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, 1998
--------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----
ACT OF 1934
For the transition period from to
----------------------- --------------------
Commission file number 2-22791
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AGWAY INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 15-0277720
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
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(Address of principal executive offices) (Zip Code)
315-449-6431
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 1, 1998
- ------------------------ --------------------------
Membership Common Stock, 103,277 shares
$25 par value per share
1
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
- ------ ---------------------
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1998 and June 30, 1997........................ 3
Condensed Consolidated Statements of Operations and Retained Margin for the three months
and nine months ended March 31, 1998 and March 31, 1997............................................. 4
Condensed Consolidated Cash Flow Statements for the nine months ended March 31, 1998
and March 31, 1997.................................................................................. 5
Notes to Condensed Consolidated Financial Statements................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 10
PART II. OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings.......................................................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................................... 15
SIGNATURES.......................................................................................... 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
------------- ------------
ASSETS (Unaudited)
- ------
<S> <C> <C>
Current Assets:
Trade accounts receivable (including notes receivable of
$23,142 and $44,074, respectively), less allowance for
doubtful accounts of $9,515 and $7,864, respectively................... $ 154,820 $ 209,868
Leases receivable, less unearned income of $63,199 and
$58,225, respectively.................................................. 129,170 124,552
Advances and other receivables............................................. 41,982 37,918
Inventories:
Raw materials.......................................................... 9,184 9,396
Finished goods......................................................... 198,314 134,336
Goods in transit and supplies.......................................... 19,670 6,908
------------- ------------
Total inventories................................................. 227,168 150,640
Prepaid expenses........................................................... 44,545 52,714
------------- ------------
Total current assets................................................... 597,685 575,692
Marketable securities available for sale........................................ 36,988 35,586
Other security investments...................................................... 52,632 49,668
Properties and equipment, net................................................... 212,043 215,095
Long-term leases receivable, less unearned income of $104,418 and
$94,366, respectively...................................................... 344,431 320,809
Net pension asset............................................................... 168,383 100,052
Other assets .................................................................. 13,843 11,355
------------- ------------
Total assets........................................................... $ 1,426,005 $ 1,308,257
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Notes payable.............................................................. $ 98,100 $ 59,200
Current installments of long-term debt..................................... 102,840 113,720
Current installments of subordinated debt.................................. 82,641 62,999
Accounts payable........................................................... 157,129 121,063
Other current liabilities.................................................. 121,719 113,927
------------- ------------
Total current liabilities.............................................. 562,429 470,909
Long-term debt.................................................................. 207,090 215,975
Subordinated debt............................................................... 378,563 375,128
Other liabilities............................................................... 88,990 68,494
------------- ------------
Total liabilities.......................................................... 1,237,072 1,130,506
Shareholders' equity:
Preferred stock, net.......................................................... 48,243 57,541
Common stock, net............................................................. 2,586 2,639
Retained margin............................................................... 138,104 117,571
------------- ------------
Total shareholders' equity................................................. 188,933 177,751
Commitments and contingencies...................................................
Total liabilities and shareholders' equity............................. $ 1,426,005 $ 1,308,257
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED MARGIN
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ -----------------------------
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales and revenues from:
Product sales (including
excise taxes)........................ $ 359,765 $ 406,747 $ 1,004,339 $ 1,091,730
Leasing operations..................... 16,210 14,290 48,318 41,748
Insurance operations................... 6,658 6,834 20,482 19,883
------------- ------------- ------------- -------------
Total net sales and revenues....... 382,633 427,871 1,073,139 1,153,361
Cost and expenses from:
Products and plant operations.......... 326,087 378,934 937,983 1,032,422
Leasing operations..................... 5,654 4,958 19,801 16,895
Insurance operations................... 4,174 4,181 12,840 12,168
Selling, general and administrative
activities........................... 33,936 31,656 96,345 95,208
------------- ------------- ------------- -------------
Total costs and expenses........... 369,851 419,729 1,066,969 1,156,693
Operating margin (loss)..................... 12,782 8,142 6,170 (3,332)
Interest expense, net....................... (8,824) (8,902) (22,835) (23,491)
Other income, net........................... 5,522 11,631 10,276 15,742
