ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (000 OMITTED)
1999 COMPARED TO 1998.
NET INCOME
Our Net Income Increased by 1,600 (18%) from $8,800 in 1998 to $10,400 in 1999.
<TABLE>
<CAPTION>
PERCENTAGE
FY 1999 FY 1998 INCREASE CHANGE
------- ------- -------- ------
<S> <C> <C> <C> <C>
Net income $10,400 $8,800 $1,600 18%
</TABLE>
The increase was principally due to increased revenue from a larger outstanding
portfolio of leases and notes receivable during 1999 as compared to 1998.
TOTAL REVENUES
Total Revenues of $70,000 in 1999 Increased $4,500 (7%) as Compared to $65,500
in 1998.
<TABLE>
<CAPTION>
PERCENTAGE
FY 1999 FY 1998 INCREASE CHANGE
------- ------- -------- ------
<S> <C> <C> <C> <C>
Total revenues $70,000 $65,500 $4,500 7%
</TABLE>
The increase is attributable in part to a $55,400 (11%) increase in net leases
and notes in 1999 as compared to 1998. Total revenue as a percentage of average
net leases and notes decreased from 13.5% in 1998 to 13.1% in 1999. This decline
was consistent with a decline in prevailing market interest rates.
INCREASE IN LEASE PORTFOLIO
Increases in the lease portfolio resulting from new booked lease volume of
$252,100 in 1999 and $227,300 in 1998 exceeded lease reductions from leases
repaid and provision for credit losses of $196,700 and $177,400 in 1999 and
1998, respectively.
FY 1999 FY 1998
------- -------
New booked lease volume $252,100 $227,300
Leases repaid (188,700) (169,800)
Provision for credit losses ( 8,000) ( 7,600)
--------- ---------
Portfolio increase $ 55,400 $ 49,900
========= =========
The increase in new booked lease volume in excess of leases repaid and provision
for credit losses had the effect of increasing the size of the lease portfolio,
thereby increasing total revenues. The increased volume of new leases resulted
from development of Telmark's existing markets and the addition of new
employees.
6
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (000 OMITTED) (CONTINUED)
INTEREST EXPENSE
Interest expense increased from $26,900 in 1998 to $27,600 in 1999. While the
weighted average interest rate paid on debt decreased from 7.2% to 6.9%, total
interest rate expense increased due to increased borrowings required to finance
the growth of the lease portfolio noted above.
<TABLE>
<CAPTION>
PERCENTAGE
FY 1999 FY 1998 INCREASE CHANGE
------- ------- -------- ------
<S> <C> <C> <C> <C>
Interest expense $27,600 $26,900 $700 3%
</TABLE>
Total debt outstanding at June 30, 1999 increased by $28,100 to $433,700 as
compared to total debt outstanding at June 30, 1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses of $16,200 in 1999 increased by
$600 (3%) compared to $15,600 in 1998.
<TABLE>
<CAPTION>
PERCENTAGE
FY 1999 FY 1998 INCREASE CHANGE
------- ------- -------- ------
<S> <C> <C> <C> <C>
Selling, general, PERCENTAGE
and administrative
expenses $16,200 $15,600 $600 3%
</TABLE>
The increase in total selling, general, and administrative expenses was
primarily the result of additional personnel and incentives paid to certain
employees relating to additional new business. Expenses which are determined to
be related to origination of new lease business are deferred and recorded over
the term of the leases.
PROVISION FOR CREDIT LOSSES
The provision for credit losses of $8,000 in 1999 represents an increase of $400
(5%) compared to $7,600 in 1998.
<TABLE>
<CAPTION>
PERCENTAGE
FY 1999 FY 1998 INCREASE CHANGE
------- ------- -------- ------
<S> <C> <C> <C> <C>
Provision for Credit Losses $8,000 $7,600 $400 5%
</TABLE>
This increase is based on our analysis of reserves required to provide for
uncollectible receivables. Telmark's allowance for credit losses is based on a
periodic review of the collection history of past leases, current credit
practices, an analysis of delinquent accounts, and current economic conditions.
At June 30, 1999, the allowance for credit losses was $30,000 compared to
$27,100 at June 30, 1998. During 1998 and 1999, the general economy remained
strong, however, the total value of non-earning accounts increased from $3,000
in 1998 to $4,900 in 1999. Reserves are established at a level sufficient to
cover estimated losses in the portfolio.
1998 COMPARED TO 1997.
NET INCOME
Our net income increased by $900 (11%) from $7,900 in 1997 to $8,800 in 1998.
