EXHIBIT 13
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TELMARK LLC
2000 Annual Report
To Investors
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This Annual Report To Investors contains forward-looking statements that
involve certain risks and uncertainties. Actual results could differ materially
from those statements. Certain factors that could cause actual results to differ
materially from those projected include, but are not limited to, uncertainties
of economic, competitive and market decisions and future business decisions, as
well as those factors discussed in Telmark's annual report on Form 10-K for the
year ended June 30, 2000.
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Telmark Investors:
In fiscal year 2000, Telmark achieved outstanding financial results. The
portfolio net investment grew 13 percent to $659 million with key financial
ratios improving over the prior year.
Pre-tax income was $20.1 million, a $1.9 million increase over the prior year.
Portfolio quality was again strong with our fifth straight year of currency over
97%. A $5 million dividend was paid to our owner reflecting Telmark's strong
financial condition.
Our results are the product of good old-fashioned sales and credit discipline.
Telmark's sales philosophy of "people buy from people" may seem antiquated in an
e-commerce world, but nothing replaces the insights and knowledge that come from
our employees. Continual focus on servicing customers is our time-tested
blueprint for success.
After 36 years, Telmark is now a nation-wide finance company: we have the
capacity to finance assets anywhere in the continental United States. The
platform that we have built going into the 21st century is characterized by what
we believe to be the most talented agricultural sales force in the nation
coupled with a lean corporate staff and a de-layered company structure.
On behalf of all Telmark employees, thanks for the confidence you have placed in
us.
Daniel J. Edinger
President
Telmark LLC
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BUSINESS OF TELMARK
Telmark LLC ("Telmark," "we," "our," "us" or "Company") was organized in 1964 as
Telmark Inc. under the Business Corporation Law of the State of New York.
Effective July 1, 1998, Telmark Inc. was merged into Telmark LLC, a Delaware
limited liability company which was formed to carry on the business of Telmark
in limited liability company, rather than corporate, form. We are owned and
controlled by Agway Inc. ("Agway"), one of the largest agricultural supply and
services cooperatives in the United States, in terms of revenues, based on a
1999 Co-op 100 Index produced by the National Cooperative Bank. We are a direct
wholly-owned subsidiary of Agway Holdings, Inc., an indirect subsidiary of
Agway. Telmark currently employs 234 persons.
Our operations are comprised almost exclusively of direct finance leasing of
agricultural related equipment, vehicles and buildings to farmers or other rural
businesses that serve the agricultural marketplace. Our leases offer customers
an alternative to directly purchasing or borrowing to purchase as a means of
acquiring the use of equipment, vehicles or buildings.
o We brand our leasing service as Agrilease(R) and Telease
Financial Services(R).
o We highlight our service-oriented approach in advertisements
and product brochures.
We offer a variety of lease financing packages, with varying payment schedules
on a monthly, quarterly, semiannual or annual basis, depending on the expected
timing of customer cash flows, customer credit quality, and the customer's
individual preferences.
With a direct finance lease the customers have use of the leased property over a
specified term for a periodic rental charge: the lease payment. Customers make
lease payments in advance. In most cases, at least two months of the lease
payments are collected in advance before the lease starts. We offer most direct
finance leases for a period which does not exceed our estimate of the useful
life (based on our estimate of customers use) of the equipment or the building
leased. We offer equipment and vehicle leases typically for a period of 3 to 6
years, and generally do not exceed eight years. We offer building leases
typically for longer terms (e.g., 5 to 10 years), up to maximum terms of 15
years. As of June 30, 2000, our outstanding leases had an average original term
of approximately 5.9 years and average remaining term of approximately 4.6
years.
Generally, the customer selects the supplier of the equipment or other property
to be leased and we are not responsible for its suitability, performance, life,
or any other characteristics. In some cases, the financing is offered to the
ultimate customer through a dealer of a selected manufacturer. Our primary
responsibility is to buy the property from the supplier, lease it to the
customer, and collect the lease payments. For certain lease contracts we have
agreed to indemnify customers if certain adverse tax consequences arise in
connection with a lease. We cannot predict our liability under these
indemnification provisions, but we believe that our liability is remote and the
net effect of any liability is not material. The customers assume all
obligations of insurance, repairs, maintenance, service, and property taxes.
Historically, in most of our lease transactions, the lessee has purchased the
leased property or equipment upon termination of the lease. However, at the
expiration of the direct finance lease term, the customers have an option to:
o purchase the leased property,
o renew the lease, or
o return the leased property to us.
We realize net earnings, if revenues from our leases, exceed our operating
expenses and income taxes. Our "revenue" from a lease is the sum of all payments
due under the lease plus the residual value of the leased property, less the
cost of purchasing the leased property.
o "Operating expenses" include interest expense, provision for
credit losses (the dollar amount we set aside to cover its
estimated losses should a lessee fail to make required payments
under a lease), and selling and general and administrative
expenses including our payroll costs, rent, advertising costs
and fees paid for credit checking and legal and accounting
services.
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o "Interest expense" is the single largest operating cost of
Telmark and is primarily the interest we must pay on the
amounts borrowed from banks and other investors to finance our
leases.
An example of how a direct finance lease transaction generates profits for us is
set forth below:
o A potential customer determines that he needs to acquire a
machine to harvest his corn. He selects a harvester and enters
into a lease with us for that particular machine.
o We purchase the harvester using funds we borrow or with
available cash on hand. Under terms of the lease, the customer
agrees to make lease payments to us.
o At the end of the lease term, the customer may (1) purchase the
harvester from us for its fair market value, (2) extend the
lease on terms agreed to by us, or (3) return the harvester to
us. We make a profit on the lease to the extent that the sum of
the lease payments collected during the lease term plus the
proceeds from the sale or re-lease of the equipment after the
initial lease term exceeds the cost of the equipment and other
operating expenses.
