UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----
ACT OF 1934
For the quarterly period ended September 30, 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
-------
AGWAY INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 15-0277720
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
315-449-6431
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 10, 1999
- ------------------------ ---------------------------------
Membership Common Stock, 99,728 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 September 30, 1998 and June 30, 1998.................... 3
Condensed Consolidated Statements of Operations and Retained Earnings for the three months
ended September 30, 1998 and September 30, 1997..................................................... 4
Consolidated Statements of Comprehensive Income for the three months ended
September 30, 1998 and September 30, 1997........................................................... 5
Condensed Consolidated Cash Flow Statements for the three months ended September 30, 1998
and September 30, 1997.............................................................................. 6
Notes to Condensed Consolidated Financial Statements................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 19
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings.......................................................................... 21
Item 6. Exhibits and Reports on Form 8-K........................................................... 22
SIGNATURES.......................................................................................... 23
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Restated
September 30, June 30,
1998 1998
------------- --------------
ASSETS
- ------
<S> <C> <C>
Current Assets:
Trade accounts receivable (including notes receivable of $45,725 and
$49,394, respectively), less allowance for doubtful accounts of
$7,782 and $7,926, respectively........................................ $ 169,819 $ 203,637
Leases receivable, less unearned income of $61,350 and
$65,048, respectively.................................................. 153,066 137,493
Advances and other receivables............................................. 26,449 25,480
Inventories:
Raw materials.......................................................... 2,623 7,576
Finished goods......................................................... 128,352 139,861
Goods in transit and supplies.......................................... 3,319 1,777
------------- --------------
Total inventories................................................. 134,294 149,214
Prepaid expenses and other assets.......................................... 52,451 52,774
------------- --------------
Total current assets................................................... 536,079 568,598
Marketable securities available for sale........................................ 36,751 36,412
Other security investments...................................................... 51,189 51,761
Properties and equipment, net................................................... 214,683 213,795
Long-term leases receivable, less unearned income of $116,714 and
$110,721, respectively..................................................... 356,350 357,777
Net pension asset............................................................... 181,692 176,792
Other assets .................................................................. 19,457 12,159
------------- --------------
Total assets...................................................... $ 1,396,201 $ 1,417,294
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Notes payable.............................................................. $ 51,000 $ 65,100
Current installments of long-term debt..................................... 95,284 99,173
Current installments of subordinated debt.................................. 76,507 75,589
Accounts payable........................................................... 123,288 114,548
Other current liabilities.................................................. 105,787 114,311
------------ -------------
Total current liabilities.............................................. 451,866 468,721
Long-term debt.................................................................. 246,209 255,356
Subordinated debt............................................................... 395,404 386,607
Other liabilities............................................................... 103,130 100,381
------------ -------------
Total liabilities...................................................... 1,196,609 1,211,065
Commitments and contingencies...................................................
Shareholders' equity:
Preferred stock, net....................................................... 46,941 47,871
Common stock, net.......................................................... 2,548 2,571
Accumulated other comprehensive income..................................... 1,291 705
Retained earnings.......................................................... 148,812 155,082
------------ -------------
Total shareholders' equity............................................. 199,592 206,229
------------ -------------
Total liabilities and shareholders' equity........................ $ 1,396,201 $ 1,417,294
============ =============
</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
September 30,
------------------------------
1998 1997
------------ -------------
Restated
<S> <C> <C>
Net sales and revenues from:
Product sales (including excise taxes)..................................... $ 278,960 $ 314,409
Leasing operations......................................................... 16,913 15,762
Insurance operations....................................................... 6,966 6,858
------------ -------------
Total net sales and revenues........................................... 302,839 337,029
Cost and expenses from:
Products and plant operations.............................................. 271,047 299,167
Leasing operations......................................................... 7,366 7,049
Insurance operations....................................................... 4,633 4,200
Selling, general and administrative activities............................. 35,074 31,565
------------ -------------
Total operating costs and expenses..................................... 318,120 341,981
Operating earnings (loss)....................................................... (15,281) (4,952)
Interest expense, net........................................................... (7,523) (6,874)
Other income, net............................................................... 13,254 2,124
------------ -------------
Loss from operations before income taxes........................................ (9,550) (9,702)
Income tax benefit ............................................................. 3,280 2,078
------------ -------------
Loss from operations before cumulative effect of an accounting change........... (6,270) (7,624)
Cumulative effect on prior years (to June 30, 1997) of an accounting
change, net of tax expense of $16,500...................................... 0 28,956
------------ -------------
Net earnings (loss)............................................................. (6,270) 21,332
Retained earnings balance, beginning of period.................................. 155,082 117,571
