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 September 30, 1995
------------------
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
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AGWAY INC.*
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 15-0277720
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
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(Address of principal executive offices) (Zip Code)
315-449-6431
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(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 November 3, 1995
- --------------------------------------- --------------------------------
Membership Common Stock, $25 par value 108,326 shares
per share
* Agway is a taxpaying corporation founded on cooperative principles.
Membership is limited to farmers and each may hold only one share of
common stock.
1
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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PART I. FINANCIAL INFORMATION
- ------- ---------------------
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1995 and June 30, 1995....................... 3
Condensed Consolidated Statements of Operations and Retained Margin for the three months
ended September 30, 1995 and September 30, 1994........................................................ 4
Condensed Consolidated Cash Flow Statements for the three months ended September 30, 1995
and September 30, 1994................................................................................. 5
Notes to Condensed Consolidated Financial Statements................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 10
<CAPTION>
PART II. OTHER INFORMATION
- -------- -----------------
<S> <C>
Item 1. Legal Proceedings............................................................................ 15
Item 6. Exhibits and Reports on Form 8-K............................................................. 15
SIGNATURES............................................................................................ 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, June 30,
1995 1995
-------------- -------------
ASSETS (Unaudited) (Note)
- ------
<S> <C> <C>
Current Assets:
Trade accounts receivable (including notes receivable of
$30,037 and $33,661, respectively), less allowance for
doubtful accounts of $13,088 and $12,443, respectively.......... $ 205,710 $ 252,052
Leases receivable, less unearned income of $42,640 and
$41,523 respectively............................................ 94,926 96,063
Uncollected insurance premiums.................................... 9,888 10,261
Advances and other receivables.................................... 25,456 22,969
Inventories
Raw materials................................................... 16,879 21,221
Finished goods.................................................. 137,275 139,791
Goods in transit and supplies................................... 13,795 16,984
--------------- -------------
Total inventories............................................... 167,949 177,996
Prepaid expenses.................................................. 67,199 73,890
--------------- -------------
Total current assets.......................................... 571,128 633,231
Marketable securities available for sale............................... 33,075 34,752
Other security investments............................................. 41,273 41,304
Properties and equipment, net.......................................... 305,251 311,313
Long-term leases receivable, less unearned income of
$68,517 and $68,799 respectively..................................... 249,705 236,522
Other assets........................................................... 97,777 96,969
--------------- -------------
Total assets.................................................. $ 1,298,209 $ 1,354,091
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Notes payable..................................................... $ 84,500 $ 83,133
Current installments of long-term debt and subordinated debt 94,094 94,818
Accounts payable.................................................. 116,967 153,543
Unearned insurance premiums....................................... 16,674 17,023
Other current liabilities......................................... 128,554 141,234
--------------- -------------
Total current liabilities..................................... 440,789 489,751
Long-term debt......................................................... 238,146 242,668
Subordinated debt...................................................... 380,971 369,962
Other liabilities...................................................... 73,222 73,128
Interest of others in consolidated subsidiaries........................ 6,217 6,217
Commitments and contingencies..........................................
Preferred stock, net................................................... 62,892 65,635
Common stock, net...................................................... 2,712 2,728
Paid-in capital........................................................ 1,470 1,470
Retained margin........................................................ 91,790 102,532
--------------- -------------
Total liabilities and shareholders' equity.................... $ 1,298,209 $ 1,354,091
=============== =============
</TABLE>
Note: The balance sheet at June 30, 1995 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.
