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, 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 FEBRUARY 5, 1999
- ------------------------ -------------------------------
Membership Common Stock, 101,169 shares
$25 par value per share
1
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
- ------ ---------------------
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1998 and June 30, 1998..................... 3
Condensed Consolidated Statements of Operations and Retained Earnings for the three months
and six months ended December 31, 1998 and December 31, 1997........................................ 4
Consolidated Statements of Comprehensive Income for the three months and six months ended
December 31, 1998 and December 31, 1997............................................................. 5
Condensed Consolidated Cash Flow Statements for the six months ended December 31, 1998
and December 31, 1997............................................................................... 6
Notes to Condensed Consolidated Financial Statements................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................... 12
PART II. OTHER INFORMATION
- ------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders........................................ 20
Item 6. Exhibits and Reports on Form 8-K........................................................... 20
SIGNATURES.......................................................................................... 21
</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,
1998 1998
------------ ------------
ASSETS (Unaudited)
- ------
<S> <C> <C>
Current Assets:
Trade accounts receivable (including notes receivable of $33,449 and
$49,394, respectively), less allowance for doubtful accounts of
$7,595 and $7,926, respectively........................................ $ 144,261 $ 203,637
Leases receivable, less unearned income of $63,561 and
$65,048, respectively.................................................. 130,689 137,493
Advances and other receivables............................................. 23,779 26,417
Inventories:
Raw materials.......................................................... 9,346 7,576
Finished goods......................................................... 142,264 139,861
Goods in transit and supplies.......................................... 5,995 1,777
------------ -------------
Total inventories................................................. 157,605 149,214
Prepaid expenses........................................................... 45,151 52,774
------------ -------------
Total current assets................................................... 501,485 569,535
Marketable securities available for sale........................................ 36,854 36,412
Other security investments...................................................... 52,050 51,761
Properties and equipment, net................................................... 214,396 213,795
Long-term leases receivable, less unearned income of $119,874 and
$110,721, respectively..................................................... 382,363 357,777
Net pension asset............................................................... 186,592 176,792
Other assets.................................................................... 17,346 12,159
------------ -------------
Total assets...................................................... $ 1,391,086 $ 1,418,231
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Notes payable.............................................................. $ 76,700 $ 65,100
Current installments of long-term debt..................................... 120,694 99,173
Current installments of subordinated debt.................................. 59,621 75,589
Accounts payable........................................................... 113,653 114,548
Other current liabilities.................................................. 106,788 114,452
------------ -------------
Total current liabilities.............................................. 477,456 468,862
Long-term debt.................................................................. 204,154 255,356
Subordinated debt............................................................... 411,378 386,607
Other liabilities............................................................... 104,788 100,568
------------ -------------
Total liabilities...................................................... 1,197,776 1,211,393
Commitments and contingencies...................................................
Shareholders' equity:
Preferred stock, net....................................................... 45,668 47,871
Common stock, net.......................................................... 2,532 2,571
Retained earnings.......................................................... 144,093 155,691
Accumulated other comprehensive income..................................... 1,017 705
------------ -------------
Total shareholders' equity............................................. 193,310 206,838
------------ -------------
Total liabilities and shareholders' equity........................ $ 1,391,086 $ 1,418,231
============ ==============
</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 EARNINGS
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ -----------------------------
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales and revenues from:
Product sales (including excise taxes) $ 292,398 $ 333,602 $ 571,359 $ 648,011
Leasing operations...................... 17,583 16,346 34,496 32,108
Insurance operations.................... 7,597 6,966 14,563 13,823
------------- ------------- ------------- ------------
Total net sales and revenues........ 317,578 356,914 620,418 693,942
Cost and expenses from:
Products and plant operations 273,611 315,759 538,630 614,926
Leasing operations...................... 7,188 7,098 14,554 14,147
Insurance operations.................... 4,824 4,467 9,457 8,667
Selling, general and administrative
activities............................ 38,473 31,251 73,882 62,815
------------- ------------- ------------- ------------
Total operating costs and expenses.. 324,096 358,575 636,523 700,555
Operating earnings (loss).................... (6,518) (1,661) (16,105) (6,613)
Interest expense, net........................ (8,214) (7,136) (15,737) (14,011)
Other income, net............................ 4,037 2,629 17,290 4,754
------------- ------------- ------------- ------------
Loss from operations before income taxes (10,695) (6,168) (14,552) (15,870)
Income tax benefit .......................... 3,359 2,506 4,646 4,584
------------- ------------- ------------- ------------
Loss from operations before cumulative
effect of an accounting change.......... (7,336) (3,662) (9,906) (11,286)
Cumulative effect on prior years of an
accounting change, net of tax
expense of $16,500...................... 0 0 0 28,956
------------- ------------- ------------- ------------
Net earnings (loss).......................... (7,336) (3,662) (9,906) 17,670
Retained earnings balance, beginning of
