<PAGE>1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 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 March 31, 1994
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 2-22791
AGWAY INC.*
---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 15-0277720
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
- ---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
315-449-6431
--------------------------------------------------
(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 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.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at April 30, 1994
- -------------------------------------- -----------------------------
<S> <C>
Common Stock, $25 par value per share 111,025 shares
</TABLE>
* Agway is a taxpaying corporation founded on cooperative principles.
Membership is limited to farmers and each may hold only one share
of common stock.
<PAGE>2
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1994 and
June 30, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations and Retained
Margin for the three months and nine months ended
March 31, 1994 and March 31, 1993 . . . . . . . . . . . . . . . 4
Condensed Consolidated Cash Flow Statements for the nine months
ended March 31, 1994 and March 31, 1993 . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . .14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . .14
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . .15
<PAGE>3
PART I. FINANCIAL INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
March 31, June 30,
1994 1993
(Unaudited) (Note)
----------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 771
Trade notes and accounts receivable, less allowance for
doubtful accounts of $13,724 and $13,267, respectively . . . . . . $ 162,743 212,196
Lease receivables, less unearned income of $29,004 and
$28,717, respectively. . . . . . . . . . . . . . . . . . . . . . . 81,304 75,243
Advances and other receivables . . . . . . . . . . . . . . . . . . . 43,272 36,224
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Raw materials. . . . . . . . . . . . . . . . . . . . . . . . . . . 24,622 19,919
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . 205,470 152,348
Goods in transit and supplies. . . . . . . . . . . . . . . . . . . 14,255 9,592
-------------- --------------
Total inventories. . . . . . . . . . . . . . . . . . . . . . . . . 244,347 181,859
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 64,036 58,863
-------------- --------------
Total current assets 595,702 565,156
Marketable securities. . . . . . . . . . . . . . . . . . . . . . . . . . 35,632 34,532
Other security investments . . . . . . . . . . . . . . . . . . . . . . . 36,184 34,102
Properties and equipment, net. . . . . . . . . . . . . . . . . . . . . . 249,868 259,980
Long-term lease receivables, less unearned income of
$42,419 and $41,253, respectively. . . . . . . . . . . . . . . . . . . 168,451 155,544
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,449 72,140
Net assets of discontinued operations. . . . . . . . . . . . . . . . . . 93,137 92,544
-------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,260,423 $ 1,213,998
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87,000 $ 70,600
Current installments of long-term debt and subordinated debt . . . . 94,521 66,039
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 126,192 95,735
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . 125,725 132,773
-------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . 433,438 365,147
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143,025 150,107
Subordinated debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . 371,626 379,619
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,454 123,724
Preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,456 53,474
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,776 2,790
Paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,319 7,350
Retained margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,329 131,787
-------------- --------------
Total liabilities and shareholders' equity. . . . . . . . . . . $ 1,260,423 $ 1,213,998
============== ==============
</TABLE>
Note: The balance sheet at June 30, 1993 has been derived from the audited
financial statements at that date but does not include all the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See accompanying notes to condensed consolidated financial statements.
