[FRONT COVER WITH PHOTOS]
1999
ANNUAL REPORT
TO INVESTORS
[TELMARK LOGO]
A farmer-owned organization
<PAGE>
This Annual Report To Investors contains forward-looking statements that
involve certain risks and uncertainties. Actual results could differ materially
from those statements. Certain factors that could cause actual results to differ
materially from those projected include, but are not limited to, uncertainties
of economic, competitive and market decisions and future business decisions, as
well as those factors discussed in Telmark's annual report on Form 10-K for the
year ended June 30, 1999.
2
<PAGE>
Annual Report Letter
Telmark Investors:
I am pleased to report another year with significant increases in all of
Telmark's key financial measurements, including our managed portfolio, which is
now at $570 million.
Pre-tax net income was $18.2 million: a $2.7 million increase over the prior
year. Telmark's portfolio quality continues strong with currency over 97% for
the fourth consecutive year.
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. We have
employees who desire to take ownership of their customers' needs. This focus on
the customer has resulted in an employee group that is highly motivated to find
financial solutions for a customer's business.
While other lenders seek efficiencies by becoming larger merely for the sake of
size, they further remove themselves from the customer. 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.
Daniel J. Edinger
President
Telmark LLC
3
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
4
<PAGE>
BUSINESS OF TELMARK
Telmark LLC ("Telmark," "we," "our," "us" or "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. We are owned and
controlled by Agway Inc. ("Agway"), one of the largest agricultural supply and
services cooperatives in the United States, in terms of revenues, based on a
1998 Co-op 100 Index produced by the National Cooperative Bank. We are a direct
wholly-owned subsidiary of Agway Holdings, Inc., an indirect subsidiary of
Agway. Telmark currently employs 215 persons.
Our 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. Our leases offer customers
an alternative to directly purchasing or borrowing to purchase as a means of
acquiring the use of equipment, vehicles or buildings.
o We branded our leasing service with the registered trademark,
Agrilease(R). We also use TFS(SM) to identify our services
through dealers of selected manufacturer products.
o We highlight our service-oriented approach, using the tagline
"The Flexible Financing Alternative(SM)" in our advertisements
and product brochures.
We offer 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. Customers make
lease payments in advance. In most cases, at least two months of the lease
payments are collected in advance before the lease starts. We offer most direct
finance leases for a period which does not exceed our estimate of the useful
life (based on our estimate of customers use) of the equipment or the building
leased. We offer equipment and vehicle leases typically for a period of 3 to 6
years, and generally do not exceed eight years. We offer building leases
typically for longer terms (e.g., 5 to 10 years), up to maximum terms of 15
years. As of June 30, 1999, our outstanding leases had an average original term
of approximately 5.5 years and average remaining term of approximately 4 years.
Generally, the customer selects the supplier of the equipment or other property
to be leased and we are 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. Our primary
responsibility is to buy the property from the supplier, lease it to the
customer, and collect the lease payments, although in certain circumstances we
have agreed to indemnify customers if certain adverse tax consequences arise in
connection with a lease. We cannot predict our liability under these
indemnification provisions, but we believe that our liability is remote and the
net effect of any liability is not material. The customers assume all
obligations of insurance, repairs, maintenance, service, and property taxes.
Historically, in most of our lease transactions, the lessee has purchased the
leased property or equipment upon termination of the lease. However, at the
expiration of the direct finance lease term, the customers have an option to
o purchase the leased property,
o renew the lease, or
o return the leased property to us.
We realize net earnings, if revenues from our leases, exceed our operating
expenses and income taxes. Our "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.
5
<PAGE>
o "Operating expenses" include interest expense, provision for
credit losses (the dollar amount we set 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 our payroll costs, rent,
advertising costs and fees paid for credit checking and legal
and accounting services.
o "Interest expense" is the single largest operating cost of
Telmark and is primarily the interest we must pay on the
amounts borrowed from banks and other investors to finance our
leases.
