AGWAY INC, 10-Q/A, 1999-09-16

AGWAY INC
10-Q/A, 1999-09-16
GRAIN MILL PRODUCTS

Previous: AGWAY INC, 10-Q/A, 1999-09-16

Next: AGWAY INC, 10-K405/A, 1999-09-16

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A

(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---
ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---
ACT OF 1934
For the transition period from to
---------------------- ---------------------
Commission file number 2-22791
-------

AGWAY INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

DELAWARE 15-0277720
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

333 Butternut Drive, DeWitt, New York 13214
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

315-449-6431
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Class Outstanding at September 10, 1999
- ------------------------ ---------------------------------
Membership Common Stock, 99,728 shares
$25 par value per share

<PAGE>

AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

INDEX

PAGE NO.
--------
PART I. FINANCIAL INFORMATION
- ------- ---------------------
<S> <C> <C>

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of March 31, 1999 and June 30, 1998......................... 3

Condensed Consolidated Statements of Operations and Retained Earnings for the three months
and nine months ended March 31, 1999 and March 31, 1998.............................................. 4

Consolidated Statements of Comprehensive Income for the three months and nine months ended
March 31, 1999 and March 31, 1998.................................................................... 5

Condensed Consolidated Cash Flow Statements for the nine months ended March 31, 1999
and March 31, 1998................................................................................... 6

Notes to Condensed Consolidated Financial Statements................................................. 7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 13

Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................. 22

PART II. OTHER INFORMATION
- -------- -----------------

Item 1. Legal Proceedings........................................................................... 24

Item 6. Exhibits and Reports on Form 8-K............................................................ 25

SIGNATURES........................................................................................... 26

</TABLE>

<PAGE>

PART I. FINANCIAL INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 1. CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)

<TABLE>
<CAPTION>
Restated Restated
March 31, June 30,
1999 1998
------------ ------------
ASSETS
- ------
<S> <C> <C>
Current Assets:
Trade accounts receivable (including notes receivable of $15,587 and
$49,394, respectively), less allowance for doubtful accounts of
$7,807 and $7,926, respectively....................................... $ 132,815 $ 203,637
Leases receivable, less unearned income of $61,637 and
$65,048, respectively.................................................. 139,851 137,493
Advances and other receivables............................................. 12,449 25,480
Inventories:
Raw materials.......................................................... 11,483 7,576
Finished goods......................................................... 194,626 139,861
Goods in transit and supplies.......................................... 7,001 1,777
----------- -----------
Total inventories................................................. 213,110 149,214
Prepaid expenses and other assets.......................................... 40,631 52,774
----------- -----------
Total current assets................................................... 538,856 568,598

Marketable securities available for sale........................................ 36,880 36,412
Other security investments...................................................... 51,673 51,761
Properties and equipment, net................................................... 214,280 213,795
Long-term leases receivable, less unearned income of $126,545 and
$110,721, respectively..................................................... 381,366 357,777
Net pension asset............................................................... 192,542 176,792
Other assets .................................................................. 24,403 12,159
----------- -----------
Total assets...................................................... $ 1,440,000 $ 1,417,294
=========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Notes payable............................................................. $ 96,400 $ 65,100
Current installments of long-term debt..................................... 102,090 99,173
Current installments of subordinated debt.................................. 79,309 75,589
Accounts payable........................................................... 155,940 114,548
Other current liabilities.................................................. 104,647 114,311
----------- -----------
Total current liabilities.............................................. 538,386 468,721

Long-term debt.................................................................. 199,040 255,356
Subordinated debt............................................................... 408,963 386,607
Other liabilities............................................................... 104,415 100,381
----------- -----------
Total liabilities...................................................... 1,250,804 1,211,065
Commitments and contingencies
Shareholders' equity:
Preferred stock, net....................................................... 43,047 47,871
Common stock, net.......................................................... 2,520 2,571
Accumulated other comprehensive income..................................... 617 705
Retained earnings.......................................................... 143,012 155,082
----------- -----------
Total shareholders' equity............................................. 189,196 206,229
----------- -----------
Total liabilities and shareholders' equity........................ $ 1,440,000 $ 1,417,294
=========== ===========

</TABLE>

See accompanying notes to condensed consolidated financial statements.

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 1. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
(Thousands of Dollars)

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ -----------------------------
1999 1998 1999 1998
------------- ------------- ------------- ------------
Restated Restated
<S> <C> <C> <C> <C>
Net sales and revenues from:
Product sales (including excise taxes) $ 333,247 $ 356,898 $ 904,606 $ 1,004,908
Leasing operations...................... 17,269 16,210 51,765 48,318
Insurance operations.................... 6,505 6,658 21,068 20,482
------------- ------------- ------------- ------------
Total net sales and revenues........ 357,021 379,766 977,439 1,073,708

Cost and expenses from:
Products and plant operations........... 296,728 322,992 840,344 937,918
Leasing operations...................... 5,610 5,654 20,164 19,801
Insurance operations.................... 4,082 4,174 13,539 12,840
Selling, general and admin. activities.. 37,217 34,164 111,100 96,979
------------- ------------- ------------- ------------
Total operating costs and expenses.. 343,637 366,984 985,147 1,067,538

Operating earnings (loss).................... 13,384 12,782 (7,708) 6,170

Interest expense, net........................ (8,155) (8,824) (23,892) (22,835)
Other income, net............................ l,904 5,522 19,194 10,276
------------- -------------- ------------- ------------
Earnings (loss) before income taxes.......... 7,133 9,480 (12,406) (6,389)
Income tax benefit (expense) ................ (4,364) (5,430) 2,028 (847)
------------- -------------- ------------- -------------

Earnings (loss) before cumulative effect
of an accounting change................. 2,769 4,050 (10,378) (7,236)

Cumulative effect on prior years of an
accounting change, net of tax
expense of $16,500...................... 0 0 0 28,956
------------- -------------- ------------- ------------
Net earnings (loss).......................... 2,769 4,050 (10,378) 21,720

Retained earnings balance, beginning of
period.................................. 140,243 133,450 155,082 117,571
Dividends.................................... 0 (3) (1,692) (1,794)
------------- -------------- ------------- ------------
Retained earnings, end of period............. $ 143,012 $ 137,497 $ 143,012 $ 137,497
============= ============== ============= ============

</TABLE>

See accompanying notes to condensed consolidated financial statements.

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 1. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Thousands of Dollars)

Other comprehensive income, net of tax:
Unrealized gains (losses) on
available-for-sale securities:
Unrealized holding gains (losses)
arising during period............ (405) 62 (108) 562
Reclassification adjustment
for (gains) losses included in
net income....................... 5 46 20 45
------------- -------------- ------------- -------------

Other comprehensive income.................. (400) 108 (88) 607

Comprehensive (loss) income................ $ 2,369 $ 4,158 $ (10,466) $ 22,327
============= ============== ============= =============

</TABLE>

See accompanying notes to condensed consolidated financial statements.

