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, 1996
------------------
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
- --------------------------------------------------------------------------------
(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 November 8, 1996
- -------------------------------- -------------------------------
Membership Common Stock, $25 par 106,853 shares
value per share
1
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1996 and June 30, 1996..................... 3
Condensed Consolidated Statements of Operations and Retained Margin for the three months
ended September 30, 1996 and September 30, 1995...................................................... 4
Condensed Consolidated Cash Flow Statements for the three months ended September 30, 1996
and September 30, 1995............................................................................... 5
Notes to Condensed Consolidated Financial Statements................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 11
PART II. OTHER INFORMATION
- -------- -----------------
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,
1996 1996
------------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current Assets:
Trade accounts receivable (including notes receivable of
$36,151 and $35,182, respectively), less allowance for
doubtful accounts of $10,054 and $10,062, respectively ... $ 173,127 $ 207,304
Leases receivable, less unearned income of $49,235 and
$48,403, respectively .................................... 105,637 105,374
Advances and other receivables ............................. 34,017 35,914
Inventories:
Raw materials ............................................ 11,777 16,161
Finished goods ........................................... 136,075 128,770
Goods in transit and supplies ............................ 9,186 12,587
---------- ----------
Total inventories ...................................... 157,038 157,518
Prepaid expenses ........................................... 54,625 58,380
---------- ----------
Total current assets ................................... 524,444 564,490
Marketable securities available for sale ........................ 35,238 34,115
Other security investments ...................................... 43,959 42,406
Properties and equipment, net ................................... 227,562 237,015
Long-term leases receivable, less unearned income of
$75,515 and $75,828, respectively ............................. 279,307 268,815
Net pension asset ............................................... 88,430 85,181
Other assets .................................................... 11,379 12,249
---------- ----------
Total assets ........................................... $1,210,319 $1,244,271
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Notes payable .............................................. $ 79,100 $ 62,200
Current installments of long-term debt and subordinated debt 111,542 108,896
Accounts payable ........................................... 100,432 117,457
Other current liabilities .................................. 96,645 120,099
---------- ----------
Total current liabilities .............................. 387,719 408,652
Long-term debt .................................................. 184,325 197,413
Subordinated debt ............................................... 413,475 400,284
Other liabilities ............................................... 65,744 66,664
---------- ----------
Total liabilities .......................................... 1,051,263 1,073,013
Shareholders' equity:
Preferred stock, net .......................................... 57,906 59,319
Common stock, net ............................................. 2,674 2,689
Retained margin ............................................... 98,476 109,250
---------- ----------
Total shareholders' equity ................................. 159,056 171,258
---------- ----------
Commitments and contingencies
Total liabilities and shareholders' equity ............. $1,210,319 $1,244,271
========== ==========
</TABLE>
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,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
Net sales and revenues from:
Product sales ............................................... $ 333,179 $ 306,522
Leasing operations .......................................... 12,962 11,214
Insurance operations ........................................ 6,043 6,887
--------- ---------
Total net sales and revenues ............................ 352,184 324,623
Cost and expenses from:
Products and plant operations ............................... 318,780 290,124
Leasing operations .......................................... 5,956 5,257
Insurance operations ........................................ 3,952 4,791
Selling, general and administrative activities .............. 32,929 33,480
--------- ---------
Total costs and expenses ................................ 361,617 333,652
Operating loss ................................................... (9,433) (9,029)
Interest expense, net ............................................ (6,559) (6,920)
Other income, net ................................................ 973 1,961
--------- ---------
Loss from continuing operations before income taxes .............. (15,019) (13,988)
Income tax benefit ............................................... 4,165 3,527
--------- ---------
Loss from continuing operations .................................. (10,854) (10,461)
Discontinued operations:
Loss on disposal of Hood, net of tax expense of $39 ......... (268)
--------- ---------
Net loss ......................................................... $ (10,854) $ (10,729)
Retained Margin:
Balance at beginning of period .............................. 109,250 102,532
Adjustment to unrealized gains (losses) on available-for-sale
securities, net of tax .................................. 80 (13)
--------- ---------
Balance at end of period ......................................... $ 98,476 $ 91,790
========= =========
</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,
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Net cash flows (used in) provided by operating activities .. $ (7,584) $ 8,498
Cash flows (used in) provided by investing activities:
Purchases of property, plant and equipment ............ (1,898) (3,444)
Proceeds from disposal of businesses .................. 5,234
Proceeds from disposal of property, plant and equipment 3,249 1,314
Leases originated ..................................... (39,714) (33,889)
Leases repaid ......................................... 27,298 20,732
Proceeds from sale of marketable securities ........... 2,410 3,947
Purchases of marketable securities .................... (3,453) (2,283)
Net purchase of investments in related cooperatives ... (1,553) (46)
Net changes in net assets of discontinued operations .. (390)
-------- --------
Net cash flows used in investing activities ................ (8,427) (14,059)
Cash flows (used in) provided by financing activities:
Net change in short-term borrowings ................... 16,900 14,200
Proceeds from long-term debt .......................... 7,541 572
Repayment of long-term debt ........................... (17,840) (10,260)
Proceeds from sale of subordinated debt ............... 19,612 19,496
Maturity and redemption of subordinated debt .......... (6,343) (13,273)
Redemption of stock ................................... (1,432) (2,763)
Cash dividends paid ................................... (2,210) (2,410)
Other ................................................. (217) (1)
-------- --------
Net cash flows provided by financing activities ............ 16,011 5,561
-------- --------
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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
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, 1996 are not necessarily indicative of the results that may
be expected for the year ending June 30, 1997 due 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, 1996.
