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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934
For the fiscal year ended June 30, 1997
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
AGWAY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 15-0277720
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
333 BUTTERNUT DRIVE, DEWITT, NEW YORK 13214
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 315-449-6436
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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.
X
--- ---
Yes No
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN ANY DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. X
---
STATE THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON
EQUITY HELD BY NON-AFFILIATES OF THE REGISTRANT AS OF AUGUST 22, 1997.
Membership Common Stock, $25 Par Value - $2,621,425
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT AUGUST 22, 1997
----- ------------------------------
Membership Common Stock, $25 Par Value 104,857 Shares
PAGE 1 OF 200. EXHIBIT INDEX APPEARS ON SEQUENTIALLY NUMBERED PAGE 62.
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<PAGE>
FORM 10-K ANNUAL REPORT - 1997
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Page
PART I
<S> <C> <C>
Items 1 & 2. Business and Properties
General................................................................................... 3
Agriculture............................................................................... 3
Retail.................................................................................... 5
Energy.................................................................................... 6
Leasing................................................................................... 6
Insurance................................................................................. 6
Discontinued Operations................................................................... 6
Competition............................................................................... 7
Human Resources........................................................................... 8
Regulation................................................................................ 9
Administrative............................................................................ 9
Stockholder Membership and Control of Agway............................................... 9
Patronage Refunds......................................................................... 11
Retained Margin........................................................................... 11
Item 3. Legal Proceedings............................................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders........................................... 12
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters..................... 13
Item 6. Selected Financial Data....................................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 14
Item 8. Financial Statements and Supplementary Data................................................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 26
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 57
Item 11. Executive Compensation........................................................................ 59
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 61
Item 13. Certain Relationships and Related Transactions................................................ 61
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 62
Signatures.................................................................................... 72
</TABLE>
2
<PAGE>
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
(THOUSANDS OF DOLLARS)
GENERAL
Agway Inc. (the Company or Agway), incorporated under the Delaware General
Corporation Law in 1964 and headquartered in DeWitt, New York, functions as an
agricultural cooperative directly engaged in manufacturing, processing,
distribution and marketing of products and services for its farmer-members and
other customers, primarily in the states of Connecticut, Delaware, Maine,
Maryland, Massachusetts, New Hampshire, New Jersey, New York, Ohio,
Pennsylvania, Rhode Island, and Vermont. The Company, through certain of its
subsidiaries, is involved in retail and wholesale sales of farm supplies, yard
and garden products, pet food and pet supplies; the distribution of petroleum
products; repackaging and marketing of produce; processing and marketing
sunflower seeds; the underwriting and sale of certain types of property and
casualty insurance; the sale of health insurance; and lease financing.
Operating as a cooperative, the Company is eligible to pay patronage refunds to
its members and "contract patrons." For income tax purposes, Agway is subject to
corporate income tax at applicable tax rates on all taxable income remaining
after deductions for patronage refunds, if or when paid.
Agway Financial Corporation (AFC), a wholly owned subsidiary of the Company, is
a Delaware corporation incorporated in 1986 with principal executive offices
located in Wilmington, Delaware. AFC's principal business activities consist of
securing financing through bank borrowings and issuance of corporate debt
instruments to provide funds to the Company and AFC's sole wholly owned
subsidiary, Agway Holdings Inc. (AHI), and AHI's subsidiaries, for general
corporate purposes. The payment of principal and interest on this debt is
unconditionally guaranteed by Agway.
Major subsidiary holdings of AHI include Agway Consumer Products Inc. (Agway
Retail Services and Country Products Group), Agway Petroleum Corporation
(Energy), Telmark Inc. and subsidiaries (Leasing), Agway Insurance Company and
Agway General Agency (Insurance), as well as former holdings in H.P. Hood Inc.
(Hood) and Curtice Burns Foods, Inc. (Curtice Burns), which have been sold.
In an exemptive relief granted pursuant to a "no action letter" issued by the
staff of the Securities and Exchange Commission, AFC, as a separate company, is
not required to file periodic reports but does report summarized AFC financial
information in the Company's financial statement footnotes.
AGRICULTURE
AGWAY AGRICULTURAL PRODUCTS
Agway Agricultural Products (AAP) is comprised of seven geographically-based
enterprise units which provide animal feed, agronomic and farm supply products
and services to farmers in their specific geographic markets. Each enterprise
unit is responsible for management, operations, sales, billing, and customer
service.
ANIMAL FEEDS: AAP operates 16 feed mills and 20 grind and mix facilities,
principally in New York, Pennsylvania, and Vermont. These operations manufacture
livestock and poultry feeds under Company formula and provide grain and
ingredient brokerage services. Products are sold primarily through an Agway
sales force, which actively calls on farmer-customers and responds to customer
calls to any Agway facility. Production capacity is sufficient to meet market
needs. During 1996, AAP and Farmland Industries, Inc. formed AFI, a limited
liability company, to provide better pricing of feed products through volume
purchasing.
3
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES - CONTINUED
(THOUSANDS OF DOLLARS)
AGWAY AGRICULTURAL PRODUCTS (CONTINUED)
AGRONOMIC NEEDS: AAP operates 120 agronomic blending plants and storage
facilities. These operations manufacture, process, and procure crop-related
products to be sold as direct shipments to customers, farmer-dealers, and
wholesale accounts. The fertilizer operations in York and East Berlin,
Pennsylvania, manufacture yard and garden fertilizers sold to dealers and
distributors on the East Coast. Fertilizer grading equipment has been installed
at East Liverpool, Ohio, and Kittanning, Pennsylvania, to sell to other
commercial fertilizer customers. AAP sources substantially all of its fertilizer
needs through CF Industries, Inc., of which it is a member cooperative eligible
for patronage refunds. AAP has a significant investment as a result of receiving
part of its patronage refund in stock.
Products sold primarily for farm use include plant nutrients, lime, crop
protectants, and various seed products. For certain products, customers are
offered extended payment terms and are entitled to return their purchase for
either a replacement item or refund in the ordinary course of business.
Agronomic operations are seasonal, with the majority of sales and demand on
working capital generated in late winter and spring. Production capacity is
sufficient to meet market needs.
FARM SUPPLIES: While all Agway-owned retail stores (see Retail) carry farm
supplies, yard and garden products, pet food and pet supplies, 67 store
locations have a significantly heavier emphasis on farm supplies, due to their
geographic location and customer base. These locations are managed by AAP and
also coordinate the delivery of feed and crop-related products to farmers in
their territory.
RESEARCH AND APPLIED TECHNOLOGY: The Research and Applied Technology Department
operates the Agway Farm Research Center (Research Farm) in Tully, New York, and
the Technical Center in Ithaca, New York. Research for the crops operations is
conducted in conjunction with universities, other suppliers, and farmers. During
the fiscal years ended June 30, 1997, 1996 and 1995, net expenditures of $700,
$600 and $1,300, respectively, were made on agricultural research activities by
the Company as a whole. In the fourth quarter of 1997, the following occurred:
(1) the Technical Center was transferred to Cornell University and (2) a
decision was announced that the main dairy nutrition research program sponsored
by eleven cooperatives that had been conducted at the Research Farm will move to
a new facility owned by another cooperative. The transition to the new facility
will occur in 1998 as well as an evaluation as to alternative uses for or
potential sale of the Research Farm.
COUNTRY PRODUCTS GROUP
Country Products Group (CPG) operates four different businesses: produce repack
operations, commodity processing and repack operations, bag manufacturing and
printing, and forage seed processing. All operations have sufficient capacity to
meet their operating requirements. The seed operation is seasonal in nature,
with the majority of sales occurring in the spring.
The produce repack operations operated eight distribution facilities during
1997, located in Canastota, DeWitt, Elba, and Chittenango, New York; Winder,
Georgia; Tampa, Florida; and two in Plant City, Florida. These produce
businesses specialize in the sale of consumer packages of potatoes, onions, and
other vegetables to retail outlets. During 1997, the operations previously
handled by the Canastota and Chittenango facilities were consolidated to a new
183,000 square foot building in DeWitt, New York. The Canastota property is no
longer being used for processing and was sold July 1997. The Chittenango
property continues limited operations. Additionally, a new 31,500 square foot
building was built in fiscal 1997 in Winder, Georgia, complete with packaging
equipment. This business is named Country Best Produce and became operational in
June 1997. Country Best Produce and Adams Produce Co. Inc. combined operations
in August 1997 in a new limited liability company, Country Best Adams, L.L.C.,
which is 80% owned by CPG. Tablestock and seed potatoes are marketed from
Presque Isle, Maine.
4
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES - CONTINUED
(THOUSANDS OF DOLLARS)
COUNTRY PRODUCTS GROUP (CONTINUED)
The commodity processing and repack operations purchase certain commodities
produced by members and other farmers and conduct processing and repacking
operations as well as marketing, sales, and distribution of the end products.
Principal commodities processed, sold, and distributed include edible dry beans,
human edible sunflower seed, bird food, and flour. Edible dry bean processing
plants are located at Caledonia, Geneva, and Moravia, New York, with combined
storage capacity of 185,000 cwt. Sunflower processing and storage facilities,
located at Grandin, North Dakota, produce and market human edible sunflower
seed, hulled millet, wild bird food, and related products. During fiscal 1997, a
major expansion of the sunflower facility was initiated. It is expected that the
expansion will be complete in the fall of 1997 and will add 230,000 bushels of
storage capacity to its already existing 2.5 million bushels of storage
capacity. A flour mill is located in Churchville, New York, with wheat storage
capacity of 250,000 bushels.
A multi-walled bag printing and manufacturing plant, located in Wapakoneta,
Ohio, supplies bags used by external customers as well as by Pro-Pet, L.L.C.
The seed operation produces, conditions, and markets forage seed. These
facilities are located in Nampa, Idaho.
From July through October 1996, two pet food manufacturing plants, located in
Waverly, New York, and St. Marys, Ohio, produced small animal food products,
which were distributed through the Agway retail store and franchised
representative system, other cooperatives, and direct to users. In October 1996,
all manufacturing ceased at the Waverly facility and was transferred to the Ohio
operation. In November 1996, Agway sold its pet food manufacturing brands,
business, and Ohio facility to Pro-Pet, L.L.C., of which Agway maintained an
ownership of 16.6%, and continued to source substantially all of its pet food
needs from Pro-Pet, L.L.C. In June 1997, the Waverly facility was sold.
RETAIL
Agway Retail Services (ARS) provides support for wholesale purchasing,
warehousing, and distribution activities to AAP and Agway's entire wholesale and
retail system. ARS conducts retail sales and distribution activities through 183
Company-owned stores and 328 franchised representative stores located in all of
Agway's primary states except Ohio. Of the Agway-owned stores, although all
carry farm supplies, 116 locations, managed by ARS, are in more suburban areas
and therefore have a greater emphasis on yard and garden products, pet food and
pet supplies. The other 67 Agway-owned stores are managed by AAP. The franchised
representative stores are authorized to sell Agway-branded products and, along
with Agway-owned stores, are located in areas where a retail market presence is
deemed desirable.
The retail system is focused primarily on three product categories: farm-related
products, yard and garden products, and pet food and pet supplies. ARS
additionally generates sales of animal health products directly to farmers
through a mail-order catalog service which complements the Agway retail system.
The farm-related and yard and garden products are seasonal, with the majority of
sales and demand on working capital generated in late winter and spring. In
1996, ARS entered into a ten-year logistics agreement with Ryder Integrated
Logistics (RIL) to manage its distribution of products with an estimated annual
expense under this agreement of approximately $10,000. In 1997, two distribution
centers, located in Elizabethtown, Pennsylvania, and Westfield, Massachusetts,
which are operated to support the retail store and franchised representative
system, were sold to a third party and leased to RIL.
In 1997, ARS began executing a business plan that includes upgrading or
relocating existing store locations, store expansion, acquisitions, and
construction of new store locations. ARS completed major upgrades for several
locations, expanded nine locations, and made three business acquisitions during
1997. Several other store activities are in process, and it is planned that ARS
will continue to enhance and grow its retail store locations.
5
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES - CONTINUED
(THOUSANDS OF DOLLARS)
ENERGY
Energy is Agway Petroleum Corporation, a Delaware corporation wholly owned by
AHI, doing business as Agway Energy Products (AEP). AEP is a full service energy
company operating in New York, Pennsylvania, New Jersey, Vermont, and
Massachusetts. AEP markets oil and gas heating and air-conditioning equipment,
petroleum products including gasolines, kerosene, fuel oil, diesel fuel,
propane, lubricating oils and greases, antifreeze, and other related items. In
March 1997, AEP began marketing natural gas to residential and small commercial
customers in New York. 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.
During 1997, AEP owned and operated 10 terminals with storage capacity of
approximately 2,900,000 barrels of product. AEP operates 96 retail distribution
centers, located throughout its operating territory. AEP also distributes
petroleum products through approximately 100 distributors and resellers.
Facilities are sufficient to meet the current operating requirements of the
business.
LEASE FINANCING
Telmark Inc. (Telmark), a New York corporation wholly owned by AHI, and its
consolidated subsidiaries finance equipment, buildings, and vehicles to farmers
and other customers in rural communities. Telmark operates a captive sales force
as its primary distribution system in 27 states in the eastern and midwestern
United States. Telmark transacts business in the continental United States
through a separate division, Telease Financial Services, which generates
business directly from farm equipment dealers and from brokers. During 1997,
Telmark formed TFS Limited (TFS) and Telmark Lease Funding Corp. I, wholly owned
subsidiaries of Telmark Inc. TFS is a Canadian corporation formed to conduct
certain lease transactions with Canadian customers. Telmark Lease Funding Corp.
I is a New York corporation established solely to enable a lease securitization
financing entered into during 1997.
As of June 30, 1997, Telmark had approximately $460,500 of leases outstanding
with persons other than Agway and its subsidiaries, net of unearned interest and
finance charges of approximately $152,600. Telmark finances its operations and
lease portfolio growth through borrowings under its lines of credit, private
placements of debt with institutional investors, sales of debentures to the
public, or lease securitizations. As a result of Telmark issuing subordinated
debentures to the public, it files periodic reports with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934.
INSURANCE
Agway Insurance Company (Insurance) is a New York property and casualty company
wholly owned by AHI. This company is authorized to write insurance as specified
in the New York Insurance Law, Sections 46 and 341 (1) (d), and currently writes
insurance in 10 eastern states from the Insurance headquarters in DeWitt, New
York. Lines of insurance sold include Farmowners, Homeowners, Farm Commercial
and Personal Auto Liability and Physical Damage, and miscellaneous commercial
policies that support the agricultural marketplace.
DISCONTINUED OPERATIONS
In 1993, the Agway Board of Directors authorized management to sell the
Company's interest in Curtice Burns and Hood, the major investments in what was
Agway's food group segment. Curtice Burns was sold in 1995 and Hood was sold in
1996. See Management's Discussion and Analysis of Financial Condition and
Results of Operations for the specifics of these sales.
6
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES - CONTINUED
(THOUSANDS OF DOLLARS)
COMPETITION
The Company, one of the largest agricultural cooperatives in the country, deals
in a wide variety of product lines and market segments. Many of its high-volume
products are sold in highly competitive markets where product differentiation is
difficult to achieve. The Company strives to distinguish itself through superior
customer service, product selection, and product knowledge.
AGRICULTURE
AGWAY AGRICULTURAL PRODUCTS: In the animal feed business, the Company is one of
the largest in sales volume in the northeastern United States. Competition
exists with large national and regional feed manufacturers as well as with local
independent mills. The market position held by Agway in the feed business is
significant, resulting from performance quality of its products, research, an
established manufacturing and distribution system, and knowledgeable work force.
In the agronomic business, Agway plant nutrients, seed, crop protectants, and
lime products compete in the commercial farm market. Although there are
substantial regional variations in market share, the Company's competitive
position is strong in the commercial farm market. Competition varies
significantly by product line and consists of independent dealers and several
nationally integrated corporations. Agway competes on the basis of technical
expertise and field application services, product performance, crop management
practices developed by Agway, and expert assistance to the farmer in making crop
management decisions.
COUNTRY PRODUCTS GROUP: CPG competes with a large number of firms of all sizes
and types in most of its product categories. The principal factors of
competition in the produce repack operations are product quality, efficiencies
in product distribution, concentration in selected markets, and current market
pricing. In the product lines of dry beans, tablestock and seed potatoes, flour,
and bag printing and manufacturing, CPG does not occupy a major position in
national markets. The bird food products are primarily marketed to the Agway
retail store and franchised representative system and other cooperatives, and
compete based on product quality. The human edible sunflower seed and hulled
millet are marketed internationally and compete on the basis of product variety
and quality. The seed business competes on the basis of technical expertise and
product performance.
RETAIL
ARS competition varies by product line and location and consists of larger yard
and garden chains, smaller yard and garden nurseries, building material stores,
home center stores, large discounters, and specialty pet stores. Wholesale
competition to franchised representatives also varies by product line and
consists of national, regional and local wholesalers; independent distributors;
and pet food manufacturers. ARS competes with this competition on the basis of
product knowledge, expertise, and customer service.
ENERGY
AEP competes in the residential, farm, and commercial markets with a large
number and variety of competitors, ranging from major oil companies to local
fuel oil distributors. The principal methods of competition are service,
quality, and price. AEP continues to maintain and expand its share of the
heating oil and propane market in the geographic areas where it perceives its
market goals can be achieved.
LEASE FINANCING
Telmark competes with national and regional financing companies in addition to
traditional agricultural lenders. Other major sources of competition are
manufacturers' finance and lease programs and regional banks offering financing
products to their customers. The Farm Credit System, the major independent
competitor presently active in the agricultural market, offers a complete array
of traditional loan programs as well as lease financing.
7
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES - CONTINUED
(THOUSANDS OF DOLLARS)
INSURANCE
Insurance competes with major direct writers, national agency companies, and
smaller regional insurance carriers. Insurance utilizes an independent agency
distribution system to market insurance products and services for the benefit of
the farm, rural, and suburban community. Growth opportunities come through the
development of specialty products for the agricultural community, professional
agency recruitment, and dedication of marketing resources to targeted rural
markets.
HUMAN RESOURCES
Agway and its subsidiaries employ approximately 7,100 persons, 2,500 of which
are part-time. There are approximately 130 employees represented by two
different unions with six existing union contracts. The Company enjoys
satisfactory relations with both its union and nonunion employees as a result of
competitive wage, health, and benefit programs.
8
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES - CONTINUED
(THOUSANDS OF DOLLARS)
REGULATION
The Food and Drug Administration's regulatory powers are applied throughout the
agricultural industry and many of Agway's products are subject to these
regulations. The Company believes its business, as currently conducted, is not
adversely affected by present Food and Drug Administration laws and regulations.
The Company and its subsidiaries are subject to various laws and governmental
regulations concerning employee health, product safety, and environmental
matters. It can be anticipated that increasingly stringent requirements will be
imposed upon the Company and the chemical and petroleum distribution industries
in general. Examples of federal environmental laws administered by the
Environmental Protection Agency (EPA) are the Toxic Substances Control Act; the
Federal Insecticide, Fungicide and Rodenticide Act; the Resource Conservation
Recovery Act; the Clean Air Act; the Safe Drinking Water Act; the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA); and the
Superfund Amendments and Reauthorization Act (SARA). The Company is also subject
to regulations of the Occupational Safety and Health Administration (OSHA)
concerning employee safety and health matters. Under these and other statutes,
the EPA, OSHA and other federal agencies have the authority to promulgate
regulations that result in expenditures for pollution control, reduction of
chemical exposure, waste treatment and disposal, and plant modification. These
regulations might also result in discontinuance of certain products and
operations. The Company is negotiating with various government agencies
concerning Superfund cleanup sites. In addition to these federal activities,
various states have been delegated certain authority under the aforementioned
federal statues. These delegations of authority generally involve permit
issuance and compliance with the statutes. Many states have adopted or are in
the process of adopting environmental, product safety, and health laws and
regulations, some of which may be more burdensome than similar federal
requirements. The state environmental legislation administered by state agencies
includes laws for regulating air, surface and ground water, occupational safety,
solid waste, and hazardous substances cleanup.
As part of its long-term environmental protection program, the Company spent
approximately $1,800 in fiscal 1997 on capital projects. The Company estimates
that during fiscal 1998 and 1999 approximately $1,600 per year will be spent on
additional capital projects for environmental protection. These estimates
include the additional capital required to comply with EPA Underground Storage
Tank (UST) regulations that become effective in December 1998. Presently, the
total additional capital required to comply with the EPA UST regulations is
estimated to be approximately $550. The total capital requirements may change
due to the actual number of USTs actively in use on the effective date.
ADMINISTRATIVE
The Company's principal administrative office is located at 333 Butternut Drive
in DeWitt, New York. It occupies approximately 240,000 square feet under terms
of a lease with 10 remaining years with two 10-year renewal options. In
addition, under a 5-year renewable lease, ARS occupies approximately 80,000
square feet of administrative office space located at 301 Plainfield Road,
Syracuse, New York.
STOCKHOLDER MEMBERSHIP AND CONTROL OF AGWAY
The membership of Agway consists of farmers or cooperative organizations of
farmers (members) who are record holders of one share of Membership Common Stock
of Agway and who purchase farm supplies or farm services or market farm products
through Agway or franchised representatives. Present membership is approximately
80,000 farmers.
Only members of the Company and certain "contract patrons" are eligible to
receive patronage refunds. (See Patronage Refunds.) Only members are eligible to
attend membership meetings and to participate in the selection of member
committees; be elected or appointed to the Agway Council or elected to the Board
of Directors of the Company (each of the foregoing is described below); and, by
reason of their ownership of Membership Common Stock of the Company, be entitled
to vote.
9
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES - CONTINUED
(THOUSANDS OF DOLLARS)
STOCKHOLDER MEMBERSHIP AND CONTROL OF AGWAY (CONTINUED)
The Company has presently two classes of capital stock outstanding, preferred
and common. The series of preferred stock are: 6% Cumulative Preferred Stock,
Series A ($100 par value); 8% Cumulative Preferred Stock, Series B ($100 par
value); 8% Cumulative Preferred Stock, Series B-1 ($100 par value); and 7%
Cumulative Preferred Stock, Series C ($100 par value) owned by members of Agway,
the Agway Inc. Employees' Thrift Investment Plan and the general public. The
Honorary Member Preferred Stock, Series HM ($25 par value), is held only by
former Agway members. The Membership Common Stock ($25 par value) is held only
by active farmers who are patrons of Agway.
The incidents of ownership of Membership Common Stock in Agway differ
considerably from those of common stock ownership in a typical business
corporation. The Membership Common Stock may be purchased only by persons
entitled to membership in the Company. Only farmers and cooperative
organizations of farmers who purchase farm supplies or services or market farm
products through Agway may be members. By reason of the fact that the Company is
an agricultural cooperative, its Membership Common Stock primarily serves the
purpose of evidencing membership in the Company rather than of evidencing an
equity interest in the Company. The equity claim of Membership Common
Stockholders to the assets of Agway is measured by, and restricted to, the $25
par value of the share, plus dividends declared and unpaid, if any, for the
current year. Except for the dividends, which are limited to 8% of the par value
of Membership Common Stock, and may be declared in any one year and the capital
invested as represented by the par value of such shares, the residual equities
in the net assets of Agway (Retained Margin) are held for the benefit of past
and present member-patrons of the Company.
Agway members are not entitled to a distribution of assets with respect to
Retained Margin prior to the dissolution of the Company. In the event of
dissolution of the Company and after payment in full of all debts and any
amounts to which holders of preferred stock, revolving fund certificates, and
common stock are entitled, pursuant to the provisions of the By-laws of the
Company, the Retained Margin will be distributed proportionately among the Agway
past and present member-patrons in accordance with their interests.
The control of the affairs and business of Agway is vested in its Board of
Directors. All shareholder actions, except as otherwise provided by law,
including the election of directors, are determined by the vote of Agway
stockholder-members present by proxy or in person at the annual meeting (or
special meetings) of stockholders.
The Board of Directors currently numbers 17 persons, all of whom are nominated
on a district representation basis by 93 Agway Geographic Member Committees
representing members within the 17 Director Districts. A plan was adopted by the
Board of Directors in 1994 to reduce the number of Director Districts from 18 to
15 over the period 1994 through 1997, and after the 1997 stockholders' annual
meeting of the Company, the Board of Directors will number 15. At each annual
meeting of the Company, the stockholders elect five or six directors to fill the
vacancies resulting from the expiration of the terms of district directors and
each director so elected holds office for a term of three years. Although the
directors are nominated on a district representation basis, the persons so
nominated are elected by the vote of all members.
The Agway Council consists of the chairperson of each Agway Geographic Member
Committee and one other committee member appointed annually by the chairperson.
Being elected chairperson of one of these committees automatically places a
person on the Council and removal as chairperson automatically removes him/her
from the Council. The Council meets with the Agway Board of Directors annually
and serves as liaison between the Agway Board, Agway management, and the
chairperson's committee. The objective of the Agway Council is to improve member
communications and to increase the effectiveness of the committees.
10
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES - CONTINUED
(THOUSANDS OF DOLLARS)
PATRONAGE REFUNDS
The By-laws of the Company provide that, after the close of each fiscal year,
members and so-called "contract patrons" shall be paid patronage refunds in cash
in an amount equal to realized net margin of the Company (computed on a tax
basis) derived from sales of farm supplies for the fiscal year after deduction
of (a) such reasonable reserves as the Board of Directors may determine to be
necessary for operating purposes and (b) amounts paid or set aside for payments
as dividends on issued and outstanding stock of the Company, provided that the
total of such refunds paid shall not exceed the total net margin attributable to
purchasing business conducted with such members and contract patrons during the
fiscal year. (The term "purchasing," as referred to herein, refers to the buying
of Agway farm supplies by Agway members or contract patrons.) Each member or
contract patron shares the total patronage refunds in the proportion in which
his/her purchases of farm supplies transacted for the year directly with the
Company, as well as through Agway representatives, bears to the total farm
supply business transacted with all such members and contract patrons in such
year. No patronage refunds are payable with respect to marketing business done
through Agway except on a contract basis.
Pursuant to the Company's By-laws, the Board of Directors has authorized the
Company to enter into patronage refund contracts with the following contract
patrons: certain departments or agencies of state governments and political
subdivisions; the Federal Government; and charitable, religious, and educational
institutions engaged in the production or utilization of agricultural products.
The business done with such contract patrons represents less than 1% of the
Company's annual sales volume.
RETAINED MARGIN
All net margin (gross receipts reduced by all operating expenses) of the Company
remaining after provision for the payment of applicable income taxes, the
payment of dividends on issued and outstanding stock of the Company, the payment
of patronage refunds from purchasing activities, as well as all net margin from
the business activities of predecessors in interest to the Company retained as
reasonable reserves, represent the Retained Margin of the Company. Such Retained
Margin consists of:
(1) That portion of member margin (net margin derived from purchasing business
with members) undistributed to member-patrons.
(2) Residual net margin attributable to nonmember patron business and to
marketing operations.
(3) All other income, including dividends and interest from investments.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are not involved in any material pending legal
proceedings other than ordinary routine litigation incidental to the business
except the following:
In June 1990, the State of New York (NYS) commenced a lawsuit in the New York
State Supreme Court for Albany County against Agway Petroleum Corporation (APC),
Speedsville Volunteer Fire Department, and other defendants alleging they are
strictly and jointly and severally liable for $158 in cleanup and removal costs
incurred by the New York Environmental Protection and Spill Compensation Fund
and $200 in statutory penalties pursuant to the New York State Navigation Law.
NYS alleges that a gasoline storage system located on property of the
Speedsville Volunteer Fire Department discharged gasoline that was detected in a
nearby residential well. NYS also alleges that the owners of the gasoline
storage system included APC and Speedsville Volunteer Fire Department. Because
APC believes that at no time did it own the gasoline storage system and its
gasoline did not contribute to the contamination, APC denies NYS's allegations
and believes the relief sought by NYS against APC is unjustified. Therefore, APC
intends to contest the allegations in the lawsuit and believes adjustments, if
any, will not be material in relation to the consolidated financial position of
Agway.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
(THOUSANDS OF DOLLARS)
In August 1994, the Environmental Protection Agency (EPA) notified Motor
Transportation Services, Inc. (MTS), a dissolved wholly owned subsidiary of AHI,
that the EPA has reason to believe that MTS is a potentially responsible party
(PRP) under the Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA) at the Rosen Site, Cortland, New York. The EPA requested
that MTS and other PRPs participate in the ongoing Remedial
Investigation/Feasibility Study (RI/FS) for the Rosen Site. MTS believes that
its involvement at the Rosen Site, if any, is minimal and responded accordingly
to the EPA's request. In a related matter, other PRPs at the Rosen Site, Cooper
Industries, Inc., et al., filed a complaint under CERCLA against the Company,
MTS and other alleged PRPs at the Rosen Site in the U.S. District Court,
Northern District of New York, in June 1992, seeking reimbursement for the cost
of the ongoing RI/FS. The Company and MTS believe the relief sought by Cooper
Industries, Inc., et al. is unjustified and are contesting the allegations in
the lawsuit. The Company does not believe that adjustments, if any, will be
material in relation to the consolidated financial position of Agway.
In December 1985, it was asserted by the Massachusetts Department of
Environmental Protection (MDEP) that certain real property located in Acton,
Massachusetts, previously owned by Agway is contaminated and that Agway and the
current owner of the property are responsible for the cost of investigating and
cleaning up environmental contamination at the property. In September 1993,
Agway entered into an Administrative Consent Order with the MDEP pursuant to
which Agway performed a phase II comprehensive site assessment. In March 1995,
Agway and the current owner entered into a settlement agreement whereby Agway
agreed, at Agway's expense, to complete any additional assessment, containment,
removal or remediation actions at the property. The current owner agreed to
cooperate with Agway in achieving a permanent solution satisfactory to the MDEP
and in compliance with the MDEP's requirements. Agway prepared a risk assessment
scope of work that was approved by the MDEP, and the MDEP also approved
reclassification of the site. Agway submitted drafts of its risk
characterization and remedial action plan reports for public comment in July
1997 and plans to finalize those reports in September 1997. The Company
currently has accrued its best estimate relative to the cost of any additional
assessment, containment, removal or remediation actions regarding the property.
However, it is reasonably possible that the results of ongoing and/or future
environmental studies or other factors could alter this estimate and require the
recording of additional liabilities. The extent or amount of such events cannot
be estimated at this time. However, Agway believes that its past experience
provides a reasonable basis for its estimates recorded for this matter.
In August 1995, the EPA notified Agway that the EPA has reason to believe that
Agway is a PRP under CERCLA at the Tri-Cities Barrel site, Port Crane, New York.
The EPA requested that Agway and other PRPs participate in the ongoing RI/FS for
the Tri-Cities Barrel site. Agway continues to participate with other PRPs in
the ongoing RI/FS and the Removal Action for the site. In June 1997, the
cooperating PRPs agreed upon an allocation of responsibility for past and future
investigation and remediation costs. Based on this allocation and the cost
estimates for the site, Agway has accrued its best estimate for any additional
costs at the site.
In April 1997, the EPA notified Agway Petroleum Corporation (APC) that the EPA
has reason to believe that APC is a PRP under CERCLA at the Friedrichsohn's
Cooperage, Inc. Superfund Site, Waterford, NY. In August 1997, the EPA demanded
that APC and other PRPs reimburse it for payment of approximately $1,800 in
cleanup costs. According to the EPA's waste-in list for the site, the EPA has
attributed approximately 6% of the total drums associated with the drum
reconditioning operations at the site to APC. Based on prior information
provided by the EPA to APC and APC's investigation of its involvement at the
site, APC believes that its involvement at the site is minimal and responded to
the EPA's demand accordingly. The Company does not believe that adjustments will
be material in relation to the consolidated financial position of Agway.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no items submitted to a vote of security holders for the three months
ended June 30, 1997.
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Principal Market:
There is no market for the equity securities of the Company other than
through its current practice of repurchasing outstanding securities at par
($25) whenever registered holders thereof elect to tender them for
redemption.
(b) Approximate Numbers of Holders of Common Stock:
The number of holders of record of the Company's Common Stock, as of
August 22, 1997, is 104,857, of which 24,667 shares have been called for
those holders no longer meeting the membership eligibility requirements as
identified in Section 2.1(a) in the By-Laws of Agway Inc.
(c) Dividends Paid:
An annual 6% dividend, or $1.50 per share, was paid on the Company's
Common Stock in 1997 and 1996.
(d) Limitations on Ownership and Availability of Net Margin to Membership
Common Stockholders:
Refer to Items 1 and 2, Business and Properties sections titled
"Stockholder Membership and Control of Agway" and "Patronage Refunds."
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Financial Data of the Company and Consolidated
Subsidiaries has been derived from consolidated financial statements audited by
Coopers & Lybrand L.L.P., whose report for the years ended June 30, 1997, 1996
and 1995 is included elsewhere in the Form 10-K, and should be read in
conjunction with the full consolidated financial statements of the Company and
Notes thereto.
<TABLE>
<CAPTION>
(In Thousands of Dollars Except Per Share Amounts)
--------------------------------------------------------------------------------------
Years Ended June 30
1997 1996 1995 1994 1993
------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales and revenues (1)... $ 1,671,122 $ 1,662,500 $ 1,592,053 $ 1,694,274 $ 1,719,890
Margin (loss) from
continuing
operations (2)(3)........ $ 10,670 $ 11,147 $ (7,800) $ 555 $ 24,969
Net margin (loss) (2)(3)..... $ 10,670 $ 12,662 $ (15,730) $ (3,445) $ 18,992
Total assets (1)(2).......... $ 1,300,261 $ 1,245,891 $ 1,225,193 $ 1,273,958 $ 1,223,758
Total long-term debt ........ $ 329,695 $ 291,666 $ 268,310 $ 253,104 $ 216,146
Total long-term subordinated
debt...................... $ 438,127 $ 414,927 $ 399,064 $ 407,144 $ 379,619
Cash dividends per share
of common stock .......... $ 1.50 $ 1.50 $ 1.50 $ 1.50 $ 1.50
</TABLE>
(1) Certain amounts reported in fiscal years ended June 30, 1993-1996, have been
reclassified to conform to current year presentation.
(2) The Company changed its method of accounting for certain inventory in the
second quarter of fiscal 1997. As required, the Company has retroactively
adjusted prior years' net margin (loss) for this change. The effect on
margin (loss) from continuing operations and on net margin (loss) for fiscal
years ended June 30, 1993-1996, was $(758), $(141), $178 and $1,062,
respectively.
(3) The 1994 data reflect a $6,065 credit before taxes from business
restructuring and an after-tax operating loss of $4,000 from discontinued
operations; 1995 data reflect an after-tax loss of $12,360 in discontinued
operations related to Hood, an after-tax gain on the sale of Curtice Burns
of $4,430, and a credit before taxes from business restructuring of $3,248;
1996 data reflect a $1,943 credit before taxes from business restructuring
and an after-tax gain on the sale of Hood of $1,515, net of operating losses
until the time of sale.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
The following discussion refers to Agway Inc. and Consolidated Subsidiaries and
should be read in conjunction with Selected Financial Data (Item 6) and the
Consolidated Financial Statements of the Company and Notes thereto (Item 8),
specifically Financial Information Concerning Segment Reporting (Note 15) and
Discontinued Operations (Note 19). The purpose of this discussion is to outline
the most significant factors having an impact upon the results of operations,
the liquidity, and the capital resources of the Company for fiscal years ended
June 30, 1995 through June 30, 1997.
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
CONSOLIDATED RESULTS
The Company's net margin of $10,700 for 1997 is a $2,000 (15.7%) decline from a
net margin of $12,700 in 1996. The $2,000 decline reflects a $1,500 decrease in
gain on sale of discontinued operations and a $500 decrease from continuing
operations as compared to 1996. The continuing operations margin decline
represents a $4,500 pre-tax decrease offset by a $4,000 decline in tax expense
as compared to 1996. The 1997 pre-tax results, despite an overall decline from
1996, reflect operational improvements in AAP Enterprise operations and in all
other business units, an increase in pension credit, and a decline in interest
expense in 1997 as compared to 1996. These improvements to pre-tax results in
1997 were more than offset by (1) decreased gross margins that resulted from a
combination of increased commodity costs and unfavorable experience with
exchange-traded futures and options; (2) net charges from the current year sale
of the pet food manufacturing brands and businesses of the Country Products
Group (CPG) as compared to significant gains on the sale of CPG businesses
generated in the prior year; and (3) a charge for the adoption of a new
accounting pronouncement on the impairment of long-lived assets.
Consolidated net sales and revenues of $1,671,100 increased $8,600 (.5%) in 1997
compared to $1,662,500 in 1996. The increase is primarily from higher sales
prices in Agriculture and Energy due to increased product costs in 1997 for feed
products, heating oil, diesel fuel, and propane as compared to 1996. In
addition, an increase in volume was experienced, particularly in AAP seed,
fertilizer, and certain feed products; Energy bulk commercial sales; and Telmark
lease volume. These increases to sales more than offset significant declines in
sales at CPG and ARS as these business units have refocused their businesses and
exited several businesses or product lines. AAP's direct marketing feed sales
also experienced significant declines in 1997 over 1996 due to lower wheat
yields in the Northeast.
Consolidated operating expenses of $1,642,300 increased $15,500 (1%) compared to
$1,626,800. The increase is primarily due to increased product costs noted above
and the additional costs associated with volume growth in Telmark's lease
portfolio in 1997. The Company's Insurance operations reduced operating expenses
$4,700 (22.4%) in 1997 as compared to 1996 from improved underwriting results.
Selling, general and administrative expenses (SG&A) have decreased $5,300 (3.9%)
in 1997 as compared to 1996. The declines reflect the ongoing reduction of
costs, resulting from prior decentralization efforts and management's continued
efforts to reduce these costs.
The Company's interest expense, net of interest income, of $31,000 in 1997
decreased by $2,100 (6.4%) compared to $33,100 in 1996. Average Company debt
levels and cost of debt in 1997 were the same as compared to 1996. Additionally,
prior year interest assessments in the settlement of federal and state income
tax audits inflated the 1996 net interest expense.
Other income, net, of $18,800 increased $300 (1.9%) compared to $18,400 in 1996.
The Company received an increase in its patronage refund received from a
cooperative supplier in 1997 as compared to 1996. This increase was partially
offset by a gain on the sale of an investment in 1996 that did not recur in
1997.
Income tax expense of $5,900 and $9,900 in 1997 and 1996, respectively, resulted
in effective tax rates of 35.7% and 47.1%, respectively. The decrease in
effective rate is mainly attributable to adjustments made in the current year to
prior years' tax liabilities. See Note 9 of the financial statements of the
Company for more details.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
(THOUSANDS OF DOLLARS)
AGRICULTURE
Total sales and revenues of $790,700 in 1997 decreased by $78,800 (9.1%)
compared to $869,500 in 1996. AAP experienced a $21,200 (3.2%) decline in sales
and revenues while CPG declined $57,600 (27.3%) in 1997 as compared to 1996.
AAP experienced a combination of increased selling prices and higher volumes on
its principal supply products during 1997 as compared to 1996. Increased selling
prices in 1997 are due to higher feed product costs than in 1996. Volume
increases in 1997 occurred in seed units, fertilizer tons, and feed tons as well
as increased revenues from crop-related services over 1996. The seed,
fertilizer, and feed volume improvements were the result of improvements in
enterprise operations and management, while a delay in the spring 1996 sales of
crop-related services into the first quarter of 1997 increased volume in these
services. However, these increases in sales during 1997 were more than offset by
declines in direct marketing feed sales and farm store power equipment and yard
and garden tool sales. The combination of lower Northeast wheat yields and low
carry-in stock that has allowed farmers increased storage capacity resulted in
less marketing of these products. Power equipment sales were impacted by a
business decision to de-emphasize the sale of this equipment in farm stores.
Tool sales were negatively impacted by mild winter conditions which decreased
demand for these products.
The majority of the $57,600 decline in CPG sales in 1997 represents the decline
in sales volume from lines of business sold, mainly during the prior year. As
part of CPG's strategic plan, Agway's laboratory animal diet business, Pro-Lawn,
and Sacramento Valley Milling were sold in 1996 and the pet food manufacturing
brands and business and Roberts Seed were sold in the first half of 1997.
Additional declines in sales were experienced in CPG's ongoing operations. Seed
and tablestock potato sales decreased 50% in 1997 as compared to 1996 due to a
weak potato market which depressed sales prices. Sunflower seed and printed bag
sales for the production of bird foods in CPG's specialty products operations
declined in 1997 as compared to 1996 from less product demand because of a lower
than normal snow coverage in the Northeast during the winter of 1996-97.
The Agriculture segment operating margin of $3,200 in 1997 decreased $20,200
(86.3%) as compared to $23,400 in 1996.
AAP's operating loss of $2,000 in 1997 represents a decrease of $15,200 (115%)
from an operating margin of $13,200 in 1996. The operating loss decrease is due
in part to a $1,500 loss from the adoption of a new accounting pronouncement on
the impairment of long-lived assets but is primarily due to declines in gross
margins on feed sales, principally from unfavorable experience with
exchange-traded futures and option contracts in 1997 compared to gains
experienced in 1996. The effect of these decreases was partially offset by
improved field operations in the enterprises and improved patronage refunds from
a cooperative supplier. The business improvements have resulted from the locally
managed AAP enterprises' responsiveness and competitiveness to the needs of farm
operations in their territory, which, in turn, have improved gross margins at
these field operations.
CPG's operating margin of $5,200 in 1997 decreased $5,000 (49%) as compared to
$10,200 in 1996. During 1996 through early 1997, CPG executed a planned
divestiture of a number of its businesses. Divested businesses resulted in $500
of losses in 1997 compared to $3,100 of gains from operations and sale in 1996.
The remaining reduction of operating margin in 1997 as compared to 1996 results
from margins earned in 1996 on businesses sold. Margins from ongoing operations
are comparable to the prior year.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
(THOUSANDS OF DOLLARS)
RETAIL
Total sales and revenues of $246,400 in 1997 decreased $15,600 (6%) compared to
$262,000 in 1996. The decrease is the result of Retail's continued changes to
focus on its three primary product categories: yard and garden, pet food and pet
supplies, and farm-related products. During 1997, the combination of exiting the
power equipment business at additional locations, completely exiting the frozen
food business, and entering into an agreement with a third party to sell water
systems and pay Retail a commission has resulted in an $8,800 decrease in sales
in 1997 as compared to 1996. Partially offsetting these declines is a $5,000
improvement in Retail's yard and garden business. Additionally impacting sales
was a mild and relatively snow-free winter in many parts of the Northeast, which
reduced by $3,700 the bird food and ice melter salt sales. Finally, a decline in
sales of farm-related products was experienced by Retail during 1997 as compared
to 1996 as farm supply stores managed by AAP are supplying an increasing amount
of the farmers' supply needs.
The Retail operating margin of $5,200 in 1997 increased $300 (6.1%) compared to
$4,900 in 1996. The realignment of products, particularly the increase in yard
and garden sales, has increased the gross margin percentage for ARS in 1997; but
the overall reduction in sales noted above has resulted in a decrease in total
gross margin dollars in 1997 compared to 1996. This was more than offset by a 3%
decrease in costs, principally SG&A expenses.
ENERGY
Net sales and revenues of $606,900 in 1997 increased $60,900 (11.2%) as compared
to $546,000 in 1996. The increase was due to higher commodity prices in heating
oils and diesel fuel as a result of strong demand and low inventory in the
industry. These higher costs increased the average selling price of all products
by 4.6% in 1997 as compared to 1996. Additionally, total unit volume sold of all
products increased 6.3% in 1997 as compared to 1996, despite 1997 being 7.5%
warmer than in 1996 based on degree days. The major component of the volume
increase was the result of significant increases in bulk unit sales in heating
oils and diesel fuels during 1997 as compared to 1996.
Energy's operating margin of $19,500 in 1997 increased $3,400 (21.2%) compared
to $16,100 in 1996. Overall, product margins in 1997 were comparable with 1996
mainly due to the increased volume at a lower margin rate. The higher product
costs during 1997 could not be fully recovered through increased selling prices,
particularly in heating oil and diesel fuels. Total operating expenses decreased
$3,400 in 1997 compared to 1996. The decreases were experienced in distribution
and SG&A expenses and were the result of the combination of lower freight costs,
lower amortization of intangibles, and improved management of these costs.
LEASE FINANCING
Total revenues of $56,900 in 1997 increased by $8,300 (17.1%) as compared to
$48,600 in 1996. The increase is attributable primarily to the $71,200 (19.0%)
increase in net leases and notes during 1997 as compared to 1996. Interest and
finance charge income, as a percentage of average net leases and notes,
increased slightly from 12.9% in 1996 to 13.0% in 1997.
