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, 1997
-----------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- --------------------
Commission file number 2-22791
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AGWAY INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 15-0277720
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
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(Address of principal executive offices) (Zip Code)
315-449-6431
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 6, 1998
- ------------------------- -------------------------------
Membership Common Stock, 103,684 shares
$25 par value per share
1
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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PART I. FINANCIAL INFORMATION
- ------ ---------------------
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1997 and June 30, 1997.................. 3
Condensed Consolidated Statements of Operations and Retained Margin for the three months
and six months ended December 31, 1997 and December 31, 1996..................................... 4
Condensed Consolidated Cash Flow Statements for the six months ended December 31, 1997
and December 31, 1996............................................................................ 5
Notes to Condensed Consolidated Financial Statements............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 10
PART II. OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings....................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders..................................... 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>
December 31, June 30,
1997 1997
------------ -----------
ASSETS (Unaudited)
- ------
<S> <C> <C>
Current Assets:
Trade accounts receivable (including notes receivable of
$33,339 and $44,074, respectively), less allowance for
doubtful accounts of $8,179 and $7,864, respectively................... $ 168,457 $ 209,868
Leases receivable, less unearned income of $56,849 and
$58,225, respectively.................................................. 128,106 124,552
Advances and other receivables............................................. 41,165 37,918
Inventories:
Raw materials.......................................................... 7,908 9,396
Finished goods......................................................... 159,684 134,336
Goods in transit and supplies.......................................... 9,149 6,908
------------- -----------
Total inventories................................................. 176,741 150,640
Prepaid expenses........................................................... 46,682 52,714
------------- -----------
Total current assets................................................... 561,151 575,692
Marketable securities available for sale........................................ 36,448 35,586
Other security investments...................................................... 48,290 49,668
Properties and equipment, net................................................... 213,792 215,095
Long-term leases receivable, less unearned income of $104,176 and...............
$94,366, respectively...................................................... 335,054 320,809
Net pension asset............................................................... 158,758 100,052
Other assets .................................................................. 13,312 11,355
------------- -----------
Total assets........................................................... $ 1,366,805 $ 1,308,257
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Notes payable.............................................................. $ 96,280 $ 59,200
Current installments of long-term debt..................................... 104,187 113,720
Current installments of subordinated debt.................................. 86,080 62,999
Accounts payable........................................................... 109,217 121,063
Other current liabilities.................................................. 112,026 113,927
------------- -----------
Total current liabilities.............................................. 507,790 470,909
Long-term debt.................................................................. 229,572 215,975
Subordinated debt............................................................... 355,060 375,128
Other liabilities............................................................... 88,003 68,494
------------- -----------
Total liabilities.......................................................... 1,180,425 1,130,506
Shareholders' equity:
Preferred stock, net.......................................................... 49,832 57,541
Common stock, net............................................................. 2,599 2,639
Retained margin............................................................... 133,949 117,571
------------- -----------
Total shareholders' equity................................................. 186,380 177,751
Commitments and contingencies...................................................