3
<PAGE>
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
September 30,
--------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Net sales and revenues from:
Product sales..................................... $ 416,130 $ 454,853
Leasing operations................................ 11,180 9,213
Insurance operations............................. 6,887 6,684
Service revenues.................................. 3,392 4,216
--------------- --------------
Total net sales and revenues.................. 437,589 474,966
Cost and expenses from:
Products and plant operations..................... 391,999 430,732
Leasing operations................................ 5,257 4,361
Insurance operations.............................. 4,791 4,458
Selling, general and administrative activities.... 41,994 47,452
--------------- --------------
Total costs and expenses...................... 444,041 487,003
Operating loss......................................... (6,452) (12,037)
Interest expense, net.................................. (8,475) (8,554)
Other income, net...................................... 710 681
--------------- --------------
Loss from continuing operations
before income taxes .............................. (14,217) (19,910)
Income tax benefit..................................... (3,488) (6,834)
--------------- ---------------
Loss from continuing operations........................ (10,729) (13,076)
Discontinued operations:
Adjustment required for reclassification
of Hood to continuing operations.................. 0 1,806
--------------- --------------
Margin from discontinued
operations............................... 0 1,806
--------------- --------------
Net loss.............................................. $ (10,729) $ (11,270)
Retained Margin:
Balance at beginning of period................... 102,532 123,346
Adjustment to unrealized gains (losses)
on available-for-sale securities,
net of tax................................... (13) 95
--------------- --------------
Balance at end of period.............................. $ 91,790 $ 112,171
=============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------
1995 1994
-------------- -------------
<S> <C> <C>
Net cash flows provided by operating activities........................ $ 12,575 $ 30,258
Cash flows (used in) provided by investing activities:
Purchases of property, plant and equipment........................ (4,453) (7,240)
Proceeds from disposal of businesses and property, plant and
equipment..................................................... 1,381 1,001
Leases originated................................................. (33,889) (34,588)
Leases repaid..................................................... 20,732 14,392
Proceeds from sale of marketable securities....................... 3,947 468
Purchases of marketable securities................................ (2,283) (638)
Other............................................................. 30 (230)
Net changes in net assets of discontinued operations.............. 0 (350)
--------------- --------------
Net cash flows used in investing activities............................ (14,535) (27,185)
Cash flows (used in) provided by financing activities:
Net change in short-term borrowings............................... 1,367 5,840
Proceeds from long-term debt...................................... 10,572 12,000
Repayment of long-term debt....................................... (10,894) (22,689)
Proceeds from sale of subordinated debt........................... 19,496 13,858
Maturity and redemption of subordinated debt...................... (13,273) (6,726)
Redemption of stock............................................... (2,763) (2,419)
Cash dividends paid............................................... (2,410) (2,589)
Other............................................................. (135) (348)
--------------- --------------
Net cash flows provided by (used in) financing activities.............. 1,960 (3,073)
--------------- --------------
Net decrease in cash and equivalents................................... 0 0
Cash and equivalents at beginning of period............................ 0 0
--------------- -------------
Cash and equivalents at end of period.................................. $ 0 $ 0
=============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
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 three-month period ended
September 30, 1995 are not necessarily indicative of the results that may
be expected for the year ended June 30, 1996 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, 1995.
Certain reclassifications have been made to conform prior year financial
statements with the current year presentation.
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 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 pursuant to a "no
action letter" issued 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.
