Server: Netscape-Enterprise/2.01 Date: Mon, 29 Dec 1997 18:07:22 GMT Content-type: text/html Fiscal 1998 Second Quarter Report

Fiscal 1998 Second Quarter Report

To Our Shareholders:

Presently, the 1997 crop season is progressing toward harvest with generally good conditions throughout Ag Services' market. With these conditions, we expect that the financial progress made in the first six months of this year will continue through to year end. Net revenues reached a record $58.9 million for the three months ended August 31, 1997, up 18.8% from $49.6 million reported in the second quarter of the prior year. Net income for the same three month period was $1,934,490, up 18.3% from $1,634,997 for the second quarter last year.

For the six months ended August 31, 1997, we also reached record revenues and earnings. Net revenues were $139.7 million, up 20.6% from $115.8 million reported in the prior year. Net income for the six months ended August 31, 1997 was $3,856,735 ($0.71 per share fully diluted), an increase of 20.2% from $3,207,713 ($0.63 per share fully diluted) for same six month period a year ago.

Gross margins on the sale of farm inputs for the six months ended August 31, 1997 decreased to 5.8% from 6.4% for the same period in the prior year. As we reported in our 1997 Annual Report and previous quarterly reports, the current decline in the Company's gross margin on farm inputs was expected to occur. Penetrating the market segment of larger, higher quality producers required pricing our products more aggressively; it also required making more cash advances available to the customer. These factors have put pressure on margins but provides the foundation necessary for long-term growth and stability. Year to date net income as a percentage of net revenues, however, stayed consistent with the same period last year and withstood the decline in input margins. Offsetting the input margin decline was improvement in financing margin attained through an asset backed commercial paper borrowing arrangement which began in March of this year and yielded significant interest cost savings. Improvement in financing margin for the six months through August 1997 was also provided by the conversion of the Company's 7% Convertible Subordinated Debentures in June of the prior year. The conversion has allowed for year to date interest costs to be $240,000 less than the same period last year. Furthermore, continued improvement in lowering overhead costs resulted in year to date operating expense as a percentage of net revenues to decline to 2.6% from 2.7% for the same period last year.

Planning has begun for our 1999 fiscal year and includes some steps to expand our market. Additional District Sales Managers are being added to penetrate new market areas, and we are now promoting our new "AgriFlex Credit" program. This program extends the range of financing and supply options to all categories of farming operations. We believe this program will broaden our customer base as well as attracting and retaining higher quality customers.

In other news, staffing and purchasing has begun at the three Retail Chemical and Fertilizer Service Centers the Company is leasing in northwestern Illinois. Planned operations will begin at these facilities with fall application of fertilizer in 1997. These facilities, along with the expansion of our program, are changes we believe will keep the Company competitive and expanding.

Sincerely,

Gaylen D. Miller
Chairman of the Board

Henry C. Jungling
President & Chief Executive Officer

Kevin D. Schipper
Chief Operating Officer


AG SERVICES OF AMERICA, INC.

Condensed Statements of Income
(In thousands except per share amounts)(unaudited)

                                Three Months Ended         Six Months Ended
                                    August 31,                 August 31,   
                                  1997       1996           1997       1996 

Net Revenues
  Farm inputs                    $54,628    $46,129       $132,967  $110,389
  Financing income                 4,315      3,502          6,751     5,449
                                 $58,943    $49,631       $139,718  $115,838

Cost of revenues
  Farm inputs                    $51,335    $43,128       $125,288  $103,270
  Financing expense                1,946      1,620          2,686     2,537
  Provision for doubtful notes       914        800          2,171     1,861
                                 $54,195    $45,548       $130,145  $107,668

Income before operating
   expenses and income taxes      $4,748     $4,083         $9,573    $8,170

Operating expenses                 1,704      1,531          3,585     3,162

Income before income taxes        $3,044     $2,552         $5,988    $5,008

Federal and state income taxes     1,110        917          2,131     1,800

Net income                        $1,934     $1,635         $3,857    $3,208

Earnings per common and
   common equivalent share
     Primary                       $0.36      $0.39          $0.71     $0.79

     Fully diluted                 $0.36      $0.31          $0.71     $0.63

Weighted average common and common
  equivalent shares outstanding
     Primary                       5,435      3,655          5,424     4,036

