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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
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ACT OF 1934
For the fiscal year ended June 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 2-22791
AGWAY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 15-0277720
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
333 BUTTERNUT DRIVE, DEWITT, NEW YORK 13214
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 315-449-6436
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
X
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Yes No
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN ANY DEFINITIVE PROXY ORINFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. X
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STATE THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON
EQUITY HELD BY NON-AFFILIATES OF THE REGISTRANT AS OF 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
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<PAGE>
FORM 10-K ANNUAL REPORT - 1999
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CROSS REFERENCE SHEET
<TABLE>
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Page
PART I
<S> <C> <C>
Items 1 & 2 Business and Properties
General............................................................................... 3
Agriculture........................................................................... 4
Country Products Group................................................................ 6
Energy................................................................................ 8
Leasing............................................................................... 8
Insurance............................................................................. 9
Human Resources....................................................................... 9
Administrative........................................................................ 9
Regulation............................................................................ 9
Stockholder Membership and Control of Agway........................................... 10
Retained Earnings..................................................................... 11
Patronage Refunds..................................................................... 11
Item 3. Legal Proceedings......................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders....................................... 13
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................. 13
Item 6. Selected Financial Data................................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 14
Item 7a. Quantitative and Qualitative Disclosures about Market Risk................................ 31
Item 8. Financial Statements and Supplementary Data............................................... 34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 34
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 68
Item 11. Executive Compensation.................................................................... 71
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 74
Item 13. Certain Relationships and Related Transactions............................................ 74
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 75
Signatures................................................................................ 85
</TABLE>
2
<PAGE>
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
(THOUSANDS OF DOLLARS)
GENERAL
Agway Inc. was incorporated under the Delaware General Corporation Law in 1964
and is headquartered in DeWitt, New York. Agway is an agricultural cooperative
directly engaged in manufacturing, processing, distribution and marketing of
agricultural feed and agronomic products and services for its farmer-members and
other customers, primarily in the northeastern United States and Ohio. In
addition, Agway is involved in retail and wholesale sales of farm supplies, yard
and garden products, pet food and pet supplies; repackaging and marketing
produce; and processing and marketing sunflower seeds. Agway, through certain of
its subsidiaries, is involved in the distribution of petroleum products; lease
financing; the underwriting and sale of certain types of property and casualty
insurance; and the sale of health insurance. In this Form 10-K, unless otherwise
indicated, the "Company," "Agway," "we," or "our" refer to Agway Inc. and its
subsidiaries.
Operating as a cooperative, Agway is eligible to pay patronage refunds to its
members and "contract patrons" from earnings on sales of patronage eligible
products and services. For income tax purposes, Agway is subject to corporate
income tax at applicable tax rates on all taxable income remaining after
deductions for patronage refunds, if paid.
Agway reports its operations principally in five business segments: Agriculture,
Country Products Group, Energy, Leasing, and Insurance. Agway modified its
segment reporting in 1999 by combining the former Retail segment with the
Agriculture segment in light of a consolidation of these two operations in April
1999, as explained further under Agriculture. Additionally, as required by new
accounting standards, the Country Products Group was broken into its own segment
in 1999 to align our disclosure with how our business is managed.
Agway, as one of the largest agricultural cooperatives in the United States,
deals in a wide variety of product lines and market segments. Many of its
high-volume products are sold in highly competitive markets where product
differentiation is difficult to achieve. Agway strives to distinguish itself
through superior customer service, product selection, and product knowledge.
Agway Financial Corporation (AFC), a wholly owned subsidiary of Agway, is a
Delaware corporation incorporated in 1986 with principal executive offices
located in Wilmington, Delaware. AFC's principal business activities consist of
securing financing through bank borrowings and issuance of corporate debt
instruments to provide funds for general corporate purposes to Agway and AFC's
wholly owned subsidiary, Agway Holdings Inc. (AHI), and AHI's subsidiaries. The
payment of principal and interest on this AFC debt is guaranteed by Agway. This
guarantee is full and unconditional, and joint and several. Telmark and
Insurance finance their activities through operations or with a combination
of short- and long-term credit facilities.
Major holdings of AHI include Agway Energy Products LLC and Agway Energy
Services Inc. (Energy), Telmark LLC and its subsidiaries (Leasing), and Agway
Insurance Company and Agway General Agency Inc. (Insurance). Effective June 26,
1999, Agway Consumer Products Inc., a Delaware corporation and former holding of
AHI, was merged into Agway Inc. Agway Consumer Products Inc. held the assets and
business operations of the former Retail segment and certain assets and business
operations of the Country Products Group and Agriculture. This merger into Agway
aligns the legal structure more closely with the management structure of Agway
and facilitates the ability to manage these assets and businesses prospectively.
In exemptive relief granted pursuant to a "no action letter" issued by the staff
of the SEC, AFC is not required to file periodic reports with the SEC for itself
but does report summarized financial information in Agway's financial statement
footnotes.
3
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
(THOUSANDS OF DOLLARS)
AGRICULTURE
Agriculture is comprised principally of six geographically-based enterprise
units. Each unit is responsible for management, operations, sales, billing, and
customer service within its geographic territory. In April 1999, Agway
consolidated the former Agway Retail Services into the Agway Agricultural
Products enterprise-based system, creating the new Agriculture and Retail Group
(Agriculture). The stores and franchisee dealer system previously managed
centrally and as a separate business activity is now integrated into and managed
by the enterprise units in their respective geographic territories. The
agricultural business is focused on animal feed, agronomic and farm services to
farmers in their specific geographic markets. The retail business is being
refocused as a distribution channel promoting Agway-branded products, augmented
by non-branded products that broaden and complement product offerings in three
primary categories: farm-related products, yard and garden products, and pet
food and pet supplies.
ANIMAL FEEDS: Agriculture operates 15 feed mills and 15 grind and mix
facilities, principally in New York, Pennsylvania, and Vermont. These operations
manufacture livestock and poultry feeds under Agway formula. Products are sold
primarily through an Agway sales force, which actively calls on farmer-customers
and responds to customer inquiries. In August 1998, Agriculture acquired a feed
manufacturer located in Vermont and combined one of its existing feed plants
into the operations. The acquisition significantly increased our market presence
in Vermont. We expect that production capacity of animal feeds will be
sufficient to meet market needs of the enterprise units. In addition, in 1999,
Agriculture constructed a farm in Elba, New York, which, on a contract basis for
farmers, custom raises heifers that test free of specific pathogens.
AGRONOMY: Agriculture operates 109 agronomic blending plants and storage
facilities. These operations manufacture, process, and procure crop-related
products to be sold as direct shipments to farmer-customers, farmer- dealers,
non-farmer customers, and wholesale accounts. The fertilizer operations in York
and East Berlin, Pennsylvania, manufacture yard and garden fertilizers sold to
dealers and distributors on the East Coast. At East Liverpool, Ohio, we have
fertilizer grading equipment through which we sell fertilizer to other
commercial customers. Agriculture sources substantially all of its fertilizer
needs through CF Industries, Inc., a cooperative of which Agway is a member
eligible for patronage refunds. Agriculture has a significant investment in CF
Industries.
Crop-related products sold primarily for farm use include plant nutrients, lime,
crop protectants, and various seed products. The agronomic operations are
seasonal in nature, with the majority of sales and demand on working capital
generated at the beginning of a growing season which in the Northeast is late
winter and spring. Agway believes that production capacity is currently
sufficient to meet the agronomic needs of Agway's market.
RETAIL: Agriculture conducts retail sales and distribution activities through
162 Agway-owned stores and 306 dealer stores located throughout the northeastern
United States. Agriculture has a long-term agreement with a third-party to
manage its distribution of products, which includes two distribution centers,
located in Elizabethtown, Pennsylvania, and Westfield, Massachusetts. The
emphasis of the retail business is on farm-related products, yard and garden
products, and pet food and pet supply products manufactured or branded by Agway.
The dealer stores are authorized to sell Agway products and, along with
Agway-owned stores, are located in areas where a retail market presence is
deemed desirable.
Agriculture additionally generates sales of animal health products directly to
farmers through a mail-order catalog service which complements the Agway retail
system. The farm-related and yard and garden products are seasonal, with the
majority of sales and demand on working capital generated in late winter and
spring.
4
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
(THOUSANDS OF DOLLARS)
AGRICULTURE (CONTINUED)
RETAIL (CONT.): In 1999, the former Agway Retail Services attempted to implement
a new franchise program in an attempt to gain a consistent representation of the
Agway brand throughout the entire retail store system. During this
implementation period, the retail business experienced a sharp decline in sales
to the dealer store network as a result of dealer dissatisfaction with this new
program and Agway suffered significant losses from operations. In April 1999,
the former Agway Retail Services was consolidated into Agriculture, where the
retail business is being refocused as a distribution channel promoting
Agway-branded products augmented by non-branded products that broaden and
complement its product offerings. Agriculture terminated the new franchise
program and has implemented a simplified dealer agreement which to date is
resulting in improved relations and increased sales to dealers. Additionally,
Agriculture's geographic enterprise units assumed the responsibility of managing
the retail operations, including the dealer relationships, and anticipate
expanding the wholesale-branded distribution channel by regaining sales and
growing dealer business with Agway. Finally, Agriculture will continue to review
and assess the financial condition of all retail operations and will modify
these operations, as deemed necessary, in order to improve the results of these
operations prospectively.
OTHER ACTIVITIES: In addition to the enterprise-managed business activities,
Agriculture has direct marketing operations involved in the processing, bulk
storage, and retail and wholesale sales of seeds and bulk storage and wholesale
sales of fertilizer products; and a grain marketing business that, until July
1999, consisted of a central grain marketing department (the department) and 11
elevators in New York, Pennsylvania, and New Jersey. Historically, the
department, on behalf of farmers and others, bought and sold grains, principally
corn, soy complex, oats, wheat, barley, and canola. In response to
irregularities discovered in the operation of the department, as further
described in Management's Discussion and Analysis (MD&A)(Item 7) and in Note 17
to the financial statements, in July 1999, management of the daily operations
of the elevators was decentralized and reassigned to the agricultural enterprise
units in the elevators' respective geographic areas; the duties of the
department were narrowed, reorganized, and assigned to new management; and the
business activity curtailed from an active solicitation of business, to meeting
the grain marketing needs of local farmers and meeting the need for local grain
by our own feed mills.
RESEARCH AND APPLIED TECHNOLOGY: Agway's membership in the Cooperative Research
Farms with other cooperatives continues to provide research on new products. In
addition, the six geographically-based enterprises each conduct research
pertinent to their market.
In 1999, Agriculture announced the creation of Agway Coordinated Dairy Systems
Company (CDS). CDS is responsible for coordinating Agway's involvement, from the
producer to the consumer, in the production of dairy food products. For example,
CDS will provide the technical knowledge to Agway's Agriculture enterprises for
custom raising heifers that test specific-pathogen-free (TSPF). In addition, CDS
will collaborate with LifeRight Foods, LLC, a Country Products Group joint
venture involved in the development of nutritionally enriched dairy food
products for retail markets.
During the years ended June 30, 1999, 1998 and 1997, net expenditures of $1,300,
$400 and $700, respectively, were made on agricultural research activities by
Agriculture.
COMPETITION: In the animal feed business, we are one of the largest in sales
volume in the northeastern United States. (Feed Management, Jan 1998)
Competition exists with large national and regional feed manufacturers as well
as with local independent mills. The market position held by Agway in the feed
business is significant, resulting from performance, quality of its products,
research, an established manufacturing and distribution system, and a
knowledgeable work force.
5
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
(THOUSANDS OF DOLLARS)
AGRICULTURE (CONTINUED)
COMPETITION (CONT.): In the agronomic business, our plant nutrient, seed, crop
protectant, and lime products compete in the commercial farm market. Although
there are substantial regional variations in market share, our competitive
position is strong in the commercial farm market. Competition varies
significantly by product line and consists of independent dealers and several
nationally integrated corporations. We compete on the basis of technical
expertise and field application services, product performance, crop management
practices developed by Agway, and expert assistance to the farmer in making crop
management decisions.
In the retail business, competition varies by product line and location and our
competitors consist of larger yard and garden chains, smaller yard and garden
nurseries, building material stores, home center stores, large discounters, and
specialty pet stores. Wholesale competition to dealer stores also varies by
product line and consists of national, regional and local wholesalers;
independent distributors; and pet food manufacturers. The retail business
competes on the basis of product quality, product knowledge, expertise, and
customer service.
COUNTRY PRODUCTS GROUP
In 1999, Agway's Country Products Group (CPG) reorganized its business
operations into three divisions - The Produce Group, The Business Group, and The
Investment Group. Agway believes that all operations have sufficient capacity to
meet their operating requirements. During 1999, CPG divested of the forage seed
operation located in Nampa, Idaho and Powell, Wyoming.
THE PRODUCE GROUP: The Produce Group (generally marketed under the name Country
Best) operates a network of sixteen offices/facilities. Facilities in DeWitt,
Elba, Sterling and Chittenango, NY; Winder, Georgia; and Plant City, Florida
specialize in sizing and packing potatoes, onions and corn into consumer
packages for sale to grocery store and food service outlets. A second facility
in Plant City, Florida specializes in handling and selling fresh strawberries
and other vegetables primarily from Florida. There are three farmers' market
locations (Forest Park, Georgia; and Tampa and Plant City, Florida) which sell a
wide variety of produce to food service distributors and grocery store outlets.
Produce brokerage locations operate out of Calverton, New York; Vero Beach and
Pompano, Florida; and Idaho Falls, Idaho; and market a wide variety of produce
across the United States. Truck brokerage offices are located in Forest Park,
Georgia and Presque Isle, Maine; and a seed and tablestock potato marketing
office is also located in Presque Isle, Maine.
THE BUSINESS GROUP: The Business Group consists of a wide variety of operations
involved in commodity processing and repack operations, and manufacturing of
bags and pet and animal feeds. The commodity processing and repack operations
purchase certain commodities produced by Agway farmer-members and other farmers
and conduct processing and repacking operations as well as marketing, sales, and
distribution of the end products. Principal commodities processed, sold, and
distributed include edible dry beans, human edible sunflower seed, bird food,
and flour. Edible dry bean processing plants are located at Caledonia and
Geneva, New York. Sunflower processing and storage facilities, located at
Grandin, North Dakota, produce and market human edible sunflower seed, hulled
millet, wild bird food, and related products. A major expansion of the sunflower
facility was put into service during 1999. A pastry flour mill is located in
Churchville, New York.
A multi-walled bag printing and manufacturing plant, located in Wapakoneta,
Ohio, supplies bags used by internal Agway operations and external customers,
including Pro-Pet, LLC, a pet food manufacturer, and Buckeye Feeds, a large
animal feed company, in which Agway has minority interests.
6
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
(THOUSANDS OF DOLLARS)
COUNTRY PRODUCTS GROUP (CONTINUED)
THE INVESTMENT GROUP: The Investment Group consists of several businesses
involved in new technologies to benefit agricultural and food businesses.
CPG Technologies International Inc., headquartered in Blue Bell, Pennsylvania,
invests in food technologies such as the preservation of fruits and vegetables.
LifeRight Foods, LLC, headquartered in Philadelphia, Pennsylvania, is a joint
venture owned 45% by CPG. The balance is owned 45% and 10% by two independent
entities. The purpose of LifeRight Foods is to develop and market branded,
nutritionally enriched food products for the retail market. This is to be
accomplished through the development or license of animal feed products which
produce enhanced food products. LifeRight Foods will also collaborate with
Agriculture's Coordinated Dairy Systems Company to develop nutritionally
enriched dairy food products for retail markets.
CPG Nutrients, a division of CPG headquartered in DeWitt, New York, is exploring
opportunities to apply new technologies within the agricultural industry, and
where feasible and practical, to introduce those products and market them to
national and international agricultural customers. A facility in Kittanning,
Pennsylvania is currently being equipped to begin production of the first
product, OptigenTM 1200, a new controlled release nitrogen source.
CPG worked with Cornell University and New York State Electric & Gas Corporation
to invest in a new hydroponics greenhouse in Ithaca, New York where testing is
being done on controlled environment agriculture.
In 1999, CPG, through AHI, purchased approximately 16% of the outstanding common
stock of a publicly traded company, Planet Polymer Technologies Inc.
(Planet)(NASDAQ Small Cap-POLY), San Diego, California, and received warrants
that, if fully exercised, would allow CPG to own as much as a total of 36% of
Planet's outstanding common stock. In addition, CPG entered into an agreement
with Planet for an exclusive worldwide license to all current and future
products that utilize Planet's polymer technology for agricultural and
food-related purposes (other than products already covered by existing
agreements). Under the terms of the agreement, CPG has the exclusive right to
grant licenses and sublicenses on the technology developed under the agreement
to other parties. In return for the rights granted to CPG, CPG will pay
royalties to Planet in accordance with the terms of the license agreement.
During the year ended June 30, 1999, The Investment Group incurred approximately
$400 in research and development expenditures.
COMPETITION: CPG competes with a large number of firms of all sizes and types in
most of its product categories. The principal factors of competition in these
operations are product quality, efficiencies in product distribution,
concentration in selected markets, technology and current market pricing. In the
Produce Group and in the dry beans, flour and bag printing and manufacturing
product lines of the Business Group, CPG does not occupy a major position in
national markets. The bird food products are primarily marketed to the Agway
retail store and dealer system and other cooperatives, and compete based on
product quality. The human edible sunflower seed and hulled millet are marketed
internationally and compete on the basis of product variety and quality.
7
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
(THOUSANDS OF DOLLARS)
ENERGY
Agway Energy Products LLC (AEP), a Delaware limited liability company wholly
owned by AHI, is a full-service energy solutions provider to residential, farm,
and commercial customers principally in New York, Pennsylvania, New Jersey, and
Vermont. AEP serves the majority of its customer base by providing home comfort,
particularly in the area of heating, ventilation, and air conditioning (HVAC)
equipment and fuels to power these systems. AEP installs and services all types
of whole-house warm and cool air systems (furnaces, boilers, air conditioners),
air cleaners, humidifiers, de-humidifiers, hearth products, space heaters, room
air conditioners, and water systems. Services such as duct cleaning, air
balancing, and energy audits are also offered. AEP is also engaged in the sale
and delivery of fuel oil, kerosene, propane, gasoline and diesel fuel (both
delivered direct to users and distributed through AEP's service stations), as
well as natural gas and electricity where de-regulation makes that possible. A
product emphasis on oil and propane heating fuels creates seasonal increases in
sales and working capital requirements in the fall and winter months. All
products are purchased from numerous suppliers or through open-market purchases.
During 1999, AEP owned and operated, within its geographic territory, 95
distribution and sales centers and 7 terminals with storage capacity of
approximately 2.3 million barrels of product. AEP also distributes products
through approximately 80 distributors and resellers. Agway believes that these
facilities are sufficient to meet the current operating requirements of the
business.
COMPETITION: The HVAC, fuel oil, propane, and power fuel industries in which AEP
competes are generally fragmented and consist of a large number of small
businesses. Some consolidation in HVAC and propane has created a number of
larger competitors in these industries. Power fuel competition includes major
oil companies as well as smaller, independent businesses. Also, several large,
fully-integrated competitors have emerged offering a similar range of home
comfort products and services. These competitors have evolved from utility
companies in the face of deregulation and the corresponding threat to their
traditionally captive customer base.
LEASING
Telmark LLC (Telmark), a Delaware limited liability company wholly owned by AHI,
and its consolidated subsidiaries finance equipment, buildings, and vehicles to
farmers and other customers in rural communities. Telmark operates a captive
sales force as its primary distribution system in 29 states in the eastern and
midwestern United States. Telmark also transacts business in the continental
United States and Canada through a separate division, Telease Financial Services
(TFS), which generates business directly from farm equipment dealers and from
brokers. TFS Limited is a Canadian corporation which conducts certain lease
transactions with Canadian customers. Telmark Lease Funding I, LLC and Telmark
Lease Funding II, LLC, both Delaware limited liability companies, were
established solely to enable lease securitization financings entered into during
1997 and 1999, respectively.
As of June 30, 1999, Telmark had approximately $569,300 of leases outstanding
with persons other than Agway and its subsidiaries, net of unearned interest and
finance charges of approximately $199,000. Telmark finances its operations and
lease portfolio growth through borrowings under its lines of credit, private
placements of debt with institutional investors, sales of debentures to the
public, or lease securitizations. As a result of Telmark issuing subordinated
debentures to the public, it files its own periodic reports with the SEC
pursuant to the Securities Exchange Act of 1934.
COMPETITION: Telmark competes with other financing companies in addition to
traditional agricultural lenders. Other major sources of competition are
manufacturers' finance and lease programs and regional banks offering financing
products to their customers. The Farm Credit System, the major independent
competitor presently active in the agricultural market, offers a complete array
of traditional loan programs as well as lease financing.
8
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
(THOUSANDS OF DOLLARS)
INSURANCE
Agway Insurance Company (Insurance) is a New York property and casualty
insurance company wholly owned by AHI. This company is authorized to write
insurance as specified in the New York Insurance Law, Sections 1113 and 4102(c),
and currently writes insurance in 10 eastern states from the Insurance
headquarters in DeWitt, New York. Lines of insurance sold include farmowners,
homeowners, farm commercial and personal auto liability and physical damage, and
miscellaneous commercial policies that support the agricultural marketplace.
Agway General Agency Inc. (Agency) markets medical, long-term care, life and
other products designed by non-affiliated companies for the agricultural
marketplace. In addition, Agency provides administrative management services to
Agway business units including claims, risk, facilities, data processing and
payroll/benefits management.
COMPETITION: Insurance competes with major direct writers, national agency
companies, and smaller regional insurance carriers. Insurance utilizes an
independent agency distribution system to market insurance products and services
for the benefit of the farm and rural community. Growth opportunities come
through the development of specialty products for the agricultural community,
professional agency recruitment, and dedication of marketing resources to
targeted rural markets.
HUMAN RESOURCES
Agway and its subsidiaries employ approximately 7,200 persons, 2,700 of whom are
part-time. There are approximately 130 employees represented by two different
unions with six existing union contracts. We enjoy satisfactory relations with
both our union and nonunion employees as a result of competitive wage, health,
and benefit programs.
ADMINISTRATIVE
Our principal administrative office is located at 333 Butternut Drive in DeWitt,
New York. It occupies approximately 180,000 square feet under terms of a lease
with 8 remaining years with two 10-year renewal options. Agway also rents 80,000
square feet of administrative office space at 301 Plainfield Road, Syracuse, New
York. Agway has not renewed this lease, which expires December 1999, and is
relocating personnel to the principal administrative office or to an Agriculture
enterprise office. Agway believes that the combination of its principal
administrative office and other satellite business unit locations are sufficient
for its operations.
REGULATION
Agway and its subsidiaries are subject to various laws and governmental
regulations concerning employee health, product safety, and environmental
matters. These laws and regulations are enforced by federal government agencies
such as the Occupational Safety and Health Administration (OSHA), the Food and
Drug Administration (FDA) and the Environmental Protection Agency (EPA). OSHA
monitors employee safety and health matters. The FDA sets standards for foods
and other products sold to consumers, and the EPA creates rules to protect the
environment, such as rules to control pollution and to reduce exposure to
chemicals. Many states have adopted similar laws and regulations, which are
enforced by state agencies and some of which may be more burdensome than similar
federal requirements.
Agway believes its business, as currently conducted, is not adversely affected
by any of these laws and regulations. However, these laws and regulations are
constantly changing and may impose greater requirements and expense on Agway and
its subsidiaries in the future. Currently, Agway is negotiating with various
government agencies concerning the clean up of hazardous waste sites. These
sites are commonly known as Superfund sites under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 (CERCLA).
9
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
(THOUSANDS OF DOLLARS)
STOCKHOLDER MEMBERSHIP AND CONTROL OF AGWAY
Agway members are farmers or cooperative organizations of farmers who hold one
share of Agway's Membership Common Stock and who purchase farm supplies or farm
services, or market farm products through Agway, Agway dealer stores or other
authorized dealers. Currently, there are approximately 71,000 members. Each
share of Membership Common Stock is entitled to one vote for the election of
directors and for other corporate actions.
The Membership Common Stock, $25 par value, is held only by active Agway
members. Agway also has preferred stock. Four different series of Cumulative
Preferred Stock (Series A, Series B, Series B-1 and Series C), $100 par value,
is held by Agway members, the Agway, Inc. Employees' Thrift Investment Plan and
the general public. Honorary Member Preferred Stock (Series HM), $25 par value,
is held only by former Agway members (see Note 12 of the financial statements
for further details of preferred stock).
Ownership of Membership Common Stock is different than ownership of common stock
in typical business corporations because Agway is an agricultural cooperative.
Membership Common Stock may only be purchased by persons who qualify as Agway
members and is transferrable only with Agway's consent. Membership Common Stock
indicates membership in Agway rather than indicating a significant equity
interest in Agway. A holder of Membership Common Stock is limited to the $25 par
value of the security, plus dividends declared and unpaid, if any, for the
current year. Dividends are limited to 8% of the par value of Membership Common
Stock and may be declared at the discretion of the Agway Board of Directors each
fiscal year. The residual equity in the net assets of Agway is held for the
benefit of past and present member-patrons of Agway.
The Board of Directors controls the affairs and business of Agway. All
stockholder actions, except as otherwise provided by law, including the election
of directors, are determined by the vote of Agway members present by proxy
(another person authorized by the member to vote) or in person at the annual
meeting (or special meetings) of members. There are 90 geographic member
committees representing the members in the 15 districts. There are currently 15
directors on the Board of Directors. One director is nominated from each
district by the member committees in that district. Once elected, a director
holds office for a term of 3 years. Members elect 5 directors each year at the
annual meeting to fill vacancies resulting from the expiration of the terms of
certain district directors. Although the directors are nominated by the members
of each district, the directors are elected to the Board of Directors by the
vote of all members.
Each geographic member committee elects a chairperson for the committee. The
chairperson plus one other member of the committee appointed by the chairperson
become members of the Agway Council. Removal of the chairperson by the committee
automatically removes that person from the Agway Council. The Agway Council
meets with the Board of Directors annually, and serves as a contact between the
Board of Directors, management of Agway, and the chairperson's committee. The
purpose of the Agway Council is to improve member communications and to increase
the effectiveness of the committees.
10
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
(THOUSANDS OF DOLLARS)
RETAINED EARNINGS
Retained Earnings (also sometimes referred to as retained margins) are held for
the benefit of past and present Agway members. Retained Earnings are all net
earnings (gross receipts reduced by all operating expenses) of Agway remaining
after payment of income taxes, dividends on issued and outstanding stock,
patronage refunds, and all net earnings from the business activities of
predecessors in interest (companies who were acquired by or merged into Agway),
kept as reasonable reserves. Retained Earnings consist of :
(1) The portion of Member Earnings (net earnings based only on purchases from
members) undistributed to members.
(2) Net earnings based on nonmember purchases and marketing operations.
(3) All other income, including earnings from non-agricultural divisions and
subsidiaries of Agway, dividends and interest from investments.
The Retained Earnings of Agway will only be distributed to Agway members upon
dissolution of Agway. According to the By-laws adopted by Agway, upon
dissolution, the Retained Earnings will be distributed proportionately among
Agway's past and present members in accordance with their interests, after all
debts are paid in full and any amounts due to holders of preferred stock,
revolving fund certificates, and common stock are paid.