<PAGE>4
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED MARGIN
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------------- ----------------------------------
1994 1993 1994 1993
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net sales and revenues from:
Product sales. . . . . . . . . . . . . $ 420,433 $ 396,447 $ 1,097,267 $ 1,109,781
Leasing operations . . . . . . . . . . 8,857 7,808 24,984 24,137
Insurance operations . . . . . . . . . 6,682 6,616 20,363 22,532
Other services . . . . . . . . . . . . 3,793 5,682 14,416 20,408
--------------- --------------- --------------- ----------------
Total net sales and revenues. . . 439,765 416,553 1,157,030 1,176,858
Cost and expenses from:
Products and plant operations. . . . . 327,613 314,847 887,068 905,847
Leasing operations . . . . . . . . . . 2,507 2,502 9,587 9,724
Insurance operations . . . . . . . . . 4,762 4,506 13,490 15,589
Retail operations. . . . . . . . . . . 48,361 47,070 130,627 131,407
Selling, general and
administrative activities. . . . . . 41,049 34,442 115,589 102,095
--------------- --------------- --------------- ----------------
Total costs and expenses. . . . . 424,292 403,367 1,156,361 1,164,662
Operating margin . . . . . . . . . . . . . 15,473 13,186 669 12,196
Operating interest expense, net. . . . . . 7,361 6,923 20,393 20,450
Other income (expense), net. . . . . . . . 1,823 2,168 5,267 4,671
Margin (loss) from continuing --------------- --------------- --------------- ----------------
operations before income taxes . . . . 9,935 8,431 (14,457) (3,583)
Income and franchise tax
expense (benefit). . . . . . . . . . . 5,560 5,398 (1,493) 2,872
Margin (loss) from continuing --------------- --------------- --------------- ----------------
operations . . . . . . . . . . . . . . 4,375 3,033 (12,964) (6,455)
Discontinued operations:
Loss from operations, net of tax
expense (benefit) of $0, $(333),
$0, and $(1,069) and interest of
others of $0, $468, $0, and $2,767,
respectively . . . . . . . . . . . . (621) (1,830)
Effect of disposal . . . . . . . . . . --------------- --------------- --------------- ----------------
Loss from discontinued
operations. . . . . . . . . . . (621) (1,830)
--------------- --------------- --------------- ----------------
Net margin (loss). . . . . . . . . . . . . 4,375 2,412 (12,964) (8,285)
Retained Margin:
Balance at beginning of period . . . . 111,984 103,415 131,787 116,112
Dividends. . . . . . . . . . . . . . . (2) (2,456) (2,073)
Equity in unrealized gains (losses)
of insurance companies. . . . . . (28) 4 (38) 77
--------------- ---------------- --------------- ----------------
Balance at end of period . . . . . . . . . $ 116,329 $ 105,831 $ 116,329 $ 105,831
=============== ================ =============== ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>5
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------------------
1994 1993
-------------- --------------
<S> <C> <C>
Net cash flows from continuing operations activities . . . . . . . . . . $ 7,203 $ 4,806
Net loss from discontinued operations. . . . . . . . . . . . . . . . . . (1,830)
-------------- --------------
Net cash flows from operating activities . . . . . . . . . . . . . . . . 7,203 2,976
Cash flows (used in) provided by investing activities:
Purchases of property, plant and equipment . . . . . . . . . . . . . (18,486) (16,859)
Proceeds from disposal of businesses and property and
equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,856 32,098
Leases originated. . . . . . . . . . . . . . . . . . . . . . . . . . (96,339) (69,664)
Leases repaid. . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,634 62,859
Proceeds from sale of marketable securities. . . . . . . . . . . . . 19,764 12,565
Purchases of marketable securities . . . . . . . . . . . . . . . . . (20,901) (13,656)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,490 (2,310)
-------------- --------------
Net investing activities (used in) provided by continuing operations . . (33,982) 5,033
Net change in net assets of discontinued operations. . . . . . . . . . . (593) 5,710
-------------- --------------
Net cash flows (used in) provided by investing activities. . . . . . . . (34,575) 10,743
Cash flows used in financing activities:
Net change in short-term borrowings. . . . . . . . . . . . . . . . . 16,400 28,141
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . 57,000 51,004
Repayment of long-term debt. . . . . . . . . . . . . . . . . . . . . (69,119) (71,588)
Proceeds from issuance of subordinated debt. . . . . . . . . . . . . 36,892 49,320
Redemption of subordinated debt. . . . . . . . . . . . . . . . . . . (10,110) (52,398)
Redemption of capital stock. . . . . . . . . . . . . . . . . . . . . (573) (12,365)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,889) (5,833)
-------------- --------------
Net cash flows provided by (used in) financing activities. . . . . . . . 26,601 (13,719)
-------------- --------------
Net decrease in cash and equivalents . . . . . . . . . . . . . . . . . . (771) 0
Cash and equivalents at beginning of period. . . . . . . . . . . . . . . 771 0
-------------- --------------
Cash and equivalents at end of period. . . . . . . . . . . . . . . . . . $ 0 $ 0
============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>6
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Thousands of Dollars)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and 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. Operating results for the three- and nine-month periods
ended March 31, 1994 are not necessarily indicative of the results that
may be expected for the year ended June 30, 1994. For further
information, refer to the consolidated financial statements and notes
thereto included in the annual report on Form 10-K for the year ended
June 30, 1993.
