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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 24, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 2-22791
AGWAY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 15-0277720
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
333 BUTTERNUT DRIVE, DEWITT, NEW YORK 13214
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 315-449-6436
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
X
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Yes No
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN ANY DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. X
---
STATE THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON
EQUITY HELD BY NON-AFFILIATES OF THE REGISTRANT AS OF SEPTEMBER 15, 2000.
Membership Common Stock, $25 Par Value - $2,462,500
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 15, 2000
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Membership Common Stock, 98,500 Shares
$25 Par Value
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<PAGE>
FORM 10-K ANNUAL REPORT - 2000
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Page
PART I
<S> <C> <C>
Items 1 & 2. Business and Properties
General............................................................................. 3
Agriculture......................................................................... 4
Country Products Group.............................................................. 5
Energy.............................................................................. 7
Leasing............................................................................. 7
Insurance........................................................................... 8
Discontinued Operations............................................................. 8
Human Resources..................................................................... 9
Administrative...................................................................... 9
Regulation.......................................................................... 9
Stockholder Membership and Control of Agway......................................... 9
Retained Earnings................................................................... 10
Patronage Refunds................................................................... 10
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............................... 29
Item 8. Financial Statements and Supplementary Data.............................................. 32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 32
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............................................................................... 84
</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 (seed and fertilizers) and services for
its farmer-members and other customers, primarily in the northeastern United
States and Ohio. In addition, Agway is involved in repackaging and marketing
produce and processing and marketing sunflower seeds. Agway, through certain of
its subsidiaries, is involved in the distribution of petroleum products; the
installation and servicing of heating, ventilation, and air-conditioning
equipment; 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. As one of the largest
agricultural cooperatives in the United States, Agway 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.
In October 1999, Agway announced that it was converting its owned retail stores
into dealer-owned and operated stores. In June 2000, the Company signed an
agreement for the sale of its consumer wholesale dealer distribution business to
Southern States Cooperative, Inc. (Southern States). The consumer wholesale
dealer distribution business is the wholesale procurement and supply system that
supports the Agway-owned retail stores and Agway dealer-owned retail network.
Together these business activities comprise the business historically referred
to as the Agway retail services business. As indicated by these above announced
activities, Agway is discontinuing its retail services business. These
operations are therefore reflected separately as discontinued operations in this
Form 10-K. See the Discontinued Operations section of Business and Properties
and Note 18 to the financial statements for details.
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.
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). The payment of
principal and interest on this AFC debt is guaranteed by Agway. This guarantee
is full and unconditional, and joint and several. Leasing and Insurance finance
their activities through operations or with a combination of short- and
long-term credit facilities. Telmark's debt is not guaranteed by Agway.
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 five geographically-based enterprise
units. Each unit is responsible for management, operations, sales, billing, and
customer service within its geographic territory. The agricultural business is
focused on animal feed, agronomy, and farm services to farmers in their specific
geographic markets.
ANIMAL FEEDS: Agriculture operates 17 feed mills and 10 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. We expect that production capacity of animal
feeds will be sufficient to meet market needs of the enterprise units. In 1999,
Agriculture completed construction of a farm in Elba, New York, which, on a
contract basis for farmers, custom raises heifers in an environment that is
designed to result in those heifers testing free of specific pathogens, with the
ultimate goal of increasing the productivity and productive lives of such
heifers. Additional "tested specific pathogen free" (TSPF(TM)) facilities have
been built or are under construction in Easton, New York, Hopkinton, New York
and Newburg, Pennsylvania. In July 1999, management of the daily operations of
11 grain elevators was decentralized and reassigned to the enterprise units in
the elevators' respective geographic areas. These elevators are now used
principally for storage of grain for use in our feed mills.
AGRONOMY: Agriculture operates 121 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 the majority of its fertilizer through
CF Industries, Inc., an agricultural 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. Agriculture's seed operations produce, import, and market,
primarily for commercial use, agricultural, vegetable, and turf seeds through
facilities located in Hall, New York, and Elizabethtown, Emmanus, Mifflinburg,
and York, Pennsylvania. Agway believes that production capacity is currently
sufficient to meet the agronomic needs of Agway's market.
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. Agriculture additionally generates sales of animal
health products directly to farmers through a mail-order catalog service. In
September 1999, Agway acquired Brubaker Agronomic Consulting Services, Inc., an
agricultural consulting firm specializing in crop, turf, natural resources,
engineering and nutrient management plans.
Until July 1999, the grain marketing business 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. Commencing in July 1999, management of the daily operations
of the elevators was decentralized and reassigned to the 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. In May 2000, Agway announced a grain merchandising agreement with R.
F. Cunningham Co. Inc., a professional grain merchant company, pursuant to which
Agway continues to purchase grain for use in its feed mills, and R. F.
Cunningham assumed all other on-farm grain procurement activities and
relationships.
4
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
(THOUSANDS OF DOLLARS)
AGRICULTURE (CONTINUED)
RESEARCH AND APPLIED TECHNOLOGY: The five enterprise units each conduct research
pertinent to their market. In 2000, the enterprise units assumed responsibility
for the activities of the Agway Coordinated Dairy System, which activities
include management of the TSPF(TM) heifer farms and collaboration with the
Country Products Group in development and distribution of new animal feed
products.
During the years ended June 2000, 1999 and 1998, net expenditures of $2,400,
$1,300 and $400, respectively, were incurred by Agriculture on agricultural
research activities.
COMPETITION: In the animal feed business, we are one of the largest suppliers
based on sales volume in the northeastern United States (Feed Management).
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.
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.
COUNTRY PRODUCTS GROUP
Agway's Country Products Group (CPG) is organized into three divisions: The
Produce Group, The Business Group, and The Investment Group. Agway believes that
all operations of CPG have sufficient capacity to meet their operating
requirements.
THE PRODUCE GROUP: The Produce Group (generally marketed under the name Country
Best) operates a network of seventeen 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; 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. During 2000, CPG purchased the majority
ownership of a full-line produce operation in Donna, Texas.
THE BUSINESS GROUP: The Business Group consists of operations involved in
commodity processing and repack operations, manufacturing of bags, an investment
in a pet food manufacturer, ProPet, LLC (ProPet), and an indirect investment in
an animal feed company, Buckeye Feed Mills, Inc. (Buckeye 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 human edible sunflower
seed, bird food, soybeans, and edible dry beans. 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.
Soybean and edible dry bean processing plants are located at Caledonia and
Geneva, New York. The multi-walled bag printing and manufacturing plant, located
in Wapakoneta, Ohio, supplies bags used by internal Agway operations and
external customers, including Pro- Pet and Buckeye Feeds. CPG divested of its
pastry flour mill located in Churchville, New York, in May 2000 as a strategic
response to industry consolidation.
5
<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 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 providing daily production of an animal feed
product, OptigenTM 1200, a new controlled release nitrogen source.
Agway CPG Technologies International, headquartered in DeWitt, New York, invests
in post-harvest 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.
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
continues on controlled environment agriculture.
CPG, through AHI, currently owns approximately 26% (2,000,000 shares) of the
outstanding common stock of Planet Polymer Technologies Inc. (Planet). Planet is
publicly traded on the NASDAQ small cap market under the trading symbol "Poly"
and is located in San Diego, California. CPG could own a total of 35% of
Planet's outstanding common stock if existing warrants are fully exercised. In
November 1998, Planet granted Agway an exclusive worldwide license to all
current and future products that utilize Planet's polymer coating technology for
agricultural and food-related purposes (other than products already covered by
existing agreements). In March 2000, Agway and Planet entered into sub-license
agreements defining sales royalties due Planet with respect to Planet's
patented/patent pending coatings and/or polymer systems sold for use in animal
feed products and on fruits, vegetables, floral and nursery items.
During the years ended June 2000, 1999 and 1998, expenditures of $500, $500 and
$0, respectively, were incurred by The Investment Group on research and
development activities.
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 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 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.
CPG Nutrients has no direct competitors in the market for controlled-release
nitrogen products in the animal feed area, so competition will come from
indirect sources. As new products are developed, competitive factors may change.
CPG Technologies International competition comes from several types of coating
companies and producers of similar products, some of which are much larger than
Technologies and have had a long history in the industry. Coatings of waxes,
shellacs, anti-oxidants, modified atmosphere films, and new coating
developments, as well as products such as controlled atmosphere containers, film
liners, and wax boxes, all compete in the market for specialized coatings and
films. We compete on the basis of a new technology bringing improved product
quality and performance over existing technologies.
6
<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 2000, 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. As of June 2000, AEP sold 6 of its
7 terminals to Buckeye Partners, L.P. (Buckeye). This sale is part of Energy's
strategy to focus on growing its retail energy marketing business, and the sale
is expected to have no negative impact on Energy's customers or its operations.
The agreement with Buckeye allows Energy to utilize these terminal facilities
for storage as part of its distribution network. 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 Telmark's consolidated subsidiaries finance equipment, buildings, and
vehicles to farmers and other customers in rural communities. Telmark employs a
captive sales force as its primary distribution system in most of the
continental United States. Telmark offers financing in the continental United
States through its Telmark Express program. Telmark also transacts business in
Canada through a separate subsidiary, Telease Financial Services, Ltd. (TFS).
TFS is a Canadian corporation which enters into certain lease transactions with
Canadian customers. Telmark Lease Funding I, II, and III, Delaware limited
liability companies, were established solely to enable lease securitization
financings entered into during 1997, 1999, and 2000, respectively.
As of June 2000, Telmark had approximately $641,800 of leases outstanding with
persons other than Agway and its subsidiaries, net of unearned interest and
finance charges of approximately $239,400. Telmark finances its operations and
lease portfolio growth through borrowings under its lines of credit, private
placements of debt with institutional investors, lease securitizations, or sales
of debentures to the public. 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 finance affiliates of equipment
manufacturers, agricultural financial institutions, other independent finance
and leasing companies, and commercial banks. Many of these organizations have
substantial financial and other resources and, as a consequence, are able to
compete on a long-term basis within the market segment which Telmark serves.
7
<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.
DISCONTINUED OPERATIONS
In April 1999, the former Agway retail services business segment was
consolidated into Agriculture, where the Agriculture geographic enterprise units
assumed responsibility for managing the retail operations, including the
wholesale dealer relationships and the wholesale distribution channel. At June
1999, the Agway retail services business consisted of two major components, a
retail store distribution system and a wholesale procurement and supply system.
The retail store distribution system was comprised of 157 Agway-operated stores
and 306 franchise representative (dealer) stores, of which 27 were owned by
Agway and leased to dealers. In addition, Agway's retail services business owned
43 surplus properties. In total, Agway's retail store distribution system had an
interest in 227 properties. The wholesale procurement and supply system
consisted of a long-term contract for inventory storage and distribution with a
third party, as well as home office sales and administrative functions. The
home office activity included signing up and maintaining the dealer franchise
agreements, sales of merchandise to dealers and the procurement thereof, as well
as the performance of certain administrative functions.
In October 1999, the Agway Board of Directors approved a plan to restructure the
retail store distribution system. This plan called for the sale or closure of
the 227 Agway retail properties over the next 1 1/2 years. For financial
reporting purposes, this action was considered a business restructuring within
the retail business of the Agriculture segment because Agway, at that time, was
still committed to serving this retail franchise dealer business. As of June
2000, there remained 34 operating stores to be converted to dealers or otherwise
disposed of, 46 properties for disposition which are currently leased to
dealers, and 69 closed properties for sale. In the spring of 2000, the Agway
Board of Directors authorized the sale of the wholesale procurement and supply
system to Southern States Cooperative, Inc. An agreement was executed on June
20, 2000 and closed on July 31, 2000.
The sale of the wholesale procurement and supply system, when combined with the
sale and closure of the Agway-owned or operated retail stores, constitutes a
plan to discontinue operations of the retail services business. For financial
reporting purposes, the measurement date upon which this discontinued operation
plan became effective was June 20, 2000. Operating results of the retail
services business, including restructuring activity which took place through
that date, are included in the operating loss from discontinued operations in
the financial statements for the year ended June 2000. The anticipated gains and
losses after June 20, 2000 from the future anticipated sale of the wholesale
procurement and supply system, which was consummated on July 31, 2000, and the
sale or closure of the remaining Agway-owned or operated retail store
properties, as well as the results of their future operations through the
anticipated dates of sale, are included in the loss on disposal of the retail
services business in the June 2000 statement of operations. Prior year financial
results have been reclassified to reflect the retail services business as a
discontinued operation.
8
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
(THOUSANDS OF DOLLARS)
HUMAN RESOURCES
As of June 2000, Agway and its subsidiaries employed approximately 5,600 people,
1,300 of whom were part-time. This represents a decrease of 1,600 people from
June 1999, of whom 1,400 were part-time. This decrease is substantially due to
the conversion of the retail store distribution system of Agway's operated
retail stores into dealer owned and operated stores, which began in October
1999. There are approximately 140 employees represented by two different unions
with seven existing union contracts. We enjoy satisfactory relations with both
our union and nonunion employees as a result of competitive wage 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 7 remaining years with two 10-year renewal options. 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). See
Legal Proceedings (Item 3).
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 or authorized dealers. Currently,
there are approximately 70,000 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,
are held by Agway members, the Agway, Inc. Employees' 40l(k) 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).
9
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
(THOUSANDS OF DOLLARS)
STOCKHOLDER MEMBERSHIP AND CONTROL OF AGWAY (CONTINUED)
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 15 directors on the Board of
Directors. 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 directors.
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.
10
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
(THOUSANDS OF DOLLARS)
PATRONAGE REFUNDS (CONTINUED)
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
subsequent 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 subsequent 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 subsequent 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 June
2000, the subsequent owner of the property transferred it to a new owner. The
new owner has agreed to cooperate with Agway in complying with the MDEP's
requirements. 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.
In March 2000, the EPA issued the Record of Decision (ROD) for the Remedial
Design/Remedial Action (RD/RA) for the site. The EPA has requested that Agway
and the other PRPs participate in the RD/RA. A group of cooperating PRPs,
including Agway, have notified EPA of their intention to enter into negotiations
for a consent decree to perform the RD/RA. 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.
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 2000.
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
15, 2000, is 98,500, of which 28,809 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 2000 and 1999.
(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 2000 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. The Selected
Financial Data for years prior to June 2000 has been reclassified to reflect the
Agway retail services business as a discontinued operation. See Note 18 to the
financial statements.
<TABLE>
<CAPTION>
(In Thousands of Dollars Except Per Share Amounts)
------------------------------------------------------------------------
Years Ended
------------------------------------------------------------------------
June 2000 June 1999 June 1998 June 1997 June 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales and revenues ..... $ 1,426,886 $ 1,221,466 $ 1,299,797 $ 1,391,986 $ 1,371,525
Earnings from continuing
operations (1) ......... $ 6,152 $ 12,941 $ 16,016 $ 8,499 $ 8,858
Net earnings (loss)(1)(2)(3) $ (9,377) $ 1,795 $ 41,145 $ 10,670 $ 12,662
Total assets ............... $ 1,572,659 $ 1,437,172 $ 1,380,891 $ 1,261,763 $ 1,216,435
Total long-term debt ....... $ 418,549 $ 371,972 $ 352,188 $ 329,969 $ 291,528
Total subordinated debt .... $ 474,874 $ 486,303 $ 462,196 $ 438,127 $ 414,927
Cash dividends per share
of common stock ........ $ 1.50 $ 1.50 $ 1.50 $ 1.50 $ 1.50
</TABLE>
(1) The data reflects a credit before taxes from business restructuring of
$1,943 in 1996.