Impairment of Long-Lived Assets
In March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," was issued. Statement
No. 121 requires impairment losses to be measured and recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be
disposed of. The Company adopted Statement No. 121 as of July 1, 1996, the
effect of which was approximately a $1,700 charge against pre-tax earnings.
Reclassifications
Certain reclassifications have been made to conform prior year financial
statements with the current year presentation.
6
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
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 staff of the Securities and Exchange
Commission, AFC, as a separate company, is not required to file periodic
reports with respect to these debt securities. However, as required by the
1934 Act, the summarized financial information concerning AFC and
Consolidated Subsidiaries is as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Net sales and revenues ............................................. $ 239,482 $ 221,429
Operating loss ..................................................... (1,267) (1,042)
Loss from continuing operations .................................... (2,816) (7,433)
Net loss ........................................................... (2,816) (7,701)
September 30, June 30,
1996 1996
------------ ------------
Current assets ..................................................... $ 518,201 $ 530,547
Properties and equipment, net ...................................... 162,737 166,504
Noncurrent assets .................................................. 364,245 353,377
----------- -----------
Total assets ................................................... $ 1,045,183 $ 1,050,428
=========== ===========
Current liabilities ................................................ $ 226,840 $ 227,781
Long-term debt ..................................................... 178,211 191,189
Subordinated debt .................................................. 413,475 400,284
Noncurrent liabilities ............................................. 15,226 17,006
Shareholder's equity ............................................... 211,431 214,168
----------- -----------
Total liabilities and shareholder's equity ......................... $ 1,045,183 $ 1,050,428
=========== ===========
</TABLE>
7
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
3. BORROWING ARRANGEMENTS
----------------------
Agway and AFC
As of September 30, 1996, the Company had certain facilities available with
various banking institutions whereby lenders have agreed to provide funds
up to $254,000 to separately financed units of the Company as follows: AFC
- $50,000 and Telmark - $204,000. In addition, AFC may issue up to $50,000
of commercial paper under the terms of a separate agreement, backed by a
letter of credit.
The $50,000 line of credit available to AFC and its ability to issue
$50,000 of commercial paper require collateralization using 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
retained margins. The amounts outstanding as of September 30, 1996 under
AFC's $50,000 line of credit and $50,000 commercial paper were $10,900 and
$50,000, respectively. In November 1996, the Company renegotiated its line
of credit facility to extend the availability through January 1, 1998 and
to provide seasonal increases in the line of credit which will be available
so that total availability under AFC's line of credit will increase to
$60,000 at June 1, 1997 and $75,000 at October 1, 1997. The Company's
commercial paper program, which expires December 31, 1996, is currently
being renegotiated so that it parallels the changes made to the line of
credit facility. The Company expects that these changes will be
successfully renegotiated. The Company has ongoing discussions with its
lenders and expects to continue to have appropriate and adequate financing
to meet its ongoing needs.
Annually, Agway and AFC offer subordinated debentures and subordinated
money market certificates to the public. Of Agway's and AFC's subordinated
debt at September 30, 1996, $382,213 is redeemable in whole or in part at
the principal amount plus accrued interest, prior to maturity dates, at the
option of the Company. The foregoing debt bears interest payable
semi-annually on January l and July 1 of each year. The money market
certificates' interest rate is at the greater of the quoted rate or a rate
based upon the discount rate for U. S. Government Treasury Bills, with
maturities of 26 weeks. In October 1996, $14,700 of subordinated money
market certificates issued by AFC matured. The Company has refinanced this
debt through the issuance of subordinated debt and short-term bank
borrowings.
