SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
_____ 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: 0-25360
AG-CHEM EQUIPMENT CO., INC.
(Exact Name of Registrant as Specified in Its Charter)
Minnesota 41-0872842
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5720 Smetana Drive
Minnetonka, Minnesota 55343-9688
(Address of Principal Executive Offices)
(612) 933-9006
(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 Exchange Act during
the past 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
As of April 30, 1999 there were outstanding, 9,603,368 shares of the
issuers' Common Stock, $.01 par value per share.
<PAGE>
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. INTERIM CONSOLIDATED FINANCIAL
STATEMENTS.................................................... 2
NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS.................................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS................................................. 9
PART II
ITEM 1. LEGAL PROCEEDINGS............................................... 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 15
SIGNATURES ................................................................ 16
EXHIBITS ................................................................ 17
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AG-CHEM EQUIPMENT CO., INC. AND SUBSIDIARIES
(Dollars in Thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(UNAUDITED)
March 31, September 30,
ASSETS 1999 1998
------ ----------- -------------
<S> <C> <C>
CURRENT ASSETS:
Accounts receivable, less allowance for
doubtful accounts of $815 and $730, respectively $ 27,816 $ 23,499
Notes receivable, current portion, and
accrued interest receivable 5,206 4,178
Inventories (note 2) 102,777 101,751
Deferred income tax benefits 3,900 4,000
Prepaid expenses and other current assets 440 617
-------- --------
Total current assets 140,139 134,045
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION OF $38,532 AND $37,326, RESPECTIVELY 44,078 45,813
OTHER ASSETS:
Notes receivable, long-term portion 5,659 5,596
Intangible and other assets, net of accumulated
amortization of $3,889 and $3,404, respectively 2,189 2,740
-------- --------
Total other assets 7,848 8,336
-------- --------
Total assets $192,065 $188,194
======== ========
</TABLE>
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SEE ACCOMPANYING CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
AG-CHEM EQUIPMENT CO., INC. AND SUBSIDIARIES
(Dollars in Thousands except Per Share Amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(UNAUDITED)
March 31, September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------------------------------ ----------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Current installments of long-term debt $ 6,198 $ 6,367
Note payable to banks 3,615 11,352
Accounts payable 17,272 15,120
Checks outstanding in excess of cash balances 324 2,145
Customer prepayments 7,491 6,934
Accrued expenses (note 3) 15,332 14,566
Deferred income 1,796 1,013
Accrued income taxes 3,916 374
--------- ---------
Total current liabilities 55,944 57,871
--------- ---------
LONG-TERM DEBT, LESS CURRENT INSTALLMENTS 58,806 59,903
--------- ---------
Total liabilities 114,750 117,774
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value
Authorized, 40,000,000 shares; issued and
outstanding, 9,627,068 and 9,640,268 shares, respectively 96 96
Additional paid-in capital 1,466 1,737
Retained earnings 76,079 68,930
Accumulated other comprehensive income (326) (343)
--------- ---------
Total stockholders' equity 77,315 70,420
--------- ---------
Total liabilities and stockholders' equity $ 192,065 $ 188,194
========= =========
</TABLE>
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SEE ACCOMPANYING CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
AG-CHEM EQUIPMENT CO., INC. AND SUBSIDIARIES
(Dollars in Thousands except Per Share Amounts)
<TABLE>
<CAPTION>
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 110,995 $ 122,500 $ 164,657 $ 185,037
Cost of sales 80,089 88,353 118,141 133,918
--------- --------- --------- ---------
Gross profit 30,906 34,147 46,516 51,119
Selling, general and administrative expenses 18,803 20,549 34,824 38,168
--------- --------- --------- ---------
Operating income 12,103 13,598 11,692 12,951
--------- --------- --------- ---------
Other income (expense):
Other income 1,044 715 1,972 1,432
Interest expense (1,411) (1,508) (2,496) (3,225)
--------- --------- --------- ---------
Earnings before income taxes 11,736 12,805 11,168 11,158
Income tax expense 4,231 4,875 4,020 4,323
--------- --------- --------- ---------
Net earnings $ 7,505 $ 7,930 $ 7,148 $ 6,835
========= ========= ========= =========
Basic and diluted earnings per
share $ 0.78 $ 0.82 $ 0.74 $ 0.71
========= ========= ========= =========
Weighted average common shares outstanding 9,626 9,667 9,633 9,668
========= ========= ========= =========
</TABLE>
