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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
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ACT OF 1934 For the fiscal year ended June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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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
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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
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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
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State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant as of August 21, 1998.
Membership Common Stock, $25 Par Value - $2,554,000
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 21, 1998
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Membership Common Stock, $25 Par Value 102,160 Shares
PAGE 1 OF 143. EXHIBIT INDEX APPEARS ON SEQUENTIALLY NUMBERED PAGE 67.
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<PAGE>
FORM 10-K ANNUAL REPORT - 1998
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
Lease Financing........................................................................... 6
Insurance................................................................................. 6
Competition............................................................................... 7
Human Resources........................................................................... 8
Administrative............................................................................ 8
Regulation................................................................................ 8
Stockholder Membership and Control of Agway............................................... 9
Patronage Refunds......................................................................... 10
Retained Margin........................................................................... 10
Item 3. Legal Proceedings............................................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders........................................... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters..................... 12
Item 6. Selected Financial Data....................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 13
Item 7a. Quantitative and Qualitative Disclosures about Market Risk......................................26
Item 8. Financial Statements and Supplementary Data................................................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 28
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 60
Item 11. Executive Compensation........................................................................ 63
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 66
Item 13. Certain Relationships and Related Transactions................................................ 66
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 67
Signatures.................................................................................... 77
</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
guaranteed by Agway. This guarantee is full and unconditional, and joint and
several.
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.
Major subsidiary holdings of AHI include Agway Consumer Products Inc. (Agway
Retail Services and Country Products Group), Agway Energy Products LLC and Agway
Energy Services (Energy), Telmark LLC and subsidiaries (Lease Financing or
Leasing), and Agway Insurance Company and Agway General Agency (Insurance).
AGRICULTURE
Agway Agricultural Products
Agway Agricultural Products (AAP) is comprised of six 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 15 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.
Agronomic Needs: AAP operates 110 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., a cooperative of which Agway is a member
eligible for patronage refunds. AAP has a significant investment as a result of
receiving part of its patronage refund in stock.
3
<PAGE>
Items 1 and 2. Business and Properties - Continued
(Thousands of Dollars)
Agway Agricultural Products (continued)
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, 65 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 scope of research has been expanded while
reducing net expenditures. The research that had been conducted at the Agway
Research Farm in conjunction with eleven other cooperatives through membership
in the Cooperative Research Farms (CRF) was moved during 1998 to a facility
owned by another member. All research at the Agway-owned facility has been
concluded, and the facility will be sold. This change has moved the focus on
research to the six geographically-based enterprise units, where various forms
of research are being conducted in conjunction with universities, other
suppliers, and farmers. During the years ended June 30, 1998, 1997 and 1996, net
expenditures of $400, $700 and $600, respectively, were made on agricultural
research activities by the Company as a whole.
Country Products Group
Country Products Group (CPG) operates five different businesses: produce
operations, commodity processing and repack operations, bag manufacturing and
printing, forage seed processing and food technology. All operations have
sufficient capacity or have planned expansions to meet their operating
requirements. The seed operation is seasonal in nature, with the majority of
sales occurring in the spring.
The produce operations operated eight distribution facilities during 1998. They
are located in DeWitt, Elba, and Chittenango, New York; Winder and Forest Park,
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 grocery store and food service outlets. During 1997, the
operations previously handled by the Canastota and Chittenango facilities were
consolidated to a new building in DeWitt, New York. The Canastota property was
sold in July 1997, and the Chittenango property continues limited operations.
Country Best Adams, LLC, was created in 1998 and is 80% owned by CPG. It
operates in a newly constructed building in Winder, Georgia, and leases space at
the Atlanta Market in Forest Park, Georgia. A truck brokerage office is located
in Presque Isle, Maine, as well as a seed and tablestock potato marketing
office.
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. 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 1998, a major expansion of the sunflower facility was
completed. A pastry flour mill is located in Churchville, New York.
A multi-walled bag printing and manufacturing plant, located in Wapakoneta,
Ohio, supplies bags used by internal Agway customers and external customers,
including Pro-Pet, LLC, a pet food manufacturer in which Agway has a minority
interest and through whom Agway Retail sources its Agway-branded pet food
products.
The seed operation produces, conditions, and markets forage seed. These
facilities are located in Nampa, Idaho, and a new leased facility in Powell,
Wyoming.
4
<PAGE>
Items 1 and 2. Business and Properties - Continued
(Thousands of Dollars)
Country Products Group (continued)
During 1998, CPG formed a new food technology group which invests in various
food technologies such as the preservation of fruits and vegetables.
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, LLC, of which Agway maintained an
ownership share, and continued to source substantially all of its pet food needs
from Pro-Pet, LLC. 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 178
Company-owned stores and 313 franchised representative stores located in all of
Agway's primary states except Ohio. Of the Agway-owned stores, although all
carry farm supplies, 113 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 65 Agway- owned stores have a significantly heavier
emphasis on farm supplies and 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. ARS has
a long-term logistics agreement with Ryder Integrated Logistics (RIL) to manage
its distribution of products, which includes two distribution centers, located
in Elizabethtown, Pennsylvania, and Westfield, Massachusetts.
During the past two years, ARS has been executing a business plan that includes
upgrading or relocating existing store locations, store expansion, acquisitions,
construction of new store locations, and improving merchandising and marketing.
Additionally, ARS exited the power equipment lines in most locations and has
completely exited the frozen food product line.
In 1998, Retail initiated a reorganization of the structure of its business to
support a strategy designed to better serve the needs of customers through three
distinct distribution channels: direct, wholesale, and retail. This
reorganization takes effect in fiscal 1999 and allows each channel to focus on
the needs of their particular customer. The direct channel focuses on serving
farmers by shipping basic farm supplies in bulk directly to the farm. The
wholesale channel serves independent dealers through a wholesale sales force.
The retail channel serves consumers through company-owned stores and
franchisees. Finally, ARS has completed the development of a new franchise
program which will be fully implemented in 1999 and is anticipated to gain a
consistent representation of the Agway brand throughout the entire retail store
system.
5
<PAGE>
Items 1 and 2. Business and Properties - Continued
(Thousands of Dollars)
ENERGY
Energy is Agway Energy Products LLC (AEP), a Delaware limited liability company
wholly owned by AHI. Agway Petroleum Corporation, a former New York subsidiary
of AHI, merged into the newly formed AEP on July 1, 1998. AEP is a full service
energy company providing energy products and services to residential, farm, and
business customers. AEP manages a portfolio of businesses in distinct regional
geographic markets. These geographic regions exist in New York, Pennsylvania,
New Jersey, and Vermont. The businesses AEP is engaged in are oil delivery;
propane delivery; heating, ventilating and air conditioning (HVAC) equipment
installation and services; natural gas and electricity marketing; power fuel
delivery; and retail stations. 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 1998, AEP owned and operated 7 terminals with storage capacity of
approximately 2.3 million barrels of product. AEP operates 96 retail
distribution centers, located throughout its operating territory. AEP also
distributes petroleum products through approximately 80 distributors and
resellers. Facilities are sufficient to meet the current operating requirements
of the business. In March 1997, AEP began marketing natural gas to residential
and small commercial customers in New York through a sister subsidiary, Agway
Energy Services LLC (a wholly owned subsidiary of AHI).
LEASE FINANCING
Telmark LLC (Telmark), a Delaware limited liability company wholly owned by AHI,
and its consolidated subsidiaries finance equipment, buildings, and vehicles to
farmers and other customers in rural communities. Telmark Inc., a former New
York subsidiary of AHI, merged into the newly formed Telmark on July 1, 1998.
Telmark operates a captive sales force as its primary distribution system in 29
states in the eastern and midwestern United States. Telmark transacts business
in the continental United States and Canada through a separate division, Telease
Financial Services, which generates business directly from farm equipment
dealers and from brokers. TFS Limited is a Canadian corporation which conducts
certain lease transactions with Canadian customers. Telmark Lease Funding I, LLC
was established solely to enable a lease securitization financing entered into
during 1997. Telmark Lease Funding Corp. I was organized in 1997 as a New York
corporation, which, effective July 1, 1998, was merged into Telmark Lease
Funding I, LLC, a Delaware limited liability company.
As of June 30, 1998, Telmark had approximately $512,700 of leases outstanding
with persons other than Agway and its subsidiaries, net of unearned interest and
finance charges of approximately $175,800. 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. (See Cash Flows from Financing Activities -
Telmark under Management's Discussion and Analysis of Financial Condition and
Results of Operations (Item 7).) 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 1113 and 4102(c), 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. The Agway General Agency
(Agency) markets medical, long-term care, life and other products designed by
non-affiliated companies for the agricultural marketplace. In addition, Agency
provides administrative management services to Agway business units including
claims, risk, facilities, data processing and payroll/benefits management.
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 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 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 and HVAC service companies. The principal methods of
competition are service, quality, and price. AEP continues to maintain its
competitive position in the energy industry 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 and rural 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 7,000 persons, 2,300 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.
ADMINISTRATIVE
The Company's principal administrative office is located at 333 Butternut Drive
in DeWitt, New York. It occupies approximately 180,000 square feet under terms
of a lease with 9 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.
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 $800 in fiscal 1998 on capital projects. The Company expects to
incur $600 to complete its compliance with EPA Underground Storage Tank (UST)
regulations that become effective in December 1998. See Note 12 to the
consolidated financial statements.
8
<PAGE>
Items 1 and 2. Business and Properties - Continued
(Thousands of Dollars)
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
75,000 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.
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 15 persons, all of whom are nominated
on a district representation basis by 90 Agway Geographic Member Committees
representing members within the 15 Director Districts. At each annual meeting of
the Company, the stockholders elect five 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.
9
<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 feed, agronomic products, and selected eligible
farm supplies to members 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 currently 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 earnings from non-agricultural divisions and
subsidiaries as well as 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 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. In March 1998, the EPA issued a unilateral administrative order to
the PRPs, including the Company and MTS, for a removal action at the Rosen Site.
The Company and MTS have notified the EPA that they will comply with the order
by cooperating with the other PRPs to assure that the removal action is
performed. The Company does not believe that adjustments, if any, will be
material in relation to the consolidated financial position of Agway.
10
<PAGE>
Item 3. Legal Proceedings - Continued
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 finalized, in April 1998, its risk
characterization and remedial action plan reports and, in July 1998, its remedy
implementation plan report. 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--predecessor to
Agway Energy Products LLC) 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 revised
waste-in list for the site, the EPA has attributed approximately 1.68% 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.
While the Company is not depending on contributions from insurance or third
parties in determining its reserves for environmental clean-up liability, the
Company will determine on a site-by-site basis whether such a contribution claim
is warranted.
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, 1998.
11
<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 21, 1998, is 102,160, of which 27,428 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 1998 and 1997. (d) Limitations on Ownership and
Availability of Net Margin to Membership Common Stockholders:
Refer to Stockholder Membership and Control of Agway and Patronage Refunds
under Business and Properties (Items 1 and 2).
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
PricewaterhouseCoopers LLP, whose report for the years ended June 30, 1998, 1997
and 1996 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
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales and revenues (1)... $ 1,562,943 $ 1,671,714 $ 1,663,085 $ 1,592,857 $ 1,695,129
Margin (loss) from
continuing operations (2). $ 12,798 $ 10,670 $ 11,147 $ (7,800) $ 555
Net margin (loss) (2)(3)(4).. $ 41,754 $ 10,670 $ 12,662 $ (15,730) $ (3,445)
Total assets (1)............. $ 1,418,231 $ 1,300,261 $ 1,245,891 $ 1,225,193 $ 1,273,958
Total long-term debt ........ $ 354,529 $ 330,371 $ 291,666 $ 268,310 $ 253,104
Total long-term subordinated
debt...................... $ 462,196 $ 438,127 $ 414,927 $ 399,064 $ 407,144
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, 1994-1997, have been
reclassified to conform to the current year presentation.
(2) The 1994 data reflects a $6,065 credit before taxes from business
restructuring; 1995 data reflects a credit before taxes from business
restructuring of $3,248; and 1996 data reflects a $1,943 credit before taxes
from business restructuring.
(3) The 1994 data reflects an after-tax operating loss of $4,000 from
discontinued operations; 1995 data reflects an after-tax loss of $12,360 in
discontinued operations related to Hood and an after-tax gain on the sale of
Curtice Burns of $4,430; and 1996 data reflects an after-tax gain on the
sale of Hood of $1,515, net of operating losses until the time of sale.
(4) Effective July 1, 1997, the Company changed its method of determining the
market-related value of its plan assets under Statement of Financial
Accounting Standards (SFAS) No. 87, "Accounting for Pensions." A cumulative
effect adjustment, net of tax, of $28,956 increased net margin in 1998.
12
<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, 1996 through June 30, 1998.
RESULTS OF OPERATIONS
1998 COMPARED WITH 1997
CONSOLIDATED RESULTS
The Company's net margin of $41,800 for 1998 is a $31,100 (291%) increase from a
net margin of $10,700 in 1997. The $31,100 increase includes a net cumulative
effect adjustment for a pension accounting change of $29,000 (see Note 14 to the
consolidated financial statements) and a $2,100 (20%) increase from continuing
operations as compared to 1997. The continuing operations margin increase
represents an $8,600 pre-tax increase from 1997 offset by a $6,500 increase in
tax expense as compared to 1997.
The net business unit pre-tax operating results decreased by $6,400 and are
discussed below by business segment. Additionally, net corporate expenses
increased $1,200 as compared to the prior year. The net corporate expense
increase was principally due to a net $2,000 increase in corporate
self-insurance costs based on liability claims outstanding and actuarial
estimates of reserve development. These declines in pre-tax operating results
were more than offset by the growth of the net pension asset recognized in the
income statement during 1998, which was higher by $16,200 as compared to 1997.
Of the pension-related increase, $15,000 was due to the change in accounting
noted previously. It is anticipated that, due to a pension plan amendment
effective July 1, 1998 (see Note 14 to the consolidated financial statements),
the pension income in future years would be at historical levels.
Consolidated net sales and revenues of $1,562,900 decreased $108,800 (7%) in
1998 compared to $1,671,700 in 1997. The decrease is primarily from the Energy
segment ($102,000) due to a combination of reduced costs for petroleum products
resulting in lower selling prices and reduced volume from the warmer winter
season as compared to the prior year. The Retail segment experienced lower sales
($16,000) as this operating unit has refocused their business and exited
specific product lines. These decreases to sales were offset slightly by
increased lease revenues in Telmark ($8,500).
Consolidated operating expenses of $1,520,300 decreased $122,600 (7%) compared
to $1,642,900 in 1997. The decrease is primarily due to the decreased product
costs and the reduced variable operational costs associated with the lower sales
levels noted above. These decreases were partially offset by additional costs
associated with volume growth in the lease portfolio in 1998. Selling, general
and administrative expenses were consistent with the prior year.
Other income, net, of $13,400 decreased $5,400 (29%) compared to $18,800 in
1997. The decline was substantially due to receiving less patronage refund from
a cooperative supplier in 1998 as compared to 1997.
Income tax expense of $12,400 and $5,900 in 1998 and 1997, respectively,
resulted in effective tax rates of 49.2% and 35.7%, respectively. The increase
in the effective rate is mainly attributable to the change in adjustments made
in the prior years' tax liabilities (see Note 9 to the consolidated financial
statements). Tax expense associated with the cumulative effect adjustment
totaled $16,500 and is reflective in the net adjustment amount.
AGRICULTURE
Total sales and revenues of $769,700 in 1998 decreased by $1,600 (.2%) compared
to $771,300 in 1997. AAP sales and revenues decreased $27,800 (5%) and CPG sales
and revenues increased $26,200 (17%) in 1998 as compared to 1997.
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
(Thousands of Dollars)
AGRICULTURE (continued)
Despite AAP increased feed volume (5%) over the prior year, the decrease in
pricing levels of feed products has resulted in an overall decrease in total
feed sales compared to 1997. Crop sales declined compared to last year, largely
due to a similar decrease in pricing level of products as in feed. Even though
crops sales dollars were down, volume increases were experienced principally in
fertilizer (8%), seed corn units (7%), and soybean seed units (37%). AAP farm
stores experienced a decline in sales due to a planned reduction in the sale of
power equipment and the discontinuation of the frozen food business as well as
an increased emphasis on bagged feed delivery routes has continued to lower
sales.
The increase in CPG sales resulted from strong sales growth in its produce
operations of $32,000 (44%) compared to 1997. This growth in produce resulted
substantially from an acquisition of a business and the formation of Country
Best Adams during the first quarter of 1998. Additionally, an increasing
customer base at the seed operation, principally other cooperative and wholesale
businesses, has increased sales by $6,200 (39%) as compared to the prior year.
