<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 1997
REGISTRATION NO. 333-11205
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST EFFECTIVE AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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TELMARK INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK
(STATE OF INCORPORATION)
6159
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NO.)
16-0907546
(I.R.S. EMPLOYER IDENTIFICATION NO.)
333 BUTTERNUT DRIVE,
DEWITT, NEW YORK 13214
315-449-7935
(ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DAVID M. HAYES, ESQ.
TELMARK INC.
BOX 4943
SYRACUSE, NEW YORK 13221
315-449-6436
(NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO
THE PUBLIC: AS SOON AS PRACTICABLE ON OR AFTER THE EFFECTIVE DATE
OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
CROSS REFERENCE SHEET
TELMARK INC.
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FORM S-1
LOCATION OF THE
ITEM NO. REQUIRED IN PROSPECTUS CAPTION IN PROSPECTUS
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<S> <C> <C> <C>
1. Forepart of the Registration Statement Outside Front Cover Page
and Outside Front Cover Page of Prospectus
2. Inside Front Cover and Outside Back Inside Front Cover Page
Cover Pages of Prospectus and Outside Back Cover Page
3. Summary Information, Risk Factors, Selected Financial Data
and Ratio of Earnings to Fixed Charges Prospectus Summary, Risk Factors,
and Ratio of Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Inapplicable
6. Dilution Inapplicable
7. Selling Security Holders Inapplicable
8. Plan of Distribution Plan of Distribution
9. Description of Securities to be Registered Description of the Debentures
10. Interests of Named Experts and Counsel Legal Matters
11. Information with Respect to the Registrant Business of Telmark, Selected Financial
Data, Management's Discussion and
Analysis of Financial Condition and
Results of Operations, Legal Proceedings,
Directors and Management, Executive
Compensation, Certain Relationships and
Related Transactions, Principal
Stockholders, Financial Statements
12. Disclosure of Commission Position on Not Required
Indemnification for Securities Act Liability
</TABLE>
<PAGE>
SUBJECT TO COMPLETION DATED SEPTEMBER 5, 1997
PROSPECTUS
$22,000,000
TELMARK INC.
DEBENTURES
The Debentures (the "Debentures") are being issued by Telmark Inc., a New York
Corporation ("Telmark" or the "Company"), which is engaged in the business of
leasing agricultural and related equipment.
The following securities are being offered:
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====================================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC (3) OR COMMISSIONS (1) COMPANY (2) (3)
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<S> <C> <C> <C>
Debentures, $1,000 minimum denomination
and additional multiples of $100
(minimum 8.0% per annum) due March 31, 2001
Per Unit 100% None
Total * None *
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Debentures, $1,000 minimum denomination
and additional multiples of $100
(minimum 8.5% per annum)
due March 31, 2003
Per Unit 100% None
Total * None *
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Debentures under the Interest Reinvestment
Option (ranging from minimum of 6.0% to
8.5% per annum) due from December 31,
1997 through March 31, 2003
Per Unit 100% None
Total * None *
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TOTAL $22,000,000 $22,000,000
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</TABLE>
A complete description of the securities offered is set forth on pages 23
through 27 herein.
(1) No salespeople will be employed to solicit the sale of these
securities, and no commission or discount will be paid or allowed to
anyone in connection with their sale.
(2) It is assumed that all securities offered are sold and the amount of
proceeds is before deduction of estimated expenses of $102,586 to be
paid by Telmark, which includes legal fees, state and federal
registration fees, printing, trustee fees, accounting fees and other
miscellaneous expenses. Because there is no underwriting of the
securities offered, there is no assurance that all or any part of the
indicated proceeds will be received by the Company from the offering
of the securities.
(3) The amount of Debentures sold at a particular interest rate and
maturity date and the respective proceeds therefrom will vary,
provided, however, that the aggregate price to the public and proceeds
to the Company from this offering of Debentures will not exceed
$22,000,000.
The Company may, from time to time prior to the completion of the offering of
the Debentures, change the rate of interest or maturity date offered by filing a
supplement with the Securities and Exchange Commission. The applicable
supplement, if any, will be attached to this Prospectus. Any change in the
interest rate or maturity date offered will not affect the rate of interest on
or maturity date of any Debentures theretofore issued.
The Debentures are unsecured obligations of the Company and subordinated to
all Senior Debt (as defined herein) of the Company. As of July 31, 1997, Senior
Debt of $344,306,110 was outstanding. See "Description of the Debentures -
Subordination Provisions."
There can be no assurance that the Debentures offered hereby will be sold or
that there will be a secondary market for the Debentures.
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AN INVESTMENT IN THESE DEBENTURE INVOLVES CERTAIN RISKS.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS
<PAGE>
AVAILABLE INFORMATION
Telmark has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Debentures offered hereby. This Prospectus omits
certain of the information contained in the Registration Statement and the
exhibits and schedules thereto. Reference is hereby made to such Registration
Statement and exhibits and schedules for further information with respect to
Telmark and the Debentures. The Registration Statement, together with its
exhibits and schedules, can be inspected and copied at the offices of the
Commission, at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D. C. 20549 and at the regional offices of the Commission at Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661 and
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D. C. 20549, at
prescribed rates. The Securities and Exchange Commission also maintains a web
site which contains information regarding registrants who file electronically,
the "EDGAR" data base. The web site address for the EDGAR data base is
http://www.sec.gov/edgarhp.htm. A prospectus will also be sent in January of
each year to all holders of securities who have elected the interest
reinvestment option.
Any statements contained herein concerning the provisions of any document are
not necessarily complete, and, in such instance, reference is made to the
copy of such document filed as an exhibit to the Registration Statement. Each
statement is qualified in its entirety by such reference.
TABLE OF CONTENTS
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PAGE PAGE
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<S> <C> <C> <C>
Prospectus Summary Information.................. 3 Certain Relationships and Related
Risk Factors.................................... 5 Transactions............................ 22
Use of Proceeds................................. 7 Principal Stockholders ................... 22
Business of Telmark............................. 7 Description of the Debentures.............. 23
Selected Financial Data......................... 15 Description of the Interest
Management's Discussion & Analysis of Financial Reinvestment Option..................... 27
Condition and Results of Operations........ 15 Legal Matters............................. 28
Legal Proceedings............................... 18 Experts................................... 28
Directors and Management........................ 19 Plan of Distribution...................... 28
Executive Compensation.......................... 21 Index to Financial Statements............. 30
</TABLE>
2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements appearing elsewhere in this Prospectus.
THE COMPANY
Telmark Inc. and its consolidated subsidiaries ("Telmark" or the "Company") is
in the business of leasing agricultural related equipment, vehicles, and
buildings. Telmark's customers are farmers and other rural businesses as well as
manufacturers and independent dealers that serve the agricultural marketplace.
Telmark is indirectly owned and controlled by Agway Inc. ("Agway"), one of the
largest agricultural supply and services cooperatives in the United States, in
terms of revenues, based on a 1996 Co-op 100 Index produced by the National
Cooperative Bank. Telmark is a direct wholly-owned subsidiary of Agway Holdings,
Inc., a subsidiary of Agway.
There are certain risks that should be carefully reviewed by an investor
before deciding to purchase the Debentures. See "Risk Factors."
NEITHER AGWAY NOR ANY OF ITS OTHER SUBSIDIARIES GUARANTEES THE PAYMENT OF
INTEREST ON OR THE PRINCIPAL OF THE DEBENTURES. SEE "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND
CAPITAL RESOURCES."
Telmark operates throughout the continental United States. The Company's field
representatives serve customers in 27 states including Alabama, Connecticut,
Delaware, Georgia, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland,
Massachusetts, Michigan, Minnesota, Missouri, New Hampshire, New Jersey, New
York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina,
Tennessee, Vermont, Virginia, West Virginia, and Wisconsin. Customers in other
states are served through dealers of equipment distributed by selected farm
equipment manufacturers.
The Company's principal executive office is located at 333 Butternut Drive,
DeWitt, New York 13214 and its telephone number is (315)449-7935.
THE OFFERING
Securities Offered . . . . . . . $22,000,000 principal amount of Debentures (the
"Debentures") under the Indenture dated as of
September 30, 1993 (the "Indenture"), between
Telmark and OnBank & Trust Co. Manufacturers &
Traders Trust Company assumed Trustee
responsibilities pursuant to an Agreement of
Resignation, Appointment and Acceptance by and
among OnBank & Trust Co., Telmark and
Manufacturers & Traders Trust Co. As of July
31, 1997, the Company had previously issued
and outstanding $31,492,035 under the
Indenture.
Form and Denomination.......... The Debentures will be issued in registered
form in minimum denominations as set forth in
the table on the cover page of this
Prospectus. The Company may, from time to
time, change the minimum denominations offered
by filing a supplement with the Securities and
Exchange Commission. The applicable
supplement, if any, will be attached to this
Prospectus. Any change in minimum
denominations offered will not affect the
minimum denominations of any Debentures
theretofore issued. Additional amounts may be
added to the principal of the Debenture
pursuant to an election by the holder thereof
to have quarterly interest payments added to
the principal of the Debenture. Debenture
holders who elect the reinvestment option will
receive a statement from the Company
indicating the amounts added to the principal
of the Debentures.
Maturity Date.................. Principal on the Debentures will be payable on
the maturity dates for each Debenture as set
forth in the table on the cover page of this
Prospectus. The Company may, from time to
time, change the maturity date offered by
filing a supplement with the Securities and
Exchange Commission. The applicable
supplement, if any, will be attached to this
Prospectus. Any change in maturity date
offered will not affect the maturity date of
any Debentures theretofore issued.
3
<PAGE>
PROSPECTUS SUMMARY (CONTINUED)
THE OFFERING (CONTINUED)
Interest....................... Interest on the 8.0% Debentures due March 31,
2001, is payable at a rate per annum equal to
the greater of: (1) the "stated rate" of 8.0%
per annum; and, (2) the "Treasury Bill Rate"
as defined below under "Description of
Debentures - Interest."
Interest on the 8.5% Debentures, due March 31,
2003, is payable at a rate per annum equal to
the greater of: (1) the "stated rate" of 8.5%
per annum; and (2) the "Treasury Bill Rate" as
defined below under "Description of Debentures
- Interest." The company may, from time to time
prior to the completion of the offering of the
Debentures, change the rate of interest offered
by filing a supplement with the Securities and
Exchange Commission. The applicable supplement,
if any, will be attached to this Prospectus.
Any change in the interest rate offered will
not affect the rate of interest on any
Debentures theretofore issued.
Interest Payment Dates......... Interest will be payable quarterly in arrears
on January 1, April 1, July 1 and October 1 of
each year and on the Maturity Date as set forth
in the table on the cover page of this
Prospectus. Additional amounts may be added to
the principal of the Debenture pursuant to an
election by the holder thereof to have
quarterly payments added to and increase the
principal amount of the Debenture. See
"Description of Debentures - Payments of
Principal and Interest."
Optional Redemption............ Upon not less than 30 days written notice, the
Debentures are redeemable on a designated date
(each such date, a "Redemption Date"), in whole
or in part, at the option of the Company, at
the principal amount thereof, together with
accrued but unpaid interest thereon. See
"Description of the Debentures - Redemption
Provisions."
Ranking........................ The Debentures are subordinated to all Senior
Debt (as defined herein) of the Company.
Therefore, in the event of any distribution of
assets of Telmark under any total liquidation
or reorganization of Telmark, the holders of
all Senior Debt shall be entitled to receive
payment in full before the holders of the
Debentures are entitled to receive any payment.
In addition to its subordination provisions,
the Indenture contains only limited
restrictions on highly leveraged transactions,
reorganizations, restructuring, mergers or
similar transactions involving the Company,
which may adversely affect the holders of the
Debentures. See "Description of the Debentures
- Subordination Provisions."
Use of Proceeds................ The Company intends to ultimately use the
entire net proceeds from this offering to
purchase equipment and buildings for lease.
Pending such application, the net proceeds may
be used to (i) reduce outstanding borrowings,
if any, under the Company's line of credit
agreements or (ii) fund maturing Senior Debt.
See "Use of Proceeds."
Settlement and Issue Date ..... Persons interested in purchasing Debentures
should forward their completed application and
a check (personal, cashiers or certified) or
money order payable to the Company in an amount
equal to the principal amount of the Debenture
to be purchased. Applications are available at
certain Company and Agway locations.
Applications generally will be processed by the
Company within five to ten days of the date of
receipt by the Company, at which time they will
be forwarded to the trustee to authenticate,
who in turn will forward the Debenture to the
applicant. The "Issue Date" is defined as the
first day of the month in which the application
and proceeds are received by the Company for
such Debenture.
4
<PAGE>
RISK FACTORS
GENERAL PORTFOLIO RISK
The principal assets of the Company are its portfolio of outstanding leases and
the residual value of equipment or other property under lease. Investment risks
inherent in any leasing company include the possibility that lessees fail to
make the payments required under a lease and that the equipment or property
leased might be sold at lease expiration for less than the residual value
anticipated at the initiation of the lease. The Company's leasing business may
be affected by general economic conditions, including the level of inflation,
fluctuations in general business conditions, and the availability of financing
to the Company and its customers. The Company's business is dependent upon
continued demand for leases as a financing vehicle and would be adversely
affected by customer use of other finance methods in acquiring the use of
equipment such as the election to purchase equipment.
CREDIT RISK. Bankruptcies, contract disputes, or defaults by lessees could
result in the nonpayment of amounts due to the Company under its leases. The
ultimate collectibility of amounts due under its leases is directly dependent
upon the credit practices employed by Telmark and the creditworthiness of the
individual leases comprising its portfolio. See "Business of Telmark - Credit
Policies." Despite current credit practices and the existence of financial
reserves to anticipate the potential impact of default or nonpayment of leases,
there are other factors that could significantly impact the Company's lease
collection experience and its earnings. These factors include changes in general
economic conditions, government farm policy, adverse weather conditions and
international commodities prices which are beyond the control of the Company.
Some of these risks are related to Telmark's concentration of customers in
particular segments of agriculture or specific geographic areas. Telmark's
business is concentrated in agriculture in the New England, Mid-Atlantic, and
Midwest states with approximately 75% of its leases directly related to
production agriculture. At June 30, 1997, approximately 49% of the Company's net
lease investment was in the states of Michigan, New York, Ohio and Pennsylvania.
Adverse developments in any of these areas of concentration could have a
corresponding adverse effect on the collectibility of its lease receivables. See
"Risk Factors - Agricultural Economy."
RESIDUAL VALUE RISK. Residual values represent the estimated resale value of
leased equipment or other leased property that the Company expects to derive as
leases expire. Residual values of leased assets are estimated at the time that
the leases are written. Realization of residual values depends on several
factors not within the Company's control, such as the condition of the
equipment, the cost of comparable new equipment and technological or economic
obsolescence of the equipment. Telmark has generally not experienced any losses
as a result of the failure to realize estimated residual values on equipment and
property lease expirations. During the past nine years, the Company has
collected more than its net lease receivable for all leases which terminated.
The net lease receivable with respect to a lease equals the sum of payments due
to the Company under the lease, the estimated residual value of the leased
property at the end of the lease and the net costs incurred by the Company in
entering into the lease, less imputed unearned interest and finance charges with
respect to the lease. Although there can be no assurance this experience will
continue in the future, Company management monitors residual collections and
anticipates this trend to continue. Failure to realize residual values could
have a material adverse effect on the Company's earnings. See "Business of
Telmark - Residual Value."
FINANCING
The ongoing availability of adequate financing to maintain the size of the
Company's current lease portfolio and to permit lease portfolio growth is key to
the Company's continuing profitability and stability. Telmark's principal
sources of financing include banks, debt placements with private institutional
investors, Debentures sold to the public, and lease backed asset securitization;
at June 30, 1997, these financing sources provided approximately 53%, 32%, 8%
and 7%, respectively, of the Company's outstanding debt. Telmark has been
successful in arranging its past financing needs and believes that its current
financing arrangements are adequate to meet its foreseeable operating
requirements. There can be no assurance, however, that Telmark will be able to
obtain future financing in amounts that are sufficient or on terms that are
acceptable. The Company's inability to obtain adequate financing would have a
material adverse effect on its operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Liquidity and Capital
Resources."
INTEREST RATE RISK AFFECTING THE COMPANY
The Company endeavors to limit the effects of changes in interest rates by
matching as closely as possible, on an ongoing basis, the maturity and repricing
characteristics of funds borrowed to finance its leasing activities with the
maturity and repricing characteristics of its lease portfolio. However, a rise
in interest rates would increase the cost of funds borrowed by the Company to
finance its leasing business and could lower the value of the Company's
outstanding leases in the secondary market. See "Management's Discussion and
Analysis of Financial Condition and
5
<PAGE>
RISK FACTORS (CONTINUED)
Results of Operations - Liquidity and Capital Resources." In addition, higher
interest rates, inasmuch as they would increase the cost of funds borrowed by
the Company for financing its leases, would also increase the cost of leases to
potential lessees and could decrease the demand for the Company's leases.
SUBORDINATION
The Debentures are unsecured obligations of the Company and are subordinated to
all Senior Debt (as defined herein) of the Company. Therefore, in the event of
bankruptcy, liquidation or reorganization of the Company, its assets will be
available to pay obligations of the Debentures only after all Senior Debt has
been paid in full, and there may not be sufficient assets remaining to pay
amounts due on any or all of the Debentures then outstanding. As of July 31,
1997, Senior Debt of $344,036,110 was outstanding. See "Description of the
Debentures - Subordination Provisions."