period.................................. 153,121 138,903 155,691 117,571
Dividends.................................... (1,692) (1,791) (1,692) (1,791)
------------- ------------- ------------- ------------
Retained earnings, end of period............. $ 144,093 $ 133,450 $ 144,093 $ 133,450
============= ============= ============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ -----------------------------
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net earnings (loss)......................... $ (7,336) $ (3,662) $ (9,906) $ 17,670
Other comprehensive income, net of tax:
Unrealized gains (losses) on
available-for-sale securities:
Unrealized holding gains (losses)
arising during period.............. (243) 53 297 500
Less: Reclassification adjustment
for gains (losses) included in
net income......................... 31 23 (15) 1
------------- ------------- ------------- ------------
Other comprehensive income.................. (274) 30 312 499
Comprehensive (loss) income................. $ (7,610) $ (3,632) $ (9,594) $ 18,169
============= ============= ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<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,
-----------------------------------
1998 1997
------------- --------------
<S> <C> <C>
Net cash flows provided by operating activities.............................. $ 37,664 $ 215
Cash flows provided by (used in) investing activities:
Purchases of property, plant and equipment.............................. (10,394) (17,473)
Proceeds from disposal of property, plant and equipment 1,544 5,881
Proceeds from sale of business.......................................... 14,150 0
Cash paid for acquisitions of businesses................................ (6,720) (1,458)
Leases originated....................................................... (119,754) (116,557)
Leases repaid........................................................... 98,362 95,262
Proceeds from sale of marketable securities............................. 2,693 8,427
Purchases of marketable securities...................................... (2,822) (8,790)
Net redemption of investments in cooperatives........................... (522) 1,378
------------- --------------
Net cash flows used in investing activities.................................. (23,463) (33,330)
Cash flows provided by (used in) financing activities:
Net change in short-term borrowings..................................... 11,380 36,690
Proceeds from long-term debt............................................ 11,880 60,225
Repayment of long-term debt............................................. (42,065) (56,444)
Proceeds from sale of subordinated debt................................. 102,680 74,946
Maturity and redemption of subordinated debt............................ (93,879) (71,932)
Payments on capital leases.............................................. (113) (471)
Redemption of stock, net ............................................... (2,243) (7,750)
Cash dividends paid..................................................... (1,841) (2,149)
------------- --------------
Net cash flows (used in) provided by financing activities.................... (14,201) 33,115
------------- --------------
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.
6
<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, 1998, are not necessarily indicative of the results that may
be expected for the year ending June 30, 1999, 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, 1998.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes
comprehensive accounting and reporting requirements for derivative
instruments and hedging activities. SFAS No. 133 requires companies to
record derivatives on the balance sheet as assets or liabilities, measured
at fair value. The accounting for gains or losses resulting from changes in
the values of those derivatives is dependent on the use of the derivative
and the type of risk being hedged. The statement is effective for all
quarters of fiscal years beginning after June 15, 1999. At the present
time, the Company has not fully analyzed the effect or timing of the
adoption of SFAS No. 133 on the Company's consolidated financial
statements.
Comprehensive Income
Effective July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This pronouncement requires the Company to report,
among other things, the effects of unrealized investment holding gains or
losses for available-for-sale securities as "comprehensive income" for all
periods presented.
Reclassifications
Certain reclassifications have been made to conform prior year financial
statements with the current year presentation.
7
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Thousands of Dollars)
2. AGWAY FINANCIAL CORPORATION
---------------------------
Agway Financial Corporation (AFC) is a wholly owned subsidiary of the
Company whose principal business activity is securing financing through
bank borrowings and issuance of corporate debt instruments to provide funds
for the Company, its subsidiaries, 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
December 31, December 31,
------------------------------- --------------------------------
1998 1997 1998 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales and revenues......... $ 235,094 $ 265,839 $ 444,928 $ 498,375
Operating earnings............. 3,326 10,896 3,192 13,423
Net loss....................... (7,373) (2,280) (19,805) (9,651)
<CAPTION>
December 31, June 30,
1998 1998
------------- --------------
<S> <C> <C>
Current assets.................................................... $ 463,482 $ 524,800
Properties and equipment, net..................................... 147,748 150,618
Noncurrent assets................................................. 475,604 451,303
------------- --------------
Total assets...................................................... $ 1,086,834 $ 1,126,721
============= ==============
Current liabilities............................................... $ 5,757 $ 15,173
Short-term notes payable.......................................... 76,700 65,100
Current portion of long-term debt................................. 178,557 170,836
Long-term debt.................................................... 192,807 248,128
Subordinated debt................................................. 411,378 386,607
Noncurrent liabilities............................................ 26,724 26,474
Shareholder's equity.............................................. 194,911 214,403
------------- -------------
Total liabilities and shareholder's equity........................ $ 1,086,834 $ 1,126,721
============= =============
</TABLE>
8
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
3. BORROWING ARRANGEMENTS
----------------------
As of December 31, 1998, the Company had certain facilities available with
banking institutions whereby lenders have agreed to provide funds up to
$377,000 to separately financed units of the Company as follows: AFC -
$75,000 and Telmark - $302,000. In addition, AFC may issue up to $50,000 of
commercial paper under the terms of a separate agreement, backed by a bank
standby letter of credit.