Operating margin of $13,000 in 1997 increased $1,400 (12.2%) as compared to
$11,600 in 1996. The increase in total revenues was partially offset by
increased interest cost of $3,200 (15.7%), increased SG&A costs of $2,700
(27.4%), and an increase in the provision for credit losses of $900 (13.5%) in
1997 as compared to 1996. The average cost of interest paid on debt for Telmark
remained unchanged at 7.5% for 1997 and 1996. The increased SG&A expenses in
1997 are primarily due to increased payroll costs and increases in advertising
costs.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
(THOUSANDS OF DOLLARS)
INSURANCE
Insurance net sales and revenues of $27,000 in 1997 increased $1,600 (6.2%) as
compared to $25,400 in 1996. The increase resulted from an increase in direct
premiums written and a reduction in reinsurance costs in 1997 as compared to
1996.
The net margin of $700 in 1997 increased $6,000 (113%) as compared to the net
loss of $5,300 in 1996. The increase has substantially been the result of
improvement in loss development. Insurance experienced losses on a more
historical level during 1997. Adverse development in older claims and certain
unusually large farmowner and auto liability casualty losses in 1996 did not
occur in 1997.
1996 COMPARED WITH 1995
During 1997, the following changes were made which affected the segment analysis
as previously reported: (1) management of selected operating locations,
particularly within Agriculture and Retail, was transferred between business
segments; (2) the Company changed its method of accounting for certain petroleum
inventory, which required retroactive restatement, the effect thereof has been
set forth in Item 6 above; and (3) the management and allocation of corporate
costs to the business operations were revised in a continued effort to reduce
overall Company costs. As the result of these changes, the appropriate
reclassifications and restatements have been reflected in the following
discussion of prior year results.
CONSOLIDATED RESULTS
The Company's net margin of $12,700 in 1996 is a $28,400 improvement over 1995's
net loss of $15,700. Of that improvement, $18,900 is from continuing operations
and $9,500 is from discontinued operations. The $18,900 from continuing
operations reflects a $27,100 pre-tax improvement, offset by an $8,200 increase
in income tax expense. The $27,100 pre-tax improvement is the result of (1)
improved operating results, particularly in Agway Agricultural Products (AAP)
and Agway Retail Services (ARS), but also in Leasing (Telmark), Country Products
Group (CPG) and Energy, offset by reduced results in the Insurance operations;
(2) net gains on sale of property, plant and equipment, investments and
businesses, principally by CPG, as the Company continues to focus its
operations; and (3) reduced expenses resulting from decentralization activities
undertaken in 1995 to reduce costs for 1996, reduced severance cost in 1996 as
compared to 1995 and continued expense reduction efforts during 1996, offset by
increased interest expense.
Consolidated net sales and revenues of $1,662,500 increased $70,400 (4.4%) in
1996 compared to $1,592,100 in 1995. The increase was due principally to price
increases in AAP and price and volume increases in Energy, but also by sales and
revenue volume increases in Telmark and some lines of business in CPG. These
increases were offset by reduced sales in 1996 from businesses sold in 1995,
principally by ARS; businesses sold in 1996, principally by CPG; and reduced
volume in ARS and Insurance as these units refocus their mix of business.
Consolidated operating costs and expenses of $1,626,800 in 1996 increased
$51,500 (3.3%) compared to $1,575,200 in 1995. The increase was due principally
to price increases in product costs in AAP and Energy as well as additional
costs associated with an increased portfolio in Telmark and increased claim
costs experienced in Insurance. The selling, general and administrative (SG&A)
expenses of $136,200 included above reflect a $16,000 (10.5%) decrease from
$152,200 in 1995. These SG&A reductions reflect a decrease in severance cost of
$5,200 to $1,100 in 1996 compared to $6,300 in 1995 and also reflect the ongoing
reduction of costs, net of inflation, which result from the decentralization
activities noted above.
Interest expense, net of interest income, of $33,100 in 1996 increased $3,100
(10.3%) compared to $30,000 in 1995. Of the increase, $2,100 is due to interest
assessed in the settlement of state income tax audits of prior years for Energy
and $1,300 is due to interest assessed in the settlement of federal income tax
audits of prior years for the Company.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
(THOUSANDS OF DOLLARS)
CONSOLIDATED RESULTS (CONTINUED)
Other income, net, of $18,400 increased $11,300 (158.1%) in 1996 compared to
$7,100 in 1995. The increase is substantially attributable to three items: (1) a
$5,100 increase in patronage refunds received from cooperative suppliers; (2)
$3,800 in gains on the sale of businesses (particularly in the CPG operations of
Agriculture); and (3) a $1,300 gain on the sale of an investment.
Income tax expense of $9,900 and $1,700 for 1996 and 1995, respectively, results
in an effective tax rate of 47.1% and 28.9%. See Note 9 of the financial
statements of the Company for more details.
AGRICULTURE
Total sales and revenues of $869,500 in 1996 increased $79,200 (10%) compared to
$790,300 in 1995. AAP experienced a $98,200 (17.5%) increase that was
substantially the result of price increases reflecting the increase in cost in
feed and fertilizer ingredients. CPG experienced an overall decline in sales and
revenues in 1996, as compared to 1995, totaling $19,000 (8.3%). The overall
sales reduction resulted from the sales of CPG's Pro-Lawn Products and
laboratory animal diet line of business and Sacramento Valley Milling, a bean
seed operation in California, in 1996. This was somewhat offset by CPG's
sunflower operation which had significant improvements in 1996, increasing its
sales and revenues by $6,900 (20%) over 1995.
The Agriculture operating margin improved $21,500 from a margin of $1,900 in
1995 to a margin of $23,400 in 1996. AAP's 1996 operating margin had a
significant improvement of $18,000 (370.0%) over 1995. The largest contributing
factors to this improvement were the $14,600 (30.8%) increase to AAP's gross
margins, an increase of $5,100 in patronage refunds received from cooperative
suppliers, and a decline in expenses as the result of management's success in
reducing SG&A costs from the reorganization and the realignment of AAP into
enterprises during 1995.
AAP's gross margins over 1995 resulted from a change in AAP's feed ingredient
purchasing program. During 1996, Agway Inc., through AAP, joined forces with
Farmland Industries, Inc., to form AFI, a limited liability company, to provide
a vehicle to achieve better pricing in the marketplace through volume
purchasing. Additionally, in a market year with potentially tight supplies and
increasing prices for commodities needed in the Company's feed business, the
Company increased the use of forward purchase contracts, principally to assure
supply, and the use of exchange-traded futures contracts, principally to assist
in the management of the cost of these commodities. AAP's enhanced purchasing
program enabled it to capture the benefits of the rising market during 1996,
which is reflected in reduced cost of sales. Due to the volatility of the
commodities market, the benefits experienced in the feed business from the use
of exchange-traded futures contracts, which was a major component of the gross
margin improvement in 1996 in feed ingredients, may or may not be realized at
the same level in future years.
CPG's operating margin increased $3,500 (51.8%) over 1995, resulting from a
$1,100 (36.5%) improvement in its sunflower operations and a net $3,800 gain on
the sales of businesses noted previously. These were offset by a reduction in
operating margin due to businesses having been sold during the year and one-time
costs attributable to the start-up of the new produce facility in DeWitt, New
York.
RETAIL
Total sales and revenues of $262,000 in 1996 decreased $30,400 (10.4%) compared
to $292,400 in 1995. Sales declines resulted from the exit of the Dairy Route
and Installation & Service businesses in late 1995. Additionally, the summer
drought and early winter conditions in the Northeast during the first half of
1996 adversely impacted sales, particularly with yard and garden product lines
such as fertilizers and turf seeds. In order to improve overall margins in the
retail store system during 1996, ARS has made product mix changes and created
marketing programs designed to de-emphasize high dollar value and lower margin
products such as power equipment in favor of smaller per unit value products
with higher turnover and margins. This focus has resulted in an overall decline
in total sales and revenues and some improvement in margins.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
(THOUSANDS OF DOLLARS)
RETAIL (CONTINUED)
The operating margin of ARS of $4,900 in 1996 is an improvement of $2,200
(82.3%) compared to $2,700 in 1995. This substantial improvement results in part
from the product mix change noted above, but also from a reduction in expenses
as the result of management's successful efforts to cut back SG&A costs of the
retail store system by reorganizing its structure and management organization.
ENERGY
Total net sales and revenues of $546,000 in 1996 increased $35,200 (6.9%) as
compared to $510,800 in 1995. A large part of this increase (85%) was
attributable to price increases, while the remaining increase was due to volume
increases. The prices for Energy's heating and power fuels increased 8% to 10%
over 1995 as the result of a rise in the market prices during peak winter
months. The volume increases, particularly in heating oil and propane, resulted
from 1996 being 8.4% colder than 1995 (based on degree days). These were
partially offset by volume decreases resulting from management decisions to
close certain company-owned retail keytrol/cardtrol sites which were determined
not to be economical to upgrade to comply with the new storage tank regulatory
requirements, and diesel fuel volume lost in the summer and fall of 1995 to
competitors who sold their excess supplies from the warm 1995 winter at bargain
prices.
Energy's operating margin of $16,100 in 1996 is a $3,300 (25.5%) increase
compared to $12,800 in 1995. Product margin improvements totaled $4,000 in 1996
as compared to 1995 and were mainly attributable to a change in propane sales
mix to higher margin accounts. The margins in heating oils and power fuels were
reduced by higher product costs as the result of a volatile market price of fuel
oil that could not be fully recovered through increased selling price to
customers. The lower gross margins in power fuels were also due to volatile
product costs as well as product mix, competitive pricing and higher operating
costs. Additionally, Energy's operating margin was affected by increases in
administrative expenses of $2,000 over 1995 offset by increases in other income
of $1,100 from the sale of fixed assets and a restructuring credit.
LEASE FINANCING
Total net revenues of $48,600 in 1996 increased $6,700 (16%) compared to $41,900
in 1995. The increase resulted from a $41,500 (12.4%) increase in the net lease
portfolio in 1996 compared to 1995. Interest and finance charges as a percent of
average net leases and notes increased from 12.7% in 1995 to 12.9% in 1996.
Operating profits of $11,600 in 1996 increased $1,000 (9.4%) as compared to
$10,600 in 1995. The increase in total revenues was partially offset by interest
expense, which increased $2,600 (14.9%) to $20,300 in 1996 due to Telmark's
increased borrowings required to finance the growth of the lease portfolio. The
average cost of debt for Telmark remains unchanged from 1995 at 7.5%. SG&A
expenses increased $1,600 (20%) to $9,800 in 1996 as compared to 1995. Telmark
payroll costs for additional personnel, incentives on new business booked and
expansion of its advertising all drove expenses upward in 1996.
INSURANCE
Insurance net sales and revenues of $25,400 in 1996 decreased $4,200 (14.2%) as
compared to $29,600 in 1995. The decline in revenues is in Insurance's direct
written premium due to competitive price conditions for personal lines business.
Operating losses for Insurance in 1996 of $5,300 declined $6,000 compared to
$700 in 1995. This decline was the result of adverse development in older
claims, certain unusually large farmowner and auto losses and increased claim
activity in the second and third quarters of 1996 due to severe weather
conditions in the Northeast.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
(THOUSANDS OF DOLLARS)
DISCONTINUED OPERATIONS
In 1993, the Agway Board of Directors authorized management to sell the
Company's interest in Curtice Burns Foods, Inc. (Curtice Burns) and H. P. Hood
Inc. (Hood), the major investments in what was Agway's food group segment.
Curtice Burns was sold in 1995 and Hood was sold in 1996. As a result, the 1996
results from discontinued operations reflect a net gain of $2,100 on the sale of
Hood and a net loss of $600 on its operations through the date of sale. The 1995
results from discontinued operations reflect a $4,400 gain on the sale of
Curtice Burns and $12,400 of net losses in relation to the operations and sale
of Hood.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operations and external borrowings continues to be the
Company's major ongoing source of funds to finance capital improvements,
business acquisitions, shareholder dividends, and a growing lease portfolio at
Telmark. During the three-year period ended June 30, 1997, significant
additional cash was generated from the sale of businesses, particularly at CPG
and with Agway's discontinued operations.
CASH FLOWS FROM OPERATIONS
The net cash flows generated from operating activities totaled $22,100, $9,300
and $16,200 in 1997, 1996 and 1995, respectively. The increase in cash flow from
operations in 1997 reflects a substantially lesser demand for cash to fund
working capital increases offset by a somewhat lower amount of cash generated
from earnings as compared to 1996. The 1996 decrease in cash flow from
operations as compared to 1995 reflects the generation of cash flow from working
capital reductions in 1995 compared to the working capital demand in 1996 offset
by the improved cash generated from earnings in 1996 compared to 1995.
CASH FLOWS FROM INVESTING
Net cash flows used in the Company's investing activities totaled $74,200,
$28,500 and $20,100 in 1997, 1996 and 1995, respectively. The most significant
use of cash over the past three years is from the Company's growing lease
business (Telmark). The cash requirements to fund lease origination growth in
excess of lease repayments amounted to $79,200, $48,500 and $62,800 in 1997,
1996 and 1995, respectively. Capital expenditures in 1997 of $25,745 were
comparable to 1996 and a decrease from $38,475 in 1995. The Company anticipates
that capital expenditures will increase as profits increase from planned growth
in many of its business units. This increase in capital expenditures will be
somewhat offset as fixed asset upgrades of existing facilities are completed.
Cash flow used in investing was partially funded by cash generated from the sale
of businesses and the sale of discontinued operations, which amounted to a total
of $22,000, $42,400 and $76,400 in 1997, 1996 and 1995, respectively.
CASH FLOWS FROM FINANCING ACTIVITIES
The Company finances its operations and the operations of all its continuing
businesses and subsidiaries, except Telmark and Insurance, through Agway
Financial Corporation (AFC). External sources of short-term financing for the
Company and all its other continuing operations include revolving credit lines,
letters of credit, and a commercial paper program. Insurance finances itself
through operations or with a combination of short- and long-term credit
facilities. Telmark's finance arrangements are explained below.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
(THOUSANDS OF DOLLARS)
CASH FLOWS FROM FINANCING ACTIVITIES (CONTINUED)
As of June 30, 1997, the Company had certain facilities available with various
banking institutions whereby lenders have agreed to provide funds up to $274,000
to separately financed units of the Company as follows: AFC, $70,000 and
Telmark, $204,000. In addition, AFC may issue up to $50,000 of commercial paper
under the terms of a separate agreement, backed by a bank standby letter of
credit. The bank has agreed to increase AFC's line of credit to $100,000 on
October 1, 1997, to provide a facility for interim funding, if necessary, for
maturing subordinated debt (see below). The lines of credit to Telmark have not
changed since June 30, 1996, and are considered sufficient to finance new
business and support incremental repayments on debt.
AGWAY AND AFC
The $70,000 line of credit available to AFC at June 30, 1997, and the $50,000
commercial paper facility require collateralization using certain of the
Company's accounts receivable and non-petroleum inventories (collateral).
Amounts that can be drawn under these AFC short-term agreements are limited to a
specific calculation based upon the collateral available. Adequate collateral
has existed throughout the fiscal year to permit AFC to borrow amounts to meet
the ongoing needs of the Company and is expected to continue to do so. In
addition, the agreements include certain covenants, the most restrictive of
which requires the Company to maintain specific quarterly levels of interest
coverage and monthly levels of tangible retained margins. At June 30, 1997, the
Company violated its interest coverage covenant but has subsequently obtained
waivers from its lenders for June 1997 and amendments through the term of these
agreements. AFC bank lines of credit and commercial paper facilities are
available to the Company through December 1997. The amounts outstanding as of
June 30, 1997 and 1996, under AFC's $70,000 line of credit and $50,000
commercial paper were $0 and $34,300 and $12,200 and $50,000, respectively. The
Company has ongoing discussions with its lenders and expects to continue to have
appropriate and adequate financing to meet its ongoing needs.
Annually, AFC offers subordinated debentures and subordinated money market
certificates to the public. Of AFC's subordinated debt, $337,700 is redeemable
in whole or in part at the principal amount plus accrued interest, prior to
maturity dates, at the option of the Company. The foregoing debt bears interest
payable semiannually on January 1 and July 1 of each year. The money market
certificates' interest rate is at the greater of the quoted rate or a rate based
upon the discount rate for U.S. Government Treasury Bills, with maturities of 26
weeks. In October 1997, $52,000 of subordinated money market certificates issued
by AFC will mature. Additionally, in July 1997, the restriction on
transferability of $16,700 of preferred stock issued in connection with the 1993
acquisition of local cooperative affiliates expired. The Company expects to
refinance this debt and fund any increased redemptions of preferred stock either
through a new issue of subordinated debt, through short-term bank borrowings, or
a combination of both. An increase in the short-term credit facilities providing
this liquidity is described above.
TELMARK
Telmark finances its operations and lease portfolio growth principally through
lease payments which totaled $143,900 in 1997. Additionally, cash flows from
operations, which were $16,000, $13,200 and $12,000 for 1997, 1996 and 1995,
respectively, borrowings under lines of credit, private placements of debt with
institutional investors, sales of debentures to the public, and lease-backed
asset securitization all provide financing sources for Telmark.
At June 30, 1997, Telmark has two separate credit facilities available from
banks which allow Telmark to borrow up to an aggregate of $204,000. An
uncommitted short-term line of credit agreement permits Telmark to borrow up to
$4,000 on an unsecured basis with interest paid upon maturity. The line bears
interest at money market variable rates. A committed $200,000 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 amount outstanding as of
June 30, 1997 and 1996, under the short-term line of credit and the revolving
term loan facility was $4,000 and $190,900 and $0 and $146,000, respectively.
The portion of the revolving term loan that is short term at June 30, 1997 and
1996, was $24,900 and $0, respectively.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
(THOUSANDS OF DOLLARS)
TELMARK (CONTINUED)
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 $4,000 line of credit has been renewed through
December 1997. The $200,000 revolving term agreement loan facility is available
through February 1, 1998.
At June 30, 1997, Telmark also had balances outstanding on ten unsecured senior
note private placements totaling $119,722. 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 financial covenants, the
most restrictive of which prohibit (i) tangible net worth, defined as tangible
assets less total liabilities (excluding any notes payable to Agway Holdings,
Inc.), from being less than $70,000, (ii) the ratio of total liabilities less
subordinated notes payable to Agway Holdings, Inc. to shareholder's equity plus
subordinated notes payable to Agway Holdings, Inc. from exceeding 5:1, (iii) the
ratio of earnings available for fixed charges from being less than 1.25:1, and
(iv) dividend distributions and restricted investments made after December 31,
1994 that exceed 50% of consolidated net income for the period beginning on
January 1, 1995 through the date of determination, inclusive.
On May 28, 1997, Telmark, through a newly created wholly owned special purpose
subsidiary, Telmark Lease Funding Corp. I, issued $23,999 of Class A
lease-backed notes and $1,946 of Class B lease-backed notes to three insurance
companies. The subsidiary pays interest at 6.58% on the Class A notes and 7.01%
on the Class B notes. The notes are collateralized by 1,165 leases 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.
Final scheduled maturity of the notes is December 15, 2004.
In September 1996, Telmark's registration with the Securities and Exchange
Commission of its third offering to the public of $22,000 of debentures, due
March 31, 2000, and March 31, 2002, became effective. The debentures are
unsecured, subordinated to all senior debt at Telmark. The interest on the debt
is payable quarterly on January 1, April 1, July 1, and October 1. 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. This offer of debentures is
continuing and the proceeds of the offering will be used to provide financing
for Telmark's leasing activities. As of June 30, 1997, approximately $4,000 of
debentures were sold. Telmark's first registration of debentures, due December
31, 1997, was effective February 1, 1994, and approximately $4,700 of that
$25,000 offering was sold and is outstanding at June 30, 1997. Telmark's second
registration of debentures, due March 31, 1998, and March 31, 2000, was
effective October 31, 1994, and approximately $22,100 of that $30,000 offering
was sold and is outstanding at June 30, 1997. In addition, beginning in 1997,
Telmark allows reinvestment of interest in the outstanding debentures.
As of June 30, 1997, Telmark had approximately $198 of reinvested interest.
Telmark conducts ongoing discussions and negotiations with existing and
potential lenders for future financing needs. The Company believes Telmark will
continue to have appropriate and adequate short-term and long-term financing to
meet its ongoing needs.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
(THOUSANDS OF DOLLARS)
Sources of longer-term financing of the Company include the following as of June
30, 1997:
<TABLE>
<CAPTION>
Source of debt Agway & AFC Telmark Total
- -------------- ------------- --------- ---------
<S> <C> <C> <C>
Banks - due 7/97 to 7/00 with interest
from 6.0% to 8.4%...................................... $ 2,625 $ 170,000 $ 172,625
Insurance companies - due 9/97 to 4/04
with interest from 5.9% to 8.9%........................ 144,492 144,492
Capital leases & other - due 1997 to 2007
with interest from 6% to 12%........................... 12,488 90 12,578
-------------- --------- ---------
Long-term debt..................................... 15,113 314,582 329,695
Subordinated money market certificates - due
10/97 to 10/08 with interest from 4.5% to 9.5%......... 385,345 385,345
Subordinated debentures - due 1997 to 2003
with interest at 6.0% to 8.5%.......................... 21,738 31,044 52,782
-------------- --------- ---------
Total subordinated debt............................ $ 407,083 $ 31,044 $ 438,127
-------------- --------- ---------
Total debt.................................... $ 422,196 $ 345,626 $ 767,822
============== ========= =========
</TABLE>
OTHER MATTERS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Company is including the following cautionary statement in this Form 10-K to
make applicable and take advantage of the new "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statement made by, or on behalf of, the Company. Where any such forward-looking
statement includes a statement of the assumptions or basis underlying such
forward-looking statement, the Company 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, the Company, 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
"believe," "expect," and "anticipate" and similar expressions identify
forward-looking statements.
IMPAIRMENT OF LONG-LIVED ASSETS
In the first quarter of 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires impairment losses to be measured and recorded on long-lived assets,
whether these assets are held for disposal or used in operations, when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. The
adoption of this standard resulted in a $1,700 pre-tax charge to operating
margin related to certain AAP fertilizer and feed plants and ARS store
locations.
ENVIRONMENTAL ISSUES
The Company is subject to a number of governmental regulations concerning
environmental matters, either directly or as a result of the operations of its
subsidiaries. The Company expects that it will be required to expend funds to
participate in the remediation of certain sites, including sites where the
Company 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 sites with underground
fuel storage tanks, and will incur other expenses associated with environmental
compliance.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
(THOUSANDS OF DOLLARS)
ENVIRONMENTAL ISSUES (CONTINUED)
At June 30, 1997, the Company has been 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 the Company could be required to pay
in excess of its pro rata share of remediation costs. The Company's
understanding of the financial strength of other PRPs at these Superfund sites
has been considered, where appropriate, in the Company's determination of its
estimated liability.
The Company continually monitors its 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 is estimable. Estimates of the extent of the
Company's 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, the Company
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 Company does not anticipate that any such adjustment
would be material to its 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 reserves established will cause future cash outlays over
approximately five years based upon current estimates, and it is not expected
that such outlays will materially impact the Company's liquidity position.
As part of its long-term environmental protection program, the Company spent
approximately $1,800 in fiscal 1997 on capital projects. The Company estimates
that during fiscal 1998 and 1999 approximately $1,600 per year will be spent on
additional capital projects for environmental protection. These estimates
include the additional capital required to comply with EPA Underground Storage
Tank (UST) regulations that become effective in December 1998. Presently, the
total additional capital required to comply with the EPA UST regulations is
estimated to be approximately $550. The total capital requirements may change
due to the actual number of USTs actively in use on the effective date.
YEAR 2000
In fiscal 1996, the Company initiated a Companywide program to prepare its
computer systems and applications for the year 2000. As a result of this
program, in fiscal 1997, a comprehensive review to identify the systems affected
by this issue was completed, an implementation plan was compiled and is
currently being executed, and estimated cost projections were determined. As a
result of the procedures already completed, the Company expects to either modify
or upgrade existing systems or replace some systems altogether where it is
determined to be cost beneficial.
The Company expects to incur internal staff costs as well as consulting and
other expenses related to the execution of the implementation plan. The Company
has also identified that a portion of the cost estimates are not likely to be
incremental costs to the Company, but rather will represent the redeployment of
existing information technology resources. Testing and conversion of existing
and replacement system applications are expected to cost approximately $14,200
over the next two fiscal years. Approximately 75% of this estimate represents
costs to replace existing systems for year 2000 compliance, the majority of
which will be capitalized. The accounting treatment of costs incurred in
connection with the year 2000 compliance will be treated as period costs and
will be expensed as incurred as compared to the capitalization of new systems
implemented.
The Company presently believes that with the planned modifications to existing
systems and conversion to new systems, the year 2000 compliance issue will be
resolved on a timely basis and will not pose significant operational problems
for the Company's computer systems as so modified and converted.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
(THOUSANDS OF DOLLARS)
AGRICULTURAL ECONOMY AND OTHER FACTORS
The financial condition of the Company can be directly affected by factors
affecting the agricultural economy, since these factors impact the demand for
the Company's products and the ability of its customers to make payments for
products already purchased through credit extended by the Company. These factors
include: (i) changes in government agricultural programs (e.g., milk marketing
orders and acreage reduction programs) that may adversely affect the level of
income of customers of the Company; (ii) weather-related conditions which
periodically occur that can impact the agricultural productivity and income of
the customers of the Company; and (iii) the relationship of demand relative to
supply of agricultural commodities produced by customers of the Company.
Federal agricultural legislation, formally known as The Federal Agriculture
Improvement and Reform Act of 1996, was signed into law on April 4, 1996. This
legislation replaced the former program of variable price-linked deficiency
payments with fixed payments to farmers which decline over a seven-year period.
This legislation also eliminated federal planting restrictions and acreage
controls allowing farmers more flexibility to plant for the market. The impact
of this legislation on the agricultural economy, and on the financial condition
of the Company, is not expected to be significant in the short-term. The
longer-term impact on the financial condition of the Company of such a major
change in the federal government's role in agriculture cannot be predicted at
this time.
The Company's energy business is impacted by factors such as weather conditions
in the Northeast and the relationship of supply and demand for petroleum
products worldwide as well as within Agway's market. Agway's retail and
insurance businesses can be impacted by weather conditions as well as from
fluctuations in the economy in the northeastern United States that, in general,
affect consumer demand for products. To the extent that these factors adversely
affect the customers of the Company, the financial condition of the Company
could be adversely affected.
The Company's endeavors to limit the effects of changes in interest rates by
matching as closely as possible, on an ongoing basis, the maturity and repricing
characteristics of funds borrowed to finance its leasing activities with the
maturity and repricing characteristics of its lease portfolio. However, a rise
in interest rates would increase the cost of funds borrowed by the Company to
finance its leasing business and could lower the value of the Company's
outstanding leases in the secondary market. In addition, higher interest rates,
inasmuch as they would increase the cost of funds borrowed by the Company, would
also increase the cost of leases and could decrease demand for leases.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES:
Agway Inc.'s Report on Financial Statements............................................................ 27
Report of Independent Accountants...................................................................... 28
Consolidated Balance Sheets, June 30, 1997 and 1996.................................................... 30
Consolidated Statements of Operations, fiscal years ended June 30, 1997, 1996 and 1995................. 31
Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended June 30,
1997, 1996 and 1995............................................................................... 32
Consolidated Statements of Cash Flow, fiscal years ended June 30, 1997, 1996 and 1995.................. 33
Notes to Consolidated Financial Statements............................................................. 34
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
This item is inapplicable.
26
<PAGE>
AGWAY INC.'S REPORT ON FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles by the Company. The
integrity and objectivity of the data in these financial statements, including
estimates and judgments, are the responsibility of Agway, as is all other
information included in this annual report.
The consolidated financial statements of Agway Inc. and Consolidated
Subsidiaries have been audited by Coopers & Lybrand L.L.P., independent
auditors, who relied on the opinion of Price Waterhouse LLP, independent
auditors, as it relates to H.P. Hood Inc., a former investment of the Company,
which has been sold and is reflected as discontinued operations in the June 30,
1995, financial statements. The Coopers & Lybrand L.L.P. and Price Waterhouse
LLP reports follow. Agway has made available to Coopers & Lybrand L.L.P. all of
the Company's financial records and related data, as well as the minutes of
Directors' meetings. Furthermore, Agway believes that all representations made
to Coopers & Lybrand L.L.P. during its audit were valid and appropriate.
Agway maintains a system of internal accounting controls intended to provide
reasonable assurance, given the inherent limitations of all internal control
systems, at appropriate costs, that transactions are executed in accordance with
Company authorization, are properly recorded and reported in the financial
statements, and that assets are adequately safeguarded.
The Budget & Audit Committee of the Board of Directors, which consists of seven
directors who are not employees, meets periodically with management and the
independent auditors to review the manner in which they are performing their
responsibilities and to discuss auditing, internal accounting controls, and
financial reporting matters. The independent auditors have free access to the
Budget & Audit Committee.
AGWAY INC.
/s/ DONALD P. CARDARELLI
BY DONALD P. CARDARELLI
President and CEO
August 22, 1997
/s/ PETER J. O'NEILL
BY PETER J. O'NEILL
Senior Vice President,
Finance & Control,
Treasurer and Controller
August 22, 1997
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Agway Inc.:
We have audited the consolidated balance sheets of Agway Inc. and Consolidated
Subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for the
years ended June 30, 1997, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of H. P. Hood Inc., for the year ended June 30, 1995. Such
statements of H. P. Hood Inc. (not presented separately herein) reflect total
assets amounting to $147,302,000 at June 30, 1995, and total revenues amounting
to $482,738,000 for the year ended June 30, 1995. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for this subsidiary prior to any
adjustment to reflect this subsidiary as discontinued operations, is based
solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Agway Inc. and Consolidated
Subsidiaries, as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for the years ended June 30, 1997, 1996 and 1995, in
conformity with generally accepted accounting principles.
As further discussed in the notes to the consolidated financial statements, the
Company changed its accounting for long-lived assets and certain inventories in
1997.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Syracuse, New York
August 22, 1997
28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of H.P. Hood Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and retained deficit and of cash flows
present fairly, in all material respects, the financial position of H.P. Hood
Inc. and its subsidiaries (the "Company") at June 24, 1995, and the results of
their operations and their cash flows for the year in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
August 11, 1995
29
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ASSETS
1997 1996
------------- -------------
<S> <C> <C>
Current assets:
Trade accounts receivable (including notes receivable of
$44,074 and $35,182, respectively), less allowance for
doubtful accounts of $7,864 and $10,062, respectively.................. $ 209,868 $ 207,327
Leases receivable, less unearned income of $58,225 and $48,403,
respectively........................................................... 124,552 105,374
Advances and other receivables............................................. 29,922 35,900
Inventories................................................................ 150,640 159,959
Prepaid expenses and other assets.......................................... 52,714 57,551
------------- -------------
Total current assets................................................... 567,696 566,111
Marketable securities........................................................... 35,586 34,115
Other security investments...................................................... 49,668 42,406
Properties and equipment, net................................................... 215,095 237,015
Long-term leases receivable, less unearned income of $94,366 and
$75,828, respectively...................................................... 320,809 268,815
Net pension asset............................................................... 100,052 85,181
Other assets.................................................................... 11,355 12,248
------------- -------------
Total assets........................................................... $ 1,300,261 $ 1,245,891
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
------------- -------------
Current liabilities:
Notes payable.............................................................. $ 59,200 $ 62,200
Current installments of long-term debt..................................... 113,720 94,253
Subordinated debt, current................................................. 62,999 14,643
Accounts payable........................................................... 113,067 116,519
Other current liabilities.................................................. 113,927 121,046
------------- -------------
Total current liabilities.............................................. 462,913 408,661
Long-term debt.................................................................. 215,975 197,413
Subordinated debt............................................................... 375,128 400,284
Other liabilities............................................................... 68,494 66,811
------------- -------------
Total liabilities...................................................... 1,122,510 1,073,169
Shareholders' equity:
Preferred stock, less amount held in Treasury.............................. 57,541 59,319
Common stock ($25 par--300,000 shares authorized; 171,792 and 162,070
shares issued, less amount held in Treasury)........................... 2,639 2,689
Retained margin............................................................ 117,571 110,714
------------- -------------
Total shareholders' equity............................................. 177,751 172,722
Commitments and contingencies...................................................
Total liabilities and shareholders' equity............................. $ 1,300,261 $ 1,245,891
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
30
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
Net sales and revenues from:
Product sales (including excise taxes)................. $ 1,587,159 $ 1,588,442 $ 1,520,502
Leasing operations..................................... 56,943 48,627 41,942
Insurance operations................................... 27,020 25,431 29,609
------------- ------------- --------------
Total net sales and revenues....................... 1,671,122 1,662,500 1,592,053
------------- ------------- --------------
Cost and expenses from:
Products and plant operations.......................... 1,471,465 1,451,029 1,391,315
Leasing operations..................................... 23,486 20,305 17,675
Insurance operations................................... 16,437 21,176 17,321
Selling, general and administrative activities......... 130,944 136,200 152,177
Restructuring credit................................... (1,943) (3,248)
------------- ------------- --------------
Total operating costs and expenses................. 1,642,332 1,626,767 1,575,240
------------- ------------- --------------
Operating margin............................................ 28,790 35,733 16,813
Interest expense, net of interest income of $9,976,
$10,330 and $8,829, respectively....................... (30,970) (33,085) (30,003)
Other income, net........................................... 18,763 18,422 7,137
------------- ------------- --------------
Margin (loss) from continuing operations before
income taxes........................................... 16,583 21,070 (6,053)
Income tax expense.......................................... (5,913) (9,923) (1,747)
------------- ------------- --------------
Margin (loss) from continuing operations.................... 10,670 11,147 (7,800)
Discontinued operations:
Loss from operations, including tax benefit of
$120 and $13,637, respectively..................... (595) (12,360)
Gain on disposal of Hood, net of tax expense
of $1,711.......................................... 2,110
Gain on disposal of Curtice Burns, net of tax
expense of $19,700................................. 4,430
------------- ------------- --------------
Margin (loss) from discontinued operations.... 1,515 (7,930)
------------- ------------- --------------
Net margin (loss)........................................... $ 10,670 $ 12,662 $ (15,730)
============= ============= ==============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
31
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
(PAR VALUE $25) PREFERRED PAID-IN RETAINED
SHARES AMOUNT STOCK CAPITAL MARGIN TOTAL
-------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance as of June 30, 1994, as
previously reported ................. 110,854 $ 2,771 $ 71,338 $ 6,371 $123,346 $203,826
Adjustment for the cumulative effect
on prior years of applying
retroactively the new method
of valuing inventories .............. 224 224
Balance as of June 30, 1994, as
adjusted ........................... 110,854 2,771 71,338 6,371 123,570 204,050
Net loss ............................ (15,730) (15,730)
Dividends declared .................. (4,785) (4,785)
Redeemed, net ....................... (1,735) (43) (5,703) (5,746)
Adjustment to unrealized losses
on available-for-sale securities,
net of tax ...................... (121) (121)
Sale of stock of Curtice Burns ...... (4,901) (4,901)
-------- -------- -------- -------- -------- --------
Balance June 30, 1995 .................... 109,119 2,728 65,635 1,470 102,934 172,767
Net margin .......................... 12,662 12,662
Dividends declared .................. (4,382) (4,382)
Redeemed, net ....................... (1,545) (39) (6,316) (6,355)
Adjustment to unrealized losses
on available-for-sale securities,
net of tax ...................... (500) (500)
Sale of stock of Hood ............... (1,470) (1,470)
-------- -------- -------- -------- -------- --------
Balance June 30, 1996 .................... 107,574 2,689 59,319 0 110,714 172,722
Net margin .......................... 10,670 10,670
Dividends declared .................. (4,237) (4,237)
Redeemed, net ....................... (2,022) (50) (1,778) (1,828)
Adjustment to unrealized losses
on available-for-sale securities,
net of tax ...................... 424 424
-------- -------- -------- -------- -------- --------
Balance June 30, 1997 .................... 105,552 $ 2,639 $ 57,541 $ 0 $117,571 $177,751
======== ======== ======== ======== ======== ========
</TABLE>
Common shares, purchased at par value, held in Treasury at June 30 were: 66,240
in 1997; 54,496 in 1996; 61,734 in 1995. A common stock dividend per share of
$1.50 was declared for fiscal 1997, 1996 and 1995. Dividend payments are
restricted to a maximum of 8% of par value, as governed by the Farm Credit
Administration. See Note 13 for the details of preferred stock activity.
The accompanying notes are an integral part of the consolidated
financial statements.
32
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FISCAL YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net margin (loss)........................................ $ 10,670 $ 12,662 $ (15,730)
Adjustments to reconcile margins to net cash:
Depreciation and amortization........................ 29,831 33,422 33,720
Restructuring credit................................. (1,943) (3,248)
Receivables and other asset provisions............... 10,341 10,993 9,369
Net pension income................................... (14,871) (11,338) (9,956)
Patronage refund received in stock................... (7,762) (3,264) (1,123)
Deferred income tax (benefit) expense................ 4,795 11,474 (15,682)
(Gain) loss on sale of:
Businesses....................................... (360) (3,799)
Other security investments....................... (1,348)
Properties and equipment......................... (2,613) 891 1,436
Changes in assets and liabilities, net of effects
of businesses acquired or sold:
Receivables...................................... (210) (14,982) 15,333
Inventory........................................ 6,048 (12,527) 20,709
Payables......................................... (2,603) (21,802) (4,400)
Other .......................................... (11,133) 10,910 (14,247)
------------- ------------- ------------
Net cash flows from operating activities.................... 22,133 9,349 16,181
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............... (25,745) (26,025) (38,475)
Cash paid for acquisitions............................... (2,178) (688)
Disposal of property, plant and equipment................ 11,429 4,012 6,373
Purchases of marketable securities available for sale.... (25,084) (10,973) (1,704)
Sale of marketable securities available for sale......... 24,037 11,110 774
Leases originated........................................ (223,061) (174,999) (170,495)
Leases repaid .......................................... 143,906 126,529 107,649
Purchases of investments in related cooperatives......... (4,657) (4,401) (1,700)
Proceeds from sale of investments in related cooperatives 5,159 4,586 1,069
Proceeds from disposal of businesses..................... 21,958 26,467
Proceeds from sale of discontinued operations............ 15,900 55,786
Net changes in assets of discontinued operations......... 20,625
------------- ------------- ------------
Net cash flows used in investing activities................. (74,236) (28,482) (20,098)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term borrowing....................... (3,000) (8,100) 7,500
Proceeds from long-term debt............................. 132,771 67,513 90,220
Repayment of long-term debt.............................. (92,069) (42,896) (73,501)
Proceeds from sale of subordinated debentures............ 63,086 81,565 65,398
Redemption of subordinated debt.......................... (39,887) (65,701) (73,479)
Payments on capitalized leases........................... (2,673) (2,311) (1,512)
Proceeds from sale of stock.............................. 2,291 13 33
Redemption of stock...................................... (4,119) (6,368) (5,779)
Cash dividends paid...................................... (4,297) (4,582) (4,963)
------------- ------------- ------------
Net cash flows from financing activities.................... 52,103 19,133 3,917
------------- ------------- ------------
Net increase (decrease) in cash and equivalents............. 0 0 0
Cash and equivalents at beginning of year................... 0 0 0
------------- ------------- ------------
Cash and equivalents at end of year......................... $ 0 $ 0 $ 0
============= ============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
33
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Agway Inc. (the Company or Agway), incorporated under the Delaware General
Corporation Law in 1964 and headquartered in DeWitt, New York, functions as an
agricultural cooperative directly engaged in manufacturing, processing,
distribution and marketing of products and services for its farmer-members and
other customers primarily in the states of Connecticut, Delaware, Maine,
Maryland, Massachusetts, New Hampshire, New Jersey, New York, Ohio,
Pennsylvania, Rhode Island, and Vermont. The Company, through certain of its
subsidiaries, is involved in retail and wholesale sales of farm supplies; yard
and garden products; pet food and pet supplies; the distribution of petroleum
products; repackaging and marketing of vegetables; processing and marketing
sunflower seeds; underwriting and sale of certain types of property and casualty
insurance; sale of health insurance; and lease financing.
Fiscal Year
The Company's fiscal year-end is on the last Saturday in June. Fiscal years
ended June 1997 and June 1995 were comprised of 52 weeks. Fiscal year ended June
1996 was comprised of 53 weeks.
Basis of Consolidation
The consolidated financial statements include the accounts of all wholly owned
subsidiaries. Operations of H.P. Hood Inc. (Hood), which was 99.9% owned through
December 14, 1995, and Curtice Burns Foods, Inc. (Curtice Burns), which was 34%
owned through November 3, 1994, are presented as discontinued operations (see
Note 19). All significant intercompany transactions and balances have been
eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to conform prior year financial
statements with the current year presentation.
Cash and Equivalents
The Company considers all investments with a maturity of three months or less
when purchased to be cash equivalents.
Leases Receivable
Telmark lease contracts, which qualify as direct finance leases as defined by
Statement of Financial Accounting Standards (SFAS) No. 13, "Accounting for
Leases," are accounted for by recording on the balance sheet the total future
minimum lease payments receivable plus the estimated unguaranteed residual value
of leased equipment less the unearned interest and finance charges. Unearned
interest and finance charges represent the excess of the total future minimum
lease payments plus the estimated unguaranteed residual value expected to be
realized at the end of the lease term over the cost of the related equipment.
Interest and finance charge income is recognized as revenue, by using the
interest method over the term of the lease, which for most commercial and
agricultural leases is 60 months or less with a maximum of 180 months for
buildings. Income recognition is suspended on all leases and notes which become
past due greater than 120 days. Initial direct costs incurred in consummating a
lease are capitalized as part of the investment in direct finance leases and
amortized over the lease term as a reduction in the yield. Gains on lease sales
are reduced for estimated future servicing fees and estimated losses under the
recourse provisions of the sale (limited to 7.5% of the sale proceeds).
Servicing amounts are amortized over the life of the sold leases.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," effective for the Company on January 1, 1997,
provides new methods of accounting and reporting for transfers and servicing of
financial assets and extinguishments of liabilities. The Company has applied
SFAS 125 to securitization transactions occurring after January 1, 1997. The
effect of adopting SFAS 125 has not had a material effect on the Company's
results of operations, financial position, or liquidity.
34
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market, except for grain
inventories associated with the Company's grain marketing program, which are
marked to market. For those inventories stated at cost, the Company uses the
average unit cost or the first-in, first-out method.
During the second quarter of fiscal 1997, the Company's Energy segment changed
its method of determining the cost of liquid product inventories from the
last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. The
liquid product inventories totaled $15,900 and $15,600 at June 30, 1997 and
1996, respectively, and represent 10% of the Company's total inventory for the
same periods noted above.
As required by generally accepted accounting principles, the Company has
retroactively adjusted prior years' financial statements for this change. The
Company has also changed to the FIFO method of inventory valuation for tax
purposes. Management believes the FIFO method will provide a better match of
current costs and current revenues. The cumulative effect of the change
(reported as an increase in retained earnings as of June 30, 1994) of $224
represents the effect on net earnings of the reversal of the LIFO reserve at
that date. The restatement of income as previously reported for fiscal years
ended June 30, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Net margin (loss), as previously reported....................................... $ 11,600 $ (15,908)
Effect of change in accounting method, net of tax............................... 1,062 178
------------- -------------
Adjusted net margin (loss)...................................................... $ 12,662 $ (15,730)
============= =============
</TABLE>
Commodity Instruments
The Company has exposure to price fluctuations associated with certain commodity
inventories, product gross margins and certain anticipated transactions in its
Agriculture and Energy segments. Commodities such as corn, soy complex, oats,
wheat, gasoline, fuel oil, and propane are purchased at market prices which are
subject to volatility. In order to manage the risk of market price fluctuations,
the Company enters into various exchange-traded futures and option contracts and
over-the-counter option contracts with third parties. The Company closely
monitors and manages its exposure to market price risk on a daily basis in
accordance with policies that put certain limitations on this activity.
Agriculture financial instrument contracts are entered into within the grain
marketing and feed businesses. The grain marketing program enters into both
forward purchase and sales commitments with farmers and others on a variety of
grain products. At the same time, grain marketing enters into generally matched
transactions (in both maturity and amount) using offsetting forward commitments
and/or exchange-traded futures contracts to hedge against price fluctuations in
the market price of grains. In the feed business, exchange-traded futures and
option contracts are entered into to manage exposure to fluctuations in the
prices for its present and anticipated needs of major ingredients for its feed
business. The inventory futures contracts and forward commitments associated
with this activity are marked to market at the end of the reporting period with
the resulting gains or losses being charged to cost of sales.
Energy financial instrument contracts are designated at inception as a hedge
where there is a direct relationship to the price risk associated with the
Company's inventories or future purchases and sales of commodities used in the
Company's operations. Hedges of inventories are accounted for under the deferral
method with gains and losses from hedging activity and premiums paid for option
contracts included in the cost of sales as those inventories are sold. Hedges of
anticipated transactions are also accounted for under the deferral method with
gains and losses on these transactions recognized in cost of sales when the
anticipated hedged transaction occurs. Gains and losses on early terminations of
financial instrument contracts designated as hedges are deferred and included in
cost of sales in the same period as the hedged transaction.
35
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Commodity Instruments (continued)
For derivative financial instruments not designated as effective hedges of firm
commitments or anticipated transactions, changes in the fair value of these
contracts are recognized in cost of sales currently.