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 1. CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
(Thousands of Dollars)

<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------------
1999 1998
---------- -----------
<S> <C> <C>
Net cash flows provided by operating activities............................. $ 46,664 $ 27,370

Cash flows provided by (used in) investing activities:
Purchases of property, plant and equipment.............................. (17,486) (23,026)
Proceeds from disposal of property, plant and equipment................. 1,977 6,879
Proceeds from sale of business.......................................... 14,150 298
Cash paid for acquisitions of business.................................. (7,090) (2,631)
Leases originated....................................................... (176,672) (165,272)
Leases repaid........................................................... 145,232 131,707
Proceeds from sale of marketable securities............................. 5,790 11,742
Purchases of marketable securities...................................... (6,345) (12,537)
Net purchase of investments in cooperatives............................. (950) (2,980)
---------- ----------

Net cash flows used in investing activities.................................. (41,394) (55,820)

Cash flows provided by (used in) financing activities:
Net change in short-term borrowings..................................... 31,080 38,510
Proceeds from long-term debt............................................ 13,273 62,857
Repayment of long-term debt............................................. (67,106) (82,181)
Proceeds from sale of subordinated debt................................. 128,629 106,288
Maturity and redemption of subordinated debt............................ (102,553) (83,210)
Payments on capital leases.............................................. (186) (520)
Redemption of stock, net ............................................... (4,875) (9,351)
Cash dividends paid..................................................... (3,532) (3,943)
---------- ----------

Net cash flows (used in) provided by financing activities.................... (5,270) 28,450
---------- ----------

Net decrease in cash and equivalents......................................... 0 0
Cash and equivalents at beginning of period.................................. 0 0
---------- ----------

Cash and equivalents at end of period....................................... $ 0 $ 0
========== ==========

</TABLE>

See accompanying notes to condensed consolidated financial statements.

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Thousands of Dollars)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Agway Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine-month period ended March
31, 1999, are not necessarily indicative of the results that may be
expected for the year ending June 30, 1999, due to the seasonal nature of
certain major segments of the Company's business. For further information,
refer to the consolidated financial statements and notes thereto included
in the annual report on Form 10-K for the year ended June 30, 1998.

Future Accounting Requirements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes
comprehensive accounting and reporting requirements for derivative
instruments and hedging activities. SFAS No. 133 requires companies to
record derivatives on the balance sheet as assets or liabilities, measured
at fair value. The accounting for gains or losses resulting from changes in
the values of those derivatives is dependent on the use of the derivative
and the type of risk being hedged. The statement is effective for all
quarters of fiscal years beginning after June 15, 2000. At the present
time, the Company is currently evaluating the impact that the adoption of
SFAS No. 133 will have on its consolidated financial statements.

Comprehensive Income
Effective July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This pronouncement requires the Company to report,
among other things, the effects of unrealized investment holding gains or
losses for available-for-sale securities as "comprehensive income" for all
periods presented.

Reclassifications
Certain reclassifications have been made to conform prior year financial
statements with the current year presentation.

Restatement
On July 8, 1999, Agway announced that it had become aware of accounting
irregularities in its grain marketing department. As more fully discussed
in Footnote 6, upon investigation, Agway has determined that the financial
statements as previously filed for the quarter ended March 31, 1999
required restatements.

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Thousands of Dollars)

2. AGWAY FINANCIAL CORPORATION
---------------------------
Agway Financial Corporation (AFC) is a wholly owned subsidiary of the
Company whose principal business activity is securing financing through
bank borrowings and issuance of corporate debt instruments to provide funds
for the Company, its subsidiaries, 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. In an exemptive relief granted pursuant to a "no action letter"
issued by the staff of the Securities and Exchange Commission, AFC, as a
separate company, is not required to file periodic reports with respect to
these debt securities. However, as required by the 1934 Act, the summarized
financial information concerning AFC and consolidated subsidiaries is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales and revenues......... $ 260,382 $ 268,572 $ 705,310 $ 766,947
Operating earnings............. 22,163 20,225 25,478 33,649
Net earnings (loss)............ 1,297 399 (18,386) (9,335)
</TABLE>

<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------------- -------------
<S> <C> <C>
Current assets.................................................... $ 473,964 $ 524,800
Properties and equipment, net..................................... 145,659 150,618
Noncurrent assets................................................. 475,913 451,303
------------- -------------
Total assets...................................................... $ 1,095,536 $ 1,126,721
============= =============

Current liabilities............................................... $ 2,727 $ 15,173
Short-term notes payable.......................................... 96,400 65,100
Current installments of long-term debt............................ 100,013 95,247
Current installments of subordinated debt......................... 79,309 75,589
Long-term debt.................................................... 186,615 248,128
Subordinated debt................................................. 408,963 386,607
Noncurrent liabilities............................................ 25,580 26,474
Shareholder's equity.............................................. 195,929 214,403
------------- -------------
Total liabilities and shareholder's equity........................ $ 1,095,536 $ 1,126,721
============= =============

</TABLE>

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)

3. BORROWING ARRANGEMENTS
----------------------
As of March 31, 1999, the Company had certain facilities available with
banking institutions whereby lenders have agreed to provide funds up to
$377,000 to separately financed units of the Company as follows: AFC -
$75,000 and Telmark - $302,000. In addition, AFC may issue up to $50,000 of
commercial paper under the terms of a separate agreement, backed by a bank
standby letter of credit.

AFC
As of March 31, 1999, AFC's available bank facilities included a short-term
line of credit and a long-term revolving line of credit. These facilities
and AFC's ability to issue commercial paper require collateralization using
certain of the Company's accounts receivable and non-petroleum inventories
("collateral"). The maximum amounts which can be drawn under these AFC
agreements are subject to a limitation based on a specific calculation
relating to the collateral available. Adequate collateral has existed
throughout the fiscal year to permit AFC to borrow amounts to meet the
ongoing needs of the Company and is expected to continue to do so. The line
of credit and long-term revolving line of credit additionally require the
Company's investment in bank stock 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 earnings. As described in
Footnote 6, due to the restatement of financial results, Agway violated
certain of its covenants in its loan agreements, including the interest
coverage covenant as of December 1998, March 1999, and June 1999 and a
tangible net worth covenant as of November and December 1998. Agway
disclosed the above-referenced losses and restatements, and causes thereof,
to its lenders and has obtained waivers for these violations, and the
covenants in the loan agreements have been amended through the remaining
term of the agreements. AFC annually renews its line of credit and
commercial paper program in the quarter ended December 31. The Company
expects to continue to have appropriate and adequate financing to meet its
ongoing needs.

