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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --
ACT OF 1934
For the quarterly period ended September 30, 1998
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 33-70732
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TELMARK LLC*
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(Exact name of registrant as specified in its certificate of formation)
Delaware 16-1551523
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
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(Address of principal executive offices) (Zip Code)
315-449-7935
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 6, 1998
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Membership Certificate One
* 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
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TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
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Pages
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ITEM 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets, September 30, 1998 and June 30, 1998....................... 3
Condensed Consolidated Statements of Income and Member's Equity, for the three months ended
September 30, 1998 and 1997....................................................................... 4
Condensed Consolidated Statements of Cash Flows for the three months ended
September 30, 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............. 8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................................................................. 9
SIGNATURES.................................................................................................. 10
</TABLE>
2
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PART I. FINANCIAL INFORMATION
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
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(Unaudited)
<S> <C> <C>
Restricted cash ......................................................... $ 1,856 $ 1,704
Leases and notes ........................................................ 707,028 688,988
Unearned interest and finance charges ................................... (178,276) (175,887)
Net deferred origination costs .......................................... 9,665 9,596
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Net investment .................................................... 538,417 522,697
Allowance for credit losses ............................................. (28,491) (27,071)
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Leases and notes, net ............................................. 509,926 495,626
Investments ............................................................. 11,850 11,850
Equipment, net .......................................................... 831 1,000
Deferred income taxes ................................................... 3,978 7,030
Other assets ............................................................ 1,088 1,106
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Total assets ......................................................... $ 529,529 $ 518,316
========= =========
LIABILITIES AND MEMBER'S EQUITY
Accounts payable ........................................................ 4,416 5,108
Payable to Agway Inc. ................................................... 8,894 4,443
Accrued expenses, including interest of
$8,540 - September 30 and $4,262 - June 30 ........................ 11,392 7,918
Borrowings under short term lines of credit ............................. 42,000 20,000
Borrowings under revolving line of credit ............................... 146,000 165,000
Term debt ............................................................... 185,323 186,677
Subordinated debentures ................................................. 34,339 34,006
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Total liabilities .................................................... 432,364 423,152
Commitments & contingencies
Member's equity ......................................................... 97,165 95,164
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Total liabilities and member's equity ................................ $ 529,529 $ 518,316
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS of INCOME and MEMBER'S EQUITY
THREE MONTHS ENDED SEPTEMBER 30,
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Revenues:
Interest and finance charges ...... $16,548 $15,411
Service fees and other income ..... 365 351
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Total revenues ............... 16,913 15,762
Expenses:
Interest Expense .................. 7,365 7,049
Provision for credit losses ....... 1,550 1,516
Selling, general and administrative 4,577 4,039
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Total expenses ............... 13,492 12,604
Income before income taxes .............. 3,421 3,158
Provision for income taxes .............. 1,420 1,390
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Net income .............................. 2,001 1,768
Member's equity, beginning of period .... 95,164 86,406
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Member's equity, end of period .......... $97,165 $88,174
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30,
(Thousands of Dollars)
(Unaudited)
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1998 1997
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Net cash flow provided by operating activities: .............. $ 7,937 $ 6,232
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Cash flows from investing activities:
Leases originated ....................................... (58,593) (60,869)
Leases repaid ........................................... 42,743 37,864
Purchases of equipment .................................. 0 (107)
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Net cash flow used in investing activities .......... (15,850) (23,112)
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Cash flows from financing activities:
Net change in borrowings under short term lines of credit 22,000 3,000
Net change in borrowings under revolving line of credit . (19,000) 9,100
Proceeds from term debt ................................. 0 0
Repayment of term debt .................................. (1,337) (3,259)
Repayment of capital lease .............................. (17) (18)
Net change payable to Agway Inc. ........................ 6,087 7,109
Proceeds from sale of debentures ........................ 333 613
Net change in restricted cash ........................... (153) 335
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Net cash flow provided by financing activities ...... 7,913 16,880
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Net change in cash .................................. 0 0
Cash at beginning of period .................................. 0 0
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Cash at end of period ........................................ $ 0 $ 0
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Thousands of Dollars)
(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 period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended June 30,
1999. 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, 1998.
NOTE 2 - RESTRICTED CASH
Certain cash accounts, amounting to $1,856 at September 30, 1998 as
compared to $1,704 at June 30, 1998 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 Payable to Agway Inc. is
dependant on the timing of deposits and the drawing of checks.
