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 September 30, 1999
------------------
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 November 5, 1999
- ------------------------- -------------------------------
Membership Common Stock, 99,549 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, 1999 and June 30, 1999................... 3
Condensed Consolidated Statements of Operations and Retained Earnings for the three months
ended September 30, 1999 and September 30, 1998.................................................... 4
Consolidated Statements of Comprehensive Income for the three months ended
September 30, 1999 and September 30, 1998.......................................................... 5
Condensed Consolidated Cash Flow Statements for the three months ended September 30, 1999
and September 30, 1998............................................................................. 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................................ 23
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Form 8-K.......................................................... 25
SIGNATURES......................................................................................... 26
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 1. CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, June 30,
ASSETS 1999 1999
- ------ ------------- --------------
<S> <C> <C>
Current Assets:
Trade accounts receivable (including notes receivable of $40,850 and
$45,960, respectively), less allowance for doubtful accounts of
$7,554 and $7,155, respectively........................................ $ 168,497 $ 185,536
Leases receivable, less unearned income of $65,101 and
$64,473, respectively.................................................. 134,255 131,431
Advances and other receivables............................................. 30,189 23,456
Inventories:
Raw materials.......................................................... 3,233 6,892
Finished goods......................................................... 134,857 137,348
Goods in transit and supplies.......................................... 3,142 1,826
------------- --------------
Total inventories................................................. 141,232 146,066
Prepaid expenses and other assets.......................................... 54,396 52,341
------------- --------------
Total current assets................................................... 528,569 538,830
Marketable securities available for sale........................................ 36,204 35,099
Other security investments...................................................... 50,679 51,010
Properties and equipment, net................................................... 216,342 215,425
Long-term leases receivable, less unearned income of $138,024 and
$134,623, respectively..................................................... 435,620 419,444
Net pension asset............................................................... 202,118 198,160
Other assets .................................................................. 22,111 19,083
------------- --------------
Total assets...................................................... $ 1,491,643 $ 1,477,051
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Notes payable.............................................................. $ 132,600 $ 81,800
Current installments of long-term debt..................................... 101,339 94,699
Current installments of subordinated debt.................................. 65,085 76,968
Accounts payable........................................................... 119,740 115,350
Other current liabilities.................................................. 105,882 115,865
------------- -------------
Total current liabilities.............................................. 524,646 484,682
Long-term debt.................................................................. 260,018 279,417
Subordinated debt............................................................... 422,051 409,335
Other liabilities............................................................... 103,305 104,670
------------- -------------
Total liabilities...................................................... 1,310,020 1,278,104
Commitments and contingencies
Shareholders' equity:
Preferred stock, net....................................................... 42,543 42,917
Common stock, net.......................................................... 2,492 2,506
Accumulated other comprehensive income..................................... (385) (239)
Retained earnings.......................................................... 136,973 153,763
------------- -------------
Total shareholders' equity............................................. 181,623 198,947
------------- -------------
Total liabilities and shareholders' equity........................ $ 1,491,643 $ 1,477,051
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 1. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Net sales and revenues from:
Product sales (including excise taxes)..................................... $ 291,428 $ 278,960
Leasing operations......................................................... 18,272 16,913
Insurance operations....................................................... 6,980 6,966
------------- -------------
Total net sales and revenues........................................... 316,680 302,839
Cost and expenses from:
Products and plant operations.............................................. 288,659 271,047
Leasing operations......................................................... 7,701 7,366
Insurance operations....................................................... 4,152 4,633
Selling, general and administrative activities............................. 37,582 35,074
------------- -------------
Total operating costs and expenses..................................... 338,094 318,120
Operating loss.................................................................. (21,414) (15,281)
Interest expense, net........................................................... (7,687) (7,523)
Other income, net............................................................... 2,725 13,254
------------- -------------
Loss before income taxes........................................................ (26,376) (9,550)
Income tax benefit ............................................................. 9,586 3,280
------------- -------------
Net loss ....................................................................... (16,790) (6,270)
Retained earnings, beginning of period.......................................... 153,763 155,362
------------- -------------
Retained earnings, end of period........................................... $ 136,973 $ 149,092
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 1. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Net loss ....................................................................... $ (16,790) $ (6,270)
Other comprehensive income, net of tax:
Unrealized gains (losses) on
available-for-sale securities:
Unrealized holding gains (losses)
arising during period................................................ (146) 540
Reclassification adjustment
for (gains) losses included in
net income........................................................ 0 46
------------- --------------
Other comprehensive income (loss)............................................... (146) 586
------------- --------------
Comprehensive loss.............................................................. $ (16,936) $ (5,684)
============= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 1. CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Net cash flows (used in) provided by operating activities.................... $ (3,131) $ 34,780
Cash flows provided by (used in) investing activities:
Purchases of property, plant and equipment.............................. (6,929) (8,210)
Proceeds from disposal of property, plant and equipment................. 20 1,468
Proceeds from sale of business.......................................... 0 14,150
Cash paid for acquisition of business................................... (4,950) (6,720)
Leases originated....................................................... (68,426) (58,593)
Leases repaid........................................................... 47,450 42,743
Proceeds from sale of marketable securities............................. 645 247
Purchases of marketable securities...................................... (1,896) 0
Net purchase of investments in cooperatives............................. 319 572
------------- --------------
Net cash flows used in investing activities.................................. (33,767) (14,343)
Cash flows provided by (used in) financing activities:
Net change in short-term borrowings..................................... 50,800 (14,320)
Proceeds from long-term debt............................................ 876 1,921
Repayment of long-term debt............................................. (13,505) (14,945)
Proceeds from sale of subordinated debt................................. 23,570 18,812
Maturity and redemption of subordinated debt............................ (22,737) (9,098)
Payments on capital leases.............................................. (15) (12)
Redemption of stock, net ............................................... (389) (954)
Cash dividends paid..................................................... (1,702) (1,841)
------------- --------------
Net cash flows provided by (used in) financing activities.................... 36,898 (20,437)
------------- --------------
Net increase (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
Item 1. 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, 1999, are not necessarily indicative of the results that may
be expected for the year ending June 30, 2000, due to the seasonal nature
of certain major segments of our 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, 1999.
