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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-70732
TELMARK LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CERTIFICATE OF FORMATION)
DELAWARE 16-1551523
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
333 BUTTERNUT DRIVE, DEWITT, NEW YORK 13214
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 315-449-7935
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which registered
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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.
X
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No Yes
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN ANY DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE OF PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. X
---
STATE THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING COMMON
EQUITY HELD BY NON-AFFILIATES OF THE REGISTRANT SEPTEMBER 10, 1999.
ZERO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
EQUITY SECURITIES, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT SEPTEMBER 10, 1999
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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
I(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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<PAGE>
FORM 10-K ANNUAL REPORT - 1999
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
CROSS-REFERENCE SHEET
PART I
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Item 1. & 2. Business and Properties.........................................................................3
Item 3. Legal Proceedings...............................................................................5
Item 4. Submission of Matters to Vote of Security Holders...............................................5
PART II
Item 5. Market for the Registrant's Common Equity and Related Membership Matters........................6
Item 6. Selected Financial Data.........................................................................6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........6
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................................11
Item 8. Financial Statements...........................................................................12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........25
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................26
Item 11. Executive Compensation.........................................................................27
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................29
Item 13. Certain Relationships and Related Transactions.................................................30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................31
Signatures.....................................................................................33
</TABLE>
2
<PAGE>
PART I
ITEM 1. & 2. BUSINESS AND PROPERTIES
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 that was formed solely 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.
Agway is subject to certain informational reporting requirements of the
Securities Exchange Act of 1934 and in accordance with those rules, files
reports and other information with the Commission. Reports filed with the
Commission can be inspected at the Public Reference Section of the Commission at
450 Fifth Street N.W., Washington D.C. 20549 and at the regional offices of the
Commission at Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor, New York, New
York 10048. Copies of the materials can be obtained from the Commission at
prescribed rates.
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 as Agrilease(R) and TFS(SM).
o We highlight our service-oriented approach in advertisements
and product brochures.
We have over 17,000 customers, most of whom are in the dairy, forestry crops and
transportation industries. Our customers are farmers and other rural businesses
as well as manufacturers and independent dealers who serve the agricultural
marketplace.
We operate throughout the continental United States and Canada. Our own field
representatives serve customers in 29 states. We serve customers in other states
through unaffiliated dealers of equipment distributed by selected farm equipment
manufacturers.
We compete with finance affiliates of equipment manufacturers, agricultural
financial institutions, other independent finance and leasing companies, and
commercial banks. Many of these organizations have substantial financial and
other resources and as a consequence are able to compete on a long-term basis
within the market segment which we serve. See "Business of Telmark -
Competition," in our Annual Report to Investors provided with this prospectus.
We use direct mail, advertisements in trade magazines and referrals from
equipment retailers and building contractors to solicit customers. Our main
competitors are agricultural lenders and other leasing companies. We believe
that we compete effectively because of:
o our special expertise in agricultural equipment financing;
o our close relationship with the farming community;
o our focus on service;
o our financial strength; and
o our credit management.
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.
3
<PAGE>
ITEM 1. & 2. BUSINESS AND PROPERTIES (CONTINUED)
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 our customers have use of the leased property over a
specified term for a periodic rental charge: i.e., 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 require the
advance payment to provide protection in the event of default on the lease.
We offer most of the direct finance leases for a period which does not exceed
our estimate of the useful life of the equipment, vehicle, or the building
leased.
o We offer equipment and vehicle leases typically for a period
of 3 to 6 years, and generally do not
exceed eight years.
o We offer building leases typically for longer terms (e.g., 5
to 10 years) than for equipment leases, 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. Our primary responsibility is to buy the property
from the supplier, lease it to the customers, 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. Telmark also offers financing through specific equipment manufacturer
programs.
We retain title to the leased property, but our customers are responsible for
insurance, repairs, maintenance, service, and property taxes. At the expiration
of the direct finance lease term, the lessee has an option to:
o purchase the leased property,
o renew the lease, or
o return the leased property to us.
Historically, in most of our lease transactions, the lessee has purchased the
leased property or equipment upon termination of the lease.
Telmark has internal credit approval policies that are required to be followed
prior to entering into any lease transaction. The required procedures vary by
kind and size of transaction. We set credit approval limits based on the total
amount of leases outstanding to the customer. We assign lending authority to
members of management depending on position, training, and experience. Telmark's
Board of Directors must approve all lease amounts exceeding $1 million. After a
Telmark field representative completes a financial application, we conduct a
thorough credit approval process.
Telmark retains title to the equipment or building leased. If appropriate,
Telmark obtains a lien on the real estate owned by the farmer or customer as
collateral for payments under a building lease. We maintain monthly delinquency
reports which monitor leases that have been delinquent for over 30 days, as well
as 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.
The potential losses from non-earning leases are partly offset by our ability to
repossess leased property and to foreclose on other property in which we have
been granted a security interest. Accounts are generally written off at the
earlier of the time they are determined to be uncollectible or when they become
one year past due.
4
<PAGE>
ITEM 1. & 2. BUSINESS AND PROPERTIES (CONTINUED)
We may not be able to collect lease payments under the following circumstances:
o Bankruptcy of the customer;
o Defaults by customer; or
o Contract disputes between customers and suppliers.
