additional cash credit facility at March 31, 2002. Accounts payable increased 39.64% at March 31, 2002 to $1,917,366 compared to $1,373,124 at March 31, 2001. The increase was the result of increased inventory production to meet seasonal sales demands coupled with extended term payables provided by some of the Company's principal suppliers. Accrued expenses and other current liabilities decreased 35.46% at March 31, 2002 to $973,543 compared to $1,508,550 at March 31, 2001. The decrease in accrued expenses and other current liabilities was the result of lower dealer deposits from pre-season order programs, coupled with lower general accruals. In 1997, the Nasdaq listing requirements were substantially expanded. The Company does not currently qualify under the more stringent requirements because the price at which its Common Stock is trading is below the $1 per share minimum. The Company was formally notified on January 13, 1999, that its Common Stock was delisted from quotation on The Nasdaq SmallCap Market for failure to meet the new listing requirements. The Company's Common Stock is now quoted on the OTC Bulletin Board. The removal from quotation on the Nasdaq SmallCap Market could have a material adverse effect on the Company's ability to raise additional equity capital in a public stock offering should that become necessary. FORWARD-LOOKING STATEMENTS -------------------------- Certain statements in this Form 10-Q contain "forward-looking" information (as defined in Section 27A of the Securities Act of 1933, as amended) that involves risks and uncertainties that may cause actual results to differ materially from those predicted in the forward-looking statements. Forward-looking statements can be identified by their use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. If any of the Company's assumptions on which the forward-looking statements are based prove incorrect or should unanticipated circumstances arise, the Company's actual results could differ materially from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, the factors listed below and the risks detailed in the Company's Securities and Exchange Commission filings, including the Company's Form 10-K for the fiscal year ended December 31, 2001. Forward-looking statements contained in this Form 10-Q relate to the Company's plans and expectations as to: profitability; timing of demand for bagging machines and bags; reductions in U.S. milk prices; availability of credit in the farming sector; potential purchases of the Company's bagging machines, bags and composting systems; 13 anticipated inventory production; the availability of trade credit and working capital; and the Company's dependence on the dairy industry. The following factors, among others, could cause actual results to differ from those indicated in the forward-looking statements: a downturn in the dairy industry; a sharp decline in U.S. milk prices; a reduction in availability of credit in the farming sector; an increase in interest rates; adverse weather conditions; a sharp decline in the health of the farming sector of the U.S. economy; disruption of the manufacturing process of our sole bag manufacturer; and increases in the price of bags. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which the Company is exposed is interest rates. The Company's exposure to changes in interest rates is minimal. Primarily all of the Company's long-term debt is fixed rate. The Company's line of credit is based on the prime rate plus 1/4% and one long-term debt instrument is based on the prime rate plus 3/4%. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. None. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the quarter ended March 31, 2002. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AG-BAG INTERNATIONAL LIMITED, a Delaware corporation (Registrant) Date: April 22, 2002 By: /s/ Michael R. Wallis --------------------------- Michael R. Wallis Chief Financial Officer and Vice President of Finance (duly authorized and principal financial officer) 15