Future Accounting Requirements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) Nos. 133 and 137 which establish comprehensive
accounting and reporting requirements for derivative instruments and
hedging activities. They require 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 statements are now effective for all quarters of
fiscal years beginning after June 15, 2000. At the present time, Agway has
not completed its evaluation of the impact that the adoption of these new
standards will have on its consolidated financial statements.
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
Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Thousands of Dollars)
2. AGWAY FINANCIAL CORPORATION
---------------------------
Agway Financial Corporation (AFC), a wholly owned subsidiary of Agway, is a
Delaware corporation incorporated in 1986 with principal executive offices
located in Wilmington, Delaware. AFC's principal business activities
consist of securing financing through bank borrowings and issuance of
corporate debt instruments to provide funds for general corporate purposes
to Agway and AFC's wholly owned subsidiary, Agway Holdings Inc. (AHI), and
AHI's subsidiaries. The payment of principal and interest on this AFC debt
is guaranteed by Agway. This guarantee is full and unconditional, and joint
and several. Telmark and Insurance finance their activities through
operations or with a combination of short- and long-term credit facilities.
Major holdings of AHI include Agway Energy Products LLC and Agway Energy
Services Inc. (Energy), Telmark LLC and its subsidiaries (Leasing), and
Agway Insurance Company and Agway General Agency Inc. (Insurance).
Effective June 26, 1999, Agway Consumer Products Inc., a Delaware
corporation and former holding of AHI, was merged into Agway Inc. Agway
Consumer Products Inc. held the assets and business operations of the
former Retail segment and certain assets and business operations of the
Country Products Group and Agriculture. This merger into Agway aligns the
legal structure more closely with the management structure of Agway and
facilitates the ability to manage these assets and businesses
prospectively. The September 1998 results as shown below have been restated
to reflect this merger.
In exemptive relief granted pursuant to a "no action letter" issued by the
staff of the SEC, AFC is not required to file periodic reports with the SEC
for itself but does report summarized financial information in Agway's
financial statement footnotes. 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,
-------------------------------
Restated
1999 1998
-------------- -------------
<S> <C> <C>
Net sales and revenues............................................ $ 132,264 $ 118,399
Operating earnings (loss)......................................... (6,526) 1,671
Net loss.......................................................... (8,285) (4,023)
September 30, June 30,
1999 1999
-------------- -------------
Current assets.................................................... $ 639,004 $ 567,602
Properties and equipment, net..................................... 86,173 86,018
Noncurrent assets................................................. 576,091 557,688
-------------- -------------
Total assets...................................................... $ 1,301,268 $ 1,211,308
============== =============
Current liabilities............................................... $ 128,741 $ 67,391
Short-term notes payable.......................................... 132,600 81,800
Current installments of long-term debt............................ 98,408 92,268
Current installments of subordinated debt......................... 65,085 76,968
Long-term debt.................................................... 244,545 264,021
Subordinated debt................................................. 422,051 409,335
Noncurrent liabilities............................................ 20,916 23,262
Shareholder's equity.............................................. 188,922 196,263
-------------- -------------
Total liabilities and shareholder's equity........................ $ 1,301,268 $ 1,211,308
============== =============
</TABLE>
8
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
3. BORROWING ARRANGEMENTS
----------------------
As of September 30, 1999, Agway had certain facilities available with
banking institutions whereby lenders have agreed to provide funds up to
$385,000 to separately financed units of Agway as follows: AFC - $65,000
and Telmark - $320,000. 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, 1999, AFC's available bank facilities included a
short-term line of credit and a long-term revolving line of credit. These
facilities and AFC's ability to issue 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 Agway and is expected to continue to
do so. The line of credit and long-term revolving line of credit
additionally require Agway's investment in bank stock as additional
collateral. In addition, the agreements include certain covenants, the most
restrictive of which requires Agway to maintain specific quarterly levels
of interest coverage and monthly levels of tangible retained earnings.
Agway is currently negotiating with its banks for the annual renewal of
its line of credit and commercial paper program. The long-term revolving
line of credit that expires on December 31, 1999, will not be renewed. It
is anticipated by Agway that the short-term line of credit and commercial
paper program will be renewed at a level appropriate and adequate to meet
our ongoing financing needs. The terms, conditions, and financial covenants
of these arrangements may be modified based on the finalization of these
negotiations with the banks.