The specifics of these arrangements are as follows:
<TABLE>
<CAPTION>
Outstanding
Available ---------------------------
3/31/99 3/31/99 6/30/98 Term Expires
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Short-term line of credit*................ $ 50,000 $ 0 $ 0 12/31/99
Long-term revolving line of credit........ $ 25,000 $ 0 $ 0 01/01/01
Commercial paper.......................... $ 50,000 $ 1,400 $ 30,100 12/31/99

</TABLE>

*AFC's short-term line of credit facility provides for an increase to
$75,000, which will become available on October 1, 1999, to assist in
refinancing maturing subordinated debt.

In addition, Agway, through AFC, offers subordinated money market
certificates (and previously offered subordinated debentures) to the
public. AFC's subordinated debt is not redeemable by the holder. However,
AFC does have a practice of repurchasing at face value, plus interest
accrued at the stated rate, certain subordinated debt whenever presented
for repurchase. The foregoing debt bears interest payable semi-annually on
January l and July 1 of each year. The money market certificates bear
interest at a rate that is the greater of the stated rate or a rate based
upon the average discount rate for U.S. Treasury Bills, with maturities of
26 weeks. Subordinated money market certificates due between October 1999
and October 2013 bear a weighted average interest rate of 8.0%, while
subordinated debentures due between July 1999 and July 2003 bear a weighted
average interest rate of 8.1%.

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)

3. BORROWING ARRANGEMENTS (continued)
----------------------------------
Telmark
As of March 31, 1999, Telmark's available credit facilities from banks
allow Telmark to borrow up to an aggregate of $302,000. Uncommitted
short-term line of credit agreements permit Telmark to borrow up to $52,000
on an uncollateralized basis with interest paid upon maturity. The lines
bear interest at money market variable rates. A committed $250,000
partially collateralized revolving line of credit permits Telmark to draw
short-term funds bearing interest at money market rates or draw long-term
debt at rates appropriate for the term of the note drawn. The total amount
outstanding as of March 31, 1999, under the short-term lines of credit was
$52,000 and under the revolving term loan facility was $151,000, of which
$108,000 was long-term. As of June 30, 1998, the total amount outstanding
was $20,000 under the short-term lines of credit and under the revolving
term loan facility was $165,000, of which $150,000 was long-term. The
uncommitted lines of credit expire within the next 12 months, and the
$250,000 revolving term loan facility is available through August 1, 2000.

Telmark had balances outstanding on uncollateralized senior notes from
private placements totaling $160,000 and $169,000 at March 31, 1999, and at
June 30, 1998, respectively. The principal bears interest at fixed rates
ranging from 6.5% to 8.9%. The principal payments commence May 1999 with
final installment due in May 2004. Interest is payable semiannually on each
senior note. Principal payments are both semiannual and annual. The note
agreements are similar to one another and each contains several specific
financial covenants.

Telmark, through a wholly owned special purpose subsidiary, has two classes
of lease-backed notes outstanding totaling $11,800 and $17,700 at March 31,
1999, and June 30, 1998, respectively, payable to insurance companies.
Interest rates on these classes of notes are 6.58% and 7.01%, respectively.
The notes are collateralized by leases, which Telmark sold to this
subsidiary, having an aggregate present value of contractual lease payments
equal to the principal balance of the notes. The final scheduled maturity
of these notes is December 2004.

Telmark offers subordinated debentures to the public. The debentures are
unsecured and subordinated to all senior debt at Telmark. The interest on
the debt is payable quarterly on January 1, April 1, July 1 and October 1
and is allowed to be reinvested.

The Company's long-term and subordinated debt outstanding at March 31,
1999, as compared to June 30, 1998, is as follows:
<TABLE>
<CAPTION>
AFC
Agway (excluding Telmark) Telmark Total
---------------------- ---------------------- ----------------------- -----------------------
3/99 6/98 3/99 6/98 3/99 6/98 3/99 6/98
--------- ---------- ---------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt ...... $ 14,502 $ 11,154 $ 6,818 $ 6,698 $ 279,810 $ 336,677 $ 301,130 $ 354,529
Currently payable..... 2,077 3,926 1,167 1,661 98,846 93,586 102,090 99,173
--------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Net long-term debt... $ 12,425 $ 7,228 $ 5,651 $ 5,037 $ 180,964 $ 243,091 $ 199,040 $ 255,356
========= ========== ========== ========= ========== ========== ========== ==========

Subordinated debt.... $ 0 $ 0 $ 451,147 $ 428,190 $ 37,125 $ 34,006 $ 488,272 $ 462,196
Currently payable..... 0 0 61,109 75,589 18,200 0 79,309 75,589
--------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Net subordinated debt $ 0 $ 0 $ 390,038 $ 352,601 $ 18,925 $ 34,006 $ 408,963 $ 386,607
========= ========== ========== ========= ========== ========== ========== ==========
</TABLE>

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)

4. COMMITMENTS AND CONTINGENCIES
-----------------------------
Environmental
The Company is subject to a number of governmental regulations concerning
environmental matters, either directly or as a result of the operations of
its subsidiaries. The Company expects that it will be required to expend
funds to participate in the remediation of certain sites, including sites
where the Company has been designated by the Environmental Protection
Agency (EPA) as a potentially responsible party (PRP) under the
Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) and sites with underground fuel storage tanks, and will incur
other expenses associated with environmental compliance.

The Company continually monitors its operations with respect to potential
environmental issues, including changes in legally mandated standards and
remediation technologies. Agway's recorded liability reflects those
specific issues where remediation activities are currently deemed to be
probable and where the cost of remediation is estimable. Estimates of the
extent of the Company's degree of responsibility relating to a particular
site and the method and ultimate cost of remediation require a number of
assumptions for which the ultimate outcome may differ from current
estimates. The Company is designated as a PRP under CERCLA or as a third
party to the original PRPs in several Superfund sites. The liability under
CERCLA is joint and several, meaning that the Company could be required to
pay in excess of its pro rata share of remediation costs. The Company is
not indemnified for existing environmental cleanup liability. The Company's
understanding of the financial strength of other PRPs at these Superfund
sites has been considered, where appropriate, in the Company's
determination of its estimated liability. The Company believes that its
past experience provides a reasonable basis for estimating its liability.
As additional information becomes available, estimates are adjusted as
necessary. While the Company does not anticipate that any such adjustment
would be material to its financial statements, it is reasonably possible
that the result of ongoing and/or future environmental studies or other
factors could alter this expectation and require the recording of
additional liabilities. The extent or amount of such events, if any, cannot
be estimated at this time. The settlement of the reserves established will
cause future cash outlays over approximately five years based upon current
estimates, and it is not expected that such outlays will materially impact
the Company's liquidity position.

