UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----
ACT OF 1934
For the quarterly period ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----
ACT OF 1934
For the transition period from to
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Commission file number 33-70732
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TELMARK LLC*
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(Exact name of registrant as specified in its charter)
Delaware 16-1551523
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
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(Address of principal executive offices) (Zip Code)
315-449-7935
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's equity
securities, as of the latest practicable date.
Class Outstanding at January 30, 1999
- ------------------------------------- ----------------------------------
Membership Certificate One
* Telmark is a direct wholly owned subsidiary of Agway Holdings, Inc., a
subsidiary of Agway, Inc., which is a reporting Company under the
Securities Exchange Act of 1934, and meets the conditions set forth in
General Instructions H(1)(a) and (b) of Form 10-Q and is therefore
filing this form with the reduced disclosure format.
1
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TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
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PAGES
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ITEM 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets, December 31, 1998 and June 30, 1998........................ 3
Condensed Consolidated Statements of Income and Member's Equity, for the three months and
six months ended December 31, 1998 and 1997....................................................... 4
Condensed Consolidated Statements of Cash Flows for the six months ended
December 31, 1998 and 1997........................................................................ 5
Notes to Condensed Consolidated Financial Statements.............................................. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 7
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................................................................. 11
SIGNATURES.................................................................................................. 12
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2
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PART I. FINANCIAL INFORMATION
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
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<S> <C> <C>
(Unaudited)
Restricted Cash.......................................................... $ 2,714 $ 1,704
Leases and notes......................................................... 717,408 688,988
Unearned interest and finance charges.................................... (183,732) (175,887)
Net deferred origination costs........................................... 9,929 9,596
------------ ----------------
Net investment..................................................... 543,605 522,697
Allowance for credit losses............................................. (30,157) (27,071)
------------ ---------------
Leases and notes, net.............................................. 513,448 495,626
Investments.............................................................. 11,850 11,850
Equipment, net........................................................... 696 1,000
Deferred income taxes.................................................... 5,579 7,030
Other assets............................................................. 1,062 1,106
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Total Assets.......................................................... $ 535,349 $ 518,316
=========== ==========
LIABILITIES AND MEMBER'S EQUITY
Accounts payable..................................................... 5,165 5,108
Payable to Agway Financial Corporation .............................. 22,023 4,443
Accrued expenses, including interest of
$3,940 - December 31 and $4,262 - June 30 ..................... 7,453 7,918
Borrowings under short term lines of credit.......................... 10,000 20,000
Borrowings under revolving line of credit............................ 178,000 165,000
Term debt............................................................ 176,713 186,677
Subordinated debentures.............................................. 36,441 34,006
----------- ----------
Total liabilities.............................................. 435,795 423,152
Commitments & contingencies
Member's equity...................................................... 99,554 95,164
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Total liabilities and member's equity.......................... $ 535,349 $ 518,316
=========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND MEMBER'S EQUITY
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
------------------------------------- -------------------------------------
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenues:
Interest and finance charges $17,194 $15,968 $33,742 $31,379
Service fees and other income 389 378 754 729
--------------- ---------------- --------------- ---------------
Total revenues 17,583 16,346 34,496 32,108
Expenses:
Interest expense 7,189 7,098 14,554 14,147
Provision for credit losses 2,020 1,900 3,570 3,416
Selling, general and administrative 4,353 3,843 8,930 7,882
--------------- ---------------- --------------- ---------------
Total expenses 13,562 12,841 27,054 25,445
--------------- ---------------- --------------- ---------------
Income before income taxes 4,021 3,505 7,442 6,663
Provision for income taxes 1,632 1,517 3,052 2,907
--------------- ---------------- --------------- ---------------
Net income 2,389 1,988 4,390 3,756
Member's equity, beginning of period 97,165 88,174 95,164 86,408
--------------- ---------------- --------------- ---------------
Member's equity, end of period $99,554 $90,162 $99,554 $90,162
=============== ================ =============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31,
