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, 1997
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 2-22791
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AGWAY INC.
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(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 October 24, 1997
-------------------------- -------------------------------
Membership Common Stock, 104,488 shares
$25 par value per share
1
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
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<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1997 and June 30, 1997................... 3
Condensed Consolidated Statements of Operations and Retained Margin for the three months
ended September 30, 1997 and September 30, 1996.................................................... 4
Condensed Consolidated Cash Flow Statements for the three months ended September 30, 1997
and September 30, 1996............................................................................. 5
Notes to Condensed Consolidated Financial Statements............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 10
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Form 8-K.......................................................... 14
SIGNATURES......................................................................................... 15
</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,
1997 1997
--------------- --------------
ASSETS (Unaudited)
- ------
<S> <C> <C>
Current Assets:
Trade accounts receivable (including notes receivable of
$41,744 and $44,074, respectively), less allowance for
doubtful accounts of $8,392 and $7,864, respectively............... $ 179,232 $ 209,868
Leases receivable, less unearned income of $59,988 and
$58,225, respectively.............................................. 123,930 124,552
Advances and other receivables....................................... 39,804 37,918
Inventories:
Raw materials...................................................... 3,366 9,396
Finished goods..................................................... 129,220 134,336
Goods in transit and supplies...................................... 13,778 6,908
--------------- --------------
Total inventories................................................ 146,364 150,640
Prepaid expenses..................................................... 48,452 52,714
--------------- --------------
Total current assets............................................. 537,782 575,692
Marketable securities available for sale.................................. 35,000 35,586
Other security investments................................................ 48,928 49,668
Properties and equipment, net............................................. 212,870 215,095
Long-term leases receivable, less unearned income of $94,431 and
$94,366, respectively................................................ 342,839 320,809
Net pension asset......................................................... 152,133 100,052
Other assets.............................................................. 13,343 11,355
--------------- --------------
Total assets..................................................... $ 1,342,895 $ 1,308,257
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Notes payable........................................................ $ 92,200 $ 59,200
Current installments of long-term debt............................... 113,080 113,720
Current installments of subordinated debt............................ 63,974 62,999
Accounts payable..................................................... 106,260 121,063
Other current liabilities............................................ 100,588 113,927
--------------- --------------
Total current liabilities........................................ 476,102 470,909
Long-term debt............................................................ 195,883 215,975
Subordinated debt......................................................... 392,230 375,128
Other liabilities......................................................... 85,972 68,494
--------------- --------------
Total liabilities.................................................... 1,150,187 1,130,506
Shareholders' equity:
Preferred stock, net.................................................... 50,720 57,541
Common stock, net....................................................... 2,616 2,639
Retained margin......................................................... 139,372 117,571
--------------- --------------
Total shareholders' equity........................................... 192,708 177,751
Commitments and contingencies.............................................
Total liabilities and shareholders' equity....................... $ 1,342,895 $ 1,308,257
=============== ==============
</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,
-------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Net sales and revenues from:
Product sales (including excise taxes)................................ $ 314,957 $ 329,423
Leasing operations.................................................... 15,762 13,317
Insurance operations.................................................. 6,858 6,314
------------- -------------
Total net sales and revenues...................................... 337,577 349,054
Cost and expenses from:
Products and plant operations......................................... 299,908 315,650
Leasing operations.................................................... 7,049 5,956
Insurance operations.................................................. 4,200 3,952
Selling, general and administrative activities........................ 31,371 32,929
------------- -------------
Total costs and expenses.......................................... 342,528 358,487
Operating margin (loss).................................................... (4,951) (9,433)
Interest expense, net...................................................... (6,874) (6,559)
Other income, net.......................................................... 2,123 973
