<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended March 31, 1997
--------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the transition period from to
--------------- ---------------
Commission file number 2-22791
-------
AGWAY INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 15-0277720
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
315-449-6431
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 2, 1997
- ------------------------------------------------ --------------------------
Membership Common Stock, $25 par value per share 105,966 shares
1
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1997 and June 30, 1996........................... 3
Condensed Consolidated Statements of Operations and Retained Margin for the three months
and nine months ended March 31, 1997 and March 31, 1996................................................ 4
Condensed Consolidated Cash Flow Statements for the nine months ended March 31, 1997
and March 31, 1996..................................................................................... 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 6. Exhibits and Reports on Form 8-K............................................................. 16
SIGNATURES............................................................................................ 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
---------- ----------
(Unaudited)
ASSETS
- ------
<S> <C> <C>
Current Assets:
Trade accounts receivable (including notes receivable of
$17,669 and $35,182, respectively), less allowance for
doubtful accounts of $9,481 and $10,062, respectively .... $ 152,502 $ 207,327
Leases receivable, less unearned income of $54,186 and
$48,403, respectively .................................... 118,126 105,374
Advances and other receivables ............................. 30,557 35,900
Inventories:
Raw materials ............................................ 14,176 16,161
Finished goods ........................................... 195,899 128,770
Goods in transit and supplies ............................ 21,782 15,028
---------- ----------
Total inventories ...................................... 231,857 159,959
Prepaid expenses ........................................... 45,799 57,551
---------- ----------
Total current assets ................................... 578,841 566,111
Marketable securities available for sale ........................ 36,057 34,115
Other security investments ...................................... 49,589 42,406
Properties and equipment, net ................................... 215,848 237,015
Long-term leases receivable, less unearned income of
$85,726 and $75,828, respectively ............................. 293,451 268,815
Net pension asset ............................................... 94,931 84,757
Other assets .................................................... 10,250 12,672
---------- ----------
Total assets ........................................... $1,278,967 $1,245,891
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Notes payable .............................................. $ 90,800 $ 62,200
Current installments of long-term debt and subordinated debt 170,259 108,896
Accounts payable ........................................... 150,370 116,519
Other current liabilities .................................. 109,357 121,046
---------- ----------
Total current liabilities .............................. 520,786 408,661
Long-term debt .................................................. 157,593 197,413
Subordinated debt ............................................... 373,217 400,284
Other liabilities ............................................... 69,932 66,811
---------- ----------
Total liabilities .......................................... 1,121,528 1,073,169
Shareholders' equity:
Preferred stock, net .......................................... 57,645 59,319
Common stock, net ............................................. 2,658 2,689
Retained margin ............................................... 97,136 110,714
---------- ----------
Total shareholders' equity ................................. 157,439 172,722
Commitments and contingencies
Total liabilities and shareholders' equity ............. $1,278,967 $1,245,891
========== ==========
</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 Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales and revenues from:
Product sales ..................... $ 406,747 $ 408,632 $ 1,091,730 $ 1,061,343
Leasing operations ................ 14,290 12,052 41,748 35,746
Insurance operations .............. 6,834 6,475 19,883 20,063
----------- ----------- ----------- -----------
Total net sales and revenues .. 427,871 427,159 1,153,361 1,117,152
Cost and expenses from:
Products and plant operations ..... 378,934 371,730 1,032,422 984,928
Leasing operations ................ 4,958 4,387 16,895 14,803
Insurance operations .............. 4,181 4,943 12,168 17,754
Selling, general and
administrative activities ....... 31,656 34,860 95,208 100,413
----------- ----------- ----------- -----------
Total costs and expenses ...... 419,729 415,920 1,156,693 1,117,898
Operating margin (loss) ................ 8,142 11,239 (3,332) (746)
Interest expense, net .................. (8,902) (8,454) (23,491) (22,912)
Other income, net ...................... 11,631 11,505 15,742 19,457
