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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended August 31, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 000-19320
Ag Services of America, Inc.
(Exact name of registrant as specified in its charter)
Iowa 42-1264455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1309 Technology Parkway, Cedar Falls, Iowa 50613
(Address of principal executive offices) (Zip Code)
(319) 277-0261
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report.)
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.
[X] Yes [ ] No
5,479,514 common shares were outstanding as of October 11, 2002.
AG SERVICES OF AMERICA, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial statements:
Consolidated condensed balance sheets, August 31, 2002
(unaudited) and February 28, 2002 1
Unaudited consolidated condensed statements of income,
three months and six months ended August 31, 2002 and 2001 2
Unaudited consolidated condensed statements of cash flows,
six months ended August 31, 2002 and 2001 3
Unaudited consolidated statement of stockholders' equity,
six months ended August 31, 2002 4
Notes to consolidated condensed financial statements
(unaudited) 5-8
Item 2. Management's discussion and analysis of
financial condition and results of operations 9-14
Item 3. Quantitative and qualitative disclosures
about market risk 14
Item 4. Controls and procedures 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and reports on form 8-K: 16
Certifications 17-20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AG SERVICES OF AMERICA, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
August 31, February 28
ASSETS 2002 2002*
(Unaudited)
---------- ----------
CURRENT ASSETS
Cash $17 $42
Customer notes receivable, less allowance
for doubtful notes and reserve for
discounts August 31, 2002 $20,367;
February 28, 2002 $10,521 493,097 202,981
Inventory and other assets 135 3,466
Foreclosed assets held for sale 2,283 2,314
Prepaid income taxes - 735
Deferred income taxes, net 7,680 4,030
---------- ----------
Total current assets $503,212 $213,568
---------- ----------
LONG-TERM RECEIVABLES AND OTHER ASSETS
Customer notes receivable, less allowance
for doubtful notes August 31, 2002 $4,100;
February 28, 2002 $4,079; $51,423 $51,166
Loan origination fees, less accumulated
amortization August 31, 2002 $1,467;
February 28, 2002 $513; 340 598
Deferred income taxes, net 2,305 2,335
---------- ----------
$54,068 $54,099
---------- ----------
PROPERTY AND EQUIPMENT
Land and building, less accumulated
depreciation August 31, 2002 $67;
February 28, 2002 None $5,391 $5,316
Equipment, less accumulated depreciation
August 31, 2002 $1,911; February 28, 2002
$1,675 1,560 818
---------- ----------
$6,951 $6,134
---------- ----------
$564,231 $273,801
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, including current maturities $452,999 $179,736
Outstanding checks in excess of
bank balances 5,093 10,723
Accounts payable 16,301 1,738
Accrued expenses 4,372 2,233
Income taxes payable 5,415 -
----------- ----------
Total current liabilities $484,180 $194,430
----------- ----------
LONG-TERM LIABILITIES
Notes payable, less current maturities $3,775 $7,904
----------- ----------
STOCKHOLDERS' EQUITY
Capital stock $24,477 $24,396
Retained earnings 53,140 48,481
Accumulated other comprehensive income (loss) (1,341) (1,410)
----------- ----------
$76,276 $71,467
----------- ----------
$564,231 $273,801
=========== ==========
*Condensed from Audited Financial Statements.
See Notes to Consolidated Financial Statements.