NOTE 4 - YEAR 2000
The approach of the year 2000 presents potential issues to all
organizations who use computers in the conduct of their business or depend
on business partners who use computers. To the extent computer use is
date-sensitive, hardware or software that recognizes the year by the last
two digits may erroneously recognize "00" as 1900 rather than 2000, which
could result in errors or system failures.
Telmark utilizes a number of computers and computer software (systems) in
the conduct of its business that are principally involved in the flow of
information. Telmark initiated its year 2000 compliance efforts in January
1996. The initial focus of the Company's compliance efforts was on the
Company's information systems, including assessment of the issue, planning
the conversion to compliance, plan implementation, and testing. All systems
have been inventoried. Those systems determined to be at risk were
prioritized, and plans were put in place to upgrade systems by remediation,
replacements, or doing without these systems. Through September 1998, the
assessment and planning phases have been completed. The remaining portion
of these plans are in process of implementation with final implementation
scheduled to be completed in June 1999. Testing of systems is being
conducted for each system as implemented. The interaction of updated
systems will be tested in the enterprise-wide testing environment.
In addition to the information technology systems review noted above, the
Company has also initiated processes to review and to modify, where
appropriate, other areas impacted by year 2000. These areas include, but
are not limited to, hardware and software associated with end-user
computing functions, vendor and supplier relationships, external interfaces
to internal information technology systems, remote location access to
information technology systems, facility management, and certain
non-information technology issues, such as the extent to which embedded
chips are used in business operations. The Company anticipates that
solutions to all year 2000 areas above will be implemented and tested no
later than December 1999.
6
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TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Thousands of Dollars)
(Unaudited)
NOTE 4 - YEAR 2000 (continued)
The Company's ultimate Parent, Agway Inc., engaged an international
consulting firm in March 1998 to evaluate the Parent Company's overall
approach to year 2000 plans and implementation compared to industry "best
practices." Based on this review, Telmark has increased the involvement of
higher-level management to assure a focus on the implementation timetable
and the development of specific contingency plans, and has initiated
development of a more comprehensive enterprise-wide testing environment to
be in place by December 1998. The business continuity plans are expected to
be completed by January 1999.
The year 2000 compliance issue is an uncertainty that is continuously being
monitored as the Company implements its plans. Based on the work performed
to date, the Company presently believes that the likelihood of the year
2000 having a material effect on the results of operations, liquidity, or
financial condition is remote. Notwithstanding the foregoing, it is not
presently clear that all parts of the country's infrastructure, including
such things as the national banking systems, electrical power,
transportation of goods, communications, and governmental activities, will
be fully functioning as the year 2000 approaches. To the extent failure
occurs in such activities, which are outside the Company's control, it
could affect the Company's ability to service its customers with the same
degree of effectiveness with which they are served presently. The Company
is identifying elements of the infrastructure that are of greater
significance to its operations, obtaining information on an ongoing basis
as to their expected year 2000 readiness, and determining alternative
solutions if required.
The Company expects to incur internal staff costs as well as consulting and
other expenses related to its year 2000 efforts. Due to the level of effort
required to complete remediation for the year 2000, non-business critical
system enhancements have been deferred until the year 2000 efforts have
been completed. The conversion and testing of existing systems are expected
to cost the Company approximately $235, of which $190 has been incurred and
$45 is expected to be incurred from October 1998 through December 1999.
Additionally, the Company estimates the cost to remediate all other areas
may approximate $500. However, these costs will vary as the Company
continues to assess and implement its plans or if the Company is required
to invoke contingency plans. The Company treats non-capital costs
associated with year 2000 as period costs and they are expensed when
incurred.
7
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PART I. FINANCIAL INFORMATION (continued)
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(In 000's rounded to nearest hundred thousand)
RESULTS OF OPERATIONS
Total revenues of $16,900 for the first quarter of 1999 increased by $1,200 (7%)
as compared to the first quarter of the prior year. This increase is due
primarily to higher investment in leases and notes. The Company's net investment
in leases and notes increased by $15,700 (3%) to $538,400 in the first quarter
of 1999, as compared to a $22,900 (5%) increase in net investment in leases to
$492,700 for the corresponding period in the prior year.
Income from operations before income taxes for the first quarter of 1999 was
$3,400, which was an increase of $300 (8%) over the first quarter of the prior
year. The increase in total revenues was partially offset by increases in
selling, general and administrative expenses and provision for credit losses.
