0000002852-01-500056.txt : 20011008 0000002852-01-500056.hdr.sgml : 20011008 ACCESSION NUMBER: 0000002852-01-500056 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010918 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 002-22791 FILM NUMBER: 1739794 BUSINESS ADDRESS: STREET 1: 333 BUTTERNUT DR CITY: DEWITT STATE: NY ZIP: 13214 BUSINESS PHONE: 3154496431 10-K405 1 live10k2001.txt YEAR ENDED JUNE 2001 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (MARK ONE) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ---- ACT OF 1934 For the fiscal year ended June 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 (I.R.S. EMPLOYER IDENTIFICATION NO.) OF INCORPORATION OR ORGANIZATION) 333 BUTTERNUT DRIVE, DEWITT, NEW YORK 13214 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 315-449-6436 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- None None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. X ------- ------ Yes No INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN ANY DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. X --- STATE THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON EQUITY HELD BY NON-AFFILIATES OF THE REGISTRANT AS OF SEPTEMBER 14, 2001. Membership Common Stock, $25 Par Value - $2,434,750 INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. CLASS OUTSTANDING AT SEPTEMBER 14, 2001 ----- --------------------------------- Membership Common Stock, $25 Par Value 97,390 Shares -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- FORM 10-K ANNUAL REPORT - 2001 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES CROSS REFERENCE SHEET
Page PART I Items 1 & 2. Business and Properties General...................................................................................... 3 Agriculture.................................................................................. 4 Country Products Group....................................................................... 5 Energy....................................................................................... 7 Leasing...................................................................................... 8 Insurance.................................................................................... 8 Discontinued Operations...................................................................... 9 Human Resources.............................................................................. 9 Administrative............................................................................... 9 Regulation................................................................................... 9 Stockholder Membership and Control of Agway.................................................. 10 Retained Earnings............................................................................ 11 Patronage Refunds............................................................................ 11 Item 3. Legal Proceedings................................................................................ 12 Item 4. Submission of Matters to a Vote of Security Holders.............................................. 13 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................ 13 Item 6. Selected Financial Data.......................................................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 14 Item 7a. Quantitative and Qualitative Disclosures about Market Risk....................................... 29 Item 8. Financial Statements and Supplementary Data...................................................... 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 74 PART III Item 10. Directors and Executive Officers of the Registrant............................................... 74 Item 11. Executive Compensation........................................................................... 77 Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 80 Item 13. Certain Relationships and Related Transactions................................................... 80 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................. 81 Signatures....................................................................................... 90
2 PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES (THOUSANDS OF DOLLARS) GENERAL Agway Inc. was incorporated under the Delaware General Corporation Law in 1964 and is headquartered in DeWitt, New York. Agway is an agricultural cooperative directly engaged in manufacturing, processing, distribution and marketing of agricultural feed and agronomic products (seed, fertilizers, and chemicals) and services for its farmer-members and other customers, primarily in the northeastern United States and Ohio. In addition, Agway is involved in repackaging and marketing produce and processing and marketing sunflower seeds. Agway, through certain of its subsidiaries, is involved in the distribution of petroleum products; the installation and servicing of heating, ventilation, and air-conditioning equipment; lease financing; the underwriting and sale of certain types of property and casualty insurance; and the sale of health insurance. In this Form 10-K, unless otherwise indicated, the "Company," "Agway," "we," or "our" refer to Agway Inc. and its subsidiaries. Operating as a cooperative, Agway is eligible to pay patronage refunds to its members and "contract patrons" from earnings on sales of patronage eligible products and services. For income tax purposes, Agway is subject to corporate income tax at applicable tax rates on all taxable income remaining after deductions for patronage refunds, if paid. Agway reports its operations principally in five business segments: Agriculture, Country Products Group, Energy, Leasing, and Insurance. As one of the largest agricultural cooperatives in the United States, Agway deals in a wide variety of product lines and market segments. Many of its high-volume products are sold in highly competitive markets where product differentiation is difficult to achieve. Agway strives to distinguish itself through superior customer service, product selection, and product knowledge. In June 2000, Agway discontinued its retail services business. These operations are therefore reflected separately as discontinued operations in this Form 10-K. See the Discontinued Operations section of Business and Properties and Note 14 to the financial statements for further details. Prior to July 1, 2001, Agway Financial Corporation (AFC), a Delaware corporation incorporated in 1986 with principal executive offices located in Wilmington, Delaware, was a wholly owned subsidiary of Agway. AFC's principal business activities consisted of securing financing through bank borrowings and public issuance of corporate debt instruments, principally in the form of Subordinated Money Market Certificates (the Debt Securities), to provide funds for general corporate purposes to Agway and AFC's wholly owned subsidiary, Agway Holdings Inc. (AHI), and AHI's subsidiaries. Major holdings of AHI 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. In exemptive relief granted pursuant to a "no action letter" issued by the staff of the SEC, AFC did not file periodic reports with the SEC for itself but did report summarized financial information in Agway's financial statement footnotes. Leasing and Insurance finance their activities through their own operations or with a combination of their own short- and long-term credit facilities. Telmark's debt is not guaranteed by Agway. Effective July 1, 2001, we simplified the Agway corporate structure by merging AFC and AHI into Agway Inc. The more complex structure 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, as described above. In connection with the assumption by Agway of the obligations under the Debt Securities, 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. Also effective July 1, 2001, Agway, as the sole member of Milford Fertilizer Company LLC, a Delaware limited liability company (Milford), merged Milford with and into Agway Inc. As a result of this merger, Agway Inc. has assumed all of the assets and liabilities of Milford. The Mergers are not expected to result in a material change in the consolidated financial position or results of operations of Agway. 3 ITEMS 1 AND 2. BUSINESS AND PROPERTIES (THOUSANDS OF DOLLARS) AGRICULTURE Agriculture, since 1995, has been comprised principally of five geographically-based enterprise units. Each unit was responsible for management, operations, sales, billing, and customer service within its geographic markets. The agricultural business is focused on animal feed, agronomy, and farm services to farmers in their specific geographic markets. As part of the Agriculture realignment (as described below), the segment is transitioning from the enterprise unit basis of operations to a line of business structure that creates a separate Feed and Nutrition and an Agronomy Divisions. FEED AND NUTRITION: The Feed and Nutrition Division, as realigned, operates 15 feed mills and 4 grind and mix facilities, principally in New York and Pennsylvania. These operations manufacture livestock and poultry feeds under Agway formulae. Products are sold primarily through an Agway sales force, which actively calls on farmer-customers and responds to customer inquiries. Agway believes that production capacity of animal feeds will be sufficient to meet market needs of the Feed and Nutrition Division. The Feed operations have built or have under construction four farms, which, on a contract basis for farmers, custom raise heifers in an environment that is designed to result in those heifers testing free of specific pathogens (TSPF(TM) - tested-specific pathogen free) with the ultimate goal of increasing the productivity levels of such heifers. The facilities are in Elba, Easton, and Hopkinton, New York, and Newburg, Pennsylvania. AGRONOMY: The Agronomy Division, as realigned, operates 72 agronomic blending plants and storage facilities. These operations manufacture, process, and procure fertilizer and other crop-related products to be sold as direct shipments to farmer-customers, farmer-dealers, non-farmer customers, and wholesale accounts. The fertilizer operation in East Berlin, Pennsylvania, manufactures yard and garden fertilizers sold to dealers and distributors on the East Coast. At East Liverpool, Ohio, we have fertilizer grading equipment which processes fertilizer we sell to other commercial customers. Agronomy purchases the majority of its fertilizer from CF Industries, Inc., an agricultural cooperative of which Agway is a member and is eligible for patronage refunds. Agway has a significant investment in CF Industries. Other crop-related products sold primarily for farm use include plant nutrients, lime, crop protectants, and various seed products. The Agronomy operation is seasonal in nature, with the majority of sales and demand on working capital generated at the beginning of a growing season, which in the Northeast is late winter and spring. Agriculture's seed operations produce, import, and market, primarily for commercial use, agricultural, vegetable, and turf seeds through facilities located in Hall, New York, and Elizabethtown, Emmaus, Mifflinburg, and York, Pennsylvania. Agway believes that production capacity of agronomy products will be sufficient to meet the market needs of the Agronomy Division. The Agronomy operation also has direct marketing operations involved in the processing, bulk storage, and retail and wholesale sales of seeds and bulk storage and wholesale sales of fertilizer products. Additional sales are generated from Brubaker Agronomic Consulting Services, LLC, an agricultural consulting firm specializing in crop, turf, natural resources, engineering and nutrient management plans. RESEARCH AND DEVELOPMENT: The Feed and Nutrition and Agronomy Divisions each conduct research pertinent to their markets. During the years ended June 2001, 2000 and 1999, net expenditures of $200, $2,400 and $1,300, respectively, were incurred by Agriculture on agricultural research activities. COMPETITION: The Feed operations are one of the largest suppliers based on sales volume in the northeastern United States (Source: Feed Management). Competition exists with large national and regional feed manufacturers as well as with local independent mills. The market position held by Agway in the feed business is significant, resulting from performance, quality of its products, an established manufacturing and distribution system, and a knowledgeable work force. 4 ITEMS 1 AND 2. BUSINESS AND PROPERTIES (THOUSANDS OF DOLLARS) AGRICULTURE (CONTINUED) In Agronomy operations, our fertilizer, plant nutrient, seed, crop protectant, and lime products compete in the commercial farm market. Although there are substantial regional variations in market share, our competitive position is strong in the commercial farm market. Competition varies significantly by product line and consists of independent dealers and several nationally integrated corporations. We compete on the basis of technical expertise and field application services, product performance, crop management practices developed by Agway, and expert assistance to the farmer in making crop management decisions. AGRICULTURE REALIGNMENT: On December 7, 2000, 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 and to convert the segment's historic operating losses to profits by fiscal 2003. 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 structures, this realignment involves the conversion of some existing Agway-owned facilities to dealer operations, as well as the sale or closing of some existing Agway-owned facilities. As of June 30, 2001, the management structure is in place, and the realignment is in process. It is expected the system support conversion, and the majority of the facility conversions and closings, will be substantially completed on or about September 30, 2001. Sale of closed facilities is estimated to take place through June 2002. Approximately 4 feed mills, 9 feed storage facilities, 24 crop facilities, 1 fertilizer terminal, and 13 farm stores and farm centers have been or are expected to be closed and/or sold under the Agriculture Plan. Additionally, 6 crop facilities and 3 farm stores and farm centers are expected to be converted to dealer operations. COUNTRY PRODUCTS GROUP Agway's Country Products Group (CPG) is organized into three divisions: The Produce Group, The Business Group, and The Investment Group. Agway believes that all operations of CPG have sufficient capacity to meet their operating requirements. THE PRODUCE GROUP: The Produce Group (generally marketed under the name Country Best) operates a network of seventeen offices/facilities. Facilities in DeWitt, Elba, Sterling and Chittenango, NY; Winder, Georgia; and Plant City, Florida specialize in sizing and packing potatoes, onions and corn into consumer packages for sale to grocery store and food service outlets. A second facility in Plant City, Florida specializes in handling and selling fresh strawberries and other vegetables primarily from Florida. There are three farmers' market locations (Forest Park, Georgia; and Tampa and Plant City, Florida) which sell a wide variety of produce to food service distributors and grocery store outlets. Produce brokerage locations operate out of Calverton, New York; Pompano, Florida; and Idaho Falls, Idaho; and market a wide variety of produce across the United States. Truck brokerage offices are located in Salina, Oklahoma, and Presque Isle, Maine; and a seed and tablestock potato marketing office is also located in Presque Isle, Maine. The full-line produce operation in Donna, Texas, was shut down in July 2001, due to unsatisfactory financial performance. 5 ITEMS 1 AND 2. BUSINESS AND PROPERTIES (THOUSANDS OF DOLLARS) COUNTRY PRODUCTS GROUP (CONTINUED) THE BUSINESS GROUP: The Business Group consists of operations involved in commodity processing and repack operations, and manufacturing of bags. The commodity processing and repack operations purchase certain commodities produced by Agway farmer-members and other farmers and conduct processing and repacking operations as well as marketing, sales, and distribution of the end products. Principal commodities processed, sold, and distributed include human edible sunflower seed and bird food. Sunflower processing and storage facilities, located at Grandin, North Dakota, produce and market human edible sunflower seed, hulled millet, wild bird food, and related products. The multi-walled bag printing and manufacturing plant, located in Wapakoneta, Ohio, supplies bags used by internal Agway operations and external customers, including Pro-Pet LLC (Pro-Pet) and Buckeye Feed Mills, Inc. (Buckeye Feeds). CPG has a minority investment in Pro-Pet, a pet food manufacturer. During 2001, Agway sold an indirect investment in Buckeye Feeds, an animal feed company. Also, during 2001, Agway decided to exit the bean operations which historically processed, sold, and distributed soybeans and edible dry beans. The soybean and edible dry bean processing plants, located at Caledonia and Geneva, New York, are now for sale. THE INVESTMENT GROUP: The Investment Group has invested in several businesses involved in new technologies to benefit agricultural and food businesses. CPG Nutrients, a division of CPG, headquartered in DeWitt, New York, is exploring opportunities to apply new technologies within the agricultural industry and, where feasible and practical, to introduce those products and market them to national and international agricultural customers. A facility in Kittanning, Pennsylvania, is providing daily production of an animal feed product, OptigenTM 1200, a controlled release nitrogen source. Agway CPG Technologies International (CPG Technologies), headquartered in DeWitt, New York, invests in post- harvest technologies such as Fresh Seal(TM), a innovative product used for the preservation of fruits and vegetables. LifeRight Foods, LLC, headquartered in Philadelphia, Pennsylvania, is a joint venture owned 45% by CPG. The balance is owned 45% and 10% by two independent entities. The purpose of LifeRight Foods is to develop and market branded, nutritionally enriched food products for the retail market. This is to be accomplished through the development or license of animal feed products which produce enhanced food products. CPG, through Agway, currently owns approximately 33% (3,000,000 shares) of the outstanding common stock of Planet Polymer Technologies Inc. (Planet), located in San Diego, California. On July 18, 2001, Planet's common stock was delisted from the Nasdaq small cap stock market due to non-compliance with Nasdaq net tangible assets and minimum bid pricing requirements. In November 1998, Planet granted Agway an exclusive worldwide license to all current and future products that utilize Planet's polymer coating technology for agricultural and food-related purposes (other than products already covered by existing agreements). In March 2000, Agway and Planet entered into sub-license agreements defining sales royalties due Planet with respect to Planet's patented/patent pending coatings and/or polymer systems sold for use in animal feed products and on fruits, vegetables, floral and nursery items. In November 2000, Agway purchased rights to the Planet patents that are used in animal feed products and on fruits, vegetables, floral, and nursery items. For these rights, Agway agreed to (1) pay $250 in cash, (2) continue the sales royalties due Planet as defined in the sub-license agreement existing prior to the purchase of these patent rights, and (3) sell back to Planet the exclusive worldwide license to all current and future products that utilize this polymer coating technology for uses other than agricultural and food-related purposes for $150. RESEARCH AND DEVELOPMENT: During the years ended June 2001, 2000 and 1999, expenditures of $300, $500 and $300, respectively, were incurred by The Investment Group on research and development activities. 6 ITEMS 1 AND 2. BUSINESS AND PROPERTIES (THOUSANDS OF DOLLARS) COUNTRY PRODUCTS GROUP (CONTINUED) COMPETITION: CPG competes with a large number of firms of all sizes and types in most of its product categories. The principal factors of competition in these operations are product quality, efficiencies in product distribution, concentration in selected markets, technology and current market pricing. In the Produce Group and in the bag printing and manufacturing product lines of the Business Group, CPG does not occupy a major position in national markets. In the Business Group, the bird food products are primarily marketed to the dealer system of other cooperatives, and compete based on product quality. The human edible sunflower seed and hulled millet are marketed internationally and compete on the basis of product variety and quality. In the Investment Group, CPG Nutrients has no direct competitors in the market for controlled-release nitrogen products in the animal feed area, so competition will come from indirect sources. CPG Nutrients competes on the basis of a new technology bringing improved product quality and performance over existing technologies. As new products are developed, competitive factors may change. CPG Technologies' competition comes from several types of coating companies and producers of similar products, some of which are much larger than CPG Technologies and have had a long history in the industry. Produce coatings of waxes, shellacs, anti-oxidants, modified atmosphere films, and new coating developments, as well as products such as controlled atmosphere containers, film liners, and wax boxes, all compete in the market for specialized coatings and films. We compete on the basis of a new technology bringing improved product quality and performance over existing technologies. ENERGY Agway Energy Products LLC (AEP), a wholly owned Delaware limited liability company, is a full-service energy solutions provider to residential, farm, and commercial customers principally in New York, Pennsylvania, New Jersey, and Vermont. AEP is engaged in the sale and delivery of fuel oil, kerosene, propane, gasoline and diesel fuel (both delivered direct to users and distributed through AEP's service stations), as well as the re-marketing of natural gas and electricity where deregulation makes that possible. AEP serves the majority of its customer base by providing home comfort, particularly in the area of heating, ventilation, and air conditioning (HVAC) equipment and fuels to power these systems. AEP installs and services all types of whole-house warm and cool air systems (furnaces, boilers, air conditioners), air cleaners, humidifiers, de-humidifiers, hearth products, space heaters, room air conditioners, and water systems. Services such as duct cleaning, air balancing, and energy audits are also offered. A product emphasis on oil and propane heating fuels creates seasonal increases in sales and working capital requirements in the fall and winter months. All products are purchased from numerous suppliers or through open-market purchases. During 2001, AEP owned and operated, within its geographic territory, 95 distribution and sales centers. AEP also distributes products through approximately 80 distributors and resellers. Agway believes that these facilities are sufficient to meet the current operating requirements of the business. In June 2000, AEP sold 6 of its 7 terminals to Buckeye Partners, L.P. (Buckeye). The sale of the terminals is part of AEP's strategy to focus on growing its retail energy marketing business, and is not expected to have a negative impact on AEP customers or its operations. An agreement with Buckeye allows AEP to utilize these terminal facilities for storage as part of its distribution network. COMPETITION: The fuel oil, propane, HVAC, and power fuel industries in which AEP competes are generally fragmented and consist of a large number of small businesses. Some consolidation in fuel oil, propane, and HVAC has created a number of larger competitors in these industries. Power fuel competition includes major oil companies as well as smaller, independent businesses. Also, several large, fully-integrated competitors have emerged offering a similar range of home comfort products and services. These competitors have evolved from utility companies in the face of deregulation and the corresponding threat to their traditionally captive customer base. 7 ITEMS 1 AND 2. BUSINESS AND PROPERTIES (THOUSANDS OF DOLLARS) LEASING Telmark LLC (Telmark), a wholly owned Delaware limited liability company, and Telmark's consolidated subsidiaries finance equipment, buildings, and vehicles to farmers and other customers in rural communities. Telmark employs a captive sales force as its primary distribution system in most of the continental United States. Telmark offers financing in the continental United States through its Telmark Express program. Telmark also transacts business in Canada through a separate subsidiary, Telease Financial Services, Ltd. (TFS). TFS is a Canadian corporation which enters into certain lease transactions with Canadian customers. On September 14, 2001, Agway pledged its membership interest in Telmark as additional collateral to secure Agway's obligations under its Credit Agreement with lenders. In the event Agway defaults on its obligations under this Credit Agreement, Agway lenders could choose among the remedies available to them, including the right to foreclose on the Telmark membership interest pledged as security, which would result in a change in control of Telmark. As of June 2001, Telmark had approximately $668,300 of leases outstanding with persons other than Agway and its subsidiaries, net of unearned interest and finance charges of approximately $264,900. Telmark finances its operations and lease portfolio growth through earnings and borrowings under its lines of credit, private placements of debt with institutional investors, lease securitizations, or sales of debentures to the public. As a result of Telmark issuing subordinated debentures to the public, it files its own periodic reports with the SEC pursuant to the Securities Exchange Act of 1934. COMPETITION: Telmark competes with finance affiliates of equipment manufacturers, agricultural financial institutions, other independent finance and leasing companies, and commercial banks. Many of these organizations have substantial financial and other resources and, as a consequence, are able to compete on a long-term basis within the market segment which Telmark serves. INSURANCE Agway Insurance Company (Insurance), a wholly owned New York property and casualty insurance company, is authorized to write insurance as specified in the New York Insurance Law, Sections 1113 and 4102(c), and currently writes insurance in 10 eastern states from the Insurance headquarters in DeWitt, New York. Lines of insurance sold include farmowners, homeowners, farm commercial and personal auto liability and physical damage, and miscellaneous commercial policies that support the agricultural marketplace. Agway General Agency Inc. (Agency) markets medical, long-term care, life and other products designed by non-affiliated companies for the agricultural marketplace. In addition, Agency provides administrative management services to Agway business units including claims, risk, facilities, data processing and payroll/benefits management. COMPETITION: Insurance competes with major direct writers, national agency companies, and smaller regional insurance carriers. Insurance utilizes an independent agency distribution system to market insurance products and services for the benefit of the farm and rural community. Growth opportunities come through the development of specialty products for the agricultural community, professional agency recruitment, and dedication of marketing resources to targeted rural markets. 8 ITEMS 1 AND 2. BUSINESS AND PROPERTIES (THOUSANDS OF DOLLARS) DISCONTINUED OPERATIONS In fiscal 2000, the former Agway retail services business consisted of two major components, a retail store distribution system and a wholesale procurement and supply system. In the second quarter of fiscal 2000, the Agway Board of Directors approved a plan to restructure the retail store distribution system. This plan called for the sale or closure of the 227 Agway retail properties. In the spring of 2000, the Agway Board of Directors authorized the sale of the wholesale procurement and supply system to Southern States Cooperative, Inc. An agreement for this sale was executed on June 20, 2000 and closed on July 31, 2000. The sale of the wholesale procurement and supply system, when combined with the sale and closure of the Agway-owned or operated retail stores, constituted a plan to discontinue operations of the retail services business. For financial reporting purposes, the measurement date upon which this discontinued operation plan became effective was June 20, 2000. Operating results of the retail services business, including restructuring activity which took place through that date, are included in the operating loss from discontinued operations in the financial statements for the year ended June 2000. The anticipated gains and losses after June 20, 2000 from the future anticipated sale of the wholesale procurement and supply system, which was consummated on July 31, 2000, and the sale or closure of the remaining Agway-owned or operated retail store properties, as well as the results of their future operations through the anticipated dates of sale, are included in the loss on disposal of the retail services business in the June 2000 statement of operations. Prior year financial results reflect the retail services business as a discontinued operation. During fiscal 2000 and 2001, the plan to discontinue the operations of the retail services business was executed. As of June 30, 2001, a total net asset of discontinued operations of $5,414 remains, as detailed in Note 14 to the financial statements, and no adjustments to the estimated net loss on disposal of discontinued operations established as of the June 20, 2000, measurement date was required. HUMAN RESOURCES As of June 30, 2001, Agway and its subsidiaries employed approximately 4,700 people, 700 of whom were part-time. This represents a decrease of 900 people from 5,600 employees as of June 24, 2000, of whom 600 were part-time. The decrease is substantially due to the discontinuation of the former retail services business and to the Agriculture Plan realignment. There are approximately 120 employees represented by two different unions with seven existing union contracts. We enjoy satisfactory relations with both our union and nonunion employees as a result of competitive wage and benefit programs. ADMINISTRATIVE Our principal administrative office is located at 333 Butternut Drive in DeWitt, New York. It occupies approximately 180,000 square feet under terms of a lease with 6 remaining years with two 10-year renewal options. Agway believes that the combination of its principal administrative office and other satellite business unit locations are sufficient for its operations. REGULATION Agway and its subsidiaries are subject to various laws and governmental regulations concerning employee health, product safety, and environmental matters. These laws and regulations are enforced by federal government agencies such as the Occupational Safety and Health Administration (OSHA), the Food and Drug Administration (FDA) and the Environmental Protection Agency (EPA). OSHA monitors employee safety and health matters. The FDA sets standards for foods and other products sold to consumers, and the EPA creates rules to protect the environment, such as rules to control pollution and to reduce exposure to chemicals. Many states have adopted similar laws and regulations, which are enforced by state agencies and some of which may be more burdensome than similar federal requirements. 9 ITEMS 1 AND 2. BUSINESS AND PROPERTIES (THOUSANDS OF DOLLARS) REGULATION (CONTINUED) Agway believes its business, as currently conducted, is not adversely affected by any of these laws and regulations. However, these laws and regulations are constantly changing and may impose greater requirements and expense on Agway and its subsidiaries in the future. Currently, Agway is negotiating with various government agencies concerning the clean up of hazardous waste sites. These sites are commonly known as Superfund sites under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA). See Legal Proceedings (Item 3). STOCKHOLDER MEMBERSHIP AND CONTROL OF AGWAY Agway members are farmers or cooperative organizations of farmers who hold one share of Agway's Membership Common Stock and who purchase farm supplies or farm services or market farm products through Agway or authorized dealers. Currently, there are approximately 69,000 members. Each share of Membership Common Stock is entitled to one vote for the election of directors and for other corporate actions. The Membership Common Stock, $25 par value, is held only by active Agway members. Ownership of Membership Common Stock is different from ownership of common stock in typical business corporations because Agway is an agricultural cooperative. Membership Common Stock may only be purchased by persons who qualify as Agway members and is transferrable only with Agway's consent. Membership Common Stock indicates membership in Agway rather than indicating a significant equity interest in Agway. A holder of Membership Common Stock is limited to the $25 par value of the security, plus dividends declared and unpaid, if any, for the current year. Dividends are limited to 8% of the par value of Membership Common Stock and may be declared at the discretion of the Agway Board of Directors each fiscal year. The residual equity in the net assets of Agway is held for the benefit of past and present member-patrons of Agway. Agway also has preferred stock. Four different series of Cumulative Preferred Stock (Series A, Series B, Series B-1 and Series C), $100 par value, are held by Agway members, the Agway Inc. Employees' 40l(k) Thrift Investment Plan and the general public. In addition, non-cumulative Honorary Member Preferred Stock (Series HM), $25 par value, is held only by former Agway members (see Note 12 of the financial statements for further details of preferred stock). The Board of Directors controls the affairs and business of Agway. All stockholder actions, except as otherwise provided by law, including the election of directors, are determined by the vote of Agway members present by proxy (another person authorized by the member to vote) or in person at the annual meeting (or special meetings) of members. There are presently 14 directors on the Board of Directors, all of whom are members. Effective October 2001, there will be 17 directors on the Board of Directors, at least 14 of whom shall be members, up to two of whom shall be other directors who are not required to be members, and the chief executive officer of the Company. Members elect directors each year at the annual meeting to fill new seats or vacancies resulting from the expiration of the terms of certain directors. Once elected, a director holds office for a term of 3 years. 10 ITEMS 1 AND 2. BUSINESS AND PROPERTIES (THOUSANDS OF DOLLARS) STOCKHOLDER MEMBERSHIP AND CONTROL OF AGWAY (CONTINUED) Agway announced a new process for nominating and electing Directors which takes effect for the Cooperative's 2001 Director elections to be held in October 2001: o Three geographic Nomination Regions have replaced the fifteen Nomination Districts that comprise Agway's membership. o Director Nominating Forums established in each region identified and recommended Member Director candidates. o Every Agway member has the opportunity to participate on an annual basis in the Director Nominating Forums, with special emphasis placed on engaging those members who represent the majority of Agway's patronage volume. o In October 2001, two outside Directors and Agway's CEO will be added to the Board, while over the next two years, the number of Member Directors will be reduced from 14 to 12. RETAINED EARNINGS Retained Earnings (also sometimes referred to as retained margins) are held for the benefit of past and present Agway members. Retained Earnings are all net earnings (gross receipts reduced by all operating expenses) of Agway remaining after payment of income taxes, dividends on issued and outstanding stock, patronage refunds, and all net earnings from the business activities of predecessors in interest (companies who were acquired by or merged into Agway), kept as reasonable reserves. Retained Earnings consist of : (1) The portion of Member Earnings (net earnings based only on purchases by members) undistributed to members. (2) Net earnings based on nonmember purchases and marketing operations. (3) All other income, including earnings from non-agricultural divisions and subsidiaries of Agway, dividends and interest from investments. The Retained Earnings of Agway will only be distributed to Agway members upon dissolution of Agway. According to the By-laws adopted by Agway, upon dissolution, the Retained Earnings will be distributed proportionately among Agway's past and present members in accordance with their interests, after all debts are paid in full and any amounts due to holders of preferred stock, revolving fund certificates, and common stock are paid. PATRONAGE REFUNDS The By-laws of Agway provide that, after the end of each fiscal year, an amount equal to the earnings, if any, realized on a tax basis by Agway after deduction for reasonable reserves for future operating expenses and amounts paid or set aside for payment of income taxes and dividends on issued and outstanding stock of Agway may be paid as patronage refunds in cash. The total amount of patronage refunds paid must not exceed the total earnings attributable to the sale of farm supplies by Agway to members during the fiscal year. These patronage refunds are based on sales of feed, agronomic products, and selected eligible farm supplies to members for the fiscal year. Each member's total patronage refund is based on the proportion of his/her purchases of farm supplies made from Agway during the fiscal year, to the total farm supply purchases made by all members in such year. No patronage refunds are payable with respect to the purchase of services for the marketing of farm products through Agway, unless specified in a contract between the member and Agway. 11 ITEMS 1 AND 2. BUSINESS AND PROPERTIES (THOUSANDS OF DOLLARS) PATRONAGE REFUNDS (CONTINUED) The By-laws of Agway also allow the Board of Directors to authorize the payment of patronage refunds to certain contract patrons. Contract patrons are persons or businesses, other than members, who purchase eligible farm supplies from Agway. Payment of patronage refunds to contract patrons must be made on the same terms and conditions as those specified above for members. Examples of contract patrons may be certain departments or agencies of governments, and charitable, religious or educational institutions that use or produce farm supplies. Business with contract patrons currently represents less than 1% of Agway's annual sales volume. ITEM 3. LEGAL PROCEEDINGS Agway and its subsidiaries are not involved in any material pending legal proceedings other than ordinary routine litigation incidental to the business except the following: 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. The lawsuit is still in the preliminary stages. 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. In August 1994, the Environmental Protection Agency (EPA) notified Motor Transportation Services, Inc. (MTS), a dissolved wholly owned subsidiary of AHI, that the EPA has reason to believe that MTS is a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) at the Rosen Site, Cortland, New York. The EPA requested that MTS and other PRPs participate in the ongoing Remedial Investigation/Feasibility Study (RI/FS) for the Rosen Site. In March 1998, the EPA issued a unilateral administrative order to the PRPs, including Agway and MTS, for a removal action at the Rosen Site. Agway and MTS have notified the EPA that they will comply with the order by cooperating with the other PRPs to assure that the removal action is performed. In addition, Agway and MTS have offered to cooperate with the other PRPs in performing a Remedial Design/Remedial Action (RD/RA) for the site in accordance with the Record of Decision (ROD) issued by the EPA and a Consent Decree was entered by the Court in May 1999. In a related matter, other PRPs at the Rosen Site, Cooper Industries, Inc., et al., filed a complaint under CERCLA against Agway, MTS and other alleged PRPs at the Rosen Site in the U.S. District Court, Northern District of New York, in June 1992, seeking reimbursement for the cost of the ongoing RI/FS. In January 2001, the parties agreed to a voluntary dismissal of this lawsuit. Agway currently has accrued its best estimate relative to the cost of any additional assessment, containment, removal or remediation actions regarding the property. However, it is reasonably possible that the results of ongoing and/or future environmental studies or other factors could alter this estimate and require the recording of additional liabilities. The extent or amount of such events cannot be estimated at this time. However, Agway believes that its past experience provides a reasonable basis for its estimates recorded for this matter. In August 1995, the EPA notified Agway that the EPA has reason to believe that Agway is a PRP under CERCLA at the Tri-Cities Barrel site, Port Crane, New York. In June 1997, the cooperating PRPs agreed upon an allocation of responsibility for past and future investigation and remediation costs. In March 2000, the EPA issued the Record of Decision (ROD) for the Remedial Design/Remedial Action (RD/RA) for the site. The EPA has requested that Agway and the other PRPs participate in the RD/RA. A group of cooperating PRPs, including Agway, negotiated a Consent Decree with the EPA to perform the RD/RA. The Consent Decree was filed with the U.S. District Court, Northern District of New York, in April 2001 and was approved by the Court in August 2001. Based on the agreed upon allocation and the cost estimates for the site, Agway has accrued its best estimate for any additional costs at the site. 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no items submitted to a vote of security holders for the three months ended June 2001. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Principal Market: There is no market for the equity securities of Agway other than through its current practice of repurchasing outstanding securities at par ($25) whenever registered holders thereof elect to tender them for redemption. (b) Approximate Numbers of Holders of Common Stock: The number of holders of record of Agway's Common Stock, as of September 14, 2001, is 97,390, of which 28,607 shares have been called for those holders no longer meeting the membership eligibility requirements as identified in Section 2.1(a) in the By-Laws of Agway Inc. (c) Dividends Paid: An annual 6% dividend, or $1.50 per share, was paid on Agway's Common Stock in 2001 and 2000. (d) Limitations on Ownership and Availability of Net Earnings to Membership Common Stockholders: Refer to Stockholder Membership and Control of Agway and Patronage Refunds under Business and Properties (Items 1 and 2). ITEM 6. SELECTED FINANCIAL DATA The following Selected Financial Data of Agway and Consolidated Subsidiaries has been derived from consolidated financial statements audited by PricewaterhouseCoopers LLP, independent certified public accountants, whose report for the three years ended June 2001 is included elsewhere in the Form 10-K, and should be read in conjunction with the full consolidated financial statements of Agway and notes thereto.
