UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----
ACT OF 1934
For the quarterly period ended December 31, 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
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
315-449-6431
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 4, 2000
- ------------------------ -------------------------------
Membership Common Stock, 99,349 shares
$25 par value per share
1
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
- ------ ---------------------
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1999 and June 30, 1999............................. 3
Condensed Consolidated Statements of Operations and Retained Earnings for the three months
and six months ended December 31, 1999 and December 31, 1998................................................ 4
Consolidated Statements of Comprehensive Income for the three months and six months ended
December 31, 1999 and December 31, 1998..................................................................... 5
Condensed Consolidated Cash Flow Statements for the six months ended December 31, 1999
and December 31, 1998....................................................................................... 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 4. Submission of Matters to a Vote of Security Holders................................................ 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>
December 31, June 30,
ASSETS 1999 1999
- ------ --------------- --------------
<S> <C> <C>
Current Assets:
Trade accounts receivable (including notes receivable of $29,498 and
$45,960, respectively), less allowance for doubtful accounts of
$7,720 and $7,155, respectively...................................... $ 168,001 $ 185,536
Leases receivable, less unearned income of $65,688 and
$64,330, respectively................................................ 132,382 131,431
Advances and other receivables............................................ 33,692 23,456
Inventories:
Raw materials........................................................ 7,971 6,892
Finished goods....................................................... 160,362 137,348
Goods in transit and supplies........................................ 1,101 1,826
-------------- --------------
Total inventories............................................... 169,434 146,066
Prepaid expenses and other assets......................................... 57,010 52,341
-------------- --------------
Total current assets................................................. 560,519 538,830
Marketable securities available for sale........................................ 36,579 35,099
Other security investments...................................................... 51,318 51,010
Properties and equipment, net................................................... 218,268 215,425
Long-term leases receivable, less unearned income of $145,977 and
$134,623, respectively.................................................... 443,848 419,444
Net pension asset............................................................... 203,464 198,160
Other assets ................................................................ 19,266 19,083
-------------- --------------
Total assets.................................................... $ 1,533,262 $ 1,477,051
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Notes payable............................................................. $ 166,602 $ 81,800
Current installments of long-term debt.................................... 92,226 94,699
Current installments of subordinated debt................................. 72,855 76,968
Accounts payable.......................................................... 138,217 115,350
Other current liabilities................................................. 107,763 115,865
-------------- --------------
Total current liabilities............................................ 577,663 484,682
Long-term debt.................................................................. 288,785 279,417
Subordinated debt............................................................... 389,033 409,335
Other liabilities............................................................... 107,326 104,670
-------------- --------------
Total liabilities.................................................... 1,362,807 1,278,104
Commitments and contingencies
Shareholders' equity:
Preferred stock, net...................................................... 42,337 42,917
Common stock, net......................................................... 2,487 2,506
Accumulated other comprehensive income.................................... (778) (239)
Retained earnings......................................................... 126,409 153,763
-------------- --------------
Total shareholders' equity........................................... 170,455 198,947
-------------- --------------
Total liabilities and shareholders' equity...................... $ 1,533,262 $ 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 Six Months Ended
December 31, December 31,
----------------------------------- ---------------------------------
1999 1998 1999 1998
---------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Net sales and revenues from:
Product sales (including excise taxes)........ $ 340,534 $ 292,398 $ 632,144 $ 571,359
Leasing operations............................ 19,056 17,583 37,327 34,496
Insurance operations.......................... 6,980 7,597 13,960 14,563
---------------- --------------- ---------------- ------------
Total net sales and revenues............. 366,570 317,578 683,431 620,418
Cost and expenses from:
Products and plant operations................. 321,400 272,905 610,239 543,617
Leasing operations............................ 8,179 7,188 15,880 14,554
Insurance operations.......................... 4,192 4,824 8,344 9,457
Selling, general and administrative...........
