EX-99 3 revisedenergyfinancials.txt REVISED ENERGY FINANCIAL STATEMENTS EXHIBIT 99 AGWAY ENERGY GROUP (AGWAY ENERGY PRODUCTS, LLC, AGWAY ENERGY SERVICES, INC. AND AGWAY ENERGY SERVICES - PA, INC.) REPORT ON AUDITED COMBINED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED JUNE 30, 2003, 2002 AND 2001 PRICEWATERHOUSECOOPERS [Logo] PRICEWATERHOUSECOOPERS LLP One Lincoln Center Syracuse NY 13202 Telephone 315-474-8541 Facsimile 315-473-1385 REPORT OF INDEPENDENT AUDITORS To the Shareholder of Agway Energy Products, LLC, Agway Energy Services, Inc. and Agway Energy Services - PA, Inc. and the Board of Directors of Agway Inc.: In our opinion, the accompanying combined statements of financial position and the related combined statements of operations, comprehensive income, combined equity and cash flows present fairly, in all material respects, the combined financial position of Agway Energy Products, LLC, Agway Energy Services, Inc. and Agway Energy Services - PA, Inc., collectively referred to as Agway Energy Group, at June 30, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America. These combined financial statements are the responsibility of Agway Energy Group's management; our responsibility is to express an opinion on these combined financial statements 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 combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined 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. The accompanying combined financial statements have been prepared assuming Agway Energy Group will continue as a going concern. As described in Note 3 to the combined financial statements, Agway Energy Group's parent, Agway Inc., and certain of its wholly owned subsidiaries filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code on October 1, 2002. This bankruptcy filing did not include the Agway Energy Group. From time to time the Agway Energy Group requires short-term borrowings to meet seasonal working capital requirements. Such borrowings are provided by Agway Inc.'s accumulated cash balances or through a credit facility provided by lenders to Agway Inc. and certain of its subsidiaries, including the Agway Energy Group. Further, substantially all of Agway Energy Group's assets are pledged as collateral under this facility. These matters raise a substantial doubt about Agway Energy Group's ability to continue as a going concern. Management plans in regard to this uncertainty are described in Notes 1 and 3. The combined financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ PricewaterhouseCoopers LLP November 11, 2003, except for Note 4, as to which the date is December 2, 2003 1 AGWAY ENERGY GROUP COMBINED STATEMENTS OF FINANCIAL POSITION JUNE 30, 2003 AND 2002 (Thousands of Dollars) ------------------------------- ASSETS

The accompanying notes are an integral part of the financial statements. 2 AGWAY ENERGY GROUP COMBINED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 2003, 2002, AND 2001 (Thousands of Dollars) -------------------------------

The accompanying notes are an integral part of the financial statements. 3 AGWAY ENERGY GROUP COMBINED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED JUNE 30, 2003, 2002, AND 2001 (Thousands of Dollars) -------------------------------

The accompanying notes are an integral part of the financial statements. 4 AGWAY ENERGY GROUP COMBINED STATEMENTS OF CHANGES IN COMBINED EQUITY FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001 (Thousands of Dollars) -----------------------------------

The accompanying notes are an integral part of the financial statements. 5 AGWAY ENERGY GROUP COMBINED STATEMENTS OF CASH FLOW YEARS ENDED JUNE 30, 2003, 2002 AND 2001 (Thousands of Dollars) ----------------------------------

The accompanying notes are an integral part of the financial statements. 6 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ----------------------------- 1. DESCRIPTION OF THE BUSINESS ORGANIZATION AND BASIS OF COMBINATION Agway Energy Products, LLC ("AEP") is a Delaware limited liability company. Agway Energy Services, Inc. ("AES") and Agway Energy Services-PA, Inc. ("AES-PA") are incorporated in Delaware. All companies are wholly owned by Agway Inc. ("Agway"), and are collectively referred to as the Agway Energy Group (the "Group"). The Group operations constitute Agway's energy-related businesses and are operated under common management. AEP 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 and 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. AES and AES-PA market natural gas and electricity to residential and commercial customers in New York and Pennsylvania where deregulation makes that possible. Weather and commodity prices impact the Group's sales, cost of sales and working capital requirements. During 2003, the Group owned and operated, within its geographic territory, 138 facilities, including sales, distribution and service stations. The Group believes that these facilities are sufficient to meet the current operating requirements of the business. In June 2000, the Group sold 6 of its 7 terminals to Buckeye Partners, L.P. ("Buckeye"). In May 2001, the Group sold its final terminal to Buckeye and no longer operates terminals. An agreement with Buckeye allows the Group to utilize these terminal facilities for storage as part of its distribution network through 2025. The sale of the terminals has been a part of the Group's strategy to focus on growing its retail energy business. The combined financial statements include the accounts of AEP, AES, and AES-PA. No significant intercompany transactions exist between entities. Unless otherwise noted, the amounts included herein refer to the Group. SUBSEQUENT EVENT As discussed in Note 3, on October 1, 2002, Agway and certain of its subsidiaries (not including the Group) filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Chapter 11 Proceedings"). In connection with the Chapter 11 Proceedings, Agway announced on April 21, 2003 that it would immediately begin exploring the potential sales of each of its remaining businesses while exploring other strategic opportunities that could result in greater value for Agway Inc.'s creditors. On November 10, 2003, the Agway Energy Group entered into a Purchase and Sale Agreement to sell substantially all of the assets and certain liabilities of the Group. The sale is subject to auction and final approval in the U.S. Bankruptcy Court for the Northern District of New York in Utica, New York ("Bankruptcy Court"). 