(2) 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.
(3) The data reflects after-tax loss on disposal and loss from discontinued
retail operations of $15,529, $11,146 and $3,827 for 2000, 1999 and 1998,
respectively. The 1997 and 1996 data reflects after-tax earnings of $2,172
and $2,289, respectively, from discontinued retail operations. The 1996
data reflects an after-tax gain on sale of Hood of $1,515, net of operating
losses until the time of sale.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
The following discussion refers to Agway Inc. and Consolidated Subsidiaries and
should be read in conjunction with Selected Financial Data (Item 6) and the
Consolidated Financial Statements of Agway and Notes thereto (Item 8),
specifically Financial Information Concerning Segment Reporting (Note 14) and
Discontinued Operations (Note 18). 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 2000. Agway reports its operations principally in five business
segments: Agriculture, Country Products Group, Energy, Leasing, and Insurance.
The consolidated results and the Agriculture business segment for all periods
discussed have been reclassified to reflect the Agway Retail Services business
as a discontinued operation.
RESULTS OF OPERATIONS
2000 COMPARED WITH 1999
CONSOLIDATED RESULTS
Agway's net loss of $9,400 for 2000 reflects a decrease in earnings of $11,200
from net earnings of $1,800 in 1999. The net earnings from continuing operations
of $6,100 in 2000 decreased $6,800 from the $12,900 net earnings in 1999. This
$6,800 decrease was made up of a $10,200 decrease in pre-tax earnings offset by
a $3,400 decrease in tax expense. The 2000 results have a $15,500 net loss from
discontinued operations as compared to $11,100 in 1999. (See Discontinued
Operations section below.)
Consolidated net sales and revenues from continuing operations of $1,426,900
increased $205,400 (17%) compared to $1,221,500 in 1999. The increase was
substantially the result of increased sales in the Energy and Country Products
Group (CPG) segments. The increase in Energy was principally due to increases in
the cost of petroleum products over the prior year combined with a slight
increase in volume. The increase in Country Products Group sales resulted from
new acquisitions in CPG's Produce Group operations. These sales increases in
2000 were further enhanced by increased sales from Energy's heating, ventilation
and air-conditioning installation and service sales and growth in electric and
gas market sales; an increase in lease revenues at Telmark; and increases in
Agriculture's national commercial vegetable seed operations, new livestock
nutrition centers and heifer rearing services. These improvements were partially
offset by sales declines in Agriculture's feed and agronomy operations which,
during 2000, faced continued industry-wide depressed commodity pricing, high
spring rainfall in a significant part of its planting territory, and planned
operational reductions in its grain marketing operations. An additional decline
in sales was experienced in CPG's sunflower operation, the result of a poor
sunflower seed crop in the fall of 1999.
Consolidated operating expenses from continuing operations of $1,409,000
increased $217,900 (18%) compared to $1,191,100 in 1999. The increase in
operating expense was substantially due to increased cost of products and plant
operations of $202,900 (20%) from the increase in Energy's product costs noted
above and increased selling, general and administrative activities of $12,600
(10%), principally in Agriculture and CPG.
Net interest expense from continuing operations increased $4,500 (17%) in 2000
as compared to 1999. Borrowing levels were higher in 2000 as working capital
requirements increased $47,400, principally as a result of Energy's high product
costs substantially driving up the carrying value of inventory and accounts
receivable.
Other net income from continuing operations of $25,700 increased $6,800 (36%) in
2000 as compared to $18,900 in 1999. Other income in 2000 included a $12,900
gain from the sale of six pipeline terminal storage facilities and $5,000 from a
negotiated settlement in Agriculture of amounts due the Company on claims from
prior years' business activity. The 1999 other net income included a $10,700 net
gain on sale of CPG's Allied Seed business.
Income tax expense from continuing operations of $6,900 in 2000 and $10,300 in
1999 results in effective tax rates of 53% and 44%, respectively. State taxes
are a significant factor in the effective rate. 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 relating to certain acquisitions in 2000
increased the effective tax rate for 2000 as compared to the effective rate for
1999.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
AGRICULTURE
Total Agriculture sales and revenues of $508,700 in 2000 decreased by $26,500
(5%) as compared to $535,200 in 1999. Total feed sales, including enterprise and
direct marketing sales, decreased $10,100 (4%) despite a 6% increase in feed
unit volume in 2000 as compared to 1999. The decline in feed sales in 2000 was
substantially the result of a planned reduction in grain marketing sales
combined with overall lower commodity market pricing. These declines more than
offset sales growth in the new livestock nutrition centers in 2000. Total
agronomy sales decreased $14,100 (5%) in 2000 as compared to 1999. The decline
in agronomy sales resulted from the continued industry-wide low commodity
pricing of nitrogen products. Additionally, high rainfall in the northern
portion of Agway's market territory during the spring 2000 planting season
delayed plantings and the sale of agronomy products such as fertilizers,
pesticides and lime. The agronomy operations experienced sales growth in 2000 in
its national commercial vegetable seed and agronomy consulting businesses which
partially offset the sales declines noted above. The Agriculture farm store
sales decreased $3,800 (15%), a direct result of closing several locations
during 2000. Agriculture's new TSPF(TM) (tested specific pathogen free) heifer
rearing services had its initial revenues of $1,100 during 2000.
Agriculture loss before income taxes of $13,500 increased $1,100 (9%) from
$12,400 in 1999. The feed operations pre-tax earnings increased $2,600 (29%) in
2000. The grain marketing unauthorized speculative positions, as more fully
described in the 1999 Management Discussion and Analysis, resulted in $8,600 in
pre-tax losses in 1999, and an additional $1,300 of pre-tax losses were incurred
in 2000 in closing the unauthorized speculative positions which were outstanding
at June 1999. The combined enterprise and direct marketing feed operations had
increased costs of $4,400 in 2000 as compared to 1999 as a result of facility
improvements, higher production costs from increased unit volume, and costs
relating to the discontinuation of the futures trading operations. The agronomy
operations pre-tax earnings decreased $3,500 (55%) in 2000 as compared to 1999.
The decline was substantially the result of lost margins from the delays in
spring 2000 planting noted above and one-time costs associated with the
acquisition of an agronomic consulting operation. The new TSPF(TM) operations
reduced earnings by $1,600 in 2000 as compared to 1999 as the research and
development costs to initiate the operation of several new facilities were
greater than the revenues generated. Total administrative expenses more than
offset earnings from operations noted above. During 2000, administrative costs
increased $4,400 as compared to 1999, principally due to increases to bad debt
expense and lower interest revenues. This cost increase was offset by a $5,000
negotiated settlement for amounts due the Company on claims from prior years'
business activity. Finally, farm stores pre-tax losses were reduced by $800 due
to lower operational expenses.
COUNTRY PRODUCTS GROUP
Country Products Group (CPG) total sales and revenues of $202,000 in 2000
increased $30,300 (18%) compared to $171,700 in 1999. The growth in CPG sales
over the prior year was substantially in the Produce Group, where sales
increased $35,400 due to the acquisition of new produce businesses in the second
half of 1999 and in the first half of 2000. Additionally, CPG's Investment Group
began commercial sales of Optigen(TM) 1200, a controlled-release nitrogen feed
product, to dairy farmers in the Northeast beginning in October 1999. Sales of
this new product totaled $1,700 for 2000. The growth in sales due to these new
operations was partially offset by a $6,100 (10%) decline in the Business Group
sales and a $700 decrease from the sale in the first quarter of 1999 of Allied
Seed. The decline in Business Group sales was substantially the result of a poor
sunflower seed crop in the fall of 1999, which was widespread in its territory
due to adverse growing conditions.
CPG loss before income taxes of $2,900 in 2000 is a $15,000 (124%) decrease
in earnings compared to earnings before income taxes of $12,100 in 1999. Pre-tax
earnings declined in 2000 by $9,100 as compared to the prior year, primarily due
to the differences in gains resulting from the sale of certain business
operations during each of those years. In 1999, CPG recognized a gain of $10,700
on the sale of Allied Seed. In fiscal 2000, CPG recognized a gain of $1,600 on
the sale of certain assets and its flour operation. The Business Group pre-tax
earnings declined $2,500 (93%) due to the sunflower operations experiencing
lower margin from higher product and production costs associated with the poor
sunflower seed crop harvested in the fall of 1999. The Produce Group pre-tax
earnings declined $2,500 (64%). While increased produce sales provided increased
gross margins, these gross margins were at a lower percentage than the prior
year and were more than offset by additional costs, principally from the new
produce operations. CPG's Investment Group had an increase in pre-tax loss in
2000 of $1,300 (37%) as compared to 1999. The increased loss in 2000 occurred as
the Investment Group continues to incur costs related to several of its new
product initiatives.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
ENERGY
Energy total sales and revenues of $644,900 in 2000 increased $193,000 (43%) as
compared to total sales and revenues of $451,900 in 1999. Overall, sales dollar
increases from petroleum product volume increases were $6,200 (1%) in 2000 as
compared to 1999. The volume increases were driven by higher wholesale volume of
diesel fuel and heating oil and continued volume growth in the retail and
wholesale propane business. Throughout fiscal 2000, the petroleum industry
experienced significant increases in the pricing of product, particularly in the
first and third quarters of the fiscal year, primarily due to pressure on global
supply of products. As a result of these market conditions, Energy experienced
sales dollar increases due to price increases in its liquid products of $167,500
(38%) for 2000 as compared to 1999. Additionally, continued focus on growth of
the heating, ventilation and air-conditioning installation and services sales
and in the electric and gas marketing business increased sales in 2000 by $7,200
(15%) and $12,100 (168%), respectively, as compared to 1999.
Earnings before income taxes of $22,000 for 2000 increased $9,000 (69%) from
$13,000 in 1999. Overall, gross margin dollars increased $7,200 (4%) in 2000 as
compared to 1999 and were substantially driven by the continued growth in
heating, ventilation and air-conditioning installation and service sales and an
increase in propane product volumes with margins comparable to the prior year.
The improved margins, however, were more than offset by increases in total
operating expenses of $11,200 (7%) in 2000 as compared to 1999. An increase in
payroll costs associated with the increased service sales and unit volume, as
well as increased administrative costs, principally information system cost from
implementation of a new operating system, and increased automotive fuels costs,
increased total operating costs in 2000 as compared to 1999. Finally, other
revenue was substantially increased as a result of the June 2000 sale of six
pipeline terminal storage facilities to Buckeye Partners, L.P., resulting in a
net gain to Energy of $12,900. This sale is part of Energy's strategy to focus
on growing its retail energy marketing business, and the sale will have no
negative impact on Energy's customers or its operations. The agreement with
Buckeye allows Energy to utilize these terminal facilities for storage as part
of its distribution network.
LEASING
Leasing total revenues of $76,800 in 2000 increased $6,800 (10%) as compared to
$70,000 in 1999. The increase is attributable in part to a $75,500 (14%)
increase in net leases and notes during 2000 as compared to 1999. Increases in
the lease portfolio from new booked volume of $282,100 in 2000 and $252,100 in
1999 exceeded lease reductions from collection and provision for credit losses
of $206,600 and $196,700 in 2000 and 1999, respectively. The increase in new
booked volume in excess of leases repaid and bad debt provisions had the effect
of increasing total revenues. Total revenues as a percentage of average net
leases and notes decreased slightly from 13.1% in 1999 to 12.6% in 2000.
Lease earnings before income taxes of $20,100 in 2000 increased $1,900 (10%)
from $18,200 in 1999. The 2000 increase in total revenues noted above was
partially offset by increases in interest expense and selling, general and
administrative (SG&A) costs incurred to generate these revenues in 2000 as
compared to 1999. While the weighted average interest rate paid on debt remains
constant in 2000 as compared to 1999 at 6.9%, the total interest costs of
$31,500 increased $3,900 (14%) in 2000 as compared to 1999 due to increased
borrowings required to finance the growth of the lease portfolio noted above.
The SG&A expenses of $17,300 in 2000 increased $1,100 (7%) from 1999, primarily
the result of additional personnel and incentive costs relating to additional
new leases booked. The provision for credit losses of $7,900 in 2000 decreased
$100 (1%) as compared to 1999 based on Telmark's analysis of reserves required
to provide for uncollectible receivables. Telmark's allowance for credit losses
is based on a periodic review of the collection history of past leases, current
credit practices, an analysis of delinquent accounts, and current economic
conditions. At June 2000, the allowance for credit losses was $32,500 compared
to $30,000 at June 1999. During 2000 and 1999, the general economy remained
strong and the total value of non-earning accounts increased from $4,900 in 1999
to $6,000 in 2000 and as a percentage of lease portfolio remained at 0.9% in
both years. Reserves are established at a level management believes is
sufficient to cover estimated losses in the portfolio.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
INSURANCE
Insurance Group total net revenues of $27,200 in 2000 decreased $800 (3%)
compared to $28,000 in 1999. The decline was experienced in net earned premiums
of Agway Insurance Company. Reinsurance premiums, which reduce earned revenues,
were higher in 2000 as compared to 1999. The 1999 reinsurance premiums were
lower due to favorable claims development during 1999 in the 1995
experienced-rated reinsurance contract. In the Agency, 2000 revenues of $800
were at the same levels as in 1999.
Earnings before income taxes of the Agway Insurance Company of $600 in 2000
decreased $400 (40%) from $1,000 in 1999. The decline in net earned premiums,
combined with higher costs from new system implementation, was partially offset
by improved claims experience in 2000 as compared to 1999. The Agency
experienced a pre-tax loss of $600 in 2000, an increased loss of $100 as
compared to 1999. Higher salary and marketing expenses cause the increased loss
in 2000.
DISCONTINUED OPERATIONS
As disclosed in Business and Properties (Items 1 and 2), the sale of the
wholesale procurement and supply system, when combined with the sale and closure
of the Agway-owned or operated retail stores, constitutes a plan to discontinue
operations of the retail services business of Agway. For financial reporting
purposes, the measurement date upon which this discontinued operation plan
became effective was June 20, 2000. Operating results of the retail services
business, including restructuring activity which took place through that date,
are included in the operating loss from discontinued operations in the financial
statements for the year ended June 2000. The anticipated gains and losses after
June 20, 2000, from the future anticipated sale of the wholesale procurement and
supply system, which was consummated on July 31, 2000, and the sale or closure
of the remaining Agway-owned or operated retail store properties, as well as the
results of their future operations through the anticipated dates of sale, are
included in the loss on disposal of retail in the June 2000 statement of
operations. Prior year financial results have been reclassified to reflect the
retail services business as a discontinued operation. The financial disclosure
impact of this decision is detailed in Note 18 to the financial statements.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
1999 COMPARED WITH 1998
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
Agway's net earnings of $1,800 for 1999 decreased by $39,300 (96%) from 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, $16,000
after-tax earnings from 1998 business activity, and a $3,800 net loss from
discontinued operations. (See the 2000 Management Discussion and Analysis for
more discussion of the discontinued operations.) The $3,100 reduction in 1999
earnings from business activity includes a $7,000 reduction in pre-tax earnings
from continuing operations offset by a $3,900 decrease in taxes in 1999 compared
to 1998. The decrease in pre-tax earnings from continuing operations is
principally a result of increased losses of $7,500 in Agriculture's grain
marketing department and $10,500 in decreased pension income. These decreases
are partially offset by a $9,600 net increase in income principally 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 in continuing operations for 1999. An additional $7,300 decrease in
earnings from 1998 to 1999 resulted from deteriorating operating results from
the discontinued retail operations.