Marketable Securities
All of the Company's marketable debt and equity securities, which relate
entirely to the Company's insurance operations, are classified as available for
sale and carried at fair value. Unrealized gains and losses, net of tax, are
reported in a separate component of shareholders' equity.
Other Security Investments
Other security investments consist of capital stock of a cooperative bank and
other cooperative suppliers acquired at par or stated value. This stock is not
traded and is historically redeemed on a periodic basis by the issuer at cost.
By its nature, this stock is held to redemption and is reported at cost. The
Company believes it is not practical to estimate the fair value of these
investments without incurring excessive costs since there is no established
market and it is inappropriate to estimate future cash flows which are largely
dependent on future earnings of the cooperative bank and other cooperative
suppliers.
Patronage refunds received from the cooperative bank in the form of additional
bank stock and cash are recorded as a reduction of interest expense and totaled
approximately $1,200, $1,400 and $900 for the years ended June 30, 1997, 1996
and 1995, respectively. Patronage refunds received on the stock of other
cooperatives are reflected in other income.
Properties and Equipment
Properties and equipment are recorded at cost. Depreciation and amortization are
charged to operations, principally on a straight-line basis, over the estimated
useful lives of the properties and equipment, and over the term of the lease for
capital leases. Ordinary maintenance and repairs are charged to operations as
incurred. Gains and losses on disposition or retirement of assets are reflected
in income as incurred.
Other Assets
Other assets include approximately $7,300 and $8,000 at June 30, 1997 and 1996,
respectively, of costs in excess of the fair value of net tangible assets
acquired in purchase transactions (goodwill) as well as acquired non-compete
agreements, customer lists, and trademarks. Goodwill and other intangible assets
are amortized on a straight-line basis over periods ranging from 1 to 40 years.
Amortization included in continuing operations totaled approximately $1,100,
$1,600 and $2,400 for fiscal years ending June 30, 1997, 1996 and 1995,
respectively.
Impairment of Long-Lived Assets
In the first quarter of 1997, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 requires impairment losses to be measured and recorded on
long-lived assets, whether these assets are held for disposal or used in
operations, when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. The adoption of this standard resulted in a $1,700 pre-tax
charge to operating margin related to certain AAP fertilizer and feed plants and
ARS store locations.
36
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Environmental Remediation Costs
The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Costs of future expenditures for environmental remediation obligations are not
discounted to their present value. Recoveries of environmental remediation costs
from other parties are recorded as assets when their receipt is deemed probable
and the amount is reasonably estimable.
Expendable Costs
The Company expenses advertising and research and development costs as they are
incurred. Advertising expense for the years ended June 30, 1997, 1996 and 1995
was approximately $10,800, $23,200 and $20,700, respectively. Net research and
development costs were approximately $700, $600 and $1,300 for the years ended
June 30, 1997, 1996 and 1995, respectively.
Income Taxes
The Company is subject to income taxes on all income not distributed to patrons
as patronage refunds and provides for income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." Under the liability
method specified by SFAS No. 109, deferred tax assets and liabilities are based
on the difference between the financial statement and tax basis of assets and
liabilities as measured by the tax rates that are anticipated to be in effect
when these differences reverse. The deferred tax provision represents the net
change in the assets and liabilities for deferred tax. A valuation allowance is
established when it is necessary to reduce deferred tax assets to amounts for
which realization is reasonably assumed.
Discontinued Operations
Interest expense allocated from continuing operations to discontinued operations
was based upon the proportion of net assets separately financed to total Company
assets. Total interest expense allocated was approximately $400 and $1,000 for
the years ended June 30, 1996 and 1995, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
37
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
2. AGWAY FINANCIAL CORPORATION
Agway Financial Corporation (AFC) is a wholly owned subsidiary of the Company
whose principal business activity is securing financing through bank borrowings
and issuance of corporate debt instruments to provide funds for the Company and
AFC's sole wholly owned subsidiary, Agway Holdings Inc. (AHI), and AHI's
subsidiaries, for general corporate purposes. The payment of principal and
interest on this debt is unconditionally guaranteed by the Company.
Major subsidiary holdings of AHI include Agway Consumer Products Inc. (ARS and
CPG), Agway Petroleum Corporation (Energy), Telmark Inc. and subsidiaries
(Leasing), Agway Insurance Company and Agway General Agency (Insurance), as well
as former holdings in Hood and Curtice Burns.
In an exemptive relief granted pursuant to a "no action letter" issued by the
staff of the Securities and Exchange Commission, AFC, as a separate company, is
not required to file periodic reports with respect to these debt securities.
However, as required by the 1934 Act, the summarized financial information
concerning AFC and consolidated subsidiaries, as of the fiscal year ended June
30, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- ----------------
<S> <C> <C> <C>
Net sales and revenues......................... $ 1,109,960 $ 1,087,317 $ 1,089,316
Operating margin............................... 42,428 33,763 31,644
Margin (loss) from continuing operations....... 5,183 (5,212) 13,822
Net margin (loss).............................. 5,183 (3,697) 5,892
1997 1996
----------------- -----------------
Current assets................................. $ 522,514 $ 532,158
Properties and equipment, net.................. 155,969 166,504
Noncurrent assets.............................. 409,670 353,377
----------------- -----------------
Total assets................................... $ 1,088,153 $ 1,052,039
================= =================
Current liabilities............................ $ 264,679 $ 227,782
Long-term debt................................. 209,296 191,189
Subordinated debt.............................. 375,128 400,284
Noncurrent liabilities......................... 17,813 17,152
Shareholder's equity........................... 221,237 215,632
----------------- ----------------
Total liabilities and shareholder's equity..... $ 1,088,153 $ 1,052,039
================= ================
</TABLE>
3. RESTRUCTURING RESERVES
In June 1992, the Company established a $75,000 reserve for the estimated net
cost to complete a significant restructuring project of the Company. This
project was planned to be completed over several years. As initiatives within
this project were completed, the Company monitored the estimated costs to
complete the project and recognized into income a reduction in costs totaling
$11,256, which has been realized as follows: $1,943 in fiscal 1996; $3,248 in
fiscal 1995; and $6,065 in fiscal 1994. At June 30, 1996, all projects related
to these planned activities were concluded and no further charges or credits
from these activities will occur.
38
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
4. LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES
Net investments in leases at June 30 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Leases (minimum payments):
Commercial and agricultural............................................. $ 596,442 $ 505,783
Retail.................................................................. 16,682 4,771
-------------- --------------
Total leases........................................................ 613,124 510,554
Unearned interest and finance charges........................................ (152,591) (124,231)
Net deferred origination costs............................................... 8,842 7,642
------------- --------------
Net investment.......................................................... 469,375 393,965
Allowance for credit losses.................................................. (24,014) (19,776)
------------- --------------
Net leases receivable................................................... $ 445,361 $ 374,189
============= ==============
</TABLE>
Included within the above are estimated unguaranteed residual values of leased
property approximating $63,700 and $54,400 at June 30, 1997 and 1996,
respectively. Additionally, as of June 30, 1997 and 1996, the recognition of
interest income was suspended on approximately $2,700 and $2,900, respectively,
of net leases.
Contractual maturities of leases (minimum payments) over the next five years and
thereafter were as follows at June 30, 1997: $186,645 in 1998; $147,955 in 1999;
$106,314 in 2000; $67,124 in 2001; $38,262 in 2002; and $66,824 thereafter.
5. INVENTORIES
Inventories at June 30 consist of the following:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Raw materials................................................................. $ 9,396 $ 16,161
Finished goods................................................................ 138,691 128,770
Goods in transit and supplies................................................. 2,553 15,028
-------------- --------------
Total inventories....................................................... $ 150,640 $ 159,959
============== ==============
</TABLE>
39
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
6. MARKETABLE SECURITIES
All of the Company's marketable debt and equity securities, which relate
entirely to the Company's insurance operations, are classified as
available-for-sale marketable securities and include:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
June 30, 1997
- -------------
U.S. government securities and obligations........... $ 5,997 $ 5 $ (131) $ 5,871
Mortgage-backed securities........................... 17,875 78 (119) 17,834
Corporate securities................................. 12,138 19 (276) 11,881
------------- ------------ ------------ -------------
Total available-for-sale marketable securities.. $ 36,010 $ 102 $ (526) $ 35,586
============= ============ ============ =============
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ ------------ --------------
June 30, 1996
- -------------
U.S. government securities and obligations........... $ 7,620 $ 13 $ (229) $ 7,404
Non-U.S. government obligations...................... 3,487 (131) 3,356
Mortgage-backed securities........................... 7,357 156 (30) 7,483
Corporate securities................................. 16,704 10 (842) 15,872
-------------- ------------- ------------ -------------
Total available-for-sale marketable securities.. $ 35,168 $ 179 $ (1,232) $ 34,115
============== ============= ============ =============
</TABLE>
The cost of securities sold is based on the specific identification method.
Realized gains and losses, declines in value judged to be other-than-temporary,
and interest and dividends are included in income. Gross gains of approximately
$200 and $500 were realized on sales of debt and equity securities in 1997 and
1996, respectively. Gross gains realized in 1995 were immaterial. Gross losses
realized on sales of debt and equity securities totaled approximately $200 and
$300 in 1997 and 1996, respectively. Gross losses realized in 1995 were
immaterial.
At June 30, 1997, the Company did not hold any debt from a single issuer that
exceeded 10 percent of the Company's shareholders' equity.
The amortized cost and the fair value of available-for-sale debt securities at
June 30, 1997, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties. There
were no contractual maturities due in one year or less.
Amortized Fair
Cost Value
--------- ---------
Due after one year through five years......... $ 9,472 $ 9,351
Due after five years through ten years........ 4,518 4,476
Due after ten years........................... 22,020 21,759
--------- ---------
$ 36,010 $ 35,586
========= ==========
40
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
7. OTHER SECURITY INVESTMENTS
Other security investments at June 30 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
CF Industries, Inc.............................................................. $ 22,151 $ 17,521
CoBank, ACB..................................................................... 20,643 22,158
Other........................................................................... 6,874 2,727
------------- -------------
$ 49,668 $ 42,406
============= =============
</TABLE>
8. PROPERTIES AND EQUIPMENT
Properties and equipment, at cost, including capital leases, consist of the
following at:
<TABLE>
<CAPTION>
Owned Leased Combined
------------- ------------- -------------
<S> <C> <C> <C>
June 30, 1997
- -------------
Land and land improvements................................. $ 35,050 $ 721 $ 35,771
Buildings and leasehold improvements....................... 123,025 7,051 130,076
Machinery and equipment.................................... 330,304 4,123 334,427
Capital projects in progress............................... 7,713 7,713
------------- ------------- -------------
496,092 11,895 507,987
Less: accumulated depreciation and amortization............ 282,709 10,183 292,892
------------- ------------- --------------
Properties and equipment, net.............................. $ 213,383 $ 1,712 $ 215,095
============= ============= ==============
Owned Leased Combined
June 30, 1996
- -------------
Land and land improvements................................. $ 36,126 $ 1,071 $ 37,197
Buildings and leasehold improvements....................... 126,419 8,991 135,410
Machinery and equipment.................................... 343,728 7,442 351,170
Capital projects in progress............................... 9,484 9,484
-------------- -------------- --------------
515,757 17,504 533,261
Less: accumulated depreciation and amortization............ 281,861 14,385 296,246
-------------- ------------- --------------
Properties and equipment, net.............................. $ 233,896 $ 3,119 $ 237,015
============== ============== ===============
</TABLE>
Depreciation and amortization expense relating to properties and equipment
amounted to approximately $28,800, $31,800 and $31,300 in 1997, 1996 and 1995,
respectively.
41
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
9. INCOME TAXES
The provision (benefit) for income taxes as of June 30 consists of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Continuing operations:
Current:
Federal........................................... $ (2,226) $ (3,736) $ 2,674
State............................................. 3,344 2,253 1,379
Deferred.............................................. 5,676 11,372 (3,153)
(Decrease) increase in valuation allowance............ (881) 34 847
------------- ------------- -------------
$ 5,913 $ 9,923 $ 1,747
============= ============= =============
Discontinued operations:
Current:
Federal........................................... $ $ 1,591 $ 9,656
State............................................. 1,553
Deferred.............................................. (5,146)
------------- ------------- --------------
$ 0 $ 1,591 $ 6,063
============= ============= ==============
</TABLE>
The Company's effective income tax rate on margin (loss) from continuing
operations before income taxes differs from the federal statutory regular tax
rate as of June 30 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Statutory federal income tax rate.......................... 35.0% 35.0% (35.0%)
Tax effects of:
State income taxes, net of federal benefit (1)........ 14.0 7.4 8.2
Items for which no federal tax effect was recognized 1.8 2.5 20.9
Dividend received deduction........................... - - (1.6)
Amortization of intangibles........................... .4 .5 2.2
Adjustment to prior years' tax liabilities............ (10.8) 2.7 18.1
Other items........................................... (4.7) (1.0) 7.4
Basis difference in investment........................ - 8.7
------------- ------------- -------------
Effective income tax rate......................... 35.7% 47.1% 28.9%
============= ============= =============
</TABLE>
(1) For state income tax purposes, the Company does not file combined income tax
returns and is therefore unable to recognize the benefit of certain net
operating losses incurred by subsidiaries.
42
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
9. INCOME TAXES (CONTINUED)
The components of the deferred tax assets and liabilities as of June 30 were as
follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Other liabilities and reserves............................................ $ 13,246 $ 14,644
Leases receivable......................................................... 7,752 9,900
Self-insurance reserves................................................... 6,280 6,554
Medical reserves.......................................................... 7,682 7,325
Inventory................................................................. 4,391 5,833
Deferred compensation..................................................... 4,350 4,964
Accounts receivable....................................................... 2,673 3,421
Environmental............................................................. 3,070 3,540
NOL carryforward.......................................................... 3,673 368
Alternative minimum tax credit carryforward............................... 7,135 5,385
ITC carryforward.......................................................... 1,959 1,194
------------- -------------
Gross deferred tax asset.................................................. 62,211 63,128
Less valuation allowance.................................................. (881)
------------- -------------
Total net deferred tax asset.......................................... 62,211 62,247
------------- -------------
Deferred tax liabilities:
Pension assets............................................................ 34,018 28,961
Excess of tax over book depreciation...................................... 14,715 15,228
Prepaid medical........................................................... 6,675 6,455
Other assets ............................................................. 2,269 2,274
------------- -------------
Total deferred tax liability.......................................... 57,677 52,918
------------- -------------
Net deferred tax asset........................................... $ 4,534 $ 9,329
============= =============
</TABLE>
The Company's net deferred tax asset at June 30, 1997 and 1996, of $4,534 and
$9,329, respectively, consists of a net current asset of $20,714 and $24,267
included in prepaid expenses and a net long-term liability of $16,180 and
$14,938 included in other liabilities as of June 30, 1997 and 1996,
respectively. The total gross deferred tax assets are partially offset by a
valuation allowance of $881 at June 30, 1996. Based on the Company's history of
taxable earnings and its expectations for the future, management has determined
that operating income will likely be sufficient to recognize all of its net
deferred tax asset.
At June 30, 1997, the Company's federal AMT credit can be carried forward
indefinitely. The net operating loss (NOL) carryforwards expire in 2012, and the
ITC credits expire in 2003.
43
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
10. SHORT-TERM NOTES PAYABLE
As of June 30, 1997, the Company had certain facilities available with various
banking institutions whereby lenders have agreed to provide funds up to $274,000
to separately financed units of the Company as follows: AFC, $70,000 and
Telmark, $204,000. In addition, AFC may issue up to $50,000 of commercial paper
under the terms of a separate agreement, backed by a bank letter of credit.
Short-term borrowings under these credit facilities were as follows:
<TABLE>
<CAPTION>
Agway
and AFC
(excluding
Telmark) Telmark Total
-------------- ------------ -------------
<S> <C> <C> <C>
June 30, 1997
- -------------
Bank lines of credit....................................... $ $ 24,900 $ 24,900
Commercial paper........................................... 34,300 34,300
-------------- ------------- -------------
$ 34,300 $ 24,900 $ 59,200
============== ============= =============
Weighted average interest rate............................. 5.57% 6.53%
============== =============
Agway
and AFC
(excluding
Telmark) Telmark Total
-------------- ------------- -------------
June 30, 1996
- -------------
Bank lines of credit....................................... $ 12,200 $ $ 12,200
Commercial paper........................................... 50,000 50,000
-------------- ------------- -------------
$ 62,200 $ 0 $ 62,200
============== ============= =============
Weighted average interest rate............................. 5.86% -
============== =============
</TABLE>
The carrying amount of the Company's short-term borrowings approximates their
fair value. Interest rates charged on commercial paper outstanding range from
5.57% and 5.58% at June 30, 1997, and 5.37% to 5.62% at June 30, 1996. Interest
rates charged by the banks on cash drawdowns of the Company's lines of credit
approximate prevailing short-term borrowing rates ranging between 7.70% and
7.74% at June 30, 1996.
Letters of credit of $28,000, which are primarily used to back general liability
claims, are also available to AFC. At June 30, 1997, letters of credit issued
totaled approximately $24,800.
The $70,000 line of credit available to AFC increases to $100,000 effective
October 1, 1997. This line of credit and the $50,000 commercial paper facility,
as amended in February 1997, are available to the Company through December 1997.
These AFC agreements, including $2,625 in long-term debt, require
collateralization using certain of the Company's accounts receivable and
non-petroleum inventories (collateral). Amounts that can be drawn under these
AFC short-term agreements are limited to a specific calculation based upon the
collateral available. Adequate collateral has existed throughout the fiscal year
to permit AFC to borrow amounts to meet the ongoing needs of the Company and is
expected to continue to do so. In addition, the agreements include certain
covenants, the most restrictive of which requires the Company to maintain
specific quarterly levels of interest coverage and monthly levels of tangible
retained margins. At June 30, 1997, the Company violated its interest coverage
covenant but has subsequently obtained waivers from its lenders for June 1997
and amendments through the term of these agreements.
44
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
10. SHORT-TERM NOTES PAYABLE (CONTINUED)
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. The current
uncommitted short-term line of credit agreement permits Telmark to borrow up to
$4,000 on an unsecured basis with interest paid upon maturity. The line bears
interest at money market variable rates. A committed $200,000 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 amount outstanding as of
June 30, 1997 and 1996, under the short-term line of credit and the revolving
term loan facility was $4,000 and $190,900 and $12,200 and $50,000,
respectively. The portion of the revolving term loan that is short term at June
30, 1997 and 1996, was $24,900 and $0, respectively.
The Company and Telmark have ongoing discussions with their lenders and expect
to continue to have appropriate and adequate financing to meet their ongoing
needs.
11. DEBT
Long-Term Debt:
Long-term debt consists of the following at June 30, 1997:
<TABLE>
<CAPTION>
Agway
and AFC Telmark Total
-------------- ------------- -------------
<S> <C> <C> <C>
Notes payable - banks (a).................................. $ 2,625 $ 170,000 $ 172,625
Notes payable - insurance companies (b)(c)................. 144,492 144,492
Other...................................................... 10,858 10,858
-------------- ------------- -------------
Subtotal long-term debt, excluding capital leases.......... 13,483 314,492 327,975
Obligations under capital leases:
Industrial revenue bonds.............................. 358 358
Others................................................ 1,272 90 1,362
-------------- ------------- -------------
Total long-term debt....................................... 15,113 314,582 329,695
Less: current portion...................................... 5,521 108,199 113,720
-------------- ------------- -------------
$ 9,592 $ 206,383 $ 215,975
============== ============= =============
</TABLE>
(a) Under Telmark's revolving loan facility, principal of $170,000 bears
interest at fixed rates ranging from 5.95% to 8.40%, payments commencing
July 1997 with final installments due in 2000. Under an AFC loan agreement
bearing an interest rate of 8.53%, principal of $2,625 is payable in
quarterly installments of $175 commencing August 1997 and ending in
February 2001. The bank notes of $172,625 are collateralized by the
Company's investment in the bank having a book value of $20,643 at
June 30, 1997. The Agway and AFC debt agreements contain a number of
restrictive financial covenants,the most restrictive of which requires the
Company to maintain specific quarterly levels of interest coverage and
monthly levels of tangible retained margins. The $2,625 AFC credit
facility loan covenants are integrated with the short-term facilities.
(b) Under Telmark loan agreements with various insurance companies, principal
of $119,722 bears interest at fixed rates ranging from 5.90% to 8.88%,
payments commencing September 1997 with final installment due in 2004. The
note agreements are similar to one another and each contains financial
covenants, the most restrictive of which prohibit Telmark from having (1)
tangible net worth less than $70,000; (2) a debt-to-equity ratio (as
defined) which exceeds 5:1; (3) a ratio of earnings available for fixed
charges less than 1.25:1; and (4) dividend distributions after December
31, 1994 that exceed 50% of consolidated net income for the period January
1, 1995 through the date of determination.
(c) On May 28, 1997, Telmark, through a newly created wholly owned special
purpose subsidiary, Telmark Lease Funding Corp. I, issued $23,999 of Class
A lease-backed notes and $1,946 of Class B lease-backed notes to three
insurance companies. The subsidiary pays interest at 6.58% on the Class A
notes and 7.01% on the Class B notes. The notes are collateralized by
1,165 leases 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. Final
scheduled maturity of the notes is December 15, 2004.
45
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
11. DEBT (CONTINUED)
Subordinated Debt:
Subordinated debt consists of the following at June 30, 1997:
<TABLE>
<CAPTION>
AFC Telmark Total
--------------- ------------- -------------
<S> <C> <C> <C>
Subordinated debentures, due 1997 to 2003,
interest at 6.0% to 8.5%.............................. $ 21,738 $ 31,044 $ 52,782
Subordinated money market certificates,
due 1997 to 2008, interest at 4.5% to 9.5%............ 385,345 385,345
--------------- ------------- -------------
Total long-term subordinated debt.......................... 407,083 31,044 438,127
Less: current portion..................................... 51,980 11,019 62,999
--------------- ------------- -------------
$ 355,103 $ 20,025 $ 375,128
=============== ============= =============
</TABLE>
Of AFC's subordinated debt, $337,700 is redeemable in whole or in part at the
principal amount plus accrued interest, prior to maturity dates, at the option
of the Company. The foregoing debt bears interest payable semiannually on
January 1 and July 1 of each year for AFC and payable quarterly on January 1,
April 1, July 1, and October 1 for Telmark. The money market certificates'
interest rate is at the greater of the quoted rate or a rate based upon the
discount rate for U.S. Government Treasury Bills, with maturities of 26 weeks.
Maturities:
Aggregate annual maturities on long-term debt during the next five fiscal years
ending June 30 and thereafter are as follows:
<TABLE>
<CAPTION>
Capital Subordinated
Leases Borrowings Total Debt
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
1998................................... $ 655 $ 113,182 $ 113,837 $ 62,999
1999................................... 197 108,484 108,681 74,464
2000................................... 190 55,234 55,424 76,479
2001................................... 190 21,346 21,536 42,726
2002................................... 190 10,512 10,702 43,861
Thereafter............................. 870 19,217 20,087 137,598
------------- ------------- ------------- -------------
2,292 327,975 330,267 438,127
Imputed interest....................... (572) (572)
------------- ------------- ------------- -------------
Total.................................. $ 1,720 $ 327,975 $ 329,695 $ 438,127
============= ============= ============= =============
</TABLE>
46
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
12. COMMITMENTS AND CONTINGENCIES
Environmental
The Company is subject to a number of governmental regulations concerning
environmental matters, either directly or as a result of the operations of its
subsidiaries. The Company expects that it will be required to expend funds to
participate in the remediation of certain sites, including sites where the
Company 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 sites with underground
fuel storage tanks, and will incur other expenses associated with environmental
compliance.
The Company continually monitors its 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 is estimable. Estimates of the extent of the
Company's 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. At June 30, 1997, the
Company has been 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 the Company could be required to pay in excess of its
pro rata share of remediation costs. The Company's understanding of the
financial strength of other PRPs at these Superfund sites has been considered,
where appropriate, in the Company's determination of its estimated liability.
The Company 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 Company does not anticipate that any such
adjustment would be material to its 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 reserves established will cause future cash
outlays over approximately five years based upon current estimates, and it is
not expected that such outlays will materially impact the Company's liquidity
position.
As part of its long-term environmental protection program, the Company spent
approximately $1,800 in fiscal 1997 on capital projects. The Company estimates
that during fiscal 1998 and 1999 approximately $1,600 per year will be spent on
additional capital projects for environmental protection. These estimates
include the additional capital required to comply with EPA Underground Storage
Tank (UST) regulations that become effective in December 1998. Presently, the
total additional capital required to comply with the EPA UST regulations is
estimated to be approximately $550. The total capital requirements may change
due to the actual number of USTs actively in use on the effective date.
Year 2000
In fiscal 1996, the Company initiated a Companywide program to prepare its
computer systems and applications for the year 2000. As a result of this
program, in fiscal 1997, a comprehensive review to identify the systems affected
by this issue was completed, an implementation plan was compiled and is
currently being executed, and estimated cost projections were determined. As a
result of the procedures already completed, the Company expects to either modify
or upgrade existing systems or replace some systems altogether where it is
determined to be cost beneficial.
The Company expects to incur internal staff costs as well as consulting and
other expenses related to the execution of the implementation plan. The Company
has also identified that a portion of the cost estimates are not likely to be
incremental costs to the Company, but rather will represent the redeployment of
existing information technology resources. Testing and conversion of existing
and replacement system applications are expected to cost approximately $14,200
over the next two fiscal years. Approximately 75% of this estimate represents
costs to replace existing systems for year 2000 compliance, the majority of
which will be capitalized. The accounting treatment of costs incurred in
connection with the year 2000 compliance will be treated as period costs and
will be expensed as incurred as compared to the capitalization of new systems
implemented.
47
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Year 2000 (continued)
The Company presently believes that with the planned modifications to existing
systems and conversion to new systems, the year 2000 compliance issue will be
resolved on a timely basis and will not pose significant operational problems
for the Company's computer systems as so modified and converted.
Other
The Company 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 Company. The Company 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 the results of operations, financial position, or
liquidity of the Company.
Commitments to extend credit at the Company's leasing subsidiary, Telmark, are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Outstanding commitments to
extend lease financing at June 30, 1997 and 1996, approximated $12,900 and
$14,800, respectively.
During 1994 and prior, Telmark entered into lease sale contracts that contain
limited recourse provisions which are limited to 7.5% of the sale proceeds. At
June 30, 1997, Telmark was contingently liable for approximately $2,000 under
the limited recourse provisions. The Company evaluates the potential liability
in establishing its allowance for credit losses.
The Internal Revenue Service performed a routine employment tax audit during
fiscal 1996 and proposed a $6,300 payroll tax adjustment against one of the
Company's operations. The proposed assessment alleges that the Company
misclassified certain workers. The Company has appealed this assessment and at
this time believes the issue will be resolved in the Company's favor. Therefore,
it has accrued no liability.
In 1996, the Company entered into a ten-year logistics agreement with an
outsourcer to manage its two retail distribution centers. The amount of annual
service fees is dependent upon the services provided, volume of activities
required, and the number of shipping destinations. The estimated annual expense
under this agreement is approximately $10,000.
Rent expense for the fiscal years 1997, 1996 and 1995 approximated $12,000,
$9,000 and $10,000, respectively. Future minimum payments under noncancelable
operating leases approximate $8,500, $7,900, $5,700, $4,500 and $4,100 for the
fiscal years 1998 through 2002, respectively, and approximately $6,200
thereafter.
48
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
13. PREFERRED STOCK
Values are whole numbers except where noted as (000).
<TABLE>
<CAPTION>
Preferred Stock
--------------------------------------------------------------------------
Cumulative
-------------------------------------------------- Honorary Dollar
6% 8% 8% 7% Member Amount
Series A Series B Series B-1 Series C Series HM in 000s
----------- ----------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Par Value........................... $ 100 $ 100 $ 100 $ 100 $ 25
=========== =========== =========== =========== ==========
Shares Authorized................... 350,000 250,000 140,000 150,000 80,000
=========== =========== =========== =========== ==========
Shares Outstanding:
Balance June 30, 1994............ 337,675 227,100 19,810 128,217 2,291 $ 71,338
Issued (redeemed), net......... (54,612) (1,619) (400) (409) 70 (5,703)
----------- ----------- ----------- ----------- ---------- --------
Balance June 30, 1995............ 283,063 225,481 19,410 127,808 2,361 65,635
Issued (redeemed), net......... (50,152) ( 1,359) (300) (11,365) 67 (6,316)
----------- ----------- ----------- ----------- ---------- --------
Balance June 30, 1996............ 232,911 224,122 19,110 116,443 2,428 59,319
Issued (redeemed), net......... (2,972) 13,105 (750) (27,201) 126 (1,778)
----------- ----------- ----------- ----------- ---------- --------
Balance June 30, 1997............... 229,939 237,227 18,360 89,242 2,554 $ 57,541
=========== =========== =========== =========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Preferred Stock
---------------------------------------------------------------
Cumulative
-------------------------------------------------- Honorary
6% 8% 8% 7% Member
Series A Series B Series B-1 Series C Series HM
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Annual Dividends Per Share:
June 30, 1995.................... $ 6.00 $ 8.00 $ 8.00 $ 7.00 $ 1.50
June 30, 1996.................... $ 6.00 $ 8.00 $ 8.00 $ 7.00 $ 1.50
June 30, 1997.................... $ 6.00 $ 8.00 $ 8.00 $ 7.00 $ 1.50
Shares Held in Treasury
(purchased at par value):
June 30, 1995.................... 66,937 24,519 120,590 22,192 632
June 30, 1996.................... 117,089 25,878 120,890 33,557 729
June 30, 1997.................... 120,061 12,773 121,640 60,758 812
</TABLE>
There are 10,000 shares of authorized preferred stock undesignated as to series,
rate, and other attributes. The Series A preferred stock has priority with
respect to the payment of dividends. The Company maintains the practice of
providing a market by repurchasing, at par, preferred stock as the holders elect
to tender the securities for repurchase, subject to Board of Directors'
approval. The Company practice of repurchasing preferred stock specifically did
not apply to approximately 166,600 shares of 6% Series A preferred stock issued
in fiscal 1994 in connection with the acquisition of local cooperative
affiliates. As a condition of this transaction, the Company's repurchase
practice for this preferred stock was specifically suspended until July 1997.
That restriction is no longer in effect. The Series HM preferred stock may be
issued only to former members of Agway and no more than one share of such stock
may be issued to any one person. The preferred stock has no pre-emptive or
conversion rights.
49
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
14. RETIREMENT BENEFITS
Pension Plan
The Company has a non-contributory defined benefit pension plan covering the
majority of employees of Agway Inc. The plan's benefit formulae generally base
payments to retired employees upon years of credited service and a percentage of
qualifying compensation during the final years of employment. Generally, pension
costs are funded annually at no less than the amount required by law and no more
than the maximum allowed by federal income tax guidelines. The vested benefit
obligation is based on the actuarial present value of the benefits that the
employee would be entitled to at the expected retirement date.
The majority of the plan's investments consist of U.S. government and agency
securities, U.S. corporate bonds, U.S. and foreign equities, equity and bond
funds and temporary investments (short-term investments in demand notes and
money market funds). At June 30, 1997 and 1996, the Company's plan assets
included Company debt securities and preferred stock with estimated fair values
of $5,900.
The Employees' Retirement Plan of Agway, Inc. has assets that exceed accumulated
benefit obligations. In June 1997, the Agway Board of Directors approved a
one-time benefit increase to retirees and beneficiaries of retirees who
commenced receipt of monthly plan benefits prior to January 1, 1992, and are
currently receiving these benefits. This benefit increase increased the
unrecognized prior service cost in 1997 by $7,100. The following table sets
forth the plan's funded status and amounts recognized in the Company's
consolidated financial statements at June 30:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested..................................................................... $ 264,465 $ 251,753
Non-vested................................................................. 9,786 9,574
------------- -------------
Accumulated benefit obligation.................................................. 274,251 261,327
Additional amounts related to projected pay increases........................... 27,207 26,613
------------- -------------
Projected benefit obligation for service rendered to date....................... 301,458 287,940
Plan assets at fair value ...................................................... 538,433 486,650
------------- -------------
Projected benefit obligation less than plan assets.............................. 236,975 198,710
Unrecognized net gain........................................................... (135,604) (101,901)
Unrecognized prior service cost................................................. 13,175 7,697
Unrecognized net transition asset............................................... (14,494) (19,325)
------------- -------------
Net pension asset............................................................... $ 100,052 $ 85,181
============= =============
</TABLE>
Net pension income included the following income/(expense) components for the
year ended June 30:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Service benefits earned during the period................... $ (5,236) $ (6,060) $ (5,920)
Interest cost on projected benefit obligation............... (21,527) (21,216) (21,033)
Actual return on plan assets................................ 73,413 83,238 62,415
Net amortization and deferral............................... (31,779) (44,624) (25,506)
------------- ------------- -------------
$ 14,871 $ 11,338 $ 9,956
============= ============= =============
</TABLE>
In determining the actuarial present values of the projected benefit obligations
as of June 30, the following assumptions were used:
<TABLE>
<CAPTION>
1997 1996
------------- --------------
<S> <C> <C>
Weighted average discount rate................................................. 7.75% 7.75%
Rate of increase in future compensation........................................ 5.50% 5.50%
Expected long-term rate of return.............................................. 10.25% 10.25%
</TABLE>
50
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
14. RETIREMENT BENEFITS (CONTINUED)
Postretirement Benefits
The Company provides postretirement health care and life insurance benefits to
eligible retirees and their dependents. Eligibility for benefits depends upon
age and years of service. The Company's postretirement benefit plans are not
funded. The accrued postretirement benefit cost expected to be paid in the next
year is in other current liabilities while the remaining amount is included in
other liabilities. The reconciliation of funded status and the net periodic
postretirement benefit cost recognized in the Company's consolidated financial
statements at June 30 were as follows:
<TABLE>
<CAPTION>
Health and Life Insurance
--------------------------------
1997 1996
------------ -------------
<S> <C> <C> <C>
Reconciliation of funded status:
- --------------------------------
Accumulated postretirement benefit obligation:
Retirees and surviving spouses......................... $ 30,818 $ 30,538
Actives eligible to retire............................. 3,314 3,345
Actives not yet eligible to retire..................... 7,905 10,289
------------- -------------
Total unfunded accumulated postretirement
benefit obligation.................... 42,037 44,172
Unrecognized prior service cost............................. (1,525)
Unrecognized net gain (loss)................................ 2,174 (1,281)
Unrecognized net transition obligation...................... (20,093) (21,348)
------------- -------------
Accrued postretirement benefit cost.................... $ 22,593 $ 21,543
============= =============
1997 1996 1995
------------- ------------- -------------
Annual expense for fiscal year ended June 30:
- --------------------------------------------
Interest cost............................................... $ 3,158 $ 3,243 $ 3,521
Amortization of transition obligation....................... 1,255 1,255 1,452
Service cost-benefits earning during the period............. 723 816 724
Prior service cost.......................................... 66
------------- ------------- -------------
Net periodic postretirement benefit cost............... $ 5,202 $ 5,314 $ 5,697
============= ============= =============
</TABLE>
In determining the accumulated postretirement benefit obligation, the weighted
average discount rate used was 7.75% at June 30, 1997 and 1996, respectively.
For measurement purposes, the assumed health care cost trend rate used to
measure the Company's accumulated benefit obligation was, for persons under age
65, 7.0% and 7.3% for June 30, 1997 and 1996, respectively. For persons over age
65, the Company has an insured medical program limiting the Company's subsidy to
a per month/per retiree basis. The health care cost trend rate assumption for
fiscal 1998 and forward at June 30, 1997, decreases gradually until the year
2002, when the ultimate trend rate is then fixed at 5.0%. A one percentage point
increase in the assumed health care cost trend rate at June 30, 1997, would
increase the aggregate service and interest cost components of net periodic
postretirement benefit cost by $200, and the accumulated postretirement benefit
obligation by $1,200.
Employees' Thrift Investment Plan
The Agway Inc. Employees' Thrift Investment Plan is a defined contribution plan
covering substantially all employees of Agway and its subsidiaries. Under the
plan, each participant may invest up to 15% of his or her salary, of which a
maximum of 6% qualifies for Company matching. Participant contributions are
invested at the option of the participant in any combination of four funds.
The Company will contribute an amount of at least 10%, but not more than 50%, of
each participant's regular contributions, as defined, up to 6% of his or her
salary on an annual basis. Company contributions to this plan for fiscal years
ended June 30, 1997, 1996 and 1995 were approximately $1,200, $1,300 and $500,
respectively. For the fiscal years ended June 30, 1997 and 1996, the Board of
Directors of the Company approved an additional match of 20% to supplement the
minimum contribution level of 10%.
51
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
15. FINANCIAL INFORMATION CONCERNING SEGMENT REPORTING
The Company, as an agricultural cooperative in the northeastern United States,
operates principally in five business segments:
(1) Agriculture, through AAP, engages in the manufacturing and processing of
various animal feeds, crop inputs, fertilizers and farm supplies and,
through CPG, engages in the manufacturing, processing and repacking of a
variety of agricultural products marketed directly to consumers,
retailers, wholesalers and processors as well as to AAP and ARS.
(2) Retail, through ARS, engages in the retail marketing of agricultural
supplies and materials, yard and garden items, and pet food and pet
supplies, as well as the wholesale purchase, warehousing and distribution
of these products to Agway franchised representatives and other
businesses. It also provides marketing, purchasing, technical, and
strategic support for AAP and the Agway retail store outlets.
(3) Energy, through Agway Energy Products, operates a full-service energy
company which markets oil and gas heating and air-conditioning equipment,
petroleum products including gasolines, kerosene, fuel oil, diesel fuel,
propane, lubricating oils and greases, antifreeze, and other related
items. In March 1997, AEP began marketing natural gas to residential and
small commercial customers.
(4) Leasing, through Telmark Inc., is engaged in the business of leasing
agricultural related equipment, vehicles, and buildings to farmers and
other customers, primarily in rural communities.
(5) Insurance markets property and casualty insurance and, through Agway
Insurance Agency Inc., markets accident and health insurance as well as
long-term-care products.
Total revenue of each industry segment includes the sale of products and
services to unaffiliated customers, as reported in the Company's consolidated
statements of operations, as well as sales to other segments of the Company
which are priced on a competitive basis.
Operating margin (loss) consists of total revenues less operating expenses.
Certain shared service expenses, including the corporate insurance program,
information services, payroll and accounts payable administration, and
facilities management, are allocated based on various allocation formulas. In
computing operating margin (loss), none of the following items have been added
to or deducted from segment results: revenue earned at the corporate level and
not derived from operations of any industry segment; corporate expenses;
interest expense, net of interest income; other income generated from assets not
allocable to segments; member refunds; income taxes; and margin or (loss) from
discontinued operations.
Identifiable assets in the segments of the Company are those assets used by each
segment in its operations. General management assets consist principally of
cash, various prepaid expenses, fixed assets, net pension assets, and net assets
of discontinued operations.
52
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
15. FINANCIAL INFORMATION CONCERNING SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
Year ended June 30, 1997 Agriculture Retail Energy Leasing Insurance Other(a) Consolidated
- ------------------------- ----------- ---------- ----------- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and revenues to
unaffiliated customers $ 740,508 $ 239,854 $ 606,610 $ 56,908 $ 27,020 $ 222 $ 1,671,122
Intersegment sales and
revenues.............. 50,151 6,591 305 35 (57,082)
----------- ---------- ----------- ---------- --------- ---------- ------------
Total sales
and revenues $ 790,659 $ 246,445 $ 606,915 $ 56,943 $ 27,020 $ (56,860) $ 1,671,122
=========== ========== =========== ========== ========= ========== ============
Operating margin plus
other income, net..... $ 3,203 $ 5,223 $ 19,537 $ 13,003 $ 694 $ 5,893 $ 47,553
Interest expense, net of
interest income....... (30,970)
------------
Margin from
continuing
operations before
income taxes.... $ 16,583
============
Identifiable assets...... $ 341,579 $ 105,496 $ 165,941 $ 462,704 $ 53,845 $ 170,696 $ 1,300,261
Depreciation and
amortization........... 6,660 11,659 9,591 529 55 1,337 29,831
Capital expenditures..... 7,429 12,792 4,632 540 352 25,745
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30, 1996 Agriculture Retail Energy Leasing Insurance Other(a) Consolidated
- ------------------------- ----------- ---------- ---------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and revenues to
unaffiliated customers $ 787,315 $ 253,214 $ 545,704 $ 48,577 $ 25,431 $ 2,259 $ 1,662,500
Intersegment sales and
revenues.............. 82,142 8,823 323 50 (91,338)
----------- ---------- ---------- --------- ---------- ----------- ------------
Total sales and
revenues.............. $ 869,457 $ 262,037 $ 546,027 $ 48,627 $ 25,431 $ (89,079) $ 1,662,500
============ ========== ========== ========= ========== =========== =============
Operating margin (loss)
plus other income,
net................. $ 23,394 $ 4,902 $ 16,119 $ 11,589 $ (5,310) $ 3,461 $ 54,155
Interest expense, net of
interest income....... (33,085)
-------------
Margin from
continuing
operations before
income taxes.... $ 21,070
=============
Identifiable assets...... $ 361,130 $ 105,432 $ 170,063 $ 394,470 $ 53,971 $ 160,825 $ 1,245,891
Depreciation and
amortization.......... 10,917 9,872 10,545 450 125 1,513 33,422
Capital expenditures..... 8,624 11,645 4,332 1,142 13 1,320 27,076
</TABLE>
<TABLE>
<CAPTION>
Year ended June 30, 1995 Agriculture Retail Energy Leasing Insurance Other(a) Consolidated
- ------------------------- ----------- ---------- ----------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and revenues to
unaffiliated customers $ 725,445 $ 282,114 $ 510,439 $ 41,874 $ 29,609 $ 2,572 $ 1,592,053
Intersegment sales and
revenues.............. 64,830 10,294 339 68 (75,531)
----------- ---------- ----------- ---------- --------- ----------- ------------
Total sales and
revenues............ $ 790,275 $ 292,408 $ 510,778 $ 41,942 $ 29,609 $ (72,959) $ 1,592,053
=========== ========== =========== ========== ========= =========== ============
Operating margin (loss)
plus other income,
net................. $ 1,893 $ 2,689 $ 12,842 $ 10,555 $ 652 $ (4,681) $ 23,950
Interest expense, net of
interest income....... (30,003)
-------------
Loss from continuing
operations before
income taxes.... $ (6,053)
=============
Identifiable assets...... $ 367,101 $ 106,517 $ 169,430 $ 357,653 $ 56,339 $ 168,153 $ 1,225,193
Depreciation and
amortization.......... 15,272 5,013 10,519 257 256 2,403 33,720
Capital expenditures..... 12,725 4,486 18,051 719 144 2,350 38,475
</TABLE>
(a) Represents unallocated net corporate items and intersegment eliminations.
53
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
16. OTHER INCOME (EXPENSE)
The components of other income (expense) for the year ended June 30 are
summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Patronage refund income..................................... $ 9,534 $ 8,037 $ 2,904
Rent and storage revenue.................................... 4,063 3,552 3,313
Gain/(loss) on sale of:
Businesses............................................. 360 3,799
Other security investments............................. 1,348
Properties and equipment............................... 2,613 (891) (1,436)
Dividend income............................................. 57 320 206
Other, net.................................................. 2,136 2,257 2,150
------------- ------------- -------------
$ 18,763 $ 18,422 $ 7,137
============= ============= =============
</TABLE>
17. SUPPLEMENTAL DISCLOSURES ABOUT CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Additional disclosure of operating cash flows:
Cash paid during the year for:
Interest........................................... $ 39,812 $ 43,195 $ 39,339
============= ============= =============
Income taxes....................................... $ 3,661 $ 3,499 $ 9,826
============= ============= =============
Additional disclosure for non-cash
investing and financing activities:
Dividends declared but unpaid at June 30............... $ 2,149 $ 2,210 $ 2,410
============= ============= =============
</TABLE>
18. FINANCIAL AND COMMODITY INSTRUMENTS
FINANCIAL INSTRUMENTS
Fair Value
Carrying amounts of trade notes and accounts receivable, financial instruments
included in other assets and other liabilities, notes payable and accounts
payable approximate their fair values because of the short-term maturities of
these instruments. The fair value of the Company's long-term debt and
subordinated debentures is estimated based on discounted cash computations using
estimated borrowing rates available to the Company ranging from 6.18% to 8.87%
in 1997 and 6.80% to 8.96% in 1996.
The carrying amounts and estimated fair values of the Company's significant
financial instruments held for purposes other than trading at June 30 were as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- --------- ---------- --------
<S> <C> <C> <C> <C>
Liabilities:
Long-term debt (excluding capital leases)..... $ 327,975 $ 333,669 $ 287,305 $288,446
Subordinated debentures........................ 438,127 433,736 414,927 409,163
</TABLE>
54
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
18. FINANCIAL AND COMMODITY INSTRUMENTS (CONTINUED)
Off-Balance-Sheet Risk
In the normal course of business, the Company has letters of credit, performance
contracts, and other guarantees that are not reflected in the accompanying
consolidated balance sheets. In the past, no significant claims have been made
against these financial instruments. Management believes that the likelihood of
performance under these financial instruments is minimal and expects no material
losses and/or cash requirements to occur in connection with these instruments.