PATRONAGE REFUNDS
The By-laws of Agway provide that, after the end of each fiscal year, members
shall be paid patronage refunds in cash, in an amount equal to the earnings
realized on a tax basis by Agway after deduction for reasonable reserves for
future operating expenses and amounts paid or set aside for payment of dividends
on issued and outstanding stock of Agway. The total amount of patronage refunds
paid must not exceed the total earnings attributable to the sale of farm
supplies by Agway to members during the fiscal year. These patronage refunds are
based on sales of feed, agronomic products, and selected eligible farm supplies
to members for the fiscal year. Each member's total patronage refund is based on
the proportion of his/her purchases of farm supplies made directly from Agway,
Agway dealer stores or other authorized dealers during the fiscal year, to the
total farm supply purchases made by all members in such year. No patronage
refunds are payable with respect to the purchase of services for the marketing
of farm products through Agway, unless specified in a contract between the
member and Agway.
The By-laws of Agway also allow the Board of Directors to authorize the payment
of patronage refunds to certain contract patrons. Contract patrons are persons
or businesses, other than members, who purchase eligible farm supplies from
Agway. Payment of patronage refunds to contract patrons must be made on the same
terms and conditions as those specified above for members. Examples of contract
patrons may be certain departments or agencies of state governments, the federal
government, and charitable, religious or educational institutions that use or
produce agricultural products. Business with contract patrons currently
represents less than 1% of Agway's annual sales volume.
11
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Agway and its subsidiaries are not involved in any material pending legal
proceedings other than ordinary routine litigation incidental to the business
except the following:
In August 1994, the Environmental Protection Agency (EPA) notified Motor
Transportation Services, Inc. (MTS), a dissolved wholly owned subsidiary of AHI,
that the EPA has reason to believe that MTS is a potentially responsible party
(PRP) under the Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA) at the Rosen Site, Cortland, New York. The EPA requested
that MTS and other PRPs participate in the ongoing Remedial
Investigation/Feasibility Study (RI/FS) for the Rosen Site. In a related matter,
other PRPs at the Rosen Site, Cooper Industries, Inc., et al., filed a complaint
under CERCLA against Agway, MTS and other alleged PRPs at the Rosen Site in the
U.S. District Court, Northern District of New York, in June 1992, seeking
reimbursement for the cost of the ongoing RI/FS. Agway and MTS believe the
relief sought by Cooper Industries, Inc., et al. is unjustified and are
contesting the allegations in the lawsuit. In March 1998, the EPA issued a
unilateral administrative order to the PRPs, including Agway and MTS, for a
removal action at the Rosen Site. Agway and MTS have notified the EPA that they
will comply with the order by cooperating with the other PRPs to assure that the
removal action is performed. In addition, Agway and MTS have offered to
cooperate with the other PRPs in performing a Remedial Design/Remedial Action
(RD/RA) for the site in accordance with the Record of Decision (ROD) issued by
the EPA and a Consent Decree has been entered by the Court as of May 1999. Agway
currently has accrued its best estimate relative to the cost of any additional
assessment, containment, removal or remediation actions regarding the property.
However, it is reasonably possible that the results of ongoing and/or future
environmental studies or other factors could alter this estimate and require the
recording of additional liabilities. The extent or amount of such events cannot
be estimated at this time. However, Agway believes that its past experience
provides a reasonable basis for its estimates recorded for this matter.
In December 1985, it was asserted by the Massachusetts Department of
Environmental Protection (MDEP) that certain real property located in Acton,
Massachusetts, previously owned by Agway is contaminated and that Agway and the
current owner of the property are responsible for the cost of investigating and
cleaning up environmental contamination at the property. In September 1993,
Agway entered into an Administrative Consent Order with the MDEP pursuant to
which Agway performed a phase II comprehensive site assessment. In March 1995,
Agway and the current owner entered into a settlement agreement whereby Agway
agreed, at Agway's expense, to complete any additional assessment, containment,
removal or remediation actions at the property. The current owner agreed to
cooperate with Agway in achieving a permanent solution satisfactory to the MDEP
and in compliance with the MDEP's requirements. Agway prepared a risk assessment
scope of work that was approved by the MDEP, and the MDEP also approved
reclassification of the site. Agway finalized, in April 1998, its risk
characterization and remedial action plan reports and, in July 1998, its remedy
implementation plan report. Pursuant to the remedy implementation plan, Agway
completed activities associated with the installation of an impermeable
vegetated surface cover system in October 1998, will continue a ground water
monitoring program and has implemented an activity and use limitation. In
addition, Agway has negotiated a resolution of MDEP's claim for past
response/oversight costs and interest related to the site. Agway currently has
accrued its best estimate relative to the cost of any additional assessment,
containment, removal or remediation actions regarding the property. However, it
is reasonably possible that the results of ongoing and/or future environmental
studies or other factors could alter this estimate and require the recording of
additional liabilities. The extent or amount of such events cannot be estimated
at this time. However, Agway believes that its past experience provides a
reasonable basis for its estimates recorded for this matter.
In August 1995, the EPA notified Agway that the EPA has reason to believe that
Agway is a PRP under CERCLA at the Tri-Cities Barrel site, Port Crane, New York.
The EPA requested that Agway and other PRPs participate in the ongoing RI/FS for
the Tri-Cities Barrel site. The Removal Action has been completed, and Agway
continues to participate with other PRPs in the ongoing RI/FS. In June 1997, the
cooperating PRPs agreed upon an allocation of responsibility for past and future
investigation and remediation costs. Based on this allocation and the cost
estimates for the site, Agway has accrued its best estimate for any additional
costs at the site.
While Agway is not depending on contributions from insurance or third parties in
determining its reserves for environmental clean-up liability, we will determine
on a site-by-site basis whether such a contribution claim is warranted.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no items
submitted to a vote of security holders for the three months ended June 30,
1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Principal Market:
There is no market for the equity securities of Agway other than through
its current practice of repurchasing outstanding securities at par ($25)
whenever registered holders thereof elect to tender them for redemption.
(b) Approximate Numbers of Holders of Common Stock:
The number of holders of record of Agway's Common Stock, as of September
10, 1999, is 99,728, of which 29,172 shares have been called for those
holders no longer meeting the membership eligibility requirements as
identified in Section 2.1(a) in the By-Laws of Agway Inc.
(c) Dividends Paid:
An annual 6% dividend, or $1.50 per share, was paid on Agway's Common
Stock in 1999 and 1998.
(d) Limitations on Ownership and Availability of Net Earnings to Membership
Common Stockholders: Refer to Stockholder Membership and Control of Agway
and Patronage Refunds under Business and Properties (Items 1 and 2).
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Financial Data of Agway and Consolidated Subsidiaries has
been derived from consolidated financial statements audited by
PricewaterhouseCoopers LLP, whose report for the three years ended June 30, 1999
is included elsewhere in the Form 10-K, and should be read in conjunction with
the full consolidated financial statements of Agway and notes thereto.
<TABLE>
<CAPTION>
(In Thousands of Dollars Except Per Share Amounts)
-----------------------------------------------------------------------------------
Years Ended June 30
-----------------------------------------------------------------------------------
Restated
1999 1998 1997 1996 1995
------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales and revenues....... $ 1,484,362 $ 1,562,943 $ 1,671,714 $ 1,663,085 $ 1,592,857
Earnings (loss) from
continuing operations (1)(2) $ 1,795 $ 12,189 $ 10,670 $ 11,147 $ (7,800)
Net earnings (loss)(1)(2)(3)(4) $ 1,795 $ 41,145 $ 10,670 $ 12,662 $ (15,730)
Total assets (1) ............ $ 1,477,051 $ 1,417,294 $ 1,300,261 $ 1,245,891 $ 1,225,193
Total long-term debt......... $ 374,116 $ 354,529 $ 330,371 $ 291,666 $ 268,310
Total subordinated debt...... $ 486,303 $ 462,196 $ 438,127 $ 414,927 $ 399,064
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, earnings from
continuing operations, net earnings, 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 14 and 16
and Note 17 to the financial statements.
(2) The data reflects a net improvement from the sale of Allied Seed of $9,600
in 1999 and a credit before taxes from business restructuring of $3,248 in
1995 and $1,943 in 1996.
(3) The 1995 data reflects an after-tax loss of $12,360 in discontinued
operations related to the sale of 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.
(4) Effective July 1, 1997, Agway 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 earnings in 1998.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
The following discussion refers to Agway Inc. and Consolidated Subsidiaries and
should be read in conjunction with Selected Financial Data (Item 6) and the
Consolidated Financial Statements of Agway and Notes thereto (Item 8),
specifically Financial Information Concerning Segment Reporting (Note 14). 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 the three years ended June 30, 1999.
Agway reports its operations principally in five business segments: Agriculture,
Country Products Group, Energy, Leasing, and Insurance. Agway modified its
segment reporting in 1999 by combining the former Retail segment with the
Agriculture segment, in light of a consolidation of these two operations in
April 1999. Additionally, the Country Products Group was broken into its own
segment to align our disclosure with how our business is managed, in accordance
with the adoption, as of June 30, 1999, of Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Relative
Information." All prior year presentations have been restated to reflect these
changes.
RESULTS OF OPERATIONS
1999 COMPARED WITH 1998
CONSOLIDATED RESULTS
Agway's net earnings of $1,800 for 1999 decreased by $39,300 (96%) from restated
net earnings of $41,100 in 1998. The 1998 net earnings included $29,000 net of
tax income from the cumulative effect of a pension accounting change and $12,100
after-tax earnings from 1998 business activity. The $10,400 reduction in 1999
earnings from business activity includes an $18,300 reduction in pre-tax
earnings offset by a $7,900 decrease in taxes in 1999 compared to 1998. The
pre-tax earnings decrease is principally a result of increased losses of $7,500
in Agriculture's grain marketing department, a $10,500 increase in losses in
Agriculture's retail business activities, and $10,500 in decreased pension
income. These decreases are partially offset by a $9,600 net increase in income
from the sale of Country Products Group's Allied seed business in 1999 as
compared to earnings from Allied's operation in 1998 as well as improved
earnings in most of Agway's other business activities, as discussed below. The
decrease in pre-tax earnings and the effects of legal entity restructuring
caused the reduction to tax expense for 1999.
On July 8, 1999, Agway announced that it had become aware of accounting
irregularities in its grain marketing department (the 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. In addition
to losses from this activity in 1999, as more fully described in the Agriculture
segment discussion below, 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, Agway has filed an amended Form 10-K for 1998 and restated its
financial results.
Consolidated net sales and revenues of $1,484,400 decreased $78,600 (5%) in 1999
compared to $1,563,000 in 1998. The decrease was substantially the result of a
$93,600 decrease in the sales of agricultural feed and energy products used in
Agway's business, which in turn resulted from a decrease in world market prices
for those products. Additionally, sales declined in 1999 by $21,900 due to the
sale of CPG's Allied seed business in the first quarter of 1999 and by $6,500 in
the Agriculture direct marketing and retail operations. These declines, among
others, were partially offset by sales increases of $24,700 due to volume
improvements in the agricultural feed and energy businesses; increased sales of
$7,500 in CPG, principally in the sunflower and produce operations; increased
revenue of $6,900 from Energy's HVAC installation and service sales and growth
in electric and gas marketing sales; and a $4,500 increase in lease revenues at
Telmark.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
CONSOLIDATED RESULTS (CONTINUED)
Consolidated operating expenses of $1,465,900 decreased $55,300 (4%) compared to
$1,521,200 in 1998. The decrease is primarily due to decreased costs of products
and plant operations of $77,400 (6%) primarily from lower commodity costs, as
noted above. The decline was partially offset by increased selling, general, and
administrative (SG&A) expenses of $20,800 (16%) substantially due to increased
labor costs, increased marketing costs and increased professional services
associated with several projects including year 2000 readiness.
Other income, net, of $19,800 increased $6,400 (48%) in 1999 as compared to
$13,400 in 1998. The increase is due to the gain on sale of CPG's Allied seed
business, which was partially offset by lower patronage income from CF
Industries in 1999 as compared to 1998.
Income tax expense of $4,200 in 1999 and $12,100 in 1998 results in effective
tax rates of 70% and 50%, respectively. The increase in the effective rate
results substantially from state taxes. Agway does not file a consolidated
return for state tax purposes and therefore cannot recognize the benefit of
operating losses of certain subsidiaries. This fact combined with an increase in
non-deductible goodwill in 1999 increased the effective rate for 1999 as
compared to the effective rate for 1998. Tax expense associated with the
cumulative effect adjustment in 1998 totaled $16,500 and is reflected in the net
cumulative effect amount.
AGRICULTURE
Total Agriculture sales and revenues of $775,700 in 1999 decreased by $19,500
(3%) compared to $795,200 in 1998. Volume increases in enterprise feed
operations of $21,700 were more than offset by pricing decreases in the feed and
agronomy sales of Agriculture's enterprise units in 1999 compared to 1998. The
pricing decreases reflect the world market conditions of agricultural
commodities. The overall enterprise feed unit volume increase of 10% in 1999
compared to 1998 reflects the acquisition of a new feed business in the first
quarter of 1999. The agronomy business unit volume increased in 1999 compared to
1998 and is led by increased seed corn units (5%) and soybean seed units (4%).
The service revenues in feed and agronomy businesses increased $700 in 1999 as
compared to 1998.
Direct marketing sales in 1999 decreased $2,900 (5%) as compared to 1998. The
sales decrease was attributable to a decrease in grain marketing sales of $3,100
due to lower wheat sales and lower commodity pricing as noted above and lower
sales in the fertilizer operations of $5,400 due substantially to the lower
commodity prices. The sales declines in grain marketing and the fertilizer
operations were partially offset by a $5,600 improvement in the direct seed
operations as a result of the continued growth in the commercial vegetable seed
business.
Retail operations sales declined $3,600 (1%) in 1999 as compared to 1998. Retail
store sales increased $4,200 (2%) in 1999 as compared to 1998. Improved sales of
mulches and nursery products and increased sales from new store locations were
partially offset by decreases in sales from closed store locations and lower
bagged feed sales. The net increase in retail store sales was more than offset
by the declines in wholesale sales. A number of our franchise dealers resisted a
proposed change in the historical dealer relationship by sourcing some of their
product elsewhere, which reduced the wholesale sales and changed the mix of
product sold to products with overall lower gross margins. This dealer
relationship was modified in the fourth quarter of fiscal 1999 to address
concerns identified.
The Agriculture segment pre-tax loss of $32,900 in 1999 is $16,600 (102%) higher
than the restated $16,300 loss in 1998. Of the $16,600 increase in losses,
$7,500 is from the grain marketing department and $10,500 is from retail
operations. As discussed more fully below, Agriculture's grain marketing
department produced $8,600 in pre-tax losses in 1999 compared to a restated
$1,100 loss in 1998. Also, as more fully disclosed below, losses in retail
operations increased $10,500 to $22,200 in 1999 from $11,700 in 1998. The above
increased losses more than offset the improved operating results in 1999
achieved by the agricultural enterprises from the sales of feed and agronomy
products and services.
15
<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. In an effort to recover these losses, additional
speculative positions in commodity instruments were taken within the department
throughout 1999. In addition, while the unauthorized activity was occurring, the
department did not hedge its inventory and forward contracts, in violation of
express policies, which led to further losses from the department's operations.
The 1999 loss includes $5,500 from unauthorized speculation in commodity
instruments and $3,100 from operations, due in part to violating Agway policy by
not hedging positions in inventory and forward contracts. To reflect these
losses and their effect on the Company, Agway has amended its previously filed
annual report on Form 10-K for the year ended June 30, 1998, and its 1999
quarterly reports on Form 10-Q with the SEC. 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. However, during
the period it took to close the unauthorized speculative commodity instrument
positions and hedge the open inventory and forward contract positions, further
market losses of approximately $1,300 were incurred, which will be reflected in
Agway's Form 10-Q for the first quarter of 2000.
Gross margins in the Agriculture retail operations decreased $4,600 as a result
of the wholesale margins decreasing $1,900 from the lower sales noted above.
Additionally, improved margins in the nursery-related products were more than
offset by declining margins in all other product lines. Operating expenses of
Agriculture's retail operation increased $4,400 from new locations added during
the year and from increased labor costs. Additional costs of $1,400, principally
related to severance, were incurred in connection with the consolidation of the
retail business into Agriculture. Agriculture continues to review and assess the
financial condition of all retail operations and will modify these operations,
as deemed necessary, in order to improve the results of these operations.
Overall, Agriculture operations product margins in 1999 improved $7,100 (5%)
over 1998.The feed and agaronomy businesses improved product margins $9,400(10%)
in 1999 as compared to 1998. Feed product margins increased as a result of the
combined increased feed tonnage, improved pricing strategies during 1999, and
the acquisition of a new feed business in the first quarter of 1999. Agronomy
product margins increased from improved margins in fertilizers, lime and
pesticides. The product margin improvements in the feed and agronomy businesses
were partially offset by a decline of $1,600 in direct marketing product
margins. A $7,600 decrease in grain marketing margins due to the grain marketing
losses noted above is partially offset by improved margins from the direct seed
operations and by absence this year of the prior year's unfavorable experience
with exchange-traded futures in our feed procurement business.
Agriculture operations expenses increased $9,100 (7%) in 1999 as compared to
1998. The increase is substantially due to increased costs associated with
increased unit volume sales in the feed and agronomy businesses ($7,500) and the
seed and fertilizer operations ($2,500) of direct marketing.
Finally, other revenues declined $3,300 (49%) mainly due to lower patronage
refunds from CF Industries, and interest costs increased $800 (11%) due to the
increased costs of carrying higher asset levels in 1999 as compared to 1998.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
COUNTRY PRODUCTS GROUP
Total sales and revenues of $171,700 in 1999 decreased $14,400 (8%) compared to
$186,100 in 1998. The sales and revenues from the continuing operations of
Country Products Group (CPG) showed a net increase of $7,500 (5%) in 1999 as
compared to 1998. The majority of the growth in sales came from two divisions:
The Business Group ($5,600) and The Produce Group ($1,800). The Business Group's
sunflower seed operation experienced increased bird food sales over the prior
year and increased volume of human edible sunflower seed sales from increased
capacity from a new processing plant that became operational in 1999. These
improvements were partially offset by lower sales in the flour operations due to
low wheat prices and in bean operations due to lower export demand in 1999 as
compared to 1998. The Produce Group sales growth is substantially due to the
acquisition of new produce businesses during the second half of 1999. The
overall decrease in CPG sales for 1999 is the result of the sale of the Allied
seed business in the first quarter of 1999, which lowered sales in the current
year by $21,900.
CPG pre-tax earnings of $12,100 in 1999 increased $5,900 (95%) from $6,200 in
1998. The increase in 1999 pre-tax earnings includes a net improvement in
pre-tax earnings of $9,600 from the sale of Allied Seed which was partially
offset by $2,300 in start-up costs incurred in 1999 related to initiatives for
future growth in CPG's Investment Group and a $900 charge to reflect equity
accounting for CPG's investment in Planet Polymer. The Business Group's bean and
flour operations and the Produce Group operations realized increased pre-tax
earnings of $900 due to stronger gross margins during 1999 as compared to 1998.
Finally, despite the increase in sales in the Business Group's sunflower seed
operation noted above, higher cost of product in 1999 as compared to 1998 and
new expenses being incurred from the implementation of the new processing plant
lowered pre-tax results in this business by $1,100.
ENERGY
Total Energy sales and revenues of $451,900 in 1999 decreased $53,200 (11%) as
compared to $505,100 in 1998. The excess of supply in the world energy markets
has driven competitive pricing down and reduced sales dollars by $62,900 in 1999
as compared to 1998. The reduced Energy sales were partially offset by an
increase in revenue of $6,900 from HVAC installation and service sales and
continued growth in the new electric and gas marketing business. In addition,
sales increased $3,000 from increased unit volume of liquid petroleum product
sales. A 23% increase in sales of power fuels to commercial customers was
substantially reduced by the results of a decision not to renew a low-margin
commercial contract in heating oil and a reduction in sales of retail power
fuels. A planned reduction in the number of retail storage tanks in place in
1999 as compared to 1998 decreased retail sales of power fuels.
Pre-tax earnings from operations of $13,000 for 1999 increased $5,000 (63%) from
$8,000 in 1998. The same imbalance of supply and demand noted above reduced
energy commodity costs in 1999 over 1998 and along with increased HVAC and new
business revenues provided for increased overall gross margins on all products
of $12,300 (8%) as compared to 1998. The improvements to gross margins in 1999
were partially offset by a $9,000 (6%) increase over the prior year in operating
expenses. The operating expense increase resulted from increased distribution
labor costs, increased marketing costs and increased administrative costs,
principally information systems costs related to year 2000 readiness. Interest
expense declined $2,800 in 1999 due to lower asset levels (particularly
inventory and receivables) during 1999 as compared to 1998. Other revenues
generated from thruput product in Energy's system decreased $700 in 1999 as
compared to 1998.
LEASING
Total revenues of $70,000 in 1999 increased $4,500 (7%) as compared to $65,500
in 1998. The increase is attributable in part to a $55,400 (11%) increase in net
leases and notes during 1999 as compared to 1998. Increases in the lease
portfolio from new booked volume of $252,100 in 1999 and $227,300 in 1998
exceeded lease reductions from collection and provision for credit losses of
$196,700 and $177,400 in 1999 and 1998, 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 from 13.5% in 1998 to 13.1%
in 1999.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
LEASING (CONTINUED)
Pre-tax earnings of $18,200 in 1999 increased $2,800 (18%) from $15,400 in 1998.
The 1999 increase in total revenues noted above was partially offset by
increases in interest costs, SG&A costs and in the provision for credit losses
in 1999 as compared to 1998. While the average cost of interest paid on debt
decreased from 7.2% to 6.9%, the interest costs of $27,600 increased $800 (3%)
in 1999 as compared to 1998 due to increased borrowings required to finance the
growth of the lease portfolio noted above. The SG&A expenses of $16,200 in 1999
increased $500 (4%) from1998, primarily the result of additional personnel and
incentive costs relating to additional new leases booked. The provision for
credit losses of $8,000 in 1999 increased $400 (6%) as compared to 1998 based on
Telmark's analysis of reserves required to provide for uncollectible
receivables. Monthly, Telmark reviews its allowance for credit losses
considering an analysis of delinquent accounts, current economic conditions,
estimated residual values and the creditworthiness of Telmark customers. At June
30, 1999, the total value of non-earning accounts increased to $4,900 as
compared to $3,000 in 1998.
INSURANCE
Total net revenues of $28,000 in 1999 increased $700 (2%) as compared to $27,300
in 1998. The increase was experienced in the net earned premiums of Agway
Insurance Company. A reduction in the frequency and severity of catastrophic
claims and favorable claims development in the 1995 experience rated reinsurance
contract resulted in lower reinsurance premium cost incurred by the Insurance
Company in 1999 as compared to 1998. In Agency, 1999 revenues were at the same
levels as in 1998.
Pre-tax earnings of the Insurance Company of $1,000 increased $800 (400%) from
$200 in 1998. The improved earnings resulted principally from a return to more
historical levels of commission expense as compared to a large increase in
commission expense in 1998. The Agency experienced a pre-tax loss of $500 in
1999 and 1998. This is principally related to expenses associated with the
Agency's provision of administrative management services to Agway business
units.
RESULTS OF OPERATIONS
1998 COMPARED WITH 1997
CONSOLIDATED RESULTS
Agway's restated net earnings of $41,100 for 1998 increased $30,400 (284%) from
net earnings of $10,700 in 1997. The $30,400 increase includes a net cumulative
effect adjustment for a pension accounting change of $29,000 (see Note 13 to the
consolidated financial statements) and a $1,500 (14%) increase in net earnings
as compared to 1997. The net earnings 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 pre-tax operating results decreased by $5,100 (27%) and
are discussed below by business segment. Additionally, net corporate pre-tax
expenses in 1998 increased $2,500 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. The decline in net corporate pre-tax
expenses was 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.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
CONSOLIDATED RESULTS (CONTINUED)
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 in 1998 as compared to 1997. The Agriculture segment experienced lower
sales ($46,800) due to decreases in pricing levels of feed and crop products and
a refocus of the retail business to exit specific product lines. These decreases
to sales were partially offset by increased revenues at Country Products Group
($27,500) and increased lease revenues in Telmark ($8,600).
Consolidated operating expenses of $1,521,200 in 1998 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 (SG&A) expenses in 1998 were consistent with
1997 levels.
Other income, net, of $13,400 decreased $5,400 (29%) in 1998 compared to $18,800
in 1997. The decline was substantially due to receiving less patronage refund
from a cooperative supplier in 1998 as compared to 1997.
Income tax expense of $12,100 and $5,900 in 1998 and 1997, respectively,
resulted in effective tax rates of 50% and 36%, respectively. The increase in
the effective rate is mainly attributable to the change in adjustments made in
the prior years' tax liabilities (see Note 8 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 Agriculture sales and revenues of $795,200 in 1998 decreased by $46,800
(6%) compared to $842,000 in 1997. Despite increased feed volume (5%) over the
prior year, the decrease in pricing levels of feed products resulted in an
overall decrease in total feed sales compared to 1997. Agronomy sales in 1998
declined compared to 1997, largely due to a similar decrease in pricing level of
agronomy products as was experienced in the feed business. Even though agronomy
sales dollars were down in 1998, volume increases were experienced principally
in fertilizer (8%), seed corn units (7%), and soybean seed units (37%).
Total sales and revenues of the retail operations of Agriculture decreased
$21,500. The decrease was the result of a continued focus on three primary
product categories: yard and garden, pet food and pet supplies, and farm-related
products. An outcome of this focus was reduced sales of $12,600 during 1998
through a planned reduction of the power equipment business at most retail
locations and the discontinuation of the frozen food product line. Additionally,
sales associated with bagged feed and fertilizers and farm supplies declined
$8,000, principally due to a decline in demand for these products and an
increased emphasis on bagged feed delivery routes. 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 dealer volume, which was negatively impacted by the implementation of a
new franchisee program which began in 1998, and a net decline in all other
primary product categories.
Agriculture restated pre-tax operating loss of $16,300 in 1998 represents a
higher loss by $8,400 (106%) than the operating loss of $7,900 in 1997. The 1998
pre-tax results have been restated to reflect losses from accounting
irregularities in the Agriculture grain marketing department, as further
described in the 1999 Management's Discussion and Analysis (MD&A) and in Note 17
to the financial statements. The retail operations pre-tax results decreased
$9,400 in 1998 as compared to 1997 and Agriculture pre-tax results improved by
$1,000.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
AGRICULTURE (CONTINUED)
Agriculture pre-tax improvement of $1,000 was due to improved results in direct
marketing which decreased its pre-tax losses in 1998 by $6,600 as compared to
1997. The improvement to these operations was principally in gross margins due
to lower unfavorable experience with exchange-traded futures in the feed
business and improved margins in the seed business as the result of growth in
the commercial vegetable seed business. These improvements were partly offset by
increased pre-tax losses in enterprise operations of $4,400 due principally to
reduced margins in feed and agronomy sales from the low commodity prices in 1998
as compared to 1997. Additionally, net support costs increased $1,300 in 1998 as
compared to 1997. The increase in net support costs are due principally to
reduced patronage income of $5,100 due to lower CF Industries Inc. earnings,
offset by: (1) $1,500 in increased costs in 1997 due to a charge in the first
quarter of 1997 for the adoption of a new accounting policy on impairment of
long-lived assets and (2) overall lower support costs in 1998 of $2,300 as
compared to 1997.
The Agriculture retail operations had increased losses of $9,400 in 1998 as
compared to 1997. Overall, retail gross margins decreased $2,800 in 1998 as
compared to 1997 principally due to the planned product line reductions noted
above. The growth in margins in the nursery product lines, particularly through
acquisitions in 1998, was offset by declines in margins of all other primary
product lines. Despite the lower gross margin dollars, the gross margin
percentage improved 2% in 1998 as compared to 1997. Service revenues also
decreased in 1998 as compared to 1997 by $400, principally from lower
maintenance fees on power equipment. Total expenses increased $4,400 in 1998 due
principally to increased costs from new locations, non-recurring costs
associated with business restructure in Retail and increased costs in payroll
and depreciation of operating continuing store locations. Finally, other revenue
in retail operations declined $1,300 in 1998 as compared to 1997 as the gains on
the sale of surplus property in 1997 were greater than in 1998.