Sales growth at CPG has been partially offset by the elimination of sales from
the pet food business by $11,400, which was sold in the prior year to Pro-Pet
LLC, a company in which CPG has a minority interest.
The Agriculture segment's operating margin of $7,600 increased $4,400 as
compared to $3,200 in 1997. AAP operating margin increased $700 (37%) and CPG
increased $3,700 (71%) in 1998 compared to 1997.
AAP's operating loss of $1,300 in 1998 represents an improvement of $700 (35%)
from an operating loss of $2,000 in 1997. The reduced loss as compared to the
prior year resulted from improved operating margins in Direct Marketing of
$9,000. The improvement in gross margins is principally due to lower unfavorable
experience with exchange-traded futures ($5,600) and improved margins in the
seed business ($2,400) as the result of growth in the commercial vegetable seed
business. These improved margins were mostly offset by (1) increased losses in
Enterprise operations of $4,900 due principally to reduced margins in feed and
crop sales and (2) increased net support costs of $3,400. Increased net support
costs are due to reduced patronage income ($5,100), largely due to lower CF
Industries Inc. earnings, offset by a non-recurring charge ($1,500) incurred in
the first quarter last year for the adoption of a new accounting policy
regarding the improvement of long-lived assets.
CPG's operating margin of $8,900 in 1998 represents a $3,700 (71%) increase from
an operating margin of $5,200 in 1997. Operating improvements in a variety of
CPG business operations during 1998 resulted in increased margins over 1997. In
the produce operation, operating margins increased $2,600 principally from
potatoes, onions and strawberries product lines. The Pro-Pet LLC investment and
net charges in the prior year on the sale of the pet food manufacturing brands
and businesses improved margins in 1998 over the prior year by $1,400 as the
benefits of better inventory management and cost savings from the joint venture
were realized. All other CPG business had a net improvement ($300) over last
year. Initial start-up costs associated with new operations decreased margins by
$600.
RETAIL
Total sales and revenues of $251,600 in 1998 decreased $16,000 (6%) compared to
$267,600 in 1997. The decrease is the result of Retail's continued focus on its
three primary product categories: yard and garden, pet food and pet supplies,
and farm-related products. An outcome of this focus is reduced sales during 1998
through a planned reduction of the power equipment business at most retail
locations ($7,100) and the discontinuation of the frozen food product line
($3,800). Additionally, sales associated with bag feed and fertilizers, and farm
supplies declined ($6,000) principally due to an increasing amount of farmers'
needs being supplied by farm supply stores managed by AAP. Increased sales were
experienced from several nursery acquisitions during 1998 ($5,900). This
increase was partially offset ($5,000) by reduced sales from closed stores,
lower franchisee volume, which was negatively impacted by the implementation of
a new franchisee program during 1998, and a net decline in all other primary
product categories.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
(Thousands of Dollars)
RETAIL (continued)
Retail's operating loss of $2,700 in 1998 represents a decrease in earnings of
$7,900 (152%) from an operating margin of $5,200 in 1997. Gross margin dollars
declined $2,500 in 1998 as compared to 1997. The nursery product lines showed
strong growth in margins ($2,500), particularly through acquisitions. However,
the planned product line reductions noted above decreased margins by $2,900 and
net declines of $2,100 were experienced in the margins of all other primary
product lines. Overall, gross margin percentage improved 2% despite the dollar
reductions. Total expenses increased $4,100 as compared to last year due
principally to increased costs from new business locations ($2,500) and
non-recurring costs ($600) associated with business restructuring in Retail.
Other revenue, principally from the sale of surplus properties, also declined
$1,300 as compared to the prior year.
ENERGY
Total sales and revenues of $505,100 in 1998 decreased $102,000 (17%) compared
to $607,100 in 1997. Reduced commodity cost for petroleum products in the
current year allowed for reduced selling prices to customers. The lower selling
prices decreased sales by $54,100 compared to 1997. Total unit volume sold of
all products decreased 10.5% resulting in sales decline of $56,200, mostly in
the residential sales of heating oils and propane. This decline was mainly
caused by the current year's winter season being 8% warmer, based on
degree-days, compared to 1997. These declines were slightly offset by increases
in sales of $8,300 from a growing natural gas product line for both residential
and commercial customers and from an increase in service revenues as Energy
continues to emphasize its technical strength in servicing heating, ventilating,
and air-conditioning equipment.
Energy's operating margin of $15,200 in 1998 represents a decrease of $4,300
(22%) from an operating margin of $19,500 in 1997. The lower sales dollars,
noted above, partially offset by stronger gross margin rates, reduced overall
gross margin dollars on all products by $6,900 as compared to 1997. Operating
expenses declined by $2,000 in 1998 as compared to 1997. Total distribution
costs were lower in part due to the decline in volume and in part due to
initiatives to lower its delivery costs of products and to reorganize how Energy
manages the markets it serves.
LEASE FINANCING
Total revenues of $65,500 in 1998 increased $8,600 (15%) compared to $56,900 in
1997. The increase is attributable in part to a $49,900 (11%) increase in net
leases and notes during 1998 as compared to 1997. Increases in the lease
portfolio resulting from new booked volume of $227,300 in 1998 and $231,000 in
1997 exceeded lease reductions from collection and net bad debt expense of
$177,400 and $159,800 in 1998 and 1997, respectively. The net increase in new
booked volume has the effect of increasing revenues. Total revenues, as a
percentage of average net leases and notes, decreased slightly from 13.7% in
1997 to 13.5% in 1998.
Operating margin of $15,400 in 1998 represents an increase of $2,400 (18%) from
an operating margin of $13,000 in 1997. The increase in total revenues noted
above was partially offset by increased interest cost of $3,400 (14%), increased
SG&A costs of $3,100 (25%) and a decrease in the provision for credit losses of
$400 (5%) in 1998 as compared to 1997. While the average cost of interest paid
on debt decreased from 7.5% to 7.2%, interest costs increased due to increased
borrowings required to finance the growth of the lease portfolio. The SG&A
expense increase was primarily the result of additional personnel and incentives
paid relating to the additional new business booked and increased travel costs
as the Company expands its territory.
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
(Thousands of Dollars)
INSURANCE
Total net revenues of $27,300 in 1998 increased $300 (1%) compared to $27,000 in
1997. From 1997 to 1998, sales of the Insurance Company's core product offerings
increased 3%, while depopulation of mandatory assigned risk automobile pools
resulted in a 27% decrease in premiums allocated to the Insurance Company. In
Agency, 1998 sales of long-term care and other insurance products continued to
increase, while revenue related to medical products continued to decrease.
Ongoing healthcare regulatory activity and rising medical costs are expected to
depress future medical product sales.
During 1998, the Insurance Company experienced an operating gain of $200
compared to $1,200 in 1997. The 1998 results were impacted principally by an
increase in commission expense of $900. In addition, net claims losses increased
slightly in 1998 compared to 1997. This resulted from lower 1998 reinsurance
recoveries as the Insurance Company experienced more favorable claims severity
and frequency results in 1998 compared to 1997. The Agency experienced an
operating loss of $500 in 1998 and 1997. This is principally related to expenses
associated with the Agency's provision of administrative management services to
Agway business units. The $300 decrease in 1998 Agency net revenues from sales
of medical products was offset by a $300 decrease in selling, general and
administrative expenses attributable to the medical product.
1997 COMPARED WITH 1996
CONSOLIDATED RESULTS
The Company's net margin of $10,700 for 1997 is a $2,000 (16%) 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 $1,671,700 increased $8,600 (.5%) in 1997
compared to $1,663,100 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 $1,642,900 increased $15,500 (1%) compared to
$1,627,400. 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%) in 1997 as compared to 1996 from improved underwriting results.
Selling, general and administrative expenses (SG&A) have decreased $5,300 (4%)
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.
16
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
(Thousands of Dollars)
CONSOLIDATED RESULTS (continued)
The Company's interest expense, net of interest income, of $31,000 in 1997
decreased by $2,100 (6%) 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 $400 (2%) 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.
AGRICULTURE
Total sales and revenues of $771,300 in 1997 decreased by $98,800 (11%) compared
to $870,100 in 1996. AAP experienced a $41,200 (6%) decline in sales and
revenues while CPG declined $57,600 (27%) 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%) 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.
17
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
(Thousands of Dollars)
AGRICULTURE (continued)
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.
RETAIL
Total sales and revenues of $267,600 in 1997 decreased $17,300 (6%) compared to
$284,900 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 (7%) 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 $607,100 in 1997 increased $61,100 (11%) 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%) 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.
18
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
(Thousands of Dollars)
LEASE FINANCING
Total revenues of $56,900 in 1997 increased by $8,300 (17%) as compared to
$48,600 in 1996. The increase is attributable primarily to the $71,200 (19%)
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%) as compared to
$11,600 in 1996. The increase in total revenues was partially offset by
increased interest cost of $3,200 (16%), increased SG&A costs of $2,700 (27%),
and an increase in the provision for credit losses of $900 (14%) 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.
INSURANCE
Insurance net sales and revenues of $27,000 in 1997 increased $1,600 (6%) 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 operating 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.
DISCONTINUED OPERATIONS
The 1996 results from discontinued operations reflect a net gain of $2,100 on
the sale of H.P. Hood Inc. (Hood) and a net loss of $600 on its operations
through the date of sale.
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 two-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.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ------------
Net cash flows from/(used in)
<S> <C> <C> <C>
Operating activities...................................... $ 43,856 $ 24,234 $ 9,349
Investing activities...................................... (82,331) (77,014) (28,482)
Financing activities...................................... 38,475 52,780 19,133
------------ ----------- ------------
Net increase (decrease) in cash and equivalents................. $ 0 $ 0 $ 0
============ =========== ============
</TABLE>
Cash Flows From Operations
The increase in cash flow from operating activities in 1998 as compared to 1997
is due in part ($9,100) to a lesser demand for cash to fund working capital and
in part ($10,500) due to increased cash from earnings. The biggest contributor
to the lower demand was from a decline in receivables during 1998 (cash
provided) as compared to increased receivable balances in the prior two years.
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.
19
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
(Thousands of Dollars)
Cash Flows From Investing
The most significant use of cash over the past three years is from the Company's
growing lease financing business (Telmark). The cash requirements to fund lease
origination growth in excess of lease repayments amounted to $57,400, $79,200
and $48,500 in 1998, 1997 and 1996, respectively. Capital expenditures required
cash of $30,952, $25,745 and $26,025 for 1998, 1997 and 1996, respectively. 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
investing activities, principally the sale of businesses and the sale of
discontinued operations, which amounted to a total of $0, $21,958 and $42,367 in
1998, 1997 and 1996, 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.
As of June 30, 1998, the Company had certain facilities available with various
banking institutions whereby lenders have agreed to provide funds up to $369,000
to separately financed units of the Company as follows: AFC, $75,000 and
Telmark, $294,000. The AFC amount is a $50,000 short-term line of credit and a
$25,000 long-term revolver. 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 short-term line
of credit to $75,000 on October 1, 1998, to provide a facility for interim
funding, if necessary, for maturing subordinated debt (see below). The lines of
credit to Telmark have increased $90,000 since June 30, 1997, and are considered
sufficient to finance new business and support incremental repayments on debt.
Agway and AFC
The $50,000 short-term line of credit and the $25,000 long-term revolver
available to AFC at June 30, 1998, 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. The line of credit and long-term revolver
additionally require the Company's investment in bank stock, which had a book
value of $7,100 at June 30, 1998, as additional collateral. 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. AFC bank short-term lines of credit and
commercial paper facilities are available to the Company through December 1998.
The long-term revolver is available until January 1, 2000. The amounts
outstanding as of June 30, 1998 and 1997, under AFC's $50,000 short-term line of
credit and $50,000 commercial paper were $0 and $30,100 and $0 and $34,300,
respectively. The long-term revolver, which became available in January 1998,
has $0 outstanding at June 30, 1998. The Company has ongoing discussions with
its lenders and expects to continue to have appropriate and adequate financing
to meet its ongoing needs.
AFC offers subordinated debentures and subordinated money market certificates to
the public. AFC's subordinated debt is not redeemable by the holder. However,
AFC does have a practice of repurchasing at face value, plus interest accrued at
the stated rate, certain subordinated debt whenever presented for repurchase.
The foregoing debt bears interest payable 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 1998, $75,600 of
subordinated money market certificates issued by AFC will mature. The Company
expects to refinance this debt 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.
20
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
(Thousands of Dollars)
Telmark
Telmark finances its operations and lease portfolio growth principally through
payments received on existing leases, which totaled $169,800 in 1998 and
$151,900 in 1997. Additionally, cash flows from operations, which were $21,200,
$15,200 and $12,600 for 1998, 1997 and 1996, respectively, borrowings under
lines of credit, private placements of debt with institutional investors, sales
of debentures to the public, sales of leases, and lease-backed asset
securitization all provide financing sources for Telmark.
At June 30, 1998, Telmark has several credit facilities available from banks
which allow Telmark to borrow up to an aggregate of $294,000. Uncommitted
short-term line of credit agreements permit Telmark to borrow up to $44,000 on
an unsecured basis with interest paid upon maturity. The lines bear interest at
money market variable rates. A committed $250,000 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 June 30, 1998
and 1997, under the short-term lines of credit and the revolving term loan
facility were $20,000 and $165,000 and $4,000 and $190,900, respectively. The
portion of the revolving term loan that is short term at June 30, 1998 and 1997,
was $15,000 and $20,900, 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
$44,000 lines of credit all have terms expiring during the next 12 months. The
$250,000 revolving term agreement loan facility is available through February 1,
1999.
At June 30, 1998, Telmark also had balances outstanding on unsecured senior note
private placements totaling $169,000. 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 $75,000, (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 September 30,
1997, that exceed 75% of consolidated net income for the period beginning on
October 1, 1997, through the date of determination, inclusive.
Telmark, through a wholly owned special purpose subsidiary, Telmark Lease
Funding I, LLC, originally issued $24,000 of Class A lease-backed notes and
$2,000 of Class B lease-backed notes to three insurance companies. Outstanding
principal at June 30, 1998, is $17,700. 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 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.
Telmark registers with the Securities and Exchange Commission from time to time
to offer to the public debentures. 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 and is allowed to be reinvested. The
offering of the debentures is not underwritten, and there can be no guarantee as
to the amount of debentures, if any, that will be sold. The proceeds of the
offerings are used to provide financing for Telmark's leasing activities. As of
June 30, 1998, approximately $34,000 of debentures were outstanding under these
offerings.
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.
21
<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, 1998:
<TABLE>
<CAPTION>
Source of debt Agway AFC Telmark Total
- -------------- ------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Banks - due 8/98 to 2/01 with interest
from 6.6% to 8.4%............................... $ 0 $ 1,925 $ 150,000 $ 151,925
Insurance companies - due 7/98 to 5/04
with interest from 5.9% to 8.9%................. 0 0 186,660 186,660
Capital leases and other - due 1998 to 2012
with interest from 6% to 12%.................... 11,154 4,773 17 15,944
------------- ------------ -------------- ------------
Long-term debt.............................. 11,154 6,698 336,677 354,529
Subordinated money market certificates - due
10/98 to 10/08 with interest from 4.5% to 9.5% 0 407,488 0 407,488
Subordinated debentures - due 1999 to 2003
with interest at 7.0% to 8.5%................... 0 20,702 34,006 54,708
------------- ------------ -------------- ------------
Total subordinated debt..................... 0 $ 428,190 $ 34,006 $ 462,196
------------- ------------ -------------- ------------
Total debt............................. $ 11,154 $ 434,888 $ 370,683 $ 816,725
============= ============ ============== ============
</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 "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. Certain factors that could cause actual results to
differ materially from those projected have been discussed herein and include
the factors set forth below. Other factors that could cause actual results to
differ materially include uncertainties of economic, competitive and market
decisions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. 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." This statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future undiscounted cash flows is less
than the carrying amount of the asset, an impairment loss is recognized. Assets
to be disposed of are reported at the lower of the carrying amount or fair value
less cost to sell. The adoption of this standard resulted in a $1,700 pre-tax
charge to operating margin in 1997 related to certain feed and fertilizer plants
($1,500) in the Agriculture segment and store locations ($200) in the Retail
segment. Such facilities are held and used in operations. The pre-tax charge for
impairment is included in the selling, general and administrative expenses on
the consolidated statements of operations and totaled $2,200 in 1998.
22
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
(Thousands of Dollars)
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.