The ultimate collectibility of amounts due under our leases is directly
dependent upon the credit practices we use, and the creditworthiness of our
customers. Even though we follow our credit policies and we establish reserves
for bad debts, there are other factors that could significantly impact a
customer's ability to pay and consequently, our lease collection experience and
our earnings. Additional factors that might impact our ability to collect lease
payments are:
o Changes in general economic conditions;
o Changes in the level of government expenditures on farm
programs and other changes in government agricultural programs
that adversely effect the level of income of our customers;
o Adverse weather-related conditions that negatively impact the
agricultural productivity and income of customers; and
o Oversupply of, or reduced demand for, agricultural commodities
produced by our customers.
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.
o "Operating expenses" include interest expense, provision for
credit losses (the dollar amount Telmark sets aside to cover
its estimated losses should a customer fail to make required
payments under a lease), and selling, general and
administrative expenses, including 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 it must pay on the
amounts borrowed from banks and other investors to finance
leases.
We lease all of our office space from Agway. We do not own any of the real
property we use for office facilities.
We have three wholly owned subsidiaries:
o Telease Financial Services, Ltd.
o Telmark Lease Funding I, LLC; and
o Telmark Lease Funding II, LLC.
Telease Financial Services, Ltd. is a Canadian Corporation formed to conduct
certain lease transactions with Canadian customers. Telmark Lease Funding I, LLC
was established solely to enable a lease securitization financing entered into
during 1997. Telmark Lease Funding II, LLC was established solely to enable a
lease securitization financing entered into in 1999.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any litigation or legal proceedings pending, or to the
best of our knowledge threatened, which, in the opinion of management,
individually or in the aggregate, would have a material adverse affect on our
results of operations, financial condition, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not required.
5
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED MEMBERSHIP
MATTERS
Effective July 1, 1998 Telmark Inc's. common stock was cancelled by virtue of
the merger of Telmark Inc. with and into Telmark LLC, with Telmark LLC being the
surviving entity in the merger. We have one limited liability company membership
interest outstanding, which is indirectly owned by Agway through its
wholly-owned subsidiary Holdings. There is no public market for the membership
interest and we do not expect one to develop. During the years ended June 30,
1999, 1998, and 1997, Telmark or its predessor paid no dividends with respect to
its common stock and there was no distribution of member's equity. Under a loan
covenant, dividends are prohibited to the extent they exceed 75% of net income
for the period beginning on October 1, 1997, through the date of determination,
inclusive. As of June 30, 1999, $13.0 million of member's equity was free of
this restriction.
ITEM 6. SELECTED FINANCIAL DATA
Not required.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (000 OMITTED)
1999 COMPARED TO 1998.
NET INCOME
Our Net Income Increased by 1,600 (18%) from $8,800 in 1998 to $10,400 in 1999.
<TABLE>
<CAPTION>
PERCENTAGE
FY 1999 FY 1998 INCREASE CHANGE
------- ------- -------- ------
<S> <C> <C> <C> <C>
Net income $10,400 $8,800 $1,600 18%
</TABLE>
The increase was principally due to increased revenue from a larger outstanding
portfolio of leases and notes receivable during 1999 as compared to 1998.
TOTAL REVENUES
Total Revenues of $70,000 in 1999 Increased $4,500 (7%) as Compared to $65,500
in 1998.
<TABLE>
<CAPTION>
PERCENTAGE
FY 1999 FY 1998 INCREASE CHANGE
------- ------- -------- ------
<S> <C> <C> <C> <C>
Total revenues $70,000 $65,500 $4,500 7%
</TABLE>
The increase is attributable in part to a $55,400 (11%) increase in net leases
and notes in 1999 as compared to 1998. Total revenue as a percentage of average
net leases and notes decreased from 13.5% in 1998 to 13.1% in 1999. This decline
was consistent with a decline in prevailing market interest rates.
INCREASE IN LEASE PORTFOLIO
Increases in the lease portfolio resulting from new booked lease volume of
$252,100 in 1999 and $227,300 in 1998 exceeded lease reductions from leases
repaid and provision for credit losses of $196,700 and $177,400 in 1999 and
1998, respectively.
FY 1999 FY 1998
------- -------
New booked lease volume $252,100 $227,300
Leases repaid (188,700) (169,800)
Provision for credit losses ( 8,000) ( 7,600)
Portfolio increase $ 55,400 $ 49,900
========= =========
The increase in new booked lease volume in excess of leases repaid and provision
for credit losses had the effect of increasing the size of the lease portfolio,
thereby increasing total revenues. The increased volume of new leases resulted
from development of Telmark's existing markets and the addition of new
employees.
6
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (000 OMITTED) (CONTINUED)
INTEREST EXPENSE
Interest expense increased from $26,900 in 1998 to $27,600 in 1999. While the
weighted average interest rate paid on debt decreased from 7.2% to 6.9%, total
interest rate expense increased due to increased borrowings required to finance
the growth of the lease portfolio noted above.