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 was determined at that time that unauthorized
speculative positions in commodity instruments were taken within the department
in violation of express policies, which resulted in losses to Agway, as more
fully described in the Agriculture segment discussion below.
Consolidated net sales and revenues from continuing operations of $1,221,500
decreased $78,300 (6%) in 1999 compared to $1,299,800 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, as a result of 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 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.
Consolidated operating expenses from continuing operations of $1,191,000
decreased $65,800 (5%) compared to $1,257,000 in 1998. The decrease is primarily
due to decreased costs of products and plant operations of $83,600 (8%)
primarily from lower commodity costs, as noted above. The decline was partially
offset by increased selling, general, and administrative (SG&A) expenses of
$16,600 (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, from continuing operations of $18,900 increased $6,600 (54%)
in 1999 as compared to $12,300 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 from continuing operations of $10,300 in 1999 and $14,200 in
1998 results in effective tax rates of 44% and 47%, respectively. The level of
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 of accounting change adjustment in 1998 totaled $16,500 and is
reflected in the net cumulative effect amount as disclosed in the consolidated
statement of operations.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
AGRICULTURE
Total Agriculture sales and revenues of $535,200 in 1999 decreased by $16,000
(3%) compared to $551,200 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.
The Agriculture segment pre-tax loss of $12,400 in 1999 is $5,500 (79%) higher
than the $6,900 loss in 1998. Of the $5,500 increase in losses, $7,500 is from
the grain marketing department. As discussed more fully below, Agriculture's
grain marketing department produced $8,600 in pre-tax losses in 1999 compared to
a $1,100 loss in 1998. The above increased losses were partially offset by the
improved operating results in 1999 achieved by the agricultural enterprises from
the sales of feed and agronomy products and services.
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 1998 and the first three
quarters of fiscal 1999, which were corrected, at the time of the filing of the
1999 annual report, by amending the annual and quarterly reports affected. 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 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 are reflected in Agway's Form 10-K
for the year ended June 2000.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
AGRICULTURE (CONTINUED)
Overall, Agriculture operations product margins in 1999 improved $7,200 (6%)
over 1998. The feed and agronomy 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. In
addition to the improved product margins, the feed and agronomy businesses had
increased service revenues of $1,300 (6%) in 1999 over 1998.
Agriculture operations expenses increased $9,400 (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 $3,500 (62%) mainly due to lower patronage
refunds from CF Industries, and net interest costs increased $800 (11%) due to
the increased costs of carrying higher asset levels in 1999 as compared to 1998.
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.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
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.
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 $700 (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 $600 (4%) from 1998, 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 (5%) as compared to 1998 based on
Telmark's analysis of reserves required to provide for uncollectible
receivables. Periodically, 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 and as a percentage of lease portfolio was 0.6% in
1998 and 0.9% in 1999.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
INSURANCE
Total net revenues of $28,000 in 1999 increased $700 (3%) 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.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
During the year ended June 2000, cash from sale of discontinued operations, from
sale of other assets, and from external borrowings funded the growing lease
portfolio of Telmark, the significant working capital growth, particularly in
Energy, capital improvements, business acquisitions, and shareholder dividends.
During the years ended June 1999 and 1998, cash generated from continuing
operations, from sale of businesses and/or assets, and from external borrowings
was Agway's major source of funds to finance the growing lease portfolio at
Telmark, capital improvements, business acquisitions, and shareholder dividends.
<TABLE>
<CAPTION>
June 2000 June 1999 June 1998
------------ ----------- -----------
<S> <C> <C> <C>
Net cash flows from (used in):
Continuing operating activities........................ $ (37,738) $ 31,007 $ 40,331
Discontinued operating activities...................... 35,995 (391) 237
Investing activities................................... (95,291) (78,576) (78,296)
Financing activities................................... 121,798 50,736 38,039
------------ ------------ -----------
Net increase (decrease) in cash and equivalents............... $ 24,764 $ 2,776 $ 311
============ ============ ===========
</TABLE>
CASH FLOWS FROM OPERATIONS
The $68,700 decline in net cash flows from continuing operating activities from
a net cash inflow of $31,007 in 1999 to a net cash outflow of $37,738 in 2000 is
due substantially to a higher need for working capital. In 2000, working capital
needs increased $47,400, principally as a result of high energy product costs,
substantially driving up the carrying value of inventory and accounts
receivable. In 1999, working capital reductions, due principally to low
agricultural and energy commodity prices, provided $15,300 of cash to continuing
operations.
The decline in net cash flows from continuing operating activities of $9,300 in
1999 as compared to 1998 is due in part to $27,000 higher cash earnings in 1998
as compared to 1999 and a lower need for working capital of $17,700 in 1999 as
compared to 1998.
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 $83,400, $63,500 and $57,400 in 2000, 1999 and 1998, respectively.
Capital expenditures and business acquisitions required cash of $32,700, $35,200
and $25,700 for 2000, 1999 and 1998, respectively.
Cash flow used in investing was partially funded by cash generated from
investing activities, principally the proceeds from the disposal of business
and/or property and equipment, which amounted to a total of $23,200, $19,000 and
$4,600 in 2000, 1999 and 1998, respectively.
CASH FLOWS FROM FINANCING
Agway finances its operations and the operations of all of its businesses and
subsidiaries through Agway Financial Corporation (AFC). External sources of
short-term financing for Agway and its continuing operations, other than Agway
Insurance Company and Telmark, include revolving credit lines, letters of
credit, and a commercial paper program. Insurance finances its activities
through operations. Telmark's finance arrangements are explained below. As of
June 2000, Agway had certain facilities available with banking institutions
whereby lenders have agreed to provide funds up to $401,700 to separately
financed units of the Company as follows: AFC - $65,000 and Telmark - $336,700.
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
The specifics of these AFC arrangements are as follows:
<TABLE>
<CAPTION>
Outstanding
Available -------------------------
June 2000 June 2000 June 1999 Term Expires
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Short-term line of credit*............ $ 65,000 $ 51,900 $ 0 December 2000
Commercial paper...................... $ 50,000 $ 50,000 $ 38,500 December 2000
</TABLE>
*AFC's short-term line of credit facility decreases to $50,000 for August 2000
through December 2000, to reflect the decline in seasonal financing needs and
expected financing requirements through that date.
The $65,000 short-term line of credit and the $50,000 commercial paper facility
available to AFC at June 2000, require collateralization using certain of
Agway's accounts receivable and non-petroleum inventories (collateral). The line
of credit additionally requires Agway's investment in bank stock, which had a
book value of $3,000 and $4,700 at June 2000 and 1999, respectively, as
additional collateral. The maximum 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 2000 to
permit AFC to borrow amounts to meet the ongoing needs of Agway and is expected
to continue to do so. In addition, the agreements include certain covenants, the
most restrictive of which requires Agway to maintain specific quarterly levels
of interest coverage, monthly levels of tangible retained earnings, monthly
current ratios, and limits available credit to a multiple of earnings as defined
in the agreement. Other covenants limit capital expenditures to agreed upon
levels during the term of the agreements, require the monthly maintenance of
senior liabilities to tangible capital ratios as defined in the agreements and
the maintenance of a minimum total of $425,000 in Agway preferred stock and AFC
subordinated debt. The required minimum level of preferred stock and
subordinated debt has historically been at levels that do not interfere with the
normal volume of requests Agway has received and fulfilled to repurchase such
securities at par value or principal amount prior to maturity.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
CASH FLOWS FROM FINANCING (CONTINUED)
AFC (continued)
The earnings level as measured at June 2000 was not adequate to support the
borrowing level under these agreements. Borrowing requirements since autumn 1999
have been and remain high relative to the prior year. This has principally been
to support high working capital requirements, particularly in Agway's energy
business, where cost of petroleum products has increased accounts receivable and
inventory levels. For the year ended June 2000, Agway did not meet the interest
coverage, tangible retained earnings, or the multiple of earnings ratio
covenants set forth in the agreements. Additionally, for the months of July and
August 2000, we did not meet the current ratio covenant. The banks have waived
violations of covenants and borrowing limits and have amended these measurements
and covenants to agreed upon levels of financial performance through December
2000, the remaining term of these credit arrangements. These revised borrowing
limits and financial covenants are expected to continue to be restrictive
through December 2000, and, given the historical volatility of Agway's operating
results, may be violated in the ensuing months. Agway, however, is anticipating
a continuation of high-cost petroleum products through the winter of 2001 and,
accordingly, has commenced negotiations with several lenders to increase and
restructure its credit facilities effective January 1, 2001. The restructured
credit facilities are anticipated to include increased lines of credit without a
commercial paper program. Agway's existing banks have expressed interest in
participating in the restructured lines of credit at reduced levels from their
current commitments. AFC annually renews its lines of credit in the quarter
ended December 31. Agway expects to continue to have appropriate and adequate
financing to meet its ongoing needs. However, we are presently in negotiations
for these new credit facilities; therefore, there is no assurance that the
Company will achieve the desired levels of financing, and the terms of such
financing, as unltimately negotiated, cannot be determined at this time.
In addition to the short-term line of credit and commercial paper program,
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, though AFC historically has had a practice
of repurchasing at face value, plus interest accrued at the stated rate, certain
subordinated debt whenever presented for repurchase prior to maturity. However,
AFC is under no obligation to repurchase such debt when so presented, and AFC
may stop or suspend this repurchase practice at any time. In addition, the terms
or conditions of the lines of credit discussed above, as ultimately negotiated,
may cause AFC to limit or cease its past practices with regard to the repurchase
of subordinated debt. 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
2000 are due between October 2000 and October 2014 and bear a weighted average
interest rate of 8.0%, while subordinated debentures due between July 2001 and
July 2003 bear a weighted average interest rate of 7.7%.
In October 2000, $50,700 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 cash from operations, through sales of discontinued
assets, through short-term bank borrowings, or a combination thereof.
Telmark
Telmark finances its operations and lease portfolio growth principally through
payments received on existing leases, which totaled $198,700, $188,600 and
$169,800 in 2000, 1999 and 1998, respectively. Additionally, Telmark's cash
flows from operations, which were $24,400, $22,800 and $21,200 for 2000, 1999
and 1998, respectively, as well as borrowings under lines of credit, private
placements of debt with institutional investors, sales of debentures to the
public, and lease-backed asset securitization all provide financing sources for
Telmark.
At June 2000, Telmark has credit facilities available from banks which allow
Telmark to borrow up to an aggregate of $336,700. Uncommitted short-term line of
credit agreements permit Telmark to borrow up to $86,700 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 2000 and 1999 under the
short-term lines of credit were $75,200 and $164,500, respectively, and under
the revolving term loan facility were $35,000 and $156,300, respectively. The
portion of the
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
CASH FLOWS FROM FINANCING (CONTINUED)
Telmark (continued)
revolving term loan that is short term at June 2000 and 1999 was $500 and
$8,300, 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 $86,700 lines
of credit all have terms expiring during the next 12 months. The $250,000
revolving term loan facility is available through August 1, 2001.
At June 2000, Telmark also had balances outstanding on uncollateralized senior
note private placements totaling $122,000. 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 based
on Telmark's financial statements, the most restrictive of which prohibit (i)
tangible net worth (defined as consolidated tangible assets less total
liabilities (excluding any notes payable to Agway Holdings, Inc.-AHI)) from
being less than an amount equal to or greater than the sum of $85,000, plus 50%
of all net income (if a positive number) for all fiscal years ending after
January 1, 2000 (as of June 2000, required minimum net worth is $90,900), (ii)
the ratio of (a) total liabilities less subordinated notes payable to AHI to (b)
members' equity plus subordinated notes payable to AHI from exceeding 5:1, (iii)
the ratio of earnings available for fixed charges from being less than 1.25:1,
and (iv) equity distributions and restricted investments (as defined) made after
July 1, 1999, to exceed 50% of consolidated net income for the period beginning
on July 1, 1999, through the date of determination, inclusive. As of June 2000,
$900 of Telmark's member equity was free of this restriction. For the year ended
June 2000, Telmark complied with all its covenants contained in its borrowing
arrangements.
Telmark, through three wholly owned special purpose subsidiaries, has six
classes of lease-backed notes outstanding totaling $118,300 and $58,800 at June
2000 and 1999, respectively, payable to insurance companies. Interest rates on
these classes of notes range from 6.5% to 9.1%. 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
and by segregated cash accounts. The scheduled maturity of these notes is in
varying amounts and dates through December 2008.
Telmark registers with the SEC from time to time to offer debentures to the
public. The debentures are unsecured and subordinated to all senior debt at
Telmark. The interest on the debt is paid on January 1, April 1, July 1, and
October 1 of each 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. Telmark's subordinated
debentures bear interest at a rate that is the greater of the stated rate or a
rate based upon an average discount rate for U.S. Government Treasury Bills,
with maturities of 26 weeks. Telmark debentures as of June 2000 are due between
March 2001 and March 2008 and bear a weighted average interest rate of 8.1%. As
of June 2000, approximately $37,400 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.
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
CASH FLOWS FROM FINANCING (CONTINUED)
Sources of longer-term financing of Agway include the following as of June 2000:
<TABLE>
<CAPTION>
Source of debt Agway AFC Telmark Total
-------------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Banks - due 7/00 to 4/04 with interest
from 5.57% to 8.58%..................................... $ 0 $ 525 $ 164,000 $ 164,525
Insurance companies - due 7/00 to 2/07
with interest from 6.47% to 9.05%....................... 0 0 240,256 240,256
Capital leases and other - due 2000 to 2018
with interest from 7.5% to 10%.......................... 11,336 2,432 0 13,768
------------ ------------ ------------ ----------
Long-term debt..................................... 11,336 2,957 404,256 418,549
Subordinated money market certificates - due
10/00 to 10/14 with interest from 4.5% to 9.5%.......... 0 430,299 0 430,299
Subordinated debentures - due 2001 to 2008
with interest at 6.0% to 8.75%.......................... 0 7,177 37,398 44,575
------------ ------------ ------------ ----------
Total subordinated debt............................ 0 437,476 37,398 474,874
------------ ------------ ------------ ----------
Total debt.................................... $ 11,336 $ 440,433 $ 441,654 $ 893,423
============ ============ ============ ==========
</TABLE>
26
<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 $400 in 2000 on capital projects related
principally to comply with Pennsylvania above-ground storage tank regulation.
Agway expects to have approximate expenses in the amount of $500 in 2001
associated with this compliance.
At June 2000, Agway was 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 at least five years based upon
current estimates, and it is not expected that such outlays will materially
impact Agway's liquidity position.
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(THOUSANDS OF DOLLARS)
YEAR 2000
The Company had no material issues relating to the millennium date change on
January 1, 2000, the leap year on February 29, 2000, or the month-end, the
quarter-end, or year-end processing. As previously disclosed, Agway initiated
its year 2000 efforts in January 1996 and completed extensive work to assure
that the Company's operations were not impacted by the century date change as of
January 1, 2000. Our efforts focused on information system modification or
replacement, as well as a review of all other areas within the Company that may
be impacted by this event. Business contingency and continuity plans were
developed, and a command center was established to monitor and react to critical
business interruptions, if any, either prior or subsequent to the millennium
date change.
