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PROSPECTUS
[LOGO] $25,000,000
TELMARK LLC
DEBENTURES
The Debentures (the "Debentures") are being issued by Telmark LLC, a Delaware
limited liability company ("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
TITLE OF CLASS (1) PUBLIC (2) OR COMMISSIONS (3) COMPANY (2) (4)
- ----------------------------------------------------- --------------------------- -------------------- ----------------
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Debentures, $1,000 minimum denomination
and additional multiples of $100
(minimum 6.5% per annum) due March 31, 2001
Per Unit 100% None
Total * None *
- ----------------------------------------------------- --------------------------- -------------------- ----------------
Debentures, $1,000 minimum denomination
and additional multiples of $100
(minimum 6.75% per annum)
due March 31, 2002
Per Unit 100% None
Total * None *
- ----------------------------------------------------- --------------------------- -------------------- ----------------
Debentures under the Interest Reinvestment
Option (ranging from minimum of 6.5% to 8.5%
per annum) due from March 31, 2000
through March 31, 2003
Per Unit 100% None
Total * None *
- ----------------------------------------------------- --------------------------- -------------------- ----------------
TOTAL $25,000,000 $25,000,000
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WHILE THE DEBENTURES WILL, AT A MINIMUM, PAY THE STATED RATE OF INTEREST, A
HIGHER RATE MAY BE PAID BASED UPON THE TREASURY BILL RATE.
(1) A complete description of the securities offered is set forth on pages
18 through 23 herein.
(2) 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 $25,000,000.
(3) 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.
(4) It is assumed that all securities offered are sold and the amount of
proceeds is before deduction of estimated expenses of $102,375 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.
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 August 31, 1998, Senior
Debt of $373,801,612 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.
------------------
AN INVESTMENT IN THESE DEBENTURES INVOLVES CERTAIN RISKS. FOR A DISCUSSION OF
CERTAIN FACTORS TO BE CONSIDERED BY PROSPECTIVE INVESTORS IN CONNECTION WITH AN
INVESTMENT IN THE SECURITIES OFFERED HEREBY, SEE THE "RISK FACTORS" SECTION OF
THIS PROSPECTUS SET FORTH ON PAGE 5.
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 SEPTEMBER 28, 1998
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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. Holders of securities may obtain an Annual Report or
Prospectus upon request from: Patricia Edwards, Assistant Secretary, P. O. Box
4761, Syracuse, New York 13221; Telephone: 315-449-6311. Telmark shall file with
the Securities and Exchange Commission supplementary and periodic information,
documents and reports required of issuers under Sections 13(a) and 15(d) of the
Securities Exchange Act of 1934. Reports and other information filed with the
Commission can be inspected and copied at the public reference facilities of the
SEC, Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 as well as
the following Regional Offices: 7 World Trade Center, Suite 1300, New York, New
York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
IL 60661-2511. Copies of such materials can be obtained by mail from the
Commission at prescribed rates. Requests should be directed to the SEC's Public
Reference Section. 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. In addition, materials may be inspected or
obtained at 333 Butternut Drive, DeWitt, New York 13214 (P. O. Box 4933,
Syracuse, New York, 13221; telephone: 315-449-6436). 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference into this Prospectus its
latest Annual Report to Investors provided to the Commission on August 27,
1998, for the fiscal year ended June 30, 1998, which at the time of its original
preparation met the requirements of Securities Exchange Act Rule 14a-3. The
Annual Report to Investors must accompany this Prospectus. The latest Form 10-Q
filed under the Securities Exchange Act of 1934 subsequent to the date of such
Annual Report will be provided herewith.
The Company's latest Annual Report on Form 10-K for the year ended June 30,
1998 filed on August 27, 1998 is incorporated by reference herein. To the extent
a statement or information included in any document incorporated by reference is
superseded or modified by a statement or information included in any subsequent
documents incorporated by reference, the statement or information so superseded
or modified shall not constitute a part of this Prospectus.
The Company will provide a copy of any of the foregoing documents
incorporated herein by reference (other than exhibits to such documents),
without charge to each person to whom a copy of this Prospectus is delivered,
upon the written or oral request of any such person to: Patricia Edwards,
Assistant Secretary, P.O. Box 5060, Syracuse, New York 13220-5060; telephone:
315-449-6311.
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TABLE OF CONTENTS
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Prospectus Summary Information.................. 3 Description of the Debentures............. 8
Risk Factors.................................... 5 Description of the Interest
Use of Proceeds................................. 7 Reinvestment Option..................... 13
Plan of Distribution............................ 7 Legal Matters............................. 13
Experts................................... 13
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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 or
in Telmark's Annual Report to Investors, the Annual Report on Form 10-K and the
latest quarterly report on Form 10-Q filed with the Securities and Exchange
Commission.
THE COMPANY
Telmark LLC 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 1997 Co-op 100 Index produced by the National
Cooperative Bank. Telmark is a direct wholly-owned subsidiary of Agway Holdings,
Inc., an indirect subsidiary of Agway.
There are certain risks that should be carefully reviewed by an investor before
deciding to purchase the Debentures. See the "Risk Factors" section of this
Prospectus.
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" IN THE COMPANY'S ANNUAL REPORT TO INVESTORS PROVIDED HEREWITH.