activities................................ 41,216 38,473 78,798 73,882
---------------- --------------- ---------------- ------------
Total operating costs and expenses 374,987 323,390 713,261 641,510
Operating loss...................................... (8,417) (5,812) (29,830) (21,092)
Interest expense, net............................... (8,897) (8,214) (16,584) (15,737)
Other income, net................................... 4,508 4,037 7,232 17,290
---------------- --------------- ---------------- ------------
Loss before income taxes............................ (12,806) (9,989) (39,182) (19,539)
Income tax benefit ................................. 3,815 3,112 13,401 6,392
---------------- --------------- ---------------- ------------
Net loss ......................................... (8,991) (6,877) (25,781) (13,147)
Retained earnings, beginning of period.............. 136,973 149,092 153,763 155,362
Dividends..................................... (1,573) (1,692) (1,573) (1,692)
---------------- --------------- ---------------- ------------
Retained earnings, end of period.................... $ 126,409 $ 140,523 $ 126,409 $ 140,523
================ =============== ================ ============
</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 Six Months Ended
December 31, December 31,
----------------------------- ----------------------------
1999 1998 1999 1998
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net loss ......................................... $ (8,991) $ (6,877) $ (25,781) $ (13,147)
Other comprehensive income, net of tax:
Unrealized gains (losses) on
available-for-sale securities:
Unrealized holding gains (losses)
arising during period.................... (395) (243) (541) 297
Reclassification adjustment
for (gains) losses included in
net earnings............................. 2 (31) 2 15
------------ ----------- ------------ -----------
Other comprehensive income (loss)................... (393) (274) (539) 312
------------ ----------- ------------ -----------
Comprehensive loss.................................. $ (9,384) $ (7,151) $ (26,320) $ (12,835)
============ =========== ============ ===========
</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>
Six Months Ended
December 31,
---------------------------------------
1999 1998
--------------- -------------
<S> <C> <C>
Net cash flows (used in) provided by operating activities....................... $ (11,783) $ 37,664
Cash flows provided by (used in) investing activities:
Purchases of property, plant and equipment................................ (14,056) (10,394)
Proceeds from disposal of property, plant and equipment................... 4,243 1,544
Proceeds from sale of business............................................ 0 14,150
Cash paid for acquisition of business..................................... (4,950) (6,720)
Leases originated......................................................... (134,705) (119,754)
Leases repaid............................................................. 101,376 98,362
Proceeds from sale of marketable securities............................... 1,413 2,693
Purchases of marketable securities........................................ (3,431) (2,822)
Net purchase of investments in cooperatives............................... (518) (522)
--------------- -------------
Net cash flows used in investing activities..................................... (50,628) (23,463)
Cash flows provided by (used in) financing activities:
Net change in short-term borrowings....................................... 84,802 11,380
Proceeds from long-term debt.............................................. 11,509 11,880
Repayment of long-term debt............................................... (3,147) (42,065)
Proceeds from sale of subordinated debt................................... 56,056 102,680
Maturity and redemption of subordinated debt.............................. (80,470) (93,879)
Payments on capital leases................................................ (4,037) (113)
Redemption of stock, net ................................................. (600) (2,243)
Cash dividends paid....................................................... (1,702) (1,841)
--------------- -------------
Net cash flows provided by (used in) financing activities....................... 62,411 (14,201)
--------------- -------------
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 six-month
period ended December 31, 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 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 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 December 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. As required by the 1934 Act, the summarized
financial information concerning AFC and consolidated subsidiaries is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------------ ------------------------------------
Restated Restated
1999 1998 1999 1998
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales and revenues.............. $ 196,030 $ 150,629 $ 328,294 $ 269,028
Operating earnings (loss)........... 11,074 9,974 4,548 11,645
Net earnings (loss)................. 3,190 (1,933) (5,095) (5,956)
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
---------------- ----------------
<S> <C> <C>
Current assets............................................................... $ 657,116 $ 567,602
Properties and equipment, net................................................ 85,084 86,018
Noncurrent assets............................................................ 588,580 557,688
---------------- ----------------
Total assets................................................................. $ 1,330,780 $ 1,211,308
================ ================
Current liabilities.......................................................... $ 121,917 $ 67,391
Short-term notes payable..................................................... 166,602 81,800
Current installments of long-term debt....................................... 89,791 92,268
Current installments of subordinated debt.................................... 72,855 76,968
Long-term debt............................................................... 276,704 264,021
Subordinated debt............................................................ 389,034 409,335
Noncurrent liabilities....................................................... 23,248 23,262
Shareholder's equity......................................................... 190,629 196,263
---------------- ----------------
Total liabilities and shareholder's equity................................... $ 1,330,780 $ 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 December 31, 1999, 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 December 31, 1999, 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. In addition, the
agreements include certain covenants, the most restrictive of which
require Agway to maintain specific quarterly levels of interest coverage,
monthly levels of tangible retained earnings, and quarterly levels of
senior debt to earnings before interest, tax, depreciation, and
amortization.
