- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- -----
ACT OF 1934 For the fiscal year ended June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -----
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 2-22791
AGWAY INC.
(Exact name of registrant as specified in its charter)
Delaware 15-0277720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: 315-449-6436
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X
--- ---
Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant as of September 10, 1999.
Membership Common Stock, $25 Par Value - $2,493,200
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 September 10, 1999
------- ---------------------------------
Membership Common Stock, $25 Par Value 99,728 Shares
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
FORM 10-K/A ANNUAL REPORT - 1998
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Page
PART II
<S> <C> <C>
Item 6. Selected Financial Data....................................................................... 3
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 4
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.................................... 18
Item 8. Financial Statements and Supplementary Data................................................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 54
Signatures.................................................................................... 64
</TABLE>
2
<PAGE>
PART II
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/A, 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
-----------------------------------------------------------------------------------
Restated
1998 1997 1996 1995 1994
------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales and revenues (2)..... $ 1,562,943 $ 1,671,714 $ 1,663,085 $ 1,592,857 $ 1,695,129
Margin (loss) from
continuing operations(1)(3). $ 12,189 $ 10,670 $ 11,147 $ (7,800) $ 555
Net margin(loss)(1)(3)(4)(5)... $ 41,145 $ 10,670 $ 12,662 $ (15,730) $ (3,445)
Total assets (1)(2)............ $ 1,417,294 $ 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) The 1998 data is restated to correct information regarding Agriculture's
grain marketing activities as previously reported. As a result of recently
disclosed losses in connection with these activities, margins from
continuing operations, net margins, and total assets as currently reported
for 1998 are lower than originally reported by $600, $600 and $900,
respectively. See Management's Discussion and Analysis on pages 4 and 6 and
Note 20 to the financial statements.
(2) Certain amounts reported in fiscal years ended June 30, 1994-1997, have been
reclassified to conform to the current year presentation.
(3) 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.
(4) 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 H.P. Hood Inc. (Hood) and an after-tax
gain on the sale of Curtice Burns Foods, Inc. 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.
(5) 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.
3
<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
On July 8, 1999, Agway announced that it had become aware of accounting
irregularities in its grain marketing department and that Agway had initiated an
investigation. It has been determined that unauthorized speculative positions in
commodity instruments were taken within the department in violation of express
policies, which resulted in losses to Agway. After-tax losses of $600 related to
grain marketing in 1998 were concealed within the department through improper
accounting for premiums on options sold. To reflect these losses and their
effect on the Company, the following Management Discussion and Analysis has been
restated.
The Company's restated net margin of $41,100 for 1998 is a $30,400 (284%)
increase from a net margin of $10,700 in 1997. (See Agriculture Management
Discussion and Analysis for details of events requiring restatement.) The
$30,400 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 $1,500 (14%) increase from continuing operations as compared
to 1997. The continuing operations margin increase represents a $7,700 pre-tax
increase from 1997 offset by a $6,200 increase in tax expense as compared to
1997.
The net business unit restated pre-tax operating results decreased by $7,300 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 restated 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 restated operating costs and expenses of $1,521,200 decreased
$121,700 (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.
4
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
CONSOLIDATED RESULTS (CONTINUED)
Income tax expense of $12,100 as restated for 1998 and $5,900 in 1997,
respectively, resulted in effective tax rates of 49.8% 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.
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 restated operating margin of $6,700 increased $3,500
as compared to $3,200 in 1997. AAP operating margin decreased $300 (16%) and CPG
increased $3,700 (71%) in 1998 compared to 1997.
AAP's restated operating loss of $2,300 in 1998 represents an increased loss of
$300 (15%) from an operating loss of $2,000 in 1997. The increased loss as
compared to the prior year resulted partly from increased losses of $1,100 in
the grain marketing department. Improved operating margins in all other Direct
Marketing operations of $8,100 resulted due to lower unfavorable experience with
exchange-traded futures ($5,600) in the feed business 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.
5
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
AGRICULTURE (CONTINUED)
On June 28, 1999, it was disclosed to Agway's management by personnel within
Agriculture's grain marketing department (the department) that records within
the department had been falsified to conceal losses from unauthorized activity.
An investigation, under guidance from external legal counsel and including
internal legal counsel, internal financial staff, external auditors, and private
investigators, has been conducted. 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 fiscal 1999. To reflect these losses and their effect on the
Company, this report is an amendment to the previously filed annual report on
Form 10-K for the year ended June 30, 1998. To assure adherence to policies on
use of commodity instruments, Agway has since reorganized the operating,
control, and reporting structures of the department, reassigned management
responsibility, and reduced the scope of its business activity.