Telmark operates throughout the continental United States. The Company's field
representatives serve customers in 29 states including Alabama, Connecticut,
Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, 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............. $25,000,000 principal amount of Debentures (the
"Debentures") under the Indenture dated as of
September 30, 1993 (the "Indenture"), between
Telmark and OnBank & Trust Co. Manufacturers
and Traders Trust Company assumed Trustee
responsibilities pursuant to an Agreement of
Resignation, Appointment and Acceptance by and
among OnBank & Trust Co., Telmark and
Manufacturers and Traders Trust Company. The
Indenture was amended as of June 30 and July 1,
1998 to allow the formation of a limited
liability company by Agway and a merger of
Telmark Inc. with and into Telmark LLC, a
Delaware limited liability company. As of July
31, 1998, the Company had previously issued and
outstanding $34,006,887 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
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PROSPECTUS SUMMARY (CONTINUED)
THE OFFERING (CONTINUED)
Interest....................... Interest on the 6.5% Debentures due March 31,
2001, is payable at a rate per annum equal to
the greater of: (1) the "stated rate" of 6.5%
per annum; and, (2) the "Treasury Bill Rate" as
defined below under "Description of Debentures
- Interest."
Interest on the 6.75% Debentures, due March 31,
2002, is payable at a rate per annum equal to
the greater of: (1) the "stated rate" of 6.75%
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
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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, 1998, approximately 46% 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," in the Company's Annual Report to Investors provided
herewith.
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, 1998, these financing sources provided approximately 46%, 42%, 8%
and 4%, 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", in the Company's Annual Report to Investors provided herewith.
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 Results of Operations - Liquidity and
Capital Resources" and "Quantitative and Qualitative Disclosures About Market
Risk", in the Company's Annual Report to Investors provided herewith. 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.
5
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RISK FACTORS (CONTINUED)
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 August 31,
1998, Senior Debt of $373,801,612 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 members equity of the Company through subsidiaries. This
ownership permits Agway to control all 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 Item 10 "Directors and Executive
Officers of the Registrant", in the Company's Annual Report to Investors
provided herewith.
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 that 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. The Company can also be affected by major
international events, like the downturn in the Asian economy, which can affect
such things as the general level of interest rates. 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",
in the Company's Annual Report to Investors provided herewith.
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.
The Company has completed significant assessments in its major business
operations, continues to assess all of these areas, and has developed or, in
some cases, is in the process of developing the implementation plans to address
the issues identified. The Company anticipates that solutions to all year 2000
areas above will be implemented and tested no later than December 1999.
The Company's 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 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
6
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RISK FACTORS (CONTINUED)
YEAR 2000 (CONTINUED)
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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Quantitative and Qualitative Disclosures about Market Risk" in
the Company's Annual Report to Investors provided herewith.
LACK OF GUARANTEE
Although Agway owns all of the members equity 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", in the Company's Annual Report to Investors provided
herewith.
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.
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", in the Company's Annual Report to Investors provided herewith.
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 $25,000,000. 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", in the Company's Annual
Report to Investors provided herewith.
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
7
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PLAN OF DISTRIBUTION (CONTINUED)
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.
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 and Traders Trust Company assumed
Trustee responsibilities pursuant to an Agreement of Resignation, Appointment
and Acceptance by and among OnBank & Trust Co., Telmark, and Manufacturers and
Traders Trust Company. Supplemental Indentures between the Company and
Manufacturers and Traders Trust Company were executed as of June 30 and July 1,
1998. 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
$25,000,000 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 August 31, 1998, there was $34,339,508 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 6.5% per annum) due March 31, 2001
Per Unit 100% None
Total * None *
- ----------------------------------------------------- --------------------------- -------------------- ----------------
Debentures, $1,000 minimum denomination
and additional multiples of $100
(minimum 6.75% per annum)
due March 31, 2002
Per Unit 100% None
Total * None *
- ----------------------------------------------------- --------------------------- -------------------- ----------------
Debentures under the Interest Reinvestment
Option (ranging from minimum of 6.5% to 8.5%
per annum) due from March 31, 2000
through March 31, 2003
Per Unit 100% None
Total * None *
- ----------------------------------------------------- --------------------------- -------------------- ----------------
TOTAL $25,000,000 $25,000,000
- ----------------------------------------------------- --------------------------- -------------------- ----------------
</TABLE>
INTEREST. Notwithstanding 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 6.5% 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 6.5% per annum; and, (2) the "Treasury Bill Rate" (as defined
below).
8
<PAGE>
DESCRIPTION OF THE DEBENTURES (CONTINUED)
Interest on the 6.75% Debentures, due March 31, 2002, 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 6.75% 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.
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".
