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 September 30, 1999
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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 certificate of formation)
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
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of membership interests outstanding of each of the issuer's
classes of membership interests, as of the latest practicable date.
Class Outstanding at October 29, 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
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Pages
-----
<S> <C> <C>
ITEM 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets, September 30, and June 30, 1999............................ 3
Condensed Consolidated Statements of Income and Member's Equity, for the three months ended
September 30, 1999 and 1998....................................................................... 4
Condensed Consolidated Statements of Cash Flows for the three months ended
September 30, 1999 and 1998....................................................................... 5
Notes to Condensed Consolidated Financial Statements.............................................. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........................................ 11
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................................................................. 12
SIGNATURES.................................................................................................. 13
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
Restricted cash.................................................................$ 3,918 $ 4,480
Leases and notes receivable..................................................... 793,383 768,580
Unearned interest and finance charges........................................... (203,286) (199,122)
Net deferred origination costs.................................................. 11,817 11,591
-------------- -------------
Net investment............................................................ 601,914 581,049
Allowance for credit losses..................................................... (31,736) (29,978)
-------------- -------------
Leases and notes, net..................................................... 570,178 551,071
Investments..................................................................... 12,780 12,780
Equipment, net.................................................................. 769 868
Deferred income taxes........................................................... 4,079 5,443
Other assets.................................................................... 1,371 1,345
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Total assets.................................................................$ 593,095 $ 575,987
============= =============
LIABILITIES AND MEMBER'S EQUITY
Accounts payable................................................................ 5,653 6,692
Payable to Agway Inc. and subsidiaries.......................................... 9,055 22,337
Accrued expenses, including interest of
$7,975 - September 30 and $3,258 - June 30................................ 11,426 7,658
Borrowings under short term lines of credit..................................... 70,000 35,000
Borrowings under revolving line of credit....................................... 146,300 156,300
Term debt....................................................................... 203,672 204,801
Subordinated debentures......................................................... 39,174 37,633
-------------- -------------
Total liabilities............................................................ 485,280 470,421
Commitments & contingencies
Member's equity................................................................. 107,815 105,566
-------------- -------------
Total liabilities and member's equity........................................$ 593,095 $ 575,987
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 1. FINANCIAL STATEMENTS (continued)
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS of INCOME and MEMBER'S EQUITY
THREE MONTHS ENDED SEPTEMBER 30,
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Revenues:
Interest and finance charges...................$ 17,924 $ 16,548
Service fees and other income.................. 347 365
Total revenues............................ 18,271 16,913
Expenses:
Interest Expense............................... 7,701 7,365
Provision for credit losses.................... 1,869 1,550
Selling, general and administrative............ 4,859 4,577
------------- -------------
Total expenses............................ 14,429 13,492
Income before income taxes........................... 3,842 3,421
Provision for income taxes........................... 1,593 1,420
Net income........................................... 2,249 2,001
Member's equity, beginning of period................. 105,566 95,164
Member's equity, end of period.......................$107,815 $ 97,165
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 1. FINANCIAL STATEMENTS (continued)
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30,
(Thousands of Dollars)
(Unaudited)
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Net cash flow provided by operating activities:........................$ 8,746 $ 7,937
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Cash flows from investing activities:
Leases originated................................................. (68,426) (58,593)
Leases repaid..................................................... 47,450 42,743
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Net cash flow used in investing activities.................... (20,976) (15,850)
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Cash flows from financing activities:
Net change in borrowings under short term lines of credit......... 35,000 22,000
Net change in borrowings under revolving line of credit........... (10,000) (19,000)
Repayment of term debt............................................ (1,129) (1,354)
Net change payable to Agway Inc. and subsidiaries................. (13,744) 6,087
Proceeds from sale of debentures.................................. 1,541 333
Net change in restricted cash..................................... 562 (153)
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Net cash flow provided by financing activities................ 12,230 7,913
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Net change in cash............................................ 0 0
Cash at beginning of period............................................ 0 0
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Cash at end of period..................................................$ 0 $ 0
============= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 1. FINANCIAL STATEMENTS (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 in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three-month period ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended June 30,
2000. 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, 1999.