(THOUSANDS OF DOLLARS)
(UNAUDITED)
Increase (Decrease) in Cash
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1998 1997
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NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES:............................... $ 10,937 $ 10,582
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CASH FLOWS FROM INVESTING ACTIVITIES:
Leases originated........................................................ (119,754) (116,557)
Leases repaid............................................................ 98,362 95,262
Purchases of equipment................................................... (12) (202)
-------------- --------------
Net cash flow used in investing activities........................... (21,404) (21,497)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in borrowings under short term lines of credit... (10,000) 3,000
Net increase (decrease) in borrowings under revolving line of credit..... 13,000 (24,200)
Proceeds from term debt.................................................. 0 60,000
Repayment of term debt................................................... (9,947) (31,580)
Net increase (decrease) payable to Agway Financial Corporation........... 16,006 (1,162)
Proceeds from sale of debentures......................................... 2,435 6,218
Net increase (decrease) in restricted cash............................... (1,010) (1,361)
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Net cash flow provided by financing activities....................... 10,467 10,915
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Net increase (decrease) in cash...................................... 0 0
Cash at beginning of period................................................... 0 0
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Cash at end of period......................................................... $ 0 $ 0
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three-month and six-month periods ended December 31, 1998 are not
necessarily indicative of the results that may be expected for the year
ended June 30, 1999. For further information, refer to the consolidated
financial statements and notes thereto included in the annual report on
Form 10-K for the year ended June 30, 1998.
NOTE 2 - RESTRICTED CASH
Cash related to securitized leases is held in segregated accounts pending
distribution to the lease-backed note holders and is restricted in its use.
On December 31, 1998 restricted cash was $2,714 compared to $1,704 on June
30, 1998.
NOTE 3 - CASH MANAGEMENT
Instead of having its own cash account the Company uses the depository
accounts Agway Financial Corporation, drawing checks against these accounts
and making deposits to them. The balance in the Payable to Agway Financial
Corporation varies on a daily basis depending on the timing of deposits and
the drawing of checks.
6
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PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN 000'S ROUNDED TO NEAREST HUNDRED THOUSAND)
RESULTS OF OPERATIONS
Total revenues for the three-month and six-month periods ended December 31, 1998
compared to the corresponding periods of the prior year are as follows:
1998 1997 $ Increase % Increase
---- ---- ---------- ----------
Three-months 17,600 16,300 1,300 8.0
Six-months 34,500 32,100 2,400 7.5
The increase in total revenues in 1998 is mostly due to an increase in the
Company's investment in leases and notes, as compared to the comparable period
of the prior year partly offset by a lower income rate on new and replacement
leases and notes. Average net investment in leases and notes for the three-month
and six-month periods ended December 31, 1998 compared to the corresponding
periods of the prior year are as follows:
1998 1997 $ Increase % Increase
---- ---- ---------- ----------
Three-months 530,600 481,300 49,300 10.0
Six-months 534,900 484,400 50,500 10.0
Increases in expenses for the three-month and six-month periods ended December
31, 1998 compared to the corresponding periods in the prior year are as follows:
Three-months Six-months
------------ ----------------
$ % $ %
---- ---- ----- -------
Interest expense $100 1.3% $400 2.9%
Selling, general, and $500 13.3% $1,100 13.3%
administrative
expenses
Provision for credit $100 6.3% $200 4.5%
losses
Total expenses $700 5.6% $1,600 6.3%
The increase in interest expense is due to an increase in the amount of debt
required to finance the increase in the amount of net leases and notes, partly
offset by lower interest rates on new and replacement debt than the same periods
in the prior year.
The increase in selling, general and administrative expenses was primarily the
result of higher payroll and related expenses. The increase in payroll was
partly offset by lower professional services ($200) as some information
technology services are being provided internally rather than being outsourced,
and by higher levels of deferred initial costs associated with the new lease
volume.
The provision for credit losses increased due to an increase in the size of the
lease portfolio.
Net income for the three-months ended December 31, 1998 was $2,400, an increase
of $400 (20%) from the corresponding period in the prior year. For the
six-months ended December 31, 1998, net income was $4,400, an increase of $600
(17%) from the corresponding period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company endeavors to limit the effects of changes in interest rates by
matching as closely as possible, on an ongoing basis, the maturity and repricing
characteristics of funds borrowed to finance its leasing activities with the
maturity and repricing characteristics of its lease portfolio. The Company has
financed its operations, including the growth of its lease portfolio,
principally through borrowing under its lines of credit, private placements of
debt with institutional investors, sale of debentures to the public,
lease-backed asset securitization, principal collections on leases and cash
provided from operations.