7 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ------------------------------ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CUMULATIVE EFFECT OF ACCOUNTING CHANGE On July 1, 2000, upon adoption of Statement of Financial Accounting Standards (SFAS) No. 133, the Group recorded a net-of-tax cumulative-effect loss of $1,057 to recognize at fair value the time value component of all option contracts which are excluded from the assessment of hedge effectiveness as allowed by the standard. The Group also recorded a net-of-tax cumulative-effect gain of $3,061 in other comprehensive income to recognize at fair value all derivative instruments that are designated and qualify as cash-flow hedges. See Commodity Instruments section of this Note for further details of the Group's accounting for derivatives and hedging activities. CASH AND CASH EQUIVALENTS The Group considers all investments with a maturity of three months or less when purchased to be cash equivalents. TRADE RECEIVABLES The Group uses the allowance method to account for doubtful accounts. Under the allowance method, the Group reduces its receivables to amounts it deems collectible. Trade receivables with credit balances represent customer prepayments. Interest is credited to customers' prepayment balances. The weighted average interest rate used to credit customer prepayment balances approximated 3.25%, 5.0% and 5.0% for the fiscal years ended June 30, 2003, 2002 and 2001, respectively. Certain receivables of AES and AES-PA are pledged as collateral to certain utilities under agreements whereby the utilities billed customers on behalf of the Group. The remainder of the receivables are pledged as collateral under the DIP Facility, as discussed in Note 4. LEASE RECEIVABLES Subsequent to the sale of substantially all of the assets of Telmark LLC ("Telmark"), a sister company, the Group purchased lease receivables with a net present value of $939 from Telmark on June 30, 2003. These receivables relate to the lease of equipment to various independent companies who deliver fuel for the Group. Interest and finance charge income is recognized as interest income, by using the interest method over the term of the lease. INVENTORIES Inventories are stated at the lower of cost or market. For those inventories stated at cost, the average unit cost method is used. 8 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ------------------------------ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMMODITY INSTRUMENTS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair-value hedge transactions in which the Group is hedging changes in fair value of an asset, liability, or firm commitment, changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. For cash-flow hedge transactions in which the Group is hedging the variability of cash flows related to a variable-priced asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current-period earnings. The Group 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. The Group has fair value hedges associated with its fixed price sales 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. Under SFAS No. 133, the value of option contracts that the Group enters into has two components of value: time value and intrinsic value. The intrinsic value is the value by which the option is in the money (i.e., the amount by which the value of the commodity exceeds the exercise or "strike" price of the option). The remaining amount of option value is attributable to time value. The Group 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, 2003, the Group had a derivative asset of $2,400 recorded in prepaid and other current assets. In addition, an after-tax total of $779 of deferred net unrealized gains on derivatives instruments was accumulated in other comprehensive income and is expected to be reclassified into earnings during the next 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 years ended June 30, 2003, 2002 and 2001, losses of $2,500, $1,800 and $3,400, respectively, are included in cost of goods sold for the change in option time value not used in the assessment of hedge effectiveness. In conjunction with its hedging programs, the Group has established brokerage accounts with a registered brokerage firm. Under the terms of the brokerage agreement, the broker has the right to make a margin call on the Group to cover any deficit balances. In addition, the broker has a continuing lien on any accounts held with the brokerage firm. At June 30, 2003, the fair value of the positions held in the brokerage accounts covered the Group's margin requirements. 