9
<PAGE>
DESCRIPTION OF THE DEBENTURES (CONTINUED)
<TABLE>
<CAPTION>
PAYMENT AVERAGE
DATE "TREASURY BILL RATE" HIGH LOW
- ---------------------------- ------------------------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Jan.-89 7.68% 8.36% 7.34%
Apr.-89 8.41% 8.77% 8.21%
Jul.-89 8.65% 9.12% 8.19%
Oct.-89 7.75% 8.08% 7.35%
Jan.-90 7.60% 7.92% 7.40%
Apr.-90 7.57% 7.77% 7.30%
Jul.-90 7.83% 8.03% 7.74%
Oct.-90 7.51% 7.75% 7.19%
Jan.-91 7.18% 7.36% 6.96%
Apr.-91 6.34% 6.96% 5.85%
Jul.-91 5.75% 6.06% 5.61%
Oct.-91 5.63% 5.79% 5.23%
Jan.-92 5.01% 5.39% 4.50%
Apr.-92 3.98% 4.39% 3.80%
Jul.-92 3.97% 4.27% 3.71%
Oct.-92 3.46% 3.90% 3.18%
Jan.-93 3.10% 3.45% 2.78%
Apr.-93 3.23% 3.46% 3.06%
Jul.-93 3.04% 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 4.15% 4.81% 3.61%
Oct.-94 4.75% 4.99% 4.53%
Jan.-95 5.34% 5.85% 4.89%
Apr.-95 6.20% 6.42% 5.86%
Jul.-95 5.82% 6.00% 5.65%
Oct.-95 5.43% 5.61% 5.30%
Jan.-96 5.31% 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 5.17% 5.38% 5.07%
Apr.-97 5.07% 5.11% 4.97%
Jul.-97 5.30% 5.45% 5.00%
Oct.-97 5.15% 5.26% 5.05%
Jan.-98 5.11% 5.19% 5.01%
Apr.-98 5.13% 5.30% 4.91%
Jul.-98 5.08% 5.17% 4.99%
</TABLE>
If the Debentures currently being offered had been outstanding on July 1,
1998, the stated interest rates would have been paid. Although the period
September 1, 1998 to November 30, 1998, is not complete as of the date of this
Prospectus (and hence the Treasury Bill Rate for the January 1, 1999 interest
payment date cannot yet be determined), the average Treasury Bill Rate as of
September 2, 1998 was 5.03%.
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
10
<PAGE>
DESCRIPTION OF THE DEBENTURES (CONTINUED)
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), a 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.
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 August 31, 1998,
Senior Debt of $373,801,612 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.
11
<PAGE>
DESCRIPTION OF THE DEBENTURES (CONTINUED)
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.
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.
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.
12
<PAGE>
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
----------------------- ---
7.25% March 31, 2000
8.00% March 31, 2000
8.25% March 31, 2000
8.50% March 31, 2000
7.50% March 31, 2001
8.00% March 31, 2001
7.50% March 31, 2002
8.50% March 31, 2003
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.
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 consolidated balance sheets as of June 30, 1998 and 1997 and the
consolidated statements of income, member's equity, and cash flows for each of
the three years in the period ended June 30, 1998, incorporated by reference in
this Prospectus, have been incorporated herein, in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
13
<PAGE>
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14
<PAGE>
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15
<PAGE>
TELMARK LLC
[LOGO]
PROSPECTUS
Until November 7, 1998 all dealers
effecting transactions 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 subscriptions.
<PAGE>
[LOGO]
A farmer-owned organization
TELMARK LLC
ANNUAL REPORT
TO INVESTORS
1998
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
2
<PAGE>
[LOGO]
Telmark Investors:
We are pleased to report another year with significant increases in all of
Telmark's key financial measurements, including our managed portfolio, which
surpasses the $500 million milestone.
Pre-tax net income was $15.4 million, our most profitable year ever, while
portfolio quality continues strong with currency over 97%.
Telmark is a farmer-owned organization. It is important for farmers to have a
lender that is dedicated to serving their needs. We stay true to these roots by
focusing on financing production agriculture. Production agriculture continues
to be our core business, representing 60% of Telmark's portfolio. At the same
time, we recognize that growth and diversification brings financial strength.
The remainder of the portfolio is primarily in forestry operations and
commercial businesses that support agriculture.
Telmark's success involves several factors, with one common denominator: our
people. Success comes from good implementation by talented people. Our culture
seeks to reduce rank and bureaucracy. We have employees who desire to take
ownership of their customers' needs. This environment has resulted in an
employee group that is highly motivated to satisfy customers.
While other lenders seek efficiencies by becoming centralized and impersonal,
Telmark is committed to the philosophy that "people buy from people." Our sales
representatives work and live in the communities they serve. All of our
employees are dedicated to taking the time to understand and meet our customers
needs.
On behalf of all Telmark employees and customers, thanks for your continued
support.
/s/ DAN EDINGER
- -----------------
Daniel J. Edinger
President
Telmark LLC
3
<PAGE>
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4
<PAGE>
BUSINESS OF TELMARK
Telmark LLC ("Telmark" or the "Company") was organized in 1964 as Telmark Inc.
under the Business Corporation Law of the State of New York. Effective July 1,
1998, Telmark Inc. was merged into Telmark LLC, a Delaware limited liability
company which was formed to carry on the business of Telmark in limited
liability company, rather than corporate, form. Telmark is a wholly owned
subsidiary of Agway Holdings, Inc., ("Holdings") Holdings is an indirect wholly
owned subsidiary of Agway, Inc. ("Agway"). Telmark currently employs 206
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, 1998,
the Company's outstanding leases had an average original term of approximately
5.5 years and average remaining term of approximately 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 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 approximately 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.
5
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
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.