Certain amounts have been reclassified in the June 30, 1993 condensed
consolidated balance sheet to conform to the March 31, 1994
presentation. These reclassifications had no effect on the working
capital or shareholders' equity of the Corporation.
2. AGWAY FINANCIAL CORPORATION
Summarized financial information for Agway Financial Corporation and
Consolidated Subsidiaries is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------------- ---------------------------------
1994 1993 1994 1993
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales and revenues . . . . . . . . . . . $ 291,587 $ 279,623 $ 696,281 $ 755,460
Operating margin . . . . . . . . . . . . . . 40,601 31,246 64,809 55,332
Margin from continuing operations. . . . . . 18,127 13,241 19,454 19,991
Net margin . . . . . . . . . . . . . . . . . 18,127 12,620 19,454 18,161
</TABLE>
<TABLE>
<CAPTION>
March 31, June 30,
1994 1993
--------------- ---------------
<S> <C> <C>
Current assets . . . . . . . . . . . . . . . $ 462,000 $ 433,907
Properties and equipment, net. . . . . . . . 126,580 128,898
Noncurrent assets. . . . . . . . . . . . . . 248,926 240,004
Net assets of discontinued operations. . . . 93,137 92,544
--------------- ---------------
Total assets . . . . . . . . . . . . . . . . $ 930,643 $ 895,353
=============== ===============
Current liabilities. . . . . . . . . . . . . $ 295,272 $ 249,721
Long-term debt . . . . . . . . . . . . . . . 138,705 155,598
Subordinated debt. . . . . . . . . . . . . . 371,626 379,619
Noncurrent liabilities . . . . . . . . . . . 31,098 34,859
Shareholders' equity . . . . . . . . . . . . 93,942 75,556
Total liabilities and --------------- ---------------
shareholders' equity . . . . . . . . . . $ 930,643 $ 895,353
=============== ===============
</TABLE>
<PAGE>7
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
3. SUPPLEMENTAL DISCLOSURES ABOUT OPERATING CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------------------------
1994 1993
--------------- ---------------
<S> <C> <C>
Additional disclosure of operating cash flows:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,229 $ 34,077
=============== ===============
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . $ 9,494 $ 9,782
=============== ===============
</TABLE>
During the fiscal year ended June 30, 1993, 46 local cooperative affiliates
were acquired, and during fiscal 1994, 6 additional local cooperative
affiliates were acquired. Three of these cooperatives were merged into
Agway during the first and second quarters of fiscal 1993, 43 were acquired
during the third and fourth quarters of fiscal 1993, 3 were merged in the
first quarter of fiscal 1994, 2 were merged in the second quarter fiscal
1994 and 1 was merged in the third quarter of fiscal 1994, for a total
purchase price of $21,700 plus certain liabilities assumed of $17,300.
Settlement for the acquisitions was consummated in the nine-month period
ended March 31, 1994 in the form of cash ($5,000) and restricted preferred
stock, 6%, $100 par value, ($16,700).