------------- -------------
Loss from operations before income taxes .................................. (9,702) (15,019)
Income tax benefit (expense)............................................... 2,078 4,165
------------- -------------
Loss from operations before cumulative effect of an accounting change...... (7,624) (10,854)
Cumulative effect on prior years (to June 30, 1997) of an accounting
change, net of tax expense of $16,500................................. 28,956
------------- -------------
Net margin (loss).......................................................... $ 21,332 $ (10,854)
Retained Margin:
Balance at beginning of period........................................ 117,571 110,714
Adjustment to unrealized gains (losses) on available-for-sale
securities, net of tax............................................ 469 80
------------- -------------
Balance at end of period................................................... $ 139,372 $ 99,940
============= =============
</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,
--------------------------------
1997 1996
--------------- --------------
<S> <C> <C>
Net cash flows provided by (used in) operating activities................. $ 5,995 $ (7,286)
Cash flows provided by (used in) investing activities:
Purchases of property, plant and equipment........................... (8,004) (1,898)
Proceeds from disposal of property, plant and equipment.............. 3,865 2,948
Proceeds from disposal of businesses................................. 5,234
Cash paid for acquisitions........................................... (1,458)
Leases originated.................................................... (60,869) (46,485)
Leases repaid........................................................ 37,864 34,069
Proceeds from sale of marketable securities.......................... 5,677 2,410
Purchases of marketable securities................................... (4,694) (3,452)
Net purchase of investments in related cooperatives.................. 740 (1,551)
--------------- ---------------
Net cash flows used in investing activities............................... (26,879) (8,725)
Cash flows provided by (used in) financing activities:
Net change in short-term borrowings.................................. 32,610 16,900
Proceeds from long-term debt......................................... 354 7,541
Repayment of long-term debt.......................................... (21,113) (17,840)
Proceeds from sale of subordinated debt.............................. 30,416 19,612
Maturity and redemption of subordinated debt......................... (12,339) (6,343)
Payments on capital leases........................................... (51) (221)
Redemption of stock, net ............................................ (6,844) (1,428)
Cash dividends paid.................................................. (2,149) (2,210)
--------------- ---------------
Net cash flows provided by financing activities........................... 20,884 16,011
--------------- ---------------
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, 1997 are not necessarily indicative of the results that may
be expected for the year ending June 30, 1998 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, 1997.
Reclassifications
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 guaranteed by the Company. This
guarantee is full and unconditional, and joint and several. 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,
-------------- -------------
1997 1996
-------------- -------------
<S> <C> <C>
Net sales and revenues............................................ $ 232,535 $ 240,734
Operating margin (loss)........................................... 275 (1,267)
Net loss.......................................................... (7,371) (2,816)
September 30, June 30,
1997 1997
-------------- -------------
Current assets.................................................... $ 516,626 $ 530,509
Properties and equipment, net..................................... 152,519 155,969
Noncurrent assets................................................. 432,543 409,670
-------------- -------------
Total assets...................................................... $ 1,101,688 $ 1,096,148
============== =============
Current liabilities............................................... $ 285,823 $ 272,674
Long-term debt.................................................... 192,017 209,296
Subordinated debt................................................. 392,230 375,128
Noncurrent liabilities............................................ 16,959 17,813
Shareholder's equity.............................................. 214,659 221,237
-------------- -------------
Total liabilities and shareholder's equity........................ $ 1,101,688 $ 1,096,148
============== =============
</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 ARRANGEMENTS
----------------------
Agway and AFC
As of September 30, 1997, the Company had certain facilities available with
banking institutions whereby lenders have agreed to provide funds up to
$327,000 to separately financed units of the Company as follows: AFC -
$70,000 and Telmark - $257,000. 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 $70,000 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, 1997 under
AFC's $70,000 line of credit and $50,000 commercial paper were $0 and
$37,200, respectively. The Company's current line of credit facility
continues through January 1, 1998 and provides a seasonal increase to
$100,000, which becomes effective October 1, 1997. The Company's current
commercial paper program continues through December 31, 1997. 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, through AFC, offers subordinated money market certificates
to the public. Of AFC's subordinated debt at September 30, 1997, $350,118
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 stated rate or a rate based upon the average discount rate
for U.S. Treasury Bills, with maturities of 26 weeks.