AFC
As of December 31, 1998, AFC had bank facilities available which included a
$50,000 short-term line of credit and a $25,000 long-term revolving line of
credit. 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"). The maximum
amounts which can be drawn under these AFC agreements are subject to a
limitation based on a specific calculation relating to 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. The line of credit and long-term
revolving line of credit additionally require the Company's investment in
bank stock as additional collateral. 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 earnings. There was $0 and $16,700 outstanding as of
December 31, 1998, under AFC's short-term line of credit and commercial
paper program, respectively, as compared to $0 and $30,100, respectively,
at June 30, 1998. AFC's short-term line of credit facility of $50,000
continues through December 31, 1999, but provides for an increase to
$75,000, which will become available on October 1, 1999, to assist in
refinancing maturing subordinated debt. AFC's current commercial paper
program continues through December 31, 1999. The Company's $25,000
long-term revolving line of credit is available through January 1, 2001. At
December 31, 1998, and at June 30, 1998, $0 was outstanding under that
revolving line of credit. AFC annually renews its line of credit and
commercial paper program in the quarter ended December 31. The Company
expects to continue to have appropriate and adequate financing to meet its
ongoing needs.
In addition, Agway, through AFC, offers subordinated money market
certificates (and previously offered subordinated debentures) to the
public. AFC's subordinated debt is not redeemable by the holder. However,
AFC does have a practice of repurchasing at face value, plus interest
accrued at the stated rate, certain subordinated debt whenever presented
for repurchase. 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 1999
and October 2013 bear a weighted average interest rate of 8.0%, while
subordinated debentures due between July 1999 and July 2003 bear a weighted
average interest rate of 8.1%.
9
<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
As of December 31, 1998, Telmark had credit facilities available from banks
which allow Telmark to borrow up to an aggregate of $302,000. Uncommitted
short-term line of credit agreements permit Telmark to borrow up to $52,000
on an uncollateralized basis with interest paid upon maturity. The lines
bear interest at money market variable rates. A committed $250,000
partially collateralized revolving line of credit permits Telmark to draw
short-term funds bearing interest at money market rates or draw long-term
debt at rates appropriate for the term of the note drawn. The total amount
outstanding as of December 31, 1998, under the short-term lines of credit
was $10,000 and under the revolving term loan facility was $178,000, of
which $128,000 was long-term. As of June 30, 1998, the total amount
outstanding was $20,000 under the short-term lines of credit and under the
revolving term loan facility was $165,000, of which $150,000 was long-term.
The uncommitted lines of credit expire within the next 12 months, and the
$250,000 revolving term loan facility is available through February 1,
2000.
Telmark had balances outstanding on uncollateralized senior notes from
private placements totaling $162,000 and $169,000 at December 31 and at
June 30, 1998, respectively. The principal bears interest at fixed rates
ranging from 6.5% to 8.88%. The payments commence March 1999 with final
installment due in May 2004. 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 several specific
financial covenants.
Telmark, through a wholly owned special purpose subsidiary, has two classes
of lease-backed notes outstanding totaling $14,700 and $17,700 at December
31, 1998, and June 30, 1998, 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. Final scheduled maturity of
these notes is December 2004.
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 is allowed to be reinvested.
Long-term and subordinated debt outstanding at December 31, 1998, as
compared to June 30, 1998, is as follows:
<TABLE>
<CAPTION>
AFC
Agway (Excluding Telmark) Telmark Total
--------------------- --------------------- -------------------- --------------------
12/98 6/98 12/98 6/98 12/98 6/98 12/98 6/98
--------- ---------- ---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt........ $ 13,105 $ 11,154 $ 7,030 $ 6,698 $ 304,713 $ 336,677 $ 324,848 $ 354,529
Currently payable..... 1,758 3,926 1,120 1,661 117,816 93,586 120,694 99,173
--------- ---------- ---------- --------- --------- --------- --------- ---------
Net long-term debt.... $ 11,347 $ 7,228 $ 5,910 $ 5,037 $ 186,897 $ 243,091 $ 204,154 $ 255,356
========= ========== ========== ========= ========= ========= ========= =========
Subordinated debt..... $ 0 $ 0 $ 434,558 $ 428,190 $ 36,441 $ 34,006 $ 470,999 $ 462,196
Currently payable..... 0 0 59,621 75,589 0 0 59,621 75,589
--------- ---------- ---------- --------- --------- --------- --------- ---------
Net subordinated debt. $ 0 $ 0 $ 374,937 $ 352,601 $ 36,441 $ 34,006 $ 411,378 $ 386,607
========= ========== ========== ========= ========= ========= ========= =========
</TABLE>
10
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
4. COMMITMENTS AND CONTINGENCIES
-----------------------------
Environmental
The Company is subject to a number of governmental regulations concerning
environmental matters, either directly or as a result of the operations of
its subsidiaries. The Company expects that it will be required to expend
funds to participate in the remediation of certain sites, including sites
where the Company has been designated by the Environmental Protection
Agency (EPA) as a potentially responsible party (PRP) under the
Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) and sites with underground fuel storage tanks, and will incur
other expenses associated with environmental compliance.