<TABLE>
<CAPTION>
PERCENTAGE
FY 1999 FY 1998 INCREASE CHANGE
------- ------- -------- ------
<S> <C> <C> <C> <C>
Interest expense $27,600 $26,900 $700 3%
</TABLE>
Total debt outstanding at June 30, 1999 increased by $28,100 to $433,700 as
compared to total debt outstanding at June 30, 1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses of $16,200 in 1999 increased by
$600 (3%) compared to $15,600 in 1998.
<TABLE>
<CAPTION>
PERCENTAGE
FY 1999 FY 1998 INCREASE CHANGE
------- ------- -------- ------
<S> <C> <C> <C> <C>
Selling, general, PERCENTAGE
and administrative
expenses $16,200 $15,600 $600 3%
</TABLE>
The increase in total selling, general, and administrative expenses was
primarily the result of additional personnel and incentives paid to certain
employees relating to additional new business. Expenses which are determined to
be related to origination of new lease business are deferred and recorded over
the term of the leases.
PROVISION FOR CREDIT LOSSES
The provision for credit losses of $8,000 in 1999 represents an increase of $400
(5%) compared to $7,600 in 1998.
<TABLE>
<CAPTION>
PERCENTAGE
FY 1999 FY 1998 INCREASE CHANGE
------- ------- -------- ------
<S> <C> <C> <C> <C>
Provision for Credit Losses $8,000 $7,600 $400 5%
</TABLE>
This increase is based on our analysis of reserves required to provide for
uncollectible receivables. Telmark's allowance for credit losses is based on a
periodic review of the collection history of past leases, current credit
practices, an analysis of delinquent accounts, and current economic conditions.
At June 30, 1999, the allowance for credit losses was $30,000 compared to
$27,100 at June 30, 1998. During 1998 and 1999, the general economy remained
strong, however, the total value of non-earning accounts increased from $3,000
in 1998 to $4,900 in 1999. Reserves are established at a level sufficient to
cover estimated losses in the portfolio.
1998 COMPARED TO 1997.
NET INCOME
Our net income increased by $900 (11%) from $7,900 in 1997 to $8,800 in 1998.
<TABLE>
<CAPTION>
PERCENTAGE
FY 1999 FY 1998 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 1999 FY 1998 INCREASE CHANGE
------- ------- -------- ------
<S> <C> <C> <C> <C>
Total revenues $65,500 $56,900 $8,600 15%
</TABLE>
The increase is attributable in part to a $49,900 (11%) increase in net leases
and notes in 1998 as compared to 1997. Total revenue, as a percentage of average
net leases and notes, decreased slightly from 13.7% in 1997 to 13.5% in 1998.
7
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (000 OMITTED) (CONTINUED)
INCREASE IN LEASE PORTFOLIO
Increases in the least portfolio resulting from new booked volume of $227,300 in
1998 and $231,000 million in 1997 exceeded lease reductions from leases repaid
and net bad debt expense of $177,400 and $159,800 in 1998 and 1997,
respectively.
Increase In Lease Portfolio FY 1998 FY 1997
-------- --------
New booked volume $227,300 $231,000
Leases repaid (169,800) (151,900)
Provision for credit losses ( 7,600) ( 7,900)
--------- ---------
Portfolio increase $ 49,900 $ 71,200
========= =========
The increase in new booked volume in excess of leases repaid and bad debt
provisions had the effect of increasing total revenues.
INTEREST EXPENSE
While the weighted average interest rate paid on debt decreased from 7.5% to
7.2%, total interest expense increased due to increased borrowings required to
finance the growth of the lease portfolio noted above.
<TABLE>
<CAPTION>
PERCENTAGE
FY 1999 FY 1998 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 1999 FY 1998 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 1999 FY 1998 (DECREASE) CHANGE
------- ------- -------- ------
<S> <C> <C> <C> <C>
Provision for Credit Losses $7,600 $7,900 (300) 4%
</TABLE>
This decrease is based on our analysis of reserves required to provide for
uncollectible receivables. Telmark's allowance for credit losses is based on a
periodic review of the collection history of past leases, current credit
practices, an analysis of delinquent accounts, and current economic conditions.
During 1997 and 1998, the general economy remained strong and the total value of
non-earning accounts increased only slightly from $2,700 in 1997 to $3,000 in
1998. Reserves are established at a level sufficient to cover estimated losses
in the portfolio.
8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (000 OMITTED) (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The ongoing availability of adequate financing to maintain the size of our
portfolio and to permit lease portfolio growth is key to our continuing
profitability and stability. We have principally financed our operations,
including the growth of our lease portfolio, through borrowings under our lines
of credit, private placements of debt with institutional investors and other
term debt, lease backed notes, principal collections on leases and cash provided
from operations. Total assets have grown at an average annual rate of 16% over
the past fifteen years. The debt to equity ratio decreased from 4.3 in both 1997
and 1998 to 4.1 in 1999.
CASH IN FLOWS FY 1999 FY 1998 FY 1997
-------- ------- -------
Cash flows from operations $22,800 $21,200 $15,200
Cash flows from financing 41,000 36,800 64,500
-------- -------- -------
Total cash in flows 63,800 58,000 79,700
CASH OUT FLOWS
Cash flows from investing (63,800) (58,000) (79,700)
Virtually all of the cash flows from both operations and financing activities
was invested in growth of our lease portfolio. Telmark has been successful in
arranging its past financing needs and believes that its current financing
arrangements are adequate to meet its foreseeable operating requirements. There
can be no assurance, however, that Telmark will be able to obtain future
financing in amounts or on terms that are acceptable. Our inability to obtain
adequate financing would have a material adverse effect on our operations.