LIMITED PROTECTIONS IN CONNECTION WITH CERTAIN TRANSACTIONS
In addition to its subordination provisions, the Indenture contains only limited
restrictions on highly leveraged transactions, reorganizations, restructuring,
mergers or similar transactions involving the Company, which may adversely
affect the holders of the Debentures. See "Description of Debentures - General"
and "Description of Debentures - Subordination Provisions."
NO UNDERWRITING
The offering of the Debentures is not being underwritten. Accordingly, no
underwriter, such as an investment bank, has undertaken a review of the
corporate records of the Company, evaluated its financial conditions, or
evaluated the terms of the Debentures and this offering, including the Company's
ability to meet its payment obligations on the Debentures. See "Plan of
Distribution."
CONTROL OF THE COMPANY
Agway owns all of the voting stock of the Company through subsidiaries. This
ownership permits Agway to control all corporate actions of the Company
(including the payment of dividends by the Company to Agway) and could result in
the Company taking actions that would adversely affect its ability to make
payments of principal or interest on the Debentures. See "Principal
Stockholder," "Directors and Management," and "Executive Compensation."
AGRICULTURAL ECONOMY
The financial condition of the Company is indirectly affected by factors
influencing the agricultural economy, since these factors impact the demand for
equipment leased by the Company and the ability of its customers to make
payments on leases. These factors include: (i) changes in the level of
government expenditures on farm programs and the elimination of the acreage
reduction programs could adversely affect the level of income of customers of
the Company; (ii) adverse weather-related conditions that negatively impact the
agricultural productivity and income of customers of the Company; and (iii)
oversupply of, or reduced demand for, agricultural commodities produced by
customers of the Company. To the extent that these factors adversely affect the
customers of the Company, the financial condition of the Company and the ability
of the Company to make payments on the Debentures could be adversely affected.
See "Business of Telmark - Agricultural Economy."
LACK OF GUARANTEE
Although Agway owns all of the common stock of the Company through subsidiaries,
neither Agway nor any of its subsidiaries guarantees the payment of interest on
or the principal of the Debentures. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
ABSENCE OF PUBLIC MARKET, REDEMPTION AND MARKET RISK
There is no market for the Debentures and there is no intent on the part of the
Company to create or encourage a trading mechanism for these Debentures. The
Company does not intend to apply for listing of the Debentures on any securities
exchange. The secondary market for, and the market value of, the Debentures will
be affected by a number of factors independent of the creditworthiness of
Telmark, including the level and direction of interest rates, the remaining
period to maturity of the Debentures, Telmark's right to redeem the Debentures,
the aggregate principal amount of the Debentures and the availability of
comparable investments. In addition, the market value of the Debentures may be
affected by numerous other interrelated factors, including factors that affect
the U.S. corporate debt market generally and Telmark specifically.
6
<PAGE>
RISK FACTORS (CONTINUED)
There is no assurance that: (1) a secondary market value of the Debentures will
develop, (2) any secondary market will continue, (3) the price at which an
investor can sell the Debentures will enable the investor to realize a desired
yield on that investment, or (4) in the event of redemption the investor will be
able to reinvest the proceeds in comparable securities at an effective interest
rate as high as that of the Debentures. The market value of the Debentures is
likely to fluctuate; such fluctuations may be significant and could result in
significant losses to investors. Debenture holders should rely solely on the
Company's ability to repay principal at maturity of the offered Debentures as
the source for liquidity in this investment.
COMPETITION
The Company 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 that the Company serves. The Company
believes its leasing products and services will effectively serve its intended
markets in the foreseeable future and that existing competition, while
formidable, will not impair prospects for growth. See "Business of Telmark -
Competition."
USE OF PROCEEDS
There is no assurance that all or any of the Debentures will be sold and the
Company has no minimum amount of Debentures which must be sold as a condition to
the sale of the Debentures. The net proceeds of the sale of the offered
securities will be no greater than $22,000,000. The Company will use net
proceeds to purchase equipment and buildings for lease. Pending such
application, the net proceeds may be used to (i) reduce outstanding borrowings,
if any, under the Company's line of credit agreements, or (ii) fund maturing
Senior Debt. The Company intends to ultimately use the entire net proceeds of
the sale of the offered securities to purchase equipment and buildings for
lease. See "Notes to Financial Statements - Note 5" with respect to the
outstanding indebtedness of the Company.
BUSINESS OF TELMARK
Telmark was organized in 1964 under the Business Corporation Law of the State of
New York. It is a wholly-owned subsidiary of Agway Holdings, Inc. which is an
indirect wholly-owned subsidiary of Agway. Telmark currently employs 195
persons.
The Company's operations are comprised almost exclusively of direct finance
leasing of agricultural related equipment, vehicles and buildings to farmers or
other rural businesses that serve the agricultural marketplace (herein,
"customers" or "lessees"). The Company's leases offer customers an alternative
to directly purchasing or borrowing to purchase as a means of acquiring the use
of equipment, vehicles or buildings. Telmark has branded its leasing service
with the registered trademark, Agrilease(R). It also uses TFS(SM) to identify
its services through dealers of selected manufacturer products. The Company
highlights its service-oriented approach, using the tagline "The Flexible
Financing Alternative(SM)" in its advertisements and product brochures. Telmark
offers a variety of lease financing packages, with varying payment schedules on
a monthly, quarterly, semiannual or annual basis, depending on the expected
timing of customer cash flows and customer credit quality and the customer's
individual preferences.
With a direct finance lease the customers have use of the leased property over a
specified term for a periodic rental charge: the lease payment. Lease payments
are made in advance of the period and typically the equivalent of two monthly
payments are required in advance at the outset of the lease. Most direct finance
leases offered are for a period which does not exceed the Company's estimate of
the useful life (based on Telmark's estimate of customers use) of the equipment
or the building leased. Equipment leases generally do not exceed eight years.
Building leases are typically offered for longer terms (e.g., 5 to 10 years)
than for equipment leases, up to maximum terms of 15 years. As of June 30, 1997,
the Company's outstanding leases had an average original term of approximately 5
years and average remaining term of less than 4 years.
Generally, the lessee selects the supplier of the equipment or other property to
be leased and the Company is not responsible for its suitability, performance,
life, or any other characteristics. In some cases, the financing is offered to
the ultimate customer through a dealer of a selected manufacturer. The Company's
primary responsibility is to buy the property from the supplier, lease it to the
lessee, and collect the lease payments, although in certain circumstances it has
agreed to indemnify lessees in the event that certain unintended and adverse tax
consequences to such lessee arise in connection with the relevant lease. While
Telmark's liability, if any, under such arrangements cannot be
7
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
predicted with any certainty, it views the likelihood of such liability as
remote and believes that the net effect of such liability, if any, would be
immaterial. The lessee assumes all obligations of insurance, repairs,
maintenance, service, and property taxes. At the expiration of the direct
finance lease term, the lessee has an option to (i) purchase the leased
property, (ii) renew the lease, or (iii) return the leased property to the
Company. In 95% of the Company's lease transactions, the lessee purchases the
leased property or equipment upon termination of the lease.
The Company realizes most of its net earnings (profits) to the extent that
revenues from its leases exceeds the Company's operating expenses and income
taxes. The Company's "revenue" from a lease is the sum of all payments due under
the lease plus the residual value of the leased property, less the cost of
purchasing the leased property. "Operating expenses" include interest expense,
provision for credit losses (the dollar amount the Company sets aside to cover
its estimated losses should a lessee fail to make required payments under a
lease), and selling and general and administrative expenses including the
Company's payroll costs, rent, advertising costs and fees paid for credit
checking and legal and accounting services. "Interest expense" is the single
largest operating cost of the Company and is primarily the interest it must pay
on the amounts borrowed by the Company from banks and other investors to finance
its leases. An example of how a direct finance lease transaction generates
profits for the Company is set forth below.
A potential customer determines that he needs to acquire a machine to harvest
his corn. He selects a harvester and enters into a lease with Telmark for that
particular machine. Telmark purchases the harvester using funds it borrows or
with available cash on hand. Under terms of the lease, the customer agrees to
make lease payments to Telmark. At the end of the lease term, the customer may
(i) purchase the harvester from Telmark for its fair market value, (ii) extend
the lease on terms agreed to by Telmark, or (iii) return the harvester to
Telmark. Telmark makes a profit on the lease to the extent that the sum of the
lease payments collected during the lease term plus the proceeds from the sale
or re-lease of the equipment after the initial lease term exceeds the cost of
the equipment and other operating expenses.
The Company occasionally sells portions of its "net lease receivables" to
provide an additional source of capital for the Company, and such sales may also
produce net earnings for the Company. The net lease receivable with respect to a
lease equals the sum of payments due to the Company under the lease, the
estimated residual value of the leased property at the end of the lease and the
net costs incurred by the Company in entering into the lease, less imputed
unearned interest and finance charges with respect to the lease. During the
fiscal years ended June 30, 1994, 1993, and 1992, Telmark sold $5.5 million,
$10.7 million, and $21.4 million respectively, of certain net lease receivables.
The Company did not sell any lease receivables in 1995, 1996, or 1997. Under the
terms of these sales, in the event the purchasers do not receive payment when
due with respect to the receivables purchased, the purchaser has the right to
seek recovery of such unpaid amounts from the Company up to an amount equal to a
maximum of 7.5% of the proceeds from such sales. The lease receivables sold are
not included in the Company's financial statements except to the extent of
proceeds realized from their sale. The Company, however, does include the
outstanding balances of these lease receivables in the term "Leases" discussed
below for statistical purposes. The Company continues to service the leases
relating to such lease receivables on behalf of the purchasers. As of June 30,
1997, the remaining balances on net lease receivables sold approximated $1.9
million. See "Business of Telmark - Portfolio Mix" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
PORTFOLIO MIX
Telmark finances agricultural and related equipment, vehicles and buildings of
both a general and specialized nature. As exemplified by the following four
schedules, the Company has a portfolio of leases which are diverse with respect
to the type of equipment to which they relate, their dollar amount, the industry
involved and their geographic origination. Such diversification helps mitigate
adverse circumstances affecting particular industry, geographic and other
segments of the Company's business, to the extent that such circumstances do not
adversely affect the entire business of the Company.
"Leases" in the Company's portfolio are defined by the Company for the following
statistical purposes as amounts due to it by lessees under all of the Company's
outstanding leases (known as "gross lease receivables") and includes leases sold
(the collection of which is administered by the Company) and excludes imputed
unearned interest and finance charges. As of June 30, 1997, Telmark had
approximately $463.0 million of Leases outstanding.
8
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
PORTFOLIO MIX (CONTINUED)
Equipment which the Company leases includes milking machines, tractors,
combines, feed processing equipment and forestry equipment (e.g., log skidders
and log harvesting equipment); vehicles leased include trucks, trailers and fork
lifts; and buildings leased include barn structures, silos and greenhouses.
Approximately 10% of the equipment leases are for used equipment. The percentage
of leases by equipment type has generally remained constant and the Company does
not anticipate significant changes in the types of equipment to be leased. Given
the nature of the equipment leased and the generally short-term duration of its
leases, the Company has not been adversely affected by, and does not anticipate
being adversely affected by significant technological developments that may
affect the value of the equipment leased to customers. The breakdown of leases
by equipment type is as follows:
SCHEDULE OF LEASES
BY EQUIPMENT TYPE
- --------------------------------------------------------------------------------
June 30, 1997
- --------------------------------------------------------------------------------
(Percentages are of dollar amounts due under outstanding Leases)
- --------------------------------------------------------------------------------
Equipment Type %
- -------------- --
Farm equipment, machinery and tractors.................................... 39%
Highway vehicles.......................................................... 15%
Buildings................................................................. 25%
Forestry related equipment................................................ 12%
Other less than 5% of total............................................... 9%
----
Total............................................................... 100%
====
Telmark maintains a large customer base which includes over 18,000 customers.
The minimum purchase price of equipment which the Company finances is $1,500.
Approximately 30% of the Company's customers hold more than one lease with the
Company. In order to limit its credit exposure to particular customers,
Telmark's Board of Directors maintains a policy which precludes any one customer
from accounting for more than 2.5% of the dollar amount of the Company's
outstanding Leases, except for Agway and affiliates. Currently, no customer
accounts for more than 1.0% of the dollar amount of the Company's outstanding
Leases. Telmark's average lease size at origination is approximately $25,000.
The breakdown of leases by size is as follows:
SCHEDULE OF LEASES BY SIZE
- --------------------------------------------------------------------------------
Dollar Amounts and Corresponding Percentages are of Leases Entered into During
Year Ended June 30, 1997
- --------------------------------------------------------------------------------
Dollars
Original Size Transaction (In Millions) %
- ---------------------------- ------------- ----
Under $7,500 $ 9.0 4%
$ 7,500 - $24,999 58.0 26%
$25,000 - $49,999 46.8 21%
$50,000 - $99,999 49.0 22%
$100,000 - $249,999 38.0 17%
$250,000 & Over 22.3 10%
------ ----
Total $ 223.1 100%
======== ====
9
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
PORTFOLIO MIX (CONTINUED)
The largest industry concentrations are in dairy, crops, forestry, livestock,
and transportation. These industries may be impacted differently by various
factors including changing economic conditions, technological advances in the
equipment and agricultural sector, government regulation and subsidies, and
domestic and international consumer demand, among others. Generally, the
diversity of enterprises served by the Company helps keep any single adverse
trend from having an adverse effect on the ability of all customers to meet
their lease obligations. For example, a long period of low grain prices could
reduce the ability of grain farmers to meet their obligations, but the low grain
prices would reduce the feed costs paid by dairy farmers, thereby making it
easier to meet their lease obligations.
The breakdown of leases by industry is as follows:
SCHEDULE OF LEASES
BY INDUSTRY
- --------------------------------------------------------------------------------
June 30, 1997
- --------------------------------------------------------------------------------
(Percentages are of dollar amounts due under outstanding Leases)
- --------------------------------------------------------------------------------
Industry %
- -------- ----
Dairy....................................................................... 19%
Crops....................................................................... 21%
Forestry.................................................................... 15%
Livestock................................................................... 14%
Transportation.............................................................. 9%
Other less than 5% of total................................................. 22%
----
Total.................................................................100%
====
The aforementioned industries are defined as follows: Dairy is the production of
milk; it is sold in the raw state to a processor. Forestry is the harvesting and
initial processing of forest products. The wood is sold in the form of logs or
rough cut lumber. Crops is the production of grain or hay; it is sold in bulk.
Livestock is the production of animals. The animals are generally sold live to a
processor. Transportation is the movement of products by truck. Products being
moved are generally farm input (e.g., fertilizer, feed) items being transported
to farms or farm products going to market. Other is the aggregate of all other
types of accounts.
At June 30, 1997, leases originated in the states of Michigan, New York, Ohio
and Pennsylvania accounted for approximately 49% of the total lease portfolio.
Pennsylvania and New York have historically been the most significant in terms
of lease activity due to the large number of dairy farms located there. However,
the Company's business continues to expand geographically and its concentration
of leases in Pennsylvania and New York has been reduced from approximately 68%
in 1984 to 28% in 1997. The Company's continued expansion into new geographic
markets mitigates the potential adverse effect on the Company of circumstances
which may impact these markets such as state and local regulations, local
economic conditions, and weather conditions (i.e., floods, drought). For
example, if poor growing conditions such as early or late frost, hail, or lack
of rain reduce the apple crop in western New York, the orchard enterprises
located there could lose part of their normal crop; however, the Michigan
orchard enterprises might enjoy higher prices and income because of higher
demand for their apples. The geographic distribution of leases is as follows:
10
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
PORTFOLIO MIX (CONTINUED)
SCHEDULE OF LEASES
BY GEOGRAPHIC DISTRIBUTION
- --------------------------------------------------------------------------------
June 30, 1997
- --------------------------------------------------------------------------------
(Percentages are of dollar amounts due under outstanding Leases)
- --------------------------------------------------------------------------------
State %
- ----- -----
New York................................................................... 16%
Pennsylvania............................................................... 12%
Michigan................................................................... 11%
Ohio....................................................................... 9%
Virginia................................................................... 5%
Illinois................................................................... 5%
Maryland................................................................... 4%
Delaware................................................................... 4%
Indiana.................................................................... 4%
Wisconsin.................................................................. 4%
Kentucky................................................................... 3%
North Carolina............................................................. 3%
West Virginia.............................................................. 3%
All Others less than 3%.................................................... 17%
-----
Total................................................................ 100%
=====
CREDIT POLICIES
Potential lessees undergo a thorough credit approval process after a Telmark
field representative completes a financial application. The Telmark
representative is responsible for obtaining the most accurate information
possible for a proper application review. Personal observation and meetings with
the customer assist the Telmark representative in providing a comprehensive
evaluation of the lease application.
