UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
----
ACT OF 1934
For the quarterly period ended September 23, 2000
------------------
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
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(Address of principal executive offices) (Zip Code)
315-449-6431
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 3, 2000
------------------------ -------------------------------
Membership Common Stock, 98,350 shares
$25 par value per share
1
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
------- ---------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 23, 2000 and June 24, 2000.................... 3
Condensed Consolidated Statements of Operations and Retained Earnings for the three months
ended September 23, 2000 and September 25, 1999..................................................... 4
Consolidated Statements of Comprehensive Income for the three months ended September 23, 2000
and September 25, 1999.............................................................................. 5
Condensed Consolidated Cash Flow Statements for the three months ended September 23, 2000
and September 25, 1999.............................................................................. 6
Notes to Condensed Consolidated Financial Statements................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 21
PART II. OTHER INFORMATION
-------- -----------------
Item 6. Exhibits and Reports on Form 8-K........................................................... 22
SIGNATURES.......................................................................................... 23
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 1. CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 23, June 24,
ASSETS 2000 2000
------ -------------- -------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash...................................................................... $ 9,286 $ 29,244
Trade accounts receivable (including notes receivable of $36,506 and
$38,755, respectively), less allowance for doubtful accounts of
$7,879 and $7,204, respectively...................................... 189,696 210,598
Leases receivable, less unearned income of $73,280 and
$71,944, respectively................................................ 159,055 152,255
Advances and other receivables............................................ 25,724 22,401
Inventories:
Raw materials........................................................ 3,505 7,982
Finished goods....................................................... 99,092 101,859
Goods in transit and supplies........................................ 2,187 2,099
-------------- -------------
Total inventories............................................... 104,784 111,940
Prepaid expenses and other assets......................................... 57,398 48,743
-------------- -------------
Total current assets................................................. 545,943 575,181
Marketable securities available for sale........................................ 35,553 36,254
Other security investments...................................................... 50,998 51,472
Properties and equipment, net................................................... 171,553 175,784
Long-term leases receivable, less unearned income of $169,228 and
$167,414, respectively.................................................... 486,330 470,595
Net pension asset............................................................... 217,669 213,455
Other assets ................................................................ 34,304 21,110
Net assets of discontinued operations........................................... 25,060 34,278
-------------- -------------
Total assets.................................................... $ 1,567,410 $ 1,578,129
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Notes payable............................................................. $ 192,064 $ 177,576
Current installments of long-term debt.................................... 130,370 136,211
Current installments of subordinated debt................................. 55,949 57,125
Accounts payable.......................................................... 107,485 94,046
Other current liabilities................................................. 113,559 122,060
-------------- -------------
Total current liabilities............................................ 599,427 587,018
Long-term debt.................................................................. 261,740 282,338
Subordinated debt............................................................... 420,237 417,749
Other liabilities............................................................... 112,779 108,433
-------------- -------------
Total liabilities.................................................... 1,394,183 1,395,538
Commitments and contingencies...................................................
Shareholders' equity:
Preferred stock, net...................................................... 38,273 39,695
Common stock, net......................................................... 2,462 2,473
Accumulated other comprehensive income (loss)............................. 5,296 (798)
Retained earnings......................................................... 127,196 141,221
-------------- -------------
Total shareholders' equity........................................... 173,227 182,591
-------------- -------------
Total liabilities and shareholders' equity...................... $ 1,567,410 $ 1,578,129
============== =============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 1. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
September 23, September 25,
2000 1999
--------------- --------------
<S> <C> <C>
Net sales and revenues from:
Product sales (including excise taxes).................................... $ 291,513 $ 238,584
Leasing operations........................................................ 20,544 18,271
Insurance operations...................................................... 6,972 6,980
--------------- --------------
Total net sales and revenues......................................... 319,029 263,835
Cost and expenses from:
Products and plant operations............................................. 286,048 238,199
Leasing operations........................................................ 9,369 7,701
Insurance operations...................................................... 4,312 4,152
Selling, general and administrative activities............................ 32,431 33,603
--------------- -------------
Total operating costs and expenses................................... 332,160 283,655
Operating loss.................................................................. (13,131) (19,820)
Interest expense, net........................................................... (9,011) (6,394)
Other income, net............................................................... 1,148 2,314
--------------- -------------
Loss before income taxes........................................................ (20,994) (23,900)
Income tax benefit ............................................................. 8,026 8,711
--------------- -------------
Loss from continuing operations................................................. (12,968) (15,189)
Discontinued operations:
Loss from operations, net of tax of $0 and $874, respectively............. 0 (1,601)
Loss on disposal of retail................................................ 0 0
--------------- -------------
Loss from discontinued operations......................................... 0 (1,601)
Loss before cumulative effect of an accounting change........................... (12,968) (16,790)
Cumulative effect of accounting change, net of tax benefit of $723.............. (1,057) 0
-------------- -------------
Net loss ..................................................................... (14,025) (16,790)
-------------- -------------
Retained earnings, beginning of period.......................................... 141,221 153,763
-------------- -------------
Retained earnings, end of period................................................ $ 127,196 $ 136,973
============== =============
</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
----------------------------------
September 23, September 25,
2000 1999
--------------- --------------
<S> <C> <C>
Net loss ..................................................................... $ (14,025) $ (16,790)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period................... 295 (146)
Reclassification adjustment for (gains) losses included in net earnings... 0 0
Unrealized gains (losses) on derivatives:
Cumulative effect of accounting change, net of tax expense $2,041......... 3,061 0
Unrealized holding gains (losses) arising during period................... 3,402 0
Reclassification adjustment for (gains) losses included in net earnings... (664) 0
--------------- --------------
Other comprehensive income (loss), net of tax................................... 6,094 (146)
--------------- --------------
Comprehensive loss.............................................................. $ (7,931) $ (16,936)
=============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 1. CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
September 23, September 25,
2000 1999
--------------- -------------
<S> <C> <C>
Net cash flows provided by (used in) continuing operations...................... $ 8,432 $ (10,527)
Net cash flows provided by (used in) discontinued operations.................... 9,218 9,568
--------------- -------------
Net cash flows provided by (used in) operating activities....................... 17,650 (959)
Cash flows provided by (used in) investing activities:
Purchases of property, plant and equipment................................ (3,351) (6,909)
Proceeds from disposal of property, plant and equipment................... 2,170 (1,350)
Cash paid for acquisition of business..................................... 0 (4,950)
Leases originated......................................................... (76,727) (68,426)
Leases repaid............................................................. 52,616 47,450
Proceeds from sale of marketable securities............................... 1,473 645
Purchases of marketable securities........................................ (477) (1,896)
Net purchase of investments in cooperatives............................... 351 319
--------------- -------------
Net cash flows used in investing activities..................................... (23,945) (35,117)
Cash flows provided by (used in) financing activities:
Net change in short-term borrowings....................................... 14,488 50,800
Proceeds from long-term debt.............................................. 562 876
Repayment of long-term debt............................................... (26,969) (13,560)
Proceeds from sale of subordinated debt................................... 24,604 23,570
Maturity and redemption of subordinated debt.............................. (23,291) (22,737)
Payments on capital leases................................................ (32) 103
Redemption of stock, net ................................................. (1,433) (389)
Cash dividends paid....................................................... (1,592) (1,702)
--------------- -------------
Net cash flows provided by (used in) financing activities....................... (13,663) 36,961
--------------- -------------
Net increase (decrease) in cash and equivalents................................. (19,958) 885
Cash and equivalents at beginning of period..................................... 29,244 4,480
--------------- -------------
Cash and equivalents at end of period........................................... $ 9,286 $ 5,365
=============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Thousands of Dollars)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Agway Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month
period ended September 23, 2000, are not necessarily indicative of the
results that may be expected for the year ending June 30, 2001, 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
24, 2000.
New Accounting Standard
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 (as
amended by SFAS No. 137) is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000, (June 25, 2000, for the
Company). SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
On June 25, 2000, upon adoption of SFAS No. 133, the Company recorded a
net-of-tax cumulative-effect loss of $1,100 to recognize at fair value the
component of all option contracts associated with the Company's Energy
segment which is excluded from the assessment of hedge effectiveness as
allowed by the new standard. The Company also recorded a net-of-tax
cumulative-effect gain of $3,100 in other comprehensive income to
recognize at fair value all derivative instruments in the Company's Energy
segment that are designated and qualify as cash- flow hedges. The Company
expects to reclassify this gain to earnings during the current fiscal
year. See Note 7 for further details of the Company's accounting for
derivatives and hedging activities.
Fiscal Quarter
The fiscal quarter-end of Agway Inc. for the first quarter of the current
and prior year was September 23 and September 25, respectively. The fiscal
quarter-end of certain of Agway's subsidiaries, including Agway Energy
Products LLC, Telmark LLC, and Agway Insurance Company, is September 30,
and these subsidiaries are consolidated on that basis.
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) is a wholly owned subsidiary of Agway.
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 certain of AHI's subsidiaries.
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). 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 their own operations or
through a combination of their own short- and long-term credit facilities.
In exemptive relief granted pursuant to a "no action letter" issued by the
staff of the SEC, AFC is not required to file periodic reports with the
SEC for itself but does report summarized financial information in Agway's
financial statement footnotes. However, as required by the 1934 Act, the
summarized financial information concerning AFC and consolidated
subsidiaries is as follows:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
September 23, September 25,
2000 1999
--------------- --------------
<S> <C> <C>
Net sales and revenues............................................... $ 191,191 $ 139,467
Operating loss....................................................... (4,535) (6,527)
Net loss............................................................. (8,594) (8,285)
September 23, June 30,
2000 2000
--------------- --------------
Current assets....................................................... $ 683,867 $ 696,404
Properties and equipment, net........................................ 78,269 79,178
Noncurrent assets.................................................... 632,563 618,303
--------------- --------------
Total assets......................................................... $ 1,394,699 $ 1,393,885
=============== ==============
Current liabilities.................................................. $ 122,755 $ 112,259
Short-term notes payable............................................. 192,064 177,576
Current installments of long-term debt............................... 125,102 133,399
Current installments of subordinated debt............................ 55,949 57,125
Long-term debt....................................................... 255,303 273,814
Subordinated debt.................................................... 420,237 417,749
Noncurrent liabilities............................................... 23,200 19,373
Shareholder's equity................................................. 200,089 202,590
--------------- --------------
Total liabilities and shareholder's equity........................... $ 1,394,699 $ 1,393,885
=============== ==============
</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
----------------------
Agway finances its operations and the operations of all of its businesses
and subsidiaries through Agway Financial Corporation (AFC). External
sources of short-term financing for Agway and its continuing operations,
other than Agway Insurance Company and Telmark, 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. As of September 2000, Agway had certain facilities
available with banking institutions whereby lenders have agreed to provide
funds up to $436,700 to separately financed units of the Company as
follows: AFC - $50,000 and Telmark - $386,700. 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
The specifics of these AFC arrangements are as follows:
<TABLE>
<CAPTION>
Outstanding
Available ------------------------------------
Sept. 2000 Sept. 2000 June 2000 Term Expires
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Short-term line of credit.................... $ 50,000 $ 20,800 $ 51,900 December 2000
Commercial paper............................. $ 50,000 $ 50,000 $ 50,000 December 2000
</TABLE>
Effective November 1, 2000, AFC's line of credit was increased to
$75,000, principally to support anticipated increased working capital
requirements of the Company's energy business due to the industrywide
increasing costs of petroleum commodities.