The Company's leasing subsidiary, Telmark, is a party to financial instruments
with off-balance-sheet risk in the normal course of business to meet the
financing needs of its leasing customers. These financial instruments consist of
commitments to extend credit not recognized in the balance sheet. In the event
of nonperformance by the other party to the financial instrument, the Company's
credit risk is limited to the contractual amount of Telmark's commitment to
extend credit.
Credit and Market Risk
The Company, operating as an agricultural cooperative primarily in the
Northeast, has a concentration of accounts and lease receivables due from
farmer-members throughout the region. This concentration of agricultural
customers may affect the Company's overall credit risk in that the repayment of
farmer-member receivables may be affected by inherent risks associated with (1)
the overall economic environment of the region; (2) the impact of adverse
regional weather conditions on crops; and (3) changes in the level of government
expenditures on farm programs and other changes in government agricultural
programs that adversely affect the level of income of farmers. The Company
mitigates this credit risk by analyzing farmer-member credit positions prior to
extending credit and requiring collateral on long-term arrangements and the
underlying asset with Telmark's lease contracts.
Energy extends unsecured credit to petroleum wholesalers and residential
fuel-oil customers. The Retail business extends working capital lines of credit,
secured by inventory and accounts receivable, to its representatives. The credit
function within the Energy and Retail businesses manages credit risk associated
with these trade receivables by routinely assessing the financial strength of
its customers.
COMMODITY INSTRUMENTS
As described in Note 1, the Company uses exchange-traded futures and options and
over-the-counter options to manage the risk of commodity price changes in its
Agriculture and Energy businesses. As exchange-traded futures and options are
actively traded on regulated exchanges, these contracts are subject to movements
in market values. The Company determines the fair value of its exchange-traded
contracts based on the settlement prices for open contracts, which are
established by the exchange on which the instruments are traded. The fair value
of the Company's over-the-counter contracts is determined based on obtaining
quotes from brokers. The margin accounts for open commodity futures and option
contracts, which reflect daily settlements as market values change, are recorded
in advances and other receivables. The margin account represents the Company's
basis in those contracts. As of June 30, 1997 and 1996, the carrying and fair
value of the Company's investment in commodities futures and option contracts
was $3,200 and $3,600, respectively. The total net deferred gains and losses on
open contracts at June 30, 1997 and 1996, were immaterial.
55
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
19. DISCONTINUED OPERATIONS
On March 23, 1993, the Company's Board of Directors authorized management to
sell its 34% interest in Curtice Burns and 99.9% interest in Hood, the major
investments in what was Agway's food group segment. On November 3, 1994, AHI
sold its interest in Curtice Burns to Pro-Fac and received cash proceeds of
$55,786 and recorded a $4,430 profit, net of income taxes of $19,700. On
December 15, 1995, AHI sold all of its common stock of Hood. In accordance with
the Stock Purchase Agreement, AHI received $25,500 in the form of $15,900 in
cash and $9,600 in a promissory note in consideration of the sale of its Hood
common stock and recorded a gain on disposal of Hood of $2,110, net of income
tax of $1,711. AHI assumed certain specified obligations of Hood, including the
liability for certain supplemental executive retirement plans and certain
management bonuses. Furthermore, under the Stock Purchase Agreement, AHI has
indemnified the Buyer with regard to specified representations, warranties and
litigation; federal and state taxes through fiscal 1995; and 50% of all other
indemnification obligations in excess of $1,000 identified within two years of
the closing date. The obligations and/or liabilities assumed and expenses
incurred by AHI in the transaction were estimated at $7,000 at the closing date.
Immediately after closing, AHI exchanged the note of $9,600 received as proceeds
for certain specified assets of Hood, including stock of a Farm Credit System
cooperative bank, certain accounts receivable and certain real estate and fixed
assets. As of June 30, 1997, the estimates made as of the closing date of the
sale remain adequate to cover the indemnifications made.
Net sales and revenues from the discontinued operations of Hood and Curtice
Burns for the period of time owned during the years ended June 30, 1996 and 1995
were approximately $188,000 and $749,000, respectively.
The loss from the operation of the discontinued operations for the fiscal years
ended June 30 related solely to Hood and was comprised of the following:
<TABLE>
<CAPTION>
1996 1995
------------- --------------
<S> <C> <C>
Transaction costs and allowance.............................................. $ (746) $ (16,724)
Pre-tax margin (loss) from Hood operations................................... 446 (2,666)
Interest expense............................................................. (415) (1,000)
------------- --------------
Pre-tax loss ................................................................ (715) (20,390)
Income tax benefit........................................................... 120 5,406
------------- --------------
Losses of discontinued operations....................................... (595) (14,984)
------------- --------------
Reclassification in 1995 to reconsolidate Hood,
net of tax benefit of $8,230............................................ 2,624
------------- --------------
(Loss) from discontinued operations.......................................... $ (595) $ (12,360)
============= ==============
</TABLE>
56
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The directors of the Company determine Company policy and are nominated on a
district representation basis by committees representing members within each
district. Each of the following directors is a full-time farmer and has been
engaged in full-time farming during the past five years:
<TABLE>
<CAPTION>
Year
Became
A
Name Age Office Name of Farm Director Term Expires
---- --- ------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
Ralph H. Heffner(1) 59 Chairman of the Jersey Acres Farms Inc. 1973 November 1997
Board and Director
Robert L. Marshman 58 Vice Chairman of the
Board and Director Marshman Farms 1989 November 1999
Kevin B. Barrett 41 Director Heavenly View Farm 1996 November 1999
Keith H. Carlisle 55 Director Carlisle Bros., Inc. 1995 November 1998
Vyron M. Chapman 64 Director Chapman Farms, Inc. 1985 November 1997
D. Gilbert Couser 56 Director Shawangunk View Farm 1995 November 1998
Andrew J. Gilbert 38 Director Adon Farms 1995 November 1998
Peter D. Hanks 49 Director Big Green Farms, Inc. 1984 November 1999
Frederick A. Hough 71 Director The Hough Farm 1979 November 1997
Samuel F. Minor 59 Director The Springhouse 1987 November 1999
Carl D. Smith 62 Director Hillacre Farms 1984 November 1999
Thomas E. Smith 62 Director Lazy Acres 1986 November 1998
Gary K. Van Slyke 54 Director VanSlyke's Dairy Farm 1994 November 1997
Joel L. Wenger 66 Director Weng-Lea Farms 1987 November 1999
Edwin C. Whitehead 56 Director White Ayr Farms 1994 November 1997
Christian F. Wolff, Jr. 72 Director Pen-Col Farms 1982 November 1997
William W. Young 44 Director Will-O-Crest Farm 1989 November 1998
</TABLE>
Ralph H. Heffner, Chairman of the Board of Directors, was paid $47,000 and
Robert L. Marshman, Vice Chairman of the Board of Directors, was paid $21,500
for their services for the fiscal year ended June 30, 1997. All directors of the
Company earn an annual retainer fee of $12,000 for participation on the Agway
Inc. Board. Each Board Committee Chairman earns an additional annual retainer
fee of $3,000. Each director of Agway Inc. who is also a member of the Agway
Insurance Company or Telmark Inc. Board earns an additional $400 or $1,000,
respectively. A fee of $200 is also earned by such directors for each day that
they were involved in business for the Company. Expenses of Board members
incurred in connection with Company business are reimbursed by the Company.
Any director of the Company may elect to defer compensation for distribution at
a later date. Deferred amounts are invested in interest-bearing accounts and may
be paid in a lump sum or in annual installments over a period of up to 20 years.
A retirement benefit plan for Board members requires annual payments to retired
or permanently disabled directors who served a minimum of six full years. The
benefit is computed at $250 for each full year of service and is paid to the
director or surviving spouse for a period equal to the years served on the Board
through December 31, 1995, the date the plan was terminated. All earned benefits
as of December 31, 1995, will be paid when due. As of June 30, 1997, the present
value of accumulated benefits under this plan is approximately $500.
(1) All correspondence in relation to operational matters should be addressed
to D. P. Cardarelli, President and Chief Executive Officer, Agway Inc.,
P.O. Box 4933, Syracuse, New York 13221.
57
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - CONTINUED
EXECUTIVE OFFICERS
The executive officers of the Company provide operating control to carry out the
policies established by the Board of Directors and serve at the discretion of
the Board with no guarantee of employment. There are no full-time executive
officers of the Company who are members of the Board of Directors. The principal
occupation of all executive officers of the Company for the past five years,
except for Mr. Schalk and Ms. Smith, has been as an officer or employee of the
Company. The following is a listing of these officers as of July 1, 1997:
<TABLE>
<CAPTION>
Years Served
Name Age Office As Officer
---- --- ------ ----------
<S> <C> <C> <C>
Donald P. Cardarelli 41 President and CEO 6
Robert A. Fischer, Jr. 49 Vice President, Agway Agricultural Products 2
David M. Hayes 53 Senior Vice President, General Counsel and Secretary 16
Stephen H. Hoefer 42 Vice President, Public Affairs 3
Michael R. Hopsicker 32 Vice President, Agway Energy Products 1
Dennis J. LaHood 51 Vice President, Country Products Group 2
Peter J. O'Neill 50 Senior Vice President, Finance & Control,
Treasurer and Controller 8
William L. Parker 50 Vice President and Chief Information Officer 2
Donald F. Schalk 46 Vice President, Agway Retail Services 2
Robert D. Sears 56 Vice President, Membership 3
G. Leslie Smith 54 Vice President and Chief Investment Officer -
</TABLE>
Mr. Cardarelli served as Vice President, Treasurer of the Company from May 1992
to August 1994; as Executive Vice President and Chief Operating Officer from
August 1994 to January 1995; and as General Manager and CEO from January 1995
and President from February 1995 to July 1, 1997.
Mr. Fischer has served as President, Milford Fertilizer Company, since June
1970; as Executive Director, Crops from October 1994 to February 1995; and as
Vice President, Agway Agricultural Products, from February 1995 to July 1, 1997.
Mr. Hoefer served as Director of Government Affairs/Corporate Transportation
Services from June 1992 through June 1994; and as Vice President, Public
Affairs, from June 1994 to July 1, 1997.
Mr. Hopsicker served as Assistant Treasurer, Finance & Control, from October
1991 to November 1992; as Director, Planning & Operations, AEP, from November
1992 to December 1994; as Director, Financial Planning, Finance & Control, from
December 1994 to October 1995; as Director, Business Development, ARS, from
October 1995 to April 1996; and as Vice President, Agway Energy Products, from
April 1996 to July 1, 1997.
Mr. LaHood served as President, ADS, from October 1987 to August 1992; as
Director, Computer and Communication Services, from August 1992 to October 1992;
as President, Country Foods, from October 1992 to October 1994; as Executive
Director, Country Foods and Seed Operations, from October 1994 to February 1995;
and as Vice President, Country Products Group, from February 1995 to July 1,
1997.
Mr. Parker served as Vice President, Systems, for Agway Insurance from July 1985
to January 1993; as Director of New Project Management from January 1993 to
September 1994; as Vice President, Information Services, from September 1994 to
May 1996; and as Vice President, Chief Information Officer and Director of
Information Services, ARS, from May 1996 to July 1, 1997.
Mr. Schalk served as Director of Marketing-Agriculture from January 1990 to July
1993; as Executive Director, Feed, from October 1994 to February 1995; and as
Vice President, Agway Retail Services, from February 1995 to July 1, 1997. For
the period July 1993 to October 1994, Mr. Schalk was a region manager of Harris
Moran Seed Co.
Mr. Sears served as Director of Member Relations from June 1992 through June
1994; and as Vice President, Membership, from June 1994 to July 1, 1997.
Ms. Smith served as Director, Trust Investments, from September 1993 to April
1997;and as Vice President and Chief Investment Officer from May 1997 to July 1,
1997. For the period October 1989 to August 1993, Ms. Smith was Executive
Administrator for TWA Pilots Trust Annuity Plan.
58
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding annual and long-term
compensation for services in all capacities to the Company for the fiscal years
ended June 1997, 1996 and 1995 of those persons who served as (i) the chief
executive officer (CEO) at any time during the fiscal year, and (ii) the other
four most highly compensated executive officers of the Company (other than the
CEO) who were serving in such capacity at June 30, 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION
-------------------
NAME AND ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) COMPENSATION(3)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Donald P. Cardarelli 1997 $387,024 $ 80,000 $ 3,925
President and CEO 1996 336,065 330,638 3,038
1995 236,232 125,000 1,004
Robert A. Fischer, Jr. 1997 220,000 44,000 118,411
Vice President, 1996 200,000 175,090 105,212
Agway Agricultural 1995 156,370 - 104,281
Products
David M. Hayes 1997 190,008 45,500 8,203
Senior Vice President, 1996 187,558 95,000 7,372
General Counsel and 1995 180,908 - 4,110
Secretary
Dennis J. LaHood 1997 178,293 88,000 2,877
Vice President, 1996 165,022 132,000 2,780
Country Products 1995 126,598 - 759
Group
Peter J. O'Neill 1997 250,016 50,000 5,185
Senior Vice President, 1996 250,016 150,000 6,137
Finance and Control, 1995 219,182 75,000 1,990
Treasurer and
Controller
</TABLE>
(1) Salary is used in determining the average annual compensation pursuant to
the Company's Retirement Plan. This amount includes all deferred amounts
under the Agway Inc. Employees' Thrift Investment Plan, Agway Inc.
Employees' Benefit Equalization Plan, and the Milford Fertilizer Company
Employees' Profit Sharing and Savings Plan.
(2) Members of the chief executive officer's staff and other executives
designated by the Company's chief executive officer are eligible for
participation in the Agway Inc. management incentive policy. Contingent
upon each individual's performance as determined by the President and CEO,
the Company's net margin, and other performance factors, each eligible
executive may be paid a bonus. Bonuses are reflected in the fiscal year
earned regardless of payment date.
(3) Amounts shown for certain officers include contributions made by the
Company to the Agway Inc. Employees' Thrift Investment Plan, the Agway
Inc. Employees' Benefit Equalization Plan, the Agway Inc. Employees'
Deferred Compensation Program, and any other payments not appropriately
characterized as salary or bonus. In addition, with respect to Mr.
Fischer, amounts include non-compete payments and payments to the Milford
Fertilizer Company Employees' Profit Sharing and Savings Plan.
59
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION - CONTINUED
EMPLOYEES' RETIREMENT PLAN
The Employees' Retirement Plan of Agway Inc. (the Retirement Plan) is a
non-contributory defined benefit plan covering nearly all employees. The
Retirement Plan provides for retirement benefits, at a normal retirement age of
65, based upon average annual compensation received during the highest 60
consecutive months in the last 10 years of service and credited years of
service. Optional earlier retirement and other benefits are also provided. The
Retirement Plan pays a monthly retirement benefit based on the greater amount
calculated under two formulas. The benefit amount under one formula is subject
to an offset for Social Security benefits.
The following table shows estimated annual benefits payable upon retirement
based on certain 5-year average remuneration levels and years-of-service
classifications. The table was developed assuming a normal retirement at age 65.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
YEARS OF CREDITED SERVICE
- ------------------------------------------------------------------------------------------------------------------------------
REMUNERATION 5 10 15 20 25 30 35
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$150,000 $ 12,000 $ 24,000 $ 36,000 $ 48,000 $ 60,000 $ 72,000 $ 84,000
175,000 14,000 28,000 42,000 56,000 70,000 84,000 98,000
200,000 16,000 32,000 48,000 64,000 80,000 96,000 112,000
225,000 18,000 36,000 54,000 72,000 90,000 108,000 126,000
250,000 20,000 40,000 60,000 80,000 100,000 120,000 140,000
275,000 22,000 44,000 66,000 88,000 110,000 132,000 154,000
300,000 24,000 48,000 72,000 96,000 120,000 144,000 168,000
325,000 26,000 52,000 78,000 104,000 130,000 156,000 182,000
350,000 28,000 56,000 84,000 112,000 140,000 168,000 196,000
375,000 30,000 60,000 90,000 120,000 150,000 180,000 210,000
400,000 32,000 64,000 96,000 128,000 160,000 192,000 224,000
425,000 34,000 68,000 102,000 136,000 170,000 204,000 238,000
450,000 36,000 72,000 108,000 144,000 180,000 216,000 252,000
</TABLE>
Amount under the Retirement Plan may be subject to reduction because of the
limitations imposed under the Internal Revenue Code; however, the extent of any
reduction will vary in individual cases according to circumstances existing at
the time pension payments commence. The Agway Inc. Employees' Benefit
Equalization Plan has been established to provide for the amount of any such
reduction in annual pension benefits under the Retirement Plan.
The benefits shown are computed on a straight life basis and do not reflect an
offset for up to 50% of the Social Security benefits, subject to certain minimum
benefits. Also, the benefits are based on continuing the Plan's benefit formulas
as in effect on June 30, 1997. As of June 30, 1997, the officers and their
respective number of credited years of service under the Retirement Plan were as
follows: Messrs. Cardarelli, 12; Hayes, 24; Lahood, 27; and O'Neill, 8. Mr.
Fischer does not participate in the Retirement Plan nor any other long-term
incentive programs of the company. However, he participates in the Milford
Fertilizer Company Employees' Profit Sharing and Savings Plan. "Compensation" is
defined as the regular salary or wages, as reported in the "Salary" column of
the Summary Compensation Table, which is paid to an employee for services
rendered to Agway Inc., including overtime and vacation pay but excluding
bonuses or special pay.
DIRECTOR COMPENSATION
For a discussion of director compensation, see Item 10, "Directors and Executive
Officers of the Registrant," of this Form 10-K.
60
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION - CONTINUED
COMPENSATION COMMITTEE INTERLOCKS AND INSIDE PARTICIPATION
The Company has a committee of certain directors, including the Chairman and
Vice Chairman of the Board of Directors, which determines the compensation of
Donald P. Cardarelli, President and CEO of Agway Inc. The compensation of the
other executive officers of Agway Inc. is determined by Mr. Cardarelli. Salaries
of all executive officers are included in the annual operating budget, which is
approved by the entire Board of Directors of Agway Inc.
None of the executive officers or directors who participate in establishing
compensation policies had interlocks reportable under Section 402(J) of
Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None of the executive officers of the Company, either individually or in the
aggregate, own greater than 1% of any class of equity securities of Agway Inc.
or its subsidiaries. Agway is an agricultural cooperative and each of its
members, including each director, owns one share of $25 par value common stock.
None of the directors, either individually or in the aggregate, own greater than
1% of any class of equity security of Agway Inc. or its subsidiaries.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Agway's members, including its Directors, are customers of the Company and/or
its subsidiaries. They purchase products from the Company in the normal course
of operating their farm businesses and may sell certain agricultural products to
the Company at market prices. The prices, terms, and conditions of any purchase
or sale transaction are on the same basis for all of the Company's members.
61
<PAGE>
PART IV
<TABLE>
<CAPTION>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE
(A) INDEX TO DOCUMENT LIST LOCATION
--------
(1) FINANCIAL STATEMENTS
<S> <C>
Among the responses to this Item 14(a)(1) are the following
financial statements, which are included in Item 8 on page 26:
(i) Report of Independent Accountants.......................................................... 28
(ii) Consolidated Balance Sheets, June 30, 1997 and 1996........................................ 30
(iii) Consolidated Statements of Operations, fiscal years ended June 30, 1997, 1996 and 1995..... 31
(iv) Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended
June 30, 1997, 1996 and 1995............................................................... 32
(v) Consolidated Statements of Cash Flow, fiscal years ended June 30, 1997, 1996 and 1995...... 33
(vi) Notes to Consolidated Financial Statements................................................. 34
(2) FINANCIAL STATEMENT SCHEDULES
(i) Report of Independent Accountants.......................................................... 63
(ii) The following schedules are presented:
Schedule I - Condensed Financial Information of Registrant, each of the
three years in the period ended June 30, 1997....................... 64
Schedule II - Valuation and Qualifying Accounts, fiscal years ended
June 30, 1997, 1996 and 1995........................................ 68
</TABLE>
Schedules other than these listed above have been omitted as they are not
required, inapplicable, or the required information is included in the
consolidated financial statements or notes thereto.
62
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Agway Inc.:
Our report on the consolidated financial statements of Agway Inc. and
Consolidated Subsidiaries has been included in this Form 10-K of Agway Inc. and
Consolidated Subsidiaries. In connection with our audits of such financial
statements, we have also audited the related financial statement schedules
listed in Item 14(a)(2)(ii) of Part IV of this Annual Report on Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Syracuse, New York
August 22, 1997
63
<PAGE>
ITEM 14(A)(2). FINANCIAL STATEMENT SCHEDULES
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
----------------------------------------------------------
AGWAY INC. (PARENT CO. ONLY)
CONDENSED BALANCE SHEETS
JUNE 30, 1997 AND 1996
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash....................................................................... $ $ 1,029
Trade accounts receivable (including notes receivable of $34,251
and $30,820, respectively), less allowance for doubtful
accounts of $4,156 and $5,312, respectively............................ 92,262 89,975
Inventories................................................................ 50,072 57,849
Other current assets....................................................... 53,231 64,344
------------- -------------
Total current assets................................................... 195,565 213,197
Investments in subsidiaries..................................................... 203,812 184,707
Properties and equipment, net................................................... 46,855 60,188
Net pension asset............................................................... 100,052 85,181
Other assets .................................................................. 1,990 1,449
------------- -------------
Total assets........................................................... $ 548,274 $ 544,722
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 25,006 $ 31,525
Operating advances payable to subsidiaries, net............................ 185,464 167,166
Other current liabilities.................................................. 118,032 131,771
------------- -------------
Total current liabilities.............................................. 328,502 330,462
Other liabilities............................................................... 42,021 41,538
Shareholders' equity............................................................ 177,751 172,722
------------- -------------
Total liabilities and shareholders' equity............................. $ 548,274 $ 544,722
============= =============
</TABLE>
64
<PAGE>
ITEM 14(A)(2). FINANCIAL STATEMENT SCHEDULES - CONTINUED
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
----------------------------------------------------------
AGWAY INC. (PARENT CO. ONLY)
CONDENSED STATEMENTS OF OPERATIONS AND RETAINED MARGIN
FISCAL YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
Net sales and revenues from:
Product sales.......................................... $ 526,611 $ 594,188 $ 500,145
Other services......................................... 12,215 7,890 7,398
------------- ------------- --------------
Total net sales and revenues....................... 538,826 602,078 507,543
Cost and expenses from:
Products and plant operations.......................... 506,838 551,758 472,137
Selling, general and administrative activities......... 49,439 49,473 58,887
Restructuring credit................................... (1,301) (4,179)
------------- ------------- --------------
Total operating costs and expenses................. 556,277 599,930 526,845
------------- ------------- --------------
Operating income (loss)..................................... (17,451) 2,148 (19,302)
Interest expense, net....................................... (876) (786) (241)
Other income, net........................................... 21,862 22,744 24,143
------------- ------------- --------------
Margin (loss) from continuing operations before
income taxes and equity in earnings of subsidiaries ... 3,535 24,106 4,600
Income tax benefit (expense)................................ 7,904 (2,185) (17,995)
------------- ------------- --------------
Income (loss) before equity in earnings of subsidiaries..... 11,439 21,921 (13,395)
Equity in (loss) earnings of unconsolidated subsidiaries.... (769) (10,774) 5,595
------------- ------------- --------------
Margin (loss) from continuing operations.................... 10,670 11,147 (7,800)
Discontinued operations:
Loss from operations, including tax benefit of
$120 and $13,637, respectively..................... (595) (12,360)
Gain on disposal of Hood, net of tax expense
of $1,711.......................................... 2,110
Gain on disposal of Curtice Burns, net of tax
expense of $19,700................................. 4,430
------------- ------------- --------------
Margin (loss) from discontinued operations.... 1,515 (7,930)
------------- ------------- --------------
Net margin (loss) .......................................... 10,670 12,662 (15,730)
Retained margin - July 1.................................... 110,714 102,934 123,570
Dividends .............................................. (4,237) (4,382) (4,785)
Equity in net unrealized losses of marketable securities.... 424 (500) (121)
------------- ------------- --------------
Retained margin - June 30................................... $ 117,571 $ 110,714 $ 102,934
============= ============= ==============
</TABLE>
65
<PAGE>
ITEM 14(A)(2). FINANCIAL STATEMENT SCHEDULES - CONTINUED
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
----------------------------------------------------------
AGWAY INC. (PARENT CO. ONLY)
CONDENSED STATEMENTS OF CASH FLOW
FISCAL YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net cash flows from operating activities.................... $ 7,695 $ 13,162 $ 18,795
Cash flows from investing activities:
Purchases of property, plant and equipment............. 140 (4,588) (10,091)
Other.................................................. (1,827) 3,935 2,582
-------------- ------------- -------------
Net cash flows from investing activities.................... (1,687) (653) (7,509)
Cash flows from financing activities:
Payments on capitalized leases......................... (830) (529) (513)
Cash dividends paid.................................... (4,297) (4,582) (4,963)
Other.................................................. (1,910) (6,369) (5,810)
-------------- ------------- -------------
Net cash flows from financing activities.................... (7,037) (11,480) (11,286)
Net increase in cash and equivalents........................ (1,029) 1,029 0
Cash and equivalents at beginning of year................... 1,029 0 0
-------------- ------------- -------------
Cash and equivalents at end of year......................... $ 0 $ 1,029 $ 0
============== ============= =============
</TABLE>
66
<PAGE>
ITEM 14(A)(2). FINANCIAL STATEMENT SCHEDULES - CONTINUED
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
----------------------------------------------------------
AGWAY INC. (PARENT CO. ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION
(THOUSANDS OF DOLLARS)
BASIS OF PRESENTATION
In the preceding condensed financial statements, which represent the parent
company only, the Company's investment in subsidiaries is stated at cost plus
equity in undistributed earnings of subsidiaries since the date of acquisition.
These financial statements should be read in conjunction with the Company's
consolidated financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to conform prior year financial
statements with the current year presentation.
INVENTORIES
Inventories at June 30 consist of the following:
1997 1996
------------- -------------
Raw materials.................... $ 2,144 $ 7,787
Finished goods................... 44,895 45,706
Goods in transit and supplies.... 3,033 4,356
------------- -------------
$ 50,072 $ 57,849
============= =============
DEBT
Debt capital for Agway is supplied by its wholly owned subsidiary, AFC, which
secures financing through bank borrowings and issuance of corporate debt
instruments. The payment of principal and interest on this debt is
unconditionally guaranteed by Agway. The total debt of AFC guaranteed by Agway
is disclosed in Note 11.
RELATED PARTY TRANSACTIONS
Transactions between Agway Inc. and its unconsolidated subsidiaries are as
follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30
----------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales and revenues...................................... $ 48,521 $ 69,436 $ 42,291
Product and plant operation expenses........................ 8,960 10,933 11,523
Recovery of selling, general and administrative
expenses............................................... 19,207 24,821 27,696
Interest expense, net....................................... 6,993 4,775 4,710
</TABLE>
67
<PAGE>
ITEM 14(A)(2). FINANCIAL STATEMENT SCHEDULES - CONTINUED
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -------------------------------------------------------------------------------------------------------------------
ADDITIONS
------------------------
BALANCE CHARGED TO CHARGED TO BALANCE
AT BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- -------------------------------------------------------------------------------------------------------------------
for the year ended June 30, 1997
- -------------------------------------------------------------------------------------------------------------------
Reserves deducted in the balance sheet from assets
to which they apply:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful notes and accounts
receivable (current)...................... $ 10,062 $ 623 $ 2,821(a) $ 7,864
========= ========= ======== ========== =========
Allowance for doubtful leases receivable...... $ 19,776 $ 9,718 $ 5,480(a) $ 24,014
========= ========= ======== ========== =========
Inventory reserve............................. $ 2,547 $ 385 $ 570(b) $ 2,362
========= ========= ======== ========== =========
Surplus property reserve...................... $ 1,428 $ 66 $ 638(c) $ 856
========= ========= ======== ========== =========
Income tax valuation allowance................ $ 881 $ (881) $ 0
========= ========= ======== ========= =========
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
for the year ended June 30, 1996
- -------------------------------------------------------------------------------------------------------------------
Reserves deducted in the balance sheet from assets to which they apply:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful notes and accounts
receivable (current)...................... $ 9,716 $ 3,993 $ 3,647(a) $ 10,062
========= ========= ======== ========== =========
Allowance for doubtful leases receivable...... $ 15,331 $ 7,000 $ 2,555(a) $ 19,776
========= ========= ======== ========== =========
Inventory reserve............................. $ 2,914 $ 367(b) $ 2,547
========= ========= ======== ========== =========
Surplus property reserve..................... $ 660 $ 1,024 $ 256(c) $ 1,428
========= ========= ======== ========== =========
Income tax valuation allowance................ $ 847 $ 34 $ 881
========= ========= ======== ========== =========
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
for the year ended June 30, 1995
- -------------------------------------------------------------------------------------------------------------------
Reserves deducted in the balance sheet from assets
to which they apply:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful notes and accounts
receivable (current)...................... $ 12,656 $ 2,556 $ 5,496(a) $ 9,716
========= ========= ======== ========== =========
Allowance for doubtful leases receivable...... $ 12,434 $ 6,813 $ 3,916(a) $ 15,331
========= ========= ======== ========== =========
Inventory reserve............................. $ 0 $ 2,914 $ 2,914
========= ========= ======== ========== =========
Surplus property reserve...................... $ 0 $ 660 $ 660
========= ========= ======== ========== =========
Income tax valuation allowance................ $ 0 $ 847 $ 847
========= ========= ======== ========== =========
</TABLE>
(a) Accounts charged off, net of recoveries.
(b) Difference between cost and market of applicable inventories.
(c) Locations sold.
68
<PAGE>
ITEM 14(B). REPORTS ON FORM 8-K
No reports on Form 8-K for the three months ended June 30,
1997, have been filed.
ITEM 14(C)(1). EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION
REGULATION S-K
(i) The following required exhibits are hereby incorporated by
reference to previously filed Registration Statements on
Forms S-1, S-2, S-3, or S-7 or on Form 10-Q/A filed on the
dates as specified:
ARTICLES OF INCORPORATION AND BY-LAWS
3(a) - Certificate creating series of preferred stock of
Agway Inc. dated July 5, 1977, filed by reference
to Exhibit 3(a)(5) of Registration Statement on
Form S-1, File No. 2-59896, dated September 16,
1977.
3(b) - Certificate creating series of Honorary Member
Preferred Stock of Agway Inc. dated June 15, 1981,
filed by reference to Exhibit 1(c) of the
Registration Statement on Form S-1,File No.2-73928,
dated September 3, 1981.
INSTRUMENT DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
4(a) - The Indenture dated as of October 1, 1974 between
Agway Inc. and First Trust and Deposit Company of
Syracuse, New York, Trustee, including forms of
Subordinated Debentures (Minimum 8% per annum) due
July 1, 1999, and Subordinated Debentures (Minimum
8.5% per annum) due July 1, 1999, filed by
reference to Exhibit 4 of the Registration
Statement (Form S-7), File No. 2-52179 dated
November 21, 1974.
4(b) - The Indenture dated as of September 1, 1976
between Agway Inc. and First Trust and Deposit
Company of Syracuse, New York, Trustee, including
forms of Subordinated Debentures (Minimum 7% per
annum) due July 1, 2001, and Subordinated
Debentures (Minimum 7.5% per annum) due July 1,
2001, filed by reference to Exhibit 4 of the
Registration Statement (Form S-1), File No.
2-57227, dated September 21, 1976.
4(c) - The Indenture dated as of September 1, 1978
between Agway Inc. and First Trust and Deposit
Company of Syracuse, New York, Trustee, including
forms of Subordinated Debentures (Minimum 7.5% per
annum) due July 1, 2003, and Subordinated
Debentures (Minimum 8% per annum) due July 1, 2003,
filed by reference to Exhibit 4 of the Registration
Statement (Form S-1), File No. 2-62549 dated
September 8, 1978.
4(d) - The Indenture dated as of August 25, 1982,
between Agway and Key Bank of Central New York of
Syracuse, New York, Trustee, including forms of
Subordinated Money Market Certificates (Minimum 9%
per annum) due October 31, 1997, and Subordinated
Money Market Certificates (Minimum 9 1/2% per
annum) due October 31, 1997, filed by reference to
Exhibit 4 of the Registration Statement (Form S-1),
File No. 2-79047, dated August 27, 1982.
4(e) - The Indenture dated as of September 1, 1985,
between Agway and Key Bank of Central New York of
Syracuse, New York, Trustee, including forms of
Subordinated Money Market Certificates (Minimum 7
1/2% per annum) due October 31, 2005, and
Subordinated Member Money Market Certificates
(Minimum 8% per annum) due October 31, 2005, filed
by reference to Exhibit 4 of the Registration
Statement (Form S-2), File No. 2-99905, dated
August 27, 1985.
4(f) - The Indenture dated as of September 1, 1986,
between AFC and Key Bank of Central New York of
Syracuse, New York, Trustee, including forms of
Subordinated Member Money Market Certificates
(Minimum 6% per annum) due October 31, 2006, and
Subordinated Money Market Certificates (Minimum 5
1/2% per annum) due October 31, 2006, filed by
reference to Exhibit 4 of the Registration
Statement (Form S-3), File No.
33-8676, dated September 11, 1986.
69
<PAGE>
ITEM 14(C)(1). EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION
REGULATION S-K - CONTINUED
4(g) - The Supplemental Indenture dated as of October 1,
1986, among AFC, Agway Inc. and Key Bank of Central
New York of Syracuse, New York, Trustee, including
forms of subordinated debt securities filed by
reference to Exhibit 4 of Registration Statement on
Form S-3, File No. 33-8676, dated September 11,
1986.
4(h) - The Indenture dated as of August 24, 1987,
between AFC and Key Bank of Central New York of
Syracuse, New York, Trustee, including forms of
Subordinated Member Money Market Certificates
(Minimum 7% per annum) due October 31, 1998, and
Subordinated Member Money Market Certificates
(Minimum 6 1/2% per annum) due October 31, 2008,
and Subordinated Money Market Certificates (Minimum
6 1/2% per annum) due October 31, 1998, and
Subordinated Money Market Certificates (Minimum 6%
per annum) due October 31, 2008, filed by reference
to Exhibit 4 of Registration Statement on Form S-3,
File No. 33-16734, dated August 31, 1987.
4(i) - The Indenture dated as of August 23, 1988,
between AFC and Key Bank of Central New York of
Syracuse, New York, Trustee, including forms of
Subordinated Member Money Market Certificates
(Minimum 9 1/2% per annum) due October 31, 2000,
and Subordinated Member Money Market Certificates
(Minimum 9% per annum) due October 31, 2008, and
Subordinated Money Market Certificates (Minimum 9%
per annum) due October 31, 2000, and Subordinated
Money Market Certificates (Minimum 8 1/2% per
annum) due October 31, 2008, filed by reference to
Exhibit 4 of Registration Statement on Form S-3,
File No. 33-24093, dated August 31, 1988.
4(j) - The Supplemental Indenture dated as of October
14, 1988, among AFC, Agway Inc. and Key Bank of
Central New York, National Association, Trustee,
amending the Indentures dated as of August 23,
1988, and August 24, 1988, filed on October 18,
1988.
4(k) - The Indenture dated as of August 23, 1989, among
AFC, Agway Inc. and Key Bank of Central New York of
Syracuse, New York, Trustee, including forms of
Subordinated Money Market Certificates and
Subordinated Member Money Market Certificates,
filed by reference to Exhibit 4 of Registration
Statement on Form S-3, File No. 33-30808, dated
August 30, 1989.
4(1) - Agway Board of Directors resolutions authorizing
the issuance of Honorary Member Preferred Stock,
Series HM and Membership Common Stock and
authorizing AFC to issue Money Market Certificates
under Indentures dated as of August 23, 1989, filed
herein.
4(m)- AFC Board of Directors resolutions authorizing the
issuance of Money Market Certificates under
Indentures dated as of August 23, 1989, filed
herein.
4(n) - The Supplemental Indenture dated as of August 24,
1992, among AFC, Agway Inc. and Key Bank of New
York, Trustee, amending the Indenture dated as of
August 23, 1989, filed by reference to Exhibit 4 of
Registration Statement on Form S- 3, File No.
33-52418, dated September 25, 1992.
LETTER ON CHANGE IN ACCOUNTING PRINCIPLES
18 - Letter on change in accounting principles, filed by
reference to Form 10-Q/A filed for the second
quarter ending December 31, 1996.
70
<PAGE>
ITEM 14(C)(1). EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION
REGULATION S-K - CONTINUED
(ii)The following exhibits are filed as a separate section of
this report:
3 - AGWAY, INC. BY-LAWS AS AMENDED JUNE 18, 1997
10 - MATERIAL CONTRACTs
(a) Directors - Deferred Compensation Agreement
(b) Board Officers - Deferred Compensation
Agreement
12 - STATEMENT RE COMPUTATION OF RATIOS
13 - ANNUAL REPORT TO SECURITY HOLDERS, FORM 10-Q OR
QUARTERLY REPORT TO SECURITY HOLDERS
21 - SUBSIDIARIES OF THE REGISTRANT
23 - CONSENTS OF EXPERTS AND COUNSEL
27 - FINANCIAL DATA SCHEDULE*
99 - ADDITIONAL EXHIBITS
The Annual Report on Form 11-K for year ended
June 30, 1997 of the Agway Inc. Employees' Thrift
Investment Plan.
* Included with electronic filing only.
71
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By /s/ DONALD P. CARDARELLI
------------------------
DONALD P. CARDARELLI
PRESIDENT, CEO AND
GENERAL MANAGER
(PRINCIPAL EXECUTIVE OFFICER)
Date August 25, 1997
-------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ------ ----
<S> <C> <C>
/s/ Donald P. Cardarelli President, CEO and August 25, 1997
(DONALD P. CARDARELLI) General Manager
(Principal Executive Officer)
/s/ Peter J. O'Neill Senior Vice President, August 25, 1997
(PETER J. O'NEILL) Finance & Control,
Treasurer and Controller
(Principal Financial Officer
& Principal Accounting Officer)
/s/ Ralph H. Heffner Chairman of the August 25, 1997
(RALPH H. HEFFNER) Board and Director
/s/ Robert L. Marshman Vice Chairman of the August 25, 1997
(ROBERT L. MARSHMAN) Board and Director
/s/ Kevin B. Barrett Director August 25, 1997
(KEVIN B. BARRETT)
/s/ Keith H. Carlisle Director August 25, 1997
(KEITH H. CARLISLE)
/s/ Vyron M. Chapman Director August 25, 1997
(VYRON M. CHAPMAN)
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ D. Gilbert Couser Director August 25, 1997
(D. GILBERT COUSER)
/s/ Andrew J. Gilbert Director August 25, 1997
(ANDREW J. GILBERT)
/s/ Peter D. Hanks Director August 25, 1997
(PETER D. HANKS)
/s/ Frederick A. Hough Director August 25, 1997
(FREDERICK A. HOUGH)
/s/ Samuel F. Minor Director August 25, 1997
(SAMUEL F. MINOR)
/s/ Carl D. Smith Director August 25, 1997
(CARL D. SMITH)
/s/ Thomas E. Smith Director August 25, 1997
(THOMAS E. SMITH)
/s/ Gary K. Van Slyke Director August 25, 1997
(GARY K. VAN SLYKE)
/s/ Joel L. Wenger Director August 25, 1997
(JOEL L. WENGER)
/s/ Edwin C. Whitehead Director August 25, 1997
(EDWIN C. WHITEHEAD)
/s/ Christian F. Wolff, Jr. Director August 25, 1997
(CHRISTIAN F. WOLFF, JR.)
/s/ William W. Young Director August 25, 1997
(WILLIAM W. YOUNG)
</TABLE>
73
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
As of the date of this filing on Form 10-K, the Registrant has not had available
to be sent to security holders the annual report for fiscal year ended June 30,
1997. Subsequent to the filing of the annual report on Form 10-K, the Registrant
shall furnish security holders with annual reports.
74
<PAGE>
AGWAY INC.
FORM 10-K
JUNE 30, 1997
EXHIBIT INDEX
Exhibit
Number Title
- ------- -----
( 3) Agway, Inc. By-Laws as amended June 18, 1997
(10) Material contracts
(a) Directors - Deferred Compensation Agreement
(b) Board Officers - Deferred Compensation Agreement
(12) Statements re computation of ratios
(13) Annual report to security holders, Form 10-Q or
quarterly report to security holders
(21) Subsidiaries of registrant
(23) Consent of experts and counsel
(27) Financial data schedule*
(99) Additional exhibits
Annual report on Form 11-K for the year ended June 30, 1997 of
the Agway Inc. Employees' Thrift Investment Plan
*Included with electronic filing only.
EXHIBIT 3
<PAGE>
BY-LAWS
of
AGWAY INC.
As Amended to June 18, 1997
---------------------------
GENERAL
1.1 Certificate of Incorporation - The certificate of incorporation
-----------------------------
of the corporation is hereby made a part of these by-laws and all matters
hereinafter contained in these by-laws shall be subject to such provisions in
regard thereto, if any, as are set forth in the certificate of incorporation.
All references in these by-laws to the certificate of incorporation shall be
construed to mean the certificate of incorporation as from time to time amended.
The name and purposes of the corporation shall be as set forth in the
certificate of incorporation.
1.2 Definitions - As used in these by-laws, the following terms have
-----------
the following meanings:
(a) "Person" means any individual, partnership, firm,
corporation, association, or any other form of business organization.
(b) "Farmer" means any person who produces agricultural products
for sale.
(c) "Member" means any person meeting the qualifications
specified in section 2.1 of these by-laws; and for purposes of
sections 9.1-9.4 of these by-laws, also includes any contract patron.
(d) "Contract Patron" means any person who is a party to a
contract with the corporation providing for the payment of patronage
refunds authorized by section 9.6 of these by-laws.
MEMBERSHIP
2.1 Members -The following persons shall be members of the corporation
-------
:
(a) Any farmer or cooperative organization of farmers which:
- 1 -
<PAGE>
(1) is a record holder of one share of $25 par value
membership common stock of this corporation, and
(2) has purchased farm supplies or farm services or has
marketed farm products through this corporation since the
beginning of the preceding fiscal year of the corporation.
A cooperative organization of farmers, which acts only as a local
representative of the corporation in the distribution of farm supplies, shall
not thereby be qualified for membership.
2.2 Non-Members - All persons or organizations, not qualified for
-----------
membership under section 2.1 of these by-laws, who shall purchase from or market
through the corporation shall be non-members of the corporation, and, except in
the case of contract patrons, shall not be entitled to share in refunds based on
their patronage.
2.3 Privileges of Membership - Each member shall have the following
-------------------------
rights and privileges:
(a) As a stockholder, to participate in and vote at meetings
of stockholders as provided in section 2.4 of these by-laws.
(b) To participate in patronage refunds as provided in
sections 9.1-9.5 of these by-laws.
(c) To attend and participate in local membership meetings,
and to participate in the selection of member committees or
committeemen.
(d) To be eligible to serve on local member committees or on
the Agway council or on the board of directors of this corporation.
2.4 Voting -
------
(a) All voting rights shall be vested in the $25 par value
membership common stock of the corporation, the record holder of which
shall be entitled to only one vote to be cast by the holder thereof in
person, or by proxy, at any meeting of stockholders; each holder of
membership common stock shall be entitled to only one vote regardless
of the number of shares held.
(b) Except as otherwise provided by the laws of Delaware,
the certificate of incorporation or these by-laws, all actions taken
-2-
<PAGE>
at a meeting of stockholders shall be determined by a majority vote at
a meeting at which a quorum is present.
2.5 Representative of a Member or Stockholder - If any member or
--------------------------------------------
stockholder is other than a natural person, such member or stockholder may be
represented by any officer thereof or by any other individual duly authorized by
a writing executed and filed with the secretary of the corporation.
2.6 Non-Transferability of Membership - No membership shall be
-----------------------------------
assigned or transferred either voluntarily or involuntarily or by operation of
law.
2.7 Termination of Membership - A membership shall be terminated:
-------------------------
(a) By transfer or the tender for purchase by the corporation
by a member of his share of $25 par value membership common stock of
the corporation, such termination to be effective upon the recording
of such transfer or purchase upon the stock records of the
corporation.
(b) By the call for redemption by the corporation of the
member's share of $25 par value membership common stock of the
corporation because the person has ceased to be a member of the
corporation as defined in section 2.1 of these by-laws.
(c) By the call for redemption by the corporation of the
member's share of $25 par value membership common stock of the
corporation because such redemption is necessary to maintain the
status of the corporation as an agricultural cooperative under
applicable law.
2.8 Member Committees - Members shall be eligible to attend meetings
------------------
at which those members doing business with the corporation and residing within a
geographical area shall select a member committee from among their own number.
