UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the transition period from to
------------------- ------------------
Commission file number 33-70732
--------------
TELMARK INC.*
- --------------------------------------------------------------------------------
(Exact name of registrant 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)
315-449-7935
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1998
- --------------------------------------- -----------------------------
Common Stock, $1 par value per share 400,000 shares
* Telmark is a direct wholly owned subsidiary of Agway Holdings, Inc., a
subsidiary of Agway, Inc., which is a reporting Company under the
Securities Exchange Act of 1934, and meets the conditions set forth in
General Instructions H(1)(a) and (b) of Form 10-Q and is therefore
filing this form with the reduced disclosure format.
1
<PAGE>
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
ITEM 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets, March 31, 1998 and June 30, 1997........................... 3
Condensed Consolidated Statements of Income and Retained Earnings, for the three months and
nine months ended March 31, 1998 and 1997......................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
March 31, 1998 and 1997........................................................................... 5
Notes to Condensed Consolidated Financial Statements.............................................. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 7
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................................................................. 9
SIGNATURES.................................................................................................. 10
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
Restricted Cash......................................... $ 1,094,009 $ 716,553
Leases and notes........................................ 660,215,242 613,532,639
Unearned interest and finance charges................... (167,616,218) (152,590,770)
Net deferred origination costs.......................... 9,199,478 8,841,537
---------------- -----------------
Net investment.................................... 501,798,502 469,783,406
Allowance for credit losses............................. (27,689,065) (24,013,513)
---------------- -----------------
Leases and notes, net............................. 474,109,437 445,769,893
Investments............................................. 11,849,986 10,807,417
Equipment, net.......................................... 947,314 1,055,377
Deferred income taxes................................... 10,032,639 10,643,896
Other assets............................................ 1,179,925 937,120
---------------- -----------------
Total Assets $ 499,213,310 $ 469,930,256
================ =================
LIABILITIES AND SHAREHOLDER'S EQUITY
Borrowings under lines of credit and term debt.......... 349,041,383 339,482,406
Subordinated debentures................................. 37,862,213 31,043,938
Accounts payable........................................ 4,482,780 4,398,757
Net payable to Agway Inc................................ 3,519,081 449,632
Accrued expenses, including interest of
$8,073,072 - March 31 and $4,785,997 - June 30.... 11,542,752 8,149,485
---------------- -----------------
Total Liabilities 406,448,209 383,524,218
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....................................... 60,765,101 54,406,038
---------------- -----------------
Total Shareholder's Equity.............................. 92,765,101 86,406,038
---------------- -----------------
Total Liability & Shareholder's Equity $ 499,213,310 $ 469,930,256
================ =================
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
----------------------------------- ----------------------------------
1998 1997 1998 1997
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Interest and Finance charges $15,766,536 $13,875,143 $47,145,454 $40,648,021
Other service fees and other income 442,914 414,528 1,172,276 1,100,334
--------------- ---------------- --------------- ---------------
Total revenues 16,209,450 14,289,671 48,317,730 41,748,355
Expenses:
Interest expense 5,653,919 4,957,751 19,801,050 16,894,637
Provision for credit losses 1,809,000 2,095,000 5,225,000 5,403,000
Selling, general and administrative 4,178,395 3,491,977 12,060,625 9,663,353
--------------- ---------------- --------------- ---------------
Total expenses 11,641,314 10,544,728 37,086,675 31,960,990
--------------- ---------------- --------------- ---------------
Income before income taxes 4,568,136 3,744,943 11,231,055 9,787,365
Provision for income taxes 1,964,854 1,458,159 4,871,992 3,996,993
--------------- -------------- -------------- ---------------
Net income 2,603,282 2,286,784 6,359,063 5,790,372
Retained earnings, beginning of period 58,161,819 50,018,036 54,406,038 46,514,448
--------------- -------------- --------------- ---------------
Retained earnings, end of period $60,765,101 $52,304,820 $60,765,101 $52,304,820
=============== ============== =============== ===============
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES: .....................$ 17,195,470 $ 15,600,134
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Leases originated....................................(165,271,594) (160,282,436)
Leases repaid........................................ 131,707,050 117,337,333
Purchases of equipment............................... (323,068) (466,050)
Purchases of investments............................. (1,042,569) (768,996)
------------- -------------
Net cash flow used
in investing activities..................... (34,930,181) (44,180,149)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in borrowings under lines of credit....... (12,900,000) 43,400,000
Proceeds from notes payable.......................... 60,000,000 0
Repayment of notes payable........................... (37,487,021) (15,622,223)
Proceeds from sale of debentures..................... 11,557,892 6,492,644
Repayment of debentures.............................. (4,739,617) 0
Repayment capital lease.............................. (54,002) (48,825)
Net change payable to Agway Inc...................... 1,734,915 (5,641,581)
Net change in restricted cash........................ (377,456) 0
------------- -------------
Net cash flow provided by
financing activities........................... 17,734,711 28,580,015
------------- -------------
Net change in cash............................... 0 0
Cash at beginning of year................................. 0 0
------------- -------------
Cash at end of year..................................$ 0 $ 0
============= =============
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three-month and nine-month periods ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year
ended June 30, 1998. For further information, refer to the consolidated
financial statements and notes thereto included in the annual report on
Form 10-K for the year ended June 30, 1997.
NOTE 2 - RESTRICTED CASH
Certain cash accounts, amounting to $1,094,009 at March 31, 1998 as
compared 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.
NOTE 3 - 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 Net Payable to Agway Inc.
is dependent on the timing of deposits and the drawing of checks.
