Exhibit 99.1
AGWAY ENERGY GROUP
(AGWAY ENERGY PRODUCTS, LLC, AGWAY ENERGY SERVICES, INC.
AND AGWAY ENERGY SERVICES - PA, INC.)
UNAUDITED COMBINED FINANCIAL STATEMENTS
AGWAY ENERGY GROUP
(AGWAY ENERGY PRODUCTS, LLC, AGWAY ENERGY SERVICES, INC. AND
AGWAY ENERGY SERVICES - PA, INC.)
COMBINED STATEMENTS OF FINANCIAL POSITION
UNAUDITED
(Thousands of Dollars)
ASSETS
Sept. 30, June 30,
2003 2003
------------- --------------
Current assets:
Cash $ 3,875 $ 4,180
Trade receivables, less allowance for doubtful
accounts of $2,261, and $2,236, respectively 49,741 57,579
Lease receivables, current 0 263
Inventories 13,555 12,150
Deferred tax assets 2,259 2,259
Prepaid expenses and other current assets 17,025 8,009
------------- --------------
Total current assets 86,455 84,440
Lease receivables 0 676
Receivable from Agway Inc. 19,744 12,723
Properties and equipment, net 78,574 78,567
Intangible assets, net 367 388
------------- --------------
$ 185,140 $ 176,794
============= ==============
LIABILITIES AND MEMBER'S EQUITY
Current liabilities:
Current installment of long-term debt $ 25 $ 25
Accounts payable 15,915 13,344
Trade receivables with credit balances 37,720 18,821
Other current liabilities 27,327 35,523
------------- --------------
Total current liabilities 80,987 67,713
Long-term debt 25 25
Deferred tax liabilities 13,234 12,849
Insured claims deductible reserve 10,361 10,361
Environmental reserve 4,533 4,533
------------- --------------
Total liabilities 109,140 95,481
Commitments and contingencies (Note 5)
Combined equity:
Common stock (AES), $1 par value; 1,000 shares
authorized;1,000 issued and outstanding 1 1
Common stock (AES -PA), $1 par value; 1,000 shares
authorized; 1,000 issued and outstanding 1 1
Retained earnings (AES and AES-PA) 2,513 2,357
Accumulated other comprehensive income 1,356 779
Member's equity (AEP) 72,129 78,175
------------- --------------
Combined equity 76,000 81,313
------------- --------------
Total liabilities and combined equity $ 185,140 $ 176,794
============= ==============
The accompanying notes are an integral part of the financial statements.
2
AGWAY ENERGY GROUP
(AGWAY ENERGY PRODUCTS, LLC, AGWAY ENERGY SERVICES, INC. AND
AGWAY ENERGY SERVICES - PA, INC.)
COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2003, AND 2002
UNAUDITED
(Thousands of Dollars)
-----------------------------------
2003 2002
------------- --------------
Product sales $ 96,015 $ 81,017
Service and equipment revenue 15,583 17,564
------------- --------------
Total sales and revenue 111,598 98,581
Cost of product sold 79,824 70,547
Operating expenses 36,461 34,768
Selling, general and administrative expenses 4,438 4,247
Interest expense, net 1,125 1,142
Other income, net (182) (299)
------------- --------------
Loss before income taxes (10,068) (11,824)
Benefit from income taxes 4,178 4,934
------------- --------------
Net loss $ (5,890) $ (6,890)
Other comprehensive income, net of tax:
Commodity instrument cash flow hedges:
Unrealized holding gains arising during period, net of tax
expense of $187 and $2,655, respectively 280 3,982
Reclassification adjustment for gains (losses) included in net earnings,
net of tax expense of $197 and $(307), respectively 297 (460)
------------- --------------
Other comprehensive income 577 3,522
------------- --------------
Comprehensive loss $ (5,313) $ (3,368)
============= ==============
The accompanying notes are an integral part of the financial statements.
3
AGWAY ENERGY GROUP
(AGWAY ENERGY PRODUCTS, LLC, AGWAY ENERGY SERVICES, INC. AND
AGWAY ENERGY SERVICES - PA, INC.)
