<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 December 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.
Class Outstanding at January 31, 1995
- ------------------------------------- -------------------------------
Common Stock, $25 par value per share 110,085 shares
* 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 December 31, 1994
and June 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations and Retained Margin
for the three months and six months ended December 31, 1994 and
December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Cash Flow Statements for the six months ended
December 31, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . .15
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . .19
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . .19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . .20
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
<PAGE>3
PART I. FINANCIAL INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
December 31, June 30,
1994 1994
------------ ------------
ASSETS (Unaudited) (Note)<F1>
- ------
<S> <C> <C>
Current Assets:
Trade notes and accounts receivable, less allowance for
doubtful accounts of $15,572 and $15,515, respectively . . . . . $ 202,136 272,925
Leases receivable, less unearned income of $36,274 and
$33,209, respectively. . . . . . . . . . . . . . . . . . . . . . 93,968 84,653
Uncollected insurance premiums . . . . . . . . . . . . . . . . . . 10,124 9,936
Advances and other receivables . . . . . . . . . . . . . . . . . . 21,303 26,447
Inventories
Raw materials. . . . . . . . . . . . . . . . . . . . . . . . . . 23,774 23,292
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . 157,437 158,639
Goods in transit and supplies. . . . . . . . . . . . . . . . . . 24,245 15,857
-------------- --------------
Total inventories. . . . . . . . . . . . . . . . . . . . . . . . 205,456 197,788
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . 88,950 92,039
-------------- --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . 621,937 683,788
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . 34,923 33,943
Other security investments. . . . . . . . . . . . . . . . . . . . . . . 39,048 38,913
Properties and equipment, net . . . . . . . . . . . . . . . . . . . . . 312,479 318,359
Long-term leases receivable, less unearned income of
$59,450 and $51,775, respectively . . . . . . . . . . . . . . . . . . 213,736 191,654
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,764 91,214
Net assets of discontinued operations . . . . . . . . . . . . . . . . . 0 48,424
-------------- --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,313,887 $ 1,406,295
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,248 $ 77,193
Current installments of long-term debt and subordinated debt . . . 98,344 117,143
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 145,214 165,134
Unearned insurance premiums. . . . . . . . . . . . . . . . . . . . 16,951 16,868
Other current liabilities. . . . . . . . . . . . . . . . . . . . . 139,131 136,197
-------------- --------------
Total current liabilities. . . . . . . . . . . . . . . . . . . 451,888 512,535
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223,868 208,915
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 364,175 379,835
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,045 94,967
Interest of others in consolidated subsidiaries . . . . . . . . . . . . 6,055 6,217
Commitments and contingencies . . . . . . . . . . . . . . . . . . . . .
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,824 71,338
Common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,755 2,771
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,470 6,371
Retained margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,807 123,346
-------------- --------------
Total liabilities and shareholders' equity . . . . . . . . . . $ 1,313,887 $ 1,406,295
============== ==============
<FN>
<F1> Note: The balance sheet at June 30, 1994 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. It has been reclassified to consolidate H. P. Hood (Hood) previously reported as a
discontinued operation.
</FN>
</TABLE>
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 Six Months Ended
December 31, December 31,
-------------------------------- --------------------------------
1994 1993 1994 1993
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales and revenues from:
Product sales. . . . . . . . . . . . $ 473,802 $ 478,729 $ 934,723 $ 932,850
Leasing operations . . . . . . . . . 9,924 8,230 19,138 15,957
Insurance operations . . . . . . . . 6,677 6,982 13,361 13,681
-------------- -------------- -------------- --------------
Total net sales and revenues . . 490,403 493,941 967,222 962,488
Cost and expenses from:
Products and plant operations. . . . 431,929 438,368 860,565 863,105
Leasing operations . . . . . . . . . 4,445 3,580 8,806 7,080
Insurance operations . . . . . . . . 3,915 4,341 8,373 8,728
Selling, general and
administrative activities. . . . . 54,169 49,814 105,535 97,246
-------------- -------------- -------------- --------------
Total costs and expenses . . . . 494,458 496,103 983,279 976,159
Operating loss. . . . . . . . . . . . . . (4,055) (2,162) (16,057) (13,671)
Interest expense, net . . . . . . . . . . (9,083) (7,695) (17,672) (15,861)
Other Hood costs, net . . . . . . . . . . (10,207) 0 (10,207) 0
Other income (expense), net . . . . . . . 1,874 1,422 2,555 2,163
-------------- -------------- -------------- --------------
Loss from continuing operations
before income taxes . . . . . . . . (21,471) (8,435) (41,381) (27,369)
Income tax benefit. . . . . . . . . . . . 7,251 2,134 14,086 8,895
-------------- -------------- -------------- --------------
Loss from continuing operations . . . . . (14,220) (6,301) (27,295) (18,474)
Discontinued operations:
Gain on disposal of Curtice Burns,
net of tax expense of $19,700. . . . 4,430 0 4,430 0
Adjustment required for reclassification
of Hood to continuing operations . . 817 743 2,623 1,135
Credit from discontinued -------------- -------------- -------------- --------------
operations . . . . . . . . . 5,247 743 7,053 1,135
-------------- -------------- -------------- --------------
Net loss. . . . . . . . . . . . . . . . . (8,973) (5,558) (20,242) (17,339)
Retained Margin:
Balance at beginning of period . . . 112,171 119,998 123,346 131,787
Dividends. . . . . . . . . . . . . . (2,374) (2,454) (2,374) (2,454)
Equity in unrealized capital gains
(losses) of insurance companies . (17) (2) 77 (10)
-------------- -------------- -------------- --------------
Balance at end of period. . . . . . . . . $ 100,807 $ 111,984 $ 100,807 $ 111,984
============== ============== ============== ==============
</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>
Six Months Ended
December 31,
-------------------------------
1994 1993
-------------- -------------
<S> <C> <C>
Net cash flows provided by operating activities . . . . . . . . . . . . $ 42,426 $ 39,436
