UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----
ACT OF 1934
For the quarterly period ended March 31, 2000
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----
EXCHANGE ACT OF 1934
For the transition period from to
------------------------ --------------------
Commission file number 2-22791
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AGWAY INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 15-0277720
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
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(Address of principal executive offices) (Zip Code)
315-449-6431
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 5, 2000
- ------------------------ --------------------------
Membership Common Stock, 99,022 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 March 31, 2000 and June 30, 1999............................. 3
Condensed Consolidated Statements of Operations and Retained Earnings for the three months
and nine months ended March 31, 2000 and March 31, 1999.................................................. 4
Consolidated Statements of Comprehensive Income for the three months and nine months ended
March 31, 2000 and March 31, 1999........................................................................ 5
Condensed Consolidated Cash Flow Statements for the nine months ended March 31, 2000
and March 31, 1999....................................................................................... 6
Notes to Condensed Consolidated Financial Statements..................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 22
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings............................................................................... 24
Item 6. Exhibits and Reports on Form 8-K................................................................ 24
SIGNATURES............................................................................................... 25
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 1. CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 2000 1999
- ------ ----------- -----------
<S> <C> <C>
Current Assets:
Trade accounts receivable (including notes receivable of $19,478 and
$45,960, respectively), less allowance for doubtful accounts of
$7,873 and $7,155, respectively ................................................... $ 166,787 $ 185,536
Leases receivable, less unearned income of $68,491 and
$64,330, respectively ............................................................. 148,191 131,431
Advances and other receivables ......................................................... 39,625 23,456
Inventories:
Raw materials ..................................................................... 11,014 6,892
Finished goods .................................................................... 189,963 137,348
Goods in transit and supplies ..................................................... 1,803 1,826
----------- -----------
Total inventories ............................................................ 202,780 146,066
Prepaid expenses and other assets ...................................................... 51,269 52,341
----------- -----------
Total current assets .............................................................. 608,652 538,830
Marketable securities available for sale ..................................................... 36,539 35,099
Other security investments ................................................................... 52,062 51,010
Properties and equipment, net ................................................................ 214,213 215,425
Long-term leases receivable, less unearned income of $156,348 and
$134,623, respectively ................................................................. 442,862 419,444
Net pension asset ............................................................................ 208,459 198,160
Other assets ................................................................................. 21,017 19,083
----------- -----------
Total assets ................................................................. $ 1,583,804 $ 1,477,051
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Notes payable .......................................................................... $ 160,388 $ 81,800
Current installments of long-term debt ................................................. 100,249 94,699
Current installments of subordinated debt .............................................. 72,109 76,968
Accounts payable ....................................................................... 163,533 115,350
Other current liabilities .............................................................. 111,149 115,865
----------- -----------
Total current liabilities ......................................................... 607,428 484,682
Long-term debt ............................................................................... 274,547 279,417
Subordinated debt ............................................................................ 417,097 409,335
Other liabilities ............................................................................ 107,617 104,670
----------- -----------
Total liabilities ................................................................. 1,406,689 1,278,104
Commitments and contingencies
Shareholders' equity:
Preferred stock, net ................................................................... 40,389 42,917
Common stock, net ...................................................................... 2,479 2,506
Accumulated other comprehensive income (loss) .......................................... (825) (239)
Retained earnings ...................................................................... 135,072 153,763
----------- -----------
Total shareholders' equity ........................................................ 177,115 198,947
----------- -----------
Total liabilities and shareholders' equity ................................... $ 1,583,804 $ 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 Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales and revenues from:
Product sales (including excise taxes) ........... $ 438,915 $ 333,247 $ 1,084,519 $ 904,606
Leasing operations ............................... 19,264 17,269 56,592 51,765
Insurance operations ............................. 6,629 6,505 20,589 21,068
----------- ----------- ----------- -----------
Total net sales and revenues ................ 464,808 357,021 1,161,700 977,439
Cost and expenses from:
Products and plant operations .................... 397,444 296,728 1,021,143 840,344
Leasing operations ............................... 6,921 5,610 22,801 20,164
Insurance operations ............................. 3,809 4,082 12,153 13,539
Selling, general and administrative
activities ................................... 38,031 37,217 116,829 111,100
----------- ----------- ----------- -----------
Total operating costs and expenses .......... 446,205 343,637 1,172,926 985,147
Operating earnings (loss) .............................. 18,603 13,384 (11,226) (7,708)
Interest expense, net .................................. (9,007) (8,155) (25,591) (23,892)
Other income, net ...................................... 6,080 1,904 13,312 19,194
----------- ----------- ----------- -----------
Earnings (loss) before income taxes .................... 15,676 7,133 (23,505) (12,406)
Income tax (expense) benefit ........................... (7,013) (4,364) 6,387 2,028
----------- ----------- ----------- -----------
Net earnings (loss) .................................... 8,663 2,769 (17,118) (10,378)
Retained earnings, beginning of period ................. 126,409 140,243 153,763 155,082
Dividends ........................................ 0 0 (1,573) (1,692)
----------- ----------- ----------- -----------
Retained earnings, end of period ....................... $ 135,072 $ 143,012 $ 135,072 $ 143,012
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 1. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