9 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ------------------------------ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTIES AND EQUIPMENT Properties and equipment are recorded at cost and are depreciated over the estimated useful lives of the respective assets principally by the straight-line method. Ordinary maintenance and repairs are charged to operations as incurred. All of the Group's property and equipment is pledged as collateral under Agway's Debtor in Possession Credit Facility ("DIP Facility") as described in Note 4. Gains and losses on disposition or retirement of assets are reflected in income as incurred. The useful lives for the respective assets are as follows: Number of Years --------------- Propane loaned equipment 30 Buildings 13-20 Machinery and equipment 2-20 Automotive equipment 6-12 Leasehold improvements 5 Office equipment 3-5 PREPAIDS AND OTHER CURRENT ASSETS Prepaids and other current assets include prepaid product taxes, deposits with suppliers and derivative assets. INTANGIBLE ASSETS As of June 30, 2003 and 2002, the Group held acquired intangible assets consisting of customer lists and non-competes with a carrying amount of $388 and $471, respectively. Intangible assets like these with finite lives are amortized over their estimated useful lives and had amortization expense during the years ended June 30, 2003, 2002 and 2001 of $83, $83 and $14, respectively. RECEIVABLE WITH AGWAY INC. The Group utilizes the bank accounts of its parent, Agway. Accordingly, the Group draws checks against Agway's accounts and also makes deposits to these accounts. The Group's net cash activity accumulates in the net intercompany account with Agway. Certain shared expenses incurred by Agway on behalf of the Group are charged to the Group through the net intercompany account for such things as information services, payroll, facilities, risk management and interest. The expenses are allocated to the Group and Agway's other business units based upon each business unit's usage, as determined by relevant metrics, which management believes to be a reasonable basis for such allocations. In addition, as discussed in Note 10, the Group pays Agway through the intercompany account to assume the Group's obligations to pay deductible amounts on insured claims against the Group. These obligations are fully collateralized by letters of credit and surety bonds. As discussed in Note 3, on October 1, 2002, Agway and certain subsidiaries (not including the Group) filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As of October 1, 2002, the Group had a pre-petition receivable from Agway of $102, excluding the receivable related to insured claims receivable from Agway. On October 1, 2002, the Bankruptcy Court approved a motion to allow Agway and the Group to continue its centralized cash management practices and to adjust in the ordinary course their intercompany accounts on a daily basis. 10 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ------------------------------ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IMPAIRMENT OF LONG-LIVED ASSETS SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," while retaining many of the requirements of SFAS No. 121. In accordance with SFAS No. 144, long-lived assets 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. The Group recognized no impact in its financial statements regarding the adoption of this statement. ENVIRONMENTAL REMEDIATION COSTS The Group 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 recognized upon notification of coverage by the other party. COMPREHENSIVE INCOME Comprehensive income consists of net earnings (loss) and deferred gains and losses on cash flow hedges, net of tax. REVENUE RECOGNITION Revenues from product sales are recorded when the goods are delivered, title and risk of loss passes to the customer and collection is reasonably assured. Revenues from installation, cleaning and repair services are recognized upon completion of the service performed. Revenues from service contracts are recognized over the life of the contract. ADVERTISING COSTS The Group expenses advertising costs as they are incurred. Advertising expense for the years ended June 30, 2003, 2002 and 2001, was approximately $6,100, $8,000 and $7,600, respectively. INCOME TAXES AEP, AES, and AES-PA are included in a consolidated federal tax return filed by Agway. For state income tax filing purposes, through June 30, 2001, AEP is included as a business division of Agway Holdings Inc. Effective July 1, 2001, Agway simplified its corporate structure by merging Agway Financial Corporation (AFC) and Agway Holdings, Inc. (AHI) into Agway. Beginning July 1, 2001 AEP is included as a business division of Agway for state income tax filing purposes. AES and AES-PA file separate state income tax returns. Under tax sharing arrangements with Agway, the provision for federal and state income taxes and related credits and carryforwards are calculated on a separate company basis and billed to the applicable entity on a periodic basis. 11 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ------------------------------ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES (CONTINUED) The Group provides for income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes," on a combined separate company basis. 