COUNTRY PRODUCTS GROUP
Total CPG sales and revenues of $186,100 increased $27,500 (17%) in 1998 as
compared to $158,600 in 1997. 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 a new produce operation during the first quarter of 1998.
Additionally, an increasing customer base at the seed operation, principally
other cooperative and wholesale businesses, increased sales in 1998 by $6,200
(39%) as compared to 1997. Sales growth at CPG was partially offset by the
elimination of sales from the pet food business by $11,400, which was sold in
1997 to Pro-Pet LLC, a company in which CPG has a minority interest.
CPG's pre-tax earnings of $6,200 in 1998 increased $3,600 (138%) from pre-tax
earnings of $2,600 in 1997. Operating improvements in a variety of CPG business
operations during 1998 resulted in increased margins over 1997. In the produce
operation, pre-tax earnings increased $2,600 principally from potatoes, onions
and strawberries product lines. The Pro-Pet LLC investment and net charges in
1997 on the sale of the pet food manufacturing brands and businesses improved
pre-tax earnings in 1998 over 1997 by $1,500 as the benefits of better inventory
management and cost savings from the joint venture were realized. All other CPG
business had a net improvement in pre-tax earnings ($100) over 1997. Initial
start-up costs associated with new operations decreased pre-tax earnings by $600
in 1998.
20
<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 in 1998 decreased sales by $54,100 compared to 1997. Total unit volume
sold of all products decreased 10.5% in 1998, resulting in a 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 pre-tax earnings of $8,000 in 1998 decreased $2,800 (26%) from $10,800
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 in 1998 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. Interest
expense declined $1,700 in 1998 due to lower asset levels during 1998 as
compared to 1997. Finally, increased thruput and storage revenues increased
other revenue by $700 in 1998 as compared to 1997.
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 provision for credit losses
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.
Pre-tax earnings of $15,400 in 1998 increased $2,400 (19%) from $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 $300 (5%) in 1998 as compared to
1997. While the average cost of interest paid on debt decreased from 7.5% to
7.2%, the interest costs of $26,900 in 1998 increased $3,400 (14%) from 1997 due
to increased borrowings required to finance the growth of the lease portfolio
noted above. The SG&A expenses of $15,600 in 1998 increased $3,100 (25%) as
compared to 1997, primarily the result of additional personnel and incentive
costs relating to the additional new business booked and increased travel costs
as Telmark expands its territory. The provision for credit losses of $7,600 in
1998 decreased $400 (5%) as compared to 1997 based on Telmark's analysis of
reserves required to provide for uncollectible receivables. Telmark periodically
reviews its allowance for credit losses considering an analysis of delinquent
accounts, current economic conditions, estimated residual values, and the
creditworthiness of its customers. During 1998, the total value of non-earning
accounts increased only slightly to $3,000 in 1998 as compared to $2,700 in
1997.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
INSURANCE
Total net revenues of $27,300 in 1998 increased $300 (1%) compared to $27,000 in
1997. From 1997 to 1998, sales of the Insurance Company's core product offerings
increased 3%, while depopulation of mandatory assigned risk automobile pools
resulted in a 27% decrease in premiums allocated to the Insurance Company. In
Agency, 1998 sales of long-term care and other insurance products continued to
increase, while revenue related to medical products continued to decrease.
Ongoing healthcare regulatory activity and rising medical costs are expected to
depress future medical product sales.
Insurance Company pre-tax earnings of $200 in 1998 decreased $1,000 (83%)
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 a pre-tax
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 SG&A expenses attributable
to the medical product.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operations and external borrowings continues to be Agway's
major ongoing source of funds to finance capital improvements, business
acquisitions, shareholder dividends, and a growing lease portfolio at Telmark.
During the years ended June 30, 1997 and 1999, significant additional cash was
generated from the sale of businesses, particularly at CPG.
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Net cash flows from (used in):
Operating activities...................................... $ 30,499 $ 43,856 $ 24,234
Investing activities...................................... (81,503) (82,331) (77,014)
Financing activities...................................... 51,004 38,475 52,780
-------------- ------------- --------------
Net increase (decrease) in cash and equivalents $ 0 $ 0 $ 0
============== ============= ==============
</TABLE>
CASH FLOWS FROM OPERATIONS
The decline in net cash flows from operating activities of $13,400 in 1999 as
compared to 1998 is due to a decrease in cash from earnings of $31,200 offset by
a $17,800 decrease in demand for cash to fund working capital. The lower working
capital demand for cash was from a larger decrease in receivable balances during
1999 (cash provided) as compared to 1998.
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 1997.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
CASH FLOWS FROM INVESTING
The most significant use of cash over the past three years has been in
connection with Agway's growing lease financing business (Telmark). The cash
requirements to fund lease origination growth in excess of lease repayments
amounted to $63,500, $57,400 and $79,200 in 1999, 1998 and 1997, respectively.
Capital expenditures and business acquisitions required cash of $38,300, $33,900
and $27,900 for 1999, 1998 and 1997, respectively. Agway anticipates that
capital expenditures and acquisitions will continue to increase as profits
increase from planned growth in many of its business units.
Cash flow used in investing was partially funded by cash generated from
investing activities, principally the proceeds from the disposal of business,
which amounted to a total of $14,200, $0 and $22,000 in 1999, 1998 and 1997,
respectively.
CASH FLOWS FROM FINANCING
Agway finances its operations and the operations of all its businesses and
subsidiaries through Agway Financial Corporation (AFC). External sources of
short-term financing for Agway and all its other continuing operations include
revolving credit lines, letters of credit, and a commercial paper program.
Insurance finances its activities through operations or with a combination of
short- and long-term credit facilities. Telmark's finance arrangements are
explained below. As of June 30, 1999, Agway had certain facilities available
with banking institutions whereby lenders have agreed to provide funds up to
$380,000 to separately financed units of the Company as follows: AFC - $65,000
and Telmark - $315,000. In addition, AFC may issue up to $50,000 of commercial
paper under the terms of a separate agreement, backed by a bank standby letter
of credit.
AFC
As of June 30, 1999, AFC's available bank facilities included a short-term line
of credit and a term revolving line of credit. These facilities and AFC's
ability to issue commercial paper require collateralization using certain of
Agway's accounts receivable and non-petroleum inventories (collateral). Amounts
which can be drawn under these AFC agreements are subject to a limitation based
on a specific calculation relating to the collateral available. Adequate
collateral existed throughout 1999 to permit AFC to borrow amounts to meet the
ongoing needs of Agway and is expected to continue to do so. The line of credit
and term revolving line of credit additionally require Agway's investment in
bank stock as additional collateral. In addition, the agreements include certain
covenants, the most restrictive of which requires Agway to maintain specific
quarterly levels of interest coverage and monthly levels of tangible retained
earnings. At June 30, 1999, Agway violated its interest coverage covenant but
has subsequently obtained waivers from its lenders for June 1999 and amendments
through the term of the agreements. In addition, due to the restatement of
financial results, as described in the MD&A and in Note 17 to the financial
statements, Agway violated certain of its covenants in its loan agreements,
including the interest coverage covenant as of December 1998 and March 1999 and
a tangible net worth covenant as of November and December 1998. Agway disclosed
the above-referenced losses and restatements, and causes thereof, to its lenders
and has obtained waivers for these violations. AFC annually renews its line of
credit and commercial paper program in the quarter ended December 31. Agway
expects to continue to have appropriate and adequate financing to meet its
ongoing needs, although the terms of this financing cannot be determined at this
time.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
CASH FLOWS FROM FINANCING ACTIVITIES (CONTINUED)
AFC (continued)
The specifics of these AFC arrangements are as follows:
<TABLE>
<CAPTION>
Outstanding
Available ------------------------------
6/30/99 6/30/99 6/30/98 Term Expires
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Short-term line of credit*..................... $ 50,000 $ 0 $ 0 12/31/99
Term revolving line of credit.................. $ 15,000 $ 0 $ 0 12/31/99
Commercial paper............................... $ 50,000 $ 38,500 $ 30,100 12/31/99
</TABLE>
*AFC's short-term line of credit facility provides for an increase to $75,000,
which will become available on October 1, 1999, to provide a facility for
interim funding, if necessary, for maturing subordinated debt.
In addition, Agway, through AFC, offers subordinated money market certificates
(and previously offered subordinated debentures) to the public. AFC's
subordinated debt is not redeemable by the holder. However, AFC does have a
practice of repurchasing at face value, plus interest accrued at the stated
rate, certain subordinated debt whenever presented for repurchase. The foregoing
debt bears interest payable semi-annually on January l and July 1 of each year.
AFC's money market certificates bear interest at a rate that is the greater of
the stated rate or a rate based upon the average discount rate for U.S.
Government Treasury Bills (T-Bills), with maturities of 26 weeks. AFC
subordinated money market certificates as of June 30, 1999, are due between
October 1999 and October 2013 and bear a weighted average interest rate of 8.0%,
while subordinated debentures due between July 1999 and July 2003 bear a
weighted average interest rate of 8.1%.
In October 1999, $58,800 of subordinated money market certificates issued by AFC
will mature. Agway expects to refinance this debt either through a new issue of
subordinated debt, through short-term bank borrowings, or a combination of both.
Telmark
Telmark finances its operations and lease portfolio growth principally through
payments received on existing leases, which totaled $188,600, $169,800 and
$151,900 in 1999, 1998 and 1997, respectively. Additionally, Telmark's cash
flows from operations, which were $22,800, $21,200 and $15,200 for 1999, 1998
and 1997, respectively, as well as 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, 1999, Telmark has several credit facilities available from banks
which allow Telmark to borrow up to an aggregate of $315,000. Uncommitted
short-term line of credit agreements permit Telmark to borrow up to $65,000 on
an uncollateralized basis with interest paid upon maturity. The lines bear
interest at money market variable rates. A committed $250,000 partially
collateralized revolving 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, 1999 and 1998, under the short-term lines of credit and the revolving
term loan facility were $35,000 and $156,300 and $20,000 and $165,000,
respectively. The portion of the revolving term loan that is short term at June
30, 1999 and 1998, was $8,300 and $15,000, respectively. Telmark borrows under
its short-term line of credit agreement and its revolving term agreement from
time to time to fund its operations. Short- term debt serves as interim
financing between the issuances of long-term debt. Telmark renews its lines of
credit annually. The $65,000 lines of credit all have terms expiring during the
next 12 months. The $250,000 revolving term loan facility is available through
August 1, 2000.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
CASH FLOWS FROM FINANCING ACTIVITIES (CONTINUED)
Telmark (continued)
At June 30, 1999, Telmark also had balances outstanding on unsecured senior note
private placements totaling $146,000. Interest is payable semiannually on each
senior note. Principal payments are both semiannual and annual. The note
agreements are similar to each other 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. As of June 30,
1999, $13,000 of Telmark's member equity was free of this restriction. Telmark
complied with all its covenants contained in its borrowing arrangements.
Telmark, through two wholly owned special purpose subsidiaries, has four classes
of lease-backed notes outstanding totaling $58,800 and $17,700 at June 30, 1999
and 1998, respectively, payable to insurance companies. Interest rates on these
classes of notes range from 6.5% to 7.6%. The notes are collateralized by
leases, which Telmark sold to these subsidiaries, 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.
The scheduled maturity of these notes is December 2007.
Telmark registers with the SEC 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 of each relevant year and may, at the holder's option, 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. Telmark's subordinated debentures bear interest at a rate that is
the greater of the stated rate or a rate based upon the average discount rate
for T-Bills, with maturities of 26 weeks. Telmark debentures as of June 30,
1999, are due between March 2000 and March 2003 and bear a weighted average
interest rate of 8.1%. As of June 30, 1999, approximately $37,600 of debentures
were outstanding under these offerings.
Telmark conducts ongoing discussions and negotiations with existing and
potential lenders for future financing needs. Agway believes Telmark will
continue to have appropriate and adequate short-term and long-term financing to
meet its ongoing needs.
Sources of longer-term financing of Agway include the following as of June 30,
1999:
<TABLE>
<CAPTION>
Source of debt Agway AFC Telmark Total
- -------------- ------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Banks - due 8/99 to 4/04 with interest
from 6.26% to 8.58%............................. $ 0 $ 1,225 $ 148,000 $ 149,225
Insurance companies - due 7/99 to 3/07
with interest from 6.4% to 7.64%................ 0 0 204,801 204,801
Capital leases and other - due 1999 to 2018
with interest from 7.5% to 10%.................. 17,827 2,263 0 20,090
-------------- ------------ -------------- ------------
Long-term debt.............................. 17,827 3,488 352,801 374,116
Subordinated money market certificates - due
10/99 to 10/13 with interest from 4.5% to 9.5%.. 0 428,959 0 428,959
Subordinated debentures - due 1999 to 2003
with interest at 7.0% to 8.5%................... 0 19,711 37,633 57,344
-------------- ------------ -------------- ------------
Total subordinated debt..................... 0 448,670 37,633 486,303
-------------- ------------ -------------- ------------
Total debt............................. $ 17,827 $ 452,158 $ 390,434 $ 860,419
============== ============ ============== ============
</TABLE>
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
OTHER MATTERS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Agway 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, Agway. Where any such forward-looking statement includes a
statement of the assumptions or basis underlying such forward-looking statement,
Agway 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 Agway. Where, in any forward- looking
statement, Agway, 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.
ENVIRONMENTAL ISSUES
Agway and its subsidiaries are subject to various laws and governmental
regulations concerning environmental matters. We expect to be required to expend
funds to participate in the remediation of certain sites, including sites where
we have been designated by the Environmental Protection Agency (EPA) as a
potentially responsible party (PRP) under the Comprehensive Environmental
Response, Compensation, and Liability Act (CERCLA) and at sites with underground
fuel storage tanks. We will also incur other expenses associated with
environmental compliance. As part of its long-term environmental protection
program, Agway spent approximately $100 in 1999 on capital projects related
principally to the removal of underground storage tanks. Agway expects to have
approximate expenses in the amount of $400 during 2000.
At June 30, 1999, Agway is designated as a PRP under CERCLA or as a third party
to the original PRPs in several Superfund sites. The liability under CERCLA is
joint and several, meaning that we could be required to pay in excess of our pro
rata share of remediation costs. Agway's understanding of the financial strength
of other PRPs at these Superfund sites has been considered, where appropriate,
in the determination of our estimated liability.
We continually monitor our 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 our 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, we believe that past experience provides
a reasonable basis for estimating our liability. As additional information
becomes available, estimates are adjusted as necessary. While we do not
anticipate that any such adjustment would be material to our 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 Agway's liquidity position.
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
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. In addition, in some business segments, computer chips are
embedded in the automation of certain processing or manufacturing operations.
Agway initiated its year 2000 compliance efforts in January 1996. The year 2000
compliance effort has been comprehensive, including each business segment as
well as corporate-level activities. Agway engaged an international consulting
firm in March 1998 to evaluate Agway's approach to year 2000 plans and
implementation compared to industry "best practices." Year 2000 readiness
responsibility has been assigned to high-level management within each business
segment and for Agway as a whole. This includes periodic reports to the Board of
Directors regarding the implementation timetable and the development of
contingency plans. In the systems area, the effort has included (1) inventorying
all critical information systems; (2) prioritizing those systems determined to
be at risk; (3) planning the upgrade through system remediation, replacement,
outsourcing, or disposal; (4) testing and implementation of upgraded systems;
and (5) testing of the critical upgraded systems in a year 2000 environment
created for that purpose. While upgraded systems are individually tested for
year 2000 compliance prior to implementation, the year 2000 environment allows
us to not only test them in a simulated year 2000 environment but also to test
the interaction of critical systems on an "enterprise-wide" basis in a simulated
year 2000 environment.
The prioritization of Agway's year 2000 compliance work considers, among other
things, the seasonal business cycles of certain Agway business segments to allow
for implementation of and training on major new systems during the non- peak
portion of each segment's business cycle. Through July 1999, the inventory,
prioritization, and planning stages for all information systems are complete.
The testing and implementation stage is complete for most systems and the
majority of information systems selected for enterprise-wide testing have also
been completed. As of the end of July 1999, there is, however, still some
information system work to be completed. The outstanding issues and their
scheduled completion dates are discussed below:
- - In June 1999, the Energy and Insurance segments completed implementation
of a new general ledger accounts payable and fixed asset set of systems
which had been implemented corporately and by the Agriculture and Leasing
segments at the beginning of 1999. This set of systems was enterprise-wide
tested in August 1999.
- - The wholesale information systems within the Agriculture segment have
largely been replaced with a new system. One remaining critical module is
scheduled for implementation in September 1999. Other non-critical
modules, which will improve operational efficiency, are scheduled for
implementation by October 1999. Enterprise-wide testing of this wholesale
system is scheduled for completion in October 1999. The accounts
receivable system for the wholesale business is also scheduled for
replacement by October 1999.
- - The Agway Energy segment is replacing its retail operations information
system. Rollout of this new system into each of the Energy business
operating plants started in February 1999, after last year's winter
season. Over 70% of the plants are presently operating on this new system
and the remaining plants are scheduled for implementation from August
through October 1999. Since this system was modified for Agway's use, the
vendor is performing further year 2000 compliance testing and Agway's
internal enterprise-wide testing of the system interfaces is scheduled for
October 1999. In addition, the Energy segment has upgraded its wholesale
accounts receivable system and is in process of training users for
implementation, which is scheduled for September 1999.
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
YEAR 2000 (CONTINUED)
Based on the work to date, we believe that these remaining information system
projects will be implemented on a timely basis as scheduled.
In addition to the information systems review noted above, Agway 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 (personal computers),
information technology (IT) vendor relationships, external interfaces to
internal IT systems, remote location access to IT systems, and certain non-
information technology issues such as supplier year 2000 readiness, facility
year 2000 readiness, and the extent to which embedded chips are used in
machinery and equipment used in business operations. In the IT-related areas,
Agway has completed significant assessments in its major business operations and
has developed and implemented plans to address the critical issues. With respect
to suppliers, Agway has initiated dialogue, both in writing and with key vendors
by interview, regarding their year 2000 readiness. These communications will
continue to the extent useful through December 1999. In the case of embedded
chips in manufacturing and processing operations, the review, assessment, and
remediation are complete in the Country Products Group and Energy segments. The
Agriculture segment has determined that the only facilities requiring further
consideration are the feed mills, which are currently under review. Remediation
of embedded chips in these mills, if any, is expected to be moderate and to be
completed by October 1999.
The year 2000 compliance issue is an uncertainty that is continuously being
monitored as Agway implements its plans. Based on the work performed to date,
Agway presently believes that the likelihood of the year 2000 having a material
effect on the results of operations, liquidity, or financial condition is
remote. Notwithstanding the foregoing, it is not presently clear that all parts
of the country's infrastructure, including such things as the national banking
systems, electrical power, transportation of goods, communications, and
governmental activities, will be fully functioning as the year 2000 approaches.
Our research to date gives us increased confidence in many of these
infrastructure components but also persuades us that absolute certainty
regarding their performance will not likely be possible prior to passing into
the year 2000. To the extent failure occurs in such activities, which are
outside Agway's control, it could affect Agway's sources of supply and Agway's
ability to service its customers with the same degree of effectiveness with
which they are served presently. Agway has identified elements of the
infrastructure that are of greater significance to its operations and is
obtaining information on an ongoing basis as to their expected year 2000
readiness.
Each of Agway's business segments has either completed or is in the process of
completing business contingency and continuity plans in the event of unusual
business developments due to entering into the year 2000. The methodology used
for this planning process was common for each business area. Each business unit
identified its business processes and assessed each process on the basis of its
importance to the conduct of business and the probability of its having a year
2000-generated problem. Processes identified as critical to the conduct of
business with a moderate or higher probability of exposure to year 2000
disruption were then investigated for work-around alternatives. Those processes
for which alternatives were not readily available were then considered further
for establishment of business contingency and continuity plans.
Our business contingency and continuity plans were set to provide the best
possible assurance first for those services we provide customers that involve
human health and safety, i.e., principally delivery of energy products; second
for those services that involve animal life and welfare, principally delivery of
animal feeds; and third for those business activities that provide cash flow to
Agway to permit us to meet our obligations.
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
YEAR 2000 (CONTINUED)
Based on these priorities, the most severe difficulty that we could face would
be either the disruption of supply of our energy or feed products to the
Northeast or power failures which would disrupt ability to deliver product to
our customer base. In both our energy and feed businesses, we have multiple
locations throughout our market territory and will store product to the extent
possible prior to December 31, 1999, as a contingency plan. In the normal course
of business, we have multiple suppliers so that alternative supply is available.
If primary transportation of bulk product to the Northeast, i.e., pipelines or
rail, is impaired, we would move to alternative transportation to the extent
available, move product from locations with higher stored inventory to locations
experiencing shortages and, if necessary, particularly in Energy, move to
allocation programs which are part of our standard business continuity programs.
Similarly, in the event of localized power failures, we have the ability in
emergency conditions to move product from non-affected locations to affected
locations.
Finally, we have established a command center that makes use of the telephones
and work space in our existing overnight call center. A back-up generator is in
place with capacity to provide power to this command center, Agway's computer
center, and limited additional space. Business units have been allocated work
space in this area to monitor and react to critical business interruptions just
prior and subsequent to the millennium date change.
Agway has incurred 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 Agway approximately $18,100, of which $14,900 has been
incurred and $3,200 is expected to be incurred from July 1999 through December
1999. Approximately 85% of these estimated costs represent replacement costs and
will be capitalized. Additionally, Agway estimates the costs to remediate all
other areas, as well as costs to create corporate-level testing environments and
contingency planning efforts, approximate $3,500, of which $2,300 has been
incurred and $1,200 is expected to be incurred from July 1999 through December
1999. However, these costs will vary as Agway continues to assess and implement
its plans or if Agway is required to invoke contingency plans. Agway treats
non-capital costs associated with year 2000 as period costs and they are
expensed when incurred.
The year 2000 statements set forth above are designated as "Year 2000 Readiness
Disclosures" pursuant to the Year 2000 Information and Readiness Disclosure Act
(P.L. 105-271).
AGRICULTURAL ECONOMY AND OTHER FACTORS
The financial condition of Agway can be directly affected by factors affecting
the agricultural economy, since these factors impact the demand for our products
and the ability of our customers to make payments for products already purchased
through credit extended by us. These factors may include: (i) changes in
government agricultural programs that may adversely affect the level of income
of customers of Agway (e.g., milk marketing orders and acreage reduction
programs); (ii) weather-related conditions which periodically occur that can
impact the agricultural productivity and income of the customers of Agway; and
(iii) the relationship of demand relative to supply of agricultural commodities
produced by customers of Agway. Agway can also be affected by major
international events, like the downturn in foreign economies, which can affect
such things as the price of commodities we use in our operations as well as the
general level of interest rates.
29
<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, 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 Agway, is not expected to be significant in the
short-term. The longer-term impact on our financial condition of such a major
change in the federal government's role in agriculture cannot be predicted at
this time.
Agway Energy Products 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 agricultural, 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 our customers, the financial condition of Agway could be adversely
affected.
FUTURE ACCOUNTING REQUIREMENTS
See Note 1 to consolidated financial statements.
30
<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. We are exposed to market risk
in the areas of interest rates and commodity prices. These exposures are
directly related to our normal funding and investing activities and to our use
of agricultural and energy commodities in the operation of our business.
INTEREST RATE EXPOSURE
We do not use derivatives or other interest rate instruments to hedge interest
rate risk due to the fixed rate nature of the majority of our debt obligations.
The following table provides information about the 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
2000 2001 2002 2003 2004 Thereafter Total 6/30/99
--------- --------- --------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Available-for-sale securities $ 3,040 $ 3,501 $ 4,883 $ 4,282 $ 2,235 $ 18,451 $ 36,392 $ 36,438
Weighted average interest rate.. 6.18% 6.40% 6.21% 6.35% 6.39% 6.34%
LIABILITIES
Bank lines of credit - Telmark 43,300 43,300 43,300
Weighted average interest rate.. 5.79%
Long-term debt, including
current portion - Telmark..... 91,461 84,431 68,581 48,608 57,529 2,191 352,801 361,086
Weighted average interest rate.. 7.05% 6.75% 6.67% 6.70% 6.65% 6.62%
Subordinated debentures,
including current
portion - Telmark............. 18,200 3,766 4,650 11,017 37,633 37,887
Weighted average interest rate.. 8.23% 7.49% 7.29% 8.00%
Commercial paper - AFC.......... 38,500 38,500 38,500
Weighted average interest rate.. 5.02%
Long-term debt, including
current portion - Agway & AFC. 2,984 5,611 7,560 239 196 1,645 18,235 18,230
Weighted average interest rate.. 8.47% 8.52% 8.50% 7.95% 8.06% 6.92%
Subordinated debentures,
including current
portion - AFC................. 11,632 3,234 4,845 19,711 19,681
Weighted average interest rate.. 8.34% 7.38% 7.88%
Subordinated money market
certificates, including
current portion - AFC......... 47,136 49,278 48,731 36,036 39,007 208,771 428,959 424,207
Weighted average interest rate.. 7.63% 9.15% 8.25% 6.92% 8.10% 7.80%
</TABLE>
Telmark, Agway'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. 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. Telmark subordinated debentures bear interest at a
rate that is the greater of the stated rate or a rate based upon the average
discount rate for T-Bills, with maturities of 26 weeks. Based on the T-Bill rate
of 4.9% as of June 30, 1999, as compared to the stated rates of the debentures
which range from 6.0% to 8.5% at June 30, 1999, we believe that 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, 1999, we do 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 Agway.
31
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(THOUSANDS OF DOLLARS)
INTEREST RATE EXPOSURE (CONTINUED)
AFC's subordinated money market certificates bear interest at a rate that is the
greater of the stated rate or a rate based upon the discount rate of T-Bills,
with maturities of 26 weeks. Based on the T-Bill rate of 4.9% at June 30, 1999,
as it compares to the stated rates of the money market certificates which range
from 4.5% to 9.5% at June 30, 1999, we believe 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, 1999 and 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 by market price changes to the underlying
commodities that the commodity instruments are hedging. As of June 30, 1999
and 1998, assuming a 10% hypothetical change in the underlying commodity price,
the potential change in fair value of Energy's commodity instruments was $1,100
and $500, respectively.
In the Agriculture segment's feed business, exchange-traded commodity
instruments are used principally to hedge corn, soy complex, and oats, which
can be sold directly as ingredients or included in feed products. Since November
1997, all transactions involving derivative financial instruments in the feed
business are required to have a direct relationship to the price risk associated
with existing inventories or future purchase or sale of its products. A
sensitivity analysis has been prepared to estimate Agriculture's feed business
exposure to market risk of its exchange-traded instrument position as of June
30, 1999 and 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 by market price changes to the underlying
commodities that the commodity instruments are hedging. As of June 30, 1999 and
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.
32
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(THOUSANDS OF DOLLARS)
COMMODITY PRICE EXPOSURE (CONTINUED)
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.