-1-
AG SERVICES OF AMERICA, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three Months Ended August 31, 2002 and 2001
(Dollars in Thousands, Except Per Share Amounts)
Three Months Ended Six Months Ended
August 31, August 31,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net revenues:
Farm inputs $139,397 $101,600 $345,088 $259,501
Financing income 9,087 8,710 15,403 14,969
---------- ---------- ---------- ----------
$148,484 $110,310 $360,491 $274,470
---------- ---------- ---------- ----------
Cost of revenues:
Farm inputs $132,949 $97,258 $330,348 $248,681
Financing expense 4,467 4,517 7,849 7,907
Provision for doubtful notes 2,828 1,924 6,904 4,951
---------- ---------- ---------- ----------
$140,244 $103,699 $345,101 $261,539
---------- ---------- ---------- ----------
Income before operating
expenses and income taxes $8,240 $6,611 $15,390 $12,931
Operating expenses 4,172 3,171 7,815 6,523
---------- ---------- ---------- ----------
Income before income taxes $4,068 $3,440 $7,575 $6,408
Income taxes 1,566 1,415 2,916 2,549
---------- ---------- ---------- ----------
Net income $2,502 $2,025 $4,659 $3,859
========== ========== ========== ==========
Earnings per share:
Basic $0.46 $0.37 $0.85 $0.72
========== ========== ========== ==========
Diluted $0.45 $0.37 $0.85 $0.70
========== ========== ========== ==========
Weighted average shares:
Basic 5,476,961 5,451,250 5,475,125 5,368,834
========== ========== ========== ==========
Diluted 5,501,575 5,504,141 5,507,416 5,487,860
========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
-2-
AG SERVICES OF AMERICA, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended August 31, 2002 and 2001
(Dollars in Thousands)
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $4,659 $3,859
Adjustments to reconcile net income to
net cash (used in) operating activities:
Depreciation 327 346
Amortization 954 221
Deferred income taxes (3,657) -
(Increase) in customer notes receivable (290,373) (214,613)
Changes in assets and liabilities 26,183 16,007
---------- ----------
Net cash (used in) operating activities ($261,907) ($194,180)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Purchases) of building and
equipment,net ($1,144) ($1,209)
(Purchases) proceeds of foreclosed assets
held for sale, net 31 (304)
---------- ----------
Net cash (used in) investing activities ($1,113) ($1,513)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings $334,509 $263,975
Principal payments on borrowings (65,269) (67,178)
Increase in excess of outstanding
checks over bank balance (5,630) (1,705)
(Increase) in loan origination fees (696) (76)
Proceeds from issuance of capital stock,
net 81 634
---------- ----------
Net cash provided by financing
activities $262,995 $195,650
---------- ----------
Increase (decrease) in cash ($25) ($43)
CASH
Beginning 42 61
---------- ----------
Ending $17 $18
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $5,654 $6,084
Income taxes $423 $3,184
See Notes to Consolidated Financial Statements
-3-
AG SERVICES OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended August 31, 2002
(Dollars in thousands)
Capital Stock
--------------------------
Accumulated
Other
Shares Retained Comprehensive Comprehensive
Issued Amount Earnings Income (Loss) Total Income
------------ ------------ ------------ ------------ ------------ ------------
Balance,
February 28, 2002 5,468,864 $24,396 $48,481 ($1,410) $71,467
Comprehensive income:
Net income - - 4,659 - 4,659 $4,659
Other comprehensive
income, net of tax - - - 69 69 69
------------
Total comprehensive income $4,728
============
Issuance of capital stock
upon the exercise
of options 10,550 80 - - 80
Issuance of captial stock
under the stock
purchase plan 100 1 - - 1
------------ ------------ ------------ ------------ ------------
Balance, August 31, 2002 5,479,514 $24,477 $53,140 ($1,341) $76,276
============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements
-4-
AG SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions of Form 10-Q and Rule 10-01
of Regulation S-X. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principals generally accepted in the United States of America have been
condensed or omitted. It is suggested these interim consolidated
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report for
the year ended February 28, 2002 ("Fiscal 2002"). In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the financial position,
results of operations and cash flows for the interim periods presented
have been made. Operating results for the six month period ended
August 31, 2002 are not necessarily indicative of the results that may
be expected for the year ending February 28, 2003 ("Fiscal 2003").
Principles of Consolidation
The consolidated financial statements include the accounts of Ag Services
of America, Inc. (the Company) and its wholly owned subsidiaries,
Ag Acceptance Corporation and Powerfarm, Inc. All material intercompany
balances and transactions have been eliminated in consolidation.
According to the terms related to the asset backed securitized financing
program as described in Note 3 of the consolidated condensed financial
statements, the Company formed Ag Acceptance Corporation, a wholly owned,
special purpose corporation.
In conjunction with the Company's e-commerce initiative, the Company
created Powerfarm, Inc. a wholly owned subsidiary which operates and
manages the Company's website Powerfarm.com.