Other
The Company is also subject to various investigations, claims, and legal
proceedings covering a wide range of matters that arise in the ordinary
course of its business activities. Each of these matters is subject to
various uncertainties, and it is possible that some of these matters may be
resolved unfavorably to the Company. The Company has established accruals
for matters for which payment is probable and amounts reasonably estimable.
Management believes any liability that may ultimately result from the
resolution of these matters in excess of amounts provided under the above
stated policy will not have a material adverse effect on the financial
position, results of operations or liquidity of the Company.

5. SUBSEQUENT EVENT
----------------
On April 8, 1999, the Company announced that it is combining its
agricultural products and retail services businesses. See Management's
Discussion and Analysis of Financial Condition and Results of Operations
for further details.

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(Thousands of Dollars)

6. RESTATEMENT
-----------
On July 8, 1999, Agway announced that it had become aware of accounting
irregularities in its grain marketing department. An investigation, under
guidance from external legal counsel and including internal legal counsel,
internal financial staff, external auditors, and private investigators, was
initiated. Reports on the investigation findings have been made directly to
the Board of Directors.

The investigation has determined that unauthorized speculative positions in
commodity instruments were taken within the department in violation of
express policies, which resulted in losses to Agway. Through falsification
of market values on inventory held and on forward contracts and improper
accounting for premiums on options sold, losses were concealed within the
department, resulting in misreported earnings by Agway for the fourth
quarter of the year ended June 30, 1998, and the first three quarters of
1999. In an effort to recover these losses, additional speculative
positions in commodity instruments were taken within the department
throughout 1999. In addition, while the unauthorized activity was
occurring, the department did not hedge its inventory and forward
contracts, in violation of express policies, which led to further losses
from the department's operations. To reflect these losses and their effect
on the Company, Agway has amended its previously filed annual report on
Form 10-K for the year ended June 30, 1998, and its 1999 quarterly reports
on Form 10-Q with the SEC. For the year ended June 30, 1998, the net
earnings of $41,754, as previously reported, have been reduced by $609 to
$41,145 to reflect this restatement. The after-tax effects of the
activities described above on each of the first three quarters of 1999 are
as follows:
<TABLE>
<CAPTION>
Consolidated Net Earnings (Loss)
-----------------------------------------------------
As As Previously Net
Period Restated Reported Adjustment
------ ------------- ------------- --------------
<S> <C> <C> <C>

Three months ended September 1998...................... $ (6,270) $ (2,570) $ (3,700)
Three months ended December 1998....................... (6,877) (7,336) 459
Six-month period ended December 1998................... (13,147) (9,906) (3,241)
Three months ended March 1999.......................... 2,769 3,255 (486)
Nine-month period ended March 1999..................... (10,378) (6,651) (3,727)
</TABLE>

The total pre-tax loss from department activities is $8,600 for the year
ended June 30, 1999. This compares to a pre-tax loss as restated of $1,100
in 1998 and a $300 pre-tax loss in 1997. The 1999 loss includes $5,500 from
unauthorized speculation in commodity instruments and $3,100 from
operations, due in part to not hedging positions in inventory and forward
contracts.

The results of operations, as restated, violated certain of Agway's
covenants in its loan agreements, including an interest coverage covenant
as of December 1998, March 1999, and June 1999 and a tangible net worth
covenant as of November and December 1998. Agway disclosed the
above-referenced losses and restatements, and causes thereof, to its
lenders and has obtained waivers for these violations, and the covenants in
the loan agreements have been amended through the remaining term of the
agreements.

Subsequent to year-end, open unauthorized speculative commodity instruments
were closed. In addition, inventory and open forward contracts have been
hedged. During the period it took to restructure and hedge the open
positions of the department, further market losses of approximately $1,300
were incurred, which will be reflected in Agway's Form 10-Q for the first
quarter of fiscal 2000. Agway has restructured its grain marketing
activities, substantially reducing their scope, and requiring that its net
position at any point in time to be effectively hedged.

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)

RESULTS OF OPERATIONS
- ---------------------
The Company is including the following cautionary statement in this Form 10-Q to
make applicable and take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 for any forward- looking
statement made by, or on behalf of, the Company. Where any such forward-looking
statement includes a statement of the assumptions or basis underlying such
forward-looking statement, the Company cautions that, while it believes such
assumptions or basis to be reasonable and makes them in good faith, assumed
facts or basis almost always vary from actual results, and the differences
between assumed facts or basis and actual results can be material, depending
upon the circumstances. Where, in any forward-looking statement, the Company, or
its management, expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect," and "anticipate" and similar expressions identify
forward-looking statements.

The Company's net sales and revenues and operating results are significantly
impacted by seasonal fluctuations due to the nature of its operations and the
geographic location of its service area, which is primarily the Northeastern
United States. Agriculture and Retail net sales and revenues are traditionally
higher in the spring as customers acquire products to initiate the growing
season. Energy generally realizes significantly higher net sales and revenues in
the winter months due to cold winter conditions. Leasing and Insurance are not
materially impacted by seasonal fluctuations.

<TABLE>
<CAPTION>
Results by Operating Segment
-------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
------------------------------------ ---------------------------------------
Restated $ Increase Restated $ Increase
3/31/99 3/31/98 (Decrease) 3/31/99 3/31/98 (Decrease)
--------- --------- ---------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales and Revenues
- ----------------------
Agriculture.................. $ 154,023 $ 166,471 $ (12,448) $ 438,150 $ 470,795 $ (32,645)
Energy ...................... 147,851 155,632 (7,781) 352,277 410,477 (58,200)
Retail ...................... 43,755 48,285 (4,530) 149,684 162,057 (12,373)
Leasing...................... 17,269 16,210 1,059 51,765 48,318 3,447
Insurance.................... 6,505 6,658 (153) 21,068 20,482 586
Other (a).................... (12,382) (13,490) 1,108 (35,505) (38,421) 2,916
--------- ---------- ---------- --------- ----------- ------------
$ 357,021 $ 379,766 $ (22,745) $ 977,439 $ 1,073,708 $ (96,269)
========= ========== ========== ========= =========== ============

Earnings (Loss) from
- --------------------
Operations before Income Taxes
------------------------------
Agriculture................. $ (6,412) $ (1,245) $ (5,167) $ (10,865) $ (17,080) $ 6,215
Energy....................... 23,006 15,514 7,492 22,841 17,890 4,951
Retail....................... (9,036) (4,688) (4,348) (18,617) (8,243) (10,374)
Leasing...................... 5,757 4,568 1,189 13,199 11,231 1,968
Insurance.................... 37 (107) 144 (144) 60 (204)
Other (a).................... l,936 4,262 (2,326) 5,072 12,588 (7,516)
--------- ---------- ---------- --------- ---------- ------------
Operating earnings (loss),
plus other income, net.... 15,288 18,304 (3,016) 11,486 16,446 (4,960)
Interest (expense), net of
interest income........... (8,155) (8,824) 669 (23,892) (22,835) (1,057)
--------- ---------- ---------- --------- ---------- ------------
$ 7,133 $ 9,480 $ (2,347) $ (12,406) $ (6,389) $ (6,017)
========= ========== ========== ========= ========== ============
</TABLE>

(a) Represents unallocated corporate items and intersegment eliminations.