Management conducts ongoing discussions and negotiations with existing and
potential lenders for future financing needs. See footnote 5 to the Consolidated
Financial Statements "Borrowing under Lines of Credit and Term Debt."
OTHER MATTERS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
We are including the following cautionary statement in this Form 10-K to make
applicable and take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statement made
by, or on behalf of, Telmark. Where any such forward-looking statement includes
a statement of the assumptions or basis underlying such forward-looking
statement, Telmark cautions that, while it believes such assumptions or basis to
be reasonable and makes them in good faith, assumed facts or basis almost always
vary from actual results, and the differences between assumed facts or basis and
actual results can be material, depending upon the circumstances. Certain
factors that could cause actual results to differ materially from those
projected have been discussed herein and include the factors set forth below.
Other factors that could cause actual results to differ materially include
uncertainties of economic, competitive and market decisions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of Telmark. Where, in any forward-looking
statement, Telmark, or its management, expresses an expectation or belief as to
future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The words "believe," "expect" and "anticipate" and similar expressions identify
forward-looking statements.
YEAR 2000
The approach of the year 2000 presents potential issues to all organizations who
use computers in the conduct of their business or depend on business partners
who use computers. To the extent computer use is date-sensitive, hardware or
software that recognizes the year by the last two digits may erroneously
recognize "00" as 1900 rather than 2000, which could result in errors or system
failures.
Telmark utilizes a number of computers and computer software programs in the
conduct of its business that are principally involved in the flow of
information. This includes the software for tracking the lease portfolio, the
financial and administration software, and the related hardware and operating
system software. It also includes the personal computers and software used by
the field sales force. All critical hardware and operating software has been
inventoried and made year 2000 ready through replacement or remediation. This
hardware and software has been tested and determined to be year 2000 compliant.
All critical application software has been inventoried and upgraded
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (000 OMITTED) (CONTINUED)
YEAR 2000 (CONTINUED)
through remediation or replacements. The lease portfolio tracking software has
been updated to a new vendor certified year 2000 compliant version. The
financial and administration applications have been replaced by applications
that are vendor-certified as year 2000 compliant. Successful internal testing of
the year 2000 compliance of the lease portfolio tracking software and the
financial and administrative software has been completed. The interaction of the
new vendor software with other corporate systems has also been tested in an
enterprise wide test environment which was completed during August 1999. New
year 2000 compliant personal computers and operating systems have been acquired
for the field sales force and the related application software has been replaced
or remediated, successfully tested as year 2000 compliant, and installed. These
new fully tested year 2000 compliant personal computer systems have been
distributed to the field sales force.
In addition to the information technology applications review noted above,
Telmark also reviewed and modified, where appropriate, other areas impacted by
year 2000. External interfaces to internal information technology applications
have been tested and are compliant. There are no embedded chips used in the
business operations. Business continuity plans are complete.
Telmark's principal sources of capital are banks, insurance companies, and its
customers' repayment of leases. While banks and insurance companies are highly
computer-dependent and are exposed as creditors to a broad array of businesses,
both nationally and internationally, Telmark management considers failure of its
banks and insurance company investors as remote. Telmark has a number of such
creditors which diversifies the risk. Telmark's customer base is widely
diversified in number, geography and industry and in Telmark management's
opinion is not highly exposed to year 2000 related failures. The year 2000
compliance issue is, however, an uncertainty that is continuously being
monitored by Telmark. Based on the work performed to date, we presently believe
that the likelihood of the year 2000 having a material effect on the results of
operations, liquidity, or financial condition is remote.
Notwithstanding the foregoing, it is not presently clear that all parts of the
country's infrastructure, including such things as the national banking systems,
electrical power, transportation of goods, communications, and governmental
activities, will be fully functioning as the year 2000 approaches. Our research
to date gives us increased confidence in many of these infrastructure components
but also persuades us that absolute certainty regarding their performance will
not likely be possible prior to passing into the year 2000. To the extent
failure occurs in such activities, which are outside the our control, it could
affect our ability to service our customers with the same degree of
effectiveness with which they are served presently. We have identified elements
of the infrastructure that are of greater significance to our operations, is
obtaining information on an ongoing basis as to their expected year 2000
readiness, and have considered alternative solutions if required.
We have incurred internal staff costs as well as consulting and other expenses
related to its year 2000 efforts. Due to the level of effort required to
complete remediation for the year 2000, non-business critical software
application enhancements have been deferred until the year 2000 efforts have
been completed. The conversion and testing of existing applications and
replacements of hardware has cost Telmark approximately $803, all of which has
been incurred as of June 30, 1999. However, additional costs may be incurred if
Telmark is required to invoke continuity plans. Telmark treats non-capital costs
associated with year 2000 as period costs and they have been expensed when
incurred.