Summarized financial information for AFC and Consolidated Subsidiaries is
as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------
1995 1994
--------------- ---------------
<S> <C> <C>
Net sales and revenues.......................... $ 334,395 $ 373,046
Operating margin................................ 1,204 (611)
Loss from continuing operations................. (7,701) (7,256)
Net margin (loss)............................... (7,701) (5,450)
September 30, June 30,
1995 1995
---------------- ----------------
Current assets.................................. $ 601,048 $ 615,336
Properties and equipment, net................... 230,421 231,928
Noncurrent assets............................... 345,953 335,568
---------------- ----------------
Total assets.................................... $ 1,177,422 $ 1.182,832
================ ================
Current liabilities............................. $ 321,906 $ 322,492
Long-term debt.................................. 232,497 240,107
Subordinated debt............................... 380,971 369,962
Noncurrent liabilities.......................... 22,649 23,158
Interest of others in consolidated subsidiaries 6,217 6,217
Shareholder's equity............................ 213,182 220,896
---------------- ----------------
Total liabilities and
shareholder's equity........................ $ 1,177,422 $ 1,182,832
================ ================
</TABLE>
6
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
3. BORROWING ARRANGEMENT
----------------------
As of September 30, 1995, the Company had available lines of credit with
various banking institutions whereby lenders have agreed to provide funds
up to $117,000 to separately financed units of the Company as follows: AFC
- $65,000, Telmark - $24,000 and Hood - $28,000 compared to $65,000,
$24,000 and $33,000, respectively, as of June 30, 1995. In addition, AFC
may issue up to $60,000 of commercial paper under the terms of a separate
agreement, backed by a letter of credit. Telmark has a committed term loan
of $125,000 available to be borrowed through November 30, 1995, of which
$94,000 was outstanding as of September 30, 1995. Long-term and
subordinated debt outstanding amounted to:
<TABLE>
<CAPTION>
Agway & AFC Telmark Hood Total
------------------ ------------------ ------------------ ------------------
9/95 6/95 9/95 6/95 9/95 6/95 9/95 6/95
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt $ 18,672 $ 22,843 $239,955 $245,467 $ 42,103 $ 32,880 $300,730 $301,190
Currently payable 6,764 13,702 45,622 34,622 10,198 10,198 62,584 58,522
-------- ------ -------- -------- -------- -------- -------- ---------
Net long-term debt $ 11,908 $ 9,141 $194,333 $210,845 $ 31,905 $ 22,682 $238,146 $242,668
======== ======= ======== ======== ======= ======== ======== ========
Subordinated debt $394,224 $390,889 $ 11,062 $ 8,174 $ 7,195 $ 7,195 $412,481 $406,258
Currently payable 31,047 35,833 463 463 31,510 36,296
-------- -------- -------- -------- -------- -------- -------- --------
Net long-term debt $363,177 $355,056 $ 11,062 $ 8,174 $ 6,732 $ 6,732 $380,971 $369,962
======== ======= ======== ======== ======== ======== ======== =========
</TABLE>
The AFC short-term lines were available through October 31, 1995. Currently,
one 30-day extension through December 1, 1995 and one 60-day extension
through December 31, 1995 are in place for the availability of the $65,000
line of credit and the availability of issuing $60,000 of commercial paper,
respectively. Annual renewals are in the process of negotiations. These AFC
short-term lines of credit and $1,900 of AFC long-term bank debt payable on
October 1, 1995 are collateralized by certain of the Company's accounts
receivable and non-petroleum inventories ("collateral"). Amounts which can be
drawn under the AFC short-term agreements are limited to a specific
calculation based upon the collateral available. Adequate collateral has
existed throughout the fiscal year to permit AFC to borrow amounts 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. The Company obtained
waivers for specific covenant violations at June 30, 1995 covering July and
August 1995 and amending these covenants for September and October 1995. The
Company has ongoing discussions with its lenders and expects to continue the
appropriate and adequate financing currently available under these
facilities.
Telmark borrows under its short-term line of credit agreements from time to
time to fund its operations. Short-term lines serve as interim financing
between the issuances of long-term debt. The current line of credit
agreements with various banks permit Telmark to borrow up to $24,000 on an
unsecured basis with interest paid quarterly and/or upon maturity, of which
$20,000 is formally committed and $4,000 is uncommitted. The lines bear
interest at money market variable rates. As of September 30, 1995, Telmark
had $20,500 outstanding against these lines.
Telmark renews its lines of credit annually (usually in the late fall). The
$20,000 line of credit has been renewed through November 30, 1995. The $4,000
line of credit has been renewed through December 31, 1995. Annual renewals
are in the process of negotiations. The Company believes Telmark has
sufficient lines of credit in place to meet interim funding needs.
The Hood short-term credit facility is used to supply letters of credit as
well as short-term financing. Letters of credit of $13,200 were outstanding
at September 30, 1995. The short-term credit facility expires on July 1,
1996. The Company has ongoing discussions with the lenders to Hood and
expects to negotiate a continuation of the appropriate and adequate financing
currently available to Hood.