Cash flows (used in) provided by investing activities:
Purchases of property, plant and equipment . . . . . . . . . . . . (17,340) (14,401)
Cash paid for acquisitions . . . . . . . . . . . . . . . . . . . . 0 (4,985)
Proceeds from disposal of businesses and property, plant and
equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,329 5,079
Leases originated. . . . . . . . . . . . . . . . . . . . . . . . . (80,115) (61,148)
Leases repaid. . . . . . . . . . . . . . . . . . . . . . . . . . . 45,524 45,125
Proceeds from sale of marketable securities. . . . . . . . . . . . 715 (19,450)
Purchases of marketable securities . . . . . . . . . . . . . . . . (1,618) 19,442
Proceeds from sale of discontinued operations. . . . . . . . . . . 55,786 0
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (135) (1,105)
Net changes in net assets of discontinued operations . . . . . . . 0 325
-------------- -------------
Net cash flows provided by (used in) investing activities . . . . . . . 7,146 (31,118)
Cash flows (used in) provided by financing activities:
Net change in short-term borrowings. . . . . . . . . . . . . . . . (24,945) (25,800)
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . 36,205 59,475
Repayment of long-term debt. . . . . . . . . . . . . . . . . . . . (39,238) (55,939)
Proceeds from sale of subordinated debt. . . . . . . . . . . . . . 31,894 19,560
Maturity and redemption of subordinated debt . . . . . . . . . . . (47,611) (5,985)
Proceeds from sale of stock. . . . . . . . . . . . . . . . . . . . 6 1,857
Redemption of stock. . . . . . . . . . . . . . . . . . . . . . . . (2,536) (348)
Cash dividends paid. . . . . . . . . . . . . . . . . . . . . . . . (2,589) (2,057)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (758) (556)
-------------- -------------
Net cash flows used in financing activities . . . . . . . . . . . . . . (49,572) (9,793)
-------------- -------------
Net decrease in cash and equivalents. . . . . . . . . . . . . . . . . . 0 (1,475)
Cash and equivalents at beginning of period . . . . . . . . . . . . . . 0 1,475
-------------- -------------
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 of Agway Inc. (the "Company") 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 six-month period ended
December 31, 1994 are not necessarily indicative of the results that
may be expected for the year ended June 30, 1995 due, among other
reasons, to the seasonal nature of certain major segments of the
Company's business. 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, 1994.
Certain reclassifications have been made to conform prior year
financial statements with the current year presentation. These
reclassifications had no effect on the shareholders' equity of the
Company. Subsequent to the close of the second quarter of fiscal
1995, Agway determined that Hood should no longer be classified
as a discontinued operation and has reclassified Hood to continuing
operations for all periods presented (see also Note 6 to the financial
statements).
2. AGWAY FINANCIAL CORPORATION
Agway Financial Corporation (AFC) is a wholly owned subsidiary
of the Company whose principal business activity is securing
financing through bank borrowings and issuance of corporate debt
instruments to provide funds for the Company, its sole stockholder,
and AFC's sole wholly owned subsidiary, Agway Holdings Inc.
(AHI), and AHI's subsidiaries, for general corporate purposes. The
payment of principal and interest on this debt is absolutely and
unconditionally guaranteed by the Company. In an exemptive relief
granted by the Securities and Exchange Commission, AFC, as a
separate company, is not required to file periodic reports with
respect to these debt securities provided the 1934 Act reports of the
Company contain summarized financial information concerning
AFC.
On July 1, 1994, (i) certain subsidiaries of AFC (Seedway Inc.,
Allied Seed Cooperative Inc., and Pro-Lawn Products Inc.) were
transferred to and merged into Agway Inc., and (ii) certain operating
divisions of Agway Inc. (Retail/Wholesale Operations) were
transferred to AFC and merged together with the Country Foods
operations into Agway Consumer Products Inc., formerly Agway
Country Foods, Inc. The prior year financial statements have been
restated to give retroactive effect to these changes in reporting
entities.
Summarized financial information for AFC and Consolidated
Subsidiaries is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------- --------------------------------
1994 1993 1994 1993
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Net sales and revenues. . . . . . . . . $ 401,831 $ 394,436 $ 779,501 $ 779,874
Operating margin. . . . . . . . . . . . 11,488 15,230 18,005 20,101
Loss from continuing operations . . . . (10,641) (6,353) (17,897) (18,944)
Net loss. . . . . . . . . . . . . . . . (5,394) (5,610) (10,844) (17,809)
</TABLE>
<PAGE>7
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Thousands of Dollars)
2. AGWAY FINANCIAL CORPORATION (continued)
---------------------------------------
<TABLE>
<CAPTION>
Reclassified
December 31, June 30,
1994 1994
--------------- ---------------
<S> <C> <C>
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 593,665 $ 656,290
Properties and equipment, net. . . . . . . . . . . . . . . . . . 230,536 233,287
Noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . 311,088 290,201
Net assets of discontinued operations. . . . . . . . . . . . . . 0 48,424
--------------- --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,135,289 $ 1,228,202
=============== ==============
Current liabilities. . . . . . . . . . . . . . . . . . . . . . . $ 321,754 $ 392,809
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 220,764 205,579
Subordinated debt. . . . . . . . . . . . . . . . . . . . . . . . 364,175 379,835
Noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . 29,708 35,424
Shareholder's equity . . . . . . . . . . . . . . . . . . . . . . 198,888 214,555
Total liabilities and --------------- --------------
shareholder's equity. . . . . . . . . . . . . . . . . . . . . $ 1,135,289 $ 1,228,202
=============== ==============
<CAPTION>
3. SUPPLEMENTAL DISCLOSURES ABOUT OPERATING CASH FLOWS
---------------------------------------------------
Six Months Ended
December 31,
--------------------------------
1994 1993
Additional disclosure of operating cash flows: --------------- --------------
<S> <C> <C>
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,640 $ 20,375
=============== ==============
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . $ 2,154 $ 6,756
=============== ==============
</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. The total purchase price of
$21,700 plus certain liabilities assumed of $15,900 was settled in
fiscal 1994 in the form of cash ($5,000) and restricted preferred
stock, 6%, $100 par value, ($16,700). This occurred primarily in
the first quarter of fiscal 1994 for cash ($4,800) and restricted
preferred stock, 6%, $100 par value, ($15,900).