The Company's long-term revolving line of credit expired on December 31,
1999. 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 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. 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 -----------------------------
12/31/99 12/31/99 6/30/99 Term Expires
--------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Short-term line of credit*...................... $ 75,000 $ 39,600 $ 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 $65,000 from
January 1, 2000, through March 31, 2000, and decreases again to $50,000 at
April 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. 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 7.7%.
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 December 31, 1999, 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 December 31, 1999, under the short-term lines of credit
was $15,900 and under the revolving term loan facility was $246,100, of
which $185,000 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 $122,000 at December 31, 1999, 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 $56,400 and
$58,800 at December 31 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 December 31,
1999, as compared to June 30, 1999, is as follows:
<TABLE>
<CAPTION>
AFC
Agway (excluding Telmark) Telmark Total
----------------------- ----------------------- ---------------------- ----------------------
12/99 6/99 12/99 6/99 12/99 6/99 12/99 6/99
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt .......... $ 14,516 $ 17,827 $ 3,077 $ 3,488 $ 363,418 $ 352,801 $ 381,011 $ 374,116
Currently payable........ 2,435 2,431 802 807 88,989 91,461 92,226 94,699
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Net long-term debt....... $ 12,081 $ 15,396 $ 2,275 $ 2,681 $ 274,429 $ 261,340 $ 288,785 $ 279,417
========== ========== ========== ========== ========== ========== ========== =========
Subordinated debt........ $ 0 $ 0 $ 420,431$ 448,670 $ 41,457 $ 37,633 $ 461,888 $ 486,303
Currently payable........ 0 0 54,227 58,768 18,628 18,200 72,855 76,968
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Net subordinated debt.... $ 0 $ 0 $ 366,204 $ 389,902 $ 22,829 $ 19,433 $ 389,033 $ 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 December 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..... $ 138,626 $ 42,549 $ 159,366 $ 19,051 $ 6,980 $ (2) $ 366,570
Intersegment sales and
revenues................... 464 4,194 100 5 0 (4,763) 0
----------- ------------ ----------- --------- ---------- --------- ------------
Total sales and revenues $ 139,090 $ 46,743 $ 159,466 $ 19,056 $ 6,980 $ (4,765) $ 366,570
=========== ============ =========== ========= ========== ========= ============
Earnings (loss) before
income taxes.............. $ (15,036) $ (893) $ 6,129 $ 4,556 $ (42) $ (7,520) $ (12,806)
=========== ============ =========== ========= ========== ========= ============
Total assets................. $ 341,437 $ 78,079 $ 176,147 $ 629,642 $ 55,641 $ 252,316 $ 1,533,262
=========== ============ =========== ========= ========== ========= ============
<CAPTION>
Three Months Ended December 31, 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..... $ 136,582 $ 37,372 $ 118,440 $ 17,576 $ 7,597 $ 11 $ 317,578
Intersegment sales and
revenues................... 22 4,193 136 7 0 (4,358) 0
----------- ------------ ----------- --------- ---------- --------- ------------
Total sales and revenues $ 136,604 $ 41,565 $ 118,576 $ 17,583 $ 7,597 $ (4,347) $ 317,578
=========== ============ =========== ========= ========== ========== ============
Earnings (loss) before
income taxes.............. $ (15,714) $ 1,813 $ 2,875 $ 4,020 $ (194) $ (2,789) $ (9,989)
=========== ============ =========== ========= ========== ========= ============
Total assets................. $ 345,595 $ 60,996 $ 131,847 $ 554,995 $ 56,673 $ 237,317 $ 1,387,423
=========== ============ =========== ========= ========== ========= ============
</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)
<TABLE>
<CAPTION>
5. FINANCIAL INFORMATION CONCERNING SEGMENT REPORTING (continued)
--------------------------------------------------------------
Six Months Ended December 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..... $ 290,280 $ 85,816 $ 256,055 $ 37,317 $ 13,960 $ 3 $ 683,431
Intersegment sales and
revenues................... 689 7,116 200 10 0 (8,015) 0
----------- ----------- ---------- --------- --------- ---------- ------------
Total sales and revenues $ 290,969 $ 92,932 $ 256,255 $ 37,327 $ 13,960 $ (8,012) $ 683,431