7
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
4. 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 $4,000 in fiscal 1995 on capital projects. The Company
estimates that during fiscal 1996 and 1997 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.
8
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
5. RESTRUCTURING RESERVES
----------------------
In June 1992, the Company established a $75,000 reserve for the estimated
net cost to complete a significant restructuring of the Company planned at
that time. Periodically, management has reviewed its original estimates and
has made revisions due to changes in circumstances as the restructuring
plan evolved. The following schedule details the remaining reserves to
complete the restructuring project and their intended purposes, as well as
the actual activity for the three-month period ended September 30, 1995:
<TABLE>
<CAPTION>
Reductions
Balance Proceeds ---------- Change Balance
at Sale of Divested Costs in at
6/30/95 Assets Assets Incurred Estimate 9/30/95
----------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Restructuring Reserve:
Plant, Store & Business Divestitures
- ------------------------------------
Proceeds on sale of assets (A) (1,506) (69) (1,437)
Net book value of assets to be divested (A) 962 23 939
Cost of divestiture (1) (B) 3,099 1,012 2,087
---------- --------- --------- -------- -------- --------
Loss on divestiture 2,555 (69) 23 1,012 1,589
Incremental environmental costs (C) 3,597 60 3,537
---------- --------- --------- -------- -------- --------
TOTAL PLANT, STORE & BUSINESS 6,152 (69) 23 1,072 5,126
TOTAL RESTRUCTURING $ 6,152 $ (69) $ 23 $ 1,072 $ 0 $ 5,126
========== ========= ========= ======== ======== ========
</TABLE>
(1) Includes demolition, asset transfer costs, and commissions on real estate
transactions.
(A) Represents certain assets identified for disposition as part of the
original restructuring plan which have yet to be sold or closed. Efforts to
sell the assets and complete the shutdowns are ongoing. Ultimate
disposition will depend upon successful negotiations with willing buyers
for remaining properties. The Company anticipates that the planned
activities will be completed in fiscal 1996.
(B) Cost of divestitures includes shutdown costs in connection with the closing
and sale of remaining locations. Ultimate disposition will depend upon
successful negotiations with willing buyers for remaining properties. As
operational shutdowns are completed, costs are expected to vary from the
original estimates. The Company anticipates these efforts will be completed
in fiscal 1996.
(C) Included in the costs related to business divestitures are environmental
remediation costs, identified during the process of asset sales, that
primarily relate to real estate assets retained on energy business sold.
These anticipated cash outlays will be part of our ongoing programs
regarding environmental remediation and are expected to be incurred over
the next three years.
9
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. 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 & Consumer net sales and revenues are
traditionally higher in the spring as customers acquire products to initiate the
growing season. Correspondingly, Energy realizes significantly higher net sales
and revenues in the winter months due to cold winter conditions, and Dairy
realizes higher net sales and revenues in the early summer months and the late
fall holiday season. Financial Services and Corporate are not materially
impacted by seasonal fluctuations.
Results by Operating Segment
----------------------------
Increase (Decrease)
Three Months Ended
-------------------
9/30/95 vs. 9/30/94
-------------------
Net Sales and Revenues
Agriculture & Consumer............................. $ (15,830)
Energy............................................. (9,812)
Dairy.............................................. (13,749)
Financial Services................................. 1,790
Corporate.......................................... 224
-------------------
$ (37,377)
===================
Margin (Loss) from Operations before Income Taxes
Agriculture & Consumer............................. $ 3,609
Energy............................................. (1,213)
Dairy.............................................. 2,418
Financial Services................................. 435
Corporate.......................................... 365
-------------------
Operating margin (loss) and other income
(expense), net.................................. 5,614
Interest (expense) income, net..................... 79
-------------------
$ 5,693
===================
Numbers in the following narrative have been rounded to the nearest hundred
thousand.