2000 1999 2000 1999
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net earnings (loss) ........................................ $ 8,663 $ 2,769 $(17,118) $(10,378)
Other comprehensive income, net of tax:
Unrealized gains (losses) on
available-for-sale securities:
Unrealized holding gains (losses)
arising during period ........................... (93) (405) (634) (108)
Reclassification adjustment
for (gains) losses included in
net earnings .................................... 46 6 48 21
-------- -------- -------- --------
Other comprehensive income (loss) .......................... (47) (399) (586) (87)
-------- -------- -------- --------
Comprehensive income (loss) ................................ $ 8,616 $ 2,370 $(17,704) $(10,465)
======== ======== ======== ========
</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>
Nine Months Ended
March 31,
--------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net cash flows (used in) provided by operating activities ............................ $ (2,693) $ 48,316
Cash flows provided by (used in) investing activities:
Purchases of property, plant and equipment ..................................... (20,786) (17,752)
Proceeds from disposal of property, plant and equipment ........................ 8,576 591
Proceeds from sale of business ................................................. 0 14,150
Cash paid for acquisition of business .......................................... (4,950) (7,090)
Leases originated .............................................................. (203,635) (176,672)
Leases repaid .................................................................. 153,246 145,232
Proceeds from sale of marketable securities .................................... 2,319 5,790
Purchases of marketable securities ............................................. (4,345) (6,345)
Net purchase of investments in cooperatives .................................... (1,477) (950)
--------- ---------
Net cash flows used in investing activities .......................................... (71,052) (43,046)
Cash flows provided by (used in) financing activities:
Net change in short-term borrowings ............................................ 78,588 31,080
Proceeds from long-term debt ................................................... 75,989 13,273
Repayment of long-term debt .................................................... (73,856) (67,106)
Proceeds from sale of subordinated debt ........................................ 111,929 128,629
Maturity and redemption of subordinated debt ................................... (109,026) (102,553)
Payments on capital leases ..................................................... (4,048) (185)
Redemption of stock, net ....................................................... (2,556) (4,876)
Cash dividends paid ............................................................ (3,275) (3,532)
--------- ---------
Net cash flows provided by (used in) financing activities ............................ 73,745 (5,270)
--------- ---------
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 nine-month
period ended March 31, 2000, 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 Standard (SFAS) No. 133 which establishes comprehensive
accounting and reporting requirements for derivative instruments and
hedging activities. The standard requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. The
accounting for gains or losses resulting from changes in the values of
those derivatives is dependent on the use of the derivative and the type
of risk being hedged. SFAS No. 137 was issued modifying the effective date
for SFAS No. 133 to be 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 and, in the case of Telmark, also 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 March 1999 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. As required by the 1934 Act, the summarized
financial information concerning AFC and consolidated subsidiaries is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------------ ------------------------------------
Restated Restated
2000 1999 2000 1999
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales and revenues.............. $ 277,934 $ 178,501 $ 620,437 $ 447,529
Operating earnings (loss)........... 34,439 31,246 38,986 42,891
Net earnings (loss)................. 15,113 14,011 10,018 8,055
</TABLE>
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
---------------- ---------------
<S> <C> <C>
Current assets............................................................... $ 668,377 $ 567,602
Properties and equipment, net................................................ 84,200 86,018
Noncurrent assets............................................................ 588,233 557,688
---------------- ---------------
Total assets................................................................. $ 1,340,810 $ 1,211,308
================ ===============
Current liabilities.......................................................... $ 103,330 67,391
Short-term notes payable..................................................... 160,388 81,800
Current installments of long-term debt....................................... 96,999 92,268
Current installments of subordinated debt.................................... 72,109 76,968
Long-term debt............................................................... 262,312 264,021
Subordinated debt............................................................ 417,097 409,335
Noncurrent liabilities....................................................... 22,879 23,262
Shareholder's equity......................................................... 205,696 196,263
---------------- ---------------
Total liabilities and shareholder's equity................................... $ 1,340,810 $ 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 March 31, 2000, Agway had certain facilities available with banking
institutions whereby lenders have agreed to provide funds up to $396,700
to separately financed units of Agway as follows: AFC - $65,000 and
Telmark - $331,700. 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 March 31, 2000, AFC's available bank facilities consisted of a
short-term line of credit. This facility 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 also requires Agway's
investment in bank stock as additional collateral. Effective for each
quarter commencing with the quarter ended March 2000, the bank agreements
also limit available credit to a multiple of the 12-month rolling earnings
as defined in the agreement. The earnings level as measured at March 2000
was adequate to support the borrowing level under the agreements. In
addition, the agreements include certain covenants, the most restrictive
of which require Agway to maintain specific current ratios, quarterly
levels of interest coverage, and monthly levels of tangible retained
earnings.
The Company's long-term revolving line of credit expired on December 31,
1999, and was not renewed by the banks. This line had never been drawn
upon. The short-term line of credit and commercial paper program were
renewed through December 2000 at a level management believes is
appropriate and adequate to meet the Company's normal ongoing financing
needs. Based on negotiations with the lenders, the terms, conditions, and
financial covenants of these arrangements have been made more restrictive
and costs have increased. Given the historical volatility of the Company's
operating results, these more restrictive covenants increase the
possibility of future covenant violations. During the third quarter, Agway
violated a financial covenant and subsequently obtained appropriate
waivers and amendments from its lenders. The Company believes the lenders
continue to be supportive of the Company, and the Company expects to have
ongoing discussions with the lenders as management executes the Company's
business plans.