The Company's cost of conversion and testing of existing systems and the
replacement of systems was approximately $15,900, of which 85% has been
capitalized. Additionally, the cost to have remediated all other areas of the
Company was approximately $2,500 and was 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 or services
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; (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.
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 financial condition of 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 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.
28
<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
2001 2002 2003 2004 2005 Thereafter Total June 2000
---------- --------- --------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Available-for-sale securities.. $ 4,319 $ 4,760 $ 4,539 $ 1,957 $ 5,147 $ 17,676 $ 38,398 $ 38,844
Weighted average interest rate. 6.13% 6.35% 6.41% 6.47% 6.07% 6.33%
LIABILITIES
Bank lines of credit - AFC..... 51,900 51,900 $ 51,900
Weighted average interest rate. 10.15%
Bank lines of credit - Telmark. 75,676 75,676 75,676
Weighted average interest rate. 7.36%
Long-term debt, including
current portion - Telmark... 132,773 104,257 85,010 69,842 8,648 3,726 404,256 411,071
Weighted average interest rate. 6.90% 6.98% 7.11% 6.87% 7.69% 7.75%
Subordinated debentures,
including current portion -
Telmark..................... 5,497 7,321 11,071 6,096 7,413 37,398 35,950
Weighted average interest rate. 6.40% 6.94% 8.43% 8.25% 8.75%
Commercial paper - AFC......... 50,000 50,000 50,000
Weighted average interest rate. 5.62%
Long-term debt, including
current portion - Agway &
AFC......................... 3,322 5,101 3,805 134 165 206 12,733 12,772
Weighted average interest rate. 8.61% 8.61% 8.46% 7.23% 7.59% 7.44%
Subordinated debentures,
including current portion -
AFC......................... 3,062 4,115 7,177 6,826
Weighted average interest rate. 7.39% 7.92%
Subordinated money market
certificates, including
current portion - AFC....... 51,628 48,444 35,197 39,306 18,041 237,683 430,299 394,194
Weighted average interest rate. 8.73% 8.27% 6.97% 8.13% 7.66% 7.79%
</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 an average
discount rate for T-Bills, with maturities of 26 weeks. Based on the T-Bill rate
of 6.0% as of June 2000, as compared to the stated rates of the debentures which
range from 6.0% to 8.8% at June 2000, 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 2000,
we do not believe that reasonably possible near-term increases in interest rates
will result in a material near-term loss in future earnings, fair values, or
cash flows of Agway.
29
<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 an average discount rate of
T-Bills, with maturities of 26 weeks. Based on the T-Bill rate of 6.0% at June
2000 as it compares to the stated rates of the money market certificates which
range from 4.5% to 9.5% at June 2000, we believe a reasonably possible near-term
increase 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.
The available-for-sale securities listed above include cash equivalents and the
available for sale investment portfolio. The information disclosed above assumes
that actual call and prepayment activity will differ from contractual
maturities.
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 Energy, Agriculture, and Country Products Group
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
outstanding in relation to the value of commodity.
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 manage the price risk of corn, soy complex, and oats, which can
be sold directly as ingredients or included in feed products. In the Country
Products Group, due to a change in governmental subsidy programs during 2000,
exchange-traded commodity instruments were entered into to principally manage
the price risk of sunflower seeds which are purchased from growers by CPG and
sold to third-party producers.
A sensitivity analysis has been prepared to estimate Agway's exposure to market
risk of its commodity instrument positions as of June 2000 and 1999. 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% adverse change in market prices of the underlying
commodities. This estimated loss in fair value does not reflect the offsetting
impact of market price changes to the underlying commodities for which the
commodity instruments are managing the price risk. As of June 2000 and 1999,
assuming a 10% hypothetical adverse change in the underlying commodity price,
the potential decrease in fair value of Agway's commodity instruments was as
follows:
2000 1999
---------- ----------
Energy.......................... $ 4,800 $ 1,100
Country Products Group.......... 300 -
Agriculture..................... * *
Grain Marketing (1)............. - 2,900
* The potential loss in fair value of commodity instruments resulting from a
hypothetical 10% change in market prices of the underlying commodity was
immaterial.
(1) As noted below, grain marketing activity was discontinued during 2000.
30
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(THOUSANDS OF DOLLARS)
COMMODITY PRICE EXPOSURE (CONTINUED)
Through May 2000, the Agriculture segment's grain marketing business used
exchange-traded commodity instruments to hedge inventory and forward purchase
and sales contracts for grains, principally corn, soy complex, oats, and wheat,
which were 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 recorded the grain marketing
program on a mark-to-market basis by adjusting all outstanding forward
contracts, commodity instruments, and inventory values to market value.
Effective May 2000, the grain marketing business ceased operations and
liquidated all commodity instrument positions.
31
<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......................................................... 33
Report of Independent Accountants................................................................. 34
Consolidated Balance Sheets, June 24, 2000 and June 26, 1999...................................... 35
Consolidated Statements of Operations, fiscal years ended June 24, 2000, June 26, 1999
and June 27, 1998........................................................................... 36
Consolidated Statements of Comprehensive Income, fiscal years ended June 24, 2000,
June 26, 1999 and June 27, 1998............................................................. 37
Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended
June 24, 2000, June 26, 1999 and June 27, 1998.............................................. 38
Consolidated Statements of Cash Flow, fiscal years ended June 24, 2000, June 26, 1999
and June 27, 1998........................................................................... 39
Notes to Consolidated Financial Statements........................................................ 40
</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.
32
<PAGE>
AGWAY INC. REPORT ON FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been prepared by the
Company in conformity with accounting principles generally accepted in the
United States. 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 Audit Committee of the Board of Directors, which consists of seven directors
who are not employees, meets periodically with management and the independent
auditors to review the manner in which they are performing their
responsibilities and to discuss auditing, internal accounting controls, and
financial reporting matters. The independent auditors have free access to the
Audit Committee.
AGWAY INC.
BY /s/ DONALD P. CARDARELLI
DONALD P. CARDARELLI
President and CEO
August 30, 2000
BY /s/ PETER J. O'NEILL
PETER J. O'NEILL
Senior Vice President
Finance & Control
August 30, 2000
33
<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 24,
2000 and June 26, 1999, and the result of their operations and their cash flows
for each of the three fiscal years in the period ended June 24, 2000, in
conformity with accounting principles generally accepted in the United States.
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 auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 13, the Company changed its accounting for pensions in
1998.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Syracuse, New York
August 30, 2000
34
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ASSETS
JUNE 24, 2000 JUNE 26, 1999
--------------- -------------
<S> <C> <C>
Current assets:
Cash...................................................................... $ 29,244 $ 4,480
Trade accounts receivable (including notes receivable of
$38,755 and $40,585, respectively), less allowance for
doubtful accounts of $7,204 and $6,139, respectively................. 210,598 162,411
Leases receivable, less unearned income of $71,944 and $64,330,
respectively......................................................... 152,255 131,577
Advances and other receivables............................................ 22,401 19,562
Inventories............................................................... 111,940 86,630
Prepaid expenses and other assets......................................... 43,273 49,473
--------------- -------------
Total current assets................................................. 569,711 454,133
Marketable securities........................................................... 36,254 35,099
Other security investments...................................................... 51,472 51,010
Properties and equipment, net................................................... 175,784 176,261
Long-term leases receivable, less unearned income of $167,414 and
$134,623, respectively.................................................... 470,595 419,444
Net pension asset............................................................... 213,455 198,160
Other assets.................................................................... 21,110 17,263
Net assets of discontinued operations........................................... 34,278 85,802
--------------- -------------
Total assets......................................................... $ 1,572,659 $ 1,437,172
=============== =============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Notes payable............................................................. $ 177,576 $ 81,800
Current installments of long-term debt.................................... 136,211 94,472
Subordinated debt, current................................................ 57,125 76,968
Accounts payable.......................................................... 94,046 85,179
Other current liabilities................................................. 122,060 109,671
--------------- ------------
Total current liabilities............................................ 587,018 448,090
Long-term debt.................................................................. 282,338 277,500
Subordinated debt............................................................... 417,749 409,335
Other liabilities............................................................... 102,963 103,300
--------------- ------------
Total liabilities.................................................... 1,390,068 1,238,225
Commitments and contingencies...................................................
Shareholders' equity:
Preferred stock, less amount held in Treasury............................. 39,695 42,917
Common stock ($25 par--300,000 shares authorized; 173,083 and 172,706
shares issued, less amount held in Treasury)......................... 2,473 2,506
Accumulated other comprehensive income (loss)............................. (798) (239)
Retained earnings......................................................... 141,221 153,763
--------------- ------------
Total shareholders' equity........................................... 182,591 198,947
Total liabilities and shareholders' equity...................... $ 1,572,659 $ 1,437,172
=============== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
JUNE 24, 2000 JUNE 26, 1999 JUNE 27, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net sales and revenues from:
Product sales (including excise taxes).............. $ 1,322,948 $ 1,123,492 $ 1,206,986
Leasing operations.................................. 76,785 70,006 65,476
Insurance operations................................ 27,153 27,968 27,335
------------- ------------ ------------
Total net sales and revenues................... 1,426,886 1,221,466 1,299,797
------------- ------------ ------------
Cost and expenses from:
Products and plant operations....................... 1,226,833 1,023,927 1,107,564
Leasing operations.................................. 31,536 27,626 26,871
Insurance operations................................ 15,663 17,152 16,653
Selling, general and administrative activities...... 134,980 122,406 105,818
------------- ------------ ------------
Total operating costs and expenses............. 1,409,012 1,191,111 1,256,906
------------- ------------ ------------
Operating earnings........................................ 17,874 30,355 42,891
Interest expense, net of interest income of $8,408,
$8,641 and $9,545, respectively.................... (30,591) (26,102) (24,979)
Other income, net........................................ 25,733 18,947 12,271
------------- ------------ ------------
Earnings from continuing operations before income taxes.. 13,016 23,200 30,183
Income tax expense....................................... 6,864 10,259 14,167
------------- ------------ ------------
Earnings from continuing operations...................... 6,152 12,941 16,016
Discontinued operations:
Loss from operations, net of tax benefit of $7,313,
6,086 and 2,090, respectively................. (13,187) (11,146) (3,827)
Loss on disposal of Retail, net of tax benefit
of $1,278..................................... (2,342) 0 0
------------- ------------ -----------
Loss from discontinued operations............. (15,529) (11,146) (3,827)
Earnings (loss) before cumulative effect of an accounting
change............................................. (9,377) 1,795 12,189
------------- ------------ -----------
Cumulative effect of accounting change, net of tax
expense of $16,500................................. 0 0 28,956
------------- ------------ -----------
Net earnings (loss)...................................... $ (9,377) $ 1,795 $ 41,145
============= ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
JUNE 24, 2000 JUNE 26, 1999 JUNE 27, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net earnings (loss) ............................................... $ (9,377) $ 1,795 $ 41,145
Other comprehensive income, net of tax:
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising
during period....................................... (608) (685) 660
Reclassification adjustment for losses included in
net income.......................................... 49 21 45
------------- ------------ ------------
Other comprehensive income (loss) ................................. (559) (664) 705
------------- ------------ ------------
Comprehensive income (loss)........................................ $ (9,936) $ 1,131 $ 41,850
============= ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
37
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
---------------------- OTHER
(PAR VALUE $25) PREFERRED COMPREHENSIVE RETAINED
SHARES AMOUNT STOCK INC(LOSS) EARNINGS TOTAL
--------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance June 28, 1997............................ 105,552 $ 2,639 $ 57,541 $ (280) $ 117,851 $ 177,751
Net earnings.............................. 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 27, 1998............................ 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 26, 1999............................ 100,241 2,506 42,917 (239) 153,763 198,947
Net earnings.............................. (9,377) (9,377)
Dividends declared........................ (3,165) (3,165)
Redeemed, net............................. (1,342) (33) (3,222) (3,255)
Other comprehensive income................ (559) (559)
--------- ---------- ----------- ---------- ----------- -----------
Balance June 24, 2000............................ 98,899 $ 2,473 $ 39,695 $ (798) $ 141,221 $ 182,591
========= ========== =========== ========== =========== ===========
</TABLE>
Common shares, purchased at par value, held in Treasury at year-end were: 74,184
in 2000; 72,465 in 1999; 69,427 in 1998. A common stock dividend per share of
$1.50 was declared for 2000, 1999 and 1998. 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.
38
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
JUNE 24, 2000 JUNE 26, 1999 JUNE 27, 1998
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ............................................... $ (9,377) $ 1,795 $ 41,145
Adjustments to reconcile earnings to net cash:
Net loss from discontinued operations......................... 15,529 11,146 3,827
Depreciation and amortization................................. 26,171 21,079 23,640
Receivables and other asset provisions........................ 14,378 10,730 11,123
Net pension income............................................ (19,563) (21,368) (31,909)
Cumulative effect of accounting change, net of tax............ 0 0 (28,956)
Patronage refund received in stock............................ (679) (992) (2,494)
Deferred income tax expense (benefit)......................... (2,757) 3,841 25,485
(Gain) loss on disposition of:
Businesses............................................... (1,098) (11,097) 0
Other security investments............................... 1,044 1,267 0
Properties and equipment................................. (13,995) (655) 934
Changes in assets and liabilities, net of effects of
businesses acquired or sold:
Receivables.............................................. (53,539) 18,522 (1,495)
Inventory................................................ (25,671) 2,381 3,158
Payables................................................. 9,004 (5,475) 3,056
Other.................................................... 22,815 (167) (7,183)
------------ ----------- -----------
Net cash flows from (used in) continuing operations................... (37,738) 31,007 40,331
Net cash flows from (used in) discontinued operations................. 35,995 (391) 237
------------ ----------- -----------
Net cash from (used in) operating activities.......................... (1,743) 30,616 40,568
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of properties and equipment.............................. (27,799) (27,162) (23,891)
Cash paid for acquisitions......................................... (4,950) (8,030) (1,796)
Disposition of properties and equipment............................ 20,591 4,811 4,556
Purchases of marketable securities available for sale.............. (4,658) (6,333) (12,529)
Sale of marketable securities available for sale................... 2,945 6,982 12,407
Leases originated.................................................. (282,064) (252,107) (227,270)
Leases repaid...................................................... 198,698 188,637 169,827
Purchases of investments in related cooperatives................... (1,840) (2,172) (2,601)
Proceeds from sale of investments in related cooperatives.......... 1,171 2,648 3,001
Proceeds from disposal of businesses............................... 2,615 14,150 0
------------ ----------- -----------
Net cash flows used in investing activities........................... (95,291) (78,576) (78,296)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term notes payable............................. 95,776 16,480 5,510
Proceeds from long-term debt....................................... 143,923 113,852 133,334
Repayment of long-term debt........................................ (97,225) (94,553) (110,654)
Proceeds from sale of subordinated debt............................ 131,572 133,948 118,371
Redemption of subordinated debt.................................... (143,001) (109,842) (94,302)
Payments on capitalized leases..................................... (2,716) (598) (540)
Proceeds from sale of stock........................................ 13 45 18
Redemption of stock................................................ (3,269) (5,064) (9,755)
Cash dividends paid................................................ (3,275) (3,532) (3,943)
------------ ----------- -----------
Net cash flows from financing activities.............................. 121,798 50,736 38,039
------------ ----------- -----------
Net increase (decrease) in cash and equivalents....................... 24,764 2,776 311
Cash and equivalents at beginning of year............................. 4,480 1,704 1,393
------------ ----------- -----------
Cash and equivalents at end of year................................... $ 29,244 $ 4,480 $ 1,704
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
39
<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 (seed and fertilizers) and services for
its farmer-members and other customers, primarily in the northeastern United
States and Ohio. In addition, Agway is involved in repackaging and marketing
produce; and processing and marketing sunflower seeds. Agway, through certain of
its subsidiaries, is involved in the distribution of petroleum products; the
installation and servicing of heating, ventilation, and air- conditioning
equipment; 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 of Agway Inc. is on the last Saturday in June. Fiscal years
ended June 24, 2000, June 26, 1999 and June 27, 1998, were comprised of 52
weeks. The fiscal year-end of certain of Agway's subsidiaries, including Agway
Energy Products LLC, Telmark LLC, and Agway Insurance Company, is June 30, and
these subsidiaries are consolidated on that basis.