PORTFOLIO MIX
We finance agricultural and related equipment, vehicles and buildings of both a
general and specialized nature. As exemplified by the following four schedules.
We have a portfolio of leases which are diverse with respect to the type of
equipment to which they relate, their dollar amount, the industry involved and
their geographic origination. Such diversification helps mitigate adverse
circumstances affecting particular industry, geographic and other segments of
our business, to the extent that such circumstances do not adversely affect our
entire business.
"Leases" in our portfolio are defined by us for the following statistical
purposes as amounts due to it by lessees under all of our outstanding leases
(known as "gross lease receivables") and excludes imputed unearned interest and
finance charges.
As of June 30, 2000, we had approximately $659 million of leases and notes
outstanding. We lease equipment which includes milking machines, tractors,
combines, feed processing equipment and forestry equipment (e.g., log skidders
and log harvesting equipment); vehicles leased include trucks, trailers and fork
lifts; and buildings leased include barn structures, silos and greenhouses.
Approximately 10% of the equipment leases are for used equipment. The percentage
of leases by equipment type has generally remained constant and we do not
anticipate significant changes in the types of equipment to be leased. Given the
nature of the equipment leased and the generally short-term duration of our
leases, we have not been adversely affected by, and do not anticipate being
adversely affected by significant technological developments that may affect the
value of the equipment leased to customers. The breakdown of leases by equipment
type is as follows:
SCHEDULE OF LEASES
BY EQUIPMENT TYPE
--------------------------------------------------------------------------------
JUNE 30, 2000
--------------------------------------------------------------------------------
(PERCENTAGES ARE OF DOLLAR AMOUNTS DUE UNDER OUTSTANDING LEASES)
--------------------------------------------------------------------------------
Equipment Type
--------------
%
---
Farm equipment, machinery and tractors...................................... 33%
Highway vehicles............................................................ 17%
Buildings................................................................... 33%
Forestry related equipment.................................................. 7%
Construction................................................................ 6%
Other 5% or less of total................................................... 4%
Total.................................................................100%
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BUSINESS OF TELMARK (Continued)
We maintain a large customer base which includes over 17,000 customers. The
minimum purchase price of equipment which we finance is $1,500. Approximately
30% of our customers hold more than one lease with us. In order to limit its
credit exposure to particular customers, our Board of Directors maintains a
policy which precludes any one customer from accounting for more than 2.5% of
the dollar amount of our outstanding Leases. Currently, no customer accounts for
more than 1.0% of the dollar amount of our outstanding Leases. Our average lease
size at origination is approximately $30,000. The breakdown of leases by size is
as follows:
SCHEDULE OF LEASES BY SIZE
--------------------------------------------------------------------------------
Dollar Amounts and Corresponding Percentages are of Leases Entered into During
Year Ended June 30, 2000
--------------------------------------------------------------------------------
Dollars
Original Size Transaction (In Millions) %
------------------------- ---------------- -------------
Under $7,500 $ 7.7 3%
$ 7,500 - $24,999 63.6 23%
$25,000 - $49,999 57.0 20%
$50,000 - $99,999 56.0 20%
$100,000 - $249,999 51.9 18%
$250,000 & Over 45.9 16%
------------------------- ---------------- -------------
Total $ 282.1 100%
================ =============
The largest industry concentrations are in dairy, crops, forestry, livestock,
and transportation. These industries may be impacted differently by various
factors including changing economic conditions, technological advances in the
equipment and agricultural sector, government regulation and subsidies, and
domestic and international consumer demand, among others. Generally, we serve
diverse enterprises which helps us keep any single adverse trend from having an
adverse effect on the ability of all customers to meet their lease obligations.
For example, a long period of low grain prices could reduce the ability of grain
farmers to meet their obligations, but the low grain prices would reduce the
feed costs paid by dairy farmers, thereby making it easier to meet their lease
obligations. The breakdown of leases by industry is as follows:
SCHEDULE OF LEASES
BY INDUSTRY
--------------------------------------------------------------------------------
June 30, 2000
--------------------------------------------------------------------------------
(Percentages are of dollar amounts due under outstanding leases)
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Industry %
---
Crops....................................................................... 18%
Dairy....................................................................... 17%
Livestock................................................................... 16%
Forestry.................................................................... 11%
Transportation.............................................................. 10%
Construction................................................................ 7%
Ag Services................................................................. 5%
Other less than 5% of total................................................. 16%
Total.................................................................100%
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BUSINESS OF TELMARK (CONTINUED)
PORTFOLIO MIX (CONTINUED)
The aforementioned industries are defined as follows: Dairy is the production of
milk; it is sold in the raw state to a processor. Forestry is the harvesting and
initial processing of forest products. The wood is sold in the form of logs or
rough cut lumber. Crops is the production of grain or hay; it is sold in bulk.
Livestock is the production of animals. The animals are generally sold live to a
processor. Transportation is the movement of products by truck. Products being
moved are generally farm input (e.g., fertilizer, feed) items being transported
to farms or farm products going to market. Other is the aggregate of all other
types of accounts.
At June 30, 2000, leases originated in the states of Michigan, New York, Ohio
and Pennsylvania accounted for approximately 44% of the total lease portfolio.