An example of how a direct finance lease transaction generates profits for us
is set forth below:
o 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 us for that particular machine.
o We purchase the harvester using funds we borrow or with
available cash on hand. Under terms of the lease, the customer
agrees to make lease payments to us.
o At the end of the lease term, the customer may (1) purchase
the harvester from us for its fair market value, (2) extend
the lease on terms agreed to by us, or (3) return the
harvester to us. We make 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
We finance agricultural and related equipment, vehicles and buildings of both a
general and specialized nature. As exemplified by the following four schedules.
We have 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
our business, to the extent that such circumstances do not adversely affect our
entire business.
"Leases" in our portfolio are defined by us for the following statistical
purposes as amounts due to it by lessees under all of our outstanding leases
(known as "gross lease receivables") and excludes imputed unearned interest and
finance charges.
As of June 30, 1999, we had approximately $551 million of leases and notes
outstanding. We lease equipment which 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 we do 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 our
leases, we have not been adversely affected by, and do 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, 1999
- --------------------------------------------------------------------------------
(Percentages are of dollar amounts due under outstanding Leases)
- --------------------------------------------------------------------------------
Equipment Type %
- -------------- ------
Farm equipment, machinery and tractors.................................... 38%
Highway vehicles.......................................................... 17%
Buildings................................................................. 31%
Forestry related equipment................................................ 8%
Other 5% or less of total................................................. 6%
------
Total............................................................... 100%
------
------
6
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
We maintain a large customer base which includes over 17,000 customers. The
minimum purchase price of equipment which we finance is $1,500. Approximately
30% of our customers hold more than one lease with us. In order to limit its
credit exposure to particular customers, our Board of Directors maintains a
policy which precludes any one customer from accounting for more than 2.5% of
the dollar amount of our outstanding Leases. Currently, no customer accounts for
more than 1.0% of the dollar amount of our outstanding Leases. Our average lease
size at origination is approximately $30,000. The breakdown of leases by size is
as follows:
SCHEDULE OF LEASES BY SIZE
Dollar Amounts and Corresponding Percentages are of Leases Entered into During
Year Ended June 30, 1999
- --------------------------------------------------------------------------------
Dollars
Original Size Transaction (In Millions) %
- ------------------------- ---------------- -------------
Under $7,500 $ 8.3 3%
$ 7,500 - $24,999 59.8 24%
$25,000 - $49,999 55.7 22%
$50,000 - $99,999 45.4 18%
$100,000 - $249,999 48.0 19%
$250,000 & Over 34.9 14%
---------------- -------------
Total $252.1 100%
---------------- -------------
---------------- -------------
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, we serve
diverse enterprises which helps us 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, 1999
- --------------------------------------------------------------------------------
(Percentages are of dollar amounts due under outstanding Leases)
- --------------------------------------------------------------------------------
Industry %
- -------- -----
Crops...................................................................... 22%
Dairy...................................................................... 17%
Livestock.................................................................. 17%
Forestry................................................................... 12%
Transportation............................................................. 9%
Construction............................................................... 6%
Other less than 5% of total................................................ 17%
Total................................................................ 100%
7
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
PORTFOLIO MIX (CONTINUED)
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.
At June 30, 1999, leases originated in the states of Michigan, New York, Ohio
and Pennsylvania accounted for approximately 44% 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,
our business continues to expand geographically and its concentration of leases
in Pennsylvania and New York has been reduced from approximately 68% in 1984 to
24% in 1999. Our continued expansion into new geographic markets mitigates the
potential adverse effect on 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, 1999
- --------------------------------------------------------------------------------
(Percentages are of dollar amounts due under outstanding Leases)
- --------------------------------------------------------------------------------
State %
- ----- ----
New York.................................................................... 14%
Pennsylvania................................................................ 11%
Michigan.................................................................... 10%
Ohio........................................................................ 9%
Illinois.................................................................... 6%
Indiana..................................................................... 5%
Virginia.................................................................... 5%
Wisconsin................................................................... 5%
Maryland.................................................................... 4%
Delaware.................................................................... 4%
North Carolina.............................................................. 3%
West Virginia............................................................... 3%
All Others less than 3%..................................................... 21%
Total.................................................................100%
CREDIT POLICIES
Potential lessees undergo a thorough credit approval process after our field
representative completes a financial application. Our representative is
responsible for obtaining the most accurate information possible for a proper
application review. Personal observation and meetings with the customer assist
the our representative in providing a comprehensive evaluation of the lease
application.