<PAGE>8
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
4. BORROWING ARRANGEMENTS
----------------------
As of December 31, 1994, short-term borrowing availability to AFC
of $125,000, Telmark of $24,000 and Hood of $33,000 is compared
to $135,000, $23,000 and $33,000, respectively, in the prior year.
Long-term and subordinated debt outstanding amounted to:
<TABLE>
<CAPTION>
Agway & AFC Telmark Hood Total
---------------------- ---------------------- ------------------ ----------------------
12/94 6/94 12/94 6/94 12/94 6/94 12/94 6/94
---------- ---------- ---------- ---------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt $ 27,759 $ 33,524 $ 222,578 $ 219,489 $ 37,460 $ 38,574 $ 287,797 $ 291,587
Currently payable 14,581 14,424 41,622 62,022 7,726 6,226 63,929 82,672
---------- ---------- ---------- ---------- -------- -------- ---------- ----------
Net long-term debt $ 13,178 $ 19,100 $ 180,956 $ 157,467 $ 29,734 $ 32,348 $ 223,868 $ 208,915
========== ========== ========== ========== ======== ======== ========== ==========
Subordinated debt $ 386,606 $ 403,432 $ 5,310 $ 3,712 $ 6,674 $ 7,162 $ 398,590 $ 414,306
Currently payable 34,415 34,471 0 0 0 0 34,415 34,471
---------- ---------- ---------- ---------- -------- -------- ---------- ----------
Net long-term debt $ 352,191 $ 368,961 $ 5,310 $ 3,712 $ 6,674 $ 7,162 $ 364,175 $ 379,835
========== ========== ========== ========== ======== ======== ========== ==========
</TABLE>
In addition, as of December 31, 1994, Telmark has a committed
term loan credit of $125,000 available to be borrowed through
November 30, 1995, of which $90,000 is outstanding as of
December 31, 1994. Hood has available from its bank a committed
term loan facility of up to $10,000 under specified conditions which
may be borrowed against at any time prior to June 1995. No
borrowings have been made against this $10,000 line and any that
are made would be due for repayment by October 31, 1995 and
would be guaranteed by Agway.
The AFC short-term lines are available through October 31, 1995.
These AFC short-term lines of credit and $10,000 of AFC long-term
bank debt are collateralized by the Company's accounts receivable
and non-petroleum inventories. Amounts which can be drawn under
the AFC short-term agreements are limited to a specific calculation
based upon the total of certain accounts receivable and non-
petroleum inventories ("collateral"). Adequate collateral has existed
throughout the fiscal year to meet the ongoing needs of the Company
and is expected to continue to do so. In addition, the agreements
include certain covenants, the most restrictive of which requires the
Company to maintain specific quarterly levels of interest coverage
and monthly levels of tangible net worth. These covenants were set
giving consideration to Hood as a discontinued operation. No covenant
violations existed as of December 31, 1994. Unless covenant
requirements are amended or waived, the Company anticipates future
covenant violations based upon the current credit agreement covenant
requirements and the change in circumstances with Hood as described
in Note 6. The Company has had preliminary discussions with its
lenders and expects covenant amendments or waivers will be negotiated
to make appropriate and adequate financing available under these
facilities given the change in circumstances.
The Hood short-term credit facility is used to supply letters of credit
as well as short-term financing. Letters of credit of $12,027 were
outstanding at December 31, 1994. In anticipation of the sale of
Hood, the availability of short-term financing for Hood was not
extended for a long period of time, and accordingly, the current
facility expires on February 28, 1995. Due to the change in
circumstances regarding the sale of Hood, the Company and Hood
are working with their financial institution to extend and renegotiate
the financing at adequate levels and for appropriate periods of time.
No covenant violations existed as of December 31, 1994. Unless covenant
requirements are amended or waived, the Company anticipates future
covenant violations based upon the current credit agreement covenant
requirements and the change in circumstances with Hood as described
in Note 6.
<PAGE>9
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
-----------------------------
Environmental
The Company is subject to a number of governmental regulations
concerning environmental matters, either directly, or as a result of
the operations of its subsidiaries. The Company expects that it will
be required to expend funds to remediate certain sites, including
certain Superfund sites and sites with underground fuel storage
tanks. In addition, the Company expects that it will incur other
expenses associated with environmental compliance.
The Company continually monitors its operations with respect to
potential environmental issues, including changes in legally mandated
standards and remediation technologies. The Company's recorded
liability reflects those specific issues where remediation activities
are currently deemed to be probable and where the cost of remediation
is estimable. Estimates of the extent of the Company's degree of
responsibility of a particular site and the method and ultimate cost
of remediation require a number of assumptions for which the
ultimate outcome may differ from current estimates; however, the
Company believes that its past experience provides a reasonable
basis for estimating its liability. As additional information becomes
available, estimates are adjusted as necessary. While the Company
does not anticipate that any such adjustment would be material to its
financial statements, it is reasonably possible that the result of
ongoing and/or future environmental studies, changes in legal
requirements or other factors could alter this expectation and require
the recording of additional liabilities. The extent or amount of such
events, if any, cannot be estimated at this time.
As part of its long-term environmental protection program, the
Company spent approximately $5,000 in fiscal 1994 on capital
projects. The Company estimates that during fiscal 1995 and 1996
approximately $4,000 per year will be spent on additional capital
projects for environmental protection. These estimates recognize the
additional capital required to comply with Environmental Protection
Agency (EPA) Underground Storage Tank (UST) regulations which
become effective in December 1998. Presently, the total cost to
comply with the EPA UST regulations is estimated to be
approximately $5,000. The total capital requirements may change
due to, amongst other things, the actual number of USTs actively in
use on the effective date.
Other
The Company is also subject to various investigations, claims and
legal proceedings covering a wide range of matters that arise in the
ordinary course of its business activities. 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.
6. DISCONTINUED OPERATIONS
-----------------------
On March 23, 1993, the Company's Board of Directors authorized
management to sell its 34% interest in Curtice Burns Foods, Inc.
(Curtice Burns) and 99% interest in Hood, the major investments in
Agway's food group segment.