<TABLE>
<CAPTION>
PERCENTAGE
FY 1998 FY 1997 INCREASE CHANGE
------- ------- -------- ------
<S> <C> <C> <C> <C>
Net income $8,800 $7,900 $900 11%
</TABLE>
The increase was principally due to increased revenue from a larger outstanding
portfolio of leases during 1998 as compared to 1997.
TOTAL REVENUES
Total revenues of $65,500 in 1998 increased $8,600 (15%) as compared to $56,900
in 1997.
<TABLE>
<CAPTION>
PERCENTAGE
FY 1998 FY 1997 INCREASE CHANGE
------- ------- -------- ------
<S> <C> <C> <C> <C>
Total revenues $65,500 $56,900 $8,600 15%
</TABLE>
The increase is attributable in part to a $49,900 (11%) increase in net leases
and notes in 1998 as compared to 1997. Total revenue, as a percentage of average
net leases and notes, decreased slightly from 13.7% in 1997 to 13.5% in 1998.
7
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (000 OMITTED) (CONTINUED)
INCREASE IN LEASE PORTFOLIO
Increases in the least portfolio resulting from new booked volume of $227,300 in
1998 and $231,000 million in 1997 exceeded lease reductions from leases repaid
and net bad debt expense of $177,400 and $159,800 in 1998 and 1997,
respectively.
Increase In Lease Portfolio FY 1998 FY 1997
-------- --------
New booked volume $227,300 $231,000
Leases repaid (169,800) (151,900)
Provision for credit losses ( 7,600) ( 7,900)
--------- ---------
Portfolio increase $ 49,900 $ 71,200
========= =========
The increase in new booked volume in excess of leases repaid and bad debt
provisions had the effect of increasing total revenues.
INTEREST EXPENSE
While the weighted average interest rate paid on debt decreased from 7.5% to
7.2%, total interest expense increased due to increased borrowings required to
finance the growth of the lease portfolio noted above.
<TABLE>
<CAPTION>
PERCENTAGE
FY 1998 FY 1997 INCREASE CHANGE
------- ------- -------- ------
<S> <C> <C> <C> <C>
Interest expense $26,900 $23,500 $3,400 14%
</TABLE>
Total debt outstanding at June 30, 1998 increased by $34,500 to $405,700 as
coupled to total debt at June 30, 1997.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses of $15,600 in 1998 increased by
$3,100 (25%) compared to $12,500 in 1997.
<TABLE>
<CAPTION>
PERCENTAGE
FY 1998 FY 1997 INCREASE CHANGE
------- ------- -------- ------
<S> <C> <C> <C> <C>
Selling, general, PERCENTAGE
and administrative
expenses $15,600 $12,500 $3,100 25%
</TABLE>
The increase was primarily the result of additional personnel and incentive
costs relating to the additional new business booked as we expand our territory.
PROVISION FOR CREDIT LOSSES
The provision for credit losses of $7,600 in 1998 represents a decrease of $300
(4%) compared to $7,900 in 1997.
<TABLE>
<CAPTION>
INCREASE PERCENTAGE
FY 1998 FY 1997 (DECREASE) CHANGE
------- ------- -------- ------
<S> <C> <C> <C> <C>
Provision for Credit Losses $7,600 $7,900 (300) 4%
</TABLE>
This decrease is based on our analysis of reserves required to provide for
uncollectible receivables. Telmark's allowance for credit losses is based on a
periodic review of the collection history of past leases, current credit
practices, an analysis of delinquent accounts, and current economic conditions.
During 1997 and 1998, the general economy remained strong and the total value of
non-earning accounts increased only slightly from $2,700 in 1997 to $3,000 in
1998. Reserves are established at a level sufficient to cover estimated losses
in the portfolio.
8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (000 OMITTED) (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The ongoing availability of adequate financing to maintain the size of our
portfolio and to permit lease portfolio growth is key to our continuing
profitability and stability. We have principally financed our operations,
including the growth of our lease portfolio, through borrowings under our lines
of credit, private placements of debt with institutional investors and other
term debt, lease backed notes, principal collections on leases and cash provided
from operations. Total assets have grown at an average annual rate of 16% over
the past fifteen years. The debt to equity ratio decreased from 4.3 in both 1997
and 1998 to 4.1 in 1999.