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, 1998, Telmark had
approximately $496 million of Leases and Notes outstanding. 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, 1998
- --------------------------------------------------------------------------------
(Percentages are of dollar amounts due under outstanding Leases)
- --------------------------------------------------------------------------------
Equipment Type %
- -------------- ----
Farm equipment, machinery and tractors .................................. 38%
Highway vehicles ........................................................ 16%
Buildings ............................................................... 30%
Forestry related equipment .............................................. 10%
Other less than 5% of total ............................................. 6%
----
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:
6
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
SCHEDULE OF LEASES BY SIZE
Dollar Amounts and Corresponding Percentages are of Leases Entered into During
Year Ended June 30, 1998
- --------------------------------------------------------------------------------
Dollars
Original Size Transaction (In Millions) %
- ------------------------------ ------------- ----
Under $7,500 $ 9.1 4%
$ 7,500 - $24,999 59.1 26%
$25,000 - $49,999 50.0 22%
$50,000 - $99,999 45.5 20%
$100,000 - $249,999 38.6 17%
$250,000 & Over 25.0 11%
-------- ----
Total $ 227.3 100%
======== ====
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, 1998
(Percentages are of dollar amounts due under outstanding Leases)
- --------------------------------------------------------------------------------
Industry %
- -------- ----
Crops ................................................................... 20%
Dairy ................................................................... 17%
Livestock ............................................................... 16%
Forestry ................................................................ 13%
Transportation .......................................................... 9%
Construction ............................................................ 6%
Other less than 5% of total ............................................. 19%
----
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.
7
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
PORTFOLIO MIX (CONTINUED)
At June 30, 1998, leases originated in the states of Michigan, New York, Ohio
and Pennsylvania accounted for approximately 46% 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 27% in 1998. 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:
SCHEDULE OF LEASES
BY GEOGRAPHIC DISTRIBUTION
- --------------------------------------------------------------------------------
June 30, 1998
- --------------------------------------------------------------------------------
(Percentages are of dollar amounts due under outstanding Leases)
- --------------------------------------------------------------------------------
State %
- ----- ----
New York ................................................................ 15%
Pennsylvania ............................................................ 12%
Michigan ................................................................ 10%
Ohio .................................................................... 9%
Illinois ................................................................ 6%
Indiana ................................................................. 5%
Virginia ................................................................ 5%
Maryland ................................................................ 4%
Delaware ................................................................ 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.
8
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
CREDIT POLICIES (CONTINUED)
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. The Board of Directors must approve all applications
over $1,000,000.
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, 1998, 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." 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.
9
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
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.
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.
10
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
COMMODITIES DEMAND (CONTINUED)
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.
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.
11
<PAGE>
SELECTED FINANCIAL DATA
The following "Selected Financial Data" of the Company and consolidated
subsidiaries have been derived from consolidated financial statements audited by
PricewaterhouseCoopers LLP, whose report for the years ended June 30, 1998, 1997
and 1996 is included in the Annual Report on Form 10-K, and should be read in
conjunction with the full consolidated financial statements of the Company and
Notes thereto.
<TABLE>
<CAPTION>
(Thousands of Dollars Except Ratio Amounts)
-----------------------------------------------------------------------
Years Ended June 30,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues............... $ 65,476 $ 56,943 $ 48,627 $ 41,942 $ 34,642
Income before income taxes .. $ 15,412 $ 13,003 $ 11,502 $ 9,272 $ 8,485
Provision for income taxes .. $ 6,654 $ 5,112 $ 4,745 $ 4,240 $ 4,126
Net income .................. $ 8,758 $ 7,891 $ 6,757 $ 5,032 $ 4,359
Leases and notes, net........ $ 495,626 $ 445,770 $ 374,561 $ 333,091 $ 277,058
Total Assets................. $ 518,316 $ 470,606 $ 398,198 $ 358,634 $ 300,093
Senior Debt.................. $ 371,677 $ 340,158 $ 273,000 $ 255,467 $ 215,489
Debentures (1)............... $ 34,006 $ 31,044 $ 24,258 $ 8,174 $ 3,712
Member's Equity.............. $ 95,164 $ 86,406 $ 78,514 $ 44,758 $ 40,043
Ratio of earnings to fixed charges (2) 1.6 1.5 1.6 1.5 1.6
Ratio of Senior Debt to member's equity (3) 4.3 4.3 3.8 3.7 3.6
</TABLE>
(1) Certain amounts reported in fiscal years ended June 30, 1994-1997, have been
reclassified to conform to the current year presentation. (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
1998 COMPARED TO 1997. Telmark's net income increased by $0.9 million (11%) from
$7.9 million in 1997 to $8.8 million in 1998. The increase is principally due to
a larger outstanding portfolio of leases during 1998 as compared to 1997.
Total revenues of $65.5 million in 1998 increased $8.5 million (15%) as compared
to $56.9 million in 1997. The increase is attributable in part to a $49.9
million (11%) increase in net leases and notes during 1998 as compared to 1997.
Increases in the lease portfolio resulting from new booked volume of $227.3
million in 1998 and $231.0 million in 1997 exceeded lease reductions from
collection and net bad debt expense of $177.4 million and $159.8 million in 1998
and 1997, respectively. The increase in new booked volume in excess of
collections and bad debt provisions has the effect of increasing total revenues.
Total revenue, as a percentage of average net leases and notes, decreased
slightly from 13.7% in 1997 to 13.5% in 1998.
While the average cost of interest paid on debt decreased from 7.5% to 7.2%,
interest expense of $26.9 million in 1998 represents an increase of $3.4 million
(14%) compared to $23.5 million in 1997, due to increased borrowings required to
finance the growth of the lease portfolio noted above. Selling, general, and
administrative expenses of $15.6 million in 1998 increased by $3.1 million (25%)
compared to $12.5 million in 1997. The increase was primarily the result of
additional personnel and incentive costs relating to the additional new business
booked as the Company expands its territory.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT.)
RESULTS OF OPERATIONS (CONTINUED)
The provision for credit losses of $7.6 million in 1998 represents a decrease
of $0.3 million (5%) compared to $7.9 million in 1997. This decrease 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 creditworthiness of
customers. Reserves are established at a level sufficient to cover estimated
losses in the portfolio. During 1997 and 1998, the general economy remained
strong and the total value of non-earning accounts increased only slightly from
$2.7 million in 1997 to $3.0 million in 1998.
