-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I0m+qeGbLJm8erGsZRC3s742iUQDS30P23vDcwBbRUiu0KU6yIffJT9mEjnEoFXU okDnKJa8RcagiOWF0e4z4w== 0000002852-01-500061.txt : 20020410 0000002852-01-500061.hdr.sgml : 20020410 ACCESSION NUMBER: 0000002852-01-500061 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AGWAY INC CENTRAL INDEX KEY: 0000002852 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 150277720 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-22791 FILM NUMBER: 1788659 BUSINESS ADDRESS: STREET 1: 333 BUTTERNUT DR CITY: DEWITT STATE: NY ZIP: 13214 BUSINESS PHONE: 3154496431 10-Q 1 sep10q2001.txt QTR ENDING 9/30/01 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - ---- ACT OF 1934 For the quarterly period ended September 30, 2001 ------------------ OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - ---- ACT OF 1934 For the transition period from to ------------------- ------------------------ Commission file number 2-22791 ------- AGWAY INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 15-0277720 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 333 Butternut Drive, DeWitt, New York 13214 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 315-449-6431 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 9, 2001 - ------------------------ ------------------------------- Membership Common Stock, 97,181 shares $25 par value per share 1 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES INDEX
PAGE NO. ------- PART I. FINANCIAL INFORMATION - ------ --------------------- Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of September 30, 2001 and June 30, 2001................ 3 Condensed Consolidated Statements of Operations and Retained Earnings for the three months ended September 30, 2001 and September 23, 2000................................................. 4 Consolidated Statements of Comprehensive Income for the three months ended September 30, 2001 and September 23, 2000.......................................................................... 5 Condensed Consolidated Cash Flow Statements for the three months ended September 30, 2001 and September 23, 2000.......................................................................... 6 Notes to Condensed Consolidated Financial Statements............................................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 24 PART II. OTHER INFORMATION - ------- ----------------- Item 1. Legal Proceedings...................................................................... 25 Item 6. Exhibits and Reports on Form 8-K....................................................... 25 SIGNATURES...................................................................................... 26
2 PART I. FINANCIAL INFORMATION AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 1. CONDENSED CONSOLIDATED BALANCE SHEETS (Thousands of Dollars)
September 30, June 30, ASSETS 2001 2001 - ------ ------------- -------------- (Unaudited) Current Assets: Cash....................................................................... $ 2,548 $ 0 Trade accounts receivable (including notes receivable of $8,594 and $9,572, respectively), less allowance for doubtful accounts of $9,838 and $10,633, respectively....................................... 169,598 212,793 Leases receivable, less unearned income of $79,260 and $78,126, respectively.................................................. 171,902 165,348 Advances and other receivables............................................. 29,293 19,941 Inventories: Raw materials.......................................................... 5,218 6,122 Finished goods......................................................... 67,344 79,737 Goods in transit and supplies.......................................... 3,085 2,767 ------------- -------------- Total inventories................................................. 75,647 88,626 Restricted cash .......................................................... 7,351 8,306 Prepaid expenses and other assets.......................................... 68,145 66,282 ------------- -------------- Total current assets................................................... 524,484 561,296 Marketable securities available for sale........................................ 38,956 37,556 Other security investments...................................................... 51,279 51,829 Properties and equipment, net................................................... 173,328 177,355 Long-term leases receivable, less unearned income of $183,619 and $186,795, respectively..................................................... 510,671 502,992 Net pension asset............................................................... 233,953 229,678 Other assets .................................................................. 31,378 33,785 Net assets of discontinued operations........................................... 5,879 5,414 ------------- -------------- Total assets...................................................... $ 1,569,928 $ 1,599,905 ============= ============== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current Liabilities: Notes payable.............................................................. $ 203,973 $ 201,980 Current installments of long-term debt..................................... 144,633 127,946 Current installments of subordinated debt.................................. 53,348 55,948 Accounts payable........................................................... 99,096 90,684 Other current liabilities.................................................. 108,044 131,209 ------------- -------------- Total current liabilities.............................................. 609,094 607,767 Long-term debt.................................................................. 224,699 270,743 Subordinated debt............................................................... 456,147 432,162 Other liabilities............................................................... 121,088 119,903 ------------- -------------- Total liabilities...................................................... 1,411,028 1,430,575 Commitments and contingencies................................................... Shareholders' equity: Preferred stock, net....................................................... 36,554 37,603 Common stock, net.......................................................... 2,433 2,445 Accumulated other comprehensive income (loss).............................. 812 (61) Retained earnings.......................................................... 119,101 129,343 ------------- -------------- Total shareholders' equity............................................. 158,900 169,330 ------------- -------------- Total liabilities and shareholders' equity........................ $ 1,569,928 $ 1,599,905 ============= ==============
See accompanying notes to condensed consolidated financial statements. 3 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 1. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (Unaudited) (Thousands of Dollars)
Three Months Ended ------------------------------- September 30, September 23, 2001 2000 ------------- -------------- Net sales and revenues from: Product sales ............................................................... $ 244,455 $ 271,021 Leasing operations........................................................... 21,928 20,468 Insurance operations......................................................... 7,212 6,972 ------------- -------------- Total net sales and revenues............................................. 273,595 298,461 Cost and expenses from: Products and plant operations................................................ 240,304 265,397 Leasing operations........................................................... 8,944 9,293 Insurance operations......................................................... 4,333 4,312 Selling, general and administrative activities............................... 31,265 32,431 ------------- -------------- Total operating costs and expenses....................................... 284,846 311,433 Operating loss.................................................................... (11,251) (12,972) Interest expense, net............................................................. (9,045) (9,011) Other income, net................................................................. 2,096 989 ------------- -------------- Loss before income taxes.......................................................... (18,200) (20,994) Income tax benefit ............................................................... 7,958 8,026 ------------- -------------- Loss before cumulative effect of an accounting change............................. (10,242) (12,968) Cumulative effect of accounting change, net of tax benefit of $723................ 0 (1,057) ------------- -------------- Net loss ......................................................................... (10,242) (14,025) -------------- --------------- Retained earnings, beginning of period............................................ 129,343 141,221 -------------- --------------- Retained earnings, end of period.................................................. $ 119,101 $ 127,196 ============== ===============
See accompanying notes to condensed consolidated financial statements. 4 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 1. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Thousands of Dollars)
Three Months Ended ------------------------------- September 30, September 23, 2001 2000 ------------- -------------- Net earnings (loss)............................................................... $ (10,242) $ (14,025) Other comprehensive income (loss), net of tax: Unrealized gains (losses) on available-for-sale securities: Unrealized holding gains (losses) arising during period.................. 822 295 Reclassification adjustment for (gains) losses included in net earnings.. (5) 0 Deferred gains (losses) on derivatives, net of tax: Cumulative effect of accounting change................................... 0 3,061 Holding gains (losses) arising during period............................. 82 3,402 Reclassification adjustment for (gains) losses included in net earnings.. (26) (664) ------------- ---------------- Other comprehensive income (loss)................................................. 873 6,094 ------------- -------------- Comprehensive loss................................................................ $ (9,369) $ (7,931) ============= ==============
See accompanying notes to condensed consolidated financial statements. 5 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 1. CONDENSED CONSOLIDATED CASH FLOW STATEMENTS (Unaudited) (Thousands of Dollars)
Three Months Ended ----------------------------------- September 30, September 23, 2001 2000 ------------- -------------- Net cash flows provided by (used in) continuing operations................... $ 26,597 $ 8,432 Net cash flows provided by (used in) discontinued operations................. (466) 9,218 ------------- -------------- Net cash flows provided by (used in) operating activities.................... 26,131 17,650 Cash flows provided by (used in) investing activities: Purchases of property, plant and equipment.............................. (1,794) (3,351) Proceeds from disposal of property, plant and equipment................. 2,235 2,170 Leases originated....................................................... (72,646) (76,727) Leases repaid........................................................... 55,742 52,616 Proceeds from sale of marketable securities............................. 2,873 1,473 Purchases of marketable securities...................................... (3,455) (477) Net purchase (sale) of investments in cooperatives...................... (199) 351 ------------- -------------- Net cash flows used in investing activities.................................. (17,244) (23,945) Cash flows provided by (used in) financing activities: Net change in short-term borrowings..................................... 1,993 14,488 Proceeds from long-term debt............................................ 143 562 Repayment of long-term debt............................................. (29,467) (26,969) Proceeds from sale of subordinated debt................................. 38,691 24,604 Maturity and redemption of subordinated debt............................ (17,353) (23,291) Payments on capital leases.............................................. 2,236 (32) Redemption of stock, net ............................................... (1,061) (1,433) Cash dividends paid..................................................... (1,521) (1,592) ------------- -------------- Net cash flows provided by (used in) financing activities.................... (6,339) (13,663) ------------- -------------- Net increase (decrease) in cash and equivalents.............................. 2,548 (19,958) Cash and equivalents at beginning of period.................................. 0 29,244 ------------- -------------- Cash and equivalents at end of period........................................ $ 2,548 $ 9,286 ============= ==============
See accompanying notes to condensed consolidated financial statements. 6 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Thousands of Dollars) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Agway Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended September 30, 2001, are not necessarily indicative of the results that may be expected for the year ending June 30, 2002, due to the seasonal nature of certain major segments of our business. For further information, refer to the consolidated financial statements and notes thereto included in the annual report on Form 10-K for the year ended June 30, 2001. Effective July 1, 2001, we simplified the Agway corporate structure by merging Agway Financial Corporation (AFC) and Agway Holdings Inc. (AHI) into Agway Inc. The more complex structure described below was no longer necessary due to changed circumstances related to Agway's financing. Additionally, Agway Inc. assumed all the assets and liabilities of AFC and AHI and assumed the direct responsibility of securing financing. In connection with the assumption by Agway of the obligations under the corporate debt instruments, AFC, Agway and The Chase Manhattan Bank, a New York banking corporation (the Trustee), entered into a Supplemental Indenture dated as of July 1, 2001 which provides for the assumption by Agway of all rights, responsibilities and obligations of AFC under existing indentures and the debt securities to which they relate. Prior to July 1, 2001 AFC was a wholly owned subsidiary of Agway. AFC's principal business activities consisted 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, AHI, and AHI's subsidiaries. Major holdings of AHI included 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) through June 30, 2001. As a result of an exemptive relief granted pursuant to a "no action letter" issued by the staff of the Securities and Exchange Commission (SEC), AFC did not file periodic reports with the SEC for itself but did report summarized financial information in Agway's financial statement footnotes. With the merger of AFC and AHI into Agway Inc. and the assumption by Agway of the obligations under the debt securities initially issued by AFC, such summarized financial information is no longer appropriate or relevant and therefore is no longer provided. 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. Fiscal Quarter The fiscal quarter-end of Agway Inc. for the first quarter of the current and prior year was September 30 and September 23, respectively. Effective July 1, 2001, the fiscal year-end has been changed to June 30 each year for the Company as a whole and for each of its divisions. Quarterly reports will be at quarters ended on September 30, December 31, and March 31. Reclassifications Certain reclassifications have been made to conform prior year financial statements with the current year presentation. 