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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 December 31, 1997
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
TELMARK INC.*
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(Exact name of registrant as specified in its charter)
New York 16-0907546
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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 January 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
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TELMARK INC. 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, December 31, 1997 and June 30, 1997........................ 3
Condensed Consolidated Statements of Income and Retained Earnings, for the three months and
six months ended December 31, 1997 and 1996....................................................... 4
Condensed Consolidated Statements of Cash Flows for the six months ended
December 31, 1997 and 1996........................................................................ 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.................................................................. 8
SIGNATURES.................................................................................................. 9
</TABLE>
2
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PART I. FINANCIAL INFORMATION
TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
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(Unaudited)
<S> <C> <C>
Restricted Cash ........................................................... $ 946,920 $ 716,553
Leases and notes .......................................................... 642,846,452 613,532,639
Unearned interest and finance charges ..................................... (161,024,764) (152,590,770)
Net deferred origination costs ............................................ 8,992,959 8,841,537
Net investment ...................................................... 490,814,647 469,783,406
Allowance for credit losses ............................................... (27,165,472) (24,013,513)
Leases and notes, net ............................................... 463,649,175 445,769,893
Investments ............................................................... 10,841,174 10,807,417
Equipment, net ............................................................ 976,746 1,055,377
Deferred income taxes ..................................................... 12,720,339 10,643,896
Other assets .............................................................. 979,681 937,120
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Total Assets ........................................................... $ 490,114,035 $ 469,930,256
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LIABILITIES AND SHAREHOLDER'S EQUITY
Borrowings under lines of credit and term debt ............................ 345,570,813 339,482,406
Subordinated debentures ................................................... 37,262,344 31,043,938
Accounts payable .......................................................... 5,206,557 4,398,757
Net payable to Agway Inc. ................................................. 3,917,531 449,632
Accrued expenses, including interest of
$5,044,125 - December 31 and $4,785,997 - June 30 ................... 7,994,971 8,149,485
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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 ......................................................... 58,161,819 54,406,038
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Total Shareholder's Equity ................................................ 90,161,819 86,406,038
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Total Liability & Shareholder's Equity .............................. $ 490,114,035 $ 469,930,256
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</TABLE>
See accompanying notes to condensed financial statements.
3
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TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
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1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Revenues:
Interest and Finance charges ...... $15,967,704 $13,787,806 $31,378,918 $26,772,878
Other service fees and other income 378,746 353,851 729,362 685,806
----------- ----------- ----------- -----------
Total revenues ................ 16,346,450 14,141,657 32,108,280 27,458,684
Expenses:
Interest expense .................. 7,097,975 5,981,297 14,147,131 11,936,886
Provision for credit losses ....... 1,900,000 1,818,000 3,416,000 3,308,000
Selling, general and administrative 3,843,791 3,085,254 7,882,230 6,171,376
----------- ----------- ----------- -----------
Total expenses .................... 12,841,766 10,884,551 25,445,361 21,416,262
----------- ----------- ----------- -----------
Income before income taxes ........ 3,504,684 3,257,106 6,662,919 6,042,422
Provision for income taxes ............. 1,517,000 1,366,411 2,907,138 2,538,834
----------- ----------- ----------- -----------
Net income ........................ 1,987,684 1,890,695 3,755,781 3,503,588
Retained earnings, beginning of period . 56,174,135 48,127,341 54,406,038 46,514,448
----------- ----------- ----------- -----------
Retained earnings, end of period .. $58,161,819 $50,018,036 $58,161,819 $50,018,036
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</TABLE>
See accompanying notes to condensed financial statements.
4
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TELMARK INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
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1997 1996
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CASH FLOW FROM OPERATING ACTIVITIES: $ 10,616,395 $ 10,767,650
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CASH FLOWS FROM INVESTING ACTIVITIES:
Leases originated .............. (116,557,357) (104,701,919)
Leases repaid .................. 95,262,075 81,674,261
Purchases of equipment ......... (201,978) (427,682)
Purchases of investments ....... (33,757) 0
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Net cash flow used
in investing activities (21,531,017) (23,455,340)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in borrowings under
lines of credit ............ (21,200,000) 22,000,000
Proceeds from notes payable .... 60,000,000 0
Repayment of notes payable ..... (32,676,046) (12,511,111)
Proceeds from sale of debentures 6,218,406 4,914,736
Repayment capital lease ........ (35,547) (32,139)
Net change payable to Agway Inc. (1,161,824) (1,683,796)
Net change in Restricted Cash .. (230,367) 0
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Net cash flow provided by
financing activities ..... 10,914,622 12,687,690
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Net change in cash ......... 0 0
Cash at beginning of year ........... 0 0
Cash at end of year ............ $ 0 $ 0
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</TABLE>
See accompanying notes to condensed financial statements.
5
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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 six-month periods ended December 31, 1997 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 - 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 $946,920 at December 31, 1997 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.