Revenue Recognition
The Company has decided that effective the fourth quarter of the current
fiscal year, the Company will present revenues associated with the cash
advances for fuel, irrigation, land rents and other farm inputs and
revenues associated with the input only program on a net reporting basis
in contrast to the current gross reporting basis. The input only program
is a financing program provided by the Company for various suppliers and
manufacturers. The Company has decided to report its revenue in this
manner because it believes this will be a preferable presentation under
current generally accepted accounting principles. This presentation
would have the impact of reducing farm input revenues and cost of farm
input revenues for the six month periods ended August 31, 2002 and 2001
by approximately $205 million and $153 million, respectively. For the
three months ended August 31, 2002 and 2001 the impact would have
reduced farm input revenues and cost of farm input revenues by
approximately $68 million and $50 million, respectively. Most
importantly, this presentation will have no impact on future or past
earnings of the Company.
-5-
Note 2. Commitments and Contingencies
Commitments:
In the normal course of business, the Company makes various commitments
that are not reflected in the accompanying consolidated condensed
financial statements. These include various commitments to extend
credit to customers. At August 31, 2002 and February 28, 2002 the
Company had approximately $84 million and $153 million, respectively,
in commitments to supply farm inputs. No material losses or liquidity
demands are anticipated as a result of these commitments.
Contingencies:
The Company is named in lawsuits in the ordinary course of business.
Counsel for the Company has advised the Company, while the outcome
of various legal proceedings is not certain, it is unlikely that
these proceedings will result in any liability which will materially
affect the financial position or operating results of the Company.
The availability of lines of credit to finance operations and the
existence of a multi-peril crop insurance program are essential to
the Company's operations. If the federal multi-peril crop insurance
program currently in existence was terminated or negatively modified
and no comparable private or government program was established, this
would have a material adverse effect on the Company's future
operations. The federal government has from time to time evaluated
the federal multi-peril insurance program and is likely to review
the program in the future, and there can be no assurance of the
outcome of such evaluations.
Note 3. Pledged Assets and Related Debt
The Company has an asset backed securitized financing program through
November 2002, with a maximum available borrowing amount of $375
million. Under the terms of the facility, the Company sells and may
continue to sell or contribute certain notes receivable to Ag
Acceptance Corporation ("Ag Acceptance"), a wholly owned, special
purpose subsidiary of the Company. Ag Acceptance pledges its interest
in these notes receivable to a commercial paper market conduit entity
on $305 million of the facility which incurs interest at variable
rates in the commercial paper market (current effective rates range
from 1.76% to 1.93% at August 31, 2002) and the remaining $70 million
is a term note with interest at a variable cost of LIBOR plus 38 basis
points (current effective rate is 2.195% at August 31, 2002). The
agreement contains various restrictive covenants, including, among
others, restrictions on mergers, issuance of stock, declaration or
payment of dividends, transactions with affiliates, and requires the
Company to maintain certain levels of equity and pretax earnings.
Advances under the facility are made subject to portfolio performance,
financial covenant restrictions and borrowing base calculations.
At August 31, 2002, the Company had approximately $356 million
outstanding under the asset backed securitized financing program and had
a maximum additional amount available of approximately $1.0 million,
based on borrowing base computations as provided by the agreement.
-6-
The Company also has a $75 million revolving credit facility that matures
in November of 2002. Additional terms of the agreement allow two
variable interest rate alternatives based on prime or LIBOR (current
effective rates range from 4.563% to 5.25% at August 31, 2002). The
agreement also contains various restrictive covenants, including, among
others, restrictions on mergers, issuance of stock, declaration or
payment of dividends and loans to stockholders, and requires the Company
to maintain certain levels of equity and pretax earnings. Advances
under the line of credit agreement are also subject to portfolio
performance, financial covenant restrictions, and borrowing base
calculations. At August 31, 2002 the Company had $71.4 million
outstanding under the agreement and had a maximum additional amount
available of approximately $3.6 million based on borrowing base
computations as provided by the agreement.