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)

Numbers in the following narrative have been rounded to the nearest hundred
thousand.

Consolidated Results
- --------------------
Consolidated net sales and revenues of $357,000 and $977,400 for the three and
nine months ended March 31, 1999, decreased $22,700 (6%) and $96,300 (9%),
respectively, as compared to the same periods in the prior year. The decreases
were substantially the result of a decline in sales in the Agriculture, Energy,
and Retail segments. The decrease in Energy was principally due to decreases in
volume and pricing level of petroleum products. The decrease in Agriculture was
principally due to the pricing level of agricultural feed products. The decline
in Retail was due to reduced sales to wholesale dealers. See the detailed
business segment discussion below.

Restated consolidated net earnings from operations before income taxes of $7,100
for the three months ended March 31, 1999, decreased $2,300 (25%) as compared to
the same period in the prior year. Consolidated restated net loss from
operations before income taxes of $12,400 for the nine months ended March 31,
1999, was $6,000 (94%) higher as compared to the same period in the prior year.

The decrease in the restated consolidated pre-tax operating earnings of $2,300
from the prior year for the three-month period ended March 31, 1999, resulted
principally from offsetting improvements and declines in business segment
results and a $2,500 (49%) reduction in the level of pension income offset by a
$700 (8%) decrease in net interest expense. The Company amended its defined
benefit pension plan effective July 1, 1998. The amendment increased the cost of
benefits, the plan benefit obligations, and the related interest costs which
reduced net pension income recognized by the Company in the third quarter of
1999 as compared to the same period in the prior year.

The increase in the consolidated restated pre-tax operating loss of $6,000 for
the nine months ended March 31, 1999, as compared to the same period in the
prior year, reflects a net increase in earnings of $9,200 from the sale of a
seed business, which amount was more than offset by a net reduction in business
unit operating results of $7,800 (discussed by business segment below). The net
reduction in business unit operating results for the nine months ended March 31,
1999, was substantially due to losses of $5,900 in the grain marketing business,
principally from the effects of unauthorized activities, as described in
Footnote 6. Additionally, a decline in pension credits of $7,100 (32%) increased
net corporate costs of $400 (37%), and increased net interest expense of $1,100
(5%) depressed pre-tax operating results during the nine-month period as
compared to the same period in the prior year. The increase in total corporate
costs was a result of new systems costs and professional services associated
with several projects, including year 2000 readiness. The increase in net
interest expense was due to a decline in interest revenue earned from receivable
balances combined with an increase in interest expense from a slightly higher
average interest rate on outstanding debt.

Agriculture
Agriculture consists of Agway Agricultural Products (AAP) and the Country
Products Group (CPG). Total Agriculture net sales and revenues of $154,000 and
$438,200 for the three and nine months ended March 31, 1999, decreased $12,400
(8%) and $32,600 (7%), respectively, as compared to the same periods in the
prior year. The Agriculture restated loss from operations of $6,400 for the
third quarter ended March 31, 1999, increased $5,100 (415%) as compared to the
same period in the prior year. The Agriculture restated loss from operations of
$10,900 for the nine months ended March 31, 1999, is an improvement of $6,200
(36%) as compared to the same period in the prior year.

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)

Agriculture (continued)
- -----------------------
AAP net sales and revenues of $112,300 and $317,400 for the three and nine
months ended March 31, 1999, decreased $5,100 (4%) and $19,500 (6%),
respectively, as compared to the same periods in the prior year. The AAP sales
decrease results principally from the AAP enterprise feed business as sales for
the three- and nine-month periods ended March 31, 1999, decreased $1,000 and
$12,900, respectively. A decline in the pricing levels of feed products in the
global markets caused the overall decrease in feed sales. The declining price
level of feed products was partially offset by volume improvements. AAP
experienced an increase in feed unit volume of 8% and 11% during the three
months and the nine months ended March 31, 1999, as compared to the same periods
in the prior year. The increase in volume was from the acquisition of a new
business during the first quarter of this year combined with improved feed sales
volume in the AAP enterprises.

In addition to the sales declines in the feed business, direct marketing sales
declined $1,100 and $4,100 and AAP enterprise agronomy sales decreased $2,700
and $600 for the three months and nine months ended March 31, 1999,
respectively, as compared to the same periods in the prior year. These sales
declines are principally due to these operations being negatively impacted by
the low market price of agricultural commodities in feed and crops products. The
sales declines noted above were partially offset by sales improvements of $1,100
and $2,100 in both the three and nine months in the commercial vegetable seed
business.

CPG net sales and revenues of $41,700 and $120,700 for the three and nine months
ended March 31, 1999, decreased $7,400 (15%) and $13,100 (10%), respectively, as
compared to the same periods in the prior year. The decrease in both periods is
substantially due to the sale of a seed business in the first quarter of this
year. Sales were $10,100 and $14,700 lower in the three- and nine-month periods,
respectively, as compared to the same periods in the prior year, due primarily
to the sold business. The lost sales from sold business were partially offset by
increased sales in ongoing operations of $2,700 and $1,600 for the three and
nine months ended March 31, 1999, as compared to the prior year. The improvement
to ongoing operations in the third quarter was principally due to CPG's
sunflower operations. Sales in the sunflower operations increased $2,100 over
last year from increased bird food sales and with the help of increased human
food capacity from a new processing plant that was not operational in the first
nine months of the prior year.

AAP's restated operating loss of $6,600 and $25,500 for the three- and
nine-month periods ended March 31, 1999, increased $3,100 (84%) for the three
months and increased $1,800 (7%) for the nine months, respectively, as compared
to the same periods in the prior year. The increase in operating loss for the
third quarter resulted principally from lower patronage income partially offset
by improved gross margins. The lower patronage income of $4,200, as compared to
the prior year, was due principally to lower patronageable earnings at the
Company's primary fertilizer supplier. The gross margin improvement in the third
quarter resulted from a combination of increased feed volume and improved
pricing strategies as compared to the same period in the prior year.