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SEE ACCOMPANYING CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
AG-CHEM EQUIPMENT CO., INC. AND SUBSIDIARIES
(Dollars in Thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
- --------------------------------------------------------------------------------------------
Six Months ended March 31,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 7,148 $ 6,835
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,662 4,126
Gain on sale of assets (163) (21)
Increase (decrease) in deferred income tax benefits 100 (523)
Changes in operating assets and liabilities:
Accounts receivable (4,317) (7,248)
Operating notes receivable (1,091) (1,127)
Inventories (1,026) 7,988
Other current assets 177 278
Accounts payable 2,152 4,843
Customer prepayments and deferred income 1,340 2,014
Accrued expenses 766 (778)
Income taxes 3,542 4,319
-------- --------
Cash provided by operating activities 11,290 20,706
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Retirement of short-term investments
for industrial revenue bond -- 745
Purchase of property, plant and equipment (801) (2,180)
Decrease (increase) in rental equipment 556 (4,037)
Proceeds from sale of equipment 198 26
Increase in other assets (165) (26)
-------- --------
Cash used in investing activities (212) (5,472)
-------- --------
</TABLE>
(CONTINUED ON NEXT PAGE)
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SEE ACCOMPANYING CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
AG-CHEM EQUIPMENT CO., INC. AND SUBSIDIARIES
(Dollars in Thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
- --------------------------------------------------------------------------------------
Six months ended March 31,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in checks outstanding in excess of
cash balances (1,821) (7)
Proceeds from notes payable - banks 49,850 50,800
Repayments of notes payable - banks (57,587) (59,462)
Proceeds from long-term borrowings 90,000 11,480
Repayments of long-term borrowings (91,266) (15,491)
Purchase of common stock (271) (46)
-------- --------
Cash used in financing activities (11,095) (12,726)
-------- --------
Foreign currency translation adjustment 17 (107)
-------- --------
Increase in cash -- 2,401
Cash at beginning of period -- --
-------- --------
Cash at end of period $ -- $ 2,401
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 1,878 $ 3,225
Income taxes $ 483 $ 323
</TABLE>
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SEE ACCOMPANYING CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AG-CHEM EQUIPMENT CO., INC. AND SUBSIDIARIES
(Dollars in Thousands Except Per Share Amounts)
(UNAUDITED)
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions in Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, refer to the consolidated financial statements and
footnotes thereto for the year ended September 30, 1998 included in the
Company's annual report on Form 10-K. Results of the interim periods are not
necessarily indicative of the results for an entire year.
(2) INVENTORIES
Inventories consist of the following:
March 31, September 30,
1999 1998
--------- -------------
Finished goods $ 46,009 $ 49,317
Resale parts 26,946 25,029
Work in process 4,711 4,739
Raw materials 26,305 24,068
--------- ---------
Total 103,971 103,153
Less LIFO reserve (12,445) (12,006)
--------- ---------
Total 91,526 91,147
Used equipment 11,251 10,604
--------- ---------
Total inventories $ 102,777 $ 101,751
========= =========
If the first in, first out (FIFO) method utilizing current costs had
been used for inventories valued using the LIFO method, net earnings would have
been higher by $439 and $737 for the six-month periods ended March 31, 1999 and
1998, respectively.
(3) ACCRUED EXPENSES
Accrued expenses consist of the following:
March 31, September 30,
1999 1998
--------- -------------
Compensation $ 6,063 $ 5,966
Warranty 1,426 1,537
Taxes other than income 2,532 1,543
Insurance 1,734 1,557
Interest 1,443 1,816
Other 2,134 2,147
----- -----
Total $15,332 $14,566
======= =======
7
<PAGE>
(4) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income," effective October 1, 1998. SFAS No.
130 establishes standards for reporting and display of comprehensive income and
its components, including all changes in equity during a period except those
resulting from investments by owners or distributions to owners. The following
table summarizes total comprehensive income for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- --------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings $ 7,505 $ 7,930 $ 7,148 $ 6,835
Other comprehensive income:
Foreign currency translation
adjustment 17 (107) 17 (107)
------- ------- ------- -------
Total comprehensive income $ 7,522 $ 7,823 $ 7,165 $ 6,728
======= ======= ======= =======
</TABLE>
(5) COMPUTATION OF EARNINGS PER SHARE
The per share computations are based on the weighted average number of
common shares outstanding during the periods.