The specifics of the current arrangements are as follows:
<TABLE>
<CAPTION>
Outstanding
Available ------------------------------------
3/31/00 3/31/00 6/30/99 Term Expires
--------------- --------------- ---------------- ------------
<S> <C> <C> <C> <C>
Short-term line of credit*...................... $ 65,000 $ 28,700 $ 0 12/31/00
Commercial paper................................ $ 50,000 $ 50,000 $ 38,500 12/31/00
</TABLE>
*AFC's short-term line of credit facility decreases to $50,000 at July 1,
2000, through December 31, 2000, to reflect the decline in seasonal
financing needs and expected future financing requirements.
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, although AFC can discontinue this practice of repurchasing
at any time. The foregoing debt bears interest payable semi-annually on
January l and July 1 of each year. The subordinated 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 2000 and October 2014 bear a weighted average interest
rate of 7.9%, 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 March 31, 2000, Telmark's available credit facilities from banks
allow Telmark to borrow up to an aggregate of $331,700. Uncommitted
short-term line of credit agreements permit Telmark to borrow up to
$81,700 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 March 31, 2000, under the short-term lines of credit was
$56,600 and under the revolving term loan facility was $205,100, of which
$180,000 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 $156,300, of which $148,000 was long-term. The
uncommitted lines of credit expire at various times within the next 12
months, and the $250,000 revolving term loan facility is available through
August 1, 2001.
Telmark had balances outstanding on unsecured senior notes from private
placements totaling $122,000 at March 31, 2000, and $146,000 at June 30,
1999. The principal bears interest at fixed rates ranging from 6.5% to
7.6%. The principal payments commence November 2000 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 $54,400 and
$58,800 at March 31, 2000 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.
The Company's long-term and subordinated debt outstanding at March 31,
2000, as compared to June 30, 1999, is as follows:
<TABLE>
<CAPTION>
AFC
Agway (excluding Telmark) Telmark Total
------------------ -------------------- -------------------- --------------------
3/00 6/99 3/00 6/99 3/00 6/99 3/00 6/99
------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt ................. $15,485 $17,827 $ 2,893 $ 3,488 $356,418 $352,801 $374,796 $374,116
Currently payable .............. 3,250 2,431 802 807 96,197 91,461 100,249 94,699
------- ------- -------- -------- -------- -------- -------- --------
Net long-term debt ............. $12,235 $15,396 $ 2,091 $ 2,681 $260,221 $261,340 $274,547 $279,417
======= ======= ======== ======== ======== ======== ======== ========
Subordinated debt .............. $ 0 $ 0 $444,677 $448,670 $ 44,529 $ 37,633 $489,206 $486,303
Currently payable .............. 0 0 53,170 58,768 18,939 18,200 72,109 76,968
------- ------- -------- -------- -------- -------- -------- --------
Net subordinated debt .......... $ 0 $ 0 $391,507 $389,902 $ 25,590 $ 19,433 $417,097 $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 March 31, 2000
-------------------------------------------------------------------------------------------
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 ............. $ 150,653 $ 51,240 $ 237,077 $ 19,184 $ 6,629 $ 25 $ 464,808
Intersegment sales and
revenues ........................... 131 2,113 130 80 0 (2,454) 0
----------- ---------- ---------- ---------- ---------- ---------- -----------
Total sales and revenues ......... $ 150,784 $ 53,353 $ 237,207 $ 19,264 $ 6,629 $ (2,429) $ 464,808
=========== ========== ========== ========== ========== ========== ===========
Earnings (loss) before
income taxes ...................... $ (12,034) $ (1,636) $ 25,158 $ 5,845 $ 78 $ (1,735) $ 15,676
=========== ========== ========== ========== ========== ========== ===========
Total assets ......................... $ 366,073 $ 88,188 $ 191,784 $ 638,897 $ 55,001 $ 243,861 $ 1,583,804
=========== ========== ========== ========== ========== ========== ===========
<CAPTION>
Three Months Ended March 31, 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 ............. $ 145,627 $ 39,979 $ 147,700 $ 17,262 $ 6,505 $ (52) $ 357,021
Intersegment sales and
revenues ........................... 29 2,144 151 7 0 (2,331) 0
----------- ---------- ---------- ---------- ---------- ---------- -----------
Total sales and revenues .......... $ 145,656 $ 42,123 $ 147,851 $ 17,269 $ 6,505 $ (2,383) $ 357,021
=========== ========== ========== ========== ========== ========== ===========
Earnings (loss) before
income taxes ...................... $ (19,723) $ (656) $ 21,816 $ 5,758 $ 34 $ (96) $ 7,133
=========== ========== ========== ========== ========== ========== ===========
Total assets ......................... $ 378,143 $ 65,850 $ 144,456 $ 556,003 $ 53,082 $ 242,466 $ 1,440,000
=========== ========== ========== ========== ========== ========== ===========
</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)
5. FINANCIAL INFORMATION CONCERNING SEGMENT REPORTING (continued)
--------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended March 31, 2000
-------------------------------------------------------------------------------------------
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 ........... $ 440,183 $ 137,056 $ 507,343 $ 56,501 $ 20,589 $ 28 $ 1,161,700
Intersegment sales and
revenues ......................... 819 9,230 329 91 0 (10,469) 0
----------- ----------- --------- -------- --------- --------- -----------
Total sales and revenues ....... $ 441,002 $ 146,286 $ 507,672 $ 56,592 $ 20,589 $ (10,441) $ 1,161,700