(In Thousands of Dollars Except Per Share Amounts) --------------------------------------------------------------------------------------- Years Ended --------------------------------------------------------------------------------------- June 2001 June 2000 June 1999 June 1998 June 1997 -------------- ------------- -------------- -------------- -------------- Net sales and revenues........ $ 1,548,314 $ 1,357,999 $ 1,160,278 $ 1,236,976 $ 1,325,787 Earnings from continuing operations................ $ (7,870) $ 6,152 $ 12,941 $ 16,016 $ 8,499 Net earnings (loss)(1)(2)(3).. $ (8,927) $ (9,377) $ 1,795 $ 41,145 $ 10,670 Total assets.................. $ 1,599,905 $ 1,578,129 $ 1,437,172 $ 1,380,891 $ 1,261,763 Total long-term debt ......... $ 418,689 $ 417,889 $ 371,972 $ 352,188 $ 329,969 Total subordinated debt....... $ 488,110 $ 474,874 $ 486,303 $ 462,196 $ 438,127 Cash dividends per share of common stock .......... $ 1.50 $ 1.50 $ 1.50 $ 1.50 $ 1.50
(1) Effective July 1, 1997, Agway changed its method of determining the market-related value of its plan assets under Statement of Financial Accounting Standards (SFAS) No. 87, "Accounting for Pensions." A cumulative effect adjustment, net of tax, of $28,956 increased net earnings in 1998. (2) The data reflects after-tax loss on disposal and loss from the discontinued retail services business of $0, $15,529, $11,146 and $3,827 for 2001, 2000, 1999 and 1998, respectively. The 1997 data reflects after-tax earnings of $2,172 from discontinued retail services business (see Note 14 of the financial statements for details of discontinued operations). (3) Effective June 25, 2000, Agway changed its method of determining the value of derivative instruments under Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." A cumulative effect adjustment, net of tax of $1,057, decreased net earnings in 2001. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (THOUSANDS OF DOLLARS) The following discussion refers to Agway Inc. and Consolidated Subsidiaries and should be read in conjunction with Selected Financial Data (Item 6) and the Consolidated Financial Statements of Agway and Notes thereto (Item 8), specifically Financial Information Concerning Segment Reporting (Note 13) and Discontinued Operations (Note 14). The purpose of this discussion is to outline the most significant factors having an impact upon the results of operations, the liquidity, and the capital resources of the Company for each of the three fiscal years in the period ended June 2001. Agway reports its operations principally in five business segments: Agriculture, Country Products Group, Energy, Leasing, and Insurance. The consolidated results for all periods discussed reflect the former Agway retail services business as a discontinued operation. 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 product demand from cold winter conditions. Energy net sales and revenues do not include product excise taxes. The prior years net sales and revenues have been reclassified to conform with the current year presentation. 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. RESULTS OF OPERATIONS - 2001 COMPARED WITH 2000 CONSOLIDATED RESULTS Agway's net loss of $8,900 for 2001 reflects a decrease in net loss of $500 (5%) from a net loss of $9,400 in 2000. The net loss is reported separately as continuing and discontinued operations. The net loss from continuing operations of $7,900 in 2001 represents a decrease in earnings of $14,000 from net earnings from continuing operations of $6,100 in 2000. The net loss from discontinued operations was $0 in 2001, as compared to a net loss of $15,500 in 2000, as no adjustment to the estimated net loss on disposal of discontinued operations established as of the June 20, 2000, measurement date was required. Finally, the cumulative effect of an accounting change resulted in a net loss of $1,000 in 2001. The $14,000 decrease in earnings from continuing operations is made up of a $26,700 decrease in pre-tax earnings offset by a $12,700 decrease in tax expense. The decrease in pre-tax earnings consists of operating improvements in certain business operations of $15,800 (see business segment discussion below) that were offset by $14,400 in operating losses and costs associated with the realignment and/or shutdown and exit from certain business activities in our Agriculture ($5,500) and Country Products Group ($8,900) segments. Gains in fiscal 2000 of $17,900 from the sale of 6 Energy pipeline terminal storage facilities ($12,900) and a negotiated settlement of prior years' cost ($5,000) in Agriculture's operations were unique to that year and were not repeated in 2001. Finally, corporate costs increased $10,200, substantially due to higher interest costs from higher average debt balances combined with a slightly higher average interest rate during 2001 as compared to 2000. Additionally, a decline in the amount of pension income recognized in continuing operations occurred during 2001 due to the transition asset being fully amortized during 2000. Consolidated net sales and revenues from continuing operations of $1,548,300 increased $190,300 (14%) compared to $1,358,000 in 2000. The increase was substantially the result of increased sales in the Energy segment. The increase in Energy was principally due to increases in the cost of petroleum products over the prior year combined with an increase in volume. Sales also increased in 2001 from increased sales from Energy's heating, ventilation and air- conditioning installation and service sales and growth in electric and natural gas marketing sales; an increase in lease revenues at Telmark; an increase in CPG's continuing produce operations; and increases in Agriculture's agronomy and heifer rearing services. These improvements were partially offset by sales declines in Agriculture's Feed operations, substantially due to the result of the planned exiting from the direct marketing of grains. An additional decline in sales was experienced in CPG's sunflower operation, the result of a poor sunflower seed crop that impacted 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (THOUSANDS OF DOLLARS) CONSOLIDATED RESULTS (CONTINUED) sunflower seed product sales in the first quarter of 2001, and for the remainder of the year, the result of a combination of lower product demand, low commodity pricing, and international pricing competition. Consolidated operating expenses from continuing operations of $1,527,400 in 2001 increased $187,300 (14%) compared to $1,340,100 in 2000. The increase in operating expense was substantially due to increased cost of products and plant operations of $168,200 (15%) substantially from the increase in Energy's product costs noted above and increased selling, general and administrative activities of $13,400 (10%), principally in CPG, Telmark, and Corporate. Net interest expense from continuing operations of $37,600 increased $7,000 (23%) in 2001 as compared to $30,600 in 2000. Average borrowing levels were higher in 2001 as compared to 2000, the average interest rate increased slightly, and debt fees were higher in 2001 as compared to 2000, which drove the increase in interest expense. Other income, net, from continuing operations of $3,000 decreased $22,700 (88%) in 2001 as compared to $25,700 in 2000. Total impairment losses recorded in 2001 totaled $4,400 as compared to $0 in 2000. Additionally, other income in 2000 included a $12,900 gain from the sale of six Energy pipeline terminal storage facilities and $5,000 from a negotiated settlement in Agriculture of amounts due the Company on claims from prior years' business activity, which were unique to that year and were not repeated in 2001. Income tax benefit from continuing operations of $5,800 in 2001 as compared to a tax expense of $6,900 in 2000 results in effective tax rates of (42.5%) and 52.7%, respectively. Effective July 1, 2001, Agway simplified its corporate structure by merging AFC and AHI into Agway Inc. The change in net deferred tax liabilities reflects the expected future tax rate from this structure. Additionally, an adjustment to prior years' tax liabilities and a valuation allowance had a significant impact on the effective rate. AGRICULTURE Total Agriculture sales and revenue of $523,600 in 2001 increased $14,900 (3%) as compared to $508,700 in 2000. The overall increase in sales in 2001 was from a $19,700 (8%) increase in sales in the Agronomy business and a $2,700 (212%) increase in sales in the tested specific pathogen free (TSPF) heifer-rearing services. These increases in sales were partially offset by a $4,800 (100%) decrease in the direct marketing of grains, a $400 (0%) decrease in sales in the feed business, and a $2,700 (12%) decrease in sales in the Agriculture farm stores. The sales increase in the Agronomy operations was partly related to the weather-related delay in the spring 2000 plantings. That delay resulted in the sale of agronomy products, such as fertilizer, crop protectants, and lime (which normally would have occurred in the fourth quarter of 2000) to occur in the first quarter of the current year. Additionally, the Agronomy sales increase in 2001 was due in part to an increase in pricing of certain products, such as liquid nitrogen and urea, where underlying product costs increased in 2001. These factors increased the sales price of these products. The TSPF heifer-rearing service sales increased due to the continued growth of utilization of the heifer-rearing facilities during 2001. The decline in the direct marketing of grains in 2001 as compared to 2000 was the result of the planned exiting from the direct marketing of grains during the second half of 2000. The Feed operations experienced growth in sales in the bagged feed and ongoing feed mill operations as a result of a refocused marketing and sales strategies. These increases to feed sales were offset by a loss in feed sales as a result of the actual or impending closure of several feed locations as part of the Agriculture Plan realignment. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (THOUSANDS OF DOLLARS) AGRICULTURE (CONTINUED) Agriculture pre-tax loss of $18,800 in 2001 increased $5,300 (39%) as compared to a $13,500 loss in 2000. The $18,800 loss in 2001 includes $3,800 in costs associated with the Agriculture Plan (as further described in Note 15 to the financial statements), $1,700 in asset impairment charges related to select business activities with inadequate projected future cash flows, and $13,300 in losses from ongoing operations. The $13,500 loss in 2000 included a $5,000 gain from a negotiated settlement (with no corresponding gain included in the 2001 results), a $1,900 cost from the final exiting of the grain marketing business, and $16,600 in losses from ongoing operations. The $3,300 improvement in losses from ongoing operations from $16,600 in 2000 to $13,300 in 2001 is substantially due to improved Agronomy results of $3,600, principally from improved planting conditions in the spring of 2001 as compared to 2000 combined with the weather-related delay in the spring 2000 plantings noted above and reduced administrative costs of $1,500, which were partially offset by increased losses in our developing TSPF(TM) operations of $1,100, and reduced feed results of $300. COUNTRY PRODUCTS GROUP Country Products Group (CPG) total sales and revenue of $202,800 in 2001 increased $800 (0%) as compared to $202,000 in 2000. The continuing produce operations sales increased $2,800 (2%) in 2001 as compared to 2000 due to increased volumes in various product lines and sales to new customers. Other operating units of CPG increased sales by $1,800 (100%) in 2001 as compared to 2000 primarily from the commercial sale of Optigen(TM) 1200, a controlled- release nitrogen feed product, which was not available until the second quarter of 2000. These sales increases were partially offset by a $2,200 (5%) decrease in sunflower seed sales and a $1,600 (4%) decrease in sales from the sale or shutdown of certain operations. The decline in sunflower seed sales is a result of a poor sunflower seed crop that adversely impacted sunflower seed product sales during the first quarter of 2001 and for the remainder of 2001 is a result of a combination of lower product demand, low commodity pricing, and lost sales due to international pricing competition. The sales decrease due to sold or shutdown operations resulted from the sale of a pastry flour mill in the fourth quarter of 2000, which decreased sales in 2001 by $4,800, and the shutdown of a number of other smaller operations reduced sales $1,000 (23%) in 2001 as compared to 2000. These decreases were partially offset by a $4,200 (21%) increase in sales at the Texas produce operations, which was shut down shortly after the fiscal 2001 year-end. Total CPG sales that related to operations that have been sold or exited totaled $33,700 (or 17% of total segment sales) in 2001 and $35,300 (or 17% of total segment sales ) in 2000. CPG pre-tax loss of $14,100 in 2001 is an $11,200 (388%) increase in pre-tax loss as compared to a pre-tax loss of $2,900 in 2000. The increased loss is primarily due to operating losses from discontinued businesses, costs of business shutdowns, and loss of earnings from sold businesses, which , when combined, increased pre-tax loss by $8,900 in 2001 as compared to 2000. The largest components of this impact were from the operating losses and costs of business shutdown, including asset impairment, relating to the Texas produce operation and the bean operation in 2001. In contrast, CPG had operating revenues and a gain on the sale of the flour mill in 2000. CPG's continuing operations experienced an increased loss of $2,300 (128%) in 2001 as compared to 2000. The decline was driven by lower margins in the sunflower seed operation as a result of a combination of higher product cost from the prior year carryover crop and lower product demand, excess industry capacity, and international competition, as noted above, which has suppressed margins. Additionally, overall administrative costs have increased principally from increased interest costs. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (THOUSANDS OF DOLLARS) ENERGY Energy total sales and revenue of $723,900 in 2001 increased $147,900 (26%) as compared to total sales and revenue of $576,000 in 2000. The overall sales dollar increase was primarily due to volume and price increases related to liquid products. Sales dollar increases attributable to increase in liquid product volume were $11,200 during 2001 (a 2% increase over 2000), while overall sales dollar increases attributable to price increases in liquid products were $114,100 for 2001 (a 19% increase over 2000). Volume increases of $21,000 (8%) were experienced in the retail and wholesale sales of heating oil and propane, which are a result of colder winter weather in the Northeast in 2001 as compared to 2000. These volume increases were partially offset by a $9,800 (4%) decrease in volume of power fuels, principally gasoline, in 2001 as compared to 2000. A combination of increased price competition at our gas stations and lower contracted commercial gasoline sales caused the volume declines. The price increases resulted from the petroleum industry continuing to experience significantly higher pricing of product in 2001 as compared to the prior year, primarily due to pressure on global supply of products. Additionally, sales increases in 2001 of $18,600 (96%) as compared to 2000 resulted from the continued sales growth in the electric and natural gas marketing business. Finally, continued growth of revenues in heating, ventilation and air-conditioning installation and service increased sales in 2001 by $4,000 (7%). Energy pre-tax earnings of $20,100 in 2001 decreased $1,900 (9%) as compared to $22,000 in 2000. The pre-tax earnings in 2001 include $16,500 from operating results and $3,600 of other revenues, while pre-tax earnings in 2000 included $4,800 from operating results and $17,200 from other revenue. The improvement in operating results includes a $17,400 (10%) increase in gross margin, offset by a $5,500 (3%) increase in operating expense. The gross margins were driven by product volume increases and improved margins. The operating expense increases are a result of distribution costs from the increased volume of delivered products and an increase in 2001 in management and employee incentives from the improved operating results in 2001 as compared to 2000. Finally, other revenue decreased $13,600 in 2001 as compared to 2000 substantially because Energy recognized a gain of $12,900 on sale of six pipeline terminal storage facilities in 2000. LEASING Leasing total revenues of $86,200 in 2001 increased $9,400 (12%) as compared to revenues of $76,800 in 2000. The increase is primarily due to a higher average investment in leases and notes, which was partially offset by a lower income rate on new and replacement leases and notes. Telmark's average net investment in leases and notes increased $76,800 (13%) in 2001 as compared to 2000. Pre-tax earnings from operations of $21,200 for 2001 increased $1,100 (6%) as compared to pre-tax earnings of $20,100 in 2000. The increase in pre-tax earnings is due primarily to the total revenue increases noted above, which were partially offset by an increase in total expenses of $8,200 (14%) in 2001 as compared to 2000. The increase in total expenses was substantially due to a $5,400 (17%) increase in interest expense, a $1,600 (20%) increase in provision for credit losses, and a $1,200 (7%) increase in selling, general and administrative (SGA) expenses. The increase in interest expense is due to a $71,300 (15%) increase in the average amount of debt required to finance the increase in the lease portfolio, combined with higher interest rates on new and replacement debt, as compared to the prior year. Telmark's allowance for credit losses is based on a periodic review of the collection history of past leases, current credit practices, an analysis of delinquent accounts, and current economic conditions. The increase in provision for credit losses from $7,900 to $9,500 is based on an analysis of the allowance required to provide for uncollectible receivables, and the allowance has been established at a level management believes is sufficient to cover estimated losses in the portfolio. At June 2001, the allowance for credit losses was $35,500 compared to $32,500 at June 2000. During 2001 and 2000, the total value of non-earning discounts increased from $6,000 in 2000 to $6,400 in 2001 and as a percentage of lease portfolio remained at 0.9% for both years. The increase in SGA expense is principally due to additional personnel and incentive costs, paid to certain employees relating to overall profitability, retention of business, and profitability of new business. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (THOUSANDS OF DOLLARS) INSURANCE Insurance Group (Agway Insurance Company and Agway General Agency) net revenues of $27,900 in 2001 increased $700 (3%) as compared to net revenues of $27,200 in 2000. A $900 (4%) increase in revenues was experienced at the Agway Insurance Company. The increase was in net earned premiums as sales initiatives caused the increase in net premiums year over year. In the Agency, 2001 revenues of $600 were down $200 (25%) from 2000 as a result of a decline in enrollment in the products offered by the Agency. Pre-tax earnings of the Insurance Group of $800 in 2001 increased $800 as compared to break-even results in 2000. The Agway Insurance Company experienced pre-tax earnings of $800 in 2001, which increased $200 (33%) as compared to $600 in 2000. The Insurance Company increase in net earned premiums noted above and an increase in non-operating revenues were partially offset by an increase of $1,300 in claims losses during 2001 as compared to 2000 as a result of numerous roof collapses from the heavy winter snows in the Northeast and an above average number of farm fires reported during 2001. The Agway General Agency experienced a pre-tax break-even position for 2001, which represents an increase of $600 (100%) from a net loss of $600 in 2000. The improvement in pre-tax earnings was primarily due to lower expenses in the Agency. DISCONTINUED OPERATIONS As disclosed in the Business and Properties section (Items 1 & 2), Agway discontinued the operation of our retail services business in 2000. As of June 2000, Agway reflected in its financial results both the loss from operations during 2000 as well as an estimate of the net loss on the ultimate disposal of the retail services business. During fiscal 2000 and 2001, as reflected in Note 14 of the financial statements, we executed our plans to discontinue the retail services business and no adjustment to the estimated net loss on disposal established as of the June 20, 2000 measurement date was required. RESULTS OF OPERATIONS - 2000 COMPARED WITH 1999 CONSOLIDATED RESULTS Agway's net loss of $9,400 for 2000 reflects a decrease in earnings of $11,200 from net earnings of $1,800 in 1999. The net earnings from continuing operations of $6,100 in 2000 decreased $6,800 from the $12,900 net earnings in 1999. This $6,800 decrease was made up of a $10,200 decrease in pre-tax earnings offset by a $3,400 decrease in tax expense. The 2000 results have a $15,500 net loss from discontinued operations as compared to $11,100 in 1999. (See Discontinued Operations section below.) Consolidated net sales and revenues from continuing operations of $1,358,000 increased $197,700 (17%) compared to $1,160,300 in 1999. The increase was substantially the result of increased sales in the Energy and Country Products Group (CPG) segments. The increase in Energy was principally due to increases in the cost of petroleum products over the prior year combined with a slight increase in volume. The increase in Country Products Group sales resulted from new acquisitions in CPG's Produce Group operations. These sales increases in 2000 were further enhanced by increased sales from Energy's heating, ventilation and air-conditioning installation and service sales and growth in electric and natural gas marketing sales; an increase in lease revenues at Telmark; and increases in Agriculture's national commercial vegetable seed operations, new livestock nutrition centers and heifer rearing services. These improvements were partially offset by sales declines in Agriculture's feed and agronomy operations which, during 2000, faced continued industry-wide depressed commodity pricing, high spring rainfall in a significant part of its planting territory, and planned operational reductions in its grain marketing operations. An additional decline in sales was experienced in CPG's sunflower operation, the result of a poor sunflower seed crop in the fall of 1999. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (THOUSANDS OF DOLLARS) CONSOLIDATED RESULTS (CONTINUED) Consolidated operating expenses from continuing operations of $1,340,000 increased $210,100 (19%) compared to $1,129,900 in 1999. The increase in operating expense was substantially due to increased cost of products and plant operations of $195,400 (20%), from the increase in Energy's product costs noted above and increased selling, general and administrative activities of $12,600 (10%), principally in Agriculture and CPG. Net interest expense from continuing operations increased $4,500 (17%) in 2000 as compared to 1999. Borrowing levels were higher in 2000 as working capital requirements increased $52,300, principally as a result of Energy's high product costs substantially driving up the carrying value of inventory and accounts receivable. Other net income from continuing operations of $25,700 increased $6,800 (36%) in 2000 as compared to $18,900 in 1999. Other income in 2000 included a $12,900 gain from the sale of six pipeline terminal storage facilities and $5,000 from a negotiated settlement in Agriculture of amounts due the Company on claims from prior years' business activity. The 1999 other net income included a $10,700 net gain on sale of CPG's Allied Seed business. Income tax expense from continuing operations of $6,900 in 2000 and $10,300 in 1999 results in effective tax rates of 52.7% and 44.2%, respectively. State taxes are a significant factor in the effective rate. Agway does not file a consolidated return for state tax purposes and therefore cannot recognize the benefit of operating losses of certain subsidiaries. This fact combined with an increase in non-deductible goodwill relating to certain acquisitions in 2000 and 1999 increased the effective tax rate for 2000 as compared to the effective rate for 1999. AGRICULTURE Total Agriculture sales and revenues of $508,700 in 2000 decreased by $26,500 (5%) as compared to $535,200 in 1999. Total feed sales, including enterprise and direct marketing sales, decreased $10,100 (4%) despite a 6% increase in feed unit volume in 2000 as compared to 1999. The decline in feed sales in 2000 was substantially the result of a planned reduction in grain marketing sales combined with overall lower commodity market pricing. These declines more than offset sales growth in the new livestock nutrition centers in 2000. Total agronomy sales decreased $14,100 (5%) in 2000 as compared to 1999. The decline in agronomy sales resulted from the continued industry-wide low commodity pricing of nitrogen products. Additionally, high rainfall in the northern portion of Agway's market territory during the spring 2000 planting season delayed plantings and the sale of agronomy products such as fertilizers, pesticides and lime. The agronomy operations experienced sales growth in 2000 in its national commercial vegetable seed and agronomy consulting businesses which partially offset the sales declines noted above. The Agriculture farm store sales decreased $3,800 (15%), a direct result of closing several locations during 2000. Agriculture's new TSPF(TM) (tested specific pathogen free) heifer rearing services had its initial revenues of $1,100 during 2000. Agriculture loss before income taxes of $13,500 increased $1,100 (9%) from $12,400 in 1999. The feed operations pre-tax earnings increased $2,600 (29%) in 2000. The grain marketing unauthorized speculative positions, as previously described in the 1999 10-K, resulted in $8,600 in pre-tax losses in 1999, and an additional $1,300 of pre-tax losses were incurred in 2000 in closing the unauthorized speculative positions which were outstanding at June 1999. The combined enterprise and direct marketing feed operations had increased costs of $4,400 in 2000 as compared to 1999 as a result of facility improvements, higher production costs from increased unit volume, and costs relating to the discontinuation of the futures trading operations. The agronomy operations pre-tax earnings decreased $3,500 (55%) in 2000 as compared to 1999. The decline was substantially the result of lost margins from the delays in spring 2000 planting noted above and one-time costs associated with the acquisition of an agronomic consulting operation. The new TSPF(TM) operations reduced earnings by $1,600 in 2000 as compared to 1999 as the research and development costs to initiate the operation of several new facilities were greater than the revenues generated. Total administrative expenses more than offset earnings from operations noted above. During 2000, administrative costs increased $4,400 as compared to 1999, principally due to increases to bad debt expense and lower interest revenues. This cost increase was offset by a $5,000 negotiated settlement for amounts due the Company on claims from prior years' business activity. Finally, farm stores pre-tax losses were reduced by $800 due to lower operational expenses. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (THOUSANDS OF DOLLARS) COUNTRY PRODUCTS GROUP Country Products Group (CPG) total sales and revenues of $202,000 in 2000 increased $30,300 (18%) compared to $171,700 in 1999. The growth in CPG sales over the prior year was substantially in the Produce Group, where sales increased $35,400 due to the acquisition of new produce businesses in the second half of 1999 and in the first half of 2000. Additionally, CPG's Investment Group began commercial sales of Optigen(TM) 1200, a controlled-release nitrogen feed product, to dairy farmers in the Northeast beginning in October 1999. Sales of this new product totaled $1,700 for 2000. The growth in sales due to these new operations was partially offset by a $6,100 (10%) decline in the Business Group sales and a $700 decrease from the sale in the first quarter of 1999 of Allied Seed. The decline in Business Group sales was substantially the result of a poor sunflower seed crop in the fall of 1999, which was widespread in its territory due to adverse growing conditions. CPG loss before income taxes of $2,900 in 2000 is a $15,000 (124%) decrease in earnings compared to earnings before income taxes of $12,100 in 1999. Pre-tax earnings declined in 2000 by $9,100 as compared to the prior year, primarily due to the differences in gains resulting from the sale of certain business operations during each of those years. In 1999, CPG recognized a gain of $10,700 on the sale of Allied Seed. In fiscal 2000, CPG recognized a gain of $1,600 on the sale of certain assets and its flour operation. The Business Group pre-tax earnings declined $2,500 (93%) due to the sunflower operations experiencing lower margin from higher product and production costs associated with the poor sunflower seed crop harvested in the fall of 1999. The Produce Group pre-tax earnings declined $2,500 (64%) in 2000 as compared to 1999. While increased produce sales provided increased gross margins, these gross margins were at a lower percentage than the prior year and were more than offset by additional costs, principally from the new produce operations. CPG's Investment Group had an increase in pre-tax loss in 2000 of $1,300 (37%) as compared to 1999. The increased loss in 2000 occurred as the Investment Group continues to incur costs related to several of its new product initiatives. ENERGY Energy total sales and revenues of $576,000 in 2000 increased $185,300 (47%) as compared to total sales and revenues of $390,700 in 1999. Overall, sales dollar increases from petroleum product volume increases were $6,200 (1%) in 2000 as compared to 1999. The volume increases were driven by higher wholesale volume of diesel fuel and heating oil and continued volume growth in the retail and wholesale propane business. Throughout fiscal 2000, the petroleum industry experienced significant increases in the pricing of product, particularly in the first and third quarters of the fiscal year, primarily due to pressure on global supply of products. As a result of these market conditions, Energy experienced sales dollar increases due to price increases in its liquid products of $158,100 (36%) for 2000 as compared to 1999. Additionally, continued focus on growth of the heating, ventilation and air-conditioning installation and services sales and in the electric and gas marketing business increased sales in 2000 by $8,900 (19%) and $12,100 (168%), respectively, as compared to 1999. Earnings before income taxes of $22,000 for 2000 increased $9,000 (69%) from $13,000 in 1999. Overall, gross margin dollars increased $7,200 (4%) in 2000 as compared to 1999 and were substantially driven by the continued growth in heating, ventilation and air-conditioning installation and service sales and an increase in propane product volumes with margins comparable to the prior year. The improved margins, however, were more than offset by increases in total operating expenses of $11,200 (7%) in 2000 as compared to 1999. An increase in payroll costs associated with the increased service sales and unit volume, as well as increased administrative costs, principally information system cost from implementation of a new operating system, and increased automotive fuels costs, increased total operating costs in 2000 as compared to 1999. Finally, other revenue was substantially increased as a result of the June 2000 sale of six pipeline terminal storage facilities to Buckeye Partners, L.P., resulting in a net gain to Energy of $12,900. This sale is part of Energy's strategy to focus on growing its retail energy marketing business, and the sale will have no negative impact on Energy's customers or its operations. The agreement with Buckeye allows Energy to utilize these terminal facilities for storage as part of its distribution network. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (THOUSANDS OF DOLLARS) LEASING Leasing total revenues of $76,800 in 2000 increased $6,800 (10%) as compared to $70,000 in 1999. The increase is attributable in part to a $67,800 (12%) increase in the average net leases and notes during 2000 as compared to 1999 partially offset by a lower income rate on new and replacement leases and notes. Pre-tax earnings from operations of $20,100 in 2000 increased $1,900 (10%) from $18,200 in 1999. The 2000 increase in total revenues noted above was partially offset by increases in interest expense and selling, general and administrative (SG&A) costs incurred to generate these revenues in 2000 as compared to 1999. Total interest costs of $31,500 increased $3,900 (14%) in 2000 as compared to 1999 due to a $61,700 (15%) increase in the average amount of debt required to finance the increase in the lease portfolio. The SG&A expenses of $17,300 in 2000 increased $1,100 (7%) from 1999, primarily the result of additional personnel and incentive costs relating to additional new leases booked. The provision for credit losses of $7,900 in 2000 decreased $100 (1%) as compared to 1999 based on Telmark's analysis of the allowance required to provide for uncollectible receivables. Telmark's allowance for credit losses is based on a periodic review of the collection history of past leases, current credit practices, an analysis of delinquent accounts, and current economic conditions. At June 2000, the allowance for credit losses was $32,500 compared to $30,000 at June 1999. During 2000 and 1999, the general economy remained strong and the total value of non-earning accounts increased from $4,900 in 1999 to $6,000 in 2000 and as a percentage of lease portfolio remained at 0.9% in both years. Reserves are established at a level management believes is sufficient to cover estimated losses in the portfolio. INSURANCE Insurance Group total net revenues of $27,200 in 2000 decreased $800 (3%) compared to $28,000 in 1999. The decline was experienced in net earned premiums of Agway Insurance Company. Reinsurance premiums, which reduce earned revenues, were higher in 2000 as compared to 1999. The 1999 reinsurance premiums were lower due to favorable claims development during 1999 in the 1995 experienced-rated reinsurance contract. In the Agency, 2000 revenues of $800 were at the same levels as in 1999. The Insurance Group break-even results in 2000 were a decrease of $500 as compared to pre-tax earnings of $500 in 1999. Pre-tax earnings of the Agway Insurance Company of $600 in 2000 decreased $400 (40%) from $1,000 in 1999. The decline in net earned premiums, combined with higher costs from new system implementation, was partially offset by improved claims experience in 2000 as compared to 1999. The Agency experienced a pre-tax loss of $600 in 2000, an increased loss of $100 as compared to 1999. Higher salary and marketing expenses cause the increased loss in 2000. DISCONTINUED OPERATIONS During fiscal year 2000, as disclosed in Business and Properties (Items 1 and 2), the sale of the wholesale procurement and supply system, when combined with the sale and closure of the Agway-owned or operated retail stores, constituted a plan to discontinue operations of the former retail services business of Agway. For financial reporting purposes, the measurement date upon which this discontinued operation plan became effective was June 20, 2000. Operating results of the retail services business, including restructuring activity which took place through that date, are included in the operating loss from discontinued operations in the financial statements for the year ended June 2000. The anticipated gains and losses after June 20, 2000, from the future anticipated sale of the wholesale procurement and supply system, which was consummated on July 31, 2000, and the sale or closure of the remaining Agway-owned or operated retail store properties, as well as the results of their future operations through the anticipated dates of sale, are included in the loss on disposal of retail in the June 2000 statement of operations. Prior year financial results reflect the retail services business as a discontinued operation. The financial disclosure of discontinued operations is detailed in Note 14 to the financial statements. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (THOUSANDS OF DOLLARS) FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES During the year ended June 2001, cash flow from current period operations, from reduced working capital needs, from sale of discontinued operations, from the sale of other assets, and from external borrowings funded the growing lease portfolio of Telmark, capital improvements, redemption of stock, and shareholder dividends. During the year ended June 2000, cash generated from continuing operations, from sale of discontinued operations, from sale of businesses and assets, and from external borrowings was Agway's major source of funds to finance the growing lease portfolio at Telmark, increased working capital needs, capital improvements, business acquisitions, redemption of stock, and shareholder dividends. In 1999, cash flow from operations, from reduced working capital needs, from sale of businesses and assets, and from external borrowings, was used to finance the growing lease portfolio at Telmark, capital improvement, business acquisitions, redemptions of stock, and shareholder dividends.
June 2001 June 2000 June 1999 -------------- -------------- -------------- Net cash flows from (used in): Continuing operating activities.............................. $ 17,318 $ (40,717) $ 36,358 Discontinued operating activities............................ 28,864 35,995 (391) Investing activities......................................... (65,173) (91,652) (82,224) Financing activities......................................... (150) 115,515 46,257 --------------- --------------- -------------- Net increase (decrease) in cash and equivalents.................... $ (19,141) $ 19,141 $ 0 =============== =============== ==============
CASH FLOWS FROM OPERATIONS Cash flows from continuing operations in 2001 of $17,300 improved $58,000 from a cash used of $40,700 in 2000. Substantially all of the improvement is related to working capital needs. In 2001, working capital items generated cash flows of $5,300 as compared to using cash flows of $50,400 in 2000. The generation of cash flows from working capital items in 2001 was the result of declines in receivables, principally Agriculture, and inventory, principally Energy and Agriculture. The use of cash from working capital items in 2000 was principally the result of high energy product costs that increased the carrying value of inventory and receivables. In 1999, cash flows from continuing operations generated cash flows of $36,400, principally due to lower agriculture and energy commodity prices that reduced the carrying value of inventories. CASH FLOWS FROM INVESTING The most significant use of cash over the past three years has been in connection with Agway's growing lease financing business (Telmark). The cash requirements to fund lease origination growth in excess of lease repayments amounted to $55,000, $79,700 and $63,500 in 2001, 2000 and 1999, respectively. Capital expenditures and business acquisitions required cash of $19,300, $32,700 and $35,200 for 2001, 2000 and 1999, respectively. Cash flow used in investing was partially funded by cash generated from investing activities, principally the proceeds from the disposal of business and/or property and equipment, which amounted to a total of $10,000, $23,200 and $15,300 in 2001, 2000 and 1999, respectively. 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (THOUSANDS OF DOLLARS) CASH FLOWS FROM FINANCING Agway and AFC Effective March 28, 2001, Agway and AFC established a new senior debt facility (the Agway Senior Debt) for all business operations except for Agway Insurance Company 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 Note 9 to the financial statements. Effective July 1, 2001, AFC was merged into Agway. As a result, Agway assumed liability for any amounts borrowed by AFC under the Credit Agreement (as defined below). 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 as amended September 14, 2001) between Agway, certain of its subsidiaries and a syndicated group of lenders (the Credit Agreement). 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. The credit facilities that this senior debt financing replaces amounted to a total availability for letters of credit and lines of credit of up to $148,000. Amounts owed under the former facilities have been repaid and those facilities have been terminated. 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 (as discussed below), 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 greater than 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 increases to $25,000 (collateral borrowing base greater than outstanding loans). 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. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (THOUSANDS OF DOLLARS) CASH FLOWS FROM FINANCING (CONTINUED) Agway and AFC (continued) These conditions reduce the practical availability under the senior debt financing from $175,000 to $150,000. 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 Agway does not continue to meet the conditions of the Credit Agreement, including those described above. As of June 30, 2001, the total amount outstanding under the Credit Agreement was $83,700, of which $22,400 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%. These amended rates, effective September 14, 2001, are now approximately 25 basis points higher than the rates which were available to Agway in its prior senior debt financing arrangements. As of June 30, 2001, Agway was in violation of certain of the financial covenants contained within the Credit Agreement because it had not maintained the required minimum level of 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 LLC), and increase the required minimum range of Minimum Capital balances to $455,000 to $465,000 throughout the year, an increase of $15,000 over the previous range to reflect the actual increased balances outstanding at June 30, 2001, and the projections of those balances. Based on this waiver and amendment, Agway is currently in compliance with, and no default exists under, the terms of the Credit Agreement. On November 1, 2001, $43,100 of subordinated money market certificate obligations of Agway (previously issued by AFC and assumed by Agway) will mature. Agway expects to refinance this debt either through a new issue of subordinated debt, through cash from operations, through sales of discontinued assets, through short-term bank borrowings, or a combination thereof. Telmark Debt At June 30, 2001, Telmark had credit facilities available from banks aggregating to $389,300. Uncommitted short- term line of credit agreements permit Telmark to borrow up to $89,300 on an unsecured basis with interest paid upon maturity. The lines bear interest at money market variable rates. A committed $300,000 partially collateralized (by an investment in a cooperative bank with a book value of $14,700 at June 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 June 30, 2001 and June 30, 2000 under the short- term lines of credit were $71,100 and $75,200, respectively, and under the revolving term loan facility were $215,500 and $164,500, respectively. The portion of the revolving term loan that is short term at June 30, 2001 and June 30, 2000 is $49,500 and $500, respectively. Telmark borrows under its short-term line of credit agreement and its revolving term agreement from time to time to fund its operations. Short-term debt serves as interim financing between the issuances of long-term debt. Telmark renews its lines of credit annually. The $89,300 short-term lines of credit all have terms expiring during the next 12 months. The $300,000 revolving term loan facility is available through May 1, 2002. 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (THOUSANDS OF DOLLARS) CASH FLOWS FROM FINANCING (CONTINUED) Telmark Debt (continued) In November 2000, Telmark issued $61,000 of unsecured senior notes to institutional investors. The terms of the note agreement are similar to the terms of other unsecured senior notes. Telmark had balances outstanding on all unsecured senior notes from private placements totaling $149,500 at June 30, 2001, and $122,000 at June 30, 2000. The principal bears interest at fixed rates ranging from 6.6% to 8.7%. Interest is payable semiannually on each senior note. Principal payments are on both a semiannual and an annual basis. 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. Telmark, through two wholly owned special purpose subsidiaries, has four classes of lease-backed notes outstanding totaling $90,800 and $118,300 at June 30, 2001 and June 30, 2000, respectively, payable to institutional investors. Interest rates on these classes of notes range from 6.5% to 9.1%. The notes are collateralized by leases, which Telmark sold to these subsidiaries, having an aggregate present value of contractual lease payments equal to 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. Two notes relating to Telmark Lease Funding I, LLC were paid in full during 2001, and in June 2001, Telmark Lease Funding I, LLC was approved to be dissolved. The final scheduled maturity of these notes is in varying amounts and dates through December 2008. Telmark registers with the SEC to offer debentures to the public. The Telmark debentures are unsecured and subordinated to all senior debt at Telmark. The interest on the debt is paid on January 1, April 1, July 1, and October 1 of each year and may, at the holder's option, be reinvested. 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 June 30, 2001, of approximately $38,800 are due at various dates through March 2009 and bear a weighted average interest rate of 8.0%. Total sources of longer-term financing of Agway include the following as of June 2001:
Source of debt Agway AFC Telmark Total -------------- --------- --------- --------- --------- Banks - due 2001 to 2004 with interest from 5.36% to 7.47% ......................... $ 0 $ 0 $166,000 $166,000 Insurance companies - due 2001 to 2012 with interest from 6.54% to 9.05% ........... 0 0 240,260 240,260 Capital leases and other - due 2001 to 2018 with interest from 7.5% to 10% .............. 10,639 1,790 0 12,429 --------- --------- --------- --------- Long-term debt ............................ 10,639 1,790 406,260 418,689 Subordinated money market certificates - due 2001 to 2016 with interest from 4.5% to 9.75% 0 442,551 0 442,551 Subordinated debentures - due 2001 to 2009 with interest at 6.25% to 9% ................ 0 6,787 38,772 45,559 --------- --------- --------- --------- Total subordinated debt ................... 0 449,338 38,772 488,110 --------- --------- --------- --------- Total debt ......................... $ 10,639 $451,128 $445,032 $906,799 ========= ========= ========= =========
25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (THOUSANDS OF DOLLARS) OTHER MATTERS CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Agway is including the following cautionary statement in this Form 10-K to make applicable and take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, Agway. Where any such forward-looking statement includes a statement of the assumptions or basis underlying such forward-looking statement, Agway cautions that, while it believes such assumptions or basis to be reasonable and makes them in good faith, assumed facts or basis almost always vary from actual results, and the differences between assumed facts or basis and actual results can be material, depending upon the circumstances. Certain factors that could cause actual results to differ materially from those projected have been discussed herein and include the factors set forth below. Other factors that could cause actual results to differ materially include uncertainties of economic, competitive and market decisions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of Agway. Where, in any forward- looking statement, Agway, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. The words "believe," "expect," and "anticipate" and similar expressions identify forward-looking statements. ENVIRONMENTAL ISSUES 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. 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (THOUSANDS OF DOLLARS) OTHER ISSUES 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. AGRICULTURAL ECONOMY AND OTHER FACTORS The financial condition of Agway can be directly affected by factors affecting the agricultural economy, since these factors impact the demand for our products and the ability of our customers to make payments for products or services already purchased through credit extended by us. These factors may include: (i) changes in government agricultural programs that may adversely affect the level of income of customers of Agway; (ii) weather-related conditions which periodically occur that can impact the agricultural productivity and income of the customers of Agway; and (iii) the relationship of demand relative to supply of agricultural commodities produced by customers of Agway. Agway can also be affected by major international events, like the downturn in foreign economies, which can affect such things as the price of commodities we use in our operations as well as the general level of interest rates. Federal agricultural legislation, formally known as The Federal Agriculture Improvement and Reform Act of 1996, replaced the former program of variable price-linked deficiency payments with fixed payments to farmers which decline over a seven-year period. This legislation also eliminated federal planting restrictions and acreage controls allowing farmers more flexibility to plant for the market. The impact of this legislation on the agricultural economy, and on the financial condition of Agway, is not expected to be significant in the short-term. The financial condition of Agway Energy Products is impacted by factors such as weather conditions in the Northeast and the relationship of supply and demand for petroleum products worldwide as well as within Agway's market. Agway's agricultural and insurance businesses can be impacted by weather conditions as well as from fluctuations in the economy in the northeastern United States that, in general, affect consumer demand for products. To the extent that these factors adversely affect our customers, the financial condition of Agway could be adversely affected. NEW ACCOUNTING STANDARD 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. 137) was 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 were designated and qualified as cash-flow hedges. See Note 1 for further details of the Company's accounting for derivatives and hedging activities. 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (THOUSANDS OF DOLLARS) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS 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. 142 allows for early adoption, as of July 1, 2001, by the Company. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. This has no material 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 during the six-month period ending December 31, 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 adoption. 28 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (THOUSANDS OF DOLLARS) Market risk represents the risk of loss that may impact the financial position, results of operations, or cash flows of Agway due to adverse changes in financial and commodity market prices and rates. We are exposed to market risk in the areas of interest rates and commodity prices. These exposures are directly related to our normal funding and investing activities and to our use of agricultural and energy commodities in the operation of our business. INTEREST RATE EXPOSURE The following table provides information about the other financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates.