Telmark
As of September 30, 1996, Telmark had two separate credit facilities
available from banks which allow Telmark to borrow up to an aggregate of
$204,000. An uncommitted short-term line of credit agreement permits
Telmark to borrow up to $4,000 on an unsecured basis with interest paid
upon maturity. The line bears interest at money market variable rates. A
committed $200,000 partially collateralized revolving term loan facility
permits Telmark to draw short-term funds bearing interest at money market
rates or draw long-term debt at rates appropriate for the term of the note
drawn. The total amounts outstanding as of September 30, 1996, under the
short-term line of credit and the revolving term loan facility were $4,000
and $156,200, respectively.
Telmark borrows under its short-term line of credit agreement and its
revolving term agreement from time to time to fund its operations.
Short-term debt serves as interim financing between the issuances of
long-term debt. Telmark renews its lines of credit annually. The $4,000
line of credit has been renewed through December 31, 1996. The $200,000
revolving term agreement loan facility is available through February 1,
1998.
At September 30, 1996, Telmark also had balances outstanding on unsecured
senior note private placements totaling $121,333. Interest is payable
semiannually on each senior note. Principal payments are both semiannual
and annual. The note agreements are similar to one another and each contain
specific financial covenants.
8
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
3. BORROWING ARRANGEMENTS (continued)
----------------------------------
Telmark (continued)
Telmark has registered with the SEC two shelf offerings of debentures. The
debentures are unsecured, subordinated to all senior debt at Telmark, and
are not guaranteed by Agway nor any of Agway's other subsidiaries. The
interest on the debt is payable quarterly on January 1, April 1, July 1 and
October 1. The offering of debentures is continuing and the proceeds of the
offerings will be used to provide financing for Telmark's leasing
activities.
The Company believes Telmark will continue to have appropriate and adequate
short-term and long-term financing to meet its ongoing needs.
Long-term and subordinated debt outstanding at September 30, 1996, as
compared to June 30, 1996, amounted to:
<TABLE>
<CAPTION>
Agway & AFC Telmark Total
------------------- ------------------- -------------------
9/96 6/96 9/96 6/96 9/96 6/96
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Long-term debt ...... $ 17,673 $ 18,666 $263,473 $273,000 $281,146 $291,666
Currently payable ... 6,033 6,065 90,788 88,188 96,821 94,253
-------- -------- -------- -------- -------- --------
Net long-term debt .. $ 11,640 $ 12,601 $172,685 $184,812 $184,325 $197,413
======== ======== ======== ======== ======== ========
Subordinated debt ... $401,666 $390,669 $ 26,530 $ 24,258 $428,196 $414,927
Currently payable ... 14,721 14,643 14,721 14,643
-------- -------- -------- -------- -------- --------
Net subordinated debt $386,945 $376,026 $ 26,530 $ 24,258 $413,475 $400,284
======== ======== ======== ======== ======== ========
</TABLE>
9
<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 participate in the remediation of certain sites, including sites
where the Company has been designated by the Environmental Protection
Agency (EPA) as a potentially responsible party (PRP) under the
Comprehensive Environmental Response Compensation and Liability Act
(CERCLA) and sites with underground fuel storage tanks, and 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. Agway'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 relating to 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. At September 30, 1996, the Company had been designated as a PRP
under CERCLA or as a third party to the original PRPs in several Superfund
sites. The liability under CERCLA is joint and several, meaning that the
Company could be required to pay in excess of its pro rata share of
remediation costs. The Company's understanding of the financial strength of
other PRPs at these Superfund sites has been considered, where appropriate,
in the Company's determination of its estimated liability. 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 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. The settlement of
the reserves established will cause future cash outlays over approximately
five years based upon current estimates, and it is not expected that such
outlays will materially impact the Company's liquidity position.
As part of its long-term environmental protection program, the Company
estimates that during fiscal 1997 and 1998 approximately $1,300 and $3,700
per year will be spent, respectively, on capital projects for environmental
protection. These estimates include the additional capital required to
comply with EPA Underground Storage Tank (UST) regulations that become
effective in December 1998. Presently, the total additional capital
required to comply with the EPA UST regulations is estimated to be
approximately $3,700. The total capital requirements may change due to 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 under the above
stated policy will not have a material adverse effect on the financial
position, results of operations or liquidity of the Company.