Certain other supplemental disclosures are as follows:
Schedule of Restructuring Activities:
<TABLE>
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Cash proceeds. . . . . . . . . . . . . . . . . . . . . . . . $ 3,013 $ 21,384
Cash spent . . . . . . . . . . . . . . . . . . . . . . . . . (8,405) (11,147)
--------------- ---------------
Total cash flow (used in) provided by operating activities . . (5,392) 10,237
Cash flows from investing activities:
Proceeds from disposal of business and property,
plant and equipment. . . . . . . . . . . . . . . . . . . . . 6,714 30,099
--------------- ---------------
Net increase in cash and equivalents . . . . . . . . . . . . . $ 1,322 $ 40,336
=============== ===============
</TABLE>
4. BORROWING ARRANGEMENTS
In fiscal 1994, the Company renegotiated and renewed certain of its bank
loan agreements through October 28, 1994. Adequate lines of credit of
$149,250 are available to the Company under the new agreements as compared
to lines of credit of $158,000 in the prior agreements. This includes
retention of a commercial paper facility of $50,000. Certain of these
agreements, upon the occurrence of certain defined events, give the lenders
the right to perfect a security interest in certain of the Company's
accounts receivables and non-petroleum inventories. In addition, the
agreements include certain covenants, the most restrictive of which
requires to Company to maintain specific monthly levels of interest
coverage and tangible net worth.
H. P. Hood, Inc., a subsidiary held for sale by the Company, was in
violation of certain financial covenants relating to credit facilities
provided by a bank for the months ended February and March 1994. The
Bank has issued a waiver for these violations for each month and has
subsequently amended the loan agreement through June 30, 1994. At
March 31, 1994, borrowing outstanding under the credit facilities
aggregated $36,641.
<PAGE>8
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
5. COMMITMENTS AND CONTINGENCIES
The Company is subject to various investigations, claims, and legal
proceedings covering a wide range of matters that arise in the ordinary
course of its business activities. In addition, the Company is
conducting a number of environmental investigations and remedial actions
at current and former Company locations and, along with other companies,
has been named a potentially responsible party for certain waste disposal
sites. Each of these matters is subject to various uncertainties, and it
is possible that some of these matters may be resolved unfavorably to the
Company. The Company has established accruals for matters for which
payment is probable and amounts reasonably estimable. Management believes
any liability that may ultimately result from the resolution of these
matters in excess of amounts provided will not have a material adverse
effect on the financial position or results of operations of the Company.
<PAGE>9
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
RESULTS OF OPERATIONS
The Company's net sales and revenues and operating results are significantly
impacted by seasonal fluctuations due to the nature of its operations and the
geographic location of its service area, which is defined primarily as the
Northeastern United States. Agriculture and Consumer Group net sales and
revenues are traditionally higher in the spring as customers initiate the
growing season. Correspondingly, the Company's Energy Group realizes
significantly higher net sales and revenues in the winter months due to the
cold winter conditions in the Northeast. The Financial Services Group is
generally not materially impacted by seasonal fluctuations.
Results by Operating Segment
Increase (Decrease)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
3/31/94 vs. 3/31/93 3/31/94 vs. 3/31/93
-------------------- --------------------
<S> <C> <C>
Net Sales and Revenues
Agriculture & Consumer . . . . . . . . . . . . $ 24,115 $ 55,128
Energy . . . . . . . . . . . . . . . . . . . . (1,915) (72,254)
Financial Services . . . . . . . . . . . . . . 1,080 (1,975)
Intercompany Transactions. . . . . . . . . . . (68) (727)
-------------------- --------------------
$ 23,212 $ (19,828)
==================== ====================
Margin (Loss) from Continuing Operations before
Income Taxes
Agriculture & Consumer . . . . . . . . . . . . $ (2,674) $ (18,353)
Energy . . . . . . . . . . . . . . . . . . . . 6,768 8,447
Financial Services . . . . . . . . . . . . . . (340) (409)
Operating Margin (Loss). . . . . . . . . . . . 3,754 (10,315)
Other Items. . . . . . . . . . . . . . . . . . (2,250) (559)
-------------------- --------------------
$ 1,504 $ (10,874)
==================== ====================
</TABLE>
Parenthetical numbers in the following narrative have been rounded to the
nearest hundred thousand.
