<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 December 31, 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
-------
AGWAY INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 15-0277720
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
315-449-6431
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 31, 1997
- ------------------------ -------------------------------
Membership Common Stock, 106,730 shares
$25 par value per share
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 December 31, 1996 and June 30, 1996........................ 3
Condensed Consolidated Statements of Operations and Retained Margin for the three months
and six months ended December 31, 1996 and December 31, 1995........................................... 4
Condensed Consolidated Cash Flow Statements for the six months ended December 31, 1996
and December 31, 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 4. Submission of Matters to a Vote of Security Holders.......................................... 16
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>
December 31, June 30,
1996 1996
---------- ----------
ASSETS (Unaudited)
- ------
<S> <C> <C>
Current Assets:
Trade accounts receivable (including notes receivable of
$25,882 and $35,182, respectively), less allowance for
doubtful accounts of $9,575 and $10,062, respectively .... $ 159,287 $ 207,327
Leases receivable, less unearned income of $51,402 and
$48,403, respectively .................................... 113,064 105,374
Advances and other receivables ............................. 38,657 35,900
Inventories:
Raw materials ............................................ 19,300 16,161
Finished goods ........................................... 168,402 128,770
Goods in transit and supplies ............................ 15,971 15,028
---------- ----------
Total inventories ...................................... 203,673 159,959
Prepaid expenses ........................................... 49,797 57,551
---------- ----------
Total current assets ................................... 564,478 566,111
Marketable securities available for sale ........................ 35,679 34,115
Other security investments ...................................... 44,483 42,406
Properties and equipment, net ................................... 219,996 237,015
Long-term leases receivable, less unearned income of
$79,092 and $75,828, respectively ............................. 280,813 268,815
Net pension asset ............................................... 91,680 84,757
Other assets .................................................... 10,825 12,672
---------- ----------
Total assets ........................................... $1,247,954 $1,245,891
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Notes payable .............................................. $ 94,600 $ 62,200
Current installments of long-term debt and subordinated debt 167,257 108,896
Accounts payable ........................................... 113,368 116,519
Other current liabilities .................................. 105,145 121,046
---------- ----------
Total current liabilities .............................. 480,370 408,661
Long-term debt .................................................. 172,052 197,413
Subordinated debt ............................................... 373,328 400,284
Other liabilities ............................................... 68,619 66,811
---------- ----------
Total liabilities .......................................... 1,094,369 1,073,169
Shareholders' equity:
Preferred stock, net .......................................... 59,324 59,319
Common stock, net ............................................. 2,671 2,689
Retained margin ............................................... 91,590 110,714
---------- ----------
Total shareholders' equity ................................. 153,585 172,722
Commitments and contingencies
Total liabilities and shareholders' equity ............. $1,247,954 $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 Six Months Ended
December 31, December 31,
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales and revenues from:
Product sales .................... $ 353,580 $ 347,637 $ 686,758 $ 654,090
Leasing operations ............... 13,813 11,830 26,775 23,044
Insurance operations ............. 6,456 5,973 12,500 12,859
--------- --------- --------- ---------
Total net sales and revenues . 373,849 365,440 726,033 689,993
Cost and expenses from:
Products and plant operations .... 335,251 322,821 654,032 613,199
Leasing operations ............... 5,981 5,159 11,937 10,416
Insurance operations ............. 4,035 8,020 7,987 12,811
Selling, general and
administrative activities ...... 30,623 32,356 63,552 65,553
--------- --------- --------- ---------