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 which 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, on a separate company basis, to reduce deferred taxes to amounts for which realization is reasonably assumed. INSURED CLAIMS DEDUCTIBLE RESERVE Through its parent company, Agway, the Group participates in large deductible insurance programs for workers' compensation, general and auto liability. The insurance policies are purchased and administered by Agway. The Group's liabilities for these programs are actuarially calculated on a separate company basis based on claims filed and an estimate of claims incurred but not yet reported. Projection of losses concerning these liabilities is subject to a high degree of variability due to factors such as claim settlement patterns, litigation trends and legal interpretations. Insurance expenses included in the statements of operations are recognized at amounts sufficient to accrue the actuarially calculated insurance liabilities after giving consideration to claim payments made. Other costs such as insurance premiums and the costs of Agway's risk management department are allocated to the Group based upon the proportion of the Group's historical claims to the total claims of Agway. The Group pays Agway through the intercompany account to assume the Group's obligations to pay deductible amounts on insured claims against the Group. In the event that Agway is unable to satisfy the Group's obligations, such claims could be asserted, directly or indirectly, against the Group. Consequently, the actuarial estimate of the insured claims is shown as a reserve on the Group's balance sheet and Agway's obligation to satisfy those obligations is included as a receivable in the intercompany receivable from Agway. 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 disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 12 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ------------------------------ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) has recently issued the following: SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal ---------------------------------------------------------------------- Activities," was issued June 2002 and is effective for exit or ---------- disposal activities initiated after December 31, 2002. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity Including Certain Costs Incurred in a Restructuring." The Group implemented this statement for all exit or disposal activities initiated after December 31, 2002. The adoption of this standard had no impact on the financial statements of the Group. Interpretation No. 45, "Guarantor's Accounting and Disclosure ---------------------------------------------------------------------- Requirements for Guarantees, Including Indirect Guarantees of ---------------------------------------------------------------------- Indebtedness of Others," (FIN 45) was issued in November 2002. FIN 45 ------------------------ elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee. However, the provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor's obligations does not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. See Note 10 for discussion of the Group's liability recognition and disclosure relating to guarantees. Interpretation No. 46, "Consolidation of Variable Interest Entities," --------------------------------------------------------------------- (FIN 46) was issued in January 2003. The interpretation provides guidance on consolidating variable interest entities. The interpretation requires variable interest entities to be consolidated if the equity investment at risk is not sufficient to permit an entity to finance its activities without support from other parties or the equity investors lack certain specified characteristics. In October 2003, the FASB deferred the effective date of FIN 46 for all variable interest entities existing prior to February 1, 2003 to the first reporting period ending after December 15, 2003. The adoption of this standard had no impact on the financial statements of the Group. SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments ---------------------------------------------------------------------- and Hedging Activities," was issued in April 2003. SFAS No. 149 amends ---------------------- and clarifies financial accounting and reporting for derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard does not impact the Group's accounting and reporting of derivative instruments and hedging activities. 13 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ------------------------------ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED) SFAS No. 150,"Accounting for Certain Financial Instruments with ---------------------------------------------------------------------- Characteristics of Both Liabilities and Equity," was issued in May ----------------------------------------------- 2003 and is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is generally effective for the Group at the beginning of the first quarter of fiscal 2004, except for certain provisions related to mandatorily redeemable financial instruments for which the standard has been deferred. The adoption of this standard does not have an impact on the financial statements of the Group. 3. BANKRUPTCY OF PARENT The parent company of the Group, Agway, and certain of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code on October 1, 2002. AEP, AES, and AES-PA were NOT included in the Chapter 11 filings. The Group requires short-term borrowings to meet seasonal and working capital requirements. Such short-term financing is made available to the Group by the parent company from cash accumulated since October 1, 2002 or from Agway's $65,000 DIP Facility described below. The Group continues to operate as it had prior to Agway's Chapter 11 Proceedings. However, we cannot predict the impact, if any, from the planned sale of the Group or of Agway's Chapter 11 Proceedings on the Group's financial condition and results of operations. 