------------ -------------
Retained earnings, end of period................................................ $ 148,812 $ 138,903
============ =============
</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
September 30,
------------------------------
Restated
1998 1997
------------- -------------
<S> <C> <C>
Net earnings (loss)............................................................... $ (6,270) $ 21,332
Other comprehensive income, net of tax:
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period.................. 540 447
Less: Reclassification adjustment for gains (losses) included
in net income.................................................... (46) (22)
------------- -------------
Other comprehensive income........................................................ 586 469
Comprehensive (loss) income....................................................... $ (5,684) $ 21,801
============= =============
</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>
Three Months Ended
September 30,
----------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Net cash flows provided by operating activities.............................. $ 34,780 $ 6,671
Cash flows provided by (used in) investing activities:
Purchases of property, plant and equipment.............................. (8,210) (8,004)
Proceeds from disposal of property, plant and equipment................. 1,468 3,867
Proceeds from sale of business.......................................... 14,150 0
Cash paid for acquisitions of businesses................................ (6,720) (1,458)
Leases originated....................................................... (58,593) (60,869)
Leases repaid........................................................... 42,743 37,864
Proceeds from sale of marketable securities............................. 247 5,676
Purchases of marketable securities...................................... 0 (4,694)
Net redemption of investments in cooperatives........................... 572 739
------------ -------------
Net cash flows used in investing activities.................................. (14,343) (26,879)
Cash flows provided by (used in) financing activities:
Net change in short-term borrowings..................................... (14,320) 32,610
Proceeds from long-term debt............................................ 1,921 354
Repayment of long-term debt............................................. (14,945) (21,789)
Proceeds from sale of subordinated debt................................. 18,812 30,416
Maturity and redemption of subordinated debt............................ (9,098) (12,339)
Payments on capital leases.............................................. (12) (51)
Redemption of stock, net ............................................... (954) (6,844)
Cash dividends paid..................................................... (1,841) (2,149)
------------ -------------
Net cash flows (used in) provided by financing activities.................... (20,437) 20,208
------------ -------------
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 three-month period ended
September 30, 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 would be 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, 2000. 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.
Restatement
On July 8, 1999, Agway announced that it had become aware of accounting
irregularities in its grain marketing department. As more fully discussed
in Footnote 5, upon investigation, Agway has determined that the financial
statements as previously filed for the quarter ended September 30, 1998
required restatement.
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
September 30,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Net sales and revenues............................................ $ 209,835 $ 232,535
Operating earnings (loss)......................................... (2,882) 246
Net loss.......................................................... (12,432) (7,371)
September 30, June 30,
1998 1998
-------------- -------------
Current assets.................................................... $ 513,304 $ 524,800
Properties and equipment, net..................................... 149,311 150,618
Noncurrent assets................................................. 449,043 451,303
-------------- -------------
Total assets...................................................... $ 1,111,658 $ 1,126,721
============== =============
Current liabilities............................................... $ 29,879 $ 15,173
Short-term notes payable.......................................... 51,000 65,100
Current portion of long-term debt................................. 169,921 170,836
Long-term debt.................................................... 235,983 248,128
Subordinated debt................................................. 395,404 386,607
Noncurrent liabilities............................................ 26,914 26,474
Shareholder's equity.............................................. 202,557 214,403
-------------- -------------
Total liabilities and shareholder's equity........................ $ 1,111,658 $ 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 September 30, 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 September 30, 1998, AFC had bank facilities available which included
a $50,000 short-term line of credit and a $25,000 long-term revolver. These
facilities and AFC's ability to issue $50,000 of commercial paper require
collateralization using certain of the Company's accounts receivable and
non-petroleum inventories ("collateral"). Amounts which can be drawn under
these AFC agreements are limited to a specific calculation based upon the
collateral available. Adequate collateral has existed throughout the fiscal
year to permit AFC to borrow amounts to meet the ongoing needs of the
Company and is expected to continue to do so. The line of credit and
long-term revolver 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 were no amounts outstanding as of
September 30, 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, 1998, but provides for an increase to
$75,000, which became available on October 1, 1998, to assist in paying
maturing subordinated debt. AFC's current commercial paper program
continues through December 31, 1998. The Company's $25,000 long-term
revolving line of credit is available through January 1, 2000, of which $0
was outstanding at September 30, 1998, and at June 30, 1998. AFC annually
renews its line of credit and commercial paper program in the quarter ended
December 31. The Company is currently negotiating with its lenders and
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. In October 1998, $76,500 of subordinated money market
certificates issued by AFC matured. The Company is refinancing this debt
either through a new issuance of subordinated debt, through short-term bank
borrowings, or a combination of both. An increase in the short-term credit
facilities providing this liquidity is described above. Subordinated money
market certificates due between October 1998 and October 2008 bear a
weighted average interest rate of 8.2%, while subordinated debentures due
between July 1999 and July 2003 bear a weighted average interest rate of
8.1%.
Telmark
As of September 30, 1998, Telmark had several credit facilities available
from banks which allow Telmark to borrow up to an aggregate of $302,000.