=========== =========== ========= ======== ========= ========= ===========
Earnings (loss) before
income taxes .................... $ (43,315) $ (2,326) $ 19,267 $ 14,244 $ 71 $ (11,446) $ (23,505)
=========== =========== ========= ======== ========= ========= ===========
Total assets ....................... $ 366,073 $ 88,188 $ 191,784 $638,897 $ 55,001 $ 243,861 $ 1,583,804
=========== =========== ========= ======== ========= ========= ===========
<CAPTION>
Nine Months Ended March 31, 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 ........... $ 439,265 $ 113,472 $ 351,881 $ 51,745 $ 21,068 $ 8 $ 977,439
Intersegment sales and
revenues ......................... 78 8,702 397 20 0 (9,197) 0
----------- ----------- --------- -------- --------- --------- -----------
Total sales and revenues ........ $ 439,343 $ 122,174 $ 352,278 $ 51,765 $ 21,068 $ (9,189) $ 977,439
=========== =========== ========= ======== ========= ========= ===========
Earnings (loss) before
income taxes .................... $ (53,469) $ 12,678 $ 19,376 $ 13,199 $ (154) $ (4,036) $ (12,406)
=========== =========== ========= ======== ========= ========= ===========
Total assets ....................... $ 378,143 $ 65,850 $ 144,456 $556,003 $ 53,082 $ 242,466 $ 1,440,000
=========== =========== ========= ======== ========= ========= ===========
</TABLE>
(a) Represents unallocated net corporate items and intersegment eliminations.
13
<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. RETAIL RESTRUCTURING PLAN
-------------------------
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 is focused on converting 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-operated 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. This
conversion of Agway-operated stores is taking place in a series of
transactions with numerous counter-parties. Certain locations are being
sold for alternative uses. During this transition period which affects two
fiscal years, we expect continued operating losses from our retail
operations, but at a reduced level as compared to the prior year. There
have been and will continue to be costs for such items as severance pay
and inventory liquidation. Further, there have been and will continue to
be gains and losses related to the sale or conversion of these retail
business locations. The level of gain or loss is being determined on a
transaction-by-transaction basis over the transition period and cannot
presently be reasonably estimated for all locations. As costs associated
with these restructuring transactions become probable and can be
reasonably estimated, they are being accrued.
In the third quarter, the retail restructuring efforts have resulted in 30
stores being converted to dealers, 6 stores/properties being sold, 1 store
being closed, and 21 new wholesale dealers being established. The efforts
to date have resulted in 41 stores being converted to dealers, 18
stores/properties being sold, 11 stores being closed, and 80 new wholesale
dealers being established. Additionally, approximately 70 locations are
currently under negotiations, some of which have a commitment in place.
This activity has generated approximately $13,100 in net cash from the
sale of fixed assets and inventory. The following represents the gain or
loss from the retail restructuring for the periods ended March 31, 2000,
including estimated losses of $800 accrued as of that date for business
locations where transactions are probable and losses can reasonably be
estimated:
<TABLE>
<CAPTION>
Three Nine
Months Months
Ended Ended
3/31/00 3/31/00
------- -------
<S> <C> <C>
Net gain on sale of assets ................................................. $ 1,500 $ 3,400
Loss on sale/liquidation of inventory ...................................... (1,900) (2,700)
Severance costs ............................................................ (100) (200)
Other transaction costs(1) ................................................. (400) (800)
------- -------
Net gain (loss) on restructuring activity ............................. $ (900) $ (300)
======= =======
</TABLE>
(1) Other transaction costs include items such as professional
services fees, environmental surveys and advertising.
In addition to the above costs, a $5,800 non-cash charge to earnings was
accrued in the corporate accounts ("other segments") in the second quarter
to recognize the effect of the retail plan on the Company's retirement
benefit plans in accordance with curtailment accounting requirements.
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)
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
the higher demand from 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 $464,800 and $1,161,700 for the three and
nine months ended March 31, 2000, increased $107,800 (30%) and $184,300 (19%),
respectively, as compared to the same periods in the prior year. The increases
in both the three-month and nine-month periods were substantially the result of
increased sales in the Energy and Country Products Group segments. The increase
in Energy was principally due to increases in the cost of petroleum products
over the prior year combined with volume improvements. The increase in Country
Products Group sales resulted from new acquisitions in its Produce Group's
operations. The sales increases during the three months ended March 31, 2000,
were further enhanced by increased sales in the Agriculture segment in the
agronomy business from early spring weather and from improved wholesale dealer
sales, a direct result of the Agriculture segment concentrating on enhancing its
relationship with these dealers. The Company's sales increases in the nine-month
period ended March 31, 2000, were further enhanced by the Leasing segment, which
had improvement from continued growth of the lease portfolio.