The credit search usually begins with electronic credit bureau systems such as
TRW, Inc. and local or regional creditors such as banks. For Agway cooperative
members, the Agway credit system provides additional information. For
contemplated transactions of over $100,000, a county court house search provides
records of any existing liens against the lessee. Telmark retains title to the
equipment or building leased. In addition, Telmark often obtains a second lien
on the real estate owned by the farmer or lessee as collateral for payments
under a building lease. In the event of a default on the lease, the second lien
entitles Telmark to foreclose on the real estate property and take title subject
to any and all prior liens on the property. Upon foreclosure, if this collateral
is insufficient to cover all existing liens, prior lienholders may receive more
than Telmark. Thus, Telmark looks first to the lessee's historical and future
ability to service its debt and lease payments, and then to the mortgage
position of a lease collateralized by real estate.
Credit approvals are made based on the total amount outstanding to the customer.
Lending authority is assigned to members of management depending on position,
training, and experience. Generally amounts up to $200,000 require approval from
one of six Regional Credit Managers. Amounts over $200,000 are approved by the
Director of Credit, in specific cases the Director of Credit can approve
applications up to $1,000,000. The Board of Directors must approve all
applications over the Director of Credit's authority.
Telmark maintains monthly delinquency reports which monitor leases that have
been delinquent (i.e., payment due has not been made) for over 30 days, and
non-earning leases. Generally, accounts past due at least 120 days, as well as
accounts in foreclosure or bankruptcy, are transferred to non-earning status.
Non-earning accounts cannot become current unless all past due lease payments
are paid or the lease is amended. As of June 30, 1997, non-earning leases were
.6% of the Company's net investment in leases before allowances for credit
losses. The potential losses from non-earning leases are mitigated by the
ability of the Company to repossess leased property and to foreclose on other
property in which the Company has been granted a security interest. See
"Business of Telmark - Portfolio Mix."
11
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
CREDIT POLICIES (CONTINUED)
Leases may be amended by Telmark and a lessee to change the terms, remaining
amount, and payment schedule for the remaining lease balance. There is a fee
collected for the amendment. All lease amendments are supported by legal
documentation and, as management deems appropriate, a new credit evaluation.
The Company maintains financial reserves (provision for credit losses) to cover
losses in its existing lease portfolio from default or nonpayment. Telmark's
provision for credit losses is determined by a periodic evaluation of the lease
portfolio, including analysis of delinquent accounts, current economic
conditions, estimated residual values and credit worthiness of customers. The
provision reflects management's estimates of the inherent credit risk within the
portfolio.
RESIDUAL VALUE
The Company generally estimates the residual value at the end of a lease to be
10% of the purchase price on a piece of new equipment and 15% of the market
value at inception for a building. It is not possible to forecast with certainty
the value of any equipment upon termination of the lease. The market value of
used equipment depends upon, among other things, its physical condition, the
supply and demand for equipment of its type and its remaining useful life in
relation to the cost of new equipment at the time the lease terminates. Telmark
has generally not experienced any losses as a result of the failure to realize
estimated residual values on equipment and property lease expirations. During
the past nine years, the Company has collected slightly over 100% of the net
lease receivable for all leases which terminated. The net lease receivable with
respect to a lease equals the sum of payments due to the Company under the
lease, the estimated residual value of the leased property at the end of the
lease and the net costs incurred by the Company in entering into the lease, less
imputed unearned interest and finance charges with respect to the lease. This
residual performance can be attributed to the Company's ability to sell the
equipment, vehicle or building to the original lessee at the end of the lease in
over 95% of the Company's transactions. Management believes that obsolescence
factors, such as technological sophistication and computerization have only a
moderate effect on the farming equipment sector and that agricultural equipment
will continue to show strong residual values.
INSURANCE COVERAGE
Under a Company lease, the customer assumes the obligation to insure the leased
property against claims arising from the customer's use of the leased property.
The Company may be exposed to liability from claims by lessees and third parties
including claims due to the lessees' use of the property or defects in the
property. However, in general direct finance lessors such as the Company have
not been held liable for such claims. In addition, the leases provide the
Company protection against such liability claims. Under the terms of each lease
the Company disclaims such liability and the customer agrees to indemnify the
Company for any claim or action arising in connection with the manufacture,
selection, purchase, delivery, possession, use, operation, maintenance, leasing,
and return of the equipment leased. The Company requires the customer to provide
insurance coverage naming the Company as an additional insured in certain
circumstances and has insurance coverage for most liability claims against it
through insurance policies purchased by Agway.
AGRICULTURAL ECONOMY
The Company is indirectly affected by factors that affect the agricultural
economy in which its customers operate. These factors include (i) governmental
agricultural programs, (ii) weather conditions, and (iii) supply and demand
conditions with respect to agricultural commodities. These factors may affect
the economic vitality of the Company's customers and consequently their
decisions to lease equipment or property for their businesses as well as the
ability of these customers to make the required payments on their leases.
Government Subsidies. In the 1990's, federal budgetary constraints have resulted
in decreased government spending programs, including the farm subsidies and
programs participated in by certain Telmark customers. Government program
changes that may affect the Company include elimination of price supports and
acreage reduction programs. Price support programs included the establishment of
minimum prices for certain commodities as well as the purchase by the Government
of excess supplies of such commodities. Under the recently enacted Federal
Agricultural Improvement and Reform (FAIR) Act, farmers of crops covered under
previous programs can utilize "contract acreage" the way they choose as opposed
to having the use dictated by a government subsidy program. This will require
the farmer to have marketing management skills that capitalize on the free
market approach, and could yield both a greater profit potential and greater
risk.
12
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
AGRICULTURAL ECONOMY (CONTINUED)
Generally, FAIR is expected to improve the U.S. farm outlook by providing crop
farmers with more control over their growing plans and provides more opportunity
in the world market based on market demand. Over seven years, farmers will
adjust from past government programs through declining market transition
payments. The dairy portion of FAIR reduces subsidies over four years to avoid a
sudden drop-out of dairy farms and give businesses time to adjust over four
years. Farmers will need to develop management and marketing skills to control
their marketplace.
All the new FAIR programs increase the profit and the risk potential of
participating farmers and the existence and magnitude of these programs may
influence those farmers' decisions to lease equipment and the ability of those
farmer customers to continue to make payments on their Telmark leases.
The overall impact of these programs on Telmark is uncertain. The availability
of these programs varies widely by crop, commodity and geographic region as does
the level of benefits received by a particular farmer. In addition, elimination
of programs, such as acreage reduction programs, may increase demand for
equipment leased by Telmark to the extent that such changes result in farmers
increasing their production of certain crops.
Weather. Adverse weather conditions can have varying effect on the customers of
the Company depending on the region experiencing such conditions. When adverse
conditions occur in the region served by the Company, the effect can be negative
as was the case in 1992 when many parts of the Northeast, the Company's primary
territory, experienced a relatively cold summer and a wet fall. This adversely
impacted grape farmers (whose crops never matured and had poorer sugar content),
as well as potato, vegetable and grain farmers. However, adverse weather
conditions occurring in other regions may be advantageous to the customers of
the Company. For example, the floods occurring in parts of the Midwest and the
droughts which occurred in parts of the West and Southwest in 1993 reduced
output in those areas which increased the demand for crops grown by Telmark
customers. Inclement weather can also benefit Telmark's food processor customers
to the extent that it increases demand for frozen or canned products as opposed
to fresh products.
Commodities Demand. Supply and demand conditions with respect to agricultural
commodities produced by customers of the Company can be affected by a number of
factors. These factors include both national and international economic
conditions, local, national and international weather conditions (e.g., the
floods in the Midwest discussed above), and technological changes which increase
farmer productivity (e.g., the growth hormone BST which increases milk
production in cows). The income of the customers of the Company is in part
determined by the demand for the commodities and the amount of such commodities
they produce. Generally, any of the above factors which increase demand may
increase the income of the customers of the Company to the benefit of the
Company. Conversely, any of the above factors which decrease demand may decrease
such income to the detriment of the Company.
Historically, Telmark customers have produced products which are marketed within
the United States. Domestic demand for these products, in addition to being
affected by the availability and demand for competing products, may be affected
by the state of the United States economy. However, the economic condition of
foreign countries and their demand for the type of products produced by Telmark
customers may also influence the demand for products of Telmark's customers. For
example, economic recessions in Europe and Japan have contributed to soft
foreign demand for U. S. agricultural products, as has the transition to market
economies in Eastern Europe, the republics of the former Soviet Union, and
China. This softened demand has been offset by Government export support
programs. A discontinuation of these export support programs may result in a
surplus of certain commodities due to reduced exports which may reduce the
demand and price of products produced by customers of Telmark.
Telmark customers may also be affected by agreements between the United States
and foreign governments, such as the North American Free Trade Agreement and the
General Agreement on Tariffs and Trade which may impact indirectly demand for
Telmark's customers' products. The impact of these agreements on Telmark's
customers is unclear. To the extent that these agreement's result in an increase
in competing imports or greater domestic supply, Telmark's customers and thus
Telmark may be adversely affected. However, to the extent these agreements
increase demand for commodities of the type produced by Telmark's customers,
Telmark and its customers may be beneficially affected.
13
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
MARKETING AND SALES
Telmark uses both direct mail and advertising campaigns routed through its
parent publications and other agricultural publications as a means of promoting
its leasing products to farmers and other rural businesses that serve the
agricultural marketplace. In addition, leasing product brochures are available
at many equipment dealer franchises. Advertising and communication efforts for
non-Agway businesses are typically targeted towards special market segments such
as forestry and trucking via magazines and trade shows.
Much of Telmark's business comes from referrals to Telmark by equipment
retailers and building contractors of customers wishing to purchase equipment,
vehicles or buildings. The retailer or contractor refers the customer to
Telmark, where a field representative will complete a credit application and
seek credit approval in a day. Upon approval, the retailer or contractor is paid
by Telmark for the equipment, vehicles or buildings which are then "acquired" by
the customer. Using the identification TFS(SM), the Company provides financing
through the dealers of selected manufacturers of equipment. In the cases where
financing is through manufacturer sponsored financing programs, the dealer
rather than a Telmark field representative completes a credit application.
FACILITIES
The Company leases all of the office space it uses from Agway. Telmark does not
own any of the real property it uses for office facilities.
COMPETITION
The Company's main competitors are agricultural financial institutions and other
leasing companies. Many of these organizations have greater financial and other
resources than the Company and as a consequence are able to obtain funds on
terms more favorable than those available to the Company. The Company's
strongest competitors are agricultural financial institutions such as the Banks
of the Farm Credit System and their affiliates, federal government sponsored
enterprises ("GSEs") which are the largest agricultural lenders in the nation,
and local and regional banks servicing the agricultural sector. These
competitors may enjoy a relative advantage in financing their leasing business.
Banks of the Farm Credit System as GSEs may be able to raise funds in the public
debt market at a lower interest rate than the Company can. Similarly, commercial
banks may be able to raise funds more cheaply than the Company through their
offering of Federal Deposit Insurance Corporation insured deposit accounts.
Other leasing companies competing with the Company include equipment
manufacturers with finance subsidiaries, and independent leasing companies.
Finance subsidiaries of equipment manufacturers frequently charge reduced
interest rates on equipment leases to stimulate sales of equipment produced by
their parent companies. Telmark competes with its competitors by focusing on
agricultural equipment financing, service to its customers, and tailoring its
portfolio of products to address the specific needs of farmers and other rural
businesses which serve the agricultural marketplace.
14
<PAGE>
SELECTED FINANCIAL DATA
The following "Selected Financial Data" of the Company have been derived from
financial statements audited by Coopers & Lybrand L.L.P., whose reports for the
periods ended or as of June 30, 1997, 1996 and 1995 are included elsewhere in
this Prospectus, and should be read in conjunction with the full financial
statements of the Company and Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
(Thousands of Dollars)
----------------------------------------------------
Years Ended June 30,
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Total revenues ....................... $ 56,943 $ 48,627 $ 41,942 $ 34,642 $ 34,158
Income before income taxes ........... $ 13,003 $ 11,502 $ 9,272 $ 8,485 $ 9,920
Provision for income taxes ........... $ 5,112 $ 4,745 $ 4,240 $ 4,126 $ 4,481
Net income ........................... $ 7,892 $ 6,757 $ 5,032 $ 4,359 $ 5,439
Leases and notes, net ................ $445,770 $374,561 $333,091 $277,058 $231,577
Total Assets ......................... $470,193 $398,198 $358,634 $300,093 $249,085
Senior Debt .......................... $339,482 $273,000 $255,467 $215,489 $170,400
Debentures (1) ....................... $ 31,044 $ 24,258 $ 8,174 $ 3,712 $ 0
Stockholder's Equity ................. $ 86,406 $ 78,514 $ 44,758 $ 40,043 $ 36,908
Ratio of earnings to fixed charges (2) 1.5 1.6 1.5 1.6 1.7
Ratio of Senior Debt to equity (3) ... 4.3 3.8 3.7 3.6 3.1
</TABLE>
(1) In January 1994 the Company commenced a public offering of Subordinated
Debentures. See Note 5 of the Notes to Financial Statements.
(2) For purposes of this ratio, earnings represents operating income before (i)
income taxes, (ii) interest charges, and (iii) rental expense. Fixed charges
include interest on all senior and subordinated debt.
(3) Under a support agreement and Senior Debt agreements, subordinated debt
payable to Agway Holdings, Inc. is included in the definition of equity for
purposes of this ratio. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1997 COMPARED TO 1996. Telmark's net income increased by $1.1 million (16.8%)
from $6.8 million in 1996 to $7.9 million in 1997. The increase is principally
due to a larger outstanding portfolio during the year.
Revenue is recognized over the term of the leases. Increases in the lease
portfolio from new booked volume of $223.1 million in 1997 and $175.0 million in
1996 were in excess of lease reductions from collection and net bad debt expense
which totaled $151.9 million and $133.5 million in 1997 and 1996, respectively.
The increase in new booked volume in excess of collections and bad debt
provisions has the effect of increasing total revenues. Total revenues of $56.9
million in 1997 increased by $8.3 million (17.1%) as compared to $48.6 million
in 1996. The increase is attributable in part to $71.2 million (19.0%) increase
in net leases and notes during 1997 as compared to 1996. Interest and finance
charges, as a percentage of average net leases and notes, increased slightly
from 12.9% in 1996 to 13.0% in 1997. During the same period, the average cost of
interest paid on debt remained unchanged at 7.5%.
Selling, general, and administrative expenses of $12.5 million in 1997 increased
by $2.7 million (27.4%) compared to $9.8 million in 1996. Those increases were
primarily the result of additional people, incentives paid relating to the
additional new business booked, and advertising. Other administrative expenses
remained low due to tight expense control. While the average cost of interest
paid on debt remained unchanged, interest expense of $23.5 million in 1997
increased by $3.2 million (15.7%) compared to $20.3 million in 1996, due to
increased borrowings required to finance the growth of the lease portfolio.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
The provision for credit losses of $7.9 million in 1997 increased $0.9 million
(13.5%) compared to $7 million in 1996. This increase is based on the Company's
analysis of reserves required to provide for uncollectible receivables.
Telmark's allowance for credit losses is determined by a periodic review of the
lease portfolio, including analysis of delinquent accounts, current economic
conditions, estimated residual values, and credit worthiness of customers.
Reserves are established at a level sufficient to cover all estimated losses in
the portfolio. The basis for the amount is a comprehensive review of all large
and non-earning accounts and a quantitative and qualitative review of the entire
portfolio based on prior experience. During 1996 and 1997, the general economy
remained strong and the total value of non-earning accounts was reduced from
$2.9 million in 1996 to $2.7 million in 1997. However, management believes that
it was prudent to increase the level of reserve to approximately $24.0 million
because of the increase in the size of the overall lease portfolio over the
prior year. Accordingly, the provision for credit losses increased.
FISCAL 1996 COMPARED TO 1995. Telmark's net income for 1996 increased by $1.7
million (34.3%) from 1995 to $6.8 million. The increase is due to a larger
outstanding portfolio during the year and a somewhat higher margin on the
portfolio.
Revenue is recognized over the term of the leases. Increases in the lease
portfolio from new booked volume of $175.0 million in 1996 and $170.5 million in
1995, in excess of lease reductions from collection, sale of leases, and net bad
debt expense totaling $134 million and $114 million in 1996 and 1995
respectively, have the effect of increasing total revenues. Total revenues in
1996 increased by $6.7 million (15.9%) over 1995, attributable in part to the
$41 million (12.4%) increase in net leases during fiscal 1996. Interest and
finance charges, as a percentage of the notes and leases, increased slightly
from 12.7% in fiscal 1995 to 12.9% in 1996. During the same period, the average
cost of interest paid on debt remained unchanged at 7.5%.
Selling, general and administrative expenses increased by $1.6 million (20.0%)
to $9.8 million from $8.2 million the previous year. Those increases were
primarily the result of additional people, incentives paid relating to the
additional new business booked, and advertising. Other administrative expenses
remained low due to tight expense control. For fiscal 1996, interest expense
increased by $2.6 million (14.9%) to $20.3 million due to increased borrowings
required to finance the growth of the lease portfolio while the average cost of
interest paid on debt remained unchanged.