NOTE 4 - LOAN COVENANT VIOLATION
In conjunction with a recent private placement offering, the Company
ascertained that it was in technical violation of certain covenants in
existing loan agreements specific to debt issuances by subsidiaries and
assets pledged as collateral. The Company received all necessary permanent
waivers in relation to these violations prior to December 31, 1997.
6
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PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK INC
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 $16,300 for the three months and $32,100 for the six-months
ended December 31, 1997 increased $2,200 (15.6%) and $4,600 (16.9%),
respectively, as compared to the corresponding period in the prior year. The
Company's net investment in leases and notes increased by $21,000 (4.5%) to
$490,800 for the six-month period ended December 31, 1997, as compared to an
increase of $22,700 (5.8%) to $417,000 for the corresponding period in the prior
year. Increased revenues were the result of higher average net investment.
Total expenses increased $2,000 (18.0%) for the three months and $4,000 (18.8%)
for the six-months ended December 31, 1997 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, and
the provision for credit losses. Interest expense for the three months increased
by $1,100 (18.7%) and $2,200 (18.5%) for the six months ended December 31, 1997
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 $800 (24.6%) for the three month
period and $1,700 (27.7%) for the six-month period ended December 31, 1997 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 increased by $100 (4.5%)
for the three months and $100 (3.3%) for the six-months ended December 31, 1997
as compared to the corresponding periods in the prior year, due to an increase
in the size of the lease portfolio.
Net income for the three months ended December 31, 1997 was $2,000, an increase
of $100 from the corresponding period in the prior year. For the six-months
ended December 31, 1997, net income was $3,800, an increase of $300 (7.2%) 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 decreased $200 (1.4%) to $10,600 in the six
months ended December 31, 1997 as compared to the corresponding periods in the
prior year. Cash used in investing activities decreased $1,900 (8.2%) in the
first six months of fiscal year 1998 due to increased lease originations of
$11,900, being more than offset by a $13,600 increase in principal repayments on
leases in the first six months of fiscal year 1998 as compared to the first six
months of fiscal year 1997. Net borrowings from financing activities of $10,900
for the current year is a $1,800 (14.0%) decrease as compared to $12,700 for the
first six months of 1997.
As of December 31, 1997, 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 December 31, 1997 under the short-term line of credit and the revolving term
loan facility were $7,000 and $166,700, 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
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PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN 000'S ROUNDED TO NEAREST HUNDRED THOUSAND)
At December 31, 1997, Telmark had balances outstanding on unsecured senior notes
from private placements totaling $151,600 as compared to $119,700 June 30, 1997.
Through a private placement in December 1997, $60,000 of senior notes were
issued. 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 contains specific financial covenants that must be complied with by
Telmark. As noted in Note 3 to the financial statements, a technical default
occurred under the note agreements; however, permanent waivers were received in
connection with such technical defaults.
Additionally, Telmark's wholly owned special purpose subsidiary has two classes
outstanding of lease-backed notes totaling $20,200 at December 31, 1997 as
compared to $24,800 at June 30, 1997 payable to insurance companies. Interest on
these notes is 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.
The Company believes Telmark will continue to have appropriate and adequate
short-term and long-term financing to meet its ongoing needs.
During January of 1998, a severe ice storm affected many of Telmark's customers
(in certain areas, i.e., the far northern parts of New York and portions of New
England). While the Company has not yet fully assessed the impact of the weather
or the damage caused thereby on all of its customers in these regions or on
their ability to make payments under their leases and notes, the Company does
not expect a significant negative impact on the overall performance of the lease
and note portfolio.
8
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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 December 31, 1997.
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, INC.
(REGISTRANT)
DATE FEBRUARY 10, 1998 BY /S/ DANIEL J. EDINGER, PRESIDENT
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DANIEL J. EDINGER, PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
DATE FEBRUARY 10, 1998 BY /S/ PETER J. O'NEILL, TREASURER
----------------- ----------------------------------
PETER J. O'NEILL, TREASURER
(PRINCIPAL ACCOUNTING OFFICER)
10
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 946,920
<SECURITIES> 0
<RECEIVABLES> 642,846,452
<ALLOWANCES> 27,165,472
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,421,696
<DEPRECIATION> 1,444,950
<TOTAL-ASSETS> 490,114,035
<CURRENT-LIABILITIES> 0
<BONDS> 382,833,157
0
0
<COMMON> 400,000
<OTHER-SE> 89,761,819
<TOTAL-LIABILITY-AND-EQUITY> 490,114,035
<SALES> 0
<TOTAL-REVENUES> 32,108,280
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,416,000
<INTEREST-EXPENSE> 14,147,131
<INCOME-PRETAX> 6,662,919
<INCOME-TAX> 2,907,138
<INCOME-CONTINUING> 3,755,781
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,755,781
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