The Company continually monitors its operations with respect to potential
environmental issues, including changes in legally mandated standards and
remediation technologies. Agway's recorded liability reflects those
specific issues where remediation activities are currently deemed to be
probable and where the cost of remediation is estimable. Estimates of the
extent of the Company's degree of responsibility relating to a particular
site and the method and ultimate cost of remediation require a number of
assumptions for which the ultimate outcome may differ from current
estimates. At December 31, 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.
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)
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 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
12/31/98 12/31/97 (Decrease) 12/31/98 12/31/97 (Decrease)
---------- --------- ----------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES AND REVENUES
- ----------------------
Agriculture.................. $ 137,851 $ 144,736 $ (6,885) $ 284,127 $ 304,324 $ (20,197)
Energy....................... 118,576 151,306 (32,730) 204,427 254,845 (50,418)
Retail....................... 47,779 52,257 (4,478) 105,928 113,772 (7,844)
Leasing...................... 17,583 16,346 1,237 34,496 32,108 2,388
Insurance.................... 7,597 6,966 631 14,563 13,823 740
Other (a).................... (11,808) (14,698) 2,890 (23,123) (24,930) 1,807
---------- --------- ----------- ---------- -------- ------------
$ 317,578 $ 356,913 $ (39,335) $ 620,418 $ 693,942 $ (73,524)
========== ========= =========== ========== ========= ============
EARNINGS (LOSS) FROM
OPERATIONS BEFORE
INCOME TAXES
- ---------------------
Agriculture.................. $ (3,978) $ (10,236) $ 6,258 $ 534 $ (15,835) $ 16,369
Energy....................... 3,801 7,205 (3,404) (164) 2,376 (2,540)
Retail....................... (7,212) (3,626) (3,586) (9,581) (3,556) (6,025)
Leasing...................... 4,022 3,505 517 7,442 6,663 779
Insurance.................... (190) 162 (352) (181) 168 (349)
Other (a).................... 1,076 3,958 (2,882) 3,135 8,325 (5,190)
---------- --------- ----------- ---------- --------- -----------
Operating earnings (loss),
plus other income, net.... (2,481) 968 (3,449) 1,185 (1,859) 3,044
Interest (expense), net of
interest income........... (8,214) (7,136) (1,078) (15,737) (14,011) (1,726)
---------- --------- ----------- ---------- --------- -----------
$ (10,695) $ (6,168) $ (4,527) $ (14,552) $ (15,870) $ 1,318
========== ========= =========== ========== ========= ===========
</TABLE>
(a) Represents unallocated corporate items and intersegment eliminations.
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)
Numbers in the following narrative have been rounded to the nearest hundred
thousand.
CONSOLIDATED RESULTS
- --------------------
Consolidated net sales and revenues of $317,600 and $620,400 for the three and
six months ended December 31, 1998 decreased $39,300 (11%) and $73,500 (11%),
respectively, as compared to the same periods in the prior year. The decreases
were substantially the result of a decline in sales in Energy and Agriculture,
principally due to decreases in volume and pricing level of petroleum products
and the pricing level of agricultural feed products.
See the detailed business segment discussion below.
Net loss of $7,300 and $9,900 for the three- and six-month periods ended
December 31, 1998, is higher than the comparable periods last year by $3,700
(100%) and $27,600 (156%), respectively. Last year's results included $29,000 of
net income from the cumulative effect of an accounting change in pension
accounting. Net loss from operations before income taxes of $10,700 and $14,600
for the three and six months ended December 31, 1998, represents an increased
loss of $4,500 (73%) for the three-month period and a $1,300 (8%) reduced loss
for the six-month period ended December 31, 1998, as compared to the prior year.
The increase in net loss from operations before income taxes from the prior year
for the three-month period ended December 31, 1998, resulted from a combination
of items including: a decline in net business unit operating results of $600
(20%) (discussed by business segment below), a $1,700 (27%) reduction in the
level of pension income, a $1,100 (45%) increase in corporate costs and a $1,100
(15%) increase in net interest expense. The Company amended its defined benefit
pension plan effective July 1, 1998. The amendment increased the cost of
benefits, the plan benefit obligations and related interest costs which reduced
net pension income recognized by the Company in the first six months of 1999
compared to the same period in the prior year. The increase in total corporate
costs was a result of new systems costs and professional services associated
with several projects including year 2000 readiness. The increase in net
interest expense was due to a decline in interest revenue earned from receivable
balances combined with an increase in interest expense from a slightly higher
average interest rate on outstanding debt.