4. FUNDING FROM THE PARENT COMPANY Notes Payable Agway and certain subsidiaries, including the Group, are direct obligors to the DIP Facility. At June 30, 2003, Agway and certain subsidiaries had available under its DIP Facility (described below) a $100,000 short-term line of credit, up to $85,000 of which could be used for letters of credit. Due to the sale of certain Agway assets, as defined in the DIP agreement, the upper limit of the line of credit was decreased from $125,000 to $100,000 during the quarter ended March 31, 2003. In October 2003, subsequent to Agway's fiscal year-end, the agreement was further amended (fourth amendment) reducing the commitment to $65,000 as more fully described below. At June 30, 2003, there were no outstanding borrowings on the line of credit. The letters of credit issued at June 30, 2003 totaled approximately $33,700 ($26,900 to support the Agway insurance programs, $4,500 to support business activities of the Group and the remainder supporting activities of other subsidiaries). June 30, 2003 June 30, 2002 ------------- ------------- Borrowings on line of credit $ 0 $ 34,180 ============= ============= Weighted average interest rate 5.89% ============= ============= 14 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ------------------------------ 4. FUNDING FROM THE PARENT COMPANY (CONTINUED) Agway Senior Debt As more fully described below, as a result of the Agway Chapter 11 Proceedings, the Agway Senior Debt Agreement ("Senior Debt") has been replaced by the DIP Facility. During the first quarter ended September 30, 2002, Agway and certain subsidiaries, including the Group, had available under its Senior Debt an asset-based revolving line of credit for up to $150,000 pursuant to the terms of a credit agreement dated March 28, 2001 between Agway, certain subsidiaries, including the Group, and a syndicated group of lenders (the "Credit Agreement"). During the first quarter ended September 30, 2002, Agway sold certain of its assets for gross proceeds of approximately $42,100, which had the impact of reducing the commitment level from $150,000 to $125,000. A variety of Agway's assets, including substantially all of the assets of the Group, collateralized the Senior Debt and currently collateralize the DIP Facility. Interest rates were determined as either prime rate plus 2.5% or the London Interbank Offered Rate (LIBOR) plus 4%. The Credit Agreement had a number of financial covenants which had restricted capital spending and required Agway to maintain minimum levels of earnings before interest, taxes, depreciation, and amortization (EBITDA), as defined in the Credit Agreement, and minimum ratios of EBITDA to fixed charges and interest of Senior Debt. Prior to June 30, 2002, this Credit Agreement had been amended three times in response to violations of financial covenants. In connection with those amendments, those violations were waived and certain covenants were modified. As of September 30, 2002, Agway was in default under the Credit Agreement, and it was necessary to obtain a waiver regarding those covenant violations. Those covenant violations were permanently waived on November 14, 2002, and as a result, Agway and subsidiaries, including the Group, no longer have any obligations under the Credit Agreement. DIP Facility On October 22, 2002, the Bankruptcy Court granted Agway and certain subsidiaries, including the Group, final approval to enter into an 18-month term DIP Facility of $125,000 with its existing lenders to fund working capital requirements. As in the former Credit Agreement, interest rates are determined, at the option of Agway, as either prime rate plus 2.5% or the LIBOR plus 4%. On December 3, 2002, Agway announced the completion of the sale of certain of its other assets for gross proceeds of approximately $57,000, which reduced to zero the outstanding revolving credit balance with its secured lender and provided $15,000 of cash collateral to support Agway's outstanding letters of credit as required per the terms of the DIP Facility. The amount available to Agway and certain of its subsidiaries, including the Group, under this DIP Facility is the lesser of the "collateral borrowing base" or, as of June 30, 2003, the $85,000 upper limit of the line of credit. The collateral borrowing base consists of certain of Agway's eligible (as defined in the DIP Facility) accounts receivable and inventory as well as the pledge of Agway's limited liability membership interest in Telmark, its wholly owned former leasing subsidiary, and cash collateral of $15,000 at June 30, 2003 and of $38,700, or 108% of the maximum amount available to be drawn on outstanding letters of credit, as a result of the fourth amendment of the DIP Facility effective October 16, 2003. As of June 30, 2003, Agway and subsidiaries had $66,300 available under the DIP Facility. 15 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ------------------------------ 4. FUNDING FROM THE PARENT COMPANY (CONTINUED) DIP Facility (continued) The DIP Facility has a number of financial covenants which restrict Agway's capital spending and require Agway and its business units, including the Group, to maintain minimum levels of earnings before interest, taxes, depreciation, amortization, and restructuring charges (EBITDA), as defined in the agreement, as well as a maximum level of cash restructuring charges for Agway. As of March 31, 2003 and April 30, 2003, Agway was in violation of a financial covenant that requires Agway to meet a minimum level of EBITDA for the rolling 12-month periods ended March 31, 2003 and April 30, 2003. Agway recognized substantial continuing operations losses as a result of the required adoption of a change in accounting for goodwill, the recording of charges for the impairment of long-lived assets and the curtailment of its pension plan in connection with the potential sale of its business units. On