At June 30, 1998, 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 $800 in fiscal 1998 on capital projects. The Company expects to
incur $600 to complete its compliance with EPA Underground Storage Tank (UST)
regulations that become effective in December 1998.
Year 2000
The approach of the year 2000 presents potential issues to all organizations who
use computers in the conduct of their business or depend on business partners
who use computers. To the extent computer use is date-sensitive, hardware or
software that recognizes the year by the last two digits may erroneously
recognize "00" as 1900 rather than 2000, which could result in errors or system
failures.
Agway utilizes a number of computers and computer software (systems) in the
conduct of its business. Many systems are for specific business segments and
others have broader corporate-wide use. Systems are principally involved in the
flow of information rather than in the processing, manufacturing, and
distributing operations. Agway initiated its year 2000 compliance efforts in
January 1996. The initial focus of the Company's compliance efforts was on the
Company's information systems, including assessment of the issue, planning the
conversion to compliance, plan implementation, and testing. All systems have
been inventoried. Those systems determined to be at risk were prioritized, and
plans were put in place to upgrade systems by remediation, replacements,
outsourcing, or doing without these systems. Through June 1998, the assessment
and planning phases, as well as certain portions of the implementation, have
been completed. The remaining portion of these plans are in process of
implementation, with a completion for specific systems scheduled throughout the
next fiscal year and the final implementations scheduled to be completed in
September 1999. Testing of systems is being conducted for each system as
implemented. The interaction of updated systems will be tested in the
enterprise-wide testing environment.
23
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Continued
(Thousands of Dollars)
Year 2000 (continued)
In addition to the information technology systems review noted above, the
Company has also initiated processes to review and to modify, where appropriate,
other areas impacted by year 2000. These areas include, but are not limited to,
hardware and software associated with end-user computing functions, vendor and
supplier relationships, external interfaces to internal IT systems, remote
location access to IT systems, facility management, and certain non-information
technology issues, such as the extent to which embedded chips are used in
machinery and equipment used in business operations. The Company has completed
significant assessments in its major business operations, continues to assess
all of these areas, and has developed or, in some cases, is in the process of
developing the implementation plans to address the issues identified. The
Company anticipates that solutions to all year 2000 areas above will be
implemented and tested no later than December 1999.
The Company engaged an international consulting firm in March 1998 to evaluate
the Company's approach to year 2000 plans and implementation compared to
industry "best practices." Based on this review, the Company has increased the
involvement of higher-level management to assure a focus on the implementation
timetable and the development of specific contingency plans, and has initiated
development of a more comprehensive enterprise-wide testing environment to be in
place by December 1998.
The year 2000 compliance issue is an uncertainty that is continuously being
monitored as the Company implements its plans. Based on the work performed to
date, the Company presently believes that the likelihood of the year 2000 having
a material effect on the results of operations, liquidity, or financial
condition is remote. Notwithstanding the foregoing, it is not presently clear
that all parts of the country's infrastructure, including such things as the
national banking systems, electrical power, transportation of goods,
communications, and governmental activities, will be fully functioning as the
year 2000 approaches. To the extent failure occurs in such activities, which are
outside the Company's control, it could affect the Company's sources of supply
and the Company's ability to service its customers with the same degree of
effectiveness with which they are served presently. The Company is identifying
elements of the infrastructure that are of greater significance to its
operations, obtaining information on an ongoing basis as to their expected
year 2000 readiness, and determining alternative solutions if required.
The Company expects to incur significant internal staff costs as well as
consulting and other expenses related to its year 2000 efforts. Due to the level
of effort required to complete remediation for the year 2000, non-business
critical system enhancements have been deferred until the year 2000 efforts have
been completed. The conversion and testing of existing systems and the
replacement of systems are expected to cost the Company approximately $18,000,
of which $9,000 has been incurred and $9,000 is expected to be incurred from
July 1998 through December 1999. Approximately 75% of these estimated costs
represent replacement costs and will be capitalized. Additionally, the Company
estimates the costs to remediate all other areas may approximate $6,000.
However, these costs will vary as the Company continues to assess and implement
its plans or if the Company is required to invoke contingency plans. The Company
treats non-capital costs associated with year 2000 as period costs and they are
expensed when incurred.
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. The
Company can also be affected by major international events, like the downturn in
the Asian economy, which can affect such things as the price of commodities the
Company uses in its operations as well as the general level of interest rates.
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 (continued)
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.
Telmark, the Company's leasing business, 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. (See Quantitative and Qualitative Disclosures about Market Risk
- - Interest Rate Exposure (Item 7a).)
25
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
(Thousands of Dollars)
Market risk represents the risk of loss that may impact the financial position,
results of operations, or cash flows of Agway due to adverse changes in
financial and commodity market prices and rates. Agway is exposed to market risk
in the areas of interest rates and commodity prices. These exposures are
directly related to its normal funding and investing activities and to its use
of agricultural and energy commodities in its operations.
Interest Rate Exposure
The Company does not use derivatives and other interest rate instruments based
on the fixed rate nature of the majority of the Company's debt obligations. The
following table provides information about the Company's other financial
instruments that are sensitive to changes in interest rates. The table presents
principal cash flows and related weighted average interest rates by expected
maturity dates.
<TABLE>
<CAPTION>
Fair Value
1999 2000 2001 2002 2003 Thereafter Total 6/30/98
--------- --------- --------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Available-for-sale securities $ 3,973 $ 3,927 $ 3,428 $ 4,158 $ 3,485 $ 17,626 $ 36,597 $ 37,686
Weighted average interest rate 6.2% 6.55% 6.4% 6.25% 6.46% 6.42%
Liabilities
Bank lines of credit - Telmark 35,000 35,000 35,000
Weighted average interest rate 6.30%
Long-term debt, including
current portion - Telmark... 93,569 88,565 64,849 43,862 22,982 22,833 336,660 342,628
Weighted average interest rate 7.18% 7.06% 6.96% 6.83% 7.00% 7.01%
Subordinated debentures,
including current portion -
Telmark 0 17,794 2,711 3,398 10,103 0 34,006 34,605
Weighted average interest rate 8.23% 7.87% 7.50% 8.42%
Commercial paper - AFC..... 30,100 30,100 30,100
Weighted average interest rate 5.59%
Long-term debt, including
current portion-Agway & AFC. 5,269 2,314 2,638 3,442 111 1,472 15,246 15,241
Weighted average interest rate 8.50% 8.56% 8.54% 8.49% 7.90% 9.93%
Subordinated debentures,
including current portion -
AFC. 0 11,957 0 3,431 0 5,314 20,702 20,863
Weighted average interest rate 8.34% 7.38% 7.86%
Subordinated money market
certificates, including
current portion - AFC.... 75,589 45,300 48,097 46,357 36,028 156,117 407,488 414,321
Weighted average interest rate 8.56% 7.86% 9.15% 8.22% 6.90% 8.07%
</TABLE>
Telmark, the Company's leasing business, 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 lease activities with the maturity and repricing characteristics of its
lease portfolio. However, a rise in interest rate would increase the cost of
that portion of debt which is not precisely matched to the characteristics of
the portfolio and could lower the value of outstanding leases in the secondary
market. Telmark has a formal risk management policy which limits the short-term
exposure to an amount which is immaterial to the results of operations or cash
flows. The Telmark subordinated debentures' interest rate is at the greater of
the quoted rate or a rate based upon the discount rate for U.S. Government
Treasury Bills (T-Bill), with maturities of 26 weeks. Based on the T-Bill rate
as of June 30, 1998, as compared to the stated rate of the debentures, a
reasonably possible near-term change in interest rates and the conversion of
debt to a variable rate would not cause material near-term losses in future
earnings or cash flows. Finally, for the portion of debt which is not precisely
matched as of June 30, 1998, the Company does not believe that reasonably
possible near-term changes in interest rates will result in a material effect on
future earnings, fair values, or cash flows of the Company.
26
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures about Market Risk - Continued
(Thousands of Dollars)
Interest Rate Exposure (continued)
Subordinated money market certificates of AFC have interest rates at the greater
of the quoted rate or a rate based upon the discount rate of T-Bills, with
maturities of 26 weeks. The T-Bill rate at June 30, 1998, of 5.11% compares to
the money market certificates' stated rates which range from 4.5% to 9.5% at
June 30, 1998. The Company believes a reasonably possible near-term change in
T-Bill rates and the conversion of AFC debt to a variable rate would not cause
material near-term losses in future earnings or cash flows.
Commodity Price Exposure
The Company has exposure to adverse 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 formal policies established for this
activity. These policies limit the duration to maturity of contracts entered
into as well as the level of exposure to be hedged. Since November 1997, the
Company modified its practices relating to its feed business so that all
transactions involving derivative financial instruments are required to have a
direct relationship to the price risk associated with existing inventories or
future purchase and sales of its products.
Agriculture commodity 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. Energy commodity instrument contracts are entered into as a hedge
against the price risk associated with the Company's inventories or future
purchases and sales of commodities used in the Company's operations.
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, 1998 and 1997, the carrying and fair value of the
Company's investment in commodities futures and option contracts was $2,200 and
$3,200, respectively, and the total net deferred gains and losses on open
contracts were immaterial. At June 30, 1998, the actual open positions of these
instruments and the potential near-term losses in earnings, fair value, and/or
cash flows from changes in market rates or prices were not material.
27
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES:
Agway Inc. Report on Financial Statements............................................................ 29
Report of Independent Accountants...................................................................... 30
Consolidated Balance Sheets, June 30, 1998 and 1997.................................................... 31
Consolidated Statements of Operations, fiscal years ended June 30, 1998, 1997 and 1996................. 32
Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended June 30,
1998, 1997 and 1996............................................................................... 33
Consolidated Statements of Cash Flow, fiscal years ended June 30, 1998, 1997 and 1996.................. 34
Notes to Consolidated Financial Statements............................................................. 35
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
This item is inapplicable.
28
<PAGE>
AGWAY INC. 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 PricewaterhouseCoopers LLP, independent
auditors, whose report follows. Agway has made available to
PricewaterhouseCoopers LLP 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 PricewaterhouseCoopers LLP 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 21, 1998
/s/ PETER J. O'NEILL
By PETER J. O'NEILL
Senior Vice President
Finance & Control
Treasurer and Controller
August 21, 1998
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Agway Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Agway Inc.
and Consolidated Subsidiaries at June 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1998, 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 audits. We conducted our audits 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 audits provide a reasonable basis for the opinion expressed
above. As further discussed in note 14, the Company changed its accounting for
pensions in 1998.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Syracuse, New York
August 21, 1998
30
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1997
(Thousands of Dollars)
<TABLE>
<CAPTION>
ASSETS
1998 1997
------------- --------------
<S> <C> <C>
Current assets:
Trade accounts receivable (including notes receivable of
$49,394 and $44,074, respectively), less allowance for
doubtful accounts of $7,926 and $7,864, respectively................... $ 203,637 $ 209,868
Leases receivable, less unearned income of $65,048 and $58,225,
respectively........................................................... 137,493 124,552
Advances and other receivables............................................. 26,417 29,922
Inventories................................................................ 149,214 150,640
Prepaid expenses and other assets.......................................... 52,774 52,714
------------- --------------
Total current assets................................................... 569,535 567,696
Marketable securities........................................................... 36,412 35,586
Other security investments...................................................... 51,761 49,668
Properties and equipment, net................................................... 213,795 215,095
Long-term leases receivable, less unearned income of $110,721 and
$94,178, respectively...................................................... 357,777 320,809
Net pension asset............................................................... 176,792 100,052
Other assets.................................................................... 12,159 11,355
------------- --------------
Total assets........................................................... $ 1,418,231 $ 1,300,261
============= ==============
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Current liabilities:
Notes payable.............................................................. $ 65,100 $ 59,200
Current installments of long-term debt..................................... 99,173 114,396
Subordinated debt, current................................................. 75,589 62,999
Accounts payable........................................................... 114,548 112,391
Other current liabilities.................................................. 114,452 113,927
------------- -------------
Total current liabilities.............................................. 468,862 462,913
Long-term debt.................................................................. 255,356 215,975
Subordinated debt............................................................... 386,607 375,128
Other liabilities............................................................... 100,568 68,494
------------- -------------
Total liabilities...................................................... 1,211,393 1,122,510
Commitments and contingencies...................................................
Shareholders' equity:
Preferred stock, less amount held in Treasury.............................. 47,871 57,541
Common stock ($25 par--300,000 shares authorized; 172,265 and 171,792
shares issued, less amount held in Treasury)........................... 2,571 2,639
Retained margin............................................................ 156,396 117,571
------------- -------------
Total shareholders' equity............................................. 206,838 177,751
Total liabilities and shareholders' equity........................ $ 1,418,231 $ 1,300,261
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
31
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS of OPERATIONS
fiscal years ended June 30, 1998, 1997 and 1996
(Thousands of Dollars)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Net sales and revenues from:
Product sales (including excise taxes)................. $ 1,470,132 $ 1,587,751 $ 1,589,027
Leasing operations..................................... 65,476 56,943 48,627
Insurance operations................................... 27,335 27,020 25,431
------------- ------------ -------------
Total net sales and revenues....................... 1,562,943 1,671,714 1,663,085
------------- ------------ -------------
Cost and expenses from:
Products and plant operations.......................... 1,345,339 1,471,885 1,451,574
Leasing operations..................................... 26,871 23,486 20,305
Insurance operations................................... 16,653 16,437 21,176
Selling, general and administrative activities......... 131,413 131,116 136,240
Restructuring credit................................... 0 0 (1,943)
------------- ------------ -------------
Total operating costs and expenses................. 1,520,276 1,642,924 1,627,352
------------- ------------ -------------
Operating margin............................................ 42,667 28,790 35,733
Interest expense, net of interest income of $10,032,
$9,976 and $10,330, respectively....................... (30,825) (30,970) (33,085)
Other income, net........................................... 13,361 18,763 18,422
------------- ------------ -------------
Margin from continuing operations before income taxes....... 25,203 16,583 21,070
Income tax expense.......................................... (12,405) (5,913) (9,923)
------------- ------------ -------------
Margin from continuing operations........................... 12,798 10,670 11,147
Discontinued operations:
Loss from operations, including tax benefit of $120.... 0 0 (595)
Gain on disposal of Hood, net of tax expense of $1,711 0 0 2,110
------------- ------------ -------------
Margin from discontinued operations................ 0 0 1,515
------------- ------------ -------------
Margin before cumulative effect of an accounting change..... 12,798 10,670 12,662
------------- ------------ -------------
Cumulative effect of accounting change, net of tax expense
of $16,500............................................. 28,956 0 0
------------- ------------ -------------
Net margin.................................................. $ 41,754 $ 10,670 $ 12,662
============= ============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
32
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS of CHANGES in SHAREHOLDERS' EQUITY
fiscal years ended June 30, 1998, 1997 and 1996
(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 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 gains
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
Net margin........................... 41,754 41,754
Dividends declared................... (3,634) (3,634)
Redeemed, net........................ (2,714) (68) (9,670) (9,738)
Adjustment to unrealized gains
on available-for-sale securities,
net of tax......................... 705 705
------- --------- --------- --------- --------- ----------
Balance June 30, 1998..................... 102,838 $ 2,571 $ 47,871 $ 0 $ 156,396 $ 206,838
======= ========= ========= ========= ========= ==========
</TABLE>
Common shares, purchased at par value, held in Treasury at June 30 were: 69,427
in 1998; 66,240 in 1997; 54,496 in 1996. A common stock dividend per share of
$1.50 was declared for 1998, 1997 and 1996. Dividend payments are restricted to
a maximum of 8% of par value per annum. See Note 13 for the details of preferred
stock activity.
The accompanying notes are an integral part of the consolidated
financial statements.