Curtice Burns
Curtice Burns accepted an offer from Pro-Fac Cooperative Inc. (Pro-
Fac) to acquire all outstanding shares of Curtice Burns for $19 per
share in cash, and entered into a definitive merger agreement with
Pro-Fac. This agreement closed on November 3, 1994 and the
Company received cash proceeds of $55,786.
<PAGE>10
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
6. DISCONTINUED OPERATIONS (continued)
-----------------------------------
Curtice Burns (continued)
The effect of disposal of Curtice Burns versus the original estimate
is as follows:
<TABLE>
<CAPTION>
November 3, 1994 June 30, 1994
--------------- ----------------
<S> <C> <C>
Operating loss from measurement date to November 3
and June 30, 1994, including tax expense of
$12,200 and $11,500, respectively <F1>. . . . . . . . . . . . $ (17,300) $ (17,500)
Estimated operating income (loss) from July 1, 1994
through plan disposal date, including tax expense
of $0 and $200, respectively. . . . . . . . . . . . . . . . . 0 (200)
--------------- ---------------
Total operating losses during phaseout period, net of tax expense (17,300) (17,700)
Actual/expected gain, including tax expense of $7,500
and $9,400, respectively. . . . . . . . . . . . . . . . . . 21,730 19,600
Gain on disposal, net of tax expense of $19,700 and $21,100, --------------- ---------------
respectively <F2> . . . . . . . . . . . . . . . . . . . . . . $ 4,430 $ 1,900
=============== ===============
<FN>
<F1> Includes a pre-tax restructuring charge of $9,700 for Curtice Burns, which occurred in the fourth quarter
of fiscal 1993, for exiting the meat snacks business, closure of the Hiland potato chip business and certain
staff reductions. In addition, tax expense relating to the operating loss from the measurement date
includes $9,200 for taxes on the undistributed margins of Curtice Burns as of the measurement date.
<F2> The $4,430 net after tax gain exceeded the $1,900 gain estimated as of June 30, 1994. The net operating
results from June 1994 through date of close exceeded June estimates by $400, and the gain on disposal,
net of taxes, exceeded June estimates by $2,100 primarily due to a $1,900 reduction in anticipated state
taxes. Taxes of $16,700 (which include the $9,200 tax on undistributed margins) are currently payable
on the pre-tax gain of $29,230.
</FN>
</TABLE>
Hood
As of November 1994, the sale of Hood was anticipated to close
shortly in a sale to a Hood management led buyout group, the terms
of which had been generally agreed to by Agway and the
management buyout group in a transaction which included a complex
financing structure. A delay ensued. Based on changed business
conditions and financial markets during this prolonged negotiation,
on January 24, 1995, Agway and the management buyout group
mutually concluded to cease the pursuit of this sale transaction.
Agway is actively pursuing alternative buyers for Hood. Under
these circumstances, while Agway is still actively interested in the
sale of Hood and while such a sale could be consummated in the
near future, Agway is no longer able to estimate with reasonable
certainty whether a sale will occur within the next year and,
accordingly, has reclassified Hood to continuing operations for
financial reporting purposes.
<PAGE>11
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
6. DISCONTINUED OPERATIONS (continued)
-----------------------------------
Hood (continued)
Financial information with respect to Hood previously reported as
discontinued as of June 30, 1993, June 30, 1994 and December 31, 1994
and for the periods then ended:
<TABLE>
<CAPTION>
December 31, 1994 June 30, 1994 June 30, 1993
------------------- ------------------- -------------------
<S> <C> <C> <C>
Total assets . . . . . . . . . . . . . . . $ 159,700 $ 164,300 $ 162,400
Total liabilities. . . . . . . . . . . . . $ 126,500 $ 128,800 $ 118,400
<CAPTION>
Six Months Fiscal Year Fiscal Year
Ended Ended Ended
December 31, 1994 June 30, 1994 June 30, 1993
------------------- ------------------- -------------------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . $ 252,800 $ 493,000 $ 559,500
Operating profits. . . . . . . . . . . . . $ 800 $ (3,300) $ 3,000
</TABLE>
Total assets of Hood consist primarily of accounts receivable,
inventories and properties and equipment, net.
Total liabilities consist primarily of notes payable, long-term debt and
accounts payable. The following table details the major components of
Hood debt.
<TABLE>
<CAPTION>
December 31, 1994 June 30, 1994 June 30, 1993
------------------- ------------------- -------------------
<S> <C> <C> <C>
Note payable <F1>. . . . . . . . . . . . . $ 12,800 $ 14,400 $ 2,700
=================== =================== ===================
Long-term debt
Bank loan <F2> . . . . . . . . . . . . $ 26,100 $ 27,000 $ 30,200
Senior lender <F3> . . . . . . . . . . 9,300 9,600 13,200
6% income debentures, interest
cumulative due 1996-2004 . . . . . . . 500 500 500
7.5% subordinated debentures
due 2001 <F4>. . . . . . . . . . . 6,700 6,700 6,700
Other long-term debt . . . . . . . . . . . 1,500 1,900 2,100
------------------- ------------------- -------------------
44,100 45,700 52,700
Less current portion . . . . . . . . . . . 7,700 6,200 11,100
------------------- ------------------- -------------------
$ 36,400 $ 39,500 $ 41,600
=================== =================== ===================
<FN>
<F1> Hood has a $33,000 credit facility with a bank, which is collateralized by all of the assets of Hood and
supports both Hood's working capital and letters of credit needs. Outstanding letters of credit, which may
comprise up to $25,000 of the total facility, were $12,027 at December 31, 1994.
<F2> Borrowings from the bank consist of a term loan due through June 1, 1996, which is collateralized by all
of the assets of Hood, and an unsecured note assigned by Agway, which is due through fiscal 2001. The
bank requires Hood to comply with certain financial, operating and other covenants.