The $75,000 short-term line of credit and the $50,000 commercial paper
facility currently available to AFC require collateralization using
certain of Agway's accounts receivable and non-petroleum inventories
(collateral). The line of credit additionally requires Agway's investment
in bank stock, which had a book value of $2,700 and $3,000 at September
2000 and June 2000, respectively, as additional collateral. The maximum
amounts that can be drawn under these AFC agreements are subject to a
limitation based on a specific calculation relating to the collateral
available. Adequate collateral existed throughout the first quarter to
permit AFC to borrow amounts to meet the ongoing needs of Agway and is
expected to continue to do so. In addition, the agreements include
certain covenants, the most restrictive of which requires Agway to
maintain specific quarterly levels of interest coverage, monthly levels
of tangible retained earnings, monthly current ratios, and limits
available credit to a multiple of earnings as defined in the agreement.
Other covenants limit capital expenditures to agreed upon levels during
the term of the agreements, require the monthly maintenance of senior
liabilities to tangible capital ratios as defined in the agreements and
the maintenance of a minimum total of $425,000 in Agway preferred stock
and AFC subordinated debt. The required minimum level of preferred stock
and subordinated debt has historically been at levels that do not
interfere with the normal volume of requests Agway has received and
fulfilled to repurchase such securities at par value or principal amount
prior to maturity.
For the months of July and August 2000, Agway did not meet the current
ratio covenant. The banks have waived these violations of this covenant
and have amended the covenant to agreed upon levels of financial
performance through December 2000, the remaining term of these credit
arrangements. As of September 2000, Agway met all covenant requirements.
However, the bank covenants are restrictive and, given the historical
volatility of Agway's operating results, may be violated between now and
December 31, 2000.
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)
----------------------------------
AFC (continued)
To meet working capital demands of the most recent petroleum product cost
increases, banks under AFC's current lending arrangements agreed to
increase AFC's line of credit to $75,000 effective November 1, 2000
through the expiration of this financing arrangement on December 31, 2000.
AFC annually renews its lines of credit in the quarter ended December 31,
and in anticipation of these continued high petroleum product costs, AFC
has been negotiating with several lenders to increase and restructure its
credit facilities effective January 1, 2001. The restructured credit
facilities are anticipated to include increased lines of credit without a
commercial paper program. Agway's existing banks have expressed interest
in participating in the restructured lines of credit at reduced levels
from their current commitments. Agway expects to continue to have
appropriate and adequate financing to meet its ongoing needs. However, we
are presently in negotiations for these new credit facilities; therefore,
there is no assurance that the Company will achieve the desired levels of
financing, and the terms of such financing, as ultimately negotiated,
cannot be determined at this time.
In addition to the short-term line of credit and commercial paper program,
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, though AFC historically
has had a practice of repurchasing at face value, plus interest accrued at
the stated rate, certain subordinated debt whenever presented for
repurchase prior to maturity. However, AFC is under no obligation to
repurchase such debt when so presented, and AFC may stop or suspend this
repurchase practice at any time. In addition, the terms or conditions of
the lines of credit discussed above, as ultimately negotiated, may cause
AFC to limit or cease its past practices with regard to the repurchase of
subordinated debt. The foregoing debt bears interest payable semi-annually
on January l and July 1 of each year. AFC's 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. Government Treasury Bills
(T-Bills), with maturities of 26 weeks. AFC subordinated money market
certificates as of September 2000 are due between October 2000 and October
2014 and bear a weighted average interest rate of 8.0%, while subordinated
debentures due between July 2001 and July 2003 bear a weighted average
interest rate of 7.7%.
In October 2000, $50,100 of subordinated money market certificates issued
by AFC matured. Agway refinanced this debt through a combination of new
issuance of subordinated debt, cash from operations, sales of discontinued
assets, and short-term bank borrowings.
Telmark
At September 2000, Telmark had credit facilities available from banks
which allow Telmark to borrow up to an aggregate of $386,700, which
reflects an increase in the revolving term loan facility of $50,000 since
June 2000. Uncommitted short-term line of credit agreements permit Telmark
to borrow up to $86,700 on an uncollateralized basis with interest paid
upon maturity. The lines bear interest at money market variable rates. A
committed $300,000 partially collateralized revolving term loan facility
permits Telmark to draw short-term funds bearing interest at money market
rates or draw long-term debt at rates appropriate for the term of the note
drawn. The total amounts outstanding as of September 2000 and June 2000
under the short-term lines of credit were $85,700 and $75,200,
respectively, and under the revolving term loan facility were $177,600 and
$154,500, respectively. The portion of the revolving term loan that is
short term at September 2000 and June 2000 was $35,600 and $500,
respectively. Telmark borrows under its short-term line of credit
agreement and its revolving term agreement from time to time to fund its
operations. Short-term debt serves as interim financing between the
issuances of long-term debt. Telmark renews its lines of credit annually.
The $86,700 lines of credit all have terms expiring during the next 12
months. The $300,000 revolving term loan facility is available through
August 1, 2001.