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, 1999 and 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, 1999 and 1998,
assuming a 10% hypothetical change in the underlying commodity price, the
potential change in fair value of the department's commodity instruments was
$2,900 and $700, respectively. Subsequent to year-end, open unauthorized
speculative commodity instruments were closed. In addition, inventory and
open forward contracts have been hedged. During the period it took to
restructure and hedge the open positions of the department, further market
losses of approximately $1,300 were incurred, which will be reflected in Agway's
Form 10-Q for the first quarter of fiscal 2000.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
PAGES
-----
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES:
<S> <C>
Agway Inc. Report on Financial Statements.............................................................. 35
Report of Independent Accountants...................................................................... 36
Consolidated Balance Sheets, June 30, 1999 and 1998.................................................... 37
Consolidated Statements of Operations, fiscal years ended June 30, 1999, 1998 and 1997................. 38
Consolidated Statements of Comprehensive Income, fiscal years ended June 30, 1999,
1998 and 1997..................................................................................... 39
Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended June 30,
1999, 1998 and 1997............................................................................... 40
Consolidated Statements of Cash Flow, fiscal years ended June 30, 1999, 1998 and 1997.................. 41
Notes to Consolidated Financial Statements............................................................. 42
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting
and financial disclosure.
34
<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 six
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
35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Agway Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 75 present fairly, in all material
respects, the financial position of Agway Inc. and its subsidiaries at June 30,
1999 and 1998, and the result of their operations and their cash flows for each
of the three years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules listed in the index appearing under Item 14(a)(2)
on page 75 present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedules are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedules 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.
The 1998 financial statements have been restated to correct for the accounting
effect of the irregularities as described in Note 17.
As discussed in Note 13, the Company changed its accounting for pensions in
1998.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Syracuse, New York
September 2, 1999
36
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ASSETS RESTATED
1999 1998
------------- --------------
<S> <C> <C>
Current assets:
Trade accounts receivable (including notes receivable of
$45,960 and $49,394, respectively), less allowance for
doubtful accounts of $7,155 and $7,926, respectively................... $ 185,536 $ 203,637
Leases receivable, less unearned income of $64,330 and $65,048,
respectively........................................................... 131,431 137,493
Advances and other receivables............................................. 23,456 25,480
Inventories................................................................ 146,066 149,214
Prepaid expenses and other assets.......................................... 52,341 52,774
------------- --------------
Total current assets................................................... 538,830 568,598
Marketable securities........................................................... 35,099 36,412
Other security investments...................................................... 51,010 51,761
Properties and equipment, net................................................... 215,425 213,795
Long-term leases receivable, less unearned income of $134,623 and
$110,721, respectively..................................................... 419,444 357,777
Net pension asset............................................................... 198,160 176,792
Other assets.................................................................... 19,083 12,159
------------- --------------
Total assets........................................................... $ 1,477,051 $ 1,417,294
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
RESTATED
1999 1998
------------- --------------
Current liabilities:
Notes payable.............................................................. $ 81,800 $ 65,100
Current installments of long-term debt..................................... 94,699 99,173
Subordinated debt, current................................................. 76,968 75,589
Accounts payable........................................................... 115,350 114,548
Other current liabilities.................................................. 115,865 114,311
------------- --------------
Total current liabilities.............................................. 484,682 468,721
Long-term debt.................................................................. 279,417 255,356
Subordinated debt............................................................... 409,335 386,607
Other liabilities............................................................... 104,670 100,381
------------- --------------
Total liabilities...................................................... 1,278,104 1,211,065
Commitments and contingencies...................................................
Shareholders' equity:
Preferred stock, less amount held in Treasury.............................. 42,917 47,871
Common stock ($25 par--300,000 shares authorized; 172,706 and 172,265
shares issued, less amount held in Treasury)........................... 2,506 2,571
Accumulated other comprehensive income (loss).............................. (239) 425
Retained earnings.......................................................... 153,763 155,362
------------- --------------
Total shareholders' equity............................................. 198,947 206,229
Total liabilities and shareholders' equity........................ $ 1,477,051 $ 1,417,294
============= ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
37
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
RESTATED
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Net sales and revenues from:
Product sales (including excise taxes)............... $ 1,386,388 $ 1,470,132 $ 1,587,751
Leasing operations................................... 70,006 65,476 56,943
Insurance operations................................. 27,968 27,335 27,020
------------- ------------- --------------
Total net sales and revenues..................... 1,484,362 1,562,943 1,671,714
------------- ------------- --------------
Cost and expenses from:
Products and plant operations........................ 1,268,899 1,346,276 1,471,885
Leasing operations................................... 27,626 26,871 23,486
Insurance operations................................. 17,152 16,653 16,437
Selling, general and administrative activities....... 152,221 131,413 131,116
------------- ------------- --------------
Total operating costs and expenses............... 1,465,898 1,521,213 1,642,924
------------- ------------- --------------
Operating earnings........................................ 18,464 41,730 28,790
Interest expense, net of interest income of $9,140,
$10,032, and $9,976, respectively.................... (32,286) (30,825) (30,970)
Other income, net......................................... 19,790 13,361 18,763
------------- ------------- --------------
Earnings from operations before income taxes.............. 5,968 24,266 16,583
Income tax expense........................................ (4,173) (12,077) (5,913)
------------- ------------- --------------
Earnings before cumulative effect of an accounting
change............................................... 1,795 12,189 10,670
------------- ------------- --------------
Cumulative effect of accounting change, net of tax
expense of $16,500................................... 0 28,956 0
------------- ------------- --------------
Net earnings.............................................. $ 1,795 $ 41,145 $ 10,670
============= ============= ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
38
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FISCAL YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
RESTATED
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Net earnings ............................................. $ 1,795 $ 41,145 $ 10,670
Othercomprehensive income, net of tax:
Unrealized gains (losses) on available-for-sale
securities:
Unrealized holding gains (losses) arising
during period................................ (685) 660 413
Reclassification adjustment for losses included
in net income............................... 21 45 11
------------- ------------- --------------
Other comprehensive income(loss) ......................... (664) 705 424
------------- ------------- --------------
Comprehensive income...................................... $ 1,131 $ 41,850 $ 11,094
============= ============= ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
39
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
(PAR VALUE $25) PREFERRED COMPREHENSIVE RETAINED
SHARES AMOUNT STOCK INC (LOSS) EARNINGS TOTAL
--------- ---------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance June 30, 1996..................... 107,574 $ 2,689 $ 59,319 $ (704) $ 111,418 $ 172,722
Net earnings........................ 10,670 10,670
Dividends declared.................. (4,237) (4,237)
Redeemed, net....................... (2,022) (50) (1,778) (1,828)
Other comprehensive income.......... 424 0 424
--------- ---------- ----------- ------------- ---------- -------------
Balance June 30, 1997..................... 105,552 2,639 57,541 (280) 117,851 177,751
Net earnings, as restated........... 41,145 41,145
Dividends declared.................. (3,634) (3,634)
Redeemed, net....................... (2,714) (68) (9,670) (9,738)
Other comprehensive income.......... 705 0 705
--------- ---------- ----------- ------------- ----------- --------------
Balance June 30, 1998, as restated........ 102,838 2,571 47,871 425 155,362 206,229
Net earnings........................ 1,795 1,795
Dividends declared.................. (3,394) (3,394)
Redeemed, net....................... (2,597) (65) (4,954) (5,019)
Other comprehensive income.......... (664) 0 (664)
--------- ---------- ----------- ------------- ----------- --------------
Balance June 30, 1999..................... 100,241 $ 2,506 $ 42,917 $ (239) $ 153,763 $ 198,947
========= ========== =========== ============= =========== ==============
</TABLE>
Common shares, purchased at par value, held in Treasury at June 30 were: 72,465
in 1999; 69,427 in 1998; 66,240 in 1997. A common stock dividend per share of
$1.50 was declared for 1999, 1998 and 1997. Dividend payments are restricted to
a maximum of 8% of par value per annum. See Note 12 for the details of preferred
stock activity.
The accompanying notes are an integral part of the consolidated financial
statements.
40
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FISCAL YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
RESTATED
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .......................................... $ 1,795 $ 41,145 $ 10,670
Adjustments to reconcile earnings to net cash:
Depreciation and amortization...................... 26,676 28,797 29,831
Receivables and other asset provisions............. 11,194 11,390 10,341
Net pension income................................. (21,368) (31,909) (14,871)
Cumulative effect of accounting change, net of tax. 0 (28,956) 0
Patronage refund received in stock................. (992) (2,494) (4,984)
Deferred income tax expense........................ 4,251 25,768 4,795
(Gain) loss on disposition of:
Businesses...................................... (11,097) 0 (360)
Other security investments..................... 1,267 0 0
Properties and equipment....................... (401) (1,210) (2,613)
Changes in assets and liabilities, net of effects
of businesses acquired or sold:
Receivables.................................... 18,020 7,962 (210)
Inventory...................................... 1,225 2,042 6,048
Payables....................................... 335 814 (3,278)
Other.......................................... (406) (9,493) (11,135)
------------- ------------- --------------
Net cash flows from operating activities.................. 30,499 43,856 24,234
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of properties and equipment.................. (30,250) (30,952) (25,745)
Cash paid for acquisitions............................. (8,030) (2,969) (2,178)
Disposition of properties and equipment................ 4,972 8,770 11,429
Purchases of marketable securities available for sale.. (6,333) (12,529) (25,084)
Sale of marketable securities available for sale....... 6,982 12,407 24,037
Leases originated...................................... (252,107) (227,270) (231,006)
Leases repaid.......................................... 188,637 169,827 151,851
Purchases of investments in related cooperatives....... (2,172) (2,601) (4,657)
Proceeds from sale of investments in related
cooperatives........................................... 2,648 2,986 2,381
Proceeds from disposal of businesses................... 14,150 0 21,958
------------- ------------- --------------
Net cash flows used in investing activities............... (81,503) (82,331) (77,014)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term borrowing..................... 16,480 5,510 (3,000)
Proceeds from long-term debt........................... 113,852 133,837 132,771
Repayment of long-term debt............................ (94,722) (110,644) (91,394)
Proceeds from sale of subordinated debentures.......... 133,948 118,371 63,086
Redemption of subordinated debt........................ (109,842) (94,302) (39,887)
Payments on capitalized leases......................... (161) (617) (2,671)
Proceeds from sale of stock............................ 45 18 2,291
Redemption of stock.................................... (5,064) (9,755) (4,119)
Cash dividends paid.................................... (3,532) (3,943) (4,297)
------------- ------------- --------------
Net cash flows from financing activities.................. 51,004 38,475 52,780
------------- ------------- --------------
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.
41
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Agway Inc. was incorporated under the Delaware General Corporation Law in 1964
and is headquartered in DeWitt, New York. Agway is an agricultural cooperative
directly engaged in manufacturing, processing, distribution and marketing of
agricultural feed and agronomic products and services for its farmer-members and
other customers, primarily in the northeastern United States and Ohio. In
addition, Agway is involved in retail and wholesale sales of farm supplies, yard
and garden products, pet food and pet supplies; repackaging and marketing
produce; and processing and marketing sunflower seeds. Agway, through certain of
its subsidiaries, is involved in the distribution of petroleum products; lease
financing; the underwriting and sale of certain types of property and casualty
insurance; and the sale of health insurance.
Fiscal Year
The fiscal year-end is on the last Saturday in June. Fiscal years ended June
1999, 1998 and 1997 were comprised of 52 weeks.
Basis of Consolidation
The consolidated financial statements include the accounts of all wholly owned
subsidiaries. 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
Agway 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. Provisions for credit
losses are charged to income in amounts sufficient to maintain the allowance at
a level considered adequate to cover losses in the existing portfolio. The net
investment in a lease is charged against the allowance for credit losses when
determined to be uncollectible, generally within one year of becoming past due.
Inventories
Inventories are stated at the lower of cost or market, except for grain
inventories associated with Agriculture's grain marketing program, which are
marked to market. For those inventories stated at cost, we use the average unit
cost or the first-in, first-out method.
42
<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
underlying 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 marketable debt securities, which relate entirely to Agway's Insurance
operations, are classified as available for sale and carried at fair value.
Unrealized gains and losses, net of tax, are reported in accumulated other
comprehensive income (loss).
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. We
believe it is not practical to estimate the fair value of these investments
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 $1,400, $1,600 and $1,200 for the
years ended June 30, 1999, 1998 and 1997, 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 $15,000 and $9,100 at June 30, 1999 and 1998,
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 ($2,900 over 1 to 10 years, $8,900 over
15 to 20 years, and $3,200 over 40 years). Amortization included in operating
results totaled approximately $1,700, $1,400 and $1,100 for fiscal years ending
June 30, 1999, 1998 and 1997, respectively. Other assets are reviewed for
impairment, as described under Impairment of Long-Lived Assets below.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles to be held and used by an
entity are to 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 pre-tax charge for impairment is included in other
income, net, on the consolidated statements of operations and totaled $700,
$2,200 and $1,700 in 1999, 1998 and 1997, respectively.
43
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Environmental Remediation Costs
Agway 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.
Excise Taxes
Excise taxes included in product sales were approximately $25,300, $28,900 and
$31,400 for the years ended June 30, 1999, 1998 and 1997, respectively.
Advertising/Research and Development Costs
Agway expenses advertising and research and development costs as they are
incurred. Advertising expense for the years ended June 30, 1999, 1998 and 1997
was approximately $8,300, $11,800 and $10,800, respectively. Net research and
development costs were approximately $1,800, $400 and $700 for the years ended
June 30, 1999, 1998 and 1997, respectively.
Income Taxes
Agway 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 Agway. Patronage
refunds are based on taxable earnings on patronage business and, when declared,
are paid in cash.
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.
Future Accounting Requirements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes comprehensive accounting and reporting requirements for derivative
instruments and hedging activities. SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. The accounting for gains or losses resulting from changes in the values
of those derivatives is dependent on the use of the derivative and the type of
risk being hedged. In June 1999, SFAS No. 137 was issued, which deferred the
effective date of SFAS No. 133 to all fiscal quarters of fiscal years beginning
after June 15, 2000. At the present time, Agway has not completed its evaluation
of the impact that the adoption of SFAS No. 133 will have on its consolidated
financial statements.
44
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income
Effective July 1, 1998, Agway adopted SFAS No. 130, "Reporting Comprehensive
Income." This statement requires a company to report, among other things, the
effects of unrealized investment holding gains or losses for available-for- sale
securities as "comprehensive income" for all periods presented.
2. AGWAY FINANCIAL CORPORATION
Agway Financial Corporation (AFC), a wholly owned subsidiary of Agway, is a
Delaware corporation incorporated in 1986 with principal executive offices
located in Wilmington, Delaware. AFC's principal business activities consist of
securing financing through bank borrowings and issuance of corporate debt
instruments to provide funds for general corporate purposes to Agway and AFC's
wholly owned subsidiary, Agway Holdings Inc. (AHI), and AHI's subsidiaries. The
payment of principal and interest on this AFC debt is guaranteed by Agway. This
guarantee is full and unconditional, and joint and several. Telmark and
Insurance finance their activities through operations or with a combination
of short- and long-term credit facilities.
Major holdings of AHI include Agway Energy Products LLC and Agway Energy
Services Inc. (Energy), Telmark LLC and its subsidiaries (Leasing), and Agway
Insurance Company and Agway General Agency Inc. (Insurance). Effective June 26,
1999, Agway Consumer Products Inc., a Delaware corporation and former holding of
AHI, was merged into Agway Inc. Agway Consumer Products Inc. held the assets and
business operations of the former Retail segment and certain assets and business
operations of the Country Products Group and Agriculture. This merger into Agway
aligns the legal structure more closely with the management structure of Agway
and facilitates the ability to manage these assets and businesses prospectively.
The 1998 and 1997 results as shown below have been restated to reflect this
merger.
In exemptive relief granted pursuant to a "no action letter" issued by the staff
of the SEC, AFC is not required to file periodic reports with the SEC for itself
but does report summarized financial information in Agway's financial statement
footnotes. 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>
Restated Restated
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Net sales and revenues...................................... $ 580,883 $ 625,555 $ 698,021
Operating earnings.......................................... 46,120 46,248 37,876
Net earnings (loss)......................................... (6,659) (765) 11,053
Restated
1999 1998
------------- -------------
Current assets.............................................. $ 567,602 $ 561,999
Properties and equipment, net............................... 86,018 90,487
Noncurrent assets........................................... 557,688 446,885
------------- -------------
Total assets................................................ $ 1,211,308 $ 1,099,371
============= =============
Current liabilities......................................... $ 67,391 $ 8,725
Short-term notes payable.................................... 81,800 65,100
Current portion of long-term debt........................... 169,236 170,477
Long-term debt.............................................. 264,021 245,819
Subordinated debt........................................... 409,335 386,607
Noncurrent liabilities...................................... 23,262 22,757
Shareholder's equity........................................ 196,263 199,886
------------- -------------
Total liabilities and shareholder's equity $ 1,211,308 $ 1,099,371
============= =============
</TABLE>
45
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
3. LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES
Net investments in leases at June 30 were as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Leases (minimum payments):
Commercial and agricultural................................................ $ 739,866 $ 667,050
Retail..................................................................... 28,349 21,464
------------- -------------
Total leases........................................................... 768,215 688,514
Unearned interest and finance charges........................................... (198,953) (175,769)
Net deferred origination costs.................................................. 11,591 9,596
------------- -------------
Net investment............................................................. 580,853 522,341
Allowance for credit losses..................................................... (29,978) (27,071)
------------- -------------
Net leases receivable...................................................... $ 550,875 $ 495,270
============= =============
</TABLE>
Included within the above are estimated unguaranteed residual values of leased
property approximating $82,100 and $72,400 at June 30, 1999 and 1998,
respectively. Additionally, as of June 30, 1999 and 1998, the recognition of
interest income was suspended on approximately $4,900 and $3,000, respectively,
of net leases.
Contractual maturities of leases (minimum payments) over the next five years and
thereafter were as follows at June 30, 1999: $220,000 in 2000; $171,400 in 2001;
$126,500 in 2002; $83,500 in 2003; $51,800 in 2004; and $115,000 thereafter.
4. INVENTORIES
Inventories at June 30 consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Finished goods................................................................ $ 137,348 $ 139,861
Raw materials................................................................. 6,892 7,576
Supplies...................................................................... 1,826 1,777
-------------- -------------
Total inventories........................................................ $ 146,066 $ 149,214
============== =============
</TABLE>
46
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
5. MARKETABLE SECURITIES
All marketable debt securities relate entirely to Agway's insurance operations
and are classified as available-for-sale marketable securities. At June 30,
1999, we did not hold any debt from a single issuer that exceeded 10 percent of
shareholders' equity. Marketable securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
June 30, 1999
- -------------
U.S. government securities and obligations......... $ 3,842 $ 12 $ (95) $ 3,759
Mortgage-backed securities......................... 13,116 40 (136) 13,020
Corporate securities............................... 18,504 36 (220) 18,320
----------- ---------- ----------- ------------
Total available-for-sale marketable securities. $ 35,462 $ 88 $ (451) $ 35,099
=========== ========== =========== ============
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- ------------
June 30, 1998
- -------------
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
=========== ========== =========== ============
</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
$4, $81 and $200 were realized on sales of debt securities in 1999, 1998 and
1997, respectively. Gross losses realized on sales of debt securities totaled
approximately $36, $150 and $200 in 1999, 1998 and 1997, respectively.
The amortized cost and the fair value of available-for-sale debt securities at
June 30, 1999, 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.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------- -------------
<S> <C> <C>
Due within one year or less....................................................... $ 65 $ 65
Due after one year through five years............................................. 6,557 6,553
Due after five years through ten years............................................ 12,195 12,009
Due after ten years............................................................... 16,645 16,472
------------- -------------
$ 35,462 $ 35,099
============= =============
</TABLE>
47
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
6. OTHER SECURITY INVESTMENTS
Other security investments at June 30 consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
CF Industries, Inc.............................................................. $ 25,260 $ 25,260
CoBank, ACB..................................................................... 17,445 18,940
Other........................................................................... 8,305 7,561
------------- -------------
$ 51,010 $ 51,761
============= =============
</TABLE>
7. 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, 1999
- -------------
Land and land improvements.................................. $ 35,599 $ 0 $ 35,599
Buildings and leasehold improvements........................ 139,398 5,968 145,366
Machinery and equipment..................................... 333,185 473 333,658
Capital projects in progress................................ 19,042 0 19,042
-------------- ------------- -------------
527,224 6,441 533,665
Less: accumulated depreciation and amortization............. 314,502 3,738 318,240
-------------- ------------- -------------
Properties and equipment, net............................... $ 212,722 $ 2,703 $ 215,425
============== ============= =============
Owned Leased Combined
-------------- ------------- -------------
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
============== ============= =============
</TABLE>
Depreciation and amortization expense relating to properties and equipment
amounted to approximately $24,900, $27,400 and $28,800 in 1999, 1998 and 1997,
respectively.
48
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
8. INCOME TAXES
The provision for income taxes as of June 30 consists of the following:
<TABLE>
<CAPTION>
Restated
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Continuing operations:
Current:
Federal.......................................... $ (1,255) $ (1,131) $ (2,226)
State............................................ 1,177 3,940 3,344
Deferred............................................. 4,251 9,268 5,676
(Decrease) increase in valuation allowance........... 0 0 (881)
------------- ------------- --------------
$ 4,173 $ 12,077 $ 5,913
============= ============= ==============
</TABLE>
The deferred tax provision on the cumulative effect of accounting change in 1998
was $16,500.
The effective income tax rate on earnings from operations before income taxes
differs from the federal statutory regular tax rate as of June 30 as follows:
<TABLE>
<CAPTION>
Restated
1999 1998 1997
------------- ------------- --------------
<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)....... 22.3 14.1 14.0
Nondeductible items (2).............................. 13.6 2.6 2.2
Adjustment to prior years' tax liabilities........... (3.4) (2.2) (10.8)
Other items.......................................... 2.4 0.3 (4.7)
------------- ------------- --------------
Effective income tax rate........................ 69.9% 49.8% 35.7%
============= ============= ==============
</TABLE>
(1) For state income tax purposes, Agway does not file combined income tax
returns and is therefore unable to recognize the benefit of certain net
operating losses incurred by subsidiaries.
(2) Nondeductible items are principally related to goodwill amortization.
49
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
8. INCOME TAXES (CONTINUED)
The components of the deferred tax assets and liabilities as of June 30 were as
follows:
<TABLE>
<CAPTION>
Restated
1999 1998
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss (NOL) carryforward...................................... $ 15,324 $ 8,771
Other liabilities and reserves............................................. 12,501 14,849
Medical reserves........................................................... 9,517 9,477
Self-insurance reserves.................................................... 8,268 7,190
Alternative minimum tax (AMT) credit carryforward.......................... 6,005 6,960
Deferred compensation...................................................... 4,977 4,647
Inventory reserves......................................................... 4,351 4,250
Accounts receivable........................................................ 2,681 3,025
Environmental reserve...................................................... 2,261 3,066
Investment tax credit (ITC) carryforward................................... 1,604 2,072
Leases receivable.......................................................... 1,123 3,043
------------ -------------
Total net deferred tax asset........................................... 68,612 67,350
------------ -------------
Deferred tax liabilities:
Pension assets............................................................. 71,231 63,551
Excess of tax over book depreciation....................................... 14,970 16,233
Prepaid medical expenses................................................... 6,212 6,522
Other assets............................................................... 1,684 2,278
------------ -------------
Total deferred tax liability........................................... 94,097 88,584
------------- -------------
Net deferred tax liability........................................ $ (25,485) $ (21,234)
============= =============
</TABLE>
Agway's net deferred tax (liability) asset at June 30, 1999 and 1998, of
$(25,485) and $(21,234), respectively, consists of a net current asset of
$24,858 and $23,693 included in prepaid expenses and a net long-term liability
of $50,343 and $44,927 included in other liabilities as of June 30, 1999 and
1998, respectively. Based on Agway's history of taxable earnings and our
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, 1999, the federal AMT credit can be carried forward indefinitely.
The net operating loss (NOL) carryforward expires in 2019, and the ITC
carryforward expires in 2002 and 2003.
50
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
9. SHORT-TERM NOTES PAYABLE
As of June 30, 1999, Agway had certain facilities available with various
financial institutions whereby lenders have agreed to provide funds up to
$380,000 to separately financed units of Agway as follows: AFC - $65,000 and
Telmark - $315,000. The AFC amount is a $50,000 short-term line of credit and a
$15,000 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, 1999, to provide a facility for interim funding, if
necessary, for maturing subordinated debt. Letters of credit of $28,100, which
are primarily used to back general liability claims, are also available to AFC.
At June 30, 1999, letters of credit issued totaled approximately $18,300. The
carrying amounts of Agway's short-term borrowings approximate their fair value
and were as follows:
<TABLE>
<CAPTION>
AFC
(excluding
Telmark) Telmark Total
------------- ------------ -------------
<S> <C> <C> <C>
June 30, 1999
- -------------
Bank lines of credit........................................ $ 0 $ 43,300 $ 43,300
Commercial paper............................................ 38,500 0 38,500
------------- ------------ -------------
$ 38,500 $ 43,300 $ 81,800
============= ============ =============
Weighted average interest rate.............................. 5.0% 5.8%
============= ============
AFC
(excluding
Telmark) Telmark Total
------------- ------------ -------------
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.............................. 5.6% 6.3%
============= ============
</TABLE>
The interest rate charged on commercial paper outstanding was 5.02% at June 30,
1999, and ranged from 5.56% to 5.62% at June 30, 1998.
The $50,000 short-term line of credit and the $50,000 commercial paper facility
available to AFC at June 30, 1999, as well as the term revolver, require
collateralization using certain of Agway's accounts receivable and non-petroleum
inventories (collateral). Amounts that can be drawn under these AFC agreements
are subject to a limitation based on a specific calculation relating to the
collateral available. Adequate collateral existed throughout 1999 to permit AFC
to borrow amounts to meet the ongoing needs of Agway. The line of credit and
term revolver additionally require Agway's investment in bank stock, which had a
book value of $4,700 and $7,100 at June 30, 1999 and 1998, respectively, as
additional collateral. In addition, the agreements include certain covenants,
the most restrictive of which requires Agway to maintain specific quarterly
levels of interest coverage and monthly levels of tangible retained earnings. At
June 30, 1999, Agway violated its interest coverage covenant but has
subsequently obtained waivers from its lenders for June 1999 and amendments
through the term of the agreements. In addition, due to the restatement of
financial results, as described in the Management's Discussion and Analysis
(MD&A) and in Note 17 to the financial statements, Agway violated certain of
its covenants in its loan agreements, including the interest coverage covenant
as of December 1998 and March 1999 and a tangible net worth covenant as of
November and December 1998. Agway disclosed the above-referenced losses and
restatements, and causes thereof, to its lenders and has obtained waivers for
these violations. AFC annually renews its line of credit and commercial paper
program in the quarter ended December 31. AFC bank lines of credit (short and
long-term) and commercial paper facilities are available to Agway through
December 1999.
51
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
9. 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
$65,000 on an uncollateralized basis with interest paid upon maturity. The lines
bear interest at money market variable rates. A committed $250,000 partially
collateralized revolving 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 $12,800 and
$11,900 at June 30, 1999 and 1998, respectively. The $65,000 lines of credit all
have terms expiring during the next 12 months. The total amounts outstanding as
of June 30, 1999 and 1998, under the short-term lines of credit and the
short-term component of the revolving term loan facility were $35,000 and $8,300
and $20,000 and $15,000, respectively. The portion of the revolving term loan
that is long term at June 30, 1999 and 1998, was $148,000 and $150,000,
respectively.