In planning for business continuance, the highest priority is our ability to
maintain high quality customer service. All business events were evaluated for
impact of a potential Y2K failure. From this analysis, we developed continuity
plans for all critical events to assure business processes could be performed in
an alternate manner. These plans were approved by Telmark's senior management
and include the details of the scope, any preparation steps needed, plan date of
activation, appropriate communications, and procedures. Two tests are planned to
validate these plans in the event of a failure whether facility or system
related.
10
<PAGE>
ITEM 7A. 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.
11
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
<S> <C>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES:
Report of Independent Accountants.......................................................................13
Consolidated Balance Sheets, June 30, 1999 and 1998.....................................................14
Consolidated Statements of Income and Member's Equity,
for the years ended June 30, 1999, 1998 and 1997...............................................15
Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997..................16
Notes to Consolidated Financial Statements..............................................................17
</TABLE>
12
<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
13
<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 $518,316
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
14
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME AND MEMBER'S EQUITY
FISCAL YEARS ENDED JUNE 30, 1999, 1998, AND 1997
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Interest and finance charges........$ 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.
15
<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.
16
<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.
17
<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.
18
<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>
19
<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>
20
<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.
21
<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>
22
<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.
23
<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.
24
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting and
financial disclosure.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT MEMBERS OF MANAGEMENT OF THE
REGISTRANT
The Directors of Telmark determine our policy and are elected by the member at
each annual meeting to serve until the next annual meeting or until their
successors are elected and qualified. The following table sets forth certain
information regarding the Telmark's Directors, executive officers and
significant members of management:
<TABLE>
<CAPTION>
Years served Year Became Term
Name Age Position as Officer a Director Expires
-------------------------------------------------------------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Peter J. O'Neill 52 Senior Vice President,
Finance and Control,
Chairman of the
Board and Director 5 1995 July, 2000
Andrew J. Gilbert 40 Director 1997 July, 2000
Samuel F. Minor 61 Director 1989 July, 2000
Gary K. Van Slyke 56 Director 1996 July, 2000
William W. Young 46 Director 1992 July, 2000
Daniel J. Edinger 48 President and Director 11 1988 July, 2000
Raymond G. Fuller 48 Director of Customer 5
Operations
Herbert E. Gerhart 54 Secretary and 22
Director of Finance
Karen A. Johnson 37 Treasurer
Richard A. Kalin 50 Controller 5
Kipp R. Weaver 49 Director of Credit 5
</TABLE>
The Board of Directors, except for Messrs. O'Neill and Edinger, are paid an
annual retainer fee of $1,000 for their services on the Telmark Board. The
executive officers and significant members of management of Telmark provide
operating control to carry out the policies established by the Board of
Directors and serve at the discretion of the Board with no guarantee of
employment. Telmark is organized with nine functional managers and six region
managers reporting to the President, Daniel J. Edinger. The officers with
company wide responsibilities who report to the President are the Director of
Credit, Director of Customer Operations, Director of Finance, and the
Controller. More detailed biographies of each person listed above, except for
those who have been a director or officer for more than 5 years, are set forth
below.
ANDREW J. GILBERT - Mr. Gilbert is a member of the Agway Board of Directors. He
has been engaged in full-time farming for more than five years.
GARY K. VAN SLYKE - Mr. Van Slyke is a member of the Agway Board of Directors.
He has been engaged in full-time farming for more than five years.
RAYMOND G. FULLER - Mr. Fuller was Collection Manager from 1985 to 1996, and was
named Director of Customer Operations in September 1996.
KAREN A. JOHNSON - Ms. Johnson is Treasurer of Agway Inc. She served as
Assistant Treasurer of Agway from September 1992 to August 1998. She was named
Treasurer of Agway and Telmark in August 1998.
RICHARD A. KALIN - Mr. Kalin was named Controller in July 1995. He served as
Accounting Manager for the prior three years.
KIPP R. WEAVER - Mr. Weaver was named Director of Credit in May 1995. During the
prior three years he was employed as an officer of the Farm Credit Bank of
Baltimore.
26
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Employees of Telmark are eligible to participate in Agway Inc.'s benefits and
compensation plans. The following table sets forth information regarding annual
and long-term compensation for services in all capacities to Telmark for the
fiscal years ended June 1999, 1998, and 1997, of the chief executive officer and
any of the other four most highly compensated executive officers of the Telmark
(other than the CEO) who were serving in such capacity at June 30, 1999 and were
compensated over $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------
ANNUAL
COMPENSATION(4)
----------------------------
ALL OTHER
NAME AND COMPENSATION
PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) (3)
- ------------------------------ ------------ --------------- ------------ -------------------
<S> <C> <C> <C> <C>
Daniel J. Edinger............. 1999 $199,710 $155,040 $3,764
President 1998 178,853 105,240 3,033
1997 130,619 52,801 2,807
Raymond G. Fuller............. 1999 $69,139 $61,616 $1,556
Director of 1998 60,580 38,688 814
Customer Operations 1997 59,414 27,261 774
Herbert E. Gerhart............ 1999 $69,208 $61,616 $1,480
Secretary and 1998 61,152 39,059 1,253
Director of Finance 1997 61,152 21,403 1,170
Richard A. Kalin.............. 1999 $69,238 $61,616 $2,001
Controller 1998 61,412 39,220 1,258
1997 61,412 21,494 1,183
Kipp R. Weaver................ 1999 $84,890 $74,703 $2,126
Director of Credit 1998 82,394 52,632 968
1997 82,394 28,838 704
- ------------------
</TABLE>
(1) Total compensation (defined as base salary or wages, overtime and bonus
or incentive compensation) is used in determining the average annual
compensation pursuant to the Agway Inc. Retirement Plan. This amount includes
all deferred amounts under the Agway Inc. Employees' Thrift Investment Plan and
the Agway Inc. Employee's Benefits Equalization Plan.