Total liabilities and shareholders' equity............................. $ 1,366,805 $ 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 Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales and revenues from:
Product sales (including
excise taxes)........................ $ 333,724 $ 355,559 $ 648,682 $ 684,982
Leasing operations..................... 16,346 14,142 32,108 27,459
Insurance operations................... 6,966 6,735 13,823 13,049
------------- ------------- ------------- -------------
Total net sales and revenues....... 357,036 376,436 694,613 725,490
Cost and expenses from:
Products and plant operations.......... 316,094 337,838 616,002 653,489
Leasing operations..................... 7,098 5,981 14,147 11,937
Insurance operations................... 4,467 4,035 8,667 7,987
Selling, general and administrative
activities........................... 31,038 30,623 62,410 63,552
------------- -------------- ------------- -------------
Total costs and expenses........... 358,697 378,477 701,226 736,965
Operating margin (loss)..................... (1,661) (2,041) (6,613) (11,475)
Interest expense, net....................... (7,136) (8,030) (14,011) (14,589)
Other income, net........................... 2,629 3,135 4,754 4,108
------------- ------------- ------------- -------------
Loss from operations before income taxes.... (6,168) (6,936) (15,870) (21,956)
Income tax benefit (expense)................ 2,506 292 4,584 4,457
------------- ------------- ------------- -------------
Loss from operations before cumulative
effect of an accounting change......... (3,662) (6,644) (11,286) (17,499)
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)........................... $ (3,662) $ (6,644) $ 17,670 $ (17,499)
Retained Margin:
Balance at beginning of period......... 139,372 99,940 117,571 110,714
Dividends.............................. (1,791) (2,087) (1,791) (2,085)
Adjustment to unrealized gains (losses)
on available-for-sale securities,
net of tax........................... 30 381 499 460
------------- -------------- ------------- ------------
Balance at end of period.................... $ 133,949 $ 91,590 $ 133,949 $ 91,590
============== ============== ============= ============
</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,
----------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Net cash flows used in operating activities.................................. $ (461) $ (21,093)
Cash flows provided by (used in) investing activities:
Purchases of property, plant and equipment.............................. (17,473) (8,306)
Proceeds from disposal of property, plant and equipment................. 5,881 5,609
Proceeds from disposal of businesses.................................... 0 13,777
Cash paid for acquisitions.............................................. (1,458) 0
Leases originated....................................................... (116,557) (104,701)
Leases repaid........................................................... 95,262 81,674
Proceeds from sale of marketable securities............................. 8,427 19,558
Purchases of marketable securities...................................... (8,790) (20,662)
Net purchase of investments in related cooperatives..................... 1,378 (2,075)
------------- --------------
Net cash flows used in investing activities.................................. (33,330) (15,126)
Cash flows provided by (used in) financing activities:
Net change in short-term borrowings..................................... 36,690 32,400
Proceeds from long-term debt............................................ 60,225 27,850
Repayment of long-term debt............................................. (55,768) (29,331)
Proceeds from sale of subordinated debt................................. 74,946 34,798
Maturity and redemption of subordinated debt............................ (71,932) (25,101)
Payments on capital leases.............................................. (471) (2,173)
Redemption of stock, net ............................................... (7,750) (14)
Cash dividends paid..................................................... (2,149) (2,210)
------------- -------------
Net cash flows provided by financing activities.............................. 33,791 36,219
------------- -------------
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, 1997, are not necessarily indicative of the results that may
be expected for the year ending June 30, 1998, due to the seasonal nature
of certain major segments of the Company's business. For further
information, refer to the consolidated financial statements and notes
thereto included in the annual report on Form 10-K for the year ended June
30, 1997.
Reclassifications
Certain reclassifications have been made to conform prior year financial
statements with the current year presentation.
2. AGWAY FINANCIAL CORPORATION
---------------------------
Agway Financial Corporation (AFC) is a wholly owned subsidiary of the
Company whose principal business activity is securing financing through
bank borrowings and issuance of corporate debt instruments to provide funds
for the Company and AFC's sole wholly owned subsidiary, Agway Holdings Inc.
(AHI), and AHI's subsidiaries, for general corporate purposes. The payment
of principal and interest on this debt is guaranteed by the Company. This
guarantee is full and unconditional, and joint and several. In an exemptive
relief granted pursuant to a "no action letter" issued by the staff of the
Securities and Exchange Commission, AFC, as a separate company, is not
required to file periodic reports with respect to these debt securities.