10. DEBT
Long-Term Debt:
Long-term debt consists of the following at June 30, 1999:
<TABLE>
<CAPTION>
AFC
(excluding
Agway Telmark) Telmark Total
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Notes payable - banks (a)........................... $ 0 $ 1,225 $ 148,000 $ 149,225
Notes payable - insurance companies (b)(c).......... 0 0 204,801 204,801
Other............................................... 14,747 2,263 0 17,010
-------------- ------------- ------------- ------------
Subtotal long-term debt, excluding capital leases... 14,747 3,488 352,801 371,036
Obligations under capital leases.................... 3,080 0 0 3,080
-------------- ------------- ------------- ------------
Total long-term debt................................ 17,827 3,488 352,801 374,116
Less: current portion............................... 2,431 807 91,461 94,699
-------------- ------------- ------------- ------------
$ 15,396 $ 2,681 $ 261,340 $ 279,417
============== ============= ============= ============
Long-term debt consists of the following
at June 30, 1998:
Restated*
AFC
Restated* (excluding
Agway Telmark) Telmark Total
-------------- ------------- ------------- ------------
Notes payable - banks .............................. $ 0 $ 1,925 $ 150,000 $ 151,925
Notes payable - insurance companies................. 0 0 186,660 186,660
Other............................................... 11,216 2,105 0 13,321
-------------- ------------- ------------- ------------
Subtotal long-term debt, excluding capital leases... 11,216 4,030 336,660 351,906
Obligations under capital leases.................... 2,606 0 17 2,623
-------------- ------------- ------------- ------------
Total long-term debt................................ 13,822 4,030 336,677 354,529
Less: current portion............................... 4,285 1,302 93,586 99,173
-------------- ------------- ------------- ------------
$ 9,537 $ 2,728 $ 243,091 $ 255,356
============== ============= ============= ============
</TABLE>
*See Note 2.
52
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
10. DEBT (CONTINUED)
(a) Under Telmark's revolving term loan facility at June 30, 1999, principal of
$148,000 bears interest at fixed rates ranging from 5.56% to 7.67%,
payments commencing August 1999 with final installments due in April 2004.
The facility is collateralized by Telmark's investment in the bank stock,
which has a book value of $12,800 and $11,900 at June 30, 1999 and 1998,
respectively.
As of June 30, 1999, under an AFC loan agreement bearing an interest rate
of 8.58%, principal of $1,225 is payable in quarterly installments of $175
commencing August 1999 and ending in February 2001. The AFC bank notes of
$1,225, the term revolver, and amounts outstanding on AFC's short-term line
of credit and commercial paper facility are collateralized by certain of
Agway's accounts receivable and non-petroleum inventories as well as
Agway's investment in the bank stock (see Note 9). The AFC debt agreements
contain a number of restrictive financial covenants, the most restrictive
of which requires Agway to maintain specific quarterly levels of interest
coverage and monthly levels of tangible retained earnings. At June 30,
1999, Agway violated its interest coverage covenant but has subsequently
obtained waivers from its lenders for June 1999 and amendments through the
term of the agreement. In addition, due to the restatement of financial
results, as described in the MD&A and in Note 17, Agway violated certain of
its covenants in its loan agreements, including the interest coverage
covenant as of December 1998 and March 1999 and a tangible net worth
covenant as of November and December 1998. Agway disclosed the
above-referenced losses and restatements, and causes thereof, to its
lenders and has obtained waivers for these violations. The AFC loan
agreement and the 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 $146,000 bears interest at fixed rates ranging from 6.5% to 7.6%,
payments commencing November 1999 with final installment due in May 2004.
The note agreements are similar to each other and each contain 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. The subsidiary pays interest at 6.6% on the Class A notes
and 7.0% 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. The notes are further collateralized
by the residual values of these leases. Final scheduled maturity of the
notes is December 2004.
In June 1999, Telmark, through a wholly owned special purpose subsidiary,
Telmark Lease Funding II, LLC, initially issued $44,800 of Class A
lease-backed notes and $3,600 of Class B lease-backed notes to an insurance
company. The subsidiary pays interest at 6.5% on the Class A notes and 7.6%
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. The notes are further collateralized by the
residual value of these leases. Final scheduled maturity of the notes is
December 2007.
53
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
10. DEBT (CONTINUED)
Subordinated Debt:
Subordinated debt consists of the following at June 30, 1999:
<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%........................... $ 19,711 $ 37,633 $ 57,344
Subordinated money market certificates,
due 1999 to 2013, interest at a weighted average
rate of 8.0% with a range of 4.5% to 9.5%.............. 428,959 0 428,959
------------- ------------ -------------
Total long-term subordinated debt........................... 448,670 37,633 486,303
Less: current portion...................................... 58,768 18,200 76,968
------------- ------------ -------------
$ 389,902 $ 19,433 $ 409,335
============= ============ =============
Subordinated debt consists of the following at
June 30, 1998:
AFC
(excluding
Telmark) Telmark Total
------------- ------------ -------------
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
============= ============ =============
</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 AFC
subordinated debt bears interest payable semiannually on January 1 and July 1 of
each year and for Telmark is payable quarterly on January 1, April 1, July 1,
and October 1 of each relevant year. The interest rates of AFC money market
certificates and Telmark's debentures are at the greater of the stated 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 years ending
June 30 and thereafter are as follows:
<TABLE>
<CAPTION>
Capital Subordinated
Leases Borrowings Total Debt
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
2000.................................... $ 456 $ 94,445 $ 94,901 $ 76,968
2001.................................... 456 90,042 90,498 53,044
2002.................................... 457 76,141 76,598 56,615
2003.................................... 458 48,847 49,305 47,053
2004.................................... 459 57,725 58,184 43,852
Thereafter.............................. 2,527 3,836 6,363 208,771
Imputed interest........................ (1,733) 0 (1,733) 0
------------ ------------- ------------ -------------
Total................................... $ 3,080 $ 371,036 $ 374,116 $ 486,303
============ ============= ============ =============
</TABLE>
54
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
11. COMMITMENTS AND CONTINGENCIES
Environmental
Agway and its subsidiaries are subject to various laws and governmental
regulations concerning environmental matters. We expect to be required to expend
funds to participate in the remediation of certain sites, including sites where
we have been designated by the Environmental Protection Agency (EPA) as a
potentially responsible party (PRP) under the Comprehensive Environmental
Response, Compensation, and Liability Act (CERCLA) and at sites with underground
fuel storage tanks. We will also incur other expenses associated with
environmental compliance.
At June 30, 1999, Agway is designated as a PRP under CERCLA or as a third party
to the original PRPs in several Superfund sites. The liability under CERCLA is
joint and several, meaning that we could be required to pay in excess of our pro
rata share of remediation costs. Agway's understanding of the financial strength
of other PRPs at these Superfund sites has been considered, where appropriate,
in the determination of our estimated liability.
We continually monitor our 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 our 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, we believe that past experience provides
a reasonable basis for estimating our liability. As additional information
becomes available, estimates are adjusted as necessary. While we do not
anticipate that any such adjustment would be material to our 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 Agway's liquidity position.
As part of its long-term environmental protection program, Agway spent
approximately $100 in 1999 on capital projects related principally to the
removal of underground storage tanks. Agway expects to have approximate expenses
in the amount of $400 in 2000.
Other
Agway 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
Agway. Agway 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 Agway.
Commitments to extend credit at Agway'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, 1999, approximated $12,600.
In 1996, Agway entered into a long-term agreement with a third party 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.
55
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense for the years ended June 30, 1999, 1998 and 1997 was approximately
$17,100, $14,000 and $12,000, respectively. Future minimum payments under
noncancelable operating leases approximate $14,000, $12,500, $12,300, $12,000
and $11,700 for the years ending June 30, 2000 through 2004, respectively, and
approximately $13,500 thereafter.
12. 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, 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
Issued (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
Issued (redeemed), net......... (19,405) (1,357) 0 (28,782) 3 (4,954)
----------- ----------- ----------- ----------- ----------- -----------
Balance June 30, 1999............ 133,771 234,789 18,010 41,954 2,584 $ 42,917
=========== =========== =========== =========== =========== ===========
<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, 1997.................... $ 6.00 $ 8.00 $ 8.00 $ 7.00 $ 1.50
June 30, 1998.................... $ 6.00 $ 8.00 $ 8.00 $ 7.00 $ 1.50
June 30, 1999.................... $ 6.00 $ 8.00 $ 8.00 $ 7.00 $ 1.50
Shares Held in Treasury (purchased
at par value):
June 30, 1997.................... 120,061 12,773 121,640 60,758 812
June 30, 1998.................... 196,823 13,854 121,990 79,274 970
June 30, 1999.................... 216,228 23,565 121,990 108,056 1,070
</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. Agway 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.
56
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
13. RETIREMENT BENEFITS
Effective for 1999, Agway adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The provisions of SFAS No. 132
revised employers' disclosures about pension and other postretirement benefit
plans. The statement does not change the measurement or recognition of these
plans. The 1998 disclosures were restated for comparative purposes, as required
by the statement.
Pension Plan
The Employees' Retirement Plan of Agway Inc. is a non-contributory defined
benefit pension plan covering the majority of employees of Agway Inc. The plan's
benefit formulae through June 30, 1998, based payment to retired employees
generally upon years of credited service and a percentage of qualifying
compensation during the final years of employment. Effective July 1, 1998, the
plan's benefit formulae base payment on a pension equity formula and also
include incentive compensation as pensionable earnings for all employees.
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, 1999 and 1998, retirement plan assets included
Agway debt securities and preferred stock with estimated fair values of $18,600
and $10,000, respectively.
The Employees' Retirement Plan of Agway Inc. has assets that exceed the benefit
obligation. The following table sets forth the plan's funded status and amounts
recognized in Agway's consolidated financial statements at June 30 as a net
pension asset:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Change in Benefit Obligation
- ----------------------------
Benefit obligation at beginning of year......................................... $ 332,719 $ 301,769
Service cost (with interest).................................................... 9,835 5,373
Interest cost................................................................... 23,948 22,547
Amendments...................................................................... 24,772 0
Special termination benefits.................................................... 0 626
Actuarial (loss) gain........................................................... (11,042) 25,771
Benefits paid................................................................... (34,315) (23,367)
------------- --------------
Benefit obligation at end of year............................................... $ 345,917 $ 332,719
============= ==============
Change in Plan Assets
- ---------------------
Fair value of plan assets at beginning of year.................................. $ 582,988 $ 538,433
Actual return on plan assets.................................................... 30,302 67,922
Benefits paid................................................................... (34,315) (23,367)
------------- --------------
Fair value of plan assets at end of year........................................ $ 578,975 $ 582,988
============= ==============
Funded status................................................................... $ 233,058 $ 250,269
Unrecognized prior service cost................................................. 31,621 11,415
Unrecognized net gain........................................................... (61,814) (75,482)
Unrecognized net transition obligation.......................................... (4,705) (9,410)
------------- --------------
Net pension asset............................................................... $ 198,160 $ 176,792
============= ==============
</TABLE>
57
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
13. RETIREMENT BENEFITS (CONTINUED)
Pension Plan (continued)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Components of Net Pension Income
- --------------------------------
Service cost (with interest).................................................... $ 9,835 $ 5,373
Interest cost................................................................... 23,948 22,547
Expected return on plan assets.................................................. (53,682) (54,078)
Amortization of:
Transition obligation....................................................... (4,705) (4,705)
Prior service cost.......................................................... 4,566 2,314
Actuarial gains and losses.................................................. (1,330) (3,360)
------------- -------------
Net pension income.............................................................. $ (21,368) $ (31,909)
============= =============
Weighted-Average Assumptions as of June 30
- ------------------------------------------
Discount rate................................................................... 7.50% 7.00%
Expected return on plan assets.................................................. 9.50% 10.25%
Rate of compensation increase................................................... 5.00% 5.00%
</TABLE>
Effective July 1, 1998, Agway amended its pension plan to include a pension
equity formula, as well as to recognize incentive compensation as pensionable
compensation for all employees. This amendment increased the benefit obligation
and unrecognized prior service cost by approximately $24,800. The net pension
income for 1999 and in future years is reduced as a result of this amendment.
Effective July 1, 1997, Agway changed its method of determining the
market-related value of the retirement 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 in 1998, net of tax of
$16,500, was $28,956.
Pro forma amounts (unaudited), assuming the new accounting method was applied
during all periods presented, are shown with a comparison to actual results:
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------------
Restated
1998 1997
------------ --------------
<S> <C> <C>
Earnings from operations:
As reported................................................................ $ 12,189 $ 10,670
Pro forma.................................................................. $ 12,189 $ 18,410
Net earnings:
As reported................................................................ $ 41,145 $ 10,670
Pro forma.................................................................. $ 12,189 $ 18,410
</TABLE>
58
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
13. RETIREMENT BENEFITS (CONTINUED)
Postretirement Benefits
Agway provides postretirement health care and life insurance benefits to
eligible retirees and their dependents. Eligibility for benefits depends upon
age and years of service. Agway'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 Agway's consolidated financial
statements at June 30 were as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Change in Benefit Obligation
- ----------------------------
Benefit obligation at beginning of year......................................... $ (43,985) $ (42,037)
Service cost (with interest).................................................... (699) (601)
Interest cost................................................................... (3,028) (3,110)
Plan participant contributions.................................................. (1,563) (1,551)
Actuarial loss.................................................................. (528) (2,363)
Benefits paid................................................................... 5,866 5,677
------------- -------------
Benefit obligation at end of year............................................... $ (43,937) $ (43,985)
============= =============
Funded status................................................................... $ (43,937) $ (43,985)
Unrecognized prior service cost................................................. 1,261 1,393
Unrecognized net loss........................................................... 717 189
Unrecognized net transition obligation.......................................... 17,583 18,838
------------- -------------
Accrued postretirement benefit cost............................................. $ (24,376) $ (23,565)
============= =============
1999 1998
------------- -------------
Components of Net Periodic Postretirement Benefit Cost
- ------------------------------------------------------
Service cost (with interest).................................................... $ 699 $ 601
Interest cost................................................................... 3,028 3,110
Amortization of:
Transition obligation....................................................... 1,255 1,255
Prior service cost.......................................................... 132 132
Gains and losses............................................................ 0 0
------------- -------------
Net periodic postretirement expense............................................. $ 5,114 $ 5,098
============= =============
</TABLE>
In determining the benefit obligation, the weighted average discount rate used
was 7.5% and 7.0% at June 30, 1999 and 1998, respectively. Assumed health care
cost trend rates have a significant effect on the amounts reported for the
health care plans. A one percentage point change in the assumed health care cost
trend rates would have the following effect:
<TABLE>
<CAPTION>
1% Point 1% Point
Increase Decrease
------------ -------------
<S> <C> <C>
As of June 30, 1999
- -------------------
Effect on total of services and interest cost components........................ $ 200 $ (200)
Effect on year-end benefit obligation........................................... 1,400 (1,200)
</TABLE>
59
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
13. RETIREMENT BENEFITS (CONTINUED)
Postretirement Benefits (continued)
For measurement purposes, the assumed health care cost trend rate used to
measure Agway's accumulated benefit obligation was, for persons under age 65,
7.5% for June 30, 1999 and 1998. For persons over age 65, Agway has an insured
medical program limiting Agway's subsidy to a per month/per retiree basis. The
health care cost trend rate assumption for fiscal 2000 and forward at June 30,
1999, decreases gradually until the year 2002, when the ultimate trend rate is
then fixed at 5%.
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 Agway matching. Participant contributions
are invested at the option of the participant in any combination of four funds.
Agway 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. Agway contributions to this plan for years ended June 30,
1999, 1998 and 1997, were approximately $1,300, $1,300 and $1,200, respectively.
For the years ended June 30, 1999, 1998 and 1997, the Board of Directors of
Agway approved an additional match of 20% to supplement the minimum contribution
level of 10%.
60
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
14. FINANCIAL INFORMATION CONCERNING SEGMENT REPORTING
Agway is an agricultural cooperative directly engaged in manufacturing,
processing, distribution, and marketing of agricultural feed and agronomic
products and services for its farmer-members and other customers, primarily in
the northeastern United States and Ohio. Agway reports its operations
principally in five business segments. Agway modified its segment reporting in
1999 by combining the former Retail segment with the Agriculture segment, in
light of a consolidation of these two operations in April 1999. The Country
Products Group was broken into its own segment to align our disclosure with how
our business is managed, in accordance with the adoption, as of June 30,1999, of
SFAS No. 131, "Disclosures about Segments of an Enterprise and Relative
Information." The new segment disclosure now reports earnings (loss) before
income taxes and other details not previously shown by segment. All prior year
presentations have been restated to reflect these changes.
(1) AGRICULTURE engages in the manufacturing, processing, marketing, and
direct distribution of various animal feeds, crop inputs, fertilizers and
farm supplies and through a retail store system engages in the retail
marketing of agricultural products and supplies, yard and garden items,
and pet food and pet supplies, as well as the wholesale purchase,
warehousing, and distribution of these products and supplies to Agway
dealer representatives and other businesses.
(2) COUNTRY PRODUCTS GROUP engages in the manufacturing, processing and
repacking of a variety of agricultural products marketed directly to
consumers, retailers, wholesalers and processors. Country Products Group
also is involved in the exploration and development of new technologies
to benefit agricultural and food businesses.
(3) ENERGY operates a full-service energy company which markets and services
heating, ventilation and air-conditioning equipment. Energy is also
engaged in the sale and delivery of fuel oil, kerosene, propane, gasoline
and diesel fuel, as well as natural gas and electricity where
de-regulation makes that possible.
(4) LEASING, through Telmark LLC, is principally engaged in the business of
leasing agricultural-related equipment, vehicles, and buildings to
farmers and other customers in rural communities. Interest income for the
Leasing segment is reported as "Net Sales and Revenues."
(5) INSURANCE, through Agway Insurance Company, underwrites property and
casualty insurance. Agway General Agency Inc., also included in the
Insurance segment, markets medical, long-term care, and life and other
products designed by non-affiliated companies for the agricultural
marketplace. In addition, Agency provides administrative management
services to Agway business units, including claims, risk, facilities,
data processing, and payroll/benefits management.
Total sales and revenues of each industry segment includes the sale of products
and services to unaffiliated customers, as reported in the Agway consolidated
statements of operations, as well as sales to other segments of Agway which are
competitively priced.
The Other category within the summary of business segments includes intersegment
eliminations, interest and taxes. The category also includes net corporate
expenses and pension income.
61
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
14. FINANCIAL INFORMATION CONCERNING SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
Country
Products
Year ended June 30, 1999 Agriculture Group Energy Leasing Insurance Other(a) Consolidated
- ------------------------ ------------- ----------- ---------- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and revenues to
unaffiliated customers. $ 774,968 $ 160,152 $ 451,284 $ 70,006 $ 27,968 $ (16) $ 1,484,362
Intersegment sales and
revenues............... 692 11,572 613 0 0 (12,877) 0
------------- ----------- ---------- ---------- --------- ---------- ------------
Total sales and revenues $ 775,660 $ 171,724 $ 451,897 $ 70,006 $ 27,968 $ (12,893) $ 1,484,362
============= =========== ========== ========== ========= ========== ============
Operating earnings (loss) $ (23,658) $ 2,950 $ 12,992 $ 18,202 $ 130 $ 7,848 $ 18,464
Interest income.......... 6,965 10 614 0 0 1,551 9,140
Interest expense......... (19,211) (2,239) (5,120) 0 (12) (14,844) (41,426)
Other income, net........ 3,012 11,355 4,538 (43) 378 550 19,790
------------- ----------- ---------- ---------- --------- ---------- ------------
Earnings (loss) before
income taxes........... $ (32,892) $ 12,076 $ 13,024 $ 18,159 $ 496 $ (4,895) $ 5,968
============= =========== ========== ========== ========= ========== ============
Total assets............. $ 396,611 $ 64,365 $ 133,624 $ 596,905 $ 55,578 $ 229,968 $ 1,477,051
Depreciation and
amortization.......... 12,195 3,959 8,506 493 92 1,431 26,676
Capital expenditures..... 17,030 4,707 5,002 511 89 2,911 30,250
</TABLE>
<TABLE>
<CAPTION>
Country
Products
Year ended June 30, 1998 Agriculture Group Energy Leasing Insurance Other(a) Consolidated
- ------------------------ ------------- ----------- ---------- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and revenues to
unaffiliated customers. $ 795,056 $ 170,398 $ 504,702 $ 65,445 $ 27,335 $ 7 $ 1,562,943
Intersegment sales and
revenues............... 164 15,686 398 31 0 (16,279) 0
------------- ----------- ---------- ---------- --------- ---------- ------------
Total sales and revenues $ 795,220 $ 186,084 $ 505,100 $ 65,476 $ 27,335 $ (16,272) $ 1,562,943
============= =========== ========== ========== ========= ========== ============
Operating earnings (loss) $ (11,676) $ 7,702 $ 9,879 $ 15,412 $ (436) $ 20,849 $ 41,730
Interest income.......... 7,631 182 778 0 0 1,441 10,032
Interest expense......... (18,975) (2,825) (7,884) 0 (7) (11,166) (40,857)
Other income, net........ 6,755 1,170 5,272 0 173 (9) 13,361
------------ ----------- ---------- ---------- --------- ---------- ------------
Earnings (loss) before
income taxes........... $ (16,265) $ 6,229 $ 8,045 $ 15,412 $ (270) $ 11,115 $ 24,266
============ =========== ========== ========== ========= ========== ============
Total assets............. $ 393,877 $ 61,743 $ 141,469 $ 524,797 $ 56,014 $ 239,394 $ 1,417,294
Depreciation and amortization 15,436 2,947 8,668 607 78 1,061 28,797
Capital expenditures..... 16,534 4,539 5,631 471 297 3,480 30,952
</TABLE>
(a) Represents unallocated net corporate items and intersegment eliminations.
62
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
14. FINANCIAL INFORMATION CONCERNING SEGMENT REPORTING (CONTINUED)
<TABLE>
<CAPTION>
Country
Products
Year ended June 30, 1997 Agriculture Group Energy Leasing Insurance Other(a) Consolidated
- ------------------------ ------------ ------------ ----------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and revenues to
unaffiliated customers. $ 841,801 $ 139,153 $ 606,800 $ 56,908 $ 27,020 $ 32 $ 1,671,714
Intersegment sales and
revenues............... 147 19,449 305 35 0 (19,936) 0
------------ ------------ ----------- --------- --------- ----------- ------------
Total sales and revenues $ 841,948 $ 158,602 $ 607,105 $ 56,943 $ 27,020 $ (19,904) $ 1,671,714
============ ============ =========== ========= ========= =========== ============
Operating earnings (loss) $ (9,908) $ 5,040 $ 14,961 $ 12,992 $ 512 $ 5,193 $ 28,790
Interest income.......... 7,180 211 963 0 0 1,622 9,976
Interest expense......... (18,111) (2,844) (9,683) 0 (3) (10,305) (40,946)
Other income, net........ 12,923 182 4,576 11 181 890 18,763
------------ ------------ ----------- --------- --------- ----------- ------------
Earnings (loss) before
income taxes........... $ (7,916) $ 2,589 $ 10,817 $ 13,003 $ 690 $ (2,600) $ 16,583
============ ============ =========== ========= ========= =========== ============
Total assets............. $ 391,659 $ 55,403 $ 165,242 $ 477,252 $ 53,942 $ 156,763 $ 1,300,261
Depreciation and amortization 15,383 2,936 9,591 529 55 1,337 29,831
Capital expenditures 13,551 6,670 4,632 540 0 352 25,745
</TABLE>
(a) Represents unallocated net corporate items and intersegment eliminations.
63
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
15. OTHER INCOME (EXPENSE)
The components of other income (expense) for the year ended June 30 are
summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Patronage refund income..................................... $ 1,231 $ 4,344 $ 9,534
Rent and storage revenue.................................... 4,304 4,636 4,063
Gain (loss) on disposition of:
Businesses............................................. 11,097 0 360
Other security investments............................. (1,267) 0 0
Properties and equipment............................... 401 1,210 2,613
Other, net.................................................. 4,024 3,171 2,193
------------- ------------- -------------
$ 19,790 $ 13,361 $ 18,763
============= ============= =============
16. SUPPLEMENTAL DISCLOSURES ABOUT CASH FLOWS
1999 1998 1997
------------- ------------- -------------
Additional disclosure of operating cash flows:
Cash paid during the year for:
Interest........................................... $ 41,999 $ 40,807 $ 39,812
============= ============= =============
Income taxes....................................... $ 2,586 $ 3,253 $ 3,661
============= ============= =============
Additional disclosure for non-cash investing and financing
activities:
Dividends declared but unpaid at June 30............... $ 1,702 $ 1,840 $ 2,149
============= ============= =============
</TABLE>
17. 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 Agway's long-term debt and subordinated
debentures is estimated based on discounted cash flow computations using
estimated borrowing rates available to Agway ranging from 6.2% to 9.0% in 1999
and 5.9% to 8.8% in 1998.
The carrying amounts and estimated fair values of Agway's significant financial
instruments held for purposes other than trading at June 30 were as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Liabilities:
Long-term debt (excluding capital leases) $ 371,036 $ 379,316 $ 351,906 $ 357,869
Subordinated debentures........................ 486,303 481,775 462,196 469,789
</TABLE>
64
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
17. FINANCIAL AND COMMODITY INSTRUMENTS (CONTINUED)
FINANCIAL INSTRUMENTS (CONTINUED)
Fair Value (continued)
Agway 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, 1999 and
1998, the carrying and fair value of Agway's investment in commodity futures and
option contracts was $1,800 and $2,200, respectively.
Off-Balance-Sheet Risk
In the normal course of business, Agway 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.
Agway'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 credit
risk is limited to the contractual amount of Telmark's commitment to extend
credit. Telmark uses the same credit and collateral policies in making
commitments as it does for on-balance-sheet instruments.
Credit and Market Risk
Agway, 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
Agway'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. Agway mitigates this credit risk by
analyzing farmer-member credit positions prior to extending credit and requiring
collateral on long-term arrangements and for the underlying asset in the case of
Telmark's lease contracts.
Energy extends unsecured credit to petroleum wholesalers and residential
fuel-oil customers. Agriculture's retail business extends working capital lines
of credit, secured by inventory and accounts receivable, to its dealers. The
credit function within the Energy and Agriculture businesses manages credit risk
associated with these trade receivables by routinely assessing the financial
strength of its customers.
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.
65
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
17. FINANCIAL AND COMMODITY INSTRUMENTS (CONTINUED)
COMMODITY INSTRUMENTS
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.
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.
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.
On July 8, 1999, Agway announced that it had become aware of accounting
irregularities in its grain marketing department. An investigation, under
guidance from external legal counsel and including internal legal counsel,
internal financial staff, external auditors, and private investigators, was
initiated. Reports on the investigation findings have been made directly to the
Board of Directors.
66
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
17. FINANCIAL AND COMMODITY INSTRUMENTS (CONTINUED)
COMMODITY INSTRUMENTS (CONTINUED)
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. In an effort to recover
these losses, additional speculative positions in commodity instruments were
taken within the department throughout 1999. In addition, while the unauthorized
activity was occurring, the department did not hedge its inventory and forward
contracts in violation of express policies, which led to further losses from
the department's operations. To reflect these losses and their effect on the
Company, Agway has amended its previously filed annual report on Form 10-K
for the year ended June 30, 1998, and its 1999 quarterly reports on Form 10-Q
with the SEC. For the year ended June 30, 1998, the net earnings of $41,754, as
previously reported, have been reduced by $609 to $41,145 to reflect this
restatement. The after-tax effects of the activities described above on each
of the first three quarters of 1999 are as follows:
<TABLE>
<CAPTION>
Consolidated Net Earnings (Loss)
----------------------------------------------------
As As Previously Net
Restated Reported Adjustment
------------- ------------- ------------
<S> <C> <C> <C>
Period
- ------
Three months ended September 1998........................... $ (6,270) $ (2,570) $ (3,700)
Three months ended December 1998............................ (6,877) (7,336) 459
Six-month period ended December 1998........................ (13,147) (9,906) (3,241)
Three months ended March 1999............................... 2,769 3,255 (486)
Nine-month period ended March 1999.......................... (10,378) (6,651) (3,727)
</TABLE>
The total pre-tax loss from department activities is $8,600 for the year ended
June 30, 1999. This compares to a pre-tax loss as restated of $1,100 in 1998 and
a $300 pre-tax loss in 1997. The 1999 loss includes $5,500 from unauthorized
speculation in commodity instruments and $3,100 from operations, due in part to
not hedging positions in inventory and forward contracts.