5. SUBSEQUENT EVENT
----------------
On October 31, 1996, the Company's Country Products Group (CPG) entered
into an agreement with five other cooperative organizations to form
Pro-Pet, L.L.C., of which CPG will be a one-sixth owner. As part of the
formation of this joint venture, CPG sold its pet food manufacturing brands
and business, including its St. Marys, Ohio, pet food plant, to the
venture. The proceeds from the sale, net of a reinvestment into the
venture, totaled approximately $7,500, and the gain on sale was fully
offset by losses experienced from the closing of a second pet food plant
that had also been a part of Agway's pet food manufacturing business. Agway
will continue to purchase its pet food product from Pro-Pet, L.L.C., and
this change in manufacturing ownership will not materially affect Agway's
retail pet food business.
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)
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 primarily the Northeastern
United States. Agriculture and Retail net sales and revenues are traditionally
higher in the spring as customers acquire products to initiate the growing
season. Energy realizes significantly higher net sales and revenues in the
winter months due to cold winter conditions. Leasing and Insurance are not
materially impacted by seasonal fluctuations.
Results by Operating Segment
----------------------------
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
$ Increase
9/30/96 9/30/95 (Decrease)
---------- ---------- ----------
<S> <C> <C> <C>
Net Sales and Revenues
- ----------------------
Agriculture ........................................... $ 168,862 $ 164,457 $ 4,405
Retail ................................................ 63,096 58,445 4,651
Energy ................................................ 107,943 97,479 10,464
Leasing ............................................... 13,317 11,526 1,791
Insurance ............................................. 6,314 7,243 (929)
Other (a) ............................................. (7,348) (14,527) 7,179
--------- --------- ---------
$ 352,184 $ 324,623 $ 27,561
========= ========= =========
Margin (Loss) from Continuing Operations
- ----------------------------------------
before Income Taxes
-------------------
Agriculture ........................................... $ (8,739) $ (6,506) $ (2,233)
Retail ................................................ 687 134 553
Energy ................................................ (4,898) (4,772) (126)
Leasing ............................................... 2,785 2,434 351
Insurance ............................................. (64) (29) (35)
Other...............................................(a) 1,769 1,671 98
--------- --------- ---------
Operating margin (loss) plus other income, net ........ (8,460) (7,068) (1,392)
Interest (expense), net of interest income ............ (6,559) (6,920) 361
--------- --------- ---------
$ (15,019) $ (13,988) $ (1,031)
========= ========= =========
</TABLE>
(a) Represents unallocated corporate items and intersegment eliminations.
Numbers in the following narrative have been rounded to the nearest hundred
thousand.
Consolidated Results
- --------------------
The sales increase of $27,600 (9%) for the first quarter of fiscal 1997, as
compared to the first quarter in the prior year, was the result of (1) higher
sales prices charged by Agway Agricultural Products (AAP) for feed products and
by Energy for heating oil due to an increase in the cost of these products; (2)
delayed spring sales of crop-related services; (3) volume increases in pet food,
bird seeds and lawn & garden seeds; and (4) increased revenues as the result of
a higher average net lease investment at Telmark. These increases were after
considering sales declines due to the sale of businesses of CPG during 1996 and
the first quarter of 1997.
Loss from continuing operations before tax increased $1,000 (7%) to $15,000 for
the first quarter of 1997 as compared to the first quarter in the prior year.
The operating results from ongoing operations improved $1,000. However, during
the first quarter of 1997, the adoption of a new accounting pronouncement on the
impairment of long-lived assets negatively impacted results by approximately
$1,700, and one-time net charges for the exiting of the pet food business and
the transfer of ARS distribution center management totaled approximately $1,000.
These charges were partially offset by improved operational results experienced
by CPG due to divested lines of business not incurring losses in fiscal 1997 as
they had done in the first quarter of the prior year.
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)
Agriculture
- -----------
Agriculture consists of Agway Agricultural Products (AAP) and the Country
Products Group (CPG). Total net sales and revenues for the first quarter of
fiscal 1997 of $168,900 increased $4,400 (3%) as compared to the first quarter
of fiscal 1996. This increase resulted from a $14,300 (13%) increase in AAP
sales in the first quarter of fiscal 1997, as compared to the same period during
the prior year, as a result of increased feed product prices and delayed spring
sales of crop-related services which increased the first quarter 1997 sales. The
AAP sales increase was offset by CPG experiencing an overall decline in total
net sales and revenues of $9,900 (19%) in the first quarter of 1997 as compared
to the same period during the prior year. The reduction represents the effect on
sales volume from lines of business sold during fiscal 1996, which included
Pro-Lawn, laboratory animal diet and Sacramento Valley Milling, as well as
Roberts Seed which was sold in the first quarter of fiscal 1997. These
divestitures were part of CPG's strategic plan. These reductions in sales levels
at CPG were partially offset by the improved volumes in CPG's ongoing flour,
bean, produce and sunflower operations during the first quarter of 1997 as
compared to the first quarter of the prior year.