7 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) (Thousands of Dollars) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) ------------------------------------------------------ Comprehensive Income Comprehensive income consists of net earnings (loss), the net change in unrealized gains and losses on available-for-sale securities, net of tax, and deferred gains and losses on cash flow hedges, net of tax. The unrealized gains and losses on available-for-sale securities are net of tax expense of $421 and $152 for the three months ended September 30, 2001 and September 23, 2000, respectively. The deferred gains and losses on derivatives are net of tax of $37 and $3,866 for the three months ended September 30, 2001 and September 23, 2000. New Accounting Standards The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 (as amended by SFAS No. 138) is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000, (June 25, 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. On June 25, 2000, upon adoption of SFAS No. 133, the Company recorded a net-of-tax cumulative-effect loss of $1,100 to recognize at fair value the component of all option contracts associated with the Company's Energy segment which is excluded from the assessment of hedge effectiveness as allowed by the new standard. The Company also recorded a net-of-tax cumulative-effect gain of $3,100 in other comprehensive income to recognize at fair value all derivative instruments in the Company's Energy segment that are designated and qualify as cash- flow hedges. See Note 6 for further details of the Company's accounting for derivatives and hedging activities. In June 2001, the FASB approved SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," which are effective July 1, 2001 and July 1, 2002, respectively, for the Company. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The adoption of this standard has no impact on the financial statements of the Company. Under SFAS No. 142, amortization of goodwill, including goodwill recorded in past business combinations, will discontinue upon adoption of this standard. In addition, goodwill recorded as a result of business combinations completed after July 1, 2001, will not be amortized. All goodwill and intangible assets will be tested for impairment in accordance with the provisions of the Statement. The Company is currently reviewing the provisions of SFAS No. 142 and assessing the impact of its adoption on July 1, 2002. 8 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) (Thousands of Dollars) 2. BORROWING ARRANGEMENTS ---------------------- Agway's senior debt facility (the Agway Senior Debt) is available for all business operations except for Agway Insurance Company (Insurance) and Telmark and Telmark's subsidiaries (Telmark). The Agway Insurance Company is independently financed through operations and liquidity provided by its investment portfolio. Telmark finances itself through a series of credit arrangements that are independent from the Agway Senior Debt. Each of those arrangements is more fully described in this footnote. Effective July 1, 2001, Agway Financial Corporation (AFC) was merged into Agway, as more fully described in Note 1. As a result, Agway assumed liability for any amounts borrowed by AFC under the Credit Agreement (as defined below). As of September 30, 2001, Agway had certain facilities available with various financial institutions whereby lenders have agreed to provide funds up to $564,200 to separately financed units of Agway as follows: Agway, excluding Telmark and Insurance - $175,000 and Telmark - $389,200. The Agway amount is a $175,000 short- term line of credit, up to $35,000 of which can be used for letters of credit. At September 30, 2001, letters of credit issued, primarily to back Agway insurance programs, under the Agway Senior Debt totaled approximately $28,800. The carrying amounts of Agway's and Telmark's short-term borrowings approximate their fair value and were as follows:
September 2001 Agway Telmark Total -------------- ------------- ------------- -------------- Bank lines of credit................................... $ 25,670 $ 178,303 $ 203,973 ============= ============= ============== Weighted average interest rate......................... 6.93% 3.92% ============= ============= June 2001 Agway Telmark Total --------- ------------- ------------- -------------- Bank lines of credit................................... $ 61,342 $ 140,638 $ 201,980 ============= ============= ============== Weighted average interest rate......................... 7.22% 4.67% ============= =============
Agway Senior Debt The Agway Senior Debt is a syndicated three-year asset-based revolving line of credit for up to $175,000 pursuant to the terms of a credit agreement dated March 28, 2001 (and amended as of September 14, 2001) between Agway, certain of its subsidiaries and a syndicated group of lenders (the Credit Agreement). Interest rates are determined at the option of the Company, as either prime rate, plus 2.00%, or the London Interbank Offering Rate (LIBOR), plus 3.50%. The interest rate charged on bank lines of credit ranged from 3.33% to 7.75% at September 30, 2001. Up to $35,000 of this line of credit can be designated for use as letters of credit. In this asset-based line of credit, the amount available to Agway is the lesser of the "collateral borrowing base" or the $175,000 upper limit of the line of credit. The collateral borrowing base consists of certain of Agway's eligible accounts receivable and inventory (as defined under the Credit Agreement). Certain covenants and conditions of the Credit Agreement, as more fully discussed below, restrict the use of funds and reduce the practical availability of financing under the agreement by $25,000 to a maximum of $150,000. 9 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) (Thousands of Dollars) 2. BORROWING ARRANGEMENTS (continued) ---------------------------------- Agway Senior Debt (continued) As previously reported, based on Agway's June 30, 2001, financial results, Agway was in violation of certain of the financial covenants within the Credit Agreement because it had not maintained the required minimum level of earnings before interest, taxes, depreciation, and amortization (EBITDA) and the minimum ratios of EBITDA to fixed charges and interest on senior debt. On September 14, 2001, the syndicated group of lenders agreed to waive these violations, and further agreed to amend these covenants for each of the succeeding four quarters through June 2002 based on revised operating budgets for that period of time. In exchange for those amendments, Agway agreed to pay 25 basis points in additional interest on its borrowings, grant additional security interests in equipment and properties not previously pledged as collateral (including a pledge of its membership interest in Telmark) and increase the required minimum range of Minimum Capital (as defined below) balances of $455,000 to $465,000, an increase of $15,000, to reflect the actual increased balances outstanding at June 30, 2001, and the projections of the balances. As of September 30, 2001, the Company has met the amended covenants and conditions under the Credit Agreement. As of September 30, 2001, the collateral borrowing base was $111,700, which adequately supported Agway's borrowing needs which totaled $54,500. Management believes that adequate collateral exists and will continue to exist so that the Agway senior debt financing is, and will continue to be, adequate to meet the ongoing needs of Agway. The Credit Agreement has a number of financial covenants which restrict our capital spending and require us to maintain minimum levels of earnings before interest, taxes, depreciation, and amortization (EBITDA), as defined in the Credit Agreement, minimum ratios of EBITDA to fixed charges and interest on senior debt, and a minimum outstanding balance of preferred stock, subordinated debt, and certain debt of a subsidiary. That minimum outstanding balance requirement, as amended, ranges from $455,000 to $465,000 throughout the year. (This minimum amount of capital we must maintain is referred to as the Minimum Capital.) Other conditions of the Credit Agreement prevent us, in certain circumstances, from using funds we borrow under the Credit Agreement to pay interest or dividends on, or repurchase or repay principal of, our subordinated debt or preferred stock. To avoid these use restrictions, the Credit Agreement requires us to have a minimum excess borrowing capacity as defined in the agreement (collateral borrowing base in excess of outstanding loans) of at least $20,000 if we are not in default under the Credit Agreement. If we are in default under the Credit Agreement, to avoid these use restrictions, the minimum excess borrowing capacity we must maintain (collateral borrowing base in excess of outstanding loans) increases to $25,000. Further, if we are in default under the Credit Agreement, we are subject to these use restrictions if: (a) we default on our payment of principal, interest or other amounts due to the lenders under the Credit Agreement; (b) we fail to maintain the cash management procedures we agree to with the lenders under the Credit Agreement; (c) we do not maintain the Minimum Capital balance of $455,000 to $465,000; or (d) the agent under the Credit Agreement provides us with a written notice that such payments are no longer permitted. These conditions, if present, reduce the practical availability under the Agway Senior Debt from $175,000 to $150,000 or $25,000 less than the collateral borrowing base, whichever is lower. The Credit Agreement was designed in part to allow and enable us to continue our past practice of repurchasing, at face value, certain subordinated debt and preferred stock when presented for repurchase prior to maturity. However, while it is our current intent to continue this historic practice, we are under no obligation to repurchase subordinated debt prior to its maturity and preferred stock when so presented, and may stop or suspend this practice at any time or may be required to stop or suspend such practice if we do not continue to meet the conditions of the Credit Agreement, including those described above. 10 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) (Thousands of Dollars) 2. BORROWING ARRANGEMENTS (continued) ---------------------------------- Agway Subordinated Debt Agway registers with the SEC to offer debentures to the public on a continuing basis. The debentures are unsecured and subordinated to all senior debt of Agway. The Agway subordinated debt bears interest payable semiannually on January 1 and July 1 of each year. The interest rates of Agway's money market certificates 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. Agway's subordinated debt is not redeemable by the holder, though Agway, 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, Agway is under no obligation to repurchase such debt when so presented, and may stop or suspend this repurchase practice at any time. In addition, the terms or conditions of the lines of credit may, in certain circumstances, cause Agway to limit or cease its past practices with regard to the repurchase of subordinated debt. Telmark Lines of Credit and Revolving Loans At September 30, 2001, Telmark had credit facilities available from banks aggregating to $389,200. Uncommitted short-term line of credit agreements with various lenders permit Telmark to borrow up to $89,200 on an uncollateralized basis with interest paid upon maturity. The lines bear interest at money market variable rates. A committed $300,000 partially collateralized (by stock in a cooperative bank, which has a book value of $14,695 at September 30, 2001) 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 September 30 and June 30, 2001 under the short-term lines of credit were $76,903 and $71,138, respectively, and under the short-term component of the revolving term loan facility were $101,400 and $69,500, respectively. The portion of the revolving term loan that is long-term at September 30 and June 30, 2001 is $127,000 and $166,000, respectively. Telmark borrows under its 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. Telmark renews its lines of credit annually. The $89,200 lines of credit all have terms expiring at various times during the next 12 months. The $300,000 revolving term loan facility is available through May 1, 2002. Telmark Unsecured Notes Payable to Insurance Companies Telmark has balances outstanding on uncollateralized senior note private placements totaling $149,500 at both September 30 and June 30, 2001. Interest is payable semiannually on each senior note. Principal payments are paid on both a semiannual and an annual basis. The principal bears interest at fixed rates ranging from 6.55% to 8.72%. The notes have various maturities through December 2012. The note agreements are similar to one another and each contains several specific financial covenants that must be complied with by Telmark. As of September 30, 2001, Telmark has complied with all covenants contained in its borrowing agreements. Telmark Lease-Backed Notes Payable to Insurance Companies Telmark, through two wholly owned special purpose subsidiaries, has four classes of lease-backed notes outstanding totaling $82,267 and $90,760 at September 30 and June 30, 2001, respectively. The notes are collateralized by leases, which Telmark sold to these subsidiaries, having an aggregate present value of contractual lease payments equal to or greater than 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 principal bears interest at fixed rates ranging from 6.54% to 9.05% and has various final scheduled maturity in varying amounts and dates through December 2008. 11 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) (Thousands of Dollars) 2. BORROWING ARRANGEMENTS (continued) ---------------------------------- Telmark Subordinated Debentures Telmark registers with the SEC to offer debentures to the public on a continuing basis. The debentures are unsecured and subordinated to all senior debt of Telmark. The interest on the debentures is paid quarterly on January 1, April 1, July 1, and October 1 of each year and may, at the holder's option, be reinvested. 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 outstanding as of September 30, 2001 of $41,544 are due at various dates through March 2009 and bear a weighted average interest rate of 8.2%. Telmark conducts ongoing discussions and negotiations with existing and potential lenders for future financing needs. Telmark has been successful in arranging its past financing needs and believes that its current financial arrangements are adequate to meet its foreseeable operating requirements. There can be no assurance, however, that Telmark will be able to obtain future financing in amounts, or on terms, that are favorable to Telmark. The Company's long-term and subordinated debt outstanding at September 30, 2001, as compared to June 30, 2001, is as follows:
AFC Agway (excluding Telmark) Telmark Total -------------------- -------------------- ----------------- ----------------- 9/01 6/01 9/01 6/01 9/01 6/01 9/01 6/01 --------- --------- --------- --------- --------- --------- --------- --------- Long-term debt........ $ 10,565 $ 10,639 $ * $ 1,790 $ 358,767 $ 386,260 $ 369,332 $ 398,689 Currently payable..... 1,118 1,307 * 143 143,515 126,496 144,633 127,946 --------- --------- --------- --------- --------- --------- --------- --------- Net long-term debt.... $ 9,447 $ 9,332 $ * $ 1,647 $ 215,252 $ 259,764 $ 224,699 $ 270,743 ========= ========= ========= ========= ========= ========= ========= ========= Subordinated debt..... $ 467,951 $ * $ * $ 449,338 $ 41,544 $ 38,772 $ 509,495 $ 488,110 Currently payable..... 45,366 * * 47,628 7,982 8,320 53,348 55,948 ---------- --------- --------- --------- --------- --------- --------- --------- Net subordinated debt. $ 422,585 $ * $ * $ 401,710 $ 33,562 $ 30,452 $ 456,147 $ 432,162 ========= ========= ========= ========= ========= ========= ========= =========
* Effective July 1, 2001 the Agway corporate structure was simplified by merging AFC and AHI into Agway, Inc. See Note 1 for more details. 12 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) (Thousands of Dollars) 3. FINANCIAL INFORMATION CONCERNING SEGMENT REPORTING -------------------------------------------------- Agway is an agricultural cooperative directly engaged in manufacturing, processing, marketing and direct distribution of various animal feeds and agronomic products and services for its farmer-members and other customers, primarily in the northeastern United States and Ohio. In addition, Agway is involved in the manufacturing, processing and repacking of a variety of agricultural products marketed directly to consumers, retailers, wholesalers, and processors; is involved in the distribution of petroleum products; the installation and servicing of heating, ventilation, and air-conditioning equipment; marketing of natural gas and electricity, where deregulation makes that possible; lease financing; the underwriting and sale of certain types of property and casualty insurance; and the sale of health insurance. Agway reports its operations principally in five business segments. 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. Interest income for the Leasing segment is reported as net sales and revenues and interest expense is reported as cost and expenses from leasing operations (cost of sales).