8
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
CREDIT POLICIES (CONTINUED)
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. We retain title to the
equipment or building leased. In addition, we often obtain a lien on the real
estate owned by the farmer or lessee as collateral for payments under a building
lease. If a customer defaults on a lease, the real estate lien entitles us 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 us. Thus, we look 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.
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.
We maintain 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, 1999, non-earning leases were
.9% of our net investment in leases before allowances for credit losses. The
potential losses from non-earning leases are mitigated by our ability to
repossess leased property and to foreclose on other property in which we are
granted a security interest. See "Business of Telmark - Portfolio Mix." Leases
may be amended by us and a lessee to change the terms, remaining amount, and
payment schedule for the remaining lease balance. There is generally a fee
collected for the amendment. All lease amendments are supported by legal
documentation and, as management deems appropriate, a new credit evaluation.
We maintain financial reserves (provision for credit losses) to cover losses in
our existing lease portfolio from default or nonpayment. Our allowance for
credit losses is based on a periodic review of the collection history of past
lessees, current credit practices, an analysis of delinquent accounts and
current economic conditions. The provision reflects management's estimates of
the inherent credit risk within the portfolio.
RESIDUAL VALUE
We generally estimate 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. We have 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 ten years, we have 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 us under the lease, the
estimated residual value of the leased property at the end of the lease and the
net costs incurred by us in entering into the lease, less imputed unearned
interest and finance charges with respect to the lease. This residual
performance can be attributed to our ability to sell the equipment, vehicle or
building to the original lessee at the end of the lease in most 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.
9
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
INSURANCE COVERAGE
Under a Telmark lease, the customer assumes the obligation to insure the leased
property against claims arising from the customer's use of the leased property.
We may be exposed to liability from claims by lessees and third parties
including claims due to the customers' use of the property or defects in the
property. However, in general direct finance lessors such as us have not been
held liable for such claims. In addition, the leases provide us protection
against such liability claims. Under the terms of each lease, we disclaim such
liability and the customer agrees to indemnify us 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. We require the customer to provide insurance coverage naming us as an
additional insured in certain circumstances and we have insurance coverage for
most liability claims against us through insurance policies purchased by Agway.
AGRICULTURAL ECONOMY
We are indirectly affected by factors that affect the agricultural economy in
which our customers operate. These factors include
o governmental agricultural programs,
o weather conditions, and
o supply and demand conditions with respect to agricultural commodities.
These factors may affect the economic vitality of our 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 customers. Government program changes that
may affect Telmark 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 enacted Federal Agricultural Improvement
and Reform (FAIR) Act, in 1996, 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 leases.
The overall impact of these programs on us 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 us to the extent that such changes result in farmers
increasing their production of certain crops.
10
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
COMMODITIES DEMAND (CONTINUED)
Weather. Adverse weather conditions can have varying effect on our customers
depending on the region experiencing such conditions. When adverse conditions
occur in the region served by us, the effect can be negative as was the case in
1992 when many parts of the Northeast, our 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 our customers. 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 our customers. Inclement weather can also benefit our
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 our customers 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 our customers 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 our customers
to the benefit of us. Conversely, any of the above factors which decrease demand
may decrease such income to our detriment.
Historically, our 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 our customers
may also influence the demand for products of our 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 our customers.
Our 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
our customers' products. The impact of these agreements on our customers is
unclear. To the extent that these agreement's result in an increase in competing
imports or greater domestic supply, our customers and thus we may be adversely
affected. However, to the extent these agreements increase demand for
commodities of the type produced by our customers, we and our customers may be
beneficially affected.
MARKETING AND SALES
We use both direct mail and advertising campaigns routed through our parent's
publications and other agricultural publications as a means of promoting our
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 our business comes from referrals to us 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 us for the
equipment, vehicles or buildings which are then "acquired" by the customer.
Using the identification TFS(SM), we provide financing through the dealers of
selected manufacturers of equipment. In the cases where financing is through
manufacturer sponsored financing programs, the dealer rather than our field
representative completes the credit application.