Fair Value 2002 2003 2004 2005 2006 Thereafter Total June 2001 ---- ---- ---- ---- ---- ---------- ----- --------- ASSETS Available-for-sale securities...... $ 5,642 $ 4,834 $ 2,774 $ 4,106 $ 4,763 $ 15,243 $ 37,362 $ 37,556 Weighted average interest rate..... 5.77% 6.40% 6.38% 6.17% 6.26% 6.30% LIABILITIES Bank lines of credit - Agway....... $ 61,342 $ - $ - $ - $ - $ - $ 61,342 $ 61,342 Weighted average interest rate..... 7.22% Bank lines of credit - Telmark..... 120,638 - - - - - 120,638 120,638 Weighted average interest rate..... 4.67% Long-term debt, including current portion - Telmark............... 146,496 111,924 79,091 6,323 23,213 39,213 406,260 419,753 Weighted average interest rate..... 6.67% 6.76% 6.74% 7.65% 8.22% 8.44% Subordinated debentures, including current portion - Telmark....... 8,320 11,608 9,534 - - 9,310 38,772 38,772 Weighted average interest rate..... 6.31% 8.43% 8.32% 8.78% Long-term debt, including current portion - Agway................. 1,333 3,343 4,963 143 98 1,124 11,004 11,090 Weighted average interest rate..... 6.93% 6.80% 6.77% 7.48% 6.32% 6.46% Subordinated debentures, including current portion - Agway......... 2,894 3,893 - - - - 6,787 6,795 Weighted average interest rate..... 7.38% 7.92% Subordinated money market certificates, including current portion - Agway................. 44,734 34,143 38,477 47,171 35,912 242,114 442,551 441,922 Weighted average interest rate..... 7.81% 7.02% 8.18% 8.74% 8.15% 8.20%
We do not use derivatives or other interest rate instruments to hedge interest rate risk due to the fixed rate nature of the majority of our debt obligations. Telmark, Agway's leasing business, tries to limit the effects of changes in interest rates by matching as closely as possible, on an ongoing basis, the maturity and cost of funds borrowed to finance its lease activities with the maturity and repricing characteristics of its lease portfolio. However, a rise in interest rate would increase the cost of funds Telmark borrows to finance its lease portfolio, including that portion of debt which is not precisely matched to the characteristics of the portfolio. Telmark has a formal risk management policy which limits the short-term exposure to an amount which is immaterial to the results of operations or cash flows. Telmark subordinated debentures bear interest at a rate that is the greater of the stated rate or a rate based upon an average discount rate for U.S. Government Treasury Bills (T-Bills), with maturities of 26 weeks. Based on the T-Bill rate of 3.55% as of June 2001, as compared to the stated rates of the debentures, which range from 6.25% to 9.00% at June 2001, we believe that a reasonably possible near-term change in interest rates and the conversion of debt to a variable rate would not cause material near-term losses in future earnings or cash flows. Finally, for the portion of debt which is not precisely matched as of June 2001, we do not believe that reasonably possible near-term increases in interest rates will result in a material near-term loss in future earnings, fair values, or cash flows. 29 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (THOUSANDS OF DOLLARS) INTEREST RATE EXPOSURE (CONTINUED) Agway's subordinated money market certificates (previously issued by AFC and assumed by Agway) bear interest at a rate that is the greater of the stated rate or a rate based upon an average discount rate of T-Bills, with maturities of 26 weeks. Based on the T-Bill rate of 3.55% at June 2001 as it compares to the stated rates of the money market certificates which range from 4.5% to 9.75% at June 2001, we believe a reasonably possible near-term increase in T- Bill rates and the conversion of Agway debt to a variable rate would not cause material near-term losses in future earnings or cash flows. The maturities of available-for-sale securities are based on the assumption that actual call and prepayment activity will differ from contractual maturities. 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, confection and bakery kernel sunflower seeds, gasoline, distillate and propane. These price fluctuations impact commodity inventories, product gross margins, and anticipated transactions in our Agriculture, Energy and Country Products Group 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 June 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 June 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 $600 and $4,800, respectively. The potential loss in fair value of commodity instruments for Agriculture and Country Products Group was immaterial for both periods. 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS PAGES ----- AGWAY INC. AND CONSOLIDATED SUBSIDIARIES: Agway Inc. Report on Financial Statements.................................................................. 32 Report of Independent Accountants.......................................................................... 33 Consolidated Balance Sheets, June 30, 2001 and June 24, 2000............................................... 34 Consolidated Statements of Operations, fiscal years ended June 30, 2001, June 24, 2000 and June 26, 1999......................................................................................... 35 Consolidated Statements of Comprehensive Income, fiscal years ended June 30, 2001, June 24, 2000 and June 26, 1999..................................................................................... 36 Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended June 30, 2001, June 24, 2000 and June 26, 1999....................................................................... 37 Consolidated Statements of Cash Flow, fiscal years ended June 30, 2001, June 24, 2000 and June 26, 1999......................................................................................... 38 Notes to Consolidated Financial Statements................................................................. 39
31 AGWAY INC. REPORT ON FINANCIAL STATEMENTS The accompanying consolidated financial statements have been prepared by the Company in conformity with accounting principles generally accepted in the United States. The integrity and objectivity of the data in these financial statements, including estimates and judgments, are the responsibility of Agway, as is all other information included in this annual report. The consolidated financial statements of Agway Inc. and Consolidated Subsidiaries have been audited by PricewaterhouseCoopers LLP, independent auditors, whose report follows. Agway has made available to PricewaterhouseCoopers LLP all of the Company's financial records and related data, as well as the minutes of Directors' meetings. Furthermore, Agway believes that all representations made to PricewaterhouseCoopers LLP during its audit were valid and appropriate. Agway maintains a system of internal accounting controls intended to provide reasonable assurance, given the inherent limitations of all internal control systems, at appropriate costs, that transactions are executed in accordance with Company authorization, are properly recorded and reported in the financial statements, and that assets are adequately safeguarded. The Audit Committee of the Board of Directors, which consists of seven directors who are not employees, meets periodically with management and the independent auditors to review the manner in which they are performing their responsibilities and to discuss auditing, internal accounting controls, and financial reporting matters. The independent auditors have free access to the Audit Committee. AGWAY INC. BY /s/ DONALD P. CARDARELLI DONALD P. CARDARELLI President and CEO September 14, 2001 BY /s/ PETER J. O'NEILL PETER J. O'NEILL Senior Vice President Finance & Control September 14, 2001 32 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Agway Inc.: In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 81 present fairly, in all material respects, the financial position of Agway Inc. and its subsidiaries at June 30, 2001 and June 24, 2000, and the result of their operations and their cash flows for each of the three fiscal years in the period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 14(a)(2) on page 81 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PRICEWATERHOUSECOOPERS LLP PRICEWATERHOUSECOOPERS LLP Syracuse, New York August 17, 2001, except for Note 9, as to which the date is September 14, 2001 33 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS)
ASSETS JUNE 30, JUNE 24, 2001 2000 --------------- -------------- Current assets: Cash......................................................................... $ 0 $ 19,141 Trade accounts receivable (including notes receivable of $36,416 and $38,755, respectively), less allowance for doubtful accounts of $10,633 and $7,204, respectively................... 212,793 209,261 Leases receivable, less unearned income of $78,126 and $71,944, respectively............................................................ 165,348 152,255 Advances and other receivables............................................... 19,941 23,738 Inventories.................................................................. 88,626 111,940 Restricted cash.............................................................. 8,306 10,103 Prepaid expenses and other assets............................................ 66,282 48,143 --------------- -------------- Total current assets.................................................... 561,296 574,581 Marketable securities............................................................. 37,556 36,254 Other security investments........................................................ 51,829 51,472 Properties and equipment, net..................................................... 177,355 175,784 Long-term leases receivable, less unearned income of $186,795 and $167,414, respectively....................................................... 502,992 470,595 Net pension asset................................................................. 229,678 213,455 Other assets...................................................................... 33,785 21,710 Net assets of discontinued operations............................................. 5,414 34,278 --------------- -------------- Total assets............................................................ $ 1,599,905 $ 1,578,129 =============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable................................................................ $ 181,980 $ 177,576 Current installments of long-term debt....................................... 147,946 136,211 Subordinated debt, current................................................... 55,948 57,125 Accounts payable............................................................. 90,684 94,046 Other current liabilities.................................................... 131,209 122,060 --------------- -------------- Total current liabilities............................................... 607,767 587,018 Long-term debt.................................................................... 270,743 281,678 Subordinated debt................................................................. 432,162 417,749 Other liabilities................................................................. 119,903 109,093 --------------- -------------- Total liabilities....................................................... 1,430,575 1,395,538 Commitments and contingencies..................................................... Shareholders' equity: Preferred stock, less amount held in Treasury................................ 37,603 39,695 Common stock ($25 par--300,000 shares authorized; 173,323 and 173,083 shares issued, less amount held in Treasury)............................ 2,445 2,473 Accumulated other comprehensive income (loss)................................ (61) (798) Retained earnings............................................................ 129,343 141,221 --------------- -------------- Total shareholders' equity.............................................. 169,330 182,591 --------------- -------------- Total liabilities and shareholders' equity.......................... $ 1,599,905 $ 1,578,129 =============== ==============
The accompanying notes are an integral part of the consolidated financial statements. 34 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (THOUSANDS OF DOLLARS)
JUNE 30, JUNE 24, JUNE 26, 2001 2000 1999 -------------- -------------- -------------- Net sales and revenues from: Product sales ........................................... $ 1,435,552 $ 1,254,220 $ 1,062,304 Leasing operations....................................... 84,868 76,626 70,006 Insurance operations..................................... 27,894 27,153 27,968 -------------- -------------- -------------- Total net sales and revenues........................ 1,548,314 1,357,999 1,160,278 -------------- -------------- -------------- Cost and expenses from: Products and plant operations............................ 1,326,341 1,158,105 962,739 Leasing operations....................................... 35,616 31,377 27,626 Insurance operations..................................... 17,003 15,663 17,152 Selling, general and administrative activities........... 148,426 134,980 122,406 -------------- -------------- -------------- Total operating costs and expenses.................. 1,527,386 1,340,125 1,129,923 -------------- -------------- -------------- Operating earnings............................................ 20,928 17,874 30,355 Interest expense, net of interest income of $8,185, $9,452 and $8,642, respectively.......................... (37,633) (30,591) (26,102) Other income, net............................................. 3,029 25,733 18,947 -------------- -------------- -------------- Earnings (loss) from continuing operations before income taxes............................................. (13,676) 13,016 23,200 Income tax expense (benefit).................................. (5,806) 6,864 10,259 -------------- -------------- -------------- Earnings (loss) from continuing operations.................... (7,870) 6,152 12,941 Discontinued operations: Loss from operations, net of tax benefit of $0, $7,313 and $6,086, respectively..................... 0 (13,187) (11,146) Loss on disposal, net of tax benefit of $0, $1,278 and $0 0 (2,342) 0 -------------- -------------- -------------- Loss from discontinued operations................... 0 (15,529) (11,146) Earnings (loss) before cumulative effect of an accounting change................................................... (7,870) (9,377) 1,795 -------------- -------------- -------------- Cumulative effect of accounting change, net of tax benefit of $723.......................................... (1,057) - - -------------- -------------- -------------- Net earnings (loss)........................................... $ (8,927) $ (9,377) $ 1,795 ============== ============== ==============
The accompanying notes are an integral part of the consolidated financial statements. 35 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (THOUSANDS OF DOLLARS)
JUNE 30, JUNE 24, JUNE 26, 2001 2000 1999 -------------- ------------- -------------- Net earnings (loss) .......................................... $ (8,927) $ (9,377) $ 1,795 Other comprehensive income, net of tax: Unrealized gains (losses) on available-for-sale securities: Unrealized holding gains (losses) arising during period................................... 779 (608) (685) Reclassification adjustment for losses included in net earnings.................................... 148 49 21 Deferred gains (losses) on derivatives, net of tax: Cumulative effect of accounting change.............. 3,061 Holding gains (losses) arising during period........ 2,448 0 0 Reclassification adjustment for (gains) losses included in net earnings........................ (5,699) 0 0 -------------- -------------- -------------- Other comprehensive income (loss) ............................ 737 (559) (664) -------------- -------------- -------------- Comprehensive income (loss)................................... $ (8,190) $ (9,936) $ 1,131 ============== ============== ==============
The accompanying notes are an integral part of the consolidated financial statements. 36 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (THOUSANDS OF DOLLARS)
COMMON STOCK ACCUMULATED --------------------- OTHER (PAR VALUE $25) PREFERRED COMPREHENSIVE RETAINED SHARES AMOUNT STOCK INC (LOSS) EARNINGS TOTAL -------- ----------- ---------- ------------- ------------ ----------- Balance June 27, 1998............................. 102,838 $ 2,571 $ 47,871 $ 425 $ 155,362 $ 206,229 Net earnings (loss)........................ 1,795 1,795 Dividends declared......................... (3,394) (3,394) Redeemed, net.............................. (2,597) (65) (4,954) (5,019) Other comprehensive income................. (664) 0 (664) -------- ---------- ---------- ---------- ------------ ----------- Balance June 26, 1999............................. 100,241 2,506 42,917 (239) 153,763 198,947 Net earnings (loss)........................ (9,377) (9,377) Dividends declared......................... (3,165) (3,165) Redeemed, net.............................. (1,342) (33) (3,222) (3,255) Other comprehensive income................. (559) (559) -------- ---------- ---------- ---------- ------------ ----------- Balance June 24, 2000............................. 98,899 2,473 39,695 (798) 141,221 182,591 Net earnings (loss)........................ (8,927) (8,927) Dividends declared......................... (2,951) (2,951) Redeemed, net.............................. (1,124) (28) (2,092) (2,120) Other comprehensive income................. 737 737 -------- ---------- ---------- ---------- ------------ ----------- Balance June 30, 2001............................. 97,775 $ 2,445 $ 37,603 $ (61) $ 129,343 $ 169,330 ======== ========== ========== ========== ============ ============
Common shares, purchased at par value, held in Treasury at year-end were: 75,548 in 2001; 74,184 in 2000; 72,465 in 1999. A common stock dividend per share of $1.50 was declared for 2001, 2000 and 1999. Dividend payments are restricted to a maximum of 8% of par value per annum. See Note 12 for the details of preferred stock activity. The accompanying notes are an integral part of the consolidated financial statements. 37 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (THOUSANDS OF DOLLARS)
JUNE 30, 2001 JUNE 24, 2000 JUNE 26, 1999 ------------- --------------- ---------------- CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net earnings (loss) ............................................. $ (8,927) $ (9,377) $ 1,795 Adjustments to reconcile earnings to net cash: Net loss from discontinued operations....................... 0 15,529 11,146 Depreciation and amortization............................... 26,896 26,171 24,728 Receivables and other asset provisions...................... 18,362 14,378 10,730 Net pension income.......................................... (16,223) (19,563) (21,368) Cumulative effect of accounting change, net of tax.......... 1,057 0 0 Patronage refund received in stock.......................... (360) (679) (992) Deferred income tax expense (benefit)....................... (7,033) (2,757) 3,841 (Gain) loss on disposition of: Businesses............................................. 0 (1,098) (11,097) Other security investments............................. 509 1,044 1,267 Properties and equipment............................... (2,215) (13,995) (655) Changes in assets and liabilities, net of effects of businesses acquired or sold: Receivables............................................ (8,601) (57,177) 18,522 Inventory.............................................. 23,314 (25,671) 2,381 Payables............................................... (3,267) 9,004 (3,771) Other.................................................. (6,194) 23,474 (169) ------------- --------------- --------------- Net cash flows from (used in) continuing operations................. 17,318 (40,717) 36,358 Net cash flows from (used in) discontinued operations............... 28,864 35,995 (391) ------------- --------------- --------------- Net cash from (used in) operating activities........................ 46,182 (4,722) 35,967 CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Purchases of properties and equipment............................ (18,787) (27,799) (27,162) Cash paid for acquisitions....................................... (484) (4,950) (8,030) Disposition of properties and equipment.......................... 9,948 20,592 1,163 Purchases of marketable securities available for sale............ (4,905) (4,658) (6,333) Sale of marketable securities available for sale................. 4,530 2,945 6,982 Leases originated................................................ (265,986) (276,199) (252,107) Leases repaid.................................................... 211,017 196,471 188,637 Purchases of investments in related cooperatives................. (3,201) (1,840) (2,172) Proceeds from sale of investments in related cooperatives........ 2,695 1,171 2,648 Proceeds from disposal of businesses............................. 0 2,615 14,150 ------------- --------------- --------------- Net cash flows used in investing activities......................... (65,173) (91,652) (82,224) CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Net change in short-term notes payable........................... 4,404 95,776 16,480 Proceeds from long-term debt..................................... 131,099 143,263 113,852 Repayment of long-term debt...................................... (130,165) (97,225) (94,553) Proceeds from sale of subordinated debt.......................... 183,028 131,571 133,948 Redemption of subordinated debt.................................. (169,792) (143,001) (109,842) Payments on capitalized leases................................... (15,380) (2,716) (597) Proceeds from sale of stock...................................... 7 14 45 Redemption of stock.............................................. (2,127) (3,269) (5,064) Cash dividends paid.............................................. (3,021) (3,275) (3,532) Net change in restricted cash.................................... 1,797 (5,623) (4,480) ------------- --------------- --------------- Net cash flows from financing activities............................ (150) 115,515 46,257 ------------- --------------- --------------- Net increase (decrease) in cash and equivalents..................... (19,141) 19,141 0 Cash and equivalents at beginning of year........................... 19,141 0 0 ------------- --------------- --------------- Cash and equivalents at end of year................................. $ 0 $ 19,141 $ 0 ============= =============== ===============
The accompanying notes are an integral part of the consolidated financial statements. 38 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Agway Inc. was incorporated under the Delaware General Corporation Law in 1964 and is headquartered in DeWitt, New York. Agway is an agricultural cooperative directly engaged in manufacturing, processing, distribution and marketing of agricultural feed and agronomic products (seed, fertilizers, and chemicals) and services for its farmer-members and other customers, primarily in the northeastern United States and Ohio. In addition, Agway is involved in repackaging and marketing produce and processing and marketing sunflower seeds. Agway, through certain of its subsidiaries, is involved in the distribution of petroleum products; the installation and servicing of heating, ventilation, and air-conditioning equipment; lease financing; the underwriting and sale of certain types of property and casualty insurance; and the sale of health insurance. Fiscal Year The fiscal year-end of Agway Inc. is on the last Saturday in June. Fiscal year ended June 30, 2001, was comprised of 53 weeks and fiscal years June 24, 2000, and June 26, 1999, were comprised of 52 weeks. The fiscal year-end of certain of Agway's subsidiaries, including Agway Energy Products LLC, Telmark LLC, and Agway Insurance Company, is June 30, and these subsidiaries are consolidated on that basis. Effective July 1, 2001, the fiscal year-end has been changed to June 30 each year for the company as a whole and each of its divisions. Quarterly reports will be at quarters ended on September 30, December 31, and March 31. Basis of Consolidation The consolidated financial statements include the accounts of all wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Reclassifications Certain reclassifications have been made to conform prior year financial statements with the current year presentation. Cash and Equivalents Agway considers all investments with a maturity of three months or less when purchased to be cash equivalents. Included in cash at June 2000 is $19,141 received on June 30, 2000, for the sale of six terminals by Agway Energy Products LLC. This cash was used to reduce debt on July 1, 2000. Restricted Cash Certain cash accounts amounting to $8,306 and $10,103 at June 2001 and June 2000, respectively, collateralize certain Telmark lease-backed notes payable. This cash is held in segregated cash accounts by Telmark pending distribution and is restricted in its use. Accounts Receivable Agway uses the allowance method to account for doubtful accounts and notes. 39 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Leases Receivable Telmark lease contracts, which qualify as direct finance leases as defined by Statement of Financial Accounting Standards (SFAS) No. 13, "Accounting for Leases," are accounted for by recording on the balance sheet the total future minimum lease payments receivable, plus the estimated unguaranteed residual value of leased equipment, less the unearned interest and finance charges. Unearned interest and finance charges represent the excess of the total future minimum lease payments, plus the estimated unguaranteed residual value expected to be realized at the end of the lease term over the cost of the related equipment. Interest and finance charge income is recognized as revenue, by using the interest method over the term of the lease, which for most commercial and agricultural leases is 60 months or less with a maximum of 180 months for buildings. Income recognition is suspended on all leases and notes which become past due greater than 120 days. Initial direct costs incurred in consummating a lease are capitalized as part of the investment in direct finance leases and amortized over the lease term as a reduction in the yield. Provisions for credit losses are charged to income in amounts sufficient to maintain the allowance at a level considered adequate to cover losses in the existing portfolio. The net investment in a lease is charged against the allowance for credit losses when determined to be uncollectible, generally within one year of becoming past due. Inventories Inventories are stated at the lower of cost or market. For those inventories stated at cost, we use the average unit cost or the first-in, first-out method. Commodity Instruments 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 used in its operations, principally heating oil and propane. Energy has fair value hedges associated with its fixed price purchase contracts and cash flow 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 June 30, 2001, Energy had a derivative liability of $300. An after-tax total of $190 of deferred net unrealized losses on derivatives instruments were accumulated in other comprehensive income and are expected to be reclassified into earnings during the next 12 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 year ended June 30, 2001, $3,700 is included in 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 match its purchase and sales contracts whenever possible to hedge price risk; 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 contract; 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. 40 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Commodity Instruments (continued) In the Country Products Group segment, exchange-traded soybean oil futures contracts are used principally to manage the price risk of confection and bakery kernel sunflower seeds which are purchased from growers by CPG and sold to customers. Foreign currency forward contracts are entered into to manage fluctuations in foreign currency denominated sales transactions. Because the commodity instrument used by CPG (soybean oil futures contracts) does not create a highly effective hedging relationship (as defined by SFAS No. 133) with the sunflower seed purchase contracts, and because the timing of the foreign currency contracts does not match the associated sales contracts, these derivatives are marked to market currently in earnings. Marketable Securities All marketable securities relate entirely to Agway's Insurance operations, are classified as available-for-sale, and are carried at fair value. Unrealized gains and losses, net of tax, are reported in accumulated other comprehensive income (loss). Other Security Investments Other security investments consist of capital stock of a cooperative bank and other cooperative suppliers acquired at par or stated value. This stock is not traded and is historically redeemed on a periodic basis by the issuer at cost. By its nature, this stock is held to redemption and is reported at cost. We believe it is not practical to estimate the fair value of these investments since there is no established market and it is inappropriate to estimate future cash flows which are largely dependent on future earnings of the cooperative bank and other cooperative suppliers. Patronage refunds received from the cooperative bank are recorded as a reduction of interest expense and totaled approximately $1,800, $1,200 and $1,400 for the years ended June 2001, June 2000 and 1999, respectively. Patronage refunds received on the stock of other cooperatives are reflected in other income. Properties and Equipment Properties and equipment are recorded at cost. Depreciation and amortization are charged to operations, principally on a straight-line basis, over the estimated useful lives of the properties and equipment, and over the term of the lease for capital leases. Ordinary maintenance and repairs are charged to operations as incurred. Gains and losses on disposition or retirement of assets are reflected in income as incurred. Other Assets Other assets include approximately $12,400 and $15,800 at June 2001 and 2000, respectively, of costs in excess of the fair value of net tangible assets acquired in purchase transactions (goodwill) as well as acquired non-compete agreements, customer lists, and trademarks. Goodwill and other intangible assets are amortized on a straight-line basis ($1,600 over 1 to 10 years, $7,800 over 12 to 20 years, and $3,000 over 40 years). Amortization included in operating results totaled approximately $2,300, $2,000 and $1,500 for fiscal years ending June 2001, 2000 and 1999, respectively. Other assets are reviewed for impairment, as described under Impairment of Long-Lived Assets below. 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 (benefit) of $477, $(288) and $(342) for 2001, 2000 and 1999, respectively. The deferred gains and losses on derivatives are net of tax of $(126) in 2001. 41 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Impairment of Long-Lived Assets In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," long-lived assets and certain identifiable intangibles to be held and used by an entity are to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized by reducing the recorded value to fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. The pre-tax charge for impairment is included in other income, net, on the consolidated statements of operations and totaled $4,400, $400 and $700 in 2001, 2000 and 1999, respectively. Environmental Remediation Costs Agway accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value. Recoveries of environmental remediation costs from other parties are considered in determining the Company's accrual for these losses. Advertising/Research and Development Costs Agway expenses advertising and research and development costs as they are incurred. Advertising expenses included in selling, general and administrative expenses for the years ended June 2001, 2000 and 1999 were approximately $11,800, $13,200 and $11,600, respectively. Net research and development costs were approximately $500, $2,900 and $1,800 for the years ended June 2001, 2000 and 1999, respectively. Income Taxes Agway is subject to income taxes on all income not distributed to patrons as patronage refunds and provides for income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes." Under the liability method specified by SFAS No. 109, deferred tax assets and liabilities are based on the difference between the financial statement and tax basis of assets and liabilities as measured by the tax rates that are anticipated to be in effect when these differences reverse. The deferred tax provision represents the net change in the assets and liabilities for deferred tax. A valuation allowance is established when it is necessary to reduce deferred tax assets to amounts for which realization is reasonably assured. The provision for income taxes has been allocated between continuing and discontinued operations for all years presented. Patronage Refunds Patronage refunds are declared and paid at the discretion of the Board of Directors in accordance with the provision of the By-laws of Agway. Patronage refunds are based on taxable earnings on patronage business and, when declared, are paid in cash. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 42 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue Recognition We record revenue from product sales when the goods are shipped and title and risk of loss passes to the customer. Revenue from service contracts is accounted for when the services are provided. Impact of Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards No. 141, "Business Combinations," (SFAS No. 141) and No. 142, "Goodwill and Other Intangible Assets," (SFAS No. 142) which are effective July 1, 2001 and July 1, 2002, respectively, for the Company. SFAS No. 142 allows for early adoption, as of July 1, 2001, by the Company. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. 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 during the six-month period ending December 31, 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. 141 and SFAS No. 142 and assessing the impact of adoption. (See Other Assets section of this Note for details of intangible and goodwill asset balances and amounts of annual amortization.) 2. LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES Net investments in leases at fiscal year-end were as follows:
June 2001 June 2000 -------------- -------------- Gross leases: Commercial and agricultural................................................ $ 936,144 $ 860,788 Retail .................................................................... 17,562 20,388 ------------- -------------- Total leases........................................................... 953,706 881,176 Unearned interest and finance charges........................................... (264,922) (239,358) Net deferred origination costs.................................................. 15,072 13,568 ------------- -------------- Net investment............................................................. 703,856 655,386 Allowance for credit losses..................................................... (35,516) (32,536) -------------- --------------- Net leases receivable...................................................... $ 668,340 $ 622,850 ============== ===============
Included within the above are estimated unguaranteed residual values of leased property approximating $103,700 and $92,700 at June 2001 and 2000, respectively. Additionally, as of June 2001 and 2000, the recognition of interest income was suspended on approximately $6,400 and $6,000, respectively, of net leases. Maturities of gross leases over the next five years and thereafter are as follows at June 2001: $247,823 in 2002; $202,283 in 2003; $156,736 in 2004; $108,373 in 2005; $70,753 and 2006; and $167,738 thereafter. 3. INVENTORIES Inventories consist of the following:
June 2001 June 2000 ------------- -------------- Finished goods.................................................................. $ 80,240 $ 101,859 Raw materials................................................................... 6,122 7,982 Supplies........................................................................ 2,264 2,099 -------------- -------------- Total inventories.......................................................... $ 88,626 $ 111,940 ============== ===============
43 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 4. MARKETABLE SECURITIES All marketable securities relate to Agway's insurance operations and are classified as available-for-sale. At June 2001, we did not hold any debt from a single issuer that exceeded 10 percent of shareholders' equity. Marketable securities are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------- -------------- ------------- -------------- June 2001 --------- U.S. government securities and obligations............ $ 7,012 $ 95 $ (34) $ 7,073 Mortgage-backed securities............................ 12,214 127 (30) 12,311 Corporate securities.................................. 16,557 215 (74) 16,698 Equity securities ................................... 1,579 0 (105) 1,474 -------------- -------------- -------------- -------------- Total available-for-sale marketable securities... $ 37,362 $ 437 $ (243) $ 37,556 ============== ============== ============== ============== Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------- -------------- ------------- -------------- June 2000 --------- U.S. government securities and obligations............ $ 5,236 $ 9 $ (202) $ 5,043 Mortgage-backed securities............................ 14,256 21 (294) 13,983 Corporate securities.................................. 17,972 0 (744) 17,228 -------------- -------------- -------------- -------------- Total available-for-sale marketable securities... $ 37,464 $ 30 $ (1,240) $ 36,254 ============== ============== ============== ==============
The cost of securities sold is based on the specific identification method. Realized gains and losses, declines in value judged to be other-than-temporary, and interest and dividends are included in income. Gross gains of approximately $23, $0 and $4 were realized on sales of debt securities in 2001, 2000 and 1999, respectively. Gross losses realized on sales of debt securities totaled approximately $270, $74 and $36 in 2001, 2000 and 1999, respectively. The amortized cost and the fair value of available-for-sale securities at June 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair Cost Value -------------- -------------- Due within one year or less........................................................... $ 1,805 $ 1,815 Due after one year through five years................................................. 6,260 6,358 Due after five years through ten years................................................ 14,546 14,629 Due after ten years................................................................... 14,751 14,754 -------------- -------------- $ 37,362 $ 37,556 ============== ==============
5. OTHER SECURITY INVESTMENTS Other security investments consist of the following:
June 2001 June 2000 ------------- ------------- CF Industries, Inc................................................................ $ 25,260 $ 25,260 CoBank, ACB....................................................................... 16,696 16,648 Other............................................................................. 9,873 9,564 ------------- ------------- $ 51,829 $ 51,472 ============= =============
44 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 6. PROPERTIES AND EQUIPMENT Properties and equipment, at cost, including capital leases, consist of the following at:
Owned Leased Combined --------------- ------------- -------------- June 2001 --------- Land and land improvements................................... $ 24,236 $ 0 $ 24,236 Buildings and leasehold improvements......................... 95,923 7,061 102,984 Machinery and equipment...................................... 314,273 473 314,746 Capital projects in progress................................. 6,837 0 6,837 --------------- ------------- --------------- 441,269 7,534 448,803 Less: accumulated depreciation and amortization.............. 266,758 4,690 271,448 --------------- ------------- --------------- Properties and equipment, net................................ $ 174,511 $ 2,844 $ 177,355 =============== ============= =============== Owned Leased Combined --------------- ------------- ------------- June 2000 --------- Land and land improvements................................... $ 21,381 $ 0 $ 21,381 Buildings and leasehold improvements......................... 93,290 7,061 100,351 Machinery and equipment...................................... 307,372 473 307,845 Capital projects in progress................................. 13,720 0 13,720 --------------- ------------- --------------- 435,763 7,534 443,297 Less: accumulated depreciation and amortization.............. 263,624 3,889 267,513 --------------- ------------- --------------- Properties and equipment, net................................ $ 172,139 $ 3,645 $ 175,784 =============== ============= ===============
Depreciation and amortization expense relating to properties and equipment amounted to approximately $24,600, $24,200 and $23,200 in 2001, 2000 and 1999, respectively. 45 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 7. RETIREMENT BENEFITS Pension Plan The Employees' Retirement Plan of Agway Inc. is a non-contributory defined benefit pension plan covering the majority of employees of Agway Inc. The plan's benefit formulae bases payment on a pension equity formula and also include incentive compensation as pensionable earnings for all employees. Generally, pension costs are funded annually at no less than the amount required by law and no more than the maximum allowed by federal income tax guidelines. The vested benefit obligation is based on the actuarial present value of the benefits that the employee would be entitled to at the expected retirement date. The majority of the plan's investments consist of U.S. government and agency securities, U.S. corporate bonds, U.S. and foreign equities, equity and bond funds and temporary investments (short-term investments in demand notes and money market funds). At June 2001 and 2000, retirement plan assets included Agway debt securities and preferred stock with estimated fair values of $10,100 and $15,100, respectively. The Employees' Retirement Plan of Agway Inc. has assets that exceed the benefit obligation. The following tables set forth the plan's funded status and amounts recognized in Agway's consolidated financial statements at June 2001 and 2000 as a net pension asset. The net pension income is summarized for each of the three years ended June 2001:
2001 2000 ------------- -------------- Change in Benefit Obligation ---------------------------- Benefit obligation at beginning of year.......................................... $ 338,503 $ 345,917 Service cost (with interest)..................................................... 9,195 9,975 Interest cost.................................................................... 24,697 24,661 Amendments....................................................................... 419 0 Curtailment...................................................................... 0 458 Actuarial gain (loss) ........................................................... 4,650 (6,738) Benefits paid.................................................................... (44,330) (35,770) --------------- --------------- Benefit obligation at end of year................................................ $ 333,134 $ 338,503 =============== =============== Change in Plan Assets --------------------- Fair value of plan assets at beginning of year................................... $ 569,633 $ 578,975 Actual return on plan assets..................................................... 41,506 26,428 Benefits paid.................................................................... (44,330) (35,770) --------------- --------------- Fair value of plan assets at end of year......................................... $ 566,809 $ 569,633 =============== =============== Funded status.................................................................... $ 233,675 $ 231,130 Unrecognized prior service cost.................................................. 20,147 23,219 Unrecognized net gain............................................................ (24,144) (40,894) --------------- --------------- Net pension asset................................................................ $ 229,678 $ 213,455 =============== ===============
46 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 7. RETIREMENT BENEFITS (CONTINUED) Pension Plan (continued)
2001 2000 1999 -------------- ------------- -------------- Components of Net Pension Income -------------------------------- Service cost (with interest)................................. $ 9,195 $ 9,975 $ 9,835 Interest cost................................................ 24,697 24,661 23,948 Expected return on plan assets............................... (53,606) (53,350) (53,682) Amortization of: Transition obligation.................................... 0 (4,705) (4,705) Prior service cost....................................... 3,491 4,134 4,566 Actuarial gains and losses............................... 0 (278) (1,330) Recognized curtailment (gain)/loss(1)........................ 0 4,268 0 -------------- -------------- -------------- Net pension income........................................... $ (16,223) $ (15,295) $ (21,368) =============== =============== =============== Weighted-Average Assumptions as of June 30 ------------------------------------------ Discount rate................................................ 7.75% 7.75% 7.50% Expected return on plan assets............................... 9.75% 9.75% 9.50% Rate of compensation increase................................ 5.00% 5.00% 5.00%