Three Months Ended September 2001 --------------------------------------------------------------------------------------------------- Country Products Agriculture Group Energy Leasing Insurance Other Consolidated ----------- ----------- ----------- ----------- --------- ----------- ------------ Net sales and revenues to unaffiliated customers ... $ 92,037 $ 43,643 $ 108,764 $ 21,928 $ 7,212 $ 11 $ 273,595 Intersegment sales and revenues ................. 302 1,063 78 590 0 (2,033) 0 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total sales and revenues $ 92,339 $ 44,706 $ 108,842 $ 22,518 $ 7,212 $ (2,022) $ 273,595 =========== =========== =========== =========== =========== =========== =========== Earnings (loss) before income taxes ............ $ (8,214) $ (370) $ (10,052) $ 5,299 $ 305 $ (5,168) $ (18,200) =========== =========== =========== =========== =========== =========== =========== Total assets ............... $ 228,739 $ 67,011 $ 166,501 $ 748,473 $ 56,792 $ 302,412 $ 1,569,928 =========== =========== =========== =========== =========== =========== =========== Three Months Ended September 2000 --------------------------------------------------------------------------------------------------- Country Products Agriculture Group Energy Leasing Insurance Other Consolidated ----------- ----------- ----------- ----------- ----------- ----------- ------------ Net sales and revenues to unaffiliated customers ... $ 98,963 $ 43,365 $ 128,683 $ 20,468 $ 6,972 $ 10 $ 298,461 Intersegment sales and revenues ................. 2,230 1,761 85 76 0 (4,152) 0 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total sales and revenues $ 101,193 $ 45,126 $ 128,768 $ 20,544 $ 6,972 $ (4,142) $ 298,461 =========== =========== =========== =========== =========== =========== =========== Earnings (loss) before income taxes ............ $ (8,932) $ (2,284) $ (8,912) $ 4,212 $ 171 $ (5,249) $ (20,994) =========== =========== =========== =========== =========== =========== =========== Total assets ............... $ 248,494 $ 67,725 $ 202,085 $ 693,154 $ 55,032 $ 300,920 $ 1,567,410 =========== =========== =========== =========== =========== =========== ===========
13 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) (Thousands of Dollars) 4. DISCONTINUED OPERATIONS ----------------------- In fiscal 2000, the Agway Board of Directors approved a plan to restructure the retail store distribution system, which called for the sale or closure of the 227 Agway retail properties, and also authorized the sale of the wholesale procurement and supply system to Southern States Cooperative, Inc. An agreement for the sale was executed on June 20, 2000 and the sale 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, constituted a plan to discontinue operations of the retail services business. All retail store operations ceased during fiscal 2001, and the Company is continuing to market the remaining former store properties for sale. The expected loss on discontinuance of the retail operation was estimated and reported in fiscal 2000. No adjustments to those estimates have been required for these discontinued operations during the first quarter of fiscal 2002 or 2001. The net sales and revenues from discontinued operations (retail services business) for the first quarter of 2002 and 2001 were approximately $0 and $19,200, respectively. No interest expense was allocated to discontinued operations for the first quarter of 2002 or 2001. A summary of net assets of discontinued operations was as follows:
September 30, June 30, 2001 2001 ------------- -------------- Net accounts/notes receivable................................................ $ 1,041 $ 1,118 Property, plant and equipment, net........................................... 6,349 8,525 Other assets, net............................................................ 8,678 6,651 Accounts payable and accrued expenses........................................ (9,158) (9,306) Long-term liabilities........................................................ (1,031) (1,574) ------------- -------------- Net assets of discontinued operations........................................ $ 5,879 $ 5,414 ============= ==============
5. AGRICULTURE REALIGNMENT ----------------------- In the second quarter of fiscal 2001, the Agway Board of Directors approved a plan to realign the Agriculture segment of Agway's business (the Agriculture Plan). The Agriculture Plan is intended to realign the Agriculture segment with the continuing concentration of farming and our member farmers in the northeastern United States. The Agriculture Plan calls for the formation of a Feed and Nutrition Division and an Agronomy Division that are being structured to enable Agway to act as a wholesaler of its agricultural products in its traditional marketplace and as a retailer of its agricultural products in select markets. In addition to establishing the management and systems support structure, 62 locations have been identified for conversion to dealer operations, sale, or closure. Approximately 412 employees at these locations may be paid severance. Sale of closed facilities is estimated to take place through June 2003. Gains on the sale of properties are recognized when realized. Inventories have been reduced to their estimated net realizable values. Operating costs during the transition period are recognized when incurred. During this transition period, we expect continued losses from the Agriculture segment's operations, due in part to the costs associated with the Agriculture Plan. The financial impact associated with the Agriculture Plan transactions incurred in the first quarter of fiscal 2002 is summarized below. Plan-related severance cost accruals remaining at September 30, 2001 totaled $700.
Quarter Ended September 30, 2001 ------------------- Net gain on sale of assets................................................. $ 936 Gain (loss) on sale/liquidation of inventory............................... 629 Severance cost adjustments................................................. 200 Other transaction costs.................................................... (201) ------------------- Net gain (loss) on realignment activity.................................... $ 1,564 ===================
14 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) (Thousands of Dollars) 6. ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES ------------------------------------------------- All derivatives are recognized on the balance sheet at their fair value. At the time a derivative contract is entered into, the Company either designates the derivative as a fair value or cash flow hedge. 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 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, commitment, or forecasted transaction, changes in the fair value of the derivative are reported in other comprehensive income. The gains and losses on the derivatives that are reported in comprehensive income are 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 derivatives' changes in fair value and the change in fair value of derivatives designated but not qualifying as effective hedges are recognized in current- period earnings. For all derivatives designated as a hedge, the Company formally documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for the use of the hedging instrument. This documentation includes linking the derivatives that are designated as fair value or cash flow hedges to specific assets or liabilities on the balance sheet, commitments, or to forecasted transactions. The Company assesses at the time a derivative contract is entered into and at least quarterly whether the hedge relationship between the derivative and the hedged item is highly effective in offsetting changes in fair value or cash flows. Any change in fair value of the derivative resulting from ineffectiveness, as defined by SFAS No. 133, is recognized currently in earnings. Further, for derivatives that have ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively. The Company's Energy segment enters into a combination of exchange-traded futures and options contracts and, in certain circumstances, over the counter options (collectively derivatives) to manage the price risk associated with future purchases of the commodities sold in its operations, principally heating oil and propane. Energy has fair value hedges associated with its fixed price purchase contracts and cash flows hedges for its variable priced purchase contracts. The derivatives are specifically matched in volume and maturity with the various purchase commitments of the business and generally expire within a year. The value of option contracts that Energy enters into has two components: time and intrinsic value. The intrinsic value is the value by which the option is in the money. The remaining amount of option value is attributable to time value. Energy does not include the time value of option contracts in its assessment of hedge effectiveness and therefore records changes in the time value component of its options currently in earnings. At September 30, 2001, Energy had a derivative liability of $224. An after-tax total of $56 of deferred net unrealized gains on derivatives instruments was accumulated in other comprehensive income and is expected to be reclassified into earnings during the next twelve months. The pre-tax earnings impact for the time value component of option value not used in assessing hedge effectiveness totaled $1,800 upon the initial adoption of SFAS No. 133 at July 1, 2000, and is included, net of tax, in the cumulative effect of accounting change. For the three months ended September 30, 2001, $1,200 is included as a charge to cost of goods sold for the change in option time value not used in the assessment of hedge effectiveness. In the Agriculture segment, the purchase of corn, soy complex, and oats, which can be sold directly as ingredients or included in feed products sold by Agriculture, creates price risk for this business. Agriculture intends to use natural hedges of purchase and sales contracts whenever possible; however, exchange-traded commodity instruments are used principally to manage the price risk associated with unmatched commodity purchases or sales. Agriculture matches all derivative contracts with their underlying purchase or sale contracts; however, due to the differences in the changes in the commodity cash price at an Agriculture location versus the Chicago Board of Trade, a highly effective hedging relationship (as defined by SFAS No. 133) has not been achieved. Therefore, the derivatives used in Agriculture are marked to market currently in earnings. The impact of marking these derivatives to market for the three months ended September 30, 2001, was immaterial. 15 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) (Thousands of Dollars) 7. COMMITMENTS AND CONTINGENCIES ----------------------------- Environmental We 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. We are 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. As a result of the use and handling of hazardous substances in our normal operations, an unexpected environmental event or significant changes in environmental compliance requirements could have a material adverse impact on our financial condition and results of operations. We continually monitor our operations with respect to potential environmental issues, including changes in legal requirements and remediation technologies. Our recorded liability in our financial statements reflects those specific issues where we think remediation activities are likely and where we can estimate the cost of remediation. Estimating the extent of our responsibility for a particular site and the method and ultimate cost of remediation of that site require that we make a number of assumptions. As a result, the ultimate outcome of remediation of a site may differ from our estimates. However, we believe that our past experience provides us with a reasonable basis for estimating our liability. When we receive additional information we adjust our estimates as necessary. While we do not anticipate that any such adjustment will be material to our financial statements, the result of ongoing and/or future environmental studies or other factors could alter this expectation and require that we record additional liabilities. We currently can't determine whether we will incur additional liabilities in the future or, if we do, the extent or amount of such additional liabilities. 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. Insurance Coverage The Company uses various insurance companies to insure its primary casualty insurance risks as well as to obtain various umbrella/excess liability coverages. On October 3, 2001, the Commonwealth Court of Pennsylvania approved the petition of the Pennsylvania Insurance Commissioner for an Order of Liquidation for Reliance Insurance Company (RIC). Agway has obtained insurance coverage from RIC in various segments of its insurance programs since 1991. Presently, Agway has five pending claims which could be affected by this liquidation. Total covered amounts by RIC on these claims are currently estimated at $1,600. In addition, future claims could be affected by this liquidation. The liquidation statute establishes certain priorities for payment of claims. Direct policyholders are one of the top priorities for payment. To the extent, if any, RIC is unable to meet its claim obligations to its policyholders and other creditors, certain state insurance guarantee funds may provide additional sources of claim payments. The Company cannot at this time determine the ultimate outcome of this liquidation, its impact on outstanding and future claims against RIC policies held by Agway, or the impact on the Company's financial results. It is anticipated that due to this proceeding the Company, at a minimum, can expect delays in receiving cash settlement for claims outstanding under RIC policies. 16 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) (Thousands of Dollars) RESULTS OF OPERATIONS - --------------------- Agway is including the following cautionary statement in this Form 10-Q to make applicable and take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, 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 in this report and include the factors set forth below. Other factors that could cause actual results to differ materially include uncertainties of economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. 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 "intend," "believe," "expect," and "anticipate" and phrases "it is probable" and "it is possible" or similar words or phrases identify forward-looking statements. Agway's net sales and revenues and operating results are significantly impacted by seasonal fluctuations due to the nature of its operations and the geographic location of its service area, which is primarily the northeastern United States. Agriculture net sales and revenues are traditionally higher in the spring as customers acquire products to initiate the growing season. Energy generally realizes significantly higher net sales and revenues in the winter months due to the higher demand from cold winter conditions. Country Products Group, Leasing, and Insurance are not materially impacted by seasonal fluctuations. Amounts in the following narrative have been rounded to the nearest hundred thousand. Consolidated Results - -------------------- Consolidated net sales and revenues of $273,600 for the fiscal quarter ended September 30, 2001, decreased $25,000 (8%) as compared to the same period in the prior year. The decrease in the three-month period was substantially the result of decreased sales in the Energy and Agriculture segments, as more fully described below. Consolidated pre-tax loss of $18,200 for the three months ended September 30, 2001, improved $2,800 (13%) over the same period in the prior year. Improvements in Agriculture, Country Products Group, Leasing, and Insurance were partially offset by a decline in Energy. See further explanation of pre-tax results by business segment below. Net corporate costs of $5,200 remained constant for the three-month period as compared to the prior year. Effective June 25, 2000, Agway adopted a new accounting requirement for all derivative instruments. As a result, a loss on the cumulative effect of accounting change, net of tax of $1,100, is reflected in the first quarter of the prior year. 17 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) (Thousands of Dollars) Agriculture - ----------- Total Agriculture sales and revenues of $92,300 for the three months ended September 30,2001, decreased $8,900 (9%) as compared to $101,200 for the same period in the prior year. The decrease in sales for the three-month period was principally due to an $8,700 (21%) decrease in sales in the Agronomy business over the same period in the prior year. About half of the decline in sales was a result of a return to normal summer sales levels in the current year compared to a peak in summer sales last year caused by delayed spring planting in that year. Also contributing to the decrease in sales was the closing of agronomy locations during the latter half of the prior year as part of a planned business realignment. The Feed business sales and revenues of $58,100 for the quarter ended September 30, 2001 increased $1,400 (3%) from $56,700 in the first quarter of the prior year. The increase in sales is the result of an increase in revenues in the tested specific pathogen free (TSPF) heifer-rearing services from continued growth of utilization of these facilities. The remaining feed operations showed a less than 1% increase in sales. The average selling price of feed has remained flat compared to the same period in the prior year. The selling price of feed products is largely driven by commodity prices, which have also remained flat compared to the prior year. Agriculture pre-tax loss of $8,200 for the three months ended September 30, 2001 decreased $700 (8%) as compared to a pre-tax loss of $8,900 for the same period in the prior year. The overall decrease in pre-tax loss resulted from a combination of factors. A negotiated settlement of $900 was received in the first quarter of fiscal 2002 with no comparable amount received in the first quarter of the prior year. Additionally, the impacts of the Agriculture realignment plan during the first quarter of fiscal 2002 resulted in $1,600 in net gains on the sale of property and inventory and also created expense reductions of approximately $2,600 as compared to the prior year, primarily from fewer operating Agriculture locations. These improvements were substantially offset by declines in Feed and Agronomy margins. The declines in Feed and Agronomy margins resulted from higher Agronomy commodity pricing as compared to the prior year and the loss of revenues from closed Feed and Agronomy locations which combined to reduce margin levels in the first quarter of 2002 as compared to the same period in the prior year. Country Products Group - ---------------------- Country Products Group (CPG) total sales and revenues of $44,700 for the three-months ended September 30, 2001, decreased $400 (1%) as compared to the same period in the prior year. The decline in sales is primarily in the Produce Group due to the closing of the Texas produce operation, which accounted for a decrease in sales of $2,900 (84%) as compared to the same period in the prior year. This decrease was partially offset by an increase in the remaining Produce Group locations sales and revenues of $1,700 (6%). The sunflower business also experienced an increase in sales of $1,000 (11%) as compared to the same period in the prior year. The sales increase was in human edible sunflower seeds as a result of increased demand for their use in snack foods, as well as continued growth of new bakery product lines, which were initiated in the second half of the prior year. Additionally, poor sunflower seed crop in the prior year adversely impacted sunflower sales in the first quarter of the prior year. Finally, the Investment Group sales increased $500 (83%) substantially due to the sale of Optigen 1200, a controlled-release nitrogen feed product. CPG pre-tax loss of $400 for the three-months ended September 30, 2001 represents an improvement in results of $1,900 (84%) as compared to a pre-tax loss of $2,300 for the same period in the prior year. Produce operations that were shut down during 2001 incurred $1,200 of losses in the first quarter of the prior year while generating $200 of income during the final wind-down of these operations in the first quarter of 2002. In addition, the sunflower business operations pre-tax profits increased $700 over the same period in the prior year due to higher margins from the new bakery products lines combined with lower margins experienced in the first quarter of the prior year due to high product costs and increased production costs associated with the poor sunflower crop in that year. These improvements were partially offset by a decrease of $200 in CPG's remaining businesses. 