Restructuring of Operations
- ---------------------------
In fiscal 1992, the Company initiated Customer Driven: 1995 (the "Project")
to restructure the Company to better focus on its members and customers and
to re-engineer the Company's business processes to improve future
profitability. Implementation of Project strategies has and will continue
to have a significant impact on the markets served, assets utilized, and
operating practices of the Agriculture & Consumer and Energy groups, as well
as on administrative functions. During the quarter under review, and as
indicated in the Company's annual report on Form 10-K for the fiscal year
ended June 30, 1993, Company management has continued implementation of the
Project and details of certain of these strategies will be reviewed in the
following segment discussions.
Discontinued Operations
- -----------------------
On March 23, 1993, the Agway Board of Directors authorized management to
sell the Company's 34% interest in Curtice Burns Foods, Inc. (Curtice Burns
Foods) and 99% interest in H. P. Hood Inc. (Hood). Management and the
Board are actively pursuing their plan to sell these investments in fiscal
1994 and negotiations regarding these sales continued throughout the third
quarter. Accordingly, these operations are reflected as discontinued
operations. Agway's decision to make these sales is part of the overall
strategic plan of focusing on its agriculture, consumer,
<PAGE>10
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
(Unaudited)
(Thousands of Dollars)
Discontinued Operations (continued)
- ----------------------------------
energy, insurance, and leasing businesses. In the fourth quarter of fiscal
1993, Curtice Burns initiated a restructuring program. As part of that
program, in the quarter ended December 1993, Curtice Burns Foods, Inc.
completed the sale of two businesses, the oats portion of the National Oats
business and the Hiland Potato Chip business, and, in the quarter ended
March 31, 1994, completed the sale of the Curtice Burns Meat Snacks
business.
Agriculture & Consumer Group
- ---------------------------
Project initiatives for fiscal 1993 for the Agriculture & Consumer Group were
primarily focused on transferring the marketing, sales and related operating
assets of agricultural products, previously conducted through retail
operations, to agricultural hubs and dedicated customer service centers.
This transition was completed in fiscal 1993 in New England and Pennsylvania
and was completed in New York, the final region to transition, in the first
half of fiscal 1994. An additional initiative focused on merging 52 local
store cooperatives into Agway, which was materially completed in the fourth
quarter of fiscal 1993, has increased sales and asset levels in fiscal 1994.
Fiscal 1994 initiatives for the Group center around streamlining operating
and administrative processes through reviews of supply chain management,
product category management, and warehousing systems; closing,
consolidating, or converting facilities to focus assets and capital in
selected markets and eliminate duplication; and sales enhancement through
customer service and quality reviews. The fiscal 1993 initiatives were
intended to improve customer service, knowing that certain of these changes
would increase costs at least during the period of transition until cost
reduction strategies can be implemented. The 1994 initiatives focus on
detail plans for future implementation of strategies for expense control
and sales enhancement anticipated to improve results of operations in future
years.
Net sales and revenues for the third quarter of fiscal 1994 of $228,400 and
for the nine months to date of $664,500 increased $24,100 (11.8%) and
$55,100 (9.0%), respectively, as compared to the corresponding periods in
the prior fiscal year. The increases are primarily attributed to the
Group's consumer business which included the merger of local store
cooperatives into Agway and to a lesser extent volume and price increases
among selected product lines within the Group.