Total costs and expenses ..... 375,890 368,356 737,508 701,979
Operating loss ........................ (2,041) (2,916) (11,475) (11,986)
Interest expense, net ................. 8,030 7,538 14,589 14,460
Other income, net ..................... 3,135 5,950 4,108 7,953
--------- --------- --------- ---------
Loss from continuing operations
before income taxes .............. (6,936) (4,504) (21,956) (18,493)
Income tax (benefit) expense .......... (292) 424 (4,457) (3,103)
--------- --------- --------- ---------
Loss from continuing operations ....... (6,644) (4,928) (17,499) (15,390)
Discontinued operations:
Gain on disposal of Hood,
net of tax expense of $1,585
and $1,624, respectively ......... 2,284 2,017
--------- --------- --------- ---------
Net loss .............................. $ (6,644) $ (2,644) $ (17,499) $ (13,373)
Retained Margin:
Balance at beginning of period,
as previously reported ....... 98,476 91,790 109,250 102,532
Adjustment for the cumulative
effect on prior years of
applying retroactively the
FIFO method of valuing
Energy inventories, net of tax 1,464 402 1,464 402
--------- --------- --------- ---------
Balance at beginning of period,
as adjusted .................. 99,940 92,192 110,714 102,934
Dividends ........................ (2,087) (2,172) (2,085) (2,172)
Adjustment to unrealized gains
(losses) on available-for-sale
securities, net of tax ....... 381 795 460 782
--------- --------- --------- ---------
Balance at end of period .............. $ 91,590 $ 88,171 $ 91,590 $ 88,171
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Net cash flows used in operating activities ................ $(24,278) $ (1,966)
Cash flows (used in) provided by investing activities:
Purchases of property, plant and equipment ............ (8,306) (7,518)
Proceeds from disposal of businesses .................. 13,777
Proceeds from disposal of property, plant and equipment 8,794 1,782
Leases originated ..................................... (93,264) (74,098)
Leases repaid ......................................... 70,237 60,841
Proceeds from sale of marketable securities ........... 19,558 5,968
Purchases of marketable securities .................... (20,662) (6,339)
Net purchase of investments in related cooperatives ... (2,077) 466
Proceeds from disposal of discontinued operations ..... 15,900
-------- --------
Net cash flows used in investing activities ................ (11,943) (2,998)
Cash flows (used in) provided by financing activities:
Net change in short-term borrowings ................... 32,400 15,800
Proceeds from long-term debt .......................... 27,850 19,781
Repayment of long-term debt ........................... (29,331) (19,585)
Proceeds from sale of subordinated debt ............... 34,798 44,790
Maturity and redemption of subordinated debt .......... (25,101) (49,304)
Payments on capital leases ............................ (2,172) (665)
Redemption of stock, net .............................. (13) (3,443)
Cash dividends paid ................................... (2,210) (2,410)
-------- --------
Net cash flows provided by financing activities ............ 36,221 4,964
-------- --------
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 six-month period ended
December 31, 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.
Inventories
During the second quarter of fiscal 1997, the Company's Energy division
changed its method of determining the cost of liquid product inventories
from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO)
method. The liquid product inventories on a FIFO basis totaled $15,583 and
$34,759 at June 30, 1996 and December 31, 1996, respectively, and represent
10% and 17% of the Company's total inventory for the same periods noted
above.
As required by generally accepted accounting principles, the Company has
retroactively adjusted prior years' financial statements for this change.
The Company has also applied to the Internal Revenue Service to change to
the FIFO method of inventory valuation for tax purposes. At the time the
Company elected LIFO accounting for its liquid products inventory in its
Energy division, the Company owned a majority interest in a refinery and
maintained significantly higher levels of liquid product inventories
throughout the Energy distribution system. Since that time, the Company
sold its interest in the refinery and has changed its business practice
with respect to liquid product inventory management. As a result of these
changes, inventory levels of liquid product currently are substantially
less and the inventory turns in approximately 15 days. Accordingly, FIFO is
a preferable method of accounting for liquid product inventories, better
reflecting how the Company currently manages its operations and better
matching revenues and costs.