18 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) (Thousands of Dollars) Energy - ------ Energy sales and revenues of $108,800 for the three months ended September 30, 2001, decreased $20,000 (15%) as compared to the same period in the prior year. Overall, sales dollar decreases from liquid product volume was $9,000 (8%) during the three-month period as compared to the same period in the prior year. The volume decreases were the result of both a combination of warmer weather conditions in our primary markets in the current quarter as compared to the same period in the prior year, and the timing of Energy's summer fill program which occurred in the spring of 2001 as compared to the first quarter of the prior year. As a result of market conditions and a decrease in commodity prices, Energy experienced sales dollars decreases relating to price in its liquid products of $13,500 (12%) for the three- month period. Additionally, sales and revenues from the electric and natural gas marketing business improved $2,500 ( 51%) while the heating , ventilation and air conditioning installation and service business remained constant with the comparable period in the prior year. Energy pre-tax loss of $10,100 for the three-month period ended September 30, 2001, represents an increased loss of $1,100 (13%) as compared to the same period in the prior year. In the three-month period ended September 30, 2001, overall gross margin dollars decreased $800 (3%) over the same period in the prior year, and were driven by the decrease in sales noted above. Additionally, an increase of $300 (19%) in interest expense was incurred to cover the increase in cost of capital as compared to the same period in the prior year. Leasing - ------- Total revenue of $22,500 for the three-month period ended September 30, 2001, increased $2,000 (10%) as compared to the same period in the prior year. These increases were primarily due to a higher average investment in leases and a higher income rate on the outstanding portfolio. Telmark's average net investment in leases increased $63,200 (10%) in the three-month period ended September 30, 2001, as compared to the same period in the prior year. Pre-tax earnings from operations of $5,300 for the three months ended September 30, 2001, increased $1,100 (26%) as compared to the same period in the prior year. The total revenue increases noted above were partially offset by an increase in total expenses of $900 (5%) for the three months ended September 30, 2001, as compared to the same period in the prior year. The increase in total expenses resulted from a $500 increase provision for credit losses, a $300 increase in selling, general and administrative costs, and a $200 increase in interest expense. The increases can be attributable to the growing lease portfolio. Insurance - --------- Insurance Group total net revenues of $7,200 for the three-month period ended September 30, 2001, increased $200 (3%) as compared to the same period in the prior year. The increase was in net earned premiums of the Agway Insurance Company as sales initiatives caused the increase in net premiums over the same period in the prior year. Pre-tax earnings of the Insurance Group of $300 for the three-month period ended September 30, 2001, increased $100 (62%) as compared to the same period in the prior year. The improvement in pre-tax earnings for the three-month period resulted substantially from favorable case reserve experience. The General Agency experienced a pre-tax break-even position for the first quarter ended 2002 and 2001. 19 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) (Thousands of Dollars) LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash generated from external borrowings and/or operations are Agway's major ongoing sources of funds to finance capital improvements, business acquisitions, shareholder dividends, and a growing lease portfolio at Telmark. The following is a summary of net cash flows for the three months ended:
September 30, September 23, Increase 2001 2000 (Decrease) -------------- ------------- ------------- Net cash flows provided by (used in): Operating activities...................................... $ 26,131 $ 17,650 $ 8,481 Investing activities...................................... (17,244) (23,945) 6,701 Financing activities...................................... (6,339) (13,663) 7,324 -------------- ------------- -------------- Net increase (decrease) in cash and equivalents................. $ 2,548 $ (19,958) $ 22,506 ============== ============= ==============
Cash Flows Provided By Operating Activities Cash flows from continuing operations of $26,100 improved $8,500 over the prior year. Primarily these improvements are related to working capital needs. As of September 30, 2001, working capital items generated cash flows of $31,000 as compared to generating cash flows of $9,400 for the same period in the prior year. The generation of cash flows from working capital items was a result of declines in receivables and inventory, principally in Energy and Agriculture. Cash flows for discontinued operations used cash of $500 as of September 30, 2001, compared to generating cash flows of $9,200 for the same period in the prior year. The generation of cash flows from discontinued operations as of September 30, 2000, was from the sale of former retail locations. As discussed in Note 7 to the financial statements, the Company has obtained insurance coverage from Reliance Insurance Company (RIC) in various segments of its insurance programs since 1991. Agway currently has five pending claims with RIC (estimated at approximately $1,600) and may make more claims in the future under policies issued by RIC. On October 3, 2001, the Commonwealth Court of Pennsylvania approved the petition of the Pennsylvania Insurance Commissioner for an Order of Liquidation for RIC. While the impact, if any, of the liquidation of RIC on the Company cannot be predicted at this time, if RIC is unable to satisfy, or is delayed in satisfying, its obligations to the Company, such failure or delay in paying claims could negatively affect our liquidity. Cash Flows Used in Investing Activities The cash flow used in investing activities decreased in the three months ended September 30, 2001, by $6,700 as compared to the same period in the prior year. The most significant use of cash 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 decreased $7,200 compared to the same period in the prior year. Cash Flows Used in Financing Activities Agway's senior debt facility (the Agway Senior Debt) is available for all business operations except for Agway Insurance Company (Insurance) and Telmark and Telmark's subsidiaries (Telmark). The Agway Insurance Company is independently financed through operations and liquidity provided by its investment portfolio. Telmark finances itself through a series of credit arrangements that are independent from the Agway Senior Debt. Each of those arrangements is more fully described in this footnote. Effective July 1, 2001, Agway Financial Corporation (AFC) was merged into Agway, as more fully described in Note 1. As a result, Agway assumed liability for any amounts borrowed by AFC under the Credit Agreement (as defined below). 20 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) (Thousands of Dollars) LIQUIDITY AND CAPITAL RESOURCES (continued) - ------------------------------------------ Cash Flows Used in Financing Activities (continued) Agway Senior Debt The Agway Senior Debt is a syndicated three-year asset-based revolving line of credit for up to $175,000 pursuant to the terms of a credit agreement dated March 28, 2001 (and amended as of September 14, 2001) between Agway, certain of its subsidiaries and a syndicated group of lenders (the Credit Agreement). Interest rates are determined at the option of the Company, as either prime rate, plus 2.00%, or the London Interbank Offering Rate (LIBOR), plus 3.50%. The interest rate charged on bank lines of credit ranged from 3.33% to 7.75% at September 30, 2001. Up to $35,000 of this line of credit can be designated for use as letters of credit. In this asset-based line of credit, the amount available to Agway is the lesser of the "collateral borrowing base" or the $175,000 upper limit of the line of credit. The collateral borrowing base consists of certain of Agway's eligible accounts receivable and inventory (as defined under the Credit Agreement). Certain covenants and conditions of the Credit Agreement, as more fully discussed below, restrict the use of funds and reduce the practical availability of financing under the agreement by $25,000 to a maximum of $150,000. As previously reported, based on Agway's June 30, 2001, financial results, Agway was in violation of certain of the financial covenants within the Credit Agreement because it had not maintained the required minimum level of earnings before interest, taxes, depreciation, and amortization (EBITDA) and the minimum ratios of EBITDA to fixed charges and interest on senior debt. On September 14, 2001, the syndicated group of lenders agreed to waive these violations, and further agreed to amend these covenants for each of the succeeding four quarters through June 2002 based on revised operating budgets for that period of time. In exchange for those amendments, Agway agreed to pay 25 basis points in additional interest on its borrowings, grant additional security interests in equipment and properties not previously pledged as collateral (including a pledge of its membership interest in Telmark) and increase the required minimum range of Minimum Capital (as defined below) balances of $455,000 to $465,000, an increase of $15,000, to reflect the actual increased balances outstanding at June 30, 2001, and the projections of the balances. As of September 30, 2001, the Company has met the amended covenants and conditions under the Credit Agreement. As of September 30, 2001, the collateral borrowing base was $111,700, which adequately supported Agway's borrowing needs which totaled $54,500. Management believes that adequate collateral exists and will continue to exist so that the Agway senior debt financing is, and will continue to be, adequate to meet the ongoing needs of Agway. The Credit Agreement has a number of financial covenants which restrict our capital spending and require us to maintain minimum levels of earnings before interest, taxes, depreciation, and amortization (EBITDA), as defined in the Credit Agreement, minimum ratios of EBITDA to fixed charges and interest on senior debt, and a minimum outstanding balance of preferred stock, subordinated debt, and certain debt of a subsidiary. That minimum outstanding balance requirement, as amended, ranges from $455,000 to $465,000 throughout the year. (This minimum amount of capital we must maintain is referred to as the Minimum Capital.) Other conditions of the Credit Agreement prevent us, in certain circumstances, from using funds we borrow under the Credit Agreement to pay interest or dividends on, or repurchase or repay principal of, our subordinated debt or preferred stock. To avoid these use restrictions, the Credit Agreement requires us to have a minimum excess borrowing capacity as defined in the agreement (collateral borrowing base in excess of outstanding loans) of at least $20,000 if we are not in default under the Credit Agreement. If we are in default under the Credit Agreement, to avoid these use restrictions, the minimum excess borrowing capacity we must maintain (collateral borrowing base in excess of outstanding loans) increases to $25,000. Further, if we are in default under the Credit Agreement, we are subject to these use restrictions if: 21 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) (Thousands of Dollars) LIQUIDITY AND CAPITAL RESOURCES (continued) - ------------------------------------------- Cash Flows Used in Financing Activities (continued) Agway Senior Debt (continued) (a) we default on our payment of principal, interest or other amounts due to the lenders under the Credit Agreement; (b) we fail to maintain the cash management procedures we agree to with the lenders under the Credit Agreement; (c) we do not maintain the Minimum Capital balance of $455,000 to $465,000; or (d) the agent under the Credit Agreement provides us with a written notice that such payments are no longer permitted. These conditions, if present, reduce the practical availability under the Agway Senior Debt from $175,000 to $150,000 or $25,000 less than the collateral borrowing base, whichever is lower. The Credit Agreement was designed in part to allow and enable us to continue our past practice of repurchasing, at face value, certain subordinated debt and preferred stock when presented for repurchase prior to maturity. However, while it is our current intent to continue this historic practice, we are under no obligation to repurchase subordinated debt prior to its maturity and preferred stock when so presented, and may stop or suspend this practice at any time or may be required to stop or suspend such practice if we do not continue to meet the conditions of the Credit Agreement, including those described above. As of September 30, 2001, the total amount outstanding under the Credit Agreement was $54,500, of which $28,800 was designated to letters of credit principally in support of Agway insurance programs under the Agway Senior Debt. Interest rates, as amended in the manner described below, are determined at the option of the Company, as either prime rate, plus 2.00%, or the London Interbank Offering Rate (LIBOR) rate, plus 3.50%. Agway Subordinated Debt Agway registers with the Securities and Exchange Commission (SEC) to offer debentures to the public on a continuing basis. The debentures are unsecured and subordinated to all senior debt at Agway. The Agway subordinated debt bears interest payable semiannually on January 1 and July 1 of each year. The interest rates of Agway's money market certificates 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. Agway's subordinated debt is not redeemable by the holder, though Agway, 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, Agway is under no obligation to repurchase such debt when so presented, and may stop or suspend this repurchase practice at any time. In addition, the terms or conditions of the lines of credit may, in certain circumstances, cause Agway to limit or cease its past practices with regard to the repurchase of subordinated debt. On November 1, 2001, $43,100 of subordinated money market certificate obligations of Agway matured. 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. 22 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) (Thousands of Dollars) LIQUIDITY AND CAPITAL RESOURCES (continued) - ------------------------------------------- Cash Flows Used in Financing Activities (continued) Sources of Long-Term Financing Sources of long-term financing include the following as of September 2001:
Agway Inc. (excluding Source of debt Telmark) Telmark Total - -------------- ----------- ----------- ----------- Banks - due 2/02 to 4/04, interest at a weighted average rate of 6.9% with a range of 5.36% - 7.47% ............................. $ 0 $ 127,000 $ 127,000 Insurance companies - due 12/01 to 12/12, interest at a weighted average rate of 7.49% with a range of 6.55% - 8.72%............................. 0 149,500 149,500 Capital leases and other - due 2001 to 2018, interest at a weighted average rate of 9.3% with a range of 6.54% to 10%.............. 10,565 82,267 92,832 ----------- ----------- ----------- Long-term debt........................................................ 10,565 358,767 369,332 Subordinated money market certificates - due 10/01 to 10/15, interest at a weighted average rate of 8.24% with a range of 4.50% - 9.75%.......... 464,119 0 464,119 Subordinated debentures - due 3/02 to 3/09, interest at a weighted average rate of 8.19% with a range of 6.25% to 9.00%............................ 3,832 41,544 45,376 ----------- ----------- ----------- Total debt............................................................ $ 478,516 $ 400,311 $ 878,827 =========== =========== ===========