Pennsylvania and New York have historically been the most significant in terms
of lease activity due to the large number of dairy farms located there. However,
our business continues to expand geographically and its concentration of leases
in Pennsylvania and New York has been reduced from approximately 68% in 1984 to
25% in 2000. Our continued expansion into new geographic markets mitigates the
potential adverse effect on circumstances which may impact these markets such as
state and local regulations, local economic conditions, and weather conditions
(i.e., floods, drought). For example, if poor growing conditions such as early
or late frost, hail, or lack of rain reduce the apple crop in western New York,
the orchard enterprises located there could lose part of their normal crop;
however, the Michigan orchard enterprises might enjoy higher prices and income
because of higher demand for their apples. The geographic distribution of leases
is as follows:
SCHEDULE OF LEASES
BY GEOGRAPHIC DISTRIBUTION
--------------------------------------------------------------------------------
June 30, 2000
--------------------------------------------------------------------------------
(Percentages are of dollar amounts due under outstanding Leases)
--------------------------------------------------------------------------------
State %
---
New York.................................................................... 14%
Pennsylvania................................................................ 11%
Michigan.................................................................... 10%
Ohio........................................................................ 9%
Illinois.................................................................... 6%
Virginia.................................................................... 6%
Wisconsin................................................................... 6%
Indiana..................................................................... 4%
Maryland.................................................................... 4%
Delaware.................................................................... 4%
West Virginia............................................................... 3%
All Others less than 3%..................................................... 23%
Total.................................................................100%
CREDIT POLICIES
Potential lessees undergo a thorough credit approval process after our field
representative completes a financial application. Our representative is
responsible for obtaining the most accurate information possible for a proper
application review. Personal observation and meetings with the customer assist
the our representative in providing a comprehensive evaluation of the lease
application.
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BUSINESS OF TELMARK (Continued)
CREDIT POLICIES (CONTINUED)
The credit search usually begins with electronic credit bureau systems such as
TRW, Inc. and local or regional creditors such as banks. For Agway cooperative
members, the Agway credit system provides additional information. For
contemplated transactions of over $100,000, a county court house search provides
records of any existing liens against the lessee. We retain title to the
equipment or building leased. In addition, we often obtain a lien on the real
estate owned by the farmer or lessee as collateral for payments under a building
lease. If a customer defaults on a lease, the real estate lien entitles us to
foreclose on the real estate property and take title subject to any and all
prior liens on the property. Upon foreclosure, if this collateral is
insufficient to cover all existing liens, prior lienholders may receive more
than us. Thus, we look first to the lessee's historical and future ability to
service its debt and lease payments, and then to the mortgage position of a
lease collateralized by real estate.
Credit approvals are made based on the total amount outstanding to the customer.
Lending authority is assigned to members of management depending on position,
training, and experience. The Board of Directors must approve all applications
over $1,000,000.
We maintain monthly delinquency reports which monitor leases that have been
delinquent (i.e., payment due has not been made) for over 30 days, and
non-earning leases. Generally, accounts past due at least 120 days, as well as
accounts in foreclosure or bankruptcy, are transferred to non-earning status.
Non-earning accounts cannot become current unless all past due lease payments
are paid or the lease is amended. As of June 30, 2000, non-earning leases were
0.9% of our net investment in leases before allowances for credit losses. The
potential losses from non-earning leases are mitigated by our ability to
repossess leased property and to foreclose on other property in which we are
granted a security interest. See "Business of Telmark - Portfolio Mix." Leases
may be amended by us and a lessee to change the terms, remaining amount, and
payment schedule for the remaining lease balance. There is generally a fee
collected for the amendment. All lease amendments are supported by legal
documentation and, as management deems appropriate, a new credit evaluation.
We maintain financial reserves (provision for credit losses) to cover losses in
our existing lease portfolio from default or nonpayment. Our allowance for
credit losses is based on a periodic review of the collection history of past
lessees, current credit practices, an analysis of delinquent accounts and
current economic conditions. The provision reflects management's estimates of
the inherent credit risk within the portfolio.
RESIDUAL VALUE
We generally estimate the residual value at the end of a lease to be 10% of the
purchase price on a piece of new equipment and 15% of the market value at
inception for a building. It is not possible to forecast with certainty the
value of any equipment upon termination of the lease. The market value of used
equipment depends upon, among other things, its physical condition, the supply
and demand for equipment of its type and its remaining useful life in relation
to the cost of new equipment at the time the lease terminates. We have generally
not experienced any losses as a result of the failure to realize estimated
residual values on equipment and property lease expirations.
During the past ten years, we have collected slightly over 100% of the net lease
receivable for all leases which terminated. The net lease receivable with
respect to a lease equals the sum of payments due to us under the lease, the
estimated residual value of the leased property at the end of the lease and the
net costs incurred by us in entering into the lease, less imputed unearned
interest and finance charges with respect to the lease. This residual
performance can be attributed to our ability to sell the equipment, vehicle or
building to the original lessee at the end of the lease in most transactions.
Management believes that obsolescence factors, such as technological
sophistication and computerization have only a moderate effect on the farming
equipment sector and that agricultural equipment will continue to show strong
residual values.
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BUSINESS OF TELMARK (Continued)
INSURANCE COVERAGE
Under a Telmark lease, the customer assumes the obligation to insure the leased
property against claims arising from the customer's use of the leased property.
We may be exposed to liability from claims by lessees and third parties
including claims due to the customers' use of the property or defects in the
property. However, in general direct finance lessors such as us have not been
held liable for such claims. In addition, the leases provide us protection
against such liability claims. Under the terms of each lease, we disclaim such
liability and the customer agrees to indemnify us for any claim or action
arising in connection with the manufacture, selection, purchase, delivery,
possession, use, operation, maintenance, leasing, and return of the equipment
leased. We require the customer to provide insurance coverage naming us as an
additional insured in certain circumstances and we have insurance coverage for
most liability claims against us through insurance policies purchased by Agway.
AGRICULTURAL ECONOMY
We are indirectly affected by factors that affect the agricultural economy in
which our customers operate. These factors include
o governmental agricultural programs,
o weather conditions, and
o supply and demand conditions with respect to agricultural
commodities.
These factors may affect the economic vitality of our customers and consequently
their decisions to lease equipment or property for their businesses as well as
the ability of these customers to make the required payments on their leases.
Government Subsidies. Certain policies may be implemented from time to time by
the United States Department of Agriculture, the Department of Energy or other
governmental agencies which may impact the demands for products produced by our
farmer customers. Those policies may have a significant impact on their income
and ability to meet their obligations to us.