The provision for credit losses increased 2.8% to $7.0 million and is based on
the Company's analysis of reserves required to provide for uncollectible
receivables. Telmark's allowance for credit losses is determined by a periodic
review of the lease portfolio, including analysis of delinquent accounts,
current economic conditions, estimated residual values and credit worthiness of
customers. Reserves are established at a level sufficient to cover all estimated
losses in the portfolio. The basis for the amount is a comprehensive review of
all large and non-earning accounts, and a quantitative and qualitative review of
the entire portfolio based on prior experience. In 1995, Telmark implemented an
aggressive write off policy which resulted in a decrease in the total of
non-earning accounts to $3.8 million. During 1996, the general economy remained
strong and the total of non-earning accounts was further reduced to $2.9
million. However, management believes that it was prudent to increase the level
of reserve to approximately $19.8 million because of the increase in the size of
the overall lease portfolio over the prior year. Accordingly, the provision for
credit losses increased.
LIQUIDITY AND CAPITAL RESOURCES
The ongoing availability of adequate financing to maintain the size of the
Company's current lease portfolio and to permit lease portfolio growth is key to
the Company's continuing profitability and stability. The Company has
principally financed its operations, including the growth of its lease
portfolio, through borrowings under its lines of credit, private placements of
debt with institutional investors and other term debt, lease backed asset
securitization, principal collections on leases and cash provided from
operations. Total assets have grown an average rate of 17% over the past
thirteen years. This growth has been financed through growth in retained
earnings and additional paid in capital from Agway, in addition to debt
financing. At June 30, 1997, the ratio of Senior Debt to equity is at 4.3,
compared to 3.8 for fiscal 1996. Telmark has been successful in arranging its
past financing needs and believes that its current financing arrangements are
adequate to meet its foreseeable operating requirements. There can be no
assurance, however, that Telmark will be able to obtain future financing in
amounts or on terms that are acceptable. The Company's inability to obtain
adequate financing would have a material adverse effect on its operations.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Cash flows from operating activities for 1997 of $15.2 million and cash flows
from financing activities of $64.5 million were used to fund the net lease
receivable growth.
In 1996, cash flows from operations of $12.6 million and cash provided from debt
financing of $35.7 million were used to fund the net lease receivable growth.
Repayment of $27 million of subordinated debt to Agway Holdings, Inc.
("Holdings") and receipt of $27 million of paid in capital from Holdings were
included in cash flow from financing activities.
The following paragraphs summarize the terms of the Company's existing debt
agreements and instruments which the Company believes may be material to
investors. These summaries do not purport to be complete, are subject to the
detailed provisions of those documents, and are qualified in their entirety by
reference to the agreements and instruments filed as exhibits to the
registration statement of which this Prospectus is a part.
Line of Credit and Term Debt Agreements
As of June 30, 1997, the Company had two separate credit facilities available
from banks which allow the Company to borrow up to an aggregate of $204,000,000.
An uncommitted short-term line of credit agreement permits the Company to borrow
up to $4,000,000 on an unsecured basis with interest paid upon maturity. The
line bears interest at money market variable rates. A committed $200,000,000
partially collateralized (see "Investment in Bank Stock") revolving term loan
facility permits the Company 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 amount outstanding as of June 30, 1997 under the
short-term line of credit and the revolving term loan facility was $4,000,000
and $190,900,000, respectively.
Telmark borrows under its short-term line of credit agreement and its revolving
term agreement from time to time to fund its operations. Short-term debt serves
as interim financing between the issuances of long-term debt. Telmark renews its
lines of credit annually. The $4,000,000 line of credit has been renewed through
December 1997. The $200,000,000 revolving term agreement loan facility is
available through February 1, 1998. The Company believes it has sufficient lines
of credit in place to meet interim funding needs.
Senior Debt
At June 30, 1997, the Company had balances outstanding on eleven unsecured
senior note private placements totaling $119,722,223. Interest is payable
semiannually on each senior note. Principal payments are both semiannual and
annual. The note agreements are similar to one another and each contain
financial covenants, the most restrictive of which prohibit (i) tangible net
worth, defined as consolidated tangible assets less total liabilities (excluding
notes payable to Agway Holdings, Inc.), from being less than $70,000,000, (ii)
the ratio of total liabilities less subordinated notes payable to Agway
Holdings, Inc. to shareholder's equity plus subordinated notes payable to Agway
Holdings, Inc. from exceeding 5:1, (iii) the ratio of earnings available for
fixed charges from being less than 1.25:1, and (iv) dividend distributions and
restricted investments (as defined) made after December 31, 1996 are prohibited
to the extent they exceed 75% of consolidated net income for the period
beginning on January 1, 1997 through the date of determination, inclusive.
Telmark plans to continue using banks, debt placements with private
institutional investors, and Subordinated Debentures as its principal sources of
financing. In addition, the Company may sell a portion of its "net lease
receivables" to provide additional capital.
Subordinated Debentures
At July 31, 1997, the Company had an aggregate principal amount of $31,492,033
of debentures issued and outstanding under the Indenture. These debentures are
unsecured and are subordinated to all Senior Debt of the Company. Of the total
outstanding, $4,723,248 bear interest at a rate of 6% per annum, and are due
December 31, 1997; $6,298,312 bear interest at the rate of 8.25% per annum and
are due March 31, 2000; $3,502,505 bear interest at the rate of 8.25% per annum
and are due March 31, 1998; $6,759,383 bear interest at the rate of 8.50% per
annum and are due March 31, 2000; $3,018,223 bear interest at the rate of 8.00%
per annum and are due March 31, 2000; and $2,846,445 bear interest at the rate
of 7.75% and are due March 31, 1998; $1,156,872 bear interest at the rate of
7.25% per annum and are due March 31, 2000; and $3,187,045 bear interest rate at
the rate of 7.5% per annum and are due March 31, 2002.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Lease Sales
The Company has entered into lease sale transactions with banks over the years,
four of which have remaining balances as of June 30, 1997. The Company sold
approximately $10.6 million in lease receivables in September 1991, $10.8
million in June 1992, $10.7 million in June 1993, and $5.5 million in February
1994. The outstanding balance of receivables sold was $1.9 million as of June
30, 1997. See "Business of Telmark."
The Company is restricted under its private placement debt note agreements from
selling leases in an amount (i) greater than 10% of the previous year end total
assets in any year or (ii) cumulatively in excess of the sum of 35% of each
year's percentage of the previous year end total assets, after May 1992.
Currently, the Company's maximum cumulative percentage of sold leases under its
oldest note agreement is 17.4%.
Securitization
The Company through a special purpose subsidiary, financed 1,165 leases in a
securitization transaction. Collateralized notes of approximately $25.9 million
were sold to insurance companies in May 1997. The notes are collateralized by
the leases and are due in monthly installments payable through December 2004.
Amortization of the notes corresponds with the life of the leases which
collateralized payment of the notes. As of June 30, 1997, the remaining balance
of the collateralized notes was approximately $24.8 million.
Investment in Bank Stock
In accordance with the Federal Farm Credit Act, the Company, as a condition of
its borrowings (lines of credit both short-term and long term debt) from CoBank,
ACB (the "Bank") is required to invest in the capital stock of the Bank. The
initial statutory minimum amount of capital investment required for borrowers is
two percent of the aggregate loan funds advanced or one thousand dollars,
whichever is less. As of June 30, 1997, the Company holds $10,807,417 of capital
stock of the Bank. The Bank has a first lien on this capital stock as collateral
for the repayment of the Company's loan and the Company does not have access to
these funds. There is no market for the Bank's stock.
Federal regulations concerning capitalization, bylaws, and the issuance and
retirement of Bank stock provide that stock issued on or after October 6, 1988
must qualify as at-risk capital of the Bank. All of the Company's investment in
capital stock represents at-risk capital of the Bank. The retirement of at-risk
capital must be solely at the discretion of the Bank's board of directors and
not upon a date certain or upon the happening of any event, such as the
repayment of the related loan. In addition, the Bank is prohibited from reducing
its capital by retiring stock (other than protected stock), if after or due to
such retirement, the institution would not meet its at-risk capital standard set
by federal regulations.
The boards of directors of the Bank generally may authorize the payment of
patronage refunds as provided for in its bylaws. Such payment of dividends
and/or distribution of earnings are also subject to federal regulations that
establish minimum at-risk capital standards for the Bank.
LEGAL PROCEEDINGS
The Company is not a party to any litigation or legal proceedings pending, or to
the best of its knowledge threatened, which in the opinion of its management,
individually or in the aggregate, would have a material adverse affect on its
operations, financial condition, or liquidity.
18
<PAGE>
DIRECTORS AND MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT MEMBERS OF MANAGEMENT OF THE
REGISTRANT
The Directors of the Company determine Company policy and are elected by the
stockholder at each annual meeting to serve until the next annual meeting or
until their successors are elected and qualified. The following table sets forth
certain information regarding the Company's Directors, executive officers and
significant members of management:
<TABLE>
<CAPTION>
Years served Year Became Term
Name Age Position as Officer a Director Expires
---- --- -------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Peter J. O'Neill 50 Treasurer,
Chairman of the
Board and Director 3 1995 July, 1998
Gary K. Van Slyke 54 Director 1996 July, 1998
Stanley A. Weeks 59 Director 1995 July, 1998
Christian F. Wolff, Jr 72 Director 1995 July, 1998
Samuel F. Minor 59 Director 1989 July, 1998
William W. Young 44 Director 1992 July, 1998
Daniel J. Edinger 46 President and Director 9 1988 July, 1998
Herbert E. Gerhart 52 Secretary and 20
Financial Manager
Raymond G. Fuller 46 Director of Customer 3
Operations
Richard A. Kalin 48 Controller 3
George F. Lott 53 Director of Manufacturer 3
Programs
Kipp R. Weaver 47 Director of Credit 3
</TABLE>
The Board of Directors, except for Messrs. O'Neill, Edinger, and Weeks, are paid
an annual retainer fee of $1,000 for their services on the Telmark Board. The
executive officers and significant members of management of the Company 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. Telmark is organized with nine functional managers and six region
managers reporting to the President, Daniel J. Edinger. The nine functional
managers who directly report include the Director of Manufacturer Programs,
Director of Marketing, the Director of Credit, Director of Customer Operations,
Planning and Product Manager, Director of Customer Operations, Director of Human
Resources, Financial Manager, and the Controller. More detailed biographies of
each person listed above, except for those who have been a director or officer
for more than 5 years, are set forth below.
PETER J. O'NEILL - Mr. O'Neill has been employed by Agway for more than five
years. He was elected Senior Vice President, Finance and Control in 1992.
GARY K. VAN SLYKE - Mr. Van Slyke is a member of the Agway Board of Directors.
He has been engaged in full- time farming for more than five years.
STANLEY A. WEEKS - Mr. Weeks has been employed by Agway for more than five years
as Director of Farm Systems Research and Applied Technology from January 1990
through December 1994, and as Director Research Farm Operations since January
1995.
CHRISTIAN F. WOLFF, JR. - Mr. Wolff is a member of the Agway Board of Directors.
He has been engaged in full-time farming for more than five years.
RAYMOND G. FULLER - Mr. Fuller was Collection Manager from 1985 to 1997, and was
named Director of Customer Operations in September 1996.
RICHARD A. KALIN - Mr. Kalin was named Controller in July 1995. He served as
Accounting Manager for the prior three years.
19
<PAGE>
DIRECTORS AND MANAGEMENT (CONTINUED)
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT MEMBERS OF MANAGEMENT OF THE
REGISTRANT (CONTINUED)
GEORGE F. LOTT - Mr. Lott was named Director of Manufacturer Programs in 1994.
He served as Planning and Marketing Manager for the prior two years.
KIPP R. WEAVER - Mr. Weaver was named Director of Credit in May 1995. During the
prior three years he was employed as an officer of the Farm Credit Bank of
Baltimore.
20
<PAGE>
EXECUTIVE COMPENSATION
Employees of Telmark are eligible to participate in Agway Inc.'s benefits and
compensation plans. The following table sets forth information regarding annual
and long-term compensation for services in all capacities to the Company for the
fiscal years ended June 1997, 1996, and 1995, of the chief executive officer and
any of the other four most highly compensated executive officers of the Company
(other than the CEO) who were serving in such capacity at June 30,1997 and was
compensated over $100,000. In accordance with the rules on executive officer
compensation adopted by the Securities and Exchange Commission, compensation
information is not provided for any executive officers of the Company receiving
aggregate total compensation of less than $100,000.
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL OTHER
NAME AND ------------------- COMPENSATION
PRINCIPAL POSITION YEAR SALARY BONUS(2) (3)
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Daniel J. Edinger . 1997 $130,619 $ 52,801 $ 2,807
President ........ 1996 120,016 90,000 2,513
1995 96,798 - 0 - 862
Kipp R. Weaver .... 1997 $ 82,394 $ 28,838 $ 704
Director of Credit 1996 81,198 16,479 6,787
1995 5,231 - 0 - 4
</TABLE>
- --------
(1) Total compensation (defined as base salary or wages, overtime and bonus
or incentive compensation) is used in determining the average annual
compensation pursuant to the Agway Inc. Retirement Plan. This amount includes
all deferred amounts under the Agway Inc. Employees' Thrift Investment Plan and
the Agway Inc. Employee's Benefits Equalization Plan.
(2) Members of the Agway Inc. chief executive officer's staff and other
executives designated by the Agway Inc. chief executive officer are eligible for
participation in the Agway Inc. management incentive policy. Within Telmark, the
President qualified for this program. A bonus may be paid to each eligible
executive contingent upon each individual's performance as determined by the
President and CEO of Agway Inc., Telmark's net margin, and other performance
factors. Bonuses for other Telmark executive officers may be paid to each
eligible executive contingent upon each individual's performance as determined
by the President of Telmark, Telmark's net margin and other performance factors.
Bonuses are reflected in the fiscal year earned regardless of payment date.
(3) Amounts shown include contributions made by the Company to the Agway
Inc. Employees' Thrift Investment Plan and the Agway Inc. Employees' Benefits
Equalization 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 provides for retirement benefits, at a normal retirement age of
65, 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
Retirement Plan 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.
21
<PAGE>
EXECUTIVE COMPENSATION (CONTINUED)
The following table shows estimated annual benefits payable upon retirement
based on certain average remuneration levels and years-of-service
classifications. The table was developed assuming a normal retirement at age 65.
PENSION PLAN TABLE
YEARS OF CREDITED SERVICE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
REMUNERATION 5 10 15 20 25
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$100,000 $ 8,000 $ 16,000 $ 24,000 $ 32,000 $ 40,000
$125,000 $ 10,000 $ 20,000 $ 30,000 $ 40,000 $ 50,000
$150,000 $ 12,000 $ 24,000 $ 36,000 $ 48,000 $ 60,000
$175,000 $ 14,000 $ 28,000 $ 42,000 $ 56,000 $ 70,000
$200,000 $ 16,000 $ 32,000 $ 48,000 $ 64,000 $ 80,000
$225,000 $ 18,000 $ 36,000 $ 54,000 $ 72,000 $ 90,000
</TABLE>
Amount 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 Company's Employees' Benefit
Equalization Plan of Agway Inc. has been established to provide for the amount
of any such reduction in annual pension benefits under the Retirement Plan.
The benefits shown are computed on a straight life basis and do not reflect an
offset for up to 50% of the Social Security benefits, subject to certain minimum
benefits. Also, the benefits are based on continuing the Plan's benefits
formulas as in effect on June 30, 1997. The number of credited years of service
under the Retirement Plan for Mr. Edinger was 18 and for Mr. Weaver was 2.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has no compensation committee. The salary of Daniel J. Edinger,
President of Telmark is determined by Peter J. O'Neill, Chairman of the Board of
Directors of Telmark and Chief Financial Officer of Agway Inc., the parent
Company of Telmark. The salary of the other Executive Officers of Telmark is
determined by Mr. Edinger. Salaries of all Executive Officers are included in
the annual operating budget, which budget is approved by the entire Board of
Directors of Telmark.
None of the Executive Officers or Directors who participated in establishing
compensation policies had interlocks reportable under Section 402 (j) of
Regulation S-K.
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
All of the outstanding equity of the Company is owned by Agway Inc. None of the
executive officers or directors of the Company owns any equity securities of
Telmark. All of the directors other than Mr. O'Neill, Mr. Edinger and Mr. Weeks
are also directors of Agway Inc. 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 executive officers or directors of the Company either
individually or in the aggregate, own greater than 1% of any class of equity
security of Agway Inc. or it's subsidiaries.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company is an indirect wholly-owned subsidiary of Agway and as such, had
intercompany transactions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 7 to the Financial
Statement for further information.
PRINCIPAL STOCKHOLDERS
Telmark is a wholly-owned subsidiary of Agway Holdings, Inc. Agway Holdings,
Inc. is a wholly-owned subsidiary of Agway Financial Corporation which in turn
is a wholly-owned subsidiary of Agway. Agway is one of the largest supply and
services cooperatives in the United States.