----------- ----------- ----------- -----------
Margin (loss) from continuing operations
before income taxes ............... 10,871 14,290 (11,081) (4,201)
Income tax (benefit) expense ........... 4,856 8,264 399 5,162
----------- ----------- ----------- -----------
Margin (loss) from continuing operations 6,015 6,026 (11,480) (9,363)
Discontinued operations:
Gain on disposal of Hood,
net of tax expense of $1,624 ...... 2,017
----------- ----------- ----------- -----------
Net margin (loss) ...................... $ 6,015 $ 6,026 $ (11,480) $ (7,346)
Retained Margin:
Balance at beginning of period,
as previously reported ........ 91,590 88,171 109,250 102,532
Adjustment for the cumulative
effect on prior years of
applying retroactively the
FIFO method of valuing
Energy inventories, net of tax 1,464 402
----------- ----------- ----------- -----------
Balance at beginning of period,
as adjusted ................... 91,590 88,171 110,714 102,934
Dividends ......................... (2,087) (2,172)
Adjustment to unrealized gains
(losses) on available-for-sale
securities, net of tax ........ (469) (1,085) (11) (304)
----------- ----------- ----------- -----------
Balance at end of period ............... $ 97,136 $ 93,112 $ 97,136 $ 93,112
=========== =========== =========== ===========
</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>
Nine Months Ended
March 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Net cash flows provided by (used in) operating activities .. $ 28,683 $ (6,467)
Cash flows provided by (used in) investing activities:
Purchases of property, plant and equipment ............ (15,274) (14,683)
Proceeds from disposal of businesses .................. 20,385 26,276
Proceeds from disposal of property, plant and equipment 7,103 2,594
Cash paid for acquisitions ............................ (973)
Leases originated ..................................... (152,617) (114,399)
Leases repaid ......................................... 109,672 92,484
Proceeds from sale of marketable securities ........... 20,622 6,505
Purchases of marketable securities .................... (22,572) (6,108)
Net purchase of investments in related cooperatives ... (12,100) (6,687)
Proceeds from disposal of discontinued operations ..... 15,900
--------- ---------
Net cash flows provided by (used in) investing activities .. (45,754) 1,882
Cash flows provided by (used in) financing activities:
Net change in short-term borrowings ................... 28,600 11,500
Proceeds from long-term debt .......................... 28,402 23,663
Repayment of long-term debt ........................... (52,854) (29,364)
Proceeds from sale of subordinated debt ............... 54,107 72,190
Maturity and redemption of subordinated debt .......... (32,626) (61,259)
Payments on capital leases ............................ (2,554) (1,306)
Redemption of stock, net .............................. (1,707) (6,257)
Cash dividends paid ................................... (4,297) (4,582)
--------- ---------
Net cash flows provided by financing activities ............ 17,071 4,585
--------- ---------
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 nine-month period ended March
31, 1997 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.
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 Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
1997 1996 1997 1996
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net sales and revenues............. $ 317,414 $ 304,716 $ 831,626 $ 791,581
Operating margin................... 20,433 19,930 27,428 23,914
Margin (loss) from continuing
operations..................... (1,212) 2,386 (4,482) (9,990)
Net margin (loss).................. (1,212) 2,386 (4,482) (7,973)
</TABLE>
March 31, June 30,
1997 1996
---------- ----------
Current assets ........................... $ 525,767 $ 532,158
Properties and equipment, net ............ 155,028 166,504
Noncurrent assets ........................ 383,493 353,377
---------- ----------
Total assets ......................... $1,064,288 $1,052,039
========== ==========
Current liabilities ...................... $ 310,417 $ 227,782
Long-term debt ........................... 150,945 191,189
Subordinated debt ........................ 373,217 400,284
Noncurrent liabilities ................... 18,568 17,152
Shareholder's equity ..................... 211,141 215,632
---------- ----------
Total liabilities and shareholder's equity $1,064,288 $1,052,039
========== ==========
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 March 31, 1997, the Company had certain facilities available with
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 March 31, 1997 under AFC's
$50,000 line of credit and $50,000 commercial paper were $0 and $39,400,
respectively. The Company's current line of credit facility continues
through January 1, 1998 and provides seasonal increases in the line of
credit which will be available so that total availability under AFC's line
of credit will increase to $70,000 at June 1, 1997 and $100,000 at 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 and AFC offer subordinated debentures and subordinated
money market certificates to the public. Of Agway's and AFC's subordinated
debt at March 31, 1997, $380,800 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.