However, as required by the 1934 Act, the summarized financial information
concerning AFC and consolidated subsidiaries is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------- -------------------------------
1997 1996 1997 1996
-------------- ------------- -------------- -------------
<S> <C> <C>
Net sales and revenues......... $ 265,839 $ 278,674 $ 498,375 $ 514,212
Operating margin............... 10,896 5,661 13,423 4,038
Net loss....................... (2,280) (454) (9,651) (3,270)
December 31, June 30,
1997 1997
-------------- -------------
Current assets.................................................. $ 529,188 $ 530,509
Properties and equipment, net................................... 151,885 154,030
Noncurrent assets............................................... 425,449 409,670
-------------- -------------
Total assets.................................................... $ 1,106,522 $ 1,094,209
============== =============
Current liabilities............................................. $ 296,377 $ 270,735
Long-term debt.................................................. 224,919 209,296
Subordinated debt............................................... 355,060 375,128
Noncurrent liabilities.......................................... 17,772 17,813
Shareholder's equity............................................ 212,394 221,237
-------------- -------------
Total liabilities and shareholder's equity...................... $ 1,106,522 $ 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 December 31, 1997, the Company had certain facilities available with
banking institutions whereby lenders have agreed to provide funds up to
$357,000 to separately financed units of the Company as follows: AFC -
$100,000 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
The $100,000 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, 1997, under
AFC's $100,000 line of credit and $50,000 commercial paper were $20,600 and
$50,000, respectively, as compared to $0 and $34,300, respectively, at June
30, 1997. AFC's current line of credit facility was renewed in January 1998
and continues through December 31, 1998. It was renewed at $50,000 but
provides an increase to $75,000, which becomes available on October 1,
1998, to assist in paying maturing subordinated debt. In addition,
effective January 1, 1998, the Company has a $25,000 revolving line of
credit available through January 1, 2000. AFC's current commercial paper
program continues through December 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 December 31, 1997, $338,800 is
redeemable in whole or in part at the principal amount plus accrued
interest, prior to maturity dates, at the option of the Company. The
foregoing debt bears interest payable semi-annually on January l and July 1
of each year. The money market certificates' interest rate is at the
greater of the 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 10/98-10/08 bear a weighted average interest rate
of 8.1%, while subordinated debentures due 7/99-7/03 bear a weighted
average interest rate of 7.9%.
Telmark
As of December 31, 1997, Telmark had two separate credit facilities
available from banks which allow Telmark to borrow up to an aggregate of
$257,000. An uncommitted short-term line of credit agreement permits
Telmark to borrow up to $7,000 on an unsecured basis with interest paid
upon maturity. The line bears interest at money market variable rates. A
committed $250,000 revolving term loan facility permits Telmark to draw
short-term funds bearing interest at money market rates or draw long-term
debt at rates appropriate for the term of the note drawn. The $7,000 line
was increased from $4,000 on August 19, 1997, and expires December 31,
1998, and the $250,000 line was increased from $200,000 on September 22,
1997, and expires on February 1, 1999. The total amount outstanding as of
December 31, 1997, under the short-term line of credit was $7,000 and under
the revolving term loan facility was $166,700, of which $148,000 is
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 December 31, 1997, Telmark had balances outstanding on unsecured senior
notes from private placements totaling $151,600 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 outstanding of lease- backed notes payable to insurance
companies totaling $20,200 and $24,800 at December 31, 1997, and June 30,
1997, respectively. Interest on these notes is 6.58% and 7.01%. The notes
are collateralized by leases, sold by Telmark 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 December 31, 1997, as
compared to June 30, 1997, is as follows:
<TABLE>
<CAPTION>
AFC
Agway (excluding Telmark) Telmark Total
-------------------- -------------------- ---------------------- --------------------
12/97 6/97 12/97 6/97 12/97 6/97 12/97 6/97
--------- --------- --------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt........ $ 9,259 $ 9,042 $ 4,629 $ 6,071 $ 319,871 $ 314,582 $ 333,759 $ 329,695
Currently payable..... 4,607 2,363 2,661 3,158 96,919 108,199 104,187 113,720
--------- --------- --------- --------- ---------- --------- --------- ---------
Net long-term debt.... $ 4,652 $ 6,679 $ 1,968 $ 2,913 $ 222,952 $ 206,383 $ 229,572 $ 215,975
========= ========= ========= ========= ========== ========= ========= =========
Subordinated debt..... $ 0 $ 0 $ 403,878 $ 407,083 $ 37,262 $ 31,044 $ 441,140 $ 438,127
Currently payable..... 0 0 74,953 51,980 11,127 11,019 86,080 62,999
--------- --------- --------- --------- ---------- --------- --------- ---------
Net subordinated debt. $ 0 $ 0 $ 328,925 $ 355,103 $ 26,135 $ 20,025 $ 355,060 $ 375,128
========= ========= ================================ ========= ========= =========
</TABLE>
In conjunction with a private placement offering made by Telmark, the
Company ascertained that because Telmark was in technical violation of
certain covenants in its loan agreements, the Company was also in technical
violation of certain covenants in existing loan agreements specific to debt
issuances by subsidiaries and assets pledged as collateral. The Company
received all necessary permanent waivers in relation to these violations
prior to December 31, 1997.