11
<PAGE>
BUSINESS OF TELMARK (CONTINUED)
FACILITIES
We lease all of the office space we use from Agway. We do not own any of the
real property we use for office facilities.
COMPETITION
Our main competitors are agricultural financial institutions and other leasing
companies. Many of these organizations have greater financial and other
resources than us and as a consequence are able to obtain funds on terms more
favorable than those available to us. Our 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 we can. Similarly, commercial banks may be able to raise funds more
cheaply than us through their offering of Federal Deposit Insurance Corporation
insured deposit accounts.
Other leasing companies competing with us 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. We
compete with our competitors by focusing on agricultural equipment financing,
service to our customers, and tailoring our portfolio of products to address the
specific needs of farmers and other rural businesses which serve the
agricultural marketplace.
SELECTED FINANCIAL DATA
The following "Selected Financial Data" of Telmark and consolidated subsidiaries
have been derived from consolidated financial statements audited by
PricewaterhouseCoopers LLP, whose report for the years ended June 30, 1999, 1998
and 1997 is included in the Annual Report on Form 10-K, and should be read in
conjunction with the full consolidated financial statements of Telmark and Notes
thereto.
<TABLE>
<CAPTION>
(Thousands of Dollars Except Ratio Amounts)
-----------------------------------------------------------------------
Years Ended June 30,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues............... $ 70,006 $ 65,476 $ 56,943 $ 48,627 $ 41,942
Income before income taxes $ 18,158 $ 15,412 $ 13,003 $ 11,502 $ 9,272
Provision for income taxes .. $ 7,756 $ 6,654 $ 5,112 $ 4,745 $ 4,240
Net income .................. $ 10,402 $ 8,758 $ 7,891 $ 6,757 $ 5,032
Leases and notes, net........ $ 551,071 $ 495,626 $ 445,770 $ 374,561 $ 333,091
Total Assets................. $ 575,987 $ 518,316 $ 470,606 $ 398,198 $ 358,634
Senior Debt.................. $ 396,101 $ 371,677 $ 340,158 $ 273,000 $ 255,467
Debentures (1)............... $ 37,633 $ 34,006 $ 31,044 $ 24,258 $ 8,174
Member's Equity.............. $ 105,566 $ 95,164 $ 86,406 $ 78,514 $ 44,758
Ratio of earnings to fixed charges (2) 1.6 1.6 1.5 1.6 1.5
Ratio of Debt to member's equity (3) 4.1 4.3 4.3 3.8 3.7
</TABLE>
(1) Certain amounts reported in fiscal years ended June 30, 1995-1998, have been
reclassified to conform to the current year presentation. (2) For purposes of
this ratio, earnings represents operating income before income taxes, interest
charges, and rental expense. Fixed charges include interest on all senior and
subordinated debt. (3) Under 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."
12
<PAGE>
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.
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.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (000 OMITTED) (CONTINUED)
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.
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.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (000 OMITTED) (CONTINUED)
INCREASE IN LEASE PORTFOLIO (CONTINUED)
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.
15
<PAGE>
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
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (000 OMITTED) (CONTINUED)
YEAR 2000 (CONTINUED)
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 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.
17
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table provides information about the Telmark'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 2000 2001 2002 2003 2004 Thereafter Total 6/30/99
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short Term Bank
Lines of Credit 43,300 - - - - - 43,300 43,300
Weighted Average
Interest Rate 5.79% - - - - -
Long-Term Debt,
including current portion 91,461 84,431 68,581 48,608 57,529 2,191 352,801 361,086
Weighted Average
Interest Rate 7.05% 6.75% 6.67% 6.70% 6.65% 6.62% - -
Subordinated Debentures,
including current portion 18,200 3,766 4,650 11,017 - - 37,633 37,887
Weighted Average
Interest Rate 8.23% 7.49% 7.29% 8.00% - - - -
</TABLE>
Telmark does not use derivatives or other financial instruments to hedge
interest rate risk in its portfolio. Telmark 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. Telmark 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 of 4.9% as of June 30, 1999, as compared to the stated rates of the
debentures, which range from 6.0% to 8.5% at June 30, 1999, we believe 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, 1999, we do not believe that reasonably possible
near-term changes in interest rates will result in a material effect on future
earnings, fair values, or cash flows of Telmark.