The net loss before income taxes of Agriculture increased $2,200 (34%) to $8,800
for the first quarter of 1997 as compared to the same period during the prior
year. AAP's net loss before income taxes of $8,700 for the first quarter of 1997
is $1,100 (15%) higher than the same period during the prior year. AAP
enterprise operations experienced significantly improved operating results in
the first quarter of 1997, as compared to the same period during the prior year,
which were more than offset by decreased gross margins, due to increased
commodity costs and adverse experience with exchange-traded futures, and the
impact of adopting a new accounting pronouncement on the impairment of
long-lived assets. CPG experienced a $100 loss for the first quarter of 1997,
which is a $1,100 (106%) decline from a $1,000 margin in the first quarter of
the prior year. This decline was attributable to the decision to sell CPG's pet
food manufacturing brands and business and the associated net asset write-down
and other one-time costs. These charges were partially offset by improved
operating results from having divested of businesses that incurred losses in the
first quarter of the prior year. The operating results from CPG's ongoing
businesses on a combined basis resulted in positive results for the first
quarter of 1997, consistent with the prior year.
Retail
- ------
Total net sales and revenues for Agway Retail Services (ARS) increased $4,700
(8%) to $63,100 during the first quarter of 1997 as compared to the first
quarter of the prior year. This increase was the result of increases in sales of
pet food, bird seeds and lawn & garden seeds. The sales of these products were
enhanced by a trade show held in June 1996, where no such show was held at that
time in the prior year. Additionally, this increase is after considering the
declines in sales associated with planned product mix changes that reduced high
dollar value/lower margin power equipment in favor of smaller per unit value
products with higher turnover and margins.
The margin before taxes of $700 represents a $600 increase in results during the
first quarter of 1997 as compared to the first quarter of the prior year. This
increase was attributable to improved margins through product mix and pricing
strategies which have changed since the prior year as noted above. These margin
improvements were partially offset by overall increases in expenses. Increases
in manufacturing and administrative expenses were experienced in the first
quarter of 1997, as compared to the same period in the prior year, partly due to
one-time costs associated with the transfer of ARS distribution center
management to a third party vendor. These one-time costs were greater than the
reductions in selling and distribution expense experienced from improved
management of these costs.
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)
Energy
- ------
Net sales and revenues increased $10,500 (11%) to $107,900 during the first
quarter of fiscal 1997 as compared to the same period during the prior year. The
increase was attributable to 10%-12% price increases in heating oils, diesel
fuel and propane in the first quarter of 1997 as compared to the same period
during the prior year. These price increases resulted from strong demand and low
inventories in the marketplace. The unit volume for all products in the first
quarter of 1997 increased 2% over the same period during the prior year.
Energy's operating loss of $4,900 in the first quarter of 1997 represents a $100
(3%) increase over the first quarter of the prior year. A slight improvement in
gross margins and an increase in other revenues was more than offset by
increased operating expenses during the first quarter of 1997 as compared to the
same period in the prior year.
Leasing
- -------
Total revenues for Telmark for the first quarter of 1997 of $13,300 increased
$1,800 (16%) as compared to the first quarter of the prior year. The increased
revenues were the result of a higher average net investment in leases during the
first quarter of 1997 as compared to the first quarter of the prior year.
Telmark's investment in net leases and notes of $385,000 at September 30, 1996,
is an increase of $40,600 (12%) from September 30, 1995.
Telmark's operating income for the first quarter of 1997 of $2,800 represents a
$400 (15%) improvement over the first quarter of the prior year. The increase is
due primarily to the larger lease portfolio in the first quarter of fiscal 1997
as compared to the first quarter in the prior year. Revenues associated with the
larger portfolio grew at a faster rate than the level of expenses.
Insurance
- ---------
Net revenues (earned premiums) of Insurance totaled $6,300 for the first quarter
of 1997, which represents a $900 (13%) decline from the first quarter of the
prior year. The decline is the result of increased reinsurance costs required to
limit the Company's potential loss experience.