CASH IN FLOWS FY 1999 FY 1998 FY 1997
-------- ------- -------
Cash flows from operations $22,800 $21,200 $15,200
Cash flows from financing 41,000 36,800 64,500
-------- -------- -------
Total cash in flows 63,800 58,000 79,700
CASH OUT FLOWS
Cash flows from investing (63,800) (58,000) (79,700)
Virtually all of the cash flows from both operations and financing activities
was invested in growth of our lease portfolio. 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. Our inability to obtain
adequate financing would have a material adverse effect on our operations.
Management conducts ongoing discussions and negotiations with existing and
potential lenders for future financing needs. See footnote 5 to the Consolidated
Financial Statements "Borrowing under Lines of Credit and Term Debt."
OTHER MATTERS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
We are including the following cautionary statement in this Form 10-K 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, Telmark. Where any such forward-looking statement includes
a statement of the assumptions or basis underlying such forward-looking
statement, Telmark 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 decisions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of Telmark. Where, in any forward-looking
statement, Telmark, 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
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 programs 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. All critical hardware and operating software has been
inventoried and made year 2000 ready through replacement or remediation. This
hardware and software has been tested and determined to be year 2000 compliant.
All critical application software has been inventoried and upgraded
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (000 OMITTED) (CONTINUED)
YEAR 2000 (CONTINUED)
through remediation or replacements. The lease portfolio tracking software has
been updated to a new vendor certified year 2000 compliant version. The
financial and administration applications have been replaced by applications
that are vendor-certified as year 2000 compliant. Successful internal testing of
the year 2000 compliance of the lease portfolio tracking software and the
financial and administrative software has been completed. The interaction of the
new vendor software with other corporate systems has also been tested in an
enterprise wide test environment which was completed during August 1999. New
year 2000 compliant personal computers and operating systems have been acquired
for the field sales force and the related application software has been replaced
or remediated, successfully tested as year 2000 compliant, and installed. These
new fully tested year 2000 compliant personal computer systems have been
distributed to the field sales force.
In addition to the information technology applications review noted above,
Telmark also reviewed and modified, 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 complete.
Telmark's principal sources of capital are banks, insurance companies, and its
customers' repayment of leases. While banks and insurance companies are highly
computer-dependent and are exposed as creditors to a broad array of businesses,
both nationally and internationally, Telmark management considers failure of its
banks and insurance company investors as remote. Telmark has a number of such
creditors which diversifies the risk. Telmark's customer base is widely
diversified in number, geography and industry and in Telmark management's
opinion is not highly exposed to year 2000 related failures. The year 2000
compliance issue is, however, an uncertainty that is continuously being
monitored by Telmark. Based on the work performed to date, we presently believe
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. Our research
to date gives us increased confidence in many of these infrastructure components
but also persuades us that absolute certainty regarding their performance will
not likely be possible prior to passing into the year 2000. To the extent
failure occurs in such activities, which are outside the our control, it could
affect our ability to service our customers with the same degree of
effectiveness with which they are served presently. We have identified elements
of the infrastructure that are of greater significance to our operations, is
obtaining information on an ongoing basis as to their expected year 2000
readiness, and have considered alternative solutions if required.
We have incurred 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 and
replacements of hardware has cost Telmark approximately $803, all of which has
been incurred as of June 30, 1999. However, additional costs may be incurred if
Telmark is required to invoke continuity plans. Telmark treats non-capital costs
associated with year 2000 as period costs and they have been expensed when
incurred.
In planning for business continuance, the highest priority is our ability to
maintain high quality customer service. All business events were evaluated for
impact of a potential Y2K failure. From this analysis, we developed continuity
plans for all critical events to assure business processes could be performed in
an alternate manner. These plans were approved by Telmark's senior management
and include the details of the scope, any preparation steps needed, plan date of
activation, appropriate communications, and procedures. Two tests are planned to
validate these plans in the event of a failure whether facility or system
related.
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,479,753
<SECURITIES> 0
<RECEIVABLES> 768,579,808
<ALLOWANCES> 29,977,571
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,570,779
<DEPRECIATION> 1,703,080
<TOTAL-ASSETS> 575,986,635
<CURRENT-LIABILITIES> 0
<BONDS> 433,733,940
0
0
<COMMON> 0
<OTHER-SE> 105,566,351
<TOTAL-LIABILITY-AND-EQUITY> 575,986,635
<SALES> 0
<TOTAL-REVENUES> 70,006,432
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,024,205
<INTEREST-EXPENSE> 27,625,662
<INCOME-PRETAX> 18,158,342
<INCOME-TAX> 7,755,531
<INCOME-CONTINUING> 10,402,811
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,402,811
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