The reduction in the pre-tax operating loss for the six months ended December
31, 1998, as compared to the same period in the prior year, reflects a net
increase in earnings of $10,400 from the sale of a seed business offset by net
reduction in business unit operating results of $2,200 (see below), a decline in
pension credits of $3,400 (27%), increased corporate costs of $1,800 (37%) and
increased net interest expense of $1,700 (12%) during the six-month period as
compared to the same period in the prior year. The explanation for these
unfavorable non- operational variances in the six-month period as compared to
the prior year is the same as the explanation for the variances in the
three-month period note above.
AGRICULTURE
- -----------
Agriculture consists of Agway Agricultural Products (AAP) and the Country
Products Group (CPG). Total Agriculture net sales and revenues of $137,900 and
$284,100 for the three and six months ended December 31, 1998, decreased $6,900
(5%) and $20,200 (7%), respectively, as compared to the same periods in the
prior year. The Agriculture loss from operations of $4,000 for the second
quarter and earnings from operations of $500 for the six months ended December
31, 1998, are improvements of $6,300 (61%) and $16,300 (103%), respectively, as
compared to the same periods in the prior year.
13
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
AGRICULTURE (CONTINUED)
- ----------------------
AAP net sales and revenues of $96,800 and $205,100 for the three and six months
ended December 31, 1998, decreased $4,800 (5%) and $14,400 (7%), respectively,
as compared to the same periods in the prior year. The AAP sales decrease
results principally from the AAP Enterprise feed business as sales for the
three- and six-month periods ended December 31, 1998, decreased $6,300 and
$11,900, respectively, as compared to the same periods in the prior year. A
decline in the pricing levels of feed products in the global markets caused the
overall decrease in feed sales. The declining price level of feed products was
partially offset by volume improvements. AAP experienced an increase in feed
unit volume of 12% and 11% during the three and six months ended December
31,1998, respectively, as compared to the same periods in the prior year. The
increase in volume was from the acquisition of a new business during the first
quarter of this year combined with improved feed sales volume in the AAP
enterprises.
AAP Direct marketing has also been negatively impacted by the low market price
of agricultural commodities in feed and crop products. Sales in Direct marketing
improved $200 for the three months ended December 31, 1998 and declined $3,100
for the six months ended December 31, 1998, as compared to the same period in
the prior year. The three-month period reflects an improvement in commercial
vegetable seed sales, which more than offset the decline due to commodity
pricing during the quarter. AAP Enterprise agronomy sales for the three- and
six-month periods ended December 31, 1998 improved $2,100 and $2,200,
respectively, as compared to the same periods in the prior year. Favorable
weather conditions during the second quarter of this year allowed for increased
sales of crop-related products.
CPG net sales and revenues of $41,000 and $79,000 for the three and six months
ended December 31, 1998 decreased $2,100 (5%) and $5,800 (7%), respectively, as
compared to the same periods in the prior year. The decrease in both periods is
substantially due to the sale of a seed business in the first quarter of this
year. Sales were $3,900 and $5,400 lower in the three- and six-month periods as
compared to the same periods in the prior year due to the sold business. The
lost sales from sold business were partially offset by increased sales in
ongoing operations of $1,800 for the three months ended December 31, 1998, while
for the six-month period ended December 31, 1998, sales in ongoing operations
declined $400 as compared to the prior year. The improvement to ongoing
operations in the second quarter was principally due to CPG's sunflower
operations whose sales increased $1,900 over last year with the help of
increased capacity from a new processing plant that was not operational in the
first six months of the prior year. For the six-month period, sales in produce
declined due to lower market pricing, and sales in flour declined due to lower
market pricing and lower unit volume as compared to last year. These sales
declines were more than offset by the improvement in sunflower operations.
AAP's operating loss of $6,200 and $13,900 for the three- and six-month periods
ended December 31, 1998 improved $6,600 (52%) and $6,200 (31%), respectively, as
compared to the same periods in the prior year. The improvement in operating
results is substantially due to gross margin improvements of $7,500 (41%) and
$8,400 (20%) for the three- and six-month periods ended December 31, 1998,
respectively, as compared to the same periods in the prior year. The improvement
in gross margins over the prior year periods is principally due to lower
unfavorable experience with exchange-traded futures in the current year.
Additionally, gross margin improvement resulted from the combination of
increased feed volumes and improved pricing strategies during the second quarter
of the current year in comparison to the same period in the prior year. Also
contributing to the improvement in operating results in the current year for
both the three- and six-month period were higher other revenues of $1,300 which
included higher product rebates and a gain on asset sales. These improvements
were partially offset by increased expenses of $2,500 and $3,800 for the three
and six months ended December 31, 1998 mainly related to the increased cost of
distributing and selling a greater volume of feed products than in the same
periods in the prior year.