22
<PAGE>
DESCRIPTION OF THE DEBENTURES
GENERAL. Telmark is authorized to issue the Debentures pursuant to the
Indenture dated as of September 30, 1993, (the "Indenture"), between Telmark and
OnBank & Trust Co., as Trustee. Manufacturers & Traders Trust Co. assumed
Trustee responsibilities pursuant to an Agreement of Resignation, Appointment
and Acceptance by and among OnBank & Trust Co., Telmark, and Manufacturers &
Traders Trust Co. The statements under this heading, "Description of
Debentures," are completely qualified by and subject to the terms of the
Indenture. The Indenture is filed as an exhibit to the Registration Statement
and reference is made thereto for a complete statement of the terms and
provisions of these Debentures. The Debentures to be issued under this
Prospectus are limited to $22,000,000 aggregate principal amount, but the
Indenture does not limit the amount of the Debentures or other securities which
may be issued by the Company thereunder. As of July 31, 1997, there was
$31,492,035 principal amount of debentures issued and outstanding under the
Indenture. (The Debentures and any other securities issued and outstanding under
the Indenture are referred to herein as "Outstanding Debentures"). The
Debentures will be issued at 100% of their principal amount. The Debentures will
be issued in registered form in minimum denominations and multiples in excess
thereof as set forth in the table on the cover page of this Prospectus. The
following securities are being offered:
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
Title of Class PUBLIC OR COMMISSIONS COMPANY
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debentures, $1,000 minimum denomination
and additional multiples of $100
(minimum 8.0% per annum)due March 31, 2001
Per Unit 100% None
Total * None *
- ------------------------------------------------------------------------------------------------------------------
Debentures, $1,000 minimum denomination
and additional multiples of $100
(minimum 8.5% per annum)
due March 31, 2003
Per Unit 100% None
Total * None *
- ------------------------------------------------------------------------------------------------------------------
Debentures under the Interest Reinvestment
Option (ranging from minimum of 6.0% to
8.5% per annum) due from December 31,
1997 through March 31, 2002
Per Unit 100% None
Total * None *
- ------------------------------------------------------------------------------------------------------------------
Total $22,000,000 $22,000,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
INTEREST. Not withstanding the term of the Debentures set forth in the
Indenture, the Debentures will bear interest from their respective Issue Dates
at the per annum rate described below (on the basis of a 360-day year of twelve
30- day months). The Company may, from time to time prior to the completion of
the offering of the Debentures, change the rate of interest or maturity date
offered by filing a supplement with the Securities and Exchange Commission. The
applicable supplement, if any, will be attached to this Prospectus. Any change
in the interest rate or maturity date offered will not affect the rate of
interest on or maturity date of any Debentures theretofore issued. The interest
rates on the Debentures offered hereby is as follows:
Interest on the 8.0% Debentures due March 31, 2001, is payable quarterly on
January 1, April 1, July 1 and October 1, and at maturity, at a rate per
annum for each quarterly period equal to the greater of: (1) the "stated
rate" of 8.0% per annum; and, (2) the "Treasury Bill Rate" (as defined
below).
Interest on the 8.5% Debentures, due March 31, 2003, is payable quarterly
on January 1, April 1, July 1 and October 1, and at maturity, at a rate per
annum for each quarterly period equal to the greater of: (1) the "stated
rate" of 8.5% per annum; and, (2) the "Treasury Bill Rate" (as defined
below).
U.S. Treasury bills are issued and traded on a discount basis, the amount
of the discount being the difference between their face value at maturity and
their sales price. The per annum discount rate on a U.S. Treasury bill is the
percentage obtained by dividing the amount of the discount on such U.S. Treasury
bill by its face value at maturity and annualizing such percentage on the basis
of a 360-day year. The Federal Reserve Board currently publishes such rates
weekly in its Statistical Release H.15 (519). Unlike the interest on U.S.
Treasury bills, interest on the certificates will not be exempt from state and
local income taxation.
23
<PAGE>
DESCRIPTION OF THE DEBENTURES (CONTINUED)
The "Treasury Bill Rate" for each quarterly interest payment date is the
arithmetic average of the weekly per annum auction average discount rates at
issue date for U.S. Treasury bills with maturities of 26 weeks (which may vary
from the market discount rates for the same weeks), as published for each week
by the Federal Reserve Board, during the period September 1 to November 30,
inclusive, for the January 1 interest payment date, during the period December 1
to February 28 inclusive, for the April 1 interest payment date, during the
period March 1 to May 31, for the July 1 interest payment date, during the
period June 1 to August 31 for the October 1 interest payment date, or during
the period December 1 to February 28 for interest payable on the maturity date
(each such period, an "Interest Determination Period"). In the event that the
Federal Reserve Board does not publish the weekly per annum auction average
discount rate for a particular week, Telmark shall select a publication of such
rate by any Federal Reserve Bank or any U.S. Government department or agency to
be used in computing the arithmetic average. The Treasury Bill Rate will be
rounded to the nearest one hundredth of a percentage point.
In the event that Telmark in good faith determines that for any reason a
Treasury Bill Rate is not published for a particular week in an Interest
Determination Period with respect to a particular interest payment date or the
maturity date, as applicable, an "Alternate Rate" will be substituted for the
Treasury Bill Rate for such period and date. The Alternate Rate will be the
arithmetic average of the weekly per annum auction average discount rates for
those weeks in the relevant Interest Determination Period for which rates are
published as described above, if any, and the weekly per annum auction average
discount rates or market discount rates or stated interest rates for comparable
issue(s) of securities as is selected by Telmark, for those weeks in the
Interest Determination Period for which no rate is published as described above.
The Alternate Rate will be rounded to the nearest one hundredth of a percentage
point.
In the further event that Telmark in good faith determines that neither the
Treasury Bill Rate nor Alternate Rate can be computed for the period September 1
to November 30, inclusive, for the January 1 interest payment date, for the
period December 1 to February 28, inclusive, for the April 1 interest payment
date, for the period March 1 to May 31, inclusive, for the July 1 interest
payment date, or for the period June 1 to August 31, inclusive, for the October
1 interest payment date, the rate of interest payable with respect to any
Debentures will be the rate stated thereon.
The following chart sets forth for the periods indicated:
(1) The "Treasury Bill Rate", as defined above.
(2) The highest per annum discount rate on six month U.S. Treasury Bills
at one of the 26 auctions during the period used to calculate the
"Treasury Bill Rate".
(3) The lowest per annum discount rate on six month U.S. Treasury Bills
at one of the 26 auctions during the period used to calculate the
"Treasury Bill Rate".
<TABLE>
<CAPTION>
PAYMENT AVERAGE
DATE "TREASURY BILL RATE" HIGH LOW
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jan.-93 3.28% 3.45% 2.78%
Apr.-93 3.23% 3.46% 3.06%
Jul.-93 3.14% 3.19% 2.95%
Oct.-93 3.18% 3.30% 3.10%
Jan.-94 3.16% 3.30% 3.02%
Apr.-94 3.27% 3.53% 3.14%
Jul.-94 3.71% 4.81% 3.61%
Oct.-94 4.75% 4.99% 4.53%
Jan.-95 5.04% 5.85% 4.89%
Apr.-95 6.20% 6.42% 5.86%
Jul.-95 6.01% 6.00% 5.65%
Oct.-95 5.43% 5.61% 5.30%
Jan.-96 5.37% 5.38% 5.22%
Apr.-96 4.99% 5.25% 4.71%
Jul.-96 5.01% 5.19% 4.80%
Oct.-96 5.24% 5.41% 5.08%
Jan.-97 5.20% 5.38% 5.07%
Apr.-97 5.07% 5.11% 4.97%
Jul.-97 5.18% 5.45% 5.00%
</TABLE>
24
<PAGE>
DESCRIPTION OF THE DEBENTURES (CONTINUED)
If the Debentures currently being offered had been outstanding on July 1,
1997, the stated interest rates would have been paid. Although the period
September 1, 1997 to November 30, 1997, is not complete as of the date of this
Prospectus (and hence the Treasury Bill Rate for the January 1, 1998 interest
payment date cannot yet be determined), the Treasury Bill Rate as of August 22,
1997 was 5.16%.
The six-month U.S. Treasury bill rate has fluctuated widely during the
periods shown in the chart. This rate can be expected to fluctuate in the
future. These fluctuations will cause the rate of interest payable on the
Debentures to exceed the stated rate whenever the Treasury Bill Rate exceeds the
stated rate. See "Risk Factors - Absence of Public Market, Redemption and Market
Risk."
PAYMENTS OF PRINCIPAL AND INTEREST. Principal amounts of the Debentures
will be due and payable, together with interest accrued but unpaid thereon, on
the maturity date (the "Maturity Date") for the Debentures. The Maturity Date
for the Debentures offered will be as set forth in the table on the cover page
of this Prospectus. Interest on the Debentures will be payable quarterly on
January 1, April 1, July 1, and October 1 and on the Maturity Date as set forth
in the table on the cover page of this Prospectus (each, an "Interest Payment
Date"). Principal and interest on the Debentures will be payable at the office
of the transfer agent, Agway, in DeWitt, New York. Additional amounts may be
added to the principal of the Debenture pursuant to an election by the holder
thereof to have quarterly interest payments added to and increase the principal
amount of the Debenture. In such a case, the Debenture holder will receive a
statement from the Company indicating the amounts added to principal of the
Debenture. In any case in which an Interest Payment Date, a Redemption Date (as
defined below), the Maturity Date or other payment date is not a Business Day,
payment of interest or principal, as the case may be, shall be made on the next
succeeding Business Day with the same force and effect as if made on such
Interest Payment Date, Redemption Date, Maturity Date or other payment date.
"Business Day" means any day other than a Saturday or Sunday or a day on which
the Federal Reserve Bank of New York or commercial banking institutions in New
York City are authorized or required by law or executive order to close.
SUBORDINATION AND COVENANTS. The Debentures are unsecured obligations of
Telmark, and the payment thereof is subordinated to other debt (except debts
similarly subordinated) as hereinafter mentioned. There is no provision in the
Indenture that would prevent Telmark from incurring additional debt or which
would restrict the interest rate or other terms of such other debt. In addition
to its subordination provisions, the Indenture contains only limited
restrictions on highly leveraged transactions, reorganizations, restructuring,
mergers or similar transactions involving the Company, which may adversely
affect the holders of the Debentures. The Company is not limited in its ability
to merge into or transfer or lease all or substantially all of its assets to a
corporation as long as such corporation assumes the obligations of the Company
under the Debentures and the Indenture and, after the transaction, there exists
no event of default under the Indenture.
TRANSFER. The terms of the Debentures include no restrictions on transfer.
SETTLEMENT AND ISSUE DATE. Persons interested in purchasing Debentures
should forward their completed application and a check (personal, cashiers or
certified) or money order payable to the Company in an amount equal to the
principal amount of the Debenture to be purchased. Applications are available at
certain Company and Agway locations. Applications generally will be processed by
the Company within five to ten days of the date of receipt by the Company, at
which time they will be forwarded to the trustee to authenticate, who in turn
will forward the Debenture to the applicant. The "Issue Date" is defined as the
first day of the month in which the application and proceeds are received by the
Company for such Debenture.
REDEMPTION PROVISIONS. Upon not less than 30 days written notice, Telmark
may, at its option, redeem all, or by lot, from time to time any part of the
Debentures at the principal amount thereof, together with accrued but unpaid
interest from the last Interest Payment Date to the date fixed for redemption at
the stated rate. Should the Debentures be redeemed by lot, all Debentures not
redeemed will be accorded equal treatment in any subsequent redemption.
25
<PAGE>
DESCRIPTION OF THE DEBENTURES (CONTINUED)
INTEREST REINVESTMENT OPTION. At the time of application for purchase of
the Debentures, or at any time thereafter, the holder may elect to have all
interest paid on the certificates reinvested automatically. In the event that
the automatic reinvestment option is elected, the interest due on each quarterly
payment date will be added to the principal amount of the Debenture and will
earn interest thereafter on the same basis as the original principal amount.
This election may be revoked only as to future interest payments at any time by
notice to Telmark, effective on the date such notification is received by
Telmark. Interest reinvested will be subject to income tax as if it had been
received by the Debenture holder at the time reinvested.
SUBORDINATION PROVISIONS. The payment of the principal and interest on the
Debentures is subordinated in right of payment, to the extent set forth in the
Indenture, to the amounts of principal and interest due on "Senior Debt". Senior
Debt is defined as the principal of, and interest on indebtedness of Telmark for
money borrowed from or guaranteed to banks, trust companies, insurance
companies, and other financial institutions, including dealers in commercial
paper, charitable trusts, pension trusts, and other investing organizations,
evidenced by notes or similar obligations unless the instrument creating or
evidencing the indebtedness provides that such indebtedness is not superior or
is subordinate in right of payment to the Debentures. Senior Debt, as thus
defined, includes all interest-bearing debt presently outstanding except
indebtedness with respect to the Outstanding Debentures. As of July 31, 1997,
Senior Debt of $344,036,110 was outstanding.
In the event of any distribution of assets of Telmark under any total
liquidation or reorganization of Telmark, the holders of all Senior Debt shall
be entitled to receive payment in full before the holders of the Outstanding
Debentures are entitled to receive any payment. After payment in full of the
Senior Debt, the holders of the Outstanding Debentures will be entitled to
participate in any distribution of assets, both as such holders and by virtue of
subrogation to the rights of the holders of Senior Debt, to the extent that the
Senior Debt was benefited by the receipt of distributions to which the holders
of the Outstanding Debentures would have been entitled if there had been no
subordination. By reason of such subordination, in the event of Telmark's
insolvency, holders of Senior Debt may receive more, ratably, and holders of the
Outstanding Debentures may receive less, ratably, than other creditors of
Telmark.
MODIFICATION OF INDENTURE. The Indenture permits the Trustee and Telmark
to make non-material modifications and amendments to the Indenture without the
consent of any holder of Outstanding Debentures. The Indenture permits the
Trustee and Telmark to make other modifications and amendments to the Indenture
with the written consent of holders of 66-2/3% in aggregate principal amount of
Outstanding Debentures, provided that, without the consent of each holder of an
Outstanding Debenture affected, no such amendment or modification may (i) reduce
the amount of Outstanding Debentures required to amend the Indenture, (ii)
reduce the interest rate or time for payment thereof applicable to any
Outstanding Debenture, (iii) reduce the principal or change the Maturity Date of
any Outstanding Debenture, (iv) make any changes to the Indenture with respect
to the waiver of past defaults thereunder or the rights of holders of
Outstanding Debentures to receive payments, or (v) make any changes to the
subordination provisions contained in the Indenture.
COVENANTS. Under the Indenture, Telmark covenants to make payments on the
Outstanding Debentures, and to file all required reports and other documents
with the Securities and Exchange Commission. The Indenture contains no
provisions restricting the declaration of payment of dividends by Telmark or
requiring the maintenance of any ratios or reserves by Telmark.
EVENTS OF DEFAULT AND WITHHOLDING OF NOTICE THEREOF TO DEBENTURE HOLDERS.
The Indenture provides for the following Events of Default: (i) failure to pay
interest upon any of the Outstanding Debentures when due, continued for a period
of 30 days; (ii) failure to pay principal of the Outstanding Debentures when due
and payable at maturity, upon redemption or otherwise; (iii) failure to perform
any other covenant of Telmark as set forth in the Indenture, continued for 60
days after written notice by the Trustee or the holders of at least 25% in
aggregate principal amount of the Outstanding Debentures.
The Trustee, within 60 days after the occurrence of the default, is
required to give the Outstanding Debenture holders notice of all defaults known
to Trustee, unless cured prior to the giving of such notice, provided that,
except in the case of default in the payment of principal or interest on any of
the Outstanding Debentures, the Trustee may withhold such notice if and so long
as it in good faith determines that the withholding of such notice is in the
interest of the Outstanding Debenture holders.
26
<PAGE>
DESCRIPTION OF THE DEBENTURES (CONTINUED)
Upon the happening and during the continuance of a default, the Trustee or
the holders of 25% in aggregate principal amount of the Outstanding Debentures
then outstanding may declare the principal of all the Outstanding Debentures and
the interest accrued thereon due and payable, but the holders of a majority of
the aggregate principal amount of the Outstanding Debentures then outstanding
may waive all defaults and rescind such declaration if the default is cured.
Subject to the provisions of the Indenture relating to the duties of the Trustee
in case any such default shall have occurred and be continuing, the Trustee will
be under no obligation to exercise any of its rights or powers at the request,
order or direction of any holders of Outstanding Debentures unless they shall
have offered to the Trustee reasonable security or indemnity. Subject to such
provisions for security or indemnity, a majority of the holders of a majority of
the aggregate principal amount of the Outstanding Debentures then outstanding
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee.
NO GUARANTEE BY AGWAY. Neither Agway nor any of its other subsidiaries
have guaranteed the payment of principal of or interest on the Debentures. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Support Agreement."
THE TRUSTEE. The Indenture contains certain limitations on the right of
the Trustee, as a creditor of Telmark, to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise.
AUTHENTICATION AND DELIVERY. The Debentures may be authenticated and
delivered upon the written order of Telmark without any further corporate
action.
SATISFACTION AND DISCHARGE OF INDENTURE. The Indenture may be discharged
upon payment or redemption of all Outstanding Debentures or upon deposit with
the Trustee of funds sufficient therefor.
EVIDENCE AS TO COMPLIANCE WITH CONDITIONS AND COVENANTS. As evidence of
compliance with the covenants and conditions provided for in the Indentures,
Telmark is to furnish to the Trustee Officer's Certificates each year stating
that such covenants and conditions have been complied with.
DESCRIPTION OF THE INTEREST REINVESTMENT OPTION
GENERAL. If the Certificate holder has elected to have all interest paid
on the Certificate reinvested automatically, the interest due on each quarterly
interest payment date will be added to the principal amount of the certificate
and will earn interest thereafter on the same basis as the original principal
amount. This election may be revoked - as to future interest payments only - by
written notice to Telmark, effective on the date when the revocation notice is
duly received by Telmark. Interest reinvested will be subject to federal income
tax as if it had been received by the certificate holder at the time reinvested.