Total expenses increased $900 (7%) to $13,500 for the first quarter of 1999 as
compared to $12,600 in the corresponding period in the prior year. The increase
in expenses is primarily attributable to increases in interest expense and
selling, general and administrative expenses. Interest expense increased $300
(4%) to $7,400 for the first quarter of 1999 as compared to the corresponding
period in the prior year. The Company's higher average levels of interest
bearing debt in the first quarter as compared to the corresponding period in the
previous year, partly offset by slightly lower interest rates, is the primary
reason for this increase in interest expense. Selling, general and
administrative expenses increased $500 (13%) to $4,600 for the first quarter of
1999 as compared to the corresponding period of the prior year. These increases
are attributable to increased sales and other payroll costs required to manage
the larger portfolio as compared to the corresponding period in the prior year.
The provision for credit losses increased slightly to $1,600 in the first
quarter as compared to $1,500 in the corresponding period in the prior year, due
to an increase in the size of the lease portfolio.
LIQUIDITY AND CAPITAL RESOURCES
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. 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,
lease-backed asset securitization, principal collections on leases and cash
provided from operations.
Cash flows from operating activities of $7,900 in the three months ended
September 30, 1998 is $1,700 (27%) higher than the corresponding period in the
prior year. Cash used in investing activities decreased $7,300 (31%) to $15,900
in the three months ended September 30, 1998 as compared to the first quarter of
the prior year due to a decrease in lease originations of $2,300 (4%), and an
increase of $4,900 (13%) in principal repayments on leases in the three months
ended September 30, 1998 as compared to the first three months of the prior
year. The cash utilized in investing activities in the three months ended
September 30, 1998 was financed with net borrowings from financing activities of
$7,900 and the $7,900 from operations. In the prior year, cash used in investing
activities was provided by $6,200 from operating activities and $16,900 from
financing activities.
As of September 30, 1998, the Company has credit facilities available from banks
which allow the Company to borrow up to an aggregate of $302,000. Uncommitted
short-term line of credit agreements permit the Company to borrow up to $52,000
on an unsecured basis with interest paid upon maturity. The lines bear interest
at money market variable rates. A committed $250,000 partially collateralized
revolving line of credit 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 September 30,
1998, under the short-term lines of credit and the revolving term loan facility
was $42,000 and $146,000, respectively.
Telmark borrows under its short-term line of credit agreements and its revolving
term agreement from time to time to fund its operations. Short-term debt serves
as interim financing between the issuances of long-term debt. Telmark renews its
lines of credit annually. The $52,000 lines of credit all have terms expiring
during the next 12 months. The $250,000 revolving term loan facility is
available through February 1, 2000. The increase in the availability and
outstanding's under the lines of credit are necessary to support growth of the
Company's portfolio of leases and notes. The Company believes it has sufficient
lines of credit in place to meet interim funding needs.
OTHER MATTERS
The Company continues to evaluate year 2000 readiness. See footnote 4 to the
Condensed Consolidated Financial Statements.
8
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
A current report (Form 8-K) was filed on July 6, 1998, relating to the
merger of Telmark Inc. into Telmark LLC. The merger changed the company's
legal form of doing business from a New York corporation to a Delaware
limited liability company.
9
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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 LLC
(Registrant)
Date November 6, 1998 By /s/ Daniel J. Edinger
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Daniel J. Edinger, President
(Principal Executive Officer)
Date November 6, 1998 By /s/ Peter J. O'Neill
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Peter J. O'Neill, Senior Vice President,
Finance and Control
(Principal Accounting Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,856,459
<SECURITIES> 0
<RECEIVABLES> 707,028,031
<ALLOWANCES> 28,490,830
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,615,487
<DEPRECIATION> 1,784,363
<TOTAL-ASSETS> 529,528,926
<CURRENT-LIABILITIES> 0
<BONDS> 407,661,807
0
0
<COMMON> 0
<OTHER-SE> 97,164,501
<TOTAL-LIABILITY-AND-EQUITY> 529,528,926
<SALES> 0
<TOTAL-REVENUES> 16,913,163
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,550,000
<INTEREST-EXPENSE> 7,365,874
<INCOME-PRETAX> 3,420,961
<INCOME-TAX> 1,420,000
<INCOME-CONTINUING> 2,000,961
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,000,961
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
