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 March 31, 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*
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 16-1551523
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
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(Address of principal executive offices) (Zip Code)
315-449-7935
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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 shares outstanding of each of the registrant's equity
securities, as of the latest practicable date.
Class Outstanding at April 30, 1999
- ---------------------- -----------------------------
Membership Certificate One
* Telmark is a direct wholly owned subsidiary of Agway Holdings, Inc., a
subsidiary of Agway, Inc., which is a reporting Company under the
Securities Exchange Act of 1934, and meets the conditions set forth in
General Instructions H(1)(a) and (b) of Form 10-Q and is therefore
filing this form with the reduced disclosure format.
1
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TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGES
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<S> <C> <C>
ITEM 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets, March 31, 1999 and June 30, 1998........................... 3
Condensed Consolidated Statements of Income and Member's Equity, for the three months and
nine months ended March 31, 1999 and 1998......................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
March 31, 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........................................ 10
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................................................................. 11
SIGNATURES.................................................................................................. 12
</TABLE>
2
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PART I. FINANCIAL INFORMATION
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Restricted Cash.......................................................... $ 1,837 $ 1,704
Leases and notes......................................................... 729,932 688,988
Unearned interest and finance charges.................................... (188,216) (175,887)
Net deferred origination costs........................................... 10,616 9,596
----------- ------------
Net investment..................................................... 552,332 522,697
Allowance for credit losses............................................. (30,796) (27,071)
----------- ------------
Leases and notes, net.............................................. 521,536 495,626
Investments.............................................................. 12,780 11,850
Equipment, net........................................................... 457 1,000
Deferred income taxes.................................................... 6,394 7,030
Other assets............................................................. 1,044 1,106
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Total Assets.......................................................... $ 544,048 $ 518,316
=========== =============
LIABILITIES AND MEMBER'S EQUITY
Accounts payable..................................................... 5,512 5,108
Payable to Agway Inc. and subsidiaries .............................. 11,221 4,443
Accrued expenses, including interest of
$8,299 - March 31 and $4,262 - June 30 ........................ 12,497 7,918
Borrowings under short term lines of credit.......................... 52,000 20,000
Borrowings under revolving line of credit............................ 151,000 165,000
Term debt............................................................ 171,810 186,677
Subordinated debentures.............................................. 37,125 34,006
----------- -------------
Total liabilities.............................................. 441,165 423,152
Commitments & contingencies
Member's equity...................................................... 102,883 95,164
----------- -------------
Total liabilities and member's equity.......................... $ 544,048 $ 518,316
=========== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND MEMBER'S EQUITY
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
------------------------------------- -------------------------------------
1999 1998 1999 1998
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Interest and finance charges $16,797 $15,767 $50,539 $47,146
Service fees and other income 472 443 1,226 1,172
--------------- ---------------- --------------- ---------------
Total revenues 17,269 16,210 51,765 48,318
Expenses:
Interest expense 5,610 5,654 20,164 19,801
Provision for credit losses 1,959 1,809 5,529 5,225
Selling, general and administrative 3,943 4,179 12,873 12,061
--------------- ---------------- --------------- ---------------
Total expenses 11,512 11,642 38,566 37,087
--------------- ---------------- --------------- ---------------
Income before income taxes 5,757 4,568 13,199 11,231
Provision for income taxes 2,428 1,965 5,480 4,872
--------------- ---------------- --------------- ---------------
Net income 3,329 2,603 7,719 6,359
Member's equity, beginning of period 99,554 90,162 95,164 86,406
--------------- ---------------- --------------- ---------------
Member's equity, end of period $102,883 $92,765 $102,883 $92,765
=============== ================ =============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31,
(THOUSANDS OF DOLLARS)
(UNAUDITED)
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES:............................... $ 22,656 $ 17,196
-------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Leases originated........................................................ (176,672) (165,272)
Leases repaid............................................................ 145,232 131,707
Purchases of equipment................................................... (12) (323)
Purchase of investments.................................................. (930) (1,043)
-------------- ------------
Net cash flow used in investing activities........................... (32,382) (34,931)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in borrowings under short term lines of credit.............. 32,000 3,000
Net decrease in borrowings under revolving line of credit................ (14,000) (15,900)
Proceeds from term debt.................................................. 0 60,000
Repayment of term debt................................................... (14,579) (37,751)
Net increase payable to Agway Inc. and subsidiaries...................... 3,607 1,735
Proceeds from sale of debentures......................................... 2,831 11,558
Repayment of debenture................................................... 0 (4,740)
Net decrease in restricted cash.......................................... (133) (167)
-------------- ------------
Net cash flow provided by financing activities....................... 9,726 17,735
-------------- ------------
Net change in cash................................................... 0 0
Cash at beginning of period................................................... 0 0
-------------- ------------
Cash at end of period......................................................... $ 0 $ 0
============== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three-month and nine-month periods ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year
ended June 30, 1999. For further information, refer to the consolidated
financial statements and notes thereto included in the annual report on
Form 10-K for the year ended June 30, 1998.