6
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
(THOUSANDS OF DOLLARS)
RESULTS OF OPERATIONS
- ---------------------
Total revenues of $16,200 for the three months and $48,300 for the nine months
ended March 31, 1998 increased $1,900 (13%) and $6,600 (16%), respectively, as
compared to the corresponding period in the prior year. The Company's net
investment in leases and notes increased by $32,000 (7%) to $501,800 for the
nine-month period ended March 31, 1998, as compared to an increase of $41,400
(11%) to $435,800 for the corresponding period in the prior year. Increased
revenues were the result of higher average net investment.
Total expenses of $11,600 for the three months and $37,100 for the nine months
ended March 31, 1998 increased $1,100 (10%) and $5,100 (16%) respectively as
compared to the corresponding periods in the prior year. The increase in
expenses was attributable to increased interest expense and selling, general and
administrative expenses, partially offset by a decrease in the provision for
credit losses. Interest expense increased $700 (14%) for the three months and
$2,900 (17%) for the nine months ended March 31, 1998 as compared to the
corresponding periods in the prior year, due to a larger amount of debt required
to finance the larger average net investment. Selling, general and
administrative expenses increased $700 (20%) for the three-month period and
$2,400 (25%) for the nine-month period ended March 31, 1998 as compared to the
corresponding periods of the prior year, due primarily to additional salaries
and wages, and slight increases in contract data processing, travel and
telephone. The provision for credit losses decreased by $300 (14%) for the three
months and $200 (3%) for the nine months ended March 31, 1998 as compared to the
corresponding periods in the prior year, due to favorable loss experience.
Net income for the three months ended March 31, 1998 was $2,600, an increase of
$300 from the corresponding period in the prior year. For the nine months ended
March 31, 1998, net income was $6,400, an increase of $600 (10%) from the
corresponding period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has financed its operations, including the growth of its lease
portfolio, principally through borrowing under its lines of credit, private
placements of debt with institutional investors, sale of debentures to the
public, sale of leases, lease-backed asset securitization, principal collections
on leases and cash provided from operations.
Cash flows from operating activities increased $1,600 (10%) to $17,200 in the
nine months ended March 31, 1998 as compared to the corresponding periods in the
prior year. Cash used in investing activities decreased $9,200 (21%) in the
first nine months of fiscal year 1998 due to increased lease originations of
$5,000, being more than offset by a $14,400 increase in principal repayments on
leases in the first nine months of fiscal year 1998 as compared to the first
nine months of fiscal year 1997. Net borrowings from financing activities of
$17,700 for the current year is a $10,800 (38%) decrease as compared to $28,600
for the first nine months of 1997.
As of March 31, 1998, the Company had two separate lines of credit available
from banks which allow the Company to borrow up to an aggregate of $257,000. An
uncommitted short-term line of credit agreement permits the Company to borrow up
to $7,000 on an unsecured basis with interest paid upon maturity. The line bears
interest at money market variable rates. A committed $250,000 revolving term
loan facility from a cooperative bank 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 revolving term loan is partially
collateralized by stock of the cooperative bank. The total amount outstanding as
of March 31, 1998 under the short-term line of credit and the revolving term
loan facility were $7,000 and $175,000, respectively. The total amount
outstanding as of June 30, 1997 under the short-term line of credit and the
revolving term loan facility were $4,000 and $190,900 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 $7,000 line of credit has been renewed through
December 31, 1998. The $250,000 revolving term loan facility is available
through February 1, 1999.
7
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
(THOUSANDS OF DOLLARS)
At March 31, 1998, Telmark had balances outstanding on unsecured senior notes
from private placements totaling $148,500 as compared to $119,700 June 30, 1997.
Principal payments are both semiannual and annual. The note agreements are
similar to one another and each contains specific financial covenants that must
be complied with by Telmark.
Additionally, Telmark's wholly owned special purpose subsidiary has two classes
of lease-backed notes outstanding totaling $18,500 at March 31, 1998 as compared
to $24,800 at June 30, 1997 payable to insurance companies. The interest rates
on these classes of notes are 6.58% and 7.01%. The notes are collateralized by
leases sold by Telmark to this subsidiary having an aggregate present value of
contractual lease payments equal to the principal balance of the notes.
Annually, Telmark offers subordinated debentures to the public. The debentures
are unsecured and subordinated to all senior debt at Telmark. The interest on
the debt is payable quarterly on January 1, April 1, July 1 and October 1, and
the proceeds of the offerings are used to provide financing for Telmark's
leasing activities.
Telmark believes that it will continue to have appropriate and adequate
short-term and long-term financing to meet its ongoing needs.
8
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the three months
ended March 31, 1998.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELMARK, INC.
(REGISTRANT)
DATE APRIL 30, 1998 BY /S/ DANIEL J. EDINGER, PRESIDENT
-------------------- ----------------------------------
DANIEL J. EDINGER, PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
DATE APRIL 30, 1998 BY /S/ PETER J. O'NEILL, TREASURER
-------------------- ----------------------------------
PETER J. O'NEILL, TREASURER
(PRINCIPAL ACCOUNTING OFFICER)
<PAGE>
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,094,008
<SECURITIES> 0
<RECEIVABLES> 660,215,243
<ALLOWANCES> 27,689,065
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,542,785
<DEPRECIATION> 1,595,471
<TOTAL-ASSETS> 499,213,310
<CURRENT-LIABILITIES> 0
<BONDS> 386,903,596
0
0
<COMMON> 400,000
<OTHER-SE> 92,365,101
<TOTAL-LIABILITY-AND-EQUITY> 499,213,310
<SALES> 0
<TOTAL-REVENUES> 48,317,730
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,225,000
<INTEREST-EXPENSE> 19,801,050
<INCOME-PRETAX> 11,231,055
<INCOME-TAX> 4,871,992
<INCOME-CONTINUING> 6,359,063
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,359,063
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