The decline of operating results over the nine-month period, as compared to the
same period in the prior year, is substantially due to gross margin improvements
of $5,000 (7%) being more than offset by increased operating expenses of $4,300
and lower other revenues of $2,400. The gross margin improvement over the prior
year is partly due to unfavorable experience with exchange-traded futures in the
AAP feed business in the prior year and partly due to the feed volume increases
and improved pricing over the first nine months of the current year as compared
to the prior year. These gross margin improvements were negatively impacted by
the effects of unauthorized speculative activities in AAP's grain marketing
business, as described in Footnote 6. Increased operating expenses related
mainly to increased cost of distributing and selling a greater volume of feed
products. The decrease in other revenues, as compared to the prior year,
resulted from lower patronage income in the third quarter of this year, as noted
above. The decline was partially offset by increases in other rebates received
by AAP.

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)

Agriculture (continued)
- ----------------------
CPG's operating earnings plus other income of $200 and $14,600 for the three and
nine months ended March 31, 1999, decreased $2,200 (93%) and increased $8,000
(121%), respectively, as compared to the same periods in the prior year. The
decrease in the three-month period, as compared to the prior year, is due mainly
to increased costs associated with developing and marketing new products and
lost revenues from the sale of a seed business in the first quarter.

The increase in operating earnings during the nine-month period, as compared to
the prior year, is attributable to the net improvements in results of $9,200
from the sale of a seed business and a $1,200 improvement in ongoing operations,
principally produce. These improvements were partially offset by increased costs
associated with new product development.

Energy
- ------
Energy earnings from operations of $23,000 and $22,800 for the three and nine
months ended March 31, 1999, represent an earnings increase of $7,500 (48%) and
$5,000 (28%), respectively, as compared to the same periods in the prior year.
In the three months ended March 31, 1999, sales volume increased, particularly
in heating oil and propane, a total of $10,700 as compared to the same period in
the prior year and was partially offset by the sales decline due to pricing. In
the nine months ended March 31, 1999, overall sales volume declined $6,000,
substantially due to lower heating oil volumes. The above fluctuations in volume
result from a combination of the changes in heating degree-days and the
non-renewal of an annual commercial contract over the three- and nine-month
periods as compared to the same periods in the prior year. The imbalance of
supply and demand has driven competitive prices lower during the first three
quarters of this year and is expected to continue for the remainder of this
year. The lower selling prices decreased sales as compared to last year by
$20,100 during the third quarter and $56,800 for the nine months ended March 31,
1999. Finally, greater emphasis on heating, ventilation and air conditioning
(HVAC) installation and service increased these sales $1,800 and $4,000 for the
three- and nine-month periods ended March 31, 1999, as compared to the same
periods in the prior year.

Energy commodity costs continue to be lower than in the prior year and have
helped overall gross margins on all products increase by $10,600 for the third
quarter and $10,300 for the nine months ended March 31, 1999, as compared to the
same periods in the prior year. The improvements in gross margins were partially
offset by increases in distribution expense, principally labor costs, and
increases in administrative expenses, principally information systems cost
related to year 2000 readiness.

Retail
- ------
Total net sales and revenues of $43,800 and $149,700 for the three and nine
months ended March 31, 1999, decreased $4,500 (9%) and $12,400 (8%),
respectively, as compared to the same periods in the prior year. The decreases
in sales and revenues for the three- and nine-month periods ended March 31,
1999, were primarily in wholesale sales due principally to the conversion of the
historical Agway representative retail store system to a new system including
Agway franchisees and Agway wholesale dealer relationships. Many of the
wholesale dealers are presently purchasing non-Agway-branded products from other
sources of supply which they had in the prior year purchased from Agway. A loss
in sales volume due to this change is expected to continue at some level at
least through this fiscal year. This change in buying pattern has changed the
mix of products purchased, resulting in a lower average gross margin.

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)

Retail (continued)
- -----------------
Retail operating loss of $9,000 and $18,600 for the three and nine months ended
March 31, 1999, increased $4,300 (93%) and $10,400 (126%), respectively, as
compared to the same periods in the prior year. The decline in operating results
was primarily from reduced gross margin dollars, which declined $1,900 (15%) and
$5,400 (12%), and increased operating expenses of $2,500 (14%) and $5,200 (10%)
for the three- and nine-month periods ended March 31, 1999, as compared to the
same periods in the prior year. The reduction in wholesale sales and the change
in the mix of products purchased have lowered margin dollars. Operating expenses
increased from new locations which were not operational in the first nine months
of the prior year and from an increase in administrative expenses attributable
to higher labor costs and accrued costs for the unification of the retail
business into the agriculture business*.

*See Subsequent Event section of the MD&A for further description.

Leasing
- -------
Total revenue of $17,300 and $51,800 for the three and nine months ended March
31, 1999, increased $1,100 (7%) and $3,400 (7%), respectively, as compared to
the same periods in the prior year. These increases, which were partly offset by
a lower income rate on new and replacement leases, are primarily due to higher
investment in leases. The company's average net investment in leases increased
$51,700 (10%) and $50,500 (10%) in the third quarter and nine months ended March
31, 1999, as compared to the same periods in the prior year.

Pre-tax earnings from operations of $5,800 and $13,200 for the third quarter and
nine months ended March 31, 1999, increased $1,200 (26%) and $2,000 (18%),
respectively, as compared to the same periods in the prior year. Total revenue
increases noted above were supplemented by a decrease in total expenses of $100
(1%) for the third quarter and partially offset by an increase in total expenses
of $1,500 (4%) for the nine-month period ended March 31, 1999, as compared to
the same period in the prior year. These increases in total expenses were
substantially due to increased payroll costs which were partly offset by lower
professional services, as some information technology services are being
provided internally rather than being outsourced, and by higher levels of
deferred initial costs associated with the new lease volume.

Insurance
- ---------
Insurance net revenues of $6,500 and $21,100 for the three and nine months ended
March 31, 1999, decreased $200 (2%) and increased $600 (3%), respectively, as
compared to the same periods in the prior year. Net earned premiums of Agway
Insurance Company in the third quarter decreased $200 as compared to the same
period during last year, while for the nine-month period, net earned premiums
increased by $500 as compared to the same period in the prior year.

The operating results were unchanged for the three months and an operating loss
of $100 for the nine months ended March 31, 1999. This represents an increase in
earnings of $100 (135%) for the three months and a decrease in earnings of $200
(340%) for the nine months ended March 31, 1999, as compared to the same periods
in the prior year. Claims losses during the third quarter were unchanged as
compared to the same period last year, but increased $500 in the nine months as
compared to the prior year due to the effects of a windstorm in Upstate New
York. Operating expenses decreased $200 in the third quarter and increased $100
for the nine months as compared to the prior year due to fluctuations in direct
commissions and increases in data processing costs.