Telmark
As of September 30, 1997, Telmark had two separate credit facilities
available from banks which allow Telmark to borrow up to an aggregate of
$257,000. An uncommitted short-term line of credit agreement permits
Telmark to borrow up to $7,000 on an unsecured basis with interest paid
upon maturity. The line bears interest at money market variable rates. A
committed $250,000 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 $7,000 line
was increased from $4,000 on August 19, 1997 and expires December 31, 1997,
and the $250,000 line was increased from $200,000 on September 22, 1997 and
expires on July 31, 1998. The total amount outstanding as of September 30,
1997 under the short-term line of credit was $7,000 and under the revolving
term loan facility was $200,000, of which $152,000 is long-term.
At September 30, 1997, Telmark had balances outstanding on unsecured senior
notes from private placements totaling $118,611. 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
contains specific financial covenants.
Additionally, as of September 30, 1997, Telmark, through a wholly owned
special purpose subsidiary, has two classes outstanding of lease-backed
notes payable to insurance companies totaling $23,299. Interest on these
notes is 6.58% or 7.01%. The notes are collateralized by 1,165 leases
having an aggregate present value of contractual lease payments equal to
the principal balance of the notes.
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 (continued)
----------------------------------
Telmark (continued)
Annually, Telmark offers subordinated debentures to the public. The
debentures are unsecured and subordinated to all senior debt at Telmark.
The interest on the debt is payable quarterly on January 1, April 1, July 1
and October 1, and the proceeds of the offerings are 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, 1997, as
compared to June 30, 1997, amounted to:
<TABLE>
<CAPTION>
AFC
Agway (excluding Telmark) Telmark Total
-------------------- -------------------- -------------------- -------------------
9/97 6/97 9/97 6/97 9/97 6/97 9/97 6/97
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt........ $ 9,414 $ 9,042 $ 5,567 $ 6,071 $ 293,982 $ 314,582 $ 308,963 $ 329,695
Currently payable..... 5,548 2,363 3,137 3,158 104,395 108,199 113,080 113,720
--------- --------- --------- --------- --------- --------- --------- ---------
Net long-term debt.... $ 3,866 $ 6,679 $ 2,430 $ 2,913 $ 189,587 $ 206,383 $ 195,883 $ 215,975
========= ========= ========= ========= ========= ========= ========= =========
Subordinated debt..... $ $ $ 424,547 $ 407,083 $ 31,657 $ 31,044 $ 456,204 $ 438,127
Currently payable..... 52,902 51,980 11,072 11,019 63,974 62,999
--------- --------- --------- --------- --------- --------- --------- ---------
Net subordinated debt. $ $ $ 371,645 $ 355,103 $ 20,585 $ 20,025 $ 392,230 $ 375,128
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
4. RETIREMENT BENEFITS
-------------------
Pension Plan
Effective July 1, 1997, the Company changed its method of determining the
market-related value of its plan assets under Financial Accounting
Standards No. 87, "Accounting for Pensions," from a calculated value (one
that recognizes changes in fair market value of assets over a number of
years) to a fair market value method. The cumulative effect of this change
in accounting principle, net of tax, was $29,000. Had the Company remained
on its previous method of determining the market-related value, loss from
operations before income taxes for the first quarter would have been higher
by approximately $2,400.
Pro forma amounts (unaudited), assuming the new accounting principle was
applied during all periods presented, follow with a comparison to actual
results:
<TABLE>
<CAPTION>
Quarter Ended
September 30,
------------------------------
1997 1996
------------ -------------
<S> <C> <C>
LOSS FROM OPERATIONS BEFORE CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE:
As reported ............................................................ $ (7,624) $ (10,854)
Pro Forma................................................................ $ (7,624) $ (8,919)
NET MARGIN (LOSS):
As reported............................................................. $ 21,332 $ (10,854)
Pro Forma................................................................ $ (7,624) $ (8,919)
</TABLE>
8
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
5. COMMITMENTS AND CONTINGENCIES
-----------------------------
Environmental
The Company is subject to a number of governmental regulations concerning
environmental matters, either directly or as a result of the operations of
its subsidiaries. The Company expects that it will be required to expend
funds to 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, 1997, 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 is not indemnified for existing
environmental cleanup liability. 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.
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.
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 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 generally 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.