(1) In the second quarter of fiscal 2000, Agway's Board of Directors approved a plan to restructure the Company's retail store distribution system by selling or converting the Agway-owned and operated retail stores into dealer- owned and operated stores. As a result of a large number of Agway employees leaving the Company, a curtailment of both the pension and postretirement benefit plans occurred. The impact of this curtailment was as follows:
Pension Postretirement ------------ --------------- Change in benefit obligation....................................................... $ 458 $ 424 Curtailment charge................................................................. $ 4,268 $ 1,451
The curtailment charge for both the pension and postretirement benefits noted above were included in the loss on disposal of the retail business in 2000. 47 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 7. RETIREMENT BENEFITS (CONTINUED) Postretirement Benefits Agway provides postretirement health care and life insurance benefits to eligible retirees and their dependents. Eligibility for benefits depends upon age and years of service. The benefit obligation under Agway's postretirement benefit plans are general, unsecured obligations of the Company and are not funded. The accrued postretirement benefit cost expected to be paid in the next year is in other current liabilities, while the remaining amount is included in other liabilities. The reconciliation of funded status at June 2001 and 2000 and the net periodic postretirement benefit cost at June 2001, 2000 and 1999 recognized in Agway's consolidated financial statements were as follows:
2001 2000 ------------- -------------- Change in Benefit Obligation ---------------------------- Benefit obligation at beginning of year........................................... $ (40,704) $ (43,937) Service cost (with interest)...................................................... (668) (685) Interest cost..................................................................... (2,999) (3,118) Plan participant contributions.................................................... (1,108) (1,502) Actuarial gain (loss)............................................................. (2,269) 2,360 Curtailment....................................................................... 0 424 Benefits paid..................................................................... 5,537 5,754 ------------- -------------- Benefit obligation at end of year................................................. $ (42,211) $ (40,704) =============== =============== Funded status..................................................................... $ (42,211) $ (40,704) Unrecognized prior service cost................................................... 917 1,038 Unrecognized net gain............................................................. (138) (2,067) Unrecognized net transition obligation............................................ 13,886 15,042 -------------- -------------- Accrued postretirement benefit cost............................................... $ (27,546) $ (26,691) =============== =============== 2001 2000 1999 -------------- ------------- -------------- Components of Net Periodic Postretirement Benefit Cost ------------------------------------------------------ Service cost (with interest)................................. $ 668 $ 685 $ 699 Interest cost................................................ 2,999 3,118 3,028 Amortization of: Transition obligation.................................... 1,156 1,188 1,255 Prior service cost....................................... 121 125 132 Recognized curtailment (gain)/loss(2)........................ 0 1,451 0 -------------- ------------- -------------- Net periodic postretirement expense.......................... $ 4,944 $ 6,567 $ 5,114 ============== ============= ==============
(2) See Pension Plan section of this footnote for discussion of the postretirement plan curtailment in 2000. In determining the benefit obligation, the weighted average discount rate used was 7.75% for both June 2001 and 2000, respectively. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in the assumed health care cost trend rates would have the following effect:
1% Point 1% Point Increase Decrease ------------- -------------- As of June 2001 --------------- Effect on total of service and interest cost components........................... $ 184 $ (157) Effect on year-end benefit obligation............................................. 1,271 (1,118)
48 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 7. RETIREMENT BENEFITS (CONTINUED) Postretirement Benefits (continued) For measurement purposes, the assumed health care cost trend rate used to measure Agway's accumulated benefit obligation for persons under age 65 was 10% for June 2001 and 6.8% for June 2000. The health care cost trend rate assumption for fiscal 2002 and forward at June 2001 decreases gradually until the year 2006, when the ultimate trend rate is then fixed at 5%. For persons over age 65, Agway has an insured medical program limiting Agway's subsidy to a per month/per retiree basis. Employees' Thrift Investment Plan The Agway Inc. Employees' 401(k) Thrift Investment Plan is a defined contribution plan covering a substantial majority of employees of Agway and its subsidiaries. Under the plan, each participant may invest up to 15% of his or her salary, of which a maximum of 6% qualifies for an Agway matching contribution. Participant contributions are invested at the option of the participant in any combination of eight funds. Agway will contribute, as a matching contribution, an amount of at least 10%, but not more than 50%, of each participant's regular contributions, as defined, up to 6% of his or her salary on an annual basis. Agway contributions to this plan for years ended June 2001, 2000 and 1999 were approximately $1,700, $1,600 and $1,300, respectively. For the years ended June 2001, 2000 and 1999, the Board of Directors of Agway approved an additional match of 20% to supplement the minimum contribution level of 10%. 49 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 8. INCOME TAXES The provision (benefit) for income taxes consists of the following:
June 2001 June 2000 June 1999 -------------- ------------- -------------- Continuing operations: Current: Federal............................................ $ 0 $ 7,968 $ 4,844 State.............................................. 1,227 1,653 1,574 Deferred................................................ (8,547) (2,757) 3,841 Increase in valuation allowance......................... 1,514 0 0 -------------- ------------- -------------- $ (5,806) $ 6,864 $ 10,259 ============== ============= ============== Discontinued operations: Current: Federal............................................ $ 0 $ (7,968) $ (6,099) State.............................................. 0 (448) (397) Deferred................................................ 0 (175) 410 -------------- ------------- -------------- 0 $ (8,591) $ (6,086) ============== ============== ==============
The effective income tax rate on earnings from continuing operations before income taxes differs from the federal statutory regular tax rate as follows:
June 2001 June 2000 June 1999 -------------- ------------- -------------- Statutory federal income tax rate............................ (34.0%) 35.0% 35.0% Tax effects of: Impact from change in legal structure (1)............... (14.6) 0.0 0.0 Adjustment to prior years' tax liabilities.............. (14.6) 0.0 0.0 Valuation allowance..................................... 11.1 0.0 0.0 State income taxes, net of federal benefit (2).......... 3.9 8.3 6.0 Nondeductible items (3)................................. 4.2 5.1 3.5 Other items............................................. 1.5 4.3 (0.3) -------------- ------------- ------------- Effective income tax rate.......................... (42.5%) 52.7% 44.2% ============== ============= ==============
(1) Effective July 1, 2001, for reasons described in Note 19, Agway simplified its corporate structure by merging AFC and AHI into Agway Inc. The change in net deferred tax liabilities reflects the expected future tax rate from this structure. (2) For state income tax purposes, Agway does not file combined income tax returns and is therefore unable to recognize the benefit of certain net operating losses incurred by subsidiaries. (3) Nondeductible items are principally related to goodwill amortization and meal and entertainment expenses. 50 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 8. INCOME TAXES (CONTINUED) The components of the deferred tax assets and liabilities were as follows:
June 2001 June 2000 ------------- -------------- Deferred tax assets: Net operating loss (NOL) carryforward........................................ $ 28,206 $ 23,251 Medical liabilities.......................................................... 10,736 10,433 Other liabilities............................................................ 10,867 13,268 Self-insurance reserves...................................................... 11,024 9,406 Alternative minimum tax (AMT) credit carryforward............................ 7,530 6,005 Deferred compensation........................................................ 5,037 4,854 Inventory allowance.......................................................... 4,265 3,172 Accounts and lease receivable allowance...................................... 16,350 14,411 Environmental liabilities.................................................... 1,864 2,297 Investment tax credit (ITC) carryforward..................................... 1,405 1,604 --------------- --------------- Gross deferred tax asset................................................ 97,284 88,701 Less valuation allowance............................................ (1,514) 0 --------------- --------------- Total net deferred tax assets.................................. 95,770 88,701 Deferred tax liabilities: Pension assets............................................................... 82,867 76,729 Excess of tax-over-book depreciation......................................... 12,315 17,617 Net leasing activity......................................................... 19,936 18,455 Prepaid medical expenses..................................................... 334 1,039 Other assets ............................................................... 1,557 1,120 --------------- --------------- Total deferred tax liability............................................ 117,009 114,960 --------------- --------------- Net deferred tax liability.......................................... $ (21,239) $ (26,259) =============== ===============
Agway's net deferred tax liability at June 2001 and 2000 of $21,239 and $26,259, respectively, consists of a net current asset of $49,379 and $28,887 included in prepaid expenses and a net long-term liability of $70,618 and $55,146 included in other liabilities, respectively. The total gross deferred tax assets are partially offset by a valuation allowance of $1,514 at June 2001. This allowance is required to reflect the net realizable value of ITC carryforward expiring in 2002 and 2003 and charitable contribution carryforwards that expire in 2001-2005. Based on Agway's history of taxable earnings and our expectations for the future, management has determined that operating income and reversal of future taxable temporary differences will more likely than not be sufficient to recognize all of our other net deferred tax assets. At June 2001, the federal AMT credit can be carried forward indefinitely. The net operating loss (NOL) carryforward expires at various intervals between 2010 and 2020. 51 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 9. SHORT-TERM NOTES PAYABLE As of June 2001, Agway had certain facilities available with various financial institutions whereby lenders have agreed to provide funds up to $564,300 to separately financed units of Agway as follows: Agway, excluding Telmark and Insurance - $175,000 and Telmark - $389,300. 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 June 2001, letters of credit issued, primarily to back Agway insurance programs, under the Agway Senior Debt totaled approximately $22,400. The carrying amounts of Agway's short-term borrowings approximate their fair value and were as follows:
Agway Telmark Total -------------- ------------- -------------- June 2001 --------- Bank lines of credit......................................... $ 61,342 $ 120,638 $ 181,980 ============== ============= ============== Weighted average interest rate............................... 7.22% 4.67% ============== ============= Agway Telmark Total -------------- ------------- -------------- June 2000 --------- Bank lines of credit......................................... $ 51,900 $ 75,676 $ 127,576 Commercial paper............................................. 50,000 0 50,000 -------------- ------------- -------------- $ 101,900 $ 75,676 $ 177,576 ============== ============= ============== Weighted average interest rate............................... 7.93% 7.36% ============== =============
The interest rate charged on bank lines of credit ranged from 4.45% to 7.31% at June 2001. Effective March 28, 2001, Agway and AFC established a new senior debt facility (the Agway Senior Debt) for all business operations except for Agway Insurance Company 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, AFC was merged into Agway. As a result, Agway assumed liability for any amounts borrowed by AFC under the Credit Agreement (as defined below). 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). 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. The credit facilities that this senior debt financing replaces amounted to a total availability for letters of credit and lines of credit of up to $148,000. Amounts owed under the former facilities have been repaid and those facilities have been terminated. 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. 52 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 9. SHORT-TERM NOTES PAYABLE (CONTINUED) 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 (as discussed below) 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 greater than 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 increases to $25,000 (collateral borrowing base greater than outstanding loans). 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 reduce the practical availability under the senior debt financing from $175,000 to $150,000. 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 June 30, 2001, the total amount outstanding under the Credit Agreement was $83,700, of which $22,400 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%. These amended rates, effective September 14, 2001, are now approximately 25 basis points higher than the rates which were available to Agway in its prior senior debt financing arrangements. As of June 30, 2001, Agway was in violation of certain of the financial covenants within the Credit Agreement because it had not maintained the required minimum level of 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 secured, including a pledge of its membership interest in Telmark, and increase the minimum range of Minimum Capital 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. Based on this waiver and amendment, Agway is currently in compliance with, and no default exists under, the terms of the Credit Agreement. 53 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 9. SHORT-TERM NOTES PAYABLE (CONTINUED) Telmark borrows under short-term line of credit agreements and its revolving term agreement from time to time to fund its operations. Short-term debt serves as interim financing between the issuances of long-term debt. The current uncommitted short-term line of credit agreements permit Telmark to borrow up to $89,300 on an uncollateralized basis with interest paid upon maturity. The lines bear interest at money market variable rates. A committed $300,000 partially collateralized revolving term loan facility permits Telmark to draw short-term funds bearing interest at money market rates or draw long-term debt at rates appropriate for the term of the note drawn. The facility is partially collateralized by Telmark's investment in certain bank stock, which has a book value of $14,700 and $13,600 at June 2001 and 2000, respectively. The $89,300 lines of credit all have terms expiring during the next 12 months. The total amounts outstanding as of June 2001 and 2000 under the short-term lines of credit were $71,100 and $75,200, respectively, and under the short-term component of the revolving term loan facility were $49,500 and $500, respectively. The portion of the revolving term loan that is long-term at June 2001 and 2000 was $166,000 and $164,000, respectively. 10. DEBT Long-Term Debt: Long-term debt consists of the following at June 2001:
AFC (excluding Agway Telmark) Telmark Total -------------- -------------- -------------- --------------- Notes payable - banks (a)............................. $ 0 $ 0 $ 166,000 $ 166,000 Notes payable - insurance companies (b)(c)............ 0 0 240,260 240,260 Other ........................................... 9,214 1,790 0 11,004 -------------- -------------- -------------- --------------- Subtotal long-term debt, excluding capital leases..... 9,214 1,790 406,260 417,264 Obligations under capital leases...................... 1,425 0 0 1,425 -------------- -------------- -------------- --------------- Total long-term debt.................................. 10,639 1,790 406,260 418,689 Less: current portion................................. 1,307 143 146,496 147,946 -------------- -------------- -------------- --------------- $ 9,332 $ 1,647 $ 259,764 $ 270,743 ============== ============== ============== =============== Long-term debt consists of the following at June 2000: AFC (excluding Agway Telmark) Telmark Total -------------- -------------- -------------- --------------- Notes payable - banks (a) ............................ $ 0 $ 525 $ 164,000 $ 164,525 Notes payable - insurance companies (b)(c) ........... 0 0 240,256 240,256 Other................................................. 9,776 1,772 0 11,548 -------------- -------------- -------------- --------------- Subtotal long-term debt, excluding capital leases..... 9,776 2,297 404,256 416,329 Obligations under capital leases...................... 1,560 0 0 1,560 -------------- -------------- -------------- --------------- Total long-term debt.................................. 11,336 2,297 404,256 417,889 Less: current portion................................. 2,812 626 132,773 136,211 -------------- -------------- -------------- --------------- $ 8,524 $ 1,671 $ 271,483 $ 281,678 ============== ============== ============== ===============
54 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 10. DEBT (CONTINUED) (a) The portion of Telmark's revolving term loan facility that is long term at June 2001 of $166,000 bears interest at fixed rates ranging from 5.36% to 7.47%, with payments commencing August 2001 and final installments due in April 2004. (See Note 9 of the financial statements for discussions of collateralization and/or financial covenants relating to Telmark's and Agway's notes payable to banks.) (b) At June 30, 2001, Telmark also had balances outstanding on uncollateralized senior note private placements totaling $149,500. Interest is payable semiannually on each senior note. Principal payments are both semiannual and annual. The note agreements are similar to each other and each contains financial covenants based on Telmark's financial statements, the most restrictive of which prohibit: (i) tangible net worth defined as consolidated tangible assets less total liabilities (excluding any notes payable to AHI (now Agway), from being less than an amount equal to or greater than the sum of $85,000, plus 50% of all net income (if a positive number) for all fiscal years ending after January 1, 2000. As of June 2001, the required minimum net worth is $96,900, (ii) the ratio of total liabilities less subordinated notes payable to AHI (now Agway) to members' equity plus subordinated notes payable to AHI (now Agway) from exceeding 5:1, (iii) the ratio of earnings available for fixed charges from being less than 1.25:1, (iv) equity distributions and restricted investments (as defined) made after July 1, 2000, from exceeding 50% of consolidated net income for the period beginning on July 1, 2000, through the date of determination, inclusive. As of June 2001, $6,100 of Telmark's member equity was free of this restriction, and (v) entering into lease transactions with Agway which exceed 5% of Telmark's total assets. As of June 2001, $15,200 is free of this restriction. For the year ended June 2001, Telmark complied with all its covenants contained in its borrowing arrangements. (c) At June 30, 2001, Telmark, through two wholly owned special purpose subsidiaries, has four classes of lease- backed notes outstanding totaling $90,800 payable to institutional investors. Interest rates on these classes of notes range from 6.5% to 9.1%. The notes are collateralized by leases, which Telmark sold to these subsidiaries, having an aggregate present value of contractual lease payments equal to 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. Two notes relating to Telmark Lease Funding I, LLC were paid in full during 2001, and in June 2001, Telmark Lease Funding I, LLC was approved to be dissolved. The scheduled maturity of these notes is in varying amounts and dates through December 2008. Subordinated Debt: Subordinated debt consists of the following at June 2001:
AFC (excluding Telmark) Telmark Total --------------- ------------- -------------- Subordinated money market certificates, due 2001 to 2016, interest at a weighted average rate of 8.2% with a range of 4.5% to 9.75% $ 442,551 $ 0 $ 442,551 Subordinated debentures, due 2001to 2009, interest at a weighted average rate of 8.0% with a range of 6.25% to 9.0%........................... 6,787 38,772 45,559 --------------- ------------- -------------- Total subordinated debt...................................... 449,338 38,772 488,110 Less: current portion....................................... 47,628 8,320 55,948 --------------- ------------- -------------- $ 401,710 $ 30,452 $ 432,162 =============== ============= ==============
55 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 10. DEBT (CONTINUED) Subordinated debt consists of the following at June 2000:
AFC (excluding Telmark) Telmark Total -------------- ------------- -------------- Subordinated debentures, due 2001 to 2008, interest at a weighted average rate of 8.0% with a range of 6.0% to 8.75%........................... $ 7,177 $ 37,398 $ 44,575 Subordinated money market certificates, due 2000 to 2014, interest at a weighted average rate of 8.0% with a range of 4.5% to 9.5%............... 430,299 0 430,299 -------------- ------------- -------------- Total subordinated debt...................................... 437,476 37,398 474,874 Less: current portion....................................... 51,628 5,497 57,125 -------------- ------------- -------------- $ 385,848 $ 31,901 $ 417,749 ============== ============= ==============
AFC's (now Agway's) subordinated debt is not redeemable by the holder, though Agway, through AFC, historically has had a practice of repurchasing at face value, plus interest accrued at the stated rate, certain subordinated debt whenever presented for repurchase prior to maturity. However, 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, as discussed in Note 9. The Agway subordinated debt bears interest payable semiannually on January 1 and July 1 of each year and for Telmark is payable quarterly on January 1, April 1, July 1, and October 1. The interest rates of AFC (now Agway's) money market certificates and Telmark's debentures are at the greater of the stated rate or a rate based upon an average discount rate for U.S. Government Treasury Bills, with maturities of 26 weeks. Maturities: Aggregate annual maturities on long-term debt during the next five years ending June and thereafter are as follows:
Capital Subordinated Leases Borrowings Total Debt ------------- -------------- -------------- -------------- 2002..................................... $ 190 $ 147,830 $ 148,020 $ 55,948 2003..................................... 248 115,267 115,515 49,644 2004..................................... 248 84,054 84,302 48,011 2005..................................... 248 6,466 6,714 47,171 2006..................................... 248 23,311 23,559 35,912 Thereafter............................... 821 40,336 41,157 251,424 Imputed interest......................... (578) 0 (578) 0 ------------- -------------- -------------- -------------- Total.................................... $ 1,425 $ 417,264 $ 418,689 $ 488,110 ============= ============== ============== ==============
56 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 11. 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. Commitments to extend credit at Agway's leasing subsidiary, Telmark, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Outstanding commitments to extend lease financing at June 2001 approximated $14,400. Agway rents or leases a variety of equipment, vehicles, and building space. Rent expense for the years ended June 2001, 2000 and 1999 was approximately $15,300, $16,500 and $14,700, respectively. Future minimum payments under noncancelable operating leases are approximately $13,100, $11,300, $10,200, $9,500 and $9,300 for the years ending June 2002 through 2006, respectively, and approximately $9,900 thereafter. 57 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 12. PREFERRED STOCK Values are whole numbers except where noted as (000s).
Preferred Stock --------------------------------------------------------------------------------------- Cumulative --------------------------------------------------------- Honorary Dollar 6% 8% 8% 7% Member Amount Series A Series B Series B-1 Series C Series HM in 000s ------------ ------------ ------------ ------------ ------------ ------------ Par Value........................... $ 100 $ 100 $ 100 $ 100 $ 25 ============ ============ ============ ============ ============ Shares Authorized................... 350,000 250,000 140,000 150,000 80,000 ============ ============ ============ ============ ============ Shares Outstanding: Balance June 1998................ 153,176 236,146 18,010 70,736 2,581 $ 47,871 Issued (redeemed), net......... (19,405) (1,357) 0 (28,782) 3 (4,954) ------------ ------------ ------------ ------------ ------------ ------------ Balance June 1999................ 133,771 234,789 18,010 41,954 2,584 $ 42,917 Issued (redeemed), net......... (10,451) (2,044) 0 (19,702) (100) (3,222) ------------ ------------ ------------ ------------ ------------ ------------ Balance June 2000................ 123,320 232,745 18,010 22,252 2,484 $ 39,695 Issued/redeemed), net.......... (10,475) (2,047) 0 (8,371) (116) (2,092) ------------ ------------ ------------ ------------ ------------ ------------ Balance June 2001................ 112,845 230,698 18,010 13,881 2,368 $ 37,603 ============ ============ ============ ============ ============ ============
Preferred Stock ------------------------------------------------------------------------ Cumulative --------------------------------------------------------- Honorary 6% 8% 8% 7% Member Series A Series B Series B-1 Series C Series HM ------------ ------------ ------------ ------------ ------------ Annual Dividends Per Share: June 1999........................ $ 6.00 $ 8.00 $ 8.00 $ 7.00 $ 1.50 June 2000........................ $ 6.00 $ 8.00 $ 8.00 $ 7.00 $ 1.50 June 2001........................ $ 6.00 $ 8.00 $ 8.00 $ 7.00 $ 1.50 Shares Held in Treasury (purchased at par value): June 1999........................ 216,229 15,211 121,990 108,046 1,070 June 2000........................ 226,680 17,255 121,990 127,748 1,202 June 2001........................ 237,155 19,302 121,990 136,119 1,331
There are 10,000 shares of authorized preferred stock undesignated as to series, rate, and other attributes. The Series A preferred stock has priority with respect to the payment of dividends. Agway maintains the practice of providing a market by repurchasing, at par, preferred stock as the holders elect to tender the securities for repurchase, subject to Board of Directors' approval. However, while we currently intend to continue this historic practice, we are under no obligation to repurchase preferred stock when presented to us, and we 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 (see Note 9). The Series HM preferred stock may be issued only to former members of Agway and no more than one share of such stock may be issued to any one person. The preferred stock has no pre-emptive or conversion rights. 58 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 13. FINANCIAL INFORMATION CONCERNING SEGMENT REPORTING Agway reports its operations principally in five business segments as follows: (1) AGRICULTURE engages in the manufacturing, processing, marketing, and direct distribution of various animal feeds, crop inputs, fertilizers and farm supplies and services for its farmer-members and other customers primarily in the northeastern United States and Ohio. (2) COUNTRY PRODUCTS GROUP engages in the manufacturing, processing and repacking of a variety of agricultural products marketed directly to consumers, retailers, wholesalers and processors. Country Products Group also is involved in the exploration and development of new technologies to benefit agricultural and food businesses. (3) ENERGY operates a full-service energy company which markets and services heating, ventilation and air-conditioning equipment and which sells and delivers fuel oil, kerosene, propane, gasoline and diesel fuel, as well as marketing natural gas and electricity where deregulation makes that possible. (4) LEASING, through Telmark LLC, is principally engaged in the business of leasing agricultural-related equipment, vehicles, and buildings to farmers and other customers in rural communities. Interest income for the Leasing segment is reported as net sales and revenues. Interest expense is reported as cost and expenses from leasing operations (cost of sales). (5) INSURANCE, through Agway Insurance Company, underwrites property and casualty insurance. Agway General Agency Inc., also included in the Insurance segment, markets medical, long-term care, and life and other products designed by non-affiliated companies for the agricultural marketplace. In addition, Agency provides administrative management services to Agway business units, including claims, risk, facilities, data processing, and payroll/benefits management. Total sales and revenues of each industry segment includes the sale of products and services to unaffiliated customers, as reported in the Agway consolidated statements of operations, as well as sales to other segments of Agway which are competitively priced. The Other category within the summary of business segments includes net corporate expenses, pension income, intersegment eliminations, interest and taxes.
Country Products Year ended June 2001 Agriculture Group Energy Leasing Insurance Other(a) Consolidated -------------------- ------------- ------------- ------------ ----------- --------- ------------ ------------ Net sales and revenues to unaffiliated customers.... $ 514,080 $ 198,183 $ 723,242 $ 84,868 $ 27,894 $ 47 $ 1,548,314 Intersegment sales and revenues.................. 9,493 4,608 691 1,325 0 (16,117) 0 ------------- ------------- ------------ ----------- --------- ------------ ------------ Total sales and revenues $ 523,573 $ 202,791 $ 723,933 $ 86,193 $ 27,894 $ (16,070) $ 1,548,314 ============= ============= ============ =========== ========= ============ ============ Operating earnings (loss)... $ (8,520) $ (9,337) $ 21,297 $ 21,242 $ 329 $ (4,083) $ 20,928 Interest income............. 5,630 69 1,382 0 0 1,104 8,185 Interest expense............ (15,327) (3,746) (6,793) 0 (6) (19,946) (45,818) Other income, net........... (595) (1,070) 4,186 0 488 20 3,029 ------------- ------------- ------------ ----------- --------- ------------ ------------ Earnings (loss) before income taxes.............. $ (18,812) $ (14,084) $ 20,072 $ 21,242 $ 811 $ (22,905) $ (13,676) ============= ============= ============ =========== ========= ============ ============ Total assets................ $ 270,294 $ 67,571 $ 181,800 $ 735,707 $ 55,422 $ 289,111 $ 1,599,905 Depreciation and amortization 11,010 5,224 8,645 303 115 1,599 26,896 Capital expenditures........ 5,252 1,036 10,974 837 148 540 18,787
59 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 13. FINANCIAL INFORMATION CONCERNING SEGMENT REPORTING (CONTINUED)
Country Products Year ended June 2000 Agriculture Group Energy Leasing Insurance Other(a) Consolidated -------------------- ------------- ------------- ------------ ----------- --------- ------------ ------------ Net sales and revenues to unaffiliated customers.... $ 488,417 $ 190,221 $ 575,568 $ 76,626 $ 27,153 $ 14 $ 1,357,999 Intersegment sales and revenues.................. 20,268 11,780 438 159 0 (32,645) 0 ------------- ------------- ------------ ----------- --------- ------------ ------------ Total sales and revenues $ 508,685 $ 202,001 $ 576,006 $ 76,785 $ 27,153 $ (32,631) $ 1,357,999 ============= ============= ============ =========== ========= ============ ============ Operating earnings (loss)... $ (13,016) (384) 9,001 20,059 30 2,184 17,874 Interest income............. 5,767 153 1,078 0 0 2,454 9,452 Interest expense............ (13,263) (2,902) (6,709) 0 (7) (17,162) (40,043) Other income, net........... 6,972 248 18,655 0 17 (159) 25,733 ------------- ------------- ------------ ----------- --------- ------------ ------------ Earnings (loss) before income taxes.............. $ (13,540) $ (2,885) $ 22,025 $ 20,059 $ 40 $ (12,683) $ 13,016 ============= ============= ============ =========== ========= ============ ============ Total assets................ $ 293,859 $ 71,636 $ 183,462 $ 670,364 $ 54,160 $ 304,648 $ 1,578,129 Depreciation and amortization 10,778 4,413 8,839 386 98 1,657 26,171 Capital expenditures........ 18,372 2,083 6,342 0 28 974 27,799 Country Products Year ended June 1999 Agriculture Group Energy Leasing Insurance Other(a) Consolidated -------------------- ------------- ------------- ------------ ----------- --------- ------------ ------------ Net sales and revenues to unaffiliated customers.... $ 512,071 $ 160,153 $ 390,097 $ 70,006 $ 27,968 $ (17) $ 1,160,278 Intersegment sales and revenues.................. 23,163 11,572 613 0 0 (35,348) 0 ------------- ------------- ------------ ----------- --------- ------------ ------------ Total sales and revenues $ 535,234 $ 171,725 $ 390,710 $ 70,006 $ 27,968 $ (35,365) $ 1,160,278 ============= ============= ============ =========== ========= ============ ============ Operating earnings (loss)... $ (8,565) $ 2,950 $ 12,992 $ 18,201 $ 130 $ 4,647 $ 30,355 Interest income............. 6,467 10 614 0 0 1,551 8,642 Interest expense............ (12,529) (2,239) (5,119) 0 (12) (14,845) (34,744) Other income, net........... 2,168 11,355 4,538 (43) 378 551 18,947 ------------- ------------- ------------ ----------- --------- ------------ ------------ Earnings (loss) before income taxes.............. $ (12,459) $ 12,076 $ 13,025 $ 18,158 $ 496 $ (8,096) $ 23,200 ============= ============= ============ =========== ========= ============ ============ Total assets................ $ 269,884 $ 64,365 $ 133,624 $ 596,905 $ 55,578 $ 316,816 $ 1,437,172 Depreciation and amortization 10,247 3,959 8,506 493 92 1,431 24,728 Capital expenditures........ 13,943 4,707 5,002 511 89 2,910 27,162 (a) Represents unallocated net corporate items and intersegment eliminations.
60 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 14. DISCONTINUED OPERATIONS In fiscal 2000, the former Agway retail services business consisted of two major components, a retail store distribution system and a wholesale procurement and supply system. In the second quarter of fiscal 2000, the Agway Board of Directors approved a plan to restructure the retail store distribution system. This plan called for the sale or closure of the 227 Agway retail properties. In the spring of 2000, the Agway Board of Directors authorized the sale of the wholesale procurement and supply system to Southern States Cooperative, Inc. An agreement for this sale was executed on June 20, 2000 and closed on July 31, 2000. The sale of the wholesale procurement and supply system, when combined with the sale and closure of the Agway-owned or operated retail stores, constituted a plan to discontinue operations of the retail services business. For financial reporting purposes, the measurement date upon which this discontinued operation plan became effective was June 20, 2000. Operating results of the retail services business, including restructuring activity which took place through that date, are included in the operating loss from discontinued operations in the financial statements for the year ended June 2000. The anticipated gains and losses after June 20, 2000 from the future anticipated sale of the wholesale procurement and supply system, which was consummated on July 31, 2000, and the sale or closure of the remaining Agway-owned or operated retail store properties, as well as the results of their future operations through the anticipated dates of sale, are included in the loss on disposal of the retail services business in the June 2000 statement of operations. Prior year financial results reflect the retail services business as a discontinued operation. All retail store operations ceased during 2001 and the company is continuing to market the former store properties for sale. The net sales and revenues from discontinued operations (retail services business) were approximately $26,400, $222,400 and $285,200 in 2001, 2000 and 1999, respectively. Interest expense allocated to discontinued operations totaled $500, $4,100 and $6,200 in 2001, 2000 and 1999, respectively. A summary of net assets of discontinued operations at June 2001 and 2000 was as follows:
2001 2000 -------------- -------------- Accounts receivable.................................................................. $ 662 $ 22,982 Inventory............................................................................ 0 18,408 Property, plant and equipment, net................................................... 8,525 18,989 Other assets, net.................................................................... 7,107 25,470 Accounts payable and accrued expenses................................................ (9,306) (49,413) Long-term liabilities................................................................ (1,574) (2,158) -------------- -------------- Net assets of discontinued operations................................................ $ 5,414 $ 34,278 ============== ==============
Total net assets of discontinued operations of $5,414 remain as of June 2001, and no adjustments to the estimated net loss on disposal of discontinued operations established as of the June 20, 2000, measurement date was required. 61 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 15. AGRICULTURE REALIGNMENT On December 7, 2000, 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 structures, 60 locations have been identified for conversion to dealer operations, sale, or closure. Approximately 412 employees working at the identified locations may be paid severance. As of June 30, 2001, the management structure is in place, and the realignment is in process. It is expected the system support conversion, and the majority of the facility conversions and closings, will be substantially completed on or about September 30, 2001. Sale of closed facilities is estimated to take place through June 2002. 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. Costs associated with the Agriculture Plan incurred in 2001 are summarized below. As of June 30, 2001, a total of $3,372 remains accrued for expected severance costs. In 2002, while still in the transition phase, the Agriculture segment's operating losses in total will likely continue, but we expect substantial improvement in the Agriculture segment's operating results to begin.
Fiscal Year Ended June 30, 2001 ----------------------- Net gain on sale of assets................................................................... $ 879 Loss on sale/liquidation of inventory........................................................ (360) Impairment on long-lived assets.............................................................. (771) Severance costs.............................................................................. (3,463) Other transaction costs...................................................................... (60) ----------------------- Net loss on realignment activity.......................................................... $ (3,775) =======================
16. OTHER INCOME (EXPENSE) The components of other income (expense) for the years ended June 2001, 2000 and 1999 are summarized below:
2001 2000 1999 -------------- ------------- -------------- Patronage refund income...................................... $ 360 $ 787 $ 1,231 Rent and storage revenue..................................... 684 2,964 3,155 Gain (loss) on disposition of: Businesses.............................................. 0 1,098 11,097 Other security investments.............................. (509) (1,044) (1,267) Properties and equipment................................ 2,215 13,995 655 Negotiated settlement........................................ 0 5,049 0 Other, net................................................... 279 2,884 4,076 -------------- ------------- -------------- $ 3,029 $ 25,733 $ 18,947 ============== ============= ==============
62 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 17. SUPPLEMENTAL DISCLOSURES ABOUT CASH FLOWS
2001 2000 1999 -------------- ------------- -------------- Additional disclosure of operating cash flows: Cash paid during the year for: Interest........................................... $ 43,644 $ 38,905 $ 35,310 ============== ============== ============== Cost of leasing operations (interest).............. $ 35,399 $ 30,774 $ 28,629 ============== ============== ============== Income taxes....................................... $ 290 $ 2,727 $ 2,586 ============== ============== ============== Additional disclosure for non-cash investing and financing activities: Dividends declared but unpaid at fiscal year-end........ $ 1,521 $ 1,592 $ 1,702 ============== ============== ============== Note receivable from sale of business................... $ 12,522 $ - $ - ============== ============== ==============
18. FINANCIAL AND COMMODITY INSTRUMENTS Fair Value Carrying amounts of trade notes and accounts receivable, financial instruments included in other assets and other liabilities, notes payable, and accounts payable approximate their fair values because of the short-term maturities of these instruments. The fair value of Agway's long-term debt and subordinated debentures is estimated based on discounted cash flow computations using estimated borrowing rates available to Agway ranging from 5.3% to 10.0% in 2001 and 7.7% to 10% in 2000. The carrying amounts and estimated fair values of Agway's significant financial instruments held for purposes other than trading at June 2001 and 2000 were as follows:
2001 2000 ------------------------------- ------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value ------------- ------------- ------------- ------------- Liabilities: Long-term debt (excluding capital leases)....... $ 417,264 $ 430,843 $ 416,329 $ 423,843 Subordinated debentures......................... 488,110 487,489 474,874 436,970