<F3> Long-term debt due a senior lender at December 31, 1994 is evidenced by four notes due through May
31, 1998 collateralized by certain property, plant and equipment of Hood (this senior lender's interests are
generally subordinate to those of the bank); and a unsecured note for $600. Hood has available from its
bank a committed term loan facility of up to $10,000 under specified conditions which may be borrowed
against at any time prior to June 1995. No borrowings have been made against this $10,000 line and any
that are made would be due for repayment by October 31, 1995 and would be guaranteed by Agway.
<PAGE>12
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
6. DISCONTINUED OPERATIONS (continued)
- ----------------------------------------
Hood (continued)
<F4> In addition to its outstanding debt, Hood has $7.3 million of preferred stock outstanding,
which is included on the consolidated balance sheet as interest of others in consolidated
subsidiaries. The indentures related to the 7.5% subordinated debentures require certain
levels of common equity be maintained in Hood before dividends can be paid to preferred
and common shareholders or before Hood can redeem such stock. Earnings in recent periods
have been insufficient to maintain the necessary common equity and have precluded payments
of preferred and common dividends. Hood has been precluded from paying dividends by these
provisions since the quarter ended March 1994. Dividends for preferred stock are cumulative,
and unpaid dividends at December 31, 1994 amounted to $448. When unpaid dividends on certain
of these preferred shares accumulate to an amount equal to eight quarters of unpaid dividends,
holders of such preferred stock have a right, if they so choose, to elect 25% of the members
of the Hood Board of Directors.
</FN>
</TABLE>
As previously discussed, the financial statements have been
reclassified to reflect Hood as a continuing operation. A
reconciliation to margin (loss) from continuing operations as
previously reported follows:
<TABLE>
<CAPTION>
Six Months Fiscal Year Fiscal Year
Ended Ended Ended
December 31, 1994 June 30, 1994 June 30, 1993
------------------- ------------------- ------------------
<S> <C> <C> <C>
Impact of reclassification of loss from
discontinued operations to margin
(loss) from continuing operations:
Deferred interest expense. . . . . . . . . $ (891) $ (1,783) $ (2,248)
Transaction costs and allowance. . . . . . (15,884)
Pre-tax margin (loss) from
segment operations . . . . . . . . . . 2,178 (7,681) (6,231)
Pre-tax loss from continuing ------------------- ------------------- ------------------
operations . . . . . . . . . . . . . . (14,597) (9,464) (8,479)
Income tax benefit . . . . . . . . . . . . 5,031 3,086 6,970
------------------- ------------------- ------------------
Loss from continuing operations. . . . . . (9,566) (6,378) (1,509)
Original balance - margin (loss)
from continuing operations . . . . . . (17,729) 696 25,727
Reclassified balance - margin (loss) ------------------- ------------------- ------------------
from continuing operations . . . . . . $ (27,295) $ (5,682) $ 24,218
=================== =================== ==================
<CAPTION>
A reconciliation to margin (loss) from discontinued operations as previously reported follows:
June 1994 June 1993
------------------- ------------------
<S> <C> <C>
Original balance - loss from discontinued operations . . . . . . . $ (4,000) $ (5,977)
Reclassification of Hood losses to continuing operations . . . . . 6,378 1,509
Reclassified balance - credit (loss) from ------------------- ------------------
discontinued operations. . . . . . . . . . . . . . . . . . . . $ 2,378 $ (4,468)
=================== ==================
</TABLE>
The net loss relating to Hood from July 1992 to March 23, 1993
was $6,510, which was reflected in the $5,977 net loss from
discontinued operations through the measurement date as previously
reported for the year ended June 30, 1994. This included $5,454
of losses related to the operations and sale of the cheese
manufacturing division of Hood business offset by a $1,799 gain on
the sale of a segment of Hood's fluid milk business.
<PAGE>13
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
6. DISCONTINUED OPERATIONS (continued)
-----------------------------------
Hood (continued)
The net margin (loss) and deferred expenses relating to Hood were
$5,001, $(6,378) and $(9,566) for the year ended June 30, 1993,
year ended June 30, 1994 and six months ended December 31, 1994,
respectively. This incurred margin (loss) in relation to Hood
includes deferred interest expense, actual Hood losses and a tax
benefit representing the book/tax difference in the basis of Hood, for
all periods. Additionally, in December 1994, the other Hood pre-tax
costs of $10,207 include $15,884 pre-tax loss for transaction costs
incurred in connection with these past sales efforts and for pre-tax
impairment allowance with respect to the ultimate sale of its
investment in Hood, net of a $5,677 gain on curtailment of a Hood
defined benefit pension plan as described in Note 7.
The actual results of operations for Hood differed from that
originally projected due to a significant downturn in the Northeast
dairy market which adversely impacted Hood operating results. This
downturn caused a $12,600 reduction in Agway's estimated net after
tax realization from the sale of Hood which was recognized in the
$4,000 net loss from discontinued operations in June 1994. This
revaluation was based primarily upon negotiations for the sale of
Hood which reflected the market downturn.
7. RETIREMENT BENEFITS
-------------------
Postretirement Benefits
In October 1994, the Company elected to amend the existing
program for providing postretirement health care benefits (OPEB)
effective January 1, 1995. The plan amendment establishes a
separate and distinct insured medical program for retirees aged 65
or over, caps the Company's contributions to retirees aged 65 or
over and modifies coverage for active employees and retirees under
age 65. As a result of this amendment, the liability for this plan
was remeasured on October 1, 1994. Due to increasing market
rates of interest, the discount rate assumption was increased from
8% to 8.5% at the remeasurement date.
These amendments have resulted in reducing the net periodic OPEB
costs in 1995 and prospectively. This reduction of costs in the
second quarter and for the fiscal year ending June 30, 1995, totals
approximately $600 and $2,000, respectively.
The plan amendment and discount rate assumption change resulted
in a decrease of the accumulated postretirement benefit obligation
for health insurance by approximately $15,000 and $3,000,
respectively. The accumulated postretirement benefit obligation for
health insurance as of the remeasurement date totaled $33,300.
Hood Curtailment Gain
The Hood pension plan (the "Plan") covers substantially all its
employees and provides defined benefits based on years of credited
service, average compensation (as defined) and social security
benefits. The administrative committee of Hood approved, effective
December 31, 1994, to freeze the benefit accruals under the Plan.