(2) Members of the Agway Inc. chief executive officer's staff and other
executives designated by the Agway Inc. chief executive officer are eligible for
participation in the Agway Inc. management incentive plan. Within Telmark, the
President qualified for this program. A bonus may be paid to each eligible
executive contingent upon each individual's performance as determined by the
President and CEO of Agway Inc., Telmark's net margin, and other performance
factors. Bonuses for other Telmark executive officers may be paid to each
eligible executive contingent upon each individual's performance as determined
by the President of Telmark, Telmark's net margin and other performance factors.
Bonuses are reflected in the fiscal year earned regardless of payment date.
(3) Amounts shown include contributions made to the Agway Inc. Employees'
Thrift Investment Plan and the Agway Inc. Employees' Benefits Equalization Plan
and any other payment not appropriately characterized as salary or bonus.
(4) There are no perquisites paid by us in excess of the lesser of $50,000
or 10% of an executives total salary and bonus for the years disclosed.
27
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION - CONTINUED
EMPLOYEES' RETIREMENT PLAN
The Employees' Retirement Plan of Agway Inc. (the Retirement Plan) is a
non-contributory defined benefit plan covering nearly all employees. The
Retirement Plan was amended effective July 1, 1998, to include a pension equity
formula, as well as to recognize incentive compensation as pensionable
compensation for all employees. It provides for retirement benefits, up to the
limits provided by law, based upon average annual compensation received during
the highest 36 consecutive months in the last 10 years of service and credits
earned for years of service with Telmark. Full credits are earned for service on
and after July 1, 1998, and credits equal to approximately 3/4 of the full
credits are earned for service prior to July 1, 1998. The benefit is defined as
an account balance and can be paid out as a lump sum or an annuity. An employee
is 100% vested in his benefit after completing 5 years of service or attaining
age 55 after completing one year of service.
The following table shows estimated annual benefits payable upon retirement
using the credit formula in effect for service after June 30, 1998, based on
certain 3-year average remuneration levels and years-of-service classifications.
Under the formula, base credits are applied to the total average annual
compensation and excess credits are applied to the average annual compensation
in excess of one-half the Social Security Wage Base. In developing this table,
both base and excess credits have been applied to the total average annual
compensation. Further, the table was developed assuming a normal retirement at
age 65 and an annuity conversion factor based on a 6% interest rate.
PENSION PLAN TABLE
(NEW FORMULA)
YEARS OF CREDITED SERVICE
<TABLE>
<CAPTION>
3-YEAR AVERAGE
REMUNERATION 5 10 15 20 25 30 35
- -------------------- ------------ -------------- -------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 125,000 $ 8,800 $ 16,800 $ 24,800 $ 32,100 $ 39,500 $46,300 $53,000
150,000 10,600 20,200 29,700 38,500 47,400 55,500 63,600
175,000 12,400 23,500 34,700 45,000 55,300 64,800 74,300
200,000 14,100 26,900 39,600 51,400 63,200 74,000 84,900
225,000 15,900 30,200 44,600 57,800 71,100 83,300 95,500
250,000 17,700 33,600 49,500 64,200 79,000 92,500 106,100
275,000 19,400 37,000 54,500 70,700 86,900 101,800 116,700
300,000 21,200 40,300 59,400 77,100 94,800 111,000 127,300
325,000 23,000 43,700 64,400 83,500 102,700 120,300 137,900
350,000 24,800 47,000 69,300 89,900 110,600 129,500 148,500
375,000 26,500 50,400 74,300 96,400 118,500 138,800 159,100
</TABLE>
ACTIVE PARTICIPANTS ARE ENTITLED TO RECEIVE NO LESS THAN THE VALUE OF THEIR
BENEFITS ACCRUED UNDER THE OLD FORMULA THROUGH JUNE 30, 1998. IN ADDITION, MOST
ACTIVE PARTICIPANTS WHOSE AGE PLUS SERVICE TOTALED 55 YEARS OR MORE AS OF JULY
1, 1998, WILL RECEIVE THE GREATER OF THE BENEFIT DETERMINED UNDER THE NEW
FORMULA DESCRIBED ABOVE, OR THE BENEFIT DETERMINED HAD THE OLD FORMULA REMAINED
IN EFFECT.
THE OLD FORMULA IS BASED UPON AVERAGE ANNUAL COMPENSATION RECEIVED DURING THE
HIGHEST 60 CONSECUTIVE MONTHS IN THE LAST 10 YEARS OF SERVICE AND CREDITED YEARS
OF SERVICE. OPTIONAL EARLIER RETIREMENT AND OTHER BENEFITS ARE ALSO PROVIDED.