The specifics of the current arrangements are as follows:
<TABLE>
<CAPTION>
Available Outstanding
------------ ------------------------------
9/30/99 9/30/99 6/30/99 Term Expires
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Short-term line of credit*................ $ 50,000 $ 5,400 $ 0 12/31/99
Long-term revolving line of credit........ $ 15,000 $ 0 $ 0 12/31/99
Commercial paper.......................... $ 50,000 $ 46,900 $ 38,500 12/31/99
</TABLE>
*AFC's short-term line of credit facility provides for an increase to
$75,000, which became available on October 1, 1999, to assist in
refinancing maturing subordinated debt.
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 2001 and July 2003 bear a weighted
average interest rate of 8.0%.
9
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
3. BORROWING ARRANGEMENTS (continued)
---------------------------------
Telmark
As of September 30, 1999, Telmark's available credit facilities from banks
allow Telmark to borrow up to an aggregate of $320,000. Uncommitted
short-term line of credit agreements permit Telmark to borrow up to $70,000
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 September 30, 1999, under the short-term lines of credit
was $70,000 and under the revolving term loan facility was $146,300, of
which $136,000 was long-term. As of June 30, 1999, the total amount
outstanding was $35,000 under the short-term lines of credit and under the
revolving term loan facility was $168,000, of which $148,000 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 August 1, 2000.
Telmark had balances outstanding on unsecured senior notes from private
placements totaling $146,000 at both September 30 and June 30, 1999. The
principal bears interest at fixed rates ranging from 6.5% to 7.6%. The
principal payments commence November 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 two wholly owned special purpose subsidiaries, has
lease-backed notes payable to insurance companies that total $57,700 and
$58,800 at September 30 and June 30, 1999, respectively. Interest rates on
different classes of these notes range from 6.5% to 7.6%. The notes are
collateralized by leases, which Telmark sold to these subsidiaries, having
an aggregate present value of contractual lease payments equal to the
principal balance of the notes. The final scheduled maturity of these notes
is December 2007.
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.
Agway's long-term and subordinated debt outstanding at September 30, 1999,
as compared to June 30, 1999, is as follows:
<TABLE>
<CAPTION>
AFC
Agway (excluding Telmark) Telmark Total
----------------------- --------------------- ---------------------- ----------------------
9/99 6/99 9/99 6/99 9/99 6/99 9/99 6/99
---------- ---------- --------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt........ $ 18,404 $ 17,827 $ 3,280 $ 3,488 $ 339,673 $ 352,801 $ 361,357 $ 374,116
Currently payable..... 2,931 2,431 802 807 97,606 91,461 101,339 94,699
---------- ---------- --------- --------- ---------- --------- ---------- ---------
Net long-term debt.... $ 15,473 $ 15,396 $ 2,478 $ 2,681 $ 242,067 $ 261,340 $ 260,018 $ 279,417
========== ========== ========= ========= ========== ========= ========== =========
Subordinated debt..... $ 0 $ 0 $ 447,961 $ 448,670 $ 39,175 $ 37,633 $ 487,136 $ 486,303
Currently payable..... 0 0 46,603 58,768 18,482 18,200 65,085 76,968
---------- ---------- --------- --------- ---------- --------- ---------- ---------
Net subordinated debt. $ 0 $ 0 $ 401,358 $ 389,902 $ 20,693 $ 19,433 $ 422,051 $ 409,335
========== ========== ========= ========= ========== ========= ========== =========
</TABLE>
10
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
4. COMMITMENTS AND CONTINGENCIES
-----------------------------
Environmental
Agway and its subsidiaries are subject to various laws and governmental
regulations concerning environmental matters. We expect to be required to
expend funds to participate in the remediation of certain sites, including
sites where we have 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. We will also incur other expenses
associated with environmental compliance.
Agway is 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 Agway could be required to pay in excess of
its pro rata share of remediation costs. Agway's understanding of the
financial strength of other PRPs at these Superfund sites has been
considered, where appropriate, in determination of its estimated liability.
We continually monitor our 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 can be estimated. Estimates of
the extent of our degree of responsibility of 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. However, we
believe that past experience provides a reasonable basis for estimating our
liability. As additional information becomes available, estimates are
adjusted as necessary. While we do not anticipate that any such adjustment
would be material to our 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 liabilities 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 Agway's liquidity position.
Other
Agway is also subject to various investigations, claims, and legal
proceedings covering a wide range of matters that arise in the ordinary
course of our 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 Agway. We have 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 Agway.
11
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
5. FINANCIAL INFORMATION CONCERNING SEGMENT REPORTING
--------------------------------------------------
Agway is an agricultural cooperative directly engaged in manufacturing,
processing, distribution, and marketing of agricultural feed and agronomic
products and services for its farmer-members and other customers, primarily
in the northeastern United States and Ohio. Agway reports its operations
principally in five business segments. Total sales and revenues of each
industry segment includes the sale of products and services to unaffiliated
customers, as reported in the Agway consolidated statements of operations,
as well as sales to other segments of Agway which are competitively priced.