As a result, Hood recognized a curtailment gain of $5,677 as of
December 31, 1994.
8. RESTRUCTURING RESERVES
----------------------
The following schedule details the restructuring reserves to complete
the project and their intended purposes as well as the actual activity
through the six-month period ended December 31, 1994:
<PAGE>14
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
8. RESTRUCTURING RESERVES (continued)
----------------------------------
<TABLE>
<CAPTION>
Proceeds Reductions
-----------------------
Balance at Sale of Divested Costs Balance at
Restructuring Reserve: 6/30/94 Assets Assets Incurred 12/31/94
-------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Personnel Reductions
- --------------------
Severance and early retirement program $ 2,502 $ 433 $ 2,069
-------------- --------- --------- --------- ----------
TOTAL PERSONNEL <F3> 2,502 433 2,069
Plant, Store, & Business Divestitures
Proceeds on sale of assets <F4> (6,349) $ 3,598 (2,751)
Net book value of assets to be divested <F4> 11,527 $ 3,196 8,331
Cost of divestiture <F1> <F5> 3,295 1,121 2,174
-------------- --------- --------- --------- ----------
(Gain) loss on divestiture 8,473 3,598 3,196 1,121 7,754
Incremental environmental costs <F6> 5,906 693 5,213
-------------- --------- --------- --------- ----------
TOTAL PLANT, STORE & BUSINESS 14,379 3,598 3,196 1,814 12,967
Other Costs
Consulting fees 1,329 924 405
Contract buyouts and other costs <F2> 1,042 492 550
-------------- --------- --------- --------- ----------
TOTAL OTHER <F7> 2,371 1,416 955
TOTAL RESTRUCTURING $ 19,252 $ 3,598 $ 3,196 $ 3,663 $ 15,991
============== ========= ========= ========= ==========
<FN>
<F1> Includes demolition, asset transfer costs, and commissions on real estate transactions.
<F2> Includes amounts of relocation, debt restructuring costs, legal fees, and other costs.
<F3> Represents anticipated severance costs expected to result from planned business process improvements.
The detail design and implementation of certain of the business process improvements has and will take
longer than originally anticipated which has delayed the occurrence of these costs which are expected
cash outlays over the next year and one-half.
<F4> Represents certain assets identified for disposition as part of the original restructuring plan which have yet to
be sold or closed. Efforts to sell them and complete the shutdowns are ongoing. Ultimate disposition will
depend upon successful negotiations with willing buyers for remaining properties.
<F5> Cost of divestitures includes shutdown cost in connection with the closing and sale of remaining locations.
Ultimate disposition will depend upon successful negotiations with willing buyers for remaining properties.
<F6> Included in the costs related to business divestitures are environmental remediation costs identified during this
process of asset sales primarily related to real estate assets retained on energy business sold. These are
anticipated cash outlays and will be considered for expenditure as part of our ongoing programs regarding
environmental remediation and are expected to be expended over the next four and one-half years.
<F7> Other expenses include $1.3 million of consulting fees which are cash outlays expected to be paid in the fiscal
year ending June 1995. An additional $700 thousand of cash expense is expected to be paid over the next two years
related to contractual obligations for which there is no future value due to the sale of related facilities.
</FN>
</TABLE>
<PAGE>15
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)
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 acquire products to 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 and Corporate
Groups are generally not materially impacted by seasonal fluctuations.
<TABLE>
<CAPTION>
Results by Operating Segment
- ----------------------------
Increase (Decrease) Three Months Ended Six Months Ended
--------------------- ---------------------
12/31/94 vs. 12/31/93 12/31/94 vs. 12/31/93
Net Sales and Revenues --------------------- ---------------------
----------------------
<S> <C> <C>
Agriculture & Consumer. . . . . . . . . . . . . . . $ (1,670) $ 2,250
Energy. . . . . . . . . . . . . . . . . . . . . . . (8,937) (7,170)
Financial Services. . . . . . . . . . . . . . . . . 1,024 2,305
Food Group. . . . . . . . . . . . . . . . . . . . . 5,825 7,032
Corporate Groups. . . . . . . . . . . . . . . . . . 220 317
-------------------- --------------------
$ (3,538) $ 4,734
==================== ====================
<CAPTION>
Margin (Loss) from Continuing Operations before Income Taxes
------------------------------------------------------------
<S> <C> <C>
Agriculture & Consumer. . . . . . . . . . . . . . . $ 4,276 $ 5,332
Energy. . . . . . . . . . . . . . . . . . . . . . . (5,227) (4,638)
Financial Services. . . . . . . . . . . . . . . . . 92 346
Food Good . . . . . . . . . . . . . . . . . . . . . 13 (1,187)
Corporate Groups. . . . . . . . . . . . . . . . . . (10,802) (12,054)
-------------------- --------------------
Operating profit (loss) . . . . . . . . . . . . . . (11,648) (12,201)
Interest expense, net . . . . . . . . . . . . . . . (1,388) (1,811)
-------------------- --------------------
$ (13,036) $ (14,012)
==================== ====================
</TABLE>
Parenthetical numbers in the following narrative have been rounded to the
nearest hundred thousand.
Discontinued Operations
- -----------------------
On March 23, 1993, the Company's Board of Directors authorized
management to sell its 34% interest in Curtice Burns Foods, Inc.
(Curtice Burns) and 99% interest in H.P. Hood, Inc. (Hood), the major
investments in Agway's food group segment. The investment in Curtice
Burns was sold effective November 3, 1994, as previously discussed in
Note 6 to the financial statements and in Agway's 10-Q filing for the
quarter ended September 30, 1994.
Agway has been in actual negotiations with a Hood management-led
buyout group for some time. Based on changed business conditions and
capital markets and based on the status of the discussions regarding this
transaction, on January 24, 1995, it was mutually agreed by Agway and
the buyers that this transaction would no longer be pursued. Agway has
decided to actively pursue alternative buyers for Hood. Under these
circumstances, while Agway is still actively interested in the sale of Hood
and while such a sale could be consummated in the near future, Agway
is no longer able to estimate with reasonable certainty whether a sale will
occur within the next year and, accordingly, has reclassified Hood from
discontinued operations to continuing operations for financial reporting
purposes. The effect of this decision is included in Note 6 to the
financial statements.