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
--------------------------- --------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average shares
outstanding, basic and diluted 9,626 9,667 9,633 9,668
========= ========= ======== ======
Net earnings $ 7,505 $ 7,930 $ 7,148 $6,835
========= ========= ======== ======
Earnings per common share,
basic and diluted $ 0.78 $ 0.82 $ 0.74 $ 0.71
========= ========= ======== ======
</TABLE>
The Company has no potentially dilutive common shares outstanding.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
RESULTS OF OPERATIONS - THREE-MONTH PERIOD ENDED MARCH 31, 1999 COMPARED TO
THREE-MONTH PERIOD ENDED MARCH 31, 1998
Consolidated net sales decreased by $11,505 or 9.4% in the three-month
period ended March 31, 1999 from the three-month period ended March 31, 1998.
The decrease was primarily the result of decreases in pre-emergence and
post-emergence equipment unit shipments. Low commodity prices caused a softening
in the agricultural markets. Also, better than expected weather conditions
allowed the Company's customers to have a longer and easier spring application
season. These factors were the primary causes of the decrease in unit shipments.
The Company expects competition to continue to be an issue and is uncertain
about the impact on future net sales. Additionally, the farm supply industry is
experiencing consolidation which has reduced capital purchases, with a resulting
decrease in the demand for equipment in the short-term. The Company anticipates
that once the consolidation slows, customers will resume capital purchases at a
level comparable to prior periods. The Company expects consolidated net sales
during the remainder of the fiscal year ending September 30, 1999 to continue to
be less than the prior fiscal year due to the factors described above. The
changes and factors described above are quantified as follows:
* Post-emergence equipment net sales decreased $4,123 or 11.7%
during the three months ended March 31, 1999 as compared to the
prior-year period. As a result, net sales of post-emergence
equipment represented 27.9% and 28.6% of net sales during the
three-month periods ended March 31, 1999 and 1998, respectively.
* Pre-emergence equipment net sales decreased $7,061 or 13.8%
during the three months ended March 31, 1999 as compared to the
prior-year period. As a result, net sales of pre-emergence
equipment represented 39.6% and 41.7% of net sales during the
three-month periods ended March 31, 1999 and 1998, respectively.
* Net sales of other product lines decreased $321 or 0.9% during
the three months ended March 31, 1999 as compared to the
prior-year period. Consequently, net sales of other product lines
represented 32.5% and 29.7% of net sales during the three-month
periods ended March 31, 1999 and 1998, respectively.
Consolidated gross profit for the three-month period ended March 31,
1999 decreased $3,241 or 9.5% as compared to the prior-year period. Consolidated
gross profit as a percent of net sales was 27.8% and 27.9% for the three-month
periods ended March 31, 1999 and 1998, respectively. Several offsetting factors
contributed to the stable gross profit as a percentage of net sales. In the
current-year period, increases in unfavorable manufacturing variances negatively
affected gross profit as a percentage of net sales. Lower production levels, as
compared to the prior year period, caused the increase in unfavorable
manufacturing variances. Conversely, gross profit as a percentage of net sales
improved in the current-year period as the result of decreased warranty costs.
The prior-year period was negatively impacted by warranty experience related to
older model equipment. The Company has made efforts to reduce warranty expense
through improved designs on newer models. Consequently, warranty expense for the
three-month period ended March 31, 1999 was significantly lower as compared to
the prior-year period. The Company expects these trends to continue for the
remainder of the fiscal year. Also, during the prior-year period, gross profit
as a percentage of net sales was negatively impacted by higher product costs due
to start-up expenditures in the first quarter on the Company's new model 8103
Terragator. As expected, margins improved on the new model 8103 after the second
and third quarters. Such improved margins were due to the completion of the
start-up expenditures and pricing changes. The start-up costs associated with
the introduction of additional new models may negatively impact margins later in
fiscal 1999. The Company estimates that the net impact of these factors will
continue to hold margins relatively stable for fiscal 1999, depending on sales
and product mix.
9
<PAGE>
Consolidated selling, general and administrative ("S,G&A") expenses
decreased $1,746 or 8.5% in the three-month period ended March 31, 1999 as
compared to the comparable prior-year period. Compensation, employee benefits
and employee-related expenses decreased 9.5% or $1,351. The largest single
factor contributing to this decrease was a decrease in commission expense, which
is directly related to net sales. Moreover, during the three months ended
December 31, 1998, the Company initiated efforts to contain S,G&A expenses
through employment reductions and other cost control efforts. These efforts
reduced S,G&A expense during the three months ended March 31, 1999, and are
expected to have a similar effect during the remainder of fiscal 1999. All other
S,G&A expenses decreased by 6.2% or $395. S,G&A expenses as a percent of net
sales were 16.9% and 16.8% in the three-month periods ended March 31, 1999 and
1998, respectively. The Company expects that its efforts to contain such costs
will hold annual S,G&A expenses relatively stable as a percentage of sales
compared to previous periods depending on sales during the remainder of fiscal
1999.