RATES ON PREVIOUSLY ISSUED CERTIFICATES. The stated rates of interest on
Certificates previously issued by Telmark that remain outstanding (and upon
which the interest reinvestment option might be exercised by any holder thereof)
are as follows:
STATED RATE OF INTEREST DUE
----------------------- ---
6.00% December 31, 1997
7.75% March 31, 1998
8.25% March 31, 1998
8.00% March 31, 2000
8.25% March 31, 2000
8.50% March 31, 2000
7.25% March 31, 2000
7.50% March 31, 2002
Interest on these outstanding certificates is payable quarterly on January
1, April 1, July 1 and October 1, and at maturity, at the rate per annum for
each quarterly period equal to the greater of the certificates' "Stated Rate";
or the "Treasury Bill Rate," as defined above.
27
<PAGE>
LEGAL MATTERS
Legal matters in connection with the securities offered hereby have been
passed upon for the Company by David M. Hayes, Esq., Telmark Legal Counsel.
EXPERTS
The balance sheets as of June 30, 1997 and 1996 and the statements of
income, retained earnings, and cash flows for each of the three years in the
period ended June 30, 1997, have been included herein in reliance on the report
of Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
PLAN OF DISTRIBUTION
The Debentures may be sold to Agway Members, non-member patrons of Agway,
Telmark customers, Telmark and Agway employees and former employees, and the
general public. Sale of the securities offered hereby will be solicited through
direct mailings and/or availability of applications and Prospectuses through
Agway retail stores, Agway franchises, certain Agway affiliate locations and
Telmark locations. See "Description of Debentures Settlement." All employees of
Agway and Telmark offering the Debentures have other duties in connection with
the business of Agway or Telmark, as the case may be, and are not otherwise
engaged in the sale of securities. No salesperson will be employed to solicit
the sale of these securities, and no commission or discount will be paid or
allowed to anyone in connection with their sale. The individual Agway and
Telmark employees who participate in the sale of these securities may be deemed
to be underwriters of this offering within the meaning of that term as defined
in Section 2(11) of the Securities Act of 1933, as amended.
28
<PAGE>
TELMARK INC.
PROSPECTUS
Until all dealers effecting trans-
actions in the registered securities, whether
or not participating in this distribution, may
be required to deliver a Prospectus. This is in
addition to the obligations of dealers to
deliver a Prospectus when acting as
underwriters and with respect to their unsold
allotments or sub scriptions.
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C> <C>
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES:
Report of Independent Accountants......................................................................... 31
Consolidated Balance Sheets, June 30, 1997 and 1996....................................................... 32
Consolidated Statements of Income and Retained Earnings,
for the years ended June 30, 1997, 1996 and 1995..................................................... 33
Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1997, 1996 and 1995............. 34
Notes to Consolidated Financial Statements................................................................ 35
</TABLE>
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Telmark Inc.:
We have audited the accompanying balance sheets of TELMARK INC. (a wholly-owned
subsidiary of Agway Holdings, Inc.) and Consolidated Subsidiaries as of June 30,
1997 and 1996, and the related Consolidated statements of income and retained
earnings and cash flows for the years ended June 30, 1997, 1996 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financing statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telmark Inc. and
Consolidated Subsidiaries as of June 30, 1997 and 1996 and the results of their
operations and their cash flows for the years ended June 30, 1997, 1996 and 1995
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Syracuse, New York
August 8, 1997
31
<PAGE>
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
JUNE 30, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Leases and notes, net ....................................................... $445,769,893 $374,561,114
Investments ................................................................. 10,807,417 10,038,421
Equipment, net .............................................................. 1,055,377 1,061,672
Deferred income taxes ....................................................... 10,643,896 11,903,065
Income taxes prepaid to Agway Inc. .......................................... 979,599 0
Other assets ................................................................ 937,120 634,018
------------ ------------
Total Assets ................................................................ $470,193,302 $398,198,290
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
1997 1996
------------ ------------
Borrowings under lines of credit and term debt .............................. $339,482,406 $273,000,427
Subordinated Debentures ..................................................... 31,043,938 24,258,200
Accounts payable ............................................................ 4,398,757 4,645,459
Payable to Agway Inc. ....................................................... 712,678 9,521,703
Income taxes payable to Agway Inc. .......................................... 0 2,135,917
Accrued expenses, including interest of
$4,785,997 - 1997 and $4,061,387 - 1996 ............................... 8,149,485 6,122,135
------------ ------------
Total Liabilities ........................................................... 383,787,264 319,683,841
------------ ------------
Commitments & Contingencies
Common Stock, $1 par value;
authorized 1,000,000 shares;
issued and outstanding 400,000 shares ................................. 400,000 400,000
Additional paid-in capital .................................................. 31,600,000 31,600,000
Retained earnings ........................................................... 54,406,038 46,514,449
------------ ------------
Total Shareholder's Equity .................................................. 86,406,038 78,514,449
------------ ------------
$470,193,302 $398,198,290
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE>
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME AND RETAINED EARNINGS
FISCAL YEARS ENDED JUNE 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Revenues:
Interest and finance charges ....... $ 55,450,925 $ 47,241,547 $ 40,668,073
Other service fees and other income 1,492,165 1,385,011 1,273,999
------------ ------------ ------------
Total revenues ................. 56,943,090 48,626,558 41,942,072
------------ ------------ ------------
Expenses:
Interest expense ................... 23,485,503 20,305,365 17,674,736
Provision for credit losses ........ 7,947,000 7,000,000 6,812,695
Selling, general and administrative 12,507,095 9,819,581 8,182,331
------------ ------------ ------------
Total expenses ................. 43,939,598 37,124,946 32,669,762
------------ ------------ ------------
Income before income taxes ..... 13,003,492 11,501,612 9,272,310
Provision for income taxes .............. 5,111,903 4,744,778 4,239,990
------------ ------------ ------------
Net income ..................... 7,891,589 6,756,834 5,032,320
Retained earnings, beginning of year .... 46,514,449 39,757,615 35,043,295
Dividends to parent ..................... 0 0 (318,000)
------------ ------------ ------------
Retained Earnings, End of Year .......... $ 54,406,038 $ 46,514,449 $ 39,757,615
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE>
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JUNE 30, 1997, 1996, AND 1995
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1997 1996 1995
------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................. $ 7,891,589 $ 6,756,834 $ 5,032,320
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization ...... 529,016 450,453 256,992
Deferred taxes ..................... 1,259,169 1,893,115 (929,732)
Patronage refund received in stock . (768,996) (659,694) (1,436,651)
Provision for doubtful accounts .... 7,947,000 7,000,000 6,812,695
Changes in assets and liabilities:
Other assets .................. (303,100) 261,966 (120,365)
Payables ...................... (246,702) (2,178,295) 1,106,381
Income taxes payable .......... (3,115,516) (1,877,774) (751,267)
Accrued expenses .............. 2,027,350 915,670 631,633
--------------- -------------- -------------
Net cash flow provided by
operating activities .......... 15,219,810 12,562,275 10,602,006
--------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Leases originated ...................... (223,061,417) (170,494,948)
Leases repaid .......................... 143,905,638 126,529,122 107,648,633
Purchases of equipment ................. (522,723) (1,127,445) (735,302)
Proceeds from sale of equipment ........ 0 1,290,252 0
Proceeds from sale of investments ...... 0 0 457,948
--------------- -------------- -------------
Net cash flow used
in investing activities ....... (79,678,502) (48,307,020) (63,123,669)
--------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable ............ 155,844,442 52,000,000 98,000,000
Repayment of notes payable ............. (89,296,526) (34,622,222) (58,022,222)
Repayment of capital lease ............. (65,937) (46,968) 0
Repayment of subordinated notes payable 0 (27,000,000) 0
Proceeds from subordinated notes payable 0 0 6,500,000
Net change in payable to Agway Inc. .... (8,809,025) 2,329,735 1,899,885
Proceeds from sale of debentures ....... 6,785,738 16,084,200 4,462,000
Proceeds from capital contribution ..... 0 27,000,000 0
Cash dividends paid .................... 0 0 (318,000)
--------------- -------------- -------------
financing activities ........ 64,458,692 35,744,745 52,521,663
--------------- -------------- -------------
Net change in cash .......................... 0 0 0
Cash at beginning of year ................... 0 0 0
Cash at end of year ......................... $ 0 $ 0 $ 0
============= ============== =============
Cash paid during period for:
Interest ........................... $ 22,760,893 $ 19,927,395 $ 16,983,499
Taxes .............................. $ 6,968,250 $ 4,729,205 $ 5,941,459
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE>
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Operations
Telmark Inc. ("The Company") is in the business of leasing agricultural
related equipment, vehicles, and buildings. Telmark's customers are farmers and
other rural businesses as well as manufacturers and independent dealers that
serve the agricultural marketplace. The Company is indirectly owned and
controlled by Agway Inc. ("Agway"), one of the largest agricultural supply and
services cooperatives in the United States. Telmark is a direct wholly-owned
subsidiary of Agway Holdings, Inc. ("Holdings"), a subsidiary of Agway. Telmark
operates throughout the continental United States and the Company's field
representatives serve customers in 27 states including Alabama, Connecticut,
Delaware, Georgia, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland,
Massachusetts, Michigan, Minnesota, Missouri, New Hampshire, New Jersey, New
York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina,
Tennessee, Vermont, Virginia, West Virginia and Wisconsin.
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.
Cash and Equivalents
The Company considers all investments with a maturity of three months or
less when purchased to be cash equivalents. Certain cash accounts amounting to
$716,553 at June 30, 1997 related to securitized leases are held in segregated
cash accounts pending distribution to the lease-backed note holders and are
restricted in their use.
Lease Accounting
Completed 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 represents 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. As of June 30, 1997, and 1996, the
recognition of interest income was suspended on leases and notes totaling
$2,735,128 and $2,890,781, respectively.
Gains on lease sales are reduced for estimated future servicing fees and
estimated losses under the recourse provisions of the sale (limited to 7.5% of
the sale proceeds). Servicing amounts are amortized over the life of the sold
leases.
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. Initial direct costs incurred were $5,353,850,
$4,747,801, and $4,931,842 for the years ended June 30, 1997, 1996, and 1995,
respectively.
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.
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS 125), effective for the Company on January 1,1997, provides new methods of
accounting and reporting for transfers and servicing of financial assets and
extinguishments of liabilities. The Company has applied SFAS 125 to
securitization transactions occurring after January 1, 1997. The effect of
adopting SFAS 125 has not had a material effect on the Company's results of
operation, financial position or liquidity.
35
<PAGE>
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONT )
Investments
Investments comprise capital stock of a cooperative bank acquired from the
bank at par or stated value. This stock is not traded and is historically
redeemed on a periodic basis by the bank at cost. By its nature, this stock is
held for redemption and is reported at cost. Dividends on this stock are
recorded as a reduction of interest expense and totalled $1,098,566, $942,420,
and $635,298 for the years ended June 30, 1997, 1996, and 1995, respectively.
Impairment of Long Lived Assets
In the first quarter of fiscal 1997, the Company adopted Financial
Accounting Standards, Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be measured and recorded on long-lived assets, whether
these assets are held for disposal or used in operations, when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. There was no effect
when the Company adopted Statement 121.
Equipment
Depreciation is calculated using the straight-line method over the
estimated useful lives of the equipment.
Advertising Costs
The Company generally expenses advertising costs as incurred. Advertising
expense for the years ended June 30, 1997, 1996, and 1995, was approximately
$829,300, $607,500, and $216,800.
Income Taxes
The Company provides for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards (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
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.
The Company is included in a consolidated federal tax return filed by
Agway Inc.. Under the Agway/Telmark tax sharing agreement, the provision for
income taxes and related credits and carry forwards are calculated on a separate
company basis and billed to the Company as appropriate on an interim basis. The
Company files separate state tax returns.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
36
<PAGE>
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. LEASES, NOTES AND ALLOWANCE FOR CREDIT LOSSES
Leases and notes as of June 30 were as follows:
1997 1996
------------ -------------
Leases:
Commercial and agricultural $596,390,764 $505,563,322
Leasing to Agway Inc.
and subsidiaries 459,886 591,255
------------ ------------
596,850,650 506,154,577
Retail installment loans 16,681,989 4,770,950
------------ ------------
Total leases and notes $613,532,639 $510,925,527
============ ============
Net investment in leases and notes at June 30 are summarized as follows:
1997 1996
------------ -------------
Leases and notes $613,532,639 $510,925,527
Unearned interest and finance charges 152,590,770) (124,230,756)
Net deferred origination costs 8,841,537 7,642,305
------------- -------------
Net investment 469,783,406 394,337,076
Allowance for credit losses (24,013,513) (19,775,962)
------------- -------------
Leases and notes, net $445,769,893 $374,561,114
============= =============
Included within the above leases and notes is unguaranteed estimated residual
values of leased property approximating $63,670,000 and $54,400,000 at June 30,
1997, and 1996, respectively.
Contractual maturities of leases and notes were as follows at June 30,
1997:
Leases
--------------------------- Retail
Commercial To Agway Installment
and Inc. and Loans and
Agricultural Subsidiaries Miscellaneous Total
------------ ------------ ------------- ------------
1998 $179,984,150 $ 149,847 $ 6,920,106 $187,054,103
1999 142,994,545 72,888 4,887,623 147,955,056
2000 103,631,449 72,888 2,609,697 106,314,034
2001 65,440,095 80,728 1,603,304 67,124,127
2002 37,657,099 50,878 553,666 38,261,643
Thereafter 66,683,426 32,657 107,593 66,823,676
------------ ------------ ------------ ------------
Totals $596,390,764 $ 459,886 $ 16,681,989 $613,532,639
============ ============ ============ ============
Changes in the allowance for credit losses for the years ended June 30
were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year $ 19,775,962 $ 15,331,008 $ 12,433,825
Provision for credit losses charged to operations 7,947,000 7,000,000 6,812,695
Charge-offs (5,480,557) (4,611,546) (6,104,708)
Recoveries 1,771,108 2,056,500 2,189,196
------------ ------------ ------------
Balance, end of year $ 24,013,513 $ 19,775,962 $ 15,331,008
============ ============ ============
</TABLE>
37
<PAGE>
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. EQUIPMENT
Equipment, at cost, including capital leases, consisted of the following
at June 30:
<TABLE>
<CAPTION>
1997 Owned Leased Combined
- ---- ---------- ---------- ----------
<S> <C> <C> <C>
Office and other equipment ..................... $2,016,769 $ 202,950 $2,219,719
Less accumulated depreciation
and amortization ....................... 1,045,954 118,388 1,164,342
---------- ---------- ----------
$ 970,815 $ 84,562 $1,055,377
========== ========== ==========
1996
- ----
Office and other equipment ..................... $1,735,256 $ 202,950 $1,938,206
Less accumulated depreciation
and amortization ....................... 825,796 50,738 876,534
---------- ---------- ----------
$ 909,460 $ 152,212 $1,061,672
========== ========== ==========
</TABLE>
4. INCOME TAXES
The provision for income taxes consists of the following:
1997 1996 1995
---------- ---------- ----------
Currently payable:
Federal ..... $3,214,446 $1,998,193 $4,373,703
State ....... 638,288 853,470 796,019
Deferred ......... 1,259,169 1,893,115 (929,732)
---------- ---------- ----------
$5,111,903 $4,744,778 $4,239,990
========== ========== ==========
The Company's effective income tax rate on pre-tax income differs from the
federal statutory tax rate as follows:
1997 1996 1995
----- ----- -----
Statutory federal income tax rate ..... 34.0% 34.0% 35.0%
Tax effects of:
State taxes, net of federal benefit 5.4 6.7 7.2
Adjustment of prior years accruals (.5) .2 4.0
Other items ....................... .4 .4 (.5)
----- ----- -----
Effective income tax rate ............. 39.3% 41.3% 45.7%
===== ===== =====
38
<PAGE>
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONT.)
The components of the net deferred tax asset as of June 30 were as follows:
1997 1996
----------- -----------
Deferred tax assets:
Lease receivable reserves ......... $ 9,514,153 $ 7,356,164
Difference between book and
tax treatment of leases ........ 0 3,582,485
Other reserves .................... 812,939 717,038
Alternative minimum tax
credit carry forward ........... 1,117,817 0
Other ............................. 469,370 430,887
----------- -----------
Total deferred tax assets .... 11,914,279 12,086,574
----------- -----------
Deferred tax liabilities:
Difference between book and
tax treatment of leases ....... 1,086,874 0
Other ............................. 183,509 183,509
----------- -----------
Total deferred tax liabilities 1,270,383 183,509
----------- -----------
Net deferred tax asset ....... $10,643,896 $11,903,065
=========== ===========
Based on the Company's history of taxable earnings and its expectations for the
future, management has determined that operating income will more likely than
not be sufficient to recognize its deferred tax assets. At June 30, 1997 the
Company's federal AMT credit can be carried forward indefinitely.
5. BORROWINGS UNDER LINES OF CREDIT AND TERM DEBT
As of June 30, 1997, the Company had two separate credit facilities available
from banks which allow the Company to borrow up to an aggregate of $204,000,000.