The cumulative effect of the change (reported as an increase in retained
earnings as of June 30, 1995 for both the Company and Agway Financial
Corporation) of $402 represents the effect on net earnings of the reversal
of the LIFO reserve at that date. There was no effect of the change in
accounting method in net margin (loss) for the three and six months ended
December 31, 1996 and 1995. The restatement of income as previously
reported for fiscal years ended June 30, 1996 and 1995 is as follows:
1996 1995
-------- --------
Net margin (loss), as previously reported $ 11,600 $(15,908)
Effect of change in accounting method, net of tax 1,062 178
-------- --------
Adjusted net margin (loss) $ 12,662 $(15,730)
======== ========
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 Six Months Ended
December 31, December 31,
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net sales and revenues ........ $ 275,544 $ 265,507 $ 514,212 $ 486,865
Operating margin .............. 8,263 5,027 6,995 3,985
Loss from continuing operations (454) (4,943) (3,270) (12,376)
Net loss ...................... (454) (2,658) (3,270) (10,359)
</TABLE>
December 31, June 30,
1996 1996
---------- ----------
Current assets ........................... $ 550,903 $ 532,158
Properties and equipment, net ............ 157,263 166,504
Noncurrent assets ........................ 366,276 353,377
---------- ----------
Total assets ......................... $1,074,442 $1,052,039
========== ==========
Current liabilities ...................... $ 306,338 $ 227,782
Long-term debt ........................... 165,240 191,189
Subordinated debt ........................ 373,328 400,284
Noncurrent liabilities ................... 16,715 17,152
Shareholder's equity ..................... 212,821 215,632
---------- ----------
Total liabilities and shareholder's equity $1,074,442 $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 December 31, 1996, 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 December 31, 1996 under
AFC's $50,000 line of credit and $50,000 commercial paper were $34,600 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 expires 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 December 31, 1996, $418,600 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 December 31, 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 December 31, 1996, under the
short-term line of credit and the revolving term loan facility were $4,000
and $164,000, 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, 1997. The $200,000
revolving term agreement loan facility is available through February 1,
1998.
At December 31, 1996, Telmark also had balances outstanding on unsecured
senior note private placements totaling $114,300. 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 December 31, 1996, as
compared to June 30, 1996, amounted to:
<TABLE>
<CAPTION>
Agway & AFC Telmark Total
------------------- ------------------- -------------------
12/96 6/96 12/96 6/96 12/96 6/96
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Long-term debt ...... $ 15,555 $ 18,666 $272,457 $273,000 $288,012 $291,666
Currently payable ... 5,172 6,065 110,788 88,188 115,960 94,253
-------- -------- -------- -------- -------- --------
Net long-term debt .. $ 10,383 $ 12,601 $161,669 $184,812 $172,052 $197,413
======== ======== ======== ======== ======== ========
Subordinated debt ... $395,452 $390,669 $ 29,173 $ 24,258 $424,625 $414,927
Currently payable ... 51,297 14,643 51,297 14,643
-------- -------- -------- -------- -------- --------
Net subordinated debt $344,155 $376,026 $ 29,173 $ 24,258 $373,328 $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 December 31, 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.