33
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
fiscal years ended June 30, 1998, 1997 and
1996
(Thousands of Dollars)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net margin .............................................. $ 41,754 $ 10,670 $ 12,662
Adjustments to reconcile margins to net cash:
Depreciation and amortization........................ 28,797 29,831 33,422
Restructuring credit................................. 0 0 (1,943)
Receivables and other asset provisions............... 11,390 10,341 10,993
Net pension income................................... (31,909) (14,871) (11,338)
Cumulative effect of accounting change, net of tax... (28,956) 0 0
Patronage refund received in stock................... (2,494) (4,984) (3,264)
Deferred income tax expense.......................... 25,955 4,795 11,474
(Gain) loss on disposition of:
Businesses....................................... 0 (360) (3,799)
Other security investments....................... 0 0 (1,348)
Properties and equipment......................... (1,210) (2,613) 891
Changes in assets and liabilities, net of effects of
businesses acquired or sold:
Receivables...................................... 7,025 (210) (14,982)
Inventory........................................ 2,042 6,048 (12,527)
Payables......................................... 814 (3,278) (21,802)
Other............................................ (9,352) (11,135) 10,910
------------- ------------ -------------
Net cash flows from operating activities.................... 43,856 24,234 9,349
Cash flows from investing activities:
Purchases of properties and equipment.................... (30,952) (25,745) (26,025)
Cash paid for acquisitions............................... (2,969) (2,178) (688)
Disposition of properties and equipment.................. 8,770 11,429 4,012
Purchases of marketable securities available for sale.... (12,529) (25,084) (10,973)
Sale of marketable securities available for sale......... 12,407 24,037 11,110
Leases originated........................................ (227,270) (231,006) (177,502)
Leases repaid............................................ 169,827 151,851 129,032
Purchases of investments in related cooperatives......... (2,601) (4,657) (4,401)
Proceeds from sale of investments in related cooperatives 2,986 2,381 4,586
Proceeds from disposal of businesses..................... 0 21,958 26,467
Proceeds from sale of discontinued operations............ 0 0 15,900
------------- ------------ -------------
Net cash flows used in investing activities................. (82,331) (77,014) (28,482)
Cash flows from financing activities:
Net change in short-term borrowing....................... 5,510 (3,000) (8,100)
Proceeds from long-term debt............................. 133,837 132,771 67,513
Repayment of long-term debt.............................. (110,644) (91,394) (42,896)
Proceeds from sale of subordinated debentures............ 118,371 63,086 81,565
Redemption of subordinated debt.......................... (94,302) (39,887) (65,701)
Payments on capitalized leases........................... (617) (2,671) (2,311)
Proceeds from sale of stock.............................. 18 2,291 13
Redemption of stock...................................... (9,755) (4,119) (6,368)
Cash dividends paid...................................... (3,943) (4,297) (4,582)
------------- ------------ -------------
Net cash flows from financing activities.................... 38,475 52,780 19,133
------------- ------------ -------------
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.
34
<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 1998 and June 1997 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, 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.
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.
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
Commodity instrument contracts designated at inception as a hedge, where there
is a direct relationship to the price risk associated with the underlying
exposure, 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 or as the anticipated hedged
transaction occurs. Gains and losses on early terminations of commodity
instrument contracts designated as hedges are deferred and included in cost of
sales in the same period as the hedged transaction. Commodity instrument
contracts not designated as effective hedges of firm commitments or anticipated
transactions are marked to market at the end of the reporting period, with the
resulting gains or losses recognized in cost of sales.
Marketable Securities
All of the Company's marketable debt 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 are recorded as a reduction
of interest expense and totaled approximately $1,600, $1,200 and $1,400 for the
years ended June 30, 1998, 1997 and 1996, 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 $9,100 and $7,300 at June 30, 1998 and 1997,
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 ($2,300 over 1 to 10 years, $3,500 over
15-20 years, and $3,300 over 40 years). Amortization included in continuing
operations totaled approximately $1,400, $1,100 and $1,600 for fiscal years
ending June 30, 1998, 1997 and 1996, respectively.
36
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of Dollars)
1. Summary of Significant Accounting Policies (continued)
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." This statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the sum of the expected future undiscounted cash
flows is less than the carrying amount of the asset, an impairment loss is
recognized. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less cost to sell. The adoption of this standard resulted
in a $1,700 pre-tax charge to operating margin in 1997 related to certain feed
and fertilizer plants ($1,500) in the Agriculture segment and store locations
($200) in the Retail segment. Such facilities are held and used in operations.
The pre-tax charge for impairment is included in the selling, general and
administrative expenses on the consolidated statements of operations and totaled
$2,200 in 1998.
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, 1998, 1997 and 1996
was approximately $11,800, $10,800 and $23,200, respectively. Net research and
development costs were approximately $400, $700 and $600 for the years ended
June 30, 1998, 1997 and 1996, 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.
Patronage Refunds
Patronage refunds are declared and paid at the discretion of the Board of
Directors in accordance with the provision of the By-laws of the Company.
Patronage refunds are based on taxable earnings on patronage business and, when
declared, are paid in cash.
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 for the year
ended June 30, 1996.
37
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of Dollars)
1. 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 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.
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 guaranteed by the Company. This guarantee is full and
unconditional, and joint and several.
Major subsidiary holdings of AHI include Agway Consumer Products Inc. (ARS and
CPG), Agway Energy Products LLC and Agway Energy Services (Energy), Telmark LLC
and subsidiaries (Lease Financing or Leasing), and Agway Insurance Company and
Agway General Agency (Insurance).
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>
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Net sales and revenues......................... $ 1,027,964 $ 1,109,960 $ 1,110,087
Operating margin............................... 34,060 42,428 33,763
Margin (loss) from continuing operations....... (7,539) 5,183 (5,212)
Net margin (loss).............................. (7,539) 5,183 (3,697)
1998 1997
-------------- -------------
Current assets................................. $ 524,800 $ 523,189
Properties and equipment, net.................. 150,618 154,030
Noncurrent assets.............................. 451,303 409,669
-------------- -------------
Total assets................................... $ 1,126,721 $ 1,086,888
============== =============
Current liabilities............................ $ 15,173 $ 29,181
Short-term notes payable....................... 65,100 59,200
Current portion of long-term debt.............. 170,836 175,015
Long-term debt................................. 248,128 209,296
Subordinated debt.............................. 386,607 375,128
Noncurrent liabilities......................... 26,474 17,831
Shareholder's equity........................... 214,403 221,237
-------------- -------------
Total liabilities and shareholder's equity..... $ 1,126,721 $ 1,086,888
============== =============
</TABLE>
38
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of Dollars)
3. Restructuring Credit
The restructuring credit of $1,943 in 1996 represents a reduction in estimated
costs to complete a restructuring project that began in 1992.
4. Leases Receivable and Allowance for Credit Losses
Net investments in leases at June 30 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Leases (minimum payments):
Commercial and agricultural................................................ $ 667,050 $ 596,254
Retail..................................................................... 21,464 16,682
----------- ----------
Total leases........................................................... 688,514 612,936
Unearned interest and finance charges........................................... (175,769) (152,403)
Net deferred origination costs.................................................. 9,596 8,842
----------- ----------
Net investment............................................................. 522,341 469,375
Allowance for credit losses..................................................... (27,071) (24,014)
----------- ----------
Net leases receivable...................................................... $ 495,270 $ 445,361
=========== ==========
</TABLE>
Included within the above are estimated unguaranteed residual values of leased
property approximating $72,400 and $63,700 at June 30, 1998 and 1997,
respectively. Additionally, as of June 30, 1998 and 1997, the recognition of
interest income was suspended on approximately $3,000 and $2,700, respectively,
of net leases.
Contractual maturities of leases (minimum payments) over the next five years and
thereafter were as follows at June 30, 1998: $207,297 in 1999; $158,130 in 2000;
$114,693 in 2001; $75,080 in 2002; $42,858 in 2003; and $90,456 thereafter.
5. Inventories
Inventories at June 30 consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Finished goods................................................................ $ 139,861 $ 139,579
Raw materials................................................................. 7,576 9,396
Supplies...................................................................... 1,777 1,665
----------- ----------
Total inventories........................................................ $ 149,214 $ 150,640
=========== ==========
</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 securities, which relate entirely to the
Company's insurance operations, are classified as available-for-sale marketable
securities. At June 30, 1998, the Company did not hold any debt from a single
issuer that exceeded 10 percent of the Company's shareholders' equity.
Marketable securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- ----------
June 30, 1998
- -------------
<S> <C> <C> <C> <C>
U.S. government securities and obligations........... $ 3,211 $ 18 $ (32) $ 3,197
Mortgage-backed securities........................... 12,937 284 0 13,221
Corporate securities................................. 19,621 388 (15) 19,994
----------- ---------- ----------- ----------
Total available-for-sale marketable securities.. $ 35,769 $ 690 $ (47) $ 36,412
=========== ========== =========== ==========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ----------- ----------
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
========== ========== =========== ==========
</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
$81, $200 and $500 were realized on sales of debt securities in 1998, 1997 and
1996, respectively. Gross losses realized on sales of debt securities totaled
approximately $150, $200 and $300 in 1998, 1997 and 1996, respectively.
The amortized cost and the fair value of available-for-sale debt securities at
June 30, 1998, 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.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------ -------------
<S> <C> <C>
Due after one year through five years........................................... $ 6,074 $ 6,127
Due after five years through ten years.......................................... 12,274 12,566
Due after ten years............................................................. 17,421 17,719
------------ -------------
$ 35,769 $ 36,412
============ =============
</TABLE>
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>
1998 1997
------------ -------------
<S> <C> <C>
CF Industries, Inc.............................................................. $ 25,260 $ 22,151
CoBank, ACB..................................................................... 18,940 20,750
Other........................................................................... 7,561 6,767
------------ -------------
$ 51,761 $ 49,668
============ =============
</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, 1998
- -------------
Land and land improvements.................................. $ 35,290 $ 0 $ 35,290
Buildings and leasehold improvements........................ 136,163 5,350 141,513
Machinery and equipment..................................... 326,351 780 327,131
Capital projects in progress................................ 11,966 0 11,966
------------- ------------ -------------
509,770 6,130 515,900
Less: accumulated depreciation and amortization............. 298,355 3,750 302,105
------------- ------------ -------------
Properties and equipment, net............................... $ 211,415 $ 2,380 $ 213,795
============= ============ =============
Owned Leased Combined
------------- ------------ -------------
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 0 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
============= ============ =============
</TABLE>
Depreciation and amortization expense relating to properties and equipment
amounted to approximately $27,400, $28,800 and $31,800 in 1998, 1997 and 1996,
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>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Continuing operations:
Current:
Federal............................................ $ (990) $ (2,226) $ (3,736)
State.............................................. 3,940 3,344 2,253
Deferred............................................... 9,455 5,676 11,372
(Decrease) increase in valuation allowance............. 0 (881) 34
------------ ------------ -------------
$ 12,405 $ 5,913 $ 9,923
============ ============ =============
</TABLE>
The current federal provision for income taxes of discontinued operations in
1996 was $1,591. The deferred tax provision on the cumulative effect of
accounting change in 1998 was $16,500.
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>
1998 1997 1996
------------ ------------ -------------
<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)......... 13.6 14.0 7.4
Items for which no federal tax effect was recognized... 2.5 2.2 3.0
Adjustment to prior years' tax liabilities............. (2.2) (10.8) 2.7
Other items............................................ .3 (4.7) (1.0)
------------ ------------ -------------
Effective income tax rate.......................... 49.2% 35.7% 47.1%
============ ============ =============
</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>
1998 1997
------------ -------------
<S> <C> <C>
Deferred tax assets:
Other liabilities and reserves............................................. $ 14,849 $ 13,246
Medical reserves........................................................... 9,477 7,682
NOL carryforward........................................................... 8,443 3,673
Self-insurance reserves.................................................... 7,190 6,280
Alternative minimum tax credit carryforward................................ 7,147 7,135
Deferred compensation...................................................... 4,647 4,350
Inventory.................................................................. 4,250 4,391
Environmental.............................................................. 3,066 3,070
Leases receivable.......................................................... 3,043 7,752
Accounts receivable........................................................ 3,025 2,673
ITC carryforward........................................................... 2,026 1,959
------------ -------------
Total net deferred tax asset........................................... 67,163 62,211
------------ -------------
Deferred tax liabilities:
Pension assets............................................................. 63,551 34,018
Excess of tax over book depreciation....................................... 16,233 14,715
Prepaid medical............................................................ 6,522 6,675
Other assets .............................................................. 2,278 2,269
------------ -------------
Total deferred tax liability........................................... 88,584 57,677
------------ -------------
Net deferred tax (liability) asset................................ $ (21,421) $ 4,534
============ =============
</TABLE>
The Company's net deferred tax (liability) asset at June 30, 1998 and 1997, of
$(21,421) and $4,534, respectively, consists of a net current asset of $23,693
and $20,714 included in prepaid expenses and a net long-term liability of
$45,114 and $16,180 included in other liabilities as of June 30, 1998 and 1997,
respectively. 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 deferred tax asset.
At June 30, 1998, 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, 1998, the Company had certain facilities available with various
financial institutions whereby lenders have agreed to provide funds up to
$369,000 to separately financed units of the Company as follows: AFC, $75,000
and Telmark, $294,000. The AFC amount is a $50,000 short-term line of credit and
a $25,000 long-term revolver. 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 short-term line
of credit to $75,000 on October 1, 1998, to provide a facility for interim
funding, if necessary, for maturing subordinated debt. The lines of credit of
Telmark have increased $90,000 since June 30, 1997, and are considered
sufficient to finance new business and support incremental repayments on debt.
Short-term borrowings under these credit facilities were as follows:
<TABLE>
<CAPTION>
AFC
(excluding
Telmark) Telmark Total
------------- ------------ -------------
<S> <C> <C> <C>
June 30, 1998
- -------------
Bank lines of credit........................................ $ 0 $ 35,000 $ 35,000
Commercial paper............................................ 30,100 0 30,100
------------- ------------ -------------
$ 30,100 $ 35,000 $ 65,100
============= ============ =============
Weighted average interest rate.............................. 5.59% 6.30%
============= ============
AFC
(excluding
Telmark) Telmark Total
------------- ------------ -------------
June 30, 1997
- -------------
Bank lines of credit........................................ $ 0 $ 24,900 $ 24,900
Commercial paper............................................ 34,300 0 34,300
------------- ------------ -------------
$ 34,300 $ 24,900 $ 59,200
============= ============ =============
Weighted average interest rate.............................. 5.57% 6.53%
============= ============
</TABLE>
The carrying amount of the Company's short-term borrowings approximates their
fair value. Interest rates charged on commercial paper outstanding range from
5.56% and 5.62% at June 30, 1998, and 5.57% to 5.58% at June 30, 1997.
Letters of credit of $28,100, which are primarily used to back general liability
claims, are also available to AFC. At June 30, 1998, letters of credit issued
totaled approximately $23,800.
The $50,000 short-term line of credit available to AFC at June 30, 1998, 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. The line
of credit additionally requires the Company's investment in bank stock, which
had a book value of $7,090 and $9,943 at June 30, 1998 and 1997, respectively,
as additional collateral. 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. AFC bank lines of credit and commercial paper facilities are available
to the Company through December 1998.
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 short-term line of credit agreements 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 agreements permit Telmark to borrow up to
$44,000 on an unsecured basis with interest paid upon maturity. The lines bear
interest at money market variable rates. A committed $250,000 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 facility is collateralized by
Telmark's investment in the bank stock, which has a book value of $11,850 and
$10,807 at June 30, 1998 and 1997, respectively. The total amounts outstanding
as of June 30, 1998 and 1997, under the short-term lines of credit and the
revolving term loan facility were $20,000 and $165,000 and $4,000 and $190,900,
respectively. The portion of the revolving term loan that is short term at June
30, 1998 and 1997, was $15,000 and $20,900, 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, 1998:
<TABLE>
<CAPTION>
AFC
(excluding
Agway Telmark) Telmark Total
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Notes payable - banks (a)............................ $ 0 $ 1,925 $ 150,000 $ 151,925
Notes payable - insurance companies (b)(c)........... 0 0 186,660 186,660
Other................................................ 9,977 3,344 0 13,321
------------- ------------ ------------ -----------
Subtotal long-term debt, excluding capital leases.... 9,977 5,269 336,660 351,906
Obligations under capital leases..................... 1,177 1,429 17 2,623
------------- ------------ ------------ -----------
Total long-term debt................................. 11,154 6,698 336,677 354,529
Less: current portion................................ 3,926 1,661 93,586 99,173
------------- ------------ ------------ -----------
$ 7,228 $ 5,037 $ 243,091 $ 255,356
============= ============ ============ ===========
Long-term debt consists of the following
at June 30, 1997:
AFC
(excluding
Agway Telmark) Telmark Total
------------- ------------ ------------ -----------
Notes payable - banks ............................... $ 0 $ 2,625 $ 170,000 $ 172,625
Notes payable - insurance companies ................. 0 0 145,168 145,168
Other................................................ 7,787 3,071 0 10,858
------------- ------------ ------------ -----------
Subtotal long-term debt, excluding capital leases.... 7,787 5,696 315,168 328,651
Obligations under capital leases:
Industrial revenue bonds........................ 0 358 0 358
Others.......................................... 1,272 0 90 1,362
------------- ------------ ------------ -----------
Total long-term debt................................. 9,059 6,054 315,258 330,371
Less: current portion................................ 2,380 3,141 108,875 114,396
------------- ------------ ------------ -----------
$ 6,679 $ 2,913 $ 206,383 $ 215,975
============= ============ ============ ===========
</TABLE>
45
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of Dollars)
11. Debt (continued)
(a) Under Telmark's revolving loan facility, principal of $150,000 bears
interest at fixed rates ranging from 6.62% to 8.40%, payments commencing
August 1998 with final installments due in October 2000. The Telmark bank
notes of $150,000 are collateralized by its investment in the bank stock.