The Other category within the summary of business segments includes
intersegment eliminations and interest. The category also includes net
corporate expenses and pension income. Finally, interest income for the
Leasing segment is reported as "Net Sales and Revenues."
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
-----------------------------------------------------------------------------------------------
Country
Products
Agriculture Group Energy Leasing Insurance Other(a) Consolidated
------------ ----------- ------------ ----------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and revenues to
unaffiliated customers. $ 151,472 $ 43,266 $ 96,690 $ 18,266 $ 6,980 $ 6 $ 316,680
Intersegment sales and
revenues............... 225 2,922 100 5 0 (3,252) 0
------------ ----------- ------------ ----------- --------- ---------- ------------
Total sales and revenues $ 151,697 $ 46,188 $ 96,790 $ 18,271 $ 6,980 $ (3,246) $ 316,680
============ =========== ============ =========== ========= ========== ============
Earnings (loss) before
income taxes.......... $ (16,245) $ 203 $ (12,021) $ 3,842 $ 35 $ (2,190) $ (26,376)
============ =========== ============ =========== ========= ========== ============
Total assets............. $ 351,165 $ 68,104 $ 152,201 $ 614,009 $ 55,229 $ 250,935 $ 1,491,643
============ =========== ============ =========== ========= ========== ============
<CAPTION>
Three Months Ended September 30, 1998
-----------------------------------------------------------------------------------------------
Country
Products
Agriculture Group Energy Leasing Insurance Other(a) Consolidated
------------ ----------- ------------ ----------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and revenues to
unaffiliated customers. $ 157,056 $ 36,121 $ 85,740 $ 16,907 $ 6,966 $ 49 $ 302,839
Intersegment sales and
revenues............... 27 2,364 111 6 0 (2,508) 0
------------ ----------- ------------ ----------- --------- ---------- ------------
Total sales and revenues $ 157,083 $ 38,485 $ 85,851 $ 16,913 $ 6,966 $ (2,459) $ 302,839
============ =========== ============ =========== ========= ========== ============
Earnings (loss) before
income taxes.......... $ (18,031) $ 11,521 $ (5,315) $ 3,421 $ 6 $ (1,152) $ (9,550)
============ =========== ============ =========== ========= ========== ============
Total assets............. $ 367,263 $ 53,035 $ 126,431 $ 543,013 $ 55,993 $ 250,466 $ 1,396,201
============ =========== ============ =========== ========= ========== ============
</TABLE>
(a) Represents unallocated net corporate items and intersegment eliminations.
12
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
6. SUBSEQUENT EVENT
----------------
On October 19, 1999, the Board of Directors approved a plan to restructure
the retail operations within Agway's Agriculture segment. The plan is
intended to improve the operating results in our retail operations and
provide a greater opportunity to meet customer needs with products we
manufacture and sell. The restructuring will focus Agway's retail
distribution into a dealer-based system by converting a majority of the
Agway-operated retail stores into dealer-operated stores and by adding
additional retail dealer stores to the currently operating retail dealer
system. As of the beginning of the current fiscal year, there were
approximately 160 Agway-operated stores and 300 retail dealer stores. It is
expected that this conversion of Agway-operated stores will take place in a
series of transactions with numerous counter parties over the next two
fiscal years and that certain locations will be sold for alternative uses.
During this transition period, we expect continued operating losses from
our retail operations, but at a reduced level as compared to the prior
year. It is probable that there will be costs for such things as severance
pay and inventory liquidation. Further, it is expected that there will be
gains, and it is possible that there could be losses related to the sale
or conversion of these retail business locations. The level of gain
or loss will be determined on a transaction-by-transaction basis over the
transition period and cannot be presently reasonably estimated for all
locations. During the development of this plan, negotiations for conversion
or sale of certain of the Agway-operated stores were undertaken. As a
result, costs associated with consummated transactions and certain of the
transactions under negotiation are known or can be reasonably estimated,
and therefore, $500 has been incurred or accrued in the quarter ended
September 30, 1999. As additional costs associated with these restructuring
transactions can be reasonably estimated, they will be accrued. One cost
that can be reasonably estimated currently is a $4,300 curtailment cost for
the immediate recognition of the unamortized balance of prior service cost
in the pension plan associated with employees expected to be affected
over the course of the implementation of this plan. This curtailment cost
is a non-cash charge to income that will reduce the net pension asset on
the balance sheet and which will be fully recognized in the quarter ended
December 1999.
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
- ---------------------
Agway 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, Agway. Where any such forward-looking statement includes a
statement of the assumptions or basis underlying such forward-looking statement,
Agway 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, Agway, 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 "intend," "believe," "expect," and "anticipate" and
phrases "it is probable" and "it is possible" or similar words or phrases
identify forward-looking statements.
Agway'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 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. Country Products Group, Leasing, and Insurance are not
materially impacted by seasonal fluctuations.
Numbers in the following narrative have been rounded to the nearest hundred
thousand.