<PAGE>16
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)
Agriculture & Consumer Group
- ----------------------------
Net sales and revenues for the second quarter of fiscal 1995 of $208,600
and for the six months to date of $434,100 decreased $1,700 (.8%) and
increased $2,250 (.5%), respectively, as compared to the corresponding
period in the prior fiscal year. The decrease in the quarter and the
increase for the six-month period were the result of several offsetting
factors in the Agriculture & Consumer Group. The increase in consumer
franchise dealers, increased volume in sales of winter-related items and
farm fertilizers from rising market prices provided net sales and revenue
increases. These increases were offset by lower birdseed sales due to the
mild, early winter, competitive pricing in the Group's produce
repackaging business and lower feed sales in corn and soybean products
as a result of the bumper crop harvested this past fall.
Operating losses for the second quarter of fiscal 1995 of $10,900 and for
the six months to date of $21,440 decreased $4,300 (28%) and $5,300
(20%), respectively, as compared to the corresponding period in the prior
fiscal year. Gross margin percentage for the Group improved from 9.1%
to 12.5% in the second quarter and from 10.2% to 12.2% in the six-
month period as compared to the prior year.
Increased margins in Agriculture are mainly the result of improved price
management within the feed operations, earlier sales of dry fertilizers due
to rising market prices and a longer season from favorable weather
conditions in the crops operations, and growth in high-margin products
in the turf operations. The Consumer retail stores contributed to the
improved margins through increased volume in sales of snow throwers,
ice melter supplies and other winter-related products.
Energy Group
- ------------
Energy segment net sales and revenues of $138,000 for the second
quarter declined $9,000 (6%) as compared to the second quarter of the
prior year. Fiscal 1995 year-to-date net sales and revenues of $245,200
declined $7,200 (3%) as compared to the same period in the prior year.
The decrease for the quarter and year to date is primarily attributable to
volume decreases from a warmer November and December than in the
previous year as well as from locations divested since the prior year.
Total unit volume (in millions of gallons) for the quarter and year to date
had a net decrease of 10.3 (7%) and 9.2 (3%) gallons, respectively, as
compared to the corresponding periods in the prior year. The decreases
were principally due to lower retail fuel oil sales. Overall, average
selling price increased slightly over the prior year as the result of
increased gasoline prices offset by declines in diesel fuel, heating oils
and propane.
The second quarter and six-month period operating margins reflected the
significant reduction in volume by declining $5,200 (55%) and $4,600
(96%), respectively, as compared to the prior year.
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 $17,700 for the Financial Services Group for
the second quarter increased $1,000 (6%) as compared to the second
quarter of the prior year. Fiscal 1995 year-to-date net sales and revenues
of $34,700 increased $2,300 (7%) as compared to the same period in the
prior year. The increase for the quarter and year to date is primarily
attributed to Telmark, which had increases of $1,600 (19%) and $3,100
(13%), respectively, due to a higher net investment in leases as compared
to the prior year. Agway General Agency and Insurance Company
revenues declined by $600 (34%) and $800 (27%) due to smaller
amounts of income on investments and increases in operating expenses
which partially offset Telmark's increase.
<PAGE>17
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 improved in the second quarter of fiscal 1995 by $90
(3%) and increased $350 (7%) for the six-month period ended December
31 as compared to the same period in the prior year. Telmark's
operating margin improved in the second quarter of fiscal 1995 by $230
(13%) and increased $430 (13%) for the six-month period as compared
to the same period in the prior year. The increase is due primarily to
Telmark's higher average net investment and higher revenue rates.
However, increases in prevailing interest and lease rates in the
marketplace are offset by higher interest expense from a larger average
net investment and higher average borrowing rates. Operating margins
for the Agway Insurance Company decreased $200 and $300 for the
quarter and six-month period as compared to the same period in the prior
year due to smaller amounts of income on investments and increases in
operating expenses partially offset by favorable underwriting experience.
Food Group
- ----------
For segment reporting purposes, the Food Group consists of Agway
Inc.'s wholly owned subsidiary Hood, a manufacturer, distributor and
marketer of dairy and dairy-related products to the retail and food service
industries throughout the Northeast. The Food Group net sales increased
$5,800 (5%) and $7,000 (3%) over the three- and six-month periods
ended December 31 versus the prior year. In the three-month period,
sales increases in the manufacturing products group (MPG) and ice cream
were partially offset by a decrease in the dairy group. For the year-to-
date period, sales increases in MPG were offset by decreases from the
other groups. The biggest contributing factor to the MPG sales increase
is the continuing growth of its extended shelf life business.
Operating margins increased in the second quarter $13 (2%) but
decreased for the six-month period $1,200 (145%). The increased
margins for the second quarter resulted from improved MPG results
offset by the dairy and ice cream
group. MPG improved margins were a direct result of the growth in
extended shelf life business. The ice cream group profitability dropped
despite increase in net sales due to an increase in operating costs and a
change in product mix to lower margin products. For the six-month
period, decreases in both the dairy and ice cream groups more than offset
increases in MPG. In the ice cream group, product mix, higher
marketing costs from promotional efforts and slightly higher distribution
costs have resulted in a decline in margins while the dairy group has
experienced certain price concessions as well as promotional costs that
have driven their margin down.
Corporate Groups
- ----------------
The net sales and revenues of the Corporate Groups of $200 and $300
for the quarter and six-month period represent external revenues
generated from the Information Services Department and the elimination
of sales and revenues between the operating segments.
The operating loss of $10,800 and $12,000 for the three and six months
ended December 31, 1994 for the Corporate Groups represents corporate
expenses and other income generated from assets not allocable to
segments. It also includes a $10,200 provision for other Hood costs,
including transaction costs incurred in connection with past sales efforts
and an impairment allowance with respect to the ultimate sale of its
investment in Hood, net of a gain on curtailment of a Hood defined
benefit pension plan (see Notes 6 and 7 to the financial statements).