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.
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.
6
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Thousands of Dollars)
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 $1,700 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.
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.
7
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Thousands of Dollars)
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.
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.
8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
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.
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.
9
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Thousands of Dollars)
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.
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.
10
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Thousands of Dollars)
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 ($9,900) to a lesser demand for cash to fund working capital and
in part ($9,700) 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.
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.
11
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Thousands of Dollars)
Cash Flows From Investing(continued)
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.
12
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(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.
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(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.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(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.
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(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.
16
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(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).)
17
<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> <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.
18
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
(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
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 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 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 $500.
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 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 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.
19
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(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 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 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 $700.
20
<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............................................................ 22
Report of Independent Accountants...................................................................... 23
Consolidated Balance Sheets, June 30, 1998 and 1997.................................................... 24
Consolidated Statements of Operations, fiscal years ended June 30, 1998, 1997 and 1996................. 25
Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended June 30,
1998, 1997 and 1996............................................................................... 26
Consolidated Statements of Cash Flow, fiscal years ended June 30, 1998, 1997 and 1996.................. 27
Notes to Consolidated Financial Statements............................................................. 28
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
This item is inapplicable.
21
<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.
As discussed in Management's Discussion and Analysis and in the Notes to the
Consolidated Financial Statements, on June 28, 1999, Agway discovered it had
incurred losses from unauthorized speculative activities in commodity
instruments, which were concealed within Agway's grain marketing department. As
a result, the previously reported financial information as of June 1998 and for
the quarters ended September 1998, December 1998, and March 1999 did not take
into account such losses. We have amended reports filed with the SEC for these
periods, and the restated financial information has been included in this
report. An investigation, under guidance from external legal counsel and
including internal legal counsel, internal financial staff, external auditors,
and private investigators, has been conducted. Individuals identified as
involved in the unauthorized speculative activity or concealment have been
terminated from employment. The responsibilities of the department have been
reassigned, the operating, control, and reporting structures have been
reorganized, and the scope of its business activity has been reduced. The
results of the investigation of the grain marketing activities were reported to
the entire Board of Directors.
AGWAY INC.
/s/ DONALD P.CARDARELLI
By DONALD P. CARDARELLI
President and CEO
September 2, 1999
/s/ PETER J. O'NEILL
By PETER J. O'NEILL
Senior Vice President
Finance & Control
September 2, 1999
22
<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.
The previously issued 1998 financial statements have been restated to correct
for the accounting effect of the irregularities as described in Note 20.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Syracuse, New York
August 21, 1998, except as to
Note 20, as to which the date
is September 2, 1999
23
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1997
(Thousands of Dollars)
<TABLE>
<CAPTION>
ASSETS
Restated
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............................................. 25,480 29,922
Inventories................................................................ 149,214 150,640
Prepaid expenses and other assets.......................................... 52,774 52,714
------------- --------------
Total current assets................................................... 568,598 567,696
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........................................................... $ 1,417,294 $ 1,300,261
============= ==============
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Restated
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.................................................. 114,311 113,927
------------- -------------
Total current liabilities.............................................. 468,721 462,913
Long-term debt.................................................................. 255,356 215,975
Subordinated debt............................................................... 386,607 375,128
Other liabilities............................................................... 100,381 68,494
------------- -------------
Total liabilities...................................................... 1,211,065 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............................................................ 155,787 117,571
------------- -------------
Total shareholders' equity............................................. 206,229 177,751
Total liabilities and shareholders' equity........................ $ 1,417,294 $ 1,300,261
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
24
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS of OPERATIONS
fiscal years ended June 30, 1998, 1997 and 1996
(Thousands of Dollars)
<TABLE>
<CAPTION>
Restated
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.......................... 1,346,276 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................. 1,521,213 1,642,924 1,627,352
------------- ------------ -------------
Operating margin............................................ 41,730 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....... 24,266 16,583 21,070
Income tax expense.......................................... (12,077) (5,913) (9,923)
------------- ------------ -------------
Margin from continuing operations........................... 12,189 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..... 12,189 10,670 12,662
------------- ------------ -------------
Cumulative effect of accounting change, net of tax expense
of $16,500............................................. 28,956 0 0
------------- ------------ -------------
Net margin.................................................. $ 41,145 $ 10,670 $ 12,662
============= ============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
25
<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, as restated.............. 41,145 41,145
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 $ 155,787 $ 206,229
======= ========= ========= ========= ========= ==========
</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.