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 Six Months Ended
------------------------------------ ------------------------------------
$ Increase $ Increase
12/31/96 12/31/95 (Decrease) 12/31/96 12/31/95 (Decrease)
--------- --------- --------- --------- --------- ---------
Net Sales and Revenues
- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Agriculture $ 150,974 $ 164,266 $ (13,292) $ 337,104 $ 329,075 $ 8,029
Retail 49,335 56,556 (7,221) 111,928 114,575 (2,647)
Energy 167,567 140,199 27,368 275,511 237,679 37,832
Leasing 14,142 12,169 1,973 27,459 23,695 3,764
Insurance 6,735 6,344 391 13,049 13,587 (538)
Other (a) (14,904) (14,094) (810) (39,018) (28,618) (10,400)
--------- --------- --------- --------- --------- ---------
$ 373,849 $ 365,440 $ 8,409 $ 726,033 $ 689,993 $ 36,040
========= ========= ========= ========= ========= =========
Margin (Loss) from Continuing Operations
- ----------------------------------------
before Income Taxes
-------------------
Agriculture $ (7,691) $ (1,903) $ (5,788) $ (16,430) $ (8,381) $ (8,049)
Retail (1,138) (1,859) 721 (451) (1,752) 1,301
Energy 5,172 5,628 (456) 273 856 (583)
Leasing 3,257 2,965 292 6,042 5,399 643
Insurance 316 (3,856) 4,172 252 (3,885) 4,137
Other (a) 1,178 2,059 (881) 2,947 3,730 (783)
--------- --------- --------- --------- --------- ---------
Operating margin (loss)
plus other income, net 1,094 3,034 (1,940) (7,367) (4,033) (3,334)
Interest (expense), net of
interest income (8,030) (7,538) (492) (14,589) (14,460) (129)
--------- --------- --------- --------- --------- ---------
$ (6,936) $ (4,504) $ (2,432) $ (21,956) $ (18,493) $ (3,463)
========= ========= ========= ========= ========= =========
</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 $373,800 and $726,000 for the three and
six months ended December 31, 1996 increased $8,400 (2%) and $36,000 (5%),
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 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, from a higher average net
lease investment with higher revenue rates at Telmark. These increases 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 CPG during the prior year and first six 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 loss from continuing operations before taxes of $6,900 and $22,000 for the
three and six months ended December 31, 1996 increased $2,400 (54%) and $3,500
(19%), respectively, as compared to the same periods in the prior year. The
Company's results through the six months ended December 31, 1996 reflect ongoing
operations improving $2,100 over the same period in the prior year. During this
period, several one-time impacts to the financial results occurred which more
than offset the ongoing operation improvement. The adoption of a new accounting
pronouncement on the impairment of long-lived assets; one-time net charges from
the sale of the pet food manufacturing brands and business and the transition
cost from outsourcing the retail distribution center management; and a delay in
the timing of recognizing patronage refunds from fertilizer purchases have
decreased pre-tax earnings for the six months ended December 31, 1996, as
compared to the same period in the prior year, by $5,600.
In addition to the one-time items noted above, Agriculture's operating results
were affected by increased commodity costs and less favorable experience than in
the prior year with exchange-traded futures. The net decline of Agriculture, as
compared to the prior year, was substantially offset by improved underwriting
results in Insurance, continued strong earnings in Telmark and improvements in
Retail.
Agriculture
- -----------
Agriculture consists of Agway Agricultural Products (AAP) and the Country
Products Group (CPG). Total Agriculture net sales and revenues of $151,000 and
$337,100 for the three and six months ended December 31, 1996 decreased $13,300
(8%) and increased $8,000 (2%), 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 a $2,400
(2%) increase in AAP net sales and revenues, offset by a $15,600 (30%) decline
in CPG net sales and revenues. The increase in net sales and revenues for the
six-month period ended December 31, 1996, as compared to the same period in the
prior year, resulted from a $33,000 (15%) increase in AAP net sales and
revenues, offset by a $25,000 (24%) decline in CPG total net sales and revenues.
The increase in AAP sales for the three- and six-month periods ended December
31, 1996 was the result of increased feed product prices and delayed spring
sales of crop-related services which rolled into the first quarter of fiscal
1997. The decline in CPG sales for the three- and six-month periods ended
December 31, 1996 represents the decline in sales volume of $9,900 and $23,400,
respectively, from lines of business sold, mainly during the prior year, as part
of CPG's strategic plan, which included Pro-Lawn, a laboratory animal diet
business, Sacramento Valley Milling and Roberts Seed. Additionally, net sales
and revenues for the ongoing CPG speciality products operations also declined in
the six-month period ended December 31, 1996, 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 in
November and December caused less demand for this product. The remaining ongoing
operations of CPG generated net sales and revenues during the six months ended
December 31, 1996 that were equivalent to the same period in the prior year.