LEGAL PROCEEDINGS
Telmark 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
Telmark 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.
18
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES:
<S> <C>
Report of Independent Accountants.......................................................................20
Consolidated Balance Sheets, June 30, 1999 and 1998.....................................................21
Consolidated Statements of Income and Member's Equity,
for the years ended June 30, 1999, 1998 and 1997...............................................22
Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1999, 1998 and 1997...........23
Notes to Consolidated Financial Statements..............................................................24
</TABLE>
19
<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, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Telmark'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
July 30, 1999
20
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
JUNE 30, 1999 AND 1998
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Restricted cash........................................$ 4,480 $ 1,704
Leases and notes receivable, net....................... 551,071 495,626
Investments............................................ 12,780 11,850
Equipment, net......................................... 868 1,000
Deferred income taxes.................................. 5,443 7,030
Other assets........................................... 1,345 1,106
------------ ------------
Total Assets...........................................$575,987 $518,316
============ ============
LIABILITIES AND MEMBER'S EQUITY
1999 1998
------------ ------------
Borrowings under lines of credit and term debt.........$396,101 $371,677
Subordinated debentures................................ 37,633 34,006
Accounts payable....................................... 6,692 5,108
Payable to Agway Inc................................... 22,337 4,443
Accrued expenses, including interest of
$3,258 - 1999 and $4,262 - 1998 ................. 7,658 7,918
------------ ------------
Total Liabilities...................................... 470,421 423,152
Commitments & Contingencies
Member's Equity........................................ 105,566 95,164
------------ ------------
Total Liabilities and Member's Equity.............$575,987 $518,316
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME AND MEMBER'S EQUITY
FISCAL YEARS ENDED JUNE 30, 1999, 1998, AND 1997
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Interest and finance charges........$ 68,337 $ 63,872 $ 55,451
Service fees and other income....... 1,669 1,604 1,492
-------- -------- --------
Total revenues.................. 70,006 65,476 56,943
-------- -------- --------
Expenses:
Interest expense.................... 27,626 26,871 23,486
Provision for credit losses......... 8,024 7,587 7,947
Selling, general and administrative. 16,198 15,606 12,507
-------- -------- --------
Total expenses.................. 51,848 50,064 43,940
-------- -------- --------
Income before income taxes...... 18,158 15,412 13,003
Provision for income taxes............... 7,756 6,654 5,112
-------- -------- --------
Net income...................... 10,402 8,758 7,891
Member's equity, beginning of year....... 95,164 86,406 78,515
-------- -------- --------
Member's equity, end of year.............$105,566 95,164 $ 86,406
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JUNE 30, 1999, 1998, AND 1997
(THOUSANDS OF DOLLARS)
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................... $ 10,402 $ 8,758 $ 7,891
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization ........ 510 607 529
Deferred taxes ....................... 1,587 3,614 1,259
Provision for credit losses .......... 8,024 7,587 7,947
Patronage refund received in stock ... (930) (1,043) (769)
Changes in assets and liabilities:
Other assets .................... (239) (169) (1,283)
Payables ........................ 1,584 709 (246)
Income taxes payable ............ 2,153 1,330 (2,136)
Accrued expenses ................ (260) (231) 2,028
---------- ---------- ----------
Net cash flow provided by
operating activities ............ 22,831 21,162 15,220
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Leases originated ........................ (252,107) (227,270) (231,006)
Leases repaid ............................ 188,637 169,827 151,851
Purchases of equipment, net .............. (378) (552) (523)
---------- ---------- ----------
Net cash flow used
in investing activities ......... (63,848) (57,995) (79,678)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in borrowings under
short term line of credit ............ 15,000 16,000 4,000
Net change under revolving line of credit (8,700) (25,900) 44,900
Proceeds from notes payable .............. 0 100,000 38,000
Repayment of notes payable ............... (23,000) (50,723) (45,122)
Proceeds from lease backed notes ......... 48,384 0 25,944
Repayment of lease backed notes .......... (7,243) (7,785) (499)
Repayment of capital lease ............... (17) (73) (66)
Net change payable to Agway Inc. ......... 15,742 2,663 (8,092)
Repayment of debentures .................. 0 (11,208) 0
Proceeds from sale of debentures ......... 3,627 14,170 6,786
Net change in restricted cash ............ (2,776) (311) (1,393)
---------- ---------- ----------
Net cash flow provided by
financing activities .......... 41,017 36,833 64,458
---------- ---------- ----------
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 ............................. $ 28,629 $ 27,395 $ 22,761
Income Taxes ......................... $ 3,556 $ 2,972 $ 6,968
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<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. Telmark 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. We are 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 Telmark'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
Telmark considers all investments with a maturity of three months or less
when purchased to be cash equivalents. Certain cash accounts amounting to $4,480
and $1,704 at June 30, 1999, and 1998 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, 1999, and 1998, the
recognition of interest income was suspended on leases and notes totaling
approximately $4,890 and $3,046, respectively.