Operating losses for the third quarter of fiscal 1994 of $12,900 and for the
nine months to date of $37,600 increased $2,700 and $18,400, respectively,
as compared to the corresponding periods in the prior fiscal year. The Group
experiences seasonal fluctuations in its business and generally experiences
higher net sales and revenues in the spring as customers initiate the
growing season. However, weather conditions can impact the timing of the
commencement of the spring growing season, and in fiscal 1993 and 1994 the
extreme weather conditions in the winter have adversely impacted the Group's
results for the quarter and year to date. In fiscal 1994, operating losses
have been further accentuated due to (i) the merger of 52 store corporations
into Agway which now defers the recognition of a certain portion of its
margins until goods are sold to the end user (previously these margins were
recognized as wholesale margins at the time inventory was sold to the store
corporation), (ii) incremental costs associated with the Company's Project
initiatives which include expanding the Company's sales force and the
establishment of agricultural hubs and dedicated customer service centers,
and (iii) depressed gross margins across the Group's selected product lines
due to higher raw material prices, a change in product mix, and competitive
pricing in the marketplace.
The Company expects to benefit from the merged store corporations as they
will provide additional retail margins and increased sales in the spring
as the growing season commences. Furthermore, the increasing costs
associated with the Project initiatives tend to be fixed throughout the
year, while incremental revenues realized from Project initiatives will
tend to follow the seasonal sales pattern and also be more fully realized
in the spring as the growing season commences.
<PAGE>11
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
(Unaudited)
(Thousands of Dollars)
Energy Group
- ------------
Project initiatives for fiscal 1993 for the Energy Group were primarily
divestitures of retail locations in an effort to focus assets and capital in
selected markets. In addition, sales to commercial accounts were refocused
away from price-oriented accounts to service-oriented businesses. As
expected, these initiatives decreased sales volume, but had a favorable
impact on gross margins. Project initiatives for fiscal 1994 include
implementation of operational efficiency and asset management strategies,
such as centralized credit management, automating certain field operating
activities and mutually beneficial supplier agreements.
Energy segment net sales and revenues of $195,400 for the third quarter
declined $1,900 (1.0%) as compared to the third quarter of the prior year.
Fiscal 1994 year-to-date net sales and revenues of $447,800 declined $72,300
(13.9%) as compared to the same period in the prior year. The decrease for
the quarter and year to date is primarily attributable to planned Project
initiatives which included divestitures of low-margin retail locations and a
refocusing away from low-margin, high-volume commercial customers. However,
the anticipated decline in net sales and revenue for the quarter was
mitigated by extremely cold weather which increased the volume of heating
oils and propane.
Total unit volume (in millions of gallons) for the quarter and year to date
decreased 700 and 52,400 gallons, respectively, as compared to the
corresponding periods in the prior year. Average selling prices remained
constant in the third quarter and decreased 2.2% for the nine months to date
as compared to the corresponding periods in the prior year due to softness
in the world market, which also contributed to the sales decrease.
Despite the unit volume and selling price declines, the Energy Group realized
an improvement in net operating margins of $6,800 (35.7%) and $8,400
(38.5%) in the third quarter and fiscal year to date as compared to the
corresponding period in the previous fiscal year. Gross margins as a
percentage of net sales and revenues increased by 4.8% and 4.7% in the third
quarter and fiscal year to date as compared to the corresponding period in
the prior fiscal year. Total costs and expenses for the Group increased
slightly in the third quarter as compared to the corresponding period in the
prior fiscal year due to the adverse weather conditions, but declined on a
year-to-date basis as a result of the above changes in operations.
Financial Services Group
- ------------------------
For segment reporting purposes, the Financial Services Group consists of
Telmark Inc., Agway Insurance Company, and Agway General Agency, Inc.
Net sales and revenues of $16,800 for the Financial Services Group for the
third quarter increased $1,100 (6.9%) as compared to the third quarter of
the prior year. Fiscal 1994 year-to-date net sales and revenues of $49,200
decreased $2,000 (3.9%) as compared to the same period in the prior year.