The uncommitted short-term line of credit agreements permit Telmark to
borrow up to $52,000 on an unsecured basis with interest paid upon
maturity. The lines bear interest at money market variable rates. A
committed $250,000 partially collateralized revolving term loan facility
permits Telmark to draw short-term funds bearing interest at money market
rates or draw long-term debt at rates appropriate for the term of the note
drawn. The total amount outstanding as of September 30, 1998, under the
short-term lines of credit was $42,000 and under the revolving term loan
facility was $146,000, of which $137,000 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.
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 (continued)
Telmark had balances outstanding on unsecured senior notes from private
placements totaling $169,000 at September 30 and at June 30, 1998. The
principal bears interest at fixed rates ranging from 5.90% to 8.88%. The
payments commence November 1998 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 $16,300 and $17,700 at September
30, 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 September 30, 1998, as
compared to June 30, 1998, is as follows:
<TABLE>
<CAPTION>
AFC
Agway (excluding Telmark) Telmark Total
--------------------- -------------------- --------------------- ---------------------
9/98 6/98 9/98 6/98 9/98 6/98 9/98 6/98
---------- --------- --------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt........ $ 12,096 $ 11,154 $ 7,074 $ 6,698 $ 322,323 $ 336,677 $ 341,493 $ 354,529
Currently payable..... 1,870 3,926 1,424 1,661 91,990 93,586 95,284 99,173
---------- --------- --------- --------- --------- --------- ---------- ---------
Net long-term debt.... $ 10,226 $ 7,228 $ 5,650 $ 5,037 $ 230,333 $ 243,091 $ 246,209 $ 255,356
========== ========= ========= ========= ========= ========= ========== =========
Subordinated debt..... $ 0 $ 0 $ 437,572 $ 428,190 $ 34,339 $ 34,006 $ 471,911 $ 462,196
Currently payable..... 0 0 76,507 75,589 0 0 76,507 75,589
---------- --------- --------- --------- --------- --------- ---------- ---------
Net subordinated debt. $ 0 $ 0 $ 361,065 $ 352,601 $ 34,339 $ 34,006 $ 395,404 $ 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 September 30, 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.
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.
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 systems have been inventoried. Those
systems determined to be at risk were prioritized, and plans were put in
place to upgrade systems by remediation, replacements, outsourcing, or
doing without these systems. Through September 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 and the final implementations scheduled to be completed 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.
11
<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 (continued)
----------------------------------------
Year 2000 (continued)
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 December 1998. The
business continuity plans are expected to be completed by January 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.
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 $19,000, of which $11,100 has been incurred and $7,900 is
expected to be incurred from October 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 $6,000. 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.
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.
12
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
5. RESTATEMENT
-----------
On July 8, 1999, Agway announced that it had become aware of accounting
irregularities in its grain marketing department. An investigation, under
guidance from external legal counsel and including internal legal counsel,
internal financial staff, external auditors, and private investigators, was
initiated. Reports on the investigation findings have been made directly to
the Board of Directors.
The investigation has determined that unauthorized speculative positions in
commodity instruments were taken within the department in violation of
express policies, which resulted in losses to Agway. Through falsification
of market values on inventory held and on forward contracts and improper
accounting for premiums on options sold, losses were concealed within the
department, resulting in misreported earnings by Agway for the fourth
quarter of the year ended June 30, 1998, and the first three quarters of
1999. In an effort to recover these losses, additional speculative
positions in commodity instruments were taken within the department
throughout 1999. In addition, while the unauthorized activity was
occurring, the department did not hedge its inventory and forward
contracts, in violation of express policies, which led to further losses
from the department's operations. To reflect these losses and their effect
on the Company, Agway has amended its previously filed annual report on
Form 10-K for the year ended June 30, 1998, and its 1999 quarterly reports
on Form 10-Q with the SEC. For the year ended June 30, 1998, the net
earnings of $41,754, as previously reported, have been reduced by $609 to
$41,145 to reflect this restatement. The after-tax effects of the
activities described above on each of the first three quarters of 1999 are
as follows:
<TABLE>
<CAPTION>
Consolidated Net Earnings (Loss)
-----------------------------------------------------
As As Previously Net
Period Restated Reported Adjustment
------ ------------- ------------- --------------
<S> <C> <C> <C>
Three months ended September 1998...................... $ (6,270) $ (2,570) $ (3,700)
Three months ended December 1998....................... (6,877) (7,336) 459
Six-month period ended December 1998................... (13,147) (9,906) (3,241)
Three months ended March 1999.......................... 2,769 3,255 (486)
Nine-month period ended March 1999..................... (10,378) (6,651) (3,727)
</TABLE>
The total pre-tax loss from department activities is $8,600 for the year
ended June 30, 1999. This compares to a pre-tax loss as restated of $1,100
in 1998 and a $300 pre-tax loss in 1997. The 1999 loss includes $5,500 from
unauthorized speculation in commodity instruments and $3,100 from
operations, due in part to not hedging positions in inventory and forward
contracts.