Consolidated Results
- --------------------
Consolidated net sales and revenues of $316,700 for the three months ended
September 30, 1999, increased $13,800 (5%) as compared to the same period in the
prior year. The increase was substantially the result of increased sales in the
Country Products Group, Energy, and Leasing segments. The increase in Country
Products Group resulted from improvements in its Business Division's sunflower
operations and in the Produce Division. The increase in Energy was principally
due to a sharp increase in the pricing level of petroleum products and slight
volume improvements. The Leasing improvement was from continued growth of the
lease portfolio. These sales increases were partially offset by a decrease in
Agriculture, which was principally due to lower agronomy sales. The lower level
of agronomy sales occurred due to an industry-wide decline in commodity pricing
and drought conditions experienced during the first quarter of 2000. See the
detailed business segment discussion below.
Consolidated pre-tax loss from operations of $26,400 for the three months ended
September 30, 1999, increased $16,800 (176%) as compared to the same period in
the prior year. The decrease in the consolidated pre-tax operating results
resulted principally from declines in the Country Products Group and Energy
business segments (see below) and a $1,000 increase in net corporate costs,
substantially due to a reduction in the level of pension income recognized. The
decline in Country Products Group during the first quarter is principally the
result of a net improvement in results during the first quarter of the prior
year relating to the sale of the Allied Seed operations. The decline in Energy
is the result of lower product margins experienced from a sharp increase during
the quarter of petroleum product costs. The decline in pension income resulted
from lower projected gains on assets this year than 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
- -----------
Total Agriculture sales and revenues of $151,700 for the three months ended
September 30, 1999, decreased $5,400 (3%) as compared to $157,100 for the same
period in the prior year. The decrease was substantially due to a decline in
enterprise agronomy and retail operations sales. The agronomy sales decline of
$4,900 for the first quarter as compared to the same period in the prior year
was due to pervasively low industry commodity prices as a global oversupply of
nitrogen products has significantly reduced prices throughout the fertilizer
industry. Additionally, drought conditions in parts of our service area
negatively impacted the sales volume in the first quarter. The agronomy sales
decline was partially offset by an $800 increase in enterprise feed sales during
the first quarter of 2000 as compared to the same period in the prior year.
Agriculture continues to grow its feed business, which reflected a unit volume
increase of 9% in the first quarter. Agriculture's retail sales declined $2,300
for the first quarter of 2000 as compared to the same period in the prior year
and was driven by reduced sales from store locations that were closed after the
first quarter of last year and the sales declines in a number of product lines
that were negatively impacted by the drought conditions experienced during the
first quarter of this year. The decline in retail sales was partially offset by
a $1,400 (10%) increase in wholesale dealer sales during the quarter, which
was a direct result of the effort made in the fourth quarter of fiscal 1999
to improve the existing dealer relationship.
Pre-tax loss of Agriculture of $16,200 for the three months ended September 30,
1999, decreased $1,800 (10%) as compared to a pre-tax loss of $18,000 for the
same period in the prior year. Despite higher gross margin dollars in the
enterprise feed operations in the first quarter of 2000 as compared to the first
quarter in the prior year, higher operating costs caused the enterprise feed
operations pre-tax earnings to decrease $300 in the first quarter of 2000. The
increased margins and costs were substantially the result of a new business
acquisition during the first quarter of the prior year having a full quarter of
activity in the current year and the start of a new feed depot operation after
the first quarter of the prior year. The enterprise agronomy business pre-tax
results declined $1,500 for the first quarter due substantially to lower product
margins which were negatively impacted by the greater supply-versus-demand
imbalance and the drought conditions during the first quarter of 2000 as
compared to the first quarter of 1999. The enterprise retail operations pre-tax
earnings improved $800 substantially due to lower operating expenses in
connection with the consolidation of the retail business into the Agriculture
segment which occurred in the fourth quarter of fiscal 1999. Overall,
Agriculture pre-tax results for the first quarter of 2000 were negatively
impacted by $500 of net losses experienced from the closing and conversions of
Company-owned retail stores that is part of a plan to restructure the retail
operations. (See Footnote 6 for a further description of this activity and its
impact on future operating results.) Finally, improved pre-tax results in the
first quarter of 2000 were experienced due to lower losses in the grain
marketing operations as compared to the first quarter of 1999. As disclosed at
June 30, 1999, pre-tax losses totaling $5,800 from unauthorized speculative
activity occurred in the first quarter of 1999 as compared to losses of $1,800
incurred during the first quarter of 2000. The current year loss included the
costs of $1,300 incurred in closing the unauthorized speculative positions that
were outstanding at June 30, 1999, as well as losses from operations during the
first quarter of 2000.
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)
Country Products Group
- ----------------------
Total sales and revenues of $46,200 for the three months ended September 30,
1999, increased $7,700 (20%) as compared to the same period in the prior year.
The first quarter growth in sales in the current year was in the Business Group
($2,500) and in the Produce Group ($6,200). This sales growth in the first
quarter was partially offset by an $800 decline in sales as a result of the sale
of the Allied Seed business in the first quarter of the prior year. The Business
Group's sunflower seed operation experienced increased sales volume of human
edible sunflower seed this year from its processing plant expansion that was not
fully operational in the first quarter of the prior year. The Produce Group
sales growth in the first quarter of this year as compared to the same period in
the prior year is substantially due to the acquisition of new produce businesses
in the second half of the prior year and in the first quarter of the current
year. Additional sales growth resulted from the new Empire Sweets onion product
line which harvested a larger crop and had higher sales in the first quarter
this year as compared to the same period in the prior year.