Member committees shall select a chairman, vice chairman, and secretary, and
shall keep minutes of their meetings and actions taken. Each member committee so
chosen shall function with respect to nomination procedures as specified in
section 5.3 of these by-laws, and shall act in an advisory capacity in
representing members in their relationships with this corporation, its
subsidiaries and qualified agencies.
- 3 -
<PAGE>
2.9 Membership Common Stock - The ownership of membership common
------------------------
stock of the corporation is limited to one share per holder.
CAPITAL STOCK AND PATRONS' INTERESTS
3.1 Capital Stock - The amount of the authorized capital stock and
--------------
the par value of the shares shall be as fixed in the certificate of
incorporation. The issuance of any shares of capital stock of any class shall be
authorized by the board of directors by resolution fixing the consideration for
such issue.
3.2 Certificates of Stock - Certificates of stock will be signed in
----------------------
the name of the corporation by the president or a vice-president and the
treasurer or an assistant treasurer or the secretary or an assistant secretary.
Such signatures may be facsimile. Certificates shall be numbered and registered
in the order in which they are issued and the seal of the corporation shall be
affixed thereto.
Notwithstanding anything to the contrary in this section 3.2
of these by-laws, certificates of stock shall be in such form as shall, in
conformity to law, be prescribed from time to time by the board of directors.
3.3 Loss of Certificate - In case of the alleged loss or destruction
--------------------
or of the mutilation of a certificate of stock, a duplicate certificate may be
issued in place thereof, upon such terms in conformity with law as the board of
directors may prescribe. The corporation may issue a new certificate of stock in
the place of any certificate theretofore issued by it, alleged to have been
lost, stolen or destroyed, and the corporation may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of the lost,
stolen or destroyed certificate, or his legal representative, to give the
corporation (I) an affidavit (in form and substance satisfactory to the
corporation) describing the loss, theft or destruction of any such certificate,
and/or (ii) a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
3.4 Transfer of Shares of Stock - Shares of stock of the corporation
---------------------------
shall be transferable only on the books of the corporation by assignment in
writing by the owner thereof, his attorney legally constituted, or his legal
representatives, upon surrender and cancellation of the certificates therefor
and, in the case of common stock, only with the written consent of the
corporation, endorsed on the certificate of stock. Shares of common stock may
not be transferred except absolutely. The
- 4 -
<PAGE>
corporation and its transfer agents and registrars, if any, shall be entitled to
treat the holder of record of any share or shares of stock as the absolute owner
thereof for all purposes except as otherwise expressly provided by the laws of
the State of Delaware.
3.5 Redemption or Purchase of Shares of Stock - Whenever any stock is
-----------------------------------------
called by the corporation for redemption, or whenever any $25 par value
membership common stock held by a person who has ceased to be a member is
presented by the holder for sale to the corporation, the certificates
representing such stock duly endorsed for transfer and bearing any appropriate
transfer stamps shall be delivered at the principal office of the corporation or
at such bank or trust company as may be specified in the call by the
corporation. Payment for any stock so delivered shall be made by the corporation
promptly after such delivery. After call duly made in accordance with the
foregoing provisions (unless such stock shall have been duly delivered as
required by such call and the corporation shall have failed to make payment
therefor within one week after such delivery), the stock covered by such call
shall be deemed to have been purchased by the corporation on the date fixed by
the call for redemption and the holder thereof shall not thereafter be entitled
to vote in respect to such stock, or otherwise to enjoy any of the privileges
and benefits of ownership thereof, but only to receive, after delivery of the
certificates therefor, payment for such stock as hereinbefore provided.
3.6 Record Date - The board of directors may fix in advance a date
------------
not exceeding sixty (60) nor less than ten (10) days preceding the date of any
meeting of the stockholders, or not exceeding sixty (60) days preceding the date
for payment of any dividend, as a record date for the determination of the
stockholders entitled to notice of, and to vote at any such meeting or entitled
to receive a payment of any such dividend; and in such case such stockholders
and only such stockholders as shall be stockholders of record on the date so
fixed shall be entitled to such notice of, and to vote at such meeting, or to
receive payment of such dividend, notwithstanding any transfer of any stock on
the books of the corporation after such record date so fixed.
3.7 Rights, Limitations and Priorities of Patrons' Interest-
--------------------------------------------------------
(a) Revolving Fund Certificates - Revolving fund certificates
----------------------------
issued by any predecessor corporation in lieu of cash patronage
refunds, or by this corporation in exchange for such certificates
issued by a predecessor corporation, shall be redeemed at face
amount,
- 5 -
<PAGE>
fully or pro rata, in the order of issuance by year if and when the
board of directors in its sole discretion considers the funds
represented thereby no longer necessary for corporate purposes. In the
event of dissolution, such certificates shall be retired in full or on
a pro rata basis. No interest shall be paid on revolving fund
certificates.
(b) Retained Margins and Patrons' Equities - Retained margins
----------------------------------------
(any net margin retained by the corporation or any predecessor and
apportioned to patrons on the books of the corporation or of
predecessor corporations, but not allocated to patrons in the form of
any written notice) and patrons' equities (retained net margin of the
corporation or any predecessor allocated to patrons in the form of a
written notice other than a revolving fund certificate) constitute
the residual equity of the corporation which, subject to reduction by
losses, shall be held for the benefit of patrons, past as well as
present, having an interest therein pursuant to the provisions of
these by-laws or the by-laws of any predecessor corporation. Retained
margins and patrons' equities entitle the holders thereof to the same
rights and privileges, and neither shall enjoy any preference over
the other. No person shall be entitled to any distribution of assets
with respect of retained margins or patrons' equities prior to the
dissolution of the corporation. In the event of dissolution, after
payment in full of all debts and of any amounts to which the holders
of preferred stock, revolving fund certificates and common stock
shall be entitled pursuant to the provisions of these by-laws, the
remaining assets of the corporation shall be distributed
proportionately among those persons having interests in retained
margins and patrons' equities and in accordance with such interests
as reflected on the books of the corporation and predecessor
corporations.
3.8 6% Cumulative Preferred Stock, Series A - Agway, Inc. 6%
--------------------------------------------
Cumulative Preferred Stock, Series A, issued in connection with the merger of
Agway local store corporations into Agway, Inc. after September 22, 1992 will
not be subject to transfer until July 1, 1997 and thereafter.
MEETINGS OF STOCKHOLDERS
4.1 Annual Meeting - A regular annual meeting of stockholders shall
--------------
be held in the City of Syracuse, State of New York, on the first Wednesday of
the month of December, or on such
- 6 -
<PAGE>
other date and at such other place as may be designated by resolution of the
board of directors.
4.2 Notice of Annual Meeting - Notice of the time and place of the
--------------------------
annual meeting shall be given all stockholders entitled to vote not less than
ten (10) days nor more than sixty (60) days before the time of such meeting.
4.3 Special Meeting - A special meeting of stockholders may be
----------------
called at any time by the chairman, or in his absence by the vice-chairman, or
by a majority of the directors or by one percent of the membership by petition
in writing. Only such business may be transacted as is specified in the notice
of the special meeting.
4.4 Notice of Special Meetings - Notice of special meetings shall be
---------------------------
given in the same manner as for the annual meeting and in addition shall state
the purpose for which the meeting is called.
4.5 Adjournment and Notice - Any meeting may be adjourned because of
----------------------
the absence of a quorum or for any other reason. If the adjournment is for less
than thirty (30) days, no new notice need be given if the time and place of the
adjourned meeting is announced at the time of adjournment. If the adjournment is
more than thirty (30) days, notice shall be given as required for the original
meeting.
4.6 List of Stockholders - A complete list of the stockholders
---------------------
entitled to vote at any election of directors, arranged in alphabetical order,
and showing the address of each stockholder and stating that each stockholder
owns one share shall be prepared at least ten (10) days before such election by
the officer in charge of the stock ledger of the corporation. Such list shall be
open to the examination of any stockholder during ordinary business hours, for a
period of at least ten (10) days prior to the election, at a place within the
city where the election is to be held, which place shall be specified in the
notice of the meeting, and such list shall be produced and kept at the time and
place of election during the whole time thereof, and subject to the inspection
of any stockholder who may be present.
4.7 Quorum - The presence in person at any meeting of stockholders of
------
the greater of (I) 100 persons each holding a share of $25 par value membership
common stock, or (ii) the minimum number of stockholders required under
applicable law to establish a quorum, shall constitute a quorum for the
transaction of business. The stockholders present at a duly called and held
- 7 -
<PAGE>
meeting at which a quorum is present may continue to do business until
adjournment notwithstanding withdrawal of stockholders.
4.8 Inspectors of Election - There shall be elected each year one
-----------------------
Inspector of Election from each of the districts holding nominating meetings for
the election of directors. Said Inspectors shall serve at the annual meeting of
the corporation following said nominating meetings. The election of each of the
Inspectors of Election shall be by a majority of the votes cast at each of said
nominating meetings, and the weighted-vote procedure set forth in section 5.3 of
these by-laws shall obtain with respect to the election of said Inspectors of
Election. Nominations for Inspector of Election shall be made from the floor at
said nominating meetings.
If less than two of the Inspectors of Election elected pursuant
to the provisions of the above paragraph are present at the annual meeting for
which they are elected, the Chairman shall appoint one or two members, as
required, to serve as Inspectors of Election at said annual meeting so that
there shall be at least two members serving as Inspectors of Election at each
annual meeting.
4.9 Notice of Stockholder Business - At an annual meeting of the
--------------------------------
stockholders, only such business shall be conduct ed as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be (a) specified in the notice of meeting (or any supplement there
to) given by or at the direction of the board of directors, (b) otherwise
properly brought before the meeting by or at the direction of the board of
directors, or (c) otherwise properly be requested to be brought before the
meeting by a stockholder. For business to be properly requested to be brought
before an annual meeting by a stockholder, the stockholder must have given
timely notice thereof in writing to the secretary of the corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation not less than ninety (90)
days prior to the meeting; provided, however, that in the event that the date of
the meeting is not publicly announced by the corporation by mail, press release
or otherwise more than ninety (90) days prior to the meeting, notice by the
stockholder to be timely must be delivered to the secretary of the corporation
not later than the close of business on the tenth day following the day on which
such an nouncement of the date of the meeting was communicated to stock holders.
A stockholder's notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (a) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conduct ing such business at the annual meeting, (b) the name and address,
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<PAGE>
as they appear on the corporation's books, of the stock holder proposing such
business, (c) the class and number of shares of the corporation which are
beneficially owned by the stockholder, and (d) any material interest of the
stockholder in such business. Notwithstanding anything in the by-laws to the
contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in section 4.9 of these by-laws. The
chairman of an annual meeting shall, if the facts warrant, determine and declare
to the meeting that business was not properly brought before the meeting and in
accordance with the provisions of section 4.9 of these by-laws, and if he should
so determine, he shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted.
4.10 Director Nominations - Nominations for the election of directors
--------------------
may be made by the board of directors or a committee appointed by the board of
directors or by any stock holder entitled to vote in the election of directors
generally or by the secretary of the corporation pursuant to section 5.3 of
these by-laws. However, any stockholder entitled to vote in the election of
directors generally may nominate one or more persons for election as directors
at a meeting only if written notice of such stockholder's intent to make such
nomination or nominations has been given, either by personal delivery or by
United States mail, postage prepaid, to the secretary of the corporation not
later than (I) with respect to an election to be held at an annual meeting of
stockholders, ninety (90) days prior to the anniversary date of the immediately
preceding annual meeting, and (ii) with respect to an election to be held at a
special meeting of stockholders for the election of directors, the close of
business on the tenth day following the date on which notice of such meeting is
first given to stockholders. Each such notice shall set forth: (a) the name and
address of the stockholder who intends to make the nomination and of the person
or persons to be nominated; (b) a representation that the stockholder is a
holder of record of stock of the corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; (c) a description of all arrangements
or understandings between the stockholder and each nominee and any other person
or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (d) such other information
regarding each nominee proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission; and (e) the consent of each nominee to serve
as a director of the corporation if so elected. The chairman of the meeting may
refuse to acknowledge the nomination of a person not made in compliance with the
foregoing procedure.
- 9 -
<PAGE>
4.11 Order of Business - Unless otherwise determined by the board of
-----------------
directors prior to the meeting, the chairman of the stockholders' meeting shall
determine the order of business and shall have the authority in his discretion
to regulate the conduct of any such meeting, including, without limitation, by
imposing restrictions on the persons (other than stockholders of the corporation
or their duly appointed proxies) who may attend any such stockholders' meeting
based upon any determination by the chairman, in his sole discretion, that any
such person has unduly disrupted or is likely to disrupt the proceedings
thereat, and the circumstances in which any person may make a statement or ask
questions at any stockholders' meeting.
DIRECTORS
5.1 Number and Qualification - The board of directors shall consist
-------------------------
of eighteen (18) members until the regular annual meeting of stockholders is
held in 1995; thereafter, the board of directors shall consist of seventeen (17)
members until the regular annual meeting of stockholders is held in 1997;
immediately after the 1997 regular annual stockholders meeting the board of
directors shall consist of fifteen (15) members. Directors shall be members of
the corporation, except that members who are employees or franchised
representatives of the corporation shall not be eligible for election as
directors.
5.2 Nomination Districts - The territory in which the corporation
---------------------
operates shall be divided into nomination districts, seventeen (17) in number,
described as follows:
District 1. State of New York, counties of Cattaraugus
(except for southeast section), Chautauqua, Erie, Genesee,
Niagara, Orleans and Wyoming and Towns of Clarkson, Gates,
Greece, Hamlin, Ogden, Parma and Sweden located in the county
of Monroe; Commonwealth of Pennsylvania, northeast corner of
the county of Erie and the northern section of county of
Warren.
District 2. State of New York, counties of Allegany,
Cattaraugus (southeast section), Chemung, Livingston, Monroe
(except for the Towns of Clarkson, Gates, Greece, Hamlin,
Ogden, Parma and Sweden), Ontario, Schuyler, Seneca (except
for southern section), Steuben, Wayne and Yates; Commonwealth
of Pennsylvania, northern section of county of McKean and
northwest section of county of Potter.
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District 3. State of New York, counties of Broome, Cayuga,
Chenango (except for northwest section), Cortland, (except
for northeast section), Delaware (western half), Onondaga
(southern half), Seneca (southern section), Tompkins and the
Town of Gilbertsville located in the county of Otsego.
District 4. State of New York, counties of Chenango
(northwest section), Cortland (northeast section), Delaware
(eastern half), Herkimer (southern half), Madison, Oneida,
Onondaga (except for the southern half), Oswego and Otsego
(except for the Town of Gilbertsville).
District 5. State of New York, counties of Clinton, Essex,
Franklin, Hamilton (northern half), Herkimer (northern half),
Jefferson, Lewis and St. Lawrence.
District 6. State of New York, counties of Fulton, Hamilton
(southern half), Montgomery, Rensselaer, Saratoga,
Schenectady, Warren and Washington; State of Vermont,
counties of Addison, Chittenden, Franklin, Grand Isle,
Lamoille, Rutland and Washington.
District 7. Commonwealth of Pennsylvania, counties of Berks,
Carbon, Columbia, Dauphin, Lehigh, Lancaster, Lebanon,
Luzerne (southern section), Monroe (southern half), Montour,
Northampton, Northumberland, Schuylkill, Snyder, and Union.
District 8. Intentionally left blank.
District 9. States of Maine and New Hampshire; State of
Vermont, counties of Bennington, Caledonia, Essex, Orange,
Orleans, Windham and Windsor.
District 10. States of Connecticut and Rhode Island;
Commonwealth of Massachusetts; State of New York, counties of
Albany, Columbia, Dutchess, Greene, Putnam and Schoharie.
District 11. State of New York, New York City and Long Island
counties, and counties of Orange, Rockland, Sullivan (except
for the Towns of Callicoon, Cochecton, Delaware and Fremont),
Ulster and Westchester.
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District 12. Commonwealth of Pennsylvania, counties of
Bradford, Lackawanna, Luzerne (northern section), Monroe
(northern half), Pike, Sullivan, Susquehanna, Wayne and
Wyoming; State of New York, county of Tioga, and the Towns of
Callicoon, Cochecton, Delaware and Fremont located in the
county of Sullivan.
District 13. Commonwealth of Pennsylvania, counties of
Cameron, Centre, Clearfield, Clinton, Columbia, Elk, Luzerne
(southern section), Lycoming, McKean (except for northern
section), Montour, Northumberland, Potter (except for north
west section), Snyder, Tioga and Union.
District 14. Commonwealth of Pennsylvania, counties of
Armstrong, Beaver, Butler, Clarion, Crawford, Erie (except
for northeast corner), Forest, Jefferson, Lawrence, Mercer,
Venango and Warren (except for northern section); and
northern Ohio.
District 15. Commonwealth of Pennsylvania, counties of
Allegheny, Bedford, Blair, Cambria, Fayette, Fulton, Greene,
Huntingdon, Indiana, Somerset, Washington, and Westmoreland;
State of Maryland, counties of Allegany and Garrett; southern
Ohio and northern West Virginia.
District 16. State of New Jersey.
District 17. State of Delaware; State of Maryland, counties
of Caroline, Cecil, Dorchester, Kent, Queen Annes, Somerset,
Talbot, Wicomico and Worcester; Commonwealth of Pennsylvania,
counties of Bucks, Chester, Delaware, Montgomery and Phila-
delphia.
District 18. Commonwealth of Pennsylvania, counties of Adams,
Cumberland, Franklin, Juniata, Mifflin, Perry and York; State
of Maryland, counties of Baltimore, Carroll, Frederick,
Harford and Washington.
[In November 1996, the Agway, Inc. Board of Directors approved an amendment to
this section 5.2 which will be effective the day after the 1997 regular annual
stockholders meeting.]
5.3 Nomination Procedures - District Directors - Each district as
----------------------
defined in section 5.2 of these by-laws shall be subdivided into geographical
areas, each to be represented by a
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member committee, selected in the manner set forth in section 2.8 of these
by-laws, which by its chairman or vice chairman shall act for its committee as
provided herein. At least one hundred forty (140) days before each annual
meeting of the corporation, the chairman of the corporation shall appoint, for
each nomination district from which a district director is to be elected at the
next annual meeting, a nominating committee for such district consisting of one
director of the corporation from outside such district who will act as
chairperson and a non-voting member of the committee, plus the current committee
chairperson of each member committee within such district (or the chairperson's
designee) with the total number of nominating committee members to be not less
than four, including the non-voting chairperson, or greater than the number of
member committees within such district, plus one non-voting chairperson. Such
nominating committee shall recommend the member it deems best qualified to serve
as district director from such district, or if it so chooses, it may recommend
two members, both of whom it deems qualified to serve as district director from
such district, and shall report such recommendation or recommendations to the
chairman of the corporation, who thereupon shall call a meeting of all members
of the member committees within such district, at a place and at a time
designated by the board of directors. The chairman of the corporation shall
designate a chairman and alternate chairman for the meeting so called and the
presiding officer thereof shall appoint a secretary. At such a meeting the
nominating committee of the district shall present its recommendation or
recommendations to the meeting in the form of a nomination. Additional
nominations of members residing within the district may be made from the floor.
If there is more than one nominee, voting shall be by ballot of the chairman (or
his alternate) of each member committee within the district. The vote of each
such chairman (or his alternate) shall be weighted by the volume of member
business represented by such chairman (or his alternate) in accordance with the
following formula: under $250,000, 1 vote; $250,000 to $499,999, 2 votes;
$500,000 to $749,999, 3 votes; $750,000 to $999,999, 4 votes; $1,000,000 to
$1,999,999, 5 votes; one additional vote for each additional $1,000,000 of
member volume.
Whoever receives a majority of the votes cast shall be declared the
nominee for the district. In case no candidate receives a majority on the first
ballot, on each ballot the candidate with the least number of votes will be
eliminated until one candidate receives a majority. Immediately after such
meeting the secretary thereof shall transmit to the secretary of the corporation
a sworn certificate stating the name of such nominee, which shall be placed in
nomination at the annual meeting by the secretary of the corporation or his
designee.
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<PAGE>
5.4 Vacancies -
---------
(a) Any vacancy on the board of directors occurring during the
term of any director, caused by death, resignation or otherwise may be
filled for the unexpired portion of the term or until a successor
shall be elected by a majority of the directors then in office at any
regular or special meeting of the board. If the term of a district
director being replaced extends beyond the next annual meeting, the
portion of the term following such meeting shall be filled at such
meeting by the stockholders in accordance with nomination procedures
specified by the board of directors and conforming, as closely as time
permits, to the procedures set forth in section 5.3 of these by-laws.
Any vacancy shall be filled by a person from the same district as the
person being replaced.
(b) In case the entire board of directors shall die or resign,
any ten (10) stockholders may call a special meeting in the same
manner that the chairman may call such a meeting, and directors for
the unexpired terms may be elected at such special meeting in the
manner provided for their election at annual meetings.
5.5 Place of Meetings - Meetings of the board of directors shall be
-----------------
held at any place which has been designated by the board or by written consent
of all members of the board.
5.6 Regular Meetings - Regular meetings of the board of directors may
----------------
be held at such time and place as may be appointed by the board, which time may
be changed from time to time. At the regular meeting of the board of directors
in October, the election of officers, including the chairman of the board, the
vice-chairman and the president and chief executive officer shall be conducted.
5.7 Special Meetings - A special meeting of the board of directors
-----------------
shall be held whenever called by the chairman, or by the vice-chairman of the
board in the absence of the chairman, or by any five (5) directors. Any and all
business may be transacted at a special meeting.
5.8 Notice of Meetings of Directors - No notice of regular meetings
--------------------------------
of the directors need be given except that in case of a change in the time for
regular meetings written notice of such change shall be given to directors who
were not present at the meeting when such change was made. Notice of each
special meeting shall be given pursuant to section 13.3 of these by-laws,
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<PAGE>
showing the time and place, at least five (5) days prior to the time of such
meeting.
5.9 Adjournment - Notice of time and place of holding an adjourned
-----------
meeting need not be given to absent directors, if the time and place be fixed at
the meeting adjourned and the adjournment is for a period of not more than seven
(7) days.
5.10 Quorum - Except as herein provided, a majority of the directors
------
in office shall be necessary to constitute a quorum for the transaction of
business. In the event of an extreme emergency, including a substantial
disruption of communication as a result of a disaster, whether nuclear, labor
strike, flood, hurricane or any other cause, making it extremely difficult or
impossible to assemble a majority of the board for a duly called meeting, and
such emergency has been declared, either by the president, or, in his absence,
the chairman of the board, or by the President of the United States, or by any
of the Governors of the states in which the corporation does business, a quorum
of the board of directors for the transaction of business at a meeting duly
called shall not be less than one-third of the directors.
5.11 Compensation of Directors - Directors, as such, shall not
---------------------------
receive any stated compensation for their services unless its payment has been
first authorized by the board of directors. In addition to an annual retainer,
the board of directors may allow a reasonable per diem and expenses for
attendance at any meeting of the board or of the executive committee, and any
other meeting or official business.
5.12 Removal for Cause - A director may be removed for failure to
------------------
attend three (3) consecutive meetings of the board without adequate cause, or
for other neglect of duty, or for any other cause. Such removal may be effected
in either of the following two ways:
(a) Removal may be by the vote or consent of the holders of a
majority of the shares entitled to vote at an election of directors;
or
(b) Removal may be by the affirmative vote of three-fourths
(3/4) of the entire board (excluding the director complained of) at
any regular or special meeting of the board, following reasonable
notice to the director complained of and a hearing by the board of
directors; provided, however, that in the event of any such removal,
the board of directors, if requested in writing by the director
subject to removal within ten (10) days of the removal decision by
the board of
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<PAGE>
directors, shall call a special meeting of the stock holders to
confirm or overrule the decision of the board of directors. If the
earliest practicable date to hold the special meeting of the
stockholders falls within ninety (90) days of the date of the annual
meeting as provided in section 4.1 of these by-laws, the matter shall
be presented to the stockholders for a vote at the annual meeting. At
the meeting of stock holders at which the question of the removal of
the director is presented for a vote, the director complained of shall
be provided a reasonable opportunity to present his position. The vote
of the holders of a majority of the shares, present and voting,
entitled to vote at an election of directors shall confirm or overrule
the decision of the board of directors. Until such time as the
stockholders act on the removal of the director complained of, if the
stockholders are required to do so, neither the board of directors nor
the stockholders shall fill the vacancy caused by the removal of the
director.
A vacancy resulting from a vote of the stockholders may be filled by
the stockholders at the meeting voting the removal and if not so filled shall be
filled by the board of directors as provided in section 5.4 of these by-laws.
POWERS OF DIRECTORS
6.1 General Powers - Subject to the limitations of the certificate of
--------------
incorporation, of the by-laws and of the statutes of the State of Delaware
relating to action which shall be authorized or approved by stockholders, all
corporate powers shall be exercised by or under the authority of, and the
business and affairs of the corporation shall be controlled by, the board of
directors. Without prejudice to such general powers, but subject to the same
limitations, it is expressly declared that the board of directors shall have the
following powers to wit:
(a) To control the affairs and business of the corporation
and to establish and enforce rules and regulations not inconsistent
with the laws of the State of Delaware, the certificate of
incorporation or by-laws, for the guidance of its officers and the
management and conduct of its affairs and business.
(b) To borrow money and incur indebtedness for corporate
purposes, and to cause to be executed and delivered therefor, in the
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<PAGE>
corporate name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations and other evidences of indebtedness
and securities therefor, and to do every act and thing necessary to
effectuate the same.
COMMITTEES OF THE BOARD
7.1 Executive & Planning Committee - An executive and planning
--------------------------------
committee may be established by resolution adopted by a majority of the whole
board, to consist of such number of directors as may be specified, which shall
have and may exercise, in the intervals between meetings of the board, all the
powers and authority of the board of directors, and may authorize the seal of
the corporation to be affixed to all papers which may require it.
7.2 Other Committees of the Board - Other committees may be
---------------------------------
established, from time to time, by resolution of the board specifying the number
of members and prescribing the committee functions and duties.
OFFICERS AND MANAGEMENT
8.1 Corporate Officers - The officers of the corporation shall be
-------------------
elected by the board of directors and shall be a chairman of the board, a
vice-chairman, a president and chief executive officer, one or more
vice-presidents, a secretary, a controller, a treasurer and a general counsel.
The board may also appoint any other corporate officers whom the board of
directors may see fit in its discretion to designate. The chairman of the board
and the vice-chairman shall be elected by the directors from their number. The
president and chief executive officer shall recommend employee officers to the
board of directors.
8.2 Election and Term of Office - On the recommendation of the
------------------------------
president and chief executive officer, management officers shall be elected
annually at the first meeting of the board of directors following the annual
meeting of stockholders, or at such other time as the board of directors shall
determine. Unless sooner removed by the board of directors, or unless they
resign or become disqualified, all officers shall hold office until their
successors are chosen and have qualified. Any officer, whether elected or
appointed by the board of directors, may be removed at any time by a majority
vote of all of the directors.
8.3 Powers and Duties - Subject at all times to the control and
-------------------
direction of the board of directors, the president and chief executive officer
shall conduct the business of the corporation in accordance with its purposes,
and shall have administrative authority over all personnel, including employee
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<PAGE>
officers, in the employ of the corporation; and each other corporate officer
shall have and exercise the powers and duties usual to his office or delegated
to him by the board of directors.
8.4 Compensation of Officers - Officers shall each receive such
--------------------------
compensation as may be fixed by the directors. The president and chief executive
officer shall recommend compensation for employee officers to the board of
directors.
8.5 Vacancies - A vacancy occurring in any office may be filled by a
---------
majority of the directors then in office at any regular or special meeting of
the board.
8.6 Checks, Bills and Notes - All checks, drafts, bills of exchange,
-----------------------
notes, orders for the payment of money and other negotiable instruments of the
corporation shall be made in the name of the corporation, and shall be signed by
any one of the following: the president, any vice president, the secretary,
treasurer, controller, or any assistant secretary, assistant treasurer or
assistant controller. The board of directors may also delegate to other officers
or agents the power to sign or countersign such instruments. No officers or
agents of the corporation singly or jointly with others shall have the power to
make any bill payable, note or check or other negotiable instrument or endorse
the same in the name of the corporation, or contract or cause to be contracted
any debt or liability in the name or on behalf of the corporation, except as
provided in these by-laws, and as authorized by the board of directors. Bills of
exchange, checks, notes and other negotiable instruments received by the
corporation shall be endorsed for collection by such officers or agents as may
be designated by the board of directors for that purpose.
PATRONAGE ACCOUNTING
9.1 Scope of Patronage Refund Provisions - The provisions of sections
------------------------------------
9.2-9.5 of these by-laws provide for patronage refunds only with respect to that
portion of the corporation's business consisting of sales of farm supplies.
Patronage refunds, if any, with respect to marketing operations will be paid
only pursuant to marketing contracts with members and contract patrons providing
for the payment of such refunds.
9.2 Definitions - As used in sections 9.2-9.5 of these by-laws:
-----------
(a) Member - The term "member" includes any member of the
------
corporation as defined in section 1.2(c) of these by-laws and also
any person who has entered
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<PAGE>
into a patronage refund contract with the corporation as authorized by
section 9.5 of these by-laws. The term "non-member" refers to any
person who is not a member as that term is defined in the preceding
sentence.
(b) Net Margin - The "net margin" of the corporation shall be
----------
taxable income from sales of farm supplies for the fiscal year, as
computed for federal income tax purposes, but without taking into
account any deductions for patronage refunds.
(c) Member Margin - "Member margin" shall be that portion of the
-------------
net margin derived from sales of farm supplies to members, determined
by multiplying the net margin by the percentage of gross purchasing
volume which is attributable to sales of farm supplies to members.
(d) Volume Subject to Refund - "Volume subject to refund" is the
------------------------
gross volume of the corporation from sales of farm supplies for any
fiscal year, reduced by that portion of such volume attributable to
business with non-members, and increased by the average percentage
mark-up necessary to reflect an equivalent volume at the retail
level.
(e) Member's Pro Rata Share - Each "member's prorata share" of
-----------------------
any refund or reserve shall be computed by multiplying the amount or
volume subject to refund attributable to such member by a percentage
determined by dividing the total refund or reserve to be allocated,
as the case may be, by the total amount of volume subject to refund.
(f) Patronage Refund - The term "patronage refund" shall include
----------------
a patronage refund or rebate or any amount paid to a patron pursuant
to section 9.5 of these by-laws on the basis of business done with or
for such a patron.
9.3 Reasonable Reserves - The board of directors may set aside each
--------------------
fiscal year, from the net margin of the corporation, such amounts as the board
of directors in its discretion deems necessary for the efficient prosecution of
the corporation's business, provided however, that no amounts shall be set aside
which are not reasonable in amount, giving due regard to the purposes thereof
(such amounts being sometimes hereinafter referred to as "reasonable reserves").
Any reserves set aside pursuant to section 9.3 of these by-laws shall be
allocated first
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<PAGE>
to all net earnings, as defined in (ii) of section 9.4 of these by-laws, of the
corporation other than member margin and, to the extent that such reserves
exceed such net earnings, to member margin. Such reasonable reserves may be used
for such proper corporate purposes as shall be determined by the board of
directors, including, but not limited to the accumulation of working capital,
contributions to sinking funds to meet future indebtedness, payment of Federal
income and excess profits taxes, acquisition of funds for expansion or
replacement, or accumulations of reserves to offset price declines. The
corporation shall maintain records sufficient to afford permanent means for
apportioning to each member his pro rata share of all amounts retained by the
corporation as reasonable reserves for each fiscal year.
9.4 Dividends on Capital Stock - The board of directors may set aside
--------------------------
each fiscal year from funds available therefor such amounts as the board deems
appropriate for payment as dividends on issued and outstanding capital stock.
Such amounts shall be allocated pro rata between (i) member margin and (ii) all
other net earnings of the corporation (including both net margin derived from
purchasing business conducted with nonmembers, and earnings not derived from
purchasing).
9.5 Payment of Patronage Refunds -
----------------------------
(a) Obligation to Pay Patronage Refunds - The corporation shall
------------------------------------
be obligated, as soon as practicable after the close of each fiscal
year and in no event later than 8 1/2 months after the close thereof,
to pay each member in cash as a patronage refund his pro rata share
of all member margin remaining after deducting amounts, if any, set
aside therefrom by the board of directors (1) as reasonable reserves
pursuant to section 9.3 of these by-laws and (2) for payment as
dividends on issued and outstanding capital stock pursuant to section
9.4 of these by-laws; provided that the amount of patronage refunds
thus determined shall be increased or decreased to the extent
necessary to enable the obligation for the payment of such refunds to
be expressed as a percentage of volume.
(b) Minimum Payment of Patronage Refunds - Not withstanding the
-------------------------------------
provisions of paragraph (a) of section 9.5 of these by-laws, the
board of directors shall fix and/or amend from time to time the
minimum amount which shall be paid as a patronage refund and any
amount less than that so fixed shall not be distributed to the member
entitled thereto (unless he claims it in cash) but shall be retained
by the corporation as through it
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<PAGE>
were part of a reasonable reserve set aside pursuant to section 9.3 of
these by-laws.
(c) Obligation to Pay Patronage Refunds Absolute- The
----------------------------------------------------
corporation shall be absolutely liable for the payment of patronage
refunds as provided herein without further action on the part of any
officer or of the board of directors.
(d) Place of Purchase Immaterial - Each member shall be entitled
----------------------------
to his respective pro rata share of any patronage refunds paid with
respect to Agway distributed goods, regardless of where such goods
were purchased. The corporation shall enter into such contracts,
undertakings and understandings with Agway agent-buyers, local
representatives and local cooperatives as may be necessary and proper
to insure that each member will receive his pro rata share of such
refunds.
9.6 Contract Patrons - The board of directors may authorize the
-----------------
appropriate officers and/or employees of the corporation to contract to pay and
to pay patronage refunds to patrons other than the members as defined in section
1.2(c) of these by-laws, provided the amounts of such patronage refunds are
determined upon the same basis and under the same terms and conditions as those
of such members, and provided further that any such contract shall be entered
into prior to the accumulation of any gross receipts subject to the charge of
such patronage refunds.
MARKETING
10.1 Marketing Contracts - The terms and conditions under which
--------------------
agricultural products of members shall be marketed may be established by
marketing contracts to be executed by the corporation and its members on an
individual commodity or commodity group basis, not inconsistent with the
provisions of these by-laws.
[11.1 - Intentionally left blank]
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<PAGE>
INDEMNIFICATION
12.1 Right to Indemnification - The corporation shall indemnify to
-------------------------
the fullest extent possible under applicable law as it presently exists or may
hereafter be amended, any person (an "Indemnitee") who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), by reason of the fact that he, or a person for whom he is the
legal representative, is or was a director, officer, employee or agent of the
corporation or, while a director or officer of the corporation, is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation or of a partnership, limited liability company,
joint venture, trust, enterprise or nonprofit entity, including service with
respect to employee benefit plans, against all liability and loss suffered and
expenses (including attorneys' fees) reasonably incurred by such Indemnitee. Not
withstanding the preceding sentence, except as otherwise provided in section
12.3, the corporation shall be required to indemnify an Indemnitee in connection
with a proceeding (or part thereof) commenced by such Indemnitee only if the
commencement of such proceeding (or part thereof) by the Indemnitee was
authorized by the Board of Directors of the corporation.
12.2 Prepayment of Expenses - The corporation shall pay the expenses
----------------------
(including attorneys' fees) incurred by a current or former director or officer
of the corporation in defending any proceeding in advance of its final
disposition, provided, how ever, that, to the extent required by law, such
payment of expenses in advance of the final disposition of the proceeding shall
be made only upon receipt of an undertaking by the Indemnitee to repay all
amounts advanced if it should be ultimately determined that the Indemnitee is
not entitled to be indemnified under sections 12.1-12.7 of these by-laws or
otherwise.
12.3 Claims - If a claim for indemnification or advancement of
------
expenses under sections 12.1-12.7 of these by-laws is not paid in full within
sixty days after a written claim therefor by the Indemnitee has been received by
the corporation, the Indemnitee may file suit to recover the unpaid amount of
such claim and, if successful in whole or in part, shall be entitled to be paid
the reasonable expense of prosecuting such claim. In any such action the
corporation shall have the burden of proving that the Indemnitee is not entitled
to the requested indemnification or advancement of expenses under applicable
law.
12.4 Nonexclusivity of Rights - The rights conferred on any
--------------------------
Indemnitee by sections 12.1-12.7 of these by-laws shall not be exclusive of any
other rights which such Indemnitee may have
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<PAGE>
or hereafter acquire under any statute, provision of the certificate of
incorporation, these by-laws, agreement, vote of stock holders or disinterested
directors or otherwise.
12.5 Other Sources - The corporation's obligation, if any, to
--------------
indemnify or to advance expenses to any Indemnitee who was or is serving at its
request as a director, officer, employee or agent of another corporation,
partnership, limited liability company, joint venture, trust, enterprise or
nonprofit entity shall be reduced by any amount such Indemnitee may collect as
indemnification or advancement of expenses from such other corporation,
partnership, limited liability company, joint venture, trust, enterprise or
non-profit enterprise.
12.6 Amendment or Repeal - Any repeal or modification of the
---------------------
foregoing provisions of sections 12.1-12.5 of these by-laws shall not adversely
affect any right or protection hereunder of any Indemnitee in respect of any act
or omission occurring prior to the time of such repeal or modification.
12.7 Other Indemnification and Prepayment of Expenses - Sections
-----------------------------------------------------
12.1-12.6 of these by-laws shall not limit the right of the corporation, to the
extent and in the manner permitted by law, to indemnify or to advance expenses
to persons other than Indemnitees when and as authorized by appropriate
corporate action.
MISCELLANEOUS
13.1 Principal Office - The principal office of the corporation in
-----------------
the State of Delaware shall be located at 1209 Orange Street in the City of
Wilmington, County of New Castle.
13.2 Other Offices - The principal office outside the State of
--------------
Delaware shall be at DeWitt, New York. The corporation may also have an office
or offices at such other place or places, within or without the State of
Delaware as the board of directors may from time to time appoint, or the
business of the corporation may require.
13.3 Method of Giving Notice - Whenever in these by-laws notice is
------------------------
required to be given, it may be given by any one or more of the following
methods:
(a) Delivered personally; or
(b) Written notice either deposited in the mail postage prepaid
or sent by telegraph, addressed to the residence or place of business
of the person to be
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<PAGE>
notified as the same shall appear on the records of the corporation;
or
(c) To members or stockholders by publication in any corporation
bulletin or other periodical mailed to members or stockholders; or
(d) Any other means permitted under applicable law.
13.4 Waiver of Notice - The transactions of any meeting of the board
----------------
of directors or any committee however called and noticed or wherever held, shall
be as valid as though had at a meeting duly held, after regular call and notice,
if a quorum be present, and if, either before or after the meeting, each of the
directors or committee members not present signs a written waiver of notice or a
consent to holding such meeting. All such waivers or consents shall be filed
with the corporate records or made a part of the minutes of the meeting.
13.5 Effect of Holiday - If the time designated herein for any
-------------------
meeting shall fall upon a legal holiday, then any such meeting shall be held on
the next day following which is not a holiday.
13.6 Fiscal Year - The fiscal year of the corporation shall extend
-----------
from July 1 to June 30 following.
13.7 Seal - The seal of the corporation shall be circular in form and
----
shall have inscribed thereon the name of the corporation, the year of
organization and the words: "Corporate Seal, Delaware."
13.8 Amendments - These by-laws may be amended or repealed or new
----------
by-laws adopted as follows:
(a) At any meeting of stockholders, by a vote of a majority of
the stockholders present and voting, provided that the notice of the
meeting shall have set forth the substance of the proposed amendment,
repeal or new by-law provision upon which the vote is taken, or
(b) By vote of two-thirds of the directors in office.
- 24 -
EXHIBIT 10
<PAGE>
[For 15 Directors]
DEFERRED COMPENSATION AGREEMENT
AGREEMENT made this day of , 1996, between AGWAY
---- --------------
INC., a Delaware corporation, with its principal office in De Witt, New York
(hereinafter called "AGWAY"), and residing at
--------------------------
- -----------------------------------------------------------------------------
(hereinafter called "Director").
RECITALS:
A. AGWAY has established a deferred compensation program for
Directors.
B. Director desires to participate in the plan upon the following
terms and conditions.
WITNESSETH:
For good and valuable consideration, the parties, intending to be
legally bound, hereby agree as follows:
1. Director hereby designates (check one)
% of per diem (or $ of per diem) only
--- ---------
% of retainer (or $ of retainer) only
--- ---------
% of both per diem and retainer (or $ of both
--- ---------
per diem and retainer)
for the period beginning January 1, 1997 and ending December 31, 1997 be
credited to Director's Reserve Account.
2. AGWAY shall maintain in its accounting records a separate
account (herein called "Director's Reserve Account") for each Director electing
deferral of
<PAGE>
any amount under this agreement and shall credit to the Director's Reserve
Account the item or items designated by Director in Section 1 above. The
Director's Reserve Account shall also be credited at the close of each calendar
year with an amount computed by applying the average cost-of-debt percentage as
hereinafter defined to the total average accumulated credit of the Director's
Reserve Account. "Average cost-of-debt" as used in this agreement shall mean the
average cost to AGWAY of the debt employed by AGWAY during each calendar year in
the conduct of AGWAY's business, and this average cost-of-debt shall be
determined by the Treasurer of AGWAY.
3. AGWAY and Director hereby agree that payment from the Director's
Reserve Account shall begin in the January (or as soon as practicable after
January) next following Director's attainment of age fifty-five (55) or the date
on which Director's service as Director of AGWAY terminates, whichever is
earlier.
This agreement by the Director shall be irrevocable; provided, however, that at
least six (6) months prior to January 1 of the year in which payments are
scheduled to begin, Director may request, by notice in writing to Agway, that
the commencement of payments be deferred to a specified January date later than
that on which commencement was previously scheduled. Whether to approve such a
request shall be within the discretion of the Chairman of the Board of Directors
of AGWAY, or of the Vice Chairman should Director then be serving as Chairman.
Approval of such a request shall be in writing. After approval, Director shall
have no right to payment at any date earlier than that specified in the written
approval. In any event, payments shall commence not later than the January
following the calendar year when Director reaches age seventy (70). AGWAY may
impose a thirty (30) day waiting period before the first payment is made.
4. Payment will be either (a) a lump sum payment of the entire balance
in the Director's Reserve Account; or (b) in an amount determined by multiplying
the balance in the Director's Reserve Account at the beginning of each calendar
year during which a payment is to be made by a fraction, the numerator of which
is one (1) and the denominator of which will be the number of years remaining
during which the Director's Reserve Account will be paid to Director. The
<PAGE>
payment election must be made at least six (6) months prior to the commencement
of payment in writing to the chief financial officer of AGWAY to have the
payments made:
(A) over 3 years;
(B) over 5 years;
(C) over 10 years;
(D) over 15 years; or
(E) over 20 years.
If a timely election is not made, the entire balance in Director's Reserve
Account will be paid in a single lump sum.
If the initial annual payment computed for the applicable payment period
described above would be less than ten thousand dollars ($10,000), then,
notwithstanding the prior provisions of this Section, AGWAY may make payment (at
the sole discretion of AGWAY) either in one (1) lump sum or in annual
installments over the longest period resulting in an initial annual payment of
at least ten thousand dollars ($10,000).
5. Upon furnishing AGWAY with proper evidence of financial hardship,
Director may request a withdrawal of all or part of the balance in the
Director's Reserve Account. Whether to approve such a request shall be within
the discretion of the Chief Financial Officer of AGWAY or his designee. Approval
of such a request shall be in writing.
6. In the event of Director's death, either before or after the
payments to Director have begun, the amount payable, as provided in Section 4
above, shall be paid to the beneficiary or beneficiaries designated by Director
in the most recent notice in writing to AGWAY in installments computed in the
same manner as if Director was still living. If no beneficiary has been
designated, the amount payable, as provided in Section 4 above, shall be paid in
installments computed in the same manner as if Director was still living to
Director's estate or, at the sole discretion of AGWAY, the remaining balance in
the Director's Reserve Account
<PAGE>
may be paid in a lump sum to Director's estate. In the event that after payments
have commenced to the beneficiary or to the beneficiaries designated by Director
the sole beneficiary dies or all beneficiaries die, then, any remaining balance
in the Director's Reserve Account will be paid in a lump sum to the sole
beneficiary's estate or to the beneficiaries' estates. In the absence of clear
written instructions to the contrary, a designation of multiple beneficiaries
will be deemed to provide for payment to the designated beneficiaries in equal
shares, and for the payment to Director's estate of the share of any beneficiary
who predeceases Director. In the event of Director's death before the payments
to Director have begun, the payments will commence in the January (or as soon as
practicable after January), next following the date of Director's death.
7. Director agrees that AGWAY's liability to make any payment as
provided in this agreement shall be contingent upon Director's:
(a) being available to AGWAY for consultation and advice
after termination of service as a director of AGWAY, unless Director is disabled
or deceased; and
(b) retaining unencumbered any interest or benefit under
this agreement.