7
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PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN 000'S ROUNDED TO NEAREST HUNDRED THOUSAND)
LIQUIDITY AND CAPITAL RESOURCES (continued)
Instead of having its own cash account the Company uses the depository accounts
Agway Financial Corporation, drawing checks against these accounts and making
deposits to them. The balance in the Payable to Agway Financial Corporation
varies on a daily basis depending on the timing of deposits and the drawing of
checks.
Cash flows from operating activities of $10,900 in the six months ended December
31, 1998 is $400 (3%) higher than the corresponding period in the prior year.
Cash used in investing activities decreased $100 (0.4%) to $21,400 in the six
months ended December 31, 1998 as compared to the corresponding period of the
prior year. The cash used in investing activities in the six months ended
December 31, 1998 was financed with net borrowings from financing activities of
$10,500 and the $10,900 from operations. In the prior year, cash used in
investing activities was financed with net borrowings from financing activities
of $10,900 and $10,600 from operations.
As of December 31, 1998, the Company had credit facilities available from banks
which allow the Company to borrow up to an aggregate of $302,000. Uncommitted
short-term line of credit agreements permit the Company to borrow up to $52,000
on an uncollateralized basis with interest paid upon maturity. The lines bear
interest at money market variable rates. A committed $250,000 partially
collateralized revolving line of credit permits the Company to draw short-term
funds bearing interest at money market rates or draw long-term debt at rates
appropriate for the term of the note drawn. The total amount outstanding as of
December 31, 1998, under the short-term lines of credit and the revolving term
loan facility was $10,000 and $178,000, respectively.
Telmark borrows under its short-term line of credit agreements and its
revolving term agreement from time to time to fund its operations. Short-term
debt serves as interim financing between the issuances of long-term debt.
Telmark renews its lines of credit annually. The $52,000 of lines of credit all
have terms expiring during the next 12 months. The $250,000 revolving term loan
facility is available through February 1, 2000.
Through a wholly owned special purpose subsidiary, the Company, has two classes
of lease-backed notes outstanding totaling $14,700 and $17,700 at December 31,
1998, and June 30, 1998, respectively, payable to insurance companies. Interest
rates on these classes of notes are 6.58% and 7.01%, respectively. The notes are
collateralized by leases, which were sold to this subsidiary, having an
aggregate present value of contractual lease payments equal to the principal
balance of the notes. Final scheduled maturity of these notes in December 2004.
Telmark offers subordinated debentures to the public. The debentures are
unsecured and subordinated to all senior debt at Telmark. The interest on the
debt is payable quarterly on January 1, April 1, July 1 and October 1 and is
allowed to be reinvested.
The Company believes it has sufficient lines of credit in place to meet interim
funding needs.
OTHER MATTERS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Company is including the following cautionary statement in this Form 10-Q
to make applicable and take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statement made by, or on behalf of, the Company. Where any such forward-looking
statement includes a statement of the assumptions or basis underlying such
forward-looking statement, the Company cautions that, while it believes such
assumptions or basis to be reasonable and makes them in good faith, assumed
facts or basis almost always vary from actual results, and the differences
between assumed facts or basis and actual results can be material, depending
upon the circumstances. Certain factors that could cause actual results to
differ materially from those projected have been discussed herein and include
the factors set forth below. Other factors that could cause actual results to
differ materially include uncertainties of economic, competitive and market
8
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PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN 000'S ROUNDED TO NEAREST HUNDRED THOUSAND)
OTHER MATTERS (CONTINUED)
decisions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Where, in any forward-looking statement, the Company, or its
management, expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect" and "anticipate" and similar expressions identify
forward-looking statements.
YEAR 2000 READINESS
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 initiated its year 2000 compliance efforts in January 1996. In July
1998, Telmark's President assumed direct responsibility for the full year 2000
project to assure a focus on the implementation timetable and the development of
specific continuity plans.