Agway determines the fair value of its exchange-traded contracts based on the settlement prices for open contracts, which are established by the exchange on which the instruments are traded. The fair value of Agway's over-the- counter contracts is determined based on quotes from brokers. The margin accounts for open commodity futures and option contracts, which reflect daily settlements as market values change, are recorded in advances and other receivables. The margin account represents Agway's basis in those contracts. As of June 30, 2001, the carrying and fair value of Agway's investment in commodity futures and option contracts was an asset of $1,700 and $1,700, respectively. As of June 24, 2000, the carrying and fair value of Agway's investment in commodity futures and option contracts was a gain of $5,300 and $8,200, respectively. 63 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 18. FINANCIAL AND COMMODITY INSTRUMENTS (CONTINUED) Off-Balance-Sheet Risk In the normal course of business, Agway has letters of credit, performance contracts, and other guarantees that are not reflected in the accompanying consolidated balance sheets. In the past, no significant claims have been made against these financial instruments. Management believes that the likelihood of performance under these financial instruments is minimal and expects no material losses and/or cash requirements to occur in connection with these instruments. Agway's leasing subsidiary, Telmark, is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its leasing customers. These financial instruments consist of commitments to extend credit not recognized in the balance sheet. In the event of nonperformance by the other party to the financial instrument, the credit risk is limited to the contractual amount of Telmark's commitment to extend credit. Telmark uses the same credit and collateral policies in making commitments as it does for on-balance-sheet instruments. Credit and Market Risk Agway, operating as an agricultural cooperative primarily in the Northeast, has a concentration of accounts and lease receivables due from farmer-members throughout the region. This concentration of agricultural customers may affect Agway's overall credit risk in that the repayment of farmer-member receivables may be affected by inherent risks associated with (1) the overall economic environment of the region; (2) the impact of adverse regional weather conditions on crops; and (3) changes in the level of government expenditures on farm programs and other changes in government agricultural programs that adversely affect the level of income of farmers. Agway mitigates this credit risk by analyzing farmer-member credit positions prior to extending credit and requiring collateral on long-term arrangements and for the underlying asset in the case of Telmark's lease contracts. Energy extends unsecured credit to petroleum wholesalers and residential fuel-oil customers. The credit function within the Energy and Agriculture businesses manages credit risk associated with these trade receivables by routinely assessing the financial strength of its customers. In the normal course of our operations, we have exposure to market risk from price fluctuations associated with commodities such as corn, soy complex, oats, confection and bakery kernel sunflower seeds, gasoline, distillate and propane. These price fluctuations impact commodity inventories, product gross margins, and anticipated transactions in our Agriculture, Energy and Country Products Group 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. 64 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 19. CONSOLIDATING FINANCIAL STATEMENTS Prior to July 1, 2001 Agway Financial Corporation (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, Agway Holdings Inc. (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. In exemptive relief granted pursuant to a "no action letter" issued by the staff of the SEC, AFC did not file periodic reports with the SEC for itself but did report summarized financial information in Agway's financial statement footnotes. 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. Effective July 1, 2001, we simplified the Agway corporate structure by merging AFC and AHI into Agway Inc. The more complex structure 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, as described above. In connection with the assumption by Agway of the obligations under the Debt Securities, 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. The following summarized condensed consolidating financial information for the Company presents the financial information for AFC, Agway Inc. (parent company only and as of June 30, 2001 guarantor of AFC Debt), and other direct subsidiaries of Agway Inc., which do not guarantee any obligations of AFC or Agway. Subsidiaries of Agway Inc. and AFC are reported on the equity basis. Debt and goodwill have been allocated to subsidiaries. 65 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 19. CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
June 2001 -------------------------------------------------------------------------- Agway Inc. All AFC (Parent Co.) Others (Issuer) (Guarantor) (Non-Guarantor) Elims Consolidated ------------ ------------ ------------- ------------ ------------ ASSETS ------ Current Assets: Cash .......................... $ 0 $ 0 $ 1,555 $ (1,555) $ 0 Trade accounts receivable, net.. 74,353 96,245 42,250 (55) 212,793 Leases receivable, net.......... 166,694 0 0 (1,346) 165,348 Operating advance receivable.... 284,324 0 0 (284,324) 0 Advances and other receivables 4,653 13,776 2,654 (1,142) 19,941 Inventories..................... 23,959 46,435 18,232 0 88,626 Restricted cash................. 8,306 0 0 0 8,306 Prepaid expenses and other assets. 30,573 35,573 80 56 66,282 ------------ ------------ ------------ ------------ ----------- Total current assets.......... 592,862 192,029 64,771 (288,366) 561,296 Marketable securities available for sale 37,556 0 0 0 37,556 Other security investments......... 50,233 239,953 0 (238,357) 51,829 Properties and equipment, net...... 80,947 85,520 11,166 (278) 177,355 Long-term leases receivable, net... 521,971 0 0 (18,979) 502,992 Net pension asset.................. 0 229,678 0 0 229,678 Other assets....................... 93,796 23,527 9,432 (92,970) 33,785 Net assets of discontinued operations 0 5,414 0 0 5,414 ------------ ------------ ----------- ------------ ------------ Total assets................ $ 1,377,365 $ 776,121 $ 85,369 $ (638,950) $ 1,599,905 ============ ============ =========== ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current Liabilities: Notes payable................... $ 120,638 $ 61,342 $ 0 $ 0 $ 181,980 Current installments of long-term debt and subordinated debt 202,588 1,632 1,022 (1,348) 203,894 Operating advance payable....... 0 259,678 24,081 (283,759) 0 Accounts payable................ 14,891 22,470 6,988 46,335 90,684 Other current liabilities....... 94,387 78,352 8,065 (49,595) 131,209 ------------ ------------ ----------- ------------ ------------ Total current liabilities..... 432,504 423,474 40,156 (288,367) 607,767 Long-term debt..................... 262,380 19,384 8,051 (19,072) 270,743 Subordinated debt.................. 432,162 0 0 0 432,162 Other liabilities.................. 49,124 163,933 0 (93,154) 119,903 ------------ ------------ ----------- ------------ ------------ Total liabilities............. 1,176,170 606,791 48,207 (400,593) 1,430,575 Shareholders' equity: Preferred stock, net............ 0 37,603 0 0 37,603 Common stock, net............... 0 2,445 0 0 2,445 Accumulated other comprehensive income (loss)................. 0 (61) 0 0 (61) Retained earnings............... 201,195 129,343 37,162 (238,357) 129,343 ------------ ------------ ----------- ------------ ------------ Total shareholders' equity.... 201,195 169,330 37,162 (238,357) 169,330 ------------ ------------ ----------- ------------ ------------ Total liabilities and shareholders' equity...... $ 1,377,365 $ 776,121 $ 85,369 $ (638,950) $ 1,599,905 ============ ============ =========== ============ ============
66 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 19. CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
June 2000 -------------------------------------------------------------------------- Agway Inc. All AFC (Parent Co.) Others (Issuer) (Guarantor) (Non-Guarantor) Elims Consolidated ------------ ------------ ------------- ------------ ------------ ASSETS ------ Current Assets: Cash .......................... $ 0 $ 23,508 $ 6,875 $ (11,242) $ 19,141 Trade accounts receivable, net... 67,214 104,459 37,587 1 209,261 Leases receivable, net........... 152,785 0 0 (530) 152,255 Operating advance receivable..... 400,894 0 0 (400,894) 0 Advances and other receivables... 13,926 7,988 2,837 (1,013) 23,738 Inventories...................... 33,805 61,604 16,531 0 111,940 Restricted cash.................. 10,103 0 0 0 10,103 Prepaid expenses and other assets. 32,016 16,116 9 2 48,143 ------------ ------------ ------------ ------------ ------------ Total current assets........... 710,743 213,675 63,839 (413,676) 574,581 Marketable securities available for sale 36,254 0 0 0 36,254 Other security investments.......... 48,739 242,817 0 (240,084) 51,472 Properties and equipment, net....... 79,178 84,812 11,793 1 175,784 Long-term leases receivable, net.... 473,753 0 0 (3,158) 470,595 Net pension asset................... 0 213,455 0 0 213,455 Other assets........................ 59,557 8,605 10,187 (56,639) 21,710 Net assets of discontinued operations 0 34,278 0 0 34,278 ------------ ------------ ------------ ------------ ------------ Total assets................. $ 1,408,224 $ 797,642 $ 85,819 $ (713,556) $ 1,578,129 ============ ============ ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable.................... $ 177,576 $ 0 $ 0 $ 0 $ 177,576 Current installments of long-term debt and subordinated debt 190,524 1,104 2,237 (529) 193,336 Operating advance payable........ 0 379,977 20,005 (399,982) 0 Accounts payable................. 16,376 21,184 4,630 51,856 94,046 Other current liabilities........ 110,222 63,070 13,789 (65,021) 122,060 ------------ ------------ ------------ ------------ ------------ Total current liabilities...... 494,698 465,335 40,661 (413,676) 587,018 Long-term debt...................... 273,146 3,775 7,664 (2,907) 281,678 Subordinated debt................... 417,749 0 0 0 417,749 Other liabilities................... 20,041 145,941 0 (56,889) 109,093 ------------ ------------ ------------ ------------ ------------ Total liabilities.............. 1,205,634 615,051 48,325 (473,472) 1,395,538 Shareholders' equity: Preferred stock, net............. 0 39,695 0 0 39,695 Common stock, net................ 0 2,473 0 0 2,473 Accumulated other comprehensive income (loss).................. 0 (798) 0 0 (798) Retained earnings................ 202,590 141,221 37,494 (240,084) 141,221 ------------ ------------ ------------ ------------ ------------ Total shareholders' equity..... 202,590 182,591 37,494 (240,084) 182,591 ------------ ------------ ------------ ------------ ------------ Total liabilities and shareholders' equity...... $ 1,408,224 $ 797,642 $ 85,819 $ (713,556) $ 1,578,129 ============ ============ ============ ============ ============
67 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 19. CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
June 2001 ------------------------------------------------------------------------ Agway Inc. All AFC (Parent Co.) Others (Issuer) (Guarantor) (Non-Guarantor) Elims Consolidated ------------ ----------- ------------- ------------ ------------ Net sales and revenues from: Product sales................... $ 789,580 $ 526,814 $ 136,183 $ (17,025) $ 1,435,552 Leasing operations.............. 84,868 0 0 0 84,868 Insurance operations............ 27,894 0 0 0 27,894 ------------ ------------ ------------ ------------ ------------ Total net sales and revenues.. 902,342 526,814 136,183 (17,025) 1,548,314 Cost and expenses from: Products and plant operations... 743,373 477,126 121,623 (15,781) 1,326,341 Leasing operations.............. 35,616 0 0 0 35,616 Insurance operations............ 17,003 0 0 0 17,003 Selling, general and admin activities 71,210 64,166 13,051 (1) 148,426 ------------ ------------ ------------ ------------ ------------ Total operating costs and expenses 867,202 541,292 134,674 (15,782) 1,527,386 Operating income (loss)............ 35,140 (14,478) 1,509 (1,243) 20,928 Interest expense, net.............. (20,985) (15,793) (2,098) 1,243 (37,633) Other income, net.................. (14,836) 19,376 193 (1,704) 3,029 ------------ ------------ ------------ ------------ ------------ Earnings (loss) from continuing operations before income taxes.. (681) (10,895) (396) (1,704) (13,676) Income tax expense (benefit) ...... 394 (6,136) (64) 0 (5,806) ------------ ------------ ------------ ------------ ------------ Earnings (loss) before equity in unconsolidated subsidiaries..... (1,075) (4,759) (332) (1,704) (7,870) Equity in earnings from subsidiaries. 0 (3,111) 0 3,111 0 ------------ ------------ ------------ ------------ ------------ Earnings from continuing operations (1,075) (7,870) (332) 1,407 (7,870) Discontinued operations: Loss from operations, net of tax 0 0 0 0 0 Loss on disposal, net of tax.... 0 0 0 0 0 ------------ ------------ ------------ ------------ ------------ Loss from discontinued operations 0 0 0 0 0 Earnings (loss) before cumulative effect of an accounting change.. (1,075) (7,870) (332) 1,407 (7,870) Cumulative effect of accounting change, net of tax benefit of $723 0 (1,057) 0 0 (1,057) ------------ ------------ ------------ ------------ ------------ Net earnings (loss)................ $ (1,075) $ (8,927) $ (332) $ 1,407 $ (8,927) ============ ============ ============ ============ ============
68 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 19. CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
June 2000 ------------------------------------------------------------------------- Agway Inc. All AFC (Parent Co.) Others (Issuer) (Guarantor) (Non-Guarantor) Elims Consolidated ------------ ----------- ------------- ------------ ------------ Net sales and revenues from: Product sales $ 628,684 $ 522,631 $ 120,461 $ (17,556) $ 1,254,220 Leasing operations.............. 76,626 0 0 0 76,626 Insurance operations............ 27,153 0 0 0 27,153 ------------ ------------ ------------ ----------- ------------ Total net sales and revenues.. 732,463 522,631 120,461 (17,556) 1,357,999 Cost and expenses from: Products and plant operations... 592,790 474,529 108,201 (17,415) 1,158,105 Leasing operations.............. 31,377 0 0 0 31,377 Insurance operations............ 15,663 0 0 0 15,663 Selling, general and admin activities 59,700 62,637 12,505 138 134,980 ------------ ------------ ------------ ------------ ------------ Total operating costs and expenses 699,530 537,166 120,706 (17,277) 1,340,125 Operating income (loss)............ 32,933 (14,535) (245) (279) 17,874 Interest expense, net.............. (19,875) (9,113) (1,748) 145 (30,591) Other income, net.................. (1,409) 26,275 295 572 25,733 ------------ ------------ ------------ ------------ ------------ Earnings (loss) from continuing operations before income taxes.. 11,649 2,627 (1,698) 438 13,016 Income tax expense (benefit) ...... 4,763 2,231 (130) 0 6,864 ------------ ------------ ------------ ----------- ------------ Earnings (loss) before equity in unconsolidated subsidiaries..... 6,886 396 (1,568) 438 6,152 Equity in earnings from subsidiaries 0 5,756 0 (5,756) 0 ------------ ------------ ------------ ----------- ------------ Earnings from continuing operations 6,886 6,152 (1,568) (5,318) 6,152 Discontinued operations: Loss from operations, net of tax benefit of $7,313............. 0 (13,187) 0 0 (13,187) Loss on disposal, net of tax benefit of $1,278............. 0 (2,342) 0 0 (2,342) ------------ ------------ ------------ ----------- ------------ Loss from discontinued operations 0 (15,529) 0 0 (15,529) Net earnings (loss)................ $ 6,886 $ (9,377) $ (1,568) $ (5,318) $ (9,377) ============ ============ ============ =========== ============
69 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 19. CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)
June 1999 ------------------------------------------------------------------------ Agway Inc. All AFC (Parent Co.) Others (Issuer) (Guarantor) (Non-Guarantor) Elims Consolidated ------------ ----------- ------------- ------------ ------------ Net sales and revenues from: Product sales $ 421,721 $ 548,400 $ 116,481 $ (24,298) $ 1,062,304 Leasing operations.............. 70,006 0 0 0 70,006 Insurance operations............ 27,968 0 0 0 27,968 ------------ ------------ ------------ ------------ ------------ Total net sales and revenues.. 519,695 548,400 116,481 (24,298) 1,160,278 Cost and expenses from: Products and plant operations... 382,141 497,508 107,376 (24,286) 962,739 Leasing operations.............. 27,626 0 0 0 27,626 Insurance operations............ 17,152 0 0 0 17,152 Selling, general and admin activities 46,656 66,638 8,672 440 122,406 ------------ ------------ ------------ ------------ ------------ Total operating costs and expenses 473,575 564,146 116,048 (23,846) 1,129,923 Operating income (loss)............ 46,120 (15,746) 433 (452) 30,355 Interest expense, net.............. (19,287) (5,344) (1,485) 14 (26,102) Other income, net.................. (16,283) 35,171 59 0 18,947 ------------ ------------ ------------ ------------ ------------ Earnings (loss) from continuing operations before income taxes.. 10,550 14,081 (993) (438) 23,200 Income tax expense (benefit) ...... 17,209 (6,087) (862) (1) 10,259 ------------ ------------ ------------ ------------ ------------ Earnings (loss) before equity in unconsolidated subsidiaries..... (6,659) 20,168 (131) (437) 12,941 Equity in earnings from subsidiaries 0 (7,227) 0 7,227 0 ------------ ------------ ------------ ------------ ------------ Earnings from continuing operations (6,659) 12,941 (131) 6,790 12,941 Discontinued operations: Loss from operations, net of tax benefit of $6,086............. 0 (11,146) 0 0 (11,146) Loss on disposal, net of tax.... 0 0 0 0 0 ------------ ------------ ------------ ------------ ------------ Loss from discontinued operations 0 (11,146) 0 0 (11,146) ------------ ------------ ------------ ------------ ------------ Net earnings (loss)................ $ (6,659) $ 1,795 $ (131) $ 6,790 $ 1,795 ============ ============ ============ ============ ============
70 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 19. CONSOLIDATING FINANCIAL STATEMENTS(CONTINUED)
June 2001 -------------------------------------------------------------------- Agway Inc. All AFC (Parent Co.) Others (Issuer) (Guarantor) (Non-Guarantor) Elims Consolidated ----------- ----------- ------------ ---------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) ......................................... $ (2,132) $ (8,927) $ (2,036) $ 4,168 $ (8,927) Adjustments to reconcile earnings to net cash: Depreciation and amortization............................. 10,717 14,256 2,657 (734) 26,896 Receivables and other asset provisions.................... 18,362 0 0 0 18,362 Net pension income........................................ 0 (16,223) 0 0 (16,223) Cumulative effect of accounting change, net of tax........ 1,057 0 0 0 1,057 Patronage refund received in stock........................ 0 (360) 0 0 (360) Deferred income tax expense (benefit)..................... (3,350) 1,802 288 (5,773) (7,033) (Gain) loss on disposition of: Businesses............................................. 0 0 0 0 0 Other security investments............................. 509 0 0 0 509 Properties and equipment............................... (1,281) (750) (184) 0 (2,215) Changes in assets and liabilities, net of effects of businesses acquired or sold: Receivables............................................ (10,294) (1,193) (4,663) 7,549 (8,601) Inventory.............................................. 9,871 15,169 (1,702) (24) 23,314 Payables............................................... (13,757) (109,870) (3,191) 123,551 (3,267) Other.................................................. 103,535 (5,889) (109,693) (115,466) (6,194) ----------- ----------- ------------ ---------- ------------ Net cash flows from (used in) continuing operations.......... 113,237 (111,985) (2,978) 19,044 17,318 Net cash flows from (used in) discontinued operations........ 0 28,864 0 0 28,864 ----------- ----------- ------------ ---------- ------------ Net cash from (used in) operating activities................. 113,237 (83,121) (2,978) 19,044 46,182 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of properties and equipment..................... (12,387) (5,343) (1,057) 0 (18,787) Cash paid for acquisitions................................ (484) 0 0 0 (484) Disposition of properties and equipment................... 2,106 6,794 113 935 9,948 Purchases of marketable securities available for sale..... 4,905) 0 0 0 (4,905) Sale of marketable securities available for sale.......... 4,530 0 0 0 4,530 Leases originated......................................... (265,986) 0 0 0 (265,986) Leases repaid............................................. 211,017 0 0 0 211,017 Purchases of investments in related cooperatives.......... (1,948) (1,253) 0 0 (3,201) Proceeds from sale of investments in related cooperatives. 1,461 1,234 0 0 2,695 ----------- ----------- ------------ ---------- ------------ Net cash flows used in investing activities.................. (66,596) 1,432 (944) 935 (65,173) CASH FLOWS FROM FINANCING ACTIVITIES: Net change in short-term notes payable....................... (56,938) 61,342 0 0 4,404 Proceeds from long-term debt................................. 131,099 85 0 (85) 131,099 Repayment of long-term debt.................................. (130,165) (662) 0 662 (130,165) Proceeds from sale of subordinated debt...................... 183,029 0 0 0 183,029 Redemption of subordinated debt.............................. (169,792) 0 0 0 (169,792) Payments on capitalized leases............................... 1,283 2,558 (1,072) (18,149) (15,380) Proceeds from sale of stock.................................. 0 6 0 0 6 Redemption of stock.......................................... 0 (2,127) 0 0 (2,127) Cash dividends paid.......................................... 0 (3,021) 0 0 (3,021) Net change in restricted cash................................ 0 0 0 1,797 1,797 ----------- ----------- ------------ ---------- ------------ Net cash flows from financing activities..................... (41,484) 58,181 (1,072) (15,775) (150) ----------- ----------- ------------ ---------- ------------ Net inc (dec) in cash and equivalents........................ 5,157 (23,508) (4,994) 4,204 (19,141) Cash and equivalents at beginning of year.................... 0 23,508 6,548 (10,915) 19,141 ----------- ----------- ------------ ---------- ------------ Cash and equivalents at end of year.......................... $ 5,157 $ 0 $ 1,554 $ (6,711) $ 0 =========== =========== ============ ========== ============
71 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 19. CONSOLIDATING FINANCIAL STATEMENTS(CONTINUED)
June 2000 -------------------------------------------------------------------- Agway Inc. All AFC (Parent Co.) Others (Issuer) (Guarantor) (Non-Guarantor) Elims Consolidated ----------- ----------- ------------ ---------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) ......................................... $ 6,886 $ (9,377) $ (1,567) $ (5,319) $ (9,377) Adjustments to reconcile earnings to net cash: Net loss from discontinued operations..................... 0 15,529 0 0 15,529 Depreciation and amortization............................. 10,054 13,545 2,572 0 26,171 Receivables and other asset provisions.................... 14,378 0 0 0 14,378 Net pension income........................................ 0 (19,563) 0 0 (19,563) Patronage refund received in stock........................ 0 (679) 0 0 (679) Deferred income tax expense (benefit)..................... (5,263) 625 (61) 1,942 (2,757) (Gain) loss on disposition of: Businesses............................................. 0 (1,098) 0 0 (1,098) Other security investments............................. 1,012 32 0 0 1,044 Properties and equipment............................... (13,311) (411) (273) 0 (13,995) Changes in assets and liabilities, net of effects of businesses acquired or sold: Receivables............................................ (51,245) (30,517) (1,350) 25,935 (57,177) Inventory.............................................. (16,520) (7,793) (1,358) 0 (25,671) Payables............................................... 4,951 47,304 (2,381) (40,870) 9,004 Other.................................................. (12,063) (40) 10,792 24,785 23,474 ----------- ----------- ------------ ---------- ------------ Net cash flows from (used in) continuing operations.......... (61,121) 7,557 6,374 6,473 (40,717) Net cash flows from (used in) discontinued operations........ 0 35,995 0 0 35,995 ----------- ----------- ------------ ---------- ------------ Net cash from (used in) operating activities................. (61,121) 43,552 6,374 6,473 (4,722) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of properties and equipment..................... (6,894) (18,984) (1,888) (33) (27,799) Cash paid for acquisitions................................ (2,900) 0 (2,050) 0 (4,950) Disposition of properties and equipment................... 18,193 1,379 987 33 20,592 Purchases of marketable securities available for sale..... (4,658) 0 0 0 (4,658) Sale of marketable securities available for sale.......... 2,945 0 0 0 2,945 Leases originated......................................... (276,199) 0 0 0 (276,199) Leases repaid............................................. 196,471 0 0 0 196,471 Purchases of investments in related cooperatives.......... (382) (1,458) 0 0 (1,840) Proceeds from sale of investments in related cooperatives. 1,017 154 0 0 1,171 Proceeds from disposal of businesses...................... 0 2,615 0 0 2,615 ----------- ----------- ------------ ---------- ------------ Net cash flows used in investing activities.................. (72,407) (16,294) (2,951) 0 (91,652) CASH FLOWS FROM FINANCING ACTIVITIES: Net change in short-term notes payable....................... 95,776 0 0 0 95,776 Proceeds from long-term debt................................. 142,812 430 21 0 143,263 Repayment of long-term debt.................................. (93,631) (255) (3,339) 0 (97,225) Proceeds from sale of subordinated debt...................... 131,571 0 0 0 131,571 Redemption of subordinated debt.............................. (143,001) 0 0 0 (143,001) Payments on capitalized leases............................... 0 (296) (616) (1,804) (2,716) Proceeds from sale of stock.................................. 0 13 0 1 14 Redemption of stock.......................................... 0 (3,269) 0 0 (3,269) Cash dividends paid.......................................... 0 (3,275) 0 0 (3,275) Net change in restricted cash................................ 0 0 0 (5,623) (5,623) ----------- ----------- ------------ ---------- ------------ Net cash flows from financing activities..................... 133,527 (6,652) (3,934) (7,426) 115,515 ----------- ----------- ------------ ---------- ------------ Net inc (dec) in cash and equivalents........................ 0 20,606 (511) (954) 19,141 Cash and equivalents at beginning of year.................... 0 2,902 7,059 (9,961) 0 ----------- ----------- ------------ ---------- ------------ Cash and equivalents at end of year.......................... $ 0 $ 23,508 $ 6,548 $(10,915) $ 19,141 =========== =========== ============ ========== ============
72 AGWAY INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) 19. CONSOLIDATING FINANCIAL STATEMENTS(CONTINUED)
June 1999 -------------------------------------------------------------------- Agway Inc. All AFC (Parent Co.) Others (Issuer) (Guarantor) (Non-Guarantor) Elims Consolidated ----------- ----------- ------------ ---------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) ......................................... $ (6,659) $ 1,795 $ (130) $ 6,789 $ 1,795 Adjustments to reconcile earnings to net cash: Net loss from discontinued operations..................... 0 11,146 0 0 11,146 Depreciation and amortization............................. 9,426 8,702 2,941 3,659 24,728 Receivables and other asset provisions.................... 10,730 0 0 0 10,730 Net pension income........................................ 0 (21,368) 0 0 (21,368) Patronage refund received in stock........................ 0 (992) 0 0 (992) Deferred income tax expense (benefit)..................... (63,177) 72,325 (979) (4,328) 3,841 (Gain) loss on disposition of: Businesses............................................. 0 (11,097) 0 0 (11,097) Other security investments............................. 1,267 0 0 0 1,267 Properties and equipment............................... (109) (486) (60) 0 (655) Changes in assets and liabilities, net of effects of businesses acquired or sold: Receivables............................................ 5,068 20,224 583 (7,353) 18,522 Inventory.............................................. (1,100) 2,498 983 0 2,381 Payables............................................... 4,632 (10,668) (1,559) 3,824 (3,771) Other.................................................. 43,488 (50,302) 15,840 (9,195) (169) ----------- ----------- ------------ ---------- ------------ Net cash flows from (used in) continuing operations.......... 3,566 21,777 17,619 (6,604) 36,358 Net cash flows from (used in) discontinued operations........ 0 (391) 0 0 (391) ----------- ----------- ------------ ---------- ------------ Net cash from (used in) operating activities................. 3,566 21,386 17,619 (6,604) 35,967 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of properties and equipment..................... (5,492) (18,015) (4,577) 922 (27,162) Cash paid for acquisitions................................ 0 0 (8,030) 0 (8,030) Disposition of properties and equipment................... 849 972 0 (658) 1,163 Purchases of marketable securities available for sale..... (6,333) 0 0 0 (6,333) Sale of marketable securities available for sale.......... 6,982 0 0 0 6,982 Leases originated......................................... (252,107) 0 0 0 (252,107) Leases repaid............................................. 188,637 0 0 0 188,637 Purchases of investments in related cooperatives.......... 1,145 (9,238) 0 5,921 (2,172) Proceeds from sale of investments in related cooperatives. 2,648 0 0 0 2,648 Proceeds from disposal of business........................ 0 14,150 0 0 14,150 ----------- ----------- ------------ ---------- ------------ Net cash flows used in investing activities.................. (63,671) (12,131) (12,607) 6,185 (82,224) CASH FLOWS FROM FINANCING ACTIVITIES: Net change in short-term notes payable....................... 16,700 0 (220) 0 16,480 Proceeds from long-term debt................................. 113,852 152 0 (152) 113,852 Repayment of long-term debt.................................. (94,553) (83) 0 83 (94,553) Proceeds from sale of subordinated debt...................... 133,948 0 0 0 133,948 Redemption of subordinated debt.............................. (109,842) 0 0 0 (109,842) Payments on capitalized leases............................... 0 (319) (278) 0 (597) Proceeds from sale of stock.................................. 0 45 0 0 45 Redemption of stock.......................................... 0 (5,064) 0 0 (5,064) Cash dividends paid.......................................... 0 (3,532) 0 0 (3,532) Net change in restricted cash................................ 0 0 0 (4,480) (4,480) ----------- ----------- ------------ ---------- ------------ Net cash flows from financing activities..................... 60,105 (8,801) (498) (4,549) 46,257 ----------- ----------- ------------ ---------- ------------ Net inc (dec) in cash and equivalents........................ 0 454 4,514 (4,968) 0 Cash and equivalents at beginning of year.................... 0 2,448 2,545 (4,993) 0 ----------- ----------- ------------ ---------- ------------ Cash and equivalents at end of year.......................... $ 0 $ 2,902 $ 7,059 $ (9,961) $ 0 =========== =========== ============ ========== ============
73 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The directors of Agway determine Agway policy. The following directors were nominated on a district representation basis by committees representing members within each district. See page 10, Stockholder, Membership and Control of Agway, for a description of the new process of nominating and electing directors effective for the 2001 director elections. Each of the following directors is a full-time farmer and has been engaged in full-time farming during the past five years:
Year Became A Name Age Office Name of Farm Director Term Expires -------------------------------------------------------------------------------------------------------------------- Gary K. Van Slyke(1) 58 Chairman of the VanSlyke's Dairy Farm 1994 October 2003 Board and Director Andrew J. Gilbert 42 Vice Chairman of the Board and Director Adon Farms 1995 October 2001 Keith H. Carlisle 59 Director Carlisle Farms, Inc. 1995 October 2001 D. Gilbert Couser 60 Director Couser Farm 1995 October 2001 Robert L. Marshman 62 Director Marshman Farms 1989 October 2002 Jeffrey B. Martin 42 Director Martin Farms 1997 October 2003 Samuel F. Minor 63 Director The Spring House 1987 October 2003 Richard H. Skellie 57 Director Richland Farms 1999 October 2002 Carl D. Smith 66 Director Hillacre Farms 1984 October 2002 Thomas E. Smith 66 Director Lazy Acres Dairy 1986 October 2001 Joel L. Wenger 70 Director Weng-Lea Farms 1987 October 2002 Edwin C. Whitehead 60 Director White Ayr Farms 1994 October 2003 Dennis C. Wolff 49 Director Pencol Farms 2000 October 2003 William W. Young 48 Director Will-O-Crest Farm 1989 October 2001
Gary K. Van Slyke, Chairman of the Board of Directors, earned $60,000 and Andrew J. Gilbert, Vice Chairman of the Board of Directors, earned $45,000 for their services for the year ended June 2001. The Chairman is paid at an annual effective rate of $60,000 and the Vice-Chairman is paid at an annual effective rate of $45,000. All other directors receive $25,000 per year, paid quarterly, for participation on the Agway Inc. Board. In addition, each Board Committee Chairman earned an additional annual retainer fee of $3,000 and each director of Agway Inc. who was also a member of the Agway Insurance Company or Telmark LLC Board of Directors earned an additional $400 or $1,000, respectively; a fee of $200 was also earned by such directors for each day they were involved in business for the Company other than the days where the Agway Inc. Board of Directors was in session. Expenses of Board members incurred in connection with Company business are reimbursed by Agway. Any director of Agway may elect to defer compensation for distribution at a later date. Deferred amounts earn interest and may be paid in a lump sum or in annual installments over a period of up to 20 years. A retirement benefit plan for Board members requires annual payments to retired or permanently disabled directors who served a minimum of six full years as of December 31, 1995. The benefit is computed at $250 for each full year of service and is paid to the director or surviving spouse for a period equal to the years served on the Board through December 31, 1995, the date the plan was terminated. All earned benefits as of December 31, 1995, will be paid when due. As of June 2001, the present value of accumulated benefits under this plan was approximately $448,200. (1) All correspondence in relation to operational matters should be addressed to D.P. Cardarelli, President and Chief Executive Officer, Agway Inc., P.O. Box 4933, Syracuse, New York 13221. 74 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE OFFICERS The executive officers of Agway provide operating control to carry out the policies established by the Board of Directors and serve at the discretion of the Board with no guarantee of employment. As of July 1, 2001, there are no full-time executive officers of Agway who are members of the Board of Directors. The principal occupation of all executive officers of Agway for the past five years, except for Mr. Lubetkin, has been as an officer or employee of Agway. The following is a listing of these officers as of June 30, 2001:
Years Served Name Age Office As Officer ---- --- ------ ---------- Donald P. Cardarelli 45 President and Chief Executive Officer 10 Daniel J. Edinger 50 President, Telmark LLC 3 John F. Feeney 40 Corporate Controller 2 Robert A. Fischer, Jr. 53 President, Agriculture Group 6 Christopher W. Fox 53 Senior Vice President, General Counsel and Secretary - Stephen H. Hoefer 46 Senior Vice President, Public Affairs 7 Michael R. Hopsicker 36 President, Agway Energy Products LLC 5 Dennis J. LaHood 55 Vice President 6 Roy S. Lubetkin 44 President, Country Products Group - Karen J. Ohliger 39 Treasurer 2 Peter J. O'Neill 54 Senior Vice President, Finance & Control 12 William L. Parker 54 Vice President and Chief Information Officer 6 Gerald R. Seeber 54 Senior Vice President and Chief Administrative Officer and Chairman and President, Agway Insurance Group 3 G. Leslie Smith 58 Vice President and Chief Investment Officer 4 Michael P. Spyker 51 Vice President, Membership 1
More detailed biographies of each person listed above are set forth below: Mr. Cardarelli served as General Manager and CEO from January 1995 and President from February 1995 to present. Mr. Edinger served as President, Telmark LLC, from February 1988 to present. Mr. Feeney served as Director, Corporate Reporting, from July 1995 to August 1998; and as Corporate Controller from August 1998 to present. Mr. Fischer has served as President, Milford Fertilizer Company, since June 1970; as Vice President, Agway Agricultural Products, from February 1995 to July 1, 1997; as President, Agway Agricultural Products, from July 1997 to March 1999; as President, Agriculture Group, from March 1999 to June 30, 2001, when he retired from Agway. Mr. Fox served as Associate General Counsel, from July 1996 to August 2000; as Vice President, Deputy General Counsel and Secretary from August 2000 to December 2000; and as Senior Vice President, General Counsel and Secretary, from January 2001 to present. Mr. Hoefer served as Vice President, Public Affairs, from June 1994 to July 1997; and as Senior Vice President, Public Affairs, from July 1997 to present. Mr. Hopsicker served as Director, Financial Planning, Finance & Control, from December 1994 to October 1995; as Director, Business Development, ARS, from October 1995 to April 1996; as Vice President, Agway Energy Products, from April 1996 to July 1997; and as President, Agway Energy Products LLC, from July 1997 to present. 75 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE OFFICERS (CONTINUED) Mr. LaHood served as Vice President, Country Products Group, from February 1995 to July 1997; as President, Country Products Group, from July 1997 to April 2001; and as Vice President, Agway Inc., from April 2001 to July 13, 2001, when he retired from Agway. Mr. Lubetkin served as President, Country Products Group, from April 2001 to present. Prior to joining Agway, Mr. Lubetkin served as President, Churny Company (a manufacturer and marketer of specialty foods and subsidiary of Krafts Food), from February 1995 to February 1999; and as Regional General Manager and Executive Vice President, Metz Baking Company (a commercial manufacturer of fresh baked goods), from February 1999 to March 2000. Ms. Ohliger served as Assistant Treasurer from September 1992 to August 1998; and as Treasurer from August 1998 to present. Mr. O'Neill served as Senior Vice President, Finance & Control, Treasurer and Controller, from November 1994 to August 1998; and as Senior Vice President, Finance & Control, from August 1998 to present. Mr. Parker served as Vice President, Information Services, from September 1994 to May 1996; and as Vice President, Chief Information Officer, from May 1996 to present. Mr. Seeber served as President, Agway Insurance Group, from October 1993 to July 1997; as Senior Vice President, Administrative Services and President, Agway Insurance Group, from July 1997 to November 2000; and as Senior Vice President and Chief Administrative Officer and Chairman and President, Agway Insurance Group, from November 2000 to present. Ms. Smith served as Director, Trust Investments, from September 1993 to April 1997; and as Vice President and Chief Investment Officer from May 1997 to present. Mr. Spyker has served as Seed Business Unit Manager since July 1995; and as Vice President, Membership, from January 2000 to July 13, 2001, when he left Agway. 76 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth information regarding annual and long-term compensation for services in all capacities to Agway for the years ended June 2001, 2000 and 1999 of those persons who served as (i) the chief executive officer (CEO) at any time during the year, and (ii) the other four most highly compensated executive officers of Agway (other than the CEO) who were serving in such capacity at June 30, 2001 (collectively, the "named executive officers").
SUMMARY COMPENSATION TABLE ----------------------------------------------------------------------------------------------------------------- Annual Compensation (4) ----------------------- Name and ALL OTHER Principal Position YEAR SALARY(1) BONUS(1)(2) COMPENSATION(3) ----------------------------------------------------------------------------------------------------------------- Donald P. Cardarelli 2001 $547,521 $332,008 $20,009 President and CEO 2000 521,548 0 19,771 1999 478,276 154,530 18,057 Robert A. Fischer, Jr. 2001 $409,616 $375,000 $43,918 President, 2000 350,385 0 58,743 Agriculture Group 1999 316,442 40,000 63,480 Michael R. Hopsicker 2001 $255,008 $210,750 $4,527 President 2000 248,278 51,000 5,480 Agway Energy 1999 218,087 171,000 3,864 Products LLC Dennis J. LaHood 2001 $330,018 $200,000 $4,956 Vice President 2000 316,173 0 4,963 1999 252,639 211,800 3,009 Peter J. O'Neill 2001 $307,008 $187,000 $8,561 Senior Vice President, 2000 304,703 46,050 9,436 Finance & Control 1999 290,212 60,000 6,999
(1) Salary and bonus are used in determining the average annual compensation pursuant to the Employees' Retirement Plan of Agway Inc. (see page 79). This amount includes all deferred amounts under the Agway Inc. Employees' 401(k) Thrift Investment Plan, Agway Inc. Employees' Benefit Equalization Plan, and the Milford Fertilizer Company Employees' Profit Sharing and Savings Plan. (2) Members of the chief executive officer's staff and other executives designated by Agway's chief executive officer are eligible for participation in the Agway Inc. management incentive policy. Contingent upon each individual's performance as determined by the President and CEO, Agway's net earnings, and other performance factors, each eligible executive may be paid a bonus. Bonuses are reflected in the fiscal year earned regardless of payment date. (3) Amounts shown for all officers, except Mr. Fischer, include contributions made by Agway to the Agway Inc. Employees' 401(k)Thrift Investment Plan, the Agway Inc. Employees' Benefit Equalization Plan, the Agway Inc. Employees' Deferred Compensation Program, and any other payments not appropriately characterized as salary or bonus. With respect to Mr. Fischer, amounts include payments to the Milford Fertilizer Company Employees' Profit Sharing and Savings Plan, term life insurance premiums, and reportable savings interest. (4) There were no perquisites paid by Agway in excess of the lesser of $50,000 or 10% of an executive's total salary and bonus for the years disclosed. 77 ITEM 11. EXECUTIVE COMPENSATION EMPLOYEES' RETIREMENT PLAN The Employees' Retirement Plan of Agway Inc. (the Retirement Plan) is a non-contributory defined benefit plan covering nearly all employees. The Retirement Plan was amended effective July 1, 1998, to include a pension equity formula, as well as to recognize incentive compensation as pensionable compensation for all employees. It provides for retirement benefits up to the limits provided by law, based upon average annual compensation received during the highest 36 consecutive months in the last 10 years of service and credits earned for years of service with Agway. Full credits are earned for service on and after July 1, 1998, and credits equal to approximately 3/4 of the full credits are earned for service prior to July 1, 1998. The benefit is defined as an account balance and can be paid out as a lump sum or an annuity. An employee is 100% vested in his benefit after completing 5 years of service or attaining age 55 after completing one year of service. The following table shows estimated annual benefits payable upon retirement using the credit formula in effect for service after June 27, 1998, based on certain 3-year average remuneration levels and years-of-service classifications. Under the formula, base credits are applied to the total average annual compensation and excess credits are applied to the average annual compensation in excess of one-half the Social Security Wage Base. In developing this table, both base and excess credits have been applied to the total average annual compensation. Further, the table was developed assuming a normal retirement at age 65 and an annuity conversion factor based on a 6% interest rate.
PENSION PLAN TABLE (NEW FORMULA) YEARS OF CREDITED SERVICE ------------------------------------------------------------------------------------------------------------------------------------ 3-YEAR AVERAGE REMUNERATION 5 10 15 20 25 30 35 ------------------------------------------------------------------------------------------------------------------------------------ $300,000 $21,200 $ 40,300 $ 59,400 $ 77,100 $ 94,800 $111,000 $127,300 350,000 24,800 47,000 69,300 89,900 110,600 129,500 148,500 400,000 28,300 53,700 79,200 102,800 126,400 148,000 169,700 450,000 31,800 60,500 89,100 115,600 142,100 166,500 190,900 500,000 35,400 67,200 99,000 128,500 157,900 185,100 212,200 550,000 38,900 73,900 108,900 141,300 173,700 203,600 233,400 600,000 42,400 80,600 118,800 154,200 189,500 222,100 254,600 650,000 46,000 87,300 128,700 167,000 205,300 240,600 275,800 700,000 49,500 94,100 138,600 179,900 221,100 259,100 297,000 750,000 53,000 100,800 148,500 192,700 236,900 277,600 318,200 800,000 56,600 107,500 158,400 205,600 252,700 296,100 339,500 850,000 60,100 114,200 168,300 218,400 268,500 314,600 360,700 900,000 63,600 120,900 178,200 231,300 284,300 333,100 381,900 950,000 67,200 127,700 188,100 244,100 300,100 351,600 403,100
Active participants are entitled to receive no less than the value of their benefits accrued under the old Retirement Plan benefit formula which was in effect through June 27, 1998. In addition, most active participants whose age plus service totaled 55 years or more as of July 1, 1998, will receive the greater of the benefit determined under the new formula described above, or the benefit determined had the old formula remained in effect (grandfathered). The old Retirement Plan benefit formula is based upon average annual compensation received during the highest 60 consecutive months in the last 10 years of service and credited years of service. Optional earlier retirement and other benefits are also provided. The old formula pays a monthly retirement benefit based on the greater amount calculated under two formulas. The benefit amount under one formula is subject to an offset for social security benefits. 78 ITEM 11. EXECUTIVE COMPENSATION EMPLOYEES' RETIREMENT PLAN (CONTINUED) The following table shows estimated annual benefits under the old Retirement Plan formula in effect for service before July 1, 1998, based on certain 5-year average remuneration levels and years-of-service classifications. The table was developed assuming a normal retirement at age 65 and does not reflect an offset for up to 50% of the Social Security benefit, subject to certain minimum benefits.