Initial direct costs incurred in consummating a lease are not recorded
when the lease is booked. The expense is capitalized and amortized over the life
of the lease. This deferral of expenses has the effect of reducing the expense
recorded in the period the lease is booked, and increasing the expense
recognized over the remaining life of the lease.
<TABLE>
<CAPTION>
FY1999 FY1998 FY1997
------ ------ ------
<S> <C> <C> <C>
Expenses not recognized this year
are deferred to later years 6,745 5,256 5,354
Expenses from prior years amortized
this year 4,969 4,553 4,168
</TABLE>
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, generally
within one year of becoming past due.
24
<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 $1,329, $1,489, and
$1,099 for the years ended June 30, 1999, 1998, and 1997, respectively.
Equipment
Depreciation is calculated using the straight-line method over the
estimated useful lives of the equipment.
Advertising Costs
We expense advertising costs as incurred. Advertising expense for the
years ended June 30, 1999, 1998, and 1997, was approximately $1,008, $877, and
$829.
Income Taxes
Telmark 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.
We are included in a consolidated federal tax return filed by Agway Inc.
Under the Telmark's tax sharing agreement, the provision for income taxes and
related credits and carry forwards are calculated on a separate company basis
and billed to us as appropriate on an interim basis. Through June 30, 1998,
Telmark filed separate state tax returns. Effective July 1, 1998, for income tax
filing purposes, Telmark is included as a business division of 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.
25
<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:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Leases:
Commercial and agricultural $740,011 $667,222
Leasing to Agway Inc. and subsidiaries 220 302
-------- --------
740,231 667,524
Retail installment loans 28,349 21,464
-------- --------
Total leases and notes $768,580 $688,988
======== ========
Net investment in leases and notes at June 30 are summarized as follows:
1999 1998
--------- ---------
Leases and notes $768,580 $688,988
Unearned interest and finance charges (199,122) (175,887)
Net deferred origination costs 11,591 9,596
--------- ---------
Net investment 581,049 522,697
Allowance for credit losses (29,978) (27,071)
--------- ---------
Leases and notes, net $551,071 $495,626
========= =========
</TABLE>
Included within the above leases and notes is unguaranteed estimated residual
values of leased property approximating $82,100 and $72,400 at June 30, 1999,
and 1998, respectively.