Under an AFC loan agreement bearing an interest rate of 8.58%, principal of
$1,925 is payable in quarterly installments of $175 commencing August 1998
and ending in February 2001. Additionally, since January 1998, AFC has a
$25,000 long-term revolver which is available until January 1, 2000. There
are no amounts outstanding as of June 30, 1998. The AFC bank notes of
$1,925, the long-term revolver, and amounts outstanding on AFC's $50,000
short-term line of credit are collateralized by the Company's investment in
the bank stock. The 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 AFC loan agreement and the long-term
revolver component of AFC's line of credit have loan covenants that are
integrated with the short-term facilities.
(b) Under Telmark loan agreements with various insurance companies, principal
of $169,000 bears interest at fixed rates ranging from 5.90% to 8.88%,
payments commencing November 1998 with final installment due in May 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 $75,000; (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 September
30, 1997, that exceed 75% of consolidated net income for the period October
1, 1997, through the date of determination.
(c) Telmark, through a wholly owned special purpose subsidiary, Telmark Lease
Funding I, LLC, originally issued $24,000 of Class A lease-backed notes and
$2,000 of Class B lease-backed notes to three insurance companies.
Outstanding principal at June 30, 1998, is $17,700. 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 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.
46
<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, 1998:
<TABLE>
<CAPTION>
AFC
(excluding
Telmark) Telmark Total
------------- ------------ -------------
<S> <C> <C> <C>
Subordinated debentures, due 1999 to 2003,
interest at a weighted average rate of 8.1%
with a range of 7.0% to 8.5%........................... $ 20,702 $ 34,006 $ 54,708
Subordinated money market certificates,
due 1998 to 2008, interest at a weighted average
rate of 8.2% with a range of 4.5% to 9.5%.............. 407,488 0 407,488
------------- ------------ -------------
Total long-term subordinated debt........................... 428,190 34,006 462,196
Less: current portion...................................... 75,589 0 75,589
------------- ------------ -------------
$ 352,601 $ 34,006 $ 386,607
============= ============ =============
Subordinated debt consists of the following at June 30, 1997:
AFC
(excluding
Telmark) Telmark Total
------------- ------------ -------------
Subordinated debentures, due 1997 to 2003,
interest at a weighted average rate of 7.9%
with a range of 6.0% to 8.5%........................... $ 21,738 $ 31,044 $ 52,782
Subordinated money market certificates,
due 1997 to 2008, interest at a weighted average
rate of 8.1% with a range of 4.5% to 9.5%.............. 385,345 0 385,345
------------- ------------ -------------
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>
AFC's subordinated debt is not redeemable by the holder. However, AFC does have
a practice of repurchasing at face value, plus interest accrued at the stated
rate, certain subordinated debt whenever presented for repurchase. The foregoing
debt bears interest payable 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>
1999.................................... $ 416 $ 98,838 $ 99,254 $ 75,589
2000.................................... 391 90,879 91,270 75,051
2001.................................... 398 67,487 67,885 50,808
2002.................................... 399 47,304 47,703 53,186
2003.................................... 399 23,093 23,492 46,131
Thereafter.............................. 2,082 24,305 26,387 161,431
------------ ------------- ------------ -------------
Imputed interest........................ (1,462) 0 (1,462) 0
------------ ------------- ------------ -------------
Total................................... $ 2,623 $ 351,906 $ 354,529 $ 462,196
============ ============= ============ =============
</TABLE>
47
<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, 1998, 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 $800 in fiscal 1998 on capital projects. The Company expects to
incur $600 to complete its compliance with EPA Underground Storage Tank (UST)
regulations that become effective in December 1998.
Year 2000
The approach of the year 2000 presents potential issues to all organizations who
use computers in the conduct of their business or depend on business partners
who use computers. To the extent computer use is date-sensitive, hardware or
software that recognizes the year by the last two digits may erroneously
recognize "00" as 1900 rather than 2000, which could result in errors or system
failures.
Agway utilizes a number of computers and computer software (systems) in the
conduct of its business. Many systems are for specific business segments and
others have broader corporate-wide use. Systems are principally involved in the
flow of information rather than in the processing, manufacturing, and
distributing operations. Agway initiated its year 2000 compliance efforts in
January 1996. The initial focus of the Company's compliance efforts was on the
Company's information systems, including assessment of the issue, planning the
conversion to compliance, plan implementation, and testing. All systems have
been inventoried. Those systems determined to be at risk were prioritized, and
plans were put in place to upgrade systems by remediation, replacements,
outsourcing, or doing without these systems. Through June 1998, the assessment
and planning phases, as well as certain portions of the implementation, have
been completed. The remaining portion of these plans are in process of
implementation, with a completion for specific systems scheduled throughout the
next fiscal year and the final implementations scheduled to be completed in
September 1999. Testing of systems is being conducted for each system as
implemented. The interaction of updated systems will be tested in the enterprise
- -wide testing environment.
48
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of Dollars)
12. Commitments and Contingencies (continued)
Year 2000 (continued)
In addition to the information technology systems review noted above, the
Company has also initiated processes to review and to modify, where appropriate,
other areas impacted by year 2000. These areas include, but are not limited to,
hardware and software associated with end-user computing functions, vendor and
supplier relationships, external interfaces to internal IT systems, remote
location access to IT systems, facility management, and certain non-information
technology issues, such as the extent to which embedded chips are used in
machinery and equipment used in business operations. The Company has completed
significant assessments in its major business operations, continues to assess
all of these areas, and has developed or, in some cases, is in the process of
developing the implementation plans to address the issues identified. The
Company anticipates that solutions to all year 2000 areas above will be
implemented and tested no later than December 1999.
The Company engaged an international consulting firm in March 1998 to evaluate
the Company's approach to year 2000 plans and implementation compared to
industry "best practices." Based on this review, the Company has increased the
involvement of higher-level management to assure a focus on the implementation
timetable and the development of specific contingency plans, and has initiated
development of a more comprehensive enterprise-wide testing environment to be in
place by December 1998.
The year 2000 compliance issue is an uncertainty that is continuously being
monitored as the Company implements its plans. Based on the work performed to
date, the Company presently believes that the likelihood of the year 2000 having
a material effect on the results of operations, liquidity, or financial
condition is remote. Notwithstanding the foregoing, it is not presently clear
that all parts of the country's infrastructure, including such things as the
national banking systems, electrical power, transportation of goods,
communications, and governmental activities, will be fully functioning as the
year 2000 approaches. To the extent failure occurs in such activities, which are
outside the Company's control, it could affect the Company's sources of supply
and the Company's ability to service its customers with the same degree of
effectiveness with which they are served presently. The Company is identifying
elements of the infrastructure that are of greater significance to its
operations, obtaining information on an ongoing basis as to their expected
year 2000 readiness, and determining alternative solutions if required.
The Company expects to incur significant internal staff costs as well as
consulting and other expenses related to its year 2000 efforts. Due to the level
of effort required to complete remediation for the year 2000, non-business
critical system enhancements have been deferred until the year 2000 efforts have
been completed. The conversion and testing of existing systems and the
replacement of systems are expected to cost the Company approximately $18,000,
of which $9,000 has been incurred and $9,000 is expected to be incurred from
July 1998 through December 1999. Approximately 75% of these estimated costs
represent replacement costs and will be capitalized. Additionally, the Company
estimates the costs to remediate all other areas may approximate $6,000.
However, these costs will vary as the Company continues to assess and implement
its plans or if the Company is required to invoke contingency plans. The Company
treats non-capital costs associated with year 2000 as period costs and they are
expensed when incurred.
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.
49
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of Dollars)
12. Commitments and Contingencies (continued)
Other (continued)
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, 1998, approximated $27,800.
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 1998, 1997 and 1996 approximated $14,000,
$12,000 and $9,000, respectively. Future minimum payments under noncancelable
operating leases approximate $9,900, $8,500, $7,400, $6,700 and $6,300 for the
fiscal years 1999 through 2003, respectively, and approximately $3,700
thereafter.
50
<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, 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
Issues (redeemed), net......... (76,763) (1,081) (350) (18,506) 27 (9,670)
---------- ---------- ---------- ---------- --------- -----------
Balance June 30, 1998............ 153,176 236,146 18,010 70,736 2,581 $ 47,871
========== ========== ========== ========== ========= ===========
</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, 1996.................... $ 6.00 $ 8.00 $ 8.00 $ 7.00 $ 1.50
June 30, 1997.................... $ 6.00 $ 8.00 $ 8.00 $ 7.00 $ 1.50
June 30, 1998.................... $ 6.00 $ 8.00 $ 8.00 $ 7.00 $ 1.50
Shares Held in Treasury (purchased
at par value):
June 30, 1996.................... 117,089 25,878 120,890 33,557 729
June 30, 1997.................... 120,061 12,773 121,640 60,758 812
June 30, 1998.................... 196,823 13,854 121,990 79,274 970
</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 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.
51
<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 through June 30,
1998, base payment to retired employees generally 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, 1998 and 1997, the Company's plan assets
included Company debt securities and preferred stock with estimated fair values
of $10,000 and $5,900, respectively.
The Employees' Retirement Plan of Agway Inc. has assets that exceed accumulated
benefit obligations. 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>
1998 1997
------------ -------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested..................................................................... $ 289,380 $ 262,339
Non-vested................................................................. 10,563 9,580
------------ -------------
Accumulated benefit obligation.................................................. 299,943 271,919
Additional amounts related to projected pay increases........................... 32,776 29,850
------------ -------------
Projected benefit obligation for service rendered to date....................... 332,719 301,769
Plan assets at fair value ...................................................... 582,988 538,433
------------ -------------
Projected benefit obligation less than plan assets.............................. 250,269 236,664
Unrecognized net gain........................................................... (75,482) (135,847)
Unrecognized prior service cost................................................. 11,415 13,729
Unrecognized net transition asset............................................... (9,410) (14,494)
------------ -------------
Net pension asset............................................................... $ 176,792 $ 100,052
============ =============
</TABLE>
In determining the actuarial present values of the projected benefit obligations
as of June 30, the following assumptions were used:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Weighted average discount rate.................................................. 7.0% 7.75%
Rate of increase in future compensation......................................... 5.0% 5.50%
Expected long-term rate of return............................................... 10.25% 10.25%
</TABLE>
Net pension income included the following income/(expense) components for the
year ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
Service benefits earned during the period................... $ (5,373) $ (5,236) $ (6,060)
Interest cost on projected benefit obligation............... (22,547) (21,527) (21,216)
Actual return on plan assets................................ 67,922 73,413 83,238
Net amortization and deferral............................... (8,093) (31,779) (44,624)
-------------- ------------- --------------
$ 31,909 $ 14,871 $ 11,338
============== ============= ==============
</TABLE>
52
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of Dollars)
14. Retirement Benefits (continued)
Pension Plan (continued)
Effective July 1, 1997, the Company changed its method of determining the
market-related value of its plan assets under SFAS No. 87, "Accounting for
Pensions," from a calculated value (one that recognized changes in fair market
value of assets over a number of years) to a fair market value method, which is
considered a preferable method to that previously applied. The cumulative effect
of this change in accounting principle, net of tax of $16,500, was $28,956. Had
the Company remained on its previous method of determining the market-related
value, the margin from operations before income taxes for the year ended June
30, 1998, would have been approximately $15,000 lower.
Pro forma amounts (unaudited), assuming the new accounting principle was applied
during all periods presented, follow with a comparison to actual results:
<TABLE>
<CAPTION>
Year ended June 30
----------------------------------------------------
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Margin from continuing operations:
As reported........................................... $ 12,798 $ 10,670 $ 11,147
Pro forma............................................. $ 12,798 $ 18,410 $ 15,625
Net margin:
As reported........................................... $ 41,754 $ 10,670 $ 12,662
Pro forma............................................. $ 12,798 $ 18,410 $ 17,140
</TABLE>
Effective July 1, 1998, the Company amended its defined benefit pension plan to
include a pension equity formula, as well as to recognize incentive compensation
as pensionable compensation for all employees. This amendment will increase the
projected benefit obligation and unrecognized prior service cost by
approximately $24,800. The net pension income in future years will be reduced as
a result of this amendment to approximate historical levels.
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
--------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Reconciliation of funded status:
- -------------------------------
Accumulated postretirement benefit obligation:
Retirees and surviving spouses............................................. $ 32,001 $ 30,645
Actives eligible to retire................................................. 3,790 3,635
Actives not yet eligible to retire......................................... 8,194 7,866
------------ -------------
Total unfunded accumulated postretirement benefit obligation.................... 43,985 42,146
Unrecognized prior service cost................................................. (1,393) (1,525)
Unrecognized net gain (loss).................................................... (189) 2,065
Unrecognized net transition obligation.......................................... (18,838) (20,093)
------------ -------------
Accrued postretirement benefit cost.......................................... $ 23,565 $ 22,593
============ =============
</TABLE>
53
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of Dollars)
14. Retirement Benefits (continued)
Postretirement Benefits (continued)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Annual expense for the year ended June 30:
- -----------------------------------------
Interest cost............................................... $ 3,110 $ 3,158 $ 3,243
Amortization of transition obligation and prior service..... 1,387 1,321 1,255
Service cost................................................ 601 723 816
------------ ------------ -------------
Net periodic postretirement benefit cost............... $ 5,098 $ 5,202 $ 5,314
============ ============ =============
</TABLE>
In determining the accumulated postretirement benefit obligation, the weighted
average discount rate used was 7.0% and 7.75% at June 30, 1998 and 1997,
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, 7.5% and 7.0% for June 30, 1998 and 1997, 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 1999 and forward at June 30, 1998, decreases gradually until the year
2002, when the ultimate trend rate is then fixed at 4.5%. A one percentage point
increase in the assumed health care cost trend rate at June 30, 1998, would
increase the aggregate service and interest cost components of net periodic
postretirement benefit cost by $200, and the accumulated postretirement benefit
obligation by $1,300.
Employees' Thrift Investment Plan
The Agway Inc. Employees' Thrift Investment Plan is a defined contribution plan
covering a substantial majority of 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 years ended
June 30, 1998, 1997 and 1996, were approximately $1,300, $1,200 and $1,300,
respectively. For the years ended June 30, 1998, 1997 and 1996, the Board of
Directors of the Company approved an additional match of 20% to supplement the
minimum contribution level of 10%.
54
<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 yard and garden
items, pet food and pet supplies, and agricultural supplies and materials,
as well as the wholesale purchase, warehousing and distribution of these
products to Agway franchised representatives and other businesses. ARS 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 LLC, is principally engaged in the business of
leasing agricultural-related equipment, vehicles, and buildings to farmers
and other customers, primarily in rural communities.
(5) Insurance, through Agway Insurance Company, underwrites property and
casualty insurance and, through Agway General 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.