NOTE 2 - RESTRICTED CASH
Cash related to securitized leases is held in segregated accounts pending
distribution to the lease-backed note holders and is restricted in its use.
On March 31, 1999 restricted cash was $1,837 compared to $1,704 on June 30,
1998.
NOTE 3 - CASH MANAGEMENT
Instead of having its own cash account the Company uses the depository
accounts Agway 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
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN 000'S ROUNDED TO NEAREST HUNDRED THOUSAND)
RESULTS OF OPERATIONS
The Company is including the following cautionary statement in this Form 10-Q to
make applicable and take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statement made by, or on behalf of, the Company. Where any such forward-looking
statement includes a statement of the assumptions or basis underlying such
forward-looking statement, the Company cautions that, while it believes such
assumptions or basis to be reasonable and makes them in good faith, assumed
facts or basis almost always vary from actual results, and the differences
between assumed facts or basis and actual results can be material, depending
upon the circumstances. Certain factors that could cause actual results to
differ materially from those projected have been discussed herein and include
the factors set forth below. Other factors that could cause actual results to
differ materially include uncertainties of economic, competitive and market
decisions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Where, in any forward-looking statement, the Company, or its
management, expresses an expectation or belief as to future results, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe," "expect" and "anticipate" and similar expressions identify
forward-looking statements.
Total revenues for the three-month and nine-month periods ended March 31, 1999
compared to the corresponding periods of the prior year are as follows:
<TABLE>
<CAPTION>
1999 1998 $ Increase % Increase
---- ---- ---------- ----------
<S> <C> <C> <C> <C>
Three-months 17,300 16,200 1,100 6.5%
Nine-months 51,800 48,300 3,400 7.1%
</TABLE>
The increase in total revenues in 1999 is mostly due to an increase in the
Company's investment in leases and notes, as compared to the comparable period
of the prior year partly offset by a lower income rate on new and replacement
leases and notes. Average net investment in leases and notes for the three-month
and nine-month periods ended March 31, 1999 compared to the corresponding
periods of the prior year are as follows:
<TABLE>
<CAPTION>
1999 1998 $ Increase % Increase
---- ---- ---------- ----------
<S> <C> <C> <C> <C>
Three-months 548,000 496,300 51,700 10.4%
Nine-months 539,300 488,800 50,500 10.3%
</TABLE>
Increases and decreases in expenses for the three-month and nine-month periods
ended March 31, 1999 compared to the corresponding periods in the prior year are
as follows:
<TABLE>
<CAPTION>
Three-months Nine-months
--------------- --------------
$ % $ %
------- ------- ----- -----
<S> <C> <C> <C> <C>
Interest expense $0 0% $400 1.8%
Selling, general, and (200) (5.7%) $800 6.7%
administrative
expenses
Provision for credit losses $200 8.3% $300 5.8%
------- ------- ----- -----
Total expenses (100) (1.1%) $1,500 4.0%
</TABLE>
The small changes in interest expense are due to a small increase in the amount
of debt required to finance the increase in the amount of net leases and notes,
partly or fully offset by lower interest rates on new and replacement debt than
the same periods in the prior year.
A recent study indicated a higher portion of our costs are associated with the
initial acquisition of business. In the three months ended March 31, 1999, we
began deferring costs in accordance with those study results. That change had
the effect of reducing selling, general and administrative expenses as compared
to the three month period ended March 31, 1998. The increase in selling, general
and administrative expenses for the nine months was primarily the result of
higher payroll and related expenses. The increase in payroll was partly offset
by lower professional services as some information technology services are being
provided internally rather than being outsourced, and by higher levels of
deferred initial costs associated with the new lease volume.