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)
Consolidated Results (continued)
- --------------------------------
Consolidated pre-tax earnings of $15,700 for the three months ended March 31,
2000, increased $8,500 (120%) over the same period in the prior year.
Consolidated pre-tax loss from operations of $23,500 for the nine months ended
March 31, 2000, increased $11,100 (90%) as compared to the same period in the
prior year. From operations, the three months ended March 31, 2000, improved
$10,200 (140%) over the prior year. Improvements in Agriculture, Energy,
Leasing, and Insurance were partially offset by the decreases in Country
Products Group. Increased net corporate costs further reduced pre-tax earnings
for the three-month period. For the nine months ended March 31, 2000, business
unit operating results improved $7,000 (37%) as compared to the same period in
the prior year. Operating result improvements in Agriculture, Leasing, and
Insurance were partially offset by reduced earnings from operations in the
Country Products Group. Energy earnings for nine months were equivalent to last
year. The two principal reasons for the difference in pre-tax earnings for the
nine-month period are a $10,700 net improvement to results recorded in the first
quarter of last year on the CPG sale of Allied Seed and a $5,800 non-cash
corporate-level charge to earnings in the second quarter of this year to
currently recognize the effect of the retail restructuring plan on the Company's
retirement benefit plans in accordance with curtailment accounting requirements.
See the detailed business segment discussion below.
Agriculture
- -----------
Total Agriculture sales and revenues of $150,800 and $441,000 for the three and
nine months ended March 31, 2000, increased $5,100 (4%) and $1,700 (0%),
respectively, as compared to the same periods in the prior year.
The increase in sales for the three-month period was due principally from
increased sales in the enterprise agronomy business ,direct marketing sales, and
in the wholesale dealer sales, which were partially offset by decreases in
enterprise retail sales and in the enterprise feed business. Enterprise agronomy
sales increased $4,900 (28%) for the three-month period as compared to the same
period in the prior year as early spring weather in the southern portions of
Agway's market territory has moved some crop-related services typically
performed in the fourth quarter into the third quarter. Direct marketing sales
increased $2,100 (10%) for the three-month period as compared to the same period
in the prior year. The continued growth in the commercial vegetable seed
business and increased direct fertilizer sales from a greater emphasis on these
sales increased agronomy-related direct marketing sales by $5,100 (31%) in the
third quarter. These agronomy direct marketing increases were partially offset
by a decline in feed-related direct marketing sales of $3,100 (60%) in the third
quarter, substantially due to a planned reduction of grain marketing operations
during the first nine months of this year. The wholesale dealer sales increased
$4,700 (33%) in the third quarter as compared to the same period in the prior
year, principally from improved relationships with existing dealers and from an
increase in new dealers as a result of the retail restructuring plan initiated
in the second quarter of this year. (See Note 6 of the consolidated financial
statements for more discussion on the retail restructuring plan.) These sales
improvements in the third quarter were partially offset by a $5,600 (16%)
decline in enterprise retail sales in the third quarter, from planned store
conversions and closings associated with the retail restructuring plan, and a
$900 (2%) decline in the third quarter in enterprise feed sales due to a
combination of slightly lower volume and lower sales dollars per ton.
For the nine-month period, we experienced increased enterprise feed sales of
$2,500 (2%) on the strength of a unit volume increase of 3% over the same period
in the prior year and increases in wholesale dealer sales of $7,300 (18%) for
the same reasons as explained above. These increases were substantially offset
by an $8,300 (6%) decrease in enterprise retail sales from the planned store
closings and conversions noted above.
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)
Agriculture (continued)
- -----------------------
Agriculture pre-tax loss of $12,000 and $43,300 for the three and nine months
ended March 31, 2000, decreased $7,700 (39%) and $10,200 (19%), respectively, as
compared to the same periods in the prior year.
The improvement to pre-tax results in the three-month period as compared to the
same period in the prior year resulted from improved operating results in
enterprise agronomy of $1,700 (42%) and in direct marketing of $1,300 (314%),
reduced support costs of $2,500 and a negotiated settlement of $3,300 for
amounts due the Company on claims from prior years' business activity. The
improvement to enterprise agronomy pre-tax earnings resulted substantially from
improved product margins resulting from the early spring sales. Direct marketing
improvements are due to a combination of improved results in the seed operations
and an increase in direct marketing earnings, principally related to grain
marketing losses of $600 (which occurred last year from unauthorized speculative
transactions) that impacted direct marketing earnings during the three-month
period. Reduced support costs result from the consolidation of the retail
structure and management into the enterprises and the wholesale operation
restructuring which took place in April 1999. These improvements to pre-tax
results were partially offset by a $1,200 (21%) decrease in enterprise feed
operations due to higher commodity and higher operating expenses than in the
prior year.
