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
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
August 31, 1997 February 28, (unaudited) 1997
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
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
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.
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