The results of operations, as restated, violated certain of Agway's covenants in
its loan agreements, including an interest coverage covenant as of December
1998, March 1999, and June 1999 and a tangible net worth covenant as of November
and December 1998. Agway disclosed the above-referenced losses and restatements,
and causes thereof, to its lenders and has obtained waivers for these
violations, and the covenants in the loan agreements have been amended through
the remaining term of the agreements.
Subsequent to year-end, open unauthorized speculative commodity instruments were
closed. In addition, inventory and open forward contracts have been hedged.
During the period it took to restructure and hedge the open positions of the
department, further market losses of approximately $1,300 were incurred, which
will be reflected in Agway's Form 10-Q for the first quarter of fiscal 2000.
Agway has restructured its grain marketing activities, substantially reducing
their scope, and requiring that its net position at any point in time to be
effectively hedged.
67
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The directors of Agway determine Agway policy and are nominated on a district
representation basis by committees representing members within each district.
Each of the following directors is a full-time farmer and has been engaged in
full-time farming during the past five years:
<TABLE>
<CAPTION>
Year
Became
A
Name Age Office Name of Farm Director Term Expires
---- --- ------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
Ralph H. Heffner(1) 61 Chairman of the Jersey Acres Farms Inc. 1973 November 2000
Board and Director
Gary K. Van Slyke 56 Vice Chairman of the VanSlyke's Dairy Farm 1994 November 2000
Board and Director
Kevin B. Barrett 43 Director Heavenly View Farm 1996 November 1999
Keith H. Carlisle 57 Director Carlisle Bros., Inc. 1995 November 2001
D. Gilbert Couser 58 Director Shawangunk View Farm 1995 November 2001
Andrew J. Gilbert 40 Director Adon Farms 1995 November 2001
Peter D. Hanks 51 Director Big Green Farms, Inc. 1984 November 1999
Robert L. Marshman 60 Director Marshman Farms 1989 November 1999
Jeffrey B. Martin 40 Director Martin Farms 1997 November 2000
Samuel F. Minor 61 Director The Spring House 1987 November 2000
Carl D. Smith 64 Director Hillacre Farms 1984 November 1999
Thomas E. Smith 64 Director Lazy Acres Dairy 1986 November 2001
Joel L. Wenger 68 Director Weng-Lea Farms 1987 November 1999
Edwin C. Whitehead 58 Director White Ayr Farms 1994 November 2000
William W. Young 46 Director Will-O-Crest Farm 1989 November 2001
</TABLE>
Ralph H. Heffner, Chairman of the Board of Directors, was paid $54,600 and Gary
K. Van Slyke, Vice Chairman of the Board of Directors, was paid $44,350 for
their services for the year ended June 30, 1999. Effective July 1, 1998, the
Chairman is paid at an annual effective rate of $60,000 and the Vice-Chairman is
paid at an annual effective rate of $45,000. All other directors will receive
$25,000 per year, paid quarterly, for participation on the Agway Inc. Board. In
addition, each Board Committee Chairman earned an additional annual retainer fee
of $3,000 and each director of Agway Inc. who was also a member of the Agway
Insurance Company or Telmark LLC Board of Directors earned an additional $400 or
$1,000, respectively; a fee of $200 was also earned by such directors for each
day where the Agway Inc. Board of Directors is not in session. Expenses of Board
members incurred in connection with Company business are reimbursed by Agway.
Any director of Agway may elect to defer compensation for distribution at a
later date. Deferred amounts earn interest and may be paid in a lump sum or in
annual installments over a period of up to 20 years.
A retirement benefit plan for Board members requires annual payments to retired
or permanently disabled directors who served a minimum of six full years. The
benefit is computed at $250 for each full year of service and is paid to the
director or surviving spouse for a period equal to the years served on the Board
through December 31, 1995, the date the plan was terminated. All earned benefits
as of December 31, 1995, will be paid when due. As of June 30, 1999, the present
value of accumulated benefits under this plan was approximately $500,000.
(1) All correspondence in relation to operational matters should be addressed
to D.P. Cardarelli, President and Chief Executive Officer, Agway Inc.,
P.O. Box 4933, Syracuse, New York 13221.
68
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS
The executive officers of Agway provide operating control to carry out the
policies established by the Board of Directors and serve at the discretion of
the Board with no guarantee of employment. There are no full-time executive
officers of Agway who are members of the Board of Directors. The principal
occupation of all executive officers of the Agway for the past five years,
except for Mr. Feeney, has been as an officer or employee of the Agway. The
following is a listing of these officers as of July 1, 1999:
<TABLE>
<CAPTION>
Years Served
Name Age Office As Officer
---- --- ------ ----------
<S> <C> <C> <C>
Donald P. Cardarelli 43 President and Chief Executive Officer 8
Daniel J. Edinger 48 President, Telmark LLC 1
John F. Feeney 38 Corporate Controller -
Robert A. Fischer, Jr. 51 President, Agriculture & Retail Group 4
David M. Hayes 55 Senior Vice President, General Counsel
and Secretary 18
Stephen H. Hoefer 44 Senior Vice President, Public Affairs 5
Michael R. Hopsicker 34 President, Agway Energy Products LLC 3
Karen A. Johnson 37 Treasurer -
Dennis J. LaHood 53 President, Country Products Group 4
Peter J. O'Neill 52 Senior Vice President, Finance & Control 10
William L. Parker 52 Vice President and Chief Information Officer 4
Robert D. Sears 58 Vice President, Membership 5
Gerald R. Seeber 52 Senior Vice President, Administrative Services and
President, Agway Insurance Group 1
G. Leslie Smith 56 Vice President and Chief Investment Officer 2
</TABLE>
Mr. Cardarelli served as Vice President, Treasurer of the Company from May 1992
to August 1994; as Executive Vice President and Chief Operating Officer from
August 1994 to January 1995; and as General Manager and CEO from January 1995
and President from February 1995 to July 1, 1999.
Mr. Edinger served as President, Telmark LLC, from February 1988 to July 1,1999.
Mr. Feeney served as Manager, External Reporting, from November 1994 to June
1995; as Director, Corporate Reporting, from July 1995 to August 1998; and as
Corporate Controller from August 1998 to July 1, 1999. For the period August
1983 to November 1994, Mr. Feeney worked for Ernst & Young.
Mr. Fischer has served as President, Milford Fertilizer Company, since June
1970; as Executive Director, Crops from October 1994 to February 1995; as Vice
President, Agway Agricultural Products, from February 1995 to July 1, 1997; as
President, Agway Agricultural Products, from July 1997 to March 1999; and as
President, Agriculture & Retail Group from March 1999 to July 1, 1999.
Mr. Hayes served as Senior Vice President, General Counsel and Secretary from
July 1992 to July 1, 1999.
Mr. Hoefer served as Vice President, Public Affairs, from June 1994 to July
1997; and as Senior Vice President, Public Affairs, from July 1997 to July 1,
1999.
Mr. Hopsicker served as Director, Planning & Operations, AEP, from November 1992
to December 1994; as Director, Financial Planning, Finance & Control, from
December 1994 to October 1995; as Director, Business Development, ARS, from
October 1995 to April 1996; as Vice President, Agway Energy Products, from April
1996 to July 1997; and as President, Agway Energy Products LLC, from July 1997
to July 1, 1999.
Ms. Johnson served as Assistant Treasurer from September 1992 to August 1998;
and as Treasurer from August 1998 to July 1, 1999.
69
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS (CONTINUED)
Mr. LaHood served as President, Country Foods, from October 1992 to October
1994; as Executive Director, Country Foods and Seed Operations, from October
1994 to February 1995; as Vice President, Country Products Group, from February
1995 to July 1997; and as President, Country Products Group, from July 1997 to
July 1, 1999.
Mr. O'Neill served as Senior Vice President, Finance & Control, from October
1992 to November 1994; as Senior Vice President, Finance & Control, Treasurer
and Controller, from November 1994 to August 1998; and as Senior Vice President,
Finance & Control, from August 1998 to July 1, 1999.
Mr. Parker served as Director of New Project Management from January 1993 to
September 1994; as Vice President, Information Services, from September 1994 to
May 1996; and as Vice President, Chief Information Officer, from May 1996 to
July 1, 1999.
Mr. Sears served as Vice President, Membership, from June 1994 to July 1, 1999.
Mr. Seeber served as President, Agway Insurance Group, from October 1993 to July
1997; and as Senior Vice President, Administrative Services and President, Agway
Insurance Group, from July 1997 to July 1, 1999.
Ms. Smith served as Director, Trust Investments, from September 1993 to April
1997; and as Vice President and Chief Investment Officer from May 1997 to July
1, 1999.
70
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding annual and long-term
compensation for services in all capacities to Agway for the years ended June
30, 1999, 1998 and 1997 of those persons who served as (i) the chief executive
officer (CEO) at any time during the year, and (ii) the other four most highly
compensated executive officers of Agway (other than the CEO) who were serving in
such capacity at June 30, 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------
Annual Compensation (4)
-----------------------
Name and ALL OTHER
Principal Position YEAR SALARY(1) BONUS(1)(2) COMPENSATION(3)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Donald P. Cardarelli 1999 $478,276 $154,530 $18,057
President and CEO 1998 425,390 327,600 11,500
1997 387,024 80,000 3,925
Daniel J. Edinger 1999 199,710 155,040 3,764
President, 1998 178,853 105,240 3,033
Telmark LLC 1997 130,619 52,801 2,807
Robert A. Fischer, Jr. 1999 316,442 40,000 63,480
President, 1998 294,423 124,000 116,476
Agriculture & Retail 1997 220,000 44,000 118,411
Group
Michael R. Hopsicker 1999 218,087 171,000 3,864
President, 1998 202,312 105,000 2,987
Agway Energy 1997 170,014 34,001 2,873
Products LLC
Dennis J. LaHood 1999 252,639 211,800 3,009
President, 1998 220,407 175,515 2,998
Country Products 1997 178,293 88,000 2,877
Group
</TABLE>
(1) Salary and bonus are used in determining the average annual compensation
pursuant to Agway's Retirement Plan, effective July 1, 1998 (see page 72).
This amount includes all deferred amounts under the Agway Inc. Employees'
Thrift Investment Plan, Agway Inc. Employees' Benefit Equalization Plan,
and the Milford Fertilizer Company Employees' Profit Sharing and Savings
Plan.
(2) Members of the chief executive officer's staff and other executives
designated by Agway's chief executive officer are eligible for
participation in the Agway Inc. management incentive policy. Contingent
upon each individual's performance as determined by the President and CEO,
Agway's net earnings, and other performance factors, each eligible
executive may be paid a bonus. Bonuses are reflected in the fiscal year
earned regardless of payment date.
(3) Amounts shown for all officers, except Mr. Fischer, include contributions
made by Agway to the Agway Inc. Employees' Thrift Investment Plan, the
Agway Inc. Employees' Benefit Equalization Plan, the Agway Inc. Employees'
Deferred Compensation Program, and any other payments not appropriately
characterized as salary or bonus. With respect to Mr. Fischer, amounts
include payments to the Milford Fertilizer Company Employees' Profit
Sharing and Savings Plan, term life insurance premiums, and reportable
savings interest.
(4) There were no perquisites paid by Agway in excess of the lesser of $50,000
or 10% of an executive's total salary and bonus for the years disclosed.
71
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
EMPLOYEES' RETIREMENT PLAN
The Employees' Retirement Plan of Agway Inc. (the Retirement Plan) is a
non-contributory defined benefit plan covering nearly all employees. The
Retirement Plan was amended effective July 1, 1998, to include a pension equity
formula, as well as to recognize incentive compensation as pensionable
compensation for all employees. It provides for retirement benefits, based upon
average annual compensation received during the highest 36 consecutive months in
the last 10 years of service and credits earned for years of service with Agway.
Full credits are earned for service on and after July 1, 1998, and credits equal
to approximately 3/4 of the full credits are earned for service prior to July 1,
1998. The benefit is defined as an account balance and can be paid out as a lump
sum or an annuity. An employee is 100% vested in his benefit after completing 5
years of service or attaining age 55 after completing one year of service.
The following table shows estimated annual benefits payable upon retirement
using the credit formula in effect for service after June 30, 1998, based on
certain 3-year average remuneration levels and years-of-service classifications.
Under the formula, base credits are applied to the total average annual
compensation and excess credits are applied to the average annual compensation
in excess of one-half the Social Security Wage Base. In developing this table,
both base and excess credits have been applied to the total average annual
compensation. Further, the table was developed assuming a normal retirement at
age 65 and an annuity conversion factor based on a 6% interest rate.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
(NEW FORMULA)
YEARS OF CREDITED SERVICE
- ------------------------------------------------------------------------------------------------------------------------------
3-YEAR AVERAGE
REMUNERATION 5 10 15 20 25 30 35
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$300,000 $21,200 $ 40,300 $ 59,400 $ 77,100 $ 94,800 $111,000 $127,300
350,000 24,800 47,000 69,300 89,900 110,600 129,500 148,500
400,000 28,300 53,700 79,200 102,800 126,400 148,000 169,700
450,000 31,800 60,500 89,100 115,600 142,100 166,500 190,900
500,000 35,400 67,200 99,000 128,500 157,900 185,100 212,200
550,000 38,900 73,900 108,900 141,300 173,700 203,600 233,400
600,000 42,400 80,600 118,800 154,200 189,500 222,100 254,600
650,000 46,000 87,300 128,700 167,000 205,300 240,600 275,800
700,000 49,500 94,100 138,600 179,900 221,100 259,100 297,000
750,000 53,000 100,800 148,500 192,700 236,900 277,600 318,200
800,000 56,600 107,500 158,400 205,600 252,700 296,100 339,500
850,000 60,100 114,200 168,300 218,400 268,500 314,600 360,700
900,000 63,600 120,900 178,200 231,300 284,300 333,100 381,900
950,000 67,200 127,700 188,100 244,100 300,100 351,600 403,100
</TABLE>
Active participants are entitled to receive no less than the value of their
benefits accrued under the old Retirement Plan benefit formula which was in
effect through June 30, 1998. in addition, most active participants whose age
plus service totaled 55 years or more as of July 1, 1998, will receive the
greater of the benefit determined under the new formula described above, or the
benefit determined had the old formula remained in effect (grandfathered).
The old Retirement Plan benefit formula is based upon average annual
compensation received during the highest 60 consecutive months in the last 10
years of service and credited years of service. Optional earlier retirement and
other benefits are also provided. The old formula pays a monthly retirement
benefit based on the greater amount calculated under two formulas. The benefit
amount under one formula is subject to an offset for Social Security benefits.
72
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
EMPLOYEES' RETIREMENT PLAN (CONTINUED)
The following table shows estimated annual benefits under the old Retirement
Plan formula in effect for service before July 1, 1998, based on certain 5-year
average remuneration levels and years-of-service classifications. The table was
developed assuming a normal retirement at age 65 and does not reflect an offset
for up to 50% of the Social Security benefit, subject to certain minimum
benefits.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
(OLD FORMULA)
YEARS OF CREDITED SERVICE
- ------------------------------------------------------------------------------------------------------------------------------
5-YEAR AVERAGE
REMUNERATION 5 10 15 20 25 30 35
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$300,000 $24,000 $ 48,000 $ 72,000 $ 96,000 $120,000 $144,000 $168,000
350,000 28,000 56,000 84,000 112,000 140,000 168,000 196,000
400,000 32,000 64,000 96,000 128,000 160,000 192,000 224,000
450,000 36,000 72,000 108,000 144,000 180,000 216,000 252,000
500,000 40,000 80,000 120,000 160,000 200,000 240,000 280,000
550,000 44,000 88,000 132,000 176,000 220,000 264,000 308,000
600,000 48,000 96,000 144,000 192,000 240,000 288,000 336,000
650,000 52,000 104,000 156,000 208,000 260,000 312,000 364,000
700,000 56,000 112,000 168,000 224,000 280,000 336,000 392,000
750,000 60,000 120,000 180,000 240,000 300,000 360,000 420,000
800,000 64,000 128,000 192,000 256,000 320,000 384,000 448,000
850,000 68,000 136,000 204,000 272,000 340,000 408,000 476,000
900,000 72,000 144,000 216,000 288,000 360,000 432,000 504,000
950,000 76,000 152,000 228,000 304,000 380,000 456,000 532,000
</TABLE>
Amounts under the Retirement Plan may be subject to reduction because of the
limitations imposed under the Internal Revenue Code; however, the extent of any
reduction will vary in individual cases according to circumstances existing at
the time pension payments commence. The Agway Inc. Employees' Benefit
Equalization Plan has been established to provide for the amount of any such
reduction in annual pension benefits under the Retirement Plan.
The benefits shown are computed on a straight life basis and do not reflect an
offset for up to 50% of the Social Security benefit, subject to certain minimum
benefits. Also, the benefits are based on continuing the Retirement Plan's
benefit formulas as in effect on June 30, 1999. As of June 30, 1999, the
officers and their respective number of credited years of service under the
Retirement Plan were as follows: Messrs. Cardarelli, 14; Hopsicker, 10; Lahood,
29; and Edinger, 20. Mr. Fischer does not participate in the Retirement Plan nor
any other long-term incentive programs of Agway. However, he participates in the
Milford Fertilizer Company Employees' Profit Sharing and Savings Plan.
"Compensation" is defined as the regular salary or wages, as reported in the
Salary column of the Summary Compensation Table, which is paid to an employee
for services rendered to Agway Inc., including overtime, vacation pay, or
special pay and bonuses as reported in the Bonus column of the Executive
Compensation disclosure on page 71.
73
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
For a discussion of director compensation, see Directors and Executive Officers
of the Registrant (Item 10) of this Form 10-K.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDE PARTICIPATION
Agway has a committee of certai directors, including the Chairman and Vice
Chairman of the Board of Directors, which determines the compensation of Donald
P. Cardarelli, President and CEO of Agway Inc. The compensation of the other
executive officers of Agway Inc. is determined by Mr. Cardarelli. Salaries of
all executive officers are included in the annual operating budget, which is
approved by the entire Board of Directors of Agway Inc.
None of the executive officers or directors who participate in establishing
compensation policies had interlocks reportable under Section 402(J) of
Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None of the executive officers of Agway, either individually or in the
aggregate, own greater than 1% of any class of equity securities of Agway Inc.
or its subsidiaries. Agway is an agricultural cooperative and each of its
members, including each director, owns one share of $25 par value common stock.
None of the directors, either individually or in the aggregate, own greater than
1% of any class of equity security of Agway Inc. or its subsidiaries.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Agway's members, including its directors, are customers of Agway and/or its
subsidiaries. They purchase products from Agway in the normal course of
operating their farm businesses and may sell certain agricultural products to
Agway at market prices. The prices, terms, and conditions of any purchase or
sale transaction are on the same basis for all of Agway's members.
74
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
LOCATION
--------
(A) INDEX TO DOCUMENT LIST
<S> <C>
(1) FINANCIAL STATEMENTS
Among the responses to this Item 14(a)(1) are the following
financial statements, which are included in Item 8 on page 34:
(i) Report of Independent Accountants.......................................................... 36
(ii) Consolidated Balance Sheets, June 30, 1999 and 1998........................................ 37
(iii) Consolidated Statements of Operations, fiscal years ended June 30, 1999, 1998 and 1997..... 38
(iv) Consolidated Statements of Comprehensive Income, fiscal years ended
June 30, 1999, 1998 and 1997............................................................... 39
(v) Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended
June 30, 1999, 1998 and 1997............................................................... 40
(vi) Consolidated Statements of Cash Flow, fiscal years ended June 30, 1999, 1998 and 1997...... 41
(vii) Notes to Consolidated Financial Statements................................................. 42
(2) FINANCIAL STATEMENT SCHEDULES
(i) The following schedules are presented:
Schedule I - Condensed Financial Information of Registrant, each of the
three years in the period ended June 30, 1999........................... 76
Schedule II - Valuation and Qualifying Accounts, fiscal years ended
June 30, 1999, 1998 and 1997............................................ 81
</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.
75
<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, 1999 AND 1998
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
RESTATED
1999 1998
------------- --------------
<S> <C> <C>
Current assets:
Trade accounts receivable (including notes receivable of $42,390 and
$46,173, respectively), less allowance for doubtful
accounts of $4,597 and $5,486, respectively............................ $ 115,335 $ 126,540
Inventories................................................................ 114,837 118,308
Other current assets....................................................... 52,488 59,256
------------- --------------
Total current assets................................................... 282,660 304,104
Investments in subsidiaries..................................................... 231,829 172,580
Properties and equipment, net................................................... 117,017 111,735
Net pension asset............................................................... 198,160 176,792
Other assets.................................................................... 8,130 6,520
-------------- --------------
Total assets........................................................... $ 837,796 $ 771,731
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 33,653 $ 48,200
Operating advances payable to subsidiaries, net............................ 395,077 329,373
Other current liabilities.................................................. 75,006 113,022
-------------- --------------
Total current liabilities.............................................. 503,736 490,595
Other liabilities............................................................... 135,113 74,907
Shareholders' equity............................................................ 198,947 206,229
-------------- --------------
Total liabilities and shareholders' equity............................. $ 837,796 $ 771,731
============== ==============
</TABLE>
76
<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 EARNINGS
FISCAL YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
RESTATED RESTATED
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Net sales and revenues from:
Product sales.......................................... $ 793,530 $ 874,841 $ 896,111
Other services......................................... 18,426 17,607 15,614
------------- ------------- --------------
Total net sales and revenues....................... 811,956 892,448 911,725
Cost and expenses from:
Products and plant operations.......................... 743,143 812,439 837,623
Selling, general and administrative activities......... 96,454 85,844 84,573
------------- ------------- --------------
Total operating costs and expenses................. 839,597 898,283 922,196
------------- ------------- --------------
Operating income (loss)..................................... (27,641) (5,835) (10,471)
Interest expense, net....................................... (11,528) (7,788) (10,213)
Other income, net........................................... 36,014 27,949 21,500
------------- ------------- --------------
Earnings (loss) from operations before income taxes
and equity in earnings of subsidiaries................. (3,155) 14,326 816
Income tax benefit (expense)................................ (12,173) 7,073 6,821
------------- ------------- --------------
Income (loss) before equity in earnings of subsidiaries..... (9,018) 21,399 7,637
Equity in earnings (loss) of unconsolidated subsidiaries.... (7,223) (9,210) 3,033
------------- ------------- --------------
Earnings before cumulative effect of an accounting change... 1,795 12,189 10,670
Cumulative effect of accounting change, net of tax
expense of $16,500..................................... 0 28,956 0
------------- ------------- --------------
Net earnings................................................ 1,795 41,145 10,670
Retained earnings - beginning of year....................... 155,362 117,851 111,418
Dividends................................................... (3,394) (3,634) (4,237)
------------- ------------- --------------
Retained earnings - end of year............................. $ 153,763 $ 155,362 $ 117,851
============= ============= ==============
</TABLE>
77
<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, 1999, 1998 AND 1997
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
RESTATED RESTATED
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net cash flows from operating activities.................... $ 23,593 $ 34,519 $ 19,670
Cash flows from investing activities:
Purchases of property, plant and equipment (19,793) (21,913) (17,169)
Proceeds from disposal of business..................... 14,150 0 0
Other.................................................. (9,111) 884 4,639
------------- ------------- -------------
Net cash flows used in investing activities (14,754) (21,029) (12,530)
Cash flows from financing activities:
Payments on capitalized leases......................... (243) (526) (832)
Cash dividends paid.................................... (3,532) (3,943) (4,297)
Other.................................................. (5,064) (9,021) (2,011)
------------- ------------- -------------
Net cash flows used in financing activities (8,839) (13,490) (7,140)
Net increase 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>
78
<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)
BASIS OF PRESENTATION
In the preceding condensed financial statements, which represent the parent
company only, Agway'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 Agway's consolidated
financial statements.
As discussed in Note 2 to the consolidated financial statements, effective June
26, 1999, Agway Consumer Products Inc., a Delaware corporation and former
holding of AHI, was merged into Agway Inc. Agway Consumer Products Inc. held the
assets and business operations of the former Retail segment and certain assets
and business operations of the Country Products Group and Agriculture. This
merger into Agway aligns the legal structure more closely with the management
structure of Agway and facilitates the ability to manage these assets and
businesses prospectively. The 1998 and 1997 results as shown have been restated
to reflect this merger.
The 1998 results have been restated to correct for the accounting effect of
the irregularities as described in Note 17 to the Agway Inc. consolidated
financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to conform prior year financial
statements with the current year presentation.
INVENTORIES
Inventories at June 30 consist of the following:
<TABLE>
<CAPTION>
Restated
1999 1998
------------- --------------
<S> <C> <C>
Raw materials................................................................... $ 6,892 $ 7,293
Finished goods.................................................................. 106,332 109,451
Supplies........................................................................ 1,613 1,564
------------- --------------
$ 114,837 $ 118,308
============= ==============
</TABLE>
DEBT
Debt capital for Agway is supplied by its wholly owned subsidiary, AFC, which
secures financing through bank borrowings and issuance of corporate debt
instruments. The payment of principal and interest on this debt is
unconditionally guaranteed by Agway. This guarantee is full and unconditional,
and joint and several. The total debt of AFC guaranteed by Agway is disclosed in
Note 10.
RELATED PARTY TRANSACTIONS
Transactions between Agway I nc. and its unconsolidated subsidiaries are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
-----------------------------------------------------
Restated Restated
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Net sales and revenues...................................... $ 5,297 $ 36,555 $ 15,919
Product and plant operation expenses........................ 19,648 12,638 4,020
Recovery of selling, general and administrative expenses.... 19,072 19,051 19,207
Interest expense, net....................................... 17,509 14,306 15,284
</TABLE>
79
<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)
CONTINGENCIES
Agway is 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
Agway. Agway 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 Agway.
80
<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, 1999
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserves deducted in the balance sheet from assets
to which they apply:
Allowance for doubtful notes and accounts
receivable (current)...................... $ 7,926 $ 1,467 $ 0 $2,238(a) $ 7,155
========= ========= ========= ========= =========
Allowance for doubtful leases receivable...... $ 27,071 $ 9,727 $ 0 $6,820(a) $ 29,978
========= ========= ========= ========= =========
Reserve for other security investments........ $ 0 $ 1,010 $ 0 $ 0 $ 1,010
========= ========= ========= ========= =========
Reserve for obsolete and slow moving inventory $ 591 $ 135 $ 0 $ 0 $ 726
========= ========= ========= ========= =========
Surplus property reserve...................... $ 789 $ 0 $ 0 $ 91(b) $ 698
========= ========= ========= ========= =========
Income tax valuation allowance................ $ 0 $ 0 $ 0 $ 0 $ 0
========= ========= ========= ========= =========
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
for the year ended June 30, 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserves deducted in the balance sheet from assets
to which they apply:
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
========= ========= ========= ========= =========
Reserve for obsolete and slow moving inventory $ 2,362 $ 100 $ 0 $1,871 $ 591
========= ========= ========= ========= =========
Surplus property reserve...................... $ 856 $ 0 $ 0 $ 67(b) $ 789
========= ========= ========= ========= =========
Income tax valuation allowance................ $ 0 $ 0 $ 0 $ 0 $ 0
========= ========= ========= ========= =========
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
for the year ended June 30, 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserves deducted in the balance sheet from assets
to which they apply:
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
========= ========= ========= ========== =========
Reserve for obsolete and slow moving inventory $ 2,547 $ 385 $ 0 $ 570 $ 2,362
========= ========= ========= ========== =========
Surplus property reserve...................... $ 1,428 $ 66 $ 0 $ 638(b) $ 856
========= ========= ========= ========== =========
Income tax valuation allowance................ $ 881 $ 0 $ 0 $ (881) $ 0
========= ========= ========= ========== =========
</TABLE>
(a) Accounts charged off, net of recoveries.