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)

LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash generated from 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. The following is a summary of net cash flows for the nine months ended
March 31:
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Net cash flows provided by (used in):
Operating activities............................................................ $ 46,664 $ 27,370
Investing activities............................................................. (41,394) (55,820)
Financing activities............................................................. (5,270) 28,450
------------- ------------
Net increase (decrease) in cash and equivalents.................................... $ 0 $ 0
============= ============
</TABLE>

Cash Flows Provided By Operating Activities
For the nine months ended March 31, 1999, net earnings decreased $28,400 as
compared to the same period in the prior year and changes in working capital
generated cash of $63,600 compared to generating cash of $20,800 for the same
period in the prior year. The biggest contributors to the change in working
capital were from a larger decline in receivables and a smaller increase in
inventories during this year (cash provided) as compared to last year due
principally to the lower prices of feed and petroleum products in the current
market environment.

Cash Flows Used In Investing Activities
The cash flows required for investing activities decreased in the first nine
months of 1999 by $14,400 as compared to the first nine months of the prior
year. The principal reason for the decrease in cash used during the first nine
months of 1999 as compared to the prior year was from the receipt of proceeds of
$14,200 on the sale of a seed business in the Agriculture segment, which amount
was partially offset by a $4,500 increase in cash paid for the acquisition of
businesses for the first nine months of 1999 as compared to the prior year.

Cash Flows Provided By (Used In) Financing Activities
Financing activities for the nine months ended March 31, 1999, resulted in a net
cash use of $5,300 compared to cash provided by financing activities of $28,500
for the same period in the prior year. This $33,800 reduction in cash provided
from financing was substantially due to a higher net repayment of long-term debt
of $34,500 in the first nine months of 1999 as compared to the same period in
the prior year. The increased level of cash generated from the sale of
businesses as compared to the same period in the prior year and the large
decline in working capital requirements in Company operations as compared to the
same period in the prior year were the biggest reasons for this decline in
borrowings.

The Company finances its operations and the operations of all its continuing
business 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. Telmark and Insurance finance themselves
through operations or with a combination of short- and long-term credit
facilities.

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)

LIQUIDITY AND CAPITAL RESOURCES (continued)
- -------------------------------------------
Sources of longer-term financing include the following as of March 31, 1999:
<TABLE>
<CAPTION>
AFC
Agway (excluding
Source of debt Inc. Telmark) Telmark Total
- -------------- -------- --------- --------- ---------
<S> <C> <C> <C> <C>
Banks - due 5/99 to 8/01, interest at a weighted average
rate of 6.9% with a range of 5.6% - 8.6%.................. $ 0 $ 1,400 $ 108,000 $ 109,400
Insurance companies - due 4/99 to 5/04, interest at a
weighted average rate of 7.1% with a range of
6.5% - 8.9%............................................... 0 0 171,810 171,810
Capital leases and other - due 1999 to 2008, interest at a
weighted average rate of 9.3% with a range of 6% to 12% 14,502 5,418 0 19,920
-------- --------- --------- ---------
Long-term debt.......................................... 14,502 6,818 279,810 301,130
Subordinated money market certificates -
due 10/99 to 10/13, interest at a weighted average rate of
8.0% with a range of 4.5% - 9.5%........................... 0 431,320 0 431,320
Subordinated debentures - due 7/99 to 7/03, interest at a
weighted average rate of 8.1% with a range of 6.5%
to 8.5%................................................... 0 19,827 37,125 56,952
-------- --------- --------- ---------
Total debt.............................................. $ 14,502 $ 457,965 $ 316,935 $ 789,402
======== ========= ========= =========
</TABLE>

For a further description of the Company's credit facilities available at March
31, 1999, see Footnote 3 to the condensed consolidated financial statements.

OTHER MATTERS
- -------------
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 critical systems
have been inventoried. Those systems determined to be at risk are prioritized,
and plans are in place to upgrade systems by remediation, replacements,
outsourcing, or doing without these systems. Through March 1999, the assessment
and planning phases, as well as large portions of the implementation, have been
completed. The remaining portions of these plans are in process of
implementation, with a completion for specific systems scheduled throughout this
fiscal year in a manner that coordinates implementation around the busy
operational seasons for the respective business units and targets completion in
September 1999. Testing of systems is being conducted for each system as
implemented. The interaction of updated systems will be tested in an
enterprise-wide testing environment. Creation of a year 2000 enterprise-wide
test environment has been completed, and system testing within that environment
commenced in March 1999.

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)

OTHER MATTERS (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." Year 2000 readiness responsibility has been assigned
to high-level management within each business segment and for the Company as a
whole. This includes periodic reports to the Board of Directors regarding the
implementation timetable and the development of contingency plans. The Company
has been developing business continuity plans since October of 1998 and expects
to complete them by June 1999.

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. Our research to date gives us increased confidence in many
of these infrastructure components but also persuades us that absolute certainty
regarding their performance will not likely be possible prior to passing into
the year 2000. 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 has identified
elements of the infrastructure that are of greater significance to its
operations, is obtaining information on an ongoing basis as to their expected
year 2000 readiness, and will determine 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 $18,400,
of which $14,900 has been incurred and $3,500 is expected to be incurred from
March 1999 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 $4,200, of
which $600 has been incurred and $3,600 is expected to be incurred from March
1999 through December 1999. 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.

The year 2000 statements set forth above are designated as "Year 2000 Readiness
Disclosures" pursuant to the Year 2000 Information and Readiness Disclosure Act
(P.L. 105-271).

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Unaudited)
(Thousands of Dollars)

OTHER MATTERS (continued)
- ------------------------
Subsequent Event
On April 8, 1999, the Company announced that it is combining its agricultural
products and retail services businesses to better leverage the Company's talent
in serving the needs of existing and new customers. As a result, the retail
store system will be managed through the Company's six geographically based
agricultural enterprises. Additionally, as a result of this unification, the
recent conversion of the historical Agway representative retail store system to
a new franchisee and wholesale dealer relationship will be modified. Management
anticipates the adverse trend in earnings in Retail will continue through the
fourth quarter of this year. The cost savings anticipated in the current year
from this unification will be partly or fully offset by one-time costs to
implement this change.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
- ------------------------------------------------------------
See Footnote 1 to the condensed consolidated financial statements.

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Unaudited)
(Thousands of Dollars)

COMMODITY PRICE EXPOSURE
- ------------------------
In its normal course of operations, Agway has exposure to market risk from price
fluctuations associated with commodity inventories, product gross margins, and
anticipated transactions in its Agriculture and Energy businesses. To manage the
risk of market price fluctuations, Agway uses commodity derivative instruments,
including exchange-traded futures and option contracts and, in limited
circumstances, over-the-counter contracts with third parties (commodity
instruments). Agway has policies with respect to the use of these commodity
instruments that specify what they are to be used for and set limits on the
maturity of contracts entered into and the level of exposure to be hedged.