Because of the above, operating income was $12,103 and $13,598 in the
three-month periods ended March 31, 1999 and 1998, respectively.
Other income increased 46.0% to $1,044 in the three-month period ended
March 31, 1999 as compared to the prior-year three-month period.
Interest expense decreased 6.4% to $1,411 in the three-month period
ended March 31, 1999 as compared to the prior-year three-month period. The
Company expects interest expense to decrease due to net repayments of debt in
future periods.
The effective tax rate in the three-month periods ended March 31, 1999
and 1998 was 36.1% and 38.1%, respectively. The decrease in the effective tax
rate was primarily the result of a lower effective state tax rate and net
operating loss carry-forward utilization by the Company's European subsidiary.
Because of the above, net earnings were $7,505 and $7,930 in the
three-month periods ended March 31, 1999 and 1998, respectively. Earnings per
share were $.78 and $.82 for such periods.
RESULTS OF OPERATIONS - SIX-MONTH PERIOD ENDED MARCH 31, 1999 COMPARED TO
SIX-MONTH PERIOD ENDED MARCH 31, 1998
Consolidated net sales decreased by $20,380 or 11.0% in the six-month
period ended March 31, 1999 from the six-month period ended March 31, 1998. The
decrease was primarily the result of decreases in pre-emergence and
post-emergence equipment unit shipments. The conditions contributing to this
decrease are the same as those discussed for the three-month period ended March
31, 1999. The changes and factors described therein are quantified as follows:
* Post-emergence equipment net sales decreased $8,370 or 16.6%
during the six months ended March 31, 1999 as compared to the
prior-year period. As a result, net sales of post-emergence
equipment represented 25.5% and 27.2% of net sales during the
six-month periods ended March 31, 1999 and 1998, respectively.
* Pre-emergence equipment net sales decreased $10,695 or 13.4%
during the six months ended March 31, 1999 as compared to the
prior-year period. As a result, net sales of pre-emergence
equipment represented 41.9% and 43.1% of net sales during the
six-month periods ended March 31, 1999 and 1998, respectively.
* Net sales of other product lines decreased $1,315 or 2.4% during
the six months ended March 31, 1999 as compared to the prior-year
period. Consequently, net sales of other product lines
represented
10
<PAGE>
32.6% and 29.7% of net sales during the six-month periods ended
March 31, 1999 and 1998, respectively.
Consolidated gross profit for the six-month period ended March 31, 1999
decreased $4,603 or 9.0% as compared to the prior-year period. Consolidated
gross profit as a percent of net sales was 28.2% and 27.6% for the six-month
periods ended March 31, 1999 and 1998, respectively. The increase in gross
profit as a percentage of net sales was primarily the result of changes in
product mix. Additionally, gross profit as a percentage of net sales was
negatively impacted in the prior-year period by warranty experience related to
older model equipment. The Company has made efforts to reduce warranty expense
through improved designs on newer models. Warranty expense for the six-month
period ended March 31, 1999 was significantly lower as compared to the
prior-year period. The Company expects this trend to continue for the remainder
of the fiscal year. Lower production levels, as compared to the prior year
period, negatively affected gross profit as a percentage of net sales. The
Company expects that production levels for the remainder of fiscal 1999 will be
similar to the same period of the prior year. In addition, during the prior-year
period, gross profit as a percentage of net sales was negatively impacted by
higher product costs due to start-up expenditures in the first quarter on the
Company's new model 8103 Terragator. As expected, margins improved on the new
model 8103 after the second and third quarters. Such improved margins were due
to the completion of the start-up expenditures and pricing changes. The start-up
costs associated with the introduction of additional new models may negatively
impact margins later in fiscal 1999. The Company estimates that the net impact
of these factors will continue to hold margins relatively stable for fiscal
1999, depending on sales and product mix.