An uncommitted short-term line of credit agreement permits the Company to borrow
up to $4,000,000 on an unsecured basis with interest paid upon maturity. The
line bears interest at money market variable rates. A committed $200,000,000
partially collateralized revolving term loan facility permits the Company 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 amount
outstanding as of June 30, 1997, under the short-term line of credit and the
revolving term loan facility was $4,000,000 and $190,900,000, respectively.
On May 28, 1997, the Company, through a newly created wholly owned special
purpose subsidiary, Telmark Lease Funding Corp. I, issued $23,998,609 of Class A
lease-backed notes and $1,945,833 of Class B lease-backed notes to three
insurance companies. The subsidiary pays interest at 6.58% on the Class A notes
and 7.01% on the Class B notes. The notes are collateralized by 1,165 leases
having an aggregate present value of contractual lease payments equal to the
principal balance of the notes, and the notes are further secured by the
residual values of these leases. Final scheduled maturity of the notes is
December 15, 2004.
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 $4,000,000 line of credit has been renewed through
December 1997. The $200,000,000 revolving term agreement loan facility is
available through February 1, 1998. The Company believes it has sufficient lines
of credit in place to meet interim funding needs.
39
<PAGE>
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. BORROWINGS UNDER LINES OF CREDIT AND TERM DEBT (CONT.)
At June 30, term debt consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Notes payable to banks due in varying amount and dates through
July 15, 2000 with interest ranging from 5.95% to 8.40% .... $194,900,000 $146,000,000
Unsecured notes payable to insurance companies due in varying
amount and dates through May 15, 2004, with interest
ranging from 5.90% to 8.88% ................................ 119,722,223 126,844,445
Lease-backed notes payable to insurance companies in varying
amounts and dates through December 15, 2004, with interest
rates ranging from 6.58% to 7.01% .......................... 24,770,138 0
Capital lease payable in annual installments of $78,720
due in 1999 ................................................ 90,045 155,982
------------ ------------
Total Term Debt .......................................... 339,482,406 273,000,427
Subordinated debentures due in varying amount and dates through
March 31, 2002, with interest ranging from 6.00% to 8.50% .. 31,043,938 24,258,200
------------ ------------
Total Debt ............................................... $370,526,344 $297,258,627
============ ============
</TABLE>
The notes payable to banks represents the portion outstanding of the amount
available under two credit facilities $204,000,000 outstanding at June 30, 1997,
and 1996, respectively. The notes are partially collateralized by the Company's
investment in a cooperative bank having a book value of $10,807,417 and
$10,038,421 at June 30, 1997, and 1996, respectively. The subordinated
debentures represent the outstanding balance of registered debentures offered to
and held by the general public. The debentures are unsecured and are subordinate
to all senior debt of the Company.
The carrying amounts and estimated fair values of the Company's significant
financial instruments held for purposes other than trading at June 30, 1997 and
1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Liabilities:
Long-Term Debt (excluding capital leases) $314,492,357 $320,201,947 $272,844,445 $274,016,881
Subordinated Debentures ................. 31,043,937 30,946,003 8,174,000 7,876,991
</TABLE>
The aggregate amounts of notes payable, capital leases, and Subordinated
Debentures maturing after June 30, 1997, are as follows:
<TABLE>
<CAPTION>
Notes Payable
------------------------------ Capital Subordinated
Fiscal Year Ending June 30, Bank Ins. Companies Lease Debentures Total
------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1998 $ 74,900,000 $ 58,125,583 $ 78,720 $ 11,018,895 $ 144,123,198
1999 73,000,000 30,603,023 19,680 0 103,622,703
2000 43,000,000 9,477,105 0 17,007,280 69,484,385
2001 4,000,000 16,754,460 0 0 20,754,460
2002 0 10,461,593 0 3,017,763 13,479,356
Thereafter 0 19,070,597 0 0 19,070,597
------------- ------------- ------------- ---------- -------------
194,900,000 144,492,361 98,400 31,043,938 370,534,699
Imputed Interest 0 0 (8,355) 0 (8,355)
------------- ------------- ------------- --------- -------------
$ 194,900,000 $ 144,492,361 $ 90,045 $ 31,043,938 $ 370,526,344
============= ============= ============= ============ =============
</TABLE>
The Company has various loan covenants, of which the most restrictive is to
maintain a tangible net worth of at least $70,000,000, and the debt to equity
ratio (as defined) no greater than five to one. In addition, dividend
distributions and restricted investments (as defined) made after January 1,
1997, are prohibited to the extent they exceed 75% of net income for the period
beginning on January 1, 1997, through the date of determination, inclusive. As
of June 30, 1997, $3,291,000 of retained earnings were free of this restriction.
40
<PAGE>
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE BENEFIT PLANS
Employees of Telmark 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 postretirement medical plan, and a life and
health insurance plan. Total benefit costs under these plans are allocated by
Agway to Telmark primarily based on payroll costs. Benefit costs for those plans
included in selling, general and administrative expense were approximately
$1,189,000, $820,000, and $649,000 for the periods ended June 30, 1997, 1996,
and 1995, respectively.
7. RELATED PARTY TRANSACTIONS
Cash Management
In lieu of having its own cash account the Company utilizes the depository
accounts of its parent, Agway Inc., drawing checks against these accounts and
making deposits to them. The balance in the Payable to Agway Inc. is dependant
on the timing of deposits and the drawing of checks.
Inter-Company Transactions
Selected amounts related to transactions with Agway Inc. and Subsidiaries are
separately disclosed in the financial statements. Certain other transactions for
the years ended June 30 with Agway Inc. and Subsidiaries were approximately:
(Revenue) Expense 1997 1996 1995
----------------- ------------ ------------ ------------
Interest and finance charges ..... $ (38,000) $ (52,000) $ (259,000)
Administrative and general expense 1,780,000 1,828,000 3,034,000
Interest and finance charges are earned on equipment leases to Agway Inc. and
subsidiaries. The administrative and general expense caption described above
includes certain shared expenses incurred by Agway Inc. on behalf of the
Company, including the corporate insurance program, information services,
payroll and accounts payable administration and facilities management. These
expenses were allocated to the Company and management believes the methodology
used is reasonable.
In 1996, the Board of Directors of Agway approved a Capital contribution of
$27,000,000 from Holdings to Telmark. There were no other changes in paid in
Capital or Common Stock in the three years ended June 30, 1997.
8. COMMITMENTS & CONTINGENCIES
COMMITMENTS
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. Since some
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Outstanding commitments to extend lease financing at June 30, 1997, and 1996,
approximated $12,900,000 and $14,800,000, respectively.
During 1994 and prior, the Company entered into lease sale contracts which
contain limited recourse provisions which are limited to 7.5% of the sale
proceeds. At June 30, 1997, the Company was contingently liable for
approximately $2,000,000 under the limited recourse provisions. The Company
includes this potential liability in establishing its allowance for credit
losses.
LEGAL PROCEEDINGS
The Company is not a party to any litigation or legal proceedings pending, or to
the best of its knowledge threatened, which, in the opinion of its management,
individually or in the aggregate, would have a material adverse affect on its
results of operations, financial position or liquidity.
41
<PAGE>
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR 2000
The Company has and will continue to make certain investments in its software
systems and applications to ensure the Company is year 2000 compliant; the
financial impact to the Company has not been and is not anticipated to be
material to its results of operations, financial position, or liquidity.
9. FINANCIAL INSTRUMENTS
Off Balance-Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of its business to meet the financing needs of its customers.
These financial instruments consist of commitments to extend credit not
recognized in the balance sheet. In the event of non-performance by the other
party to the financial instrument, the Company's credit risk is limited to the
amount of Telmark's commitment to extend credit. The Company's exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit is represented by the contractual
amount of the instrument. The Company uses the same credit and collateral
policies in making commitments as it does for on-balance sheet instruments.
Market Risk
Telmark's business is concentrated in agriculture in the New England,
Mid-Atlantic, and Midwest states with approximately 75% of its leases directly
related to production agriculture. At June 30, 1997, approximately 49% of the
Company's net lease investment was in the states of Michigan, New York, Ohio,
and Pennsylvania. Adverse developments in any of these areas of concentration
could affect operating results adversely.
The Company endeavors to limit the effects of changes in interest rates by
matching as closely as possible, on an ongoing basis, the maturity and repricing
characteristics of funds borrowed to finance its leasing activities with the
maturity and repricing characteristics of its lease portfolio. However, a rise
in interest rates would increase that portion of the debt which is not precisely
matched to the characteristics of the portfolio and could lower the value of the
Company's outstanding leases in the secondary market.
42
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*:
Registration Fee ....................................... $ 7,586
Printing and Engraving ................................. 20,000
Registration Service and Trustee Expense ............... 10,000
Accounting Fees and Expenses ........................... 10,000
"Blue Sky" Fees and Expenses ........................... 20,000
Mailing Costs .......................................... 10,000
Legal Fees and Expenses ................................ 15,000
Miscellaneous Expenses ................................. 10,000
--------
$102,586
========
*Approximate
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
(a) Article 9 of Telmark Inc.'s Certificate of Incorporation
states as follows: "Subject to conditions and qualifications set
forth in the Business Corporation Law of the State of New York,
the corporation shall indemnify any person made a party to an
action individually or in the name of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a
director or officer of the corporation against the reasonable
expenses, including attorneys' fees, actually and necessarily
incurred by him in connection with the defense of such action, or
in connection with an appeal therein except in relation to matters
as to which such director or officer is adjudged to have breached
his duty to the corporation. Subject to the conditions and
qualifications set forth in the Business Corporation Law of the
State of New York, the corporation shall also indemnify any person
made or threatened to be made, a party to an action or proceeding
other than one by or in the right of the corporation to procure a
judgment in its favor brought to impose a liability on such person
for an act alleged to have been committed by such person as a
director or officer of the corporation, or of any other
corporation which he served at the request of the corporation,
against judgments, fines, amounts paid in settlement and
reasonable expenses, including attorneys' fees actually and
necessarily incurred in such action or proceeding if such director
or officer acted, in good faith, for a purpose which he reasonably
believed to be in the best interests of the corporation and, in
addition, had no reasonable cause to believe that his conduct was
unlawful."
(b) Article 7 of the New York Business Corporation Law permits a
corporation to indemnify its officers and directors against
liabilities as provided for in the By-laws of Telmark Inc. Under
the terms of a Directors and Officers Liability and Corporation
Reimbursement Policy purchased for Telmark Inc., each of the
directors and officers of Telmark Inc. is insured against loss
arising from any claim or claims which may be made during the
policy period by reason of any wrongful act (as defined in the
policy) in their capacities as directors or officers. In addition,
Telmark Inc. is insured against loss arising from any claim or
claims which may be made during the policy period against any
director or officer of Telmark Inc. by reason of any wrongful act
(as defined in the policy) in their capacities as directors or
officers, but only when the directors or officers shall have been
entitled to indemnification by Telmark Inc.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Telmark issued $23,998,609 and $1,945,833 principal amount of
lease backed notes - Series A and Series B, respectively: on May
28, 1997. The notes were issued through Telmark Lease Funding
Corp. I, a wholly owned special purpose subsidiary of Telmark Inc.
Such notes were sold to insurance companies and no underwriters
were used. The aggregate offering price of these notes was
$25,944,492. An aggregate placement agent fee of $194,583 was paid
to Ironwood Capital Partners Ltd. Offers and sales of the notes
were made in reliance of the exemption provided in Section 4(2) of
the Securities Act of 1933.
(b)Telmark issued $38,000,000 principal amount of Senior Notes
on April 23, 1997. Such notes were sold to insurance companies and
no underwriters were used. The offering price of these notes was
$38,000,000. A placement agent fee of $171,000 was paid to
Merrill, Lynch, Pierce, Fenner & Smith Incorporated. Offers and
sales of such notes were made in reliance of the exemption
provided in Section 4(2) of the Securities Act of 1933.
43
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS (CONTINUED)
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (CONTINUED)
(c) Telmark issued $8,500,000, $6,000,000 and $17,500,000
principal amount of Senior Notes Series A, Series B and Series C,
respectively: on May 15, 1995. Such notes were sold to insurance
companies and no underwriters were used. The aggregate offering
price of these issues was $32,000,000. An aggregate placement
agent's fee of $144,000 was paid to Merrill, Lynch, Pierce, Fenner
& Smith Incorporated. Offers and sales of such Senior Notes were
made in reliance of the exemption provided in Section 4(2) of the
Securities Act of 1933.
(d) Telmark issued $20,000,000 principal amount of Senior Notes on
November 1, 1994. Such notes were sold to an insurance company and
no underwriters were used. The offering price of this issue was
$20,000,000. A placement agent's fee of $90,000 was paid to
Merrill, Lynch, Pierce, Fenner & Smith Incorporated. Offers and
sales of such Senior Notes were made in reliance of the exemption
provided in Section 4(2) of the Securities Act of 1933.
(e) Telmark issued $15,000,000 and $5,000,000 principal amount of
Senior Notes - Series A and Series B, respectively; for a total
principal amount of $20,000,000, on June 1, 1994. Such Senior
Notes were sold to two insurance companies and no underwriters
were used. The aggregate offering price of these issuances was
$20,000,000. An aggregate placement agent's fee of $90,000 was
paid to Merrill, Lynch, Pierce, Fenner & Smith Incorporated.
Offers and sales of such Senior Notes were made in reliance of the
exemption provided in Section 4(2) of the Securities Act of 1933.
(f) Telmark issued $15,000,000 and $20,000,000 principal amount
of Senior Notes - Series A and Series B, respectively; for a total
principal amount of $35,000,000, on November 1, 1993. Such Senior
Notes were sold to three insurance companies and no underwriters
were used. The aggregate offering price of these issuances was
$35,000,000. An aggregate placement agent's fee of $175,000 was
paid to Merrill, Lynch, Pierce, Fenner & Smith Incorporated.
Offers and sales of such Senior Notes were made in reliance on the
exemption provided in Section 4(2) of the Securities Act of 1933.
(g) On March 1, 1993, Telmark issued $10,000,000 principal amount
of Senior Notes - Series A and B; for a total principal amount of
$20,000,000. Such Senior Notes were sold to four insurance
companies and no underwriters were used. The aggregate offering
price of these issuances was $20,000,000. An aggregate placement
agent's fee of $100,000 was paid to Merrill, Lynch, Pierce, Fenner
& Smith Incorporated. Offers and sales of such Senior Notes were
made in reliance on the exemption provided in Section 4(2) of the
Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(i) The following required exhibits are hereby incorporated by
reference to the previously filed Registration Statements
filed as specified.
3 - ARTICLES OF INCORPORATION AND BY-LAWS
3(a) - Certificate of Incorporation of Telmark Inc.
dated June 4, 1964, as amended September 8, 1964;
January 15, 1975; and June 16, 1987, filed by
reference to Exhibit 3 of the Registration
Statement (Form S-1), File No. 33-70732, dated
October 22, 1993.
3(b) - Bylaws of Telmark Inc., as Amended September 19,
1995, filed by reference to Exhibit 3 of the
Registration Statement (Form 10-K) dated August 23,
1996.
4 - INSTRUMENT DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
4(a) - The Indenture dated as of September 30, 1993,
between Telmark Inc. and OnBank & Trust Co. of
Syracuse, New York, Trustee, filed by reference to
Exhibit 4 of the Registration Statement (Form S-1),
File No. 33-70732, dated October 22, 1993.
4(b) - Telmark Inc. Board of Directors resolutions
authorizing the issuance of Debentures under the
Indenture dated as of June 21, 1995, filed by
reference to Exhibit 4 of the post effective
Amendment No. 1 to the Registration Statement (Form
S-1), File No. 33-84442, dated August 28, 1995.
44
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS (CONTINUED)
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
10 - MATERIAL CONTRACTS
10(a) - The Agreement dated as of October 1, 1986 among
Agway Inc., Agway Financial Corporation, Telmark
Inc., and Agway Holdings, Inc., as amended by
Addendum to Agreement effective June 29, 1990,
filed by reference to Exhibit 10 of the
Registration Statement (Form S-1), File No.
33-70732, dated October 22, 1993.
(ii) The following required exhibits are hereby attached to this
Registration Statement on Form S-1.
4 - INSTRUMENT DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES.
4(a) - The Agreement of Resignation, Appointment and
Acceptance dated August 21, 1997 under which OnBank
& Trust Co. is replaced by Manufacturers & Traders
Trust Company, as Trustee, under the Indenture
dated as of September 30, 1993, between Telmark
Inc. and OnBank & Trust Co., filed by reference to
Exhibit 4 of the Registration Statement (Form S-1),
File No. 33-70732, dated October 22, 1993.
5 - OPINION REGARDING LEGALITY, FILED HEREIN.
12 - STATEMENTS REGARDING COMPUTATION OF RATIOS, FILED HEREIN.
23 - CONSENT OF EXPERTS AND COUNSEL, FILED HEREIN.
25 - STATEMENT OF ELIGIBILITY AND QUALIFICATION OF TRUSTEE ON
FORM T-1 - of Manufacturers & Traders Trust Co., the
Successor Trustee, pursuant to Section 7.08 of the Indenture.