If Director fails to fulfill any one or more of these
contingencies, AGWAY's obligation under this agreement may be terminated by
AGWAY as to Director.
8. Director also agrees that AGWAY's obligations to make deferred
payments under this agreement are merely contractual; and that AGWAY is the
outright beneficial owner of, and does not hold for Director as trustee or
otherwise, the amounts credited to Director's Reserve Account; and that such
amounts are subject to the rights of AGWAY's creditors in the same manner and to
the same extent as all assets owned by AGWAY.
9. Neither Director nor Director's beneficiary/ies shall have the
<PAGE>
right to encumber, commute, borrow against, dispose of or assign the right
to receive payments under this agreement.
IN WITNESS WHEREOF, AGWAY and Director have duly executed this
agreement the day and year first above written.
AGWAY INC.
/s/
By: ------------------------
Secretary
/s/
-------------------------
(Director)
DESIGNATION OF BENEFICIARY/IES
Pursuant to the provisions of this Deferred Compensation Agreement, I hereby
designate as my beneficiary/ies hereunder:
-------------------
(Name of beneficiary/ies)
This designation is also effective with respect to any and all amounts of
deferred compensation accrued for my benefit under any and all Deferred
Compensation Agreements executed by me in previous years.
/s/
-------------------------------
(Director)
Date: , 1996
------------------
<PAGE>
[For 2 Board officers]
DEFERRED COMPENSATION AGREEMENT
AGREEMENT made this day of , 1996, between AGWAY INC.,
---- ------------
a Delaware corporation, with its principal office in De Witt, New York
(hereinafter called "AGWAY"), and residing at
---------------------
(hereinafter called
- ----------------------------------------------------------
"Director").
RECITALS:
A. AGWAY has established a deferred compensation program for
Directors.
B. Director desires to participate in the program upon the
following terms and conditions.
WITNESSETH:
For good and valuable consideration, the parties, intending to be
legally bound, hereby agree as follows:
1. Director hereby designates % (or $ ) of annual
---- ---------
compensation for the period beginning January 1, 1997 and ending December 31,
1997 be credited to Director's Reserve Account.
2. AGWAY shall maintain in its accounting records a separate account
(herein called "Director's Reserve Account") for each Director electing deferral
of any amount under this agreement and shall credit to the Director's Reserve
Account the amount designated by Director in Section 1 above. The Director's
Reserve Account shall also be credited at the close of each calendar year with
an amount computed by applying the average cost-of-debt percentage as
hereinafter defined to the total average accumulated credit of the Director's
Reserve Account. "Average cost-of-debt" as used in this agreement shall mean the
average cost to
<PAGE>
AGWAY of the debt employed by AGWAY during each calendar year in the conduct of
AGWAY's business, and this average cost-of-debt shall be determined by the
Treasurer of AGWAY.
3. AGWAY and Director hereby agree that payment from the Director's
Reserve Account shall begin in the January (or as soon as practicable after
January) next following Director's attainment of age fifty-five (55) or the date
on which Director's service as Director of AGWAY terminates, whichever is
earlier.
This agreement by the Director shall be irrevocable; provided, however, that at
least six (6) months prior to January 1 of the year in which payments are
scheduled to begin, Director may request, by notice in writing to Agway, that
the commencement of payments be deferred to a specified January date later than
that on which commencement was previously scheduled. Whether to approve such a
request shall be within the discretion of the Chairman of the Board of Directors
of AGWAY, or of the Vice Chairman should Director then be serving as Chairman.
Approval of such a request shall be in writing. After approval, Director shall
have no right to payment at any date earlier than that specified in the written
approval. In any event, payments shall commence not later than the January
following the calendar year when Director reaches age seventy (70). AGWAY may
impose a thirty (30) day waiting period before the first payment is made.
4. Payment will be either (a) a lump sum payment of the entire balance
in the Director's Reserve Account; or (b) in an amount determined by multiplying
the balance in the Director's Reserve Account at the beginning of each calendar
year during which a payment is to be made by a fraction, the numerator of which
is one (1) and the denominator of which will be the number of years remaining
during which the Director's Reserve Account will be paid to Director. The
payment election must be made at least six (6) months prior to the commencement
of payment in writing to the chief financial officer of AGWAY to have the
payments made:
<PAGE>
(A) over 3 years;
(B) over 5 years;
(C) over 10 years;
(D) over 15 years; or
(E) over 20 years.
If a timely election is not made, the entire balance in Director's Reserve
Account will be paid in a single lump sum.
If the initial annual payment computed for the applicable payment period
described above would be less than ten thousand dollars ($10,000), then,
notwithstanding the prior provisions of this Section, AGWAY may make payment (at
the sole discretion of AGWAY) either in one (1) lump sum or in annual
installments over the longest period resulting in an initial annual payment of
at least ten thousand dollars ($10,000).
5. Upon furnishing AGWAY with proper evidence of financial hardship,
Director may request a withdrawal of all or part of the balance in the
Director's Reserve Account. Whether to approve such a request shall be within
the discretion of the Chief Financial Officer of AGWAY or his designee. Approval
of such a request shall be in writing.
6. In the event of Director's death, either before or after the
payments to Director have begun, the amount payable, as provided in Section 4
above, shall be paid to the beneficiary or beneficiaries designated by Director
in the most recent notice in writing to AGWAY in installments computed in the
same manner as if Director was still living. If no beneficiary has been
designated, the amount payable, as provided in Section 4 above, shall be paid in
installments computed in the same manner as if Director was still living to
Director's estate or, at the sole discretion of AGWAY, the remaining balance in
the Director's Reserve Account may be paid in a lump sum to Director's estate.
In the event that after payments have commenced to the beneficiary or to the
beneficiaries designated by Director the sole beneficiary dies or all
beneficiaries die, then, any remaining balance in the Director's Reserve Account
will be paid in a lump sum to the sole beneficiary's
<PAGE>
estate or to the beneficiaries' estates. In the absence of clear written
instructions to the contrary, a designation of multiple beneficiaries will be
deemed to provide for payment to the designated beneficiaries in equal shares,
and for the payment to Director's estate of the share of any beneficiary who
predeceases Director. In the event of Director's death before the payments to
Director have begun, the payments will commence in the January (or as soon as
practicable after January), next following the date of Director's death.
7. Director agrees that AGWAY's liability to make any payment as
provided in this agreement shall be contingent upon Director's:
(a) being available to AGWAY for consultation and advice
after termination of service as a director of AGWAY, unless Director is disabled
or deceased; and
(b) retaining unencumbered any interest or benefit under
this agreement.
If Director fails to fulfill any one or more of these
contingencies, AGWAY's obligation under this agreement may be terminated by
AGWAY as to Director.
8. Director also agrees that AGWAY's obligations to make deferred
payments under this agreement are merely contractual; and that AGWAY is the
outright beneficial owner of, and does not hold for Director as trustee or
otherwise, the amounts credited to Director's Reserve Account; and that such
amounts are subject to the rights of AGWAY's creditors in the same manner and to
the same extent as all assets owned by AGWAY.
9. Neither Director nor Director's beneficiary/ies shall have the right
to encumber, commute, borrow against, dispose of or assign the right to receive
payments under this agreement.
<PAGE>
IN WITNESS WHEREOF, AGWAY and Director have duly executed this
agreement the day and year first above written.
AGWAY INC.
/s/
By: ----------------------
Secretary
/s/
----------------------
(Director)
DESIGNATION OF BENEFICIARY/IES
Pursuant to the provisions of this Deferred Compensation Agreement, I hereby
designate as my beneficiary/ies hereunder:
---------------------
(Name of beneficiary/ies)
This designation is also effective with respect to any and all amounts of
deferred compensation accrued for my benefit under any and all Deferred
Compensation Agreements executed by me in previous years.
/s/
----------------------------
(Director)
Date: , 1996
------------
EXHIBIT 12
<PAGE>
COMPUTATION OF RATIO OF MARGINS TO FIXED
CHARGES AND PREFERRED DIVIDENDS COMBINED
<TABLE>
<CAPTION>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
FOR THE YEARS ENDED JUNE 30,
(THOUSANDS OF DOLLARS)
1997 1996 1995 1994 1993
---------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Margins before income taxes and
member refunds............................. $ 16,583 $ 21,070 $ (6,053) $ 4,833 $ 17,395
Fixed charges - Interest................... 64,432 63,721 56,507 49,849 49,128
- Rentals.................... 3,772 3,004 2,789 2,298 2,610
---------- --------- ----------- --------- ----------
Total fixed charges........................ 68,204 66,725 59,296 52,147 51,738
---------- --------- ----------- --------- ----------
Adjusted net margins....................... $ 84,787 $ 87,795 $ 53,243 $ 56,980 $ 69,133
========== ========= =========== ========= ==========
Ratio of adjusted net margins to total
fixed charges.............................. 1.2 1.3 (a) 1.1 1.3
========== ========= =========== ========= ==========
Deficiency of adjusted net margins to
total fixed charges........................ N/D N/D $ 6,053 N/D N/D
=========== ========== =========== ========== ==========
<CAPTION>
Fixed charges and preferred dividends combined:
Preferred dividend factor:
<S> <C> <C> <C> <C> <C>
Preferred dividend requirements......... $ 4,115 $ 4,255 $ 4,654 $ 4,909 $ 4,130
Ratio of pre-tax margins to
after-tax margins*...................... 64.3% 52.9% 71.1% 13.5% 143.0%
Preferred dividend factor on
pre-tax basis........................... 6,400 8,043 6,546 36,363 2,888
Total fixed charges (above)................ 68,204 66,725 59,296 52,147 51,738
---------- --------- ---------- --------- ----------
Fixed charges and preferred dividends
combined................................... $ 74,604 $ 74,768 $ 65,842 $ 88,510 $ 54,626
========== ========= ========== ========= ==========
Ratio of adjusted net margins to fixed
charges and preferred dividends
combined**................................. 1.1 1.2 (b) (b) 1.3
========== ========= ========== ========= ==========
Deficiency of adjusted net margins to
fixed charges and preferred dividends
combined................................... N/D N/D $ 12,599 $ 31,530 N/D
========== ========= ========== ========= ==========
</TABLE>
* Represents pre-tax adjusted net margin from continuing operations
divided by after-tax margin, which adjusts dividends on preferred stock
to a pre-tax basis.
** Represents adjusted net margin divided by fixed charges and preferred
dividends combined.
N/D No deficiency.
(a) Adjusted net margins are inadequate to cover total fixed charges.
(b) Adjusted net margins are inadequate to cover total fixed charges and
preferred dividends combined.
<PAGE>
COMPUTATION OF RATIO OF MARGINS TO FIXED
CHARGES AND PREFERRED DIVIDENDS COMBINED
<TABLE>
<CAPTION>
AGWAY INC. (PARENT)
FOR THE YEARS ENDED JUNE 30,
(THOUSANDS OF DOLLARS)
1997 1996 1995 1994 1993
----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Margins before income taxes and
member refunds............................. $ 3,535 $ 24,106 $ 4,600 $ (17,330) $ 4,501
Fixed charges - Interest................... 6,792 7,156 5,874 14,985 8,282
- Rentals.................... 2,074 1,506 1,960 1,183 755
----------- ---------- ----------- ---------- ----------
Total fixed charges........................ 8,866 8,662 7,834 16,168 9,037
----------- ---------- ----------- ---------- ----------
Adjusted net margins....................... $ 12,401 $ 32,768 $ 12,434 $ (1,162) $ 13,538
=========== ========== =========== ========== ==========
Ratio of adjusted net margins to total
fixed charges.............................. 1.4 3.8 1.6 (a) 1.5
=========== ========== =========== ========== ==========
Deficiency of adjusted net margins to
total fixed charges........................ N/D N/D N/D $ 17,330 N/D
=========== ========== =========== ========== ==========
<CAPTION>
Fixed charges and preferred dividends combined:
Preferred dividend factor:
<S> <C> <C> <C> <C> <C>
Preferred dividend requirements......... $ 4,115 $ 4,255 $ 4,654 $ 4,909 $ 4,130
Ratio of pre-tax margin to
after-tax margins*...................... 323.6% 90.9% (291.2%) 214.5% 404.4%
Preferred dividend factor on............
pre-tax basis........................... 1,272 4,681 (1,598) 2,289 1,021
Total fixed charges (above)................ 8,866 8,662 7,834 16,168 9,037
----------- ---------- ----------- ---------- ----------
Fixed charges and preferred dividends
combined................................... $ 10,138 $ 13,343 $ 6,236 $ 18,457 $ 10,058
=========== ========== =========== ========== ==========
Ratio of adjusted net margins to fixed
charges and preferred dividends
combined**................................. 1.2 2.5 2.0 (b) 1.3
=========== ========== =========== ========== ==========
Deficiency of adjusted net margins to
fixed charges and preferred dividends...... N/D N/D N/D $ 19,619 N/D
=========== ========== =========== ========== ==========
</TABLE>
* Represents pre-tax adjusted net margin from continuing operations
divided by after-tax margin, which adjusts dividends on preferred stock
to a pre-tax basis.
** Represents adjusted net margin divided by fixed charges and preferred
dividends combined.
N/D No deficiency.
(a) Adjusted net margins are inadequate to cover total fixed charges.
(b) Adjusted net margins are inadequate to cover total fixed charges and
preferred dividends combined.
EXHIBIT 13
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended September 30, 1996
------------------
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
-------
AGWAY INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 15-0277720
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
315-449-6431
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 8, 1996
- -------------------------------- -------------------------------
Membership Common Stock, $25 par 106,853 shares
value per share
1
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1996 and June 30, 1996..................... 3
Condensed Consolidated Statements of Operations and Retained Margin for the three months
ended September 30, 1996 and September 30, 1995...................................................... 4
Condensed Consolidated Cash Flow Statements for the three months ended September 30, 1996
and September 30, 1995............................................................................... 5
Notes to Condensed Consolidated Financial Statements................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 11
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings.......................................................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................................... 15
SIGNATURES.......................................................................................... 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current Assets:
Trade accounts receivable (including notes receivable of
$36,151 and $35,182, respectively), less allowance for
doubtful accounts of $10,054 and $10,062, respectively ... $ 173,127 $ 207,304
Leases receivable, less unearned income of $49,235 and
$48,403, respectively .................................... 105,637 105,374
Advances and other receivables ............................. 34,017 35,914
Inventories:
Raw materials ............................................ 11,777 16,161
Finished goods ........................................... 136,075 128,770
Goods in transit and supplies ............................ 9,186 12,587
---------- ----------
Total inventories ...................................... 157,038 157,518
Prepaid expenses ........................................... 54,625 58,380
---------- ----------
Total current assets ................................... 524,444 564,490
Marketable securities available for sale ........................ 35,238 34,115
Other security investments ...................................... 43,959 42,406
Properties and equipment, net ................................... 227,562 237,015
Long-term leases receivable, less unearned income of
$75,515 and $75,828, respectively ............................. 279,307 268,815
Net pension asset ............................................... 88,430 85,181
Other assets .................................................... 11,379 12,249
---------- ----------
Total assets ........................................... $1,210,319 $1,244,271
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Notes payable .............................................. $ 79,100 $ 62,200
Current installments of long-term debt and subordinated debt 111,542 108,896
Accounts payable ........................................... 100,432 117,457
Other current liabilities .................................. 96,645 120,099
---------- ----------
Total current liabilities .............................. 387,719 408,652
Long-term debt .................................................. 184,325 197,413
Subordinated debt ............................................... 413,475 400,284
Other liabilities ............................................... 65,744 66,664
---------- ----------
Total liabilities .......................................... 1,051,263 1,073,013
Shareholders' equity:
Preferred stock, net .......................................... 57,906 59,319
Common stock, net ............................................. 2,674 2,689
Retained margin ............................................... 98,476 109,250
---------- ----------
Total shareholders' equity ................................. 159,056 171,258
---------- ----------
Commitments and contingencies
Total liabilities and shareholders' equity ............. $1,210,319 $1,244,271
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED MARGIN
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
Net sales and revenues from:
Product sales ............................................... $ 333,179 $ 306,522
Leasing operations .......................................... 12,962 11,214
Insurance operations ........................................ 6,043 6,887
--------- ---------
Total net sales and revenues ............................ 352,184 324,623
Cost and expenses from:
Products and plant operations ............................... 318,780 290,124
Leasing operations .......................................... 5,956 5,257
Insurance operations ........................................ 3,952 4,791
Selling, general and administrative activities .............. 32,929 33,480
--------- ---------
Total costs and expenses ................................ 361,617 333,652
Operating loss ................................................... (9,433) (9,029)
Interest expense, net ............................................ (6,559) (6,920)
Other income, net ................................................ 973 1,961
--------- ---------
Loss from continuing operations before income taxes .............. (15,019) (13,988)
Income tax benefit ............................................... 4,165 3,527
--------- ---------
Loss from continuing operations .................................. (10,854) (10,461)
Discontinued operations:
Loss on disposal of Hood, net of tax expense of $39 ......... (268)
--------- ---------
Net loss ......................................................... $ (10,854) $ (10,729)
Retained Margin:
Balance at beginning of period .............................. 109,250 102,532
Adjustment to unrealized gains (losses) on available-for-sale
securities, net of tax .................................. 80 (13)
--------- ---------
Balance at end of period ......................................... $ 98,476 $ 91,790
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Net cash flows (used in) provided by operating activities .. $ (7,584) $ 8,498
Cash flows (used in) provided by investing activities:
Purchases of property, plant and equipment ............ (1,898) (3,444)
Proceeds from disposal of businesses .................. 5,234
Proceeds from disposal of property, plant and equipment 3,249 1,314
Leases originated ..................................... (39,714) (33,889)
Leases repaid ......................................... 27,298 20,732
Proceeds from sale of marketable securities ........... 2,410 3,947
Purchases of marketable securities .................... (3,453) (2,283)
Net purchase of investments in related cooperatives ... (1,553) (46)
Net changes in net assets of discontinued operations .. (390)
-------- --------
Net cash flows used in investing activities ................ (8,427) (14,059)
Cash flows (used in) provided by financing activities:
Net change in short-term borrowings ................... 16,900 14,200
Proceeds from long-term debt .......................... 7,541 572
Repayment of long-term debt ........................... (17,840) (10,260)
Proceeds from sale of subordinated debt ............... 19,612 19,496
Maturity and redemption of subordinated debt .......... (6,343) (13,273)
Redemption of stock ................................... (1,432) (2,763)
Cash dividends paid ................................... (2,210) (2,410)
Other ................................................. (217) (1)
-------- --------
Net cash flows provided by financing activities ............ 16,011 5,561
-------- --------
Net decrease in cash and equivalents ....................... 0 0
Cash and equivalents at beginning of period ................ 0 0
-------- --------
Cash and equivalents at end of period ...................... $ 0 $ 0
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Thousands of Dollars)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Agway Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three-month period ended
September 30, 1996 are not necessarily indicative of the results that may
be expected for the year ending June 30, 1997 due to the seasonal nature of
certain major segments of the Company's business. For further information,
refer to the consolidated financial statements and notes thereto included
in the annual report on Form 10-K for the year ended June 30, 1996.
Impairment of Long-Lived Assets
In March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," was issued. Statement
No. 121 requires impairment losses to be measured and recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be
disposed of. The Company adopted Statement No. 121 as of July 1, 1996, the
effect of which was approximately a $1,700 charge against pre-tax earnings.
Reclassifications
Certain reclassifications have been made to conform prior year financial
statements with the current year presentation.
6
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
2. AGWAY FINANCIAL CORPORATION
---------------------------
Agway Financial Corporation (AFC) is a wholly owned subsidiary of the
Company whose principal business activity is securing financing through
bank borrowings and issuance of corporate debt instruments to provide funds
for the Company and AFC's sole wholly owned subsidiary, Agway Holdings Inc.
(AHI), and AHI's subsidiaries, for general corporate purposes. The payment
of principal and interest on this debt is absolutely and unconditionally
guaranteed by the Company. In an exemptive relief granted pursuant to a "no
action letter" issued by the staff of the Securities and Exchange
Commission, AFC, as a separate company, is not required to file periodic
reports with respect to these debt securities. However, as required by the
1934 Act, the summarized financial information concerning AFC and
Consolidated Subsidiaries is as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Net sales and revenues ............................................. $ 239,482 $ 221,429
Operating loss ..................................................... (1,267) (1,042)
Loss from continuing operations .................................... (2,816) (7,433)
Net loss ........................................................... (2,816) (7,701)
September 30, June 30,
1996 1996
------------ ------------
Current assets ..................................................... $ 518,201 $ 530,547
Properties and equipment, net ...................................... 162,737 166,504
Noncurrent assets .................................................. 364,245 353,377
----------- -----------
Total assets ................................................... $ 1,045,183 $ 1,050,428
=========== ===========
Current liabilities ................................................ $ 226,840 $ 227,781
Long-term debt ..................................................... 178,211 191,189
Subordinated debt .................................................. 413,475 400,284
Noncurrent liabilities ............................................. 15,226 17,006
Shareholder's equity ............................................... 211,431 214,168
----------- -----------
Total liabilities and shareholder's equity ......................... $ 1,045,183 $ 1,050,428
=========== ===========
</TABLE>
7
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
3. BORROWING ARRANGEMENTS
----------------------
Agway and AFC
As of September 30, 1996, the Company had certain facilities available with
various banking institutions whereby lenders have agreed to provide funds
up to $254,000 to separately financed units of the Company as follows: AFC
- $50,000 and Telmark - $204,000. In addition, AFC may issue up to $50,000
of commercial paper under the terms of a separate agreement, backed by a
letter of credit.
The $50,000 line of credit available to AFC and its ability to issue
$50,000 of commercial paper require collateralization using certain of the
Company's accounts receivable and non-petroleum inventories ("collateral").
Amounts which can be drawn under the AFC short-term agreements are limited
to a specific calculation based upon the collateral available. Adequate
collateral has existed throughout the fiscal year to permit AFC to borrow
amounts to meet the ongoing needs of the Company and is expected to
continue to do so. In addition, the agreements include certain covenants,
the most restrictive of which requires the Company to maintain specific
quarterly levels of interest coverage and monthly levels of tangible
retained margins. The amounts outstanding as of September 30, 1996 under
AFC's $50,000 line of credit and $50,000 commercial paper were $10,900 and
$50,000, respectively. In November 1996, the Company renegotiated its line
of credit facility to extend the availability through January 1, 1998 and
to provide seasonal increases in the line of credit which will be available
so that total availability under AFC's line of credit will increase to
$60,000 at June 1, 1997 and $75,000 at October 1, 1997. The Company's
commercial paper program, which expires December 31, 1996, is currently
being renegotiated so that it parallels the changes made to the line of
credit facility. The Company expects that these changes will be
successfully renegotiated. The Company has ongoing discussions with its
lenders and expects to continue to have appropriate and adequate financing
to meet its ongoing needs.
Annually, Agway and AFC offer subordinated debentures and subordinated
money market certificates to the public. Of Agway's and AFC's subordinated
debt at September 30, 1996, $382,213 is redeemable in whole or in part at
the principal amount plus accrued interest, prior to maturity dates, at the
option of the Company. The foregoing debt bears interest payable
semi-annually on January l and July 1 of each year. The money market
certificates' interest rate is at the greater of the quoted rate or a rate
based upon the discount rate for U. S. Government Treasury Bills, with
maturities of 26 weeks. In October 1996, $14,700 of subordinated money
market certificates issued by AFC matured. The Company has refinanced this
debt through the issuance of subordinated debt and short-term bank
borrowings.
Telmark
As of September 30, 1996, Telmark had two separate credit facilities
available from banks which allow Telmark to borrow up to an aggregate of
$204,000. An uncommitted short-term line of credit agreement permits
Telmark to borrow up to $4,000 on an unsecured basis with interest paid
upon maturity. The line bears interest at money market variable rates. A
committed $200,000 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 30, 1996, under the
short-term line of credit and the revolving term loan facility were $4,000
and $156,200, 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 $4,000
line of credit has been renewed through December 31, 1996. The $200,000
revolving term agreement loan facility is available through February 1,
1998.
At September 30, 1996, Telmark also had balances outstanding on unsecured
senior note private placements totaling $121,333. 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 contain
specific financial covenants.
8
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
3. BORROWING ARRANGEMENTS (continued)
----------------------------------
Telmark (continued)
Telmark has registered with the SEC two shelf offerings of debentures. The
debentures are unsecured, subordinated to all senior debt at Telmark, and
are not guaranteed by Agway nor any of Agway's other subsidiaries. The
interest on the debt is payable quarterly on January 1, April 1, July 1 and
October 1. The offering of debentures is continuing and the proceeds of the
offerings will be used to provide financing for Telmark's leasing
activities.
The Company believes Telmark will continue to have appropriate and adequate
short-term and long-term financing to meet its ongoing needs.
Long-term and subordinated debt outstanding at September 30, 1996, as
compared to June 30, 1996, amounted to:
<TABLE>
<CAPTION>
Agway & AFC Telmark Total
------------------- ------------------- -------------------
9/96 6/96 9/96 6/96 9/96 6/96
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Long-term debt ...... $ 17,673 $ 18,666 $263,473 $273,000 $281,146 $291,666
Currently payable ... 6,033 6,065 90,788 88,188 96,821 94,253
-------- -------- -------- -------- -------- --------
Net long-term debt .. $ 11,640 $ 12,601 $172,685 $184,812 $184,325 $197,413
======== ======== ======== ======== ======== ========
Subordinated debt ... $401,666 $390,669 $ 26,530 $ 24,258 $428,196 $414,927
Currently payable ... 14,721 14,643 14,721 14,643
-------- -------- -------- -------- -------- --------
Net subordinated debt $386,945 $376,026 $ 26,530 $ 24,258 $413,475 $400,284
======== ======== ======== ======== ======== ========
</TABLE>
9
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
4. COMMITMENTS AND CONTINGENCIES
-----------------------------
Environmental
The Company is subject to a number of governmental regulations concerning
environmental matters, either directly or as a result of the operations of
its subsidiaries. The Company expects that it will be required to expend
funds to participate in the remediation of certain sites, including sites
where the Company 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 sites with underground fuel storage tanks, and will incur
other expenses associated with environmental compliance.
The Company continually monitors its 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 is estimable. Estimates of the
extent of the Company's degree of responsibility relating to 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. At September 30, 1996, the Company had been 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 the
Company could be required to pay in excess of its pro rata share of
remediation costs. The Company's understanding of the financial strength of
other PRPs at these Superfund sites has been considered, where appropriate,
in the Company's determination of its estimated liability. The Company
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 Company does not anticipate
that any such adjustment would be material to its 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 reserves established will cause future cash outlays over approximately
five years based upon current estimates, and it is not expected that such
outlays will materially impact the Company's liquidity position.
As part of its long-term environmental protection program, the Company
estimates that during fiscal 1997 and 1998 approximately $1,300 and $3,700
per year will be spent, respectively, on capital projects for environmental
protection. These estimates include the additional capital required to
comply with EPA Underground Storage Tank (UST) regulations that become
effective in December 1998. Presently, the total additional capital
required to comply with the EPA UST regulations is estimated to be
approximately $3,700. The total capital requirements may change due to the
actual number of USTs actively in use on the effective date.
Other
The Company 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 Company. The Company 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 the financial
position, results of operations or liquidity of the Company.
5. SUBSEQUENT EVENT
----------------
On October 31, 1996, the Company's Country Products Group (CPG) entered
into an agreement with five other cooperative organizations to form
Pro-Pet, L.L.C., of which CPG will be a one-sixth owner. As part of the
formation of this joint venture, CPG sold its pet food manufacturing brands
and business, including its St. Marys, Ohio, pet food plant, to the
venture. The proceeds from the sale, net of a reinvestment into the
venture, totaled approximately $7,500, and the gain on sale was fully
offset by losses experienced from the closing of a second pet food plant
that had also been a part of Agway's pet food manufacturing business. Agway
will continue to purchase its pet food product from Pro-Pet, L.L.C., and
this change in manufacturing ownership will not materially affect Agway's
retail pet food business.
10
<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
- ---------------------
The Company'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 and Retail net sales and revenues are traditionally
higher in the spring as customers acquire products to initiate the growing
season. Energy realizes significantly higher net sales and revenues in the
winter months due to cold winter conditions. Leasing and Insurance are not
materially impacted by seasonal fluctuations.
Results by Operating Segment
----------------------------
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
$ Increase
9/30/96 9/30/95 (Decrease)
---------- ---------- ----------
<S> <C> <C> <C>
Net Sales and Revenues
- ----------------------
Agriculture ........................................... $ 168,862 $ 164,457 $ 4,405
Retail ................................................ 63,096 58,445 4,651
Energy ................................................ 107,943 97,479 10,464
Leasing ............................................... 13,317 11,526 1,791
Insurance ............................................. 6,314 7,243 (929)
Other (a) ............................................. (7,348) (14,527) 7,179
--------- --------- ---------
$ 352,184 $ 324,623 $ 27,561
========= ========= =========
Margin (Loss) from Continuing Operations
- ----------------------------------------
before Income Taxes
-------------------
Agriculture ........................................... $ (8,739) $ (6,506) $ (2,233)
Retail ................................................ 687 134 553
Energy ................................................ (4,898) (4,772) (126)
Leasing ............................................... 2,785 2,434 351
Insurance ............................................. (64) (29) (35)
Other...............................................(a) 1,769 1,671 98
--------- --------- ---------
Operating margin (loss) plus other income, net ........ (8,460) (7,068) (1,392)
Interest (expense), net of interest income ............ (6,559) (6,920) 361
--------- --------- ---------
$ (15,019) $ (13,988) $ (1,031)
========= ========= =========
</TABLE>
(a) Represents unallocated corporate items and intersegment eliminations.
Numbers in the following narrative have been rounded to the nearest hundred
thousand.
Consolidated Results
- --------------------
The sales increase of $27,600 (9%) for the first quarter of fiscal 1997, as
compared to the first quarter in the prior year, was the result of (1) higher
sales prices charged by Agway Agricultural Products (AAP) for feed products and
by Energy for heating oil due to an increase in the cost of these products; (2)
delayed spring sales of crop-related services; (3) volume increases in pet food,
bird seeds and lawn & garden seeds; and (4) increased revenues as the result of
a higher average net lease investment at Telmark. These increases were after
considering sales declines due to the sale of businesses of CPG during 1996 and
the first quarter of 1997.
Loss from continuing operations before tax increased $1,000 (7%) to $15,000 for
the first quarter of 1997 as compared to the first quarter in the prior year.
The operating results from ongoing operations improved $1,000. However, during
the first quarter of 1997, the adoption of a new accounting pronouncement on the
impairment of long-lived assets negatively impacted results by approximately
$1,700, and one-time net charges for the exiting of the pet food business and
the transfer of ARS distribution center management totaled approximately $1,000.
These charges were partially offset by improved operational results experienced
by CPG due to divested lines of business not incurring losses in fiscal 1997 as
they had done in the first quarter of the prior year.
11
<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
- -----------
Agriculture consists of Agway Agricultural Products (AAP) and the Country
Products Group (CPG). Total net sales and revenues for the first quarter of
fiscal 1997 of $168,900 increased $4,400 (3%) as compared to the first quarter
of fiscal 1996. This increase resulted from a $14,300 (13%) increase in AAP
sales in the first quarter of fiscal 1997, as compared to the same period during
the prior year, as a result of increased feed product prices and delayed spring
sales of crop-related services which increased the first quarter 1997 sales. The
AAP sales increase was offset by CPG experiencing an overall decline in total
net sales and revenues of $9,900 (19%) in the first quarter of 1997 as compared
to the same period during the prior year. The reduction represents the effect on
sales volume from lines of business sold during fiscal 1996, which included
Pro-Lawn, laboratory animal diet and Sacramento Valley Milling, as well as
Roberts Seed which was sold in the first quarter of fiscal 1997. These
divestitures were part of CPG's strategic plan. These reductions in sales levels
at CPG were partially offset by the improved volumes in CPG's ongoing flour,
bean, produce and sunflower operations during the first quarter of 1997 as
compared to the first quarter of the prior year.
The net loss before income taxes of Agriculture increased $2,200 (34%) to $8,800
for the first quarter of 1997 as compared to the same period during the prior
year. AAP's net loss before income taxes of $8,700 for the first quarter of 1997
is $1,100 (15%) higher than the same period during the prior year. AAP
enterprise operations experienced significantly improved operating results in
the first quarter of 1997, as compared to the same period during the prior year,
which were more than offset by decreased gross margins, due to increased
commodity costs and adverse experience with exchange-traded futures, and the
impact of adopting a new accounting pronouncement on the impairment of
long-lived assets. CPG experienced a $100 loss for the first quarter of 1997,
which is a $1,100 (106%) decline from a $1,000 margin in the first quarter of
the prior year. This decline was attributable to the decision to sell CPG's pet
food manufacturing brands and business and the associated net asset write-down
and other one-time costs. These charges were partially offset by improved
operating results from having divested of businesses that incurred losses in the
first quarter of the prior year. The operating results from CPG's ongoing
businesses on a combined basis resulted in positive results for the first
quarter of 1997, consistent with the prior year.
Retail
- ------
Total net sales and revenues for Agway Retail Services (ARS) increased $4,700
(8%) to $63,100 during the first quarter of 1997 as compared to the first
quarter of the prior year. This increase was the result of increases in sales of
pet food, bird seeds and lawn & garden seeds. The sales of these products were
enhanced by a trade show held in June 1996, where no such show was held at that
time in the prior year. Additionally, this increase is after considering the
declines in sales associated with planned product mix changes that reduced high
dollar value/lower margin power equipment in favor of smaller per unit value
products with higher turnover and margins.
The margin before taxes of $700 represents a $600 increase in results during the
first quarter of 1997 as compared to the first quarter of the prior year. This
increase was attributable to improved margins through product mix and pricing
strategies which have changed since the prior year as noted above. These margin
improvements were partially offset by overall increases in expenses. Increases
in manufacturing and administrative expenses were experienced in the first
quarter of 1997, as compared to the same period in the prior year, partly due to
one-time costs associated with the transfer of ARS distribution center
management to a third party vendor. These one-time costs were greater than the
reductions in selling and distribution expense experienced from improved
management of these costs.
12
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
Energy
- ------
Net sales and revenues increased $10,500 (11%) to $107,900 during the first
quarter of fiscal 1997 as compared to the same period during the prior year. The
increase was attributable to 10%-12% price increases in heating oils, diesel
fuel and propane in the first quarter of 1997 as compared to the same period
during the prior year. These price increases resulted from strong demand and low
inventories in the marketplace. The unit volume for all products in the first
quarter of 1997 increased 2% over the same period during the prior year.
Energy's operating loss of $4,900 in the first quarter of 1997 represents a $100
(3%) increase over the first quarter of the prior year. A slight improvement in
gross margins and an increase in other revenues was more than offset by
increased operating expenses during the first quarter of 1997 as compared to the
same period in the prior year.
Leasing
- -------
Total revenues for Telmark for the first quarter of 1997 of $13,300 increased
$1,800 (16%) as compared to the first quarter of the prior year. The increased
revenues were the result of a higher average net investment in leases during the
first quarter of 1997 as compared to the first quarter of the prior year.
Telmark's investment in net leases and notes of $385,000 at September 30, 1996,
is an increase of $40,600 (12%) from September 30, 1995.
Telmark's operating income for the first quarter of 1997 of $2,800 represents a
$400 (15%) improvement over the first quarter of the prior year. The increase is
due primarily to the larger lease portfolio in the first quarter of fiscal 1997
as compared to the first quarter in the prior year. Revenues associated with the
larger portfolio grew at a faster rate than the level of expenses.
Insurance
- ---------
Net revenues (earned premiums) of Insurance totaled $6,300 for the first quarter
of 1997, which represents a $900 (13%) decline from the first quarter of the
prior year. The decline is the result of increased reinsurance costs required to
limit the Company's potential loss experience.
Insurance operating loss totaled $64 for the first quarter of 1997, which is a
$35 (123%) increase from the first quarter of the prior year. Losses and loss
development significantly improved in the first quarter of fiscal 1997,
decreasing approximately 18% over the first quarter of the prior year. This
improvement, however, was offset by the lower net earned premiums and a decrease
in capital gains on investment sales in the first quarter of 1997 as compared to
the first quarter in the prior year.
13
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash Flows from Operating Activities
Cash flows from operating activities for the three months ended September 30,
1996 decreased approximately $16,000 as compared to the three months ended
September 30, 1995. The decline in operating cash flows, as compared to the
prior year, resulted principally from fluctuations in working capital items
(more specifically, inventory and other assets and liabilities).
Cash Flows from Investing Activities
Net cash flows used in the Company's investing activities totaled approximately
$8,400 for the three months ended September 30, 1996, as compared to $14,100 for
the three months ended September 30, 1995. The Company has a growing leasing
business and cash required to fund lease origination growth in excess of lease
repayments and leases sold amounted to $12,400 for the three months ended
September 30, 1996 and $13,200 for the three months ended September 30, 1995.
Additionally, proceeds of $5,200 from business sold during the three months
ended September 30, 1996 were a source of cash that was not generated in the
same period in the prior year.
Cash Flows from Financing Activities
The Company finances its operations and the operations of all its continuing
businesses and subsidiaries, except Telmark and Agway Insurance Company, through
Agway Financial Corporation (AFC). External sources of short-term financing for
the Company and all its other continuing operations include revolving credit
lines, letters of credit, and commercial paper programs. Telmark and Agway
Insurance Company finance themselves through operations or direct borrowing
arrangements. Each is financed with a combination of short- and long-term credit
facilities. In addition, Telmark has occasionally sold blocks of its lease
portfolio. Sources of longer-term financing include the following as of
September 30, 1996:
<TABLE>
<CAPTION>
Source of debt Agway & AFC Telmark Total
- -------------- ----------- -------- --------
<S> <C> <C> <C>
Banks - due 11/96 to 2/01 with interest
from 6.0% - 8.5% ............................. $ 3,150 $142,000 $145,150
Insurance companies - due 11/96 to 11/00
with interest from 5.9% - 9.2% ............... 121,333 121,333
Capital leases & other - due 1996 to 2007
with interest from 6% to 12% ................. 14,523 140 14,663
-------- -------- --------
Long-term debt ............................. 17,673 263,473 281,146
Subordinated money market certificates - due
10/96 to 10/08 with interest from 4.5% - 9.5% 378,768 26,530 405,298
Subordinated debentures - due 1999 to 2003 with
interest at 7.0% to 8.5% ..................... 22,898 22,898
-------- -------- --------
Total debt ................................. $419,339 $290,003 $709,342
======== ======== ========
</TABLE>
For a complete description of the Company's credit facilities available at
September 30, 1996, see Footnote 3 to the condensed consolidated financial
statements.
14
<PAGE>
PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
Item 1. Legal Proceedings
- --------------------------
In August 1995, the Environmental Protection Agency (EPA) notified Agway that
the EPA has reason to believe that Agway is a potentially responsible party
(PRP) under the Comprehensive Environmental Response, Compensation and Liability
Act (CERCLA) at the Tri-Cities Barrel Site, Port Crane, New York. The EPA
requested that Agway and other PRPs participate in the ongoing Remedial
Investigation/Feasibility Study (RI/FS) for the Tri-Cities Barrel Site. Agway
believes that its involvement at the Tri-Cities Barrel Site is minimal. Agway
has had further discussions with other PRPs who have been participating in the
ongoing RI/FS and decided to participate at this time. In September 1996, a
number of PRPs, including Agway, entered into an Administrative Order or Consent
for Removal Action with the EPA for the site.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
There were no reports on Form 8-K required to be filed during the first quarter
ended September 30, 1996.
15
<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 11, 1996 /s/ PETER J. O'NEILL
-------------------- --------------------------------
Peter J. O'Neill
Senior Vice President,
Finance & Control,
Treasurer and Controller
(Principal Financial Officer and
Chief Accounting Officer)
16
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended December 31, 1996
-----------------
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
-------
AGWAY INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 15-0277720
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
315-449-6431
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 31, 1997
- ------------------------ -------------------------------
Membership Common Stock, 106,730 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 December 31, 1996 and June 30, 1996........................ 3
Condensed Consolidated Statements of Operations and Retained Margin for the three months
and six months ended December 31, 1996 and December 31, 1995........................................... 4
Condensed Consolidated Cash Flow Statements for the six months ended December 31, 1996
and December 31, 1995.................................................................................. 5
Notes to Condensed Consolidated Financial Statements................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 11
PART II. OTHER INFORMATION
- -------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 16
Item 6. Exhibits and Reports on Form 8-K............................................................. 16
SIGNATURES............................................................................................ 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
---------- ----------
ASSETS (Unaudited)
- ------
<S> <C> <C>
Current Assets:
Trade accounts receivable (including notes receivable of
$25,882 and $35,182, respectively), less allowance for
doubtful accounts of $9,575 and $10,062, respectively .... $ 159,287 $ 207,327
Leases receivable, less unearned income of $51,402 and
$48,403, respectively .................................... 113,064 105,374
Advances and other receivables ............................. 38,657 35,900
Inventories:
Raw materials ............................................ 19,300 16,161
Finished goods ........................................... 168,402 128,770
Goods in transit and supplies ............................ 15,971 15,028
---------- ----------
Total inventories ...................................... 203,673 159,959
Prepaid expenses ........................................... 49,797 57,551
---------- ----------
Total current assets ................................... 564,478 566,111
Marketable securities available for sale ........................ 35,679 34,115
Other security investments ...................................... 44,483 42,406
Properties and equipment, net ................................... 219,996 237,015
Long-term leases receivable, less unearned income of
$79,092 and $75,828, respectively ............................. 280,813 268,815
Net pension asset ............................................... 91,680 84,757
Other assets .................................................... 10,825 12,672
---------- ----------
Total assets ........................................... $1,247,954 $1,245,891
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Notes payable .............................................. $ 94,600 $ 62,200
Current installments of long-term debt and subordinated debt 167,257 108,896
Accounts payable ........................................... 113,368 116,519
Other current liabilities .................................. 105,145 121,046
---------- ----------
Total current liabilities .............................. 480,370 408,661
Long-term debt .................................................. 172,052 197,413
Subordinated debt ............................................... 373,328 400,284
Other liabilities ............................................... 68,619 66,811
---------- ----------
Total liabilities .......................................... 1,094,369 1,073,169
Shareholders' equity:
Preferred stock, net .......................................... 59,324 59,319
Common stock, net ............................................. 2,671 2,689
Retained margin ............................................... 91,590 110,714
---------- ----------
Total shareholders' equity ................................. 153,585 172,722
Commitments and contingencies
Total liabilities and shareholders' equity ............. $1,247,954 $1,245,891
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED MARGIN
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales and revenues from:
Product sales .................... $ 353,580 $ 347,637 $ 686,758 $ 654,090
Leasing operations ............... 13,813 11,830 26,775 23,044
Insurance operations ............. 6,456 5,973 12,500 12,859
--------- --------- --------- ---------
Total net sales and revenues . 373,849 365,440 726,033 689,993
Cost and expenses from:
Products and plant operations .... 335,251 322,821 654,032 613,199
Leasing operations ............... 5,981 5,159 11,937 10,416
Insurance operations ............. 4,035 8,020 7,987 12,811
Selling, general and
administrative activities ...... 30,623 32,356 63,552 65,553
--------- --------- --------- ---------
Total costs and expenses ..... 375,890 368,356 737,508 701,979
Operating loss ........................ (2,041) (2,916) (11,475) (11,986)
Interest expense, net ................. 8,030 7,538 14,589 14,460
Other income, net ..................... 3,135 5,950 4,108 7,953
--------- --------- --------- ---------
Loss from continuing operations
before income taxes .............. (6,936) (4,504) (21,956) (18,493)
Income tax (benefit) expense .......... (292) 424 (4,457) (3,103)
--------- --------- --------- ---------
Loss from continuing operations ....... (6,644) (4,928) (17,499) (15,390)
Discontinued operations:
Gain on disposal of Hood,
net of tax expense of $1,585
and $1,624, respectively ......... 2,284 2,017
--------- --------- --------- ---------
Net loss .............................. $ (6,644) $ (2,644) $ (17,499) $ (13,373)
Retained Margin:
Balance at beginning of period,
as previously reported ....... 98,476 91,790 109,250 102,532
Adjustment for the cumulative
effect on prior years of
applying retroactively the
FIFO method of valuing
Energy inventories, net of tax 1,464 402 1,464 402
--------- --------- --------- ---------
Balance at beginning of period,
as adjusted .................. 99,940 92,192 110,714 102,934
Dividends ........................ (2,087) (2,172) (2,085) (2,172)
Adjustment to unrealized gains
(losses) on available-for-sale
securities, net of tax ....... 381 795 460 782
--------- --------- --------- ---------
Balance at end of period .............. $ 91,590 $ 88,171 $ 91,590 $ 88,171
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Net cash flows used in operating activities ................ $(24,278) $ (1,966)
Cash flows (used in) provided by investing activities:
Purchases of property, plant and equipment ............ (8,306) (7,518)
Proceeds from disposal of businesses .................. 13,777
Proceeds from disposal of property, plant and equipment 8,794 1,782
Leases originated ..................................... (93,264) (74,098)
Leases repaid ......................................... 70,237 60,841
Proceeds from sale of marketable securities ........... 19,558 5,968
Purchases of marketable securities .................... (20,662) (6,339)
Net purchase of investments in related cooperatives ... (2,077) 466
Proceeds from disposal of discontinued operations ..... 15,900
-------- --------
Net cash flows used in investing activities ................ (11,943) (2,998)
Cash flows (used in) provided by financing activities:
Net change in short-term borrowings ................... 32,400 15,800
Proceeds from long-term debt .......................... 27,850 19,781
Repayment of long-term debt ........................... (29,331) (19,585)
Proceeds from sale of subordinated debt ............... 34,798 44,790
Maturity and redemption of subordinated debt .......... (25,101) (49,304)
Payments on capital leases ............................ (2,172) (665)
Redemption of stock, net .............................. (13) (3,443)
Cash dividends paid ................................... (2,210) (2,410)
-------- --------
Net cash flows provided by financing activities ............ 36,221 4,964
-------- --------
Net decrease in cash and equivalents ....................... 0 0
Cash and equivalents at beginning of period ................ 0 0
-------- --------
Cash and equivalents at end of period ...................... $ 0 $ 0
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Thousands of Dollars)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Agway Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six-month period ended
December 31, 1996 are not necessarily indicative of the results that may be
expected for the year ending June 30, 1997 due to the seasonal nature of
certain major segments of the Company's business. For further information,
refer to the consolidated financial statements and notes thereto included
in the annual report on Form 10-K for the year ended June 30, 1996.