Telmark
As of March 31, 1997, 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 March 31, 1997, under the short-term line
of credit and the revolving term loan facility were $4,000 and $185,400,
respectively. On April 23, 1997, Telmark completed a private placement of
debt totaling $38,000. Proceeds of the notes were used to pay down debt
under the Telmark lines of credit.
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, 1997. The $200,000
revolving term agreement loan facility is available through February 1,
1998.
At March 31, 1997, Telmark also had balances outstanding on unsecured
senior notes from private placements totaling $111,222. 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)
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 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 March 31, 1997, as compared
to June 30, 1996, amounted to:
<TABLE>
<CAPTION>
Agway & AFC Telmark Total
------------------- ------------------- -------------------
3/97 6/96 3/97 6/96 3/97 6/96
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Long-term debt ...... $ 15,331 $ 18,666 $249,330 $273,000 $264,661 $291,666
Currently payable ... 5,280 6,065 101,788 88,188 107,068 94,253
-------- -------- -------- -------- -------- --------
Net long-term debt .. $ 10,051 $ 12,601 $147,542 $184,812 $157,593 $197,413
======== ======== ======== ======== ======== ========
Subordinated debt ... $405,658 $390,669 $ 30,750 $ 24,258 $436,408 $414,927
Currently payable ... 52,223 14,643 10,968 63,191 14,643
-------- -------- -------- -------- -------- --------
Net subordinated debt $353,435 $376,026 $ 19,782 $ 24,258 $373,217 $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 March 31, 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'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.
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 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 Nine Months Ended
----------------------------------------- -----------------------------------------
$ Increase $ Increase
3/31/97 3/31/96 (Decrease) 3/31/97 3/31/96 (Decrease)
----------- ----------- ----------- ----------- ----------- -----------
Net Sales and Revenues
- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Agriculture $ 156,711 $ 187,791 $ (31,080) $ 493,856 $ 516,875 $ (23,019)
Retail 45,454 49,162 (3,708) 157,359 163,616 (6,257)
Energy 212,372 191,603 20,769 487,882 429,282 58,600
Leasing 14,290 12,052 2,238 41,748 35,746 6,002
Insurance 6,834 6,475 359 19,883 20,063 (180)
Other (a) (7,790) (19,924) 12,134 (47,367) (48,430) 1,063
----------- ----------- ----------- ----------- ----------- -----------
$ 427,871 $ 427,159 $ 712 $ 1,153,361 $ 1,117,152 $ 36,209
=========== =========== =========== =========== =========== ===========
Margin (Loss) from Continuing Operations
- ----------------------------------------
before Income Taxes
-------------------
Agriculture $ (1,800) $ 4,650 $ (6,450) $ (18,075) $ (3,626) $ (14,449)
Retail (3,337) (3,339) 2 (3,942) (5,197) 1,255
Energy 19,931 20,347 (416) 20,205 21,203 (998)
Leasing 3,745 3,260 485 9,787 8,659 1,128
Insurance 76 (1,226) 1,302 327 (5,110) 5,437
Other(a) 1,158 (948) 2,106 4,108 2,782 1,326
----------- ----------- ----------- ----------- ----------- -----------
Operating margin (loss)
plus other income, net 19,773 22,744 (2,971) 12,410 18,711 (6,301)
Interest (expense), net of
interest income (8,902) (8,454) (448) (23,491) (22,912) (579)
----------- ----------- ----------- ----------- ----------- -----------
$ 10,871 $ 14,290 $ (3,419) $ (11,081) $ (4,201) $ (6,880)
=========== =========== =========== =========== =========== ===========
</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 $427,900 and $1,153,400 for the three and
nine months ended March 31, 1997 increased $700 (.2%) and $36,200 (3%),
respectively, as compared to the same periods in the prior year. The increases
were the result of (1) higher sales prices, due to increased product costs, in
Agriculture for feed products and in Energy for heating oils, diesel fuel and
propane; (2) delayed spring 1996 sales of crop-related services by Agriculture
which increased sales in the first quarter of fiscal 1997; and (3) increased
lease portfolio revenues, as compared to the prior year, primarily due to a
higher average net lease investment. These increases in sales were partially
offset by the weather-related decline in demand for bird food which
significantly reduced sales to consumers in the Retail business. Additionally,
the sale of businesses within the Country Products Group component of
Agriculture (CPG) during the prior year and first nine months of fiscal 1997 has
reduced the overall sales level in CPG.