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 September 30, 1999 restricted cash was $3,918 compared to $4,480 on June
30, 1999.
NOTE 3 - CASH MANAGEMENT
Instead of having our own cash account, we utilize the depository accounts
of Agway Inc. and subsidiaries drawing checks against these accounts and
making deposits to them. The balance in the Payable to Agway Inc. and
subsidiaries 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)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(In 000's rounded to nearest hundred thousand)
RESULTS OF OPERATIONS
We are 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, Telmark. Where any such forward-looking statement includes
a statement of the assumptions or basis underlying such forward-looking
statement, we caution that, while we believe such assumptions or basis to be
reasonable and make 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 our control. Where, in any forward-looking statement,
we, or our management, express 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.
Total revenues for the three-month period ended September 30, 1999 compared to
the corresponding period of 1998 are as follows:
<TABLE>
<CAPTION>
This Year Last Year $ Increase % Increase
--------- --------- ---------- ----------
<S> <C> <C> <C>
18,300 16,900 1,400 8.3%
</TABLE>
The increase in total revenues this year is mostly due to an increase in our
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 period
ended September 30, 1999 compared to the corresponding period of the prior year
are as follows:
<TABLE>
<CAPTION>
This Year Last Year $ Increase % Increase
--------- --------- ---------- ----------
<S> <C> <C> <C>
591,500 530,600 60,900 11.5%
</TABLE>
Increases in expenses for the three-month period ended September 30, 1999
compared to the corresponding period in the prior year are as follows:
<TABLE>
<CAPTION>
This Year Last Year $ Increase % Increase
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Interest expense 7,700 7,400 $300 4.1%
Selling, general and 4,900 4,600 $300 6.5%
administrative expenses
Provision for credit losses 1,900 1,600 $300 18.8%
--------- --------- ---------- ----------
Total Expenses 14,500 13,600 $900 6.6%
</TABLE>
The change 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
outstanding, partly offset by lower interest rates on new and replacement debt
than the same period last year.
Selling, general and administrative expense increased due to incentives paid to
certain employees relating to overall profitability, retention of business, and
profitability of new business.
7
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PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
(In 000's rounded to nearest hundred thousand)
RESULTS OF OPERATIONS (continued)
The provision for credit losses increased due to an increase in the size of the
lease portfolio.
Net income for the three-months ended September 30, 1999 was $2,200, an increase
of $200 (10%) from the corresponding period last year.
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.
<TABLE>
<CAPTION>
Cash In Flows This Year Last Year
--------- ---------
<S> <C> <C>
Cash flows from operations $8,800 $7,900
Cash flows from financing 12,200 7,900
--------- ---------
Total cash in flows 21,000 15,800
Cash Out Flows
Cash flows from investing (21,000) (15,800)
</TABLE>
The cash flows from both operations and financing activities were invested in
growth of our lease portfolio. We have been successful in arranging our past
financing needs and believe that our current financing arrangements are adequate
to meet our foreseeable operating requirements. There can be no assurance,
however, that we 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. Our management conducts ongoing
discussions and negotiations with existing and potential lenders for future
financing needs.
Instead of having our own cash account, we use the depository accounts of Agway
Inc. and subsidiaries drawing checks against these accounts and making deposits
to them. The balance in the Payable to Agway Inc. and subsidiaries varies on a
daily basis depending on the timing of deposits and the drawing of checks.
As of September 30, 1999, we had credit facilities available from banks which
allow us to borrow up to an aggregate of $320,000. Uncommitted short-term line
of credit agreements permit us to borrow up to $70,000 on an unsecured basis
with interest paid upon maturity. The lines bear interest at money market
variable rates. A committed $250,000 partially collateralized (by stock in a
cooperative bank) revolving line of credit permits us 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
September 30, 1999, under the short-term lines of credit and the revolving term
loan facility was $70,000 and $146,300, respectively.