26
<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>
Restated
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net margin .............................................. $ 41,145 $ 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.......................... 25,768 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...................................... 7,962 (210) (14,982)
Inventory........................................ 2,042 6,048 (12,527)
Payables......................................... 814 (3,278) (21,802)
Other............................................ (9,493) (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.
27
<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.
28
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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. Other assets are reviewed
for impairment as described under Impairment of Long-Lived Assets below.
29
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
30
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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>
31
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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>
32
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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>
33
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
34
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
9. Income Taxes
The provision (benefit) for income taxes as of June 30 consists of the
following:
<TABLE>
<CAPTION>
Restated
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Continuing operations:
Current:
Federal............................................ $ (1,131) $ (2,226) $ (3,736)
State.............................................. 3,940 3,344 2,253
Deferred............................................... 9,268 5,676 11,372
(Decrease) increase in valuation allowance............. 0 (881) 34
------------ ------------ -------------
$ 12,077 $ 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>
Restated
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)......... 14.1 14.0 7.4
Items for which no federal tax effect was recognized... 2.6 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.......................... 49.8% 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.
35
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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>
Restated
1998 1997
------------ -------------
<S> <C> <C>
Deferred tax assets:
Other liabilities and reserves............................................. $ 14,849 $ 13,246
Medical reserves........................................................... 9,477 7,682
NOL carryforward........................................................... 8,771 3,673
Self-insurance reserves.................................................... 7,190 6,280
Alternative minimum tax credit carryforward................................ 6,960 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........................................................... 2,072 1,959
------------ -------------
Total net deferred tax asset........................................... 67,350 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................................ $ (21,234) $ 4,534
============ =============
</TABLE>
The Company's net deferred tax (liability) asset at June 30, 1998 and 1997, of
$(21,234) as restated 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 $44,927 as restated 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.
36
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
37
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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>
38
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
39
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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>
40
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
41
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
42
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
43
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
44
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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>
45
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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
----------------------------------------------------
Restated
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Margin from continuing operations:
As reported........................................... $ 12,189 $ 10,670 $ 11,147
Pro forma............................................. $ 12,189 $ 18,410 $ 15,625
Net margin:
As reported........................................... $ 41,145 $ 10,670 $ 12,662
Pro forma............................................. $ 12,189 $ 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>
46
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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%.
47
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
48
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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,
as restated........... $ 6,675 $ (2,745) $ 15,151 $ 15,412 $ (263) $ 20,861 $ 55,091
Interest expense, net of
interest income....... (30,825)
------------
Margin from continuing
operations before
income taxes, as
restated $ 24,266
============
Identifiable assets,
as restated............ $ 363,961 $ 98,741 $ 141,894 $ 516,735 $ 55,939 $ 240,024 $ 1,417,294
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.
49
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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>
50
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 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 Agway's over-the-counter
contracts is determined based on 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 Agway's basis in those contracts. As of June 30, 1998 and
1997, the carrying and fair value of Agway's investment in commodities futures
and option contracts was $2,200 and $3,200, respectively.
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.
51
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
18. Financial and Commodity Instruments (continued)
Commodity Instruments (continued)
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 are required
to have a direct relationship to the price risk associated with existing
inventories or future purchase or sale of its products.
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 (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.
52
<PAGE>
AGWAY INC. and CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Thousands of Dollars)
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).
20. SUBSEQUENT EVENT
On July 8, 1999, Agway announced that it had become aware of accounting
irregularities in its grain marketing department (the 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 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. Agway has amended its previously filed annual report on Form 10-K for
the year ended June 30, 1998, 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 total restated pre-tax loss from department activities is $1,100 for the
year ended June 30, 1998. This compares to a pre-tax loss of $300 in 1997.
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.
The net effect of these irregularities on 1999 is discussed in the amended
periodic reports on Form 10-Q for that year.
53
<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 20:
(i) Report of Independent Accountants.......................................................... 23
(ii) Consolidated Balance Sheets, June 30, 1998 and 1997........................................ 24
(iii) Consolidated Statements of Operations, fiscal years ended
June 30, 1998, 1997 and 1996............................................................... 25
(iv) Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended
June 30, 1998, 1997 and 1996............................................................... 26
(v) Consolidated Statements of Cash Flow, fiscal years ended June 30, 1998, 1997 and 1996...... 27
(vi) Notes to Consolidated Financial Statements................................................. 28
(2) Financial Statement Schedules
(i) Report of Independent Accountants.......................................................... 55
(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....................... 56
Schedule II - Valuation and Qualifying Accounts, fiscal years ended
June 30, 1998, 1997 and 1996........................................ 60
</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.