COMBINED STATEMENTS OF CASH FLOW
THREE MONTHS ENDED SEPTEMBER 30, 2003, AND 2002
UNAUDITED
(Thousands of Dollars)
---------------------------------
2003 2002
------------- --------------
Cash flows from operating activities:
Net loss $ (5,890) $ (6,890)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 1,777 1,704
Gain on disposition of properties and equipment (36) (39)
Changes in assets and liabilities:
Trade and other receivables 8,777 3,864
Inventories (1,405) (2,962)
Other assets (9,016) (8,697)
Accounts payable 2,574 1,176
Other liabilities 11,665 15,155
------------- --------------
Net cash flows provided by operating activities 8,446 3,311
------------- --------------
Cash flows from investing activities:
Purchases of properties and equipment (1,862) (1,944)
Proceeds from sale of assets 133 81
------------- --------------
Net cash flows used in investing activities (1,729) (1,863)
------------- --------------
Cash flows from financing activities:
Net change in receivable/payable to Agway Inc. (7,022) (1,184)
------------- --------------
Net cash flows used in financing activities (7,022) (1,184)
------------- --------------
Net (decrease) increase in cash (305) 264
Cash, beginning of year 4,180 3,166
------------- --------------
Cash, end of period $ 3,875 $ 3,430
============= ==============
The accompanying notes are an integral part of the financial statements.
4
AGWAY ENERGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
UNAUDITED
(Thousands of Dollars)
-------------------------------
1. Description of the Business
Organization and Basis of Combination
Agway Energy Products, LLC ("AEP") is a Delaware limited liability company.
Agway Energy Services, Inc. ("AES") and Agway Energy Services-PA, Inc.
("AES-PA") are incorporated in Delaware. All companies are wholly owned by
Agway Inc. ("Agway"), and are collectively referred to as the Agway Energy
Group (the "Group"). The Group operations constitute Agway's energy-related
businesses and are operated under common management. AEP is a full-service
energy solutions provider to residential, farm, and commercial customers
principally in New York, Pennsylvania, New Jersey and Vermont. AEP is
engaged in the sale and delivery of fuel oil, kerosene, propane, gasoline
and diesel fuel and serves the majority of its customer base by providing
home comfort, particularly in the area of heating, ventilation, and air
conditioning (HVAC) equipment and fuels to power these systems. AEP
installs and services all types of whole house warm and cool air systems
(furnaces, boilers, air conditioners) air cleaners, humidifiers,
de-humidifiers, hearth products, space heaters, room air conditioners and
water systems. Services such as duct cleaning, air balancing, and energy
audits are also offered. A product emphasis on oil and propane heating
fuels creates seasonal increases in sales and working capital requirements
in the fall and winter months. All products are purchased from numerous
suppliers or through open market purchases. AES and AES-PA market natural
gas and electricity to residential and commercial customers in New York and
Pennsylvania where deregulation makes that possible. Weather and commodity
prices impact the Group's sales, cost of sales and working capital
requirements. The Group owned and operated, within its geographic
territory, 138 facilities, including sales, distribution and service
stations.
The combined financial statements include the accounts of AEP, AES, and
AES-PA. No significant intercompany transactions exist between entities.
Unless otherwise noted, the amounts included herein refer to the Group. The
accompanying condensed combined financial statements are unaudited and have
been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission. They include all adjustments that
management considers necessary for a fair statement of the results for the
interim periods presented. Such adjustments consist only of normal
recurring items, unless otherwise disclosed. Due to the seasonal nature of
the business, the results of operations for interim periods are not
necessarily indicative of the results to be expected for a full year.
Bankruptcy of Agway, Inc.
On October 1, 2002, Agway and certain of its subsidiaries (not including
the Group) filed voluntary petitions for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. In connection with the Chapter 11 proceedings,
Agway announced on April 21, 2003 that it would immediately begin exploring
the potential sales of each of its remaining businesses while exploring
other strategic opportunities that could result in greater value for Agway
Inc.'s creditors. On November 10, 2003, the Group entered into a Purchase
and Sale Agreement to sell substantially all of its assets and certain
liabilities to Suburban Propane, L.P. On December 23, 2003, following final
approval in the U.S. Bankruptcy Court for the Northern District of New York
in Utica, New York the Group closed on the sale under the Purchase and Sale
Agreement.
5
AGWAY ENERGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
UNAUDITED
(Thousands of Dollars)
2. DIP Facility
On October 22, 2002, the Bankruptcy Court granted Agway and certain
subsidiaries, including the Group, final approval to enter into an 18-month
term DIP Facility with its lenders to fund working capital requirements.