CPG pre-tax earnings of $200 for the three months ended September 30, 1999,
declined $11,300 (98%) as compared to the same period in the prior year. A
substantial amount of this decline ($10,700) resulted from the fact that pre-tax
earnings of the comparable period in the prior year reflected a net improvement
in results relating to the sale of the Allied Seed operations, while no
comparable sale occurred in the first quarter ended September 30, 1999. CPG's
Business Group improved its pre-tax results of ongoing operations by $1,000 for
the first quarter of this year as compared to the same period in the prior year.
This improvement was substantially driven by improved margins in the sunflower
seed operations. These improvements were reduced by lower margins and higher
costs experienced in the Produce Group during the first quarter which reduced
this group's pre-tax earnings by $600. CPG's Investment Group experienced a
pre-tax loss of $1,200 as it continues to incur costs related to several of its
initiatives for future growth. One of the Investment Group's businesses, CPG
Nutrients, began commercial sales of OptigenTM 1200, a controlled-release
nitrogen feed product, to dairy farmers in October 1999.
Energy
- ------
Energy sales and revenues of $96,800 for the three months ended September 30,
1999, increased $10,900 (13%) over the same period in the prior year. Overall,
product unit volumes increased 1% during the first quarter of this year as
compared to the same period in the prior year. A substantial amount of the
increase in sales dollars in the first quarter is due to a sharp increase during
the quarter of the costs of petroleum products within the energy industry.
Petroleum prices rose approximately $0.20/gallon between June and September 1999
and are approximately $0.11/gallon higher than the first quarter of the prior
year. The increased costs caused increased selling prices in the market.
Additionally, a sales increase in the three months ended September 30, 1999, of
$3,300 results from the continued growth of revenues in heating, ventilation,
and air-conditioning installation and service sales and continued sales growth
in the electric and gas marketing business.
Pre-tax loss from operations of $12,000 for the three months ended September 30,
1999, was greater by $6,700 (126%) as compared to the same period in the prior
year. The sharp increase in petroleum product costs noted above could not be
fully reflected in the selling price of the products in the market for a number
of reasons and reduced overall margin dollars on petroleum products during the
first quarter by 17% as compared to the same period in the prior year.
An operating expense increase of $5,100 in the first quarter as compared to the
same period in the prior year resulted from increased administrative costs,
principally payroll and information systems costs related to year 2000 readiness
and increased marketing costs from new initiatives.
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
- -------
Total revenue of $18,300 for the three months ended September 30, 1999,
increased $1,400 (8%) as compared to the same period in the prior year. This
increase, which was partly offset by a lower income rate on new and replacement
leases, is primarily due to higher average investment in leases. Telmark's
average net investment in leases increased $60,900 (12%) in the first quarter as
compared to the same period in the prior year.
Pre-tax earnings from operations of $3,800 for the three months ended September
30, 1999, increased $400 (12%) as compared to the same period in the prior year.
The total revenue increase noted above was partially offset by an increase in
total expenses of $900 (7%) for the quarter ended September 30, 1999, as
compared to the same period in the prior year. The increase in total expenses
was due to increased interest and selling, general and administrative expenses
(SG&A) and a higher credit loss provision. The increased interest expense is due
to an increase in the amount of debt required to finance the increase in the
lease portfolio as compared to the same period in the prior year. SG&A expenses
increased due to higher payroll costs associated with incentives paid to certain
employees relating to overall profitability, retention of business, and
profitability of new business. Finally, the increase in the provision for credit
losses results from a larger lease portfolio as of September 30, 1999, as
compared to the same period in the prior year.
Insurance
- ---------
Insurance net revenues of $7,000 for the three months ended September 30, 1999,
were the same as the prior year. Net earned premiums and investment income of
Agway Insurance Company and Agency revenues in the first quarter were at the
same levels as compared to the same period during the prior year.
Pre-tax earnings of the Insurance Company of $200 for the three months ended
September 30, 1999, increased $100 (100%) as compared to the same period in the
prior year. The improvement in pre-tax earnings resulted from improved claim
experience during the quarter being partially offset by higher costs of data
processing resulting from new system implementation. The Agency experienced a
pre-tax loss of $200 for the three months ended September 30, 1999, an increased
loss of $100 (41%) as compared to the same period in the prior year. The
increased loss resulted from increased payroll and data processing costs as
compared to the same period in the prior year.
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
- -------------------------------
Cash generated from operations and external borrowings continue to be Agway's
major ongoing sources 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>
Increase
1999 1998 (Decrease)
------------- ------------- ------------
<S> <C> <C> <C>
Net cash flows provided by (used in):
Operating activities.............................................. $ (3,131) $ 34,780 $ (37,911)
Investing activities.............................................. (33,767) (14,343) (19,424)
Financing activities.............................................. 36,898 (20,437) 57,335
------------- ------------- ------------
Net increase (decrease) in cash and equivalents...................... $ 0 $ 0 $ 0
============= ============= ============
</TABLE>
Cash Flows Provided By Operating Activities
The decrease in cash flows provided by operating activities for the three months
ended September 30, 1999, included a net earnings decrease of $10,500 as
compared to the same period in the prior year and changes in working capital
generated cash of $11,800 in the first quarter compared to generating cash of
$40,000 for the same period in the prior year. The decline in receivable and
inventory balances during the first quarter of this year was substantially
smaller than the same period in the prior year.