     Fully diluted                 5,443      5,169          5,440     5,337

Consolidated Condensed Balance Sheets
(In thousands)

						 August 31,
						   1997		        February 28,
						(unaudited)	            1997    

ASSETS

Current Assets
  Cash						   $291			    $880
  Customer notes receivable, less allowance for
    doubtful notes and reserve for discounts
    August 31, 1997 $4,793,000; 
    February 28, 1997 $1,609,000		159,938			  43,246
  Accounts receivable				    746			     209
  Inventories					  1,065			   2,841
  Foreclosed assets held for sale		    642			     431
  Deferred income tax, net			    642			     642
  Other current assets			            506			   1,683
      Total current assets		       $163,830			 $49,932
Long-term Receivables and Other Assets
  Customer notes receivable, less allowance for
    doubtful notes August 31, 1997 $1,623,000;
    February 28, 1997 $1,156,000		$11,803			  $9,561
  Foreclosed assets held for sale		    248 	      	     167
  Debt origination fees, less accumulated	
    amortization August 31, 1997 $56,925;
    February 28, 1997 $0	      		    515			     - -
  Organizational costs, less accumulated
    amortization August 31, 1997 $0
    February 28, 1997 $0                             22                      - - 
  Deferred income tax charges, net		    433			     433
						$13,021			 $10,161
Equipment, net					 $1,350			    $680
      Total assets			       $178,201			 $60,773

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
  Note payable				       $119,599			 $21,000
  Accounts payable				 10,332			     956
  Accrued expenses				  5,079			     601
  Income taxes payable			            650			     - -
      Total current liabilities		       $135,660			 $22,557
Long-Term Liabilities
  Obligation under capital lease                   $280                       $0 
Stockholders' Equity
  Capital stock					$22,137			 $21,948
  Retained earnings				 20,124			  16,268
						$42,261			 $38,216
  Total liabilities and stockholders' equity   $178,201			 $60,773

Consolidated Condensed Statements of Cash Flows
(In thousands) (unaudited)

							      Six Months Ended
			   				          August 31,       
							    1997 	     1996  
Cash Flows From Operating Activities
  Net income						   $3,857	    $3,208
  Adjustments to reconcile net income to net
    cash (used in) operating activities:
    Depreciation					      121	       106
    Amortization					       57	        22
    Deferred taxes					        0	       (30)
    Change in assets and liabilities			 (101,736)         (79,603)
      Net cash (used in) operating activities		 ($97,701)        ($76,297)
Cash Flows From Investing Activities
  Proceeds from the sale of equipment		 	       $3 	       $14
  Purchase of equipment				  	     (792) 	      (156)
  (Increase) Decrease in foreclosed assets 
      held for sale	         			     (292)	     1,965
  (Increase) in debt origination fees                         (22)             - -
      Net cash provided by (used in)
                 investing activities                     $(1,103)           1,823
Cash Flows From Financing Activities
  Proceeds from short-term borrowings			 $100,295	   $74,100
  Principal payments on short-term borrowings		   (1,697)	    (1,250)
  (Increase) in debt origination fees                        (571)             - - 
  Net payments on conversion or redemption of
      convertible subordinated debentures                     - -              (49)  
  Proceeds from issuance of capital stock, net                188	       106
      Net cash provided by
           financing activities	                	  $98,215	   $72,907
      (Decrease) in cash				    ($589)	   ($1,567)
Cash
  Beginning						      880	     1,809
  Ending						     $291             $242

AG SERVICES OF AMERICA, INC., headquartered in Cedar Falls, Iowa supplies farm inputs including seed, fertilizer, agricultural chemicals, crop insurance and cash advances for land rent, fuel and irrigation to farmers primarily in the Central United States.

Transfer Agent:

Norwest Bank Minnesota, N.A.
Stock Transfer Department
161 North Concord Exchange
P. O. Box 738
South St. Paul, MN 55075-0738

Form 10-Q

The quarterly report on Form 10-Q filed with the Securities and Exchange Commission is available upon request, and may be obtained by writing or calling the Company.

The Company's common stock is traded on the New York Stock Exchange under the symbol ASV.

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