Interest rates on the DIP Facility are determined, at the option of Agway,
as either prime rate plus 2.5% or the LIBOR plus 4%. The amount available
to Agway and certain of its subsidiaries, including the Group, under this
DIP Facility is the lesser of the "collateral borrowing base," defined in
the DIP Facility, as of June 30, 2003, or the $85,000 upper limit of the
line of credit. The collateral borrowing base consists of certain of
Agway's eligible (as defined in the DIP Facility) accounts receivable and
inventory as well as the pledge of Agway's limited liability membership
interest in Telmark, its wholly owned former leasing subsidiary, and cash
collateral of $15,000 at June 30, 2003 and of $38,700, or 108% of the
maximum amount available to be drawn on outstanding letters of credit, as a
result of the fourth amendment of the DIP Facility effective October 16,
2003. As of September 30, 2003, Agway and subsidiaries had $63,500
available under the DIP Facility. There were no borrowings outstanding
under the DIP Facility by the Group as of September 30, 2003 or June 30,
2003.
3. Inventories
Inventories consist of the following:
September 30, June 30,
2003 2003
---------- ----------
Liquid products $ 8,866 $ 7,670
Equipment, parts and accessories 4,689 4,480
---------- ----------
$ 13,555 $ 12,150
========== ==========
4. Receivable from Agway Inc.
The Group utilizes the bank accounts of Agway. Accordingly, the Group draws
checks against Agway's accounts and also makes deposits to these accounts.
The Group's net cash activity accumulates in the net intercompany account
with Agway. Certain shared expenses incurred by Agway on behalf of the
Group are charged to the Group through the net intercompany account for
such things as information services, payroll, facilities, risk management
and interest. The expenses are allocated to the Group and Agway's other
business units based upon each business unit's usage, as determined by
relevant metrics, which management believes to be a reasonable basis for
such allocations. In addition, as discussed in Note 5, the Group pays Agway
through the intercompany account to assume the Group's obligations to pay
deductible amounts on insured claims against the Group. These obligations
are fully collateralized by letters of credit and surety bonds.
As discussed in Note 1, on October 1, 2002, Agway and certain subsidiaries
(not including the Group) filed voluntary petitions for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. As of October 1, 2002, the
Group had a pre-petition receivable from Agway of $102, excluding the
receivable related to insured claims receivable from Agway. On October 1,
2002, the Bankruptcy Court approved a motion to allow Agway and the Group
to continue its centralized cash management practices and to adjust in the
ordinary course their intercompany accounts on a daily basis.
6
AGWAY ENERGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
UNAUDITED
(Thousands of Dollars)
5. Insured Claims Deductible Reserve
Through its parent company, Agway, the Group participates in large
deductible insurance programs for workers' compensation, general and auto
liability. The insurance policies are purchased and administered by Agway.
The Group's liabilities for these programs are actuarially calculated on a
separate company basis based on claims filed and an estimate of claims
incurred but not reported. Projection of losses concerning these
liabilities is subject to a high degree of variability due to factors such
as claim settlement patterns, litigation trends and legal interpretations.
Insurance expenses included in the statements of operations are recognized
at amounts sufficient to accrue the actuarially calculated insurance
liabilities after giving consideration to claim payments made. Other costs
such as insurance premiums and the costs of Agway's risk management
department are allocated to the Group based upon the projection of the
Group's historical claims to the total claims of Agway.
The Group pays Agway through the intercompany account to assume the Group's
obligations to pay deductible amounts on insured claims against the Group.
In the event that Agway is unable to satisfy the Group's obligations, such
claims could be asserted, directly or indirectly, against the Group.
Consequently, the actuarial estimate of the insured claims is shown as a
reserve on the Group's balance sheet and Agway's obligation to satisfy
those obligations is included as a receivable in the intercompany
receivable from Agway.
6. Commitments and Contingencies
Environmental
The Group is subject to various laws and governmental regulations
concerning environmental matters and expects that it will be required to
expend funds to participate in the remediation of certain sites, including
sites where it has been designated by the Environmental Protection Agency
(EPA) as a potentially responsible party (PRP) under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) and at
sites with above and underground fuel storage tanks. The Group will incur
other expenses associated with environmental compliance. The Group
continually monitors its operations with respect to potential environmental
issues, including changes in legal requirements and remediation
technologies. In addition, during the first quarter of fiscal 2004 and in
conjunction with the potential sale process, the Group performed an
environmental review of all of its properties. The review consisted of
performing Phase I Environmental Site Assessments (ESA's), and at certain
sites, groundwater and/or soil samples were analyzed for contamination. The
Group's recorded liability at September 30, 2003 reflects those specific
issues uncovered as a result of this review where remediation activities
are likely and where the Group can estimate the cost of remediation. The
environmental reserves are recorded on an undiscounted basis. The Group
expects to expend the accrued remediation costs over the next 5 years.