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. Certain cash accounts amounting to $10,103 and
$4,480 at June 2000 and 1999, respectively, collateralize certain Telmark
lease-backed notes payable. This cash is held in segregated cash accounts by
Telmark pending distribution and is restricted in its use. Included in cash at
June 2000 is $19,141 received on June 30, 2000, for the sale of six terminals by
Agway Energy Products LLC. This cash was used to reduce debt on July 1, 2000.
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.
40
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market, except for grain
inventories associated with Agriculture's grain marketing program, which
historically were marked to market. Effective May 2000, the grain marketing
program ceased operations. For those inventories stated at cost, we use the
average unit cost or the first-in, first-out method.
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 relate entirely to Agway's Insurance operations,
are classified as available for sale, and are 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 $1,200, $1,400 and $1,600 for the
years ended June 2000, 1999 and 1998, 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 $15,800 and $14,000 at June 2000 and 1999,
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 ($3,000 over 1 to 10 years, $9,700 over
15 to 20 years, and $3,100 over 40 years). Amortization included in operating
results totaled approximately $2,000, $1,500 and $1,200 for fiscal years ending
June 2000, 1999 and 1998, respectively. Other assets are reviewed for
impairment, as described under Impairment of Long-Lived Assets below.
41
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-Lived Assets
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 $400, $700
and $2,200 in 2000, 1999 and 1998, respectively.
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 considered in determining the Company's accrual for these losses.
Excise Taxes
Excise taxes included in product sales were approximately $68,900, $61,200 and
$62,900 for the years ended June 2000, 1999 and 1998, 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 2000, 1999 and 1998 was
approximately $13,200, $11,600 and $9,300, respectively. Net research and
development costs were approximately $2,900, $1,800 and $400 for the years ended
June 2000, 1999 and 1998, 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. The provision for income taxes has been
allocated between continuing and discontinued operations for all years
presented.
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 accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
42
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Future Accounting Requirements
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 (as amended by SFAS
No. 137) is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000, (July 1, 2000, for the Company). SFAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. For fair-value hedge transactions in which the Company is hedging
changes in fair value of an asset, liability, or firm commitment, changes in the
fair value of the derivative instrument will generally be offset in the income
statement by changes in the hedged item's fair value. For cash-flow hedge
transactions, in which the Company is hedging the variability of cash flows
related to a variable-priced asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be reported in other
comprehensive income. The gains and losses on the derivative instrument that are
reported in other comprehensive income will be reclassified as earnings in the
periods in which earnings are impacted by the variability of the cash flows of
the hedged item. The ineffective portion of all hedges will be recognized in
current-period earnings.
The Company estimates that on July 1, 2000, it will record a net-of-tax
cumulative-effect loss of $1,100 to recognize at fair value the time value
component of all option contracts which are excluded from the assessment of
hedge effectiveness. The Company also estimates that it will record a net-of-tax
cumulative-effect gain of $3,100 in other comprehensive income to recognize at
fair value all derivative instruments that are designated as cash-flow hedging
instruments.
43
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
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 certain of AHI's
subsidiaries. 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). 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 their own operations or through a
combination of their own short- and long-term credit facilities.
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, is as follows:
<TABLE>
<CAPTION>
June 2000 June 1999 June 1998
------------- ------------ ------------
<S> <C> <C> <C>
Net sales and revenues................................................ $ 801,350 $ 580,883 $ 625,555
Operating earnings.................................................... 32,933 46,120 46,248
Net earnings (loss)................................................... 6,886 (6,659) (765)
June 2000 June 1999
------------- ------------
Current assets........................................................ $ 690,935 $ 567,602
Properties and equipment, net......................................... 79,178 86,018
Noncurrent assets..................................................... 618,303 557,688
------------- ------------
Total assets.......................................................... $ 1,388,416 $ 1,211,308
============= ============
Current liabilities................................................... $ 112,259 $ 67,391
Short-term notes payable.............................................. 177,576 81,800
Current portion of long-term debt..................................... 190,524 169,236
Long-term debt........................................................ 273,814 264,021
Subordinated debt..................................................... 417,749 409,335
Noncurrent liabilities................................................ 13,904 23,262
Shareholder's equity.................................................. 202,590 196,263
------------- ------------
Total liabilities and shareholder's equity............................ $ 1,388,416 $ 1,211,308
============= ============
</TABLE>
44
<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 fiscal year-end were as follows:
<TABLE>
<CAPTION>
June 2000 June 1999
------------- -------------
<S> <C> <C>
Leases (minimum payments):
Commercial and agricultural.................................... $ 860,788 $ 740,012
Retail......................................................... 20,388 28,349
------------- -------------
Total leases............................................... 881,176 768,361
Unearned interest and finance charges................................ (239,358) (198,953)
Net deferred origination costs....................................... 13,568 11,591
------------- -------------
Net investment................................................. 655,386 580,999
Allowance for credit losses.......................................... (32,536) (29,978)
------------- -------------
Net leases receivable.......................................... $ 622,850 $ 551,021
============= =============
</TABLE>
Included within the above are estimated unguaranteed residual values of
leased property approximating $92,700 and $82,100 at June 2000 and 1999,
respectively. Additionally, as of June 2000 and 1999, the recognition of
interest income was suspended on approximately $6,000 and $4,900, respectively,
of net leases.
Contractual maturities of leases (minimum payments) over the next five years and
thereafter are as follows at June 2000: $236,900 in 2001; $188,500 in 2002;
$141,000 in 2003; $99,200 in 2004; $62,700 and 2005; and $152,800 thereafter.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 2000 June 1999
------------- ------------
<S> <C> <C>
Finished goods....................................................... $ 101,859 $ 77,911
Raw materials........................................................ 7,982 6,892
Supplies............................................................. 2,099 1,827
------------- -------------
Total inventories.............................................. $ 111,940 $ 86,630
============= =============
</TABLE>
45
<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 2000, 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 2000
---------
U.S. government securities and obligations.................... $ 5,236 $ 9 $ (202) $ 5,043
Mortgage-backed securities.................................... 14,256 21 (294) 13,983
Corporate securities.......................................... 17,972 0 (744) 17,228
------------- ------------ ------------ -----------
Total available-for-sale marketable securities.......... $ 37,464 $ 30 $ (1,240) $ 36,254
============= ============ ============ ===========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ ------------ -----------
June 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
============= ============ ============ ===========
</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
$0, $4 and $81 were realized on sales of debt securities in 2000, 1999 and 1998,
respectively. Gross losses realized on sales of debt securities totaled
approximately $74, $36 and $150 in 2000, 1999 and 1998, respectively.
The amortized cost and the fair value of available-for-sale debt securities at
June 2000, 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................................................................. $ 1,199 $ 1,198
Due after one year through five years....................................................... 7,070 6,894
Due after five years through ten years...................................................... 13,624 13,033
Due after ten years......................................................................... 15,571 15,129
------------ -----------
$ 37,464 $ 36,254
============ ===========
</TABLE>
46
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
6. OTHER SECURITY INVESTMENTS
Other security investments consist of the following:
<TABLE>
<CAPTION>
June 2000 June 1999
------------- -------------
<S> <C> <C>
CF Industries, Inc........................................................... $ 25,260 $ 25,260
CoBank, ACB.................................................................. 16,648 17,445
Other........................................................................ 9,564 8,305
------------- -------------
$ 51,472 $ 51,010
============= =============
</TABLE>
7. PROPERTIES AND EQUIPMENT
Properties and equipment, at cost, including capital leases, consist of the
following at:
<TABLE>
<CAPTION>
Owned Leased Combined
------------- ------------- ------------
June 2000
---------
<S> <C> <C> <C>
Land and land improvements................................ $ 21,381 $ 0 $ 21,381
Buildings and leasehold improvements...................... 93,290 7,061 100,351
Machinery and equipment................................... 307,372 473 307,845
Capital projects in progress.............................. 13,720 0 13,720
------------- ------------- ------------
435,763 7,534 443,297
Less: accumulated depreciation and amortization........... 263,624 3,889 267,513
------------- ------------- ------------
Properties and equipment, net............................. $ 172,139 $ 3,645 $ 175,784
============= ============= ============
Owned Leased Combined
------------- ------------- ------------
June 1999
---------
Land and land improvements................................ $ 21,801 $ 0 $ 21,801
Buildings and leasehold improvements...................... 90,609 4,466 95,075
Machinery and equipment................................... 306,957 473 307,430
Capital projects in progress.............................. 16,736 0 16,736
------------- ------------- ------------
436,103 4,939 441,042
Less: accumulated depreciation and amortization........... 261,231 3,550 264,781
------------- ------------- ------------
Properties and equipment, net............................. $ 174,872 $ 1,389 $ 176,261
============= ============= ============
</TABLE>
Depreciation and amortization expense relating to properties and equipment
amounted to approximately $24,200, $19,600 and $22,400 in 2000, 1999 and 1998,
respectively.
47
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
June 2000 June 1999 June 1998
---------------- --------------- --------------
<S> <C> <C> <C>
Continuing operations:
Current:
Federal.......................................... $ 7,968 $ 4,844 $ 1,283
State............................................ 1,653 1,574 3,899
Deferred.............................................. ( 2,757) 3,841 8,985
---------------- --------------- ---------------
$ 6,864 $ 10,259 $ 14,167
================ =============== ===============
Discontinued operations:
Current:
Federal.......................................... $ (7,968) $ (6,099) $ (2,414)
State............................................ (448) (397) 41
Deferred.............................................. (175) 410 283
---------------- --------------- ---------------
$ (8,591) $ (6,086) $ (2,090)
================ =============== ===============
</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 continuing operations before
income taxes differs from the federal statutory regular tax rate as follows:
<TABLE>
<CAPTION>
June 2000 June 1999 June 1998
---------------- --------------- --------------
<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)........ 12.6 6.0 11.5
Nondeductible items (2)............................... 5.1 3.5 2.1
Other items........................................... 0.0 (0.3) (1.7)
---------------- --------------- --------------
Effective income tax rate........................ 52.7% 44.2% 46.9%
================ =============== ==============
</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.
48
<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 were as follows:
<TABLE>
<CAPTION>
June 2000 June 1999
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss (NOL) carryforward.................................... $ 23,251 $ 15,214
Medical liabilities...................................................... 10,433 9,517
Other liabilities........................................................ 13,268 10,750
Self-insurance reserves.................................................. 9,406 8,268
Alternative minimum tax (AMT) credit carryforward........................ 6,005 6,005
Deferred compensation.................................................... 4,854 4,977
Inventory allowance...................................................... 3,172 3,249
Accounts receivable allowance............................................ 2,704 2,315
Environmental liabilities................................................ 2,297 2,129
Investment tax credit (ITC) carryforward................................. 1,604 1,604
----------- -----------
Total deferred tax asset............................................ 76,994 64,028
----------- -----------
Deferred tax liabilities:
Pension assets........................................................... 76,729 71,231
Excess of tax-over-book depreciation..................................... 17,617 14,975
Net leasing activity..................................................... 6,748 (1,123)
Prepaid medical expenses................................................. 1,039 6,212
Other assets .......................................................... 1,120 1,749
----------- -----------
Total deferred tax liability........................................ 103,253 93,044
----------- -----------
Net deferred tax liability..................................... $ (26,259) $ (29,016)
=========== ===========
</TABLE>
Agway's net deferred tax liability at June 2000 and 1999 of $26,259 and
$29,016, respectively, consists of a net current asset of $28,887 and $22,316
included in prepaid expenses and a net long-term liability of $55,146 and
$51,332 included in other liabilities, respectively. Based on Agway's history of
taxable earnings and our expectations for the future, management has determined
that operating income will more likely than not be sufficient to recognize all
of its net deferred tax assets.
At June 2000, the federal AMT credit can be carried forward indefinitely. The
net operating loss (NOL) carryforward expires at various intervals between 2010
and 2020, and the ITC carryforward expires in 2002 and 2003.
49
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
9. SHORT-TERM NOTES PAYABLE
As of June 2000, Agway had certain facilities available with various financial
institutions whereby lenders have agreed to provide funds up to $401,700 to
separately financed units of Agway as follows: AFC - $65,000 and Telmark -
$336,700. The AFC amount is a $65,000 short-term line of credit. 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. Letters of credit of
$23,000, which are primarily used to back general liability claims, are also
available to AFC. At June 2000, letters of credit issued for that purpose
totaled approximately $17,900. The carrying amounts of Agway's short-term
borrowings approximate their fair value and were as follows:
<TABLE>
<CAPTION>
AFC
(excluding
Telmark) Telmark Total
------------ ------------ ----------
June 2000
---------
<S> <C> <C> <C>
Bank lines of credit.......................................... $ 51,900 $ 75,676 $ 127,576
Commercial paper.............................................. 50,000 0 50,000
------------ ------------ -----------
$ 101,900 $ 75,676 $ 177,576
============ ============ ===========
Weighted average interest rate................................ 7.93% 7.36%
============ ============
AFC
(excluding
Telmark) Telmark Total
------------ ------------ -----------
June 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%
============ ============
</TABLE>
The interest rate charged on commercial paper and bank lines of credit ranged
from 5.02% to 10.15% at June 2000.
The $65,000 short-term line of credit and the $50,000 commercial paper facility
available to AFC at June 2000 require collateralization using certain of Agway's
accounts receivable and non-petroleum inventories (collateral). The line of
credit additionally requires Agway's investment in bank stock, which had a book
value of $3,000 and $4,700 at June 2000 and 1999, respectively, as additional
collateral. The maximum 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 2000 to permit AFC
to borrow amounts to meet the ongoing needs of Agway and is expected to continue
to do so. In addition, the agreements include certain covenants, the most
restrictive of which requires Agway to maintain specific quarterly levels of
interest coverage, monthly levels of tangible retained earnings, monthly current
ratios and limits available credit to a multiple of earnings as defined in
the agreement. Other covenants limit capital expenditures to agreed upon levels
during the term of the agreements, require the monthly maintenance of
senior liabilities to tangible capital ratios as defined in the agreements and
the maintenance of a minimum total of $425,000 in Agway preferred stock and AFC
subordinated debt. The required minimum level of preferred stock on subordinated
debt has historically been at levels that do not interfere with the normal
volume of requests Agway has received and fulfilled to repurchase such
securities at par value or principal amount prior to maturity.