The increase for the quarter is primarily attributed to Telmark Inc. which
increased revenues by $1,000 due to increased volume of bookings in fiscal
1994 and a gain of $500 from the sale of $5,600 of lease receivables in the
third quarter. For the nine months to date, Telmark's revenues were up by
$800. The decrease for the year-to-date period is primarily attributed to
the Agway Insurance Company and the Agway General Agency. Agway Insurance
Company revenues were constant for the third quarter but declined $2,200
for the nine months to date, as compared to the corresponding periods in
the prior year, due to termination of reinsurance assumed contracts of
$1,600 and from changes in reinsurance ceded treaties of $600 in prior
quarters. Agway General Agency Inc. revenues also remained constant for
the third quarter but declined $600 for the nine months to date as compared
to the corresponding period in the prior year due to a decline in
administrative fees on a declining base of participants in the
Agway member group health insurance plan.
<PAGE>12
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
(Unaudited)
(Thousands of Dollars)
Financial Services Group (continued)
- -----------------------------------
Operating margins declined in the third quarter of fiscal 1994 by $300
(11.0%) over the same period in the previous year and $400 (5.4%) for the
nine-month period ended March 31, 1994 as compared to the same period in the
prior year. The Agway Insurance Company revenue decline from the
reinsurance termination was offset by an equal reduction in costs and
expenses with no impact on operating margin. Operating margins for the
Agway Insurance Company decreased by $400 in the third quarter due to
unfavorable underwriting experience associated with adverse weather
conditions, but for the nine month period remained $400 ahead of the prior
year. Agway General Agency experienced a reduction in margins of $200 for
the third quarter and $700 for the nine months to date as compared to the
corresponding period in the prior fiscal year due to declining revenues as
noted above. Telmark Inc.'s operating margins increased $300 in the third
quarter, but decreased $100 for the nine-month period ended March 31, 1994
as the sale of certain lease receivables resulted in $500 of revenue for the
third quarter.
Other Items
- -----------
Other items include certain corporate activities not included within the
Company's three operating segments and includes interest expense. For the
third quarter, other items realized a decrease in income of $2,300 over the
corresponding period in the prior fiscal year. The decrease was attributed
primarily to decreased revenues from the timing of receipt of vendor rebates
in the amount of $800 in the third quarter of fiscal 1993 (received in second
quarter of fiscal 1994), an increase in interest expense for the third
quarter of $900 due to a higher level of borrowings in the quarter, and
increased costs associated with unallocated general corporate expenses. For
the nine-month period to date, other items realized a decrease in income of
$600 over the corresponding period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash flows from continuing operations for the nine months ended March 31,
1994 increased $2,400 to $7,200 as compared to the first nine months of
fiscal 1993. This increase was primarily a result of higher June 1993
Agriculture & Consumer receivables due to the late spring, which were
reduced during the first nine months of the current fiscal year, and to an
increase in accounts payable during the nine-month period. Net cash
utilized in investing activities from continuing operations for the nine
months ended March 31, 1994 was $34,000 as compared to cash provided of
$5,000 for the same period last year. Cash flows utilized in investing
activities for the nine months ended March 31, 1993 were favorably impacted
by proceeds of $32,000 from disposals of businesses and property, plant and
equipment, while increased leasing activity in fiscal 1994 resulted in the
use of an additional $21,900 of cash compared to the same period last year.
As a result of cash utilized in investing activities, net long-term
borrowings increased $15,000 in the current year, and short-term borrowings
increased $16,400. Increased short-term borrowing in the prior year
resulted from a decrease in net long-term borrowings of $23,700 combined
with redemption of $12,400 of capital stock issued in connection with an
acquisition in a prior year.
The Company finances its operations and the operations of all its continuing
businesses and subsidiaries, except Telmark and Agway Insurance Company,
through Agway Financial Corporation (AFC). Telmark and Agway Insurance
Company finance themselves through operations or direct borrowing
arrangements. Each business unit is financed with a combination of short-
and long-term credit facilities as appropriate. External sources of short-
term financing for Agway and all its continuing operations include revolving
credit lines, letters of credit, and commercial paper programs. Sources of
longer term financing include borrowings from banks and insurance companies,
subordinated debt, and capital leases. In addition, Telmark has occasionally
sold blocks of its lease portfolio. On February 1, 1994, Telmark's
registration of its offering to the public of $25,000 of debentures due
December 31, 1997 with the Securities & Exchange Commission became effective.
