TELMARK LLC, ARS, 1998-09-24

TELMARK LLC
ARS, 1998-09-24
MISCELLANEOUS EQUIPMENT RENTAL & LEASING

Previous: TELMARK LLC, POS AM, 1998-09-24

Next: AMERICAS INCOME TRUST INC, NSAR-BT, 1998-09-24

<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>

[THIS PAGE INTENTIONALLY LEFT BLANK.]

<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.

<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:

<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.

<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.

<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.

<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.

<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.

<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

<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

<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.

<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.

<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.

<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.

<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%
===== ===== =====

<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.

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
========= ========= ========= ========= =========

<PAGE>

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.

<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
<PAGE>
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.

<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK.]

<PAGE>

[LOGO]
Telmark LLC
Securities Department
PO Box 5060
Syracuse, NY 13220-5060

Telephone 315-449-6311