------------- ------------- ------------- -------------
Margin (loss) from operations before
income taxes........................... 9,480 10,871 (6,389) (11,081)
Income tax benefit (expense)................ (5,430) (4,856) (847) (399)
------------- ------------- ------------- -------------
Margin (loss) from operations before
cumulative effect of an
accounting change........................ 4,050 6,015 (7,236) (11,480)
Cumulative effect on prior years
(to June 30, 1997) of an accounting
change, net of tax expense of $16,500 0 0 28,956 0
------------- ------------- ------------- -------------
Net margin (loss)........................... $ 4,050 $ 6,015 $ 21,720 $ (11,480)
Retained Margin:
Balance at beginning of period......... 133,949 91,590 117,571 110,714
Dividends.............................. (3) 0 (1,794) (2,087)
Adjustment to unrealized gains (losses)
on available-for-sale securities,
net of tax........................... 108 (469) 607 (11)
------------- ------------- ------------- -------------
Balance at end of period.................... $ 138,104 $ 97,136 $ 138,104 $ 97,136
============= ============= ============= =============
</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,
-----------------------------------
1998 1997
------------ --------------
<S> <C> <C>
Net cash flows provided by operating activities.............................. $ 27,370 $ 28,683
Cash flows provided by (used in) investing activities:
Purchases of property, plant and equipment.............................. (23,026) (15,274)
Proceeds from disposal of property, plant and equipment................. 6,879 7,103
Proceeds from disposal of businesses.................................... 298 20,385
Cash paid for acquisitions.............................................. (2,631) (973)
Leases originated....................................................... (165,272) (160,282)
Leases repaid........................................................... 131,707 117,337
Proceeds from sale of marketable securities............................. 11,742 20,622
Purchases of marketable securities...................................... (12,537) (22,572)
Net purchase of investments in related cooperatives..................... (2,980) (12,100)
------------- --------------
Net cash flows used in investing activities.................................. (55,820) (45,754)
Cash flows provided by (used in) financing activities:
Net change in short-term borrowings..................................... 38,510 28,600
Proceeds from long-term debt............................................ 62,857 28,402
Repayment of long-term debt............................................. (82,181) (52,854)
Proceeds from sale of subordinated debt................................. 106,288 54,107
Maturity and redemption of subordinated debt............................ (83,210) (32,626)
Payments on capital leases.............................................. (520) (2,554)
Redemption of stock, net ............................................... (9,351) (1,707)
Cash dividends paid..................................................... (3,943) (4,297)
------------- --------------
Net cash flows provided by financing activities.............................. 28,450 17,071
------------- -------------
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, 1998, are not necessarily indicative of the results that may be
expected for the year ending June 30, 1998, due to the seasonal nature of
certain major segments of the Company's business. For further information,
refer to the consolidated financial statements and notes thereto included
in the annual report on Form 10-K for the year ended June 30, 1997.
Reclassifications
Certain reclassifications have been made to conform prior year financial
statements with the current year presentation.
2. AGWAY FINANCIAL CORPORATION
---------------------------
Agway Financial Corporation (AFC) is a wholly owned subsidiary of the
Company whose principal business activity is securing financing through
bank borrowings and issuance of corporate debt instruments to provide funds
for the Company and AFC's sole wholly owned subsidiary, Agway Holdings Inc.
(AHI), and AHI's subsidiaries, for general corporate purposes. The payment
of principal and interest on this debt is guaranteed by the Company. This
guarantee is full and unconditional, and joint and several. In an exemptive
relief granted pursuant to a "no action letter" issued by the staff of the
Securities and Exchange Commission, AFC, as a separate company, is not
required to file periodic reports with respect to these debt securities.
However, as required by the 1934 Act, the summarized financial information
concerning AFC and consolidated subsidiaries is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------- -------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C>
Net sales and revenues......... $ 268,572 $ 317,414 $ 766,947 $ 831,626
Operating margin............... 20,225 18,757 33,649 22,795
Net margin (loss).............. 399 (1,212) (9,335) (4,482)
March 31, June 30,
1998 1997
------------- -------------
Current assets.................................................... $ 533,820 $ 530,509
Properties and equipment, net..................................... 149,990 154,030
Noncurrent assets................................................. 439,874 409,670
------------- -------------
Total assets...................................................... $ 1,123,684 $ 1,094,209
============= =============
Current liabilities............................................... $ 312,966 $ 270,735
Long-term debt.................................................... 201,469 209,296
Subordinated debt................................................. 378,563 375,128
Noncurrent liabilities............................................ 17,907 17,813
Shareholder's equity.............................................. 212,779 221,237
------------- -------------
Total liabilities and shareholder's equity........................ $ 1,123,684 $ 1,094,209
============= =============
</TABLE>
6
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
3. BORROWING ARRANGEMENTS
----------------------
As of March 31, 1998, the Company had certain facilities available with
banking institutions whereby lenders have agreed to provide funds up to
$332,000 to separately financed units of the Company as follows: AFC -
$75,000 and Telmark - $257,000. In addition, AFC may issue up to $50,000 of
commercial paper under the terms of a separate agreement, backed by a
letter of credit.