Consolidated selling, general and administrative ("S,G&A") expenses
decreased $3,344 or 8.8% in the six-month period ended March 31, 1999 as
compared to the prior-year period. Compensation, employee benefits and
employee-related expenses decreased 8.5% or $2,164. The largest single factor
contributing to this decrease was a decrease in commission expense, which is
directly related to net sales. Moreover, during the three months ended December
31, 1998, the Company initiated efforts to contain S,G&A expenses through
employment reductions and other cost control efforts. These efforts reduced
S,G&A expense during the six months ended March 31, 1999, and are expected to
have a similar effect during the remainder of fiscal 1999. All other S,G&A
expenses decreased by 9.3% or $1,180. S,G&A expenses as a percent of net sales
were 21.1% and 20.6% in the six-month periods ended March 31, 1999 and 1998,
respectively. The Company expects that its efforts to contain such costs will
hold annual S,G&A expenses relatively stable as a percentage of net sales
compared to previous periods depending on sales during the remainder of fiscal
1999.
Because of the above, operating income was $11,692 and $12,951 in the
six-month periods ended March 31, 1999 and 1998, respectively.
Other income increased 37.7% to $1,972 in the six-month period ended
March 31, 1999 as compared to the prior-year six-month period.
Interest expense decreased 22.6% to $2,496 in the six-month period
ended March 31, 1999 as compared to the prior-year six-month period. While the
Company expects interest expense to decrease due to net repayments of debt in
future periods, such decreases are not expected to be as large as that
experienced in the three-month period ended December 31, 1998.
The effective tax rate in the six-month periods ended March 31, 1999
and 1998 was 36.0% and 38.7%, respectively. The decrease in the effective tax
rate was primarily the result of a lower effective state tax rate and net
operating loss carry-forward utilization by the Company's European subsidiary.
Because of the above, net earnings were $7,148 and $6,835 in the
six-month periods ended March 31, 1999 and 1998, respectively. Earnings per
share were $.74 and $.71 for such periods.
11
<PAGE>
LIQUIDITY AND FINANCIAL POSITION - SIX-MONTH PERIOD ENDED MARCH 31, 1999
COMPARED TO SIX-MONTH PERIOD ENDED MARCH 31, 1998
Net cash provided by operating activities decreased to $11,290 in the
six-month period ended March 31, 1999, compared to $20,706 in the six-month
period ended March 31, 1998. The major reason for this change was a decrease in
cash provided by operating assets and liabilities to $1,543 from $10,298 in the
six-month periods ended March 31, 1999 and 1998, respectively. Inventories,
together with increased accounts payable balances, provided cash of $1,126
compared to $12,831 during the six months ended March 31, 1999 and 1998,
respectively. Inventories increased to $102,777 at March 31, 1999 from $101,751
at September 30, 1998 because the number of incoming orders decreased more
rapidly than the Company's reduction of its production schedule. The Company
normally experiences the highest sales levels in the second quarter of the
fiscal year. The Company expects cash will continue to be provided by operating
activities through net earnings, and this cash will be used to satisfy the
current portion of long-term debt. Accounts receivable and inventory turnover
have remained relatively stable in recent periods, and have not significantly
affected liquidity.
Cash used in investing activities in the six-month period ended March
31, 1999 was $212 compared to $5,472 in the prior-year period. This decrease in
cash used was primarily because the Company rented less equipment to customers
during the period ended March 31, 1999, and as a result less investment in
rental equipment was required. Additionally, the Company made a greater
investment in property, plant and equipment in the prior-year to support the
Company's growth in that period.
Cash used in financing activities was $11,095 in the six-month period
ended March 31, 1999, compared to $12,726 in the prior-year period. The decrease
in cash used in financing activities was primarily the result of the net
repayments of notes payable and long-term borrowings of $9,003 during the
six-month period ended March 31, 1999, compared to $12,673 during the six-month
period ended March 31, 1998. This decrease in net repayments was primarily due
to increased working capital requirements as compared to the prior year, when
working capital was generated through the reduction of higher inventory levels.
Working capital at March 31, 1999 was $84,195. As of March 31, 1999 the
Company had $37,185 of unused credit line available. The Company periodically
receives prepayments from customers to secure either more favorable pricing or a
desired delivery date. If the Company did not receive customer prepayments, it
believes its line of credit would provide sufficient liquidity to meet working
capital requirements.
The terms of the Company's amended credit line agreement include
covenants that the Company must maintain. There are a number of standard
affirmative covenants, as well as restrictive negative covenants as to
additional borrowings and requirements for the Company to maintain certain
financial ratios. These restrictive covenants include a minimum tangible net
worth of $47,500 plus 50% of each fiscal year's net earnings, a ratio of total
liabilities to tangible net worth, and an interest coverage ratio. There are
additional limitations on mergers, acquisitions, disposal of assets, and capital
expenditures. The Company does not anticipate any difficulty in meeting these
covenants.