Inventories
During the second quarter of fiscal 1997, the Company's Energy division
changed its method of determining the cost of liquid product inventories
from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO)
method. The liquid product inventories on a FIFO basis totaled $15,583 and
$34,759 at June 30, 1996 and December 31, 1996, respectively, and represent
10% and 17% of the Company's total inventory for the same periods noted
above.
As required by generally accepted accounting principles, the Company has
retroactively adjusted prior years' financial statements for this change.
The Company has also applied to the Internal Revenue Service to change to
the FIFO method of inventory valuation for tax purposes. At the time the
Company elected LIFO accounting for its liquid products inventory in its
Energy division, the Company owned a majority interest in a refinery and
maintained significantly higher levels of liquid product inventories
throughout the Energy distribution system. Since that time, the Company
sold its interest in the refinery and has changed its business practice
with respect to liquid product inventory management. As a result of these
changes, inventory levels of liquid product currently are substantially
less and the inventory turns in approximately 15 days. Accordingly, FIFO is
a preferable method of accounting for liquid product inventories, better
reflecting how the Company currently manages its operations and better
matching revenues and costs.
The cumulative effect of the change (reported as an increase in retained
earnings as of June 30, 1995 for both the Company and Agway Financial
Corporation) of $402 represents the effect on net earnings of the reversal
of the LIFO reserve at that date. There was no effect of the change in
accounting method in net margin (loss) for the three and six months ended
December 31, 1996 and 1995. The restatement of income as previously
reported for fiscal years ended June 30, 1996 and 1995 is as follows:
1996 1995
-------- --------
Net margin (loss), as previously reported $ 11,600 $(15,908)
Effect of change in accounting method, net of tax 1,062 178
-------- --------
Adjusted net margin (loss) $ 12,662 $(15,730)
======== ========
Reclassifications
Certain reclassifications have been made to conform prior year financial
statements with the current year presentation.
6
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
2. AGWAY FINANCIAL CORPORATION
---------------------------
Agway Financial Corporation (AFC) is a wholly owned subsidiary of the
Company whose principal business activity is securing financing through
bank borrowings and issuance of corporate debt instruments to provide funds
for the Company and AFC's sole wholly owned subsidiary, Agway Holdings Inc.
(AHI), and AHI's subsidiaries, for general corporate purposes. The payment
of principal and interest on this debt is absolutely and unconditionally
guaranteed by the Company. In an exemptive relief granted pursuant to a "no
action letter" issued by the staff of the Securities and Exchange
Commission, AFC, as a separate company, is not required to file periodic
reports with respect to these debt securities. However, as required by the
1934 Act, the summarized financial information concerning AFC and
Consolidated Subsidiaries is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net sales and revenues ........ $ 275,544 $ 265,507 $ 514,212 $ 486,865
Operating margin .............. 8,263 5,027 6,995 3,985
Loss from continuing operations (454) (4,943) (3,270) (12,376)
Net loss ...................... (454) (2,658) (3,270) (10,359)
</TABLE>
December 31, June 30,
1996 1996
---------- ----------
Current assets ........................... $ 550,903 $ 532,158
Properties and equipment, net ............ 157,263 166,504
Noncurrent assets ........................ 366,276 353,377
---------- ----------
Total assets ......................... $1,074,442 $1,052,039
========== ==========
Current liabilities ...................... $ 306,338 $ 227,782
Long-term debt ........................... 165,240 191,189
Subordinated debt ........................ 373,328 400,284
Noncurrent liabilities ................... 16,715 17,152
Shareholder's equity ..................... 212,821 215,632
---------- ----------
Total liabilities and shareholder's equity $1,074,442 $1,052,039
========== ==========
7
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
3. BORROWING ARRANGEMENTS
----------------------
Agway and AFC
As of December 31, 1996, the Company had certain facilities available with
banking institutions whereby lenders have agreed to provide funds up to
$254,000 to separately financed units of the Company as follows: AFC -
$50,000 and Telmark - $204,000. In addition, AFC may issue up to $50,000 of
commercial paper under the terms of a separate agreement, backed by a
letter of credit.
The $50,000 line of credit available to AFC and its ability to issue
$50,000 of commercial paper require collateralization using certain of the
Company's accounts receivable and non-petroleum inventories ("collateral").
Amounts which can be drawn under the AFC short-term agreements are limited
to a specific calculation based upon the collateral available. Adequate
collateral has existed throughout the fiscal year to permit AFC to borrow
amounts to meet the ongoing needs of the Company and is expected to
continue to do so. In addition, the agreements include certain covenants,
the most restrictive of which requires the Company to maintain specific
quarterly levels of interest coverage and monthly levels of tangible
retained margins. The amounts outstanding as of December 31, 1996 under
AFC's $50,000 line of credit and $50,000 commercial paper were $34,600 and
$50,000, respectively. In November 1996, the Company renegotiated its line
of credit facility to extend the availability through January 1, 1998 and
to provide seasonal increases in the line of credit which will be available
so that total availability under AFC's line of credit will increase to
$60,000 at June 1, 1997 and $75,000 at October 1, 1997. The Company's
commercial paper program expires December 31, 1997. The Company has ongoing
discussions with its lenders and expects to continue to have appropriate
and adequate financing to meet its ongoing needs.
Annually, Agway and AFC offer subordinated debentures and subordinated
money market certificates to the public. Of Agway's and AFC's subordinated
debt at December 31, 1996, $418,600 is redeemable in whole or in part at
the principal amount plus accrued interest, prior to maturity dates, at the
option of the Company. The foregoing debt bears interest payable
semi-annually on January l and July 1 of each year. The money market
certificates' interest rate is at the greater of the quoted rate or a rate
based upon the discount rate for U. S. Government Treasury Bills, with
maturities of 26 weeks. In October 1996, $14,700 of subordinated money
market certificates issued by AFC matured. The Company has refinanced this
debt through the issuance of subordinated debt and short-term bank
borrowings.
Telmark
As of December 31, 1996, Telmark had two separate credit facilities
available from banks which allow Telmark to borrow up to an aggregate of
$204,000. An uncommitted short-term line of credit agreement permits
Telmark to borrow up to $4,000 on an unsecured basis with interest paid
upon maturity. The line bears interest at money market variable rates. A
committed $200,000 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 December 31, 1996, under the
short-term line of credit and the revolving term loan facility were $4,000
and $164,000, 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 $4,000
line of credit has been renewed through December 31, 1997. The $200,000
revolving term agreement loan facility is available through February 1,
1998.
At December 31, 1996, Telmark also had balances outstanding on unsecured
senior note private placements totaling $114,300. 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 contain
specific financial covenants.
8
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
3. BORROWING ARRANGEMENTS (continued)
----------------------------------
Telmark (continued)
Telmark has registered with the SEC two shelf offerings of debentures. The
debentures are unsecured, subordinated to all senior debt at Telmark, and
are not guaranteed by Agway nor any of Agway's other subsidiaries. The
interest on the debt is payable quarterly on January 1, April 1, July 1 and
October 1. The offering of debentures is continuing and the proceeds of the
offerings will be used to provide financing for Telmark's leasing
activities.
The Company believes Telmark will continue to have appropriate and adequate
short-term and long-term financing to meet its ongoing needs.
Long-term and subordinated debt outstanding at December 31, 1996, as
compared to June 30, 1996, amounted to:
<TABLE>
<CAPTION>
Agway & AFC Telmark Total
------------------- ------------------- -------------------
12/96 6/96 12/96 6/96 12/96 6/96
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Long-term debt ...... $ 15,555 $ 18,666 $272,457 $273,000 $288,012 $291,666
Currently payable ... 5,172 6,065 110,788 88,188 115,960 94,253
-------- -------- -------- -------- -------- --------
Net long-term debt .. $ 10,383 $ 12,601 $161,669 $184,812 $172,052 $197,413
======== ======== ======== ======== ======== ========
Subordinated debt ... $395,452 $390,669 $ 29,173 $ 24,258 $424,625 $414,927
Currently payable ... 51,297 14,643 51,297 14,643
-------- -------- -------- -------- -------- --------
Net subordinated debt $344,155 $376,026 $ 29,173 $ 24,258 $373,328 $400,284
======== ======== ======== ======== ======== ========
</TABLE>
9
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
4. COMMITMENTS AND CONTINGENCIES
-----------------------------
Environmental
The Company is subject to a number of governmental regulations concerning
environmental matters, either directly or as a result of the operations of
its subsidiaries. The Company expects that it will be required to expend
funds to participate in the remediation of certain sites, including sites
where the Company 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 sites with underground fuel storage tanks, and will incur
other expenses associated with environmental compliance.
The Company continually monitors its 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 is estimable. Estimates of the
extent of the Company's degree of responsibility relating to 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. At December 31, 1996, the Company had been 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 the
Company could be required to pay in excess of its pro rata share of
remediation costs. The Company's understanding of the financial strength of
other PRPs at these Superfund sites has been considered, where appropriate,
in the Company's determination of its estimated liability. The Company
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 Company does not anticipate
that any such adjustment would be material to its 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 reserves established will cause future cash outlays over approximately
five years based upon current estimates, and it is not expected that such
outlays will materially impact the Company's liquidity position.
Other
The Company 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 Company. The Company 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 the financial
position, results of operations or liquidity of the Company.
10
<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
- ---------------------
The Company'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 and Retail net sales and revenues are traditionally
higher in the spring as customers acquire products to initiate the growing
season. Energy generally realizes significantly higher net sales and revenues in
the winter months due to cold winter conditions. Leasing and Insurance are not
materially impacted by seasonal fluctuations.
<TABLE>
<CAPTION>
Results by Operating Segment
---------------------------------------------------------------------------
Three Months Ended Six Months Ended
------------------------------------ ------------------------------------
$ Increase $ Increase
12/31/96 12/31/95 (Decrease) 12/31/96 12/31/95 (Decrease)
--------- --------- --------- --------- --------- ---------
Net Sales and Revenues
- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Agriculture $ 150,974 $ 164,266 $ (13,292) $ 337,104 $ 329,075 $ 8,029
Retail 49,335 56,556 (7,221) 111,928 114,575 (2,647)
Energy 167,567 140,199 27,368 275,511 237,679 37,832
Leasing 14,142 12,169 1,973 27,459 23,695 3,764
Insurance 6,735 6,344 391 13,049 13,587 (538)
Other (a) (14,904) (14,094) (810) (39,018) (28,618) (10,400)
--------- --------- --------- --------- --------- ---------
$ 373,849 $ 365,440 $ 8,409 $ 726,033 $ 689,993 $ 36,040
========= ========= ========= ========= ========= =========
Margin (Loss) from Continuing Operations
- ----------------------------------------
before Income Taxes
-------------------
Agriculture $ (7,691) $ (1,903) $ (5,788) $ (16,430) $ (8,381) $ (8,049)
Retail (1,138) (1,859) 721 (451) (1,752) 1,301
Energy 5,172 5,628 (456) 273 856 (583)
Leasing 3,257 2,965 292 6,042 5,399 643
Insurance 316 (3,856) 4,172 252 (3,885) 4,137
Other (a) 1,178 2,059 (881) 2,947 3,730 (783)
--------- --------- --------- --------- --------- ---------
Operating margin (loss)
plus other income, net 1,094 3,034 (1,940) (7,367) (4,033) (3,334)
Interest (expense), net of
interest income (8,030) (7,538) (492) (14,589) (14,460) (129)
--------- --------- --------- --------- --------- ---------
$ (6,936) $ (4,504) $ (2,432) $ (21,956) $ (18,493) $ (3,463)
========= ========= ========= ========= ========= =========
</TABLE>
(a) Represents unallocated corporate items and intersegment eliminations.
Numbers in the following narrative have been rounded to the nearest hundred
thousand.
Consolidated Results
- --------------------
Consolidated net sales and revenues of $373,800 and $726,000 for the three and
six months ended December 31, 1996 increased $8,400 (2%) and $36,000 (5%),
respectively, as compared to the same periods in the prior year. The increases
were the result of (1) higher sales prices, due to increased product costs, in
Agriculture for feed products and in Energy for heating oils, diesel fuel and
propane; (2) delayed spring sales of crop-related services by Agriculture which
increased sales in the first quarter of fiscal 1997; and (3) increased lease
portfolio revenues, as compared to the prior year, from a higher average net
lease investment with higher revenue rates at Telmark. These increases were
partially offset by the weather-related decline in demand for bird food which
significantly reduced sales to consumers in the Retail business. Additionally,
the sale of businesses within CPG during the prior year and first six months of
fiscal 1997 has reduced the overall sales level in CPG.
11
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
Consolidated Results (continued)
- --------------------------------
Net loss from continuing operations before taxes of $6,900 and $22,000 for the
three and six months ended December 31, 1996 increased $2,400 (54%) and $3,500
(19%), respectively, as compared to the same periods in the prior year. The
Company's results through the six months ended December 31, 1996 reflect ongoing
operations improving $2,100 over the same period in the prior year. During this
period, several one-time impacts to the financial results occurred which more
than offset the ongoing operation improvement. The adoption of a new accounting
pronouncement on the impairment of long-lived assets; one-time net charges from
the sale of the pet food manufacturing brands and business and the transition
cost from outsourcing the retail distribution center management; and a delay in
the timing of recognizing patronage refunds from fertilizer purchases have
decreased pre-tax earnings for the six months ended December 31, 1996, as
compared to the same period in the prior year, by $5,600.
In addition to the one-time items noted above, Agriculture's operating results
were affected by increased commodity costs and less favorable experience than in
the prior year with exchange-traded futures. The net decline of Agriculture, as
compared to the prior year, was substantially offset by improved underwriting
results in Insurance, continued strong earnings in Telmark and improvements in
Retail.
Agriculture
- -----------
Agriculture consists of Agway Agricultural Products (AAP) and the Country
Products Group (CPG). Total Agriculture net sales and revenues of $151,000 and
$337,100 for the three and six months ended December 31, 1996 decreased $13,300
(8%) and increased $8,000 (2%), respectively, as compared to the same periods in
the prior year. The decrease in net sales and revenues for the three-month
period, as compared to the same period in the prior year, resulted from a $2,400
(2%) increase in AAP net sales and revenues, offset by a $15,600 (30%) decline
in CPG net sales and revenues. The increase in net sales and revenues for the
six-month period ended December 31, 1996, as compared to the same period in the
prior year, resulted from a $33,000 (15%) increase in AAP net sales and
revenues, offset by a $25,000 (24%) decline in CPG total net sales and revenues.
The increase in AAP sales for the three- and six-month periods ended December
31, 1996 was the result of increased feed product prices and delayed spring
sales of crop-related services which rolled into the first quarter of fiscal
1997. The decline in CPG sales for the three- and six-month periods ended
December 31, 1996 represents the decline in sales volume of $9,900 and $23,400,
respectively, from lines of business sold, mainly during the prior year, as part
of CPG's strategic plan, which included Pro-Lawn, a laboratory animal diet
business, Sacramento Valley Milling and Roberts Seed. Additionally, net sales
and revenues for the ongoing CPG speciality products operations also declined in
the six-month period ended December 31, 1996, as compared to the same period in
the prior year, mainly due to declines in sunflower seed sales for the
production of bird foods. Lower than normal snow coverage in the Northeast in
November and December caused less demand for this product. The remaining ongoing
operations of CPG generated net sales and revenues during the six months ended
December 31, 1996 that were equivalent to the same period in the prior year.
The net loss before income taxes of Agriculture of $7,700 and $16,400 for the
three and six months ended December 31, 1996 increased $5,800 (300%) and $8,000
(96%), respectively, as compared to the same periods in the prior year. AAP's
second quarter loss of $9,300 was a $5,700 (162%) increase over the same period
in the prior year, and the $18,000 six-month loss was a $6,900 (62%) increase
over the first six months of the prior year. However, AAP enterprise operations
experienced $3,100 in improvements to operating results and reduced
administrative costs by $1,200 over the six months ended December 31, 1996, as
compared to the same period in the prior year. These improvements were more than
offset by decreased gross margins, due to increased commodity costs and less
favorable experience with exchange-traded futures; the timing of patronage
refunds recognized in the second quarter last year which are expected in the
third quarter in the current year; and the impact of adopting a new accounting
pronouncement on the impairment of long-lived assets.
12
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
Agriculture (continued)
- -----------------------
CPG net income of $1,600 for both the three and six months ended December 31,
1996 decreased $100 (30%) and $1,100 (43%), respectively, as compared to the
same periods in the prior year. The net income has been adversely impacted by a
$600 decline in the sunflower seed margins due to a drop in prices combined with
lower sales volumes; a $400 decline in potato margins resulted from price
reductions in the potato industry; and the cost of net asset write-downs and
other one-time costs attributable to the sale of CPG's pet food manufacturing
brands and business. These adverse items were partially offset by improvements,
as compared to the prior year, in other continuing operations.
Retail
- ------
Total net sales and revenues of $49,300 and $111,900 for the three and six
months ended December 31, 1996 decreased $7,200 (13%) and $2,600 (2%),
respectively, as compared to the same periods in the prior year. The second
quarter decline of $7,200 resulted from a significant reduction in bird food and
ice melter salt sales due to the relatively light snow cover in November and
December in many parts of the Northeast. Additionally, sales of water systems
were significantly reduced, as compared to the prior year, as Retail entered
into an agreement under which a third party would sell these products and pay
Retail a commission. The second quarter decline in sales, as compared to the
prior year, more than offset the first quarter sales improvements in pet food,
bird food and lawn and garden seeds and the improved sale of wood pellets in the
second quarter.
Net loss before income taxes of $1,100 and $500 for the three and six months
ended December 31, 1996 improved $700 (39%) and $1,300 (74%), respectively, over
the same periods in the prior year. Gross margin dollars were down 6% for the
second quarter, as compared to the prior year, due to the decline in sales
dollars; however, margin percentages have improved through product mix and
pricing strategy changes since the prior year. Total expenses for the second
quarter and for the six-month period ended December 31, 1996 decreased $1,500
(9%) and $1,700 (5%), respectively, as compared to the same periods in the prior
year. The most significant decline in both the three- and six-month periods
ended December 31, 1996 was in selling expenses. Advertising expenses have been
either reduced or delayed to provide for enhancement to sales efforts in the
upcoming spring season. Additionally, reductions in distribution and
manufacturing expenses were more than offset by one-time costs incurred to
transfer distribution center management and from the costs of acquisition of new
businesses or improvements to current stores.
Energy
- ------
Net sales and revenues of $167,600 and $275,500 for the three and six months
ended December 31, 1996 increased $27,400 (20%) and $37,800 (16%), respectively,
as compared to the same periods in the prior year. The increase, as compared to
the prior year, is substantially due to higher commodity prices in the current
year in heating oils, diesel fuel and propane as a result of strong demand and
low industry inventories in the marketplace. Energy's average selling price of
all products increased 19.5% in the three months and 14.5% for the six months
ended December 31, 1996, as compared to the same periods in the prior year. The
total unit volume of all products for both the three and six months ended
December 31, 1996 shows slight improvements, despite temperatures being warmer
than the prior year.
Margin before income taxes of $5,200 and $300 for the three and six months ended
December 31, 1996 decreased $500 (8%) and $600 (68%), respectively, as compared
to the same periods in the prior year. Gross margin dollars decreased $400 and
$300 for the second quarter and six months ended December 31, 1996, as compared
to the same periods in the prior year, as a result of product cost increases not
being able to be absorbed by the marketplace. Total operating expenses increased
for the three and six months ended December 31, 1996, as compared to the same
periods in the prior year, as the result of increased distribution costs
partially offset by reduced selling and administrative costs. Finally, other
revenue increased over the prior year due to gains on the sale of assets in the
current year.
13
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
Leasing
- -------
Telmark total revenues of $14,100 and $27,500 for the three and six months ended
December 31, 1996 increased $2,000 (16%) and $3,800 (16%), respectively, as
compared to the same periods in the prior year. The increased revenues over both
periods, as compared to the same periods in the prior year, are the result of a
higher average net investment with higher revenue rates associated with current
period leases. The net investment increased $22,700 (6%) to $417,000 for the
six-month period ended December 31, 1996, as compared to an increase of $12,700
(4%) to $361,000 for the same period in the prior year. Revenue as a percent of
average net investment increased 3% in the six months ended December 31, 1996,
as compared to the same period in the prior year.
Margin before income taxes of $3,300 and $6,000 for the three and six months
ended December 31, 1996 increased $300 (10%) and $600 (12%), respectively, as
compared to the same periods prior year. Total revenue increases were partially
offset by an increase in total expenses for the three and six months ended
December 31, 1996 of $1,700 (18%) and $3,200 (17%), respectively, as compared to
the same periods in the prior year. The larger net investment during those
periods, as compared to the same periods in the prior year, has increased
interest expense, selling, general and administrative expenses and the provision
for credit losses in the current year.
Insurance
- ---------
Net revenues (earned premiums) of $6,700 and $13,000 for the three and six
months ended December 31, 1996 increased $400 (6%) and decreased $500 (4%),
respectively, as compared to the same periods in the prior year. The
fluctuations are the result of increased reinsurance costs being incurred
earlier over the six months ended December 31, 1996 as compared to the prior
year. The increased reinsurance costs will further limit Insurance's potential
loss exposure.
Margin before income taxes of $300 for both the three and six months ended
December 31, 1996 increased $4,200 (108%) and $4,100 (107%), respectively, as
compared to the same periods in the prior year. The increase has been the result
of improvement in loss development. In the first six months of the prior year,
Insurance experienced adverse development in older claims and certain unusually
large farmowner and auto liability casualty losses. These types of adverse
developments did not occur during the first six months of the current year.
14
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash Flows from Operating Activities
Cash flows from operating activities for the six months ended December 31, 1996
were a net cash use of $24,300, a decrease in cash flows of approximately
$22,500 as compared to the same period in the prior year. This decrease was due
primarily to larger increases in inventory and receivables over the six-month
period ended December 31, 1996, as compared to the same period in prior year,
from higher commodity market prices in Agriculture and Energy, and from higher
Energy inventory levels maintained due to the low industry inventories in the
marketplace.
Cash Flows from Investing Activities
Net cash flows used in the Company's investing activities totaled approximately
$11,900 for the six months ended December 31, 1996, as compared to $3,000 for
the six months ended December 31, 1995, an increased outflow of $8,900. The
Company has a growing leasing business and cash required to fund lease
origination growth in excess of lease repayments and leases sold amounted to
$23,000 for the six months ended December 31, 1996, as compared to $13,300 for
the six months ended December 31, 1995, a net cash outflow of $9,700.
Additionally, purchases of fixed assets and the net purchase of marketable
securities and investments in related cooperatives during the six months ended
December 31, 1996 increased $4,100 over the prior year. These increased uses
were partially offset by proceeds of $22,600 from businesses and fixed assets
sold during the six months ended December 31, 1996 that were $4,900 higher than
the cash generated from the same activity, including the disposal of
discontinued operations, in the same period in the prior year.
Cash Flows from Financing Activities
The Company finances its operations and the operations of all its continuing
businesses and subsidiaries, except Telmark and Agway Insurance Company, through
Agway Financial Corporation (AFC). External sources of short-term financing for
the Company and all its other continuing operations include revolving credit
lines, letters of credit, and commercial paper programs. Telmark and Agway
Insurance Company finance themselves through operations or direct borrowing
arrangements. Each is financed with a combination of short- and long-term credit
facilities. In addition, Telmark has occasionally sold blocks of its lease
portfolio. Sources of longer-term financing include the following as of December
31, 1996:
Agway &
Source of debt AFC Telmark Total
- -------------- -------- -------- --------
Banks - due 11/97 to 2/01 with interest
from 6.0% - 8.5% ............................ $ 2,975 $158,000 $160,975
Insurance companies - due 3/97 to 11/00
with interest from 5.9% - 9.2% .............. 114,333 114,333
Capital leases & other - due 1997 to 2007
with interest from 6% to 12% ................ 12,580 124 12,704
-------- -------- --------
Long-term debt ............................ 15,555 272,457 288,012
Subordinated money market certificates - due
10/97 to 10/08 with interest from 4.5% - 9.5% 373,020 29,173 402,193
Subordinated debentures - due 1999 to 2003 with
interest at 7.0% to 8.5% .................... 22,432 22,432
-------- -------- --------
Total debt ................................ $411,007 $301,630 $712,637
======== ======== ========
For a complete description of the Company's credit facilities available at
December 31, 1996, see Footnote 3 to the condensed consolidated financial
statements.
15
<PAGE>
PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Company held its annual meeting of shareholders on November 13, 1996, at
which a quorum was present in person or by proxy. The following Directors were
elected to three-year terms through December 1999:
Nominee In Favor Opposed
------------------ -------- -------
Robert L. Marshman 62,404 4,695
Peter D. Hanks 62,404 4,695
Carl D. Smith 62,404 4,695
Kevin B. Barrett 62,404 4,695
Samuel F. Minor 62,404 4,695
Joel L. Wenger 62,404 4,695
Eligible additional votes totaling 17,736 were not received at the time of the
annual meeting and are not included as either votes in favor or opposed.
Additionally, these 17,736 eligible additional votes may be considered
abstentions and were not included for purposes of determining a quorum at the
annual meeting.
The following is a list of directors whose terms as Directors continued after
the Annual Meeting:
Ralph H. Heffner - Chairman of the Board and Director
Robert L. Marshman - Vice Chairman of the Board and Director
Kevin B. Barrett - Director
Keith H. Carlisle - Director
Vyron M. Chapman - Director
D. Gilbert Couser - Director
Andrew J. Gilbert - Director
Peter D. Hanks - Director
Frederick A. Hough - Director
Samuel F. Minor - Director
Carl D. Smith - Director
Thomas E. Smith - Director
Gary K. Van Slyke - Director
Joel L. Wenger - Director
Edwin C. Whitehead - Director
Christian F. Wolff, Jr - Director
William W. Young - Director
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
There were no reports on Form 8-K required to be filed during the three months
ended December 31, 1996.
16
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AGWAY INC.
----------------------------------------
(Registrant)
Date February 4, 1997 /s/ PETER J. O'NEILL
---------------------- ----------------------------------------
Peter J. O'Neill
Senior Vice President,
Finance & Control,
Treasurer and Controller
(Principal Financial Officer and
Chief Accounting Officer)
17
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended December 31, 1996
-----------------
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
-------
AGWAY INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 15-0277720
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
315-449-6431
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 31, 1997
- ------------------------ -------------------------------
Membership Common Stock, 106,730 shares
$25 par value per share
1
<PAGE>
PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
18.0 Letter re change in accounting principles
27.0 Financial Data Schedule*
(b) Reports on Form 8-K
There were no reports on Form 8-K required to be filed during the three
months ended December 31, 1996.
*Included with electronic filing only.
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AGWAY INC.
----------------------------------------
(Registrant)
Date February 11, 1997 /s/ PETER J. O'NEILL
---------------------- ----------------------------------------
Peter J. O'Neill
Senior Vice President,
Finance & Control,
Treasurer and Controller
(Principal Financial Officer and
Chief Accounting Officer)
<PAGE>
EXHIBIT 18
<PAGE>
(logo) Coopers & Lybrand L.L.P. One Lincoln Center telephone (315) 474-8541
Syracuse, New York facsimile (315) 473-1385
a professional services firm
Board of Directors
Agway, Inc.
333 Butternut Drive
DeWitt, New York 13214
We are providing this letter to you for inclusion as an exhibit to your Form
10-Q filing pursuant to Item 601 of Regulation S-K.
We have read management's justification for the change in accounting from the
Last-In First-Out (LIFO) method of inventory valuation for the liquid petroleum
products to the First-In First-Out (FIFO) method contained in the Company's Form
10-Q for the quarter ended December 31, 1996. Based on our reading of the data
and discussion with Company officials of the business judgment and business
planning factors relating to the change, we believe management's justification
is reasonable. Accordingly, in reliance on management's determination as regards
elements of judgement and business planning, we concur that the newly adopted
accounting principle described above is preferable in the Company's
circumstances to the method previously applied.
We have not audited any financial statements of Agway, Inc. as of any date or
any period subsequent to June 30, 1996, nor have we audited the application of
the change in accounting principle disclosed in Form 10-Q of Agway, Inc. for the
three months ended December 31, 1996; accordingly, our comments are subject to
revision on completion of an audit of the financial statements that include the
accounting change.
/s/ Coopers & Lybrand L.L.P.
Syracuse, New York
January 7, 1997
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended March 31, 1997
--------------
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
-------
AGWAY INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 15-0277720
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
315-449-6431
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 2, 1997
- ------------------------------------------------ --------------------------
Membership Common Stock, $25 par value per share 105,966 shares
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 March 31, 1997 and June 30, 1996........................... 3
Condensed Consolidated Statements of Operations and Retained Margin for the three months
and nine months ended March 31, 1997 and March 31, 1996................................................ 4
Condensed Consolidated Cash Flow Statements for the nine months ended March 31, 1997
and March 31, 1996..................................................................................... 5
Notes to Condensed Consolidated Financial Statements................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 11
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Form 8-K............................................................. 16
SIGNATURES............................................................................................ 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
---------- ----------
(Unaudited)
ASSETS
- ------
<S> <C> <C>
Current Assets:
Trade accounts receivable (including notes receivable of
$17,669 and $35,182, respectively), less allowance for
doubtful accounts of $9,481 and $10,062, respectively .... $ 152,502 $ 207,327
Leases receivable, less unearned income of $54,186 and
$48,403, respectively .................................... 118,126 105,374
Advances and other receivables ............................. 30,557 35,900
Inventories:
Raw materials ............................................ 14,176 16,161
Finished goods ........................................... 195,899 128,770
Goods in transit and supplies ............................ 21,782 15,028
---------- ----------
Total inventories ...................................... 231,857 159,959
Prepaid expenses ........................................... 45,799 57,551
---------- ----------
Total current assets ................................... 578,841 566,111
Marketable securities available for sale ........................ 36,057 34,115
Other security investments ...................................... 49,589 42,406
Properties and equipment, net ................................... 215,848 237,015
Long-term leases receivable, less unearned income of
$85,726 and $75,828, respectively ............................. 293,451 268,815
Net pension asset ............................................... 94,931 84,757
Other assets .................................................... 10,250 12,672
---------- ----------
Total assets ........................................... $1,278,967 $1,245,891
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Notes payable .............................................. $ 90,800 $ 62,200
Current installments of long-term debt and subordinated debt 170,259 108,896
Accounts payable ........................................... 150,370 116,519
Other current liabilities .................................. 109,357 121,046
---------- ----------
Total current liabilities .............................. 520,786 408,661
Long-term debt .................................................. 157,593 197,413
Subordinated debt ............................................... 373,217 400,284
Other liabilities ............................................... 69,932 66,811
---------- ----------
Total liabilities .......................................... 1,121,528 1,073,169
Shareholders' equity:
Preferred stock, net .......................................... 57,645 59,319
Common stock, net ............................................. 2,658 2,689
Retained margin ............................................... 97,136 110,714
---------- ----------
Total shareholders' equity ................................. 157,439 172,722
Commitments and contingencies
Total liabilities and shareholders' equity ............. $1,278,967 $1,245,891
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED MARGIN
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales and revenues from:
Product sales ..................... $ 406,747 $ 408,632 $ 1,091,730 $ 1,061,343
Leasing operations ................ 14,290 12,052 41,748 35,746
Insurance operations .............. 6,834 6,475 19,883 20,063
----------- ----------- ----------- -----------
Total net sales and revenues .. 427,871 427,159 1,153,361 1,117,152
Cost and expenses from:
Products and plant operations ..... 378,934 371,730 1,032,422 984,928
Leasing operations ................ 4,958 4,387 16,895 14,803
Insurance operations .............. 4,181 4,943 12,168 17,754
Selling, general and
administrative activities ....... 31,656 34,860 95,208 100,413
----------- ----------- ----------- -----------
Total costs and expenses ...... 419,729 415,920 1,156,693 1,117,898
Operating margin (loss) ................ 8,142 11,239 (3,332) (746)
Interest expense, net .................. (8,902) (8,454) (23,491) (22,912)
Other income, net ...................... 11,631 11,505 15,742 19,457
----------- ----------- ----------- -----------
Margin (loss) from continuing operations
before income taxes ............... 10,871 14,290 (11,081) (4,201)
Income tax (benefit) expense ........... 4,856 8,264 399 5,162
----------- ----------- ----------- -----------
Margin (loss) from continuing operations 6,015 6,026 (11,480) (9,363)
Discontinued operations:
Gain on disposal of Hood,
net of tax expense of $1,624 ...... 2,017
----------- ----------- ----------- -----------
Net margin (loss) ...................... $ 6,015 $ 6,026 $ (11,480) $ (7,346)
Retained Margin:
Balance at beginning of period,
as previously reported ........ 91,590 88,171 109,250 102,532
Adjustment for the cumulative
effect on prior years of
applying retroactively the
FIFO method of valuing
Energy inventories, net of tax 1,464 402
----------- ----------- ----------- -----------
Balance at beginning of period,
as adjusted ................... 91,590 88,171 110,714 102,934
Dividends ......................... (2,087) (2,172)
Adjustment to unrealized gains
(losses) on available-for-sale
securities, net of tax ........ (469) (1,085) (11) (304)
----------- ----------- ----------- -----------
Balance at end of period ............... $ 97,136 $ 93,112 $ 97,136 $ 93,112
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
(Thousands of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Net cash flows provided by (used in) operating activities .. $ 28,683 $ (6,467)
Cash flows provided by (used in) investing activities:
Purchases of property, plant and equipment ............ (15,274) (14,683)
Proceeds from disposal of businesses .................. 20,385 26,276
Proceeds from disposal of property, plant and equipment 7,103 2,594
Cash paid for acquisitions ............................ (973)
Leases originated ..................................... (152,617) (114,399)
Leases repaid ......................................... 109,672 92,484
Proceeds from sale of marketable securities ........... 20,622 6,505
Purchases of marketable securities .................... (22,572) (6,108)
Net purchase of investments in related cooperatives ... (12,100) (6,687)
Proceeds from disposal of discontinued operations ..... 15,900
--------- ---------
Net cash flows provided by (used in) investing activities .. (45,754) 1,882
Cash flows provided by (used in) financing activities:
Net change in short-term borrowings ................... 28,600 11,500
Proceeds from long-term debt .......................... 28,402 23,663
Repayment of long-term debt ........................... (52,854) (29,364)
Proceeds from sale of subordinated debt ............... 54,107 72,190
Maturity and redemption of subordinated debt .......... (32,626) (61,259)
Payments on capital leases ............................ (2,554) (1,306)
Redemption of stock, net .............................. (1,707) (6,257)
Cash dividends paid ................................... (4,297) (4,582)
--------- ---------
Net cash flows provided by financing activities ............ 17,071 4,585
--------- ---------
Net decrease in cash and equivalents ....................... 0 0
Cash and equivalents at beginning of period ................ 0 0
--------- ---------
Cash and equivalents at end of period ...................... $ 0 $ 0
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Thousands of Dollars)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Agway Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine-month period ended March
31, 1997 are not necessarily indicative of the results that may be expected
for the year ending June 30, 1997 due to the seasonal nature of certain
major segments of the Company's business. For further information, refer to
the consolidated financial statements and notes thereto included in the
annual report on Form 10-K for the year ended June 30, 1996.
Reclassifications
Certain reclassifications have been made to conform prior year financial
statements with the current year presentation.
6
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
2. AGWAY FINANCIAL CORPORATION
---------------------------
Agway Financial Corporation (AFC) is a wholly owned subsidiary of the
Company whose principal business activity is securing financing through
bank borrowings and issuance of corporate debt instruments to provide funds
for the Company and AFC's sole wholly owned subsidiary, Agway Holdings Inc.
(AHI), and AHI's subsidiaries, for general corporate purposes. The payment
of principal and interest on this debt is absolutely and unconditionally
guaranteed by the Company. In an exemptive relief granted pursuant to a "no
action letter" issued by the staff of the Securities and Exchange
Commission, AFC, as a separate company, is not required to file periodic
reports with respect to these debt securities. However, as required by the
1934 Act, the summarized financial information concerning AFC and
Consolidated Subsidiaries is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ ------------------------------
1997 1996 1997 1996
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net sales and revenues............. $ 317,414 $ 304,716 $ 831,626 $ 791,581
Operating margin................... 20,433 19,930 27,428 23,914
Margin (loss) from continuing
operations..................... (1,212) 2,386 (4,482) (9,990)
Net margin (loss).................. (1,212) 2,386 (4,482) (7,973)
</TABLE>
March 31, June 30,
1997 1996
---------- ----------
Current assets ........................... $ 525,767 $ 532,158
Properties and equipment, net ............ 155,028 166,504
Noncurrent assets ........................ 383,493 353,377
---------- ----------
Total assets ......................... $1,064,288 $1,052,039
========== ==========
Current liabilities ...................... $ 310,417 $ 227,782
Long-term debt ........................... 150,945 191,189
Subordinated debt ........................ 373,217 400,284
Noncurrent liabilities ................... 18,568 17,152
Shareholder's equity ..................... 211,141 215,632
---------- ----------
Total liabilities and shareholder's equity $1,064,288 $1,052,039
========== ==========
7
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
3. BORROWING ARRANGEMENTS
----------------------
Agway and AFC
As of March 31, 1997, the Company had certain facilities available with
banking institutions whereby lenders have agreed to provide funds up to
$254,000 to separately financed units of the Company as follows: AFC -
$50,000 and Telmark - $204,000. In addition, AFC may issue up to $50,000 of
commercial paper under the terms of a separate agreement, backed by a
letter of credit.
The $50,000 line of credit available to AFC and its ability to issue
$50,000 of commercial paper require collateralization using certain of the
Company's accounts receivable and non-petroleum inventories ("collateral").
Amounts which can be drawn under the AFC short-term agreements are limited
to a specific calculation based upon the collateral available. Adequate
collateral has existed throughout the fiscal year to permit AFC to borrow
amounts to meet the ongoing needs of the Company and is expected to
continue to do so. In addition, the agreements include certain covenants,
the most restrictive of which requires the Company to maintain specific
quarterly levels of interest coverage and monthly levels of tangible
retained margins. The amounts outstanding as of March 31, 1997 under AFC's
$50,000 line of credit and $50,000 commercial paper were $0 and $39,400,
respectively. The Company's current line of credit facility continues
through January 1, 1998 and provides seasonal increases in the line of
credit which will be available so that total availability under AFC's line
of credit will increase to $70,000 at June 1, 1997 and $100,000 at October
1, 1997. The Company's current commercial paper program continues through
December 31, 1997. The Company has ongoing discussions with its lenders and
expects to continue to have appropriate and adequate financing to meet its
ongoing needs.
Annually, Agway and AFC offer subordinated debentures and subordinated
money market certificates to the public. Of Agway's and AFC's subordinated
debt at March 31, 1997, $380,800 is redeemable in whole or in part at the
principal amount plus accrued interest, prior to maturity dates, at the
option of the Company. The foregoing debt bears interest payable
semi-annually on January l and July 1 of each year. The money market
certificates' interest rate is at the greater of the quoted rate or a rate
based upon the discount rate for U. S.
Government Treasury Bills, with maturities of 26 weeks.
Telmark
As of March 31, 1997, Telmark had two separate credit facilities available
from banks which allow Telmark to borrow up to an aggregate of $204,000. An
uncommitted short-term line of credit agreement permits Telmark to borrow
up to $4,000 on an unsecured basis with interest paid upon maturity. The
line bears interest at money market variable rates. A committed $200,000
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 March 31, 1997, under the short-term line
of credit and the revolving term loan facility were $4,000 and $185,400,
respectively. On April 23, 1997, Telmark completed a private placement of
debt totaling $38,000. Proceeds of the notes were used to pay down debt
under the Telmark lines of credit.
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 $4,000
line of credit has been renewed through December 31, 1997. The $200,000
revolving term agreement loan facility is available through February 1,
1998.
At March 31, 1997, Telmark also had balances outstanding on unsecured
senior notes from private placements totaling $111,222. 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 contain
specific financial covenants.
8
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
3. BORROWING ARRANGEMENTS (continued)
----------------------------------
Telmark (continued)
Annually, Telmark offers subordinated debentures to the public. The
debentures are unsecured and subordinated to all senior debt at Telmark.
The interest on the debt is payable quarterly on January 1, April 1, July 1
and October 1, and the proceeds of the offerings will be used to provide
financing for Telmark's leasing activities.
The Company believes Telmark will continue to have appropriate and adequate
short-term and long-term financing to meet its ongoing needs.
Long-term and subordinated debt outstanding at March 31, 1997, as compared
to June 30, 1996, amounted to:
<TABLE>
<CAPTION>
Agway & AFC Telmark Total
------------------- ------------------- -------------------
3/97 6/96 3/97 6/96 3/97 6/96
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Long-term debt ...... $ 15,331 $ 18,666 $249,330 $273,000 $264,661 $291,666
Currently payable ... 5,280 6,065 101,788 88,188 107,068 94,253
-------- -------- -------- -------- -------- --------
Net long-term debt .. $ 10,051 $ 12,601 $147,542 $184,812 $157,593 $197,413
======== ======== ======== ======== ======== ========
Subordinated debt ... $405,658 $390,669 $ 30,750 $ 24,258 $436,408 $414,927
Currently payable ... 52,223 14,643 10,968 63,191 14,643
-------- -------- -------- -------- -------- --------
Net subordinated debt $353,435 $376,026 $ 19,782 $ 24,258 $373,217 $400,284
======== ======== ======== ======== ======== ========
</TABLE>
9
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)
4. COMMITMENTS AND CONTINGENCIES
-----------------------------
Environmental
The Company is subject to a number of governmental regulations concerning
environmental matters, either directly or as a result of the operations of
its subsidiaries. The Company expects that it will be required to expend
funds to participate in the remediation of certain sites, including sites
where the Company 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 sites with underground fuel storage tanks, and will incur
other expenses associated with environmental compliance.
The Company continually monitors its 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 is estimable. Estimates of the
extent of the Company's degree of responsibility relating to 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. At March 31, 1997, the Company had been 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 the
Company could be required to pay in excess of its pro rata share of
remediation costs. The Company's understanding of the financial strength of
other PRPs at these Superfund sites has been considered, where appropriate,
in the Company's determination of its estimated liability. The Company
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 Company does not anticipate
that any such adjustment would be material to its 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 reserves established will cause future cash outlays over approximately
five years based upon current estimates, and it is not expected that such
outlays will materially impact the Company's liquidity position.
Other
The Company 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 Company. The Company 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 the financial
position, results of operations or liquidity of the Company.
10
<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
- ---------------------
The Company'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 and Retail net sales and revenues are traditionally
higher in the spring as customers acquire products to initiate the growing
season. Energy generally realizes significantly higher net sales and revenues in
the winter months due to cold winter conditions. Leasing and Insurance are not
materially impacted by seasonal fluctuations.