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)
Consolidated Results (continued)
- --------------------------------
Net income (loss) from continuing operations before taxes of $10,900 for the
three months ended March 31, 1997 decreased $3,400 (24%), as compared to the
same period in the prior year; and the net income (loss) from continuing
operations before taxes of ($11,100) for the nine months ended March 31, 1997
represents a loss that is $6,900 (164%) greater than the loss during the same
period in the prior year. The Company's results through the nine months ended
March 31, 1997 reflect certain ongoing operational improvements of $9,800 over
the same period in the prior year from Agway Agricultural Products (AAP) field
operations, Insurance, Retail and Leasing. However, these improvements were more
than offset mostly by decreased gross margins that resulted from a combination
of increased commodity costs and unfavorable experience with exchange-traded
futures. The remaining offsets were (1) the net charges from the current year
sale of the pet food manufacturing brands and businesses of CPG as compared to
significant gains on the sales of CPG businesses generated in the prior year and
(2) a charge for the adoption of a new accounting pronouncement on the
impairment of long-lived assets.
Agriculture
- -----------
Agriculture consists of Agway Agricultural Products (AAP) and the Country
Products Group (CPG). Total Agriculture net sales and revenues of $156,700 and
$493,900 for the three and nine months ended March 31, 1997 decreased $31,100
(17%) and $23,000 (4%), respectively, as compared to the same periods 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 an $18,500 (14%)
decrease in AAP net sales and revenues and a $12,600 (25%) decline in CPG net
sales and revenues. The decrease in net sales and revenues for the nine-month
period ended March 31, 1997, as compared to the same period in the prior year,
resulted from a $15,300 (4%) increase in AAP net sales and revenues, offset by a
$38,300 (25%) decline in CPG total net sales and revenues.
The increase in AAP sales for the nine-month period ended March 31, 1997
resulted primarily from increased feed product prices and delayed spring 1996
sales of crop-related services which increased sales in the first quarter of
fiscal 1997. In the third quarter, this was offset by a decrease in grain sales
resulting from a poor wheat yield. The decline in CPG sales for the three- and
nine-month periods ended March 31, 1997 represents the decline in sales volume
of $6,300 and $29,700, respectively, from lines of business sold, mainly during
the prior year, as part of CPG's strategic plan, which included Agway's
laboratory animal diet business, Pro-Lawn, Sacramento Valley Milling and Roberts
Seed. Additionally, net sales and revenues for the ongoing CPG specialty
products operations also declined in the nine-month period ended March 31, 1997,
as compared to the same period in the prior year, mainly due to declines in
sunflower seed sales for the production of bird foods. Lower than normal snow
coverage in the Northeast caused less demand for this product.
The net loss before income taxes of Agriculture of $1,800 and $18,100 for the
three and nine months ended March 31, 1997 increased $6,500 (138%) and $14,500
(403%), respectively, as compared to the same periods in the prior year. AAP's
third quarter loss of $3,500 was $3,000 (545%) larger than the loss in the same
period in the prior year, and the $21,400 nine-month loss was $9,900 (86%)
larger than the loss in the first nine months of the prior year. AAP enterprise
field operations experienced $3,400 in improvements to operating results during
the nine months ended March 31, 1997, as compared to the same period in the
prior year. These improvements were more than offset mostly by decreased gross
margins, due to increased commodity costs and unfavorable experience with
exchange-traded futures, and also by the impact of adopting a new accounting
pronouncement on the impairment of long-lived assets. Due to the volatility of
the commodities market, the gain or losses experienced from the use of
exchange-traded futures contracts may or may not be realized at the same level
in future periods.