The results of operations, as restated, violated certain of Agway's
covenants in its loan agreements, including an interest coverage covenant
as of December 1998, March 1999, and June 1999 and a tangible net worth
covenant as of November and December 1998. Agway disclosed the
above-referenced losses and restatements, and causes thereof, to its
lenders and has obtained waivers for these violations, and the covenants in
the loan agreements have been amended through the remaining term of the
agreements.
Subsequent to year-end, open unauthorized speculative commodity instruments
were closed. In addition, inventory and open forward contracts have been
hedged. During the period it took to restructure and hedge the open
positions of the department, further market losses of approximately $1,300
were incurred, which will be reflected in Agway's Form 10-Q for the first
quarter of fiscal 2000. Agway has restructured its grain marketing
activities, substantially reducing their scope, and requiring that its net
position at any point in time to be effectively hedged.
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)
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
---------------------------------------------
Restated $ Increase
9/30/98 9/30/97 (Decrease)
------------- ------------- -------------
Net Sales and Revenues
- ----------------------
<S> <C> <C> <C>
Agriculture.......................................................... $ 146,275 $ 159,588 $ (13,313)
Retail............................................................... 58,149 61,515 (3,366)
Energy............................................................... 85,850 103,538 (17,688)
Leasing.............................................................. 16,913 15,762 1,151
Insurance............................................................ 6,966 6,858 108
Other (a)............................................................ (11,314) (10,232) (1,082)
------------- ------------- ------------
$ 302,839 $ 337,029 $ (34,190)
============= ============= ============
Earnings (Loss) from Operations before Income Taxes
- ---------------------------------------------------
Agriculture.......................................................... $ (1,180) $ (5,599) $ 4,419
Retail............................................................... (2,369) 70 (2,439)
Energy............................................................... (3,966) (4,829) 863
Leasing.............................................................. 3,421 3,158 263
Insurance............................................................ 9 6 3
Other (a)............................................................ 2,058 4,366 (2,308)
------------- ------------ ------------
Operating earnings (loss), plus other income, net.................... (2,027) (2,828) 801
Interest (expense), net of interest income........................... (7,523) (6,874) (649)
------------- ------------ ------------
$ (9,550) $ (9,702) $ 152
============= ============ ============
</TABLE>
(a) Represents unallocated corporate items and intersegment eliminations.
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)
Numbers in the following narrative have been rounded to the nearest hundred
thousand.
Consolidated Results
- --------------------
Consolidated net sales and revenues of $302,800 for the three months ended
September 30, 1998, decreased $34,200 (10%) as compared to the same period in
the prior year. The decrease is the result of a decline in sales in Energy and
Agriculture, principally due to decreases in volume and pricing level of
petroleum products and pricing levels of Agriculture feed products.
Restated net loss from operations before taxes of $9,600 for the three months
ended September 30, 1998, decreased $200 (2%) as compared to the same period in
the prior year. The decreased loss can be attributed to a gain on sale of
business in the Agriculture segment and improved operating results in Energy and
Leasing offset by unauthorized activities in Agriculture's grain marketing
business, as described further in Footnote 5, declines in Retail operating
results and lower pension credits in the first quarter of 1999 as compared to
the same period in the prior year.
Agriculture
- -----------
Agriculture consists of Agway Agricultural Products (AAP) and the Country
Products Group (CPG). Total Agriculture net sales and revenues of $146,300 for
the three months ended September 30, 1998, decreased $13,300 (8%) as compared to
the same period in the prior year.
AAP net sales and revenues of $108,300 for the three months ended September 30,
1998, decreased $9,600 (8%) as compared to the same period in the prior year.
The AAP sales decrease resulted principally from the feed and crops businesses.
Despite increased feed volume (11%) and a $3,000 sales increase due to the
acquisition of new business during the first quarter of 1999 over the prior
year, the decrease in pricing levels of feed products in the global markets
resulted in an overall decrease in the feed sales for the three months ended
September 30, 1998, as compared to the same period in the prior year. Crop sales
for the three months ended September 30, 1998, were lower than crop sales during
the same period in the prior year due to decreases in the price of fertilizer
products. Additionally, the low market price of agricultural commodities has
negatively impacted the direct marketing sales of feed and crop products. The
decline in price during the first quarter continues to show a downward trend,
which is in line with global market conditions.
CPG net sales and revenues of $38,000 for the three months ended September 30,
1998, decreased $3,700 (9%) as compared to the same period in the prior year.
The CPG sales decrease in the first quarter of this year as compared to the same
period in the prior year resulted mainly from lower prices in the produce market
($1,300), particularly potatoes, and stronger sales from the seed business in
the prior year as compared to the first quarter of this year ($1,500).