Cash Flows Used In Investing Activities
The cash flows used in investing activities increased in the first three months
of 2000 by $19,400 as compared to the first three months of the prior year. Cash
of $14,200 generated during the first quarter of the prior year from the sale of
the Allied Seed business offset the cash investments made in the prior year, and
there was a $5,200 greater net investment in Telmark leases in the first quarter
of this year compared to last year.
Cash Flows Provided By (Used In) Financing Activities
Financing activities for the three months ended September 30, 1999, provided
cash of $36,900 compared to a net cash use of $20,400 for the same period in the
prior year. This $57,300 change in cash from financing was substantially from
increased short-term borrowings to cover the changed requirements for cash for
operations and investing activities.
The Company finances its operations and the operations of all its continuing
business and subsidiaries through Agway Financial Corporation (AFC). External
sources of short-term financing for Agway and all its other continuing
operations include revolving credit lines, letters of credit, and a commercial
paper program. Insurance finances its activities through operations or with a
combination of short- and long-term credit facilities. Telmark's finance
arrangements are explained below.
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)
LIQUIDITY AND CAPITAL RESOURCES (continued)
- -------------------------------------------
Sources of longer-term financing include the following as of September 30, 1999:
<TABLE>
<CAPTION>
AFC
Agway (excluding
Source of debt Inc. Telmark) Telmark Total
- -------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Banks - due 10/99 to 4/04, interest at a weighted average
rate of 6.8% with a range of 5.6% - 7.7%................... $ 0 $ 1,050 $ 136,000 $ 137,050
Insurance companies - due 10/99 to 12/07, interest at a
weighted average rate of 6.8% with a range of
6.5% - 7.6%................................................ 0 0 203,673 203,673
Capital leases and other - due 1999 to 2008, interest at a
weighted average rate of 9.3% with a range of 6% to 12%.... 18,404 2,230 0 20,634
---------- ---------- --------- ---------
Long-term debt........................................... 18,404 3,280 339,673 361,357
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%................................................ 0 440,007 0 440,007
Subordinated debentures - due 3/00 to 7/03, interest at a
weighted average rate of 8.0% with a range of 6.0%
to 8.5%.................................................... 0 7,954 39,175 47,129
---------- ---------- --------- ---------
Total debt............................................... $ 18,404 $ 451,241 $ 378,848 $ 848,493
========== ========== ========= =========
</TABLE>
For a further description of the Company's credit facilities available at
September 30, 1999, 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.
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. In addition, in some business segments, computer chips are
embedded in the automation of certain processing or manufacturing operations.
Agway initiated its year 2000 compliance efforts in January 1996. The year 2000
compliance effort has been comprehensive, including each business segment as
well as corporate-level activities. Agway engaged an international consulting
firm in March 1998 to evaluate Agway's approach to year 2000 plans and
implementation compared to industry "best practices." Year 2000 readiness
responsibility has been assigned to high level management within each business
segment and for Agway as a whole. This includes periodic reports to the Board of
Directors regarding the implementation timetable and the development of
contingency plans. In the systems area, the effort has included:
19
<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)
1. inventorying all critical information systems;
2. prioritizing those systems determined to be at risk;
3. planning the upgrade through system remediation, replacement, outsourcing,
or disposal;
4. testing and implementation of upgraded systems; and
5. testing of the critical upgraded systems in a year 2000 environment created
for that purpose.
While upgraded systems are individually tested for year 2000 compliance prior to
implementation, the year 2000 environment allows us to not only test them in a
simulated year 2000 environment but also to test the interaction of critical
systems on an "enterprise-wide" basis in a simulated year 2000 environment.
The prioritization of Agway's year 2000 compliance work considers, among other
things, the seasonal business cycles of certain Agway business segments to allow
for implementation of and training on major new systems during the non- peak
portion of each segment's business cycle. The inventory, prioritization, and
planning stages for all information systems are complete. The testing and
implementation stage is complete for all critical systems and enterprise-wide
testing for selected critical information systems has also been completed,
except for the following outstanding information systems issues as discussed
below:
- - The accounts receivable system for the Agriculture segment's wholesale
business is scheduled for replacement November 1999.
- - Enterprise-wide testing for the Agway Energy segment's new fully installed
retail operations systems is scheduled for completion in November 1999. In
addition, the remaining year 2000 compliance tests by the vendor for the
Agway modified version of this software will be completed in November 1999.
Based on the work to date, we believe that this remaining information system
work will be completed on a timely basis. We expect minimal, if any, disruption
of our information systems as we enter the year 2000.