14
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
AGRICULTURE (CONTINUED)
- ----------------------
CPG's operating earnings plus other income of $2,200 and $14,400 for the three
and six months ended December 31, 1998, decreased $400 (14%) and increased
$10,100 (237%), respectively, as compared to the same periods in the prior year.
The decrease in the three-month period is due to an increase in costs associated
with developing and marketing new products, which is partially offset by a
$1,100 improvement in the ongoing operations, principally sunflower. The
increase in operating earnings during the six-month period as compared to the
prior year is attributable to the net improvement in results of $10,400 from the
sale of a seed business during the first quarter.
ENERGY
- ------
Net sales and revenues of $118,600 and $204,400 for the three and six months
ended December 31, 1998, decreased $32,700 (22%) and $50,400 (20%) as compared
to the same periods in the prior year. Energy commodity costs continue to be
lower than in the prior year, driving competitive prices lower during the first
half of this year. The lower selling prices decreased sales as compared to last
year by $19,500 during the second quarter and $34,400 for the six months ended
December 31, 1998. Sales decreases compared to the prior year were also due to
volume reductions, particularly in heating oil and propane. During the second
quarter and six months ended December 31, 1998, sales reductions due to volume
were $13,300 and $16,800, respectively. The volume reductions resulted
principally from warmer weather in the second quarter of this year as compared
to the second quarter of last year.
Energy earnings (loss) from operations of $3,800 and ($200) for the three and
six months ended December 31, 1998 represents an earnings decrease of $3,400
(47%) and $2,500 (105%), respectively, as compared to the same periods in the
prior year. The lower sales dollars decreased overall gross margins on all
products by $800 for the second quarter and $300 for the six months ended
December 31, 1998, as compared to the same periods in the prior year.
Distribution expense increases, principally labor costs, represent the majority
of the operating expense increase.
RETAIL
- ------
Total net sales and revenues of $47,800 and $105,900 for the three and six
months ended December 31, 1998, decreased $4,500 (9%) and $7,800 (7%),
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, 1998,
were substantially all in wholesale sales due principally to the conversion of
the historical Agway representative retail store system to a new system
including Agway franchisees and Agway wholesale dealer relationships. Many of
the wholesale dealers are presently purchasing non-Agway-branded products from
other sources of supply which they had in the prior year purchased from Agway. A
loss in sales volume due to this change is likely to continue at some level at
least through this fiscal year as this new system is implemented. This change in
buying pattern has changed the mix of products purchased, resulting in a lower
average gross margin.
Retail operating loss of $7,200 and $9,600 for the three and six months ended
December 31, 1998, increased $3,600 (99%) and $ 6,000 (169%), respectively, as
compared to the same periods in the prior year. The decline in operating results
was from reduced gross margins dollars which declined $1,800 (13%) and $3,500
(11%) and increased operating expenses of $2,200 (13%) and $2,700 (8%) for the
three- and six-month periods ended December 31, 1998 as compared to the same
periods in the prior year. The reduction in wholesale sales lowered margin
dollars while operating expense increased from new locations which were not
operational in the first six months of the prior year.
15
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
LEASING
- -------
Total revenue of $17,600 and $34,500 for the three and six months ended December
31, 1998 increased $1,200 (8%) and $2,400 (7%), respectively, as compared to the
same periods in the prior year. These increases are primarily due to higher
investment in leases partly offset by a lower income rate on new and replacement
leases. The company's average net investment in leases increased $49,300 (10%)
and $50,500 (10%) in the second quarter and six months ended December 31, 1998
as compared to the same periods in the prior year.
Earnings from operations of $4,000 and $7,400 for the second quarter and six
months ended December 31, 1998 increased $500 (15%) and $800 (12%),
respectively, as compared to the same periods in the prior year. Total revenue
increases noted above were partially offset by an increase in total of expenses
of $700 (6%) and $1,600 (6%) for the three and six-month periods ended December
31, 1998. These increases were substantially due to increased salaries and
payroll costs required managing the larger portfolio as compared to the prior
year.
INSURANCE
- ---------
Insurance net revenues of $7,600 and $14,600 for the three and six months ended
December 31, 1998, increased $600 (9%) and $700 (5%), respectively, as compared
to the same periods in the prior year. The increase for the three- and six-month
periods is the result of higher earned premiums of Agway Insurance Company.