50
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
9. SHORT-TERM NOTES PAYABLE (CONTINUED)
The earnings level as measured at June 2000 was not adequate to support the
borrowing level under these agreements. Borrowing requirements since autumn 1999
have been and remain high relative to the prior year. This has principally been
to support high working capital requirements, particularly in Agway's energy
business, where cost of petroleum products has increased accounts receivable and
inventory levels. For the year ended June 2000, Agway did not meet the interest
coverage, tangible retained earnings, or the multiple of earnings ratio
covenants set forth in the agreements. Additionally, for the months of July and
August 2000, Agway did not meet the current ratio covenant. The banks have
waived violations of covenants and borrowing limits and have amended these
measurements and covenants to agreed upon levels of financial performance
through December 2000, the remaining term of these credit arrangements.
These revised borrowing limits and financial covenants are expected to continue
to be restrictive through December 2000, and, given the historical volatility of
Agway's operating results, may be violated in the ensuing months. Agway,
however, is anticipating a continuation of high-cost petroleum products through
the winter of 2001 and, accordingly, has commenced negotiations with several
lenders to increase and restructure its credit facilities effective January 1,
2001. The restructured credit facilities are anticipated to include increased
lines of credit without a commercial paper program. Agway's existing banks have
expressed interest in participating in the restructured lines of credit at
reduced levels from their current commitment. AFC annually renews its lines of
credit in the quarter ended December 31. Agway expects to continue to have
appropriate and adequate financing to meet its ongoing needs. However, we are
presently in negotiations for these new credit facilities, therefore, there is
no assurance that the Company will achieve the desired levels of financing, and
the terms of such financing, as ultimately negotiated, cannot be determined at
this time.
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
$86,700 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 $13,600 and
$12,800 at June 2000 and 1999, respectively. The $86,700 lines of credit all
have terms expiring during the next 12 months. The total amounts outstanding as
of June 2000 and 1999 under the short-term lines of credit were $75,200 and
$500, respectively, and under the short-term component of the revolving term
loan facility were $35,000 and $8,300, respectively. The portion of the
revolving term loan that is long term at June 2000 and 1999 was $164,000 and
$148,000, respectively.
51
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
10. DEBT
Long-Term Debt:
Long-term debt consists of the following at June 2000:
<TABLE>
<CAPTION>
AFC
(excluding
Agway Telmark) Telmark Total
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Notes payable - banks (a) ................................. $ 0 $ 525 $ 164,000 $ 164,525
Notes payable - insurance companies (b)(c) ................ 0 0 240,256 240,256
Other...................................................... 9,776 2,432 0 12,208
------------ ----------- ----------- -----------
Subtotal long-term debt, excluding capital leases.......... 9,776 2,957 404,256 416,989
Obligations under capital leases........................... 1,560 0 0 1,560
------------ ----------- ----------- -----------
Total long-term debt....................................... 11,336 2,957 404,256 418,549
Less: current portion...................................... 2,812 626 132,773 136,211
------------ ----------- ----------- -----------
$ 8,524 $ 2,331 $ 271,483 $ 282,338
============ =========== =========== ===========
Long-term debt consists of the following at June 1999:
AFC
(excluding
Agway Telmark) Telmark Total
------------ ----------- ----------- -----------
Notes payable - banks (a).................................. $ 0 $ 1,225 $ 148,000 $ 149,225
Notes payable - insurance companies (b)(c)................. 0 0 204,801 204,801
Other...................................................... 14,002 2,263 0 16,265
------------ ----------- ----------- -----------
Subtotal long-term debt, excluding capital leases.......... 14,002 3,488 352,801 370,291
Obligations under capital leases........................... 1,681 0 0 1,681
------------ ----------- ----------- -----------
Total long-term debt....................................... 15,683 3,488 352,801 371,972
Less: current portion...................................... 2,204 807 91,461 94,472
------------ ----------- ----------- -----------
$ 13,479 $ 2,681 $ 261,340 $ 277,500
============ =========== =========== ===========
</TABLE>
52
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
10. DEBT (CONTINUED)
(a) The portion of Telmark's revolving term loan facility that is long term at
June 2000 of $164,000 bears interest at fixed rates ranging from 5.56% to
7.67%, payments commencing July 2000 with final installments due in April
2004. As of June 2000, under an AFC loan agreement bearing an interest
rate of 8.58%, principal of $525 is payable in quarterly installments of
$175 commencing August 2000 and ending in February 2001. (See Note 9 for
discussions of collateralization and/or financial covenants relating to
Telmark's and AFC's notes payable to banks.)
(b) At June 2000, Telmark also had balances outstanding on uncollateralized
senior note private placements totaling $122,000. 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 based on Telmark's financial statements, the most
restrictive of which prohibit (i) tangible net worth (defined as
consolidated tangible assets less total liabilities (excluding any notes
payable to Agway Holdings, Inc.-AHI)), from being less than an amount equal
to or greater than the sum of $85,000, plus 50% of all net income (if a
positive number) for all fiscal years ending after January 1, 2000 (as of
June 2000 required minimum net worth is $90,900), (ii) the ratio of (a)
total liabilities less subordinated notes payable to AHI to (b) members'
equity plus subordinated notes payable to AHI from exceeding 5:1, (iii) the
ratio of earnings available for fixed charges from being less than 1.25:1,
and (iv) equity distributions and restricted investments (as defined) made
after July 1, 1999, from exceeding 50% of consolidated net income for the
period beginning on July 1, 1999, through the date of determination,
inclusive. As of June 2000, $900 of Telmark's member equity was free of
this restriction. For the year ended June 2000, Telmark complied with all
its covenants contained in its borrowing arrangements.
(c) Telmark, through three wholly owned special purpose subsidiaries, has six
classes of lease-backed notes outstanding totaling $118,300 and $58,800 at
June 2000 and 1999, respectively, payable to insurance companies. Interest
rates on these classes of notes range from 6.5% to 9.1%. 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 and by segregated cash accounts.
The scheduled maturity of these notes is in varying amounts and dates
through December 2008.
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 2000:
<TABLE>
<CAPTION>
AFC
(excluding
Telmark) Telmark Total
------------ ------------- -----------
<S> <C> <C> <C>
Subordinated debentures, due 2001 to 2008,
interest at a weighted average rate of 8.0%
with a range of 6.0% to 8.75%............................ $ 7,177 $ 37,398 $ 44,575
Subordinated money market certificates,
due 2000 to 2014, interest at a weighted average
rate of 8.0% with a range of 4.5% to 9.5%................ 430,299 0 430,299
------------ ------------- -----------
Total long-term subordinated debt.............................. 437,476 37,398 474,874
Less: current portion......................................... 51,628 5,497 57,125
------------ ------------- -----------
$ 385,848 $ 31,901 $ 417,749
============ ============= ===========
Subordinated debt consists of the following at June 1999:
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%............................. $ 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
============ ============= ===========
</TABLE>
AFC's subordinated debt is not redeemable by the holder, though AFC
historically has had a practice of repurchasing at face value, plus interest
accrued at the stated rate, certain subordinated debt whenever presented for
repurchase prior to maturity. However, AFC is under no obligation to repurchase
such debt when so presented, and AFC may stop or suspend this repurchase
practice at any time. In addition, the terms or conditions of the lines of
credit discussed in Note 9, as ultimately negotiated, may cause AFC to limit or
cease its past practices with regard to the repurchase of subordinated debt. 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. 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
an average 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 and thereafter are as follows:
<TABLE>
<CAPTION>
Capital Subordinated
Leases Borrowings Total Debt
----------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
2001........................................... $ 190 $ 136,095 $ 136,285 $ 57,125
2002........................................... 248 109,358 109,606 58,827
2003........................................... 248 88,814 89,062 46,268
2004........................................... 248 69,976 70,224 49,517
2005........................................... 248 8,813 9,061 18,041
Thereafter..................................... 1,069 3,933 5,002 245,096
Imputed interest............................... (691) 0 (691) 0
----------- ------------- ------------ -----------
Total.......................................... $ 1,560 $ 416,989 $ 418,549 $ 474,874
=========== ============= ============ ===========
</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. As part of its long-term environmental protection
program, Agway spent approximately $400 in 2000 on capital projects related
principally to comply with Pennsylvania above-ground storage tank regulation.
Agway expects to have approximate expenses in the amount of $500 in 2001
associated with this compliance.
At June 2000, Agway is designated as a PRP under CERCLA or as a third party by
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 at least five years based upon
current estimates, and it is not expected that such outlays will materially
impact Agway's liquidity position.
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 2000 approximated $4,400.
Rent expense for the years ended June 2000, 1999 and 1998 was approximately
$16,500, $14,700 and $12,400, respectively. Future minimum payments under
noncancelable operating leases approximate $11,500, $11,300, $10,400, $9,400 and
$8,500 for the years ending June 2001 through 2005, respectively, and
approximately $10,200 thereafter.
55
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
12. PREFERRED STOCK
Values are whole numbers except where noted as (000s).
<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 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 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 1999...................... 133,771 234,789 18,010 41,954 2,584 $ 42,917
Issued (redeemed), net.............. (10,451) (2,044) 0 (19,702) (100) (3,222)
----------- ----------- ----------- ----------- ---------- ----------
Balance June 2000...................... 123,320 232,745 18,010 22,252 2,484 $ 39,695
=========== =========== =========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Preferred Stock
------------------------------------------------------------------
Cumulative
----------------------------------------------------- Honorary
6% 8% 8% 7% Member
Series A Series B Series B-1 Series C Series HM
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Annual Dividends Per Share:
June 1998.............................. $ 6.00 $ 8.00 $ 8.00 $ 7.00 $ 1.50
June 1999.............................. $ 6.00 $ 8.00 $ 8.00 $ 7.00 $ 1.50
June 2000.............................. $ 6.00 $ 8.00 $ 8.00 $ 7.00 $ 1.50
Shares Held in Treasury (purchased at
par value):
June 1998.............................. 196,823 13,854 121,990 79,274 970
June 1999.............................. 216,228 23,565 121,990 108,056 1,070
June 2000.............................. 226,681 25,610 121,990 127,763 1,202
</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. As discussed in Note 9, Agway is presently in negotiations for new
credit facilities and, depending on the outcome of these negotiations, may limit
or cease its practice of repurchasing preferred stock. 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
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 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 2000 and 1999, retirement plan assets included
Agway debt securities and preferred stock with estimated fair values of $15,100
and $18,600, respectively.
The Employees' Retirement Plan of Agway Inc. has assets that exceed the benefit
obligation. The following tables set forth the plan's funded status and amounts
recognized in Agway's consolidated financial statements at June 2000 and 1999 as
a net pension asset. The net pension income is summarized for each of the three
years ended June 2000:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Change in Benefit Obligation
----------------------------
Benefit obligation at beginning of year......................................... $ 345,917 $ 332,719
Service cost (with interest).................................................... 9,975 9,835
Interest cost................................................................... 24,661 23,948
Amendments..................................................................... 0 24,772
Curtailment..................................................................... 458 0
Actuarial (loss) gain........................................................... (6,738) (11,042)
Benefits paid................................................................... (35,770) (34,315)
------------ ------------
Benefit obligation at end of year............................................... $ 338,503 $ 345,917
============ ============
Change in Plan Assets
---------------------
Fair value of plan assets at beginning of year.................................. $ 578,975 $ 582,988
Actual return on plan assets.................................................... 26,428 30,302
Benefits paid................................................................... (35,770) (34,315)
------------ ------------
Fair value of plan assets at end of year........................................ $ 569,633 $ 578,975
============ ============
Funded status................................................................... $ 231,130 $ 233,058
Unrecognized prior service cost................................................. 23,219 31,621
Unrecognized net gain........................................................... (40,894) (61,814)
Unrecognized net transition obligation.......................................... 0 (4,705)
------------ ------------
Net pension asset............................................................... $ 213,455 $ 198,160
============ ============
</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>
2000 1999 1998
-------------- ------------ ------------
<S> <C> <C> <C>
Components of Net Pension Income
--------------------------------
Service cost (with interest).......................................... $ 9,975 $ 9,835 $ 5,373
Interest cost......................................................... 24,661 23,948 22,547
Expected return on plan assets........................................ (53,350) (53,682) (54,078)
Amortization of:
Transition obligation............................................. (4,705) (4,705) (4,705)
Prior service cost................................................ 4,134 4,566 2,314
Actuarial gains and losses........................................ (278) (1,330) (3,360)
Recognized curtailment (gain)/loss.................................... 4,268 0 0
-------------- ------------ ------------
Net pension income.................................................... $ (15,295) $ (21,368) $ (31,909)
============== ============ ============
Weighted-Average Assumptions as of June 30
------------------------------------------
Discount rate......................................................... 7.75% 7.50% 7.00%
Expected return on plan assets........................................ 9.75% 9.50% 10.25%
Rate of compensation increase......................................... 5.00% 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.
In October 1999, Agway's Board of Directors approved a plan to restructure the
Company's retail operations by converting the majority of the Agway-owned and
operated retail stores into dealer-owned and operated stores. As a result of a
large number of Agway employees leaving the Company, a curtailment of both the
pension and postretirement benefit plans occurred. The impact of this
curtailment was as follows:
Pension Postretirement
----------- --------------
Change in benefit obligation.................. $ 458 $ 424
Curtailment charge............................ $ 4,268 $ 1,451
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 2000, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
2000 1999
------------- -------------
<S> <C> <C>
Change in Benefit Obligation
----------------------------
Benefit obligation at beginning of year...................................................... $ (43,937) $ (43,985)
Service cost (with interest)................................................................. (685) (699)
Interest cost................................................................................ (3,118) (3,028)
Plan participant contributions............................................................... (1,502) (1,563)
Actuarial loss............................................................................... 2,360 (528)
Curtailment.................................................................................. 424 0
Benefits paid................................................................................ 5,754 5,866
------------- --------------
Benefit obligation at end of year............................................................ $ (40,704) $ (43,937)
============= ==============
Funded status................................................................................ $ (40,704) $ (43,937)
Unrecognized prior service cost.............................................................. 1,038 1,261
Unrecognized net loss........................................................................ (2,067) 717
Unrecognized net transition obligation....................................................... 15,042 17,583
------------- --------------
Accrued postretirement benefit cost.......................................................... $ (26,691) $ (24,376)
============= ==============
<CAPTION>
2000 1999 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Components of Net Periodic Postretirement Benefit Cost
------------------------------------------------------
Service cost (with interest)........................................... $ 685 $ 699 $ 601
Interest cost.......................................................... 3,118 3,028 3,110
Amortization of:
Transition obligation.............................................. 1,188 1,255 1,255
Prior service cost................................................. 125 132 132
Gains and losses................................................... 0 0 0
Recognized curtailment (gain)/loss..................................... 1,451 0 0
-------------- ------------- --------------
Net periodic postretirement expense.................................... $ 6,567 $ 5,114 $ 5,098
============== ============= ==============
</TABLE>
In determining the benefit obligation, the weighted average discount rate used
was 7.75% and 7.5% at June 2000 and 1999, 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 2000
---------------
Effect on total of services and interest cost components..................................... $ 196 $ (168)
Effect on year-end benefit obligation........................................................ 1,310 (1,142)
</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 for persons under age 65 was 6.8%
for June 2000 and 7.5% for June 1999. The health care cost trend rate assumption
for fiscal 2001 and forward at June 2000 decreases gradually until the year
2004, when the ultimate trend rate is then fixed at 5%. For persons over age 65,
Agway has an insured medical program limiting Agway's subsidy to a per month/per
retiree basis.