THE OLD FORMULA PAYS A MONTHLY RETIREMENT BENEFIT BASED ON THE GREATER AMOUNT
CALCULATED UNDER TWO FORMULAS. THE BENEFIT AMOUNT UNDER ONE FORMULA IS SUBJECT
TO AN OFFSET FOR SOCIAL SECURITY BENEFITS.
28
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION - CONTINUED
EMPLOYEES' RETIREMENT PLAN (CONTINUED)
The following table shows estimated annual benefits under the old formula upon
retirement based on certain 5-year average remuneration levels and
years-of-service classifications. The table was developed assuming a normal
retirement at age 65 and does not reflect an offset for up to 50% of the Social
Security benefit, subject to certain minimum benefits.
PENSION PLAN TABLE
(OLD FORMULA)
YEARS OF CREDITED SERVICE
<TABLE>
<CAPTION>
5-YEAR AVERAGE
REMUNERATION 5 10 15 20 25 30 35
- -------------------- ------------ ------------- ------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$100,000 $ 8,000 $16,000 $24,000 $32,000 $40,000 $48,000 $56,000
125,000 10,000 20,000 30,000 40,000 50,000 60,000 70,000
150,000 12,000 24,000 36,000 48,000 60,000 72,000 84,000
175,000 14,000 28,000 42,000 56,000 70,000 84,000 98,000
200,000 16,000 32,000 48,000 64,000 80,000 96,000 112,000
225,000 18,000 36,000 54,000 72,000 90,000 108,000 126,000
250,000 20,000 40,000 60,000 80,000 100,000 120,000 140,000
275,000 22,000 44,000 66,000 88,000 110,000 132,000 154,000
300,000 24,000 48,000 72,000 96,000 120,000 144,000 168,000
325,000 26,000 52,000 78,000 104,000 130,000 156,000 182,000
350,000 28,000 56,000 84,000 112,000 140,000 168,000 196,000
375,000 30,000 60,000 90,000 120,000 150,000 180,000 210,000
</TABLE>
AMOUNTS UNDER THE RETIREMENT PLAN MAY BE SUBJECT TO REDUCTION BECAUSE OF THE
LIMITATIONS IMPOSED UNDER THE INTERNAL REVENUE CODE; HOWEVER, THE EXTENT OF ANY
REDUCTION WILL VARY IN INDIVIDUAL CASES ACCORDING TO CIRCUMSTANCES EXISTING AT
THE TIME PENSION PAYMENTS COMMENCE. THE AGWAY INC. EMPLOYEES' BENEFIT
EQUALIZATION PLAN HAS BEEN ESTABLISHED TO PROVIDE FOR THE AMOUNT OF ANY SUCH
REDUCTION IN ANNUAL PENSION BENEFITS UNDER THE RETIREMENT PLAN.
THE BENEFITS SHOWN ARE COMPUTED ON A STRAIGHT LIFE BASIS AND DO NOT REFLECT AN
OFFSET FOR UP TO 50% OF THE SOCIAL SECURITY BENEFIT, SUBJECT TO CERTAIN MINIMUM
BENEFITS. ALSO, THE BENEFITS ARE BASED ON CONTINUING THE PLAN'S BENEFIT FORMULAS
AS IN EFFECT ON JUNE 30, 1999. AS OF JUNE 30, 1999, THE OFFICERS AND THEIR
RESPECTIVE NUMBER OF CREDITED YEARS OF SERVICE UNDER THE RETIREMENT PLAN WERE AS
FOLLOWS: MESSRS. EDINGER, 20; FULLER, 14; GERHART, 26; KALIN, 26; AND WEAVER, 4.
"COMPENSATION" IS DEFINED AS THE REGULAR SALARY OR WAGES, AS REPORTED IN THE
SALARY AND BONUS COLUMNS OF THE SUMMARY COMPENSATION TABLE, WHICH IS PAID TO AN
EMPLOYEE FOR SERVICES RENDERED TO TELMARK, INCLUDING OVERTIME, VACATION PAY AND
BONUSES OR SPECIAL PAY.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Telmark has no compensation committee. The salary of Daniel J. Edinger,
President of Telmark is determined by Donald P. Cardarelli, President and CEO of
Agway Inc., the parent Company of Telmark. The salary of the other Executive
Officers of Telmark is determined by Mr. Edinger. Salaries of all Executive
Officers are included in the annual operating budget, which budget is approved
by the entire Board of Directors of Telmark.
None of the Executive Officers or Directors who participated in establishing
compensation policies had interlocks reportable under Section 402 (j) of
Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding member's equity of Telmark is indirectly owned by Agway
Inc. None of the executive officers who are directors of Telmark owns any
membership interest of Telmark or equity securities of its parent company or the
parent company's subsidiaries. All of the other directors are also directors of
Agway Inc. Agway is an agricultural cooperative and each of its members
including each director owns one share of $25 par value common stock. None of
the executive officers and directors either individually or in the aggregate,
own greater than 1% of any class of equity security of Telmark or of Agway Inc.
29
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Telmark is an indirect wholly-owned subsidiary of Agway and as such, had
intercompany transactions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 7 to the Financial
Statement for further information.