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)
Agriculture (continued)
- -----------------------
CPG net income of $1,700 and $3,300 for the three and nine months ended March
31, 1997 decreased $3,500 (67%) and $4,600 (58%), respectively, as compared to
the same periods in the prior year. The sale of the Pro-Lawn business in January
1996 generated a significant gain, which accounts for $3,000 of the decrease in
net income for the three and nine months ended March 31, 1997. The net income
was adversely impacted in 1997 by a $300 decline in the sunflower seed margins
due to lower bird food sales volumes; a decline in potato margins resulted from
price reductions in the potato industry; and the cost of net asset write-downs
and other costs attributable to the current year sale of CPG's pet food
manufacturing brands and business. These adverse items were partially offset by
improvements, as compared to the prior year, in other continuing operations.
Retail
- ------
Total net sales and revenues of $45,500 and $157,400 for the three and nine
months ended March 31, 1997 decreased $3,700 (8%) and $6,200 (4%), respectively,
as compared to the same periods in the prior year. The declines are primarily
attributable to a mild and relatively snow-free winter in many parts of the
Northeast. This resulted in a significant reduction in bird food and ice melter
salt sales. Additionally, sales of water systems were significantly reduced, as
compared to the prior year, as Retail entered into an agreement under which a
third party would sell these products and pay Retail a commission. The third
quarter decline in sales, as compared to the prior year, more than offset the
first quarter sales improvements in pet food, bird food and lawn and garden
seeds and the improved sale of wood pellets in the second quarter.
Net loss before income taxes of $3,300 and $3,900 for the three and nine months
ended March 31, 1997 showed no change and improved $1,300 (25%), respectively,
over the same periods in the prior year. Gross margin dollars were down 4% for
the third quarter, as compared to the prior year, due to the decline in sales
dollars; however, margin percentages have improved through product mix and
pricing strategy changes since the prior year. Total expenses for the third
quarter and for the nine-month period ended March 31, 1997 decreased $600 (4%)
and $2,300 (4%), respectively, as compared to the same periods in the prior
year. The most significant decline in both the three- and nine-month periods
ended March 31, 1997 was in selling expenses. Advertising expenses have been
either reduced or delayed to provide for enhancement to sales efforts in the
upcoming spring season. Additionally, reductions in distribution and
manufacturing expenses were more than offset by transition costs incurred to
outsource distribution center management and from the costs of acquisition of
new businesses or improvements to current stores.
Energy
- ------
Net sales and revenues of $212,400 and $487,900 for the three and nine months
ended March 31, 1997 increased $20,800 (11%) and $58,600 (14%), respectively, as
compared to the same periods in the prior year. The increase, as compared to the
prior year, is substantially due to higher commodity prices in the current year
in heating oils, diesel fuel and propane as a result of strong demand and low
industry inventories in the marketplace. Energy's average selling price of all
products increased 8.2% for the nine months ended March 31, 1997, as compared to
the same periods in the prior year. The total unit volume of all products for
both the three and nine months ended March 31, 1997 shows slight improvements,
despite temperatures being warmer than the prior year.
Margin before income taxes of $19,900 and $20,200 for the three and nine months
ended March 31, 1997 decreased $400 (2%) and $1,000 (5%), respectively, as
compared to the same periods in the prior year. Gross margin dollars decreased
$3,400 and $3,700 for the third quarter and nine months ended March 31, 1997, as
compared to the same periods in the prior year, as a result of product cost
increases not being passed on to the marketplace through higher product prices.
Total operating expenses decreased for the three and nine months ended March 31,
1997, as compared to the same periods in the prior year, as the result of
decreased distribution costs, principally payroll costs, due to staff reductions
and a decrease in overtime. Finally, other revenue increased over the prior year
due to gains on the sale of assets in the current 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)
Leasing
- -------
Telmark total revenues of $14,300 and $41,700 for the three and nine months
ended March 31, 1997 increased $2,200 (18%) and $6,000 (17%), respectively, as
compared to the same periods in the prior year. The increased revenues over both
periods, as compared to the same periods in the prior year, are primarily the
result of a higher average net investment associated with current period leases.
The net investment increased $41,400 (11%) to $435,800 for the nine-month period
ended March 31, 1997, as compared to an increase of $21,000 (6%) to $369,400 for
the same period in the prior year.