The operating loss of $200 for the three and six months ended December 31, 1998
represents a decrease in earnings of $400 (217%) and $300 (208%), respectively,
as compared to the same periods in the prior year. Claims losses increased $300
and $800 in the second quarter and six months as compared to the prior year due
to the effects of a windstorm in Upstate New York. Increased expenses of $600
and $300 in the second quarter and six months as compared to the prior year were
both due to increased labor costs and lower ceded commission income. These
increased costs more than offset the higher earned premiums.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash generated from operations and external borrowings continues to be the
Company's major ongoing source of funds to finance capital improvements,
business acquisitions, shareholder dividends, and a growing lease portfolio at
Telmark. The following is a summary of net cash flows for the six months ended
December 31:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Net cash flows provided by (used in)
Operating activities............................................................. $ 37,664 $ 215
Investing activities............................................................. (23,463) (33,330)
Financing activities............................................................. (14,201) 33,115
------------- -------------
Net increase (decrease) in cash and equivalents..................................... $ 0 $ 0
============= =============
</TABLE>
Cash Flows Provided By Operating Activities
For the six months ended December 31, 1998, changes in working capital generated
cash of $38,600 compared to requiring cash of $5,100 for the same period in the
prior year. The biggest contributors to this were from a larger decline in
receivables and a smaller increase in inventories during this year (cash
provided) as compared to last year due principally to the lower prices of feed
and petroleum products in the current market environment.
Cash Flows Used In Investing Activities
The cash flows required for investing activities decreased in the first six
months of 1999 by $9,900 as compared to the first six months of the prior year.
The reason for the decrease in cash used during the first six months of 1999 as
compared to the prior year was from the generation of cash of $14,200 on the
sale of a seed business in the Agriculture segment, which was partially offset
by cash paid for the acquisition of businesses which increased $5,300 for the
six-month period in 1999 as compared to the prior year.
16
<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 (CONTINUED)
- ------------------------------------------
Cash Flows Provided By (Used In) Financing Activities
Financing activities for the six months ended December 31, 1998, created a net
cash use of $14,200 compared to cash provided of $33,100 for the same period in
the prior year. This $47,300 change in cash flows was substantially due to
$25,300 lower short-term borrowings in the first six months of this year as
compared to the same period in the prior year. The increased level of cash
generated from the sale of businesses in the first six months of 1999 and from
operations were the biggest reasons for this decline in borrowings.
The Company finances it operations and the operations of all its continuing
business and subsidiaries, except Telmark and Insurance, 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 a commercial paper program. Telmark and Insurance finance themselves
through operations or with a combination of short- and long-term credit
facilities.
Sources of longer-term financing include the following as of December 31, 1998:
<TABLE>
<CAPTION>
AFC
Agway (excluding
SOURCE OF DEBT Inc. Telmark) Telmark Total
- -------------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Banks - due 1/99 to 8/01, interest at a weighted average
rate of 6.9% with a range of 5.6% - 8.6%................... $ 0 $ 1,600 $ 128,000 $ 129,600
Insurance companies - due 1/99 to 5/04, interest at a
weighted average rate of 7.1% with a range of
6.5% - 8.9%................................................ 0 0 176,713 176,713
Capital leases and other - due 1999 to 2008, interest at a
weighted average rate of 9.3% with a range of 6% to 12%.... 13,105 5,430 0 18,535
---------- ------------ ------------ -----------
Long-term debt........................................... 13,105 7,030 304,713 324,848
Subordinated money market certificates - due 10/99
to 10/13, interest at a weighted average rate of 8.0% with
a range of 4.5% - 9.5%...................................... 0 414,510 0 414,510
Subordinated debentures - due 7/99 to 7/03, interest at a
weighted average rate of 8.1% with a range of 6.5%
to 8.5%.................................................... 0 20,048 36,441 56,489
---------- ------------ ------------ -----------
Total debt............................................... $ 13,105 $ 441,588 $ 341,154 $ 795,847
========== ============ ============ ============
</TABLE>
For a further description of the Company's credit facilities available at
December 31, 1998, see Footnote 3 to the condensed consolidated financial
statements.
OTHER MATTERS
- -------------
Year 2000
The approach of the year 2000 presents potential issues to all organizations who
use computers in the conduct of their business or depend on business partners
who use computers. To the extent computer use is date-sensitive, hardware or
software that recognizes the year by the last two digits may erroneously
recognize "00" as 1900 rather than 2000, which could result in errors or system
failures.
17
<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)
OTHER MATTERS (CONTINUED)
- ------------------------
Year 2000 (continued)
Agway utilizes a number of computers and computer software ("systems") in the
conduct of its business. Many systems are for specific business segments and
others have broader corporate-wide use. Systems are principally involved in the
flow of information rather than in the processing, manufacturing, and
distributing operations. Agway initiated its year 2000 compliance efforts in
January 1996. The initial focus of the Company's compliance efforts was on the
Company's information systems, including assessment of the issue, planning the
conversion to compliance, plan implementation, and testing. All critical systems
have been inventoried. Those systems determined to be at risk are prioritized,
and plans are in place to upgrade systems by remediation, replacements,
outsourcing, or doing without these systems. Through December 1998, the
assessment and planning phases, as well as certain portions of the
implementation, have been completed. The remaining portion of these plans are in
process of implementation, with a completion for specific systems scheduled
throughout this fiscal year in a manner that coordinates implementation around
the busy operational seasons for the respective business units and targets
completion in September 1999. Testing of systems is being conducted for each
system as implemented. The interaction of updated systems will be tested in the
enterprise-wide testing environment, which is planned to be ready and start
testing by March 1999.