Estimating the extent of the Group's responsibility of a particular site
and the method and ultimate cost of remediation of that site require a
number of assumptions. As a result, the ultimate outcome of remediation of
that site may differ from current estimates. However, the Group believes
that its past experience provides a reasonable basis for estimating its
liability. As additional information becomes available, estimates are
adjusted as necessary. While the Group does not anticipate that any such
adjustment would be material to its financial statements, the result of
ongoing and/or future environmental studies or other factors could alter
this expectation and require the recording of additional liabilities. The
Group currently cannot determine whether it will incur additional
liabilities in the future or the extent or amount of such additional
liabilities.
7
AGWAY ENERGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
UNAUDITED
(Thousands of Dollars)
------------------------------
6. Commitments and Contingencies (continued)
Other
The Group is also subject to various investigations, claims, and legal
proceedings covering a wide range of matters that arise in the ordinary
course of its business activities. Each of these matters is subject to
various uncertainties, and it is possible that some of these matters may be
resolved unfavorably to the Group. The Group has established accruals for
matters for which payment is probable and amounts reasonably estimable.
Management believes any liability that may ultimately result from the
resolution of these matters in excess of amounts provided under the above
stated policy will not have a material adverse effect on results of
operations, financial position or liquidity of the Group.
AEP, with Agway, has made financial cross-guarantees of a mortgage entered
into by another Agway subsidiary, which generally obligates AEP in the
event of default by the other subsidiary of Agway. The amount outstanding
on the mortgage as of September 30, 2003 was approximately $1,500. As of
June 30, 2003, the Agway subsidiary was in violation of the minimum
earnings covenant of the mortgage loan agreement. On October 22, 2003, the
mortgage lender waived this fiscal year end covenant violation.
Indemnification
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," or FIN 45. FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan
guarantees. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under that guarantee.
The following is a summary of our agreements that we have determined are
within the scope of FIN 45: When we sell certain assets, we enter into
agreements whereby we indemnify the buyers with respect to provisions of
the agreement and representations made in the agreement. Depending upon the
nature of the provision or the representations made, the term of the
indemnification can be for a period of time fixed in the agreement, fixed
by relevant statute of law, or may be for an indefinite term. The maximum
potential amount of future payments differs by agreement and by provision
or representation within the agreement and, in some cases, is not limited.
In addition, the Group has residual value guarantees associated with
certain of its operating leases, related primarily to transportation
equipment, with remaining lease periods scheduled to expire periodically
through 2009. Upon completion of the lease period, the Group guarantees
that the fair value of the equipment will equal or exceed the guaranteed
amount, or the Group will pay the lessor the difference. The maximum
potential amount of aggregate future payments the Group could be required
to make under these leasing arrangements, assuming the equipment is deemed
worthless at the end of the lease term, is approximately $3,600. No new
guarantees have been issued since December 31, 2002 that would warrant the
recording of a liability under FIN 45.
8
AGWAY ENERGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
UNAUDITED
(Thousands of Dollars)
-------------------------------
6. Commitments and Contingencies (continued)
Insurance Coverage
Agway contracts with insurance companies for property and casualty coverage
for itself and its divisions and subsidiaries, including the Group. The
main casualty programs are workers' compensation, general liability and
auto liability and an umbrella excess program that sits above the primary
liability policies. The primary casualty programs are large deductible
policies and losses incurred, within the deductible, are paid by Agway. A
contingent liability exists for the Group to the extent that Agway is
unable to satisfy the deductible for claims against the Group. As of
September 30, 2003, the estimate of the deductible claim liability for
insured claims for Agway and its subsidiaries, including claims of the
Group, was approximately $34,300. As of November 11, 2003, payments of
these liabilities are secured by letters of credit of $25,800, surety bonds
of $23,900 and cash deposits of $1,100. Since October 16, 2003, Agway has
had $53,500 in cash legally restricted to collateralize these letters of
credit and surety bonds. As a result of this collateralization, management
believes it is remote that Agway will not meet its obligation to the Group.
In addition, in certain circumstances discussed below, the Group may have a
contingent liability with respect to deductible claims against Agway and
its consolidated subsidiaries. As discussed above, the $34,300 of
consolidated claims liabilities are secured by letters of credit from the
DIP Facility, of which the Group is a party, as well as by surety bonds and
cash. As a direct borrower under the DIP Facility the Group is jointly and
severally liable for the reimbursement of drawn letters of credit. Further,
in a suit filed January 29, 2003, the surety issuer (the "Surety") alleges
that Telmark and the Group are indemnitors of Agway's liability to the
Surety for bonds drawn on by third parties and demands $3,176 for such
amounts requested for draws as of that time. Agway currently disputes this
indemnification claim. It is too early to determine the outcome of this
dispute. However, in connection with the finalization of the sale by Agway
of substantially all of the assets of Telmark, Telmark has transferred
$25,700 to Agway under terms of an account control agreement legally
restricting use of those funds pending resolution of the Surety claims
against Telmark and the Group. Further, on November 4, 2003, the Group
entered into an Agreement with Telmark and the Surety whereby the Surety
agreed to the assignment by the Group of whatever liabilities the Group may
have under this indemnity to Telmark.