May 19, 2003, the senior lenders waived the March 31, 2003 and April 30, 2003 covenant violations and amended the DIP Facility to exclude the above losses from future financial covenant calculations of EBITDA. In connection with its April 2003 decision to explore the sale of all its remaining businesses, Agway has recorded additional costs in the fourth quarter ended June 30, 2003, including additional write-offs of long-lived assets, goodwill and other intangible assets, and additional pension plan costs. Due to these additional costs, Agway was again in violation of the financial covenant that requires Agway to meet a minimum level of EBITDA for the rolling 12-month periods ended June 2003 as well as for July, August, and September 2003. In addition, due to complications associated with the potential sale of businesses and the Chapter 11 Proceedings, Agway did not provide the senior lenders with an operating plan for fiscal 2004, which was required under the agreement by July 31, 2003, or with an audited financial statement for fiscal 2003, which was required under the agreement by September 30, 2003. On October 16, 2003, as a result of the fourth amendment to the DIP Facility, the senior lenders waived the covenant violations for the periods ended June, July, August, and September 2003 and amended the DIP Facility to eliminate the EBITDA financial covenant for future periods. The senior lenders also waived and eliminated the requirement for the operating plan and extended the reporting deadline for the audited financial statement to October 30, 2003. In addition to the waivers, the fourth amendment reduced the senior lenders' commitment to $65,000 and raised the cash collateral requirement for letters of credit obligations to 108% of the maximum amount available to be drawn on outstanding letters of credit. As a result of continued complications in completing the audited financial statements for fiscal 2003, Agway received a limited waiver as of October 31, 2003 from the senior lenders further extending this reporting deadline to November 30, 2003. As of December 2, 2003, Agway is currently negotiating with senior lenders to further extend this reporting deadline. 5. INVENTORIES Inventories consist of the following at June 30: 2003 2002 ----------- ----------- Liquid products $ 7,670 $ 9,702 Equipment, parts and accessories 4,480 5,008 ----------- ----------- $ 12,150 $ 14,710 =========== =========== 16 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ------------------------------ 6. PROPERTIES AND EQUIPMENT Properties and equipment, at cost, consist of the following at June 30:

Depreciation and amortization expense relating to properties and equipment amounted to $6,782, $7,065 and $7,456 in 2003, 2002 and 2001, respectively. 7. OTHER LIABILITIES Other current liabilities include the following at June 30:

8. LONG-TERM DEBT Long-term debt at June 30 consists of obligations related to non-compete agreements as follows:

17 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ------------------------------ 9. INCOME TAXES The Group provision (benefit) for income taxes consists of the following:

In addition to the provision (benefit) reported above, for the year ended June 30, 2001, the Group recorded a current federal and state income tax benefit of $723 in the cumulative effect of accounting change for the adoption of SFAS No. 133. See Note 2 for further details. The components of the deferred tax assets and liabilities as of June 30 were as follows:

AEP's net deferred tax liability at June 30, 2003 and 2002 of $10,590 and $11,809, respectively, consists of a net current asset of $2,259 and $1,952 and a net long-term liability of $12,849 and $13,761, respectively. 18 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ------------------------------ 9. INCOME TAXES (CONTINUED) The effective income tax rate on earnings from operations before income taxes differs from the federal statutory regular tax rate as follows:

(1) During 2003, certain tax reserves established in previous years were released as tax benefits. As a result of Agway's Chapter 11 Proceedings, these reserves were determined to be no longer required. During 2001, certain open audit years with the IRS were determined not to have significant tax issues, and therefore, tax reserves established in prior years to cover identified exposure were released as tax benefits. (2) Nondeductible items are principally related to meal and entertainment expenses. 10. COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL The Group is subject to various laws and governmental regulations concerning environmental matters and expects that it will be required to expend funds to participate in the remediation of certain sites, including sites where it has been designated by the Environmental Protection Agency (EPA) as a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and at sites with above and underground fuel storage tanks. The Group will incur other expenses associated with environmental compliance. The Group continually monitors its operations with respect to potential environmental issues, including changes in legal requirements and remediation technologies. In addition, during the first quarter of fiscal 2004 and in conjunction with the potential sale process, the Group performed an environmental review of all of its properties. The review consisted of performing Phase I Environmental Site Assessments (ESA's), and at certain sites, groundwater and/or soil samples were analyzed for contamination. The Group's recorded liability at June 30, 2003 reflects those specific issues uncovered as a result of this review where remediation activities are likely and where the Group can estimate the cost of remediation. The Group's environmental remediation expense for the years ended June 30, 2003, 2002 and 2001 were $6,447, $832 and $1,187, respectively. The Group expects to expend the accrued remediation costs over the next 5 years. 