54
<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.
The previously issued 1998 Schedule I - Condensed Financial Information of
Registrant has been restated to correct for the accounting effect of the
irregularities as described in Note 20 of the Agway Inc. and Consolidated
Subsidiaries Notes to the Consolidated Financial Statements.
/s/ PRICEWATERHOUSE LLP
PricewaterhouseCoopers LLP
Syracuse, New York
August 21, 1998, except to
Note 1, as to which the date
is September 2, 1999
55
<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>
Restated
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....................................................... 57,541 53,231
------------ -------------
Total current assets................................................... 196,888 195,565
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........................................................... $ 618,952 $ 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.................................................. 121,229 119,970
------------ --------------
Total current liabilities.............................................. 343,840 330,440
Other liabilities............................................................... 68,883 42,022
Shareholders' equity............................................................ 206,229 177,751
------------ --------------
Total liabilities and shareholders' equity............................. $ 618,952 $ 550,213
============ ==============
</TABLE>
56
<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 STATEMENTS of OPERATIONS and RETAINED MARGIN
fiscal years ended JUNE 30, 1998, 1997 and 1996
(Thousands of Dollars)
<TABLE>
<CAPTION>
Restated
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.......................... 471,563 487,534 552,304
Selling, general and administrative activities......... 48,938 49,611 49,512
Restructuring credit................................... 0 0 (1,301)
------------ ----------- ------------
Total operating costs and expenses................. 520,501 537,145 600,515
------------ ----------- ------------
Operating income (loss)..................................... (6,836) (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 ................ 18,882 3,535 24,106
Income tax benefit (expense)................................ 6,891 7,904 (2,185)
------------ ----------- ------------
Income (loss) before equity in earnings of subsidiaries..... 25,773 11,439 21,921
Equity in (loss) earnings of unconsolidated subsidiaries.... (13,584) (769) (10,774)
------------ ----------- ------------
Margin from continuing operations........................... 12,189 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 .... 12,189 10,670 12,662
Cumulative effect of accounting change, net of tax
expense of $16,500..................................... 28,956 0 0
------------ ----------- ------------
Net margin.................................................. 41,145 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............................... $ 155,787 $ 117,571 $ 110,714
============ =========== ============
</TABLE>
57
<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 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>
58
<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)
NOTES TO CONDENSED FINANCIAL INFORMATION
(Thousands of Dollars)
1. 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.
The 1998 results have been restated to correct for the accounting effect of the
irregularities as described in Note 20 of the Notes to the Agway Inc.
Consolidated Financial Statements.
2. Reclassifications
Certain reclassifications have been made to conform prior year financial
statements with the current year presentation.
3. 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>
4. 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.
5. 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>
59
<PAGE>
Item 14(a)(2). Financial Statement Schedules
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.
60
<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.
61
<PAGE>
Item 14(c)(1). Exhibits Required by Securities and Exchange Commission
Regulation S-K
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.
62
<PAGE>
Item 14(c)(1). Exhibits Required by Securities and Exchange Commission
Regulation S-K
(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.
63
<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/ DONALD P. CARDARELLI
--------------------------------------
Donald P. Cardarelli
President and
Chief Executive Officer
(Principal Executive Officer)
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)
64
<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> 7,926
<INVENTORY> 149,214
<CURRENT-ASSETS> 568,598
<PP&E> 515,900
<DEPRECIATION> 302,105
<TOTAL-ASSETS> 1,417,294
<CURRENT-LIABILITIES> 468,721
<BONDS> 641,963
0
47,871
<COMMON> 2,571
<OTHER-SE> 155,787
<TOTAL-LIABILITY-AND-EQUITY> 1,417,294
<SALES> 1,470,132
<TOTAL-REVENUES> 1,562,943
<CGS> 1,346,276
<TOTAL-COSTS> 1,389,800
<OTHER-EXPENSES> 131,413
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,825
<INCOME-PRETAX> 24,266
<INCOME-TAX> 12,077
<INCOME-CONTINUING> 12,189
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 28,956
<NET-INCOME> 41,145
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