PENSION PLAN TABLE (OLD FORMULA) YEARS OF CREDITED SERVICE ------------------------------------------------------------------------------------------------------------------------------------ 5-YEAR AVERAGE REMUNERATION 5 10 15 20 25 30 35 ------------------------------------------------------------------------------------------------------------------------------------ $300,000 $24,000 $ 48,000 $ 72,000 $ 96,000 $120,000 $144,000 $168,000 350,000 28,000 56,000 84,000 112,000 140,000 168,000 196,000 400,000 32,000 64,000 96,000 128,000 160,000 192,000 224,000 450,000 36,000 72,000 108,000 144,000 180,000 216,000 252,000 500,000 40,000 80,000 120,000 160,000 200,000 240,000 280,000 550,000 44,000 88,000 132,000 176,000 220,000 264,000 308,000 600,000 48,000 96,000 144,000 192,000 240,000 288,000 336,000 650,000 52,000 104,000 156,000 208,000 260,000 312,000 364,000 700,000 56,000 112,000 168,000 224,000 280,000 336,000 392,000 750,000 60,000 120,000 180,000 240,000 300,000 360,000 420,000 800,000 64,000 128,000 192,000 256,000 320,000 384,000 448,000 850,000 68,000 136,000 204,000 272,000 340,000 408,000 476,000 900,000 72,000 144,000 216,000 288,000 360,000 432,000 504,000 950,000 76,000 152,000 228,000 304,000 380,000 456,000 532,000
Amounts under the Retirement Plan may be subject to reduction because of the limitations imposed under the Internal Revenue Code; however, the extent of any reduction will vary in individual cases according to circumstances existing at the time pension payments commence. The Agway Inc. Employees' Benefit Equalization Plan has been established to provide for the amount of any such reduction in annual pension benefits under the Retirement Plan. The benefits shown are computed on a straight line basis and do not reflect an offset for up to 50% of the Social Security benefit, subject to certain minimum benefits. also, the benefits are based on continuing the Retirement Plan's benefit formulas as in effect on june 2001. as of june 2001, the named executive officers and their respective number of credited years of service under the Retirement Plan were as follows: Messrs. Cardarelli, 16; O'Neill, 12; LaHood, 31; and Hopsicker, 12. Mr. Fischer does not participate in the Retirement Plan nor any other long-term incentive programs of Agway. However, he participates in the Milford Fertilizer Company Employees' Profit Sharing and Savings plan. "Compensation" is defined as the regular salary or wages, as reported in the Salary column of the Summary Compensation Table, which is paid to an employee for services rendered to Agway, including overtime, vacation pay, or special pay and bonuses as reported in the Bonus column of the Executive Compensation disclosure on page 77. 79 11. EXECUTIVE COMPENSATION DIRECTOR COMPENSATION For a discussion of director compensation, see Directors and Executive Officers of the Registrant (Item 10) of this Form 10-K. COMPENSATION COMMITTEE INTERLOCKS AND INSIDE PARTICIPATION Agway has a committee of certain directors, including the Chairman and Vice Chairman of the Board of Directors, which determines the compensation of Donald P. Cardarelli, President and CEO of Agway Inc. The compensation of the other executive officers of Agway Inc. is determined by Mr. Cardarelli. Salaries of all executive officers are included in the annual operating budget, which is approved by the entire Board of Directors of Agway Inc. None of the executive officers or directors who participate in establishing compensation policies had interlocks reportable under Section 402(J) of Regulation S-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT None of the executive officers of Agway, either individually or in the aggregate, owns greater than 1% of any class of equity securities of Agway Inc. or its subsidiaries. Agway is an agricultural cooperative and each of its members, including each director, owns one share of $25 par value common stock. None of the directors, either individually or in the aggregate, owns greater than 1% of any class of equity security of Agway Inc. or its subsidiaries. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Agway's members, including its directors, are customers of Agway and/or its subsidiaries. They purchase products from Agway in the normal course of operating their farm businesses and may sell certain agricultural products to Agway at market prices. The prices, terms, and conditions of any purchase or sale transaction are on the same basis for all of Agway's members. 80 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE (A) INDEX TO DOCUMENT LIST LOCATION -------- (1) FINANCIAL STATEMENTS Among the responses to this Item 14(a)(1) are the following financial statements, which are included in Item 8 on page 31: (i) Report of Independent Accountants............................................................ 33 (ii) Consolidated Balance Sheets, June 30, 2001 and June 24, 2000 ................................ 34 (iii) Consolidated Statements of Operations, fiscal years ended June 30, 2001, June 24, 2000 and June 26, 1999.......................................................................... 35 (iv) Consolidated Statements of Comprehensive Income, fiscal years ended June 30, 2001, June 24, 2000 and June 26, 1999............................................................ 36 (v) Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended June 30, 2001, June 24, 2000 and June 26, 1999............................................. 37 (vi) Consolidated Statements of Cash Flow, fiscal years ended June 30, 2001, June 24, 2000 and June 26, 1999.......................................................................... 38 (vii) Notes to Consolidated Financial Statements................................................... 39 (2) FINANCIAL STATEMENT SCHEDULES (i) The following schedules are presented: Schedule I - Condensed Financial Information of Registrant, each of the three years in the period ended June 30, 2001..................... 82 Schedule II - Valuation and Qualifying Accounts, fiscal years ended June 30, 2001, June 24, 2000 and June 26, 1999........................ 86
Schedules other than these listed above have been omitted as they are not required, inapplicable, or the required information is included in the consolidated financial statements or notes thereto. 81 ITEM 14(A)(2). FINANCIAL STATEMENT SCHEDULES AGWAY INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT ---------------------------------------------------------- AGWAY INC. (PARENT CO. ONLY) CONDENSED BALANCE SHEETS (THOUSANDS OF DOLLARS) ASSETS
JUNE 30, JUNE 24, 2001 2000 --------------- --------------- Current assets: Cash........................................................................... $ 0 $ 23,508 Trade accounts receivable (including notes receivable of $33,083 and $34,559, respectively), less allowance for doubtful accounts of $5,035 and $4,674, respectively.......................................... 96,245 104,459 Inventories................................................................... 46,435 61,604 Other current assets.......................................................... 49,349 24,104 --------------- --------------- Total current assets..................................................... 192,029 213,675 Investments in subsidiaries........................................................ 239,953 242,817 Properties and equipment, net...................................................... 85,520 84,812 Net pension asset.................................................................. 229,678 213,455 Other assets ..................................................................... 23,527 8,605 Net assets of discontinued operations.............................................. 5,414 34,278 --------------- --------------- Total assets............................................................. $ 776,121 $ 797,642 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.............................................................. $ 22,470 $ 21,184 Operating advances payable to subsidiaries, net............................... 259,678 379,977 Other current liabilities..................................................... 141,326 64,174 --------------- --------------- Total current liabilities................................................ 423,474 465,335 Other liabilities.................................................................. 183,317 149,716 Shareholders' equity............................................................... 169,330 182,591 --------------- --------------- Total liabilities and shareholders' equity............................... $ 776,121 $ 797,642 =============== ===============
82 ITEM 14(A)(2). FINANCIAL STATEMENT SCHEDULES AGWAY INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT ---------------------------------------------------------- AGWAY INC. (PARENT CO. ONLY) CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (THOUSANDS OF DOLLARS)
JUNE 30, JUNE 24, JUNE 26, 2001 2000 1999 -------------- --------------- --------------- Total net sales and revenues from product sales.............. 526,814 522,631 548,400 Cost and expenses from: Products and plant operations........................... 477,126 474,529 497,508 Selling, general and administrative activities.......... 64,166 62,637 66,638 -------------- --------------- --------------- Total operating costs and expenses................. 541,292 537,166 564,146 -------------- --------------- --------------- Operating loss............................................... (14,478) (14,535) (15,746) Interest expense, net........................................ (15,793) (9,113) (5,344) Other income, net............................................ 19,376 26,275 35,171 -------------- --------------- --------------- Earnings (loss) from operations before income taxes and equity in earnings of subsidiaries ................. (10,895) 2,627 14,081 Income tax (expense) benefit ................................ 6,136 (2,231) 6,087 -------------- --------------- --------------- Income (loss) before equity in earnings of subsidiaries...... (4,759) 396 20,168 Equity in earnings (loss) of unconsolidated subsidiaries..... (3,111) 5,756 (7,227) -------------- --------------- --------------- Earnings from continuing operations.......................... (7,870) 6,152 12,941 Discontinued operations: Loss from operations, including tax benefit of $0, $7,313 and $6,086, respectively.................... 0 (13,187) (11,146) Loss on disposal, net of tax benefit of $0, $1,278 and $0............................... 0 (2,342) 0 -------------- --------------- --------------- Loss from discontinued operations.................. 0 (15,529) (11,146) Earnings (loss) before cumulative effect of an accounting change.................................................. (7,870) (9,377) 1,795 Cumulative effect of accounting change, net of tax benefit of $723......................................... (1,057) 0 0 -------------- --------------- --------------- Net earnings (loss).......................................... (8,927) (9,377) 1,795 Retained earnings - beginning of year........................ 141,221 153,763 155,362 Dividends.................................................... (2,951) (3,165) (3,394) -------------- --------------- --------------- Retained earnings - end of year.............................. $ 129,343 $ 141,221 $ 153,763 ============== =============== ===============
83 ITEM 14(A)(2). FINANCIAL STATEMENT SCHEDULES AGWAY INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT ---------------------------------------------------------- AGWAY INC. (PARENT CO. ONLY) CONDENSED STATEMENTS OF CASH FLOW (THOUSANDS OF DOLLARS)
JUNE 30, JUNE 24, JUNE 26, 2001 2000 1999 -------------- ------------- -------------- Net cash flows from (used in) continuing operations.......... $ (111,985) $ 7,557 $ 21,777 Net cash flows from (used in) discontinued operations........ 28,864 35,995 (391) -------------- -------------- -------------- Net cash flows from (used in) operating activities........... (83,121) 43,552 21,386 Cash flows from investing activities: Purchases of property, plant and equipment.............. (5,343) (18,984) (18,015) Proceeds from disposal of business...................... 0 2,615 14,150 Disposition of properties and equipment................. 6,794 1,379 972 Other................................................... (19) (1,304) (9,238) -------------- -------------- -------------- Net cash flows used in investing activities.................. 1,432 (16,294) (12,131) Cash flows from financing activities:........................ Net change in short-term notes payable.................. 61,342 0 0 Payments on capitalized leases.......................... 2,558 (296) (319) Cash dividends paid..................................... (3,021) (3,275) (3,532) Other................................................... (2,698) (3,081) (4,950) -------------- -------------- -------------- Net cash flows used in financing activities.................. 58,181 (6,652) (8,801) Net increase in cash and equivalents......................... (23,508) 20,606 454 Cash and equivalents at beginning of year.................... 23,508 2,902 2,448 -------------- -------------- -------------- Cash and equivalents at end of year.......................... $ 0 $ 23,508 $ 2,902 ============== ============== ==============
84 ITEM 14(A)(2). FINANCIAL STATEMENT SCHEDULES AGWAY INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT ---------------------------------------------------------- AGWAY INC. (PARENT CO. ONLY) NOTES TO CONDENSED FINANCIAL INFORMATION (THOUSANDS OF DOLLARS) BASIS OF PRESENTATION In the preceding condensed financial statements, which represent the parent company only, Agway's investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since the date of acquisition. These financial statements should be read in conjunction with Agway's consolidated financial statements. RECLASSIFICATIONS Certain reclassifications have been made to conform prior year financial statements with the current year presentation. INVENTORIES Inventories consist of the following:
JUNE 2001 JUNE 2000 ------------- -------------- Finished goods.................................................................... $ 38,460 $ 52,147 Raw materials..................................................................... 6,122 7,977 Supplies.......................................................................... 1,853 1,480 ------------- -------------- $ 46,435 $ 61,604 ============== ==============
DEBT Debt capital for Agway had been supplied by its wholly owned subsidiary, AFC, which through March 28, 2001 secured financing through bank borrowings and through June 30, 2001 issued corporate debt instruments. See Agway's consolidated financial statement Note 9 for discussion of Agway short-term notes payable and Note 19 for discussion of change in legal structure. RELATED PARTY TRANSACTIONS Transactions between Agway Inc. and its unconsolidated subsidiaries are as follows:
YEARS ENDED ------------------------------------------------------- JUNE 2001 JUNE 2000 JUNE 1999 -------------- ------------- -------------- Net sales and revenues....................................... $ 2,796 $ 3,307 $ 4,637 Product and plant operation expenses......................... 12,986 14,108 19,648 Recovery of selling, general and administrative expenses..... 7,357 11,811 12,029 Interest expense, net........................................ 19,841 19,657 17,222
CONTINGENCIES Agway is also subject to various investigations, claims, and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably to Agway. Agway has established accruals for matters for which payment is probable and amounts reasonably estimable. Management believes any liability that may ultimately result from the resolution of these matters in excess of amounts provided under the above stated policy will not have a material adverse effect on the results of operations, financial position, or liquidity of Agway. 85 ITEM 14(A)(2). FINANCIAL STATEMENT SCHEDULES AGWAY INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (THOUSANDS OF DOLLARS)
------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ COL. A COL. B COL. C COL. D COL. E ------------------------------------------------------------------------------------------------------------------------------------ ADDITIONS --------------------------- BALANCE CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ for the year ended June 30, 2001 ------------------------------------------------------------------------------------------------------------------------------------ Reserves deducted in the balance sheet from assets to which they apply: Allowance for doubtful notes and accounts receivable (current)......................... $ 7,204 $ 5,531 $ 0 $ 2,102(a) $ 10,633 ========== ========== ========== ========== ========== Allowance for doubtful leases receivable.......... $ 32,536 $ 12,831 $ 0 $ 9,851(a) $ 35,516 ========== ========== ========== ========== ========== Reserve for other security investments............ $ 1,427 $ 509 $ 0 $ 1,065 $ 871 ========== ========== ========== ========== ========== Reserve for obsolete and slow moving inventory.... $ 299 $ 361 $ 0 $ 0 $ 660 ========== ========== ========== ========== ========== Surplus property reserve.......................... $ 623 $ 0 $ 0 $ 449(b) $ 174 ========== ========== ========== ========== ========== Income tax valuation allowance.................... $ 0 $ 1,514 $ 0 $ 0 $ 1,514 ========== ========== ========== ========== ========== ------------------------------------------------------------------------------------------------------------------------------------ for the year ended June 24, 2000 ------------------------------------------------------------------------------------------------------------------------------------ Reserves deducted in the balance sheet from assets to which they apply: Allowance for doubtful notes and accounts receivable (current)............................ $ 6,139 $ 2,639 $ 0 $ 1,574(a) $ 7,204 ========== ========== ========== =========== ========== Allowance for doubtful leases receivable............. $ 29,978 $ 11,737 $ 0 $ 9,179(a) $ 32,536 ========== ========== ========== =========== ========== Reserve for other security investments............... $ 1,010 $ 417 $ 0 $ 0 $ 1,427 ========== ========== ========== =========== ========== Reserve for obsolete and slow moving inventory....... $ 235 $ 64 $ 0 $ 0 $ 299 ========== ========== ========== =========== ========== Surplus property reserve............................. $ 623 $ 0 $ 0 $ 0 $ 623 ========== ========== ========== =========== ========== ------------------------------------------------------------------------------------------------------------------------------------ for the year ended June 26, 1999 ------------------------------------------------------------------------------------------------------------------------------------ Reserves deducted in the balance sheet from assets to which they apply: Allowance for doubtful notes and accounts receivable (current)............................ $ 7,172 $ 1,003 $ 0 $ 2,036(a) $ 6,139 ========== ========== ========== ========== ========== Allowance for doubtful leases receivable............. $ 27,071 $ 9,727 $ 0 $ 6,820(a) $ 29,978 ========== ========== ========== ========== ========== Reserve for other security investments............... $ 0 $ 1,010 $ 0 $ 0 $ 1,010 ========== ========== ========== ========== ========== Reserve for obsolete and slow moving inventory....... $ 100 $ 135 $ 0 $ 0 $ 235 ========== ========== ========== ========== ========== Surplus property reserve............................. $ 645 $ 0 $ 0 $ 22(b) $ 623 ========== ========== ========== ========== ==========
(a) Accounts charged off, net of recoveries. (b) Locations sold. 86 ITEM 14(B). REPORTS ON FORM 8-K Agway filed a report on Form 8-K during the fourth quarter ended June 30, 2001, as follows: On March 30, 2001, to announce the establishment of a new senior debt financing agreement. ITEM 14(C)(1). EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATION S-K (i) The following required exhibits are hereby incorporated by reference to previously filed Registration Statements on Forms S-1, S-2, S-3, or S-7 or on Form 10-K, 10-Q, or 8-K filed on the dates as specified: PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION, OR SUCCESSION 2(a) - Certificate of Ownership and Merger merging Agway Financial Corporation with and into Agway Inc., filed by reference to Exhibit 2(a) of Form 8-K, dated July 2, 2001. ARTICLES OF INCORPORATION AND BY-LAWS 3(a) - Certificate creating series of preferred stock of Agway Inc. dated July 5, 1977, filed by reference to Exhibit 3(a)(5) of Registration Statement on Form S-1, File No. 2-59896, dated September 16, 1977. 3(b) - Certificate creating series of Honorary Member Preferred Stock of Agway Inc. dated June 15, 1981, filed by reference to Exhibit 1(c) of the Registration Statement on Form S-1, File No. 2-73928, dated September 3, 1981. 3(c) - Agway Inc. By-laws as amended May 4, 2001, filed by reference to Exhibit 3ii of Pre-Effective Amendment No. 2 of Form S-3, File No. 333-59808, dated June 25, 2001. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4(a) - The Indenture dated as of September 1, 1976 between Agway Inc. and First Trust and Deposit Company of Syracuse, New York, Trustee, including forms of Subordinated Debentures (Minimum 7.5% per annum) due July 1, 2001, and Subordinated Debentures (Minimum 7.0% per annum) due July 1, 2001, filed by reference to Exhibit 4 of the Registration Statement (Form S-1), File No. 2-57227, dated September 21, 1976. 4(b) - The Indenture dated as of September 1, 1978 between Agway Inc. and First Trust and Deposit Company of Syracuse, New York, Trustee, including forms of Subordinated Debentures (Minimum 8.0% per annum) due July 1, 2003, and Subordinated Debentures (Minimum 7.5% per annum) due July 1, 2003, filed by reference to Exhibit 4 of the Registration Statement (Form S-1), File No. 2-62549, dated September 8, 1978. 4(c) - The Indenture dated as of September 1, 1985, between Agway Inc. and Key Bank of Central New York of Syracuse, New York, Trustee, including forms of Subordinated Member Money Market Certificates (Minimum 8% per annum) due October 31, 2005, and Subordinated Member Money Market Certificates (Minimum 7.5% per annum) due October 31, 2005, filed by reference to Exhibit 4 of the Registration Statement (Form S-2), File No. 2-99905, dated August 27, 1985. 87 ITEM 14(C)(1). EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATION S-K 4(d) - The Indenture dated as of September 1, 1986, between AFC and Key Bank of Central New York of Syracuse, New York, Trustee, including forms of Subordinated Member Money Market Certificates (Minimum 6% per annum) due October 31, 2006, and Subordinated Money Market Certificates (Minimum 5.5% per annum) due October 31, 2006, filed by reference to Exhibit 4 of the Registration Statement (Form S-3), File No. 33-8676, dated September 11, 1986. 4(e) - The Supplemental Indenture dated as of October 1, 1986, among AFC, Agway Inc. and Key Bank of Central New York of Syracuse, New York, Trustee, including forms of subordinated debt securities filed by reference to Exhibit 4 of the Registration Statement (Form S-3), File No. 33-8676, dated September 11, 1986. 4(f) - The Indenture dated as of August 24, 1987, between AFC and Key Bank of Central New York of Syracuse, New York, Trustee, including forms of Subordinated Member Money Market Certificates (Minimum 6.5% per annum) due October 31, 2008, and Subordinated Money Market Certificates (Minimum 6% per annum) due October 31, 2008, filed by reference to Exhibit 4 of the Registration Statement (Form S-3), File No. 33-16734, dated August 31, 1987. 4(g) - The Indenture dated as of August 23, 1988, between AFC and Key Bank of Central New York of Syracuse, New York, Trustee, including forms of Subordinated Member Money Market Certificates (Minimum 9% per annum) due October 31, 2008, and Subordinated Money Market Certificates (Minimum 8.5% per annum) due October 31, 2008, filed by reference to Exhibit 4 of the Registration Statement (Form S-3), File No. 33-24093, dated August 31, 1988. 4(h) - The Supplemental Indenture dated as of October 14, 1988, among AFC, Agway Inc. and Key Bank of Central New York, National Association, Trustee, amending the Indentures dated as of August 23, 1988, and August 24, 1988, filed on October 18, 1988. 4(i) - The Indenture dated as of August 23, 1989, among AFC, Agway Inc. and Key Bank of Central New York of Syracuse, New York, Trustee, including forms of Subordinated Money Market Certificates and Subordinated Member Money Market Certificates, filed by reference to Exhibit 4 of the Registration Statement (Form S-3), File No. 33-30808, dated August 30, 1989. 4(j) - The Supplemental Indenture dated as of August 24, 1992, among AFC, Agway Inc. and Key Bank of New York, Trustee, amending the Indenture dated as of August 23, 1989, filed by reference to Exhibit 4 of the Registration Statement (Form S-3), File No. 33-52418, dated September 25, 1992. 4(k) - Agreement of Resignation, Appointment and Acceptance among KeyCorp, Key Bank of New York, AFC and Mellon Bank, F.S.B., dated as of September 3, 1996, five agreements, filed by reference to Exhibit 4(o) of the Registration Statement (Form S-3), File No. 333-34781, dated September 2, 1997. 4(l) - Letter dated November 14, 1997 from Chase Manhattan Bank, as Successor Trustee, to Mellon Bank, F.S.B., filed by reference to Exhibit 4(a) of the Annual Report on Form 10-K, dated September 21, 2000. 88 ITEM 14(C)(1). EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATION S-K 4(m) - The Supplemental Indenture dated as of July 1, 2001 between Agway Financial Corporation, Agway Inc., and The Chase Manhattan Bank, amending the Indentures dated as of September 1, 1986, August 24, 1987, August 23, 1988 (amended by a supplemental indenture dated as of October 14, 1988) and August 23, 1989 (as amended by a supplemental indenture dated as of August 24, 1992), filed by reference to Exhibit 4(a) of Form 8-K, dated July 2, 2001. MATERIAL CONTRACTS 10(a) - Credit Agreement with lenders dated March 28, 2001, filed by reference to Exhibit 10(a) of Form 10-Q as of March 24, 2001, dated May 8, 2001. 10(b) - Security Agreement with lenders dated March 28, 2001, filed by reference to Exhibit 10(b) of Form 10-Q as of March 24, 2001, dated May 8, 2001. 10(c) - Pledge Agreement with lenders dated March 28, 2001, filed by reference to Exhibit 10(c) of Form 10-Q as of March 24, 2001, dated May 8, 2001. 10(d) - Intellectual Property Security Agreement with lenders dated March 28, 2001, filed by reference to Exhibit 10(d) of Form 10-Q as of March 24, 2001, dated May 8, 2001. (ii)The following exhibits are filed as a separate section of this report: 10 - MATERIAL CONTRACTS (e) First Amendment and Waiver to Credit Agreement, dated September 14, 2001, filed herewith (f) First Amendment to Security Agreement, dated September 14, 2001, filed herewith. (g) Pledge Amendment with lenders, dated September 14, 2001, filed herewith. (h) Vehicle Security and Escrow Agreement with lenders, dated September 14, 2001, filed herewith. (i) Directors- Deferred Compensation Agreement, filed herewith. (j) Board Officers - Deferred Compensation Agreement, filed herewith. 12 - STATEMENT RE COMPUTATION OF RATIOS 21 - SUBSIDIARIES OF THE REGISTRANT 23 - CONSENTS OF EXPERTS AND COUNSEL 89 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AGWAY INC. (Registrant) By /s/ Donald P. Cardarelli ---------------------------------------- DONALD P. CARDARELLI PRESIDENT AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) Date September 14, 2001 ---------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Donald P. Cardarelli President and Chief Executive Officer September 14, 2001 -------------------------------------------------- (DONALD P. CARDARELLI) (Principal Executive Officer) /s/ Peter J. O'Neill Senior Vice President, September 14, 2001 -------------------------------------------------- (PETER J. O'NEILL) Finance & Control (Principal Financial Officer & Principal Accounting Officer) /s/ Gary K. Van Slyke Chairman of the September 14, 2001 -------------------------------------------------- (GARY K. VAN SLYKE) Board and Director /s/ Andrew J. Gilbert Vice Chairman of the September 14, 2001 -------------------------------------------------- (ANDREW J. GILBERT) Board and Director /s/ Keith H. Carlisle Director September 14, 2001 -------------------------------------------------- (KEITH H. CARLISLE) /s/ D. Gilbert Couser Director September 14, 2001 -------------------------------------------------- (D. GILBERT COUSER)
90
SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert L. Marshman Director September 14, 2001 -------------------------------------------------- (ROBERT L. MARSHMAN) /s/ Jeffrey B. Martin Director September 14, 2001 -------------------------------------------------- (JEFFREY B. MARTIN) /s/ Samuel F. Minor Director September 14, 2001 -------------------------------------------------- (SAMUEL F. MINOR) /s/ Richard H. Skellie Director September 14, 2001 -------------------------------------------------- (RICHARD H. SKELLIE) /s/ Carl D. Smith Director September 14, 2001 -------------------------------------------------- (CARL D. SMITH) /s/ Thomas E. Smith Director September 14, 2001 -------------------------------------------------- (THOMAS E. SMITH) /s/ Joel L. Wenger Director September 14, 2001 -------------------------------------------------- (JOEL L. WENGER) /s/ Edwin C. Whitehead Director September 14, 2001 -------------------------------------------------- (EDWIN C. WHITEHEAD) /s/ Dennis C. Wolff Director September 14, 2001 -------------------------------------------------- (DENNIS C. WOLFF) /s/ William W. Young Director September 14, 2001 -------------------------------------------------- (WILLIAM W. YOUNG)
91 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. As of the date of this filing on Form 10-K, the Registrant has not had available to be sent to security holders the annual report for fiscal year ended June 30, 2001. Subsequent to the filing of the annual report on Form 10-K, the Registrant shall furnish security holders and the Commission with the annual report. 92 AGWAY INC. FORM 10-K JUNE 2001 EXHIBIT INDEX Exhibit Number Title ------- ------ (10) Material contracts (e) First Amendment and Waiver to Credit Agreement, dated September 14, 2001 (f) First Amendment to Security Agreement, dated September 14, 2001 (g) Pledge Amendment with lenders, dated September 14, 2001 (h) Vehicle Security and Escrow Agreement with lenders, dated September 14, 2001 (i) Directors - Deferred Compensation Agreement (j) Board Officers - Deferred Compensation Agreement (12) Statements re computation of ratios (21) Subsidiaries of registrant (23) Consent of experts and counsel Note: The annual report on Form 11-K for the year ended June 30, 2001 of Agway Inc. Employees' 401(k) Thrift Investment Plan will be filed separately at a later date. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- EXHIBITS filed with FORM 10-K JUNE 30, 2001 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) of the THE SECURITIES EXCHANGE ACT OF 1934 --------------------- AGWAY INC. EX-10 3 exh10.txt BOARD AND BANK AGREEMENTS EXHIBIT 10 FIRST AMENDMENT AND WAIVER TO CREDIT AGREEMENT ------------------- FIRST AMENDMENT AND WAIVER, dated as of September 14, 2001, to the Credit Agreement referred to below (this "Amendment") among Agway, Inc., a Delaware corporation, Feed Commodities International LLC, a Delaware limited liability company, Brubaker Agronomic Consulting Service LLC, a Delaware limited liability company, Agway General Agency, Inc., a New York corporation, Country Best Adams, LLC, a Delaware limited liability company, Country Best-DeBerry LLC, a Delaware limited liability company, Agway Energy Products LLC, a Delaware limited liability company ("AEP"), Agway Energy Services-PA, Inc., a Delaware corporation, and Agway Energy Services, Inc., a Delaware corporation, (the foregoing entities are sometimes collectively referred to herein as the "Borrowers" and individually as a "Borrower"); the other Credit Parties signatory hereto; GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation (in its individual capacity, "GE Capital"), for itself, as Lender, and as Agent for Lenders, and the other Lenders signatory hereto from time to time. W I T N E S S E T H ------------------- WHEREAS, Borrowers, the other Credit Parties signatory thereto, Agent, and Lenders signatory thereto are parties to that certain Credit Agreement, dated as of March 28, 2001 (including all annexes, exhibits and schedules thereto, and as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"); and WHEREAS, Agent and Lenders have agreed to amend and waive certain provisions of the Credit Agreement, in the manner, and on the terms and conditions, provided for herein; NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. Capitalized terms not otherwise defined ----------- herein shall have the meanings ascribed to them in the Credit Agreement or Annex ----- A thereto. - 2. Waiver. The parties hereto acknowledge that Borrowers ------ failed to comply with the following covenants set forth in Section 6.10 and Annex G of the Credit Agreement for the period commencing December 23, 2000 and ending June 30, 2001: (a) the Minimum Fixed Charge Coverage Ratio; (b) Minimum EBITDA (Agway Operations); (c) Minimum EBITDA (Country Products); and (d) Minimum Senior Interest Coverage Ratio. Agent and Lenders hereby waive as of the Amendment Effective Date all Events of Default arising solely from Borrowers' failure to comply with such covenants for the period commencing December 23, 2000 and ending June 30, 2001 based on the preliminary financial statements delivered to Agent and Lenders on August 8, 2001. 3. Section 1.4 of the Credit Agreement is hereby amended as ----------- of the Amendment Effective Date by deleting in clause (D) the phrase "Four Hundred and Forty Million Dollars ($440,000,000)" and inserting in lieu thereof "Four Hundred and Fifty Five Million Dollars ($455,000,000)". 4. Section 1.5(a) of the Credit Agreement is hereby amended ------------- as of the Amendment Effective Date by deleting such section in its entirety and inserting in lieu thereof the following new section to read as follows: "(a) Borrowers shall pay interest to Agent, for the ratable benefit of Lenders in accordance with the various Loans being made by each Lender, in arrears on each applicable Interest Payment Date, at the following rates: (i) with respect to the Revolving Credit Advances, the Index Rate plus the Applicable Revolver Index Margin per annum or, at the election of Borrower Representative, the applicable LIBOR Rate plus the Applicable Revolver LIBOR Margin per annum, based on the aggregate Revolving Credit Advances outstanding from time to time; and (ii) with respect to the Swing Line Loan, the Index Rate plus the Applicable Revolver Index Margin per annum: The Applicable Margins are as follows: Applicable Revolver Index Margin 2.00% Applicable Revolver LIBOR Margin 3.50% Applicable L/C Margin 3.50% Applicable Unused Line Fee Margin 0.375%" 5. Section 1.6 of the Credit Agreement is hereby amended by ----------- (i) deleting the word "or" that appears immediately prior to clause (t) thereof, and (ii) inserting the following new clause (u) in appropriate order thereto to read as follows: "; or (u) that is owned by Country Best-DeBerry LLC." 6. Section 1.7 of the Credit Agreement is hereby amended by ----------- (i) deleting the word "or" that appears immediately prior to clause p thereof and (ii) inserting the following new clause (q) in appropriate order thereto to read as follows: "; or (q) that is owned by Country Best-DeBerry LLC." 7. Section 3 of the Credit Agreement is hereby amended as of --------- the Amendment Effective Date by inserting the following new Section 3.27 in the appropriate order: "3.27 Telmark Stock. None of the Stock of Telmark LLC is -------------- subject to any Liens or encumbrances, and there are no facts, circumstances or conditions known to any Credit Party that may result in any Liens or encumbrances against such Stock." 8. Section 5.11 of the Credit Agreement is hereby amended as ------------ of the Amendment Effective Date by deleting such section in its entirety and inserting in lieu thereof the following new section: "Section 5.11 Subordinated Indebtedness and Preferred Stock. ------------------------------------------------------------ Borrowers shall have at the following times outstanding Preferred Stock, Subordinated Debt and outstanding notes under the Milford Note Program no less than, in the aggregate principal amount, (i) Four Hundred Sixty Five Million Dollars ($465,000,000) for the period February 1 through October 31 of any Fiscal Year, (ii) Four Hundred Fifty Five Million Dollars ($455,000,000) for the period November 1 through December 31 of any Fiscal Year; and (iii) Four Hundred Sixty Million Dollars ($460,000,000) for the period January 1, through January 31 of any Fiscal Year." 9. Section 5 of the Credit Agreement is hereby amended as of --------- Amendment Effective Date by inserting the following new Section 5.15 in the appropriate order: "Section 5.15 Notes Receivable --------------------------------- Borrowers shall make available to Agent originals of all notes receivable executed and delivered by growers and Account Debtors to Borrowers as of the Amendment Effective Date for purposes of allowing Agent to legend such notes identifying Agent, on behalf of itself and Lenders, as the lienholder of such notes. Borrowers shall include, on each such note delivered to it after the Amendment Effective Date the following legend: "This writing and the obligations evidenced or secured hereby are subject to the security interest of General Electric Capital Corporation, as Agent, for the benefit of Agent and certain Lenders." Agent shall have the right, from time to time during Borrowers' normal business hours to visit the premises of the Borrowers and to make on-site audits, to review such notes and the Borrowers' records relating thereto for the purpose of verifying Borrowers' compliance with their obligations under this Section 5.15, provided that, if no Default or Event of Default has occurred, such on-site audits shall be limited to twice a year. Upon the occurrence and continuation of an Event of Default, Borrowers, upon Agent's request, shall deliver all such notes receivable to Agent." 10. Section 5 of the Credit Agreement is hereby amended as --------- of the Amendment Effective Date by inserting the following new Sections 5.16 and 5.17 in the appropriate order: "5.16 Registration, Use, Maintenance, Identification of ------------------------------------------------------- Vehicles. AEP shall use and operate its Vehicles in a manner -------- and in such locations as is in compliance with AEP's established policies as of the Closing Date, with such subsequent changes thereto as would not result in a material adverse change in the value, or enforceability of, or any change in the priority of, Agent's Liens on the Vehicles subject to the Vehicle Collateral Agreement (the "Vehicle Collateral"). AEP at its own expense shall keep, maintain, service, repair, overhaul and furnish all parts, replacements, mechanisms, devices and servicing required for each of its Vehicles, (or cause the same to be done), in compliance with AEP's established policies as of the Closing Date, with such subsequent changes thereto as would not result in a material adverse change in the value or enforceability of, or any change in the priority of, Agent's Liens on the Vehicle Collateral. All such repairs, parts, mechanisms and devices shall immediately, without further act, become part of the Vehicle Collateral and subject to the security interests created pursuant to the Loan Documents. Any part added to a Vehicle in connection with any improvement, change, addition, or alteration shall immediately, without further act, become part of the Vehicle and subject to the security interests created pursuant to the Loan Documents. 5.17 Vehicle Collateral; Appraisals. Upon the purchase and -------------------------------- sale of Vehicles, AEP shall comply with the terms of the Vehicle Collateral Agreement. Agent, in its reasonable discretion, may require new appraisals of the Vehicles if there have occurred any of the events described in the definition of "Material Adverse Effect" or if there has occurred an Event of Default. AEP will cooperate with all reasonable requests and do all acts reasonably required by Agent and any Person employed by Agent as appraiser in order to assure the timely completion of such new appraisals. 11. Section 6.8 of the Credit Agreement is hereby amended as ----------- of the Amendment Effective Date by deleting clause (a) in its entirety and inserting in lieu thereof: "(a) The sale of Inventory in the ordinary course of business and the sale of Vehicles in the ordinary course consistent with prior practices." 12. Section 6.14 of the Credit Agreement is hereby amended as ------------ of the Amendment Effective Date by deleting in clause (D) of the second proviso the phrase "Four Hundred and Forty Million Dollars" ($440,000,000) and inserting in lieu thereof "Four Hundred and Fifty Five Million Dollars ($455,000,000)". 13. Section 6 of the Credit Agreement is hereby amended as of --------- the Amendment Effective Date by inserting the following new Section 6.21 in the appropriate order: "6.21 Telmark Stock. No Credit Party or Telmark LLC shall ------------- create, incur, assume or permit to exist any lien on or with respect to the Stock of the Telmark Entities." 14. Section 8.1 of the Credit Agreement is hereby amended as of the Amendment Effective Date by inserting the following new clause (o) in appropriate order thereto to read as follows: "(o) Telmark LLC fails or neglects to perform, keep or observe the negative pledge covenant set out in the side letter between Telmark LLC and the Agent, dated as of the date hereof. 15. Annex A of the Credit Agreement is hereby amended as of ------- the Amendment Effective Date by: (a) amending and restating each definition from Annex A to the Credit Agreement set forth on Schedule A attached hereto in its entirety to read as set forth on Schedule A attached hereto; (b) adding the following defined terms in the appropriate order: `Deposit Accounts' means all "deposit accounts" as such term ------------------ is defined in the Code, now or hereafter held in the name of any Credit Party. "First Amendment' means this First Amendment and Waiver to the ----------------- Credit Agreement, dated as of September __, 2001 among Agent, Lenders, Borrowers and the other Credit Parties signatory thereto. `First Amendment Effective Date' has the meaning assigned to --------------------------------- the term "Amendment Effective Date" in the First Amendment. `Letter-of-Credit Rights' means letter-of-credit rights as -------------------------- such term is defined in the Code, now owned or hereafter acquired by any Credit Party, including rights to payment or performance under a letter of credit, whether or not such Credit Party, as beneficiary, has demanded or is entitled to demand payment or performance. `Software' means all "software" as such term is defined in the ---------- Code, now owned or hereafter acquired by any Credit Party, other than software embedded in any category of goods, including all computer programs and all supporting information provided in connection with a transaction related to any program. `Supporting Obligations' means all supporting obligations as ------------------------ such term is defined in the Code, including letters of credit and guaranties issued in support of Accounts, Chattel Paper, Documents, General Intangibles, Instruments or Investment Property. `Uniform Commercial Code jurisdiction' means any jurisdiction --------------------------------------- that has adopted all or substantially all of Article 9 as contained in the 2000 Official Text of the Uniform Commercial Code, as recommended by the National Conference of Commissioners on Uniform State Laws and the American Law Institute, together with any subsequent amendments or modifications to the Official Text. `Vehicles' means any motor vehicle, truck, automobile, tractor --------- or other type of vehicle owned by any Credit Party." 16. Annex E of the Credit Agreement is hereby amended by ------- adding the following insert at the end of such Annex E: "(p) To Agent, upon its request, and in any event no less frequently than 5 Business Days after the end of each Fiscal Month, an updated report of all Vehicles owned by AEP, including a schedule of the vehicle identification numbers for such Vehicles and notations identifying any Vehicles acquired by AEP since the last such report was delivered to Agent." 17. Annex A of the Credit Agreement is hereby amended as ------- of the Amendment Effective Date by deleting the definition of "Agricultural Restructuring Plan" and inserting in lieu thereof: "Agricultural Restructuring Plan' means that certain restructuring plan, dated November 17, 2000, as modified on June 26, 2001 and approved by the Board of Directors of Agway, as the same may be further amended or modified provided that prior to any such amendment or modification, Agent shall have consented to such proposed amendment or modification." 18. Annex E is hereby amended by adding the following insert at ------- the end of clause (c): "Additionally, Borrowers shall deliver on or before January 31, 2002 month-by-month projections for Borrowers, on a consolidated and consolidating basis, for the period beginning on February 1, 2002 through March 31, 2004, which (A) includes a statement of all of the material assumptions on which such projections are based, (B) includes monthly balance sheets, income statements and statements of cash flows, and (C) integrates sales, gross profits, operating expenses, operating profit, cash flow projections and Borrowing Availability projections, all prepared on the same basis and in similar detail as that on which operating results are reported (and in the case of cash flow projections, represents management's good faith estimates of future financial performance based on historical performance), Capital Expenditures and Facilities" 19. Annex G of the Credit Agreement is hereby amended as -------- of the Amendment Effective Date by deleting such Annex in its entirety and replacing it with a new Annex G attached hereto as Exhibit A. ---------- 20. Disclosure Schedule (5.1) is hereby amended and supplemented ------------------- by inserting as an assumed name under Agway, Inc. (i) the trade name "Apex Bag Company" registered in the state of Ohio, (ii) the trade name "Central Maine Feed" registered in the state of Maine, (iii) the trade name "Milford Fertilizer Company" registered in the states of Delaware, Maryland, New Jersey, Pennsylvania and Virginia, and (iv) the trade name "Agway Feed and Nutrition Company" registered in the states of New York and Pennsylvania. 