19 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ------------------------------ 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) ENVIRONMENTAL (CONTINUED) Estimating the extent of the Group's responsibility of a particular site and the method and ultimate cost of remediation of that site require a number of assumptions. As a result, the ultimate outcome of remediation of that site may differ from current estimates. However, the Group believes that its past experience provides a reasonable basis for estimating its liability. As additional information becomes available, estimates are adjusted as necessary. While the Group does not anticipate that any such adjustment would be material to its financial statements, the result of ongoing and/or future environmental studies or other factors could alter this expectation and require the recording of additional liabilities. The Group currently cannot determine whether it will incur additional liabilities in the future or the extent or amount of such additional liabilities. OTHER The Group is also subject to various investigations, claims, and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably to the Group. The Group 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 results of operations, financial position or liquidity of the Group. AEP, with Agway, has made financial cross-guarantees of a mortgage entered into by another Agway subsidiary, which generally obligates AEP in the event of default by the other subsidiary of Agway. The amount outstanding on the mortgage as of June 30, 2003 was approximately $1,600. As of June 30, 2003, the Agway subsidiary was in violation of the minimum earnings covenant of the mortgage loan agreement. On October 22, 2003, Agway received a waiver of the event of default. INDEMNIFICATION In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," or FIN 45. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee. However, the provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor's obligations does not apply to product warranties or to guarantees accounted for as derivatives. 20 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ------------------------------ 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) INDEMNIFICATION (CONTINUED) The following is a summary of our agreements that we have determined are within the scope of FIN 45: When we sell certain assets, we enter into agreements whereby we indemnify the buyers with respect to provisions of the agreement and representations made in the agreement. Depending upon the nature of the provision or the representations made, the term of the indemnification can be for a period of time fixed in the agreement, fixed by relevant statute of law, or may be for an indefinite term. The maximum potential amount of future payments differs by agreement and by provision or representation within the agreement and, in some cases, is not limited. In addition, the Group has residual value guarantees associated with certain of its operating leases, related primarily to transportation equipment, with remaining lease periods scheduled to expire periodically through 2009. Upon completion of the lease period, the Group guarantees that the fair value of the equipment will equal or exceed the guaranteed amount, or the Group will pay the lessor the difference. The maximum potential amount of aggregate future payments the Group could be required to make under these leasing arrangements, assuming the equipment is deemed worthless at the end of the lease term, is approximately $3,600. No new guarantees have been issued since December 31, 2002 that would warrant the recording of a liability under FIN 45. INSURANCE COVERAGE Agway contracts with insurance companies for property and casualty coverage for itself and its divisions and subsidiaries, including the Group. The main casualty programs are workers' compensation, general liability and auto liability and an umbrella excess program that sits above the primary liability policies. As described in Note 2, the primary casualty programs are large deductible policies and losses incurred, within the deductible, are paid by Agway. A contingent liability exists for the Group to the extent that Agway is unable to satisfy the deductible for claims against the Group. As of June 30, 2003, the actuarial estimate of the deductible claim liability for insured claims for Agway and its subsidiaries, including claims of the Group, was $33,800. As of November 11, 2003, payments of these liabilities are currently secured by letters of credit of $25,800, surety bonds of $23,900 and cash deposits of $1,100. Since October 16, 2003 (the effective date of the fourth amendment to the DIP Facility), Agway has had $53,500 in cash legally restricted to collateralize these letters of credit and surety bonds. As a result of this collateralization, management believes it is remote that Agway will not meet its obligation to the Group. In addition, in certain circumstances discussed below, the Group may have a contingent liability with respect to deductible claims against Agway and its consolidated subsidiaries. As discussed above, the $33,800 of consolidated claims liabilities are secured by letters of credit from the DIP Facility, of which the Group is a party, as well as by surety bonds and cash. As a direct borrower under the DIP Facility the Group is jointly and severally liable