Contractual maturities of leases and notes were as follows at June 30,
1998:
<TABLE>
<CAPTION>
Leases
--------------------------
Commercial To Agway Retail
and Inc. and Installment
Agricultural Subsidiaries Loans Total
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
2000 $211,902 $ 69 $ 8,217 $220,188
2001 164,513 58 6,839 171,410
2002 122,969 51 3,481 126,501
2003 81,389 26 2,110 83,525
2004 50,550 16 1,347 51,913
Thereafter 108,688 0 6,355 115,043
-------- -------- -------- ---------
Totals $740,011 $ 220 $ 28,349 $768,580
======== ======== ======== =========
</TABLE>
Changes in the allowance for credit losses for the years ended June 30
were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year $ 27,071 $ 24,014 $ 19,776
Provision for credit losses charged to operations 8,024 7,587 7,947
Charge-offs (6,820) (6,513) (5,481)
Recoveries 1,703 1,983 1,771
--------- --------- ---------
Balance, end of year $ 29,978 $ 27,071 $ 24,014
========= ========= =========
</TABLE>
26
<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:
<TABLE>
<CAPTION>
1999 Owned Leased Combined
---- ------------- ------------- -------------
<S> <C> <C> <C>
Office and other equipment................. $ 2,571 $ 0 $ 2,571
Less accumulated depreciation
and amortization................... (1,703) 0 (1,703)
------------- ------------- -------------
$ 868 $ 0 $ 868
============= ============= =============
1998
Office and other equipment................. $ 2,413 $ 203 $ 2,616
Less accumulated depreciation
and amortization................... (1,430) (186) (1,616)
------------- ------------- -------------
$ 983 $ 17 $ 1,000
============= ============= =============
4. INCOME TAXES
The provision for income taxes consists of the following:
1999 1998 1997
------------- ------------- -------------
Currently payable:
Federal.................. $ 4,451 $ 2,321 $ 3,215
State.................... 1,718 719 638
Deferred...................... 1,587 3,614 1,259
------------- ------------- -------------
$ 7,756 $ 6,654 $ 5,112
============= ============= =============
</TABLE>
Telmark's effective income tax rate on pre-tax income differs from the federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Currently payable:
Statutory federal income tax rate ........ 34.0% 34.0% 34.0%
Tax effects of:
State taxes, net of federal benefit 8.0 8.7 5.4
Other items........................... .7 .5 (.1)
------------- ------------- -------------
Effective income tax rate 42.7% 43.2% 39.3%
============= ============= =============
</TABLE>
27
<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:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Lease receivable reserves...... $ 11,849 $ 10,726
Other reserves................. 305 761
Alternative minimum tax
credit carry forward........ 3,574 3,462
Other.......................... 655 456
------------- -------------
Total deferred tax assets 16,383 15,405
------------- -------------
Deferred tax liabilities:
Difference between book and
tax treatment of leases.... 10,745 8,192
Other.......................... 195 183
------------- -------------
Total deferred tax liabilities 10,940 8,375
------------- -------------
Net deferred tax asset $ 5,443 $ 7,030
============= =============
</TABLE>
Based on our 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, 1999, Telmark's
federal AMT credit can be carried forward indefinitely.
5. BORROWINGS UNDER LINES OF CREDIT AND TERM DEBT
As of June 30, 1999, we have credit facilities available from banks which allow
us to borrow up to an aggregate of $315,000. Uncommitted short-term line of
credit agreements permit us to borrow up to $65,000 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 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 June 30, 1999, under the short-term
lines of credit and the revolving term loan facility was $35,000 and $156,300,
respectively.
Telmark has issued lease-backed notes, through two wholly owned special purpose
funding subsidiaries. In 1997, 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. Telmark Lease Funding I, LLC pays interest at 6.58% on the
Class A notes and 7.01% on the Class B notes. In 1999, Telmark Lease Funding II,
LLC issued $44,800 of Class A lease-backed notes and $3,600 of Class B
lease-backed notes to an insurance company. Telmark Lease Funding II, LLC pays
interest at 6.54% on the Class A notes and 7.61% 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 $65,000 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. The scheduled maturity of these notes is
December 2007.
At June 30, 1999, we had balances outstanding on unsecured senior note private
placements totaling $146,000. Interest is payable semiannually on each senior
note. Principal payments are both semiannual and annual. The note agreements are
similar to each other 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, 1999, $13,000 of member's equity was free of this restriction. Telmark
has complied with all covenants contained in its borrowing agreements.