The net loss before income taxes of Agriculture of $7,700 and $16,400 for the
three and six months ended December 31, 1996 increased $5,800 (300%) and $8,000
(96%), respectively, as compared to the same periods in the prior year. AAP's
second quarter loss of $9,300 was a $5,700 (162%) increase over the same period
in the prior year, and the $18,000 six-month loss was a $6,900 (62%) increase
over the first six months of the prior year. However, AAP enterprise operations
experienced $3,100 in improvements to operating results and reduced
administrative costs by $1,200 over the six months ended December 31, 1996, as
compared to the same period in the prior year. These improvements were more than
offset by decreased gross margins, due to increased commodity costs and less
favorable experience with exchange-traded futures; the timing of patronage
refunds recognized in the second quarter last year which are expected in the
third quarter in the current year; and the impact of adopting a new accounting
pronouncement on the impairment of long-lived assets.
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 $1,600 for both the three and six months ended December 31,
1996 decreased $100 (30%) and $1,100 (43%), respectively, as compared to the
same periods in the prior year. The net income has been adversely impacted by a
$600 decline in the sunflower seed margins due to a drop in prices combined with
lower sales volumes; a $400 decline in potato margins resulted from price
reductions in the potato industry; and the cost of net asset write-downs and
other one-time costs attributable to the 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 $49,300 and $111,900 for the three and six
months ended December 31, 1996 decreased $7,200 (13%) and $2,600 (2%),
respectively, as compared to the same periods in the prior year. The second
quarter decline of $7,200 resulted from a significant reduction in bird food and
ice melter salt sales due to the relatively light snow cover in November and
December in many parts of the Northeast. 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 second 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 $1,100 and $500 for the three and six months
ended December 31, 1996 improved $700 (39%) and $1,300 (74%), respectively, over
the same periods in the prior year. Gross margin dollars were down 6% for the
second 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 second
quarter and for the six-month period ended December 31, 1996 decreased $1,500
(9%) and $1,700 (5%), respectively, as compared to the same periods in the prior
year. The most significant decline in both the three- and six-month periods
ended December 31, 1996 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 one-time costs incurred to
transfer distribution center management and from the costs of acquisition of new
businesses or improvements to current stores.
Energy
- ------
Net sales and revenues of $167,600 and $275,500 for the three and six months
ended December 31, 1996 increased $27,400 (20%) and $37,800 (16%), 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 19.5% in the three months and 14.5% for the six months
ended December 31, 1996, as compared to the same periods in the prior year. The
total unit volume of all products for both the three and six months ended
December 31, 1996 shows slight improvements, despite temperatures being warmer
than the prior year.
Margin before income taxes of $5,200 and $300 for the three and six months ended
December 31, 1996 decreased $500 (8%) and $600 (68%), respectively, as compared
to the same periods in the prior year. Gross margin dollars decreased $400 and
$300 for the second quarter and six months ended December 31, 1996, as compared
to the same periods in the prior year, as a result of product cost increases not
being able to be absorbed by the marketplace. Total operating expenses increased
for the three and six months ended December 31, 1996, as compared to the same
periods in the prior year, as the result of increased distribution costs
partially offset by reduced selling and administrative costs. 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 $14,100 and $27,500 for the three and six months ended
December 31, 1996 increased $2,000 (16%) and $3,800 (16%), 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 the result of a
higher average net investment with higher revenue rates associated with current
period leases. The net investment increased $22,700 (6%) to $417,000 for the
six-month period ended December 31, 1996, as compared to an increase of $12,700
(4%) to $361,000 for the same period in the prior year. Revenue as a percent of
average net investment increased 3% in the six months ended December 31, 1996,
as compared to the same period in the prior year.
Margin before income taxes of $3,300 and $6,000 for the three and six months
ended December 31, 1996 increased $300 (10%) and $600 (12%), respectively, as
compared to the same periods prior year. Total revenue increases were partially
offset by an increase in total expenses for the three and six months ended
December 31, 1996 of $1,700 (18%) and $3,200 (17%), 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
- ---------
Net revenues (earned premiums) of $6,700 and $13,000 for the three and six
months ended December 31, 1996 increased $400 (6%) and decreased $500 (4%),
respectively, as compared to the same periods in the prior year. The
fluctuations are the result of increased reinsurance costs being incurred
earlier over the six months ended December 31, 1996 as compared to the prior
year. The increased reinsurance costs will further limit Insurance's potential
loss exposure.