4. RETIREMENT BENEFITS
-------------------
Pension Plan
Effective July 1, 1997, the Company changed its method of determining the
market-related value of its plan assets under Financial Accounting
Standards No. 87, "Accounting for Pensions," from a calculated value (one
that recognizes changes in fair market value of assets over a number of
years) to a fair market value method. The cumulative effect of this change
in accounting principle, net of tax, was $29,000. Had the Company remained
on its previous method of determining the market-related value, loss from
operations before income taxes for the three and six months ended December
31, 1997, would have been higher by approximately $2,400 and $4,800,
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 Six Months Ended
December 31, December 31,
------------------------------ -------------------------------
1997 1996 1997 1996
------------- ------------- ------------- --------------
LOSS FROM OPERATIONS BEFORE CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE:
<S> <C> <C> <C> <C>
As reported ......................... $ (3,662) $ (6,644) $ (11,286) $ (17,499)
Pro Forma............................. $ (3,662) $ (4,709) $ (11,286) $ (13,629)
NET MARGIN (LOSS):
As reported.......................... $ (3,662) $ (6,644) $ 17,670 $ (17,499)
Pro Forma............................. $ (3,662) $ (4,709) $ (11,286) $ (13,629)
</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 December 31, 1997, the Company had been designated as a PRP
under CERCLA or as a third party to the original PRPs in several Superfund
sites. The liability under CERCLA is joint and several, meaning that the
Company could be required to pay in excess of its pro rata share of
remediation costs. The Company 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.
The Internal Revenue Service performed a routine employment tax audit
during fiscal 1996 and proposed a payroll tax adjustment against the
Company. The Company appealed this assessment, and in December 1997, the
Internal Revenue Service concluded that the proposed payroll tax adjustment
would not be assessed. No further action needs to be taken by the Company,
and no loss has been or will be incurred regarding this issue.
During January of 1998, a severe ice storm affected many of the Company's
customers in the far northern parts of New York and portions of New
England. While the Company does not yet know the impact of that storm on
its customers in those regions, it is possible that, due to the number of
the Company's customers in those regions, such storm could adversely affect
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.