The Agriculture restated operating loss of $1,200 for the three months ended
September 30, 1998, improved $4,400 (80%) as compared to a loss of $5,600 in the
same period in the prior year.
AAP's restated operating loss of $13,400 for the three months ended September
30, 1998, was higher by $6,000 (82%) as compared to the same period in the prior
year. AAP gross margins declined $4,700 during the three months ended September
30, 1998, as compared to the same period in the prior year, due to losses of
$5,800 in the AAP's grain marketing business principally from the effects of
unauthorized speculative activities, as described further in Footnote 5.
Additionally, losses were experienced from increased variable costs associated
with the increased feed volume.
CPG's operating earnings plus other income of $12,200 for the three months ended
September 30, 1998, increased $10,500 (623%) as compared to the same period in
the prior year. The increase is attributable to the net gain on the sale of a
seed business ($11,100) during the first quarter. This gain was partially offset
by lower sunflower earnings, due to higher cost of product, and new costs
associated with the start-up of new operating activities during the first
quarter of 1999 as compared to 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)
Retail
- ------
Total net sales and revenues of $58,100 for the first quarter ended September
30, 1998, decreased $3,400 (6%) as compared to the same period in the prior
year. The decline is substantially due to a reduction in wholesale sales
($3,100) due, in part, to the reaction to the implementation of a new franchise
program. This decline was slightly offset by sales growth from new locations and
growth in the nursery and related products business being greater than lost
sales from discontinued store locations during the first quarter of 1998 as
compared to the prior year.
Retail's operating loss of $2,300 for the first quarter ended September 30,
1998, represents a decrease in earnings of $2,400 from net earnings of $100 as
compared to the first quarter in the prior year. Overall gross margins were down
$1,700 and operating expenses increased $500 in the first quarter ended
September 30, 1998, as compared to the first quarter of the prior year. The
reduced sales level contributed to the lower margins. Operating expenses were
driven up by new locations that were not in operation during the first quarter
of the prior year. Finally, other revenue was lower by $200, due mainly to lower
gains on sale of fixed assets in the first quarter of this year as compared to
the same period in the prior year.
Energy
- ------
Net sales and revenues of $85,900 for the three months ended September 30, 1998,
decreased $17,700 (17%) as compared to the same period in the prior year. Energy
commodity costs continued to be lower than in the prior year, driving
competitive prices lower during the first quarter of this year. The lower
selling price decreased sales by $14,900 during the first quarter. Additionally,
sales decreases of $3,500 were experienced from volume reductions, particularly
in heating oil, during the three months ended September 30, 1998, as compared to
the same period in the prior year. The volume reductions resulted principally
from warmer weather in the first quarter than in the same period in the prior
year. These sales reductions were partially offset by a $700 sales increase in
the natural gas and electricity marketing businesses as compared to the same
period in the prior year.
Operating loss of $4,000 improved by $900 (18%) as compared to the operating
loss in the same period in the prior year. Even though overall sales volume
declined, gross margin rates were stronger in the first quarter as compared to
the prior year, which increased gross margin dollars by $500. Operating expenses
decreased $400 in the first quarter as compared to the first quarter of the
prior year, mainly due to lower distribution expense.
Leasing
- -------
Total revenue of $16,900 for the first quarter of 1999 increased by $1,200 (7%)
as compared to the first quarter of the prior year. This increase is due
primarily to higher investment in leases and notes. The Company's net investment
in leases and notes increased by $15,700 (3%) to $538,400 in the first quarter
of 1999 as compared to a $22,900 (5%) increase in net investment in leases to
$492,700 for the corresponding period in the prior year.
Income from operations before income taxes for the first quarter of 1999 was
$3,400, which was an increase of $300 (8%) over the first quarter of the prior
year. The increase in total revenues was partially offset by increases in
expenses and provision for credit losses.
Total expenses increased $900 (7%) to $13,500 for the first quarter of 1999 as
compared to $12,600 in the corresponding period in the prior year. The increase
in expenses is primarily attributable to increases in interest expense and
selling, general and administrative expenses. Interest expense increased $300
(5%) to $7,400 for the first quarter of 1999 as compared to the corresponding
period in the prior year. The Company's higher average levels of interest
bearing debt in the first quarter as compared to the corresponding period in the
previous year, partly offset by slightly lower interest rates, is the primary
reason for this increase in interest expense. Selling, general and
administrative expenses increased $500 (13%) to $4,600 for the first quarter of
1999 as compared to the corresponding period of the prior year. These increases
are attributable to increased sales and other payroll costs required to manage
the larger portfolio as compared to the corresponding period in 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)
Leasing (continued)
- -------------------
The provision for credit losses increased slightly to $1,600 in the first
quarter as compared to $1,500 in the corresponding period in the prior year, due
to an increase in the lease volume in the first quarter as compared to the prior
year.