1997 COMPARED TO 1996. Telmark's net income increased by $1.1 million (17%) from
$6.8 million in 1996 to $7.9 million in 1997. The increase is principally due to
a larger outstanding portfolio of leases during the year.
Increases in the lease portfolio resulting from new booked volume of $231.0
million in 1997 and $177.5 million in 1996 exceeded lease reductions from
collection and net bad debt expense of $159.8 million and $136.0 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 represents an increase of $8.3 million
(17%) as compared to $48.6 million in 1996. The increase is attributable in part
to a $71.2 million (19%) 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 13.5% in 1996 to 13.7% 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%) compared to $9.8 million in 1996. Those increases were
primarily the result of additional personnel, incentives paid relating to the
additional new business booked, and advertising. While the average cost of
interest paid on debt remained unchanged, interest expense of $23.5 million in
1997 represents an increase of $3.2 million (16%) compared to $20.3 million in
1996, due to increased borrowings required to finance the growth of the lease
portfolio.
The provision for credit losses of $7.9 million in 1997 represents an increase
of $0.9 million (14%) compared to $7 million in 1996. This increase is based on
the Company's analysis of reserves required to provide for uncollectible
receivables. 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.
LIQUIDITY
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
fourteen years. This growth has been financed through growth in member's equity
and additional capital contribution from Agway, in addition to debt financing.
The ratio of debt to equity was 4.3 at both June 30, 1998 and June 30, 1997.
Cash flows from operations were $21.2 million, $15.2 million, and $12.6 million,
for 1998, 1997, and 1996 respectively. Cash flows from financing activities were
$36.8 million, $64.5 million, and $35.7 million for 1998, 1997, and 1996
respectively. The cash generated from these two sources of $58.0 million, $79.7
million, and $48.3 million for 1998, 1997, and 1996 respectively, was used
solely to invest in the lease portfolio of the Company. 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. Management conducts ongoing discussions and
negotiations with existing and potential lenders for its future financing needs.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT.)
RESULTS OF OPERATIONS (CONTINUED)
As of June 30, 1998, the Company has credit facilities available from banks
which allow the Company to borrow up to an aggregate of $294,000. Uncommitted
short-term line of credit agreements permit the Company to borrow up to $44,000
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 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, 1998, under the short-term lines of credit and the revolving term loan
facility was $20,000 and $165,000, respectively.
The Company, through a wholly owned special purpose subsidiary, Telmark Lease
Funding I, LLC, issued $24,000 of Class A lease-backed notes and $2,000 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 leases having an aggregate present value of contractual lease
payments equal to the principal balance of the notes, and the notes are further
collateralized by the residual values of these leases.
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 $44,000 lines of credit all have terms expiring
during the next 12 months. The $250,000 revolving term loan facility is
available through February 1, 1999. 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.
At June 30, 1998, the Company had balances outstanding on unsecured senior note
private placements totaling $169,000. 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 $75,000, (ii) the ratio of total
liabilities less subordinated notes payable to Agway Holdings, Inc. to member'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 September 30, 1997 that exceed 75% of consolidated net
income for the period beginning on October 1, 1997 through the date of
determination, inclusive. As of June 30, 1998, $5,243 of member's equity was
free of this restriction.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not use derivatives and other interest rate instruments based
on the fixed rate nature of the majority of the Company's debt obligations. The
following table provides information about the Company's debt securities and
loans that are sensitive to changes in interest rates. The table presents
principal cash flows (in 000's) and related weighted average interest rates by
contractual maturity dates.
<TABLE>
<CAPTION>
FIXED INTEREST RATE Fair Value
Liabilities 1999 2000 2001 2002 2003 Thereafter Total 6/30/98
---- ---- ---- ---- ---- ---------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short Term Bank
Lines of Credit $35,000 - - - - - $35,000 $35,000
Weighted Average
Interest Rate 6.30% - - - - -
Long-Term Debt,
including current portion 93,569 88,565 64,849 43,862 22,982 22,833 336,660 342,628
Weighted Average
Interest Rate 7.18% 7.06% 6.96% 6.83% 7.00% 7.01%
Subordinated Debentures,
including current portion - 17,794 2,711 3,398 10,103 - 34,006 34,605
Weighted Average
Interest Rate - 8.23% 7.87% 7.50% 8.42% -
</TABLE>
14
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
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 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. The
Company has a formal risk management policy which limits the short-term exposure
to an amount which is immaterial to the results of operations or cash flows. The
subordinated debentures' interest rate is at the greater of the quoted rate or a
rate based upon the discount rate for U.S. Government Treasury Bills (T-Bill),
with maturities of 26 weeks. Based on the T-Bill rate as of June 30,1998, as
compared to the stated rate of the debentures, a reasonably possible near-term
change in interest rates and the conversion of debt to a variable rate would not
cause material near-term losses in future earnings or cash flows. Finally, for
the portion of debt which is not precisely matched as of June 30, 1998, the
Company does not believe that reasonable possible near-term changes in interest
rates will result in a material effect on future earnings, fair values, or cash
flows of the Company.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors of the Company determine Company policy and are elected by the
member 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>
Peter J. O'Neill 51 Treasurer,
Chairman of the
Board and Director 4 1995 July, 1999
Andrew J. Gilbert 39 Director 1997 July, 1999
Gary K. Van Slyke 55 Director 1996 July, 1999
Samuel F. Minor 60 Director 1989 July, 1999
William W. Young 45 Director 1992 July, 1999
Daniel J. Edinger 47 President and Director 10 1988 July, 1999
Herbert E. Gerhart 53 Secretary and 21
Financial Manager
Raymond G. Fuller 47 Director of Customer 4
Operations
Richard A. Kalin 49 Controller 4
Kipp R. Weaver 48 Director of Credit 4
</TABLE>
The Board of Directors, except for Messrs. O'Neill and Edinger, 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 officers with
company wide responsibilities who report to the President are the Director of
Credit, Director of Customer Operations, 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
.