In the Energy segment, exchange-traded commodity instruments and, in certain
circumstances, over-the-counter contracts with third parties are used
principally for gasoline, distillate, and propane. They are entered into as a
hedge against the price risk associated with Energy's inventories or future
purchases and sales of the commodities used in its operations. Generally, the
price risk extends for a period of one year or less. A sensitivity analysis has
been prepared to estimate Energy's exposure to market risk of its
exchange-traded and over-the-counter commodity instrument position as of March
31, 1999 and June 30, 1998. The fair value of such position is a summation of
the fair values calculated for each commodity instrument by valuing each
position at quoted futures prices or, in the case of options, a delta-adjusted
calculated price. The market risk of the commodity position is estimated as the
potential loss in fair value resulting from a hypothetical 10% change in market
prices of the underlying commodities. This estimated loss in fair value does not
reflect the offsetting impact of market price changes to the underlying
commodities that the commodity instruments are hedging. As of March 31, 1999
and June 30,1998, assuming a 10% hypothetical change in the underlying commodity
price, the potential change in fair value of Energy's commodity instruments was
$700 and $500, respectively.

In the Agriculture segment's feed business, exchange-traded commodity
instruments are used principally to hedge corn, soy complex, and oats,
which can be sold directly as ingredients or included in feed products. Since
November 1997, all transactions involving derivative financial instruments in
the feed business are required to have a direct relationship to the price risk
associated with existing inventories or future purchase or sale of its products.
A sensitivity analysis has been prepared to estimate Agriculture's feed business
exposure to market risk of its exchange-traded instrument position as of March
31, 1999 and June 30, 1998. The fair value of such position is a summation
of the fair values calculated for each commodity instrument by valuing each
position at quoted futures prices or, in the case of options, a delta-adjusted
calculated price. The market risk of the commodity position is estimated as
the potential loss in fair value resulting from a hypothetical 10% change in
market prices of the underlying commodities. This estimated loss in fair value
does not reflect the offsetting impact of market price changes to the
underlying commodities that the commodity instruments are hedging. As of March
31, 1999, assuming a 10% hypothetical change in the underlying commodity
price, the potential change in fair value of Agriculture's feed business
commodity instruments was $100. As of June 30, 1998, assuming a 10% hypothetical
change in the underlying commodity price, the potential change in fair value
of Agriculture's feed business commodity instruments was not material.

In the Agriculture segment's grain marketing business, exchange-traded commodity
instruments are used to hedge inventory and forward purchase and sales contracts
for grains, principally corn, soy complex, oats, and wheat, which are purchased
and sold by the grain marketing department (the department). The department
historically entered into both forward purchase contracts and forward sales
contracts (forward contracts) with farmers and others on a variety of grain
products. Agway's policy requires that the department enter into generally
matched transactions (in both maturity and amount) using offsetting forward
contracts or commodity instruments to hedge against price fluctuations in the
market price of grains. Agway records the grain marketing program on a
mark-to-market basis by adjusting all outstanding forward contracts, commodity
instruments, and inventory values to market value.

<PAGE>

PART I. FINANCIAL INFORMATION (continued)
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Unaudited)
(Thousands of Dollars)

COMMODITY PRICE EXPOSURE (continued)
- ------------------------------------
A sensitivity analysis has been prepared to estimate the department's exposure
to market risk of its exchange-traded commodity instrument position as of March
31, 1999 and June 30, 1998. The fair value of such position is a summation
of the fair values calculated for each commodity instrument by valuing each
position at quoted futures prices or, in the case of options, a delta-adjusted
calculated price. The market risk of the commodity position is estimated
as the potential loss in fair value resulting from a hypothetical 10% change
in market prices of the underlying commodities. As noted above, grain marketing
historically enters into generally matched transactions to hedge against price
fluctuations. However, as previously discussed, during the fourth quarter
of 1998 and throughout 1999, unauthorized speculative positions were taken
so that the commodity instrument activity of the department was not effectively
hedging the underlying commodities and forward contracts. As of March 31,
1999 and June 30, 1998, assuming a 10% hypothetical change in the underlying
commodity price, the potential change in fair value of the department's
commodity instruments was $3,600 and $700, respectively.

<PAGE>

PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)

Item 1. 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. 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. In addition, the Company and MTS
have offered to cooperate with the other PRPs in performing a Remedial
Design/Remedial Action (RD/RA) for the site in accordance with the Record of
Decision (ROD) issued by the EPA and a proposed Consent Decree has been lodged
before the Court. 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 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. Pursuant to the remedy implementation plan, Agway
completed activities associated with the installation of an impermeable
vegetated surface cover system in October 1998, will continue a ground water
monitoring program and has implemented an activity and use limitation. In
addition, Agway is attempting to negotiate a resolution of MDEP's claim for past
response/oversight costs and interest related to the site. 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.

<PAGE>

PART II. OTHER INFORMATION
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
(Thousands of Dollars)

Item 1. Legal Proceedings (continued)
- -------------------------------------
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. APC and other PRPs have
negotiated a partial Consent Decree with the EPA which will require APC to
reimburse the EPA a proportionate share of the cleanup costs. 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 cleanup liability, the
Company will determine on a site-by-site basis whether such a contribution claim
is warranted.

Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
There were no reports on Form 8-K required to be filed during the three months
ended March 31, 1999.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

AGWAY INC.
---------------------------------------
(Registrant)

Date September 10, 1999 /s/ PETER J. O'NEILL
-------------------------- ------------------------------------
Peter J. O'Neill
Senior Vice President,
Finance & Control,
(Principal Financial Officer and
Chief Accounting Officer)

<ARTICLE> 5

<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 36,880
<RECEIVABLES> 140,622
<ALLOWANCES> 7,807
<INVENTORY> 213,110
<CURRENT-ASSETS> 538,845
<PP&E> 528,345
<DEPRECIATION> 314,065
<TOTAL-ASSETS> 1,440,000
<CURRENT-LIABILITIES> 538,386
<BONDS> 608,003
0
43,047
<COMMON> 2,520
<OTHER-SE> 143,619
<TOTAL-LIABILITY-AND-EQUITY> 1,440,000
<SALES> 904,606
<TOTAL-REVENUES> 977,439
<CGS> 840,344
<TOTAL-COSTS> 874,047
<OTHER-EXPENSES> 111,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,892
<INCOME-PRETAX> (12,406)
<INCOME-TAX> (2,028)
<INCOME-CONTINUING> (10,378)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,378)
<EPS-BASIC> 0
<EPS-DILUTED> 0

</TABLE>