AFC
As of March 31, 1998, AFC had facilities available which included a $50,000
short-term line of credit and a $25,000 long-term revolver. These
facilities and AFC's 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
these AFC 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, 1998, under AFC's short-term line of credit and commercial paper
program were $0 and $43,100, respectively, as compared to $0 and $34,300,
respectively, at June 30, 1997. AFC's short-term line of credit facility
was renewed in January 1998 and continues through December 31, 1998. It was
renewed at $50,000 but provides for an increase to $75,000, which becomes
available on October 1, 1998, to assist in paying maturing subordinated
debt. AFC's current commercial paper program continues through December 31,
1998. In addition, effective January 1, 1998, the Company has a $25,000
long-term revolving line of credit available through January 1, 2000, of
which $0 was outstanding at March 31, 1998. The Company has ongoing
discussions with its lenders and expects to continue to have appropriate
and adequate financing to meet its ongoing needs.
Annually, Agway, through AFC, offers subordinated money market certificates
to the public. Of AFC's subordinated debt at March 31, 1998, $349,300 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 bear interest at a rate that is
the greater of the stated rate or a rate based upon the average discount
rate for U.S. Treasury Bills, with maturities of 26 weeks. Subordinated
money market certificates due between October 1998 and October 2008 bear a
weighted average interest rate of 8.1%, while subordinated debentures due
between July 1999 and July 2003 bear a weighted average interest rate of
7.9%.
Telmark
As of March 31, 1998, Telmark had two separate credit facilities available
from banks which allow Telmark to borrow up to an aggregate of $257,000. An
uncommitted short-term line of credit agreement permits Telmark to borrow
up to $7,000 on an unsecured basis with interest paid upon maturity. The
line bears interest at money market variable rates. A committed $250,000
revolving term loan facility permits Telmark to draw short-term funds
bearing interest at money market rates or draw long-term debt at rates
appropriate for the term of the note drawn. The $7,000 line of credit
expires December 31, 1998, and the $250,000 revolving term loan expires on
February 1, 1999. The total amount outstanding as of March 31, 1998, under
the short-term line of credit was $7,000 and under the revolving term loan
facility was $175,000, of which $127,000 was long-term. As of June 30,
1997, the total amount outstanding was $4,000 under the short-term line of
credit and under the revolving term loan facility was $190,900, of which
$170,000 was long-term.
At March 31, 1998, Telmark had balances outstanding on unsecured senior
notes from private placements totaling $148,500 as compared to $119,700 at
June 30, 1997. Interest is payable semiannually on each senior note.
Principal payments are both semiannual and annual. The note agreements are
similar to one another and each contains specific financial covenants.
Additionally, Telmark, through a wholly owned special purpose subsidiary,
has two classes of lease-backed notes outstanding totaling $18,500 and
$24,800 at March 31, 1998, and June 30, 1997, respectively, payable to
insurance companies. Interest rates on these classes of notes are 6.58% and
7.01%, respectively. The notes are collateralized by leases, which Telmark
sold to this subsidiary, having an aggregate present value of contractual
lease payments equal to the principal balance of the notes.
7
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
3. BORROWING ARRANGEMENTS (continued)
---------------------------------
Telmark (continued)
Annually, Telmark offers subordinated debentures to the public. The
debentures are unsecured and subordinated to all senior debt at Telmark.
The interest on the debt is payable quarterly on January 1, April 1, July 1
and October 1, and the proceeds of the offerings are used to provide
financing for Telmark's leasing activities.
The Company believes Telmark will continue to have appropriate and adequate
short-term and long-term financing to meet its ongoing needs.
Long-term and subordinated debt outstanding at March 31, 1998, as compared
to June 30, 1997, is as follows:
<TABLE>
<CAPTION>
AFC
Agway (excluding Telmark) Telmark Total
-------------------- -------------------- -------------------- --------------------
3/98 6/97 3/98 6/97 3/98 6/97 3/98 6/97
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt........ $ 10,153 $ 9,042 $ 5,736 $ 6,071 $ 294,041 $ 314,582 $ 309,930 $ 329,695
Currently payable..... 4,532 2,363 3,830 3,158 94,478 108,199 102,840 113,720
--------- --------- --------- --------- --------- --------- --------- ---------
Net long-term debt.... $ 5,621 $ 6,679 $ 1,906 $ 2,913 $ 199,563 $ 206,383 $ 207,090 $ 215,975
========= ========= ========= ========= ========= ========= ========= =========
Subordinated debt..... $ 0 $ 0 $ 423,342 $ 407,083 $ 37,862 $ 31,044 $ 461,204 $ 438,127
Currently payable..... 0 0 76,214 51,980 6,427 11,019 82,641 62,999
--------- --------- --------- --------- --------- --------- --------- ---------
Net subordinated debt. $ 0 $ 0 $ 347,128 $ 355,103 $ 31,435 $ 20,025 $ 378,563 $ 375,128
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
4. RETIREMENT BENEFITS
-------------------
Pension Plan
Effective July 1, 1997, the Company changed its method of determining the
market-related value of its plan assets under Financial Accounting
Standards No. 87, "Accounting for Pensions," from a calculated value (one
that recognizes changes in fair market value of assets over a number of
years) to a fair market value method. The cumulative effect of this change
in accounting principle, net of tax, was $29,000. Had the Company remained
on its previous method of determining the market-related value, the margin
from operations before income taxes for the three months and loss from
operations before income taxes for the nine months ended March 31, 1998,
would have been approximately $5,400 lower and $10,300 higher,
respectively.