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)
3. BORROWING ARRANGEMENTS (continued)
----------------------------------
Telmark (continued)
Telmark had balances outstanding on unsecured senior notes from private
placements totaling $122,000 at September 30 and June 30, 2000. 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 three wholly owned special purpose subsidiaries, has six
classes of lease-backed notes outstanding totaling $113,600 and $118,300
at September 2000 and June 2000, respectively, payable to insurance
companies. Interest rates on these classes of notes range from 6.5% to
9.1%. 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, and the notes are
further collateralized by the residual values of these leases and by
segregated cash accounts. The scheduled maturity of these notes is in
varying amounts and dates through December 2008.
Telmark registers with the SEC to offer debentures to the public. The
debentures are unsecured and subordinated to all senior debt at Telmark.
The interest on the debt is paid on January 1, April 1, July 1, and
October 1 of each year and may, at the holder's option, be reinvested. The
offering of the debentures is not underwritten, and there can be no
guarantee as to the amount of debentures, if any, that will be sold.
Telmark's subordinated debentures bear interest at a rate that is the
greater of the stated rate or a rate based upon an average discount rate
for U.S. Government Treasury Bills, with maturities of 26 weeks. Telmark
debentures as of September 2000 are due between March 2001 and March 2008
and bear a weighted average interest rate of 8.0%. As of September 2000,
approximately $38,400 of debentures were outstanding under these
offerings.
The Company's long-term and subordinated debt outstanding at September
2000, as compared to June 2000, is as follows:
<TABLE>
<CAPTION>
AFC
Agway (excluding Telmark) Telmark Total
----------------------- ----------------------- --------------------- ----------------------
9/00 6/00 9/00 6/00 9/00 6/00 9/00 6/00
---------- ---------- ---------- ----------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt .......... $ 11,705 $ 11,336 $ 2,796 $ 2,957 $ 377,609 $ 404,256 $ 392,110 $ 418,549
Currently payable........ 5,268 2,812 452 626 124,650 132,773 130,370 136,211
---------- ---------- ---------- ----------- ---------- --------- ---------- ----------
Net long-term debt....... $ 6,437 $ 8,524 $ 2,344 $ 2,331 $ 252,959 $ 271,483 $ 261,740 $ 282,338
========== ========== ========== =========== ========== ========= ========== ==========
Subordinated debt........ $ 0 $ 0 $ 437,790 $ 437,476 $ 38,396 $ 37,398 $ 476,186 $ 474,874
Currently payable........ 0 0 50,589 51,628 5,360 5,497 55,949 57,125
---------- ---------- ---------- ----------- ---------- --------- ---------- ----------
Net subordinated debt.... $ 0 $ 0 $ 387,201 $ 385,848 $ 33,036 $ 31,901 $ 420,237 $ 417,749
========== ========== ========== =========== ========== ========= ========== ==========
</TABLE>
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)
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 at least 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.
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
--------------------------------------------------
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. In addition, Agway
is involved in repackaging and marketing produce and processing and
marketing sunflower seeds. Agway, through certain of its subsidiaries, is
involved in the distribution of petroleum products; the installation and
servicing of heating, ventilation, and air-conditioning equipment;
marketing of natural gas and electricity; lease financing; the
underwriting and sale of certain types of property and casualty insurance;
and the sale of health insurance. 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 and interest expense
is reported as cost and expenses from leasing operations (cost of sales).
<TABLE>
<CAPTION>
Three Months Ended September 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..... $ 98,963 $ 43,365 $ 149,251 $ 20,468 $ 6,972 $ 10 $ 319,029
Intersegment sales and
revenues................... 2,230 1,761 85 76 0 (4,152) 0
----------- ----------- ----------- ----------- ---------- ---------- -----------
Total sales and revenues $ 101,193 $ 45,126 $ 149,336 $ 20,544 $ 6,972 $ (4,142) $ 319,029
=========== =========== =========== =========== ========== ========== ===========
Earnings (loss) before
income taxes.............. $ (8,932) $ (2,284) $ (8,912) $ 4,212 $ 171 $ (5,249) $ (20,994)
=========== =========== =========== =========== ========== ========== ===========
Total assets................. $ 248,494 $ 67,725 $ 202,085 $ 693,154 $ 55,032 $ 300,920 $ 1,567,410
=========== =========== =========== =========== ========== ========== ===========
<CAPTION>
Three Months Ended September 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..... $ 91,424 $ 43,266 $ 103,893 $ 18,265 $ 6,980 $ 7 $ 263,835
Intersegment sales and
revenues................... 3,338 2,922 100 6 0 (6,366) 0
----------- ----------- ----------- ---------- ---------- ---------- ------------
Total sales and revenues $ 94,762 $ 46,188 $ 103,993 $ 18,271 $ 6,980 $ (6,359) $ 263,835
=========== =========== =========== ========== ========== ========== ============
Earnings (loss) before
income taxes.............. $ (12,888) $ 204 $ (12,020) $ 3,842 $ 36 $ (3,074) $ (23,900)
=========== =========== =========== ========== ========== ========== ============
Total assets................. $ 244,265 $ 68,104 $ 152,201 $ 614,009 $ 55,229 $ 330,647 $ 1,464,455
=========== =========== =========== =========== ========== ========== ============
</TABLE>
(a) Represents unallocated net corporate costs 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. DISCONTINUED OPERATIONS
-----------------------
In October 1999, the Agway Board of Directors approved a plan to
restructure the retail store distribution system. This plan called for the
sale or closure of the 227 Agway retail properties over a period of
approximately 1 1/2 years. In the spring of 2000, the Agway Board of
Directors authorized the sale of the wholesale procurement and supply
system to Southern States Cooperative, Inc. An agreement was executed on
June 20, 2000 and the sale closed on July 31, 2000.