The Company has a credit agreement whereby the Company may borrow up to
$3.9 million, with a declining balance provision, on a revolving line
of credit through April 2022. This credit agreement is used to finance
the Company's new corporate headquarters at a fixed interest rate of
5.74% for five years. The Company had $3.8 million outstanding under
the credit agreement at August 31, 2002. The agreement also contains
various restrictive financial covenants.
In February 2002, three executive officers of the Company, who are also
the original founders of the Company, loaned an aggregate of
$4.4 million to the Company, due on March 31, 2003. The Company makes
monthly interest payments to these officers at a variable interest rate
of 0.5% below the prime rate (current effective rate is 4.25% at
August 31, 2002). These notes are unsecured.
In June 2002, the Company negotiated an additional credit facility with
a financial institution whereby the Company has the ability to borrow
up to $19.2 million effective through July 2003. Advances and repayments
under this credit agreement are based on and secured by the performance
of certain customer notes receivable of the Company. This agreement
accrues interest based on the variable interest rates of the underlying
customer notes receivables ranging from 0.5% below prime to 2.0% over
prime (current effective rates range from 4.25% to 6.75%). At
August 31, 2002 the Company had $19.0 million outstanding under the
agreement.
The Company maintains an interest-rate risk-management strategy that uses
derivative instruments to minimize significant, unanticipated earnings
fluctuations caused by interest-rate volatility. The Company's specific
goal is to lower (where possible) the cost of its borrowed funds.
In July 2000, the Company entered into an interest rate swap agreement
with an original notional amount of $30 million. The current notional
amount of $22.5 million decreases by $7.5 million annually in each
July 2003, 2004 and 2005. The swap is utilized to manage interest rate
exposures and is designated as a cash flow hedge. The swap agreement
is a variable receive/fixed pay swap which expires in July 2005 and
has the effect of converting the interest rate paid on the notional
amount of the Company's variable rate debt to a fixed rate of 9.78%.
The differential to be paid or received on the swap agreement is
recognized and accrued over the life of the agreement as other
comprehensive income based on the
-7-
remaining outstanding notional amount or changes in interest rates.
The difference between the Company's actual variable interest expense
and 9.78% on the notional amount for the next twelve months is
reclassified from other comprehensive income and recognized as
interest expense.
Note 4. Earnings Per Share
Basic earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of shares outstanding.
In computing diluted earnings per share, the dilutive effect of stock options
during the periods presented increase the weighted average number of shares.
Presented below is the computation of earnings per share for the periods
indicated:
Three Months Ended Six Months Ended
May 31 August 31,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Computation of weighted average number
of basic shares:
Basic:
Common shares outstanding at
beginning of the period 5,476,864 5,450,614 5,468,864 5,281,064
Weighted average number of shares
issued during the period 97 636 6,261 87,770
---------- ---------- ---------- ----------
Weighted average shares outstanding
(basic) 5,476,961 5,451,250 5,475,125 5,368,834
========== ========== ========== ==========
Net income available to stockholders: $2,501,922 $2,024,398 $4,659,371 $3,858,529
========== ========== ========== ==========
Basic earnings per share: $0.46 $0.37 $0.85 $0.72
========== ========== ========== ==========
Diluted:
Common shares outstanding at
beginning of the period 5,476,864 5,450,614 5,468,864 5,281,064
Weighted average number of shares
issued during the period 97 636 6,261 87,770
Weighted average of potential dilutive
shares computed using the treasury
stock method using the average market
price during the period:
Options (1) 24,614 52,891 32,291 119,026
---------- ---------- ---------- ----------
Weighted average shares outstanding
(diluted) 5,501,575 5,504,141 5,507,416 5,487,860
========== ========== ========== ==========
Net income available to stockholders: $2,501,922 $2,024,398 $4,659,371 $3,858,529
========== ========== ========== ==========
Diluted earnings per share: $0.45 $0.37 $0.85 $0.70
========== ========== ========== ==========
(1) Some of the stock options have been excluded because they are
antidilutive.
-8-
AG SERVICES OF AMERICA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth percentages of net revenues represented
by the selected items in the unaudited condensed statements of income
of the Company for the three and six months ended August 31, 2002 and
2001. In the opinion of management, all normal and recurring
adjustments necessary for a fair statement of the results for such
periods have been included. The operating results for any period are
not necessarily indicative of results for any future period.