55
<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, 1998 Agriculture Retail Energy Leasing Insurance Other(a) Consolidated
- ------------------------ ----------- ---------- --------- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and revenues to
unaffiliated customers.. $ 740,559 $ 224,896 $ 504,702 $ 65,445 $ 27,335 $ 6 $ 1,562,943
Intersegment sales and
revenues.............. 29,152 26,678 398 31 0 (56,259) 0
----------- ---------- --------- ---------- --------- ----------- ------------
Total sales and revenues $ 769,711 $ 251,574 $ 505,100 $ 65,476 $ 27,335 $ (56,253) $ 1,562,943
=========== ========== ========= ========== ========= =========== ============
Operating margin (loss)
plus other income, net.. $ 7,612 $ (2,745) $ 15,151 $ 15,412 $ (263) $ 20,861 $ 56,028
Interest expense, net of
interest income....... (30,825)
------------
Margin from continuing
operations before
income taxes $ 25,203
============
Identifiable assets...... $ 364,898 $ 98,741 $ 141,894 $ 516,735 $ 55,939 $ 240,024 $ 1,418,231
Depreciation and
amortization 13,408 4,974 8,668 607 78 1,062 28,797
Capital expenditures..... 14,101 6,972 5,631 471 297 3,480 30,952
Year ended June 30, 1997 Agriculture Retail Energy Leasing Insurance Other(a) Consolidated
- ------------------------ ----------- ---------- --------- ---------- --------- ---------- ------------
Net sales and revenues to
unaffiliated customers $ 740,904 $ 240,050 $ 606,800 $ 56,908 $ 27,020 $ 32 $ 1,671,714
Intersegment sales and
revenues.............. 30,415 27,562 305 35 0 (58,317) 0
----------- ---------- --------- ---------- --------- ---------- ------------
Total sales and revenues $ 771,319 $ 267,612 $ 607,105 $ 56,943 $ 27,020 $ (58,285) $ 1,671,714
=========== ========== ========= ========== ========= ========== ============
Operating margin plus
other income, net..... $ 3,219 $ 5,207 $ 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...... $ 341,666 $ 105,409 $ 166,132 $ 470,699 $ 53,845 $ 162,510 $ 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 0 352 25,745
Year ended June 30, 1996 Agriculture Retail Energy Leasing Insurance Other(a) Consolidated
- ------------------------ ----------- ---------- --------- ---------- --------- ---------- ------------
Net sales and revenues to
unaffiliated customers $ 787,815 $ 253,299 $ 545,704 $ 48,577 $ 25,431 $ 2,259 $ 1,663,085
Intersegment sales and
revenues.............. 82,295 31,593 323 50 0 (114,261) 0
----------- ---------- --------- ---------- --------- ---------- ------------
Total sales and revenues $ 870,110 $ 284,892 $ 546,027 $ 48,627 $ 25,431 $ (112,002) $ 1,663,085
=========== ========== ========= ========== ========= ========== ============
Operating margin (loss) plus
other income, net..... $ 23,427 $ 4,868 $ 16,119 $ 11,589 $ (5,310) $ 3,462 $ 54,155
Interest expense, net of
interest income....... (33,085)
------------
Margin from continuing
operations before
income taxes $ 21,070
============
Identifiable assets...... $ 361,342 $ 105,220 $ 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 10,796 4,332 939 13 1,321 26,025
</TABLE>
(a) Represents unallocated net corporate items and intersegment eliminations.
56
<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>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Patronage refund income..................................... $ 4,344 $ 9,534 $ 8,037
Rent and storage revenue.................................... 4,636 4,063 3,552
Gain/(loss) on disposition of:
Businesses............................................. 0 360 3,799
Other security investments............................. 0 0 1,348
Properties and equipment............................... 1,210 2,613 (891)
Other, net.................................................. 3,171 2,193 2,577
------------ ------------ -------------
$ 13,361 $ 18,763 $ 18,422
============ ============ =============
</TABLE>
17. Supplemental Disclosures about Cash Flows
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Additional disclosure of operating cash flows:
Cash paid during the year for:
Interest........................................... $ 40,807 $ 39,812 $ 43,195
============ ============ =============
Income taxes....................................... $ 3,253 $ 3,661 $ 3,499
============ ============ =============
Additional disclosure for non-cash investing
and financing activities:
Dividends declared but unpaid at June 30............... $ 1,840 $ 2,149 $ 2,210
============ ============ =============
</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 5.89% to 8.77%
in 1998 and 6.18% to 8.87% in 1997.
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>
1998 1997
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Liabilities:
Long-term debt (excluding capital leases)..... $ 351,906 $ 357,869 $ 328,651 $ 333,669
Subordinated debentures........................ 462,196 469,789 438,127 433,736
</TABLE>
57
<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. The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual amount of the instrument.
Telmark uses the same credit and collateral policies in making commitments as it
does for on-balance-sheet instruments.
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
The Company has exposure to adverse 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 formal policies established for this
activity. These policies limit the duration to maturity of contracts entered
into as well as the level of exposure to be hedged. Since November 1997, the
Company modified its practices relating to its feed business so that all
transactions involving derivative financial instruments are required to have a
direct relationship to the price risk associated with existing inventories or
future purchase and sales of its products.
Agriculture commodity 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.
58
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Thousands of Dollars)
18. Financial and Commodity Instruments (continued)
Commodity Instruments (continued)
Energy commodity instrument contracts are entered into as a hedge against the
price risk associated with the Company's inventories or future purchases and
sales of commodities used in the Company's operations.
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, 1998 and 1997, the carrying and fair value of the
Company's investment in commodities futures and option contracts was $2,200 and
$3,200, respectively, and the total net deferred gains and losses on open
contracts were immaterial. At June 30, 1998, the actual open positions of these
instruments and the potential near-term losses in earnings, fair value, and/or
cash flows from changes in market rates or prices were not material.
19. Discontinued Operations
On December 15, 1995, Agway Holdings Inc. (AHI) sold all of its common stock of
Hood. In accordance with the Stock Purchase Agreement, AHI received total
proceeds of $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 and indemnified the buyer for specified
obligations 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,
1998, the estimates made as of the closing date of the sale are adequate to
cover the indemnifications made.
Net sales and revenues from the discontinued operations of Hood for the period
of time owned during the year ended June 30, 1996, were approximately $188,000.
The loss from the operation of the discontinued operations for the year ended
June 30, 1996, related to Hood was $595 (net of tax benefit of $120).
59
<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) 60 Chairman of the Jersey Acres Farms Inc. 1973 November 2000
Board and Director
Gary K. Van Slyke 55 Vice Chairman of the VanSlyke's Dairy Farm 1994 November 2000
Board and Director
Kevin B. Barrett 42 Director Heavenly View Farm 1996 November 1999
Keith H. Carlisle 56 Director Carlisle Bros., Inc. 1995 November 1998
D. Gilbert Couser 57 Director Shawangunk View Farm 1995 November 1998
Andrew J. Gilbert 39 Director Adon Farms 1995 November 1998
Peter D. Hanks 50 Director Big Green Farms, Inc. 1984 November 1999
Robert L. Marshman 59 Director Marshman Farms 1989 November 1999
Jeffrey B. Martin 39 Director Martin Farms 1997 November 2000
Samuel F. Minor 60 Director The Spring House 1987 November 2000
Carl D. Smith 63 Director Hillacre Farms 1984 November 1999
Thomas E. Smith 63 Director Lazy Acres Dairy 1986 November 1998
Joel L. Wenger 67 Director Weng-Lea Farms 1987 November 1999
Edwin C. Whitehead 57 Director White Ayr Farms 1994 November 2000
William W. Young 45 Director Will-O-Crest Farm 1989 November 1998
</TABLE>
Ralph H. Heffner, Chairman of the Board of Directors, was paid $56,600; Gary K.
Van Slyke, Vice Chairman of the Board of Directors from October 22, 1997,
through the present, was paid $32,400; and Robert L. Marshman, Vice Chairman
from July 1, 1997 through October 21, 1997, was paid $7,200 for their services
for the year ended June 30, 1998. All other directors of the Company earned an
annual retainer fee of $12,000 for participation on the Agway Inc. Board. In
addition, each Board Committee Chairman earned an additional annual retainer fee
of $3,000 and each director of Agway Inc. who was also a member of the Agway
Insurance Company or Telmark LLC Board earned an additional $400 or $1,000,
respectively. A fee of $200 was 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.
Effective July 1, 1998, the Chairman will receive $60,000 and the Vice-Chairman
will receive $45,000. All other directors will receive $25,000 per year, paid
quarterly, for participation on the Agway Inc. Board; additionally, the fee of
$200 for each day involved in business for the company will now only be earned
on days where the full Board is not in session.
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, 1998, the present
value of accumulated benefits under this plan was approximately $500,000.
(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.
60
<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, 1998:
<TABLE>
<CAPTION>
Years Served
Name Age Office As Officer
---- --- ------ ------------
<S> <C> <C> <C>
Donald P. Cardarelli 42 President and Chief Executive Officer 7
Daniel J. Edinger 47 President, Telmark LLC -
Robert A. Fischer, Jr. 50 President, Agway Agricultural Products 3
David M. Hayes 54 Senior Vice President, General Counsel and Secretary 17
Stephen H. Hoefer 43 Senior Vice President, Public Affairs 4
Michael R. Hopsicker 33 President, Agway Energy Products LLC 2
Dennis J. LaHood 52 President, Country Products Group 3
Peter J. O'Neill 51 Senior Vice President, Finance & Control,
Treasurer and Controller 9
William L. Parker 51 Vice President and Chief Information Officer 3
Donald F. Schalk 47 President, Agway Retail Services 3
Robert D. Sears 57 Vice President, Membership 4
Gerald R. Seeber 51 Senior Vice President, Administrative Services and
President, Agway Insurance Group -
G. Leslie Smith 55 Vice President and Chief Investment Officer 1
</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, 1998.
Mr. Edinger served as President, Telmark LLC, from February 1988 to July 1,1998.
Mr. Fischer has served as President, Milford Fertilizer Company, since June
1970; as Executive Director, Crops from October 1994 to February 1995; as Vice
President, Agway Agricultural Products, from February 1995 to July 1, 1997; and
as President, Agway Agricultural Products, from July 1997 to July 1, 1998.
Mr. Hayes served as Senior Vice President, General Counsel and Secretary from
July 1992 to July 1, 1998.
Mr. Hoefer served as Director of Government Affairs/Corporate Transportation
Services from June 1992 through June 1994; as Vice President, Public Affairs,
from June 1994 to July 1997; and as Senior Vice President, Public Affairs, from
July 1997 to July 1, 1998.
Mr. Hopsicker served 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; as Vice President, Agway Energy Products, from April
1996 to July 1997; and as President, Agway Energy Products LLC, from July 1997
to July 1, 1998.
Mr. LaHood served as President, Country Foods, from October 1992 to October
1994; as Executive Director, Country Foods and Seed Operations, from October
1994 to February 1995; as Vice President, Country Products Group, from February
1995 to July 1997; and as President, Country Products Group, from July 1997 to
July 1, 1998.
Mr. O'Neill served as Senior Vice President, Finance & Control, from October
1992 to November 1994; and as Senior Vice President, Finance & Control,
Treasurer and Controller, from November 1994 to July 1, 1998.
Mr. Parker served 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 from May 1996 to July
1, 1998.
61
<PAGE>
Item 10. Directors and Executive Officers of the Registrant - Continued
Executive Officers (continued)
Mr. Schalk served as Director of Marketing-Agriculture from January 1990 to July
1993; as Executive Director, Feed, from October 1994 to February 1995; as Vice
President, Agway Retail Services, from February 1995 to July 1997; and as
President, Agway Retail Services, from July 1997 to July 1, 1998. 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, 1998.
Mr. Seeber served as Executive Vice President, Agway Insurance Group, from July
1992 to October 1993; as President, Agway Insurance Group, from October 1993 to
July 1997; and as Senior Vice President, Administrative Services and President,
Agway Insurance Group, from July 1997 to July 1, 1998.
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, 1998. For the period October 1989 to August 1993, Ms. Smith was Executive
Administrator for TWA Pilots Trust Annuity Plan.
62
<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 1998, 1997 and 1996 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, 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------
Annual Compensation (4)
-----------------------
Name and All Other
Principal Position Year Salary(1) Bonus(1)(2) Compensation(3)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Donald P. Cardarelli 1998 $425,390 $327,600 $ 11,500
President and CEO 1997 387,024 80,000 3,925
1996 336,065 330,638 3,038
Robert A. Fischer, Jr. 1998 294,423 124,000 116,476
President, 1997 220,000 44,000 118,411
Agway Agricultural 1996 200,000 175,090 105,212
Products
Michael R. Hopsicker 1998 202,312 105,000 2,987
President, 1997 170,014 34,001 2,873
Agway Energy 1996 102,277 0 1,623
Products
Dennis J. LaHood 1998 220,407 175,515 2,998
President, 1997 178,293 88,000 2,877
Country Products 1996 165,022 132,000 2,780
Group
Peter J. O'Neill 1998 266,165 130,000 4,060
Senior Vice President, 1997 250,016 50,000 5,185
Finance & Control, 1996 250,016 150,000 6,137
Treasurer and
Controller
</TABLE>
(1) Salary and bonus are used in determining the average annual compensation
pursuant to the Company's Retirement Plan, effective July 1, 1998. 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 all officers, except Mr. Fischer, 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. With respect to Mr.
Fischer, amounts include non-compete payments, payments to the Milford
Fertilizer Company Employees' Profit Sharing and Savings Plan, term life
insurance premiums, and reportable savings interest.
(4) There were no perquisites paid by the Company in excess of the lesser of
$50,000 or 10% of an executive's total salary and bonus for the years
disclosed.
63
<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 was amended effective July 1, 1998, to include a pension equity
formula, as well as to recognize incentive compensation as pensionable
compensation for all employees. It provides for retirement benefits, based upon
average annual compensation received during the highest 36 consecutive months in
the last 10 years of service and credits earned for years of service with the
Company. Full credits are earned for service on and after July 1, 1998, and
credits equal to approximately 3/4 of the full credits are earned for service
prior to July 1, 1998. The benefit is defined as an account balance and can be
paid out as a lump sum or an annuity. An employee is 100% vested in his benefit
after completing 5 years of service or attaining age 55 after completing one
year of service.
The following table shows estimated annual benefits payable upon retirement
using the credit formula in effect for service after June 30, 1998, based on
certain 3-year average remuneration levels and years-of-service classifications.
The table was developed assuming a normal retirement at age 65 and using current
annuity conversion factors and current Social Security Wage Base.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
(New Formula)
Years of Credited Service
- ------------------------------------------------------------------------------------------------------------------------------
3-Year Average
Remuneration 5 10 15 20 25 30 35
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$300,000 $20,600 $ 39,200 $ 57,800 $ 75,000 $ 92,200 $107,900 $123,700
350,000 24,100 45,900 67,600 87,800 107,900 126,300 144,800
400,000 27,700 52,600 77,500 100,500 123,600 144,800 165,900
450,000 31,200 59,300 87,300 113,300 139,300 163,200 187,000
500,000 34,700 65,900 97,200 126,100 155,000 181,600 208,100
550,000 38,200 72,600 107,000 138,900 170,700 200,000 229,200
600,000 41,700 79,300 116,900 151,700 186,400 218,400 250,300
650,000 45,200 86,000 126,700 164,400 202,100 236,800 271,400
700,000 48,800 92,700 136,600 177,200 217,800 255,200 292,500
750,000 52,300 99,300 146,400 190,000 233,500 273,600 313,600
800,000 55,800 106,000 156,300 202,800 249,300 292,000 334,700
850,000 59,300 112,700 166,100 215,500 265,000 310,400 355,800
900,000 62,800 119,400 176,000 228,300 280,700 328,800 376,900
950,000 66,300 126,100 185,800 241,100 296,400 347,200 398,000
</TABLE>
Active participants are entitled to receive no less than the value of their
benefits accrued under the old formula through June 30, 1998. In addition, most
active participants whose age plus service totaled 55 years or more as of July
1, 1998, will receive the greater of the benefit determined under the new
formula described above, or the benefit determined had the old formula remained
in effect.
The old formula is 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 old formula 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.
64
<PAGE>
Item 11. Executive Compensation - Continued
Employees' Retirement Plan (continued)
The following table shows estimated annual benefits under the old formula 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 and does not reflect an offset for up to 50% of the Social
Security benefit, subject to certain minimum benefits.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
(Old Formula)
Years of Credited Service
- -----------------------------------------------------------------------------------------------------------------------------
5-Year Average
Remuneration 5 10 15 20 25 30 35
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$300,000 $24,000 $ 48,000 $ 72,000 $ 96,000 $120,000 $144,000 $168,000
350,000 28,000 56,000 84,000 112,000 140,000 168,000 196,000
400,000 32,000 64,000 96,000 128,000 160,000 192,000 224,000
450,000 36,000 72,000 108,000 144,000 180,000 216,000 252,000
500,000 40,000 80,000 120,000 160,000 200,000 240,000 280,000
550,000 44,000 88,000 132,000 176,000 220,000 264,000 308,000
600,000 48,000 96,000 144,000 192,000 240,000 288,000 336,000
650,000 52,000 104,000 156,000 208,000 260,000 312,000 364,000
700,000 56,000 112,000 168,000 224,000 280,000 336,000 392,000
750,000 60,000 120,000 180,000 240,000 300,000 360,000 420,000
800,000 64,000 128,000 192,000 256,000 320,000 384,000 448,000
850,000 68,000 136,000 204,000 272,000 340,000 408,000 476,000
900,000 72,000 144,000 216,000 288,000 360,000 432,000 504,000
950,000 76,000 152,000 228,000 304,000 380,000 456,000 532,000
</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 benefit, subject to certain minimum
benefits. Also, the benefits are based on continuing the Plan's benefit formulas
as in effect on June 30, 1998. As of June 30, 1998, the officers and their
respective number of credited years of service under the Retirement Plan were as
follows: Messrs. Cardarelli, 13; Hopsicker, 9; LaHood, 28; and O'Neill, 9. 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.