In addition to the information technology systems review noted above, the
Company has also initiated processes to review and to modify, where appropriate,
other areas impacted by year 2000. These areas include, but are not limited to,
hardware and software associated with end-user computing functions, vendor and
supplier relationships, external interfaces to internal IT systems, remote
location access to IT systems, facility management, and certain non-information
technology issues, such as the extent to which embedded chips are used in
machinery and equipment used in business operations. The Company has completed
significant assessments in its major business operations, continues to assess
all of these areas, and has developed or, in some cases, is in the process of
developing the implementation plans to address the issues identified. The
Company anticipates that solutions to all year 2000 areas above will be
implemented and tested no later than December 1999.
The Company engaged an international consulting firm in March 1998 to evaluate
the Company's approach to year 2000 plans and implementation compared to
industry "best practices." Based on this review, the Company has increased the
involvement of higher-level management to assure a focus on the implementation
timetable and the development of specific contingency plans, and has initiated
development of a more comprehensive enterprise-wide testing environment to be in
place by February 1999. The business continuity plans are expected to be
completed by February 1999.
The year 2000 compliance issue is an uncertainty that is continuously being
monitored as the Company implements its plans. Based on the work performed to
date, the Company presently believes that the likelihood of the year 2000 having
a material effect on the results of operations, liquidity, or financial
condition is remote. Notwithstanding the foregoing, it is not presently clear
that all parts of the country's infrastructure, including such things as the
national banking systems, electrical power, transportation of goods,
communications, and governmental activities, will be fully functioning as the
year 2000 approaches. To the extent failure occurs in such activities, which are
outside the Company's control, it could affect the Company's sources of supply
and the Company's ability to service its customers with the same degree of
effectiveness with which they are served presently. The Company is identifying
elements of the infrastructure that are of greater significance to its
operations, obtaining information on an ongoing basis as to their expected year
2000 readiness, and determining alternative solutions if required.
18
<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)
OTHER MATTERS (CONTINUED)
- -------------------------
Year 2000 (continued)
The Company expects to incur significant internal staff costs as well as
consulting and other expenses related to its year 2000 efforts. Due to the level
of effort required to complete remediation for the year 2000, non-business
critical system enhancements have been deferred until the year 2000 efforts have
been completed. The conversion and testing of existing systems and the
replacement of systems are expected to cost the Company approximately $18,900,
of which $13,600 has been incurred and $5,300 is expected to be incurred from
December 1998 through December 1999. Approximately 75% of these estimated costs
represent replacement costs and will be capitalized. Additionally, the Company
estimates the costs to remediate all other areas may approximate $4,200, of
which $600 has been incurred and $3,600 is expected to be incurred from December
1998 through December 1999. However, these costs will vary as the Company
continues to assess and implement its plans or if the Company is required to
invoke contingency plans. The Company treats non-capital costs associated with
year 2000 as period costs and they are expensed when incurred.
19
<PAGE>
PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The Company held its annual meeting of shareholders on November 12, 1998, at
which a quorum was present in person or by proxy. The following Directors were
elected to three-year terms through December 2001:
Nominee In Favor Opposed
- -------------------------- ------------------- -------------------------
Keith H. Carlisle 55,491 2,132
D. Gilbert Couser 55,491 2,132
Andrew J. Gilbert 55,491 2,132
Thomas E. Smith 55,491 2,132
William W. Young 55,491 2,132
Eligible additional votes totaling 15,610 were not received at the time of the
annual meeting and are not included as either votes in favor or opposed.
Additionally, these 15,610 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 November 12, 1998, 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, 1998.
20
<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 8, 1999 /S/ PETER J. O'NEILL
-------------------- ---------------------------------------
Peter J. O'Neill
Senior Vice President,
Finance & Control,
(Principal Financial Officer and
Chief Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-30-1998
<CASH> 0
<SECURITIES> 36,854
<RECEIVABLES> 151,856
<ALLOWANCES> 7,595
<INVENTORY> 157,604
<CURRENT-ASSETS> 501,485
<PP&E> 522,941
<DEPRECIATION> 308,545
<TOTAL-ASSETS> 1,391,086
<CURRENT-LIABILITIES> 477,456
<BONDS> 615,532
0
45,668
<COMMON> 2,532
<OTHER-SE> 145,110
<TOTAL-LIABILITY-AND-EQUITY> 1,391,086
<SALES> 571,359
<TOTAL-REVENUES> 620,418
<CGS> 538,630
<TOTAL-COSTS> 562,641
<OTHER-EXPENSES> 73,882
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,737
<INCOME-PRETAX> (14,552)
<INCOME-TAX> (4,646)
<INCOME-CONTINUING> (9,906)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,906)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