(b) Locations sold.
81
<PAGE>
ITEM 14(B). REPORTS ON FORM 8-K
No reports on Form 8-K for the three months ended June 30,
1999, have been filed. Agway did file a Form 8-K on July 8,
1999, reporting that it was disclosed to Agway that records
had been falsified during the year to conceal losses from
unauthorized speculative activities in Agriculture's grain
marketing business.
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.
3(c) - By-Laws of Agway Inc., as amended April 28,
1999, filed by reference to Exhibit 3 of Form
10-K, dated August 27, 1998.
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.
82
<PAGE>
ITEM 14(C)(1). EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION
REGULATION S-K
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.
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 6.5% per
annum) due October 31,2008, 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.
83
<PAGE>
ITEM 14(C)(1). EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION
REGULATION S-K
4(n) - Agreement of Resignation, Appointment and
Acceptance among KeyCorp, Key Bank of New York,AFC
and Mellon Bank, F.S.B., dated as of September 3,
1996,five agreements,filed by reference to Exhibit
4(o) of Form S-3, File No. 333-34781, dated
September 2, 1997.
(ii) The following exhibits are filed as a separate section of
this report:
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, 1999 of the Agway Inc. Employees' Thrift
Investment Plan.
* Included with electronic filing only.
84
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AGWAY INC.
(Registrant)
By /s/ Donald P. Cardarelli
---------------------------------------
DONALD P. CARDARELLI
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date September 10, 1999
----------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Donald P. Cardarelli President and Chief Executive Officer September 10, 1999
(DONALD P. CARDARELLI) (Principal Executive Officer)
/s/ Peter J. O'Neill Senior Vice President, September 10, 1999
(PETER J. O'NEILL) Finance & Control
(Principal Financial Officer
& Principal Accounting Officer)
/s/ Ralph H. Heffner Chairman of the September 10, 1999
(RALPH H. HEFFNER) Board and Director
/s/ Gary K. Van Slyke Vice Chairman of the September 10, 1999
(GARY K. VAN SLYKE) Board and Director
/s/ Kevin B. Barrett Director September 10, 1999
(KEVIN B. BARRETT)
/s/ Keith H. Carlisle Director September 10, 1999
(KEITH H. CARLISLE)
/s/ D. Gilbert Couser Director September 10, 1999
(D. GILBERT COUSER)
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Andrew J. Gilbert Director September 10, 1999
(ANDREW J. GILBERT)
/s/ Peter D. Hanks Director September 10, 1999
(PETER D. HANKS)
/s/ Robert L. Marshman Director September 10, 1999
(ROBERT L. MARSHMAN)
/s/ Jeffrey B. Martin Director September 10, 1999
(JEFFREY B. MARTIN)
/s/ Samuel F. Minor Director September 10, 1999
(SAMUEL F. MINOR)
/s/ Carl D. Smith Director September 10, 1999
(CARL D. SMITH)
/s/ Thomas E. Smith Director September 10, 1999
(THOMAS E. SMITH)
/s/ Joel L. Wenger Director September 10, 1999
(JOEL L. WENGER)
/s/ Edwin C. Whitehead Director September 10, 1999
(EDWIN C. WHITEHEAD)
/s/ William W. Young Director September 10, 1999
(WILLIAM W. YOUNG)
</TABLE>
86
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
As of the date of this filing on Form 10-K, the Registrant has not had available
to be sent to security holders the annual report for fiscal year ended June 30,
1999. Subsequent to the filing of the annual report on Form 10-K, the Registrant
shall furnish security holders with annual reports.
87
<PAGE>
AGWAY INC.
FORM 10-K
JUNE 30, 1999
EXHIBIT INDEX
Exhibit
Number Title
- ------- -----
(10) Material contracts
(a) Directors - Deferred Compensation Agreement
(b) Board Officers - Deferred Compensation Agreement
(12) Statements re computation of ratios
(21) Subsidiaries of registrant
(23) Consent of experts and counsel
(27) Financial data schedule*
(99) Additional exhibits
Annual report on Form 11-K for the year ended June 30, 1999 of
the Agway Inc. Employees' Thrift Investment Plan
*Included with electronic filing only.
EXHIBIT 10
<PAGE>
[For 13 Directors]
DIRECTOR DEFERRED PAYMENT AGREEMENT
AGREEMENT made this day of , 1998, between AGWAY
---- ---------------
INC., a Delaware corporation, with its principal office in De Witt, New York
(hereinafter called "AGWAY"), and residing at
--------------------------
- -----------------------------------------------------------------------------
(hereinafter called "Director").
RECITALS:
A. AGWAY has established a deferred payment program for Directors.
B. Director desires to participate in the program upon the
following terms and conditions.
WITNESSETH:
For good and valuable consideration, the parties, intending to be
legally bound, hereby agree as follows:
1. Director hereby designates (check one)
% of retainer (or $ of retainer) only
--- ---------
% of per diem and all other payments other than
---
expense reimbursements (or $ of per diem
---------
and all other payments other than expense reimbursements)
only
% of both retainer and per diem and all other payments
---
other than expense reimbursements (or $ of both
---------
retainer and per diem)
-1-
<PAGE>
for the period beginning January 1, 1999 and ending December 31, 1999 be
credited to Director's Reserve Account.
2. AGWAY shall maintain in its accounting records a separate account
(herein called "Director's Reserve Account") for each Director electing deferral
of any amount under this agreement and shall credit to the Director's Reserve
Account the item or items designated by Director in Section 1 above. The
Director's Reserve Account shall also be credited at the close of each calendar
quarter with an amount computed by applying the average cost-of-debt percentage
as hereinafter defined to the total average accumulated credit of the Director's
Reserve Account. "Average cost-of-debt" as used in this agreement shall mean the
average cost to AGWAY of the debt employed by AGWAY during each calendar quarter
in the conduct of AGWAY's business, and this average cost-of-debt shall be
determined by the Treasurer of AGWAY.
3. AGWAY and Director hereby agree that payment from the Director's
Reserve Account shall begin on the first January 1 or July 1 that follows the
Director's attainment of age fifty-five (55) or the date on which Director's
service as Director of AGWAY terminates, whichever is earlier, by at least 15
months.
This agreement by the Director shall be irrevocable; provided, however, that at
least twelve (12) months prior to January 1 or July 1 described above, the
Director may request, by notice in writing to Agway, that the commencement of
payments be deferred to a specified January 1 or July 1 date later than that on
which commencement was previously scheduled. Whether to approve such a request
shall be within the discretion of the Chairman of the Board of Directors of
AGWAY, or of the Vice Chairman should Director then be serving as Chairman.
Approval of such a request shall be in writing. After approval, Director shall
have no right to payment at any date earlier than that specified in the written
approval. In any
-2-
<PAGE>
event, payments shall commence not later than the January following the calendar
year when Director reaches age seventy (70). AGWAY may impose a thirty (30) day
waiting period before the first payment is made.
4. Payment will be either (a) a lump sum payment of the entire balance
in the Director's Reserve Account; or (b) in an amount determined by multiplying
the balance in the Director's Reserve Account at the beginning of each calendar
year during which a payment is to be made by a fraction, the numerator of which
is one (1) and the denominator of which will be the number of years remaining
during which the Director's Reserve Account will be paid to Director. The
payment election must be made at least twelve (12) months prior to the
commencement of payment in writing to the chief financial officer of AGWAY to
have the payments made:
(A) over 3 years;
(B) over 5 years;
(C) over 10 years;
(D) over 15 years; or
(E) over 20 years.
If a timely election is not made, the entire balance in Director's Reserve
Account will be paid in a single lump sum.
If the initial annual payment computed for the applicable payment period
described above would be less than ten thousand dollars ($10,000), then,
notwithstanding the prior provisions of this Section, AGWAY may make payment (at
the sole discretion of AGWAY) either in one (1) lump sum or in annual
installments over the longest period resulting in an initial annual payment of
at least ten thousand dollars ($10,000).
-3-
<PAGE>
5. Upon furnishing AGWAY with proper evidence of financial hardship,
Director may request a withdrawal of all or part of the balance in the
Director's Reserve Account. Whether to approve such a request shall be within
the discretion of the Chief Financial Officer of AGWAY or his designee. Approval
of such a request shall be in writing.
6. In the event of Director's death, either before or after the
payments to Director have begun, the amount payable, as provided in Section 4
above, shall be paid to the beneficiary or beneficiaries designated by Director
in the most recent notice in writing to AGWAY in installments computed in the
same manner as if Director was still living. If no beneficiary has been
designated, the amount payable, as provided in Section 4 above, shall be paid in
installments computed in the same manner as if Director was still living to
Director's estate or, at the sole discretion of AGWAY, the remaining balance in
the Director's Reserve Account may be paid in a lump sum to Director's estate.
In the event that after payments have commenced to the beneficiary or to the
beneficiaries designated by Director the sole beneficiary dies or all
beneficiaries die, then, any remaining balance in the Director's Reserve Account
will be paid in a lump sum to the sole beneficiary's estate or to the
beneficiaries' estates. In the absence of clear written instructions to the
contrary, a designation of multiple beneficiaries will be deemed to provide for
payment to the designated beneficiaries in equal shares, and for the payment to
Director's estate of the share of any beneficiary who predeceases Director. In
the event of Director's death before the payments to Director have begun, the
payments will commence on the January 1 or July 1, next following the date of
Director's death.
7. Director agrees that AGWAY's liability to make any payment as
provided in this agreement shall be contingent upon Director's:
-4-
<PAGE>
(a) being available to AGWAY for consultation and advice after
termination of service as a director of AGWAY, unless Director is disabled or
deceased; and
(b) retaining unencumbered any interest or benefit under this
agreement.
If Director fails to fulfill any one or more of these
contingencies, AGWAY's obligation under this agreement may be terminated by
AGWAY as to Director.
8. Director also agrees that AGWAY's obligations to make deferred
payments under this agreement are merely contractual; and that AGWAY is the
outright beneficial owner of, and does not hold for Director as trustee or
otherwise, the amounts credited to Director's Reserve Account; and that such
amounts are subject to the rights of AGWAY's creditors in the same manner and to
the same extent as all assets owned by AGWAY.
9. Neither Director nor Director's beneficiary/ies shall have the right
to encumber, commute, borrow against, dispose of or assign the right to receive
payments under this agreement.
IN WITNESS WHEREOF, AGWAY and Director have duly executed this
agreement the day and year first above written.
AGWAY INC.
/s/
By: ------------------------------
Secretary
/s/
------------------------------
(Director)
-5-
<PAGE>
-----------------
DESIGNATION OF BENEFICIARY/IES
Pursuant to the provisions of this Deferred Payment Agreement, I hereby
designate as my beneficiary/ies hereunder:
- --------------------------------------------------------------------------------
(Name of beneficiary/ies)
This designation is also effective with respect to any and all amounts of
deferred compensation accrued for my benefit under any and all Deferred Payment
Agreements executed by me in previous years.
/s/
-----------------------------
(Director)
Date: , 1998
-------------
-6-
<PAGE>
[For 2 Board officers]
DIRECTOR DEFERRED PAYMENT AGREEMENT
AGREEMENT made this day of , 1998, between AGWAY INC.,
---- ------------
a Delaware corporation, with its principal office in De Witt, New York
(hereinafter called "AGWAY"), and residing at
---------------------
(hereinafter called
- ----------------------------------------------------------
"Director").
RECITALS:
A. AGWAY has established a deferred payment program for Directors.
B. Director desires to participate in the program upon the
following terms and conditions.
WITNESSETH:
For good and valuable consideration, the parties, intending to be
legally bound, hereby agree as follows:
1. Director hereby designates % (or $ ) of annual retainer
---- ---------
for the period beginning January 1, 1999 and ending December 31, 1999 be
credited to Director's Reserve Account.
2. AGWAY shall maintain in its accounting records a separate account
(herein called "Director's Reserve Account") for each Director electing deferral
of any amount under this agreement and shall credit to the Director's Reserve
Account the amount designated by Director in Section 1 above. The Director's
Reserve Account shall also be credited at the close of each calendar quarter
with an amount computed by applying the average cost-of-debt percentage as
hereinafter defined to
-1-
<PAGE>
the total average accumulated credit of the Director's Reserve Account. "Average
cost-of-debt" as used in this agreement shall mean the average cost to AGWAY of
the debt employed by AGWAY during each calendar quarter in the conduct of
AGWAY's business, and this average cost-of-debt shall be determined by the
Treasurer of AGWAY.
3. AGWAY and Director hereby agree that payment from the Director's
Reserve Account shall begin on the first January 1 or July 1 that follows the
Director's attainment of age fifty-five (55) or the date on which Director's
service as Director of AGWAY terminates, whichever is earlier, by at least 15
months.
This agreement by the Director shall be irrevocable; provided, however, that at
least twelve (12) months prior to January 1 or July 1 described above, the
Director may request, by notice in writing to Agway, that the commencement of
payments be deferred to a specified January 1 or July 1 date later than that on
which commencement was previously scheduled. Whether to approve such a request
shall be within the discretion of the Chairman of the Board of Directors of
AGWAY, or of the Vice Chairman should Director then be serving as Chairman.
Approval of such a request shall be in writing. After approval, Director shall
have no right to payment at any date earlier than that specified in the written
approval. In any event, payments shall commence not later than the January
following the calendar year when Director reaches age seventy (70). AGWAY may
impose a thirty (30) day waiting period before the first payment is made.
4. Payment will be either (a) a lump sum payment of the entire balance
in the Director's Reserve Account; or (b) in an amount determined by multiplying
the balance in the Director's Reserve Account at the beginning of each calendar
year during which a payment is to be made by a fraction, the numerator of which
is one (1) and the denominator of which will be the number of years remaining
during
-2-
<PAGE>
which the Director's Reserve Account will be paid to Director. The payment
election must be made at least twelve (12) months prior to the commencement of
payment in writing to the chief financial officer of AGWAY to have the payments
made:
(A) over 3 years;
(B) over 5 years;
(C) over 10 years;
(D) over 15 years; or
(E) over 20 years.
If a timely election is not made, the entire balance in Director's Reserve
Account will be paid in a single lump sum.
If the initial annual payment computed for the applicable payment period
described above would be less than ten thousand dollars ($10,000), then,
notwithstanding the prior provisions of this Section, AGWAY may make payment (at
the sole discretion of AGWAY) either in one (1) lump sum or in annual
installments over the longest period resulting in an initial annual payment of
at least ten thousand dollars ($10,000).
5. Upon furnishing AGWAY with proper evidence of financial hardship,
Director may request a withdrawal of all or part of the balance in the
Director's Reserve Account. Whether to approve such a request shall be within
the discretion of the Chief Financial Officer of AGWAY or his designee. Approval
of such a request shall be in writing.
6. In the event of Director's death, either before or after the
payments to Director have begun, the amount payable, as provided in Section 4
above, shall be paid to the beneficiary or beneficiaries designated by Director
in the most recent
-3-
<PAGE>
notice in writing to AGWAY in installments computed in the same manner as if
Director was still living. If no beneficiary has been designated, the amount
payable, as provided in Section 4 above, shall be paid in installments computed
in the same manner as if Director was still living to Director's estate or, at
the sole discretion of AGWAY, the remaining balance in the Director's Reserve
Account may be paid in a lump sum to Director's estate. In the event that after
payments have commenced to the beneficiary or to the beneficiaries designated by
Director the sole beneficiary dies or all beneficiaries die, then, any remaining
balance in the Director's Reserve Account will be paid in a lump sum to the sole
beneficiary's estate or to the beneficiaries' estates. In the absence of clear
written instructions to the contrary, a designation of multiple beneficiaries
will be deemed to provide for payment to the designated beneficiaries in equal
shares, and for the payment to Director's estate of the share of any beneficiary
who predeceases Director. In the event of Director's death before the payments
to Director have begun, the payments will commence on the January 1 or July 1,
next following the date of Director's death.
7. Director agrees that AGWAY's liability to make any payment as
provided in this agreement shall be contingent upon Director's:
(a) being available to AGWAY for consultation and advice after
termination of service as a director of AGWAY, unless Director is disabled or
deceased; and
(b) retaining unencumbered any interest or benefit under this
agreement.
If Director fails to fulfill any one or more of these
contingencies, AGWAY's obligation under this agreement may be terminated by
AGWAY as to Director.
-4-
<PAGE>
8. Director also agrees that AGWAY's obligations to make deferred
payments under this agreement are merely contractual; and that AGWAY is the
outright beneficial owner of, and does not hold for Director as trustee or
otherwise, the amounts credited to Director's Reserve Account; and that such
amounts are subject to the rights of AGWAY's creditors in the same manner and to
the same extent as all assets owned by AGWAY.
9. Neither Director nor Director's beneficiary/ies shall have the right
to encumber, commute, borrow against, dispose of or assign the right to receive
payments under this agreement.
IN WITNESS WHEREOF, AGWAY and Director have duly executed this
agreement the day and year first above written.
AGWAY INC.
/s/
By: --------------------------------
Secretary
/s/
--------------------------------
(Director)
-5-
<PAGE>
--------------------------
DESIGNATION OF BENEFICIARY/IES
Pursuant to the provisions of this Deferred Payment Agreement, I hereby
designate as my beneficiary/ies hereunder:
- --------------------------------------------------------------------------------
(Name of beneficiary/ies)
This designation is also effective with respect to any and all amounts of
deferred compensation accrued for my benefit under any and all Deferred Payment
Agreements executed by me in previous years.
/s/
-----------------------------
(Director)
Date: , 1998
-----------------
-6-
EXHIBIT 12
<PAGE>
<TABLE>
<CAPTION>
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS COMBINED
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
FOR THE YEARS ENDED JUNE 30,
(THOUSANDS OF DOLLARS)
-----------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Earnings before income taxes and
member refunds........................... $ 5,968 $ 24,266 $ 16,583 $ 21,070 $ (6,053)
Fixed charges - Interest................. 69,052 67,728 64,432 63,721 56,507
- Rentals.................. 5,578 4,651 3,772 3,004 2,789
----------- ---------- ----------- ---------- ----------
Total fixed charges...................... 74,630 72,379 68,204 66,725 59,296
----------- ---------- ----------- ---------- ----------
Adjusted net earnings.................... $ 80,598 $ 96,645 $ 84,787 $ 87,795 $ 53,243
=========== ========== =========== ========== ==========
Ratio of adjusted net earnings to total
fixed charges............................ 1.1 1.3 1.2 1.3 (a)
=========== ========== =========== ========== ==========
Deficiency of adjusted net earnings to
total fixed charges...................... N/D N/D N/D N/D $ 6,053
=========== ========== =========== ========== ==========
Fixed charges and preferred dividends
combined:
Preferred dividend factor:
Preferred dividend requirements....... $ 3,287 $ 3,522 $ 4,115 $ 4,255 $ 4,654
Ratio of pre-tax earnings to
after-tax earnings*................... 30.1% 50.2% 64.3% 52.9% 71.1%
Preferred dividend factor on
pre-tax basis......................... 10,920 7,016 6,400 8,043 6,546
Total fixed charges (above).............. 74,630 72,379 68,204 66,725 59,296
----------- ---------- ----------- ---------- ----------
Fixed charges and preferred dividends
combined................................. $ 85,550 $ 79,395 $ 74,604 $ 74,768 $ 65,842
=========== ========== =========== ========== ==========
Ratio of adjusted net earnings to fixed
charges and preferred dividends
combined**............................... (b) 1.2 1.1 1.2 (b)
=========== ========== =========== ========== ==========
Deficiency of adjusted net earnings to
fixed charges and preferred dividends
combined................................. $ 4,952 N/D N/D N/D $ 12,599
=========== ========== =========== ========== ==========
</TABLE>
* Represents pre-tax adjusted net earnings from continuing operations
divided by after-tax earnings, which adjusts dividends on preferred
stock to a pre-tax basis.
** Represents adjusted net earnings divided by fixed charges and preferred
dividends combined.
N/D No deficiency.
(a) Adjusted net earnings are inadequate to cover total fixed charges.
(b) Adjusted net earnings are inadequate to cover total fixed charges
and preferred dividends combined.
<PAGE>
<TABLE>
<CAPTION>
COMPUTATION OF RATIO OF MARGINS TO FIXED
CHARGES AND PREFERRED DIVIDENDS COMBINED
AGWAY INC. (PARENT)
FOR THE YEARS ENDED JUNE 30,
(THOUSANDS OF DOLLARS)
-----------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Earnings before income taxes and
member refunds........................... $ (3,155) $ 14,326 $ 816 $ 22,861 $ (6,954)
Fixed charges - Interest................. 20,343 14,908 17,042 14,993 16,248
- Rentals.................. 3,637 3,162 2,504 1,790 2,235
----------- ---------- ----------- ---------- ----------
Total fixed charges...................... 23,980 18,070 19,546 16,783 18,483
----------- ---------- ----------- ---------- ----------
Adjusted net earnings.................... $ 20,825 $ 32,396 $ 20,362 $ 39,644 $ 11,529
=========== ========== =========== ========== ==========
Ratio of adjusted net earnings to total
fixed charges............................ (a) 1.8 1.0 2.4 (a)
=========== ========== =========== ========== ==========
Deficiency of adjusted net earnings to
total fixed charges...................... (3,155) N/D N/D N/D (6,954)
=========== ========== =========== ========== ===========
Fixed charges and preferred dividends
combined:
Preferred dividend factor:
Preferred dividend requirements....... $ 3,287 $ 3,522 $ 4,115 $ 4,255 $ 4,654
Ratio of pre-tax earnings to
after-tax earnings*................... 1,517.8% 149.4% 934.9% 91.0% 327.8%
Preferred dividend factor on..........
pre-tax basis......................... 217 2,358 440 4,677 1,419
Total fixed charges (above).............. 23,980 18,070 19,546 1,790 18,483
----------- ---------- ----------- ---------- ----------
Fixed charges and preferred dividends
combined................................. $ 24,197 $ 20,428 $ 19,986 $ 6,467 $ 19,902
=========== ========== =========== ========== ==========
Ratio of adjusted net earnings to fixed
charges and preferred dividends
combined**............................... (b) 1.6 1.0 1.8 (b)
=========== ========== =========== ========== ==========
Deficiency of adjusted net earnings to
fixed charges and preferred dividends
combined................................. (3,372) N/D N/D N/D (8,373)
=========== ========== =========== ========== ===========
</TABLE>
* Represents pre-tax adjusted net earnings from continuing operations
divided by after-tax earnings, which adjusts dividends on preferred
stock to a pre-tax basis.
** Represents adjusted net earnings divided by fixed charges and preferred
dividends combined.
N/D No deficiency.
(a) Adjusted net earnings are inadequate to cover total fixed charges.
(b) Adjusted net earnings are inadequate to cover total fixed charges
and preferred dividends combined.
EXHIBIT 21
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
AS OF JUNE 30, 1999
SUBSIDIARY STATE OF INCORPORATION
- ---------- ----------------------
Agway Data Services, Inc................................................Delaware
Agway Energy Products LLC (2)...........................................Delaware
Agway Energy Services, Inc..............................................Delaware
Agway Energy Services - PA, Inc.........................................Delaware
Agway Financial Corporation.............................................Delaware
Agway Futures Trading LLC...............................................Delaware
Agway General Agency, Inc...............................................New York
Agway Holdings Inc......................................................Delaware
Agway Insurance Company.................................................New York
Agway Realties, Inc.....................................................Delaware
Commodity Transport, Inc. (5)............................................Vermont
Country Best Adams LLC..................................................Delaware
Country Products, LLC...................................................Delaware
Feed Commodities International, LLC (6)..................................Vermont
Milford Fertilizer Company LLC (5)......................................Delaware
Telmark LLC (2).........................................................Delaware
Telease Financial Services, Ltd.........................................Delaware
Telmark Lease Funding I LLC (3).........................................Delaware
Telmark Lease Funding II LLC............................................Delaware
Texas City Refining, Inc. (1)...........................................Delaware
Notes:
(1) Agway Energy Products LLC owns 67% of Texas City Refining, Inc. In
September 1993, Texas City Refining, Inc., filed a certificate of
dissolution in the office of the Delaware Secretary of State; in September
1996, Texas City Refining, Inc. was dissolved.
(2) Effective July 1998, Agway Petroleum Corporation was merged into Agway
Energy Products LLC, a Delaware limited liability company; Agway Energy
Products LLC is the surviving entity. Effective July 1998, Telmark Inc.
was merged into Telmark LLC, a Delaware limited liability company; Telmark
LLC is the surviving entity.
(3) Effective July 1998, Telmark Lease Funding Corp. I was merged into Telmark
Lease Funding I LLC; Telmark Lease Funding I LLC is the surviving entity.
(4) Effective June 1999, Agway Consumer Products, Inc. was merged into Agway
Inc.; Agway Inc. is the surviving entity.
(5) Effective July 1999, Milford Fertilizer Company was merged into Milford
Fertilizer Company LLC, a Delaware limited liability company; Milford
Fertilizer Company LLC is the surviving entity.
(6) Effective July 1999, Feed Commodities International, Inc. and Commodity
Transport, Inc. were merged into Feed Commodities International LLC, a
Delaware limited liability company; Feed Commodities International LLC is
the surviving entity.
EXHIBIT 23
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Agway Inc.:
We hereby consent to the incorporation by reference in the Registration
Statements of Agway Inc. on Form S-3 (File No. 333-62509) and on Form S-8 (File
No. 33-54083) of Agway Inc. of our reports dated September 2, 1999, relating to
the financial statements and financial statement schedules, which appear in this
Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Syracuse, New York
September 13, 1999
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Agway Inc.:
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-54083) of Agway Inc. of our report dated August
20, 1999, relating to the financial statements of the Agway Inc. Employees'
Thrift Investment Plan, which appears in Form 11-K which is filed in Exhibit 99
in this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Syracuse, New York
September 13, 1999
<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>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1000
<CASH> 0
<SECURITIES> 35,099
<RECEIVABLES> 192,691
<ALLOWANCES> 7,155
<INVENTORY> 146,066
<CURRENT-ASSETS> 538,830
<PP&E> 533,665
<DEPRECIATION> 318,240
<TOTAL-ASSETS> 1,477,051
<CURRENT-LIABILITIES> 484,682
<BONDS> 688,752
0
42,917
<COMMON> 2,506
<OTHER-SE> 153,524
<TOTAL-LIABILITY-AND-EQUITY> 1,477,051
<SALES> 1,386,388
<TOTAL-REVENUES> 1,484,362
<CGS> 1,268,899
<TOTAL-COSTS> 1,313,677
<OTHER-EXPENSES> 152,221
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,286
<INCOME-PRETAX> 5,968
<INCOME-TAX> 4,173
<INCOME-CONTINUING> 1,795
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1795
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 11-K
ANNUAL REPORT PURSUANT TO SECTION 15(D)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
---------------------------------------------
(FULL TITLE OF THE PLAN)
AGWAY INC.