The improvements to pre-tax results for the nine-month period ended March 31,
2000, as compared to the same period in the prior year, are from improved
results of $3,400 (40%) in direct marketing, $3,200 (223%) in wholesale
operations, $1,200 (12%) in enterprise agronomy, a $4,200 decline in retail and
administrative support costs, and $3,300 from a favorable litigation settlement
in the third quarter of this year. These improvements were partially offset by
declines of $3,100 (19%) in enterprise feed and $2,000 (482%) in enterprise
retail operating results. Direct marketing improved substantially due to lower
losses in the grain marketing operations as operating losses decreased from
$5,900 in the first nine months of the prior year to $1,900 for the same period
in the current year. As disclosed in the Company's Form 10-K for the fiscal year
ended June 30, 1999, net pre-tax losses totaling $5,600 from unauthorized
speculative activity occurred in the first nine months of fiscal 1999 as
compared to the current year loss, where $1,300 of costs were incurred in
closing the unauthorized speculative positions that were outstanding at June 30,
1999. The wholesale operations improvements and decline in retail and
administrative support costs results from the reduced costs from the
consolidation of the retail structure and management into the enterprise and the
wholesale operations restructuring which took place in April 1999. The earnings
fluctuations in the enterprise agronomy, retail support cost and, enterprise
feed operations were for the same reasons as in the three-month period described
above.
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)
Country Products Group
- ----------------------
Country Products Group (CPG) total sales and revenues of $53,400 and $146,300
for the three and nine months ended March 31, 2000, increased $11,200 (27%) and
$24,100 (20%), respectively, as compared to the same periods in the prior year.
The growth in CPG sales over the prior year in the three- and nine-month periods
was substantially in the Produce Group, where sales in this group increased
$13,100 (48%) and $26,700 (35%), respectively. Of the Produce Group sales growth
in the three- and nine-month periods, $12,500 and $25,900, respectively, was due
to the acquisition of new produce businesses in the second half of the prior
year and in the first half of the current year. The sales growth in the Produce
Group was partially offset by declines in sales in the Business Group of $2,100
(14%) for the three- month period and $2,700 (6%) for the nine-month period. The
Business Group sales decline resulted principally from a poor sunflower seed
crop this year.
CPG pre-tax losses of $1,600 and $2,300 for the three and nine months ended
March 31, 2000, are compared to a pre- tax loss of $700 and pre-tax earnings of
$12,700 for the same periods in the prior year. The prior year first quarter
earnings included a $10,700 net improvement in results relating to the sale of
Allied seed business. CPG earnings from ongoing operations declined $1,000
(144%) and $4,600 (219%) for the three- and nine-month periods, respectively, as
compared to the same periods in the prior year. In the three-month and the
nine-month periods, pre-tax earnings related to the Business Group declined
$1,000 (216%) and $1,700 (79%), respectively. The Business Group's sunflower
operations experienced lower margins due to high product costs in the first
quarter and increased production costs in the second and third quarters
associated with a poor sunflower crop harvest in the fall of 1999 that was
widespread in its territory due to adverse growing conditions. For the Produce
Group, gross margin from increased sales was at a lower percent than the prior
year and was more than offset by additional costs, principally from the new
produce operations. Consequently, the Produce Group's pre-tax earnings decreased
$300 (63%) and $1,500 (46%) for the three- and nine-month periods, respectively.
CPG's Investment Group experienced a decrease in pre-tax loss for the third
quarter of $300 (26%) which was substantially due to a write-down of an
investment made in the third quarter of the prior year, an increase in pre-tax
loss of $1,600 (69%) for the nine-month period as compared to the same period in
the prior year occurred as the Investment Group continues to incur costs related
to several of its initiatives for future growth.
Energy
- ------
Energy sales and revenues of $237,200 and $507,700 for the three and nine months
ended March 31, 2000, increased $89,400 (60%) and $155,400 (44%), respectively,
as compared to the same periods in the prior year. Overall, sales dollar
increases from product volume increases were $3,900 (3%) during the three-month
period and $12,300 (4%) during the nine-month period, respectively, as compared
to the same periods in the prior year. The petroleum industry experienced
enormous increases in the pricing of product in the third quarter ended March
31, 2000. Pressures on global supply caused a sudden spike in these commodities
prices and, as a result, Energy experienced sales dollars increases due to price
of $79,200 (54%) for the three-month period and $128,600 (37%) for the
nine-month period. Additionally, sales increases in the three and nine months
ended March 31, 2000, of $6,300 and $14,500, respectively, resulted from the
continued growth of revenues in heating, ventilation and air-conditioning
installation and service sales and continued sales growth in the electric and
natural gas marketing business.
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)
Energy (continued)
- ------------------
Energy pre-tax earnings of $25,200 and $19,300 for the three- and nine-month
periods ended March 31, 2000, increased $3,300 (15%) and decreased $100 (1%),
respectively, as compared to the same periods in the prior year. In the three-
and nine-month periods, overall gross margin dollars increased $7,700 (12%) and
$10,500 (8%), respectively, over the same periods in the prior year and were
driven by the continued growth in heating, ventilation and air-conditioning
sales and services and the increase in liquid product volume with margins
comparable with the prior year. The improved gross margin dollars, however, were
partially offset in the three- and nine-month periods by increases in total
operating expenses of $3,100 (7%) and $8,800 (8%), respectively, as compared to
the same periods in the prior year. Payroll costs associated with the increased
service sales and unit volume as well as increased administrative costs,
principally information systems cost from implementation of a new operating
system and automotive costs, increased overall operating costs from the prior
year.