ANDREW J. GILBERT - Mr. Gilbert is a member of the Agway Board of Directors. He
has been engaged in full-time farming for more than five years.
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.
RAYMOND G. FULLER - Mr. Fuller was Collection Manager from 1985 to 1996, and was
named Director of Customer Operations in September 1996.
15
<PAGE>
RICHARD A. KALIN - Mr. Kalin was named Controller in July 1995. He served as
Accounting Manager for the prior three 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.
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.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
There were none.
ADDITIONAL INFORMATION
The Company will provide a copy of the annual report on Form 10-K, without
charge to each person to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person to: Patricia Edwards, Assistant
Secretary, P.O. Box 5060, Syracuse, New York 13220-5060, Telephone:
315-449-6311.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGES
-----
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES:
Report of Independent Accountants ......................................... 16
Consolidated Balance Sheets, June 30, 1998 and 1997 ....................... 17
Consolidated Statements of Income and Member's Equity,
for the years ended June 30, 1998, 1997 and 1996 .................... 18
Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 1998, 1997 and 1996 .................................. 19
Notes to Consolidated Financial Statements ................................ 20
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Telmark LLC:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and member's equity and cash flows present
fairly, in all material respects, the financial position of TELMARK LLC (a
wholly-owned subsidiary of Agway Holdings, Inc.) and its subsidiaries at June
30, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Syracuse, New York
August 10, 1998
18
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
JUNE 30, 1998 AND 1997
(THOUSANDS OF DOLLARS)
ASSETS
1998 1997
-------- --------
Restricted cash ...................................... $ 1,704 $ 1,393
Leases and notes, net ................................ 495,626 445,770
Investments .......................................... 11,850 10,807
Equipment, net ....................................... 1,000 1,055
Deferred income taxes ................................ 7,030 10,644
Other assets ......................................... 1,106 937
-------- --------
Total Assets ......................................... $518,316 $470,606
======== ========
LIABILITIES AND MEMBER'S EQUITY
1998 1997
-------- --------
Borrowings under lines of credit and term debt ....... $371,677 $340,158
Subordinated debentures .............................. 34,006 31,044
Accounts payable ..................................... 5,108 4,399
Payable to Agway Inc. ................................ 4,443 450
Accrued expenses, including interest of
$4,262 - 1998 and $4,786 - 1997 ................ 7,918 8,149
-------- --------
Total Liabilities .................................... 423,152 384,200
Commitments & Contingencies
Member's Equity ...................................... 95,164 86,406
-------- --------
Total Liabilities and Member's Equity ........... $518,316 $470,606
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
19
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME AND MEMBER'S EQUITY
FISCAL YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(THOUSANDS OF DOLLARS)
1998 1997 1996
------- ------- -------
Revenues:
Interest and finance charges ............. $63,872 $55,451 $47,242
Service fees and other income ............ 1,604 1,492 1,385
------- ------- -------
Total revenues ....................... 65,476 56,943 48,627
------- ------- -------
Expenses:
Interest expense ......................... 26,871 23,486 20,305
Provision for credit losses .............. 7,587 7,947 7,000
Selling, general and administrative ...... 15,606 12,507 9,820
------- ------- -------
Total expenses ....................... 50,064 43,940 37,125
------- ------- -------
Income before income taxes ........... 15,412 13,003 11,502
Provision for income taxes .................... 6,654 5,112 4,745
------- ------- -------
Net income ........................... 8,758 7,891 6,757
Additional capital contribution ............... 0 0 27,000
Member's equity, beginning of year ............ 86,406 78,515 44,758
------- ------- -------
Member's equity, end of year .................. $95,164 $86,406 $78,515
======= ======= =======
The accompanying notes are an integral part of the
consolidated financial statements.
20
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(THOUSANDS OF DOLLARS)
Increase (Decrease) in Cash
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................... $ 8,758 $ 7,891 $ 6,757
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization .... 607 529 450
Deferred taxes ................... 3,614 1,259 1,893
Provision for doubtful accounts .. 7,587 7,947 7,000
Patronage refund received in stock (1,043) (769) (660)
Changes in assets and liabilities:
Other assets ................ (169) (1,283) 262
Payables .................... 709 (246) (2,178)
Income taxes payable ........ 1,330 (2,136) (1,878)
Accrued expenses ............ (231) 2,028 916
--------- --------- ---------
Net cash flow provided by
operating activities ........ 21,162 15,220 12,562
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Leases originated .................... (227,270) (231,006) (177,502)
Leases repaid ........................ 169,827 151,851 129,032
Purchases of equipment ............... (552) (523) (1,127)
Proceeds from sale of equipment ...... 0 0 1,290
--------- --------- ---------
Net cash flow used
in investing activities ..... (57,995) (79,678) (48,307)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in borrowings
under lines of credit ........... (9,900) 48,900 42,000
Proceeds from notes payable .......... 130,000 130,944 62,000
Repayment of notes payable ........... (88,508) (112,621) (86,622)
Repayment of capital lease ........... (73) (66) (47)
Net change payable to Agway Inc. ..... 2,663 (8,092) 2,330
Repayment of debentures .............. (11,208) 0 0
Proceeds from sale of debentures ..... 14,170 6,786 16,084
Net change in restricted cash ........ (311) (1,393) 0
--------- --------- ---------
Net cash flow provided by
financing activities ...... 36,833 64,458 35,745
--------- ---------
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 ......................... $ 27,395 $ 22,761 $ 19,927
Taxes ............................ $ 2,972 $ 6,968 $ 4,729
The accompanying notes are an integral part of the
consolidated financial statements.