Percentage Percentage
of Net Revenues of Net Revenues
------------------ ------------------
Three Months Ended Six Months Ended
August 31, August 31
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net Revenues:
Farm inputs 93.9% 92.1% 95.7% 94.5%
Financing income 6.1% 7.9% 4.3% 5.5%
-------- -------- -------- --------
100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
Cost of Revenues:
Farm inputs 89.6% 88.2% 91.6% 90.6%
Financing expense 3.0% 4.1% 2.2% 2.9%
Provision for doubtful notes 1.9% 1.7% 1.9% 1.8%
-------- -------- -------- --------
94.5% 94.0% 95.7% 95.3%
-------- -------- -------- --------
Income before operating expenses
and income taxes 5.5% 6.0% 4.3% 4.7%
Operating expenses 2.7% 2.9% 2.2% 2.4%
-------- -------- -------- --------
Income before income taxes 2.8% 3.1% 2.1% 2.3%
Federal and state income taxes 1.1% 1.3% 0.8% 0.9%
-------- -------- -------- --------
Net income 1.7% 1.8% 1.3% 1.4%
======== ======== ======== ========
-9-
Net Revenues:
Net revenues increased $38 million or 35% during the three months ended
August 31, 2002, compared with the three months ended August 31, 2001.
Net revenues increased $86 million or 31% during the six months ended
August 31, 2002, compared with the six months ended August 31, 2001.
The increase in net revenues was primarily the result of strong demand
for the Company's AgriFlex Credit(R) Financing Program and an excellent
spring planting season in its primary market area. Financing income
as a percentage of net revenues decreased to 6.1% and 4.3% for the
three and six months ended August 31, 2002, respectively, from 7.9%
and 5.5% for the same periods of the previous year. The decrease in
financing margin was primarily the result of a decrease in the prime
lending rate by approximately 200 and 254 basis points, over the
three and six months ended August 31, 2002 as compared to the same
period one year ago.
Revenues primarily consist of farm inputs, including seed, fertilizer,
agricultural chemicals, other services (which includes crop insurance
commissions, fees charged to customers and other income) and other farm
inputs including cash advances for land rental, fuel, irrigation,
product application fees and other farm related expenses. Typically,
the Company does not realize any farm input margin on "other farm inputs"
revenue. The Company has decided to prospectively change its revenue
recognition policy effective the fourth quarter of Fiscal 2003
(see Note 1). Farm input revenue for the three and six months ended
August 31, 2002 and 2001 are summarized below.
Three Months Ended August 31, 2002 August 31, 2001
---------------- ----------------
Farm input revenue
Input only program $13,051 9.4% $4,510 4.4%
Seeds 22,140 15.9% 13,352 13.2%
Chemicals 30,841 22.1% 24,056 23.7%
Fertilizer 17,019 12.2% 13,949 13.7%
Other farm inputs
(cash rents, irrigation,etc.) 55,831 40.1% 45,529 44.8%
Other services (insurance, fees, etc.) 515 0.3% 204 0.2%
----------------- ----------------
Total farm input revenue $139,397 100.0% $101,600 100.0%
================= ================
Six Months Ended August 31, 2002 August 31, 2001
---------------- ----------------
Farm input revenue
Input only program $27,118 7.9% $9,722 3.7%
Seeds $44,912 13.0% $30,048 11.6%
Chemicals $50,053 14.5% $39,140 15.1%
Fertilizer $40,835 11.8% $34,502 13.3%
Other farm inputs
(cash rents, irrigation,etc.) $179,170 51.9% $143,972 55.5%
Other services (insurance, fees, etc.) $3,000 0.9% $2,117 0.8%
----------------- ----------------
Total farm input revenue $345,088 100.0% $259,501 100.0%
================= ================
-10-
Cost of Revenues
The total cost of revenues increased slightly to 94.5% and 95.7% for the
three and six months ended August 31, 2002, as compared to 94.0% and
95.3% for the three and six months ended August 31, 2001. The gross
margin on the sale of farm inputs as a percentage of net revenues
increased slightly to 4.3% and 4.1% for the three and six months ended
August 31, 2002, respectively, compared to 3.9% for the three and six
months ended August 31, 2001. Gross margin on financing income
decreased to 3.1% and 2.1% of net revenues for the three and six months
ended August 31, 2002, from 3.8% and 2.6% for the three and six months
ended August 31, 2001. This decrease in margin was primarily the result
of a reduction in the prime lending rate of 200 and 254 basis points
for the three and six months ended August 31, 2002 as compared to a
year ago. The provision for doubtful notes remained relatively constant
at 1.9% of net revenues for the three and six months ended
August 31, 2002 as compared to 1.7% and 1.8% of net revenues for the
three and six months ended August 31, 2001.