The sale of the wholesale procurement and supply system, when combined
with the sale and closure of the Agway-owned or operated retail stores,
constitutes a plan to discontinue operations of the retail services
business. For financial reporting purposes, the measurement date upon
which this discontinued operation plan became effective was June 20, 2000.
Operating results of the retail services business, including restructuring
activity which took place through that date, were included in the
operating loss from discontinued operations in the financial statements
for the year ended June 2000. The anticipated gains and losses after June
20, 2000 from the future anticipated sale of the wholesale procurement and
supply system, which was consummated on July 31, 2000, and the sale or
closure of the remaining Agway-owned or operated retail store properties,
as well as the results of their future operations through the anticipated
dates of sale, were included in the loss on disposal of the retail
services business in the fiscal year-end June 2000 statement of
operations. No adjustments were required for discontinued operations for
the first quarter of this year. Quarterly financial results for the prior
fiscal year have been reclassified to reflect the retail services business
as a discontinued operation.
The net sales and revenues from discontinued operations (retail services
business) for the first quarter of 2001 and 2000 were approximately
$19,200 and $60,100, respectively. Net interest expense allocated to
discontinued operations for the first quarter of 2001 and 2000 totaled $0
and $1,300, respectively.
A summary of net assets of discontinued operations was as follows:
<TABLE>
<CAPTION>
September 23, June 24,
2000 2000
------------- -----------
<S> <C> <C>
Accounts receivable....................................................... $ 13,536 $ 22,982
Inventory................................................................. 1,973 18,408
Property, plant and equipment, net........................................ 18,838 18,989
Other assets, net......................................................... 17,986 23,370
Accounts payable and accrued expenses..................................... (27,266) (49,413)
Long-term liabilities..................................................... (7) (58)
------------- -----------
Net assets of discontinued operations..................................... $ 25,060 $ 34,278
============= ===========
</TABLE>
7. ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
-------------------------------------------------
All derivatives are recognized on the balance sheet at their fair value.
At the time a derivative contract is entered into, the Company either
designates the derivative as a fair value or cash flow hedge. For fair
value hedge transactions in which the Company is hedging changes in fair
value of an asset, liability, or firm commitment, changes in the fair
value of the derivative will generally be offset in the income statement
by changes in the hedged item's fair value. For cash flow hedge
transactions in which the Company is hedging the variability of cash flows
related to a variable-priced asset, liability, commitment, or forecasted
transaction, changes in the fair value of the derivative are reported in
other comprehensive income. The gains and losses on the derivatives that
are reported in comprehensive income are reclassified as earnings in the
periods in which earnings are impacted by the variability of the cash
flows of the hedged item. The ineffective portion of derivatives' changes
in fair value and the change in fair value of derivatives designated but
not qualifying as hedges are recognized in current-period earnings.
14
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
7. ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES (continued)
-------------------------------------------------------------
For all derivatives designated as a hedge, the Company formally documents
the relationship between the hedging instrument and the hedged item, as
well as the risk management objective and strategy for the use of the
hedging instrument. This documentation includes linking the derivatives
that are designated as fair value or cash flows hedges to specific assets
or liabilities on the balance sheet, commitments, or to forecasted
transactions. The Company assesses at the time a derivative contract is
entered into and at least quarterly whether the hedge relationship between
the derivative and the hedged item is highly effective in offsetting
changes in fair value or cash flows. Any change in fair value of the
derivative resulting from ineffectiveness, as defined by SFAS No. 133, is
recognized currently in earnings. Further, for derivatives that have
ceased to be a highly effective hedge, the Company discontinues hedge
accounting prospectively.
The Company's Energy segment enters into a combination of exchange-traded
futures and options contracts and, in certain circumstances, over the
counter options (collectively derivatives) to manage the price risk
associated with future purchases of the commodities used in its
operations, principally heating oil and propane. Energy has fair value
hedges associated with its fixed price purchase contracts and cash flows
hedges for its variable priced purchase contracts. The derivatives are
specifically matched in volume and maturity with the various purchase
commitments of the business and generally expire within a year. Energy
does not include the time value of option contracts in its assessment of
hedge effectiveness and therefore records changes in the time value
component of its options currently in earnings. At September 2000, Energy
had derivative assets of $12,900 classified as prepaid expenses and other
assets. A total of $5,800 of deferred net gains on derivatives instruments
were accumulated in other comprehensive income and are expected to be
reclassified into earnings during the next nine months. The pre-tax
earnings impact for the mark-to-market component of option value not used
in assessing hedge effectiveness totaled $1,800 upon the initial adoption
of SFAS No. 133 at July 1, 2000, and is included, net of tax, in the
cumulative effect of accounting change. For the three months ended
September 30, 2000, $700 is included in cost of goods sold for the change
in option value not used in the assessment of hedge effectiveness.
In the Agriculture segment, the purchase of corn, soy complex, and oats,
which can be sold directly as ingredients or included in feed products
sold by Agriculture, creates price risk for this business. Agriculture
intends to use natural hedges of purchase and sales contracts whenever
possible; however, exchange-traded commodity instruments are used
principally to manage the price risk associated with unmatched commodity
purchases or sales. Agriculture matches all derivative contracts with
their underlying purchase or sale contract; however, due to the
differences in the changes in the commodity cash price at an Agriculture
location versus the Chicago Board of Trade, a highly effective hedging
relationship (as defined by SFAS No. 133) has not been achieved.
Therefore, the derivatives used in Agriculture are marked to market
currently in earnings.