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 new "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
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 Six Months Ended
-------------------------------------- ---------------------------------------
$ Increase $ Increase
12/31/97 12/31/96 (Decrease) 12/31/97 12/31/96 (Decrease)
---------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales and Revenues
- ----------------------
Agriculture.................. $ 145,091 $ 146,280 $ (1,189) $ 305,512 $ 317,660 $ (12,148)
Retail....................... 54,722 57,103 (2,381) 115,654 121,602 (5,948)
Energy....................... 150,077 167,567 (17,490) 253,513 275,511 (21,998)
Leasing...................... 16,346 14,142 2,204 32,108 27,459 4,649
Insurance.................... 6,966 6,735 231 13,823 13,049 774
Other (a).................... (16,166) (15,391) (775) (25,997) (29,791) 3,794
---------- ---------- ----------- ---------- ----------- -----------
$ 357,036 $ 376,436 $ (19,400) $ 694,613 $ 725,490 $ (30,877)
========== ========== =========== ========== =========== ===========
Margin (Loss) from Operations
- -----------------------------
before Income Taxes
-------------------
Agriculture.................. $ (10,306) $ (7,578) $ (2,728) $ (15,952) $ (16,293) $ 341
Retail....................... (3,556) (1,251) (2,305) (3,439) (587) (2,852)
Energy....................... 7,296 5,172 2,124 2,436 273 2,163
Leasing...................... 3,505 3,257 248 6,663 6,042 621
Insurance.................... 162 316 (154) 168 252 (84)
Other (a).................... 3,867 1,178 2,689 8,265 2,946 5,319
---------- ---------- ----------- ---------- ----------- -----------
Operating margin (loss),
plus other income, net.... 968 1,094 (126) (1,859) (7,367) 5,508
Interest (expense), net of
interest income........... (7,136) (8,030) 894 (14,011) (14,589) 578
---------- ---------- ----------- ---------- ----------- -----------
$ (6,168) $ (6,936) $ 768 $ (15,870) $ (21,956) $ 6,086
=========== ========== =========== ========== =========== ===========
</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 $357,000 and $694,600 for the three and
six months ended December 31, 1997, decreased $19,400 (5%) and $30,900 (4%),
respectively, as compared to the same periods in the prior year. The decreases
were substantially the result of (1) a decline in sales in Agriculture and
Energy, principally due to a decrease in the pricing level of feed and petroleum
products; (2) planned changes in product mix in Retail sales; and (3) reduced
sales in the pet food business which was sold by the Country Products Group in
the prior year. These decreases in sales were partially offset by increased
leasing revenues, as compared to the prior year, primarily due to a higher
average net lease investment.
Net loss from operations before incomes taxes of $6,200 and $15,900 for the
three and six months ended December 31, 1997, improved $800 (11%) and $6,100
(28%), respectively, as compared to the same periods in the prior year. Growth
of the net pension asset recognized in the income statement was higher this year
by $3,400 in the three months and $6,800 in the six months ended December 31,
1997. Of these pension-related increases, $1,000 and $2,000 for the respective
periods were due to an increase in net pension assets to be recognized and
$2,400 and $4,800, respectively, were due to the change in accounting discussed
in the retirement benefits footnote.
The pension-related increase was offset by a decline in operating results of
$2,700 and $3,400 in the three-month and six-month periods, respectively, as
discussed by business segment below. The current year six-month results are
improved over last year due to the recognition last year of a $1,100 charge with
respect to the sale of the pet food business by Country Products Group (CPG) and
a $1,700 charge last year for the adoption of a new accounting pronouncement on
the impairment of long-lived assets.
Agriculture
- -----------
Agriculture consists of Agway Agricultural Products (AAP) and the Country
Products Group (CPG). Total Agriculture net sales and revenues of $145,100 and
$305,500 for the three and six months ended December 31, 1997, decreased $1,200
(1%) and $12,100 (4%), respectively, as compared to the same periods in the
prior year. The decrease in net sales and revenues for the three-month period,
as compared to the same period in the prior year, resulted from an $8,600 (8%)
decrease in AAP net sales and revenues partially offset by a $7,400 (21%)
increase in CPG net sales and revenues. The decline in net sales and revenues
for the six-month period ended December 31, 1997, as compared to the same period
in the prior year, resulted from an $18,600 (8%) decrease in AAP net sales and
revenues partially offset by a $6,500 (8%) increase in CPG total net sales and
revenues.
The decrease in AAP sales for the three- and six-month periods ended December
31, 1997, resulted principally from the feed and crops businesses. Despite an
increase in total feed volume in both the three- and six-month periods, a
decrease in the pricing level of feed products over the past six months has
decreased total feed sales as compared to the prior year. The crop business
sales also declined over the three- and six-month periods, as compared to the
prior year, largely due to sales of crop-related services that typically occur
in the spring actually occurring in the first half of the prior year.