=========== =========== ========== ========= ========= ========= ============
Earnings (loss) before
income taxes.............. $ (31,282) $ (690) $ (5,891) $ 8,399 $ (7) $ (9,711) $ (39,182)
=========== =========== ========== ========= ========= ========= ============
Total assets................. $ 341,437 $ 78,079 $ 176,147 $ 629,642 $ 55,641 $ 252,316 $ 1,533,262
=========== =========== ========== ========= ========= ========= ============
<CAPTION>
Six Months Ended December 31, 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..... $ 293,639 $ 73,493 $ 204,180 $ 34,483 $ 14,563 $ 60 $ 620,418
Intersegment sales and
revenues................... 49 6,557 247 13 0 (6,866) 0
----------- ----------- ---------- --------- --------- --------- ------------
Total sales and revenues $ 293,688 $ 80,050 $ 204,427 $ 34,496 $ 14,563 $ (6,806) $ 620,418
=========== =========== ========== ========= ========= ========= ============
Earnings (loss) before
income taxes.............. $ (33,746) $ 13,335 $ (2,440) $ 7,441 $ (188) $ (3,941) $ (19,539)
=========== =========== ========== ========= ========== ========= ============
Total assets................. $ 345,595 $ 60,996 $ 131,847 $ 554,995 $ 56,673 $ 237,317 $ 1,387,423
=========== =========== ========== ========= ========== ========= ============
</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 will focus 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. 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 items 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 presently be reasonably
estimated for all locations. As costs associated with these restructuring
transactions become probable and can be reasonably estimated, they will be
accrued. The estimated losses accrued as of December 31, 1999, for
business locations where transactions are probable and can be reasonably
estimated totaled $300. Additionally, one cost that has been estimated
currently and recorded in the second quarter is a $5,800 non-cash charge
to earnings to currently recognize the effect of the retail restructuring
plan on the Company's retirement benefit plans in accordance with
curtailment accounting requirements.
As of December 31, 1999, the retail restructuring efforts have resulted in
11 stores being converted to dealers, 12 stores/properties being sold, and
10 stores being closed. Additionally, several other locations are
currently under negotiations, some of which have a commitment in place.
This activity has generated approximately $5,400 in net cash from the sale
of fixed assets and inventory. To date, the following represents the gain
or loss from the retail restructuring:
Net gain on sale of assets....................... $ 1,900
Loss of sale/liquidation of inventory............ (800)
Severance costs.................................. (100)
Other transaction costs(1)....................... (400)
-------------
Net gain (loss) on restructuring activity... $ 600
=============
(1) Other transaction costs include items such as professional
services fees, environmental surveys and advertising.
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
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 $366,600 and $683,400 for the three and
six months ended December 31, 1999, increased $49,000 (15%) and $63,000 (10%),
respectively, as compared to the same periods in the prior year. The increases
were substantially the result of increased sales in the Energy, Country Products
Group, and Leasing 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 the current year in its Produce Group's operations. The
Leasing improvement was from continued growth of the lease portfolio. The sales
increases during the three months ended December 31, 1999, were further enhanced
by increased sales in the Agriculture segment from a growth in the feed business
and from improved wholesale dealer sales, a direct result of the Agriculture
segment concentrating on enhancing its relationship with these dealers. However,
the Company's sales increases in the six-month period ended December 31, 1999,
were partially offset by lower agronomy sales, which resulted primarily from an
industry-wide decline in commodity pricing and drought conditions in the first
quarter of this year, and reduced retail sales, which resulted primarily from
planned store closings as part of the retail restructuring, the net effect of
which was a sales decline for Agriculture in the first six months of this year
(see Note 6 of the Condensed Consolidated Financial Statements for more
discussion on the retail restructuring).