28
<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>
1999 1998
---------- ----------
<S> <C> <C>
Notes payable to banks due in varying amount and dates through
April 12, 2004 with interest ranging from 5.56% to 7.67%....... $ 191,300 $ 185,000
Unsecured notes payable to insurance companies due in varying
amount and dates through May 29, 2004, with interest
ranging from 6.47% to 7.64%.................................... 146,000 169,000
Lease-backed notes payable to insurance companies in varying
amounts and dates through December 15, 2007 with interest
rates ranging from 6.54% to 7.61%.............................. 58,801 17,660
Capital lease payable in 1999..................................... 0 17
---------- ----------
Total Term Debt.............................................. 396,101 371,677
Subordinated debentures due in varying amount and dates through
March 31, 2003, with interest ranging from 6.00% to 8.50%...... 37,633 34,006
---------- ----------
Total Debt................................................... $ 433,734 $ 405,683
========== ==========
</TABLE>
The notes payable to banks represents the portion outstanding at June 30, 1999,
and 1998, of the amount available under credit facilities totaling $315,000 and
$294,000 respectively. Of the amount outstanding at June 30, 1999, $156,300 is
partially collateralized by our investment in a cooperative bank having a book
value of $12,780 at June 30, 1999. 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
Telmark.
The carrying amounts and estimated fair values of our significant financial
instruments held for purposes other than trading at June 30, were as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ --------- -------------------------
<S> <C> <C> <C> <C>
Liabilities:
Lines of Credit and
Term Debt (excluding capital leases) $ 396,101 $404,386 $ 371,660 $377,628
Subordinated Debentures 37,633 37,887 34,006 34,605
</TABLE>
The aggregate amounts of notes payable, and subordinated debentures maturing
after June 30, 1999, are as follows:
<TABLE>
<CAPTION>
Notes Payable
--------------------------------- Subordinated
Year Ending June 30, Bank Ins. Companies Debentures Total
--------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
2000 $ 102,300 $ 32,461 $ 18,200 $ 152,961
2001 33,000 51,431 3,766 88,197
2002 10,000 58,581 4,650 73,231
2003 16,000 32,608 11,017 59,625
2004 30,000 27,529 0 57,529
Thereafter 0 2,191 0 2,191
--------------- ---------------- ------------- -------------
$ 191,300 $ $204,801 $ 37,633 $ 433,734
=============== ================ ============= =============
</TABLE>
29
<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
$1,400, $1,100, and $1,200 for the periods ended June 30, 1999, 1998, and 1997,
respectively.
7. RELATED PARTY TRANSACTIONS
Cash Management
In lieu of having our own cash account we utilizes the depository accounts of
its parent, Agway Inc., drawing checks against these accounts and making
deposits to them. The balance represented by the Payable to Agway Inc. is
dependant on the timing of deposits and the drawing of checks.
Inter-Company Transactions
Selected amounts related to transactions with Agway Inc. and Subsidiaries are
separately disclosed in the financial statements. Certain other transactions for
the years ended June 30 with Agway Inc. and Subsidiaries were approximately:
(Revenue) Expense 1999 1998 1997
----------------- ------- ------ -------
Interest and finance charges..................$ (27) $ (49) $ (38)
Administrative and general expense............ 1,691 1,638 1,780
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 Telmark,
including the corporate insurance program, information services, payroll,
benefits, and accounts payable administration and facilities management. These
expenses were allocated to us and management believes the methodology used is
reasonable.
During the years ended June 30, 1999, 1998, and 1997, Telmark paid no dividends
with respect to its common stock and there was no distribution of member's
equity.
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, 1999 approximated
$12,581.
LEGAL PROCEEDINGS
Telmark 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.
30
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
9. FINANCIAL INSTRUMENTS
Off Balance-Sheet Risk
Telmark 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, Telmark's credit risk is limited to the
amount of Telmark's commitment to extend credit. Our 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. We use 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 70% of its leases directly
related to production agriculture. However, the portfolio of agricultural leases
is diversified into many different kinds of agriculture. As of June 30, 1999,
the largest concentration was in crops enterprises which represented 19% of the
portfolio, dairy enterprises which represented 17% of the portfolio, and wood
products enterprises which represented 12% of the portfolio. At June 30, 1999,
approximately 44% of our net lease investment was in the states of Michigan, New
York, Ohio, and Pennsylvania. Developments in any of these areas of
concentration could affect operating results adversely.
Telmark 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 our outstanding leases in the secondary market.
31
<PAGE>
[BACK PAGE OF ANNUAL REPORT]
[TELMARK LOGO]
TELMARK LLC
SECURITIES DEPARTMENT
PO BOX 5060
SYRACUSE, NY 13220-5060
TELEPHONE 315-449-6311
<PAGE>