<TABLE>
<CAPTION>
Results by Operating Segment
--------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
----------------------------------------- -----------------------------------------
$ Increase $ Increase
3/31/97 3/31/96 (Decrease) 3/31/97 3/31/96 (Decrease)
----------- ----------- ----------- ----------- ----------- -----------
Net Sales and Revenues
- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Agriculture $ 156,711 $ 187,791 $ (31,080) $ 493,856 $ 516,875 $ (23,019)
Retail 45,454 49,162 (3,708) 157,359 163,616 (6,257)
Energy 212,372 191,603 20,769 487,882 429,282 58,600
Leasing 14,290 12,052 2,238 41,748 35,746 6,002
Insurance 6,834 6,475 359 19,883 20,063 (180)
Other (a) (7,790) (19,924) 12,134 (47,367) (48,430) 1,063
----------- ----------- ----------- ----------- ----------- -----------
$ 427,871 $ 427,159 $ 712 $ 1,153,361 $ 1,117,152 $ 36,209
=========== =========== =========== =========== =========== ===========
Margin (Loss) from Continuing Operations
- ----------------------------------------
before Income Taxes
-------------------
Agriculture $ (1,800) $ 4,650 $ (6,450) $ (18,075) $ (3,626) $ (14,449)
Retail (3,337) (3,339) 2 (3,942) (5,197) 1,255
Energy 19,931 20,347 (416) 20,205 21,203 (998)
Leasing 3,745 3,260 485 9,787 8,659 1,128
Insurance 76 (1,226) 1,302 327 (5,110) 5,437
Other(a) 1,158 (948) 2,106 4,108 2,782 1,326
----------- ----------- ----------- ----------- ----------- -----------
Operating margin (loss)
plus other income, net 19,773 22,744 (2,971) 12,410 18,711 (6,301)
Interest (expense), net of
interest income (8,902) (8,454) (448) (23,491) (22,912) (579)
----------- ----------- ----------- ----------- ----------- -----------
$ 10,871 $ 14,290 $ (3,419) $ (11,081) $ (4,201) $ (6,880)
=========== =========== =========== =========== =========== ===========
</TABLE>
(a) Represents unallocated corporate items and intersegment eliminations.
Numbers in the following narrative have been rounded to the nearest hundred
thousand.
Consolidated Results
- --------------------
Consolidated net sales and revenues of $427,900 and $1,153,400 for the three and
nine months ended March 31, 1997 increased $700 (.2%) and $36,200 (3%),
respectively, as compared to the same periods in the prior year. The increases
were the result of (1) higher sales prices, due to increased product costs, in
Agriculture for feed products and in Energy for heating oils, diesel fuel and
propane; (2) delayed spring 1996 sales of crop-related services by Agriculture
which increased sales in the first quarter of fiscal 1997; and (3) increased
lease portfolio revenues, as compared to the prior year, primarily due to a
higher average net lease investment. These increases in sales were partially
offset by the weather-related decline in demand for bird food which
significantly reduced sales to consumers in the Retail business. Additionally,
the sale of businesses within the Country Products Group component of
Agriculture (CPG) during the prior year and first nine months of fiscal 1997 has
reduced the overall sales level in CPG.
11
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
Consolidated Results (continued)
- --------------------------------
Net income (loss) from continuing operations before taxes of $10,900 for the
three months ended March 31, 1997 decreased $3,400 (24%), as compared to the
same period in the prior year; and the net income (loss) from continuing
operations before taxes of ($11,100) for the nine months ended March 31, 1997
represents a loss that is $6,900 (164%) greater than the loss during the same
period in the prior year. The Company's results through the nine months ended
March 31, 1997 reflect certain ongoing operational improvements of $9,800 over
the same period in the prior year from Agway Agricultural Products (AAP) field
operations, Insurance, Retail and Leasing. However, these improvements were more
than offset mostly by decreased gross margins that resulted from a combination
of increased commodity costs and unfavorable experience with exchange-traded
futures. The remaining offsets were (1) the net charges from the current year
sale of the pet food manufacturing brands and businesses of CPG as compared to
significant gains on the sales of CPG businesses generated in the prior year and
(2) a charge for the adoption of a new accounting pronouncement on the
impairment of long-lived assets.
Agriculture
- -----------
Agriculture consists of Agway Agricultural Products (AAP) and the Country
Products Group (CPG). Total Agriculture net sales and revenues of $156,700 and
$493,900 for the three and nine months ended March 31, 1997 decreased $31,100
(17%) and $23,000 (4%), respectively, as compared to the same periods in the
prior year. The decrease in net sales and revenues for the three-month period,
as compared to the same period in the prior year, resulted from an $18,500 (14%)
decrease in AAP net sales and revenues and a $12,600 (25%) decline in CPG net
sales and revenues. The decrease in net sales and revenues for the nine-month
period ended March 31, 1997, as compared to the same period in the prior year,
resulted from a $15,300 (4%) increase in AAP net sales and revenues, offset by a
$38,300 (25%) decline in CPG total net sales and revenues.
The increase in AAP sales for the nine-month period ended March 31, 1997
resulted primarily from increased feed product prices and delayed spring 1996
sales of crop-related services which increased sales in the first quarter of
fiscal 1997. In the third quarter, this was offset by a decrease in grain sales
resulting from a poor wheat yield. The decline in CPG sales for the three- and
nine-month periods ended March 31, 1997 represents the decline in sales volume
of $6,300 and $29,700, respectively, from lines of business sold, mainly during
the prior year, as part of CPG's strategic plan, which included Agway's
laboratory animal diet business, Pro-Lawn, Sacramento Valley Milling and Roberts
Seed. Additionally, net sales and revenues for the ongoing CPG specialty
products operations also declined in the nine-month period ended March 31, 1997,
as compared to the same period in the prior year, mainly due to declines in
sunflower seed sales for the production of bird foods. Lower than normal snow
coverage in the Northeast caused less demand for this product.
The net loss before income taxes of Agriculture of $1,800 and $18,100 for the
three and nine months ended March 31, 1997 increased $6,500 (138%) and $14,500
(403%), respectively, as compared to the same periods in the prior year. AAP's
third quarter loss of $3,500 was $3,000 (545%) larger than the loss in the same
period in the prior year, and the $21,400 nine-month loss was $9,900 (86%)
larger than the loss in the first nine months of the prior year. AAP enterprise
field operations experienced $3,400 in improvements to operating results during
the nine months ended March 31, 1997, as compared to the same period in the
prior year. These improvements were more than offset mostly by decreased gross
margins, due to increased commodity costs and unfavorable experience with
exchange-traded futures, and also by the impact of adopting a new accounting
pronouncement on the impairment of long-lived assets. Due to the volatility of
the commodities market, the gain or losses experienced from the use of
exchange-traded futures contracts may or may not be realized at the same level
in future periods.
12
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
Agriculture (continued)
- -----------------------
CPG net income of $1,700 and $3,300 for the three and nine months ended March
31, 1997 decreased $3,500 (67%) and $4,600 (58%), respectively, as compared to
the same periods in the prior year. The sale of the Pro-Lawn business in January
1996 generated a significant gain, which accounts for $3,000 of the decrease in
net income for the three and nine months ended March 31, 1997. The net income
was adversely impacted in 1997 by a $300 decline in the sunflower seed margins
due to lower bird food sales volumes; a decline in potato margins resulted from
price reductions in the potato industry; and the cost of net asset write-downs
and other costs attributable to the current year sale of CPG's pet food
manufacturing brands and business. These adverse items were partially offset by
improvements, as compared to the prior year, in other continuing operations.
Retail
- ------
Total net sales and revenues of $45,500 and $157,400 for the three and nine
months ended March 31, 1997 decreased $3,700 (8%) and $6,200 (4%), respectively,
as compared to the same periods in the prior year. The declines are primarily
attributable to a mild and relatively snow-free winter in many parts of the
Northeast. This resulted in a significant reduction in bird food and ice melter
salt sales. Additionally, sales of water systems were significantly reduced, as
compared to the prior year, as Retail entered into an agreement under which a
third party would sell these products and pay Retail a commission. The third
quarter decline in sales, as compared to the prior year, more than offset the
first quarter sales improvements in pet food, bird food and lawn and garden
seeds and the improved sale of wood pellets in the second quarter.
Net loss before income taxes of $3,300 and $3,900 for the three and nine months
ended March 31, 1997 showed no change and improved $1,300 (25%), respectively,
over the same periods in the prior year. Gross margin dollars were down 4% for
the third quarter, as compared to the prior year, due to the decline in sales
dollars; however, margin percentages have improved through product mix and
pricing strategy changes since the prior year. Total expenses for the third
quarter and for the nine-month period ended March 31, 1997 decreased $600 (4%)
and $2,300 (4%), respectively, as compared to the same periods in the prior
year. The most significant decline in both the three- and nine-month periods
ended March 31, 1997 was in selling expenses. Advertising expenses have been
either reduced or delayed to provide for enhancement to sales efforts in the
upcoming spring season. Additionally, reductions in distribution and
manufacturing expenses were more than offset by transition costs incurred to
outsource distribution center management and from the costs of acquisition of
new businesses or improvements to current stores.
Energy
- ------
Net sales and revenues of $212,400 and $487,900 for the three and nine months
ended March 31, 1997 increased $20,800 (11%) and $58,600 (14%), respectively, as
compared to the same periods in the prior year. The increase, as compared to the
prior year, is substantially due to higher commodity prices in the current year
in heating oils, diesel fuel and propane as a result of strong demand and low
industry inventories in the marketplace. Energy's average selling price of all
products increased 8.2% for the nine months ended March 31, 1997, as compared to
the same periods in the prior year. The total unit volume of all products for
both the three and nine months ended March 31, 1997 shows slight improvements,
despite temperatures being warmer than the prior year.
Margin before income taxes of $19,900 and $20,200 for the three and nine months
ended March 31, 1997 decreased $400 (2%) and $1,000 (5%), respectively, as
compared to the same periods in the prior year. Gross margin dollars decreased
$3,400 and $3,700 for the third quarter and nine months ended March 31, 1997, as
compared to the same periods in the prior year, as a result of product cost
increases not being passed on to the marketplace through higher product prices.
Total operating expenses decreased for the three and nine months ended March 31,
1997, as compared to the same periods in the prior year, as the result of
decreased distribution costs, principally payroll costs, due to staff reductions
and a decrease in overtime. Finally, other revenue increased over the prior year
due to gains on the sale of assets in the current year.
13
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
Leasing
- -------
Telmark total revenues of $14,300 and $41,700 for the three and nine months
ended March 31, 1997 increased $2,200 (18%) and $6,000 (17%), respectively, as
compared to the same periods in the prior year. The increased revenues over both
periods, as compared to the same periods in the prior year, are primarily the
result of a higher average net investment associated with current period leases.
The net investment increased $41,400 (11%) to $435,800 for the nine-month period
ended March 31, 1997, as compared to an increase of $21,000 (6%) to $369,400 for
the same period in the prior year.
Margin before income taxes of $3,700 and $9,800 for the three and nine months
ended March 31, 1997 increased $500 (16%) and $1,100 (13%), respectively, as
compared to the same periods in the prior year. Total revenue increases were
partially offset by an increase in total expenses for the three and nine months
ended March 31, 1997 of $1,800 (20%) and $4,900 (18%), respectively, as compared
to the same periods in the prior year. The larger net investment during those
periods, as compared to the same periods in the prior year, has increased
interest expense, selling, general and administrative expenses and the provision
for credit losses in the current year.
Insurance
- ---------
Insurance consists of Agway Insurance Company, a property and casualty insurance
subsidiary, and Agway General Agency, a subsidiary which markets accident and
health insurance and long-term care products.
Insurance net revenues (earned premiums) of $6,800 and $19,900 for the three and
nine months ended March 31, 1997 increased $400 (6%) and decreased $200 (1%),
respectively, as compared to the same periods in the prior year. The increase
for the three-month period is the result of decreased reinsurance costs. For the
nine months ended March 31, 1997, the increase in net revenues due to decreased
reinsurance costs of the Insurance Company was offset by a decline in the fees
from third-party insurers received by Agway General Agency.
Margin before income taxes of $80 and $300 for the three and nine months ended
March 31, 1997 increased $1,300 (104%) and $5,400 (106%), respectively, as
compared to the same periods in the prior year. The increase has been the result
of improvement in loss development. In the first nine months of the prior year,
Insurance experienced adverse development in older claims and certain unusually
large farmowner and auto liability casualty losses. These types of adverse
developments did not occur during the first nine months of the current year.
14
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash Flows from Operating Activities
Cash flows provided from operating activities for the nine months ended March
31, 1997 were a net of $28,700, an increase in cash flows of approximately
$35,200 as compared to the same period in the prior year. This increase is due
primarily to a smaller increase in inventory ($14,800) and a larger decrease in
receivables ($26,500) over the nine-month period ended March 31, 1997, as
compared to the same period in the prior year.
Cash Flows from Investing Activities
Net cash flows used in the Company's investing activities totaled approximately
$45,800 for the nine months ended March 31, 1997, as compared to $1,900 provided
for the nine months ended March 31, 1996, an increased outflow of $47,700. The
Company has a growing leasing business and cash required to fund lease
origination growth in excess of lease repayments and leases sold amounted to
$42,900 for the nine months ended March 31, 1997, as compared to $21,900 for the
nine months ended March 31, 1996, a net increase in cash outflow of $21,000.
Proceeds of $27,500 from businesses and fixed assets sold during the nine months
ended March 31, 1997 were $17,300 less than the cash generated from the same
activity, including the disposal of discontinued operations, in the same period
in the prior year.
Cash Flows from Financing Activities
The Company finances its operations and the operations of all its continuing
businesses and subsidiaries, except Telmark and Agway Insurance Company, through
Agway Financial Corporation (AFC). External sources of short-term financing for
the Company and all its other continuing operations include revolving credit
lines, letters of credit, and commercial paper programs. Telmark and Agway
Insurance Company finance themselves through operations or direct borrowing
arrangements. Each is financed with a combination of short- and long-term credit
facilities. In addition, Telmark has occasionally sold blocks of its lease
portfolio. Sources of longer-term financing include the following as of March
31, 1997:
Source of debt Agway & AFC Telmark Total
- -------------- ----------- -------- --------
Banks - due 11/97 to 2/01 with interest
from 6.0% - 8.5% ............................ $ 2,695 $138,000 $140,695
Insurance companies - due 5/97 to 11/00
with interest from 5.9% - 9.2% .............. 111,222 111,222
Capital leases & other - due 1997 to 2007
with interest from 6% to 12% ................ 12,636 108 12,744
-------- -------- --------
Long-term debt ............................ 15,331 249,330 264,661
Subordinated money market certificates - due
10/97 to 10/08 with interest from 4.5% - 9.5% 383,458 30,750 414,208
Subordinated debentures - due 1999 to 2003 with
interest at 7.0% to 8.5% .................... 22,200 22,200
-------- -------- --------
Total debt ................................ $420,989 $280,080 $701,069
======== ======== ========
For a complete description of the Company's credit facilities available at March
31, 1997, see Footnote 3 to the condensed consolidated financial statements.
15
<PAGE>
PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
There were no reports on Form 8-K required to be filed during the three months
ended March 31, 1997.
16
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AGWAY INC.
---------------------------------
(Registrant)
Date May 5, 1997 /s/ PETER J. O'NEILL
-------------------------- ---------------------------------
Peter J. O'Neill
Senior Vice President,
Finance & Control,
Treasurer and Controller
(Principal Financial Officer and
Chief Accounting Officer)
17
EXHIBIT 21
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
As of June 30, 1997
Subsidiary State of Incorporation
Agway Consumer Products, Inc...........................................Delaware
Agway Data Services, Inc...............................................Delaware
Agway Financial Corporation............................................Delaware
Agway General Agency, Inc..............................................New York
Agway Holdings Inc.....................................................Delaware
Agway Insurance Company................................................New York
Agway Petroleum Corporation............................................Delaware
Agway Realties, Inc....................................................Delaware
Milford Fertilizer Company.............................................Delaware
Telmark Inc............................................................New York
Texas City Refining, Inc. (1)..........................................Delaware
Notes:
(1) Agway Petroleum Corporation owns 67% of Texas City Refining, Inc. In
September 1993, Texas City Refining, Inc., filed a certificate of
dissolution in the office of the Delaware Secretary of State; in September
1996, Texas City Refining, Inc. was dissolved.
EXHIBIT 23
<PAGE>
CONSENT OF COUNSEL
The consent of David M. Hayes, General Counsel and Secretary of the
Company, is included in his opinions, a copy of which is filed as Exhibit 5.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Agway Inc.:
We consent to the incorporation by reference in this registration statement on
Form S-3 of our reports dated August 22, 1997 on our audits of the consolidated
financial statements and financial statement schedules of Agway Inc. and
Consolidated Subsidiaries as of June 30, 1997 and 1996, and for the years ended
June 30, 1997, 1996, and 1995, appearing in the Annual Report on Form 10-K (SEC
File No. 2-22791) of Agway Inc. and Consolidated Subsidiaries filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934.
We also consent to the reference to our firm under the caption "Experts" in this
Prospectus.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Syracuse, New York
September 2, 1997
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our report dated
August 11, 1995, relating to the consolidated financial statements of H. P. Hood
Inc., which appears on page 28 of Agway Inc.'s Annual Report on Form 10-K for
the year ended June 30, 1997. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
September 2, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 35,586
<RECEIVABLES> 217,732
<ALLOWANCES> 7,864
<INVENTORY> 150,640
<CURRENT-ASSETS> 567,696
<PP&E> 507,987
<DEPRECIATION> 292,892
<TOTAL-ASSETS> 1,300,261
<CURRENT-LIABILITIES> 462,913
<BONDS> 591,103
0
57,541
<COMMON> 2,639
<OTHER-SE> 117,571
<TOTAL-LIABILITY-AND-EQUITY> 1,300,261
<SALES> 1,587,159
<TOTAL-REVENUES> 1,671,122
<CGS> 1,471,465
<TOTAL-COSTS> 1,511,388
<OTHER-EXPENSES> 130,944
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,970
<INCOME-PRETAX> 16,583
<INCOME-TAX> 5,913
<INCOME-CONTINUING> 10,670
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,670
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 0
<SECURITIES> 34,752
<RECEIVABLES> 219,665
<ALLOWANCES> 9,716
<INVENTORY> 158,329
<CURRENT-ASSETS> 565,575
<PP&E> 541,121
<DEPRECIATION> 292,368
<TOTAL-ASSETS> 1,225,193
<CURRENT-LIABILITIES> 410,807
<BONDS> 582,753
0
65,635
<COMMON> 2,728
<OTHER-SE> 102,935
<TOTAL-LIABILITY-AND-EQUITY> 1,225,193
<SALES> 1,520,502
<TOTAL-REVENUES> 1,592,053
<CGS> 1,391,315
<TOTAL-COSTS> 1,426,311
<OTHER-EXPENSES> 148,929
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,003
<INCOME-PRETAX> (6,053)
<INCOME-TAX> 1,747
<INCOME-CONTINUING> (7,800)
<DISCONTINUED> (12,360)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,730)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 11-K
ANNUAL REPORT PURSUANT TO SECTION 15(D)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
AGWAY INC. EMPLOYEES' THRIFT INVESTMENT PLAN
----------------------------------------------------
(FULL TITLE OF THE PLAN)
AGWAY INC.
----------------------------------------------------------
(NAME OF ISSUER OF THE SECURITIES HELD PURSUANT TO THE PLAN)
333 BUTTERNUT DRIVE
DEWITT, NEW YORK 13214
----------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES OF THE
PLAN AND THE ISSUER OF THE SECURITIES)
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
Report on Audited Financial Statements
for the year ended June 30, 1997
---------------------------------------------
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
JUNE 30, 1997 AND 1996
---------------------------------------------
INDEX
-----
Report of Independent Accountants............................................F-2
Financial Statements:
Statements of Net Assets Available for Benefits
as of June 30, 1997 and 1996...............................F-3
Statements of Changes in Net Assets Available for Benefits
for the years ended June 30, 1997 and 1996.................F-4
Notes to Financial Statements...............................F-5 to F-17
Supplemental Schedules (Form 5500 information):
Item 27a. Schedule of Assets Held for Investment Purposes
as of June 30, 1997.......................S-1.1 and S-1.2
Item 27d. Schedule of Reportable Transactions
for the year ended June 30, 1997....................S-2.1
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Employee Benefit Plans
Administration Committee,
Agway, Inc.
We have audited the accompanying statements of net assets available for benefits
of the AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN (the "Plan") as of June
30, 1997 and 1996, and the related statements of changes in net assets available
for benefits for the years ended June 30, 1997 and 1996. These financial
statements are the responsibility of the Plan's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of the Plan as of
June 30, 1997 and 1996, and the changes in net assets available for benefits for
the years ended June 30, 1997 and 1996, in conformity with generally accepted
accounting principles.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules listed in the
accompanying index are presented for the purpose of additional analysis and are
not a required part of the basic financial statements but are supplementary
information required by the Department of Labor's Rules and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act of
1974. The supplemental schedules have been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion, are
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
Syracuse, New York
August 15, 1997
F-2
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
June 30, 1997 and 1996
-----------
(Thousands of Dollars)
ASSETS
1997 1996
------------- -------------
BGI U.S. Equity Market Fund $ 55,098 $ 44,777
Agway, Inc., Preferred Securities 27,699 28,849
Agway Financial Corp., Subordinated
Money Market Certificates 19,190 16,724
Agway Financial Corp., Subordinated
Debentures 1,980 2,630
BGI Government/Corporate Bond Index Fund 2,085 2,111
Collective Cash Investment Funds 2,558 1,982
Loans to participants 1,078 1,221
------------- -------------
TOTAL INVESTMENTS 109,688 98,294
Accrued income 1,887 1,830
Contributions receivable, employer 822 837
------------- -------------
NET ASSETS AVAILABLE FOR BENEFITS $ 112,397 $ 100,961
============= =============
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
for the years ended June 30, 1997 and 1996
-----------
(Thousands of Dollars)
1997 1996
------------- -----------
Net increase of interest in common
collective trust funds $ 13,385 $ 9,512
Interest income 1,782 1,645
Dividend income 2,191 2,287
------------- -----------
17,358 13,444
------------- -----------
Contributions:
Participants 5,513 5,554
Agway, Inc. 1,233 1,256
------------- -----------
6,746 6,810
------------- -----------
Total additions 24,104 20,254
------------- -----------
Deductions:
Benefit payments to participants 12,390 15,929
Trustee fees, administrative and
other expenses 278 247
------------- -----------
12,668 16,176
------------- -----------
Net additions 11,436 4,078
Net assets available for benefits:
Beginning of year 100,961 96,883
------------- -----------
Net assets available for benefits:
End of year $ 112,397 $ 100,961
============= ===========
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
1. DESCRIPTION OF THE PLAN
The following brief description of the Agway, Inc. Employees' Thrift
Investment Plan (the "Plan") is provided for general information
purposes only. Participants should refer to the Plan document for more
complete information of benefits provided under the Plan.
General
The Plan is a defined contribution plan covering substantially all
full-time employees of Agway, Inc. (the "Sponsor") and part-time
employees who have reached their first anniversary date (as defined in
the Plan) and worked 1,000 hours. It is subject to the provisions of
the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
Contributions
Participants may elect to contribute "regular investments" of 2% to 6%
of annual compensation (as defined in the Plan). These investments can
be made on a "pre-tax" basis, an "after-tax" basis or a combination
thereof, subject to Internal Revenue Service ("IRS") limitations.
Pre-tax regular investments are designed to take advantage of Section
401(k) of the Internal Revenue Code ("IRC") and are contributed to the
Plan before being subject to federal income tax and, in most cases,
state income tax. After-tax regular investments are contributed to the
Plan after being subject to federal and state income taxes.
Participants may invest an additional 1% to 9% of annual compensation
(as defined in the Plan) as "additional investments" on a pre-tax basis
(subject to IRS limitations) if the participant contributes the maximum
6% of regular investments. Amounts exceeding the pre-tax contribution
limits established by the IRS will be made on an after-tax basis based
on the election of the participant.
Participants may also contribute amounts representing distributions
from other qualified benefit or contribution plans.
The Sponsor shall contribute an amount equal to at least 10%, but not
more than 50%, of each participant's regular investment to the Plan.
All employer contributions are invested in the Company Security Fund.
The discretionary percentage of Sponsor contributions above 10% for
each year of operation of the Plan shall be determined by the Board of
Directors of the Sponsor. The Sponsor's contribution will be made each
pay period at a rate of 10% of the participant's regular investment.
Any amount of the Sponsor's contribution greater than 10% of the
participant's regular investment as determined by the Board of
Directors will be paid not later than the time prescribed by law for
filing the Sponsor's federal income tax return for the applicable
taxable year, including extensions for such filing.
F-5
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
1. DESCRIPTION OF THE PLAN (CONTINUED)
Contributions (continued)
The Sponsor shall also contribute on behalf of each participant, if
necessary, an amount such that the rate of return on current market
value of that portion of the Company Security Fund not invested in the
Sponsor's Money Market Certificates, will equal one-half percent less
than the interest rate plus any declared "extra" paid on the Sponsor's
member debentures. This contribution is made semi-annually to
participants with amounts invested in the Company Security Fund.
Participant Accounts
Each participant's account is credited with the participant's
contributions and allocations of (a) the Sponsor's contributions, (b)
plan earnings, and (c) administrative expenses. Allocation of plan
earnings is done on a monthly basis and is based on each fund's monthly
earning percentage (fund earnings divided by fund market value) times
the participant's accumulated investments and earnings in the fund. The
benefit to which a participant is entitled is the benefit that can be
provided from the participant's vested account.
Vesting
Participants vest immediately in their contributions plus actual
earnings thereon and Sponsor contributions and earnings thereon.
Investment Options
The Plan provides for the following separate investment fund choices to
participants: the Stock Fund, Company Security Fund, Bond Fund and Cash
Fund. All participant contributions and earnings thereon are
participant-directed. Upon enrollment in the Plan, a participant may
direct employee contributions in 25 percent increments in any of the
four funds. A participant may change investment options or elect to
transfer employee contributions up to once a month. Sponsor
contributions and earnings thereon may not be transferred from the
Company Security Fund to other investment funds. As of June 30, 1997,
there were 4,614 employees and former employees participating in this
Plan. The number of participants under each investment fund at June 30,
1997, is as follows:
Stock Fund 3,481 Bond Fund 325
Company Security Fund 4,586 Cash Fund 558
F-6
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
1. DESCRIPTION OF THE PLAN (CONTINUED)
Investment Options (continued)
Stock Fund
The Stock Fund, including earnings thereon, shall be invested in any
common stock(s), common stock fund(s), or any security convertible into
common stock as the Sponsor's Employee Benefit Plans Investment
Committee ("EBPIC") may deem advisable from time to time, but which
shall not include shares of stock or other securities of the Sponsor or
any of its subsidiaries or affiliates. The investment manager will make
purchases of such securities in the open market at prices prevailing in
such market on the day of purchase. Short-term obligations of the U.S.
Government or other investments of a short-term nature may be purchased
and held pending the selection and purchase of suitable securities.
Substantially all of the Stock Fund investments were in the "Barclays
Global Investors, N.A. ("BGI") U. S. Equity Market Fund" at June 30,
1997 and 1996, which is a common collective trust fund. As there is no
market quotation available, the fair value of the Stock Fund
investments is based on the unit market value established by the
investment manager. This unit value is calculated by dividing the net
assets of the applicable Market Fund, stated at quoted market values,
by the units outstanding.
Company Security Fund
It is explicitly provided and intended that the Company Security Fund
be invested in qualified Agway, Inc. securities. These qualified Agway,
Inc. securities include cumulative preferred stock and Agway Financial
Corp. subordinated money market certificates and debentures. However,
if at any time when the Trustee has funds available for such investment
and such prescribed securities are not available for purchase from the
Sponsor, the Trustee is authorized to hold such funds in an interest
bearing account, or to invest such funds in one or more securities of
other corporations, as instructed by EBPIC, which are comparable to the
prescribed securities of the Sponsor. Securities of Agway, Inc. will be
purchased from the Sponsor at par value or principal amount, since the
market value of such securities is maintained as such by the Sponsor as
a result of its practice of repurchasing outstanding securities at par
whenever holders thereof elect to tender them for redemption.
F-7
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
1. DESCRIPTION OF THE PLAN (CONTINUED)
Investment Options (continued)
Bond Fund
The Bond Fund is invested primarily in bonds of U. S. Government and
investment grade bonds of industrial, financial and utility
corporations. "Investment Grade" is a term for securities of high
quality that are rated BAA or better by Moody's Investor Service and
BBB or better by Standard & Poor's Corporation. Substantially all of
the Bond Fund investments were in the BGI "Government/Corporate Bond
Index Fund" at June 30, 1997 and 1996, which is a common collective
trust fund. As there is no market quotation available, fair value of
the Bond Fund investments is based on the unit market value established
by the investment manager. This unit value is calculated by dividing
the net assets of the Bond Index Fund, stated at quoted market value,
by the units outstanding.
Cash Fund
The Cash Fund investment objective is to preserve capital and earn a
competitive day-to-day interest rate. It invests in high quality,
short-term money market instruments whose maturities normally will not
exceed one year and are, on average, less than three months.
Investments may be made in U. S. Treasury or agency obligations;
obligations issued by financial, industrial, public utility, or other
companies; bankers' acceptances, bank certificates of deposit or time
deposits; commercial paper; and other similar obligations. The majority
of investments of the Cash Fund were in the BGI "Money Market Fund" at
June 30, 1997 and 1996, which is a common collective trust fund.
Loans to Participants
The Plan also includes various terms and conditions under which a
participating employee can make loans from the Plan. Participants may
borrow up to 50% of their vested account balance. Participant loans
must be no less than $500 and no greater than $50,000. Loan
transactions are treated as a transfer to (from) the investment funds
from (to) the participant notes fund. Loan terms range from 1 to 5
years or up to 20 years for the purchase of a primary residence. The
loans are secured by the balance in the participant's account and bear
interest at a rate of 1 percent over prime. Interest rates on loans
outstanding at June 30, 1997 range from 7 to 10 percent. Principal and
interest are paid ratably through payroll deductions.
F-8
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
1. DESCRIPTION OF THE PLAN (CONTINUED)
Payment of Benefits
On termination of service due to death, disability or retirement, a
participant may elect, in most circumstances, to receive either a
lump-sum amount equal to the value of the participant's vested interest
in his or her account, and either monthly or annual installments over
periods ranging from 5 to 20 years. For termination of service due to
other reasons, a participant may receive the value of the vested
interest in his or her account as a lump-sum distribution.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements of the Plan are prepared under the accrual
basis of accounting in conformity with generally accepted accounting
principles. The accounting principles and practices which affect the
more significant elements of the financial statements are:
Investment Valuation
Agway, Inc. preferred stock and Agway Financial Corp. subordinated
money market and debt securities are valued at par, which approximates
fair value, since it has been the Sponsor's practice to repurchase
outstanding securities at par when redeemed. All Agway, Inc. securities
are also purchased at par. All other Plan investments are held in bank
commingled trust funds ("common collective trust funds"), shares of
which are valued at the net asset value of shares held by the Plan at
year-end as determined by the investment manager. Purchases and sales
of securities are recorded on a trade-date basis. Participant loans are
valued at cost, which approximates fair value.
Income Recognition
Interest income from investments is recognized as earned. Dividends are
recorded on the ex-dividend date. Gain or loss on sale of securities is
based on average cost. The Plan presents in the statement of changes in
net assets the net increase in interest in common collective trust
funds which consists of the realized gains or losses and the net
increase in interest in those investments.
Trustee Fees, Administrative and Other Expenses
Trustee fees, administrative expenses and all other expenses are
recognized on the accrual basis. The Plan incurred approximately $238
in 1997 and $204 in 1996 in administrative expenses paid to the Sponsor
during the year.
F-9
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Risks and Uncertainties
The Plan provides for various investment options in any combination of
three common collective trust funds (stock, bond or cash) or company
securities. Investment securities are exposed to various risks, such as
interest rate and market. Due to the level of risk associated with
certain investment securities and the level of uncertainty related to
changes in the value of investment securities, it is at least
reasonably possible that changes in risks in the near term would
materially affect participants' account balances and the amounts
reported in the statement of net assets available for plan benefits and
the statement of changes in net assets available for plan benefits.
F-10
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
3. INVESTMENTS
The Plan's investments are held by a bank-administered trust fund. The
following table presents the fair value of investments as determined by
estimated market price. Investments that represent 5 percent or more of
the Plan's net assets are separately identified.
INVESTMENTS AT ESTIMATED FAIR VALUE
1997 1996
-------- --------
Stock Fund:
BGI U. S. Equity Market Fund $ 55,098 $ 44,777
Company Security Fund:
Agway, Inc., Preferred Securities:
8% cumulative preferred stock - Series B 19,942 18,442
7% cumulative preferred stock - Series C 7,757 10,407
-------- --------
27,699 28,849
Agway Financial Corp., Subordinated
Money Market Certificates 19,190 16,724
Agway Financial Corp., Subordinated
Debentures 1,980 2,630
Bond Fund:
BGI Government/Corporate Bond Index Fund 2,085 2,111
Collective Cash Investment Funds 2,558 1,982
Loans to participants 1,078 1,221
-------- --------
TOTAL INVESTMENTS AT FAIR VALUE $109,688 $ 98,294
======== ========
F-11
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
3. INVESTMENTS (CONTINUED)
During 1997 and 1996, the Plan's interest in common collective trust
funds (including gains and losses on investments bought and sold, as
well as held during the year) increased in value for the fiscal years
ended June 30 as follows:
1997 1996
NET INCREASE IN INTEREST IN COMMON --------- --------
COLLECTIVE TRUST FUNDS:
BGI U. S. Equity Market Fund $ 13,138 $ 9,361
BGI Government/Corporate Bond Index Fund 153 72
Collective Cash Investment Funds 94 79
--------- --------
Total $ 13,385 $ 9,512
========= ========
4. PLAN TRUSTEE
The cash and investments of the Plan are held by Boston Safe Deposit
and Trust Company (the "Trustee") under a trust agreement dated April
1, 1995. In general, the duties of the Trustee include: (1) holding
assets and collecting income therefrom; (2) investing the assets of the
Plan as directed by EBPIC or the appointed investment manager; (3)
selling or exchanging the assets of the Plan; and (4) paying benefits
to participants in the Plan on the written order of the Employee
Benefit Plans Administration Committee ("EBPAC"), which is appointed by
the Board of Directors of the Sponsor. The investment of assets in the
Stock Fund, Bond Fund and Cash Fund are directed by an investment
manager, Barclays Global Investors, N.A., San Francisco, California.
5. PLAN TERMINATION
The Sponsor may amend or terminate the Plan. Although the Sponsor has
not expressed any intent to do so, in the event the Plan is terminated
or employer contributions are discontinued, all of the assets of the
Plan shall be used for the benefit of participants and beneficiaries
under the Plan and the interest of each participant in employer
contributions and earnings thereon included in the Company Security
Fund shall vest immediately.
F-12
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
6. FEDERAL INCOME TAX STATUS
A favorable determination letter dated December 5, 1995, was issued by
the IRS on behalf of the Plan which stated that the Plan, as then
designed, was in compliance with the applicable requirements of the
IRC. Accordingly, no provision for income taxes has been included in
the Plan's financial statements.
F-13
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
7. ALLOCATION OF PLAN ASSETS AND LIABILITIES TO INVESTMENT PROGRAMS
June 30, 1997
-------------
<TABLE>
<CAPTION>
Non-
Participant
Participant-Directed Directed
---------------------------------------------------------------- -----------
Company Company
Stock Security Bond Cash Loans to Security
ASSETS Fund Fund Fund Fund Participants Fund Total
------ ----------- ----------- ----------- ----------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Collective Common
Stock Investment
Fund $ 55,098 $ 55,098
Company Security
Fund $ 34,697 $ 14,172 48,869
Collective Bond
Investment Fund $ 2,085 2,085
Collective Cash
Investment Funds 345 211 10 $ 1,991 $ 1 2,558
Loans to participants 1,078 1,078
Accrued income 1 1,339 547 1,887
Contributions receivable,
employer 822 822
----------- ----------- ----------- ----------- ----------- ----------- ---------
NET ASSETS
AVAILABLE
FOR BENEFITS $ 55,444 $ 36,247 $ 2,095 $ 1,991 $ 1,079 $ 15,541 $112,397
=========== =========== =========== =========== =========== =========== =========
</TABLE>
F-14
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
7. ALLOCATION OF PLAN ASSETS AND LIABILITIES TO INVESTMENT PROGRAMS
June 30, 1996
-------------
<TABLE>
<CAPTION>
Non-
Participant
Participant-Directed Directed
---------------------------------------------------------------- -----------
Company Company
Stock Security Bond Cash Loans to Security
ASSETS Fund Fund Fund Fund Participants Fund Total
------ ----------- ----------- ----------- ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Collective Common
Stock Investment
Fund $ 44,777 $ 44,777
Company Security
Fund $ 34,463 $ 13,740 48,203
Collective Bond
Investment Fund $ 2,111 2,111
Collective Cash
Investment Funds 318 313 1 $ 1,349 $ 1 1,982
Loans to participants 1,221 1,221
Accrued income 2 1,316 512 1,830
Contributions receivable,
employer 837 837
----------- ----------- ----------- ----------- ------------ ----------- -----------
NET ASSETS
AVAILABLE
FOR BENEFITS $ 45,097 $ 36,092 $ 2,112 $ 1,349 $ 1,222 $ 15,089 $ 100,961
=========== =========== =========== =========== =========== ============ ============
</TABLE>
F-15
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
8. ALLOCATION OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
TO INVESTMENT PROGRAMS
For the Year Ended June 30, 1997
--------------------------------
<TABLE>
<CAPTION>
Non-
Participant
Participant-Directed Directed
---------------------------------------------------------------- -----------
Company Company
Stock Security Bond Cash Loans to Security
Fund Fund Fund Fund Participants Fund Total
--------- --------- --------- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net increase of interest
in collective
investment funds $ 13,138 $ 153 $ 94 $ 13,385
Interest income $ 1,197 $ 96 $ 489 1,782
Dividend income 1,556 635 2,191
--------- --------- ---------- --------- ------------ ---------- ----------
13,138 2,753 153 94 96 1,124 17,358
--------- --------- ---------- --------- ------------ ---------- ----------
Contributions:
Participants 3,051 2,019 262 181 5,513
Agway, Inc. 1,233 1,233
--------- --------- ---------- --------- ------------ ---------- ----------
3,051 2,019 262 181 1,233 6,746
--------- --------- ---------- --------- ------------ ---------- ----------
Total additions 16,189 4,772 415 275 96 2,357 24,104
--------- --------- ---------- --------- ------------ ---------- ----------
Deductions
Benefit payments
to participants 5,281 4,327 304 516 194 1,768 12,390
Administrative
expenses 132 97 6 4 39 278
--------- --------- ---------- --------- ------------ ---------- ----------
Total deductions 5,413 4,424 310 520 194 1,807 12,668
--------- --------- ---------- --------- ------------ ---------- ----------
Net increase (decrease)
before interfund
transfers 10,776 348 105 (245) (98) 550 11,436
Transfers (from) to
other funds (429) (193) (122) 887 (45) (98) 0
Net assets available
for benefits,
beginning of year 45,097 36,092 2,112 1,349 1,222 15,089 100,961
--------- --------- ---------- --------- ----------- ---------- ---------
Net assets available
for benefits,
end of year $ 55,444 $ 36,247 $ 2,095 $ 1,991 $ 1,079 $ 15,541 $112,397
========= ========= ========== ========= =========== ========== =========
</TABLE>
F-16
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
8. ALLOCATION OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS TO
INVESTMENT PROGRAMS(CONTINUED)
For the Year Ended June 30, 1996
--------------------------------
<TABLE>
<CAPTION>
Non-
Participant
Participant-Directed Directed
------------------------------------------------------------------ -----------
Company Company
Stock Security Bond Cash Loans to Security
Fund Fund Fund Fund Participants Fund Total
----------- ----------- ---------- ---------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net increase of
interest in collective
investment funds $ 9,361 $ 72 $ 79 $ 9,512
Interest income $ 1,126 $ 86 $ 433 1,645
Dividend income 1,651 636 2,287
----------- ----------- ---------- ---------- ------------ --------- -----------
9,361 2,777 72 79 86 1,069 13,444
----------- ----------- ---------- ---------- ------------ --------- -----------
Contributions:
Participants 2,834 2,272 305 143 5,554
Agway, Inc. 1,256 1,256
----------- ----------- ---------- ---------- ------------ --------- -----------
2,834 2,272 305 143 1,256 6,810
----------- ----------- ---------- ---------- ------------ --------- -----------
Total additions 12,195 5,049 377 222 86 2,325 20,254
----------- ----------- ---------- ---------- ------------ --------- -----------
Deductions
Benefit payments
to participants 6,631 6,085 191 423 138 2,461 15,929
Administrative
expenses 105 96 5 4 37 247
----------- ----------- ---------- ---------- ------------ --------- ----------
Total deductions 6,736 6,181 196 427 138 2,498 16,176
----------- ----------- ---------- ---------- ------------ --------- ----------
Net increase (decrease)
before interfund
transfers 5,459 (1,132) 181 (205) (52) (173) 4,078
Transfers (from) to
other funds 2,655 (3,427) 588 149 35 0
Net assets available
for benefits,
beginning of year 36,983 40,651 1,343 1,405 1,239 15,262 96,883
----------- ----------- ---------- ---------- ----------- --------- ----------
Net assets
available
for benefits,
end of year $ 45,097 $ 36,092 $ 2,112 $ 1,349 $ 1,222 $ 15,089 $ 100,961
=========== =========== =========== ========== =========== ========= ==========
</TABLE>
F-17
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
ITEM 27a of Form 5500 - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
as of June 30, 1997
(Thousands of Dollars)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D
------ ------ ------ ------
Balance Held at
Close of Period
(Number of Shares Market Value
Name of Issuer or Principal Amount Cost of of Each Item at
and Title of Issue of Bonds and Notes) Each Item Close of Period
- -------------------------------- ------------------- ------------ --------------
<S> <C> <C> <C>
Stock Fund:
BGI U. S. Equity Market Fund 1,387,409 31,039 55,098
BGI Money Market Fund 21
BGI Daily Liquidity Fund 345,069 345 345
------------ -------------
Total Stock Fund 31,384 55,443
Company Security Fund:
AGWAY, INC.:
8% cumulative preferred
stock - Series B 199,420 19,942 19,942
7% cumulative preferred
stock - Series C 77,570 7,757 7,757
AGWAY FINANCIAL CORP.:
7-3/4% subordinated money
market certificates,
due October 31, 1997 1,951,233 1,951 1,951
8-1/2% subordinated money
market certificates,
due October 31, 1998 771,872 772 772
8% subordinated money
market certificates,
due October 31, 1998 5,400,235 5,400 5,400
8% subordinated debentures,
due July 1, 1999 1,130,000 1,130 1,130
7-1/2% subordinated money
market certificates,
due October 31, 1999 1,285,101 1,285 1,285
9% subordinated money
market certificates,
due October 31, 2000 2,711,722 2,712 2,712
8% subordinated money
market certificates,
due October 31, 2002 850,000 850 850
7-1/2% subordinated money
market certificates,
due October 31, 2002 1,665,313 1,665 1,665
8-1/2% subordinated money
market certificates,
due October 31, 2001 3,078,252 3,078 3,078
7-1/2% subordinated debentures,
due July 1, 2003 850,000 850 850
8% subordinated money
market certificates,
due October 31, 2005 1,476,336 1,477 1,477
-------------- -----------
Total Company securities 48,869 48,869
Collective Cash Investment Fund 210,575 211 211
-------------- -----------
Total Company Security Fund 49,080 49,080
</TABLE>
S-1.1
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
ITEM 27a of Form 5500 - SCHEDULE OF ASSETS HELD
FOR INVESTMENT PURPOSES, Continued
as of June 30, 1997
(Thousands of Dollars)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D
------ ------- ------- ------
Balance Held at
Close of Period
(Number of Shares Market Value
Name of Issuer or Principal Amount Cost of of Each Item at
and Title of Issue of Bonds and Notes) Each Item Close of Period
------------------ ------------------- ------------- ----------------
<S> <C> <C> <C>
Bond Fund:
BGI Government/Corporate
Bond Index Fund 158,672 1,842 2,085
BGI Money Market Fund 1,249 1 1
BGI Daily Liquidity Fund 9,077 9 9
------------- ----------------
Total Bond Fund 1,852 2,095
Cash Fund:
BGI Money Market Fund 1,989,168 1,989 1,989
BGI Daily Liquidity Fund 2,250 2 2
------------- ----------------
Total Cash Fund 1,991 1,991
Loans to Participants:
Participant Notes 1,078,103 1,078 1,078
BGI Daily Liquidity Fund 774 1 1
------------- ----------------
Total Loan Fund 1,079 1,079
TOTAL INVESTMENTS $ 85,386 $ 109,688
============= ================
</TABLE>
S-1.2
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
ITEM 27d of Form 5500 - SCHEDULE OF REPORTABLE TRANSACTIONS
for the year ended June 30, 1997
(Thousands of Dollars)
<TABLE>
<CAPTION>
Current Value
of Investment
Purchase Selling on Transaction Net
Price Price Date Gain(Loss)
---------- --------- -------------- ----------
<S> <C> <C> <C> <C>
SINGLE SECURITY TRANSACTIONS IN
EXCESS OF 5% OF MARKET VALUE None
SERIES OF SECURITY TRANSACTIONS
IN EXCESS OF 5% OF MARKET VALUE
The Boston Company Inc. Pooled
Employee Fund $ 22,785 $ 22,785
The Boston Company Inc. Pooled
Employee Fund $ 22,848 22,848
</TABLE>
S-2.1