Pro forma amounts (unaudited), assuming the new accounting principle was
applied during all periods presented, follow with a comparison to actual
results:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ -------------------------------
1998 1997 1998 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
MARGIN (LOSS) FROM OPERATIONS BEFORE
CUMULATIVE EFFECT OF AN ACCOUNTING
CHANGE:
As reported ......................... $ 4,050 $ 6,015 $ (7,236) $ (11,480)
Pro Forma............................. $ 4,050 $ 7,950 $ (7,236) $ (5,675)
NET MARGIN (LOSS):
As reported.......................... $ 4,050 $ 6,015 $ 21,720 $ (11,480)
Pro Forma............................. $ 4,050 $ 7,950 $ (7,236) $ (5,675)
</TABLE>
8
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
5. COMMITMENTS AND CONTINGENCIES
-----------------------------
Environmental
The Company is subject to a number of governmental regulations concerning
environmental matters, either directly or as a result of the operations of
its subsidiaries. The Company expects that it will be required to expend
funds to participate in the remediation of certain sites, including sites
where the Company has been designated by the Environmental Protection
Agency (EPA) as a potentially responsible party (PRP) under the
Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) and sites with underground fuel storage tanks, and will incur
other expenses associated with environmental compliance.
The Company continually monitors its operations with respect to potential
environmental issues, including changes in legally mandated standards and
remediation technologies. Agway's recorded liability reflects those
specific issues where remediation activities are currently deemed to be
probable and where the cost of remediation is estimable. Estimates of the
extent of the Company's degree of responsibility relating to a particular
site and the method and ultimate cost of remediation require a number of
assumptions for which the ultimate outcome may differ from current
estimates. At March 31, 1998, the Company had been designated as a PRP
under CERCLA or as a third party to the original PRPs in several Superfund
sites. The liability under CERCLA is joint and several, meaning that the
Company could be required to pay in excess of its pro rata share of
remediation costs. The Company is not indemnified for existing
environmental cleanup liability. The Company's understanding of the
financial strength of other PRPs at these Superfund sites has been
considered, where appropriate, in the Company's determination of its
estimated liability. The Company believes that its past experience provides
a reasonable basis for estimating its liability. As additional information
becomes available, estimates are adjusted as necessary. While the Company
does not anticipate that any such adjustment would be material to its
financial statements, it is reasonably possible that the result of ongoing
and/or future environmental studies or other factors could alter this
expectation and require the recording of additional liabilities. The extent
or amount of such events, if any, cannot be estimated at this time. The
settlement of the reserves established will cause future cash outlays over
approximately five years based upon current estimates, and it is not
expected that such outlays will materially impact the Company's liquidity
position.
Other
The Company is also subject to various investigations, claims, and legal
proceedings covering a wide range of matters that arise in the ordinary
course of its business activities. Each of these matters is subject to
various uncertainties, and it is possible that some of these matters may be
resolved unfavorably to the Company. The Company has established accruals
for matters for which payment is probable and amounts reasonably estimable.
Management believes any liability that may ultimately result from the
resolution of these matters in excess of amounts provided under the above
stated policy will not have a material adverse effect on the financial
position, results of operations or liquidity of the Company.
As previously reported in the second quarter financial information, a
severe ice storm affected many of the Company's customers in the far
northern parts of New York and portions of New England. During the third
quarter, the Company assessed the storm's impact on current year sales in
its agricultural feed and energy businesses, underwriting experience in its
insurance business, and collections of receivables in many of its other
businesses. Based on the results of this assessment, the impact of the
storm was determined not to be material to the Company.
9
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
RESULTS OF OPERATIONS
- ---------------------
The Company is including the following cautionary statement in this Form 10-Q to
make applicable and take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 for any forwardlooking
statement made by, or on behalf of, the Company. Where any such forward-looking
statement includes a statement of the assumptions or basis underlying such
forward-looking statement, the Company cautions that, while it believes such
assumptions or basis to be reasonable and makes them in good faith, assumed
facts or basis almost always vary from actual results, and the differences
between assumed facts or basis and actual results can be material, depending
upon the circumstances. Where, in any forward-looking statement, the Company, or
its management, expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," and "anticipate" and similar expressions identify
forward-looking statements.