Operating Expenses
Operating expenses decreased, as a result of management's efforts to
control costs, to 2.7% and 2.2% of net revenues for the three and
six months ended August 31, 2002, as compared to 2.9% and 2.4% for
the three and six months ended August 31, 2001. The increase in the
dollar amount of operating expenses is attributed to the Company's
growth. Payroll and payroll related expenses increased to $2.8 and
$5.4 million for the three and six months ended August 31, 2002 from
$2.1 and $4.4 million for the three and six months ended
August 31, 2001.
Net Income
Net income increased 23.6% to $2.5 million for the three months ended
August 31, 2002 from $2.0 million for the three months ended
August 31, 2001 and increased 20.8% to $4.7 million for the six months
ended August 31, 2002 from $3.9 million for the six months ended
August 31, 2001. The increase in net income is primarily attributable
to the increase in volume of the Company's AgriFlex Credit(R) program and
an excellent spring planting season as mentioned above.
Powerfarm
The Company continues to leverage its business model and use of its
credit products via the Internet through Powerfarm.com. The Powerfarm
website offers growers one of the most comprehensive assortments of
credit options available in the agricultural industry. The site
highlights Ag Services credit programs and allows farmers to apply for
credit lines electronically. In addition, existing customers have the
ability to access detailed account information 24 hours a day through
the site.
Inflation
The Company does not believe the Company's net revenues and net income
were significantly impacted by inflation or changing prices in Fiscal
2002 or the first six months of Fiscal 2003.
-11-
Seasonality
The Company's revenues and income are directly related to the growing
cycle for crops. Accordingly, quarterly revenues and income vary during
each fiscal year. The following tables show the Company's quarterly net
revenues and net income for Fiscal 2002 and the first two quarters of
Fiscal 2003. This information is derived from unaudited consolidated
financial statements, which include, in the opinion of management, all
normal and recurring adjustments which management consider necessary
for a fair statement of results of those periods. The operating
results for any quarter are not necessarily indicative of the results
for any future period.
Fiscal 2003 Quarter Ended
May 31 August 31 November 30 February 28
----------- ----------- ----------- -----------
(Dollars in thousands)
Net revenues $212,007 $148,484
Net income $2,157 $2,502
Fiscal 2002 Quarter Ended
May 31 August 31 November 30 February 28
----------- ----------- ----------- -----------
(Dollars in thousands)
Net revenues $164,160 $110,310 $25,104 $87,782
Net income $1,834 $2,025 $1,297 $320
Liquidity and Capital Resources
At August 31, 2002 the Company had working capital of $19.0 million, a
decrease of $39.0 million over a year ago and a decrease of $.1 million
since February 28, 2002. The decrease in working capital was due to
the restructuring of the Company's debt as the Company's current
securitized financing program and revolving credit line are set to
expire in November 2002. As a result of the expiration of these
credit facilities within the next twelve months, all debts associated
with these facilities are classified as current liabilities on the
Company's balance sheet. The Company is presently considering several
financing alternatives and expects to replace these facilities by
November. Once the new financing program is in place, working capital
will return to a more normalized, historical amount.
The components of this net decrease, since February 28, 2002, were
(i) $1.0 million increase resulting from operating activities,
consisting of approximately $4.7 million in net income, $0.3 million
in depreciation, $1.0 million in amortization, and the remainder from
a net change in other working capital items, (ii) capital expenditures
of approximately $1.1 million related to the acquisition of equipment
and furniture and (iii) net proceeds of $0.1 million from the issuance
of common stock upon exercise of options.