We borrow under our short-term line of credit agreements and our revolving term
agreement from time to time to fund our operations. Short-term debt serves as
interim financing between the issuances of long-term debt. We renew our lines of
credit annually. The $70,000 of lines of credit all have terms expiring during
the next 12 months. The $250,000 revolving term loan facility is available
through August 1, 2000.
We had balances outstanding on unsecured senior notes from private placements
totaling $146,000 at both June 30, 1999 and September 30,1999. Interest is
payable semiannually on each senior note. Principal payments are both semiannual
and annual. The note agreements are similar to one another and each contains
specific financial covenants that must be complied with by us.
8
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PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
(In 000's rounded to nearest hundred thousand)
LIQUIDITY AND CAPITAL RESOURCES (continued)
Through two wholly owned special purpose subsidiaries, we have lease-backed
notes outstanding totaling $57,700 and $58,800 at September 30, 1999, and June
30, 1999, respectively, payable to insurance companies. Interest rates on these
classes of notes range from 6.54% to 7.61%. The notes are collateralized by
leases, which were sold to those subsidiaries, having an aggregate present value
of contractual lease payments equal to the principal balance of the notes.
The final scheduled maturity of these notes is December 2007.
We offer subordinated debentures to the public. The debentures are unsecured and
subordinated to all of our senior debt. The interest on the debt is payable
quarterly on January 1, April 1, July 1 and October 1 and is allowed to be
reinvested.
We believe we have sufficient lines of credit in place to meet interim funding
needs.
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.
We utilize a number of computers and computer software programs in the conduct
of our 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 our 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 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 our 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
our field sales force.
In addition to the information technology applications review noted above, we
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.
Our 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, our management considers failure of its
banks and insurance company investors as remote. We have a number of such
creditors which diversifies the risk. Our customer base is widely diversified in
number, geography and industry and in our 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 us. 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.
9
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
(In 000's rounded to nearest hundred thousand)
YEAR 2000 READINESS (continued)
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 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,
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 us approximately $800, all of which had been
incurred by June 30, 1999. However, additional costs may be incurred if we are
required to invoke continuity plans. We have treated 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 our senior management and
include the details of the scope, any preparation steps needed, plan date of
activation, appropriate communications, and procedures. A test will be completed
in November to validate these plans in the event of a failure whether facility
or system related.
10
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use derivatives and other interest rate instruments. The principal
cash flow of our debt obligations and related weighted average interest rates by
contractual maturity dates have not materially changed since June 30, 1999.
Quantitative and Qualitative Disclosures about market risk are contained in Item
7a of our Annual Report on Form 10-K for the year ended June 30, 1999.
11
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
We did not file any reports on Form 8-K during the three months ended
September 30, 1999.
12
<PAGE>
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 November 5, 1999 By /s/ Daniel J. Edinger
-------------------- ---------------------
Daniel J. Edinger, President
(Principal Executive Officer)
Date November 5, 1999 By /s/ Peter J. O'Neill
-------------------- --------------------
Peter J. O'Neill, Senior Vice President,
Finance and Control
(Principal Accounting Officer)
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,917,790
<SECURITIES> 0
<RECEIVABLES> 793,383,043
<ALLOWANCES> 31,735,937
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,570,779
<DEPRECIATION> 1,801,599
<TOTAL-ASSETS> 593,095,309
<CURRENT-LIABILITIES> 0
<BONDS> 459,146,528
0
0
<COMMON> 0
<OTHER-SE> 107,815,798
<TOTAL-LIABILITY-AND-EQUITY> 593,095,309
<SALES> 0
<TOTAL-REVENUES> 18,271,716
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,869,357
<INTEREST-EXPENSE> 7,701,323
<INCOME-PRETAX> 3,842,462
<INCOME-TAX> 1,593,000
<INCOME-CONTINUING> 2,249,462
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,249,462
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