The Federal Agriculture Improvement and Reform Act ("FAIR") represents the most
significant change in government farm programs in more than 60 years. Under
FAIR, the former system of variable price-linked deficiency payments to farmers
has been replaced by a program of fixed payments which decline over a seven-year
period from 1996 to 2002. To compensate for adverse market and weather
conditions, additional transfer payments were made by the Federal government
during 1998 and 1999. FAIR eliminates federal planting restrictions and acreage
controls. We believe that FAIR was intended to accelerate the trend toward
greater market orientation and reduced Government influence on the agricultural
sector. As a result, we expect the number of acres under cultivation to increase
over a long period of time. This increase may favorably impact demand for our
financing services. Whether demand for our services is favorably impacted
depends in a large part on whether U.S. agriculture becomes more competitive in
world markets as this industry moves toward greater market orientation, the
extent which governmental actions expand international trade agreements and
whether market access opportunities for U.S agriculture is increased.
The U.S Congress has in the past considered, and may in the future consider,
trade measures which, if passed, could enhance agricultural export potential.
Absent such legislation, our customers access to international markets may be
adversely impacted.
We are not aware of any newly implemented or pending government policies, other
than as discussed above, having a significant impact or which may have a
significant impact on our operations.
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BUSINESS OF TELMARK (CONTINUED)
COMMODITIES DEMAND (CONTINUED)
Weather. Adverse weather conditions can have varying effect on our customers
depending on the region experiencing such conditions. When adverse conditions
occur in the region served by us, the effect can be negative as was the case in
1992 when many parts of the Northeast, our primary territory, experienced a
relatively cold summer and a wet fall. This adversely impacted grape farmers
(whose crops never matured and had poorer sugar content), as well as potato,
vegetable and grain farmers. However, adverse weather conditions occurring in
other regions may be advantageous to our customers. For example, the floods
occurring in parts of the Midwest and the droughts which occurred in parts of
the West and Southwest in 1993 reduced output in those areas which increased the
demand for crops grown by our customers in other parts of the country. Inclement
weather can also benefit our food processor customers to the extent that it
increases demand for frozen or canned products as opposed to fresh products.
Commodities Demand. Supply and demand conditions with respect to agricultural
commodities produced by our customers can be affected by a number of factors.
These factors include both national and international economic conditions,
local, national and international weather conditions (e.g., the floods in the
Midwest discussed above), government policy, and technology changes. The income
of our customers is in part determined by the demand for the commodities and the
amount of such commodities they produce. Generally, any of the above factors
which increase demand may increase the income of our customers to the benefit of
us. Conversely, any of the above factors which decrease demand may decrease such
income to our detriment.
Historically, our customers have produced products which are marketed within the
United States. Domestic demand for these products, in addition to being affected
by the availability and demand for competing products, may be affected by the
state of the United States economy. However, the economic condition of foreign
countries and their demand for the type of products produced by our customers
may also influence the demand for products of our customers.
Our customers may also be affected by agreements between the United States and
foreign governments, such as the North American Free Trade Agreement and the
General Agreement on Tariffs and Trade which may impact indirectly demand for
our customers' products. The impact of these agreements on us and our customers
is unclear.
MARKETING AND SALES
We use both direct mail and advertising campaigns routed through our parent's
publications and other agricultural publications as a means of promoting our
leasing products to farmers and other rural businesses that serve the
agricultural marketplace. In addition, leasing product brochures are available
at many equipment dealer franchises. Advertising and communication efforts for
non-Agway businesses are typically targeted towards special market segments such
as forestry and trucking via magazines and trade shows.
Much of our business comes from referrals to us by equipment retailers and
building contractors of customers wishing to purchase equipment, vehicles or
buildings. The retailer or contractor refers the customer to Telmark, where a
field representative will complete a credit application and seek credit approval
in a day. Upon approval, the retailer or contractor is paid by us for the
equipment, vehicles or buildings which are then leased from us by the customer.
Using the identification TFS(R), we provide financing through the dealers of
selected manufacturers of equipment. In the cases where financing is through
manufacturer sponsored financing programs, the dealer rather than our field
representative completes the credit application.
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BUSINESS OF TELMARK (CONTINUED)
FACILITIES
We lease all of the office space we use from Agway. We do not own any of the
real property we use for office facilities.
COMPETITION
Our main competitors are agricultural financial institutions and other leasing
companies. Many of these organizations have greater financial and other
resources than us and as a consequence are able to obtain funds on terms more
favorable than those available to us. Our strongest competitors are agricultural
financial institutions such as the Banks of the Farm Credit System and their
affiliates, federal government sponsored enterprises ("GSEs") which are among
the largest agricultural lenders in the nation, and local and regional banks
servicing the agricultural sector. These competitors may enjoy a relative
advantage in financing their leasing business. Banks of the Farm Credit System
as GSEs may be able to raise funds in the public debt market at a lower interest
rate than we can. Similarly, commercial banks may be able to raise funds more
cheaply than us through their offering of Federal Deposit Insurance Corporation
insured deposit accounts.
Other leasing companies competing with us include equipment manufacturers with
finance subsidiaries, and independent leasing companies. Finance subsidiaries of
equipment manufacturers frequently charge reduced interest rates on equipment
leases to stimulate sales of equipment produced by their parent companies. We
compete with our competitors by focusing on agricultural equipment financing,
service to our customers, and tailoring our portfolio of products to address the
specific needs of farmers and other rural businesses which serve the
agricultural marketplace.
SELECTED FINANCIAL DATA
The following "Selected Financial Data" of Telmark and consolidated subsidiaries
have been derived from consolidated financial statements audited by
PricewaterhouseCoopers LLP, whose report for the years ended June 30, 2000, 1999
and 1998 is included in the Annual Report on Form 10-K, and should be read in
conjunction with the full consolidated financial statements of Telmark and Notes
thereto.