The Company has an asset backed securitized financing program through
November 2002, with a maximum available borrowing amount of $375 million.
Under the terms of the facility, the Company sells and may continue
to sell or contribute certain notes receivable to Ag Acceptance
Corporation ("Ag Acceptance"), a wholly owned, special purpose
subsidiary of the Company. Ag Acceptance pledges its interest in these
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notes receivable to a commercial paper market conduit entity on
$305 million of the facility which incurs interest at variable rates
in the commercial paper market (current effective rates range from
1.76% to 1.93% at August 31, 2002) and the remaining $70 million is
a term note with interest at a variable cost of LIBOR plus 38 basis
points (current effective rate is 2.195% at August 31, 2002). The
agreement contains various restrictive covenants, including, among
others, restrictions on mergers, issuance of stock, declaration or
payment of dividends, transactions with affiliates, and requires the
Company to maintain certain levels of equity and pretax earnings.
Advances under the facility are made subject to portfolio performance,
financial covenant restrictions and borrowing base calculations.
At August 31, 2002, the Company had approximately $356 million
outstanding under the asset backed securitized financing program
and had a maximum additional amount available of approximately
$1.0 million, based on borrowing base computations as provided by
the agreement.
The Company also has a $75 million revolving credit facility that
matures in November of 2002. Additional terms of the agreement
allow two variable interest rate alternatives based on prime or
LIBOR (current effective rates range from 4.563% to 5.25% at
August 31, 2002). The agreement also contains various restrictive
covenants, including, among others, restrictions on mergers,
issuance of stock, declaration or payment of dividends and loans to
stockholders, and requires the Company to maintain certain levels of
equity and pretax earnings. Advances under the line of credit
agreement are also subject to portfolio performance, financial covenant
restrictions, and borrowing base calculations. At August 31, 2002 the
Company had $71.4 million outstanding under the agreement and had a
maximum additional amount available of approximately $3.6 million based
on borrowing base computations as provided by the agreement.
The Company has a credit agreement whereby the Company may borrow up to
$3.9 million, with a declining balance provision, on a revolving line of
credit through April 2022. This credit agreement is used to finance the
Company's new corporate headquarters at a fixed interest rate of 5.74%
for five years. The Company had $3.8 million outstanding under the
credit agreement at August 31, 2002. The agreement also contains
various restrictive financial covenants.
In February 2002, three executive officers of the Company, who are also
the original founders of the Company, loaned an aggregate of $4.4 million
to the Company, due on March 31, 2003. The Company makes monthly interest
payments to these officers at a variable interest rate of 0.5% below the
prime rate (current effective rate is 4.25% at August 31, 2002). These
notes are unsecured.
In June 2002, the Company negotiated an additional credit facility with
a financial institution whereby the Company has the ability to borrow
up to $19.2 million effective through July 2003. Advances and repayments
under this credit agreement are based on and secured by the performance
of certain customer notes receivable of the Company. This agreement
accrues interest based on the variable interest rates of the underlying
customer notes receivables ranging from 0.5% below prime to 2.0% over
prime (current effective rates range from 4.25% to 6.75%).
At August 31, 2002 the Company had $19.0 million outstanding under the
agreement.
The Company maintains an interest-rate risk-management strategy that uses
derivative instruments to minimize significant, unanticipated earnings
fluctuations caused by interest-rate volatility. The Company's
specific goal is to lower (where possible) the cost of its borrowed funds.
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In July 2000, the Company entered into an interest rate swap agreement
with an original notional amount of $30 million. The current notional
amount of $22.5 million decreases by $7.5 million annually in each
July 2003, 2004 and 2005. The swap is utilized to manage interest rate
exposures and is designated as a cash flow hedge. The swap agreement
is a variable receive/fixed pay swap which expires in July, 2005 and
has the effect of converting the interest rate paid on the notional
amount of the Company's variable rate debt to a fixed rate of 9.78%.