7
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN 000'S ROUNDED TO NEAREST HUNDRED THOUSAND)
RESULTS OF OPERATIONS (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 March 31, 1999 was $3,300, an increase of
$700 (28%) from the corresponding period in the prior year. For the nine-months
ended March 31, 1999, net income was $7,700, an increase of $1,400 (21%) from
the corresponding period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company endeavors to limit the effects of changes in interest rates by
matching as closely as possible, on an ongoing basis, the maturity and repricing
characteristics of funds borrowed to finance its leasing activities with the
maturity and repricing characteristics of its lease portfolio. The Company has
financed its operations, including the growth of its lease portfolio,
principally through borrowing under its lines of credit, private placements of
debt with institutional investors, sale of debentures to the public,
lease-backed asset securitization, principal collections on leases and cash
provided from operations.
Instead of having its own cash account the Company uses the depository accounts
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.
Cash flows from operating activities of $22,700 in the nine months ended March
31, 1999 is $5,500 (32%) higher than the corresponding period in the prior year.
Cash used in investing activities decreased $2,500 (7.3%) to $32,400 in the nine
months ended March 31, 1999 as compared to the corresponding period of the prior
year. The cash used in investing activities in the nine months ended March 31,
1999 was financed with net borrowings from financing activities of $9,700 and
the $22,700 from operations. In the prior year, cash used in investing
activities was financed with net borrowings from financing activities of $17,700
and $17,200 from operations.
As of March 31, 1999, the Company had credit facilities available from banks
which allow the Company to borrow up to an aggregate of $302,000. Uncommitted
short-term line of credit agreements permit the Company to borrow up to $52,000
on an uncollateralized basis with interest paid upon maturity. The lines bear
interest at money market variable rates. A committed $250,000 partially
collateralized (by stock in a cooperative bank) revolving line of credit permits
the Company to draw short-term funds bearing interest at money market rates or
draw long-term debt at rates appropriate for the term of the note drawn. The
total amount outstanding as of March 31, 1999, under the short-term lines of
credit and the revolving term loan facility was $52,000 and $151,000,
respectively.
Telmark borrows under its short-term line of credit agreements and its revolving
term agreement from time to time to fund its operations. Short-term debt serves
as interim financing between the issuances of long-term debt. Telmark renews its
lines of credit annually. The $52,000 of lines of credit all have terms expiring
during the next 12 months.
The $250,000 revolving term loan facility is available through August 1, 2000.
At March 31, 1999, Telmark had balances outstanding on unsecured senior notes
from private placements totaling $160,000 as compared to $169,000 June 30, 1998.
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
Telmark.
Through a wholly owned special purpose subsidiary, the Company has two classes
of lease-backed notes outstanding totaling $11,800 and $17,700 at March 31,
1999, and June 30, 1998, respectively, payable to insurance companies. Interest
rates on these classes of notes are 6.58% and 7.01%, respectively. The notes are
collateralized by leases, which were sold to this subsidiary, having an
aggregate present value of contractual lease payments equal to the principal
balance of the notes. The final scheduled maturity of these notes is December
2004.
8
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN 000'S ROUNDED TO NEAREST HUNDRED THOUSAND)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Telmark offers subordinated debentures to the public. The debentures are
unsecured and subordinated to all senior debt at Telmark. The interest on the
debt is payable quarterly on January 1, April 1, July 1 and October 1 and is
allowed to be reinvested.
The Company believes it has sufficient lines of credit in place to meet interim
funding needs.
YEAR 2000 READINESS
The approach of the year 2000 presents potential issues to all organizations who
use computers in the conduct of their business or depend on business partners
who use computers. To the extent computer use is date-sensitive, hardware or
software that recognizes the year by the last two digits may erroneously
recognize "00" as 1900 rather than 2000, which could result in errors or system
failures.
Telmark initiated its year 2000 compliance efforts in January 1996. In July
1998, Telmark's President assumed direct responsibility for the full year 2000
project to assure a focus on the implementation timetable and the development of
specific continuity plans.