The increase in CPG sales for the three- and six-month periods ended December
31, 1997, resulted from strong sales growth in its produce operations $7,800
(48%) and $16,000 (46%), respectively. This growth resulted substantially from
an acquisition of a business and the formation of a new operation during the
first quarter ($13,500). Additionally, strong seed operation sales have
increased sales during the first six months by $2,300 as compared to the same
period in the prior year. These improvements were partially offset from reduced
sales from the pet food business ($11,500) which was sold in 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)
- -----------------------
The Agriculture operating loss of $10,300 and $16,000 for the three and six
months ended December 31, 1997, increased $2,700 (36%) and decreased $300 (2%),
respectively, as compared to the same periods in the prior year. AAP's second
quarter loss of $12,900 was $3,700 (40%) larger than the loss in the same period
in the prior year, and the $20,300 six-month loss was $2,400 (13%) larger than
the loss in the first six months of the prior year. The increased losses in AAP
over the three- and six-month periods ended December 31, 1997, resulted from
declines in gross margins of $3,400 in each period resulting from higher
unfavorable experience with exchange-traded futures and option contracts as
compared to the same periods in the prior year. The loss for the six-month
period was reduced this year in comparison to the prior year due to a $1,500
charge incurred last year for the adoption of a new accounting pronouncement
regarding the impairment of long-lived assets.
The CPG operating margin of $2,600 and $4,300 for the three and six months ended
December 31, 1997, increased $1,000 (63%) and $2,800 (187%), respectively, as
compared to the same periods in the prior year. The operating margin improvement
in the second quarter is principally from improved margins in produce operations
($400) and sunflower operations ($500). The operating improvements in the
six-month period resulted from improved produce operation results ($1,300) and
the fact that prior year earnings absorbed a net $1,100 charge from the sale of
CPG's pet food business.
Retail
- ------
Total net sales and revenues of $54,700 and $115,700 for the three and six
months ended December 31, 1997, decreased $2,400 (4%) and $5,900 (5%),
respectively, as compared to the same periods in the prior year. The decrease in
sales and revenues for the three- and six-month periods ended December 31, 1997,
were principally the result of planned reduction of the power equipment business
at most retail locations ($1,800 and $4,400, respectively) and the
discontinuation of the frozen food product line ($2,000 and $2,800,
respectively). Additionally, for the six-month period, sales associated with bag
fertilizers and seeds declined ($1,200). These sales declines were partially
offset by improvements in the three- and six-month periods ended December 31,
1997, as compared to the prior year, in the seasonal, nursery and related
businesses ($1,500 and $2,900, respectively).
Retail's operating loss of $3,600 and $3,400 for the three and six months ended
December 31, 1997, increased $2,300 (177%) and $2,900 (580%), respectively, as
compared to the same periods in the prior year. Gross margin dollars have
declined $400 in the second quarter and $600 for the six-month period due to
planned product line reductions, while gross margin percentage has improved 2%
overall for both the three- and six-month periods. Total expenses have increased
$1,000 in the second quarter and $1,300 over the six-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 $800 and $600 for the three- and six-month periods
ended December 31, 1997, respectively, as compared to the same periods in the
prior year.
Energy
- ------
Net sales and revenues of $150,100 and $253,500 for the three and six months
ended December 31, 1997, decreased $17,500 (10%) and $22,000 (8%), respectively,
as compared to the same periods in the prior year. While heating oil unit volume
was down 1% and 2% for the three- and six-month periods, respectively, as
compared to the same periods in the prior year, due to warm weather, overall
unit volumes increased over 2% for the second quarter and are level for the
six-month period as compared to the prior year. Reduced cost for petroleum
products in the current year allowed for reduced selling price to customers. The
lower selling prices decreased sales by $20,600 and $22,400 and are principally
the reason for the decline in sales dollars for the three- and six-month periods
ended December 31, 1997, respectively.