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 loss from operations of $12,800 and $39,200 for the three
and six months ended December 31, 1999, increased $2,800 (28%) and $19,600
(100%), respectively, as compared to the same periods in the prior year. The two
principal reasons for the difference in operating results are a $10,700 gain
recorded in the first quarter of last year on the sale of Allied Seed and a
$5,800 non-cash charge to earnings in the three months ended December 31, 1999,
to currently recognize the effect of the retail restructuring plan on the
Company's retirement benefit plans in accordance with curtailment accounting
requirements. From operations, the three months ended December 31, 1999,
improved $3,000 over the prior year. Improvements in Energy, Leasing,
Agriculture, and Insurance were offset by the decreases in Country Products
Group. For the six months ended December 31, 1999, business unit operating
results declined $3,100. Improvements in Agriculture, Leasing, and Insurance
were more than offset by reduced earnings in Country Products Group and Energy.
See the detailed business segment discussion below.
Agriculture
- -----------
Total Agriculture sales and revenues of $139,100 and $291,000 for the three and
six months ended December 31, 1999, increased $2,500 (2%) and decreased $2,700
(1%), respectively, as compared to the same periods in the prior year.
The increase in sales for the three-month period was due principally from growth
in the enterprise feed business and increases in wholesale dealer sales, which
were partially offset by decreases in enterprise retail sales and direct
marketing sales. Enterprise feed sales increased $2,700 (5%) on the strength of
a unit volume increase over the same period in the prior year. Wholesale dealer
sales improved $3,300 (28%) in the second quarter as compared to the same period
in the prior year, principally from the efforts made in the fourth quarter of
fiscal 1999 to improve existing dealer relationships and partially from an
increase in new dealers as part of the retail restructuring plan initiated
during the second quarter of this year. (See Note 6 of the Condensed
Consolidated Financial Statements for more discussion on the retail
restructuring plan.) These sales improvements were partially offset by a $900
(2%) decline in enterprise retail sales, where retail sales declined from
planned store closings associated with the retail restructuring plan, and a
$2,100 (19%) decline in direct marketing sales, substantially due to a planned
reduction of grain marketing operations during the first six months of this
year.
For the six-month period, we experienced declines in enterprise agronomy sales
of $4,900 (11%), enterprise retail sales from planned store closings and
conversions of $4,300 (5%), and direct marketing sales of $1,500, principally
from planned reduced grain marketing sales. These reductions were partially
offset by increases in enterprise feed sales, $3,500 (3%), and wholesale dealer
sales, $4,800 (18%). The agronomy decline was principally in the first quarter
due to industry-wide low commodity prices of nitrogen products and drought
conditions in parts of our service area during that quarter. The other sales
fluctuations were for the same reasons as in the three-month period described
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 $15,000 and $31,300 for the three and six months
ended December 31, 1999, decreased $700 (4%) and $2,500 (7%), 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 lower costs, $900 (17%) in
enterprise agronomy operations, $1,400 (79%) in wholesale operations, and $1,400
in retail support costs, all of which were partially offset by increased costs
($1,300 (23%)) in the enterprise feed operations, $800 from lower product
rebates, and $900 from direct marketing. The reduced costs in both wholesale
operations and retail support result from the consolidation of the retail
structure and management into the enterprises and the wholesale operation
restructuring which took place in April 1999. The decline in direct marketing
earnings is principally related to grain marketing earnings of $700 last year
from unauthorized speculative transactions.
The improvements to pre-tax results for the six-month period ended December 31,
1999, as compared to the same period in the prior year, resulted from improved
results, $2,200 (22%) in direct marketing, $1,500 (77%) in wholesale operations,
and a $3,000 decline in retail and administrative support costs, all of which
were partially offset by declines, $1,900 (19%) in enterprise feed, $500 (8%) in
enterprise agronomy, $600 (9%) in enterprise retail operating results, and
$1,000 less in product rebates. Direct marketing improved substantially due to
lower losses in the grain marketing operations as operating losses decreased
from $5,200 in the first six 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 $5,000 from
unauthorized speculative activity occurred in the first half 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 direct marketing improvements to results over last year in grain
marketing were partially reduced in the current year by lower earnings in the
seed business, as major changes in this industry have reduced these results, and
from increased costs associated with the acquisition and operations of a new
consulting operation. The reduced results in agronomy for the six months reflect
the decreased earnings in the first quarter from low gross margins brought about
by industry-wide conditions and drought in specific parts of our service area.
The earnings fluctuations in wholesale operations, retail support costs, feed
enterprise operations, and retail enterprise 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 $46,700 and $92,900 for
the three and six months ended December 31, 1999, increased $5,200 (13%) and
$12,900 (16%), respectively, as compared to the same periods in the prior year.