(iii)Financial Statement schedules have been omitted as they are
not required, inapplicable, or the required information is
provided in the financial statements including the notes
thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrants hereby undertake:
A. 1. To file, during any period in which offers or sales are
being made, a post-effective amendment to this
registration statement:
a. To include any Prospectus required by section
10(a)(3) of the Securities Act of 1933;
b. To reflect in the Prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth in
the registration statement;
c. To include any material information with respect
to the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement, including (but not limited
to) any addition or deletion of a managing
underwriter;
45
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS (CONTINUED)
ITEM 17. UNDERTAKINGS (CONTINUED)
2. That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein,
and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof;
B. That, for purposes of determining liability under the
Securities Act of 1933, each filing of the registrant's
annual report pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be
a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof.
C. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrants pursuant
to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by either of
the registrants of expenses incurred or paid by a director,
officer or controlling person of such registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of
such issue.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of DeWitt, and the State of
New York.
TELMARK INC.
(Registrant)
By DANIEL J. EDINGER
President
(Principal Executive Officer)
Date 8/27/97
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
DANIEL J. EDINGER President 08/27/97
(Principal Executive Officer)
PETER J. O'NEILL Treasurer and Chairman of the
Board and Director 08/27/97
(Principal Financial Officer
& Principal Accounting Officer)
GARY K. VAN SLYKE Director 08/27/97
SAMUEL F. MINOR Director 08/27/97
WILLIAM W. YOUNG Director 08/27/97
STANLEY A. WEEKS Director 08/27/97
CHRISTIAN F. WOLFF, JR Director 08/27/97
47
<PAGE>
EXHIBIT 4
<PAGE>
AGREEMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE
THIS AGREEMENT OF RESIGNATION, APPOINTMENT AND ACCEPTANCE (this
"Agreement") dated as of August 21, 1997, by and among OnBank & Trust Co., a New
York chartered trust company ("Resigning Trustee"), Telmark Inc., a New York
corporation under Indenture dated as of September 30, 1993, (the "Company"), and
Manufacturers & Traders Trust Company, a New York chartered trust company
("Successor").
WHEREAS, Resigning Trustee and the Company entered into an Indenture
dated as of September 30, 1993, the ("Indenture"), pursuant to which the
Subordinated Debentures referred on Schedule "A" (the "Debentures") were issued;
and
WHEREAS, Resigning Trustee has been acting as Trustee under the
Indenture; and
WHEREAS, the Indenture provides that the Trustee may resign and a
successor trustee be appointed; and
WHEREAS, Resigning Trustee desires to resign as Trustee and the
Company desires to appoint Successor as successor trustee under the Indenture,
and Successor desires to serve as successor trustee subject to the terms and
conditions of the Indenture and this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound, the parties hereto agree as follows:
ARTICLE I
RESIGNATION
SECTION 1.01. RESIGNATION OF RESIGNING TRUSTEE. Resigning Trustee
hereby resigns as Trustee under the Indenture, effective immediately prior to
the opening of business on the Effective Date (as hereinafter defined).
ARTICLE II
APPOINTMENT OF SUCCESSOR TRUSTEE
SECTION 2.01 APPOINTMENT. The Company hereby appoints Successor to
serve as successor trustee with all the authority, rights and powers which are
vested in, and all duties and obligations which are binding on, the Trustee
under the Indenture, effective as of the opening of business on the first
Business Day following the date of execution by the last party to execute this
Agreement (the "Effective Date"). As used herein, Business Day means a day on
which banks in the city of Buffalo, New York, or in the city where the principal
corporate trust office of the Successor is located, are not required or
authorized to remain closed and on which the New York Stock Exchange is not
closed.
SECTION 2.02 ACCEPTANCE. Successor hereby accepts the appointment by
the Company and agrees to serve as successor trustee under the Indenture and to
perform the duties and obligations of the Trustee under the Indenture, effective
as of the opening of business on the Effective Date.
<PAGE>
SECTION 2.03 VESTING OF RIGHTS, POWERS AND DUTIES. In accordance with
the provisions of the Indenture, all rights, powers and duties of the Trustee
under the Indenture shall be vested in and undertaken by Successor, effective as
of the opening of business on the Effective Date.
SECTION 2.04 NOTICE OF DEBENTUREHOLDERS. The Company, in its capacity
as Registrar and Paying Agent, agrees to provide notice of the resignation of
Resigning Trustee and the appointment of Successor to the Debentureholders.
SECTION 2.05 ASSIGNMENT OF POWERS AND PROPERTY. Resigning Trustee
hereby confirms and assigns to Successor, in trust under the Indenture, all
property, rights, powers, duties, trusts, immunities and obligations of
Resigning Trustee as Trustee. Resigning Trustee confirms that it has transferred
to Successor (a) all monies, securities and other assets held under the
Indenture and (b) all documents relating to the trust created by the Indenture
and all other information in its possession relating to the administration and
status thereof.
SECTION 2.06 FURTHER ASSURANCES. Resigning Trustee hereby agrees, upon
reasonable request of Successor, to execute, acknowledge and deliver such
further instruments of transfer and further assurances and to do such other
things as may reasonably be required for more fully and certainly vesting and
confirming in Successor all the property, rights, powers, duties, trusts,
immunities and obligations of Resigning Trustee as Trustee under the Indenture.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company hereby represents and warrants to Successor as follows:
(a) The Company is a corporation duly organized and existing under the
laws of the State of New York;
(b) The Indenture was validly and lawfully executed and delivered by
the Company and the Debentures were validly and lawfully issued by the Company;
(c) The Company has performed or fulfilled each covenant, agreement and
condition on its part to be performed or fulfilled under the Indenture on or
prior to the date hereof; and
(d) No default or Event of Default of which the Company has notices or
is required to take notice has occurred and is continuing;
(e) All payments of principal, premium, if any, and interest on the
Debentures due and payable prior to the Effective Date have been made as
required in the Indenture; and
(f) The outstanding principal balance of the respective Debentures
issued under the Indenture is as set forth in Schedule "A". Interest thereon has
been paid through and including the respective dates shown on Schedule "A".
<PAGE>
SECTION 3.02 REPRESENTATIONS AND WARRANTIES OF RESIGNING TRUSTEE.
Resigning Trustee hereby represents and warrants to Successor as follows:
(a) Resigning Trustee is a trust company organized and existing under
the laws of the State of New York;
(b) The Indenture is in full force and effect;
(c) Resigning Trustee has received no notice of any default or Event
of Default under the terms of the Indenture; and
(d) There is no suit, action, claim or proceeding pending or threatened
against Resigning Trustee related to the Debentures, the Indenture, or Resigning
Trustee's administration of the trusts created under the Indenture.
Other than as expressly set forth above, the Resigning Trustee makes no
representations or warranty regarding the financial condition of the Company or
its ability to fulfill its obligations under the Indenture.
SECTION 3.03 REPRESENTATIONS OF SUCCESSOR. Successor hereby represents
and warrants to Resigning Trustee and the Company as follows:
(a) Successor is a trust company organized and existing under the laws
of the State of New York; and
(b) Successor is qualified and eligible to serve as Trustee under the
Indenture.
ARTICLE IV
REGISTRAR AND PAYING AGENT
SECTION 4.01 COMPANY'S OBLIGATION. The Company, as permitted by Section
2.04 of the Indenture, agrees to act as Registrar and Paying Agent with respect
to the Debentures.
ARTICLE V
MISCELLANEOUS
SECTION 5.01 DEFINITIONS. Terms not otherwise defined in this Agreement
shall have the respective meanings assigned in the Indenture.
SECTION 5.02 COUNTERPARTS. This Agreement may be executed in a number
of counterparts, each of which shall constitute an original, but such
counterparts shall together constitute but one and the same instrument.
SECTION 5.03 PRESERVATION OF RIGHTS. Except as expressly provided
herein, nothing contained in this Agreement shall in any way affect (a) the
obligations or rights of the Company, the Resigning Trustee, the Successor or
any Debentureholder under the Indenture.
<PAGE>
SECTION 5.04 SEVERABILITY. In the event any provisions of this
Agreement shall be held invalid or unenforceable by any court of competent
jurisdiction, such holding shall not invalidate or render unenforceable any
other provision hereof.
SECTION 5.05 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of Resigning Trustee, Successor, and the Company
and their respective successors and assigns.
Intending to be legally bound, the parties hereto have executed this
Agreement by their duly authorized corporate officers as of the date first above
written.
ADDRESS FOR NOTICES:
RESIGNING TRUSTEE:
OnBank & Trust Co. ONBANK & TRUST CO.
Trust Department By: Barry Slosberg
P.O. Box 4983 Title: Vice President & Trust Operations
Syracuse, New York 13221 Date: 8/21/97
SUCCESSOR:
Manufacturers & Traders MANUFACTURERS & TRADERS
Trust Company TRUST COMPANY
One M&T Plaza By: Russell T. Whitley
Corporate Trust Dept. Title: Assistant Vice President
Buffalo, New York 14203 Date: 8/21/97
COMPANY:
Telmark Inc. TELMARK INC.
P.O. Box 5060 By: Herbert E. Gerhart
Syracuse, New York 13220 Title: Secretary
Date: 8/21/97
<PAGE>
SCHEDULE A
OUTSTANDING INTEREST
MATURITY INTEREST PRINCIPAL PAID
SERIES DATE RATE BALANCE THROUGH
- ------ -------- -------- ------------ -------
QA 12/31/97 6.00% 4,723,248.15 6/30/97
QB 3/31/00 8.25% 6,298,312.22 6/30/97
QC 3/31/00 8.50% 6,759,383.45 6/30/97
QD 3/31/98 8.25% 3,502,505.18 6/30/97
QE 3/31/00 8.00% 3,018,222.56 6/30/97
QF 3/31/98 7.75% 2,846,445.44 6/30/97
QG 3/31/02 7.50% 3,202,425.43 6/30/97
QH 3/31/00 7.25% 1,176,072.39 6/30/97
<PAGE>
EXHIBIT 5
<PAGE>
(315) 449-6436
August 27, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Subordinated Debentures: $22,000,000
Registration Statement on Form S-1
----------------------------------
Gentlemen:
Reference is made to a registration statement on Form S-1 (such
registration statement and all amendments thereto hereinafter referred to as the
"Registration Statement") of Telmark Inc., a New York corporation (the
"Company") filed herewith the Securities and Exchange Commission (the "SEC")
under the Securities Act of 1933, as amended (the "Act"), and originally
declared effective on September 24, 1996, in connection with a proposed sale by
the Company of $22,000,000 aggregate principal amount of its debentures, with
such maturity dates and interest rates as set forth in the prospectus included
in the Registration Statement or as established by the Company's Board of
Directors or a duly authorized committee thereof and reflected in a prospectus
supplement filed with the SEC (the "Debentures"). The Debentures are to be
issued pursuant to an Indenture dated as of September 30, 1993 (the "Indenture")
between the Company and OnBank and Trust Company, as Trustee as amended on
August 21, 1997, by Agreement of Resignation, Appointment and Acceptance, under
which Manufacturers & Traders Trust Company replaces OnBank & Trust Co. as
Trustee.
As legal counsel to the Company, I have examined the corporate
proceedings and such other legal matters relating to the Indenture and the
Debentures as I deemed relevant to the opinions expressed below.
Based on such examination, I am of the opinion that:
1. The Company is a corporation duly organized and existing under
the laws of the State of New York.
2. The Company has corporate power to execute and deliver the
Indenture and to authorize and sell the Debentures.
<PAGE>
Securities and Exchange Commission
August 27, 1997
Page 2
3. The Debentures will be legally issued and binding obligations of the
Company (except as may be limited by bankruptcy, insolvency, reorganization, or
other laws of general applicability relating to or affecting creditors' rights
or by general equity principles) (i) so long as the Registration Statement
remains effective under the Act and the Indenture continues to qualify under the
Trust Indenture Act of 1939, as amended, and (ii) the Debentures shall have been
duly executed and authenticated as provided in the Indenture and shall have been
duly delivered to the purchasers thereof against payment of the agreed
consideration therefor.
I hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to my name under the caption "Legal
Matters" in the Prospectus.
Very truly yours,
/s/ DAVID M. HAYES
------------------
David M. Hayes
Legal Counsel
DMH/jw
bcc: H.E. Gerhart
J.M. Cain, Esq., Sutherland, Asbill & Brennan, via Fax: (202) 637-3592
<PAGE>
EXHIBIT 12
<PAGE>
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TELMARK INC.
FOR THE YEARS ENDED JUNE 30,
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income before income taxes $13,003 $11,502 $ 9,272 $ 8,485 $ 9,920
Fixed charges -
Interest 23,486 20,305 17,675 13,259 13,215
Rentals
386 145 130 58 57
------- ------- ------- ------- -------
Total fixed charges 23,872 20,450 17,805 13,317 13,272
------- ------- ------- ------- -------
Adjusted earnings $36,875 $31,952 $27,077 $21,802 $23,192
======= ======= ======= ======= =======
Ratio of earnings to fixed charges*
1.5 1.6 1.5 1.6 1.7
</TABLE>
* REPRESENTS ADJUSTED EARNINGS DIVIDED BY FIXED CHARGES.
<PAGE>
<PAGE>
EXHIBIT 23
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
of our report dated August 8, 1997, on our audits of the financial statements of
Telmark Inc. We also consent to the references to our firm under the captions
"Experts" and "Selected Financial Data."
COOPERS & LYBRAND L.L.P.
Syracuse, New York
August 26, 1997
<PAGE>
CONSENT OF COUNSEL
The consent of David M. Hayes, legal counsel to the Company, is
included in his opinion, a copy of which is filed as Exhibit 5.
<PAGE>
EXHIBIT 25
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT
OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an application to determine eligibility of a Trustee
pursuant to Section 305(b)(2) X
---
----------------
MANUFACTURERS & TRADERS TRUST COMPANY
(Exact name of trustee as specified in its charter)
NEW YORK 16-0538020
(Jurisdiction if incorporation (I.R.S. employer
or organization if not a national bank) identification No.)
One M&T Plaza
Buffalo, New York 14240-2399
(Address of principal executive offices) (Zip Code)
-------------------
TELMARK INC
(Exact name of obligor as specified in its charter)
NEW YORK 16-0907546
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
333 Butternut Drive
Dewitt, New York 13214
(Address of principal executive offices) (Zip Code)
----------------
SUBORDINATED DEBENTURES
(Title of indenture securities)
- --------------------------------------------------------------------------------
<PAGE>
ITEM 1. GENERAL INFORMATION
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Superintendent of Banks of the State of New York, 2 World
Trade Center, New York, NY 10047 and Albany, NY 12203.
Federal Reserve Bank of New York, 33 Liberty Street, New York,
NY 10045.
Federal Deposit Insurance Corporation, Washington, D.C. 20429.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH OBLIGOR
If the obligor is an affiliate of the trustee, describe each
such affiliation.
None.
[Items 3 though 15 omitted pursuant to General Instruction B to Form T-1]
<PAGE>
ITEM 16. LIST OF EXHIBITS
Exhibit A. Organization Certificate of the Trustee as now in
effect (incorporated herein by reference to
Exhibit 1, Form T-1, Registration Statement No.
33-7309).
Exhibit B. Certificate of Authority of the Trustee to
commence business (incorporated herein by
reference to Exhibit 2, Form T-1, Registration
Statement No. 33-7309).
Exhibit C. Authorization of the Trustee to exercise corporate
trust powers (incorporated herein by reference to
Exhibit 3, Form T-1, Registration Statement No.
33-7309).
Exhibit D. Existing By-Laws of the Trustee (incorporated
herein by reference to Exhibit 4, Form T-1,
Registration Statement No. 33-7309).
Exhibit E. Not Applicable.
Exhibit F. Consent of the Trustee (incorporated herein by
reference to Exhibit 6. Form T-1, Registration
Statement No. 33-7309).
Exhibit G. Report of Condition of the Trustee.*
Exhibit H. Not Applicable.
Exhibit I. Not Applicable.
- --------------------
*Filed Herewith
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, Manufacturers & Traders Trust Company, a banking corporation organized
and existing under the laws of the State of New York, has duly caused this
statement of eligibility and qualification to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of Buffalo, and State of
New York, on the 22nd day of August, 1997.
MANUFACTURERS & TRADERS TRUST COMPANY
By: /s/ RUSSELL T. WHITLEY
----------------------------------
Russell T. Whitley
Assistant Vice President
<PAGE>
MANUFACTURERS & TRADERS TRUST COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30
Dollars in thousands 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets Cash and due from banks $ 399,075
Money-market assets 214,889
Investment securities
Available for sale (cost: $1,453,571 on June 30, 1997) 1,446,481
Held to maturity (market value: $89,502 on June 30, 1997) 89,010
Other (market value: $56,965 on June 30, 1997) 56,965
------------
Total investment securities 1,592,456
------------
Loans and leases, net of unearned discount 10,504,602
Allowance for possible credit losses (267,340)
------------
Loans and leases, net 10,237,262
Other assets 426,345
------------
Total assets $ 12,870,027
- -----------------------------------------------------------------------------------------------------------------
Liabilities Deposits
Noninterest-bearing $ 1,455,790
Interest-bearing 9,374,417
------------
Total deposits 10,830,207
Short-term borrowings 727,946
Accrued interest and other liabilities 212,018
Long-term borrowings 177,919
------------
Total liabilities 11,948,090
------------
Stockholder's equity 921,937
------------
Total liabilities and stockholder's equity $ 12,870,027
------------
</TABLE>