Telmark utilizes a number of computers and computer software 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. The initial focus of the Company's compliance efforts was
on the Company's information systems, including assessment of the issue,
planning the conversion to compliance, plan implementation, and testing. All
critical hardware and operating software has been inventoried and made year 2000
ready through replacement or remediation. This hardware and software has been
tested for compliance as of March 1999. All application software has been
inventoried. Software determined to be at risk was prioritized, and plans were
put in place to upgrade through remediation, replacements, or doing without
certain software. In December 1998 the lease portfolio tracking software was
updated to a new version and the financial and administration applications have
been replaced by applications that the vendors certify as year 2000 compliant.
Testing of the year 2000 compliance of this software was completed in April
1999. The new vendor software and the interaction of that software with other
systems was also tested in April in an enterprise wide test environment. New
year 2000 compliant personal computers and operating systems will be acquired
for the field sales force and the related application software is in process of
remediation and testing. Implementation of this upgraded and fully tested
hardware and software is planned for August 1999.
In addition to the information technology applications review noted above, the
Company has also initiated processes to review and to modify, where appropriate,
other areas impacted by year 2000. External interfaces to internal information
technology applications have been tested and are compliant. There are no
embedded chips used in the business operations. Business continuity plans were
completed in March 1999.
The year 2000 compliance issue is an uncertainty that is continuously being
monitored as the Company implements its plans. Based on the work performed to
date, the Company presently believes that the likelihood of the year 2000 having
a material effect on the results of operations, liquidity, or financial
condition is remote. Notwithstanding the foregoing, it is not presently clear
that all parts of the country's infrastructure, including such things as the
national banking systems, electrical power, transportation of goods,
communications, and governmental activities, will be fully functioning as the
year 2000 approaches. 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 Company's control, it could affect the Company's ability to service
its customers with the same degree of effectiveness with which they are served
presently. The Company has identified elements of the infrastructure that are of
greater significance to its operations, obtaining information on an ongoing
basis as to their expected year 2000 readiness, and determining alternative
solutions if required.
9
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(IN 000'S ROUNDED TO NEAREST HUNDRED THOUSAND)
YEAR 2000 READINESS (CONTINUED)
The Company expects to incur internal staff costs as well as consulting and
other expenses related to its year 2000 efforts. Due to the level of effort
required to complete remediation for the year 2000, non-business critical
software application enhancements have been deferred until the year 2000 efforts
have been completed. The conversion and testing of existing applications and
replacement of hardware are expected to cost the Company approximately $721, of
which $255 has been incurred and $466 is expected to be incurred in calendar
year 1999. The majority of the costs expected to be incurred is for the purchase
of new personal computers for the field sales force. However, these costs will
vary as the Company continues to assess and implement its plans or if the
Company is required to invoke contingency plans. The Company treats non-capital
costs associated with year 2000 as period costs and they are expensed when
incurred.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Telmark does not use derivatives and other interest rate instruments. The
principal cash flow of the Company's debt obligations and related weighted
average interest rates by contractual maturity dates have not materially changed
since June 30, 1998. Quantitative and Qualitative Disclosures about market risk
are contained in Item 7a of the Company's Annual Report on Form 10-K for the
year ended June 30, 1998.
10
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the three months
ended March 31, 1999.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELMARK LLC
(REGISTRANT)
DATE MAY 3, 1999 BY /S/ DANIEL J. EDINGER
-------------- ----------------------------------------
DANIEL J. EDINGER, PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
DATE MAY 3, 1999 BY /S/ PETER J. O'NEILL
-------------- ----------------------------------------
PETER J. O'NEILL, SENIOR VICE PRESIDENT,
FINANCE AND CONTROL
(PRINCIPAL ACCOUNTING OFFICER)
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,836,570
<SECURITIES> 0
<RECEIVABLES> 729,931,532
<ALLOWANCES> 30,796,130
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,071,777
<DEPRECIATION> 1,615,177
<TOTAL-ASSETS> 544,047,925
<CURRENT-LIABILITIES> 0
<BONDS> 411,934,425
0
0
<COMMON> 0
<OTHER-SE> 102,882,895
<TOTAL-LIABILITY-AND-EQUITY> 544,047,925
<SALES> 0
<TOTAL-REVENUES> 51,765,236
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,529,134
<INTEREST-EXPENSE> 20,163,740
<INCOME-PRETAX> 13,199,296
<INCOME-TAX> 5,479,942
<INCOME-CONTINUING> 7,719,355
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,719,355
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