Leasing
- -------
Total revenue of $19,300 and $56,600 for the three- and nine-month periods ended
March 31, 2000, increased $2,000 (12%) and $4,800 (9%), respectively, as
compared to the same periods in the prior year. These increases were primarily
due to a higher average investment in leases which was partly offset by a lower
income rate on new and replacement leases. Telmark's average net investment in
leases increased $71,000 (13%) in the three-month period and $64,800 (12%) in
the nine-month period as compared to the same periods in the prior year.
Pre-tax earnings from operations of $5,800 and $14,200 for the three and nine
months ended March 31, 2000, increased $100 (2%) and $1,000 (8%), respectively,
as compared to the same periods in the prior year. The total revenue increases
noted above were partially offset by an increase in total expenses of $l,900
(17%) for the three months and $3,800 (10%) for the nine months ended March 31,
2000, as compared to the same periods in the prior year. The increase in total
expenses for both periods was substantially due to increased interest expense.
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
periods in the prior year, partially offset by lower interest rates on new and
replacement debt.
Insurance
- ---------
Insurance Group net revenues of $6,600 and $20,600 for the three- and nine-month
periods ended March 31, 2000, increased $100 (2%) for the three-month period and
decreased $500 (2%) for the nine-month period as compared to the same periods in
the prior year. These changes were experienced in net earned premiums of Agway
Insurance Company. Reinsurance premiums, which reduce earned revenues, were
lower in the three-month period as compared to the same period in the prior year
due to a large reinstatement premium occurring in the third quarter of the prior
year due to unfavorable losses, while no comparable reinstatement premium was
required in the current year. Reinsurance premiums were higher in the nine-month
period of the current year as compared to the same period in the prior year.
Higher reinsurance premiums for the nine-month period are due to favorable
claims development during the prior year in the 1995 experience-rated
reinsurance contract, which resulted in lower reinsurance premium cost incurred
by the Insurance Company in the prior year.
Pre-tax earnings of the Insurance Company of $200 and $500 for the three- and
nine-month periods ended March 31, 2000, increased $100 (40%) and $300 (150%),
respectively, as compared to the same periods in the prior year. The improvement
in pre-tax earnings for the three-month period resulted from the increased net
earned premiums (while losses and expenses were comparable to the prior year).
The Agway General Agency experienced pre-tax losses of $100 and $400 for the
three and nine months ended March 31, 2000, which represent the same results for
the three months and the nine months ended as compared to the same periods in
the prior year.
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)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash generated from external borrowings and/or operations are 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 nine months ended March 31:
<TABLE>
<CAPTION>
Increase
2000 1999 (Decrease)
-------- -------- --------
<S> <C> <C> <C>
Net cash flows provided by (used in):
Operating activities .......................................... $ (2,693) $ 48,316 $(51,009)
Investing activities .......................................... (71,052) (43,046) (28,006)
Financing activities .......................................... 73,745 (5,270) 79,015
-------- -------- --------
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 nine months
ended March 31, 2000, of $51,000 is substantially due to changes in working
capital. In the first nine months of this year, working capital generated cash
of $7,100, while for the same time period in the prior year, working capital
generated cash of $63,500. The Energy business is the reason for the significant
decrease in cash generated from working capital activities. The significant
increase in cost of energy commodities in the first nine months of this year has
increased the cash needs for inventory by $15,200 in the first nine months of
this year as compared to inventory balances declining $600 over the same period
in the prior year. Also, receivable balances increased by $41,200 in the first
nine months of this year as compared to a $3,400 increase over the same period
in the prior year. The Energy working capital needs historically peak in the
third quarter due to the seasonal nature of our heating oil and propane heating
business. Consequently, reduced Energy working capital requirements in the
fourth quarter are expected to generate cash.
Cash Flows Used In Investing Activities
The net cash flows used in investing activities increased in the first nine
months of this year by $28,000 as compared to the first nine months of the prior
year. Cash of $14,200 was generated during the first quarter of the prior year
from the sale of the Allied Seed business, where no comparable sale occurred in
the current year, and there was a $18,900 greater net investment in Telmark
leases in the first nine months of this year compared to last year. The
increased generation of cash of $8,000 from the sale of fixed assets, mainly
attributable to the retail restructuring, partially reduced the need for cash in
the first nine months of the year.
Cash Flows Provided By (Used In) Financing Activities
Financing activities for the nine months ended March 31, 2000, provided cash of
$73,700 compared to net cash used to pay down debt of $5,300 for the same period
in the prior year. This $79,000 change in cash related to financing activity was
substantially from increased short-term borrowings and long-term debt 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, except Insurance and Telmark, 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. Telmark's finance arrangements are explained in Note 3,
Borrowing Arrangements, to the Condensed Financial Statements. The Company
believes its borrowing arrangements are appropriate and adequate to meet the
normal ongoing financing needs of the Company.