21. Amendment Fee. To induce Agent and Lenders to enter into ------------- this Amendment, Borrowers hereby agree to pay Agent, for the ratable benefit of Lenders, an amendment fee in the amount of $300,000 in immediately available funds, payable on the Amendment Effective Date. 22. Representations and Warranties. To induce Agent and Lenders ------------------------------ to enter into this Amendment, Borrowers make the following representations and warranties to Agent and Lenders: (a) The execution, delivery and performance of this Amendment and the performance of the Credit Agreement, as amended by this Amendment (the "Amended Credit Agreement"), by Borrowers: (a) are within each Borrower's organizational power; (b) have been duly authorized by all necessary or proper corporate and shareholder action; (c) do not contravene any provision of any Borrower's charter or bylaws or equivalent organizational documents; (d) do not violate any law or regulation, or any order or decree of any court or Governmental Authority; (e) do not conflict with or result in the breach or termination of, constitute a default under or accelerate or permit the acceleration of any performance required by, any indenture, mortgage, deed of trust, lease, agreement or other instrument to which any Borrower is a party or by which any Borrower or any of its property is bound; (f) do not result in the creation or imposition of any Lien upon any of the property of any Borrower other than those in favor of Agent pursuant to the Loan Documents; and (g) do not require the consent or approval of any Governmental Authority or any other Person. (b) This Amendment has been duly executed and delivered by or on behalf of Borrowers. (c) Each of this Amendment and the Amended Credit Agreement constitutes a legal, valid and binding obligation of each Borrower and each of the other Credit Parties party thereto, enforceable against each in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). (d) No Default has occurred and is continuing after giving effect to this Amendment. (e) No action, claim, lawsuit, demand, investigation or proceeding is now pending or, to the knowledge of any Credit Party, threatened against any Credit Party, at law, in equity or otherwise, before any court, board, commission, agency or instrumentality of any Governmental Authority, or before any arbitrator or panel of arbitrators, (i) which challenges any Borrower's or, to the extent applicable, any other Credit Party's right, power, or competence to enter into this Amendment or perform any of their respective obligations under this Amendment, the Amended Credit Agreement or any other Loan Document, or the validity or enforceability of this Amendment, the Amended Credit Agreement or any other Loan Document or any action taken under this Amendment, the Amended Credit Agreement or any other Loan Document or (ii) except for items on Disclosure Schedule (3.13) or notifications sent to Agent since the Closing Date, which if determined adversely, is reasonably likely to have or result in a Material Adverse Effect. Except for items on Disclosure Schedule (3.13) or notifications sent to Agent since the Closing Date, to the knowledge of each Borrower, there does not exist a state of facts which is reasonably likely to give rise to such proceedings. (f) The representations and warranties of each Borrower and the other Credit Parties contained in the Credit Agreement and each other Loan Document shall be true and correct on and as of the Amendment Effective Date with the same effect as if such representations and warranties had been made on and as of such date, except that any such representation or warranty which is expressly made only as of a specified date need be true only as of such date. 23. Merger of Agway Financial Corporation, Agway Holdings, Inc., and ---------------------------------------------------------------- Milford Fertilizer Company LLC. ------------------------------- Notwithstanding anything to the contrary contained in the Credit Agreement, each of Agent, Lenders and Borrowers hereby acknowledges and agrees that Agway Holdings Inc. merged into Agway Financial Corporation, and thereafter, Agway Financial Corporation and Milford Fertilizer Company LLC have merged into Agway, Inc., with Agway, Inc. being the surviving entity. Commencing as of the Amendment Effective Date, all references to Agway Financial Corporation, Agway Holdings Inc., and Milford Fertilizer Company LLC shall be deemed to refer to Agway, Inc. 24. Change of Fiscal Year; Fiscal Months. ------------------------------------ Agent and Lenders hereby consent to each of Borrowers' change of (i) its fiscal year end to June 30, and (ii) its fiscal month and quarter ends to be calendar month ends. Disclosure Schedule (6.15) is hereby deleted in its entirety and replaced with a new Disclosure Schedule (6.15) attached hereto as Exhibit B. 25. Consent. Agent and Lenders hereby consent to Agway, Inc.'s ------- acquisition of the remaining twenty percent (20%) membership interest of Country Best - DeBerry LLC currently held by Mr. Curtis DeBerry, provided that the only consideration paid for such membership interests is (i) the forgiveness of the June 27, 2000 promissory note given by Curtis DeBerry to Agway, Inc. in the principal amount of $76,935.00 plus interest, which forgiveness Agent and Lenders also hereby consent to provided that Curtis DeBerry has satisfied certain performance criteria described in Section 10.2 of the Membership Interest Purchase Agreement between Agway, Inc. and Curtis DeBerry, a draft of which has been provided to the Agent ("Membership Interest Purchase Agreement"), and (ii) the other consideration set forth in section 2.2 of the Membership Interest Purchase Agreement. 26. No Other Amendments/Waivers. Except as expressly amended herein, --------------------------- the Credit Agreement and the other Loan Documents shall be unmodified and shall continue to be in full force and effect in accordance with their terms. In addition, except as specifically provided herein, this Amendment shall not be deemed a waiver of any term or condition of any Loan Document and shall not be deemed to prejudice any right or rights which Agent, for itself and Lenders, may now have or may have in the future under or in connection with any Loan Document or any of the instruments or agreements referred to therein, as the same may be amended from time to time. 27. Outstanding Indebtedness; Waiver of Claims. Each Borrower and ------------------------------------------- the other Credit Parties hereby acknowledges and agrees that as of September 13, 2001 the aggregate outstanding principal amount of the Revolving Loan is $19,702,940.16 and that such principal amount is payable pursuant to the Credit Agreement without defense, offset, withholding, counterclaim or deduction of any kind. Borrowers and each other Credit Party hereby waives, releases, remises and forever discharges Agent, Lenders and each other Indemnified Person from any and all claims, suits, actions, investigations, proceedings or demands arising out of or in connection with the Credit Agreement (collectively, "Claims"), whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute or common law of any kind or character, known or unknown, which any Borrower or any other Credit Party ever had, now has or might hereafter have against Agent or Lenders which relates, directly or indirectly, to any acts or omissions of Agent, Lenders or any other Indemnified Person on or prior to the Amendment Effective Date, provided, that no Borrower nor any other Credit Party waives any Claim solely to the extent such Claim relates to the Agent's or any Lender's gross negligence or willful misconduct. 28. Expenses. Each Borrower and the other Credit Parties hereby -------- reconfirms its respective obligations pursuant to Sections 1.9 and 11.3 of the Credit Agreement and pursuant to the GE Capital Fee Letter, to pay and reimburse Agent, for itself and Lenders, for all reasonable costs and expenses (including, without limitation, reasonable fees of counsel) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment and all other documents and instruments delivered in connection herewith. 29. Effectiveness. This Amendment shall become effective as of ------------- September 14, 2001 (the "Amendment Effective Date") only upon satisfaction in full in the judgment of Agent of each of the following conditions: (a) Amendment. Agent shall have received six (6) original copies of this Amendment duly executed and delivered by Agent, the Requisite Lenders and Borrowers. (b) Payment of Expenses. Borrowers shall have paid to Agent all costs, fees and expenses owing in connection with this Amendment and the other Loan Documents and due to Agent (including, without limitation, reasonable legal fees and expenses). (c) Agent shall have received a duly executed original of a vehicle collateral agreement, in form and substance satisfactory to Agent, in its sole discretion, executed by Agway Energy Products LLC, provided that certificates of title for all vehicles owned by such entities shall be delivered to LexisNexis Document Solutions Inc., the vehicle collateral agent under such agreement within five (5) Business Days of the Amendment Effective Date. (d) Telmark Pledge Agreement. Agway, Inc. and Agent shall have entered into a pledge amendment, in form and substance satisfactory to Agent, in its sole discretion, providing for a pledge of all of the member interests of Telmark LLC held by Agway, Inc., and Agent shall have received duly endorsed certificates and member interest powers representing and relating to such interests pledged by Agway, Inc. (e) First Amendment to Security Agreement. Agent shall have received a First Amendment to the Security Agreement, in form and substance satisfactory to Agent, in its sole discretion, executed and delivered by Borrowers and all Credit Parties. (f) Telmark LLC Side Letter. Telmark LLC shall have entered into a side letter, in form and substance satisfactory to Agent, in its sole discretion, providing for, among other things, a negative pledge of all the membership interests of the Telmark Entities. (g) Representations and Warranties. The representations and warranties of or on behalf of the Credit Parties in this Amendment shall be shall be true and correct on and as of the Amendment Effective Date. 30. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 31. Counterparts. This Amendment may be executed by the parties ------------ hereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. [SIGNATURE PAGES FOLLOW] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written. BORROWERS AGWAY, INC. FEED COMMODITIES INTERNATIONAL LLC BRUBAKER AGRONOMIC CONSULTING SERVICE LLC COUNTRY BEST-DEBERRY LLC AGWAY ENERGY PRODUCTS LLC AGWAY ENERGY SERVICES-PA, INC. AGWAY ENERGY SERVICES, INC. By: /s/ KAREN J. OHLIGER ------------------------------------ Name: Karen J. Ohliger ------------------------------------ Title: Treasurer ------------------------------------ AGWAY GENERAL AGENCY, INC. COUNTRY BEST ADAMS, LLC By: /s/ KAREN J. OHLIGER ------------------------------------ Name: Karen J. Ohliger ------------------------------------ Title: Asst. Treasurer ------------------------------------ LENDERS COBANK, ACB By: /s/ KENNETH E. HIDE ------------------------------------ Name: Kenneth E. Hide ------------------------------------ Title: Vice President ------------------------------------ COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEEN BANK B.A., "Rabobank Nederland" New York Branch By: /s/ BETTY H. MILLS ------------------------------------ Name: Betty H. Mills ------------------------------------ Title: Executive Director ------------------------------------ GMAC BUSINESS CREDIT, LLC By: /s/ RAY ZILKE ------------------------------------ Name: Ray Zilke ------------------------------------ Title: Asst. Vice President ------------------------------------ GENERAL ELECTRIC CAPITAL CORPORATION, as Agent and Lender By: /s/ PIETER SMIT ------------------------------------ Name: Pieter Smit ------------------------------------ Title: Its Duty Authorized Signatory EXHIBIT A --------- ANNEX G (SECTION 6.10) TO CREDIT AGREEMENT ---------------- FINANCIAL COVENANTS ------------------- Borrowers shall not breach or fail to comply with any of the following financial covenants, each of which shall be calculated in accordance with GAAP consistently applied: (a) Maximum Capital Expenditures. Borrowers and their ------------------------------- Subsidiaries (excluding all Telmark Entities, Agway Insurance Company and all of their respective Subsidiaries) on a consolidated basis shall not make Capital Expenditures during the following periods that exceed in the aggregate the amounts set forth opposite each of such periods: Period Maximum Capital Expenditures per Period ------ --------------------------------------- December 23, 2000 through June 30, 2001 $ 12,000,000 Fiscal Year ending June 30, 2002 17,000,000 Fiscal Year ending June 30, 2003 13,100,000 June 30, 2003 through March 31, 2004 12,000,000 (b) Minimum Fixed Charge Coverage Ratio. Borrowers and their -------------------------------------- Subsidiaries (excluding all Telmark Entities, Agway Insurance Company and all of their respective Subsidiaries) shall have on a consolidated basis at the end of each Fiscal Quarter set forth below, a Fixed Charge Coverage Ratio for the 12-month period then ended not less than the following: 0.50x for the Fiscal Quarter ending September 30, 2002; 0.55x for the Fiscal Quarter ending December 31, 2002; 0.60x for the Fiscal Quarter ending March 31, 2003; 0.65x for the Fiscal Quarter ending June 30, 2003; 0.65x for the Fiscal Quarter ending September 30, 2003; 0.65x for the Fiscal Quarter ending December 31, 2003; and 0.70x for the Fiscal Quarter ending March 31, 2004. (c) Minimum EBITDA (Agway Operations). Borrowers and their ----------------------------------- Subsidiaries (excluding all Telmark Entities, Agway Insurance Company and all of their respective Subsidiaries) on a consolidated basis shall have, at the end of each Fiscal Quarter set forth below, EBITDA for the 12-month period then ended (except for any period commencing December 23, 2000 and ending on or prior to December 31, 2001, which shall be for the periods described below) of not less than the following: Period EBITDA ------ ------- December 23, 2000 through June 30, 2001 $16,000,000 December 23, 2000 through September 30, 2001 3,400,000 December 23, 2000 through December 31, 2001 8,300,000 March 31, 2002 14,600,000 June 30, 2002 27,500,000 September 30, 2002 32,300,000 December 31, 2002 35,600,000 March 31, 2003 38,000,000 June 30, 2003 41,000,000 September 30, 2003 40,800,000 December 31, 2003 41,800,000 March 31, 2004 44,300,000 (d) Minimum EBITDA (Agriculture). The Agway Agriculture Business --------------------------- Unit (as designated on the Agway Operations financial statements) on a consolidated basis shall have, at the end of each Fiscal Quarter set forth below, EBITDA for the 12-month period then ended (except for any period commencing December 23, 2000 and ending on or prior to December 31, 2001, which shall be for the periods described below) of not less than the following: Period EBITDA ------ ------ December 23, 2000 through June 30, 2001 $ 10,500,000 December 23, 2000 through September30, 2001 4,200,000 December 23, 2000 through December 31, 2001 1,600,000 March 31, 2002 5,000,000 June 30, 2002 8,000,000 September 30, 2002 11,100,000 December 31, 2002 12,400,000 March 31, 2003 13,400,000 June 30, 2003 12,600,000 September 30, 2003 12,800,000 December 31, 2003 13,000,000 March 31, 2004 13,400,000 (e) Minimum EBITDA (Country Products). The Agway Country Products -------------------------------- Group Business Unit (as designated on the Agway Operations financial statements) on a consolidated basis shall have, at the end of each Fiscal Quarter set forth below, EBITDA for the 12-month period then ended (except for any period commencing December 23, 2000 and ending on or prior to December 31, 2001, which shall be for the periods described below) of not less than the following: Period EBITDA ------ -------- December 23, 2000 through June 30, 2001 $ (5,400,000) December 23, 2000 through September 30, 2001 (6,300,000) December 23, 2000 through December 31, 2001 (5,300,000) March 31, 2002 (3,700,000) June 30, 2002 2,900,000 September 30, 2002 8,600,000 December 31, 2002 9,400,000 March 31, 2003 9,800,000 June 30, 2003 10,600,000 September 30, 2003 10,500,000 December 31, 2003 11,200,000 March 31, 2004 12,400,000 (f) Minimum EBITDA (Energy). The Agway Energy Business Unit (as ------------------------ designated on the Agway Operations financial statements on a consolidated basis shall have, at the end of each Fiscal Quarter set forth below, EBITDA for the 12-month period then ended (except for any period commencing December 23, 2000 and ending on or prior to December 31, 2001, which shall be for the periods described below) of not less than the following: Period EBITDA ------ ------ December 23, 2000 through June 30, 2001 $20,000,000 December 23, 2000 through September 30, 2001 11,800,000 December 23, 2000 through December 31, 2001 20,300,000 March 31, 2002 20,500,000 June 30, 2002 22,100,000 September 30, 2002 18,600,000 December 31, 2002 19,000,000 March 31, 2003 19,400,000 June 30, 2003 21,700,000 September 30, 2003 21,400,000 December 31, 2003 21,500,000 March 31, 2004 22,100,000 (g) Minimum Senior Interest Coverage Ratio. Borrowers and their --------------------------------------- Subsidiaries (excluding all Telmark Entities, Agway Insurance Company and all of their respective Subsidiaries) on a consolidated basis shall have at the end of each Fiscal Quarter set forth below, a Senior Interest Coverage Ratio for the 12-month period then ended (except for any period commencing December 23, 2000 and ending on or prior to December 31, 2001, which shall be for the periods described below) of not less than the following: 3.0x for the period of two Fiscal Quarters commencing December 23, ---- 2000 and ending June 30, 2001 .40x for the period of three Fiscal Quarters commencing December 23, ---- 2000 and ending September 30, 2001 .80x for the period of four Fiscal Quarters commencing December 23, ---- 2000 and ending December 31, 2001 1.4x for the Fiscal Quarter ending March 31, 2002 2.7x for the Fiscal ---- Quarter ending June 30, 2002 4.0x for the Fiscal Quarter ending September 30, 2002 4.2x for the ---- Fiscal Quarter ending December 31, 2002 4.3x for the Fiscal Quarter ending March 31, 2003 4.8x for the Fiscal ---- Quarter ending June 30, 2003 4.8x for the Fiscal Quarter ending September 30, 2003 ---- 4.9x for the Fiscal Quarter ending December 31, 2003 ---- 5.0x for the Fiscal Quarter ending March 31, 2004 ---- (h) Minimum Excess Availability. Borrowers and their Subsidiaries --------------------------- (excluding all Telmark Entities, Agway Insurance Company and all of their respective Subsidiaries) at all times shall have Borrowing Availability, after giving effect to Eligible Accounts, Eligible Deferred Accounts and Eligible Inventory of Borrowers supporting Revolving Credit Advances and all Letter of Credit Obligations (on a pro forma basis, with trade payables being paid in the ordinary course, and expenses and liabilities being paid in the ordinary course of business and without acceleration of sales) of at least Ten Million Dollars ($10,000,000). Unless otherwise specifically provided herein, any accounting term used in the Agreement shall have the meaning customarily given such term in accordance with GAAP, and all financial computations hereunder shall be computed in accordance with GAAP consistently applied. That certain items or computations are explicitly modified by the phrase "in accordance with GAAP" shall in no way be construed to limit the foregoing. If any "Accounting Changes" (as defined below) occur and such changes result in a change in the calculation of the financial covenants, standards or terms used in the Agreement or any other Loan Document, then Borrowers, Agent and Lenders agree to enter into negotiations in order to amend such provisions of the Agreement so as to equitably reflect such Accounting Changes with the desired result that the criteria for evaluating Borrowers' and their Subsidiaries' financial condition shall be the same after such Accounting Changes as if such Accounting Changes had not been made; provided, however, that the agreement of Requisite Lenders to any required amendments of such provisions shall be sufficient to bind all Lenders. "Accounting Changes" means (i) changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants (or successor thereto or any agency with similar functions), (ii) changes in accounting principles concurred in by any Borrower's certified public accountants; (iii) purchase accounting adjustments under A.P.B. 16 or 17 and EITF 88-16, and the application of the accounting principles set forth in FASB 109, including the establishment of reserves pursuant thereto and any subsequent reversal (in whole or in part) of such reserves; and (iv) the reversal of any reserves established as a result of purchase accounting adjustments. All such adjustments resulting from expenditures made subsequent to the Closing Date (including capitalization of costs and expenses or payment of pre-Closing Date liabilities) shall be treated as expenses in the period the expenditures are made and deducted as part of the calculation of EBITDA in such period. If Agent, Borrowers and Requisite Lenders agree upon the required amendments, then after appropriate amendments have been executed and the underlying Accounting Change with respect thereto has been implemented, any reference to GAAP contained in the Agreement or in any other Loan Document shall, only to the extent of such Accounting Change, refer to GAAP, consistently applied after giving effect to the implementation of such Accounting Change. If Agent, Borrowers and Requisite Lenders cannot agree upon the required amendments within 30 days following the date of implementation of any Accounting Change, then all Financial Statements delivered and all calculations of financial covenants and other standards and terms in accordance with the Agreement and the other Loan Documents shall be prepared, delivered and made without regard to the underlying Accounting Change. For purposes of Section 8.1, a breach of a Financial Covenant contained in this Annex G shall be deemed to have occurred as of any date of determination by Agent or as of the last day of any specified measurement period, regardless of when the Financial Statements reflecting such breach are delivered to Agent. EXHIBIT B --------- Schedule 6.15 Accounting Periods Agway Fiscal Month Ends - as of 7/1/01 March Quarter Ends 3/31/01 3/31/02 3/31/03 3/31/04 June Quarter Ends 6/30/01 6/30/02 6/30/03 September Quarter Ends 9/30/01 9/30/02 9/30/03 December Quarter Ends 12/31/01 12/31/02 12/31/03 SCHEDULE A ---------- "Account Debtor" means any Person who may become obligated to any --------------- Credit Party under, with respect to, or on account of, an Account, Chattel Paper or General Intangibles (including a payment intangible). "Accounts" means all "accounts," as such term is defined in the Code, -------- now owned or hereafter acquired by any Credit Party, including (a) all accounts receivable, other receivables, book debts and other forms of obligations (other than forms of obligations evidenced by Chattel Paper, or Instruments), (including any such obligations that may be characterized as an account or contract right under the Code), (b) all of each Credit Party's rights in, to and under all purchase orders or receipts for goods or services, (c) all of each Credit Party's rights to any goods represented by any of the foregoing (including unpaid sellers' rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods), (d) all rights to payment due to any Credit Party for property sold, leased, licensed, assigned or otherwise disposed of, for a policy of insurance issued or to be issued, for a secondary obligation incurred or to be incurred, for energy provided or to be provided, for the use or hire of a vessel under a charter or other contract, arising out of the use of a credit card or charge card, or for services rendered or to be rendered by such Credit Party or in connection with any other transaction (whether or not yet earned by performance on the part of such Credit Party), (e) all health care insurance receivables and (f) all collateral security of any kind, given by any Account Debtor or any other Person with respect to any of the foregoing. "Chattel Paper" means any "chattel paper," as such term is -------------- defined in the Code, including electronic chattel paper, now owned or hereafter acquired by any Credit Party. "Code" means the Uniform Commercial Code as the same may, from ------ time to time, be enacted and in effect in the State of New York; provided, that to the extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern; provided further, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of, or remedies with respect to, Agent's or any Lender's Lien on any Collateral is governed by the Uniform Commercial Code as enacted and in effect in a jurisdiction other than the State of New York, the term "Code" shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority or remedies and for purposes of definitions related to such provisions. "Documents" means all "documents," as such term is defined in --------- the Code, now owned or hereafter acquired by any Credit Party, wherever located. "Fixtures" means all "fixtures" as such term is defined in the -------- Code, now owned or hereafter acquired by any CreditParty. "General Intangibles" means all "general intangibles," as such ------------------- term is defined in the Code, now owned or hereafter acquired by any Credit Party, including all right, title and interest that such Credit Party may now or hereafter have in or under any Contract, all payment intangibles, customer lists, Licenses, Copyrights, Trademarks, Patents, and all applications therefor and reissues, extensions or renewals thereof, rights in Intellectual Property, interests in partnerships, joint ventures and other business associations, licenses, permits, copyrights, trade secrets, proprietary or confidential information, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, experience, processes, models, drawings, materials and records, goodwill (including the goodwill associated with any Trademark or Trademark License), all rights and claims in or under insurance policies (including insurance for fire, damage, loss and casualty, whether covering personal property, real property, tangible rights or intangible rights, all liability, life, key man and business interruption insurance, and all unearned premiums), uncertificated securities, choses in action, deposit, checking and other bank accounts, rights to receive tax refunds and other payments, rights to receive dividends, distributions, cash, Instruments and other property in respect of or in exchange for pledged Stock and Investment Property, rights of indemnification, all books and records, correspondence, credit files, invoices and other papers, including without limitation all tapes, cards, computer runs and other papers and documents in the possession or under the control of such Credit Party or any computer bureau or service company from time to time acting for such Credit Party. "Goods" means all "goods" as defined in the Code, now owned or ----- hereafter acquired by any Credit Party, wherever located, including embedded software to the extent included in "goods" as defined in the Code, manufactured homes, standing timber that is cut and removed for sale and unborn young of animals. "Instruments" means all "instruments," as such term is defined ----------- in the Code, now owned or hereafter acquired by any Credit Party, wherever located, and, in any event, including all certificated securities, all certificates of deposit, and all promissory notes and other evidences of indebtedness, other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper. "Inventory" means all "inventory," as such term is defined in --------- the Code, now owned or hereafter acquired by any Credit Party, wherever located, and in any event including inventory, merchandise, goods and other personal property that are held by or on behalf of any Credit Party for sale or lease or are furnished or are to be furnished under a contract of service, or that constitute raw materials, work in process, finished goods, returned goods, or materials or supplies of any kind, nature or description used or consumed or to be used or consumed in such Credit Party's business or in the processing, production, packaging, promotion, delivery or shipping of the same, including all supplies and embedded software. "Investment Property" means all "investment property" as such -------------------- term is defined in the Code now owned or hereafter acquired by any Credit Party, wherever located, including (i) all securities, whether certificated or uncertificated, including stocks, bonds, interests in limited liability companies, partnership interests, treasuries, certificates of deposit, and mutual fund shares; (ii) all securities entitlements of any Credit Party, including the rights of any Credit Party to any securities account and the financial assets held by a securities intermediary in such securities account and any free credit balance or other money owing by any securities intermediary with respect to that account; (iii) all securities accounts of any Credit Party; (iv) all commodity contracts of any Credit Party; and (v) all commodity accounts held by any Credit Party. "Proceeds" means "proceeds," as such term is defined in the -------- Code, including (a) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to any Credit Party from time to time with respect to any of the Collateral, (b) any and all payments (in any form whatsoever) made or due and payable to any Credit Party from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any Governmental Authority (or any Person acting under color of governmental authority), (c) any claim of any Credit Party against third parties (i) for past, present or future infringement of any Patent or Patent License, or (ii) for past, present or future infringement or dilution of any Copyright, Copyright License, Trademark or Trademark License, or for injury to the goodwill associated with any Trademark or Trademark License, (d) any recoveries by any Credit Party against third parties with respect to any litigation or dispute concerning any of the Collateral including claims arising out of the loss or nonconformity of, interference with the use of, defects in, or infringement of rights in, or damage to, Collateral, (e) all amounts collected on, or distributed on account of, other Collateral, including dividends, interest, distributions and Instruments with respect to Investment Property and pledged Stock, and (f) any and all other amounts, rights to payment or other property acquired upon the sale, lease, license, exchange or other disposition of Collateral and all rights arising out of Collateral. "Equipment" means all "equipment," as such term is defined in --------- the Code, now owned or hereafter acquired by any Credit Party, wherever located and, in any event, including all such Credit Party's machinery and equipment, including processing equipment, conveyors, machine tools, data processing and computer equipment, including embedded software and peripheral equipment and all engineering, processing and manufacturing equipment, office machinery, furniture, materials handling equipment, tools, attachments, accessories, automotive equipment, trailers, trucks, forklifts, molds, dies, stamps, motor vehicles, rolling stock and other equipment of every kind and nature, trade fixtures and fixtures not forming a part of real property, together with all additions and accessions thereto, replacements therefor, all parts therefor, all substitutes for any of the foregoing, fuel therefor, and all manuals, drawings, instructions, warranties and rights with respect thereto, and all products and proceeds thereof and condemnation awards and insurance proceeds with respect thereto. FIRST AMENDMENT TO SECURITY AGREEMENT This FIRST AMENDMENT to Security Agreement (this "Amendment") is entered into as of this 14th day of September, 2001, by and among Agway, Inc., a Delaware corporation ("Agway") (successor by merger of Agway Holdings Inc., Agway Financial Corporation and Milford Fertilizer Company LLC), Feed Commodities International LLC, a limited liability company organized under the laws of the state of Delaware ("FCI"), Brubaker Agronomic Consulting Service LLC, a limited liability company organized under the laws of the state of Delaware ("BACS"), Agway General Agency, Inc. a New York corporation ("AGA"), Country Best Adams, LLC, a limited liability company organized under the laws of the state of Delaware ("CBA"), Country Best-Deberry LLC, a limited liability company organized under the laws of the state of Delaware ("CBD"), Agway Energy Products LLC, a limited liability company organized under the laws of the state of Delaware ("AEP"), Agway Energy Services-PA, Inc., a Delaware corporation ("AESPA"), and Agway Energy Services, Inc., a Delaware corporation ("AES"); (Agway, FCI, BACS, AGA, CBA, CBD, AEP, AESPA and AES are sometimes collectively referred to herein as "Grantors" and individually as a "Grantor") and General Electric Capital Corporation, a Delaware corporation, in its capacity as Agent for Lenders ("Agent"). WHEREAS, pursuant to that certain Credit Agreement dated as of March 28, 2001, by and among Grantors, Agent and Lenders (including all annexes, exhibits and schedules thereto, as from time to time amended, restated, supplemented or otherwise modified, the "Credit Agreement"), Lenders have made Loans to, and incurred Letter of Credit Obligations on behalf of, the Grantors; WHEREAS, Grantors have entered into a Security Agreement with Agent dated as of March 28, 2001, whereby Grantors have granted Liens to Agent to secure payment of the obligations (the "Security Agreement"); WHEREAS, Grantors and Agent have agreed to amend certain provisions of the Security Agreement on the terms and conditions, provided for herein; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in furtherance of the Grantors' duties to give further assurances to the Agent and Lenders pursuant to the terms of the Credit Agreement and the Security Agreement, the parties hereto agree as follows: 1. Amendments to Security Agreement. The Security Agreement is hereby -------------------------------- amended as of the Amendment Effective Date by: (a) amending Section 2(a) of the Security Agreement by deleting such section in its entirety and inserting in lieu thereof the following new section to read as follows: "(a) To secure the prompt and complete payment, performance and observance of all of the Obligations (specifically including, without limitation, each Grantor's Obligations arising under the cross-guaranty provisions of Section 12 of the Credit Agreement), each Grantor hereby grants, assigns, conveys, mortgages, pledges, hypothecates and transfers to Agent, for itself and the benefit of Lenders, a Lien upon all of its right, title and interest in, to and under all personal property and other assets whether now owned by or owing to, or hereafter acquired by or arising in favor of such Grantor (including under any trade names, styles or derivations thereof), and whether owned or consigned by or to, or leased from or to, such Grantor, and regardless of where located (all of which being hereinafter collectively referred to as the "Collateral"), including: (i) all Accounts; (ii) all Chattel Paper; (iii) all Documents; (iv) all Farm Products; (v) all General Intangibles (including payment intangibles and Software); (vi) all Goods (including Inventory, all Energy Product Inventory, Equipment and Fixtures); (vii) all Instruments; (viii) all Investment Property; (ix) all Deposit Accounts, of any Grantor, including all Blocked Accounts, Concentration Accounts, depository accounts, Disbursement Accounts, and all other bank accounts and all deposits therein; (x) all money, cash or cash equivalents of any Grantor; (xi) all Supporting Obligations and Letter-of-Credit Rights of any Grantor; (xii) any Commercial Tort Claims; and (xiii) to the extent not otherwise included, all Proceeds, tort claims, insurance claims and other rights to payments not otherwise included in the foregoing and products of the foregoing and all accessions to, substitutions and replacements for, and rents and profits of, each of the foregoing (including insurance proceeds)." (b) amending Section 3(b) of the Security Agreement by deleting such section in its entirety and inserting in lieu thereof the following new section to read as follows: "(b) Agent may at any time after a Default or an Event of Default has occurred and be continuing (or if any rights of set-off (other than set-off against an Account arising under the Contract giving rise to the same Account) or contra accounts may be asserted with respect to the following), without prior notice to any Grantor, notify Account Debtors and other Persons obligated on the Collateral that Agent has a security interest therein, and that payments shall be made directly to Agent. Upon the request of Agent, each Grantor shall so notify Account Debtors and other Persons obligated on Collateral. Once any such notice has been given to any Account Debtor or other Person obligated on the Collateral, the affected Grantor shall not give any contrary instructions to such Account Debtor or other Person without Agent's prior written consent." (c) amending Section 3(c) of the Security Agreement by inserting the phrase "and/or payment intangibles" after each reference to "Chattel Paper". (d) amending Section 4(a) of the Security Agreement by deleting such section in its entirety and inserting in lieu thereof the following new section to read as follows: "(a) Each Grantor has rights in and the power to transfer each item of the Collateral upon which it purports to grant a Lien hereunder free and clear of any and all Liens other than Permitted Encumbrances." (e) amending Section 4(c) of the Security Agreement by deleting the second sentence of such section in its entirety and inserting in lieu thereof the following new sentence to read as follows: "Such Lien is prior to all other Liens, except Permitted Encumbrances that would be prior to Liens in favor of Agent for the benefit of Agent and Lenders as a matter of law, and is enforceable as such as against any and all creditors of and purchasers from any Grantor (other than purchasers and lessees of Inventory in the ordinary course of business and non-exclusive licensees of General Intangibles in the ordinary course of business)." (f) amending Section 4(d) of the Security Agreement by deleting such section in its entirety and inserting in lieu thereof the following new section to read as follows: "(d) Schedule II hereto lists all Instruments, Letter of ------------ Credit Rights and Chattel Paper of each Grantor. All action by any Grantor necessary or desirable to protect and perfect the Lien of Agent on each item set forth on Schedule II (including the delivery of all originals thereof to Agent and the legending of all Chattel Paper and Instruments as required by Section 5(b) hereof) has been duly taken. The Lien of Agent, for the benefit of Agent and Lenders, on the Collateral listed on Schedule II hereto is prior to all other Liens, except Permitted Encumbrances that would be prior to the Liens in favor of Agent as a matter of law, and is enforceable as such against any and all creditors of and purchasers from any Grantor." (g) amending Section 4(e) of the Security Agreement by deleting such section in its entirety and inserting in lieu thereof the following new section to read as follows: "(e) Each Grantor's name as it appears in official filings in the state of its incorporation or other organization, the type of entity of each Grantor (including corporation, partnership, limited partnership or limited liability company), organizational identification number issued by each Grantor's state of incorporation or organization or a statement that no such number has been issued, each Grantor's state of organization or incorporation, the location of each Grantor's chief executive office, principal place of business, offices, all warehouses and premises where Collateral is stored or located, and the locations of its books and records concerning the Collateral are set forth on Schedule III-A, Schedule III-B, Schedule III-C, Schedule III-D, Schedule III-E, Schedule III-F, Schedule III-G, Schedule III-H and Schedule III-I, respectively, hereto. Each Grantor has only one state of incorporation or organization." (h) amending Section 5 of the Security Agreement by deleting such section in its entirety and inserting in lieu thereof the following new section to read as follows: "5. COVENANTS. Each Grantor covenants and agrees with Agent, --------- for the benefit of Agent and Lenders, that from and after the date of this Security Agreement and until the Termination Date: (a) Further Assurances: Pledge of Instruments; Chattel Paper. (i) At any time and from time to time, upon the written request of Agent and at the sole expense of Grantors, each Grantor shall promptly and duly execute and deliver any and all such further instruments and documents and take such further actions as Agent may deem desirable to obtain the full benefits of this Security Agreement and of the rights and powers herein granted, including (A) using its best efforts to secure all consents and approvals necessary or appropriate for the assignment to or for the benefit of Agent of any License or Contract held by such Grantor and to enforce the security interests granted hereunder; and (B) filing any financing or continuation statements under the Code with respect to the Liens granted hereunder or under any other Loan Document as to those jurisdictions that are not Uniform Commercial Code jurisdictions. (ii) Unless Agent shall otherwise consent in writing (which consent may be revoked), each Grantor shall deliver to Agent all Collateral consisting of negotiable Documents, certificated securities, Chattel Paper and Instruments (in each case, accompanied by stock powers, allonges or other instruments of transfer executed in blank) promptly after such Credit Party receives the same other than the Instruments which shall remain in possession of Agway, Inc. pursuant to section 4 of the Pledge Agreement. (iii) Each Grantor shall, in accordance with the terms of the Credit Agreement, obtain or use its best efforts to obtain waivers or subordinations of Liens from landlords and mortgagees, and each Credit Party shall in all such instances obtain signed acknowledgements of Agent's Liens from bailees having possession of any Grantor's Goods that they hold for the benefit of Agent. (iv) If required by the terms of the Credit Agreement and not waived by Agent in writing (which waiver may be revoked), each Grantor shall obtain authenticated Control Letters from each issuer of uncertificated securities, securities intermediary, or commodities intermediary issuing or holding any financial assets or commodities to or for any Grantor. (v) In accordance with Annex C to the Credit Agreement, each Grantor shall obtain a blocked account, lockbox or similar agreement with each bank or financial institution holding a Deposit Account for such Grantor. (vi) Each Grantor that is or becomes the beneficiary of a letter of credit that is not a Supporting Obligation shall promptly, and in any event within two (2) Business Days after becoming a beneficiary, notify Agent thereof and enter into a tri-party agreement with Agent and the issuer and/or confirmation bank (which form of agreement will be provided by the Agent) with respect to Letter-of-Credit Rights assigning such Letter-of-Credit Rights to Agent and directing all payments thereunder to the Collection Account, all in form and substance reasonably satisfactory to Agent. Notwithstanding the foregoing, Borrowers shall only be required to utilize commercially reasonable efforts to obtain such tri-party agreement. (vii) Each Grantor shall take all steps necessary to grant the Agent control of all electronic chattel paper in accordance with the Code and all "transferable records" as defined in each of the Uniform Electronic Transactions Act and the Electronic Signatures in Global and National Commerce Act. (viii) Each Grantor hereby irrevocably authorizes the Agent at any time and from time to time to file in any filing office in any Uniform Commercial Code jurisdiction any initial financing statements and amendments thereto that (a) indicate the Collateral (i) as all assets of such Grantor or words of similar effect, regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the Code or such jurisdiction, or (ii) as being of an equal or lesser scope or with greater detail, and (b) contain any other information required by part 5 of Article 9 of the Code for the sufficiency or filing office acceptance of any financing statement or amendment, including (i) whether such Grantor is an organization, the type of organization and any organization identification number issued to such Grantor, and (ii) in the case of a financing statement filed as a fixture filing or indicating Collateral as as-extracted collateral or timber to be cut, a sufficient description of real property to which the Collateral relates. Each Grantor agrees to furnish any such information to the Agent promptly upon request. Each Grantor also ratifies its authorization for the Agent to have filed in any Uniform Commercial Code jurisdiction any initial financing statements or amendments thereto if filed prior to the date hereof. (ix) Each Grantor shall promptly, and in any event within two (2) Business Days after the same is acquired by it, notify Agent of any commercial tort claim (as defined in the Code) acquired by it and unless otherwise consented by Agent, such Grantor shall enter into a supplement to this Security Agreement, granting to Agent a Lien in such commercial tort claim. (b) Maintenance of Records. Grantors shall keep and ---------------------- maintain, at their own cost and expense, satisfactory and complete records of the Collateral, including a record of any and all payments received and any and all credits granted with respect to the Collateral and all other dealings with the Collateral. Grantors shall mark their books and records pertaining to the Collateral to evidence this Security Agreement and the Liens granted hereby. If any Grantor retains possession of any Chattel Paper or Instruments with Agent's consent, such Chattel Paper and Instruments shall be marked with the following legend: "This writing and the obligations evidenced or secured hereby are subject to the security interest of General Electric Capital Corporation, as Agent, for the benefit of Agent and certain Lenders." (c) Covenants Regarding Patent, Trademark and ------------------------------------------------ Copyright Collateral. -------------------- (i) Grantors shall notify Agent immediately if they know or have reason to know that any application or registration relating to any Patent, Trademark or Copyright (now or hereafter existing) material to the operation of such Grantor's business may become abandoned, or of any adverse determination or development (including the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any court) regarding any Grantor's ownership of any such Patent, Trademark or Copyright, its right to register the same, or to keep and maintain the same. (ii) Within 45 days after the end of each Fiscal Quarter, Grantors shall provide Agent a list of any applications for the registration of any Patent, Trademark or Copyright filed by any Credit Party with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in the prior Fiscal Quarter, and, upon request of Agent, Grantor shall execute and deliver any and all Patent Security Agreements, Copyright Security Agreements or Trademark Security Agreements as Agent may request to evidence Agent's Lien on such Patent, Trademark or Copyright, and the General Intangibles of such Grantor relating thereto or represented thereby. (iii) Grantors shall take all actions necessary or requested by Agent to maintain and pursue each application, to obtain the relevant registration and to maintain the registration of each of the Patents, Trademarks and Copyrights (now or hereafter existing) material to the operation of such Grantor's business, including the filing of applications for renewal, affidavits of use, affidavits of noncontestability and opposition and interference and cancellation proceedings. (iv) In the event that any of the Patent, Trademark or Copyright Collateral is infringed upon, or misappropriated or diluted by a third party, such Grantor shall comply with Section 5(a)(ix) of this Security Agreement. Such Grantor shall, unless such Grantor shall reasonably determine that such Patent, Trademark or Copyright Collateral is in no way material to the conduct of its business or operations, promptly sue for infringement, misappropriation or dilution and to recover any and all damages for such infringement, misappropriation or dilution, and shall take such other actions as Agent shall deem appropriate under the circumstances to protect such Patent, Trademark or