Agriculture & Consumer
- ----------------------
Agriculture & Consumer consists of Agway Agricultural Products (AAP),
Agriculture & Related Services (ARS) and Country Products Group (CPG). Total
Agriculture & Consumer net sales and revenues for the first quarter of fiscal
1996 of $207,800 represent a decrease of $15,800 (7.0%) from the first quarter
of fiscal 1995. Operating loss for the first quarter of fiscal 1996 was reduced
by $3,600 (33.9%) as compared to the same period in the prior year.
AAP operations provided 48% of the total Agriculture & Consumer net sales during
the first three months of fiscal 1996 and 1995. First quarter AAP net sales and
revenues totaled $99,900 which is a decrease of $8,400 (7.8%) from the same
period last year. Crop and farm store sales declined $9,100 (19.8%) primarily
due to summer drought conditions in the Northeast which lowered demand for
fertilizer, lime, yard and garden equipment and supplies. Feed sales, which
decreased $1,100 (2.1%), were negatively impacted by poor milk prices which
influenced farmers to reduce spending on feed products. Additionally,
competitive market conditions continue to put pressure on fertilizer (crop
sales) and grain (feed sales) prices. First quarter decreases in sales of crop,
farm store products and feed were partially offset by a $2,100 (13.0%) increase
in ingredient sales over last year - a result of increased focus from a Direct
Marketing operation of ingredient sales to farmers and others at the AAP
enterprises. AAP's gross margin as a percentage of net sales remained constant
at 6% for the first quarter of 1996 versus 1995. Margin gains realized from the
Direct Marketing operations were offset by a decline of $1,200 (25.6%) in margin
on farm store product
10
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
Agriculture & Consumer (continued)
- ----------------------------------
sales from heavy price competition in yard and garden and power equipment lines.
In the first quarter, AAP's operating loss of $7,000 reflects an improvement of
$1,800 (20.7%) as compared to a loss of $8,700 in the first quarter of last year
primarily due to a $1,500 decrease in selling and distribution expenses.
ARS operations provided 26% of total Agriculture & Consumer net sales during the
first three months of fiscal 1996 as compared to 30% in the same period in
fiscal 1995, primarily due to lower volume in both its retail and wholesale
operations. ARS net sales totaled $54,300 in the first quarter of fiscal 1996, a
decrease of $12,300 (18.5%) from the same period last year. Of the total ARS net
sales decrease, consumer retail sales and wholesale operations decreased $7,600
(16.0%) and $4,700 (24.8%), respectively. These results were significantly
affected by management's decision to change product mix and to exit its power
equipment, wood pellet stove and patio furniture lines at certain locations.
These products were higher priced yet carried lower margins and lower inventory
turns. In addition, there was a lower demand for yard and garden products
resulting from summer drought conditions in Agway's markets and demand for power
equipment (snowblowers) decreased this year after a mild winter, while in the
prior year, anticipated adverse winter weather conditions resulted in large
sales of power equipment in the first quarter of 1995. First quarter gross
margin declined $2,500 (13.2%) due to the planned exit of various product lines
at certain locations noted above as well as weather-related reductions in volume
and its negative impact on sales; however, gross margin as a percentage of sales
improved from 27% in fiscal 1995 to 29% in 1996. In the first three months, ARS
experienced an operating loss of $200, a $600 (76.1%) improvement over the $800
loss during the same period last year. Selling, distribution and administrative
costs decreased $2,100 (11.3%) due to management's successful efforts to contain
expenses through staff reductions, limits on overtime worked and reduced
spending on selling and advertising costs.
CPG operations provided 26% of total Agriculture & Consumer net sales during the
first three months of fiscal 1996 as compared to 22% in the same period in
fiscal 1995. CPG net sales totaled $53,600 in the first quarter of fiscal 1996,
an increase of $4,900 (10%) from the same period last year. First quarter sales
in the turf and sunflower operations represent $3,300 of the increase from the
first quarter of last year primarily due to volume increases realized from CPG's
efforts to expand its customer base, particularly in the foreign export of human
edible sunflower seeds. CPG's gross margin as a percentage of sales improved
from 22% in fiscal 1995 to 26% in 1996 due primarily to improved purchase
arrangements relative to current market rates as compared to the same period
last year. As a result, CPG's $100 operating margin reflects a $1,200 (115%)
improvement over the operating loss of $1,100 in the first quarter of fiscal
1995.