MARKET RISK MANAGEMENT
The Company is exposed to market risk from changes in interest rates
and foreign currency exchange rates. Changes in these factors could cause
fluctuations in the Company's earnings and cash flows. The Company's risk to
interest rate and foreign currency exchange rate fluctuations has not materially
changed since September 30, 1998.
12
<PAGE>
IMPACT OF YEAR 2000
During the second quarter of fiscal 1999, Ag-Chem continued its
company-wide program to prepare the Company's computer systems for year 2000
compliance. The year 2000 issue relates to computer systems that use the last
two digits rather than all four to define a year and whether such systems will
properly and accurately process information when the year changes to 2000.
Incomplete or untimely resolution of year 2000 issues by the Company, by its
critical suppliers and customers, by public utility providers, or by government
entities could have a material adverse impact on the Company's business,
operations, or financial condition.
STATE OF READINESS - The Company has retained an independent consultant
to assess the adequacy of the Company's Year 2000 initiatives and remediation
plans. All of the Company's essential information technology ("IT") systems have
been inventoried and remediation plans for any Year 2000 issues have been
implemented. The Company has developed Year 2000-compliant applications for the
Company's order entry and customer service systems. The Company has upgraded its
information system used in manufacturing operations, material planning,
inventory management, order processing, financial management and human resources
applications, which is now Year 2000-compliant. The Company purchased Year
2000-compliant upgrades to the Company's payroll application and telephone
system. The Company purchased Year 2000-compliant upgrades for its software
applications for customer inquiries and for processing and tracking warranty
claims and returns. These upgrades have been fully implemented. With the
implementation of these applications and upgrades, the Company believes that all
of its core applications and IT systems are Year 2000 are compliant and testing
is currently under way to ensure compliance.
The Company is also engaged in discussions with its largest suppliers
regarding their plans to remediate Year 2000 issues. The Company sent each of
its significant suppliers a questionnaire inquiring as to the magnitude of their
Year 2000 issues and the status of their readiness. The Company has received
assurances from a significant portion of its suppliers that such third parties
will become Year 2000 compliant in a timely manner. The Company is following up
with these third parties and is searching for alternative sources, should they
be unable to continue business in the Year 2000.
RISKS - The Company is continuing to test its critical operating and
financial systems and remains uncertain of the risks the year 2000 will have on
its business operations.
As the process of inventorying non-IT systems proceeds, the Company may
identify systems that present a Year 2000 risk. In addition, if any third
parties who provide goods or services essential to the Company's business
activities fail to appropriately address their Year 2000 issues, such failure
could have a material adverse effect on the Company's business, financial
condition and operating results.
CONTINGENCY PLANS - The Company's Year 2000 Project Team's initiatives
include the development of contingency plans in the event the Company has not
completed all of its remediation plans in a timely manner. In addition, the Year
2000 Project Team is in the process of developing contingency plans in the event
that any third parties who provide goods or services essential to the Company's
business fail to appropriately address their Year 2000 issues. The Year 2000
Project Team expects to conclude the development of these contingency plans by
the end of the third quarter of fiscal 1999.
COSTS - The Company estimates that the expenses incurred to-date in
fiscal 1999 to address Year 2000 issues were approximately $100. The Company
estimates that it will incur approximately $325 of additional expense to
complete its remediation plans required for its Information Technology systems,
which includes systems software costs and consulting fees.
Refer to the Company's annual report on Form 10k for additional
discussion.
FORWARD-LOOKING STATEMENTS
13
<PAGE>
Certain information included in this Report is "forward looking" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements can be identified by the use of words such as "will,"
"intends," "expects," "should," and similar language. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. This includes factors that affect all businesses, as well as matters
specific to the Company and markets it serves. A more complete discussion of
such factors is included in the Company's Form 10-K for the year ended September
30, 1998.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998 on file with the Securities and Exchange
Commission. During the quarter ended March 31, 1999, the Company was not a party
to any newly initiated material legal proceedings and there have been no
material developments during such period to existing legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which
this report was filed.
15
<PAGE>
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-CHEM EQUIPMENT CO., INC.
Date: May 5, 1999 By: /s/ Alvin E. McQuinn
----------------------------------
Alvin E. McQuinn
Its: Chief Executive Officer
Date: May 5, 1999 By: /s/ John C. Retherford
----------------------------------
John C. Retherford
Its: Chief Financial Officer
16
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