The growth in sales over the prior year in the three- and six-month periods was
substantially in the Produce Group, where sales increased $7,200 (30%) and
$13,600 (28%), respectively. The Produce Group sales growth in the three- and
six-month periods of $8,700 and $13,400, respectively, was 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. The sales growth in the Produce Group
was partially offset by declines in sales in the Business Group of $3,200 (18%)
for the three-month period and $600 (2%) for the six-month period. The Business
Group sales decline resulted principally from a poor sunflower seed crop this
year.
CPG pre-tax losses of $900 and $700 for the three and six months ended December
31, 1999, are compared to pre-tax earnings of $1,800 and $13,300 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 $2,700 (150%) and $3,300 (127%)
for the three- and six-month periods, respectively, as compared to the same
periods in the prior year. In the three-month period, pre-tax earnings related
to the Business Group declined $1,700. 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 quarter associated with a poor
sunflower crop this fall 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 $600 and $1,200 for the three- and six-month
periods, respectively. CPG's Investment Group experienced an increase in a
pre-tax loss of $700 and $1,900 for the three- and six-month periods,
respectively, as it continues to incur costs related to several of its
initiatives for future growth.
Energy
- ------
Energy sales and revenues of $159,500 and $256,300 for the three and six months
ended December 31, 1999, increased $40,900 (35%) and $51,800 (25%),
respectively, as compared to the same periods in the prior year. Overall, sales
dollar increases from product volume increases were $7,900 (7%) during the
three-month period and $8,400 (4%) during the six-month period, respectively, as
compared to the same periods in the prior year. Increased cost of underlying
commodities caused sales prices to increase this year. As compared to the
respective periods in the prior year, sales dollars increased $28,400 (24%) for
the three-month period and $35,200 (17 %) for the six-month period.
Additionally, sales increases in the three and six months ended December 31,
1999, of $4,600 and $8,200, 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 $6,100 for the three months ended December 31, 1999,
increased $3,300 (113%) over the same period in the prior year. The pre-tax loss
of $5,900 for the six months ended December 31, 1999, was higher by $3,500
(141%) than the same period in the prior year. In the three- and six-month
periods, overall gross margin dollars increased $4,700 (11%) and $2,800 (4%),
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 months and more than offset in the six-month period by increases in total
operating expenses of $1,100 (3%) and $5,700 (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, increased overall operating costs from the prior year.
Leasing
- -------
Total revenue of $19,100 and $37,300 for the three and six months ended December
31, 1999, increased $1,500 (8%) and $2,800 (8%), 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 $63,300 (12%) in the three-month period and $61,900 (12%) in the
six-month period as compared to the same periods in the prior year.
Pre-tax earnings from operations of $4,600 and $8,400 for the three and six
months ended December 31, 1999, increased $500 (13%) and $1,000 (13%),
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 $900 (7%) for the three months and $1,800 (7%) for the six months
ended December 31, 1999, 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 net revenues of $7,000 and $14,000 for the three and six months ended
December 31, 1999, decreased $600 (8%) and $600 (4%), respectively, as compared
to the same periods in the prior year. These decreases were experienced in net
earned premiums of Agway Insurance Company. Reinsurance premiums, which reduce
earned revenues, were higher in the three- and six-month periods of the current
year as compared to the same periods in the prior year 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.
Pre-tax earnings of the Insurance Company of $100 and $300 for the three and six
months ended December 31, 1999, increased $200 and $300, respectively, as
compared to the same periods in the prior year. The improvement in pre-tax
earnings for both periods resulted substantially from improved claim experience.
The Agency experienced pre-tax losses of $100 and $300 for the three and six
months ended December 31, 1999, which represent the same results for the three
months ended and an increased loss of $100 (30%) for the six 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 six months ended December 31:
<TABLE>
<CAPTION>
Increase
1999 1998 (Decrease)
------------ ------------ ------------
<S> <C> <C> <C>
Net cash flows provided by (used in):
Operating activities...................................................... $ (11,783) $ 37,664 $ (49,447)
Investing activities...................................................... (50,628) (23,463) (27,165)
Financing activities...................................................... 62,411 (14,201) 76,612
------------ ------------ ------------
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 six months
ended December 31, 1999, of $49,400 is substantially due to changes in working
capital. In the first six months of this year, working capital generated cash of
$9,400, while for the same time period in the prior year, working capital
generated cash of $60,500. The Energy business is the reason for the significant
decrease in cash generated from working capital activities. The significant
increase of cost of energy commodities in the first half of this year has
increased the cash needs for inventory by $10,400 in the first six months of
this year as compared to inventory balances declining $3,100 over the same
period in the prior year. Also, receivable balances increased by $29,700 in the
first six months of this year as compared to receivable balances declining
$3,100 over the same period in the prior year.