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
3/31/98 3/31/97 (Decrease) 3/31/98 3/31/97 (Decrease)
----------- ----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales and Revenues
- ----------------------
Agriculture.................. $ 166,688 $ 156,657 $ 10,031 $ 471,333 $ 473,978 $ (2,645)
Retail....................... 47,934 50,379 (2,445) 160,950 172,304 (11,354)
Energy....................... 155,632 212,372 (56,740) 410,477 487,882 (77,405)
Leasing...................... 16,210 14,290 1,920 48,318 41,748 6,570
Insurance.................... 6,659 6,834 (175) 20,482 19,883 599
Other (a).................... (10,490) (12,661) 2,171 (38,421) (42,434) 4,013
------------ ----------- ---------- ----------- ----------- -----------
$ 382,633 $ 427,871 $ (45,238) $ 1,073,139 $ 1,153,361 $ (80,222)
============ =========== ========== =========== =========== ===========
Margin (Loss) from Operations
- -----------------------------
before Income Taxes
-------------------
Agriculture.................. $ (1,305) $ (1,791) $ 486 $ (17,260) $ (18,074) $ 814
Retail....................... (4,627) (3,346) (1,281) (8,063) (3,942) (4,121)
Energy....................... 15,513 19,931 (4,418) 17,890 20,205 (2,315)
Leasing...................... 4,568 3,745 823 11,231 9,788 1,443
Insurance.................... (107) 75 (182) 60 327 (267)
Other (a).................... 4,295 1,159 3,136 12,619 4,106 8,513
----------- ----------- ---------- ----------- ----------- ----------
Operating margin (loss),
plus other income, net.... 18,337 19,773 (1,436) 16,477 12,410 4,067
Interest (expense), net of
interest income........... (8,824) (8,902) 78 (22,835) (23,491) 656
----------- ----------- ---------- ----------- ----------- ----------
$ 9,513 $ 10,871 $ (1,358) $ (6,358) $ (11,081) $ 4,723
=========== =========== ========== =========== =========== ==========
</TABLE>
(a) Represents unallocated corporate items and intersegment eliminations.
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)
Numbers in the following narrative have been rounded to the nearest hundred
thousand.
Consolidated Results
- --------------------
Consolidated net sales and revenues of $382,600 and $1,073,100 for the three and
nine months ended March 31, 1998, decreased $45,200 (11%) and $80,200 (7%),
respectively, as compared to the same periods in the prior year. The decrease in
the three months ended March 31, 1998, as compared to the same period in the
prior year, was the result of a decline in sales in Energy, principally due to
decreases in volume and pricing level of petroleum products. The decrease in the
nine months ended March 31, 1998, as compared to the same period in the prior
year, was the result of a decline in sales in Energy, as noted above, a decrease
in the pricing level of Agriculture feed products, and planned changes in
product mix in Retail. The overall decreases in both the three- and nine-month
periods were partially offset by a strong growth in sales at the Country
Products Group and from increased leasing revenues at Telmark as compared to the
same periods in the prior year.
Net margin from operations before incomes taxes of $9,500 for the three months
ended March 31, 1998, decreased $1,400 (13%) as compared to the same period in
the prior year. Net loss from operations of $6,400 for the nine months ended
March 31, 1998, improved by $4,700 (43%) as compared to the same period in the
prior year. For the three and nine months ended March 31, 1998, a decline in net
business unit operating results of $4,600 (25%) and $4,400 (54%) was experienced
and is discussed by business segment below. Additionally, increases in net
corporate costs were experienced and decreased operating results by $3,200 and
$4,600 for the three- and nine-month periods ended March 31, 1998, as compared
to the same periods in the prior year. The increase of net corporate costs in
the three-month period was principally due to a strengthening of corporate
self-insurance reserves for property and casualty claims ($1,500). The increase
in net corporate costs for the nine-month period was due to the combination of
the above and employee compensation and benefit accruals based on expected
results from operations for the year ($2,100). The declines in operating results
noted above were partially offset in the three months and more than offset in
the nine-month period by the growth of the net pension asset recognized in the
income statement, which was higher by $6,400 in the three months and $13,100 in
the nine months ended March 31, 1998, than in the prior year. Of these
pension-related increases, $5,400 and $10,300 for the respective periods were
due to the change in accounting discussed in the retirement benefits footnote.