<TABLE>
<CAPTION>
Results by Operating Segment
--------------------------------------------
Three Months Ended
--------------------------------------------
$ Increase
9/30/97 9/30/96 (Decrease)
------------- ------------- ------------
<S> <C> <C> <C>
Net Sales and Revenues
- ----------------------
Agriculture......................................................... $ 160,421 $ 171,385 $ (10,964)
Retail.............................................................. 60,932 64,499 (3,567)
Energy.............................................................. 103,436 107,943 (4,507)
Leasing............................................................. 15,762 13,317 2,445
Insurance........................................................... 6,858 6,314 544
Other (a)........................................................... (9,832) (14,404) 4,572
------------- ------------- ------------
$ 337,577 $ 349,054 $ (11,477)
============= ============= ============
Margin (Loss) from Operations before Income Taxes
- -------------------------------------------------
Agriculture......................................................... $ (5,646) $ (8,714) $ 3,068
Retail.............................................................. 117 664 (547)
Energy.............................................................. (4,860) (4,899) 39
Leasing............................................................. 3,158 2,785 373
Insurance........................................................... 6 (64) 70
Other (a).......................................................... 4,397 1,768 2,629
------------- ------------- ------------
Operating margin (loss) plus other income, net...................... (2,828) (8,460) 5,632
Interest (expense), net of interest income.......................... (6,874) (6,559) (315)
------------- ------------- ------------
$ (9,702) $ (15,019) $ 5,317
============= ============= ============
</TABLE>
(a) Represents unallocated corporate items and intersegment eliminations.
Numbers in the following narrative have been rounded to the nearest hundred
thousand.
Consolidated Results
- --------------------
Consolidated net sales and revenues of $337,600 for the three months ended
September 30, 1997 decreased $11,500 (3%) as compared to the same period in the
prior year. The decrease is the result of (1) changes in product mix in
Agriculture feed and Retail sales; and (2) a decline in sales in Energy for
heating oils, diesel fuel and gasoline. These decreases in sales were partially
offset by increased leasing revenues, as compared to the prior year, primarily
due to a higher average net lease investment.
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)
Consolidated Results (continued)
- --------------------------------
Net loss from operations before taxes of $9,700 for the three months ended
September 30, 1997 improved $5,300 (35%) as compared to the same period in the
prior year. These improvements can be attributed to (1) a $2,400 increase in
income from a change in accounting for the pension plan; (2) prior year earnings
absorbed a net $1,100 charge with respect to sale of the pet food business of
Country Products Group (CPG); and (3) prior year earnings absorbed a $1,700
charge for the adoption of a new accounting pronouncement on the impairment of
long-lived assets adopted in the first quarter of the previous year. Results
from ongoing operations are comparable to the prior year, but vary somewhat by
segment, as discussed below.
Agriculture
- -----------
Agriculture consists of Agway Agricultural Products (AAP) and the Country
Products Group (CPG). Total Agriculture net sales and revenues of $160,400 for
the three months ended September 30, 1997 decreased $11,000 (6%) as compared to
the same period in the prior year. The decrease in net sales and revenues for
the three-month period, as compared to the same period in the prior year,
resulted from a $10,100 (8%) decrease in AAP net sales and revenues and a $900
(2%) decline in CPG net sales and revenues.
The AAP sales decrease is principally in the feed business. Despite an increase
in total feed volume, a shift in the product mix to lower priced feeds in the
first quarter has resulted in declining sales dollars as compared to the
previous year. CPG's decline of $900 is the net result of the 1996 sale of the
pet food business ($9,100) offset principally by an increase in sales from the
produce operations. Produce operations sales increased $8,500 substantially due
to the acquisition of a business in the first quarter ($7,300).
Agriculture's operating loss of $5,600 for the three months ended September 30,
1997 decreased $3,100, a 36% improvement as compared to the same period in the
prior year. AAP's loss of $7,300 was $1,300 (15%) less than the loss in the same
period in the prior year. In the prior year, AAP earnings absorbed a $1,500
charge from adopting a new accounting pronouncement on the impairment of
long-lived assets.
CPG operating margin of $1,700 for the three months ended September 30, 1997
improved $1,800 as compared to the same period in the prior year. The produce
operation earnings exceeded those in the same period last year due to improved
gross margins. The prior year earnings absorbed a net $1,100 charge with respect
to the sale of the pet food business of CPG.