21
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
1. SIGNIFICANT ACCOUNTING POLICIES
Operations
Telmark LLC ("Telmark" or the "Company") was organized in 1964 as Telmark
Inc. under the Business Corporation Law of the State of New York. Effective July
1, 1998, Telmark Inc. was merged into Telmark LLC, a Delaware limited liability
company. 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 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 29 states including Alabama, Connecticut, Delaware, Florida,
Georgia, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts,
Michigan, Minnesota, Mississippi, 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
$1,704 and $1,393 at June 30, 1998, and 1997 respectively 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 represent 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, 1998, and 1997, the
recognition of interest income was suspended on leases and notes totaling
approximately $3,000 and $2,700, respectively.
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 $5,256,
$5,354, and $4,748 for the years ended June 30, 1998, 1997, and 1996,
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.
22
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
(THOUSANDS OF DOLLARS)
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 $1,489, $1,099, and
$942 for the years ended June 30, 1998, 1997, and 1996, respectively.
Equipment
Depreciation is calculated using the straight-line method over the
estimated useful lives of the equipment.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
for the years ended June 30, 1998, 1997, and 1996, was approximately $900, $800,
and $600.
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. Effective July 1, 1998, the Company is
included in consolidated state tax returns filed by Holdings.
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.
Reclassifications
Certain reclassifications have been made to conform prior year financial
statements with the current year presentation.
23
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
2. LEASES, NOTES AND ALLOWANCE FOR CREDIT LOSSES
Leases and notes as of June 30 were as follows:
1998 1997
-------- --------
Leases:
Commercial and agricultural $667,222 $596,391
Leasing to Agway Inc. and subsidiaries 302 460
-------- --------
667,524 596,851
Retail installment loans 21,464 16,682
-------- --------
Total leases and notes $688,988 $613,533
======== ========
Net investment in leases and notes at June 30 are summarized as follows:
1998 1997
---------- ----------
Leases and notes $ 688,988 $ 613,533
Unearned interest and finance charges (175,887) (152,591)
Net deferred origination costs 9,596 8,842
--------- ---------
Net investment 522,697 469,784
Allowance for credit losses (27,071) (24,014)
--------- ---------
Leases and notes, net $ 495,626 $ 445,770
========= =========
Included within the above leases and notes is unguaranteed estimated residual
values of leased property approximating $72,400 and $63,700 at June 30, 1998,
and 1997, respectively.
Contractual maturities of leases and notes were as follows at June 30,
1998:
Leases
--------------------------
Commercial To Agway Retail
and Inc. and Installment
Agricultural Subsidiaries Loans Total
------------ ------------ ----------- --------
1999 $198,536 $ 82 $ 8,933 $207,551
2000 153,181 69 4,949 158,199
2001 112,071 58 2,623 114,752
2002 73,746 51 1,333 75,130
2003 42,159 26 700 42,885
Thereafter 87,529 16 2,926 90,471
-------- -------- -------- --------
Totals $667,222 $ 302 $ 21,464 $688,988
======== ======== ======== ========
Changes in the allowance for credit losses for the years ended June 30
were as follows:
1998 1997 1996
-------- -------- --------
Balance, beginning of year $ 24,014 $ 19,776 $ 15,331
Provision for credit losses
charged to operations 7,587 7,947 7,000
Charge-offs (6,513) (5,481) (4,612)
Recoveries 1,983 1,771 2,057
-------- -------- --------
Balance, end of year $ 27,071 $ 24,014 $ 19,776
======== ======== ========
24
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
3. EQUIPMENT
Equipment, at cost, including capital leases, consisted of the following
at June 30:
1998 Owned Leased Combined
---- ------- ------- --------
Office and other equipment $ 2,413 $ 203 $ 2,616
Less accumulated depreciation
and amortization (1,430) (186) (1,616)
------- ------- -------
$ 983 $ 17 $ 1,000
======= ======= =======
1997
----
Office and other equipment $ 2,017 $ 203 $ 2,220
Less accumulated depreciation
and amortization (1,046) (119) (1,165)
------- ------- -------
$ 971 $ 84 $ 1,055
======= ======= =======
4. INCOME TAXES
The provision for income taxes consists of the following:
1998 1997 1996
------ ------ ------
Currently payable:
Federal .............. $2,321 $3,215 $1,998
State ................ 719 638 854
Deferred .................. 3,614 1,259 1,893
------ ------ ------
$6,654 $5,112 $4,745
====== ====== ======
The Company's effective income tax rate on pre-tax income differs from the
federal statutory tax rate as follows:
1998 1997 1996
----- ----- -----
Statutory federal income tax rate ..... 34.0% 34.0% 34.0%
Tax effects of:
State taxes, net of federal benefit 8.7 5.4 6.7
Other items ....................... .5 (.1) .6
----- ----- -----
Effective income tax rate ............. 43.2% 39.3% 41.3%
===== ===== =====
25
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
4. INCOME TAXES (CONT.)
The components of the net deferred tax asset as of June 30 were as follows:
1998 1997
------- -------
Deferred tax assets:
Lease receivable reserves ......... $10,726 $ 9,514
Other reserves .................... 761 813
Alternative minimum tax
credit carry forward ........... 3,462 1,118
Other ............................. 456 469
------- -------
Total deferred tax assets ......... 15,405 11,914
------- -------
Deferred tax liabilities:
Difference between book and
tax treatment of leases ....... 8,192 1,087
Other ............................. 183 183
------- -------
Total deferred tax liabilities 8,375 1,270
------- -------
Net deferred tax asset ....... $ 7,030 $10,644
======= =======
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, 1998, the
Company's federal AMT credit can be carried forward indefinitely.
5. BORROWINGS UNDER LINES OF CREDIT AND TERM DEBT
As of June 30, 1998, the Company has credit facilities available from banks
which allow the Company to borrow up to an aggregate of $294,000. Uncommitted
short-term line of credit agreements permit the Company to borrow up to $44,000
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 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, 1998, under the short-term lines of credit and the revolving term loan
facility was $20,000 and $165,000, respectively.
The Company, through a wholly owned special purpose subsidiary, Telmark Lease
Funding I, LLC issued $24,000 of Class A lease-backed notes and $2,000 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 leases having an aggregate present value of contractual lease
payments equal to the principal balance of the notes, and the notes are further
collateralized by the residual values of these leases.
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 $44,000 lines of credit all have terms expiring
during the next 12 months. The $250,000 revolving term loan facility is
available through February 1, 1999. 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.
At June 30, 1998, the Company had balances outstanding on unsecured senior note
private placements totaling $169,000. 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 $75,000, (ii) the ratio of total
liabilities less subordinated notes payable to Agway Holdings, Inc. to member'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 September 30, 1997 that exceed 75% of consolidated net
income for the period beginning on October 1, 1997 through the date of
determination, inclusive. As of June 30, 1998, $5,243 of member's equity was
free of this restriction.
26
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
5. BORROWINGS UNDER LINES OF CREDIT AND TERM DEBT (CONT.)
At June 30, term debt consisted of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Notes payable to banks due in varying amount and dates through
October 16, 2000 with interest ranging from 5.88% to 8.40% . $185,000 $194,900
Unsecured notes payable to insurance companies due in varying
amount and dates through May 29, 2004, with interest
ranging from 5.90% to 8.88% ................................ 169,000 119,722
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% .......................... 17,660 25,446
Capital lease payable in 1999 ................................. 17 90
-------- --------
Total Term Debt .......................................... 371,677 340,158
Subordinated debentures due in varying amount and dates through
March 31, 2002, with interest ranging from 7.75% to 8.50% .. 34,006 31,044
-------- --------
Total Debt ............................................... $405,683 $371,202
======== ========
</TABLE>
The notes payable to banks represents the portion outstanding at June 30, 1998,
and 1997, of the amount available under credit facilities totaling $294,000 and
$204,000 respectively. Of the amount outstanding at June 30, 1998, $165,000 is
partially collateralized by the Company's investment in a cooperative bank
having a book value of $11,850 at June 30, 1998. 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, were as
follows:
1998 1997
------------------- ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Liabilities:
Lines of Credit and
Term Debt (excluding capital leases) $371,660 $377,628 $340,068 $344,972
Subordinated Debentures 34,006 34,605 31,044 30,946
The aggregate amounts of notes payable, capital leases, and subordinated
debentures maturing after June 30, 1998, are as follows:
Notes Payable
------------------------ Capital Subordinated
Year Ending June 30, Bank Ins. Companies Lease Debentures Total
--------- --------- --------- --------- ----------
1999 $ 98,000 $ 30,569 $ 20 $ 0 $ 128,589
2000 59,000 29,565 0 17,794 106,359
2001 28,000 36,849 0 2,711 67,560
2002 0 43,862 0 3,398 47,260
2003 0 22,982 0 10,103 33,085
Thereafter 0 22,833 0 0 22,833
--------- --------- --------- --------- ---------
185,000 186,660 20 34,006 405,686
Imputed Interest 0 0 (3) 0 (3)
--------- --------- --------- --------- ---------
$ 185,000 $ 186,660 $ 17 $ 34,006 $ 405,683
========= ========= ========= ========= =========
27
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TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
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
$1,100, $1,200, and $800 for the periods ended June 30, 1998, 1997, and 1996,
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 represented by 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 1998 1997 1996
----------------- -------- -------- --------
Interest and finance charges ............ $ (49) $ (38) $ (52)
Administrative and general expense ...... 1,638 1,780 1,828
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, benefits, 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 from Holdings to Telmark. There were no other changes in paid in capital
or member's equity in the three years ended June 30, 1998.
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, 1998 approximated
$27,800.
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.
28
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
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 June 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 March
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.
The Company's 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 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 $300, of which $110 has been incurred and $190 is expected to be
incurred from July 1998 through December 1999. 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.
29
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TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
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, 1998, approximately 46% 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 the cost of 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.
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[LOGO]
Telmark LLC
Securities Department
PO Box 5060
Syracuse, NY 13220-5060
Telephone 315-449-6311