Energy
- ------
Total net sales and revenues of $97,500 for the first quarter decreased $9,800
(9.1%) compared with the same period in 1994 due to unit volume decreases in
both the retail and commercial operations. Overall, 10.4 million (9.1%) fewer
gallons of product were sold in the first quarter of fiscal 1996 compared to the
first quarter of fiscal 1995. Average per unit selling prices remained
relatively constant in the first quarter of 1996 versus 1995.
Retail operations provided 81% of total Energy sales during the first quarter as
compared to 80% during the same period last year. Total sales in the retail
sector decreased $6,500 (7.6%), which resulted from a 6.9 million gallon (8.0%)
decline in retail unit volume from the first quarter of last year. Retail
gasoline sales declined $1,600 (6.7%), which represents 2.8 million gallons
(40.0%) of the decline in total retail unit volume, and reflects the ongoing
efforts of the unit to close down certain company-owned keytrol/cardtrol sites
and bulk customer sites that are determined not to be cost beneficial for
upgrade in order to comply with EPA underground storage tank (UST) regulations.
Retail diesel net sales declined $2,000 (11.3%) primarily due to a unit volume
decrease of 1.8 million gallons (8.7%) from the first quarter of last year. This
volume decrease resulted from competitors lowering prices and accepting lower
margins in an attempt to liquidate overstocked fuel oil inventories. Energy did
not react to the price cuts as its just-in-time inventory control over the prior
mild winter left no overstocked inventories. Net sales of home heating oil for
the first three months of fiscal 1996 decreased $2,400 (11.5%) as compared to
the same period last
11
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
Energy (continued)
- ------------------
year. The unit volume of home heating oil for the first quarter decreased 2.3
million gallons (8.4%) as compared to the first quarter of the prior year due to
a "summer fill" program which took place later in the first quarter of fiscal
1996 than in fiscal 1995. Also, demand for heating oil was lower in the first
quarter as compared to the prior year since customers still have heating oil
left over in their tanks from last year's mild winter season. The remaining
decrease is primarily due to volume reductions in propane and packaged product
sales and a slight decline in service revenues.
Commercial operations provided 19% of total net sales during the first quarter
as compared to 20% during the same period last year. The decline reflects the
results of management's efforts to exit specific markets and to redirect its
business efforts from high volume/low margin transport delivery sales to high
margin/low volume tankwagon sales. In the first three months of fiscal 1996, 3.5
million (12.5%) fewer gallons of product (primarily diesel) were sold than in
the first quarter of the prior year due to decreases in end-user volumes which
resulted in a decrease of $3,300 (15.4%) in total commercial sales.
For the three months ended September 30, 1995, operating loss of $5,300 was
$1,200 (30.1%) more than the first quarter of the prior year. A reduction in
gross margins of $1,500 (5.2%) is due, in part, to market pressures resulting
from a lower demand for heating oil in the first quarter as compared to the same
period last year. Additionally, retail propane sales to high margin residential
users have declined while demand for propane from lower margin
commercial/industrial users increased over last year. The gross margin reduction
was partially offset by reductions in selling, distribution and administrative
costs in the first three months of fiscal 1996 as compared to 1995.
Dairy
- -----
For segment reporting purposes, Dairy 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. Net sales in the first quarter of fiscal 1996 were $13,700 (10.8%)
less than the first quarter of fiscal 1995 primarily due to volume reductions.
Since the first quarter of fiscal 1995, Hood lost some of its private label
business to competitors due to pricing. Market pressures continue in this area.
The remaining loss of volume is primarily due to the sale of Hood's Mid-Hudson
Valley business in February 1995. Gross margin percentage for the first quarter
remained fairly constant from last year at 22.0% versus 21.4%.