<TABLE>
<CAPTION>
(Thousands of Dollars Except Ratio Amounts)
-----------------------------------------------------------------------
Years Ended June 30,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Total revenues............... $ 76,785 $ 70,006 $ 65,476 $ 56,943 $ 48,627
Income before income taxes $ 20,059 $ 18,158 $ 15,412 $ 13,003 $ 11,502
Provision for income taxes .. $ 8,352 $ 7,756 $ 6,654 $ 5,112 $ 4,745
Net income .................. $ 11,707 $ 10,402 $ 8,758 $ 7,891 $ 6,757
Leases and notes, net........ $ 626,538 $ 551,071 $ 495,626 $ 445,770 $ 374,561
Total Assets................. $ 652,483 $ 575,987 $ 518,316 $ 470,606 $ 398,198
Senior Debt.................. $ 479,932 $ 396,101 $ 371,677 $ 340,158 $ 273,000
Debentures (1)............... $ 37,398 $ 37,633 $ 34,006 $ 31,044 $ 24,258
Member's Equity.............. $ 112,273 $ 105,566 $ 95,164 $ 86,406 $ 78,514
Ratio of earnings to fixed charges (2) 1.6 1.6 1.6 1.5 1.6
Ratio of Debt to member's equity (3) 4.6 4.1 4.3 4.3 3.8
</TABLE>
(1) For purposes of this ratio, earnings represents operating income before
income taxes, interest charges, and rental expense. Fixed charges include
interest on all senior and subordinated debt.
(2) Under Senior Debt agreements, subordinated debt payable to Agway Holdings,
Inc. is included in the definition of equity for purposes of this ratio. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Thousands of Dollars)
2000 COMPARED TO 1999.
NET INCOME
Our net income increased by $1,300 (13%) from $10,400 in 1999 to $11,700 in
2000.
<TABLE>
<CAPTION>
Percentage
FY 2000 FY 1999 Increase Change
------- ------- -------- ----------
<S> <C> <C> <C> <C>
Net income $11,700 $10,400 $1,300 13%
</TABLE>
The increase was principally due to increased revenue from a larger outstanding
portfolio of leases during 2000 as compared to 1999.
TOTAL REVENUES
Total revenues of $76,800 in 2000 increased $6,800 (10%) as compared to $70,000
in 1999.
<TABLE>
<CAPTION>
Percentage
FY 2000 FY 1999 Increase Change
------- ------- -------- ----------
<S> <C> <C> <C> <C>
Total revenues $76,800 $70,000 $6,800 10%
</TABLE>
The increase is attributable in part to a $75,500 (14%) increase in net leases
and notes outstanding at June 30, 2000 compared to 1999. Total revenue, as a
percentage of average net leases and notes outstanding, decreased slightly from
13.1% in 1999 to 12.6% in 2000.
INCREASE IN LEASE PORTFOLIO
Increases in the lease portfolio resulting from new booked volume of $282,100 in
2000 and $252,100 in 1999 exceeding lease reductions from leases repaid and net
bad debt expense of $206,600 and $196,700 in 2000 and 1999, respectively.
Increase In Lease Portfolio FY 2000 FY 1999
-------- --------
New booked volume $282,100 $252,100
Leases repaid (198,700) (188,700)
Provision for credit losses ( 7,900) ( 8,000)
--------- ---------
Portfolio increase $ 75,500 $ 55,400
========= =========
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 remained constant at 6.9%,
total interest expense increased due to increased borrowings required to finance
the growth of the lease portfolio noted above.
<TABLE>
<CAPTION>
Percentage
FY 2000 FY 1999 Increase Change
------- ------- -------- ----------
<S> <C> <C> <C> <C>
Interest expense $31,500 $27,600 $3,900 14%
</TABLE>
Total debt outstanding at June 30, 2000 increased by $83,600 to $517,300 as
compared to total debt at June 30, 1999.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (THOUSANDS OF DOLLARS) (CONTINUED)
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses of $17,300 in 2000 increased by
$1,100 (7%) compared to $16,200 in 1999.
<TABLE>
<CAPTION>
Percentage
FY 2000 FY 1999 Increase Change
------- ------- -------- ----------
<S> <C> <C> <C> <C>
Selling, general,
and administrative
expenses $17,300 $16,200 $1,100 7%
</TABLE>
The increase was primarily the result of additional personnel and incentive
costs relating to the additional new business
booked.
Provision for Credit Losses
The provision for credit losses of $7,900 in 2000 represents a decrease of $100
(1%) compared to $8,000 in 1999.
<TABLE>
<CAPTION>
Increase Percentage
FY 2000 FY 1999 (Decrease) Change
------- ------- -------- ----------
<S> <C> <C> <C> <C>
Provision for Credit Losses $7,900 $8,000 (100) 1%
</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.
At June 30, 2000 the allowance for credit losses was $32,500 compared to $30,000
at June 30, 1999. During 2000 and 1999, the general economy remained strong and
the total value of non-earning accounts increased from $4,900 in 1999 to $6,000
in 2000 and as a percentage of the lease portfolio remained unchanged at 0.9%
for both 1999 and 2000. Reserves are established at a level management believes
is sufficient to cover estimated losses in the portfolio.
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%
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.
14
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (THOUSANDS OF DOLLARS) (CONTINUED)
INCREASE IN LEASE PORTFOLIO
Increases in the lease portfolio resulting from new booked lease volume of
$252,100 in 1999 and $227,300 in 1998 exceeded lease reductions from leases
repaid and provision for credit losses of $196,700 and $177,400 in 1999 and
1998, respectively.
FY 1999 FY 1998
-------- --------
New booked lease volume $252,100 $227,300
Leases repaid (188,700) (169,800)
Provision for credit losses ( 8,000) ( 7,600)
-------- --------
Portfolio increase $ 55,400 $ 49,900
-------- --------
The increase in new booked lease volume in excess of leases repaid and provision
for credit losses had the effect of increasing the size of the lease portfolio,
thereby increasing total revenues. The increased volume of new leases resulted
from development of Telmark's existing markets and the addition of new
employees.