See Pension Plan section of this footnote for discussion of the postretirement
plan curtailment in 2000.
Employees' Thrift Investment Plan
The Agway Inc. Employees' 401(k) 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 2000,
1999 and 1998 were approximately $1,600, $1,300 and $1,300, respectively. For
the years ended June 2000, 1999 and 1998, 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 reports its operations principally in five business segments as follows:
(1) AGRICULTURE engages in the manufacturing, processing, marketing, and
direct distribution of various animal feeds, crop inputs, fertilizers
and farm supplies and services for its farmer-members and other
customers primarily in the northeastern United States and Ohio. The
former Retail segment that was combined with Agriculture in April 1999
is reflected as a discontinued operation in these financial statements
and is not included in the results of the Agriculture segment for all
years presented.
(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. Interest
expense is reported as cost and expenses from leasing operations (cost
of sales).
(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 net
corporate expenses, pension income, intersegment eliminations, interest and
taxes.
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 2000 Agriculture Group Energy Leasing Insurance Other(a) Consolidated
-------------------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and revenues to
unaffiliated customers..... $ 488,417 $ 190,221 $ 644,455 $ 76,626 $ 27,153 $ 14 $ 1,426,886
Intersegment sales and
revenues................... 20,268 11,780 438 159 0 (32,645) 0
------------ ------------ ------------ ----------- ----------- ----------- ------------
Total sales and revenues $ 508,685 $ 202,001 $ 644,893 $ 76,785 $ 27,153 $ (32,631) $ 1,426,886
============ ============ ============ =========== =========== =========== ============
Operating earnings (loss).... $ (13,016) (384) 9,001 20,059 30 2,184 17,874
Interest income.............. 5,767 153 34 0 0 2,454 8,408
Interest expense............. (13,263) (2,902) (5,664) 0 (7) (17,163) (38,999)
Other income, net............ 6,972 248 18,655 0 17 (159) 25,733
------------ ------------ ------------ ----------- ----------- ----------- ------------
Earnings (loss) before
income taxes............... $ (13,540) $ (2,885) $ 22,026 $ 20,059 $ 40 $ (12,684) $ 13,016
============ ============ ============ =========== =========== =========== ============
Total assets................. $ 293,559 $ 71,636 $ 177,804 $ 670,364 $ 54,160 $ 304,836 $ 1,572,659
Depreciation and amortization 10,778 4,413 8,839 385 98 1,658 26,171
Capital expenditures......... 18,372 2,083 6,342 0 28 974 27,799
Country
Products
Year ended June 1999 Agriculture Group Energy Leasing Insurance Other(a) Consolidated
-------------------- ------------ ------------ ------------ ----------- ----------- ----------- ------------
Net sales and revenues to
unaffiliated customers..... $ 512,071 $ 160,153 $ 451,284 $ 70,006 $ 27,968 $ (16) $ 1,221,466
Intersegment sales and
revenues................... 23,163 11,572 613 0 0 (35,348) 0
------------ ------------ ------------ ----------- ----------- ----------- ------------
Total sales and revenues $ 535,234 $ 171,725 $ 451,897 $ 70,006 $ 27,968 $ (35,364) $ 1,221,466
============ ============ ============ =========== =========== =========== ============
Operating earnings (loss).... $ (8,565) $ 2,950 $ 12,992 $ 18,201 $ 130 $ 4,647 $ 30,355
Interest income.............. 6,467 10 614 0 0 1,551 8,642
Interest expense............. (12,529) (2,239) (5,119) 0 (12) (14,845) (34,744)
Other income, net............ 2,168 11,355 4,538 (43) 378 551 18,947
------------ ------------ ------------ ----------- ----------- ----------- -------------
Earnings (loss) before
income taxes............... $ (12,459) $ 12,076 $ 13,025 $ 18,158 $ 496 $ (8,096) $ 23,200
============ ============ ============ =========== =========== =========== =============
Total assets................. $ 269,884 $ 64,365 $ 133,624 $ 596,905 $ 55,578 $ 316,348 $ 1,436,704
Depreciation and amortization 6,598 3,959 8,506 493 92 1,431 21,079
Capital expenditures......... 13,943 4,707 5,002 511 89 2,910 27,162
</TABLE>
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 1998 Agriculture Group Energy Leasing Insurance Other(a) Consolidated
-------------------- ----------- ----------- ----------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales and revenues to
unaffiliated customers..... $ 531,910 $ 170,398 $ 504,702 $ 65,445 $ 27,335 $ 7 $ 1,299,797
Intersegment sales and
revenues................... 19,319 15,685 398 31 0 (35,433) 0
----------- ----------- ----------- ------------ ---------- ----------- ------------
Total sales and revenues $ 551,229 $ 186,083 $ 505,100 $ 65,476 $ 27,335 $ (35,426) $ 1,299,797
=========== =========== =========== =========== ========== =========== ============
Operating earnings (loss).... $ (7,115) $ 7,702 $ 9,879 $ 15,412 $ (436) $ 17,449 $ 42,891
Interest income.............. 7,144 182 778 0 0 1,441 9,545
Interest expense............. (12,642) (2,825) (7,884) 0 (7) (11,166) (34,524)
Other income, net............ 5,665 1,170 5,272 0 173 (9) 12,271
----------- ----------- ----------- ----------- ---------- ----------- ------------
Earnings (loss) before
income taxes............... $ (6,948) $ 6,229 $ 8,045 $ 15,412 $ (270) $ 7,715 $ 30,183
=========== =========== =========== =========== ========== =========== ============
Total assets................. $ 264,150 $ 61,743 $ 141,469 $ 524,797 $ 56,014 $ 332,087 $ 1,380,260
Depreciation and amortization 10,278 2,947 8,668 607 78 1,062 23,640
Capital expenditures......... 9,472 4,540 5,631 471 297 3,480 23,891
</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 years ended June 2000, 1999 and
1998 are summarized below:
<TABLE>
<CAPTION>
2000 1999 1998
------------- ----------- -----------
<S> <C> <C> <C>
Patronage refund income............................................... $ 787 $ 1,231 $ 4,344
Rent and storage revenue.............................................. 2,964 3,155 3,935
Gain (loss) on disposition of:
Businesses...................................................... 1,098 11,097 0
Other security investments...................................... (1,044) (1,267) 0
Properties and equipment........................................ 13,995 655 934
Negotiated settlement................................................. 5,049 0 0
Other, net............................................................ 2,884 4,076 3,058
------------- ----------- -----------
$ 25,733 $ 18,947 $ 12,271
============= =========== ===========
16. SUPPLEMENTAL DISCLOSURES ABOUT CASH FLOWS
2000 1999 1998
------------- ----------- -----------
Additional disclosure of operating cash flows:
Cash paid during the year for:
Interest................................................... $ 38,905 $ 35,310 $ 34,474
============= =========== ===========
Income taxes............................................... $ 2,727 $ 2,586 $ 3,253
============= =========== ===========
Additional disclosure for non-cash investing and financing activities:
Dividends declared but unpaid at fiscal year-end................ $ 1,592 $ 1,702 $ 1,840
============= =========== ===========
</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 7.7% to 10.0% in 2000
and 6.2% to 9.0% in 1999.
The carrying amounts and estimated fair values of Agway's significant financial
instruments held for purposes other than trading at June 2000 and 1999 were as
follows:
<TABLE>
<CAPTION>
2000 1999
---------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Liabilities:
Long-term debt (excluding capital leases)............. $ 416,989 $ 423,843 $ 370,291 $ 378,572
Subordinated debentures............................... 474,874 436,970 486,303 481,775
</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 2000,
the carrying and fair value of Agway's investment in commodity futures and
option contracts was a gain of $5,300 and $8,200, respectively. As of June
1999, the carrying and fair value of Agway's investment in commodity futures and
option contracts was a loss of $3,700 and $2,000, 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. 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, Energy, and CPG 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 manage the price risk of corn, soy complex,
and oats, which can be sold directly as ingredients or included in feed
products. 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 have been historically 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).
In May 2000, the Company ceased all operations of the grain marketing
department. As of June 2000, there were no outstanding commodity instruments.
In the CPG segment, exchange-traded commodity instruments are used principally
to manage the price risk of confection and bakery kernel sunflower seeds, and
foreign currency forward contracts are entered to manage fluctuations in foreign
currency denominated sales transactions.
18. DISCONTINUED OPERATIONS
In October 1999, the Agway Board of Directors approved a plan to restructure the
retail store distribution system. This plan called for the sale or closure of
the 227 Agway retail properties over the next 1 1/2 years. In the spring of
2000, the Agway Board of Directors authorized the sale of the wholesale
procurement and supply system to Southern States Cooperative, Inc. An agreement
was executed on June 20, 2000 and closed on July 31, 2000.
The sale of the wholesale procurement and supply system, when combined with the
sale and closure of the Agway-owned or operated retail stores, constitutes a
plan to discontinue operations of the retail services business. For financial
reporting purposes, the measurement date upon which this discontinued operation
plan became effective was June 20, 2000. Operating results of the retail
services business, including restructuring activity which took place through
that date, are included in the operating loss from discontinued operations in
the financial statements for the year ended June 2000. The anticipated gains and
losses after June 20, 2000 from the future anticipated sale of the wholesale
procurement and supply system, which was consummated on July 31, 2000, and the
sale or closure of the remaining Agway-owned or operated retail store
properties, as well as the results of their future operations through the
anticipated dates of sale, are included in the loss on disposal of the retail
services business in the June 2000 statement of operations. Prior year financial
results have been reclassified to reflect the retail services business as a
discontinued operation.
The net sales and revenues from discontinued operations (retail services
business) were approximately $222,400, $285,200 and $290,800 in 2000, 1999 and
1998, respectively. Interest expense allocated to discontinued operations
totaled $4,100, $6,200 and $5,800 in 2000, 1999 and 1998, respectively.
66
<PAGE>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
18. DISCONTINUED OPERATIONS (CONTINUED)
A summary of net assets of discontinued operations at June 2000 and 1999 was as
follows:
<TABLE>
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
Accounts receivable............................................................. $ 22,982 $ 26,967
Inventory....................................................................... 18,408 59,436
Property, plant and equipment, net.............................................. 18,989 39,164
Other assets, net............................................................... 23,370 7,536
Accounts payable and accrued expenses........................................... (49,413) (44,014)
Long-term liabilities........................................................... (58) (3,287)
------------ -----------
Net assets of discontinued operations........................................... $ 34,278 $ 85,802
============ ===========
</TABLE>
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>
Gary K. Van Slyke(1) 57 Chairman of the VanSlyke's Dairy Farm 1994 October 2000
Board and Director
Andrew J. Gilbert 41 Vice Chairman of the
Board and Director Adon Farms 1995 October 2001
Keith H. Carlisle 58 Director Carlisle Farms, Inc. 1995 October 2001
D. Gilbert Couser 59 Director Couser Farm 1995 October 2001
Ralph H. Heffner 62 Director Jersey Acres Farms Inc. 1973 October 2000
Robert L. Marshman 61 Director Marshman Farms 1989 October 2002
Jeffrey B. Martin 41 Director Martin Farms 1997 October 2000
Samuel F. Minor 62 Director The Spring House 1987 October 2000
Richard H. Skellie 56 Director Richland Farms 1999 October 2002
Carl D. Smith 65 Director Hillacre Farms 1984 October 2002
Thomas E. Smith 65 Director Lazy Acres Dairy 1986 October 2001
Joel L. Wenger 69 Director Weng-Lea Farms 1987 October 2002
Edwin C. Whitehead 59 Director White Ayr Farms 1994 October 2000
William W. Young 47 Director Will-O-Crest Farm 1989 October 2001
</TABLE>
Gary K. Van Slyke, Chairman of the Board of Directors, earned $55,900 and Andrew
J. Gilbert, Vice Chairman of the Board of Directors, earned $39,900 for their
services for the year ended June 2000. 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 they
were involved in business for the Company other than the days where the Agway
Inc. Board of Directors was 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 as of
December 31, 1995. 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
2000, the present value of accumulated benefits under this plan was
approximately $465,900.
(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 Agway for the past five years has been
as an officer or employee of the Agway. The following is a listing of these
officers as of July 1, 2000:
<TABLE>
<CAPTION>
Years Served
Name Age Office As Officer
---- --- ------ ----------
<S> <C> <C> <C>
Donald P. Cardarelli 44 President and Chief Executive Officer 9
Daniel J. Edinger 49 President, Telmark LLC 2
John F. Feeney 39 Corporate Controller 1
Robert A. Fischer, Jr. 52 President, Agriculture & Retail Group 5
David M. Hayes 56 Senior Vice President, General Counsel and Secretary 19
Stephen H. Hoefer 45 Senior Vice President, Public Affairs 6
Michael R. Hopsicker 35 President, Agway Energy Products LLC 4
Dennis J. LaHood 54 President, Country Products Group 5
Karen J. Ohliger 38 Treasurer 1
Peter J. O'Neill 53 Senior Vice President, Finance & Control 11
William L. Parker 53 Vice President and Chief Information Officer 5
Gerald R. Seeber 53 Senior Vice President, Administrative Services and
President, Agway Insurance Group 2
G. Leslie Smith 57 Vice President and Chief Investment Officer 3
Michael P. Spyker 50 Vice President, Membership -
</TABLE>
More detailed biographies of each person listed above are set forth below:
Mr. Cardarelli served as General Manager and CEO from January 1995 and President
from February 1995 to present.
Mr. Edinger served as President, Telmark LLC, from February 1988 to present.
Mr. Feeney served as Director, Corporate Reporting, from July 1995 to August
1998; and as Corporate Controller from August 1998 to present.
Mr. Fischer has served as President, Milford Fertilizer Company, since June
1970; 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 present.
Mr. Hayes served as Senior Vice President, General Counsel and Secretary, from
July 1992 to present.
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 present.
Mr. Hopsicker served 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 present.
Mr. LaHood served as Vice President, Country Products Group, from February 1995
to July 1997; and as President, Country Products Group, from July 1997 to
present.
Ms. Ohliger served as Assistant Treasurer from September 1992 to August 1998;
and as Treasurer from August 1998 to present.
69
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS (CONTINUED)
Mr. O'Neill served 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 present.
Mr. Parker served as Vice President, Information Services, from September 1994
to May 1996; and as Vice President, Chief Information Officer, from May 1996 to
present.
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 present.
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
present.
Mr. Spyker has served as Seed Business Unit Manager since July 1995; and as Vice
President, Membership, from January 2000 to present.
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
2000, 1999 and 1998 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 2000.