Insurance
- ---------
Insurance consists of Agway Insurance Company, a property and casualty insurance
subsidiary, and Agway General Agency, a subsidiary which markets products
designed by non-affiliated companies for the agricultural marketplace and
provides administrative management services to Agway business units.
Insurance net revenues of $7,000 for the three months ended September 30, 1998,
increased $100 (2%) as compared to the same period in the prior year. The
increase for the three-month period is the result of higher earned premiums and
higher investment income of the Insurance Company.
Operating earnings broke even for the three months ended September 30, 1998,
which was no change as compared to the same period in the prior year. Claim
losses increased $400 in the first quarter as compared to the same period in the
prior year due to the effects of a wind storm in Upstate New York. This claim
loss increase was totally offset by lower expenses.
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 three months ended
September 30:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net cash flows provided by (used in)
Operating activities............................................................. $ 34,780 $ 6,671
Investing activities............................................................. (14,343) (26,879)
Financing activities............................................................. (20,437) 20,208
------------- -------------
Net increase (decrease) in cash and equivalents..................................... $ 0 $ 0
============= =============
</TABLE>
Cash Flows Provided By Operating Activities
For the three months ended September 30, 1998, changes in working capital
generated cash of $40,100 compared to requiring cash of $2,700 for the same
period in the prior year. The biggest contributors to this were from a larger
decline in receivables and inventories during this year (cash provided) as
compared to last year, and increased payables during the first quarter of this
year as compared to a decrease in the first quarter of the prior year.
Cash Flows Used In Investing Activities
The cash flows required for investing activities decreased in the first quarter
of 1999 by $12,500 as compared to the first quarter of the prior year. The
reasons for the decrease in cash used were from cash generated from the sale of
business (Allied Seed in the Agriculture segment) and larger lease repayments
with a smaller amount of leases originated for the quarter than in the prior
year. Cash paid for acquisition of businesses increased $5,300 for the quarter
as compared to the prior year and partially offset the overall decline in cash
required.
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)
LIQUIDITY AND CAPITAL RESOURCES (continued)
- -------------------------------------------
Cash Flows Provided By (Used In) Financing Activities
Financing activities for the quarter ended September 30, 1998, created a net
cash use of $20,400 compared to cash provided of $20,200 for the same period in
the prior year. This $40,600 change in cash flows was substantially due to a
$14,000 paydown of short-term borrowings in the first quarter as compared to
additional short-term borrowings of $32,600 during the same period in the prior
year. Cash generated from the sale of businesses in the first quarter of 1999
and cash flow from operations were the biggest reasons for this change.
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 September 30, 1998:
<TABLE>
<CAPTION>
AFC
Agway (excluding
Source of debt Inc. Telmark) Telmark Total
- -------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Banks - due 10/98 to 2/01, interest at a weighted average
rate of 7.2% with a range of 6.6% - 8.4%................... $ 0 $ 1,750 $ 137,000 $ 138,750
Insurance companies - due 10/98 to 5/04, interest at a
weighted average rate of 7.2% with a range of
5.9% - 8.9%................................................ 0 0 185,323 185,323
Capital leases and other - due 1998 to 2008, interest at a
weighted average rate of 9.3% with a range of 6% to 12%.... 12,096 5,324 0 17,420
---------- ----------- ----------- ----------
Long-term debt........................................... 12,096 7,074 322,323 341,493
Subordinated money market certificates -
due 10/98 to 10/08, interest at a weighted average rate of
8.2% with a range of 4.5% - 9.5%............................ 0 417,116 0 417,116
Subordinated debentures - due 7/99 to 7/03, interest at a
weighted average rate of 8.1% with a range of 7.0%
to 8.5%.................................................... 0 20,456 34,339 54,795
---------- ----------- ----------- ----------
Total debt............................................... $ 12,096 $ 444,646 $ 356,662 $ 813,404
========== =========== =========== ==========
</TABLE>
For a complete description of the Company's credit facilities available at
September 30, 1998, see Footnote 3 to the condensed consolidated financial
statements.
OTHER MATTERS
- -------------
Year 2000
See Footnote 4 to the condensed consolidated financial statements.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
- ------------------------------------------------------------
See Footnote 1 to the condensed consolidated financial statements.
18
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Unaudited)
(Thousands of Dollars)
COMMODITY PRICE EXPOSURE
- ------------------------
In its normal course of operations, Agway has exposure to market risk from price
fluctuations associated with commodity inventories, product gross margins, and
anticipated transactions in its Agriculture and Energy businesses. To manage the
risk of market price fluctuations, Agway uses commodity derivative instruments,
including exchange-traded futures and option contracts and, in limited
circumstances, over - the - counter contracts with third parties (commodity
instruments). Agway has policies with respect to the use of these commodity
instruments that specify what they are to be used for and set limits on the
maturity of contracts entered into and the level of exposure to be hedged.