INTEREST EXPENSE
Interest expense increased from $26,900 in 1998 to $27,600 in 1999. While the
weighted average interest rate paid on debt decreased from 7.2% to 6.9%, total
interest 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 (4%) compared to $15,600 in 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Percentage
Selling, general, FY 1999 FY 1998 Increase Change
and administrative ------- ------- -------- ----------
expenses $16,200 $15,600 $600 4%
</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 and as a percentage of lease portfolio was 0.6% of
leases in 1998 to 0.9% of leases in 1999. Reserves are established at a level
management believes is sufficient to cover estimated losses in the portfolio.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (THOUSANDS OF DOLLARS) (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 liability to equity ratio increased from 4.5 in 1999
to 4.8 in 2000.
<TABLE>
<CAPTION>
FY 2000 FY 1999 FY 1998
-------- -------- --------
<S> <C> <C> <C>
Cash In Flows
Cash flows from operations $24,400 $22,800 $21,200
Cash flows from financing 64,600 43,700 37,100
-------- -------- --------
Total cash in flows 89,000 66,500 58,300
Cash Out Flows
Cash flows from investing (83,400) (63,800) (58,000)
Cash flows to restricted cash (5,600) (2,700) (300)
-------- -------- --------
Total cash out flows (89,000) (66,500) (58,300)
</TABLE>
Virtually all of the cash flows from both operations and financing activities
were invested in restricted cash and growth of the 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 Note 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 READINESS
We had no material issues relating to the millennium date change on January 1,
2000, the leap year on February 29, 2000, or the month end, the quarter-end, or
the year end processing. As previously disclosed, we initiated our year 2000
efforts in January 1996 and completed extensive work to assure that our
operations were not impacted by the century date change as of January 1, 2000.
Our efforts focused on information system modification or replacement, as well
as a review of all other areas of our business operations that might be impacted
by this event. Business contingency and continuity plans were developed, and a
command center was established to monitor and react to critical business
interruptions, if any, either prior or subsequent to the millennium date change.
Our cost for conversion and testing of existing applications and the replacement
of hardware was approximately $800.
The year 2000 statements set forth above are designed as "Year 2000 Readiness
Disclosures" pursuant to the Year 2000 Information and Readiness Disclosure Act
(P.L. 105-271).
16
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(THOUSANDS OF DOLLARS)
The following table provides information about 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 2001 2002 2003 2004 2005 Thereafter Total 6/30/00
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short Term Bank
Lines of Credit 75,676 - - - - - 75,676 75,676
Weighted Average
Interest Rate 7.36% - - - - - - -
Long-Term Debt,
including current portion 132,773 104,257 85,010 69,842 8,648 3,726 404,256 411,071
Weighted Average
Interest Rate 6.90% 6.98% 7.11% 6.87% 7.69% 7.75% -
Subordinated Debentures,
including current portion 5,497 7,321 11,071 6,096 - 7,413 37,398 35,950
Weighted Average
Interest Rate 6.40% 6.94% 8.43% 8.25% - 8.75% -
</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 an average discount rate for
U.S. Government Treasury Bills (T-Bill), with maturities of 26 weeks. Based on
the T-Bill rate of 5.96% as of June 30, 2000, as compared to the stated rates of
the debentures, which range from 6.0% to 8.75% at June 30, 2000, 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, 2000, we do not believe that reasonably possible
near-term changes in interest rates will result in a material effect on future
earnings, fair values, or cash flows of Telmark.
LEGAL PROCEEDINGS
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.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
There were no changes in or disagreements with accountants on accounting and
financial disclosures.
ADDITIONAL INFORMATION
Telmark will provide a copy of the annual report on Form 10-K, without charge to
each person to whom a copy of this Prospectus is delivered, upon the written or
oral request of any such person to: Patricia Edwards, Assistant Secretary, P.O.
Box 5060, Syracuse, New York 13220-5060, Telephone: 315-449-6311.
17
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES:
<S> <C>
Report of Independent Accountants.......................................................................19
Consolidated Balance Sheets, June 30, 2000 and 1999.....................................................20
Consolidated Statements of Income and Member's Equity,
for the years ended June 30, 2000, 1999 and 1998...............................................21
Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2000, 1999 and 1998...........22
Notes to Consolidated Financial Statements..............................................................23
</TABLE>
18
<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, 2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 2000, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of 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 auditing standards
generally accepted in the United States, 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
August 18, 2000
19
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
JUNE 30, 2000 AND 1999
(THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Restricted cash........................................ $ 10,103 $ 4,480
Leases and notes receivable, net....................... 626,538 551,071
Investments............................................ 13,606 12,780
Equipment, net......................................... 483 868
Deferred income taxes.................................. 0 5,443
Other assets........................................... 1,753 1,345
-------- --------
Total Assets........................................... $652,483 $575,987
======== ========
LIABILITIES AND MEMBER'S EQUITY
2000 1999
-------- --------
Borrowings under lines of credit and term debt......... $479,932 $396,101
Subordinated debentures................................ 37,398 37,633
Accounts payable....................................... 9,666 6,692
Payable to Agway Inc................................... 5,114 22,337
Deferred income taxes.................................. 39 0
Accrued expenses, including interest of
$4,020 - 2000 and $3,258 - 1999 ................. 8,061 7,658
-------- --------