In the Country Products Group segment, exchanged-traded soybean oil
futures contracts are used principally to manage the price risk of
confection and bakery kernel sunflower seeds which are purchased from
growers by CPG and sold to customers. Foreign currency forward contracts
are entered into to manage fluctuations in foreign currency denominated
sales transactions. Because the commodity instrument used by CPG (soybean
oil) does not create a highly effective hedging relationship (as defined
by SFAS No. 133) with the sunflower seed purchase contracts, and because
the timing of the foreign currency contracts does not match the associated
sales contracts, these derivatives are marked to market currently in
earnings.
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)
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.
Amounts in the following narrative have been rounded to the nearest hundred
thousand.
Consolidated Results
--------------------
Consolidated net sales and revenues of $319,000 for the fiscal quarter ended
September 23, 2000, increased $55,200 (21%) as compared to the same period in
the prior year. The increase in the three-month period was substantially the
result of increased sales in the Energy and Agriculture segments. The increase
in Energy was principally due to significant increases in the cost of petroleum
products over the prior year combined with volume improvements. The increase in
Agriculture sales resulted substantially from increases in agronomy sales, where
delayed plantings in the spring of 2000 due to high rainfall in certain areas of
our operating territory moved sales of agronomy products such as fertilizers,
crop protectants, and lime (which are typically made in the fourth quarter of
the fiscal year) to the first quarter of the current year.
Consolidated pre-tax loss of $21,000 for the three months ended September 23,
2000, improved $2,900 (12%) over the same period in the prior year. From
operations, the pre-tax results for the three months ended September 23, 2000,
improved $5,100 (24%). Improvements in Agriculture, Energy, Leasing, and
Insurance were partially offset by a decline in the Country Products Group. See
further explanation by business segment below. Increased net corporate costs of
$2,200 (72%) further reduced pre-tax results for the three-month period. The
increase in corporate costs over the prior year resulted from higher
professional services costs, higher total interest costs from overall higher
average short-term borrowings, and higher debt fees.
Effective June 25, 2000, Agway adopted a new accounting requirement for all
derivative instruments. As a result, a loss on the cumulative effect of
accounting change, net of tax of $1,100, has been recorded (See Note 1 for
details). Also, as detailed in Note 6, the former retail segment is now being
reported as a discontinued operation and the $1,600 after- tax losses on retail
operations for the quarter ended September 25, 1999, have been so reclassified.
For the quarter ended September 23, 2000, no further adjustments were required
to be recorded for this discontinued operation.
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
-----------
Total Agriculture sales and revenues of $101,200 for the three months ended
September 23, 2000, increased $6,400 (7%) as compared to $94,800 for the same
period in the prior year. The increase in sales for the three-month period was
due principally to increased sales in the agronomy business, but was also
favorably impacted by increased sales in the TSPF(TM) heifer-rearing services
and in the Agriculture farm store sales. These increases were partially offset
by sales decreases in the enterprise feed and grain marketing businesses.
Agronomy sales increased $9,300 (30%) and farm store sales increased $400 (9%)
for the three-month period as compared to the same period in the prior year.
High rainfall in the northern portion of Agway's market territory during the
spring 2000 planting season delayed plantings. Consequently, the sale of
agronomy products such as fertilizer, crop protectants, and lime that normally
would have occurred in the fourth quarter of last fiscal year occurred in the
first quarter of the current year. The TSPF(TM) heifer rearing service sales
increased $500 (278%) for the three-month period as compared to the same period
in the prior year. This new service continues to grow as a larger number of
animals are in the heifer-rearing facilities than in the prior year. The above
increases were partially offset by a decline in grain marketing sales of $2,000
(97%) and enterprise feed sales of $1,900 (3%) in the first quarter of this year
as compared to the same period in the prior year. The decrease in grain
marketing sales is due to the discontinuation of the grain marketing operations
that occurred in the second half of the prior fiscal year. The decrease in
enterprise feed sales resulted substantially from a combination of market
consolidation, increased competition, and lower milk prices which have impacted
farmers' buying decisions.
Agriculture pre-tax loss of $8,900 for the three months ended September 23,
2000, decreased $4,000 (31%) as compared to a pre-tax loss of $12,900 for the
same period 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 the agronomy operations of $2,800 (38%) and
in the grain marketing operations of $2,000 (91%). The improvements to agronomy
pre-tax earnings resulted substantially from increased sales and product margins
as compared to the prior year which were the result of the delay in spring 2000
sales until the first quarter of the current year as noted above. The grain
marketing business improvements are principally related to the absence of grain
marketing losses in the three months ended September 23, 2000, as compared to
the first quarter of the prior year. (Grain marketing losses of $1,800 were
incurred in the first quarter of the prior year principally from unauthorized
speculative transactions as previously disclosed.) These improvements were
partially offset by a decrease in enterprise feed operations of $600 (14%). The
decline in sales described above resulted in lower gross margins that were
offset slightly by lower operating expenses as the operations adjusted to the
decline in volume.