<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 2000 $521,548 $0 $19,771
President and CEO 1999 478,276 154,530 18,057
1998 425,390 327,600 11,500
Daniel J. Edinger 2000 224,637 184,950 5,017
President, 1999 199,710 155,040 3,764
Telmark LLC 1998 178,853 105,240 3,033
Robert A. Fischer, Jr. 2000 350,385 0 58,743
President, 1999 316,442 40,000 63,480
Agriculture & Retail 1998 294,423 124,000 116,476
Group
Dennis J. LaHood 2000 316,173 0 4,963
President, 1999 252,639 211,800 3,009
Country Products 1998 220,407 175,515 2,998
Group
Peter J. O'Neill 2000 304,703 46,050 9,436
Senior Vice President, 1999 290,212 60,000 6,999
Finance & Control 1998 266,165 130,000 4,060
</TABLE>
(1) Salary and bonus are used in determining the average annual compensation
pursuant to the Employees' Retirement Plan of Agway Inc., effective July
1, 1998 (see page 72). This amount includes all deferred amounts
under the Agway Inc. Employees' 401(k) 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' 401(k)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 up to the
limits provided by law, 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 27, 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 27, 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 2000. As of June 2000, the officers and
their respective number of credited years of service under the Retirement Plan
were as follows: Messrs. Cardarelli, 15; O'Neill, 11; Lahood, 30; and Edinger,
21. 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 certain directors, including the Chairman and Vice
Chairman of the Board of Directors, which determines the compensation of Donald
P. Cardarelli, President and CEO of Agway Inc. The compensation of the other
executive officers of Agway Inc. is determined by Mr. Cardarelli. Salaries of
all executive officers are included in the annual operating budget, which is
approved by the entire Board of Directors of Agway Inc.
None of the executive officers or directors who participate in establishing
compensation policies had interlocks reportable under Section 402(J) of
Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None of the executive officers of 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
(A) INDEX TO DOCUMENT LIST LOCATION
--------
<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 32:
(i) Report of Independent Accountants....................................................... 34
(ii) Consolidated Balance Sheets, June 24, 2000 and June 26, 1999 ........................... 35
(iii) Consolidated Statements of Operations, fiscal years ended June 24, 2000,
June 26, 1999 and June 27, 1998....................................................... 36
(iv) Consolidated Statements of Comprehensive Income, fiscal years ended
June 24, 2000, June 26, 1999 and June 27, 1998........................................ 37
(v) Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended
June 24, 2000, June 26, 1999 and June 27, 1998........................................ 38
(vi) Consolidated Statements of Cash Flow, fiscal years ended June 24, 2000,
June 26, 1999 and June 27, 1998....................................................... 39
(vii) Notes to Consolidated Financial Statements.............................................. 40
(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 24, 2000...................... 76
Schedule II - Valuation and Qualifying Accounts, fiscal years ended
June 24, 2000, June 26, 1999 and June 27, 1998......................... 80
</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
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
JUNE 24, 2000 JUNE 26, 1999
------------- --------------
<S> <C> <C>
Current assets:
Cash...................................................................... $ 23,508 $ 2,902
Trade accounts receivable (including notes receivable of $34,559 and
$37,015, respectively), less allowance for doubtful accounts of
$4,674 and $3,581, respectively...................................... 105,796 92,342
Inventories............................................................... 62,199 55,401
Other current assets...................................................... 23,368 45,740
----------- ------------
Total current assets................................................. 214,871 196,385
Investments in subsidiaries..................................................... 242,221 234,439
Properties and equipment, net................................................... 84,812 77,854
Net pension asset............................................................... 213,455 198,160
Net assets of discontinued operations........................................... 34,278 85,802
Other assets ................................................................ 8,005 7,560
----------- ------------
Total assets......................................................... $ 797,642 $ 800,200
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 21,184 $ 18,154
Operating advances payable to subsidiaries, net........................... 379,977 391,396
Other current liabilities................................................. 64,174 56,015
----------- ------------
Total current liabilities............................................ 465,335 465,565
Other liabilities............................................................... 149,716 135,688
Shareholders' equity............................................................ 182,591 198,947
----------- ------------
Total liabilities and shareholders' equity........................... $ 797,642 $ 800,200
=========== ============
</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
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
JUNE 24, 2000 JUNE 26, 1999 JUNE 27, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net sales and revenues from:
Product sales................................................... $ 504,697 $ 531,214 $ 613,186
Other services.................................................. 17,934 17,186 16,006
------------ ------------ ------------
Total net sales and revenues............................... 522,631 548,400 629,192
Cost and expenses from:
Products and plant operations................................... 475,163 497,512 573,617
Selling, general and administrative activities.................. 62,637 66,638 60,248
------------ ------------ ------------
Total operating costs and expenses......................... 537,800 564,150 633,865
------------ ------------ ------------
Operating loss........................................................ (15,169) (15,750) (4,673)
Interest expense, net................................................. (9,113) (5,344) (1,942)
Other income, net..................................................... 26,275 35,171 26,858
------------ ------------ ------------
Earnings from operations before income taxes
and equity in earnings of subsidiaries ......................... 1,993 14,077 20,243
Income tax benefit (expense).......................................... (2,231) 6,087 4,983
------------ ------------- ------------
Income (loss) before equity in earnings of subsidiaries............... (238) 20,164 25,226
Equity in earnings (loss) of unconsolidated subsidiaries.............. 6,390 (7,223) (9,210)
------------ ------------- ------------
Earnings from continuing operations................................... 6,152 12,941 16,016
Discontinued operations:
Loss from operations, including tax benefit of
$7,313, $6,086 and $2,090, respectively.................... (13,187) (11,146) (3,827)
Loss on disposal of retail, net of tax benefit
of $1,278.................................................. (2,342) 0 0
------------ ------------ ------------
Loss from discontinued operations............................... (15,529) (11,146) (3,827)
Earnings (loss) before cumulative effect of an accounting
change.......................................................... (9,377) 1,795 12,189
Cumulative effect of accounting change, net of tax
expense of $16,500.............................................. 0 0 28,956
------------ ------------ ------------
Net earnings (loss)................................................... (9,377) 1,795 41,145
Retained earnings - beginning of year................................. 153,763 155,362 117,851
Dividends............................................................. (3,165) (3,394) (3,634)
------------ ------------ ------------
Retained earnings - end of year....................................... $ 141,221 $ 153,763 $ 155,362
============ ============ ============
</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
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
JUNE 24, 2000 JUNE 26, 1999 JUNE 27, 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net cash flows from (used in) continuing operations................... $ 7,557 $ 21,777 $ 32,924
Net cash flows from (used in) discontinued operations................. 35,995 (391) 237
------------ ------------ ------------
Net cash flows from (used in) operating activities.................... 43,552 21,386 33,161
Cash flows from investing activities:
Purchases of property, plant and equipment...................... (18,984) (18,015) (15,189)
Proceeds from disposal of business.............................. 2,615 14,150 0
Disposition of properties and equipment......................... 1,379 972 0
Other........................................................... (1,304) (9,238) 352
------------ ------------ ------------
Net cash flows used in investing activities........................... (16,294) (12,131) (14,837)
Cash flows from financing activities:
Payments on capitalized leases.................................. (296) (319) (458)
Cash dividends paid............................................. (3,275) (3,532) (3,943)
Other........................................................... (3,081) (4,950) (9,523)
------------ ------------ ------------
Net cash flows used in financing activities........................... (6,652) (8,801) (13,924)
Net increase in cash and equivalents.................................. 20,606 454 4,400
Cash and equivalents at beginning of year............................. 2,902 2,448 (1,952)
------------ ------------ -------------
Cash and equivalents at end of year................................... $ 23,508 $ 2,902 $ 2,448
============ ============ =============
</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.
RECLASSIFICATIONS
Certain reclassifications have been made to conform prior year financial
statements with the current year presentation.
INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 2000 JUNE 1999
------------- ------------
<S> <C> <C>
Raw materials.................................................. $ 7,977 $ 6,892
Finished goods................................................. 52,742 46,896
Supplies....................................................... 1,480 1,613
------------- ------------
$ 62,199 $ 55,401
============= ============
</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 Inc. and its unconsolidated subsidiaries are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------
JUNE 2000 JUNE 1999 JUNE 1998
------------- ------------ -----------
<S> <C> <C> <C>
Net sales and revenues................................................ $ 3,307 $ 4,637 $ 36,445
Product and plant operation expenses.................................. 14,108 19,648 12,638
Recovery of selling, general and administrative expenses.............. 11,811 12,029 13,289
Interest expense, net................................................. 19,657 17,222 14,306
</TABLE>
CONTINGENCIES
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.
79
<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 24, 2000
------------------------------------------------------------------------------------------------------------------------------------
<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)............................. $ 6,139 $ 2,639 $ 0 $ 1,574(a) $ 7,204
========== ========== ========== ============ ==========
Allowance for doubtful leases receivable.............. $ 29,978 $ 11,737 $ 0 $ 9,179(a) $ 32,536
========== ========== ========== ============ ==========
Reserve for other security investments................ $ 1,010 $ 417 $ 0 $ 0 $ 1,427
========== ========== ========== ============ ==========
Reserve for obsolete and slow moving inventory........ $ 235 $ 64 $ 0 $ 0 $ 299
========== ========== ========== ============ ==========
Surplus property reserve.............................. $ 623 $ 0 $ 0 $ 0 $ 623
========== ========== ========== ============ ==========
Income tax valuation allowance........................ $ 0 $ 0 $ 0 $ 0 $ 0
========== ========== ========== ============ ==========
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
for the year ended June 26, 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)............................. $ 7,172 $ 1,003 $ 0 $ 2,036(a) $ 6,139
========== ========== ========== =========== ==========
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........ $ 100 $ 135 $ 0 $ 0 $ 235
========== ========== ========== =========== ==========
Surplus property reserve.............................. $ 645 $ 0 $ 0 $ 22(b) $ 623
========== ========== ========== =========== ==========
Income tax valuation allowance........................ $ 0 $ 0 $ 0 $ 0 $ 0
========== ========== ========== =========== ==========
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
for the year ended June 27, 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).......................... $ 7,227 $ 1,553 $ 0 $ 1,608(a) $ 7,172
========== ========== ========== =========== ==========
Allowance for doubtful leases receivable........... $ 24,014 $ 9,570 $ 0 $ 6,513(a) $ 27,071
========== ========== ========== =========== ==========
Reserve for obsolete and slow moving inventory..... $ 221 $ 100 $ 0 $ 221 $ 100
========== ========== ========== =========== ==========
Surplus property reserve........................... $ 696 $ 0 $ 0 $ 51(b) $ 645
========== ========== ========== =========== ==========
Income tax valuation allowance..................... $ 0 $ 0 $ 0 $ 0 $ 0
========== ========== ========== =========== ==========
</TABLE>
(a) Accounts charged off, net of recoveries.
(b) Locations sold.
80
<PAGE>
ITEM 14(B). REPORTS ON FORM 8-K
Agway filed a report on Form 8-K on May 18, 2000,
announcing the signing of a letter of intent with Southern
States Cooperative, Inc. (Southern States) to pursue
discussions toward the creation of a relationship to serve
Agway consumer dealers in the northeastern United States.
The letter of intent provides for the two cooperatives to
work together to develop a product distribution and
marketing system that will serve dealers with a full-line
of branded and non-branded products, as well as marketing
and advertising support to develop the cooperatives' brands
and trademarks over a larger geographic area.
Agway filed a report on Form 8-K on August 3, 2000,
announcing the June 30, 2000, sale by Agway Energy
Products, LLC of six pipeline terminal storage facilities,
located in New York and Pennsylvania, to Buckeye Partners,
L.P. (Buckeye) for a total purchase price of $19,000,000.
Agway filed a report on Form 8-K on August 15, 2000,
announcing the July 31, 2000, finalization of the purchase
by Southern States of Agway's consumer wholesale dealer
business. The aggregate consideration received by Agway
consisted of $9,080,000 in cash, assumption of $1,963,000
of accounts payable by Southern States, and a $13,300,000
interest-bearing promissory note to Agway from Southern
States payable in 30 months.
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.
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
4(a) - 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(b) - 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(c) - 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 Member Money Market
Certificates (Minimum 8% per annum) due
October 31, 2005, and Subordinated Member
Money Market Certificates (Minimum 7.5% 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.
81
<PAGE>
ITEM 14(C)(1). EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION
REGULATION S-K
4(d) - 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(e) - 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(f) - 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(g) - 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(h) - 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(i) - 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(j) - 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.
4(k) - 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.
82
<PAGE>
ITEM 14(C)(1). EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION
REGULATION S-K
(ii) The following exhibits are filed as a separate section
of this report:
3 - BY-LAWS OF AGWAY INC., AS AMENDED APRIL 26,2000
4 - INSTRUMENTS DEFINING THE RIGHTS OF SECURITY
HOLDERS, INCLUDING INDENTURES
(a) Letter dated November 14, 1997, from The
Chase Manhattan Bank, Successor Trustee
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*
* Included with electronic filing only.
Note : The annual report on Form 11-K for the year ended June 30, 2000 of
Agway Inc. Employees' 401(k) Thrift Investment Plan will be filed
separately at a later date.
83
<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 19, 2000
------------------------------------
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 19, 2000
(DONALD P. CARDARELLI) (Principal Executive Officer)
/s/ Peter J. O'Neill Senior Vice President, September 19, 2000
(PETER J. O'NEILL) Finance & Control
(Principal Financial Officer
& Principal Accounting Officer)
/s/ Gary K. Van Slyke Chairman of the September 19, 2000
(GARY K. VAN SLYKE) Board and Director
/s/ Andrew J. Gilbert Vice Chairman of the September 19, 2000
(ANDREW J. GILBERT) Board and Director
/s/ Keith H. Carlisle Director September 19, 2000
(KEITH H. CARLISLE)
/s/ D. Gilbert Couser Director September 19, 2000
(D. GILBERT COUSER)
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Ralph H. Heffner Director September 19, 2000
(RALPH H. HEFFNER)
/s/ Robert L. Marshman Director September 19, 2000
(ROBERT L. MARSHMAN)
/s/ Jeffrey B. Martin Director September 19, 2000
(JEFFREY B. MARTIN)
/s/ Samuel F. Minor Director September 19, 2000
(SAMUEL F. MINOR)
/s/ Richard H. Skellie Director September 19, 2000
(RICHARD H. SKELLIE)
/s/ Carl D. Smith Director September 19, 2000
(CARL D. SMITH)
/s/ Thomas E. Smith Director September 19, 2000
(THOMAS E. SMITH)
/s/ Joel L. Wenger Director September 19, 2000
(JOEL L. WENGER)
/s/ Edwin C. Whitehead Director September 19, 2000
(EDWIN C. WHITEHEAD)
/s/ William W. Young Director September 19, 2000
(WILLIAM W. YOUNG)
</TABLE>
85
<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
24, 2000. Subsequent to the filing of the annual report on Form 10-K, the
Registrant shall furnish security holders with annual reports.
86
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
EXHIBITS
FILED WITH
FORM 10-K
JUNE 24, 2000
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE
THE SECURITIES EXCHANGE ACT OF 1934
---------
AGWAY INC.
<PAGE>
AGWAY INC.
FORM 10-K
JUNE 2000
EXHIBIT INDEX
Exhibit
Number Title
------- ------
(3) By-Laws
(ii) Agway, Inc. By-Laws as amended to April 26, 2000
(4) Instruments defining the rights of security holders, including
indentures (a) Letter dated November 14, 1997, from The Chase
Manhattan Bank, Successor Trustee
(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*
*Included with electronic filing only.
Note: The annual report on Form 11-K for the year ended June 30, 2000
of Agway Inc. Employees' 401(k) Thrift Investment Plan will be
filed separately at a later date.