Total Liabilities...................................... 540,210 470,421
Commitments & Contingencies
Member's Equity........................................ 112,273 105,566
-------- --------
Total Liabilities and Member's Equity............. $652,483 $575,987
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF INCOME AND MEMBER'S EQUITY
FISCAL YEARS ENDED JUNE 30, 2000, 1999, AND 1998
(THOUSANDS OF DOLLARS)
2000 1999 1998
-------- -------- --------
Revenues:
Interest and finance charges........$ 75,131 $ 68,337 $ 63,872
Service fees and other income....... 1,654 1,669 1,604
-------- -------- --------
Total revenues.................. 76,785 70,006 65,476
-------- -------- --------
Expenses:
Interest expense.................... 31,536 27,626 26,871
Provision for credit losses......... 7,899 8,024 7,587
Selling, general and administrative. 17,291 16,198 15,606
-------- -------- --------
Total expenses.................. 56,726 51,848 50,064
-------- -------- --------
Income before income taxes...... 20,059 18,158 15,412
Provision for income taxes............... 8,352 7,756 6,654
-------- -------- --------
Net income...................... 11,707 10,402 8,758
Member's equity, beginning of year....... 105,566 95,164 86,406
Distribution of member's equity.......... (5,000) 0 0
-------- -------- --------
Member's equity, end of year.............$112,273 $105,566 $ 95,164
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JUNE 30, 2000, 1999, AND 1998
(THOUSANDS OF DOLLARS)
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................. $ 11,707 $ 10,402 $ 8,758
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization......... 386 510 607
Deferred taxes........................ 5,481 1,587 3,614
Provision for credit losses........... 7,899 8,024 7,587
Patronage refund received in stock.... (826) (930) (1,043)
Changes in assets and liabilities:
Other assets..................... (408) (239) (169)
Payables......................... 2,974 1,584 709
Income taxes payable............. (3,190) 2,153 1,330
Accrued expenses................. 403 (260) (231)
Net cash flow provided by
operating activities............. 24,426 22,831 21,162
Cash flows from investing activities:
Leases originated......................... (282,064) (252,107) (227,270)
Leases repaid............................. 198,698 188,637 169,827
Purchases of equipment, net............... 0 (378) (552)
Net cash flow used
in investing activities.......... (83,366) (63,848) (57,995)
Cash flows from financing activities:
Net change in borrowings under
short term line of credit............. 40,176 15,000 16,000
Net change under revolving line of credit. 8,200 (8,700) (25,900)
Proceeds from notes payable............... 0 0 100,000
Repayment of notes payable................ (24,000) (23,000) (50,723)
Proceeds from lease backed notes.......... 68,100 48,384 0
Repayment of lease backed notes........... (8,645) (7,243) (7,785)
Repayment of capital lease................ 0 (17) (73)
Net change payable to Agway Inc........... (14,033) 15,742 2,663
Repayment of debentures................... (18,380) 0 (11,208)
Proceeds from sale of debentures.......... 18,145 3,627 14,170
Distribution of member's equity........... (5,000) 0 0
Net cash flow provided by
financing activities........... 64,563 43,793 37,144
Net change in cash........................ 5,623 2,776 311
Cash at beginning of year................. 4,480 1,704 1,393
Cash at end of year....................... $ 10,103 $ 4,480 $ 1,704
Cash paid during period for:
Interest ............................. $ 30,774 $ 28,629 $ 27,395
Income Taxes.......................... $ 6,202 $ 3,556 $ 2,972
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<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. Telmark is indirectly owned and controlled by Agway
Inc. and subsidiaries ("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 Canada.
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
$10,103 and $4,480 at June 30, 2000, and 1999, respectively, collateralize
lease-backed notes payable. See Note 5. This cash is held in segregated cash
accounts pending distribution and is restricted in its 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, 2000, and 1999, the
recognition of interest income was suspended on leases and notes totaling $6,048
and $4,890, respectively.
Initial direct costs incurred in consummating a lease are not expensed when
the lease is originated. 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. Initial direct costs deferred
and amortization expense recognized were as follows for the years ended June 30:
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Expenses not recognized this year
are deferred to later years 7,524 6,745 5,256
Expenses from prior years amortized
this year 5,643 4,969 4,553
</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.
23
<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. Patronage refunds on this stock are
recorded as a reduction of interest expense and totalled $1,180, $1,329, and
$1,489 for the years ended June 30, 2000, 1999, and 1998, respectively.
Equipment
Depreciation is calculated using the straight-line method over the
estimated useful lives of the equipment.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the
years ended June 30, 2000, 1999, and 1998, was $1,034, $1,008, and $877,
respectively.
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.
Telmark is included in a consolidated federal tax return filed by Agway.
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. Under 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 Telmark as appropriate on an interim basis.
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.
24
<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:
2000 1999
---------- ----------
<TABLE>
<CAPTION>
Leases:
<S> <C> <C>
Commercial and agricultural $ 861,863 $ 740,011
Leasing to Agway Inc. and subsidiaries 4,000 220
---------- ----------
865,863 740,231
Retail installment loans 20,388 28,349
---------- ----------
Total leases and notes $ 886,251 $ 768,580
========== ==========
Net investment in leases and notes at June 30 are summarized as follows:
2000 1999
---------- ----------
Leases and notes $ 886,251 $ 768,580
Unearned interest and finance charges (240,745) (199,122)
Net deferred origination costs 13,568 11,591
---------- ----------
Net investment 659,074 581,049
Allowance for credit losses (32,536) (29,978)
---------- ----------
Leases and notes, net $ 626,538 $ 551,071
========== ==========
</TABLE>
Included within the above leases and notes are unguaranteed estimated residual
values of leased property approximating $92,700 and $82,100 at June 30, 2000,
and 1999, respectively.