In the Energy segment, exchange-traded commodity instruments and, in certain
circumstances, over-the-counter contracts with third parties are used
principally for gasoline, distillate, and propane. They are entered into as a
hedge against the price risk associated with Energy's inventories or future
purchases and sales of the commodities used in its operations. Generally, the
price risk extends for a period of one year or less. A sensitivity analysis has
been prepared to estimate Energy's exposure to market risk of its
exchange-traded and over-the-counter commodity instrument position as of
September 30, and June 30, 1998. The fair value of such position is a summation
of the fair values calculated for each commodity instrument by valuing each
position at quoted futures prices or, in the case of options, a delta-adjusted
calculated price. The market risk of the commodity position is estimated as the
potential loss in fair value resulting from a hypothetical 10% change in market
prices of the underlying commodities. This estimated loss in fair value does
not reflect the offsetting impact of market price changes to the underlying
commodities that the commodity instruments are hedging. As of September 30,
1998, and June 30, 1998, assuming a 10% hypothetical change in the underlying
commodity price, the potential change in fair value of Energy's commodity
instruments was $400 and $500, respectively.
In the Agriculture segment's feed business, exchange-traded commodity
instruments are used principally to hedge corn, soy complex, and oats, which
can be sold directly as ingredients or included in feed products. Since
November 1997, all transactions involving derivative financial instruments in
the feed business are required to have a direct relationship to the price risk
associated with existing inventories or future purchase or sale of its products.
A sensitivity analysis has been prepared to estimate Agriculture's feed business
exposure to market risk of its exchange-traded instrument position as of
September 30, and June 30, 1998. The fair value of such position is a summation
of the fair values calculated for each commodity instrument by valuing each
position at quoted futures prices or, in the case of options, a delta-adjusted
calculated price. The market risk of the commodity position is estimated as the
potential loss in fair value resulting from a hypothetical 10% change in market
prices of the underlying commodities. This estimated loss in fair value does
not reflect the offsetting impact of market price changes to the underlying
commodities that the commodity instruments are hedging. As of September 30,
1998, assuming a 10% hypothetical change in the underlying commodity price, the
potential change in fair value of Agriculture's feed business commodity
instruments was $200. As of June 30, 1998, assuming a 10% hypothetical
change in the underlying commodity price, the potential change in fair value of
Agriculture's feed business commodity instruments was not material.
In the Agriculture segment's grain marketing business, exchange-traded commodity
instruments are used to hedge inventory and forward purchase and sales contracts
for grains, principally corn, soy complex, oats, and wheat, which are purchased
and sold by the grain marketing department (the department). The department
historically entered into both forward purchase contracts and forward sales
contracts (forward contracts) with farmers and others on a variety of grain
products. Agway's policy requires that the department enter into generally
matched transactions (in both maturity and amount) using offsetting forward
contracts or commodity instruments to hedge against price fluctuations in the
market price of grains. Agway records the grain marketing program on a
mark-to-market basis by adjusting all outstanding forward contracts, commodity
instruments, and inventory values to market value.
19
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Unaudited)
(Thousands of Dollars)
COMMODITY PRICE EXPOSURE (continued)
- ------------------------------------
A sensitivity analysis has been prepared to estimate the department's exposure
to market risk of its exchange-traded commodity instrument position as of
September 30,and June 30, 1998. The fair value of such position is a summation
of the fair values calculated for each commodity instrument by valuing each
position at quoted futures prices or, in the case of options, a delta-adjusted
calculated price. The market risk of the commodity position is estimated as the
potential loss in fair value resulting from a hypothetical 10% change in market
prices of the underlying commodities. As noted above, grain marketing
historically enters into generally matched transactions to hedge against price
fluctuations. However, as previously discussed, during the fourth quarter of
1998 and throughout 1999, unauthorized speculative positions were taken so
that the commodity instrument activity of the department was not effectively
hedging the underlying commodities and forward contracts. As of September 30,
and June 30,1998, assuming a 10% hypothetical change in the underlying commodity
price, the potential change in fair value of the department's commodity
instruments was $1,300 and $700, respectively.