Agriculture
- -----------
Agriculture consists of Agway Agricultural Products (AAP) and the Country
Products Group (CPG). Total Agriculture net sales and revenues of $166,700 and
$471,300 for the three and nine months ended March 31, 1998, increased $10,000
(6%) for the three-month period and decreased $2,600 (1%) for the nine-month
period as compared to the same periods in the prior year. The Agriculture
operating loss of $1,300 and $17,300 for the three and nine months ended March
31, 1998, decreased $500 (28%) and $800 (5%), respectively, as compared to the
same periods in the prior year.
AAP net sales and revenues of $117,800 and $338,000 for the three and nine
months ended March 31, 1998, decreased $1,100 (1%) and $20,100 (6%),
respectively, as compared to the same periods in the prior year. AAP sales
decreases for the three- and nine-month periods ended March 31, 1998, resulted
principally from the feed and crops businesses. Despite an increase in total
feed volume in both the three- and nine-month periods, a decrease in the pricing
level of feed products over the past nine months has decreased total feed sales
in both periods as compared to the same periods in the prior year. The crop
business declined in the three- and nine-month periods ending March 31, 1998, as
compared to the prior year, largely due to a similar decrease in pricing level
of products as in feed and to sales of crop-related services that typically
occur in the fourth quarter actually occurring in the first quarter of the prior
fiscal year, resulting in higher than normal sales in the first quarter of the
prior year.
11
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
Agriculture (continued)
- -----------------------
CPG net sales and revenues of $48,900 and $133,300 for the three and nine months
ended March 31, 1998, increased $11,100 (29%) and $17,500 (15%), respectively,
as compared to the same periods in the prior year. The increase in CPG sales for
the three- and nine-month periods ended March 31, 1998, resulted from strong
sales growth in its produce operations of $10,100 (52%) and $26,100 (48%),
respectively. This growth in produce resulted substantially from an acquisition
of a business and the formation of a new operation during the first quarter of
1998 and stronger sales over the first nine months of the year than in the prior
year. Additionally, an increasing customer base at the seed operation has
increased sales during the three- and nine-month periods by $3,800 and $6,000,
respectively, as compared to the same periods in the prior year. Sales growth at
CPG for the nine-month period has been partially offset by the elimination of
sales from the pet food business ($11,500) which was sold in the prior year.
AAP's operating loss of $3,600 and $23,900 for the three and nine months ended
March 31, 1998, increased $100 (3%) and $2,500 (12%), respectively, as compared
to the same periods in the prior year. The increased loss for the three- and
nine-month periods, as compared to the prior year, resulted from (1) increased
losses in Enterprise operations of $2,600 and $6,300, respectively, due
principally to declining feed and crop sales noted above and (2) increased net
support costs of $4,200 and $600, respectively. These increased losses were
partially offset by improved operating results in Direct Marketing of $6,700 and
$4,500, respectively. Increased net support costs are due to reduced patronage
income, due principally to lower CF Industries earnings, reflected in the third
quarter, offset by slightly reduced selling and administrative expense and a
charge incurred in the first quarter last year for the adoption of a new
accounting policy regarding the improvement of long-lived assets. The
improvements in Direct Marketing are principally in gross margins due to lower
unfavorable experience with exchange-traded futures and improvements in gross
margin in the seed business as the result of earlier shipments than in the prior
year.
The CPG operating margin of $2,300 and $6,600 for the three and nine months
ended March 31, 1998, increased $600 (33%) and $3,300 (100%), respectively, as
compared to the same periods in the prior year. The operating margin improvement
in the third quarter is principally from improved margins in the seed operation
($500). The operating improvements in the nine-month period resulted from
improved produce operation results ($1,400), improved seed operation results
($900) and the fact that prior year earnings absorbed a net $1,000 charge from
the sale of CPG's pet food business.
Retail
- ------
Total net sales and revenues of $47,900 and $161,000 for the three and nine
months ended March 31, 1998, decreased $2,400 (5%) and $11,400 (7%),
respectively, as compared to the same periods in the prior year. The decrease in
sales and revenues for the three- and nine-month periods ended March 31, 1998,
were principally the result of planned reduction of the power equipment business
at most retail locations ($1,000 and $5,600, respectively) and the
discontinuation of the frozen food product line ($800 and $3,700, respectively).
Additionally, for the threeand nine-month periods, sales associated with bag
feed and fertilizers and farm supplies declined ($700 and $3,800, respectively).
These sales declines were partially offset by overall improvements in the three-
and nine-month periods ended March 31, 1998, as compared to the prior year, in
the seasonal, lawn and garden and nursery-related businesses ($1,200 and $3,300,
respectively) principally due to new nursery acquisitions and favorable early
spring weather.