Retail
- ------
Total net sales and revenues of $60,900 for the three months ended September 30,
1997 decreased $3,600 (6%) as compared to the same period in the prior year. The
majority of the decline in sales ($1,600) is due to the planned reduction of the
power equipment business at most retail store locations. Additionally, the
frozen food product line was discontinued, resulting in a $300 decline in sales
from the prior year.
Reduced retail sales were largely offset by improved gross margin percent,
resulting in a net gross margin decrease of approximately $200 compared to the
first quarter in the prior year. Operating expenses were up approximately $300
(2%). The operating margin of $100, consequently, decreased $500 from 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)
Energy
- ------
Net sales and revenues of $103,400 for the three months ended September 30, 1997
decreased $4,500 (4%) as compared to the same period in the prior year. The
decrease, as compared to the prior year, is a decline in volume ($2,700) and a
decline in price ($1,800).
Operating loss of $4,900 for the three months ended September 30, 1997 showed no
change as compared to the same period in the prior year. Despite lower sales
volume, gross margins improved slightly ($400). These improvements were offset
by an increase in operating expenses.
Leasing
- -------
Telmark total revenues of $15,800 for the three months ended September 30, 1997
increased $2,400 (18%) as compared to the same period in the prior year. The
increased revenues, as compared to the same period in the prior year, result
primarily from a higher average net investment. The net average investment
increased $22,900 (5%) to $492,700 for the three-month period ended September
30, 1997.
Operating margin of $3,200 for the three months ended September 30, 1997
increased $400 (13%) as compared to the same period in the prior year. Total
revenue increases were partially offset by an increase in total expenses for the
three months ended September 30, 1997 of $2,100 (20%) as compared to the same
period in the prior year. The larger net investment during this period, as
compared to the same period in the prior year, has increased interest expense
($1,100) and selling, general and administrative expenses ($1,000) in the
current year.
Insurance
- ---------
Insurance consists of Agway Insurance Company, a property and casualty insurance
subsidiary, and Agway General Agency, a subsidiary which markets accident and
health insurance and long-term care products.
Insurance net revenues (earned premiums) of $6,900 for the three months ended
September 30, 1997 increased $500 (9%) as compared to the same period in the
prior year. The increase for the three-month period is the result of both higher
direct earned premiums and decreased reinsurance costs.
Operating margin broke even for the three months ended September 30, 1997, an
increase of $100 as compared to the same period in the prior year. The increase
was the result of improvement in loss development.
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
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash Flows from Operating Activities
Net cash flows provided from operating activities for the three months ended
September 30, 1997 were $6,000, representing an increase in cash flows of
approximately $13,300 as compared to the same period in the prior year. This
increase is due primarily to an increase in cash earnings of $15,600 over the
prior year, which was partially offset by an increased use of cash to fund
working capital increases.
Cash Flows from Investing Activities
Net cash flows used in the Company's investing activities totaled approximately
$26,900 for the three months ended September 30, 1997, as compared to $8,700 for
the three months ended September 30, 1996, representing an increased outflow of
$18,200. 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 $23,000 for the three months ended September 30, 1997, as compared to $12,400
for the three months ended September 30, 1996, representing a net increase in
cash outflow of $10,600. Cash paid for property, plant and equipment was $6,100
higher in the first quarter 1997 compared to 1996. Proceeds of $3,900 from
businesses and fixed assets sold during the three months ended September 30,
1997 were $4,300 less than the cash generated from the same activity during the
corresponding period in the prior year. Additionally, $1,500 was used in the
acquisition of a produce business in the current year. Activities in securities
investments generated cash of $1,700 in the three months ended September 30,
1997, as opposed to requiring cash of $2,600 in the three months ended September
30, 1996, a cash increase of $4,300.
Cash Flows from Financing Activities
Cash of $6,800 used to redeem stock represents an increase of $5,400 over the
corresponding period in the prior year. Effective July 1, 1997, restriction on
the redemption of $16,700 of preferred stock expired. Net borrowings increased
$26,300 to finance the stock redemptions and investing activities not financed
through operating activities. Net borrowings in the prior year increased $17,400
to finance last year's stock redemptions, investing and operating activities.