In addition to the information systems review noted above, Agway 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 (personal computers),
information technology (IT) vendor relationships, external interfaces to
internal IT systems, remote location access to IT systems, and certain
non-information technology issues such as supplier year 2000 readiness, facility
year 2000 readiness, and the extent to which embedded chips are used in
machinery and equipment used in business operations. In the IT-related areas,
Agway has completed significant assessments in its major business operations and
has developed and implemented plans to address the critical issues. With respect
to suppliers, Agway is engaged in dialogue, both in writing and by interview,
regarding their year 2000 readiness. These communications will continue to the
extent useful through December 1999. In the case of embedded chips in
manufacturing and processing operations, the review, assessment, and remediation
are complete in the Country Products Group and Energy segments. The Agriculture
segment has determined that the only facilities requiring further consideration
are the feed mills. A complete inventory of embedded chips in these mills has
been completed. Based on work to date the need for remediation of these chips is
expected to be limited, if any, and is planned to be completed by November 1999.
20
<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 year 2000 compliance issue is an uncertainty that is continuously being
monitored as Agway implements its plans. Based on the work performed to date,
Agway 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.
Our research to date gives us increased confidence in many of these
infrastructure components but also persuades us that absolute certainty
regarding their performance will not likely be possible prior to passing into
the year 2000. To the extent failure occurs in such activities, which are
outside Agway's control, it could affect Agway's sources of supply and Agway's
ability to service its customers with the same degree of effectiveness with
which they are served presently. Agway has identified elements of the
infrastructure that are of greater significance to its operations and is
obtaining information on an ongoing basis as to their expected year 2000
readiness.
Each of Agway's business segments has either completed or is in the process of
completing business contingency and continuity plans in the event of unusual
business developments due to entering into the year 2000. The methodology used
for this planning process was common for each business area. Each business unit
identified its business processes and assessed each process on the basis of its
importance to the conduct of business and the probability of its having a year
2000-generated problem. Processes identified as critical to the conduct of
business with a moderate or higher probability of exposure to year 2000
disruption were then investigated for work-around alternatives. Those processes
for which alternatives were not readily available were then considered further
for establishment of business contingency and continuity plans.
Our business contingency and continuity plans were set to provide the best
possible assurance first for those services we provide customers that involve
human health and safety, i.e., principally delivery of energy products; second
for those services that involve animal life and welfare, principally delivery of
animal feeds; and third for those business activities that provide cash flow to
Agway to permit us to meet our obligations.
Based on these priorities, the most severe difficulty that we could face would
be either the disruption of supply of our energy or feed products to the
Northeast or power failures which would disrupt ability to deliver product to
our customer base. In both our energy and feed businesses, we have multiple
locations throughout our market territory and will store product to the extent
possible prior to December 31, 1999, as a contingency plan. In the normal course
of business, we have multiple suppliers so that alternative supply is available.
If primary transportation of bulk product to the Northeast, i.e., pipelines or
rail, is impaired, we would move to alternative transportation to the extent
available, move product from locations with higher stored inventory to locations
experiencing shortages and, if necessary, particularly in Energy, move to
allocation programs which are part of our standard business continuity programs.
Similarly, in the event of localized power failures, we have the ability in
emergency conditions to move product from non-affected locations to affected
locations.
Finally, we have established and tested a command center that makes use of the
telephones and work space in our existing overnight call center. A back-up
generator is in place with capacity to provide power to this command center,
Agway's computer center, and limited additional space. Business units have been
allocated work space in this area to monitor and react to critical business
interruptions just prior and subsequent to the millennium date change.
21
<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 has incurred 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 $15,900, of which $15,700 has
been incurred and $200 is expected to be incurred from October 1999 through
December 1999. Approximately 85% of these estimated costs represent replacement
costs and will be capitalized. Additionally, the Company estimates the costs to
remediate all other areas may approximate $3,000, of which $2,900 has been
incurred and $100 is expected to be incurred from October 1999 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.
The year 2000 statements set forth above are designated as "Year 2000 Readiness
Disclosures" pursuant to the Year 2000 Information and Readiness Disclosure Act
(P.L. 105-271).
FUTURE ACCOUNTING REQUIREMENTS
- ------------------------------
See Footnote 1 to the condensed consolidated financial statements.
22
<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, 1999 and June 30, 1999. 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, 1999 and June 30, 1999, assuming a 10% hypothetical change in the
underlying commodity price, the potential change in fair value of Energy's
commodity instruments was $1,700 and $1,100, 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, 1999 and June 30, 1999. 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 and June 30, 1999, 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.
23
<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, 1999 and June 30, 1999. 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 discussed in prior filings, as of June
30, 1999, unauthorized speculative positions had been taken so that the
commodity instrument activity of the department at that date was not effectively
hedging the underlying commodities and forward contracts. As of September 30 and
June 30, 1999, assuming a 10% hypothetical change in the underlying commodity
price, the potential change in fair value of the department's commodity
instruments was $290 and $2,900, respectively.
24
<PAGE>
PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
Agway filed a Form 8-K on July 8, 1999, reporting that it was disclosed to Agway
that records had been falsified to conceal losses from unauthorized speculative
activities in Agriculture's grain marketing business.
25
<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 November 5, 1999 /s/ PETER J. O'NEILL
-------------------------- ----------------------------------------
Peter J. O'Neill
Senior Vice President,
Finance & Control,
(Principal Financial Officer and
Chief Accounting Officer)
26
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
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