Telmark utilizes a number of computers and computer software in the conduct of
its business that are principally involved in the flow of information. This
includes the software for tracking the lease portfolio, the financial and
administration software, and the related hardware and operating system software.
It also includes the personal computers and software used by the field sales
force. 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 critical
hardware and operating software has been inventoried and made year 2000 ready
through replacement or remediation. This hardware and software is in process of
being tested for compliance which is planned to be completed by March 1999. All
application software has been inventoried. Software determined to be at risk was
prioritized, and plans were put in place to upgrade through remediation,
replacements, or doing without certain software. In December 1998 the lease
portfolio tracking software was updated to a new version and the financial and
administration applications have been replaced by applications that the vendors
certify as year 2000 compliant. Testing of the year 2000 compliance of this
software is expected to be completed by April 1999. The new vendor software and
the interaction of that software with other systems will be tested by June 1999
in an enterprise wide test environment. New year 2000 compliant personal
computers and operating systems will be acquired for the field sales force and
the related application software is in process of remediation and testing.
Implementation of this upgraded and fully tested hardware and software is
planned for August 1999.
In addition to the information technology applications review noted above, the
Company has also initiated processes to review and to modify, where appropriate,
other areas impacted by year 2000. External interfaces to internal information
technology applications have been tested and are compliant. There are no
embedded chips used in the business operations. Business continuity plans are
expected to be completed by February 1999.
The year 2000 compliance issue is an uncertainty that is continuously being
monitored as the Company implements its plans. Based on the work performed to
date, the Company presently believes that the likelihood of the year 2000 having
a material effect on the results of operations, liquidity, or financial
condition is remote. Notwithstanding the foregoing, it is not presently clear
that all parts of the country's infrastructure, including such things as the
national banking systems, electrical power, transportation of goods,
communications, and governmental activities, will be fully functioning as the
year 2000 approaches. To the extent failure occurs in such activities, which are
outside the Company's control, it could affect the Company's ability to service
its customers with the same degree of effectiveness with which they are served
presently. The Company is identifying elements of the infrastructure that are of
greater significance to its operations, obtaining information on an ongoing
basis as to their expected year 2000 readiness, and determining alternative
solutions if required.
9
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PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN 000'S ROUNDED TO NEAREST HUNDRED THOUSAND)
YEAR 2000 READINESS (CONTINUED)
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
software application enhancements have been deferred until the year 2000 efforts
have been completed. The conversion and testing of existing applications are
expected to cost the Company approximately $745, of which $213 has been incurred
and $532 is expected to be incurred in calendar year 1999. However, these costs
will vary as the Company continues to assess and implement its plans or if the
Company is required to invoke contingency plans. The Company treats non-capital
costs associated with year 2000 as period costs and they are expensed when
incurred.
10
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the three months
ended December 31, 1998.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELMARK LLC
(REGISTRANT)
DATE FEBRUARY 4, 1999 BY /S/ DANIEL J. EDINGER
------------------------- ----------------------------------------
DANIEL J. EDINGER, PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
DATE FEBRUARY 4, 1999 BY /S/ PETER J. O'NEILL
------------------------- ----------------------------------------
PETER J. O'NEILL, SENIOR VICE PRESIDENT,
FINANCE AND CONTROL
(PRINCIPAL ACCOUNTING OFFICER)
12
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 2,713,637
<SECURITIES> 0
<RECEIVABLES> 717,408,196
<ALLOWANCES> 30,156,630
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,627,727
<DEPRECIATION> 1,931,326
<TOTAL-ASSETS> 535,349,350
<CURRENT-LIABILITIES> 0
<BONDS> 401,153,736
0
0
<COMMON> 0
<OTHER-SE> 99,554,277
<TOTAL-LIABILITY-AND-EQUITY> 535,349,350
<SALES> 0
<TOTAL-REVENUES> 34,496,178
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,570,000
<INTEREST-EXPENSE> 14,554,243
<INCOME-PRETAX> 7,442,492
<INCOME-TAX> 3,051,754
<INCOME-CONTINUING> 4,390,737
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,390,737
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