Country Products Group
----------------------
Country Products Group (CPG) total sales and revenues of $45,100 for the three
months ended September 23, 2000, decreased $1,100 (2%) as compared to the same
period in the prior year. The decline in CPG sales as compared to the prior year
related primarily to the Business Group, where sales decreased $3,100 (20%). The
Business Group sales decline resulted principally from lower sunflower seed
sales due to a poor sunflower seed crop in the fall of 1999. The poor crop
continued to adversely impact sales during the first quarter of this year as the
new sunflower seed crop is not expected to be substantially harvested until the
second quarter of this year. Additionally, the sale of the pastry flour mill in
the fourth quarter of the prior year reduced Business Group sales in the first
quarter of this year as compared to the prior year by $1,200. These decreases
were partially offset by an $800 (3%) increase in the Produce Group sales for
the three- month period as compared to the same period in the prior year. The
increase in Produce Group sales resulted from a mixture of activity. A new
produce operation acquired in the first quarter of the prior year did not have
appreciable sales until after the first quarter of last year, and therefore, the
Produce Group experienced a growth of $3,200 in sales from this operation in the
current year as compared to last year. This increase was partially offset as
industry consolidation has caused some loss in sales volume of other produce
operations in the current year as compared to the prior year. Finally, the
Investment Group sales increased $500 ((530%) substantially due to the
commercial sale of Optigen (TM) 1200, a controlled release nitrogen feed
product, which was not available until the second quarter of the prior year.
17
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
Country Products Group (continued)
----------------------------------
CPG pre-tax losses of $2,300 for the three months ended September 23, 2000,
represents a decrease of $2,500 as compared to pre-tax income of $200 for the
same period in the prior year. The pre-tax results related to the Business Group
declined $1,200 (180%). The Business Group's sunflower operations experienced
lower margins due to high product cost and increased production costs associated
with a poor sunflower crop harvest in the fall of 1999 that was widespread in
its territory due to adverse growing conditions. The Produce Group's pre-tax
loss of $200 in the three- month period ended September 23, 2000, represents a
decrease of $1,400 compared to pre-tax income of $1,200 in the comparable period
in the prior year. The decline is due to a combination of lower gross margins
and increased operating costs. CPG's Investment Group experienced a pre-tax loss
for the first quarter of $900 as compared to $1,400 in pre-tax losses for the
same period in the prior year. The lower amount of losses in the current year as
compared to the prior year resulted substantially from revenues generated in the
current year on the commercial sale of Optigen(TM) 1200, as noted above.
Additionally, lower costs associated with new business development were incurred
in the first quarter of the current year as compared to the same period in the
prior year.
Energy
------
Energy sales and revenues of $149,300 for the three months ended September 30,
2000, increased $45,300 (44%) as compared to the same period in the prior year.
Overall, sales dollar increases from liquid product volume increases were $4,300
(4%) during the three-month period as compared to the same period in the prior
year. The volume increases were driven by higher retail volume of heating oil
and propane and higher wholesale gasoline volumes. The petroleum industry
continued to experience significant increases in the pricing of product in the
quarter ended September 30, 2000, primarily due to pressure on global supply of
products. As a result of these market conditions, Energy experienced sales
dollars increases due to price increases in its liquid products of $37,000 (36%)
for the three-month period. Additionally, continued focus on growth increased
sales in the three months ended September 30, 2000, by $1,600 (13%) in the
heating, ventilation and air-conditioning installation and service sales and
$2,400 (90%) in the electric and natural gas marketing business as compared to
the same period in the prior year.
Energy pre-tax loss of $8,900 for the three-month period ended September 30,
2000, improved by $3,100 (26%) as compared to the same period in the prior year.
In the three-month period ended September 30, 2000, overall gross margin dollars
increased $4,300 (17%) over the same period in the prior year and were driven by
an increase in liquid product volume with higher gross margin rates as compared
with the prior year. The improved gross margin dollars, however, were partially
offset in the three-month period by a $1,000 (78%) decrease in terminaling
throughput revenues and a $300 (1%) increase in total operating expenses as
compared to the same period in the prior year. The decline in throughput
revenues was the result of the sale of six pipeline terminal storage facilities
in the fourth quarter of the prior year. As a result, there is no throughput
revenue for these facilities in the first quarter of this year.
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)
Leasing
-------
Total revenue of $20,500 for the three-month period ended September 30, 2000,
increased $2,200 (12%) as compared to the same period in the prior year. These
increases were primarily due to a higher average investment in leases which was
partly offset by a slightly lower income rate on new and replacement leases.
Telmark's average net investment in leases increased $78,800 (13%) in the
three-month period ended September 30, 2000, as compared to the same period in
the prior year.
Pre-tax earnings from operations of $4,200 for the three months ended September
30, 2000, increased $400 (10%) as compared to the same period in the prior year.
The total revenue increases noted above were partially offset by an increase in
total expenses of $l,900 (13%) for the three months ended September 30, 2000, as
compared to the same period in the prior year. The increase in total expenses
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 period in the prior year
and higher interest rates on new and replacement debt.
Insurance
---------
Insurance Group net revenues of $7,000 for the three-month period ended
September 30, 2000, remained unchanged as compared to the same period in the
prior year. Net earned premiums and investment income of the Agway Insurance
Company totaled $6,800 and the Agway General Agency income was $200.
Pre-tax earnings of the Insurance Group of $200 for the three-month period ended
September 30, 2000, increased $100 (384%) as compared to the same period in the
prior year. The improvement in pre-tax earnings for the three-month period
resulted from lower expenses in the General Agency. The Insurance Company
pre-tax earnings for the three- month period of this year remain unchanged from
the prior year.
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 three months ended:
<TABLE>
<CAPTION>
September 23, September 25 Increase
2000 1999 (Decrease)
--------------- ------------- -------------
<S> <C> <C> <C>
Net cash flows provided by (used in):
Operating activities................................... $ 17,650 $ (959) $ 18,609
Investing activities................................... (23,945) (35,117) 11,172
Financing activities................................... (13,663) 36,961 (50,624)
--------------- ------------- -------------
Net increase (decrease) in cash and equivalents............... $ (19,958) $ 885 $ (20,843)
=============== ============= =============
</TABLE>
Cash Flows Provided By Operating Activities
The increase in cash flows provided by operating activities for the three months
ended September 23, 2000, included a net earnings increase of $2,700 as compared
to the same period in the prior year and the generation of $9,400 in cash flows
from working capital in the first quarter compared to net cash used of $8,100
for the same period 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 (continued)
-------------------------------------------
Cash Flows Used in Investing Activities
The cash flow used in investing activities increased in the three months ended
September 23, 2000, by $11,200 as compared to the same period in the prior year.