For a further description of the Company's credit facilities available at September 30, 2001, see Note 2 to the Condensed Consolidated Financial Statements. Telmark Liquidity Telmark's ongoing availability of adequate financing to maintain the size of our portfolio and to permit lease portfolio growth is key to Telmark's continuing profitability and stability. We have principally financed Telmark's operations, including the growth of its lease portfolio, through borrowings under its lines of credit, private placements of debt with institutional investors and other term debt, subordinated debentures, lease-backed notes, principal collections on leases and cash provided from operations. Virtually all of the cash flows from both operations and financing activities were invested in growth of the lease portfolio. Telmark has been successful in arranging its past financing needs and believes that its current financing arrangements are adequate to meet its foreseeable operating requirements. There can be no assurance, however, that Telmark will be able to obtain future financing in amounts or on terms that are acceptable. Telmark's inability to obtain adequate financing would have a material adverse effect on its operations. In addition, Agway's membership interest in Telmark has been pledged as additional collateral with respect to certain obligations of Agway. While the terms of the pledge generally do not restrict Telmark's operations, Telmark has acknowledged and agreed to the pledge, has agreed to cooperate with Agway's lenders in respect to their rights under the pledge, and has agreed to refrain from creating any lien or encumbrance with respect to the equity of Telmark subsidiaries. A foreclosure on the pledge following an event of default would result in a change of control, giving Telmark's senior lenders rights to demand repayment of existing outstanding debt. Depending upon the financial markets and Telmark's financial circumstances at that time, if the senior lenders chose to execute those rights, it could have a material adverse effect on Telmark's results of operations, liquidity and financial position. Management conducts ongoing discussions and negotiations with existing and potential lenders for future financing needs. See Note 2 to the Condensed Financial Statements, "Borrowing Arrangements." 23 PART I. FINANCIAL INFORMATION (continued) AGWAY INC. AND CONSOLIDATED SUBSIDIARIES Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Unaudited) (Thousands of Dollars) COMMODITY PRICE EXPOSURE - ------------------------ In the normal course of our operations, we have exposure to market risk from price fluctuations associated with commodities such as corn, soy complex, oats, gasoline, distillate and propane. These price fluctuations impact commodity inventories, product gross margins, and anticipated transactions in our Agriculture and Energy businesses. We manage the risk of market price fluctuations of some of these commodities by using commodity derivative instruments. Commodity derivative instruments include exchange-traded futures and option contracts and, in limited circumstances, over-the-counter contracts with third parties. We have policies that specify what we can use commodity derivative instruments for and set limits on the maturity of contracts we enter into and the level of exposure to market price fluctuations that we are trying to protect ourselves against (or hedge). However, because the commodities markets are very volatile, our gains or losses on these contracts might not fully offset the corresponding change in the prices of the underlying commodity, which could lower our earnings. A sensitivity analysis has been prepared to estimate Agway's exposure to market risk of its commodity instrument positions as of September 2001 and 2000. 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 September 2001 and 2000, assuming a 10% hypothetical adverse change in the underlying commodity price, the potential decrease in fair value of our Energy business commodity instruments was $2,300 and $5,900, respectively. The potential loss in fair value of commodity instruments for Agriculture was immaterial for both periods. 24 PART II. OTHER INFORMATION AGWAY INC. AND CONSOLIDATED SUBSIDIARIES (Thousands of Dollars) Item 1. Legal Proceedings - -------------------------- On May 5, 2000, approximately 90 North Dakota farmers (Jorgenson, et al. v. Agway Inc.) filed a Complaint against Agway Inc. in the U.S. District Court, District of North Dakota, Southeastern Division, alleging that they bought and planted a variety of confection sunflower seed during the spring of 1999 from Agway Inc. which was defective. The farmers allege that as a result of the defective seed, they are entitled to monetary damages in the amount of approximately $2,900. In addition, upon referral from the U.S. District Court, the North Dakota Supreme Court ruled in May 2001 that the farmers may proceed with their claims that Agway Inc. is liable under the North Dakota Consumer Fraud Act (Act). Possible remedies under the Act include treble damages and attorneys' fees. In October 2001, the U.S. District allowed the farmers to amend their Complaint to add approximately 18 additional farmers, a claim for fraud and a claim for punitive damages. Agway Inc. has denied and is vigorously contesting the farmers' allegations. While we do not anticipate any material adjustments to our financial statements from these claims, it is not possible at this time to determine what the ultimate outcome of these claims will be. Item 3. Defaults Upon Senior Securities - ---------------------------------------- As previously reported, based on Agway's June 30, 2001, financial results, Agway was in violation of certain financial covenants within its Credit Agreement. On September 14, 2001, the lenders agreed to waive these violations, and further agreed to amend the covenants. As of September 30, 2001, the Company has met the amended covenants and conditions under the Credit Agreement. See Note 2 of the condensed financial statements for further details. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits (3) (ii) By-laws of Agway Inc., as amended October 22, 2001 (b) Reports on Form 8-K Agway filed a report on Form 8-K on July 2, 2001 announcing the July 1, 2001 merger of Agway Financial Corporation with and into Agway Inc. Agway filed a report on Form 8-K on August 20, 2001 announcing the financial results for the fiscal year ended June 30, 2001. Additionally, the Company announced that the Company was in violation of bank covenants as of June 30, 2001, and that it was currently negotiating with the lenders to receive a waiver and amendments. (Note: On September 14, 2001, lenders agreed to waive these violations, and further agreed to amend these covenants for each succeeding four quarters through June 2002 based on revised operating budgets for that period of time.) 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AGWAY INC. --------------------------------------- (Registrant) Date November 14, 2001 /s/ PETER J. O'NEILL --------------------------- ---------------------------------------- Peter J. O'Neill Senior Vice President, Finance & Control, (Principal Financial Officer and Chief Accounting Officer) 26 EX-3.(II) 3 bylaws1001.txt BY-LAWS AMENDED OCT. 22, 2001 BY-LAWS of AGWAY INC. As Amended to October 22, 2001 ------------------------------ GENERAL 1.1 Certificate of Incorporation. The certificate of -------------------------------- incorporation of the corporation is hereby made a part of these by-laws and all matters hereinafter contained in these by-laws shall be subject to such provisions in regard thereto, if any, as are set forth in the certificate of incorporation. All references in these by-laws to the certificate of incorporation shall be construed to mean the certificate of incorporation as from time to time amended. The name and purposes of the corporation shall be as set forth in the certificate of incorporation. 1.2 Definitions. As used in these by-laws, the following ----------- terms have the following meanings: (a) "Person" means any individual, partnership, firm, corporation, association, or any other form of business organization. (b) "Farmer" means any person who produces agricultural products for sale. (c) "Member" means any person meeting the qualifications specified in section 2.1 of these by-laws; and for purposes solely of sections 9.1-9.4 of these by-laws, also includes any contract patron. (d) "Contract Patron" means any person who is a party to a contract with the corporation providing for the payment of patronage refunds authorized by section 9.6 of these by-laws. MEMBERSHIP 2.1 Members. The following persons shall be members of the ------- corporation: (a) Any farmer or cooperative organization of farmers which: 1 (1) is a record holder of one share of $25 par value membership common stock of this corporation, and (2) has purchased farm supplies or farm services or has marketed farm products through this corporation since the beginning of the preceding fiscal year of the corporation. A cooperative organization of farmers, which acts only as a dealer of the corporation in the distribution of farm supplies, shall not thereby be qualified for membership. 2.2 Non-Members. All persons or organizations, not qualified ----------- for membership under section 2.1 of these by-laws, who shall purchase from or market through the corporation shall be non-members of the corporation, and, except in the case of contract patrons, shall not be entitled to share in refunds based on their patronage. 2.3 Privileges of Membership. Each member shall have the ------------------------ following rights and privileges: (a) As a stockholder, to participate in and vote at meetings of stockholders as provided in section 2.4 of these by-laws. (b) To participate in patronage refunds as provided in sections 9.1-9.5 of these by-laws. 2.4 Voting. ------ (a) All voting rights shall be vested in the $25 par value membership common stock of the corporation, the record holder of which shall be entitled to only one vote to be cast by the holder thereof in person, or by proxy, at any meeting of stockholders; each holder of membership common stock shall be entitled to only one vote regardless of the number of shares held. (b) At any meeting of stockholders at which there is an election of directors, directors shall be elected by a vote of the holders of a plurality of the outstanding shares present in person or represented by proxy at the meeting and entitled to vote thereon. (c) Except as otherwise provided by the laws of Delaware, the certificate of incorporation or these by-laws, all other actions taken at a meeting of stockholders shall be determined by a majority vote at a meeting at which a quorum is present. 2 2.5 Representative of a Member or Stockholder. If any member ----------------------------------------- or stockholder is other than a natural person, such member or stockholder may be represented by any officer thereof or by any other individual duly authorized by a writing executed and filed with the secretary of the corporation. 2.6 Non-Transferability of Membership. No membership shall ---------------------------------- be assigned or transferred either voluntarily or involuntarily or by operation of law. 2.7 Termination of Membership. A membership shall be --------------------------- terminated: (a) By transfer or the tender for purchase by the corporation by a member of the member's share of $25 par value membership common stock of the corporation, such termination to be effective upon the recording of such transfer or purchase upon the stock records of the corporation. (b) By the call for redemption by the corporation of the member's share of $25 par value membership common stock of the corporation because the person has ceased to be a member of the corporation as defined in section 2.1 of these by-laws. (c) By the call for redemption by the corporation of the member's share of $25 par value membership common stock of the corporation because such redemption is necessary to maintain the status of the corporation as an agricultural cooperative under applicable law. 2.8 Membership Common Stock. The ownership of $25 par value ----------------------- membership common stock of the corporation is limited to one share per holder. CAPITAL STOCK AND PATRONS' INTERESTS 3.1 Capital Stock. The amount of the authorized capital stock ------------- and the par value of the shares shall be as fixed in the certificate of incorporation. The issuance of any shares of capital stock of any class shall be authorized by the board of directors by resolution fixing the consideration for such issue. 3.2 Certificates of Stock. Certificates of stock will be ----------------------- signed in the name of the corporation by the president or a vice-president and the treasurer or an assistant treasurer or the secretary or an assistant secretary. Such signatures may be facsimile. Certificates shall be numbered and registered in the order in which they are issued and the seal of the corporation shall be affixed thereto. 3 Notwithstanding anything to the contrary in this section 3.2 of these by- laws, certificates of stock shall be in such form as shall, in conformity to law, be prescribed from time to time by the board of directors. 3.3 Loss of Certificate. In case of the alleged loss or -------------------- destruction or of the mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such terms in conformity with law as the board of directors may prescribe. The corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may, in its discretion and as a condition precedent to the issuance thereof, require the owner of the lost, stolen or destroyed certificate, or the owner's legal representative, to give the corporation (i) an affidavit (in form and substance satisfactory to the corporation) describing the loss, theft or destruction of any such certificate, and/or (ii) a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. 3.4 Transfer of Shares of Stock. Shares of stock of the ------------------------------- corporation shall be transferable only on the books of the corporation by assignment in writing by the owner thereof, the owner's attorney legally constituted, or the owner's legal representatives, upon surrender and cancellation of the certificates therefor and, in the case of common stock, only with the written consent of the corporation, endorsed on the certificate of stock. Any actual or attempted transfer of the corporation's stock in violation of this Section 3.4 shall be void and the corporation shall treat the original owner as the continuing owner of the stock for all purposes. Shares of common stock may not be transferred except absolutely. The corporation and its transfer agents and registrars, if any, shall be entitled to treat the holder of record of any share or shares of stock as the absolute owner thereof for all purposes except as otherwise expressly provided by the laws of the State of Delaware. 3.5 Redemption or Purchase of Shares of Stock. Whenever any ----------------------------------------- stock is called by the corporation for redemption, or whenever any $25 par value membership common stock held by a person who has ceased to be a member is presented by the holder for sale to the corporation, the certificates representing such stock duly endorsed for transfer and bearing any appropriate transfer stamps shall be delivered at the principal office of the corporation or at such bank or trust company as may be specified in the call by the corporation. Payment for any stock so delivered shall be made by the corporation promptly after such delivery. After call duly made in accordance with the foregoing provisions (unless such stock shall have been duly delivered as required by such call and the corporation shall have failed to make payment therefor within one week after such delivery), the stock covered by such call shall be deemed to have been purchased by the corporation on the date fixed by the call for redemption and the holder thereof shall not thereafter be entitled to vote in 4 respect to such stock, or otherwise to enjoy any of the privileges and benefits of ownership thereof, but only to receive, after delivery of the certificates therefor, payment for such stock as hereinbefore provided. 3.6 Record Date. The board of directors may fix in advance a ----------- date not exceeding sixty (60) nor less than ten (10) days preceding the date of any meeting of the stockholders, or not exceeding sixty (60) days preceding the date for payment of any dividend, as a record date for the determination of the stockholders entitled to notice of, and to vote at any such meeting or entitled to receive a payment of any such dividend; and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at such meeting, or to receive payment of such dividend, notwithstanding any transfer of any stock on the books of the corporation after such record date so fixed. 3.7 Rights, Limitations and Priorities of Patrons' Interest. ------------------------------------------------------- (a) Revolving Fund Certificates. Revolving fund ------------------------------- certificates issued by any predecessor corporation in lieu of cash patronage refunds, or by this corporation in exchange for such certificates issued by a predecessor corporation, shall be redeemed at face amount, fully or pro rata, in the order of issuance by year if and when the board of directors in its sole discretion considers the funds represented thereby no longer necessary for corporate purposes. In the event of dissolution, such certificates shall be retired in full or on a pro rata basis. No interest shall be paid on revolving fund certificates. (b) Retained Margins and Patrons' Equities. Retained ---------------------------------------- margins (any net margin retained by the corporation or any predecessor and apportioned to patrons on the books of the corporation or of predecessor corporations, but not allocated to patrons in the form of any written notice) and patrons' equities (retained net margin of the corporation or any predecessor allocated to patrons in the form of a written notice other than a revolving fund certificate) constitute the residual equity of the corporation which, subject to reduction by losses, shall be held for the benefit of patrons, past as well as present, having an interest therein pursuant to the provisions of these by-laws or the by-laws of any predecessor corporation. Retained margins and patrons' equities entitle the holders thereof to the same rights and privileges, and neither shall enjoy any preference over the other. No person shall be entitled to any distribution of assets with respect of retained margins or patrons' equities prior to the dissolution of the corporation. In the event of dissolution, after payment in full of all debts and of any amounts to which the holders of preferred stock, revolving fund certificates and common stock shall be entitled pursuant to the provisions of these by-laws, the remaining assets of the corporation shall be distributed proportionately among those persons having interests in retained margins 5 and patrons' equities and in accordance with such interests as reflected on the books of the corporation and predecessor corporations. MEETINGS OF STOCKHOLDERS 4.1 Annual Meeting. The annual meeting of stockholders shall -------------- be held each year on a date and at a time designated by the board of directors. The annual meeting shall be held at such place, within or without the State of Delaware, or, if so determined by the board of directors in its sole discretion, at no place (but rather by means of remote communication), as may be fixed by the board of directors. At the meeting, directors shall be elected and any other business properly brought before the meeting pursuant to these by-laws may be transacted. 