Retail's operating loss of $4,600 and $8,100 for the three and nine months ended
March 31, 1998, increased $1,300 (38%) and $4,100 (105%), respectively, as
compared to the same periods in the prior year. Gross margin dollars have
declined $500 in the third quarter and $1,100 for the nine-month period due to
planned product line reductions. However, gross margin percentage has improved
1% overall for the nine-month period. Total expenses have increased $400 in the
third quarter and $1,800 over the nine-month period as compared to the prior
year. This increase is substantially due to increased costs from new business
locations. In addition, other revenues, principally from the sale of surplus
properties, declined $300 and $1,000 for the three- and nine-month periods ended
March 31, 1998, respectively, as compared to the same periods in the prior year.
12
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
Energy
- ------
Net sales and revenues of $155,600 and $410,500 for the three and nine months
ended March 31, 1998, decreased $56,700 (27%) and $77,400 (16%), respectively,
as compared to the same periods in the prior year. Reduced commodity cost for
petroleum products in the current year allowed for reduced selling price to
customers. The lower selling prices decreased sales by $17,700 and $40,100 for
the three- and nine-month periods ended March 31, 1998, respectively.
Additionally, the sales decreases were due to a reduction in heating oil sales,
which were down $40,000 and $41,000, respectively, for the three- and nine-month
periods as compared to the same periods in the prior year. The heating oil
decline was in residential sales, due principally from warmer weather than in
the same period in the prior year, and in wholesale sales, which declined due to
lower available product to sell to the market as compared to the prior year.
Energy operating margin of $15,500 and $17,900 for the three and nine months
ended March 31, 1998, decreased $4,400 (22%) and $2,300 (12%), respectively, as
compared to the same periods in the prior year. The lower sales dollars, as
noted above, partially offset by stronger gross margin rates, reduced overall
gross margin dollars on all products by $5,100 for the three months and $3,400
for the nine months ended March 31, 1998, as compared to the same periods in the
prior year. Operating expenses decreased for the third quarter by $800 and $600
for the nine-month period ended March 31, 1998, as compared to the same periods
in the prior year.
Leasing
- -------
Telmark total revenues of $16,200 and $48,300 for the three and nine months
ended March 31, 1998, increased $1,900 (13%) and $6,600 (16%), respectively, as
compared to the same periods in the prior year. The Company's net investment in
leases and notes increased by $32,000 (7%) to $501,800 for the nine-month period
ended March 31, 1998, as compared to an increase of $41,400 (11%) to $435,800
for the corresponding period in the prior year. Increased revenues were the
result of a higher average net investment in the three- and nine-month periods
ended March 31, 1998.
Operating margin of $4,600 and $11,200 for the three and nine months ended March
31, 1998, increased $800 (22%) and $1,400 (15%), respectively, as compared to
the same periods in the prior year. Total revenue increases noted above were
partially offset by an increase in total expenses of $1,100 (10%) and $5,100
(16%) for the threeand nine-month periods ended March 31, 1998, as compared to
the same periods in the prior year. The larger amount of debt required to
finance the increased net investment during the three- and nine-month periods,
as compared to the same periods in the prior year, has increased interest
expense $700 (14%) and $2,900 (17%), respectively, and increased selling,
general and administrative expenses $700 (20%) and $2,400 (25%), respectively,
in the three- and nine-month periods ended March 31, 1998.
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 of $6,700 and $20,500 for the three and nine months ended
March 31, 1998, decreased $200 (3%) for the three months and increased $600 (3%)
for the nine months as compared to the same periods in the prior year. The
decrease for the three-month period is the result of lower investment income
($100) and lower agency income ($100). The increase for the nine-month period is
the result of a combination of higher direct earned premiums and decreased
reinsurance premium costs ($900) which were partially offset by lower investment
income ($100) and lower agency income ($200).
Operating loss of $100 for the three months ended March 31, 1998, declined $200
as compared to an operating margin of $100 in the same period in the prior year.
Operating margin of $100 for the nine months ended March 31, 1998, decreased
$300 as compared to the same period in the prior year. The decreases were the
result of increased losses and expenses and lower investment income which were
partially offset by increased direct earned premiums, as noted above.
13
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash Flows from Operating Activities
Cash generated from operations and external borrowings continues to be the
Company's major ongoing source of funds. Net cash flows provided by operating
activities of $27,400 for the nine months ended March 31, 1998, were slightly
lower than the $28,700 generated over the same period in the prior year. Cash
provided from earnings (net margin (loss) adjusted for non-cash items) decreased
$17,100, and cash provided by working capital changes increased $15,900 in the
nine-month period ended March 31, 1998, 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
$55,800 for the nine months ended March 31, 1998, as compared to $45,800 for the
nine months ended March 31, 1997, representing an increase in net cash outflow
of $10,000. With reduced divestiture activity, principally at CPG, proceeds of
$7,200 from businesses and fixed assets sold during the nine months ended March
31, 1998, were $21,000 less than the cash generated from the same activity
during the corresponding period in the prior year. Acquisition of businesses in
the current year has resulted in cash paid for businesses and fixed assets being
$1,700 higher in the nine months ended March 31, 1998, as compared to the same
period in the prior year. The foregoing were offset by several items, the
largest of which was activity in investments in related cooperatives which
required cash of $3,000 in the nine months ended March 31, 1998, as opposed to
requiring cash of $12,100 in the nine months ended March 31, 1997, a comparative
cash increase of $9,100.