Margin before income taxes of $300 for both the three and six months ended
December 31, 1996 increased $4,200 (108%) and $4,100 (107%), 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 six 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 six 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 from operating activities for the six months ended December 31, 1996
were a net cash use of $24,300, a decrease in cash flows of approximately
$22,500 as compared to the same period in the prior year. This decrease was due
primarily to larger increases in inventory and receivables over the six-month
period ended December 31, 1996, as compared to the same period in prior year,
from higher commodity market prices in Agriculture and Energy, and from higher
Energy inventory levels maintained due to the low industry inventories in the
marketplace.
Cash Flows from Investing Activities
Net cash flows used in the Company's investing activities totaled approximately
$11,900 for the six months ended December 31, 1996, as compared to $3,000 for
the six months ended December 31, 1995, an increased outflow of $8,900. 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 six months ended December 31, 1996, as compared to $13,300 for
the six months ended December 31, 1995, a net cash outflow of $9,700.
Additionally, purchases of fixed assets and the net purchase of marketable
securities and investments in related cooperatives during the six months ended
December 31, 1996 increased $4,100 over the prior year. These increased uses
were partially offset by proceeds of $22,600 from businesses and fixed assets
sold during the six months ended December 31, 1996 that were $4,900 higher 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 December
31, 1996:
Agway &
Source of debt AFC Telmark Total
- -------------- -------- -------- --------
Banks - due 11/97 to 2/01 with interest
from 6.0% - 8.5% ............................ $ 2,975 $158,000 $160,975
Insurance companies - due 3/97 to 11/00
with interest from 5.9% - 9.2% .............. 114,333 114,333
Capital leases & other - due 1997 to 2007
with interest from 6% to 12% ................ 12,580 124 12,704
-------- -------- --------
Long-term debt ............................ 15,555 272,457 288,012
Subordinated money market certificates - due
10/97 to 10/08 with interest from 4.5% - 9.5% 373,020 29,173 402,193
Subordinated debentures - due 1999 to 2003 with
interest at 7.0% to 8.5% .................... 22,432 22,432
-------- -------- --------
Total debt ................................ $411,007 $301,630 $712,637
======== ======== ========
For a complete description of the Company's credit facilities available at
December 31, 1996, see Footnote 3 to the condensed consolidated financial
statements.
15
<PAGE>
PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Company held its annual meeting of shareholders on November 13, 1996, at
which a quorum was present in person or by proxy. The following Directors were
elected to three-year terms through December 1999:
Nominee In Favor Opposed
------------------ -------- -------
Robert L. Marshman 62,404 4,695
Peter D. Hanks 62,404 4,695
Carl D. Smith 62,404 4,695
Kevin B. Barrett 62,404 4,695
Samuel F. Minor 62,404 4,695
Joel L. Wenger 62,404 4,695
Eligible additional votes totaling 17,736 were not received at the time of the
annual meeting and are not included as either votes in favor or opposed.
Additionally, these 17,736 eligible additional votes may be considered
abstentions and were not included for purposes of determining a quorum at the
annual meeting.
The following is a list of directors whose terms as Directors continued after
the Annual Meeting:
Ralph H. Heffner - Chairman of the Board and Director
Robert L. Marshman - Vice Chairman of the Board and Director
Kevin B. Barrett - Director
Keith H. Carlisle - Director
Vyron M. Chapman - Director
D. Gilbert Couser - Director
Andrew J. Gilbert - Director
Peter D. Hanks - Director
Frederick A. Hough - Director
Samuel F. Minor - Director
Carl D. Smith - Director
Thomas E. Smith - Director
Gary K. Van Slyke - Director
Joel L. Wenger - Director
Edwin C. Whitehead - Director
Christian F. Wolff, Jr - Director
William W. Young - Director
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 December 31, 1996.
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 February 4, 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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