Insurance operating loss totaled $64 for the first quarter of 1997, which is a
$35 (123%) increase from the first quarter of the prior year. Losses and loss
development significantly improved in the first quarter of fiscal 1997,
decreasing approximately 18% over the first quarter of the prior year. This
improvement, however, was offset by the lower net earned premiums and a decrease
in capital gains on investment sales in the first quarter of 1997 as compared to
the first quarter in the prior year.
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
Cash flows from operating activities for the three months ended September 30,
1996 decreased approximately $16,000 as compared to the three months ended
September 30, 1995. The decline in operating cash flows, as compared to the
prior year, resulted principally from fluctuations in working capital items
(more specifically, inventory and other assets and liabilities).
Cash Flows from Investing Activities
Net cash flows used in the Company's investing activities totaled approximately
$8,400 for the three months ended September 30, 1996, as compared to $14,100 for
the three months ended September 30, 1995. The Company has a growing leasing
business and cash required to fund lease origination growth in excess of lease
repayments and leases sold amounted to $12,400 for the three months ended
September 30, 1996 and $13,200 for the three months ended September 30, 1995.
Additionally, proceeds of $5,200 from business sold during the three months
ended September 30, 1996 were a source of cash that was not generated in the
same period in the prior year.
Cash Flows from Financing Activities
The Company finances its operations and the operations of all its continuing
businesses and subsidiaries, except Telmark and Agway Insurance Company, through
Agway Financial Corporation (AFC). External sources of short-term financing for
the Company and all its other continuing operations include revolving credit
lines, letters of credit, and commercial paper programs. Telmark and Agway
Insurance Company finance themselves through operations or direct borrowing
arrangements. Each is financed with a combination of short- and long-term credit
facilities. In addition, Telmark has occasionally sold blocks of its lease
portfolio. Sources of longer-term financing include the following as of
September 30, 1996:
<TABLE>
<CAPTION>
Source of debt Agway & AFC Telmark Total
- -------------- ----------- -------- --------
<S> <C> <C> <C>
Banks - due 11/96 to 2/01 with interest
from 6.0% - 8.5% ............................. $ 3,150 $142,000 $145,150
Insurance companies - due 11/96 to 11/00
with interest from 5.9% - 9.2% ............... 121,333 121,333
Capital leases & other - due 1996 to 2007
with interest from 6% to 12% ................. 14,523 140 14,663
-------- -------- --------
Long-term debt ............................. 17,673 263,473 281,146
Subordinated money market certificates - due
10/96 to 10/08 with interest from 4.5% - 9.5% 378,768 26,530 405,298
Subordinated debentures - due 1999 to 2003 with
interest at 7.0% to 8.5% ..................... 22,898 22,898
-------- -------- --------
Total debt ................................. $419,339 $290,003 $709,342
======== ======== ========
</TABLE>
For a complete description of the Company's credit facilities available at
September 30, 1996, see Footnote 3 to the condensed consolidated financial
statements.
14
<PAGE>
PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
Item 1. Legal Proceedings
- --------------------------
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
has had further discussions with other PRPs who have been participating in the
ongoing RI/FS and decided to participate at this time. In September 1996, a
number of PRPs, including Agway, entered into an Administrative Order or Consent
for Removal Action with the EPA for the site.
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, 1996.
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 11, 1996 /s/ PETER J. O'NEILL
-------------------- --------------------------------
Peter J. O'Neill
Senior Vice President,
Finance & Control,
Treasurer and Controller
(Principal Financial Officer and
Chief Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000002852
<NAME> AGWAY INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 35,238
<RECEIVABLES> 183,181
<ALLOWANCES> 10,054
<INVENTORY> 157,038
<CURRENT-ASSETS> 524,444
<PP&E> 524,856
<DEPRECIATION> 297,294
<TOTAL-ASSETS> 1,210,319
<CURRENT-LIABILITIES> 387,719
<BONDS> 597,800
0
57,906
<COMMON> 2,674
<OTHER-SE> 98,476
<TOTAL-LIABILITY-AND-EQUITY> 1,210,319
<SALES> 333,179
<TOTAL-REVENUES> 352,184
<CGS> 318,780
<TOTAL-COSTS> 328,688
<OTHER-EXPENSES> 32,929
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,559
<INCOME-PRETAX> (15,018)
<INCOME-TAX> (4,165)
<INCOME-CONTINUING> (10,854)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,854)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