4.2 Special Meeting. Except as otherwise provided in the --------------- Certificate of Incorporation or in these by-laws, a special meeting of stockholders for the transaction of business as may properly come before the meeting may be called at any time by the chairman, or in the chairman's absence by the vice-chairman, or by a majority of the board of directors. Only such business may be transacted as is specified in the notice of the special meeting. The board of directors or, in the absence of action by the board of directors, the chairman of the board or, in the chairman's absence the vice-chairman, shall have the sole power to determine the time, place and date for any special meeting of stockholders. Following such determination, it shall be the duty of the secretary to cause notice to be given to the stockholders entitled to vote at such meeting that a meeting will be held at the time, place and date and in accordance with the record date determined by the board of directors or by the chairman of the board, or in the chairman's absence by the vice- chairman. 4.3 Notice of Meetings. Notice of all meetings of -------------------- stockholders, stating the time, place, if any, date, and the means of remote communication, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting and the place within the city, other municipality or community or electronic network at which the list of stockholders may be examined, shall be delivered in accordance with applicable law to each stockholder entitled to vote not less than ten (10) days nor more than sixty (60) days before the time of such meeting unless the lapse of the prescribed period of time shall have been waived. 4.4 Adjournment and Notice. Any meeting of stockholders, ----------------------- annual or special, may be adjourned from time to time solely by the chair of the meeting because of the absence of a quorum or for any other reason and to reconvene at the same or some other time, date and place, if any. The stockholders present at a meeting shall not have the authority to adjourn the meeting. If the time, date, and place, if any, thereof, and the means of remote communication, if any, by which the stockholders 6 and the proxy holders may be deemed to be present and in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken and the adjournment is for less than thirty (30) days, no notice need be given of any such adjourned meeting. If the adjournment is for more than thirty (30) days, if the time, date and place, if any, and the means of remote communication, if any, by which the stockholders and the proxy holders may be deemed to be present and in person are not announced at the meeting at which the adjournment is taken, or if after the adjournment a new record date is fixed for the adjourned meeting, then notice shall be given by the Secretary as required for the original meeting. 4.5 Order of Business. Meetings of stockholders shall be ----------------- presided over by the vice-chairman of the board or by another chair designated by the board of directors. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at a meeting shall be determined by the chair of the meeting and announced at the meeting. The board of directors may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Unless otherwise determined by the board of directors, the chairman of the stockholders' meeting shall have the exclusive right to determine the order of business and to prescribe other such rules, regulations and procedures and shall have the authority in his or her discretion to regulate the conduct of any such meeting. Such rules, regulations or procedures, whether adopted by the board of directors or prescribed by the chair of the meeting, may include, without limitation, the following: (i) rules and procedures for maintaining order at the meeting and the safety of those present; (ii) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized and constituted proxies or such other persons as the chair of the meeting shall determine; (iii) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (iv) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the board of directors or the chair of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. The secretary of the corporation, or any other person appointed by the chair of the meeting, shall act as secretary of each meeting. 4.6 Quorum. The presence in person or by proxy at any ------ meeting of stockholders of the greater of (i) one hundred (100) persons each holding a share of $25 par value membership common stock, or (ii) the minimum number of stockholders required under applicable law to establish a quorum, shall constitute a quorum for the transaction of business. The chair of the meeting shall have the power and duty to determine whether a quorum is present at any meeting of stockholders. The stockholders present at a duly called and held meeting at which a quorum is present may continue to do business until adjournment notwithstanding the subsequent withdrawal of stockholders from the meeting. Shares of its own stock belonging to the corporation or to another corporation, if a majority of the shares entitled to vote 7 in the election of directors of such other corporation is held, directly or indirectly, by the corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the corporation or any subsidiary of the corporation to vote stock, including, but not limited to, its own stock, held by it in a fiduciary capacity. 4.7 Postponement or Cancellation of Meeting. Any previously --------------------------------------- scheduled annual or special meeting of the stockholders may be postponed or canceled by resolution of the board of directors upon public notice given prior to the time previously scheduled for such meeting of stockholders. 4.8 Inspectors of Election. In advance of any meeting of ----------------------- stockholders, the board of directors may appoint Inspectors of Election to act at such meeting or any adjournment thereof. If Inspectors of Election are not so appointed, the person acting as chair of any such meeting may, and on the request of any stockholder or proxy holder shall, make such appointment. There shall be at least two (2) Inspectors of Election at any such meeting. In case any person appointed as Inspector of Election shall fail to appear or to act, the vacancy may be filled by the person acting as chair of the meeting. 4.9 Notice of Stockholder Business. ------------------------------ (a) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors (or any duly authorized committee thereof), (ii) otherwise properly brought before the meeting by or at the direction of the board of directors (or any duly authorized committee thereof), or (iii) otherwise properly be requested to be brought before the meeting by a stockholder in compliance with the procedures set forth in this paragraph. For business to be properly requested to be brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in proper written form to the secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation (x) in the case of an annual meeting that is called for a date that is within thirty (30) days before or after the anniversary date of the immediately preceding annual meeting of stockholders, not less than ninety (90) days nor more than one-hundred twenty (120) days prior to the meeting, and (y) in the case of an annual meeting that is called for a date that is not within thirty (30) days before or after the anniversary date of the immediately preceding annual meeting, not later than the close of business on the tenth day following the day on which notice of the date of the meeting was communicated to stockholders or public disclosure of the date of the meeting was made, whichever occurs first. In no event shall the public 8 announcement of an adjournment or postponement of a meeting of stockholders commence a new time period (or extend any time period) for the giving of a stockholder notice as described herein. Only such business shall be conducted at a special meeting of stockholders as shall have been described in the corporation's notice of meeting given pursuant to these by-laws. (b) To be in proper written form, such stockholder's notice to the secretary shall set forth in writing (x) as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meting, (ii) the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the by-laws of the corporation, the language of the proposed amendment), (iii) any material interest of the stockholder and beneficial owner in such business, and (iv) any other information relating to such stockholder, beneficial owner or business that is required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies relating to the proposed item of business pursuant to Section 14 of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and regulations promulgated thereunder; and (y) as to such stockholder giving notice and the beneficial owner, if any, on whose behalf the proposal is made (i) the name and address, as they appear on the corporation's books, of such stockholder and of such beneficial owner, (ii) the class or series and number of shares of the capital stock of the corporation that are owned beneficially and of record by such stockholder and such beneficial owner, (iii) a description of all arrangements or understandings between such stockholder and/or beneficial owner and any other person or persons (including their names) pursuant to which the proposals are to be made by such stockholder, (iv) a representation that such stockholder or beneficial owner intends to appear in person or by proxy at the meeting to propose the items of business set forth in its notice, (v) a representation whether the stockholder or the beneficial owner, if any, intends to (1) deliver a proxy statement and/or form of proxy to holders of at least the percentage of the corporation's outstanding capital stock required to approve or adopt the proposal and/or (2) otherwise solicit proxies from stockholders in support of such proposal, and (vi) any other information relating to such stockholder or beneficial owner that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies in support of such proposal pursuant to Section 14 of the Exchange Act, and any rules and regulations promulgated thereunder. (c) Notwithstanding anything in the by-laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in these by-laws. The chairman of an annual meeting has the power and authority to, and shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance 9 with the provisions of section 4.9 of these by-laws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this section 4.9, if the stockholder (or a qualified representative of the stockholder) does not appear at the annual or special meeting of stockholders of the corporation to present the proposed business, such proposed business shall not be transacted, notwithstanding that proxies in respect of such vote may have been received by the corporation. (d) Notwithstanding the foregoing provisions of this section 4.9, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder with respect to the matters set forth in this section 4.9. 4.10 Director Nominations. -------------------- (a) Only persons who are nominated in accordance with the procedures set forth in this paragraph shall be eligible for election as directors of the corporation. Nominations for the election of directors may be made at a meeting of stockholders pursuant to the corporation's notice of meeting (or any supplement thereto) (i) by the board of directors (or a duly authorized committee thereof), (ii) by any stockholder entitled to vote in the election of directors generally who complies with the procedures set forth in this paragraph, or (iii) by the secretary of the corporation pursuant to section 5.3 of these by-laws. Elections of directors shall be conducted at a special meeting of stockholders only as described in the corporation's notice of meeting given pursuant to these by-laws. (b) All nominations by stockholders shall be made pursuant to timely notice in proper written form to the secretary of the corporation. To be timely, a stockholder's notice shall be given, either by personal delivery or by United States mail, postage prepaid, to the secretary of the corporation at the principal executive offices of the corporation not later than (x) with respect to an election to be held at an annual meeting of stockholders which is called for a date that is within thirty (30) days before or after the anniversary date of the immediately preceding annual meeting of stockholders, not less than ninety (90) days nor more than one hundred twenty (120) days prior to such anniversary date, and (y) with respect to an election to be held at an annual meeting of stockholders which is called for a date that is not within thirty (30) days before or after the anniversary date of the immediately preceding annual meeting of stockholders or to be held at a special meeting of stockholders for the election of directors, not later than the close of business on the tenth day following the date on which notice of the date of such meeting is first mailed to stockholders or public disclosure of the date of the meeting was made, whichever occurs first. In no event shall the public announcement of an adjournment or postponement of a meeting 10 of stockholders commence a new time period (or extend any time period) for the giving of a stockholder notice as described herein. (c) Notwithstanding anything in the second sentence of section 4.10(b) to the contrary, in the event that the number of directors to be elected to the board of directors of the corporation at a meeting is increased and there is no public announcement by the corporation naming all of the nominees for director or specifying the size of the increased board of directors at least one hundred (100) days prior to the anniversary date of the immediately preceding annual meeting, a stockholder's notice required by this section 4.10 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary at the principal executive offices of the corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the corporation. (d) To be in proper written form, such stockholder's notice shall set forth, (x) as to each person whom such stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation and employment of the person, (iii) the written consent of each proposed nominee to being named as a nominee and to serve as a director if elected, (iv) the class or series and number of shares of capital stock of the corporation which are owned beneficially or of record by the person and (v) all information relating to such person that is required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Section 14 of the Exchange Act, and the rules and regulations promulgated thereunder; and (y) as to such stockholder giving notice and the beneficial owner, if any, (i) the name and address, as they appear on the corporation's books, of the stockholder, and the beneficial owner, if any, who intends to make the nomination and of the person or persons to be nominated, (ii) the class or series and number of shares of the capital stock owned beneficially and of record by such stockholder and by such beneficial owner, (iii) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and that the stockholder or the beneficial owner, if any, intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, (iv) a description of all arrangements or understandings between the stockholder and/or beneficial owner and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder, (v) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, (vi) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends to (1) deliver a proxy statement and/or form of proxy to holders of at least the 11 percentage of the corporation's outstanding capital stock required to elect the nominee and/or (2) otherwise solicit proxies from stockholders in support of such nomination, and (vii) any other information relating to such stockholder or beneficial owner that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act, and the rules and regulations promulgated thereunder. At the request of the board of directors, any person nominated by the board of directors for election as a director shall furnish to the secretary of the corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. (e) No person shall be eligible for election as a director unless nominated in accordance with the procedures set forth in the by-laws of the corporation. The chair of the meeting has the power and the authority to and shall, if the facts warrant, determine and declare to the meeting that a nomination of a person was not made in compliance with the foregoing procedure, and if he or she shall so determine, he or she shall declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this section 4.10, if the stockholder (or a qualified representative of the stockholder) does not appear at the annual or special meeting of stockholders of the corporation to present a nomination, such nomination shall be disregarded, notwithstanding that proxies in respect of such vote may have been received by the corporation. (f) For purposes of these by-laws, "public announcement" shall mean disclosure in a press release reported by a national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to the Exchange Act. (g) Notwithstanding the foregoing paragraphs of this section 4.10, a stockholder shall also comply with all applicable requirements of the Exchange Act, and the rules and regulations promulgated thereunder with respect to the matters set forth in this section 4.10. 