PRINCIPAL MEMBER
Telmark is a wholly-owned subsidiary of Agway Holdings, Inc. Agway Holdings,
Inc. is a wholly-owned subsidiary of Agway Financial Corporation which in turn
is a wholly-owned subsidiary of Agway. Agway is one of the largest supply and
services cooperatives in the United States.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
(A) INDEX TO DOCUMENT LIST LOCATION
--------
<S> <C> <C>
(1) FINANCIAL STATEMENTS
Among the responses to this Item 14(a)(1) are the following financial statements
which are included in Item 8.
(i) Report of Independent Accountants...................................................11
(ii) Consolidated Balance Sheets, June 30, 1999 and 1998.................................12
(iii) Consolidated Statements of Income and Member's Equity, for the years ended
June 30, 1999, 1998, and 1997.......................................................13
(iv) Consolidated Statements of Cash Flow, for the years ended June 30, 1999,
1998, and 1997.....................................................................14
(v) Notes to the Consolidated Financial Statements......................................15
(2) FINANCIAL STATEMENT SCHEDULES
Schedules are omitted for the reason that they are not required or are not
applicable, or the required information is shown in the financial statements or
notes thereto.
(3) THE FOLLOWING REQUIRED EXHIBITS ARE EITHER ATTACHED HERETO OR ARE HEREBY
INCORPORATED BY REFERENCE TO PREVIOUSLY FILED REGISTRATION STATEMENTS OR THE
APPLICABLE FORM 10-K FILED AS SPECIFIED.
3 - ARTICLES OF INCORPORATION
3(a) -Certificate of Incorporation of Telmark Inc. (predecessor to Telmark LLC)
dated June 4, 1964, as amended September 8, 1964; January 15, 1975; and June 16,
1987, filed by reference to Exhibit 3 of the Registration Statement (Form S-1),
File No. 33-70732, dated October 22, 1993.
BY-LAWS
3(b) -By-laws of Telmark Inc. (predecessor to Telmark LLC) as amended September
19, 1995, filed by reference to Exhibit 3 of the Annual Report (Form 10-K) dated
August 23, 1996.
CERTIFICATE OF FORMATION
3(c) -Certificate of formation of Telmark LLC dated June 25, 1998, filed by
reference to Item 14 of the Annual Report (Form 10-K) dated August 21, 1998.
LIMITED LIABILITY COMPANY AGREEMENT
3(d) -Operating agreement of Telmark LLC dated July 1, 1998, filed by reference
to Item 14 of the Annual Report (Form 10-K) dated August 21, 1998.
CERTIFICATE OF MERGER
3(e) -Certificate of Merger of Telmark Inc. into Telmark LLC effective July 1, 1998,
filed by reference to Item 14 of the Annual Report (Form 10-K) dated August 21,
1998.
31
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED)
4 - INSTRUMENT DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
4(a) -The Indenture dated as of September 30, 1993, between Telmark Inc. and OnBank
& Trust Co. of Syracuse, New York, Trustee, filed by reference to Exhibit 4 of
the Registration Statement (Form S-1), File No. 33-70732, dated October 22,
1993.
4(b) -Telmark Inc. Board of Directors resolutions dated as of June 21, 1995,
authorizing the issuance of Debentures under the Indenture filed by reference to
Exhibit 4 of the post effective Amendment No. 1 to the Registration Statement
(Form S-1), File No. 33-84442, dated August 28, 1995.
4(c) -Supplemental Indenture dated as of June 30, 1998 between Telmark Inc. and
Manufacturers and Trust Company, filed by reference to Exhibit 4 of the Current
Report (Form 8-K), File No. 33-70732, dated July 6, 1998.
4(d) -Supplemental Indenture dated as of July 1, 1998 between Telmark Inc. and
Telmark LLC and Manufacturers and Traders Trust Company, filed by reference to
Exhibit 4 of the Current Report (Form 8-K), dated July 6, 1998.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K for the three months ended June 30,
1999, have been filed.
</TABLE>
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By DANIEL J. EDINGER
-----------------------------
President
(Principal Executive Officer)
Date 9/10/99
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- -------
DANIEL J. EDINGER President 9/10/99
(Principal Executive Officer)
PETER J. O'NEILL Senior Vice President, Finance and Control 9/10/99
Chairman of the Board and Director
(Principal Financial Officer
& Principal Accounting Officer)
ANDREW J. GILBERT Director 9/10/99
SAMUEL F. MINOR Director 9/10/99
GARY K. VANSLYKE Director 9/10/99
WILLIAM W. YOUNG Director 9/10/99
33
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,479,753
<SECURITIES> 0
<RECEIVABLES> 768,579,808
<ALLOWANCES> 29,977,571
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,570,779
<DEPRECIATION> 1,703,080
<TOTAL-ASSETS> 575,986,635
<CURRENT-LIABILITIES> 0
<BONDS> 433,733,940
0
0
<COMMON> 0
<OTHER-SE> 105,566,351
<TOTAL-LIABILITY-AND-EQUITY> 575,986,635
<SALES> 0
<TOTAL-REVENUES> 70,006,432
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,024,205
<INTEREST-EXPENSE> 27,625,662
<INCOME-PRETAX> 18,158,342
<INCOME-TAX> 7,755,531
<INCOME-CONTINUING> 10,402,811
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,402,811
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
