Ag Services of America, Inc.

1309 Technology Parkway
Cedar Falls, Iowa 50613
U.S.A.
Telephone: (319) 277-0261
Toll Free: (800) 395-8505
Fax: (319) 277-0144
Web site: http://www.agservices.com

Public Company
Incorporated: 1985
Employees: 158
Sales: $197.9 million (2002)
Stock Exchanges: New York
Ticker Symbol: ASV
NAIC: 422910 Farm Supplies Wholesalers

With its headquarters located in Cedar Falls, Iowa, Ag Services of America, Inc. (ASA) provides financing, products, and agricultural-related services to farmers located in 38 states. Primary customers are corn and soybean producers in Illinois, Indiana, Iowa, Minnesota, Nebraska, North Dakota, Ohio, South Dakota, and Texas. The ASA business model is based on the company's financial services, providing funding to farmers who have difficulty securing bank loans or need additional finances to expand operations. All production supplies ("farm inputs") must then be purchased through ASA. The loans are secured by a first lien on the borrower's crop. ASA products, while not the least expensive on the market, are competitively priced. As a result, some farmers turn to ASA simply for the sake of convenience, opting for a single source of farm inputs, financing, as well as the production expertise ASA makes available to its customers. The company makes a negligible income on financing, generating most of its revenues from farm inputs, which are mostly comprised of seed, chemicals, and fertilizer. ASA offers seed from 30 national and regional seed companies and works with customers to determine the proper hybrid or variety of seed needed. Agricultural chemicals are available through major distributors or suppliers. ASA offers fertilizer from more than 500 suppliers. Company profits from all of these inputs are the result of standard dealer discounts, negotiated pricing, manufacturers' rebates, and opportunistic purchasing. In addition, ASA generates fees by acting as an agent for multi-peril crop insurance. Because it is in the company's interest that farmers succeed and become repeat customers, ASA works closely with its borrowers, paying visits to farms to offer suggestions on harvest plans and marketing strategies. Aside from making seasonal loans to farmers, ASA, through its AgriFlex Credit program, also offers long-term financing. ASA also operates Powerfarm.com, a robust web site that serves farmers in a variety of ways. They can not only apply for financing, but also buy supplies and lease equipment on line. In addition, they can stay informed on agricultural news, weather forecasts, and market quotes, and take advantage of sophisticated web-based crop production tools.

Founding the Company in 1985

ASA was formed in October 1985 by cousins Gaylen D. Miller and Henry C. Jungling, who were both raised on Iowa farms, along with Jungling's nephew, Kevin D. Schipper. Miller had experience in agribusiness, serving in administrative and accounting positions with cooperative Land-O-Lakes, Inc. and international seed company DEKALB Genetics Corporation. Jungling came to ASA after running his own farm for 18 years. The youngest of the three, Schipper, worked in product sales for Scoular Grain Company. They recognized an opportunity caused by declining commodity prices and the tightening of credit that left a number of farmers with no means of financing their next crop. The simple idea behind the company was to take a security interest in farmers' crops in order to lend them the money they needed to buy supplies, which ASA would sell to them at a profit. At first, the company did not make any direct loans, nor did it make any money on the financing, relying on the markup on inputs for their profits. Charging an interest rate of 12.5 percent, ASA simply financed the purchase of seed, chemicals, and fertilizers—areas in which the three non-bankers had some expertise. Providing the capital was Community Bank in Chillicothe, Missouri. Although ASA might approve a customer, Community Bank made the final decision on whether to make the loan. In fiscal 1987, its first full year in business, ASA served 88 farmers and recorded $2.8 million in sales and a profit of $47,006. From that positive start, the company grew steadily over the balance of the decade, posting revenues of $4.4 million in fiscal 1988 and $8.5 million in fiscal 1989. Net income during this period totaled $56,598 and $284,212.

ASA enjoyed a major growth spurt in fiscal 1990, more than doubling revenues over the previous year to $21 million while recording a profit of $411,000. In April 1990 a New York financial services company, Harris & Harris Group (H&H), acquired a 50 percent interest in ASA for $3.25 million in cash. At the same time, ASA received a trade credit of $2.75 million and a new line of bank credit totaling $16 million. H&H was controlled by Charles E. Harris, who now became the chairman of ASA. Harris brought with him nearly 20 years of experience in the investment industry, and prior to his days with H&H served as chairman of Wood Struthers and Winthrop Management Corp., the investment advisory subsidiary of Donaldson, Lufkin & Jenrette. His tenure at ASA would be short-lived, however. In December 1990 H&H announced that it was selling its 50 percent stake in ASA.