------------------------------------------------------------
(NAME OF ISSUER OF THE SECURITIES HELD PURSUANT TO THE PLAN)
333 BUTTERNUT DRIVE
DEWITT, NEW YORK 13214
---------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES OF THE PLAN
AND THE ISSUER OF THE SECURITIES)
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
Report on Audited Financial Statements
for the year ended June 30, 1999
-----------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
JUNE 30, 1999 AND 1998
-----------------------------------------------------------------------
INDEX
-----
<S> <C>
Report of Independent Accountants................................................................. F-2
Financial Statements:
Statements of Net Assets Available for Benefits
as of June 30, 1999 and 1998.................................................... F-3
Statements of Changes in Net Assets Available for Benefits
for the years ended June 30, 1999 and 1998...................................... F-4
Notes to Financial Statements............................................................ F-5 to F-15
Supplemental Schedules (Form 5500 information):
Item 27a. Schedule of Assets Held for Investment Purposes
as of June 30, 1999........................................................ S-1.1 and S-1.2
Item 27d. Schedule of Reportable Transactions
for the year ended June 30, 1999........................................... S-2.1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Employee Benefit Plans
Administration Committee,
Agway, Inc.
In our opinion, the accompanying statements of net assets available for benefits
and the related statements of changes in net assets available for benefits
present fairly, in all material respects, the net assets available for benefits
of the AGWAY INC. EMPLOYEES' THRIFT INVESTMENT PLAN (the "Plan") at June 30,
1999 and 1998, and the changes in net assets available for benefits for the
years then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Plan's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Our audit was performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules listed in the
accompanying index are presented for the purpose of additional analysis and are
not a required part of the basic financial statements but are additional
information required by the Employee Retirement Income Security Act of 1974. The
fund information in notes 7 and 8 is presented for purposes of additional
analysis rather than to present the net assets available for benefits and
changes in net assets available for benefits of each fund. The supplemental
schedules and fund information have been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, are
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
Syracuse, New York
August 20, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
June 30, 1999 and 1998
-----------
(Thousands of Dollars)
ASSETS
1999 1998
----------- -----------
<S> <C> <C>
BGI U.S. Equity Market Fund $ 79,991 $ 70,309
Agway, Inc., Preferred Securities 23,099 25,899
Agway Financial Corporation, Subordinated
Money Market Certificates 26,795 22,773
Agway Financial Corporation, Subordinated
Debentures 1,580 1,830
BGI Government/Corporate Bond Index Fund 3,409 2,910
Collective Cash Investment Funds 3,065 2,328
Loans to participants 1,322 1,144
----------- -----------
TOTAL INVESTMENTS 139,261 127,193
Accrued income 2,092 1,982
Contributions receivable, employer 1,005 903
----------- -----------
TOTAL ASSETS 142,358 130,078
Accrued Liabilities 183 0
----------- -----------
TOTAL LIABILITIES 183 0
----------- -----------
NET ASSETS AVAILABLE FOR BENEFITS $ 142,175 $ 130,078
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
for the years ended June 30, 1999 and 1998
-----------
(Thousands of Dollars)
1999 1998
------------ -----------
<S> <C> <C>
Net increase of interest in common collective trust funds $ 13,679 $ 15,996
Interest income 2,449 2,057
Dividend income 1,874 2,032
------------ -----------
Total investment income 18,002 20,085
------------ -----------
Contributions:
Participants 9,371 6,131
Agway, Inc. 1,498 1,349
------------ -----------
Total contributions 10,869 7,480
------------ -----------
Total additions 28,871 27,565
------------ -----------
Deductions:
Benefit payments to participants 16,293 9,593
Trustee fees, administrative and other expenses 481 291
------------ -----------
Total deductions 16,774 9,884
------------ -----------
Net additions 12,097 17,681
Net assets available for benefits:
Beginning of year 130,078 112,397
------------ -----------
Net assets available for benefits:
End of year $ 142,175 $ 130,078
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
1. DESCRIPTION OF THE PLAN
The following brief description of the Agway, Inc. Employees' Thrift
Investment Plan (the "Plan") is provided for general information
purposes only. Participants should refer to the Plan document for more
complete information of benefits provided under the Plan.
General
The Plan is a defined contribution plan covering substantially all
full-time employees of Agway, Inc. (the "Sponsor" or "Company") and
part-time employees who have reached their first anniversary date (as
defined in the Plan) and worked 1,000 hours. It is subject to the
provisions of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
Description of Plan
The Plan was amended in May 1999 to reflect the conversion of the
Plan's administration to a daily valuation process. In addition, other
miscellaneous items were amended as part of this conversion. The
following items represent changes to the Plan as a result of the
amendments:
- Participant account balances will be valued on a daily basis.
- Expenses will be accrued daily based on an established accrual
factor.
- Participants may change investment options or elect to
transfer employee accumulated balances daily.
- Participants may direct employee contributions in 1% increments
in any of the four funds. This changed from 25%.
- The minimum employee contribution changed from 2% to 1%.
Contributions
Participants may elect to contribute "regular investments" of 1% to 6%
of annual compensation (as defined in the Plan). These investments can
be made on a "pre-tax" basis, an "after-tax" basis or a combination
thereof, subject to Internal Revenue Service ("IRS") limitations.
Pre-tax regular investments are designed to take advantage of Section
401(k) of the Internal Revenue Code ("IRC") and are contributed to the
Plan before being subject to federal income tax and, in most cases,
state income tax. After-tax regular investments are contributed to the
Plan after being subject to federal and state income taxes.
F-5
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
1. DESCRIPTION OF THE PLAN (CONTINUED)
Contributions (continued)
Participants may invest an additional 1% to 9% of annual compensation
(as defined in the Plan) as "additional investments" on a pre-tax basis
(subject to IRS limitations) if the participant contributes the maximum
6% of regular investments. Amounts exceeding the annual pre-tax
contribution limit of $10,000 established by the IRS are made on an
after-tax basis based on the election of the participant.
Participants may also contribute amounts representing distributions
from other qualified defined benefit or contribution plans.
The Sponsor shall contribute an amount equal to at least 10%, but not
more than 50%, of each participant's regular investment to the Plan not
to exceed 6% of the participant compensation. All employer
contributions are invested in the Company Security Fund. The
discretionary percentage of Sponsor contributions above 10% for each
year of operation of the Plan shall be determined by the Board of
Directors of the Sponsor. The Sponsor's contribution will be made each
pay period at a rate of 10% of the participant's regular investment.
Any amount of the Sponsor's contribution greater than 10% of the
participant's regular investment as determined by the Board of
Directors will be paid not later than the time prescribed by law for
filing the Sponsor's federal income tax return for the applicable
taxable year, including extensions for such filing.
Participant Accounts
Each participant's account is credited with the participant's
contributions and allocations of (a) the Sponsor's contributions, (b)
plan earnings, and (c) administrative expenses. Allocation of plan
earnings is done on a daily basis and is based on each fund's daily
earning percentage (fund earnings divided by fund market value) times
the participant's accumulated investments and earnings to date in the
fund. The benefit to which a participant is entitled is the benefit
that can be provided from the participant's vested account.
F-6
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
1. DESCRIPTION OF THE PLAN (CONTINUED)
Vesting
Participants vest immediately in their contributions plus actual
earnings thereon and the Sponsor contributions and earnings thereon.
Investment Options
The Plan provides for the following separate investment fund choices to
participants: the Stock Fund, Company Security Fund, Bond Fund and Cash
Fund. All participant contributions and earnings thereon are
participant-directed. Upon enrollment in the Plan, a participant may
direct employee contributions in 1 percent increments in any of the
four funds. A participant may change investment options or elect to
transfer employee contributions on a daily basis. Sponsor contributions
and earnings thereon may not be transferred from the Company Security
Fund to other investment funds. As of June 30, 1999, there were 4,749
employees and former employees participating in this Plan. The number
of participants under each investment fund at June 30, 1999, is as
follows:
Stock Fund 3,714 Bond Fund 757
Company Security Fund 4,723 Cash Fund 410
Stock Fund
The Stock Fund, including earnings thereon, shall be invested in any
common stock(s), common stock fund(s), or any security convertible into
common stock as the Sponsor's Employee Benefit Plans Investment
Committee ("EBPIC") may deem advisable from time to time, but which
shall not include shares of stock or other securities of the Sponsor or
any of its subsidiaries or affiliates. The investment manager will make
purchases of such securities in the open market at prices prevailing in
such market on the day of purchase. Short-term obligations of the U.S.
Government or other investments of a short-term nature may be purchased
and held pending the selection and purchase of suitable securities.
Substantially all of the Stock Fund investments were in the "Barclays
Global Investors, N.A. ("BGI") U.S. Equity Market Fund" at June 30,
1999 and 1998, which is a common collective trust fund. As there is no
market quotation available, the fair value of the Stock Fund
investments is based on the unit market value established by the
investment manager. This unit value is calculated by dividing the net
assets of the applicable Market Fund, stated at quoted market values,
by the units outstanding.
F-7
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
1. DESCRIPTION OF THE PLAN (CONTINUED)
Investment Options (continued)
Company Security Fund
It is explicitly provided and intended that the Company Security Fund
be invested in qualified Agway, Inc. securities. These qualified Agway,
Inc. securities include cumulative preferred stock and Agway Financial
Corporation (AFC) subordinated money market certificates and
debentures. However, if at any time when the Trustee has funds
available for such investment and such prescribed securities are not
available for purchase from the Sponsor, the Trustee is authorized to
hold such funds in an interest bearing account, or to invest such funds
in one or more securities of other corporations, as instructed by
EBPIC, which are comparable to the prescribed securities of the
Sponsor. Securities of Agway, Inc. will be purchased from the Sponsor
at par value or principal amount, since the market value of such
securities is maintained as such by the Sponsor as a result of its
practice of repurchasing outstanding securities at par whenever holders
thereof elect to tender them for redemption.
Bond Fund
The Bond Fund is invested primarily in bonds of U.S. Government and
investment grade bonds of industrial, financial and utility
corporations. "Investment Grade" is a term for securities of high
quality that are rated BAA or better by Moody's Investor Service and
BBB or better by Standard & Poor's Corporation. Substantially all of
the Bond Fund investments were in the BGI "Government/Corporate Bond
Index Fund" at June 30, 1999 and 1998, which is a common collective
trust fund. As there is no market quotation available, fair value of
the Bond Fund investments is based on the unit market value established
by the investment manager. This unit value is calculated by dividing
the net assets of the Bond Index Fund, stated at quoted market value,
by the units outstanding.
Cash Fund
The Cash Fund investment objective is to preserve capital and earn a
competitive day-to-day interest rate. It invests in high quality,
short-term money market instruments whose maturities normally will not
exceed one year and are, on average, less than three months.
Investments may be made in U.S. Treasury or agency obligations;
obligations issued by financial, industrial, public utility, or other
companies; bankers' acceptances, bank certificates of deposit or time
deposits; commercial paper; and other similar obligations. The majority
of investments of the Cash Fund were in the BGI "Money Market Fund" at
June 30, 1999 and 1998, which is a common collective trust fund.
F-8
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
1. DESCRIPTION OF THE PLAN (CONTINUED)
Loans to Participants
The Plan also includes various terms and conditions under which a
participating employee can obtain loans from the Plan. Participants may
borrow up to 50% of their vested account balance. Participant loans
must be no less than $500 and no greater than $50,000. Loan
transactions are treated as a transfer to (from) the investment funds
from (to) the participant loan fund. Loan terms range from 1 to 5 years
or up to 20 years for the purchase of a primary residence. The loans
are secured by the balance in the participant's account and bear
interest at a rate of 1 percent over prime. Principal and interest are
paid ratably through payroll deductions.
Payment of Benefits
On termination of service due to death, disability or retirement, a
participant may elect, in most circumstances, to receive either a
lump-sum amount equal to the value of the participant's vested interest
in his or her account, and either monthly or annual installments over
periods ranging from 5 to 20 years. For termination of service due to
other reasons, a participant receives the value of the vested interest
in his or her account as a lump-sum distribution.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements of the Plan are prepared under the accrual
basis of accounting in conformity with generally accepted accounting
principles. The accounting principles and practices which affect the
more significant elements of the financial statements are:
Investment Valuation
Agway, Inc. preferred stock and AFC subordinated money market and debt
securities are valued at par, which approximates fair value, since it
has been the Sponsor's practice to repurchase outstanding securities at
par when redeemed. All Agway, Inc. securities are also purchased at
par. All other Plan investments are held in bank commingled trust funds
("common collective trust funds"), shares of which are valued at the
net asset value of shares held by the Plan at year-end as determined by
the investment manager. Purchases and sales of securities are recorded
on a trade-date basis. Participant loans are valued at cost.
Income Recognition
Interest income from investments is recognized as earned. Dividends are
recorded on the ex-dividend date. The Plan presents in the statement of
changes in net assets the net increase in interest in common collective
trust funds which consists of current year realized and unrealized
gains or losses, interest and dividends.
F-9
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Trustee Fees, Administrative and Other Expenses
Trustee fees, administrative expenses and all other expenses are
recognized in the period incurred. The Plan incurred approximately $385
in 1999 and $245 in 1998 in administrative expenses paid to the Sponsor
during the year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Risks and Uncertainties
The Plan provides for various investment options in any combination of
three common collective trust funds (stock, bond or cash) or Company
securities. Investment securities are exposed to various risks, such as
interest rate, market and credit. Due to the level of risk associated
with certain investment securities and the level of uncertainty related
to changes in the value of investment securities, it is at least
reasonably possible that changes in risks in the near term would
materially affect participants' account balances and the amounts
reported in the statement of net assets available for benefits and the
statement of changes in net assets available for benefits.
F-10
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
3. INVESTMENTS
The Plan's investments are held by a bank-administered trust fund. The
following table presents the fair value of investments as determined by
estimated market price. Investments that represent 5 percent or more of
the Plan's net assets are listed separately.
<TABLE>
<CAPTION>
INVESTMENTS AT ESTIMATED FAIR VALUE
1999 1998
------------------ ---------------
<S> <C> <C>
Stock Fund:
Equity Market Fund $ 79,991 $ 70,309
Company Security Fund:
Agway, Inc., Preferred Securities:
8% cumulative preferred stock - Series B 19,942 19,942
7% cumulative preferred stock - Series C 3,157 5,957
------------------ ---------------
23,099 25,899
AFC Subordinated Money Market Certificates 26,795 22,773
AFC Subordinated Debentures 1,580 1,830
Bond Fund:
BGI Government/Corporate Bond Index Fund 3,409 2,910
Collective Cash Investment Funds 3,065 2,328
Loans to participants 1,322 1,144
------------------ ---------------
TOTAL INVESTMENTS AT FAIR VALUE $ 139,261 $ 127,193
================== ===============
</TABLE>
During 1999 and 1998, the Plan's interest in common collective trust
funds (including gains and losses on investments bought and sold, as
well as held during the year) increased in value for the Plan years
ended June 30 as follows:
<TABLE>
<CAPTION>
NET INCREASE IN INTEREST IN COMMON 1999 1998
------------------ ---------------
<S> <C> <C>
COLLECTIVE TRUST FUNDS:
BGI U.S. Equity Market Fund $ 13,485 $ 15,635
BGI Government/Corporate Bond Index Fund 88 252
Collective Cash Investment Funds 106 109
------------------ ---------------
Total $ 13,679 $ 15,996
================== ===============
</TABLE>
F-11
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
4. PLAN TRUSTEE
The cash and investments of the Plan are held by Boston Safe Deposit
and Trust Company (the "Trustee") under a trust agreement dated April
1, 1995. In general, the duties of the Trustee include: (1) holding
assets and collecting income therefrom; (2) investing the assets of the
Plan as directed by EBPIC or the appointed investment manager; (3)
selling or exchanging the assets of the Plan; and (4) paying benefits
to participants in the Plan on the written order of the Employee
Benefit Plans Administration Committee ("EBPAC"), which is appointed by
the Board of Directors of the Sponsor. The investment of assets in the
Stock Fund, Bond Fund and Cash Fund are directed by an investment
manager, Barclays Global Investors, N.A., San Francisco, California.
5. PLAN TERMINATION
The Sponsor may amend or terminate the Plan. Although the Sponsor has
not expressed any intent to do so, in the event the Plan is terminated
or employer contributions are discontinued, all of the assets of the
Plan shall be used for the benefit of participants and beneficiaries
under the Plan.
6. FEDERAL INCOME TAX STATUS
A favorable determination letter dated December 5, 1995, was issued by
the IRS on behalf of the Plan which stated that the Plan, as then
designed, was in compliance with the applicable requirements of the
IRC. The Plan has been amended since receiving the determination
letter. However, the plan administrator believes that the Plan is
designed and is currently being operated in compliance with the
applicable requirements of the IRC. Accordingly, no provision for
income taxes has been included in the Plan's financial statements.
F-12
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
7. ALLOCATION OF PLAN ASSETS AND LIABILITIES TO INVESTMENT PROGRAMS
<TABLE>
<CAPTION>
June 30, 1999
-------------
Non-
Participant
Participant-Directed Directed
----------------------------------------------------------------- -----------
Company Company
Stock Security Bond Cash Loans to Security
Fund Fund Fund Fund Participants Fund Total
----------- --------- ---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments $ 79,991 $ 36,205 $ 3,409 $ 2,068 $ 1,322 $ 16,266 $ 139,261
Accrued income 0 1,423 0 29 0 640 2,092
Contributions receivable,
employer 0 0 0 0 0 1,005 1,005
----------- --------- ---------- ---------- ------------ ------------ ------------
TOTAL ASSETS 79,991 37,628 3,409 2,097 1,322 17,911 142,358
Accrued liabilities (41) (19) (2) (112) 0 (9) (183)
----------- --------- ---------- ---------- ------------ ------------ ------------
NET ASSETS
AVAILABLE
FOR BENEFITS $ 79,950 $ 37,609 $ 3,407 $ 1,985 $ 1,322 $ 17,902 $ 142,175
=========== ========= ========== ========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
June 30, 1998
-------------
Non-
Participant
Participant-Directed Directed
----------------------------------------------------------------- -----------
Company Company
Stock Security Bond Cash Loans to Security
Fund Fund Fund Fund Participants Fund Total
----------- --------- ---------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments $ 70,726 $ 35,542 $ 2,912 $ 1,714 $ 1,148 $ 15,151 $ 127,193
Accrued income 2 1,386 0 0 0 594 1,982
Contributions receivable,
employer 0 0 0 0 0 903 903
----------- --------- ---------- ---------- ------------ ----------- ------------
TOTAL ASSETS 70,728 36,928 2,912 1,714 1,148 16,648 130,078
Accrued liabilities 0 0 0 0 0 0 0
----------- --------- ---------- ---------- ------------ ----------- ------------
NET ASSETS
AVAILABLE
FOR BENEFITS $ 70,728 $ 36,928 $ 2,912 $ 1,714 $ 1,148 $ 16,648 $ 130,078
=========== ========= ========== ========== ============ =========== ============
</TABLE>
F-13
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
8. ALLOCATION OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS TO INVESTMENT
PROGRAMS
<TABLE>
<CAPTION>
For the Year Ended June 30, 1999
--------------------------------
Non-
Participant
Participant-Directed Directed
---------------------------------------------------------------- -----------
Company Company
Stock Security Bond Cash Loans to Security
Fund Fund Fund Fund Participants Fund Total
---------- ---------- ---------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net increase of interest
in collective
investment funds $ 13,485 $ 0 $ 88 $ 106 $ 0 $ 0 $ 13,679
Interest income 21 1,607 0 0 99 722 2,449
Dividend income 0 1,293 0 0 0 581 1,874
---------- ---------- ---------- ---------- ------------ ----------- ----------
13,506 2,900 88 106 99 1,303 18,002
---------- ---------- ---------- ---------- ------------ ----------- ----------
Contributions:
Participants 5,780 2,995 448 148 0 0 9,371
Agway, Inc. 0 0 0 0 0 1,498 1,498
---------- ---------- ---------- ---------- ------------ ----------- ----------
5,780 2,995 448 148 0 1,498 10,869
---------- ---------- ---------- ---------- ------------ ----------- ----------
Total additions 19,286 5,895 536 254 99 2,801 28,871
---------- ---------- ---------- ---------- ------------ ----------- ----------
Deductions
Benefit payments
to participants 8,892 4,592 443 167 136 2,063 16,293
Administrative
expenses 264 132 13 7 5 60 481
---------- ---------- ---------- ---------- ------------ ----------- ----------
Total deductions 9,156 4,724 456 174 141 2,123 16,774
---------- ---------- ---------- ---------- ------------ ----------- ----------
Net increase (decrease)
before interfund
transfers 10,130 1,171 80 80 (42) 678 12,097
Transfers (from) to
other funds (908) 86 415 191 216 0 0
Net assets available
for benefits,
beginning of year 70,728 36,928 2,912 1,714 1,148 16,648 130,078
---------- ---------- ---------- ---------- ------------ ----------- ----------
Net assets available
for benefits,
end of year $ 79,950 $ 38,185 $ 3,407 $ 1,985 $ 1,322 $ 17,326 $ 142,175
========== ========== ========== ========== ============ =========== ==========
</TABLE>
F-14
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
NOTES TO FINANCIAL STATEMENTS
-----------
(Thousands of Dollars)
8. ALLOCATION OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS TO INVESTMENT
PROGRAMS
<TABLE>
<CAPTION>
For the Year Ended June 30, 1998
--------------------------------
Non-
Participant
Participant-Directed Directed
----------------------------------------------------------------- -----------
Company Company
Stock Security Bond Cash Loans to Security
Fund Fund Fund Fund Participants Fund Total
----------- ---------- ---------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net increase of interest
in collective
investment funds $ 15,635 $ 0 $ 252 $ 109 $ 0 $ 0 $ 15,996
Interest income 0 1,369 0 0 101 587 2,057
Dividend income 0 1,422 0 0 0 610 2,032
----------- ---------- ---------- ---------- ------------ ----------- -----------
15,635 2,791 252 109 101 1,197 20,085
----------- ---------- ---------- ---------- ------------ ----------- -----------
Contributions:
Participants 3,769 1,941 285 136 0 0 6,131
Agway, Inc. 0 0 0 0 0 1,349 1,349
----------- ---------- ---------- ---------- ------------ ----------- -----------
3,769 1,941 285 136 0 1,349 7,480
----------- ---------- ---------- ---------- ------------ ----------- -----------
Total additions 19,404 4,732 537 245 101 2,546 27,565
----------- ---------- ---------- ---------- ------------ ----------- -----------
Deductions
Benefit payments
to participants 4,858 2,995 171 198 87 1,284 9,593
Administrative
expenses 153 89 6 5 0 38 291
----------- ---------- ---------- ---------- ------------ ----------- -----------
Total deductions 5,011 3,084 177 203 87 1,322 9,884
----------- ---------- ---------- ---------- ------------ ----------- -----------
Net increase (decrease)
before interfund
transfers 14,393 1,648 360 42 14 1,224 17,681
Transfers (from) to
other funds 891 (1,084) 457 (319) 55 0 0
Net assets available
for benefits,
beginning of year 55,444 36,247 2,095 1,991 1,079 15,541 112,397
----------- ---------- ---------- ---------- ------------ ----------- -----------
Net assets available
for benefits,
end of year $ 70,728 $ 36,811 $ 2,912 $ 1,714 $ 1,148 $ 16,765 $ 130,078
=========== ========== ========== ========== ============ =========== ===========
</TABLE>
F-15
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
ITEM 27a of Form 5500 - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
as of June 30, 1999
(Thousands of Dollars)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D
------ ------ ------ ------
Balance Held at
Close of Period
(Number of Shares Market Value
Name of Issuer or Principal Amount Cost of of Each Item at
and Title of Issue of Bonds and Notes) Each Item Close of Period
- ----------------------------------- -------------------- -------------- ----------------
<S> <C> <C> <C>
Stock Fund:
BGI U.S. Equity Market Fund 2,698,529 $ 71,366 $ 79,991
Company Security Fund:
Agway, Inc.:
8% cumulative preferred
stock - Series B 199,420 19,942 19,942
7% cumulative preferred
stock - Series C 31,570 3,157 3,157
Agway Financial Corporation:
8% subordinated money
market certificates,
due October 31, 2006 $ 7,195 7,195 7,195
6% subordinated money
market certificates,
due October 31, 2013 400 400 400
8% subordinated debentures,
due July 1, 1999 1,130 1,130 1,130
7-1/2% subordinated money
market certificates,
due October 31, 1999 1,489 1,489 1,489
9% subordinated money
market certificates,
due October 31, 2000 3,234 3,234 3,234
8% subordinated money
market certificates,
due October 31, 2002 2,254 2,254 2,254
7-1/2% subordinated money
market certificates,
due October 31, 2002 1,930 1,930 1,930
8-1/2% subordinated money
market certificates,
due October 31, 2001 3,636 3,636 3,636
7-1/2% subordinated debentures,
due July 1, 2003 450 450 450
8-1/2% subordinated money
market certificates,
due October 31, 2003 4,931 4,931 4,931
8% subordinated money
market certificates,
due October 31, 2005 1,726 1,726 1,726
------------- ------------
Total Company securities 51,474 51,474
TBC Inc. Pooled Employee Funds $ 997 997 997
------------- ------------
Total Company Security Fund $ 52,471 $ 52,471
------------- ------------
</TABLE>
S-1.1
<PAGE>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
ITEM 27a of Form 5500 - SCHEDULE OF ASSETS HELD FOR
INVESTMENT PURPOSES, Continued
as of June 30, 1999
(Thousands of Dollars)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D
------ ------ ------ ------
Balance Held at
Close of Period
(Number of Shares Market Value
Name of Issuer or Principal Amount Cost of of Each Item at
and Title of Issue of Bonds and Notes) Each Item Close of Period
- --------------------------------- ------------------- ----------- ---------------
<S> <C> <C> <C>
Bond Fund
BGI Government/Corporate
Bond Index Fund 298,156 $ 3,432 $ 3,409
Cash Fund:
BGI Money Market Fund $ 1,974 1,974 1,974
TBC Inc. Pooled Employee Funds 94 94 94
----------- ---------------
2,068 2,068
Loans to Participants:
Participant Notes $ 1,322 1,322 1,322
----------- ---------------
TOTAL INVESTMENTS $ 130,659 $ 139,261
=========== ===============
</TABLE>
S-1.2
<PAGE>
<TABLE>
<CAPTION>
AGWAY, INC. EMPLOYEES' THRIFT INVESTMENT PLAN
ITEM 27d of Form 5500 - SCHEDULE OF REPORTABLE TRANSACTIONS
for the year ended June 30, 1999
(Thousands of Dollars)
Current Value
of Investment
Purchase Selling on Transaction Net
Price Price Date Gain(Loss)
------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
SINGLE SECURITY TRANSACTIONS IN
EXCESS OF 5% OF MARKET VALUE
8% subordinated money market
certificates $ 7,100 $ 0 $ 7,100 $ 0
TBC Inc. Pooled Employee Fund 0 7,100 7,100 0
BGI Equity Market Fund 0 71,905 31,096 40,809
BGI Equity Market Fund 71,905 0 71,905 0
SERIES OF SECURITY TRANSACTIONS
IN EXCESS OF 5% OF MARKET VALUE
8% subordinated money market
certificates $ 7,195 $ 0 $ 7,195 $ 0
TBC Pooled Employee Fund 34,076 0 34,076 0
TBC Inc. Pooled Employee Funds 0 33,599 33,599 0
BSDT Late Money Dep 3,388 0 3,388 0
BSDT - Late Money Dep 0 3,388 3,388 0
BGI Equity Market Fund 600 0 600 0
BGI Equity Market Fund 0 75,555 32,729 42,826
BGI Equity Market Fund 74,598 0 74,598 0
BGI Equity Market Fund 0 3,446 3,232 214
</TABLE>
S-2.1