The debentures are unsecured and are not guaranteed by Agway nor any of
Agway's other subsidiaries. The offering of the debentures are not
underwritten and there can be no guarantee as to the amount of debentures to
be sold. The proceeds of the offering
<PAGE>13
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
(Unaudited)
(Thousands of Dollars)
LIQUIDITY AND CAPITAL RESOURCES (continued)
- ------------------------------------------
will be used to provide financing for Telmark's leasing activities. As of
March 31, 1994, approximately $1,500 of debentures were sold.
In fiscal 1994, the Company renegotiated and renewed certain of its bank
loan agreements through October 28, 1994. Adequate lines of credit of
$149,250 are available to the Company under the new agreements as compared
to lines of credit of $158,000 in the prior agreements. This includes
retention of a commercial paper facility of $50,000. Certain of these
agreements, upon the occurrence of certain defined events, give the lenders
the right to perfect a security interest in certain of the Company's
accounts receivables and non-petroleum inventories. In addition, the
agreements include certain covenants, the most restrictive of which requires
to Company to maintain specific monthly levels of interest coverage and
tangible net worth. The Company has ongoing communication with its lenders
and it is management's opinion that appropriate and adequate lines of credit
exist to finance the Company's operations and capital requirements.
<PAGE>14
PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
Item 1. Legal Proceedings
- --------------------------
In February 1988, Agway leased a feed mill located in Woodridge, New York
from Inter-County Farmers Cooperative Association, Inc. Agway manufactured
horse, poultry, and dairy feed at the feed mill. In early July 1989, due to
a mechanical malfunction, some horse feed manufactured at the feed mill was
contaminated with Monensin, a feed medication used with poultry and dairy
feed but which is harmful to horses. Agway immediately recalled the
contaminated horse feed and contacted regulatory agencies, including the
United States Food and Drug Administration (FDA). As a result of eating the
contaminated horse feed, a number of horses located in the State of New
Jersey died or were damaged. The majority of claims made by owners of the
affected horses have been settled. As of April 30, 1994, there were two
lawsuits pending which were filed by horse owners against Agway: John
Kolkowski, et al. v. Agway Inc., et al., filed on July 3, 1990 in the
Supreme Court of the State of New York for Westchester County; and Orlando
R. Petrocelli v. Agway Inc., et al., filed on August 5, 1991 in the Superior
Court of New Jersey for Mercer County. Each of these lawsuits includes
claims for money damages. On April 18, 1994, a previously pending lawsuit
by horse owners against Agway, Anthony D. Nini, et al. v. Agway Inc., et al.,
filed on October 24, 1990 in the Superior Court of New Jersey for Mercer
County, was settled. Agway agreed to pay Anthony D. Nini, et al., $1,498,
which was covered by an insurance policy issued to Agway. The FDA conducted
an investigation of the incident and referred the matter to the U. S.
Department of Justice (DOJ) to consider institution of criminal proceedings.
Agway has had an opportunity to present its views to the DOJ on why criminal
proceedings should not be instituted and the DOJ and FDA discussed with
Agway resolution of issues resulting from the FDA investigation. Agway
believes the pending lawsuits and the FDA investigation will be
satisfactorily resolved and any adjustments will not be material in relation
to the consolidated financial position of Agway.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
The Company did not file any reports on Form 8-K during the three months
ended March 31, 1994.
<PAGE>15
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.
AGWAY INC.
(Registrant)
Date May 13, 1994 /s/ PETER J. O'NEILL
------------ --------------------
Peter J. O'Neill
Senior Vice President
Corporate Finance and
Control
(Principal Financial Officer
and Chief Accounting
Officer)