<PAGE>18
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
- -------------------------------
Cash flows from operating activities for the six months ended December
31, 1994 increased $3,000 to $42,400 as compared to the first six months
of fiscal 1994 due primarily to changes in working capital. Net cash
provided by investing activities for the six months ended December 31,
1994 was $7,100 as compared to net cash utilized of $31,100 for the
same period last year and was due primarily to proceeds from the sale of
discontinued operations (Curtice Burns) of $56,000 offset by increased
leasing activity in fiscal 1995 resulting in the use of an additional
$19,000 of cash for this activity compared to the same period last year.
The net cash flows used in financing activities increased from $9,800
in the second quarter of fiscal 1994 to $49,600 in the second quarter
of fiscal 1995. The majority of this change was seen in long-term
debt, where net repayment of $3,000 occurred in the second quarter
of fiscal 1995 versus net proceeds of $3,500 in the same period of
the prior fiscal year, and increased net redemptions of subordinated
debt, where net redemptions totalled $15,700 in the second quarter
of fiscal 1995 versus net proceeds of $13,600 from such debt in the
same period of the prior fiscal year due primarily to a scheduled
redemption in fiscal 1995 of $34,000.
The Company finances its operations and the operations of all its
continuing businesses and subsidiaries, except Telmark, Agway Insurance
Company and Hood, through Agway Financial Corporation (AFC).
Telmark, Agway Insurance Company and Hood finance themselves
through operations or direct borrowing arrangements. Each is financed
with a combination of short- and long-term credit facilities as
appropriate. External sources of short-term financing for the Company
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.
The AFC short-term lines are available through October 1995. These
AFC short-term lines of credit and $10,000 of AFC long-term debt are
collateralized by the Company's accounts receivable and non-petroleum
inventories. Amounts which can be drawn under the AFC short-term
agreements are limited to a specific calculation based upon the total of
certain accounts receivable and non-petroleum inventories ("collateral").
Adequate collateral has existed throughout the fiscal year to meet the
ongoing needs of the Company and is expected to continue to do so. In
addition, the agreements include certain covenants, the most restrictive
of which requires the Company to maintain specific quarterly levels of
interest coverage and monthly levels of tangible net worth. These
covenants were set giving consideration to Hood as a discontinued
operation. No covenant violations existed as of December 31, 1994.
Unless covenant requirements are amended or waived, the Company
anticipates future covenant violations based upon the current
credit agreement covenant requirements and the change in circumstances
with Hood as described in Note 6. The Company has had preliminary
discussions with its lenders and expects covenant amendments or waivers
will be negotiated to make appropriate and adequate financing available
under these facilities given the change in circumstances.
The Hood short-term credit facility is used to supply letters of credit as
well as short-term financing. Letters of credit of $12,027 were
outstanding at December 31, 1994. In anticipation of the sale of Hood,
the availability of short-term financing for Hood was not extended for a
long period of time, and accordingly, the current facility expires on
February 28, 1995. Due to the change in circumstances regarding the
sale of Hood, the Company and Hood are working with their financial
institution to extend and renegotiate the financing at adequate levels and
for appropriate periods of time. No covenant violations existed as of
December 31, 1994. Unless covenant requirements are amended or waived,
the Company anticipates future covenant violations based upon the current
credit agreement covenant requirements and the change in circumstances with
Hood as described in Note 6.
<PAGE>19
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. As of June 30, 1994, all but one of the claims made by
owners of the affected horses have been settled. The pending lawsuit is
John Kolkowski, et al. v. Agway Inc., et al., filed on July 3, 1990 in
Supreme Court of the State of New York for Westchester County. The
lawsuit includes claims for money damages. It is currently scheduled for
trial on March 27, 1995. Settlement negotiations are ongoing. 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 lawsuit 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 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Company held its annual meeting of shareholders on November 30,
1994, at which a quorum was present in person or by proxy. The
following Directors were elected to three-year terms through December
1997:
Nominee In Favor Opposed
----------------------- -------- -------
Gary K. Van Slyke 66,215 3,765
Vyron M. Chapman 66,215 3,765
Ralph H. Heffner 66,215 3,765
Edwin C. Whitehead 66,215 3,765
Christian F. Wolff, Jr. 66,215 3,765
Frederick A. Hough 66,215 3,765
Eligible additional votes totaling 20,373 were not received at the time of
the annual meeting and are not included as either votes in favor or opposed.
Additionally, these 20,373 eligible additional votes may be considered
abstentions and were not included for purposes of determining a quorum at
the annual meeting.
The following is a list of directors whose terms as Directors continued
after the Annual Meeting:
Ralph H. Heffner - Chairman of the
Board and Director
Charles C. Brosius - Vice Chairman of
the Board and Director
Vyron M. Chapman - Director
Peter D. Hanks - Director
Frederick A. Hough - Director
Stephen P. James - Director
Robert L. Marshman - Director
Samuel F. Minor - Director
Donald E. Pease - Director
John H. Ross - Director
Carl D. Smith - Director
Thomas E. Smith - Director
John H. Talmage - Director
Gary K. Van Slyke - Director
Joel L. Wenger - Director
Edwin C. Whitehead - Director
Christian F. Wolff, Jr. - Director
William W. Young - Director
<PAGE>20
PART II. OTHER INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
There were no reports on Form 8-K required to be filed during the
second quarter ended December 31, 1994. However, there were two
Form 8-Ks filed in January 1995.
The first report was filed on January 13, 1995, announcing the
appointment of Donald P. Cardarelli as chief executive officer and
general manager of Agway Inc. Since August 1994, Cardarelli has
managed the farmer-owned cooperative as executive vice president and
chief operating officer.
On January 27, 1995, a second Form 8-K was filed to describe recent
developments surrounding the sale of the Company's 99% interest in
Hood in that the Company was no longer able to estimate with reasonable
certainty whether a sale will occur within the next year and therefore
reclassified Hood from discontinued operations to continuing operations.
<PAGE>21
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 February 14, 1995 /s/ PETER J. O'NEILL
------------------- ---------------------------------------------
Peter J. O'Neill
Senior Vice President
Corporate Finance and Control
(Principal Financial Officer and
Chief Accounting Officer)
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