4.11 Procedures for Action By Written Consent. ---------------------------------------- (a) (i) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting shall be as fixed by the board of directors or as otherwise established under this section 4.11(a). Any person seeking to have the stockholders authorize or take corporate action by written consent without a meeting shall, by written notice addressed to the secretary and delivered to the corporation and signed by a stockholder of record, request that a record date be fixed for such purpose. The written notice shall contain at a minimum the information set forth in section 4.11(a)(ii) below. The board of directors shall have 12 ten (10) days following the date of receipt of the notice to determine the validity of the request. Following the determination of the validity of the request, and (subject to section 4.11(a)(ii)) no later than ten (10) days after the date on which such request is received by the corporation, the board of directors may fix a record date for such purpose. (ii) Any stockholder's notice required by this section 4.11(a) shall describe each action that the stockholder proposes to take by consent. For each such proposal of business or nomination for election as a director, the notice shall comply with the notice requirements set forth in sections 4.9 and 4.10, as they are applicable. (b) Every written consent purporting to take or authorize the taking of corporate action and/or related revocations (each such written consent and related revocation is referred to in this section 4.11 as a "Consent") shall bear the date of signature of each stockholder who signs the Consent, and no Consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated Consent delivered in the manner required by this section 4.11, Consents signed by a sufficient number of stockholders to take such action are so delivered to the corporation. (c) A Consent shall be delivered to the corporation by delivery to its registered office in the State of Delaware or to the secretary at the principal executive offices of the corporation. Delivery to the corporation's registered office shall be made by hand or by certified or registered mail, return receipt requested. In the event of the delivery to the corporation of a Consent, the secretary shall provide for the safekeeping of such Consent and shall promptly conduct such ministerial review of the sufficiency of the Consents and of the validity of the action to be taken by stockholder consent as the secretary deems necessary or appropriate, including, without limitation, whether the holders of a number of shares having the requisite voting power to authorize or take the action specified in the Consent have given consent; provided, however, that if the corporate action to which the Consent relates is the removal or replacement of one or more members of the board of directors, the secretary shall promptly designate, in accordance with the terms of section 4.8 hereof, two persons, who shall not be members of the Board, to serve as Inspectors with respect to such Consent and such Inspectors shall discharge the functions of the Secretary under this section 4.11(c). If after such investigation the secretary or the Inspectors (as the case may be) shall determine that the Consent is valid and that the action therein specified has been validly authorized, that fact shall forthwith be certified on the records of the Corporation kept for the purpose of recording the proceedings of meetings of stockholders, and the Consent shall be filed in such records, at which time the Consent shall become effective as stockholder 13 action. In conducting the investigation required by this section 4.11(c), the secretary or the Inspectors (as the case may be) may, at the expense of the corporation, retain special legal counsel and any other necessary or appropriate professional advisors, and such other personnel as they may deem necessary or appropriate to assist them, and shall be fully protected in relying in good faith upon the opinion of such counsel or advisors. No action by written consent without a meeting shall be effective until such date as the secretary or the Inspectors (as the case may be) certify to the corporation that the Consents delivered to the Corporation in accordance with section 4.11(c) represent at least the minimum number of votes that would be necessary to take the action. Nothing contained in this section 4.11 shall in any way be construed to suggest or imply that the board of directors or any stockholder shall not be entitled to contest the validity of any Consent or revocation thereof, whether before or after such certification by the secretary or the Inspectors, or to take any other action (including, without limitation, the commencement, prosecution, or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation). DIRECTORS 5.1 Number and Qualification. The board of directors shall ------------------------ consist of not less than twelve (12) nor more than seventeen (17) people, as fixed from time to time by the board of directors. At least twelve (12) of the directors shall be members of the corporation, except that members who are employees of the corporation or dealers of the corporation's farm supplies shall not be eligible for election as member directors. Up to two (2) directors shall be other directors who are not required to be members of the corporation. Without regard to the foregoing limitations, the corporation shall nominate the chief executive officer for election at any meeting at which such person is subject to election as a director. The term of any director who is also the chief executive officer of the corporation shall expire immediately and automatically upon the termination for any reason or for no reason of such person as the chief executive officer of the corporation. All directors shall represent the interests of all common stockholders. 5.2 Nomination Regions. The territory in which the ------------------- corporation primarily operates shall be divided into nomination regions, three (3) in number, described as follows: Region A Commonwealth of Massachusetts; States of Connecticut; Maine; New Hampshire; New Jersey (northern half); State 14 of New York, counties of Albany, Dutchess, Clinton, Columbia, Essex, Franklin, Fulton, Greene, Hamilton, Herkimer (northern half), Jefferson, Lewis, Montgomery, Orange, Putnam, Rensselaer, Rockland, Saratoga, Schenectady, Schoharie, St. Lawrence, Sullivan, Ulster, Warren, Washington, Westchester; New York City and Long Island counties; States of Rhode Island; and, Vermont. Region B State of New York, counties of Allegany, Broome, Cattaraugus, Cayuga, Chautauqua, Chemung, Chenango, Cortland, Delaware, Erie, Genesee, Herkimer (southern half), Livingston, Madison, Monroe, Niagara, Oneida, Onondaga, Ontario, Orleans, Oswego, Otsego, Schuyler, Seneca, Steuben, Tioga, Tompkins, Wayne, Wyoming and Yates. Region C. Commonwealth of Pennsylvania; States of Delaware; Maryland; New Jersey (southern half); Ohio; and, northern West Virginia. 5.3 Nomination Procedures. --------------------- (a) The Membership and Nominating Committee of the board of directors, appointed under section 7.3 of these by-laws, shall have the responsibility for identifying persons to be nominated by the board of directors for election at any meeting of the stockholders. (b) For each year, there shall be appointed by the chairman of the board,or by the chairman's designee, three (3) Region Nominating Task Forces to identify and recommend at least one potential member candidate who resides in the region for each member director position to be filled in that region. Each Region Nominating Task Force shall consist of a chairman who shall be a member director and one member director from the region, neither of whom is standing for re-election during such year, and at least four (4) members from the director nominating forum of the region. The Region Nominating Task Force may supply initial recommendations to and solicit recommendations from the director nominating forum regarding potential candidates for election to the board of directors. (c) In each region there shall be a director nominating forum comprised of members who reside in the region. The members of the director nominating forums shall represent a majority of members' purchases of farm supplies from the corporation during the preceding fiscal year as determined annually by the board of directors. 15 (d) Each Region Nominating Task Force shall request recommendations from each director nominating forum with respect to potential member candidates who reside in the region for each member director position to be filled in that region for election to the board of directors. Each member of the director nominating forum shall have one vote in the director nomination process. (e) Each Region Nominating Task Force shall recommend to the Membership and Nominating Committee the member who resides in that region, who need not be the person recommended by the director nominating forum, it deems best qualified to serve as member director from such region for each member director position to be filled in that region. (f) The Membership and Nominating Committee shall recommend to the board of directors the member candidates and other candidates for each director position to be filled, who need not be any of the persons recommended by the Region Nominating Task Force, it deems best qualified to be nominated by the board of directors for election at any meeting of stockholders. (g) The board of directors shall select the candidates, who need not be any of the persons recommended by the Membership and Nominating Committee, to be nominated on behalf of the board for each election of directors. 5.4 Vacancies. --------- (a) Any vacancy on the board of directors of a member director occurring during the term of such member director, caused by an increase in the authorized number of directors, death, resignation or otherwise may be filled for the unexpired portion of the term or until a successor shall be elected, by a vote of a majority of the directors then in office, even if less than a quorum, at any regular or special meeting of the board. If the term of a member director being replaced extends beyond the next annual meeting, the newly elected director shall stand for election by the stockholders at the next annual meeting for the balance of the term. Any vacancy shall be filled by a person from the same region as the member director being replaced. (b) Any vacancy on the board of directors of any other director occurring during the term of such other director, caused by an increase in the authorized number of directors, death, resignation or otherwise may be filled for the unexpired portion of the term or until a successor shall be elected by a vote of a majority of the directors then in office, even if less than a quorum, at any regular or special meeting of the board. If the term of any other director being replaced extends beyond the next annual meeting, the newly elected director shall stand for election by the stockholders at the next annual meeting for the balance of the term. 16 (c) In case the entire board of directors shall die or resign, the president or secretary of the Corporation, or any ten (10) stockholders may call and cause notice to be given for a special meeting in the same manner that the chairman may call such a meeting, and directors for the unexpired terms may be elected at such special meeting. 5.5 Regular Meetings. Regular meetings of the board of ----------------- directors may be held at such time, date and place as may be appointed by the board, which time may be changed from time to time. At least annually, at a regular meeting of the board of directors, the election of officers, including the chairman of the board, the vice-chairman and the president and chief executive officer shall be conducted. 5.6 Special Meetings. A special meeting of the board of ----------------- directors shall be held whenever and at such location called by the chairman, or by the vice-chairman of the board in the absence of the chairman, or by any five (5) directors. The purpose or purposes of any special meeting will be specified in the notice relating thereto. Any and all business may be transacted at a special meeting. 5.7 Notice of Meetings of Directors. Three (3) day's notice -------------------------------- of regular meetings of the directors need be given except that in case of a change in the time for regular meetings written notice of such change shall be given to directors who were not present at the meeting when such change was made. Notice of each special meeting shall be given pursuant to section 12.3 of these by-laws, showing the time and place, at least twenty-four (24) hours prior to the time of such meeting. 5.8 Conference Telephone Meetings. Members of the board of ------------------------------ directors, or any committee thereof, may participate in a meeting of the board of directors or such committee by means of conference telephone or other similar communications equipment by means of which all persons participating in the meeting can hear each other and communicate with each other, and such participation in a meeting shall constitute presence in person at such meeting. 5.9 Adjournment. Notice of the time, date and place of ----------- holding an adjourned meeting shall be given to all directors. 5.10 Quorum. Except as herein provided, a majority of the ------ directors in office shall be necessary to constitute a quorum for the transaction of business. In the event of an extreme emergency, including a substantial disruption of communication as a result of a disaster, whether nuclear, labor strike, flood, hurricane or any other cause, making it extremely difficult or impossible to assemble a majority of the board for a duly called meeting, and such emergency has been declared, either by the president, or, in his or her absence, the chairman of the board, or by the President of the United States, or by any of the Governors of the states in which the corporation 17 does business, a quorum of the board of directors for the transaction of business at a meeting duly called shall not be less than one-third of the directors. 5.11 Compensation of Directors. Directors, as such, shall --------------------------- not receive any stated compensation for their services unless its payment has been first authorized by the board of directors. In addition to an annual retainer, the board of directors may allow a reasonable per diem and expenses for attendance at any meeting of the board or of the Executive and Compensation Committee, and any other meeting or official business. 5.12 Removal for Cause. A director may be removed for ------------------- failure to attend three (3) consecutive meetings of the board without adequate cause, or for other neglect of duty, or for any other cause. Such removal may be effected in either of the following two ways: (a) Removal may be by the vote or consent of the holders of a majority of the shares entitled to vote at an election of directors; or (b) Removal may be by the affirmative vote of three- fourths (3/4) of the entire board (excluding the director complained of) at any regular or special meeting of the board, following reasonable notice to the director complained of and a hearing by the board of directors; provided, however, that in the event of any such removal, the board of directors, if requested in writing by the director subject to removal within ten (10) days of the removal decision by the board of directors, shall call a special meeting of the stockholders to confirm or overrule the decision of the board of directors. If the earliest practicable date to hold the special meeting of the stockholders falls within ninety (90) days of the date of the annual meeting as provided in section 4.1 of these by-laws, the matter shall be presented to the stockholders for a vote at the annual meeting. At the meeting of stockholders at which the question of the removal of the director is presented for a vote, the director complained of shall be provided a reasonable opportunity to present his or her position. The vote of the holders of a majority of the shares, present and voting, entitled to vote at an election of directors shall confirm or overrule the decision of the board of directors. Until such time as the stockholders act on the removal of the director complained of, if the stockholders are required to do so, neither the board of directors nor the stockholders shall fill the vacancy caused by the removal of the director. A vacancy resulting from a vote of the stockholders may be filled by the stockholders at the meeting voting the removal and if not so filled shall be filled by the board of directors as provided in section 5.4 of these by-laws. 18 POWERS OF DIRECTORS 6.1 General Powers. Subject to the limitations of the --------------- certificate of incorporation, of the by-laws and of the statutes of the State of Delaware relating to action which shall be authorized or approved by stockholders, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation shall be controlled by, the board of directors. Without prejudice to such general powers, but subject to the same limitations, it is expressly declared that the board of directors shall have the following powers to wit: (a) To control the affairs and business of the corporation and to establish and enforce rules and regulations not inconsistent with the laws of the State of Delaware, the certificate of incorporation or by-laws, for the guidance of its officers and the management and conduct of its affairs and business. (b) To borrow money and incur indebtedness for corporate purposes, and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations and other evidences of indebtedness and securities therefor, and to do every act and thing necessary to effectuate the same. COMMITTEES OF THE BOARD 7.1 Executive Committee. An Executive Committee may be -------------------- established by resolution adopted by a majority of the whole board, to consist of such number of directors as may be specified, which shall have and may exercise, in the intervals between meetings of the board, all the powers and authority of the board of directors, and may authorize the seal of the corporation to be affixed to all papers which may require it. 7.2 Audit Committee. An Audit Committee may be established --------------- by resolution adopted by a majority of the whole board, to consist of at least three (3) financially literate member or other directors one of whom has financial expertise, to assure members, investors, and others that the system of internal controls established by management effectively safeguard the corporation's assets, real and intangible; that the corporation's financial reporting meets generally accepted standards and the directors' expectations for quality and integrity. The chief executive officer shall not be eligible for appointment to the Audit Committee. The board of directors shall adopt a charter for the Audit Committee, and the Audit Committee shall review this charter annually to assess the charter's adequacy. This charter shall specify the scope of the Audit Committee's responsibilities, including the selection, evaluation and replacement of auditors and overseeing auditor independence. 