Cash Flows Used In Investing Activities
The net cash flows used in investing activities increased in the first six
months of this year by $27,200 as compared to the first six 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 $12,000 greater net investment in Telmark
leases in the first six months of this year compared to last year.
Cash Flows Provided By (Used In) Financing Activities
Financing activities for the six months ended December 31, 1999, provided cash
of $62,400 compared to net cash used to pay down debt of $14,200 for the same
period in the prior year. This $76,600 change in cash related to financing
activity 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, 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 below.
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 December 31, 1999:
<TABLE>
<CAPTION>
AFC
Agway (excluding
Source of debt Inc. Telmark) Telmark Total
- -------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Banks - due 2/00 to 5/04, interest at a weighted average
rate of 6.8% with a range of 5.6% - 8.2%............................. $ 0 $ 875 $ 185,000 $ 185,875
Insurance companies - due 1/00 to 3/07, interest at a
weighted average rate of 6.8% with a range of
6.9% - 7.5%.......................................................... 0 0 178,418 178,418
Capital leases and other - due 2000 to 2018, interest at a
weighted average rate of 9.3% with a range of 6% to 12%.............. 14,516 2,202 0 16,718
----------- ---------- ---------- ----------
Long-term debt.................................................... 14,516 3,077 363,418 381,011
Subordinated money market certificates - due 10/00 to 10/14,
interest at a weighted average rate of 7.9% with a range of
4.5% - 9.5%.......................................................... 0 412,585 0 412,585
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 7,846 41,457 49,303
----------- ---------- ----------- ----------
Total debt........................................................ $ 14,516 $ 423,508 $ 404,875 $ 842,899
=========== ========== =========== ==========
</TABLE>
For a further description of the Company's credit facilities available at
December 31, 1999, 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. 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 month-end, leap year,
quarter-end, and year-end programs.
The Company's cost estimates relating to year 2000 efforts have been revised in
light of 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 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
December 31, 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
December 31 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 $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
December 31, 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
December 31 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.
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 exchange- traded commodity instrument position as of
December 31 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 December 31 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 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Company held its annual meeting of shareholders on November 5, 1999, at
which a quorum was present in person or by proxy. The following Directors were
elected to three-year terms through November 2002:
Nominee In Favor Opposed
- -------------------- --------------- ------------
Kevin B. Barrett 54,353 2,076
Robert L. Marshman 54,353 2,076
Richard H. Skellie 54,353 2,076
Carl D. Smith 54,353 2,076
Joel L. Wenger 54.353 2,076
Eligible additional votes totaling 14,441 were not received at the time of the
annual meeting and are not included as either votes in favor or opposed.
Additionally, these 14,441 eligible additional votes may be considered
abstentions and were not included for purposes of determining a quorum at the
annual meeting.
The following is a list of Directors whose terms as Directors continued after
the November 5, 1999, Annual Meeting:
Gary K. Van Slyke - Chairman of the Board and Director
Andrew J. Gilbert - Vice Chairman of the Board and Director
Kevin B. Barrett - Director
Keith H. Carlisle - Director
D. Gilbert Couser - Director
Ralph H. Heffner - Director
Robert L. Marshman - Director
Jeffrey B. Martin - Director
Samuel F. Minor - Director
Richard H. Skellie - Director
Carl D. Smith - Director
Thomas E. Smith - Director
Joel L. Wenger - Director
Edwin C. Whitehead - Director
William W. Young - Director
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
There were no reports on Form 8-K required to be filed during the three months
ended December 31, 1999.
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 February 4, 2000 /s/ PETER J. O'NEILL
----------------------- ----------------------------------------------
Peter J. O'Neill
Senior Vice President,
Finance & Control,
(Principal Financial Officer and
Chief Accounting Officer)
25
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