Margin before income taxes of $3,700 and $9,800 for the three and nine months
ended March 31, 1997 increased $500 (16%) and $1,100 (13%), respectively, as
compared to the same periods in the prior year. Total revenue increases were
partially offset by an increase in total expenses for the three and nine months
ended March 31, 1997 of $1,800 (20%) and $4,900 (18%), respectively, as compared
to the same periods in the prior year. The larger net investment during those
periods, as compared to the same periods in the prior year, has increased
interest expense, selling, general and administrative expenses and the provision
for credit losses 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 $6,800 and $19,900 for the three and
nine months ended March 31, 1997 increased $400 (6%) and decreased $200 (1%),
respectively, as compared to the same periods in the prior year. The increase
for the three-month period is the result of decreased reinsurance costs. For the
nine months ended March 31, 1997, the increase in net revenues due to decreased
reinsurance costs of the Insurance Company was offset by a decline in the fees
from third-party insurers received by Agway General Agency.
Margin before income taxes of $80 and $300 for the three and nine months ended
March 31, 1997 increased $1,300 (104%) and $5,400 (106%), respectively, as
compared to the same periods in the prior year. The increase has been the result
of improvement in loss development. In the first nine months of the prior year,
Insurance experienced adverse development in older claims and certain unusually
large farmowner and auto liability casualty losses. These types of adverse
developments did not occur during the first nine months of the current year.
14
<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 provided from operating activities for the nine months ended March
31, 1997 were a net of $28,700, an increase in cash flows of approximately
$35,200 as compared to the same period in the prior year. This increase is due
primarily to a smaller increase in inventory ($14,800) and a larger decrease in
receivables ($26,500) over the nine-month period ended March 31, 1997, as
compared to the same period in the prior year.
Cash Flows from Investing Activities
Net cash flows used in the Company's investing activities totaled approximately
$45,800 for the nine months ended March 31, 1997, as compared to $1,900 provided
for the nine months ended March 31, 1996, an increased outflow of $47,700. 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
$42,900 for the nine months ended March 31, 1997, as compared to $21,900 for the
nine months ended March 31, 1996, a net increase in cash outflow of $21,000.
Proceeds of $27,500 from businesses and fixed assets sold during the nine months
ended March 31, 1997 were $17,300 less than the cash generated from the same
activity, including the disposal of discontinued operations, 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 March
31, 1997:
Source of debt Agway & AFC Telmark Total
- -------------- ----------- -------- --------
Banks - due 11/97 to 2/01 with interest
from 6.0% - 8.5% ............................ $ 2,695 $138,000 $140,695
Insurance companies - due 5/97 to 11/00
with interest from 5.9% - 9.2% .............. 111,222 111,222
Capital leases & other - due 1997 to 2007
with interest from 6% to 12% ................ 12,636 108 12,744
-------- -------- --------
Long-term debt ............................ 15,331 249,330 264,661
Subordinated money market certificates - due
10/97 to 10/08 with interest from 4.5% - 9.5% 383,458 30,750 414,208
Subordinated debentures - due 1999 to 2003 with
interest at 7.0% to 8.5% .................... 22,200 22,200
-------- -------- --------
Total debt ................................ $420,989 $280,080 $701,069
======== ======== ========
For a complete description of the Company's credit facilities available at March
31, 1997, see Footnote 3 to the condensed consolidated financial statements.
15
<PAGE>
PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
There were no reports on Form 8-K required to be filed during the three months
ended March 31, 1997.
16
<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 May 5, 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)
17
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 36,057
<RECEIVABLES> 161,983
<ALLOWANCES> 9,481
<INVENTORY> 231,857
<CURRENT-ASSETS> 578,841
<PP&E> 511,246
<DEPRECIATION> 295,398
<TOTAL-ASSETS> 1,278,967
<CURRENT-LIABILITIES> 520,786
<BONDS> 530,810
0
57,645
<COMMON> 2,658
<OTHER-SE> 97,136
<TOTAL-LIABILITY-AND-EQUITY> 1,278,967
<SALES> 1,091,730
<TOTAL-REVENUES> 1,153,361
<CGS> 1,032,422
<TOTAL-COSTS> 1,061,485
<OTHER-EXPENSES> 95,208
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,491
<INCOME-PRETAX> (11,081)
<INCOME-TAX> 399
<INCOME-CONTINUING> (11,480)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,480)
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