Cash Flows from Financing Activities
Cash of $9,400 used to redeem stock represents an increase of $7,600 over the
corresponding period in the prior year. Effective July 1, 1997, restriction on
the redemption of $16,700 of preferred stock expired, of which $7,100 has been
redeemed as of March 31, 1998. Net borrowings in the first nine months of 1998,
as explained in detail below, increased $37,800 as compared to the comparable
period in the prior year due primarily to the need to finance the above stock
redemptions and investing activities not financed through operating activities.
The Company borrows money to finance its operations and the operations of all
its continuing businesses and subsidiaries, except Telmark and Agway Insurance
Company, through Agway Financial Corporation (AFC). External sources of
short-term financing for the Company and all its other continuing operations
include revolving credit lines, letters of credit, and commercial paper
programs. Telmark and Agway Insurance Company finance themselves through
operations or direct borrowing arrangements. Telmark 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, 1998:
<TABLE>
<CAPTION>
Agway & AFC
(excluding
Source of debt Telmark) Telmark Total
-------------- ----------- ----------- ------------
<S> <C> <C> <C>
Banks - due 4/98 to 2/01, interest at a weighted average
rate of 7.2% with a range of 6.0% - 8.4%.............................. $ 2,100 $ 127,000 $ 129,100
Insurance companies - due 5/98 to 4/04, interest at a weighted
average rate of 7.2% with a range of 5.9% - 8.9%...................... 0 167,005 167,005
Capital leases and other - due 1998 to 2007, interest at a
weighted average rate of 9.3% with a range of 6% to 12%............... 13,788 36 13,824
----------- ----------- ------------
Long-term debt...................................................... 15,888 294,041 309,929
Subordinated money market certificates - due 10/98 to 10/08, interest
at a weighted average rate of 8.2% with a range of 4.5% - 9.5%........ 402,347 0 402,347
Subordinated debentures - due 7/99 to 7/03, interest at a weighted
average rate of 8.1% with a range of 6.0% to 8.5%..................... 20,995 37,862 58,857
----------- ----------- ------------
Total debt.......................................................... $ 439,230 $ 331,903 $ 771,133
=========== =========== ============
</TABLE>
For a complete description of the Company's credit facilities available at March
31, 1998, see Footnote 3 to the condensed consolidated financial statements.
14
<PAGE>
PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
Item 1. Legal Proceedings
- --------------------------
As previously reported in its Form 10-K, the Company submitted drafts of its
risk characterization and remedial action plan reports on certain real property
located in Acton, Massachusetts, for public comment in July 1997. The Company
submitted final versions of those reports in April 1998 and anticipates
submitting a draft of its remedy implementation plan report for public comment
in June 1998. The Company currently has accrued its best estimate relative to
the cost of any additional assessment, containment, removal or remediation
actions regarding the property. However, it is reasonably possible that the
results of ongoing and/or future environmental studies or other factors could
alter this estimate and require the recording of additional liabilities. The
extent or amount of such events cannot be estimated at this time. However, Agway
believes that its past experience provides a reasonable basis for its estimates
recorded for this matter.
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, 1998.
15
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AGWAY INC.
---------------------------------------
(Registrant)
Date May 1, 1998 /s/ PETER J. O'NEILL
-------------------------- ----------------------------------------
Peter J. O'Neill
Senior Vice President,
Finance & Control,
Treasurer and Controller
(Principal Financial Officer and
Chief Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 0
<SECURITIES> 36988
<RECEIVABLES> 164335
<ALLOWANCES> 9515
<INVENTORY> 227168
<CURRENT-ASSETS> 597685
<PP&E> 512226
<DEPRECIATION> 300182
<TOTAL-ASSETS> 1426005
<CURRENT-LIABILITIES> 562429
<BONDS> 585653
0
48243
<COMMON> 2586
<OTHER-SE> 138104
<TOTAL-LIABILITY-AND-EQUITY> 1426005
<SALES> 1004339
<TOTAL-REVENUES> 1073139
<CGS> 937983
<TOTAL-COSTS> 970625
<OTHER-EXPENSES> 96345
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22835
<INCOME-PRETAX> (6389)
<INCOME-TAX> 847
<INCOME-CONTINUING> (7236)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 28956
<NET-INCOME> 21752
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