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 (continued)
- ------------------
Energy operating margin of $7,300 and $2,400 for the three and six months ended
December 31, 1997, increased $2,100 (41%) and $2,100 (792%), respectively, over
both periods as compared to the same periods in the prior year. Despite the
lower sales dollars, gross margins on all products improved $1,400 for the three
months and $1,800 for the six months ended December 31, 1997, as compared to the
same periods in the prior year. Operating expenses decreased for the second
quarter by $400 and are in line with the six-month period ended December 31,
1997, as compared to the same periods in the prior year.
Leasing
- -------
Telmark total revenues of $16,300 and $32,100 for the three and six months ended
December 31, 1997, increased $2,200 (16%) and $4,600 (17%), respectively, as
compared to the same periods in the prior year. The Company's net investment in
leases and notes increased by $21,000 (5%) to $490,800 for the six-month period
ended December 31, 1997, as compared to an increase of $22,700 (6%) to $417,000
for the corresponding period in the prior year. Increased revenues were the
result of a higher average net investment in the three- and six-month periods
ended December 31, 1997.
Operating margin of $3,500 and $6,700 for the three and six months ended
December 31, 1997, increased $200 (78%) and $600 (10%), 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 $2,000 (18%) and
$4,000 (19%) for the threeand six-month periods ended December 31, 1997, 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 six-month
periods, as compared to the same periods in the prior year, has increased
interest expense $1,100 (19%) and $2,200 (19%), respectively, and increased
selling, general and administrative expenses $800 (25%) and $1,700 (28%),
respectively, in the threeand six-month periods ended December 31, 1997.
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 $7,000 and $13,800 for the three and six months ended
December 31, 1997, increased $200 (3%) and $800 (6%), respectively, as compared
to the same periods in the prior year. The increase for the three- and six-month
periods is the result of both higher direct earned premiums and decreased
reinsurance costs.
Operating margin of $200 for the three and six months ended December 31, 1997,
decreased $150 and $100, respectively, as compared to the same periods in the
prior year. The decrease was the result of losses and expenses offsetting
increased premiums.
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
Net cash flows used in operating activities for the six months ended December
31, 1997, were $500, representing an increase in cash flows of approximately
$21,000 as compared to the same period in the prior year. This increase is due
primarily to an increase in cash earnings (net margin (loss) adjusted for
non-cash items) of $15,000 over the prior year, in addition to a decreased use
of cash to fund working capital increases of $6,000.
Cash Flows from Investing Activities
Net cash flows used in the Company's investing activities totaled approximately
$33,300 for the six months ended December 31, 1997, as compared to $15,100 for
the six months ended December 31, 1996, representing an increase in cash outflow
of $18,200. With reduced divestiture activity, principally at CPG, proceeds of
$6,000 from businesses and fixed assets sold during the six months ended
December 31, 1997, were $13,500 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 $10,600 higher in the six months ended December 31, 1997, 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 generated cash of $1,400 in the six months ended December 31,
1997, as opposed to requiring cash of $2,100 in the six months ended December
31, 1996, a cash increase of $3,500.
Cash Flows from Financing Activities
Cash of $7,800 used to redeem stock represents an increase of $7,800 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 $5,900 has been
redeemed as of December 31, 1997. Net borrowings in the first six months of 1998
increased $41,500, 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, as explained in detail
below.