Going Public in 1991

As a way to both allow H&H to cash in and to help ASA maintain its momentum, ASA chose to make a public offering of stock. As Miller explained to National Hog Farmer in a 1998 article, "We simply could not have borrowed the funds needed from traditional sources to enable the business to cash flow at the growth rate we were experiencing. We needed equity capital to secure the line of credit we needed to support our rapid growth." Harris's Wall Street experience was helpful in ASA finding contacts to make the offering a reality. After a potential underwriter was engaged, according to Miller, "A team came in and scrutinized the business and financial statements to ensure everything was in order. They also looked closely at our management team. Once we passed those scrutiny tests, it was a matter of selling our program, our concept and our ideas." Company officials then made a presentation to investor groups, a road show that mostly visited major East Coast cities. On August 1, 1991, the initial public offering was completed, netting $4.7 million for ASA and allowing H&H to sell approximately three-quarters of its interest in the company. ASA stock was subsequently listed on the NASDAQ. (In addition, a public offering of convertible subordinated debentures was completed in April 1993, netting an additional $12.9 million.)

In the 1990s ASA continued its string of strong results, topping $35.5 million in revenues for fiscal 1992 and approaching $55 million a year later, and recording net income of $1.2 million in 1992 and more than $1.8 million in 1993. Because of swings in interest rates, ASA moved from fixed-rate financing to variable-rate in 1994. Business also was impacted by unusually heavy rains in the Midwest that hurt crop yields and by extension crimped ASA's balance sheet. The company generated revenues in excess of $65.5 million in 1994 and net income just short of $2 million, a healthy increase over the year before but short of ASA's track record of growing 25 to 35 percent each year. ASA achieved a measure of diversity in 1995 by starting to do business in the Texas Panhandle and southeastern Alabama. Strong growth resumed in the mid-1990s, as sales totaled $87.3 million in 1995, $114.7 million in 1996, and $147.6 million in 1997. Net income during this period kept pace, improving from $2.4 million in 1995 to more than $3.1 million in 1996 and $4.3 million in 1997. A dozen years earlier, ASA had serviced less than 100 farmers; now in 1997 its customers totaled more than 1,250. ASA's upward trend was so strong that in 1996 the company moved to the New York Stock Exchange in a bid to widen its investor base.

ASA launched a number of initiatives in the late 1990s to maintain its growth rate. An alliance with MCS Consulting Service was forged in 1998 to provide crop consulting services to customers. ASA also established its AgriFlex Credit Program, which offered qualified farmers intermediate financing, loans amortized over three to seven years that could be used to purchase land, facilities, machinery, and other equipment. (Because ASA was not a bank, it was not bound by per farm lending limits imposed upon banks.) Another effort launched in 1999 was Powerfarm.com, ASA's e-commerce Internet site, which offered financing online as well as brand-name seed and chemicals for sale. ASA even tried to become involved in real world retailing, opening three retail service centers in northwestern Illinois. The venture failed to deliver strong results, however, and in fiscal 2000 the operations were discontinued.

Entering a New Century with Optimism

As the 20th century came to a close, ASA expressed optimism about its position. Agribusiness was undergoing a consolidation trend, as family and small farms were rolled up by big players. ASA's management team believed that even larger operations could benefit from the efficiencies and financing flexibility ASA had to offer. A slowing farm economy also made ASA an attractive option to farmers of all sizes. The company's revenues totaled $186.1 million in 1998, and topped $225 million a year later. Net income during this period increased from $5.2 million to $6.5 million. Despite a successful history and promising future, the price of Ag Services stock languished, selling at just 11 times earnings.

Company Perspectives:

Our Mission: Provide farmers the most convenient form of crop inputs and financing with the highest quality of products and services at competitive prices while increasing profitability and maximizing shareholders' wealth.