65
<PAGE>
Item 11. Executive Compensation - Continued
Director Compensation
For a discussion of director compensation, see Directors and Executive Officers
of the Registrant (Item 10) of this Form 10-K.
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.
66
<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 28:
(i) Report of Independent Accountants.......................................................... 30
(ii) Consolidated Balance Sheets, June 30, 1998 and 1997........................................ 31
(iii) Consolidated Statements of Operations, fiscal years ended
June 30, 1998, 1997 and 1996............................................................... 32
(iv) Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended
June 30, 1998, 1997 and 1996............................................................... 33
(v) Consolidated Statements of Cash Flow, fiscal years ended June 30, 1998, 1997 and 1996...... 34
(vi) Notes to Consolidated Financial Statements................................................. 35
(2) Financial Statement Schedules
(i) Report of Independent Accountants.......................................................... 68
(ii) The following schedules are presented:
Schedule I - Condensed Financial Information of Registrant, each of the
three years in the period ended June 30, 1998....................... 69
Schedule II - Valuation and Qualifying Accounts, fiscal years ended
June 30, 1998, 1997 and 1996........................................ 73
</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.
67
<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/ PRICEWATERHOUSE LLP
PricewaterhouseCoopers LLP
Syracuse, New York
August 21, 1998
68
<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, 1998 and 1997
(Thousands of Dollars)
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Current assets:
Cash....................................................................... $ 4,716 $ 0
Trade accounts receivable (including notes receivable of $38,630 and
$34,251, respectively), less allowance for doubtful
accounts of $4,432 and $4,156, respectively............................ 87,371 92,262
Inventories................................................................ 47,260 50,072
Other current assets....................................................... 58,478 53,231
------------ -------------
Total current assets................................................... 197,825 195,565
Investments in subsidiaries..................................................... 191,063 203,812
Properties and equipment, net................................................... 51,604 48,794
Net pension asset............................................................... 176,792 100,052
Other assets .................................................................. 2,605 1,990
------------ --------------
Total assets........................................................... $ 619,889 $ 550,213
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 25,559 $ 25,006
Operating advances payable to subsidiaries, net............................ 197,052 185,464
Other current liabilities.................................................. 121,370 119,970
------------ --------------
Total current liabilities.............................................. 343,981 330,440
Other liabilities............................................................... 69,070 42,022
Shareholders' equity............................................................ 206,838 177,751
------------ --------------
Total liabilities and shareholders' equity............................. $ 619,889 $ 550,213
============ ==============
</TABLE>
69
<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, 1998, 1997 and 1996
(Thousands of Dollars)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
Net sales and revenues from:
Product sales.......................................... $ 498,363 $ 506,886 $ 594,188
Other services......................................... 15,302 12,808 8,475
------------ ----------- ------------
Total net sales and revenues....................... 513,665 519,694 602,663
Cost and expenses from:
Products and plant operations.......................... 470,626 487,534 552,304
Selling, general and administrative activities......... 48,938 49,611 49,512
Restructuring credit................................... 0 0 (1,301)
------------ ----------- ------------
Total operating costs and expenses................. 519,564 537,145 600,515
------------ ----------- ------------
Operating income (loss)..................................... (5,899) (17,451) 2,148
Interest expense, net....................................... (723) (876) (786)
Other income, net........................................... 26,441 21,862 22,744
------------ ----------- ------------
Margin from continuing operations before income taxes
and equity in earnings of subsidiaries ................ 19,819 3,535 24,106
Income tax benefit (expense)................................ 6,563 7,904 (2,185)
------------ ----------- ------------
Income (loss) before equity in earnings of subsidiaries..... 26,382 11,439 21,921
Equity in (loss) earnings of unconsolidated subsidiaries.... (13,584) (769) (10,774)
------------ ----------- ------------
Margin from continuing operations........................... 12,798 10,670 11,147
Discontinued operations:
Loss from operations, including tax benefit of $120.... 0 0 (595)
Gain on disposal of Hood, net of tax expense of $1,711 0 0 2,110
------------ ----------- ------------
Margin from discontinued operations................ 0 0 1,515
Margin before cumulative effect of an accounting change .... 12,798 10,670 12,662
Cumulative effect of accounting change, net of tax
expense of $16,500..................................... 28,956 0 0
------------ ----------- ------------
Net margin.................................................. 41,754 10,670 12,662
Retained margin - beginning of year......................... 117,571 110,714 102,934
Dividends................................................... (3,634) (4,237) (4,382)
Equity in net unrealized losses of marketable securities.... 705 424 (500)
------------ ----------- ------------
Retained margin - end of year............................... $ 156,396 $ 117,571 $ 110,714
============ =========== ============
</TABLE>
70
<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, 1998, 1997 and 1996
(Thousands of Dollars)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Net cash flows from operating activities.................... $ 29,260 $ 9,633 $ 13,162
Cash flows from investing activities:
Purchases of property, plant and equipment............. (11,785) 140 (4,588)
Other.................................................. 1,262 (3,765) 3,935
------------- ------------ -------------
Net cash flows used in investing activities................. (10,523) (3,625) (653)
Cash flows from financing activities:
Payments on capitalized leases......................... (441) (830) (529)
Cash dividends paid.................................... (3,943) (4,297) (4,582)
Other.................................................. (9,637) (1,910) (6,369)
------------- ------------ -------------
Net cash flows used in financing activities................. (14,021) (7,037) (11,480)
Net increase in cash and equivalents........................ 4,716 (1,029) 1,029
Cash and equivalents at beginning of year................... 0 1,029 0
------------- ------------ -------------
Cash and equivalents at end of year......................... $ 4,716 $ 0 $ 1,029
============= ============ =============
</TABLE>
71
<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:
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Finished goods.................................................................. $ 47,225 $ 50,011
Supplies........................................................................ 35 61
------------ -------------
$ 47,260 $ 50,072
============ =============
</TABLE>
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. This guarantee is full and unconditional,
and joint and several. 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
----------------------------------------------------
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Net sales and revenues...................................... $ 50,051 $ 28,800 $ 69,436
Product and plant operation expenses........................ 17,107 9,072 10,933
Recovery of selling, general and administrative expenses.... 19,051 19,207 24,821
Interest expense, net....................................... 8,649 6,993 4,817
</TABLE>
72
<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, 1998
- -------------------------------------------------------------------------------------------------------------------
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).................... $ 7,864 $ 1,820 $ 0 $1,758(a) $ 7,926
Allowance for doubtful leases receivable.... $ 24,014 $ 9,570 $ 0 $6,513(a) $ 27,071
Inventory reserve........................... $ 2,362 $ 100 $ 0 $1,871(b) $ 591
Surplus property reserve.................... $ 856 $ 0 $ 0 $ 67(c) $ 789
Income tax valuation allowance.............. $ 0 $ 0 $ 0 $ 0 $ 0
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
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 $ 0 $ 2,821(a) $ 7,864
Allowance for doubtful leases receivable.... $ 19,776 $ 9,718 $ 0 $ 5,480(a) $ 24,014
Inventory reserve........................... $ 2,547 $ 385 $ 0 $ 570(b) $ 2,362
Surplus property reserve.................... $ 1,428 $ 66 $ 0 $ 638(c) $ 856
Income tax valuation allowance.............. $ 881 $ 0 $ 0 $ (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 $ 0 $ 3,647(a) $ 10,062
Allowance for doubtful leases receivable.... $ 15,331 $ 7,000 $ 0 $ 2,555(a) $ 19,776
Inventory reserve........................... $ 2,914 $ 0 $ 0 $ 367(b) $ 2,547
Surplus property reserve................... $ 660 $ 1,024 $ 0 $ 256(c) $ 1,428
Income tax valuation allowance.............. $ 847 $ 34 $ 0 $ 0 $ 881
</TABLE>
(a) Accounts charged off, net of recoveries.
(b) Difference between cost and market of applicable inventories.
(c) Locations sold.
73
<PAGE>
Item 14(b). Reports on Form 8-K
No reports on Form 8-K for the three months ended June 30,
1998, 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 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 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 7.5% 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(e) - 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 5.5% 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.
74
<PAGE>
Item 14(c)(1). Exhibits Required by Securities and Exchange Commission
Regulation S-K - Continued
4(f) - 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
the Registration Statement(Form S-3), File No.
33-8676, dated September 11, 1986.
4(g) - 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 6.5% per annum) due
October 31, 2008,and Subordinated Money Market
Certificates (Minimum 6.5% 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
the Registration Statement (Form S-3),File No.
33-16734, dated August 31, 1987.
4(h) - 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 9.5% 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 8.5% per annum) due
October 31,2008, filed by reference to Exhibit
4 of the Registration Statement (Form S-3),
File No. 33-24093, dated August 31, 1988.
4(i) - 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(j) - 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 the Registration Statement (Form
S-3), File No. 33-30808,dated August 30, 1989.
4(k) - 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(l) - AFC Board of Directors resolutions
authorizing the issuance of Money Market
Certificates under Indentures dated as of
August 23, 1989, filed herein.
4(m) - 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 the Registration Statement
(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 filed for the
first quarter ending September 30, 1997.
75
<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 to April 28, 1998
10 - Material contracts
(a) Directors - Deferred Compensation Agreement
(b) Board Officers - Deferred Compensation
Agreement
12 - Statement re computation of ratios
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 the year ended
June 30, 1998 of the Agway Inc. Employees' Thrift
Investment Plan.
* Included with electronic filing only.
76
<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 and Chief
Executive Officer
(Principal Executive Officer)
Date August 24, 1998
-------------------------
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 and Chief Executive Officer August 24, 1998
(Donald P. Cardarelli) (Principal Executive Officer)
/s/ Peter J. O'Neill Senior Vice President, August 24, 1998
(Peter J. O'Neill) Finance & Control,
Treasurer and Controller
(Principal Financial Officer
& Principal Accounting Officer)
/s/ Ralph H. Heffner Chairman of the August 24, 1998
(Ralph H. Heffner) Board and Director
/s/ Gary K. Van Slyke Vice Chairman of the August 24, 1998
(Gary K. Van Slyke) Board and Director
/s/ Kevin B. Barrett Director August 24, 1998
(Kevin B. Barrett)
/s/ Keith H. Carlisle Director August 24, 1998
(Keith H. Carlisle)
/s/ D. Gilbert Couser Director August 24, 1998
(D. Gilbert Couser)
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Andrew J. Gilbert Director August 24, 1998
(Andrew J. Gilbert)
/s/ Peter D. Hanks Director August 24, 1998
(Peter D. Hanks)
/s/ Robert L. Marshman Director August 24, 1998
(Robert L. Marshman)
/s/ Jeffrey B. Martin Director August 24, 1998
(Jeffrey B. Martin)
/s/ Samuel F. Minor Director August 24, 1998
(Samuel F. Minor)
/s/ Carl D. Smith Director August 24, 1998
(Carl D. Smith)
/s/ Thomas E. Smith Director August 24, 1998
(Thomas E. Smith)
/s/ Joel L. Wenger Director August 24, 1998
(Joel L. Wenger)
/s/ Edwin C. Whitehead Director August 24, 1998
(Edwin C. Whitehead)
/s/ William W. Young Director August 24, 1998
(William W. Young)
</TABLE>
78
<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,
1998. Subsequent to the filing of the annual report on Form 10-K, the Registrant
shall furnish security holders with annual reports.
79
<PAGE>
AGWAY INC.
FORM 10-K
JUNE 30, 1998
EXHIBIT INDEX
Exhibit
Number Title
- ------- -----
( 3) Agway, Inc. By-Laws as amended to April 28, 1998
(10) Material contracts
(a) Directors - Deferred Compensation Agreement
(b) Board Officers - Deferred Compensation Agreement
(12) Statements re computation of ratios
(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, 1998 of
the Agway Inc. Employees' Thrift Investment Plan
*Included with electronic filing only.
EXHIBIT 3
<PAGE>
BY-LAWS
of
AGWAY INC.
As Amended to April 28, 1998
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.
- 2 -
<PAGE>
(b) Except as otherwise provided by the laws of
Delaware, the certificate of incorporation or these by-laws,
all actions taken 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.
2.9 Membership Common Stock - The ownership of membership
------------------------
common stock of the corporation is limited to one share per holder.
- 3 -
<PAGE>
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 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.
- 4 -
<PAGE>
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 deliv ered 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, 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
- 5 -
<PAGE>
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 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.
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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 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 conducted 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
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thereto) 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 stockholders.
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 conducting such business at the annual meeting, (b) the name and address, as
they appear on the corporation's books, of the stockholder 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 stockholder 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
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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.
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, fifteen (15) 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 Mon-
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roe; 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, counties of McKean and Potter.
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. Commonwealth of Pennsylvania, counties of
Adams, Centre, Clinton, Cumberland, Franklin,
Juniata, Mifflin, Perry and York; State of Maryland,
counties of Baltimore, Carroll, Frederick, Harford
and Washington.
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<PAGE>
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; State of New Jersey.
District 12. Commonwealth of Pennsylvania, counties
of Bradford, Lackawanna, Luzerne (northern section),
Lycoming, Monroe (northern half), Pike, Sullivan,
Susquehanna, Tioga, 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. 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 Philadelphia.
District 14. Commonwealth of Pennsylvania, counties
of Armstrong, Beaver, Butler, Cameron, Clarion,
Clearfield, Craw ford, Elk, 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.
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 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
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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.
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
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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 unex pired 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, 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
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<PAGE>
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 directors, shall call a special
meeting of the stockholders 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 stockholders at which
the question of the removal of the director is presented for a
vote, the director com plained 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.
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<PAGE>
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 corporate name, promissory notes, bonds,
debentures, deeds of trust, mortgages, pledges, hypothecations
and other evidences of indebt edness and securities therefor,
and to do every act and thing necessary to effectuate the
same.
COMMITTEES OF THE BOARD
7.1 Executive & Compensation Committee - An executive and
------------------------------------
compensation 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
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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 s tockholders, 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 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
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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 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 pro rata
-----------------------
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.
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<PAGE>
(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 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, acqui sition
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 non-members, 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.
- 18 -
<PAGE>
(b) Minimum Payment of Patronage Refunds -
--------------------------------------------
Notwithstanding 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 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 - Each member shall be entitled
-----------------
to his respective pro rata share of any patronage refunds paid
with respect to Agway distributed goods purchased from Agway,
Agway franchisees and certain dealers. The corporation shall
enter into such contracts, undertakings and understandings
with Agway franchisees and certain dealers 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]
- 19 -
<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.
Notwithstanding 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, however, 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 or hereafter acquire under any
statute, provision of the certificate of incorporation, these by-laws,
agreement, vote of stockholders or disinterested directors or otherwise.
- 20 -
<PAGE>
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 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
- 21 -
<PAGE>
(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.
- 22 -
EXHIBIT 10
<PAGE>
[For 13 Directors]
DEFERRED COMPENSATION AGREEMENT
AGREEMENT made this day of , 1997, 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, 1998 and ending December 31, 1998 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
-1-
<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
-2-
<PAGE>
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:
(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
-3-
<PAGE>
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 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
-4-
<PAGE>
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.
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 , 1997
-------------
-5-
<PAGE>
[For 2 Board officers]
DEFERRED COMPENSATION AGREEMENT
AGREEMENT made this day of , 1997, between AGWAY INC.,
---- ----------
a Delaware corporation, with its principal office in DeWitt, 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, 1998 and ending December 31,
1998 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
-1-
<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:
(A) over 3 years;
-2-
<PAGE>
(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
-3-
<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.