First quarter operating margin of $2,600 represents an increase of $2,400 from
the same period last year primarily due to management's effort to reduce
selling, administrative and trade promotion spending and production efficiencies
gained by consolidating the Boston fluid milk production with the Agawam and
Portland facilities.
Financial Services
- ------------------
For segment reporting purposes, Financial Services consists of Telmark, Inc.
("Telmark"), Agway Insurance Company ("Insurance") and Agway General
Agency, Inc. ("General Agency").
Total net sales and revenues of $18,800 for Financial Services for the first
quarter increased $1,800 (10.5%) as compared to the first quarter in the prior
year primarily due to volume increases in the leasing operations of Telmark.
Telmark operations provided $11,500 (61%) of total first quarter net sales and
revenues compared to $9,600 (56%) in the first quarter of last year. Fueled by
rising interest rates and a strong economy, Telmark has experienced volume
growth, resulting in an increase of $53,000 in average assets over the same
period last year. The $1,900 (20.3%) increase in Telmark's net revenues as
compared to the same quarter last year is primarily due to this higher asset
base with relatively higher interest rates. Insurance and General Agency net
revenues for the first quarter of $7,200 are $200 (2.1%) less than the same
period last year due, in part, to General Agency's decision to exit the
third-party claims administration market in the second quarter of last year.
12
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
Financial Services (continued)
- ------------------------------
Operating margins improved in the first quarter of fiscal 1996 by $400 (21.2%)
as compared to the same period last year. Telmark's operating margin increased
in the first quarter of fiscal 1996 by $600 (32.1%) as compared to the same
period in the prior year. The increase reflects the positive impact of owned
portfolio growth with relatively higher interest rates. This growth was offset
somewhat by increased interest expenses from higher debt levels. The improvement
in operating margins was partially offset by higher claim activity in Insurance
operations in the first quarter of fiscal 1996 as compared to 1995.
Corporate
- ---------
The increase in net sales and revenues of $200 (158.9%) for the quarter is
primarily due to an increase in external revenues generated from Agway Data
Services.
Operating margin for the first quarter increased $400 (33.4%) as compared to the
prior year. A $700 decrease in re-engineering costs in fiscal 1996 as compared
to 1995 was offset primarily by costs incurred by the Company in the first
quarter of fiscal 1996 to facilitate the sale of Hood ($400).
13
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash flows from operating activities for the three months ended September 30,
1995 decreased $17,700 to $12,600 as compared to the first three months of
fiscal 1995 due primarily to a smaller increase in accounts receivable and
inventory of $17,200 and $5,200, respectively, and a smaller decrease in
accounts payable of $5,600. Net cash used in investing activities for the three
months ended September 30, 1995 was $14,500 as compared to $27,200 for the same
period last year. The reduction in cash use was due primarily to an increase in
leases repaid of $6,400 and net proceeds from sale of marketable securities of
$3,100 and a decrease in the purchase of property, plant and equipment of
approximately $2,700. The net cash flows provided by financing activities for
the three months ended September 30, 1995, were $2,000 as compared to net cash
used of $3,100 for the same period in the prior year. The majority of the change
from financing activities was the result of less net repayments of long-term
debt offset by lower net short-term borrowings. Net repayments of long-term debt
declined approximately $10,400 while short-term borrowings declined $4,500 as
compared to the three months ended September 30, 1994.
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.
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 the following as of
September 30, 1995: borrowings from banks - $127,779 maturing November 1995
through November 1999 with interest rates ranging from 5.4% - 11.5%; borrowings
from insurance companies - $145,955 maturing September 1995 through September
2000 with interest rates ranging from 5.9% - 9.2%; subordinated debt - $412,481
maturing 1995 through 2008 with interest rates ranging from 4.5% - 9.5%; and
capital leases and other long-term debt - $26,996 maturing 1995 through 2008
with interest rates ranging from 6% - 12%. In addition, Telmark has occasionally
sold blocks of its lease portfolio.