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)
LIQUIDITY AND CAPITAL RESOURCES (continued)
- -------------------------------------------
Sources of longer-term financing include the following as of March 31, 2000:
<TABLE>
<CAPTION>
AFC
Agway (excluding
Source of debt Inc. Telmark) Telmark Total
- -------------- ------- -------- -------- --------
<S> <C> <C> <C> <C>
Banks - due 5/00 to 4/04, interest at a weighted average
rate of 6.9% with a range of 5.6% - 8.6% ............................. $ 0 $ 700 $180,000 $180,700
Insurance companies - due 4/00 to 3/07, interest at a
weighted average rate of 6.8% with a range of
6.5% - 7.6% .......................................................... 0 0 176,418 176,418
Capital leases and other - due 2000 to 2018, interest at a
weighted average rate of 9.3% with a range of 6% to 12% .............. 15,485 2,193 0 17,678
------- -------- -------- --------
Long-term debt .................................................... 15,485 2,893 356,418 374,796
Subordinated money market certificates - due 10/00 to 10/14,
interest at a weighted average rate of 8.0% with a range of
4.5% - 9.5% .......................................................... 0 437,383 0 437,383
Subordinated debentures - due 3/01 to 7/03, interest at a
weighted average rate of 8.0% with a range of 6.0%
to 8.5% .............................................................. 0 7,294 44,529 51,823
------- -------- -------- --------
Total debt ........................................................ $15,485 $447,570 $400,947 $864,002
======= ======== ======== ========
</TABLE>
For a further description of the Company's credit facilities available at March
31, 2000, see Note 3 to the Condensed Consolidated Financial Statements.
OTHER MATTERS
- -------------
Year 2000
As previously disclosed, Agway initiated its year 2000 efforts in January 1996
and completed extensive work to assure that the Company's operations were not
impacted by the century date change as of January 1, 2000.
Our efforts focused on information system modification or replacement, as well
as a review of all other areas within the Company that may be impacted by this
event. Business contingency and continuity plans were developed, and a command
center was established to monitor and react to critical business interruptions,
if any, either prior or subsequent to the millennium date change.
The Company reports it had no material issues relating to the millennium date
change on January 1, 2000, the leap year on February 29, 2000, the month-end
processing, and the quarter-end processing. Based on this experience and the
amount of work and testing we have previously performed, we believe the
likelihood of a year 2000 issue that would have a material effect on the results
of operations, liquidity, or financial condition continues to be remote as we
run year-end programs.
The Company's cost estimates relating to year 2000 efforts reflect the fact that
no issues have arisen to date. The conversion and testing of existing systems
and the replacement of systems are estimated to cost the Company approximately
$15,900, of which 85% has been capitalized. Additionally, the cost to have
remediated all other areas of the Company was approximately $2,500.
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 Note 1 to the Condensed Consolidated Financial Statements.
21
<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 commodity instruments available through a regulated exchange, 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, commodity instruments available through a regulated
exchange 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 commodity instruments position as of March 31, 2000 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 March 31, 2000 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 $300 and
$1,100, respectively.
In the Agriculture segment's feed business, commodity instruments available
through a regulated exchange are used principally to hedge corn, soy complex,
and oats, which can be sold directly as ingredients or included in feed
products. 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 instruments position as of March 31, 2000 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 March 31, 2000 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, commodity instruments
available through a regulated exchange 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.
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 (continued)
- ------------------------------------
A sensitivity analysis has been prepared to estimate the department's exposure
to market risk of its commodity instruments position as of March 31, 2000 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 and above in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," 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 March 31, 2000 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
$100 and $2,900, respectively.
23
<PAGE>
PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
Item 1. Legal Proceedings
- --------------------------
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.
In April 1999, the EPA issued the Record of Decision (ROD) for the Remedial
Design/Remedial Action (RD/RA) for the site. Agway anticipates that the EPA will
request that Agway and the other PRPs participate in the RD/RA. 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.
While Agway is not depending on contributions from insurance or third parties in
determining its reserves for environmental clean-up liability, we 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 March 31, 2000.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AGWAY INC.
-------------------------
(Registrant)
Date May 5, 2000 /s/ PETER J. O'NEILL
------------------------------- ------------------------------------
Peter J. O'Neill
Senior Vice President,
Finance & Control,
(Principal Financial Officer and
Chief Accounting Officer)
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-25-2000
<CASH> 0
<SECURITIES> 36,539
<RECEIVABLES> 174,660
<ALLOWANCES> 7,873
<INVENTORY> 202,780
<CURRENT-ASSETS> 608,652
<PP&E> 539,329
<DEPRECIATION> 325,116
<TOTAL-ASSETS> 1,583,804
<CURRENT-LIABILITIES> 607,428
<BONDS> 691,644
0
40,389
<COMMON> 2,479
<OTHER-SE> 134,247
<TOTAL-LIABILITY-AND-EQUITY> 1,583,804
<SALES> 1,084,519
<TOTAL-REVENUES> 1,161,700
<CGS> 1,021,143
<TOTAL-COSTS> 1,056,097
<OTHER-EXPENSES> 116,829
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,591
<INCOME-PRETAX> (23,505)
<INCOME-TAX> (6,387)
<INCOME-CONTINUING> (17,118)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,118)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