20
<PAGE>
PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
Item 1. Legal Proceedings
- --------------------------
The Company and its subsidiaries are not involved in any material pending legal
proceedings other than ordinary routine litigation incidental to the business
except the following:
In August 1994, the Environmental Protection Agency (EPA) notified Motor
Transportation Services, Inc. (MTS), a dissolved wholly owned subsidiary of AHI,
that the EPA has reason to believe that MTS is a potentially responsible party
(PRP) under the Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA) at the Rosen Site, Cortland, New York. The EPA requested
that MTS and other PRPs participate in the ongoing Remedial
Investigation/Feasibility Study (RI/FS) for the Rosen Site. MTS believes that
its involvement at the Rosen Site, if any, is minimal and responded accordingly
to the EPA's request. In a related matter, other PRPs at the Rosen Site, Cooper
Industries, Inc., et al., filed a complaint under CERCLA against the Company,
MTS and other alleged PRPs at the Rosen Site in the U.S. District Court,
Northern District of New York, in June 1992, seeking reimbursement for the cost
of the ongoing RI/FS. The Company and MTS believe the relief sought by Cooper
Industries, Inc., et al. is unjustified and are contesting the allegations in
the lawsuit. In March 1998, the EPA issued a unilateral administrative order to
the PRPs, including the Company and MTS, for a removal action at the Rosen Site.
The Company and MTS have notified the EPA that they will comply with the order
by cooperating with the other PRPs to assure that the removal action is
performed. In addition, the Company and MTS have offered to cooperate with the
other PRPs in performing a Remedial Design/Remedial Action (RD/RA) for the site
in accordance with the Record of Decision (ROD) issued by the EPA. 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.
In December 1985, it was asserted by the Massachusetts Department of
Environmental Protection (MDEP) that certain real property located in Acton,
Massachusetts, previously owned by Agway is contaminated and that Agway and the
current owner of the property are responsible for the cost of investigating and
cleaning up environmental contamination at the property. In September 1993,
Agway entered into an Administrative Consent Order with the MDEP pursuant to
which Agway performed a phase II comprehensive site assessment. In March 1995,
Agway and the current owner entered into a settlement agreement whereby Agway
agreed, at Agway's expense, to complete any additional assessment, containment,
removal or remediation actions at the property. The current owner agreed to
cooperate with Agway in achieving a permanent solution satisfactory to the MDEP
and in compliance with the MDEP's requirements. Agway prepared a risk assessment
scope of work that was approved by the MDEP, and the MDEP also approved
reclassification of the site. Agway finalized, in April 1998, its risk
characterization and remedial action plan reports and, in July 1998, its remedy
implementation plan report. Pursuant to the remedy implementation plan, Agway
completed activities associated with the installation of an impermeable
vegetated surface cover system in October 1998, will continue a ground water
monitoring program and is implementing an activity and use limitation. 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.
In August 1995, the EPA notified Agway that the EPA has reason to believe that
Agway is a PRP under CERCLA at the Tri-Cities Barrel site, Port Crane, New York.
The EPA requested that Agway and other PRPs participate in the ongoing RI/FS for
the Tri-Cities Barrel site. Agway continues to participate with other PRPs in
the ongoing RI/FS. In June 1997, the cooperating PRPs agreed upon an allocation
of responsibility for past and future investigation and remediation costs. Based
on this allocation and the cost estimates for the site, Agway has accrued its
best estimate for any additional costs at the site.
21
<PAGE>
PART II. OTHER INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
Item 1. Legal Proceedings (continued)
- --------------------------------------
In April 1997, the EPA notified Agway Petroleum Corporation (APC--predecessor to
Agway Energy Products LLC) that the EPA has reason to believe that APC is a PRP
under CERCLA at the Friedrichsohn's Cooperage, Inc. Superfund Site, Waterford,
NY. In August 1997, the EPA demanded that APC and other PRPs reimburse it for
payment of approximately $1,800 in cleanup costs. APC and other PRPs are in the
process of negotiating a Consent Decree with the EPA which will require APC to
reimburse the EPA a proportionate share of the cleanup costs. The Company does
not believe that adjustments will be material in relation to the consolidated
financial position of Agway.
While the Company is not depending on contributions from insurance or third
parties in determining its reserves for environmental clean-up liability, the
Company will determine on a site-by-site basis whether such a contribution claim
is warranted.
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 September 30, 1998.
22
<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 September 10, 1999 /s/ PETER J. O'NEILL
----------------------- ----------------------------------------
Peter J. O'Neill
Senior Vice President,
Finance & Control,
(Principal Financial Officer and
Chief Accounting Officer)
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 36,751
<RECEIVABLES> 177,600
<ALLOWANCES> 7,782
<INVENTORY> 134,294
<CURRENT-ASSETS> 536,079
<PP&E> 520,823
<DEPRECIATION> 306,140
<TOTAL-ASSETS> 1,396,201
<CURRENT-LIABILITIES> 451,866
<BONDS> 641,613
0
46,941
<COMMON> 2,548
<OTHER-SE> 150,103
<TOTAL-LIABILITY-AND-EQUITY> 1,396,201
<SALES> 278,960
<TOTAL-REVENUES> 302,839
<CGS> 271,047
<TOTAL-COSTS> 283,046
<OTHER-EXPENSES> 35,074
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,523
<INCOME-PRETAX> (9,550)
<INCOME-TAX> (3,280)
<INCOME-CONTINUING> (6,270)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,270)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