In 2000 ASA took steps to grow its Powerfarm Internet subsidiary. It formed an alliance with Everdream Corporation, based in Fremont, California. In conjunction with Powerfarm, Everdream would offer outsourced IT services on a subscription basis. As a result, customers received such services as a 24-hour solutions center, automated backup, virus protection, and bug fixes, as well as DSL connectivity, Internet access, and a webbased e-mail account. In addition, in 2000 ASA teamed with Agritech Inversora S.A. to form Powerfarm S.A. in order to offer the company's Internet services to South American farmers. In 2001 ASA beefed up the Powerfarm web site through a number of additions. In partnership with Zions Agricultural Finance, ASA was now able to offer long-term, real estate financing online to supplement the work of its field sales managers. New crop production tools also were added to the web site, such as calculators capable of determining economic thresholds for specific pests such as European Corn Borer and Bean Leaf Beetles, and a weed identification system developed by the University of Illinois and the Illinois Council of Food and Agricultural Research.

Business continued to be strong in the early 2000s, with revenues surging to $294.6 million in 2000 and $345.7 million in 2001, while net income for these years totaled $7.6 million and $7.5 million, respectively. During the 2001 planting season, cool, wet spring weather and falling interest rates (11 cuts in total) combined to make fiscal 2002 a challenging year. While revenues continued to grow, to $387.4 million, net income dropped to $5.5 million. In a conference call held in April 2002 to discuss the year's financial results, Chairman Miller confessed, "It's been a tough, challenging year for reasons we couldn't control." He went on to say, "I'm glad it's behind us, but I'm optimistic about the future." One reason that the company was optimistic about fiscal 2003 was that applications to AgriFlex Credit were up by 20 percent over the previous year. But an unexpected complication would soon place all these hopes in jeopardy.

The financial institution that had provided credit to the company for the past six years elected to cease its relationship with ASA for the 2003 crop season, in the process erasing 80 percent of ASA's $460 million credit line. Management imposed a November deadline to secure new financing, a time frame that appeared sufficient. But the task proved difficult. With no arrangement in place by November the company would be unable to finance the 2003 crop season. ASA retained Rabobak International, a Netherlands-based investment bank specializing in food and agribusiness, to explore alternatives, which included selling the company. Because credit was tight, however, the same difficulties ASA faced in funding the next season would also hinder an attempt to land a buyer. In mid-November the company announced that it had signed a letter of agreement with New York-based American Securities Capital Partners (ASCP) in a deal that would give ASCP a 51.7 percent controlling interest in ASA in exchange for an investment as high as $70 million. The deal called for ASCP to make an initial payment of $35 million at the end of February, at which point ASCP would gain voting control of the company. Two further payments of $17.5 million were to be made in subsequent years, contingent upon the meeting of economic thresholds.

The deal with ASCP, however, proved to be difficult to close. Since ASA was working with a reduced credit line, it was unable to offer financing to all of its potential customers. Although revenues fell dramatically over the previous year, tumbling to less than $198 million in 2003, the company improved on its earnings over 2002, posting $5.9 million instead of $5.5 million. Because of its problems in securing adequate credit lines, ASA was forced to cut about a quarter of its workforce in May 2003. In July ASA shareholders approved the ASCP arrangement, but by September the deal fell through. With ASA's temporary credit line set to expire in a matter of weeks, ASA faced liquidation as a very real possibility.

Key Dates:

1985:

The company is formed.

1991:

The company goes public.

1996:

Company stock is listed on the New York Stock Exchange.

1999:

Powerfarm.com is launched.

Principal Subsidiaries

Ag Acceptance Corporation; Powerfarm, Inc.

Principal Competitors

AGriBank, FCB; Farmland Industries, Inc.; GROWMARK, Inc.

Further Reading

Buelt, Jamie Guttula, "Investors Find Farm Openings," Business Record, May 26, 1986, p. 1.

"Cedar Falls, Iowa-Based Ag Supplier Cuts Work Force," Waterloo Courier, May 9, 2003.

Dunaway, Bob, "Going Public Raises Money," National Hog Farmer, May 1, 1998.

Palmer, Joel, "Cedar Falls, Iowa-Based Ag Services of America Considers Selling Firm," Waterloo Courier, November 6, 2002, p. 1.

—Ed Dinger