The Company borrows money to finance its operations and the operations of all
its continuing businesses and subsidiaries, except Telmark and Agway Insurance
Company, through Agway Financial Corporation (AFC). External sources of
short-term financing for the Company and all its other continuing operations
include revolving credit lines, letters of credit, and commercial paper
programs. Telmark and Agway Insurance Company finance themselves through
operations or direct borrowing arrangements. Each is financed with a combination
of short- and long-term credit facilities. In addition, Telmark has occasionally
sold blocks of its lease portfolio. In conjunction with a private placement
offering made by Telmark, the Company ascertained that because Telmark was in
technical violation of certain covenants in its loan agreements, the Company was
also in technical violation of certain covenants in existing loan agreements
specific to debt issuances by subsidiaries and assets pledged as collateral. The
Company received all necessary permanent waivers in relation to these violations
prior to December 31, 1997. Sources of longer-term financing include the
following as of December 31, 1997:
<TABLE>
<CAPTION>
Agway & AFC
(excluding
Source of debt Telmark) Telmark Total
-------------- ----------- ----------- ----------
<S> <C> <C> <C>
Banks - due 1/98 to 2/01, interest at a weighted average
rate of 7.2% with a range of 6.0% - 8.4%.............................. $ 2,275 $ 148,000 $ 150,275
Insurance companies - due 1/98 to 4/04, interest at a weighted
average rate of 7.2% with a range of 5.9% - 8.9%...................... 0 171,817 171,817
Capital leases and other - due 1998 to 2007, interest at a
weighted average rate of 9.3% with a range of 6% to 12%............... 11,613 54 11,667
----------- ----------- ----------
Long-term debt...................................................... 13,888 319,871 333,759
Subordinated money market certificates - due 10/98 to 10/08, interest
at a weighted average rate of 8.1% with a range of 4.5% - 9.5%........ 381,446 0 381,446
Subordinated debentures - due 7/99 to 7/03, interest at a weighted
average rate of 7.9% with a range of 6.0% to 8.5%..................... 22,432 37,262 59,694
----------- ----------- ----------
Total debt.......................................................... $ 417,766 $ 357,133 $ 774,899
=========== =========== ==========
</TABLE>
For a complete description of the Company's credit facilities available at
December 31, 1997, 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
had originally scheduled to finalize those reports by September 30, 1997, but
now anticipates their completion in the first half of calendar 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 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Company held its annual meeting of shareholders on November 12, 1997, at
which a quorum was present in person or by proxy. The following Directors were
elected to three-year terms through December 2000:
Nominee In Favor Opposed
---------------------- ---------------------- ---------------
Gary K. Van Slyke 47,678 14,423
Jeffrey B. Martin 47,678 14,423
Ralph H. Heffner 47,678 14,423
Edwin C. Whitehead 47,678 14,423
Samuel B. Minor 47,678 14,423
Eligible additional votes totaling 17,101 were not received at the time of the
annual meeting and are not included as either votes in favor or opposed.
Additionally, these 17,101 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
Gary K. Van Slyke - Vice Chairman of the Board and Director
Kevin B. Barrett - Director
Keith H. Carlisle - Director
D. Gilbert Couser - Director
Andrew J. Gilbert - Director
Peter D. Hanks - Director
Robert L. Marshman - Director
Jeffrey B. Martin - Director
Samuel F. Minor - Director
Carl D. Smith - Director
Thomas E. Smith - Director
Joel L. Wenger - Director
Edwin C. Whitehead - 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, 1997.
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 February 9, 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> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 36448
<RECEIVABLES> 176636
<ALLOWANCES> 8179
<INVENTORY> 176741
<CURRENT-ASSETS> 561151
<PP&E> 506159
<DEPRECIATION> 292367
<TOTAL-ASSETS> 1366805
<CURRENT-LIABILITIES> 507790
<BONDS> 584632
0
49832
<COMMON> 2599
<OTHER-SE> 133949
<TOTAL-LIABILITY-AND-EQUITY> 1366805
<SALES> 648682
<TOTAL-REVENUES> 694613
<CGS> 616002
<TOTAL-COSTS> 638816
<OTHER-EXPENSES> 62410
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14011
<INCOME-PRETAX> (15870)
<INCOME-TAX> (4584)
<INCOME-CONTINUING> (11286)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 28956
<NET-INCOME> 17670
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