for the reimbursement of drawn letters of credit. Further, in a suit filed January 29, 2003, the surety issuer (the "Surety") alleges that Telmark and the Group are indemnitors of Agway's liability to the Surety for bonds drawn on by third parties and demands $3,176 for such amounts requested for draws as of that time. Agway currently disputes this indemnification claim. It is too early to determine the outcome of this dispute. However, in connection with the finalization of the sale by Agway of substantially all of the assets of Telmark, Telmark has transferred $25,700 to Agway under terms of an account control agreement legally restricting use of those funds pending resolution of 21 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ------------------------------ 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) the Surety claims against Telmark and the Group. Further, on November 4, 2003, the Group entered into an Agreement with Telmark and the Surety whereby the Surety agreed to the assignment by the Group of whatever liabilities the Group may have under this indemnity to Telmark. RENTAL AND LEASE OBLIGATIONS Total rental expense for the fiscal years ended June 30, 2003, 2002 and 2001 approximated $8,300, $7,600 and $6,800 (see Note 12). Future minimum payments as of June 30, 2003 under noncancelable operating subleases for each of the next five years and in the aggregate are: Year Ended Amount ---------- -------------- 2004 $ 3,696 2005 2,483 2006 2,129 2007 1,022 2008 325 Thereafter 54 -------------- $ 9,709 ============== 11. SUPPLEMENTAL DISCLOSURES ABOUT CASH FLOWS

12. RELATED PARTY TRANSACTIONS CASH MANAGEMENT The Group utilizes the bank accounts of its parent, Agway. Accordingly, the Group draws checks against Agway's accounts and also makes deposits to these accounts. The Group's net cash activity is included in the net intercompany receivable from Agway. INTER-COMPANY TRANSACTIONS Selected amounts related to transactions with Agway and subsidiaries are separately disclosed in the financial statements. Certain other transactions for the years ended June 30 with Agway and subsidiaries were:

22 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ------------------------------ 12. RELATED PARTY TRANSACTIONS (CONTINUED) INTER-COMPANY TRANSACTIONS (CONTINUED) The interest expense is charged to the Group based on its payable to Agway and equity balance, which is reduced by a portion of asset levels, and is at an internal borrowing rate which is set from time to time by Agway's treasurer and approximates Agway's external cost of borrowing funds. The interest rate charged was 9.0%, 9.0% and 8.2% for the years ended June 30, 2003, 2002 and 2001, respectively. The administrative and general, and operating expenses include certain shared expenses incurred by Agway on behalf of the Group for services such as information services, payroll and facilities and risk management, as discussed in Note 2. EMPLOYEE BENEFIT PLANS The Group's employees participate in Agway's employee benefit plans, which include a defined benefit retirement plan, a defined contribution 401(k) plan, a medical and dental benefit plan, a post-retirement medical plan, and a life and health insurance plan. Total benefit costs under these plans are allocated by Agway to the Group primarily based on payroll costs. Benefit costs for these plans included in operating expenses and in selling, general and administrative expense were $9,334, $7,673 and $6,658 for the years ended June 30, 2003, 2002 and 2001, respectively. These amounts do not include any pension costs for the defined benefit plan as the pension plan is over funded and did not require contributions during the years ended June 30, 2003, 2002 and 2001. LEASES The Group leases vehicles and other equipment through a sublease from its parent, Agway, the lessee. Total rental expense incurred under these sublease agreements for the year ended June 30, 2003, 2002 and 2001 amounted to $6,636, $6,200 and $5,600, respectively. The future minimum payments under these leases are included in the amounts reported in Note 10. 13. FINANCIAL AND COMMODITY INSTRUMENTS FAIR VALUE Carrying amounts of trade notes and accounts receivable and accounts payable approximate their fair values. The carrying value of the receivable/payable with Agway approximates fair value as the interest rate charged on the balance approximates Agway's external cost of borrowing. CREDIT RISK The Group extends unsecured credit to petroleum wholesalers, commercial and residential customers. The credit function within the Group manages credit risk associated with these trade receivables by routinely assessing the financial strength of its customers. 23 AGWAY ENERGY GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Thousands of Dollars) ------------------------------ 13. FINANCIAL AND COMMODITY INSTRUMENTS (CONTINUED) COMMODITY INSTRUMENTS The Group determines the commodity contacts' 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 the Group's over-the-counter contracts is determined based on quotes from brokers. As of June 30, 2003 and 2002, the carrying and fair value of the Group's investment in commodity futures and option contracts was $2,400 and $3,600, respectively. In the normal course of operations, the Group has exposure to market risk from price fluctuations associated with commodities such as gasoline, distillate and propane. These price fluctuations impact commodity inventories and anticipated transactions in our business. 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 durations of contracts we enter into and the levels 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. 24

AGWAY INC 8-K/A