The Company borrows money to finance 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, 1997:
<TABLE>
<CAPTION>
Agway & AFC
(excluding
Source of debt Telmark) Telmark Total
-------------- ----------- ----------- -----------
<S> <C> <C> <C>
Banks - due 11/97 to 2/01, interest at a weighted average
rate of 7.2% with a range of 6.0% - 8.4%.............................. $ 2,450 $ 152,000 $ 154,450
Insurance companies - due 10/97 to 4/04, interest at a weighted
average rate of 7.5% with a range of 5.9% - 8.9%...................... 141,910 141,910
Capital leases and other - due 1997 to 2007, interest at a
weighted average rate of 9.3% with a range of 6% to 12%............... 12,531 72 12,603
----------- ----------- -----------
Long-term debt...................................................... 14,981 293,982 308,963
Subordinated money market certificates - due 10/97 to 10/08, interest
at a weighted average rate of 8.1% with a range of 4.5% - 9.5%........ 402,115 402,115
Subordinated debentures - due 1999 to 2003, interest at a weighted
average rate of 7.9% with a range of 6.0% to 8.5%..................... 22,432 31,657 54,089
----------- ----------- -----------
Total debt.......................................................... $ 439,528 $ 325,639 $ 765,167
=========== =========== ===========
</TABLE>
For a complete description of the Company's credit facilities available at
September 30, 1997, see Footnote 3 to the condensed consolidated financial
statements.
13
<PAGE>
PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) List of Exhibits
18.0 Letter re change in accounting principle
27.0 Financial Data Schedule*
(b) There were no reports on Form 8-K required to be filed during the three
months ended September 30, 1997.
*Included with electronic filing only.
14
<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 October 30, 1997 /s/ PETER J. O'NEILL
---------------------- ----------------------------------------
Peter J. O'Neill
Senior Vice President,
Finance & Control,
Treasurer and Controller
(Principal Financial Officer and
Chief Accounting Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 35,000
<RECEIVABLES> 187,624
<ALLOWANCES> 8,392
<INVENTORY> 146,364
<CURRENT-ASSETS> 537,782
<PP&E> 505,998
<DEPRECIATION> 293,128
<TOTAL-ASSETS> 1,342,895
<CURRENT-LIABILITIES> 476,102
<BONDS> 588,113
0
50,720
<COMMON> 2,616
<OTHER-SE> 139,372
<TOTAL-LIABILITY-AND-EQUITY> 1,342,895
<SALES> 314,957
<TOTAL-REVENUES> 337,577
<CGS> 299,908
<TOTAL-COSTS> 311,157
<OTHER-EXPENSES> 31,371
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,874
<INCOME-PRETAX> (9,702)
<INCOME-TAX> (2,078)
<INCOME-CONTINUING> (7,624)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 28,956
<NET-INCOME> 21,332
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 18
16
<PAGE>
Board of Directors
Agway, Inc.
333 Butternut Drive
DeWitt, New York 13214
We are providing this letter to you for inclusion as an exhibit to your Form
10-Q filing pursuant to Item 601 of Regulation S-K.
We have read management's justification for the change in accounting method
related to the calculation of the market related value of pension assets for
purposes of estimating the return on those assets contained in the Company's
Form 10-Q for the quarter ended September 30, 1997. Based on our reading of the
data and discussion with Company officials about the business judgement and
business planning factors relating to the change, we believe management's
justification is reasonable. Accordingly, in reliance on management's
determination as regards elements of judgement and business planning, we concur
that the newly adopted accounting principle described above is preferable
in the Company's circumstances to the method previously applied.
We have not audited any financial statements of Agway, Inc. as of any date or
any period subsequent to June 30, 1997, nor have we audited the application of
the change in accounting principle disclosed in Form 10-Q of Agway, Inc. for the
three months ended September 30, 1997; accordingly, our comments are subject to
revision on completion of an audit of the financial statements that include the
accounting change.
COOPERS & LYBRAND
Syracuse, New York
October 28, 1997
17