The AFC short-term lines were available through October 31, 1995. Currently, one
30-day extension through December 1, 1995 and one 60-day extension through
December 31, 1995 are in place for the availability of the $65,000 line of
credit and the availability of issuing $60,000 of commercial paper,
respectively. Annual renewals are in the process of negotiations. These AFC
short-term lines of credit and $1,900 of AFC long-term bank debt payable on
October 1, 1995 are collateralized by certain of the Company's accounts
receivable and non-petroleum inventories ("collateral"). Amounts which can be
drawn under the AFC short-term agreements are limited to a specific calculation
based upon the collateral available. Adequate collateral has existed throughout
the fiscal year to permit AFC to borrow amounts 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. The Company obtained waivers for specific covenant
violations at June 30, 1995 covering July and August 1995 and amending these
covenants for September and October 1995. The Company has ongoing discussions
with its lenders and expects to continue the appropriate and adequate financing
currently available under these facilities.
14
<PAGE>
PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
Item 1. Legal Proceedings
- --------------------------
In December 1985, it was asserted by the Massachusetts Department of
Environmental Protection (MDEP) that certain real property located in West
Concord, Massachusetts previously owned by Agway is contaminated and that Agway
and the current owner of the property are responsible for the cost of
investigating and cleaning up environmental contamination at the property. In
September 1993, Agway entered into an Administrative Consent Order with the MDEP
pursuant to which Agway performed a phase II comprehensive site assessment. In
March 1995, Agway and the current owner entered into a settlement agreement
whereby Agway agreed, at Agway's expense, to complete any additional assessment,
containment, removal or remediation actions at the property. The current owner
agreed to cooperate with Agway in achieving a permanent solution satisfactory to
the MDEP and in compliance with the MDEP's requirements. Agway has prepared a
risk assessment scope of work and submitted it to the MDEP. The Company
currently has accrued its best estimate relative to the cost of any additional
assessment, containment, removal or remediation actions regarding the property.
However, it is reasonably possible that the results of ongoing and/or future
environmental studies or other factors could alter this estimate and require the
recording of additional liabilities. The extent or amount of such events cannot
be estimated at this time. However, Agway believes that its past experience
provides a reasonable basis for its estimates recorded for this matter.
On May 29, 1992, the Commissioner of Environmental Protection of the State of
Connecticut (CDEP) commenced a civil action against Hood alleging violations of
state statutes and regulations relating to pollution of the waters of the state
in connection with Hood's Suffield, Connecticut facility. In connection with
these allegations, the CDEP has made a demand of $2,400. Hood entered into a
stipulated judgment on July 5, 1995, whereby Hood agreed to pay CDEP $325,
construct an on-site wastewater pretreatment facility and conduct a study of the
Suffield facility's level of fat, oil and grease discharge.
In August 1995, the Environmental Protection Agency (EPA) notified Agway that
the EPA has reason to believe that Agway is a potentially responsible party
(PRP) under the Comprehensive Environmental Response, Compensation and Liability
Act (CERCLA) at the Tri-Cities Barrel Site, Port Crane, New York. The EPA
requested that Agway and other PRPs participate in the ongoing Remedial
Investigation/Feasibility Study (RI/FS) for the Tri-Cities Barrel Site. Agway
believes that its involvement at the Tri-Cities Barrel Site is minimal. Agway is
in contact with other PRPs who have been participating in the RI/FS and is in
the preliminary stages of negotiating the terms of possible participation in the
ongoing RI/FS.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
There were no reports on Form 8-K required to be filed during the first quarter
ended September 30, 1995.
15
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AGWAY INC.
---------------------------------------
(Registrant)
Date November 7, 1995 /s/ PETER J. O'NEILL
-------------------------- ----------------------------------------
Peter J. O'Neill
Senior Vice President,
Treasurer and Controller
(Principal Financial Officer and
Chief Accounting Officer)
16
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