-4-
<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: , 1997
---------------
-5-
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)
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Margins before income taxes and
member refunds........................... $ 25,203 $ 16,583 $ 21,070 $ (6,053) $ 4,833
Fixed charges - Interest................. 67,728 64,432 63,721 56,507 49,849
- Rentals.................. 4,651 3,772 3,004 2,789 2,298
----------- ---------- ----------- ---------- ----------
Total fixed charges...................... 72,379 68,204 66,725 59,296 52,147
----------- ---------- ----------- ---------- ----------
Adjusted net margins..................... $ 97,582 $ 84,787 $ 87,795 $ 53,243 $ 56,980
=========== ========== =========== ========== ==========
Ratio of adjusted net margins to total
fixed charges............................ 1.3 1.2 1.3 (a) 1.1
=========== ========== =========== ========== ==========
Deficiency of adjusted net margins to
total fixed charges...................... N/D N/D N/D $ 6,053 N/D
=========== ========== =========== ========== ==========
Fixed charges and preferred dividends
combined:
Preferred dividend factor:
Preferred dividend requirements....... $ 3,522 $ 4,115 $ 4,255 $ 4,654 $ 4,909
Ratio of pre-tax margins to
after-tax margins*.................... 50.8% 64.3% 52.9% 71.1% 13.5%
Preferred dividend factor on
pre-tax basis......................... 6,933 6,400 8,043 6,546 36,363
Total fixed charges (above).............. 72,379 68,204 66,725 59,296 52,147
----------- ---------- ----------- ---------- ----------
Fixed charges and preferred dividends
combined................................. $ 79,312 $ 74,604 $ 74,768 $ 65,842 $ 88,510
=========== ========== =========== ========== ==========
Ratio of adjusted net margins to fixed
charges and preferred dividends
combined**............................... 1.2 1.1 1.2 (b) (b)
=========== ========== =========== ========== ==========
Deficiency of adjusted net margins to
fixed charges and preferred dividends
combined................................. N/D N/D N/D $ 12,599 $ 31,530
=========== ========== =========== ========== ==========
</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)
-----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Margins before income taxes and
member refunds........................... $ 19,819 $ 3,535 $ 24,106 $ 4,600 $ (17,330)
Fixed charges - Interest................. 7,174 6,792 7,156 5,874 14,985
- Rentals.................. 2,375 2,074 1,506 1,960 1,183
----------- ---------- ----------- ---------- -----------
Total fixed charges...................... 9,549 8,866 8,662 7,834 16,168
----------- ---------- ----------- ---------- -----------
Adjusted net margins..................... $ 29,368 $ 12,401 $ 32,768 $ 12,434 $ (1,162)
=========== ========== =========== ========== ===========
Ratio of adjusted net margins to total
fixed charges............................ 3.1 1.4 3.8 1.6 (a)
=========== ========== =========== ========== ===========
Deficiency of adjusted net margins to
total fixed charges...................... N/D N/D N/D N/D $ 17,330
=========== ========== =========== ========== ===========
Fixed charges and preferred dividends
combined:
Preferred dividend factor:
Preferred dividend requirements....... $ 3,522 $ 4,115 $ 4,255 $ 4,654 $ 4,909
Ratio of pre-tax margin to
after-tax margins*.................... 133.1% 323.6% 90.9% (291.2%) 214.5%
Preferred dividend factor on..........
pre-tax basis......................... 2,646 1,272 4,681 (1,598) 2,289
Total fixed charges (above).............. 9,549 8,866 8,662 7,834 16,168
----------- ---------- ----------- ---------- -----------
Fixed charges and preferred dividends
combined................................. $ 12,195 $ 10,138 $ 13,343 $ 6,236 $ 18,457
=========== ========== =========== ========== ===========
Ratio of adjusted net margins to fixed
charges and preferred dividends
combined**............................... 2.4 1.2 2.5 2.0 (b)
=========== ========== =========== ========== ===========
Deficiency of adjusted net margins to
fixed charges and preferred dividends.... N/D N/D N/D N/D $ 19,619
=========== ========== =========== ========== ===========
</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 21
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
As of June 30, 1998
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 (2).........................................Delaware
Agway Realties, Inc.....................................................Delaware
Milford Fertilizer Company..............................................Delaware
Telmark Inc. (2)........................................................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.
(2) Effective July 1998, Agway Petroleum Corporation was merged into Agway
Energy Products LLC, a Delaware limited liability company; Agway Energy
Products LLC is the surviving entity. Effective July 1998, Telmark Inc.
was merged into Telmark LLC, a Delaware limited liability company; Telmark
LLC is the surviving entity.
EXHIBIT 23
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Agway Inc.:
We consent to the incorporation by reference in the registration statements of
Agway Inc. on Form S-3 (File No. 333- 34781) and on Form S-8 (File No. 33-54083)
of our report, which includes an explanatory sentence relating to a change in
pension accounting, dated August 21, 1998, on our audits of the consolidated
financial statements and financial statement schedules of Agway Inc. and
Consolidated Subsidiaries as of June 30, 1998 and 1997, and for the years ended
June 30, 1998, 1997 and 1996, which report is included in this Annual Report on
Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Syracuse, New York
August 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1.000
<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> 1,587,751
<TOTAL-REVENUES> 1,671,714
<CGS> 1,471,885
<TOTAL-COSTS> 1,511,808
<OTHER-EXPENSES> 131,116
<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
<MULTIPLIER> 1000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 0
<SECURITIES> 36,412
<RECEIVABLES> 211,564
<ALLOWANCES> 7,927
<INVENTORY> 149,214
<CURRENT-ASSETS> 569,535
<PP&E> 515,900
<DEPRECIATION> 302,105
<TOTAL-ASSETS> 1,418,231
<CURRENT-LIABILITIES> 468,862
<BONDS> 641,963
0
47,871
<COMMON> 2,571
<OTHER-SE> 156,396
<TOTAL-LIABILITY-AND-EQUITY> 1,418,231
<SALES> 1,470,132
<TOTAL-REVENUES> 1,562,943
<CGS> 1,345,339
<TOTAL-COSTS> 1,388,864
<OTHER-EXPENSES> 131,412
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,825
<INCOME-PRETAX> 25,203
<INCOME-TAX> 12,405
<INCOME-CONTINUING> 12,798
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 28,956
<NET-INCOME> 41,754
<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, 1998
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, 1998
-----------------------------------------------------------------------
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
JUNE 30, 1998 AND 1997
-----------------------------------------------------------------------
INDEX
-----
Report of Independent Accountants............................................F-2
Financial Statements:
Statements of Net Assets Available for Benefits
as of June 30, 1998 and 1997...............................F-3
Statements of Changes in Net Assets Available for Benefits
for the years ended June 30, 1998 and 1997.................F-4
Notes to Financial Statements...............................F-5 to F-15
Supplemental Schedules (Form 5500 information):
Item 27a. Schedule of Assets Held for Investment Purposes
as of June 30, 1998.......................S-1.1 and S-1.2
Item 27d. Schedule of Reportable Transactions
for the year ended June 30, 1998....................S-2.1
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Employee Benefit Plans
Administration Committee,
Agway, Inc.
In our opinion, the accompanying statements of net assets available for benefits
and the related statements of changes in net assets available for benefits
present fairly, in all material respects, the net assets available for benefits
of the AGWAY INC. EMPLOYEES' THRIFT INVESTMENT PLAN (the "Plan") at June 30,
1998 and 1997, and the changes in net assets available for benefits for the
years then ended, in conformity with generally accepted accounting principles.
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 audits. We conducted our audits 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 audits provide a reasonable basis for the opinion expressed
above.
Our audit was 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 additional
information required by the Employee Retirement Income Security Act of 1974. The
supplemental schedules have been subjected to the auditing procedures applied in
the audit 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.
/s/ PricewaterhouseCoopers LLP
---------------------------
Syracuse, New York
August 14, 1998
F-2
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
June 30, 1998 and 1997
-----------
(Thousands of Dollars)
ASSETS
1998 1997
------------- -----------
BGI U.S. Equity Market Fund $ 70,309 $ 55,098
Agway, Inc., Preferred Securities 25,899 27,699
Agway Financial Corporation, Subordinated
Money Market Certificates 22,773 19,190
Agway Financial Corporation, Subordinated
Debentures 1,830 1,980
BGI Government/Corporate Bond Index Fund 2,910 2,085
Collective Cash Investment Funds 2,328 2,558
Loans to participants 1,144 1,078
------------- -----------
TOTAL INVESTMENTS 127,193 109,688
Accrued income 1,982 1,887
Contributions receivable, employer 903 822
------------- -----------
NET ASSETS AVAILABLE FOR BENEFITS $ 130,078 $ 112,397
============= ===========
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, 1998 and 1997
-----------
(Thousands of Dollars)
1998 1997
------------------ ---------------
Net increase of interest in common
collective trust funds $ 15,996 $ 13,385
Interest income 2,057 1,782
Dividend income 2,032 2,191
------------------ ---------------
20,085 17,358
------------------ ---------------
Contributions:
Participants 6,131 5,513
Agway, Inc. 1,349 1,233
------------------ ---------------
7,480 6,746
------------------ ---------------
Total additions 27,565 24,104
------------------ ---------------
Deductions:
Benefit payments to participants 9,593 12,390
Trustee fees, administrative and
other expenses 291 278
------------------ ---------------
9,884 12,668
------------------ ---------------
Net additions 17,681 11,436
Net assets available for benefits:
Beginning of year 112,397 100,961
------------------ ---------------
Net assets available for benefits:
End of year $ 130,078 $ 112,397
================== ===============
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" or "Company") 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 defined 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, 1998,
there were 4,961 employees and former employees participating in this
Plan. The number of participants under each investment fund at June 30,
1998, is as follows:
Stock Fund 3,777 Bond Fund 667
Company Security Fund 4,924 Cash Fund 352
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,
1998 and 1997, 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
Corporation (AFC) 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, 1998 and 1997, 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, 1998 and 1997, 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 loan 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, 1998 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 AFC 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 current year realized and unrealized gains or
losses, interest and dividends.
Trustee Fees, Administrative and Other Expenses
Trustee fees, administrative expenses and all other expenses are
recognized in the period incurred. The Plan incurred approximately $245
in 1998 and $238 in 1997 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, market and credit. 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 benefits and the
statement of changes in net assets available for 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
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
<S> <C> <C>
Stock Fund:
BGI U.S. Equity Market Fund $ 70,309 $ 55,098
Company Security Fund:
Agway, Inc., Preferred Securities:
8% cumulative preferred stock - Series B 19,942 19,942
7% cumulative preferred stock - Series C 5,957 7,757
------------------ -----------------
25,899 27,699
AFC Subordinated Money Market Certificates 22,773 19,190
AFC Subordinated Debentures 1,830 1,980
Bond Fund:
BGI Government/Corporate Bond Index Fund 2,910 2,085
Collective Cash Investment Funds 2,328 2,558
Loans to participants 1,144 1,078
------------------ -----------------
TOTAL INVESTMENTS AT FAIR VALUE $ 127,193 $ 109,688
================== =================
</TABLE>
During 1998 and 1997, 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:
<TABLE>
<CAPTION>
NET INCREASE IN INTEREST IN COMMON 1998 1997
------------------ -----------------
COLLECTIVE TRUST FUNDS:
<S> <C> <C>
BGI U.S. Equity Market Fund $ 15,635 $ 13,138
BGI Government/Corporate Bond Index Fund 252 153
Collective Cash Investment Funds 109 94
------------------ -----------------
Total $ 15,996 $ 13,385
================== =================
</TABLE>
F-11
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
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.
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. The Plan has been amended since receiving the determination
letter. However, the plan administrator believes that the Plan is
designed and is currently being operated 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-12
<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, 1998
-------------
<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>
Investments $ 70,726 $ 35,542 $ 2,912 $ 1,714 $ 1,148 $ 15,151 $ 127,193
Accrued income 2 1,386 594 1,982
Contributions
receivable, employer 903 903
----------- ----------- ----------- ----------- ------------ ------------ ------------
NET ASSETS
AVAILABLE
FOR BENEFITS $ 70,728 $ 36,928 $ 2,912 $ 1,714 $ 1,148 $ 16,648 $ 130,078
=========== =========== =========== =========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
-------------
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>
Investments $ 55,443 $ 34,908 $ 2,095 $ 1,991 $ 1,079 $ 14,172 $ 109,688
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-13
<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, 1998
--------------------------------
<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 $ 15,635 $ 252 $ 109 $ 15,996
Interest income $ 1,369 $ 101 $ 587 2,057
Dividend income 1,422 610 2,032
---------- ---------- --------- ---------- ------------ ------------ ----------
15,635 2,791 252 109 101 1,197 20,085
---------- ---------- --------- ---------- ------------ ------------ ----------
Contributions:
Participants 3,769 1,941 285 136 6,131
Agway, Inc. 1,349 1,349
---------- ---------- --------- ---------- ------------ ------------ ----------
3,769 1,941 285 136 1,349 7,480
---------- ---------- --------- ---------- ------------ ------------ ----------
Total additions 19,404 4,732 537 245 101 2,546 27,565
---------- ---------- --------- ---------- ------------ ------------ ----------
Deductions
Benefit payments
to participants 4,858 2,995 171 198 87 1,284 9,593
Administrative
expenses 153 89 6 5 38 291
---------- ---------- --------- ---------- ------------ ------------ ----------
Total deductions 5,011 3,084 177 203 87 1,322 9,884
---------- ---------- --------- ---------- ------------ ------------ ----------
Net increase (decrease)
before interfund
transfers 14,393 1,648 360 42 14 1,224 17,681
Transfers (from) to
other funds 891 (967) 457 (319) 55 (117) 0
Net assets available
for benefits,
beginning of year 55,444 36,247 2,095 1,991 1,079 15,541 112,397
---------- ---------- --------- ---------- ------------ ----------- ----------
Net assets
available for
benefits,
end of year $ 70,728 $ 36,928 $ 2,912 $ 1,714 $ 1,148 $ 16,648 $ 130,078
========== ========== ========= ========== ============ =========== ==========
</TABLE>
F-14
<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-15
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
ITEM 27a of Form 5500 - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
as of June 30, 1998
(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 1,378,997 $ 32,129 $ 70,309
BGI Money Market Fund 23
TBC Inc. Pooled Employee Funds $ 417 417 417
------------- ---------------
Total Stock Fund 32,546 70,726
Company Security Fund:
Agway, Inc.:
8% cumulative preferred
stock - Series B 199,420 19,942 19,942
7% cumulative preferred
stock - Series C 59,570 5,957 5,957
Agway Financial Corporation:
8-1/2% subordinated money
market certificates,
due October 31, 1998 $ 839 839 839
8% subordinated money
market certificates,
due October 31, 1998 $ 5,841 5,841 5,841
8% subordinated debentures,
due July 1, 1999 $ 1,130 1,130 1,130
7-1/2% subordinated money
market certificates,
due October 31, 1999 $ 1,383 1,383 1,383
9% subordinated money
market certificates,
due October 31, 2000 $ 2,961 2,961 2,961
8% subordinated money
market certificates,
due October 31, 2002 $ 2,084 2,084 2,084
7-1/2% subordinated money
market certificates,
due October 31, 2002 $ 1,793 1,793 1,793
8-1/2% subordinated money
market certificates,
due October 31, 2001 $ 3,345 3,345 3,345
7-1/2% subordinated debentures,
due July 1, 2003 $ 700 700 700
8-1/2% subordinated money
market certificates,
due October 31, 2003 $ 2,930 2,930 2,930
8% subordinated money
market certificates,
due October 31, 2005 $ 1,597 1,597 1,597
------------- --------------
Total Company securities 50,502 50,502
TBC Inc. Pooled Employee Funds $ 191 191 191
------------- --------------
Total Company Security Fund 50,693 50,693
</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, 1998
(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 198,905 $ 2,494 $ 2,910
BGI Money Market Fund $ 2 2 2
---------------- -----------------
Total Bond Fund 2,496 2,912
Cash Fund:
BGI Money Market Fund $ 1,714 1,714 1,714
---------------- -----------------
Total Cash Fund 1,714 1,714
Loans to Participants:
Participant Notes $ 1,144 1,144 1,144
TBC Inc. Pooled Employee Funds $ 4 4 4
---------------- -----------------
Total Loan Fund 1,148 1,148
TOTAL INVESTMENTS $ 88,597 $ 127,193
================ =================
</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, 1998
(Thousands of Dollars)
<TABLE>
<CAPTION>
Current Value
of Investment
Purchase Selling on Transaction Net
Price Price Date Gain(Loss)
-------------- ------------ -------------- ----------
SINGLE SECURITY TRANSACTIONS IN
EXCESS OF 5% OF MARKET VALUE
<S> <C> <C> <C> <C>
7% cumulative preferred stock -
Series C $ 6,550 $ 6,550 $ 0
7% cumulative preferred stock -
Series C $ 7,300 7,300 0
7% cumulative preferred stock -
Series C 6,050 6,050 0
7% cumulative preferred stock -
Series C 6,550 6,550 0
SERIES OF SECURITY TRANSACTIONS
IN EXCESS OF 5% OF MARKET VALUE
The Boston Company Inc. Pooled
Employee Funds 24,625 24,625 0
The Boston Company Inc. Pooled
Employee Funds 24,581 24,581 0
7% cumulative preferred stock -
Series C 12,600 12,600 0
7% cumulative preferred stock -
Series C 14,400 14,400 0
</TABLE>
S-2.1