Copyright Collateral. (d) Indemnification. In any suit, proceeding or --------------- action brought by Agent or any Lender relating to any Collateral for any sum owing with respect thereto or to enforce any rights or claims with respect thereto, each Grantor will save, indemnify and keep Agent and Lenders harmless from and against all expense (including reasonable attorneys' fees and expenses), loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction of liability whatsoever of the Account Debtor or other Person obligated on the Collateral, arising out of a breach by any Grantor of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to, or in favor of, such obligor or its successors from such Grantor, except in the case of Agent or any Lender, to the extent such expense, loss, or damage is attributable solely to the gross negligence or willful misconduct of Agent or such Lender as finally determined by a court of competent jurisdiction. All such obligations of Grantors shall be and remain enforceable against and only against Grantors and shall not be enforceable against Agent or any Lender. (e) Compliance with Terms of Accounts, etc. In all ---------------------------------- material respects, each Grantor will perform and comply with all obligations in respect of the Collateral and all other agreements to which it is a party or by which it is bound relating to the Collateral. (f) Limitation on Liens on Collateral. No Grantor ----------------------------------- will create, permit or suffer to exist, and each Grantor will defend the Collateral against, and take such other action as is necessary to remove, any Lien on the Collateral except Permitted Encumbrances, and will defend the right, title and interest of Agent and Lenders in and to any of such Grantor's rights under the Collateral against the claims and demands of all Persons whomsoever. (g) Limitations on Disposition. No Grantor will sell, -------------------------- license, lease, transfer or otherwise dispose of any of the Collateral, or attempt or contract to do so except as permitted by the Credit Agreement. (h) Further Identification of Collateral. Grantors -------------------------------------- will, if so requested by Agent, furnish to Agent, as often as Agent requests, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Agent may reasonably request, all in such detail as Agent may specify. (i) Notices. Grantors will advise Agent promptly, in ------- reasonable detail, (i) of any Lien (other than Permitted Encumbrances) or claim made or asserted against any of the Collateral, and (ii) of the occurrence of any other event which would have a material adverse effect on the aggregate value of the Collateral or on the Liens created hereunder or under any other Loan Document. (j) Good Standing Certificates. Not less frequently --------------------------- than once during each calendar quarter, each Grantor shall, unless Agent shall otherwise consent, provide to Agent a certificate of good standing from its state of incorporation or organization. (k) No Reincorporation. Without limiting the -------------------- prohibitions on mergers involving the Grantors contained in the Credit Agreement, no Grantor shall reincorporate or reorganize itself under the laws of any jurisdiction other than the jurisdiction in which it is incorporated or organized as of the date hereof without the prior written consent of Agent. (l) Terminations; Amendments Not Authorized. Each ----------------------------------------- Grantor acknowledges that it is not authorized to file any financing statement or amendment or termination statement with respect to any financing statement without the prior written consent of Agent and agrees that it will not do so without the prior written consent of Agent, subject to such Grantor's rights under Section 9-509(d)(2) of the Code. (m) Authorized Terminations. Agent will promptly ----------------------- deliver to each Grantor for filing or authorize each Grantor to prepare and file termination statements and releases in accordance with Section 11.2(e) of the Credit Agreement." (i) amending Section 6 of the Security Agreement by deleting such section in its entirety and inserting in lieu thereof the following new section to read as follows: "6. AGENT'S APPOINTMENT AS ATTORNEY -IN- FACT. On the Closing Date each Grantor shall execute and deliver to Agent a power of attorney (the "Power of Attorney") substantially in the form attached hereto as Exhibit A. The power of attorney granted pursuant to the Power of Attorney is a power coupled with an interest and shall be irrevocable until the Termination Date. The powers conferred on Agent, for the benefit of Agent and Lenders, under the Power of Attorney are solely to protect Agent's interests (for the benefit of Agent and Lenders) in the Collateral and shall not impose any duty upon Agent or any Lender to exercise any such powers. Agent agrees that (a) except for the powers granted in clause (h) of the Power of Attorney, it shall not exercise any power or authority granted under the Power of Attorney unless an Event of Default has occurred and is continuing, and (b) Agent shall account for any moneys received by Agent in respect of any foreclosure on or disposition of Collateral pursuant to the Power of Attorney provided that none of Agent or any Lender shall have any duty as to any Collateral, and Agent and Lenders shall be accountable only for amounts that they actually receive as a result of the exercise of such powers. NONE OF AGENT, LENDERS OR THEIR RESPECTIVE AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES SHALL BE RESPONSIBLE TO ANY GRANTOR FOR ANY ACT OR FAILURE TO ACT UNDER ANY POWER OF ATTORNEY OR OTHERWISE, EXCEPT IN RESPECT OF DAMAGES ATTRIBUTABLE SOLELY TO THEIR OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS FINALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION, NOR FOR ANY PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES." (j) amending Section 7 of the Security Agreement by deleting such section in its entirety and inserting in lieu thereof the following new section to read as follows: "7. REMEDIES: RIGHTS UPON DEFAULT. ---------------------- (a) In addition to all other rights and remedies granted to it under this Security Agreement, the Credit Agreement, the other Loan Documents and under any other instrument or agreement securing, evidencing or relating to any of the Obligations, if any Event of Default shall have occurred and be continuing, Agent may exercise all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, each Grantor expressly agrees that in any such event Agent, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon such Grantor or any other Person (all and each of which demands, advertisements and notices are hereby expressly waived to the maximum extent permitted by the Code and other applicable law), may forthwith enter upon the premises of such Grantor where any Collateral is located through self-help, without judicial process, without first obtaining a final judgment or giving such Grantor or any other Person notice and opportunity for a hearing on Agent's claim or action and may collect, receive, assemble, process, appropriate and realize upon the Collateral, or any part thereof, and may forthwith sell, lease, license, assign, give an option or options to purchase, or sell or otherwise dispose of and deliver said Collateral (or contract to do so), or any part thereof, in one or more parcels at a public or private sale or sales, at any exchange at such prices as it may deem acceptable, for cash or on credit or for future delivery without assumption of any credit risk. Agent or any Lender shall have the right upon any such public sale or sales and, to the extent permitted by law, upon any such private sale or sales, to purchase for the benefit of Agent and Lenders, the whole or any part of said Collateral so sold, free of any right or equity of redemption, which equity of redemption each Grantor hereby releases. Such sales may be adjourned and continued from time to time with or without notice. Agent shall have the right to conduct such sales on any Grantor's premises or elsewhere and shall have the right to use any Grantor's premises without charge for such time or times as Agent deems necessary or advisable. If any Event of Default shall have occurred and be continued, each Grantor further agrees, at Agent's request, to assemble the Collateral and make it available to Agent at a place or places designated by Agent which are reasonably convenient to Agent and such Grantor, whether at such Grantor's premises or elsewhere. Until Agent is able to effect a sale, lease, or other disposition of Collateral, Agent shall have the right to hold or use Collateral, or any part thereof, to the extent that it deems appropriate for the purpose of preserving Collateral or its value or for any other purpose deemed appropriate by Agent. Agent shall have no obligation to any Grantor to maintain or preserve the rights of such Grantor as against third parties with respect to Collateral while Collateral is in the possession of Agent. Agent may, if it so elects, seek the appointment of a receiver or keeper to take possession of Collateral and to enforce any of Agent's remedies (for the benefit of Agent and Lenders), with respect to such appointment without prior notice or hearing as to such appointment. Agent shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale to the Obligations as provided in the Credit Agreement, and only after so paying over such net proceeds, and after the payment by Agent of any other amount required by any provision of law, need Agent account for the surplus, if any, to any Grantor. To the maximum extent permitted by applicable law, each Grantor waives all claims, damages, and demands against Agent or any Lender arising out of the repossession, retention or sale of the Collateral except such as arise solely out of the gross negligence or willful misconduct of Agent or such Lender as finally determined by a court of competent jurisdiction. Each Grantor agrees that ten (10) days prior notice by Agent of the time and place of any public sale or of the time after which a private sale may take place is reasonable notification of such matters. Grantors shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all Obligations, including any reasonable attorneys' fees and other expenses incurred by Agent or any Lender to collect such deficiency. (b) Except as otherwise specifically provided herein, each Grantor hereby waives presentment, demand, protest or any notice (to the maximum extent permitted by applicable law) of any kind in connection with this Security Agreement or any Collateral. (c) To the extent that applicable law imposes duties on the Agent to exercise remedies in a commercially reasonable manner, each Grantor acknowledges and agrees that it is not commercially unreasonable for the Agent (i) to fail to incur expenses reasonably deemed significant by the Agent to prepare Collateral for disposition or otherwise to complete raw material or work in process into finished goods or other finished products for disposition, (ii) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain governmental or third party consents for the collection or disposition of Collateral to be collected or disposed of, (iii) to fail to exercise collection remedies against Account Debtors or other Persons obligated on Collateral or to remove Liens on or any adverse claims against Collateral, (iv) to exercise collection remedies against Account Debtors and other Persons obligated on Collateral directly or through the use of collection agencies and other collection specialists, (v) to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature, (vi) to contact other Persons, whether or not in the same business as the Grantor, for expressions of interest in acquiring all or any portion of such Collateral, (vii) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the Collateral is of a specialized nature, (viii) to dispose of Collateral by utilizing internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capacity of doing so, or that match buyers and sellers of assets, (ix) to dispose of assets in wholesale rather than retail markets, (x) to disclaim disposition warranties, such as title, possession or quiet enjoyment, (xi) to purchase insurance or credit enhancements to insure the Agent against risks of loss, collection or disposition of Collateral or to provide to the Agent a guaranteed return from the collection or disposition of Collateral, or (xii) to the extent deemed appropriate by the Agent, to obtain the services of other brokers, investment bankers, consultants and other professionals to assist the Agent in the collection or disposition of any of the Collateral. Each Grantor acknowledges that the purpose of this Section 7(c) is to provide non-exhaustive indications of what actions or omissions by the Agent would not be commercially unreasonable in the Agent's exercise of remedies against the Collateral and that other actions or omissions by the Agent shall not be deemed commercially unreasonable solely on account of not being indicated in this Section 7(c). Without limitation upon the foregoing, nothing contained in this Section 7(c) shall be construed to grant any rights to any Grantor or to impose any duties on Agent that would not have been granted or imposed by this Security Agreement or by applicable law in the absence of this Section 7(c). (d) Neither the Agent nor the Lenders shall be required to make any demand upon, or pursue or exhaust any of their rights or remedies against, any Grantor, any other obligor, guarantor, pledgor or any other Person with respect to the payment of the Obligations or to pursue or exhaust any of their rights or remedies with respect to any Collateral therefor or any direct or indirect guarantee thereof. Neither the Agent nor the Lenders shall be required to marshal the Collateral or any guarantee of the Obligations or to resort to the Collateral or any such guarantee in any particular order, and all of its and their rights hereunder or under any other Loan Document shall be cumulative. To the extent it may lawfully do so, each Grantor absolutely and irrevocably waives and relinquishes the benefit and advantage of, and covenants not to assert against the Agent or any Lender, any valuation, stay, appraisement, extension, redemption or similar laws and any and all rights or defenses it may have as a surety now or hereafter existing which, but for this provision, might be applicable to the sale of any Collateral made under the judgment, order or decree of any court, or privately under the power of sale conferred by this Security Agreement, or otherwise." (k) amending Schedules II, III-A, III-B, III-C, III-D, III-E, III-F, III-G, III-H, III-I, III-J, III-K and III-L to the Security Agreement by deleting such Schedules in their entirety and inserting in lieu thereof the following new Schedules to read as set out on Schedules II, III-A, III-B, III-C, III-D, III-E, III-F, III-G, III-H and III-I attached hereto. Attached as Exhibit A hereto is a revised form Power of Attorney to be executed, notarized and delivered by each Grantor in connection herewith. 2. Effectiveness. This Amendment shall become effective as of ------------- September 14, 2001 (the "Amendment Effective Date") only upon satisfaction in full in the judgment of Agent of each of the following conditions on or prior to September 19, 2001: (a) Amendment. Agent shall have received ten (10) original --------- copies of this Amendment duly executed and delivered by Agent and each Grantor. (b) Representations and Warranties. The representations ------------------------------- and warranties of or on behalf of the Grantors in this Amendment shall be true and correct on and as of the Amendment Effective Date. 3. Effect on Security Agreement. All references in the Credit ----------------------------- Agreement and the other Loan Documents to the Security Agreement shall be deemed to refer to the Security Agreement as amended hereby. This Amendment does not evidence a termination of the granting of the Liens contained in the Security Agreement. The Liens granted pursuant to the Security Agreement as in effect prior to the date hereof shall remain in full force and effect and shall be continuing in all respects. 4. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF ------------- THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO ITS CONFLICTS OF LAW RULES). 5. Counterparts. This Amendment may be executed in any number of ------------ several counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be executed and delivered by its duly authorized officer as of the date first set forth above. AGWAY, INC. (SUCCESSOR BY MERGER TO AGWAY HOLDINGS INC., AGWAY FINANCIAL CORPORATION AND MILFORD FERTILIZER COMPANY LLC) FEED COMMODITIES INTERNATIONAL LLC BRUBAKER AGRONOMIC CONSULTING SERVICE LLC, COUNTRY BEST-DEBERRY LLC AGWAY ENERGY PRODUCTS LLC AGWAY ENERGY SERVICES-PA, INC. AGWAY ENERGY SERVICES, INC. By: /s/ KAREN J. OHLIGER ----------------------------------------------- Name: Karen J. Ohliger Title: Treasurer AGWAY GENERAL AGENCY, INC. COUNTRY BEST ADAMS, LLC By: /s/ KAREN J. OHLIGER ------------------------------------------------ Name: Karen J. Ohliger Title: Asst. Treasurer GENERAL ELECTRIC CAPITAL CORPORATION, AS AGENT By: /s/ PIETER SMIT ------------------------------------------------ Name: Peter Smit ---------------------------------------------- Title: Its Duly Authorized Signatory PLEDGE AMENDMENT This Pledge Amendment, dated September 14, 2001 is delivered pursuant to Section 6(d) of the Pledge Agreement referred to below. All defined termS herein shall have the meanings ascribed thereto or incorporated by reference in the Pledge Agreement. The undersigned hereby certifies that the representations and warranties in Section 5 of the Pledge Agreement are and continue to be true and correct, both as to the promissory notes, instruments, shares and limited liability company interests pledged prior to this Pledge Amendment and as to the promissory notes, instruments, shares and limited liability company interests pledged pursuant to this Pledge Amendment. The undersigned further agrees that this Pledge Amendment may be attached to that certain Pledge Agreement, dated March 28, 2001, between undersigned, as one of the Pledgors, and General Electric Capital Corporation, as Agent, (the "Pledge Agreement") and that the Pledged Shares, Pledged Interests and Pledged Indebtedness listed on this Pledge Amendment shall be and become a part of the Pledged Collateral referred to in said Pledge Agreement and shall secure all Secured Obligations referred to in said Pledge Agreement. The undersigned acknowledges that any promissory notes, instruments shares or limited liability company interests not included in the Pledged Collateral at the discretion of Agent may not otherwise be pledged by Pledgor or to any other Person or otherwise used as security for any obligations other than the Secured Obligations. AGWAY, INC (SUCCESSOR BY MERGER ------------------------------- TO AGWAY HOLDINGS INC.) ---------------------- BY:/S/ Karen J. Ohliger ---------------------------- NAME: Karen J. Ohliger -------------------------- TITLE: Treasurer -------------------------
PLEDGED INTERESTS ----------------- Name and Description of Description of Address of Pledgor Pledged Entity Pledged Interests Operating Agreements ------------------ -------------- ----------------- -------------------- Agway, Inc. Telmark LLC 100% Membership Limited Liability Company 333 Butternut Drive Interest (Membership Agreement of Telmark LLC, Dewitt, New York 13214 Certificate No. 2 for -- dated as of July 1, 1998 Units)
ACKNOWLEDGMENT AND CONSENT -------------------------- General Electric Capital Corporation, as Agent 800 Connecticut Avenue, Two North Norwalk, Connecticut 06854 Attn: Agway - Account Manager Telmark LLC ("Company") hereby (i) acknowledges receipt of a fully executed copy of the Pledge Agreement, dated as of March 28, 2001, as amended by the Pledge Amendment dated as of September 14, 2001 (the "Agreement"; capitalized terms used herein without definition have the meanings provided therein), made by Agway, Inc., Agway Financial Corporation, Agway Holdings Inc., Feed Commodities International LLC, Milford Fertilizer Company LLC, Brubaker Agronomic Consulting Service LLC, Agway General Agency, Inc., Country Best Adams, LLC, Country Best-DeBerry LLC, Agway Energy Products LLC, Agway Energy Services-PA, Inc., and Agway Energy Services, Inc. (collectively, the "Pledgors") in favor of General Electric Capital Corporation, as Agent ("Agent"); (ii) consents and agrees to the pledge by Pledgors of the Pledged Collateral pursuant to the Agreement and to all of the other terms and provisions of the Agreement; (iii) agrees to comply with all instructions received by it from Agent without further consent by Pledgors; (iv) irrevocably waives any breach or default under the Limited Liability Company Agreement as a result of the execution, delivery and performance by Pledgors and Agent of the Agreement; (v) advises Pledgors and Agent that a pledge of the Pledged Interests set forth on the Pledge Amendment dated as of September 14, 2001 to the Agreement has been registered on the books of Company and in the name of the Agent and agrees to so register any additional Pledged Interests; (vi) represents and warrants that, except for the pledge in favor of Agent, there are no liens, restrictions or adverse claims to which the Pledged Collateral is or may be subject as of the date hereof; (vii) except with the prior written consent of Agent, agrees not to admit any new Members to Company; and (viii) consents and agrees to any transfer of the Pledged Collateral pursuant to Section 8 of the Agreement. IN WITNESS WHEREOF, a duly authorized officer of the undersigned has executed and delivered this Acknowledgment and Consent as of this 14th day of September, 2001. TELMARK LLC By: JENNIFER L. HICKS ---------------------------------- Name: Jennifer L. Hicks Title: Secretary & Treasurer September 14, 2001 General Electric Capital Corporation 800 Connecticut Avenue, Two North Norwalk, Connecticut 06854 Attention: Agway Account Manager Re: Credit Agreement, dated as of March 28, 2001 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among General Electric Capital Corporation, as Agent and Lender (the "Agent"), Agway, Inc., Agway Holdings Inc., Agway Financial Corporation, Feed Commodities International LLC, Milford Fertilizer Company LLC, Brubaker Agronomic Consulting Service LLC, Agway General Agency, Inc., Country Best Adams, LLC, Country Best-DeBerry LLC, Agway Energy Products LLC, Agway Energy Services-PA, Inc., and Agway Energy Services, Inc., as borrowers (the "Borrowers"), and the lenders signatory thereto from time to time Ladies and Gentlemen: This letter, when accepted by you, will reflect our agreement with respect to (i) a representation and warranty and (ii) a certain negative covenant regarding the Telmark Entities. Capitalized terms used herein and not otherwise defined are used as defined in the Credit Agreement. Telmark LLC represents and warrants to Agent and each Lender that none of the stock of the Telmark Entities is subject to any Liens or encumbrances, and there are no facts, circumstances or conditions known to Telmark LLC that may result in any Liens or encumbrances against such Stock. Telmark LLC hereby covenants and agrees that it shall not create, incur, assume or permit to exist any lien on or with respect to the Stock of the Telmark Entities. This letter may be executed in any number of separate counterparts, each of which shall, collectively and separately, constitute one agreement. General Electric Capital Corporation September 14,2001 Page 2 Please indicate your consent to the terms and conditions of this letter by signing in the space provided below, whereupon this letter shall become an agreement among the parties to be governed by and construed in accordance with the laws of the State of New York. Very truly yours, TELMARK LLC By: JENNIFER L. HICKS -------------------------------- Name: Jennifer L. Hicks Title: Secretary & Treasurer Accepted and Agreed to: GENERAL ELECTRIC CAPITAL CORPORATION, as Agent By: PIETER SMIT --------------------------- Name: Pieter Smit Its: Duly Authorized Signatory [For 13 Directors] DIRECTOR DEFERRED PAYMENT AGREEMENT AGREEMENT made this day of , 2000, between AGWAY ----- ------------- INC., a Delaware corporation, with its principal office in De Witt, New York (hereinafter called "AGWAY"), and residing at ---------------------------------- -------------------------------------------------------------------------------- (hereinafter called "Director"). RECITALS: A. AGWAY has established a deferred payment program for Directors. B. Director desires to participate in the program upon the following terms and conditions. WITNESSETH: For good and valuable consideration, the parties, intending to be legally bound, hereby agree as follows: 1. Director hereby designates (check one) % of retainer (or $ of retainer) only --- --- ----------- % of per diem and all other payments other than --- --- expense reimbursements (or $ of per diem and all ---------- other payments other than expense reimbursements) only % of both retainer and per diem and all other --- ---- payments other than expense reimbursements (or $ of --------- both retainer and per diem) -1- for the period beginning January 1, 2001 and ending December 31, 2001 be credited to Director's Reserve Account. 2. AGWAY shall maintain in its accounting records a separate account (herein called "Director's Reserve Account") for each Director electing deferral of any amount under this agreement and shall credit to the Director's Reserve Account the item or items designated by Director in Section 1 above. The Director's Reserve Account shall also be credited at the close of each calendar quarter with an amount computed by applying the average cost-of-debt percentage as hereinafter defined to the total average accumulated credit of the Director's Reserve Account. "Average cost-of-debt" as used in this agreement shall mean the average cost to AGWAY of the debt employed by AGWAY during each calendar quarter in the conduct of AGWAY's business, and this average cost-of- debt shall be determined by the Treasurer of AGWAY. 3. AGWAY and Director hereby agree that payment from the Director's Reserve Account shall begin on the first January 1 or July 1 that follows the 15 month anniversary of the Director's attainment of age fifty-five (55) or the date on which Director's service as Director of AGWAY terminates, whichever is earlier. This agreement by the Director shall be irrevocable; provided, however, that at least twelve (12) months prior to January 1 or July 1 described above, the Director may request, by notice in writing to Agway, that the commencement of payments be deferred to a specified January 1 or July 1 date later than that on which commencement was previously scheduled. Whether to approve such a request shall be within the discretion of the Chief Financial Officer of AGWAY, or his/her designee. Approval of such a request shall be in writing. After approval, Director shall have no right to payment at any date earlier than that specified in the written approval. In any event, payments shall commence not later than the -2- January following the calendar year when Director reaches age seventy (70). AGWAY may impose a thirty (30) day waiting period before the first payment is made. 4. Payment will be either (a) a lump sum payment of the entire balance in the Director's Reserve Account; or (b) in an amount determined by multiplying the balance in the Director's Reserve Account at the beginning of each calendar year during which a payment is to be made by a fraction, the numerator of which is one (1) and the denominator of which will be the number of years remaining during which the Director's Reserve Account will be paid to Director. The payment election must be made at least twelve (12) months prior to the commencement of payment in writing to the chief financial officer of AGWAY, or his/her designee, to have the payments made: (A) over 3 years; (B) over 5 years; (C) over 10 years; (D) over 15 years; or (E) over 20 years. If a timely election is not made, the entire balance in Director's Reserve Account will be paid in a single lump sum. If the initial annual payment computed for the applicable payment period described above would be less than ten thousand dollars ($10,000), then, notwithstanding the prior provisions of this Section, AGWAY may make payment (at the sole discretion of AGWAY) either in one (1) lump sum or in annual installments over the longest period resulting in an initial annual payment of at least ten thousand dollars ($10,000). -3- 5. Upon furnishing AGWAY with proper evidence of financial hardship, Director may request a withdrawal of all or part of the balance in the Director's Reserve Account. Whether to approve such a request shall be within the discretion of the Chief Financial Officer of AGWAY, or his/her designee. Approval of such a request shall be in writing. 6. In the event of Director's death, either before or after the payments to Director have begun, the amount payable, as provided in Section 4 above, shall be paid to the beneficiary or beneficiaries designated by Director in the most recent notice in writing to AGWAY in installments computed in the same manner as if Director was still living. If no beneficiary has been designated, the amount payable, as provided in Section 4 above, shall be paid in installments computed in the same manner as if Director was still living to Director's estate or, at the sole discretion of AGWAY, the remaining balance in the Director's Reserve Account may be paid in a lump sum to Director's estate. In the event that after payments have commenced to the beneficiary or to the beneficiaries designated by Director the sole beneficiary dies or all beneficiaries die, then, any remaining balance in the Director's Reserve Account will be paid in a lump sum to the sole beneficiary's estate or to the beneficiaries' estates. In the absence of clear written instructions to the contrary, a designation of multiple beneficiaries will be deemed to provide for payment to the designated beneficiaries in equal shares, and for the payment to Director's estate of the share of any beneficiary who predeceases Director. In the event of Director's death before the payments to Director have begun, the payments will commence on the January 1 or July 1, next following the date of Director's death. 7. Director agrees that AGWAY's liability to make any payment as provided in this agreement shall be contingent upon Director's: -4- (a) being available to AGWAY for consultation and advice after termination of service as a director of AGWAY, unless Director is disabled or deceased; and (b) retaining unencumbered any interest or benefit under this agreement. If Director fails to fulfill any one or more of these contingencies, AGWAY's obligation under this agreement may be terminated by AGWAY as to Director. 8. Director also agrees that AGWAY's obligations to make deferred payments under this agreement are merely contractual; and that AGWAY is the outright beneficial owner of, and does not hold for Director as trustee or otherwise, the amounts credited to Director's Reserve Account; and that such amounts are subject to the rights of AGWAY's creditors in the same manner and to the same extent as all assets owned by AGWAY. 9. Neither Director nor Director's beneficiary/ies shall have the right to encumber, commute, borrow against, dispose of or assign the right to receive payments under this agreement. IN WITNESS WHEREOF, AGWAY and Director have duly executed this agreement the day and year first above written. AGWAY INC. By: /s/ ----------------------- Secretary By: /s/ ----------------------- (Director) -5- * * * * * * * * DESIGNATION OF BENEFICIARY/IES Pursuant to the provisions of this Deferred Payment Agreement, I hereby designate as my beneficiary/ies hereunder: -------------------------------------------------------------------------------- (Name of beneficiary/ies) This designation is also effective with respect to any and all amounts of deferred compensation accrued for my benefit under any and all Deferred Payment Agreements executed by me in previous years. /s/ ------------------------------ (Director) Date: , 2000 --------------- -6- [For 2 Board officers] DIRECTOR DEFERRED PAYMENT AGREEMENT AGREEMENT made this day of , 2000, between AGWAY --- ------------- INC., a Delaware corporation, with its principal office in De Witt, New York (hereinafter called "AGWAY"), and residing at --------------------- (hereinafter called ---------------------------------------------------------- "Director"). RECITALS: A. AGWAY has established a deferred payment program for Directors. B. Director desires to participate in the program upon the following terms and conditions. WITNESSETH: For good and valuable consideration, the parties, intending to be legally bound, hereby agree as follows: 1. Director hereby designates % (or $ ) of annual ---- --------- retainer for the period beginning January 1, 2001 and ending December 31, 2001 be credited to Director's Reserve Account. 2. AGWAY shall maintain in its accounting records a separate account (herein called "Director's Reserve Account") for each Director electing deferral of any amount under this agreement and shall credit to the Director's Reserve Account the amount designated by Director in Section 1 above. The Director's Reserve Account shall also be credited at the close of each calendar quarter with an amount computed by applying the average cost-of-debt percentage as -1- hereinafter defined to the total average accumulated credit of the Director's Reserve Account. "Average cost-of-debt" as used in this agreement shall mean the average cost to AGWAY of the debt employed by AGWAY during each calendar quarter in the conduct of AGWAY's business, and this average cost-of- debt shall be determined by the Treasurer of AGWAY. 3. AGWAY and Director hereby agree that payment from the Director's Reserve Account shall begin on the first January 1 or July 1 that follows the 15 month anniversary of the Director's attainment of age fifty-five (55) or the date on which Director's service as Director of AGWAY terminates, whichever is earlier. This agreement by the Director shall be irrevocable; provided, however, that at least twelve (12) months prior to January 1 or July 1 described above, the Director may request, by notice in writing to Agway, that the commencement of payments be deferred to a specified January 1 or July 1 date later than that on which commencement was previously scheduled. Whether to approve such a request shall be within the discretion of the Chief Financial Officer of AGWAY, or his/her designee. Approval of such a request shall be in writing. After approval, Director shall have no right to payment at any date earlier than that specified in the written approval. In any event, payments shall commence not later than the January following the calendar year when Director reaches age seventy (70). AGWAY may impose a thirty (30) day waiting period before the first payment is made. 4. Payment will be either (a) a lump sum payment of the entire balance in the Director's Reserve Account; or (b) in an amount determined by multiplying the balance in the Director's Reserve Account at the beginning of each calendar year during which a payment is to be made by a fraction, the numerator of which is one (1) and the denominator of which will be the number of years remaining -2- during which the Director's Reserve Account will be paid to Director. The payment election must be made at least twelve (12) months prior to the commencement of payment in writing to the chief financial officer of AGWAY, or his/her designee, to have the payments made: (A) over 3 years; (B) over 5 years; (C) over 10 years; (D) over 15 years; or (E) over 20 years. If a timely election is not made, the entire balance in Director's Reserve Account will be paid in a single lump sum. If the initial annual payment computed for the applicable payment period described above would be less than ten thousand dollars ($10,000), then, notwithstanding the prior provisions of this Section, AGWAY may make payment (at the sole discretion of AGWAY) either in one (1) lump sum or in annual installments over the longest period resulting in an initial annual payment of at least ten thousand dollars ($10,000). 5. Upon furnishing AGWAY with proper evidence of financial hardship, Director may request a withdrawal of all or part of the balance in the Director's Reserve Account. Whether to approve such a request shall be within the discretion of the Chief Financial Officer of AGWAY, or his/her designee. Approval of such a request shall be in writing. 6. In the event of Director's death, either before or after the payments to Director have begun, the amount payable, as provided in Section 4 above, shall be paid to the beneficiary or beneficiaries designated by Director in the most -3- recent notice in writing to AGWAY in installments computed in the same manner as if Director was still living. If no beneficiary has been designated, the amount payable, as provided in Section 4 above, shall be paid in installments computed in the same manner as if Director was still living to Director's estate or, at the sole discretion of AGWAY, the remaining balance in the Director's Reserve Account may be paid in a lump sum to Director's estate. In the event that after payments have commenced to the beneficiary or to the beneficiaries designated by Director the sole beneficiary dies or all beneficiaries die, then, any remaining balance in the Director's Reserve Account will be paid in a lump sum to the sole beneficiary's estate or to the beneficiaries' estates. In the absence of clear written instructions to the contrary, a designation of multiple beneficiaries will be deemed to provide for payment to the designated beneficiaries in equal shares, and for the payment to Director's estate of the share of any beneficiary who predeceases Director. In the event of Director's death before the payments to Director have begun, the payments will commence on the January 1 or July 1, next following the date of Director's death. 7. Director agrees that AGWAY's liability to make any payment as provided in this agreement shall be contingent upon Director's: (a) being available to AGWAY for consultation and advice after termination of service as a director of AGWAY, unless Director is disabled or deceased; and (b) retaining unencumbered any interest or benefit under this agreement. -4- If Director fails to fulfill any one or more of these contingencies, AGWAY's obligation under this agreement may be terminated by AGWAY as to Director. 8. Director also agrees that AGWAY's obligations to make deferred payments under this agreement are merely contractual; and that AGWAY is the outright beneficial owner of, and does not hold for Director as trustee or otherwise, the amounts credited to Director's Reserve Account; and that such amounts are subject to the rights of AGWAY's creditors in the same manner and to the same extent as all assets owned by AGWAY. 9. Neither Director nor Director's beneficiary/ies shall have the right to encumber, commute, borrow against, dispose of or assign the right to receive payments under this agreement. IN WITNESS WHEREOF, AGWAY and Director have duly executed this agreement the day and year first above written. AGWAY INC. By: /s/ ----------------------- Secretary /s/ ----------------------- (Director) -5- * * * * * * * * DESIGNATION OF BENEFICIARY/IES Pursuant to the provisions of this Deferred Payment Agreement, I hereby designate as my beneficiary/ies hereunder: -------------------------------------------------------------------------------- (Name of beneficiary/ies) This designation is also effective with respect to any and all amounts of deferred compensation accrued for my benefit under any and all Deferred Payment Agreements executed by me in previous years. /s/ ----------------------------------- (Director) Date: , 2000 ------------- -6- EX-12 4 exh12.txt EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS COMBINED
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES FOR THE YEARS ENDED JUNE (THOUSANDS OF DOLLARS) ---------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ---------- ----------- ---------- ----------- Earnings(Loss) before income taxes and member refunds................. $ (13,676) $ 13,016 $ 23,200 $ 30,184 $ 13,226 Fixed charges - Interest............... 82,759 71,580 62,369 61,395 58,016 - Rentals................ 5,103 5,272 4,768 4,131 3,434 ----------- ---------- ----------- ---------- ----------- Total fixed charges...................... 87,862 76,852 67,137 65,526 61,450 ----------- ---------- ----------- ---------- ----------- Adjusted net earnings.................... $ 74,186 $ 89,868 $ 90,337 $ 95,710 $ 74,676 =========== ========== =========== ========== =========== Ratio of adjusted net earnings to total fixed charges................... (a) 1.2 1.3 1.5 1.2 ----------- ========== =========== ========== =========== Deficiency of adjusted net earnings to total fixed charges.......... $ (13,677) N/D N/D N/D N/D =========== ========== =========== ========== =========== Fixed charges and preferred dividends combined: Preferred dividend factor: Preferred dividend requirements....... $ 2,847 $ 3,060 $ 3,287 $ 3,522 $ 4,115 Ratio of pre-tax earnings to after-tax earnings*................ 57.5% 47.3% 55.8% 53.0% 64.3% Preferred dividend factor on pre-tax basis...................... 4,951 6,469 5,891 6,645 6,400 Total fixed charges (above).............. 87,862 76,852 67,137 65,526 61,450 ----------- ---------- ----------- ---------- ----------- Fixed charges and preferred dividends combined....................... $ 92,813 $ 83,321 $ 73,028 $ 72,171 $ 67,850 =========== ========== =========== ========== =========== Ratio of adjusted net earnings to fixed charges and preferred dividends combined**..................... (b) 1.1 1.2 1.3 1.1 ----------- ========== =========== ========== =========== Deficiency of adjusted net earnings to fixed charges and preferred dividends combined....................... $ (18,628) N/D N/D N/D N/D =========== ========== =========== ========== ===========
* Represents after-tax earnings (loss) from continuing operations divided by pre-tax earnings (loss) from continuing operations, which adjusts dividends on preferred stock to a pre-tax basis. ** Represents adjusted net earnings divided by fixed charges and preferred dividends combined. N/D No deficiency. (a) Adjusted net earnings are inadequate to cover total fixed charges. (b) Adjusted net earnings are inadequate to cover total fixed charges and preferred dividends combined. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS COMBINED
AGWAY INC. (PARENT) FOR THE YEARS ENDED JUNE (THOUSANDS OF DOLLARS) ---------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ---------- ----------- ---------- ----------- Earnings(Loss) before income taxes and member refunds $ (10,895) $ 2,627 $ 14,081 $ 20,265 $ (2,731) Fixed charges - Interest................. 23,621 18,085 13,660 8,575 10,626 - Rentals.................. 2,479 3,193 3,017 2,604 2,135 ----------- ---------- ----------- ---------- ----------- Total fixed charges...................... 26,100 21,278 16,677 11,179 12,761 ----------- ---------- ----------- ---------- ----------- Adjusted net earnings.................... $ 15,205 $ 23,905 $ 30,758 $ 31,444 $ 10,030 =========== ========== =========== ========== =========== Ratio of adjusted net earnings to total fixed charges................... (a) 1.1 1.8 2.8 (a) ----------- ========== =========== ========== =========== Deficiency of adjusted net earnings to total fixed charges.......... $ (10,895) N/D N/D N/D $ (2,731) =========== ========== =========== ========== =========== Fixed charges and preferred dividends combined: Preferred dividend factor: Preferred dividend requirements....... $ 2,847 $ 3,060 $ 3,287 $ 3,522 $ 4,115 Ratio of pre-tax earnings to after-tax earnings*................ 43.7% 15.1% 279.4% 124.6% (193.2%) Preferred dividend factor on pre-tax basis...................... 6,515 20,265 1,176 2,827 (2,131) Total fixed charges (above).............. 26,100 21,278 16,677 11,179 12,761 ----------- ---------- ----------- ---------- ----------- Fixed charges and preferred dividends combined....................... $ 32,615 $ 41,543 $ 17,853 $ 14,006 $ 10,630 =========== ========== =========== ========== =========== Ratio of adjusted net earnings to fixed charges and preferred dividends combined**..................... (b) (b) 1.7 2.2 (b) ----------- ---------- =========== ========== =========== Deficiency of adjusted net earnings to fixed charges and preferred dividends combined....................... $ (17,410) $ (17,638) N/D N/D $ (600) ----------- ========== =========== ========== ===========
* Represents after-tax earnings (loss) from continuing operations divided by pre-tax earnings (loss) from continuing operations, which adjusts dividends on preferred stock to a pre-tax basis. ** Represents adjusted net earnings divided by fixed charges and preferred dividends combined. N/D No deficiency. (a) Adjusted net earnings are inadequate to cover total fixed charges. (b) Adjusted net earnings are inadequate to cover total fixed charges and preferred dividends combined. EX-21 5 exh21.txt EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT AS OF JUNE 2001 SUBSIDIARY STATE OF INCORPORATION/ORGANIZATION ---------- ----------------------------------- Agway Energy Products LLC...............................................Delaware Agway Energy Services, Inc..............................................Delaware Agway Energy Services - PA, Inc.........................................Delaware Agway Financial Corporation.............................................Delaware Agway General Agency, Inc...............................................New York Agway Holdings Inc......................................................Delaware Agway Insurance Company.................................................New York Agway Realties, Inc.....................................................Delaware Brubaker Agronomic Consulting Service LLC...............................Delaware Country Best Adams LLC..................................................Delaware Country Best-DeBerry LLC................................................Delaware Feed Commodities International LLC (3)..................................Delaware Milford Fertilizer Company LLC (2)......................................Delaware Telmark LLC.............................................................Delaware Telease Financial Services, Ltd...........................................Canada Telmark Lease Funding I LLC.............................................Delaware Telmark Lease Funding II LLC............................................Delaware Telmark Lease Funding III LLC...........................................Delaware Texas City Refining, Inc. (1)...........................................Delaware Notes: (1) Agway Energy Products LLC owns 67% of Texas City Refining, Inc. In September 1993, Texas City Refining, Inc., filed a certificate of dissolution in the office of the Delaware Secretary of State; in September 1996, Texas City Refining, Inc. was dissolved. (2) Effective July 1999, Milford Fertilizer Company was merged into Milford Fertilizer Company LLC, a Delaware limited liability company; Milford Fertilizer Company LLC is the surviving entity. (3) Effective July 1999, Feed Commodities International, Inc. and Commodity Transport, Inc. were merged into Feed Commodities International LLC, a Delaware limited liability company; Feed Commodities International LLC is the surviving entity. EX-23 6 exh23.txt EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements of Agway Inc. on Form S-3 (No. 333-59808) and (No. 333-62509) and on Form S-8 (No333-93531) of our report dated August 17, 2001, except for Note 9, as to which the date is September 14, 2001, relating to the financial statements and financial statement schedules, which appears in this Form 10-K. PricewaterhouseCoopers LLP Syracuse, New York September 18, 2001