7. Commodity Instruments
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," requires that all
derivative instruments be recorded on the balance sheet at their fair
value. Change 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. For fair-value hedge transactions in which the
Group is hedging changes in fair value of an asset, liability, or firm
commitment, changes in the fair value of the derivative instrument will
generally be offset in the statement of operations by changes in the hedged
item's fair value. For cash-flow hedge transactions in which the Group is
hedging the variability of cash flows related to a variable-priced asset,
liability, or a forecasted transaction, changes in the fair value of the
derivative instrument will be reported in other comprehensive income. The
gains and losses on derivative instruments that are reported in other
comprehensive income will be 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 all hedges will be recognized in
current period earnings.
9
AGWAY ENERGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
UNAUDITED
(Thousands of Dollars)
-----------------------------
7. Commodity Instruments (continued)
The Group 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. The Group has fair value hedges associated with
its fixed price sales contracts and cash flow 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 one year. Under SFAS No. 133, the value of
option contracts that the Group enters into has two components of value:
time value and intrinsic value. The intrinsic value is the value by which
the option is in the money (i.e., the amount by which the value of the
commodity exceeds the exercise or "strike" price of the option). The
remaining amount of option value is attributable to time value. The Group
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 30, 2003, the
Group had a derivative asset of $2,260 recorded in prepaid and other
current assets. In addition, an after-tax total of $1,356 of net unrealized
gains on derivative instruments was accumulated in other comprehensive
income and is expected to be reclassified into earnings during the next 12
months. For the three months ended September 30, 2003 and 2002, losses of
$1,229 and $2,207, respectively, are included in cost of products sold for
the change in option time value not used in the assessment of hedge
effectiveness.
8. Related Party Transactions
Cash Management
The Group utilizes the bank accounts of its parent, Agway. Accordingly, the
Group draws checks against Agway's accounts and also makes deposits to
these accounts. The Group's net cash activity is included in the net
intercompany receivable from Agway.
Inter-Company Transactions
Selected amounts related to transactions with Agway and subsidiaries are
separately disclosed in the financial statements. Certain other
transactions for the three months ended September 30, 2003 and 2002 with
Agway and subsidiaries were:
2003 2002
---- ----
Operating expenses $ 2,040 $1,810
Administrative and general expenses $ 562 $ 487
Interest expense $ 1,231 $ 967
The interest expense is charged to the Group based on its payable to Agway
and equity balance, which is reduced by a portion of asset levels, and is
at an internal borrowing rate which is set from time to time by Agway's
treasurer and approximates Agway's external cost of borrowing funds. The
interest rate charged was 9.0% for the three months ended September 30,
2003 and 2002. The administrative and general, and operating expenses
include certain shared expenses incurred by Agway on behalf of the Group
for services such as information services, payroll and facilities and risk
management.
10
AGWAY ENERGY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
UNAUDITED
(Thousands of Dollars)
-------------------------------
8. Related Party Transactions (continued)
Employee Benefit Plans
The Group's employees participate in Agway's employee benefit plans, which
include a defined benefit retirement plan, a defined contribution 401(k)
plan, a medical and dental benefit plan, a post-retirement medical plan,
and a life and health insurance plan. Total benefit costs under these plans
are allocated by Agway to the Group primarily based on payroll costs.
Benefit costs for these plans included in operating expenses and in
selling, general and administrative expense were $2,116 and $2,178 for the
three months ended September 30, 2003 and 2002, respectively.
Leases
The Group leases vehicles and other equipment through a sublease from
Agway, the lessee. Total rental expense incurred under these sublease
agreements for the three months ended September 30, 2003 and 2002 amounted
to $1,501 and $1,628, respectively.
9. Combined Equity
The changes in the statement of financial position captions "Retained
earnings (AES and AES-PA)" and "Member's equity (AEP)" from June 30, 2003
to September 30, 2003 are the result of the net income or loss of the
respective entities during the three months ended September 30, 2003. The
change in accumulated other comprehensive income is a result of the other
comprehensive income for the three months ended September 30, 2003 as shown
on page 3.
11