19 7.3 Compensation Committee. A Compensation Committee may ----------------------- be established by resolution adopted by a majority of the whole board, to consist of such number of directors as may be specified, to review and make recommendations on compensation issues. The chief executive officer shall not be eligible for appointment to the Compensation Committee. 7.4 Membership and Nominating Committee. A Membership and ------------------------------------ Nominating Committee may be established by resolution adopted by a majority of the whole board, to consist of such number of directors as may be specified, to review and make recommendations on membership issues and to conduct the director nomination procedures as set forth in section 5.3 of these by-laws. 7.5 Other Committees of the Board. Other committees may ------------------------------ be established, from time to time, by resolution adopted by a majority of the whole board specifying the number of members and prescribing the committee functions and duties. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not the member or members present constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. OFFICERS AND MANAGEMENT 8.1 Corporate Officers. The officers of the corporation ------------------- shall be elected by the board of directors and shall be three (3) board officers, a chairman of the board, a vice-chairman, a president and chief executive officer; and, executive officers consisting of one or more vice-presidents, a secretary, a controller, a treasurer and a general counsel. The board may also appoint any other employee officers whom the board of directors may see fit in its discretion to designate. The chairman of the board and the vice-chairman shall be elected by the member directors from their number. The president and chief executive officer shall recommend executive and employee officers to the board of directors. 8.2 Election and Term of Office. On the recommendation of ---------------------------- the president and chief executive officer, executive and employee officers shall be elected annually at the first meeting of the board of directors following the annual meeting of stockholders, or at such other time as the board of directors shall determine. Unless sooner removed by the board of directors, or unless they resign or become disqualified, all officers shall hold office until their successors are chosen and have qualified. Any officer, whether elected or appointed by the board of directors, may be removed at any time by a majority vote of all of the directors. 20 8.3 Powers and Duties. Subject at all times to the control ------------------- and direction of the board of directors, the president and chief executive officer shall conduct the business of the corporation in accordance with its purposes, and shall have administrative authority over all personnel, including executive employee officers, in the employ of the corporation; and each employee officer shall have and exercise the powers and duties usual to his or her office or delegated to him or her by the board of directors. 8.4 Compensation of Officers. Officers shall each receive -------------------------- such compensation as may be fixed by the directors. The president and chief executive officer shall recommend compensation for executive officers to the board of directors. 8.5 Vacancies. A vacancy occurring in any office may be --------- filled by a majority of the directors then in office at any regular or special meeting of the board. 8.6 Checks, Bills and Notes. All checks, drafts, bills of ----------------------- exchange, notes, orders for the payment of money and other negotiable instruments of the corporation shall be made in the name of the corporation, and shall be signed by any one of the following: the president, any vice president, the secretary, treasurer, controller, or any assistant secretary, assistant treasurer or assistant controller. The board of directors may also delegate to other officers or agents the power to sign or countersign such instruments. No officers or agents of the corporation singly or jointly with others shall have the power to make any bill payable, note or check or other negotiable instrument or endorse the same in the name of the corporation, or contract or cause to be contracted any debt or liability in the name or on behalf of the corporation, except as provided in these by-laws, and as authorized by the board of directors. Bills of exchange, checks, notes and other negotiable instruments received by the corporation shall be endorsed for collection by such officers or agents as may be designated by the board of directors for that purpose. PATRONAGE ACCOUNTING 9.1 Scope of Patronage Refund Provisions. The provisions --------------------------------------- of sections 9.2-9.5 of these by-laws provide for patronage refunds only with respect to that portion of the corporation's business consisting of sales of farm supplies. Patronage refunds, if any, with respect to marketing operations will be paid only pursuant to marketing contracts with members and contract patrons providing for the payment of such refunds. 9.2 Definitions. As used in sections 9.2-9.5 of these by- ----------- laws: (a) Member. The term "member" includes any member of ------ the corporation as defined in section 1.2(c) of these by-laws and also any person who has 21 entered into a patronage refund contract with the corporation as authorized by section 9.5 of these by-laws. The term "non-member" refers to any person who is not a member as that term is defined in the preceding sentence. (b) Net Margin. The "net margin" of the corporation ----------- shall be taxable income from sales of farm supplies for the fiscal year, as computed for federal income tax purposes, but without taking into account any deductions for patronage refunds. (c) Member Margin. "Member margin" shall be that -------------- portion of the net margin derived from sales of farm supplies to members, determined by multiplying the net margin by the percentage of gross purchasing volume which is attributable to sales of farm supplies to members. (d) Volume Subject to Refund. "Volume subject to --------------------------- refund" is the gross volume of the corporation from sales of farm supplies for any fiscal year, reduced by that portion of such volume attributable to business with non-members, and increased by the average percentage mark-up necessary to reflect an equivalent volume at the retail level. (e) Member's Pro Rata Share. Each "member's pro rata ----------------------- share" of any refund or reserve shall be computed by multiplying the amount or volume subject to refund attributable to such member by a percentage determined by dividing the total refund or reserve to be allocated, as the case may be, by the total amount of volume subject to refund. (f) Patronage Refund. The term "patronage refund" ----------------- shall include a patronage refund or rebate or any amount paid to a patron pursuant to section 9.5 of these by-laws on the basis of business done with or for such a patron. 9.3 Reasonable Reserves. The board of directors may set -------------------- aside each fiscal year, from the net margin of the corporation, such amounts as the board of directors in its discretion deems necessary for the efficient prosecution of the corporation's business, provided however, that no amounts shall be set aside which are not reasonable in amount, giving due regard to the purposes thereof (such amounts being sometimes hereinafter referred to as "reasonable reserves"). Any reserves set aside pursuant to section 9.3 of these by-laws shall be allocated first to all net earnings, as defined in (ii) of section 9.4 of these by-laws, of the corporation other than member margin and, to the extent that such reserves exceed such net earnings, to member margin. Such reasonable reserves may be used for such proper corporate purposes as shall be determined by the board of directors, including, but not limited to the accumulation of working capital, contributions to sinking funds to meet future indebtedness, payment of Federal income and excess profits taxes, acquisition of 22 funds for expansion or replacement, or accumulations of reserves to offset price declines. The corporation shall maintain records sufficient to afford permanent means for apportioning to each member his or her pro rata share of all amounts retained by the corporation as reasonable reserves for each fiscal year. 9.4 Dividends on Capital Stock. The board of directors may --------------------------- set aside each fiscal year from funds available therefor such amounts as the board deems appropriate for payment as dividends on issued and outstanding capital stock. Such amounts shall be allocated pro rata between (i) member margin and (ii) all other net earnings of the corporation (including both net margin derived from purchasing business conducted with non-members, and earnings not derived from purchasing). 9.5 Payment of Patronage Refunds. ---------------------------- (a) Obligation to Pay Patronage Refunds. --------------------------------------- The corporation shall be obligated, as soon as practicable after the close of each fiscal year and in no event later than 8 1/2 months after the close thereof, to pay each member in cash as a patronage refund his or her pro rata share of all member margin remaining after deducting amounts, if any, set aside therefrom by the board of directors (1) as reasonable reserves pursuant to section 9.3 of these by-laws and (2) for payment as dividends on issued and outstanding capital stock pursuant to section 9.4 of these by- laws; provided that the amount of patronage refunds thus determined shall be increased or decreased to the extent necessary to enable the obligation for the payment of such refunds to be expressed as a percentage of volume. (b) Minimum Payment of Patronage Refunds. ----------------------------------------- Notwithstanding the provisions of paragraph (a) of section 9.5 of these by-laws, the board of directors shall fix and/or amend from time to time the minimum amount which shall be paid as a patronage refund and any amount less than that so fixed shall not be distributed to the member entitled thereto (unless he claims it in cash) but shall be retained by the corporation as through it were part of a reasonable reserve set aside pursuant to section 9.3 of these by-laws. (c) Obligation to Pay Patronage Refunds Absolute. The -------------------------------------------- corporation shall be absolutely liable for the payment of patronage refunds as provided herein without further action on the part of any officer or of the board of directors. (d) Place of Purchase. Each member shall be entitled ----------------- to his or her respective pro rata share of any patronage refunds paid with respect to Agway distributed goods purchased from Agway and certain dealers. The corporation may enter into such contracts, undertakings and understandings with certain dealers as may be necessary and proper to insure that each member will receive his or her pro rata share of such refunds. 23 9.6 Contract Patrons. The board of directors may authorize ---------------- the appropriate officers and/or employees of the corporation to contract to pay and to pay patronage refunds to patrons other than the members as defined in section 1.2(c) of these by-laws, provided the amounts of such patronage refunds are determined upon the same basis and under the same terms and conditions as those of such members, and provided further that any such contract shall be entered into prior to the accumulation of any gross receipts subject to the charge of such patronage refunds. MARKETING 10.1 Marketing Contracts. The terms and conditions under -------------------- which agricultural products of members shall be marketed may be established by marketing contracts to be executed by the corporation and its members on an individual commodity or commodity group basis, not inconsistent with the provisions of these by-laws. INDEMNIFICATION 11.1 Right to Indemnification. The corporation shall -------------------------- indemnify and hold harmless, as such separate and independent rights shall be applicable to the fullest extent possible under applicable law as it presently exists or may hereafter be amended, any person (an "Indemnitee") who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was a director, officer, employee or agent of the corporation or, while a director or officer of the corporation, is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, limited liability company, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys' fees) reasonably incurred by such Indemnitee. Notwithstanding the preceding sentence, except as otherwise provided in section 11.3, the corporation shall be required to indemnify an Indemnitee in connection with a proceeding (or part thereof) commenced by such Indemnitee only if the commencement of such proceeding (or part thereof) by the Indemnitee was authorized by the board of directors of the corporation. 11.2 Prepayment of Expenses. The corporation shall pay the ---------------------- expenses (including attorneys' fees) incurred by an Indemnitee of the corporation in defending any proceeding in advance of its final disposition, provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the Indemnitee to repay all amounts advanced if it should be ultimately determined that the Indemnitee 24 is not entitled to be indemnified under sections 11.1-11.7 of these by-laws or otherwise. Except as otherwise provided in Section 11.3, the corporation shall be required to pay expenses in advance in connection with a proceeding (or part thereof) commenced by such Indemnitee only if the commencement of such proceeding (or part thereof) by the Indemnitee was authorized by the board of directors of the corporation. 11.3 Claims. If a claim for indemnification or advancement ------ of expenses under sections 11.1-11.7 of these by-laws is not paid in full within sixty days after a written claim therefor by the Indemnitee has been received by the corporation, the Indemnitee may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the reasonable expense of prosecuting such claim. In any such action the corporation shall have the burden of proving that the Indemnitee is not entitled to the requested indemnification or advancement of expenses under applicable law. 11.4 Nonexclusivity of Rights. The rights conferred on any ------------------------ Indemnitee by sections 11.1-11.7 of these by-laws shall not be exclusive of any other rights which such Indemnitee may have or hereafter acquire under any statute, provision of the certificate of incorporation, these by-laws, agreement, vote of stockholders or disinterested directors or otherwise. 11.5 Other Sources. The corporation's obligation, if any, ------------- to indemnify or to advance expenses to any Indemnitee who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, limited liability company, joint venture, trust, enterprise or nonprofit entity shall be reduced by any amount such Indemnitee may collect as indemnification or advancement of expenses from such other corporation, partnership, limited liability company, joint venture, trust, enterprise or non-profit enterprise. 11.6 Amendment or Repeal. Any repeal or modification of -------------------- the foregoing provisions of sections 11.1-11.5 of these by-laws shall not adversely affect any right or protection hereunder of any Indemnitee in respect of any act or omission occurring prior to the time of such repeal or modification. 11.7 Other Indemnification and Prepayment of Expenses. ----------------------------------------------------- Sections 11.1-11.6 of these by-laws shall not limit the right of the corporation, to the extent and in the manner permitted by law, to indemnify or to advance expenses to persons other than Indemnitees when and as authorized by appropriate corporate action. MISCELLANEOUS 25 12.1 Principal Office. The principal office of the ----------------- corporation in the State of Delaware shall be located at 1209 Orange Street in the City of Wilmington, County of New Castle. 12.2 Other Offices. The principal office outside the State ------------- of Delaware shall be at DeWitt, New York. The corporation may also have an office or offices at such other place or places, within or without the State of Delaware as the board of directors may from time to time appoint, or the business of the corporation may require. 12.3 Method of Giving Notice. Whenever in these by-laws ----------------------- notice is required to be given, it may be given by any one or more of the following methods: (a) Delivered personally; or (b) Written notice either deposited in the mail postage prepaid or sent by telegraph, addressed to the residence or place of business of the person to be notified as the same shall appear on the records of the corporation; or (c) To members or stockholders by publication in any corporation bulletin or other periodical mailed to members or stockholders; or (d) Any other means permitted under applicable law, including by means of electronic transmission pursuant to Section 232 of the Delaware General Corporation Law. 12.4 Waiver of Notice. The transactions of any meeting of ---------------- the board of directors or any committee however called and noticed or wherever held, shall be as valid as though had at a meeting duly held, after regular call and notice, if a quorum be present, and if, either before or after the meeting, each of the directors or committee members not present signs a written waiver of notice, a waiver of notice by electronic transmission or a consent to holding such meeting. All such waivers or consents shall be filed with the corporate records or made a part of the minutes of the meeting. 12.5 Effect of Holiday. If the time designated herein for ----------------- any meeting shall fall upon a legal holiday, then any such meeting shall be held on the next day following which is not a holiday. 12.6 Fiscal Year. The fiscal year of the corporation shall ----------- extend from July 1 to June 30 following. 26 12.7 Seal. The seal of the corporation shall be circular ---- in form and shall have inscribed thereon the name of the corporation, the year of organization and the words: "Corporate Seal, Delaware." 12.8 Amendments. These by-laws may be amended or repealed ---------- or new by-laws adopted as follows: (a) At any meeting of stockholders, by a vote of a majority of the stockholders present and voting, provided that the notice of the meeting shall have set forth the substance of the proposed amendment, repeal or new by-law provision upon which the vote is taken, or (b) By vote of a majority of the directors present at a meeting at which a quorum is present unless otherwise provided by law, the certificate of incorporation or these by-laws. 27 -----END PRIVACY-ENHANCED MESSAGE-----