Cash of $5,000 was used during the first quarter of the prior year in business
acquisitions, along with a $3,600 decrease in the amount of cash used in the
purchases of property, plant and equipment in the first quarter of this year.
Cash Flows Provided By (Used In) Financing Activities
Financing activities for the three months ended September 23, 2000, netted cash
used of $13,600 compared to cash provided of $36,900 for the same period in the
prior year. This $50,600 change in cash from financing was substantially from
decreased 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 as more fully described in Note 3,
Borrowing Arrangements, to the condensed financial statements. Insurance
finances its activities through operations. Telmark's finance arrangements are
also explained in Note 3. Agway expects to continue to have appropriate and
adequate financing to meet its ongoing needs. However, we are presently in
negotiations for new credit facilities; therefore, there is no assurance that
the Company will achieve the desired level of financing, and the terms of such
financing, as ultimately negotiated, cannot be determined at this time.
Sources of longer-term financing include the following as of September 2000:
<TABLE>
<CAPTION>
AFC
Agway (excluding
Source of debt Inc. Telmark) Telmark Total
-------------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Banks - due 10/00 to 4/04, interest at a weighted average
rate of 6.9% with a range of 5.6% - 8.6% ............................ $ 0 $ 350 $ 142,000 $ 142,350
Insurance companies - due 10/00 to 2/07, interest at a
weighted average rate of 7.1% with a range of
6.5% - 9.1%.......................................................... 0 0 235,609 235,609
Capital leases and other - due 2000 to 2018, interest at a
weighted average rate of 9.3% with a range of 7.5% to 10%............ 11,705 2,446 0 14,151
---------- ----------- ----------- -----------
Long-term debt.................................................... 11,705 2,796 377,609 392,110
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%.......................................................... 0 430,727 0 430,727
Subordinated debentures - due 3/01 to 3/08, interest at a weighted
average rate of 8.0% with a range of 6.0% to 8.8%..................... 0 7,063 38,396 45,459
---------- ----------- ----------- -----------
Total debt........................................................ $ 11,705 $ 440,586 $ 416,005 $ 868,296
========== =========== =========== ===========
</TABLE>
For a further description of the Company's credit facilities available at
September 30, 2000, see Note 3 to the Condensed Consolidated Financial
Statements.
20
<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 Energy, Agriculture, and Country Products Group
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
outstanding in relation to the value of commodity.
In the Energy segment, exchange-traded commodity instruments and, in certain
circumstances, over-the-counter contracts with third parties are used
principally for heating oil and propane. They are entered into as a hedge
against the price risk associated with Energy's future purchases of the
commodities used in its operations. Generally, the price risk extends for a
period of one year or less. In the Agriculture segment's feed business,
exchange-traded commodity instruments are used principally to manage the price
risk of corn, soy complex, and oats, which can be sold directly as ingredients
or included in feed products. In the Country Products Group, due to a change in
governmental subsidy programs during fiscal 2000, exchange-traded commodity
instruments were entered into to principally manage the price risk of sunflower
seeds which are purchased from growers by CPG and sold to customers.
A sensitivity analysis has been prepared to estimate Agway's exposure to market
risk of its commodity instrument positions as of September 2000 and 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 positions is estimated as the potential loss in fair value
resulting from a hypothetical 10% adverse change in market prices of the
underlying commodities. This estimated loss in fair value of the commodity
instruments does not reflect the offsetting impact of the market price changes
to the underlying value of the commodities. As of September 2000 and 1999,
assuming a 10% hypothetical adverse change in the underlying commodity price,
the potential decrease in fair value of Agway's commodity instruments was as
follows:
September
----------------------
2000 1999
---------- ---------
Energy................................................. $ 5,900 $ 1,700
Country Products Group................................. * -
Agriculture............................................ * *
Grain Marketing (1).................................... - *
* The potential loss in fair value of commodity instruments resulting from a
hypothetical 10% change in market prices of the underlying commodity was
immaterial.
(1) Grain marketing activity was discontinued during fiscal 2000, as disclosed
in the June 24, 2000 Form 10-K.
21
<PAGE>
PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
Agway filed a report on Form 8-K on August 3, 2000, announcing the June 30,
2000, sale by Agway Energy Products, LLC of six pipeline terminal storage
facilities, located in New York and Pennsylvania, to Buckeye Partners, L.P.
(Buckeye) for a total purchase price of $19,000.
Agway filed a report on Form 8-K on August 15, 2000, announcing the July 31,
2000, finalization of the purchase by Southern States Cooperative Inc. of
Agway's consumer wholesale procurement and supply system. The aggregate
consideration received by Agway consisted of $9,080 in cash, assumption of
$1,963 of accounts payable by Southern States Cooperative Inc., and a $13,300
interest-bearing promissory note to Agway from Southern States Cooperative Inc.
payable at the end of 30 months.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AGWAY INC.
-------------------------------------------
(Registrant)
Date November 6, 2000 /s/ PETER J. O'NEILL
------------------ --------------------------------------------
Peter J. O'Neill
Senior Vice President,
Finance & Control,
(Principal Financial Officer and
Chief Accounting Officer)
23