The differential to be paid or received on the swap agreement is
recognized and accrued over the life of the agreement as other
comprehensive income based on the remaining outstanding notional amount
or changes in interest rates. The difference between the Company's
actual variable interest expense and 9.78% on the notional amount for
the next twelve months is reclassified from other comprehensive income
and recognized as interest expense.
The Company's current securitized financing program and revolving credit
facility expire in November 2002. Currently the Company is negotiating
extensions of its existing facilities until a replacement facility is
secured. The Company is presently considering several financing
alternatives and believes the options available to it will be sufficient
to finance the Company and it's operations in the foreseeable future.
Failure to obtain alternative financing resources would materially impair
the Company's ability to finance sufficient sales of farm inputs in order
to continue operations under the normal course of business.
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995
Information contained in this report, other than historical information,
should be considered forward looking, which reflect Management's current
views of future events and financial performance that involve a number of
risks and uncertainties. The factors that could cause actual results to
differ materially include, but are not limited to, the following: general
economic conditions within the agriculture industry; competitive factors
and pricing pressures; changes in product mix; changes in the seasonality
of demand patterns; changes in weather conditions; changes in agricultural
regulations; technological problems; the amount and availability under
its asset backed securitization program; unknown risks; and other risks
detailed in the Company's Securities and Exchange Commission filings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At August 31, 2002 the Company had $455 million outstanding in notes
payable at an average variable interest rate of 2.77%. The Company
has an interest rate swap that effectively converts $22.5 million of
this variable rate debt to a fixed rate instrument. After considering
the effect of this swap, the Company has floating rate debt of
$428 million at a variable interest rate of 2.38%. A 10% increase in the
average variable interest rate would increase interest expense by
approximately 24 basis points. Assuming similar average outstanding
borrowings as Fiscal 2002 of $246 million, this would increase the
Company's interest expense by approximately $0.6 million.
The above sensitivity analysis is to provide information about the Company's
potential market risks as they pertain to an adverse change in interest
rates. The above analysis excludes the positive impact that increased
interest rates would have on financing income as approximately 95% of the
Company's notes receivable are variable rate notes.
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ITEM 4. CONTROLS AND PROCEDURES
Based on their most recent review, which was completed within 90 days of
the filing of this report, the Company's principal executive officer and
principal financial officer have concluded that the Company's disclosure
of controls and procedures are effective to ensure that information
required to be disclosed by the Company in the reports that it files or
submits under the Securities Exchange Act of 1934, as amended, is
accumulated and communicated to the Company's management, including its
principal executive officer and principal financial officer, as appropriate,
to allow timely decisions regarding required disclosure and are effective
to ensure that such information is recorded, processed, summarized and
reported in the time periods specified in the rules of the Securities
and Exchange Commission. Since the date of the evaluation described above,
there have not been any significant changes in the Company's internal
controls or other factors that could significantly affect those controls.
-15-
AG SERVICES OF AMERICA, INC.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on July 31, 2002.
Proxies for such meeting were solicited pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended.
Votes Votes
Director Name in Favor Withheld
---------------------- --------------- ---------------
Henry C. Jungling, Jr. 4,755,052 130,500
Michael Lischin 4,879,152 6,400
In addition, a proposal to ratify the appointment of McGladrey & Pullen, LLP
as independent auditors for the Company for the fiscal year ending
February 28, 2003 was approved by a vote of 5,050,153 votes in favor,
15,540 votes against and 4,401 abstaining.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No exhibits were filed during the period covered by this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period covered by
this report.
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 SERVICES OF AMERICA, INC.
----------------------------
(Registrant)
/s/ John T. Roth
----------------------------
John T. Roth
Vice President Finance
(Principal Financial and Accounting Officer)
Date: October 15, 2002
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CERTIFICATIONS
I, Henry C. Jungling, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Ag Services of America, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Securities Exhange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditor any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
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6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: October 15, 2002 /s/
-----------------------
Henry C. Jungling, Jr.
President and Chief Executive Officer
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I, John T. Roth, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Ag Services of America, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Securities Exhange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
of this quarterly report(the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditor any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
-19-
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: October 15, 2002 /s/
-----------------------
John T. Roth
Vice President Finance
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