Contractual maturities of leases and notes were as follows at June 30,
2000:
<TABLE>
<CAPTION>
Leases
--------------------------
Commercial To Agway Retail
and Inc. and Installment
Agricultural Subsidiaries Loans Total
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
2001 $ 229,809 $ 555 $ 8,124 $238,488
2002 183,283 526 5,260 189,069
2003 138,468 507 2,577 141,552
2004 97,675 479 1,568 99,722
2005 61,989 479 732 63,200
Thereafter 150,639 1,454 2,127 154,220
------------ ------------ -------- ---------
Totals $ 861,863 $4,000 $20,388 $886,251
============ ============ ======== =========
</TABLE>
Changes in the allowance for credit losses for the years ended June 30 were
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year $ 29,978 $ 27,071 $ 24,014
Provision for credit losses charged to operations 7,899 8,024 7,587
Charge-offs (9,179) (6,820) (6,513)
Recoveries 3,838 1,703 1,983
--------- --------- ---------
Balance, end of year $ 32,536 $29,978 $ 27,071
========= ========= =========
</TABLE>
25
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
3. EQUIPMENT
Equipment, at cost, consisted of the following at June 30:
<TABLE>
<CAPTION>
2000 1999
-------- ----------
<S> <C> <C>
Office and other equipment................. $ 2,571 $ 2,571
Less accumulated depreciation.............. (2,088) (1,703)
-------- ----------
$ 483 $ 868
======== ==========
</TABLE>
4. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Currently payable:
Federal.................. $ 2,427 $4,451 $ 2,321
State.................... 444 1,718 719
Deferred...................... 5,481 1,587 3,614
---------- ---------- ----------
$ 8,352 $ 7,756 $ 6,654
========== ========== ==========
</TABLE>
Telmark's effective income tax rate on pre-tax income differs from the federal
statutory tax rate as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Statutory federal income tax rate ........ 34.0% 34.0% 34.0%
Tax effects of:
State taxes, net of federal benefit 6.4 8.0 8.7
Other items........................... 1.2 .7 .5
---------- ---------- ----------
Effective income tax rate 41.6% 42.7% 43.2%
========== ========== ==========
</TABLE>
The components of the net deferred tax asset as of June 30 were as follows:
<TABLE>
<CAPTION>
2000 1999
--------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses.... $ 12,839 $ 11,849
Alternative minimum tax
credit carryforward......... 5,870 3,574
Other.......................... 917 960
--------- --------
Total deferred tax assets 19,626 16,383
--------- --------
Deferred tax liabilities:
Difference between book and
tax treatment of leases.... 19,470 10,745
Other.......................... 195 195
--------- --------
Total deferred tax liabilities 19,665 10,940
--------- --------
Net deferred tax asset
(liability).............. $ (39) $ 5,443
========= ========
</TABLE>
Based on Telmark' 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, 2000,
Telmark's federal alternative minimum tax credit can be carried forward
indefinitely.
26
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
5. BORROWINGS UNDER LINES OF CREDIT AND TERM DEBT
As of June 30, 2000, Telmark has credit facilities available from banks which
allow it to borrow up to an aggregate of $336,700. Uncommitted short-term line
of credit agreements permit borrowing up to $86,700 on an uncollateralized 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, 2000, under the
short-term lines of credit and the revolving term loan facility was $75,200 and
$164,500, respectively. The revolving term loan facility of $164,500 is
partially collateralized by our investment in a cooperative bank having a book
value of $13,600 at June 30, 2000.
Telmark has issued lease-backed notes, through three wholly owned special
purpose funding subsidiaries as follows:
<TABLE>
<CAPTION>
TELMARK LEASE FUNDING YEAR ISSUED ISSUED CLASS A ISSUED CLASS B RATE CLASS A RATE CLASS B
<S> <C> <C> <C> <C> <C>
I 1997 $24,000 $ 2,000 6.58% 7.01%
II 1999 44,800 3,600 6.54% 7.61%
III 2000 63,000 5,100 7.69% 9.05%
</TABLE>
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 and by
segregated cash accounts.
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 $86,700 lines of credit all have terms expiring
during the next 12 months. The $250,000 revolving term loan facility is
available through August 1, 2001.
At June 30, 2000, we had balances outstanding on uncollateralized senior note
private placements totaling $122,000. 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 Holdings), from being less
than an amount equal to or greater than the sum of $85,000, plus 50%
of all net income (if a positive number) for all fiscal years ended
after January 1, 2000. As of June 30, 2000 required minimum net worth
is $90,900;
(ii) the ratio of total liabilities less subordinated notes payable to
Holdings to member's equity plus subordinated notes payable to
Holdings from exceeding 5:1; (iii)the ratio of earnings available for
fixed charges from being less than 1.25:1, and
(iv) equity distributions and restricted investments (as defined) made
after July 1, 1999 to exceed 50% of consolidated net income for the
period beginning on July 1, 1999 through the date of determination,
inclusive. As of June 30, 2000, $900 of member's equity is free of
this restriction.
For the year ended June 30, 2000, Telmark has complied with all covenants
contained in its borrowing agreements.
<TABLE>
<CAPTION>
At June 30, borrowings under lines of credit, term debt
and subordinated debentures consisted of the following: 2000 1999
-------------- ---------------
<S> <C> <C>
Notes payable to banks due in varying amount and dates through
April 12, 2004 with interest ranging from 5.56% to 8.5%........ $ 239,676 $ 191,300
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%.................................... 122,000 146,000
Lease-backed notes payable to insurance companies in varying
amounts and dates through December 15, 2008 with interest
rates ranging from 6.54% to 9.05%.............................. 118,256 58,801
-------------- ---------------
Total borrowings under lines of credit and Term Debt......... 479,932 396,101
Subordinated debentures due in varying amount and dates through
March 31, 2008, with interest ranging from 6.00% to 8.75%...... 37,398 37,633
-------------- ---------------
Total Debt................................................... $ 517,330 $ 433,734
============== ===============
</TABLE>
27
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
5. BORROWINGS UNDER LINES OF CREDIT AND TERM DEBT (CONT.)
The subordinated debentures represent the outstanding balance of registered
debentures offered to and held by the general public. Interest is paid on the
debentures on January 1, April 1, July 1, and October 1 of each year. The
interest rate paid on debentures is the greater of the stated rate or a rate
based upon an average discount rate for U.S. Government Treasury Bills with a
maturity of 26 weeks. The debentures are uncollateralized 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>
2000 1999
-------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ --------- -------------------------
<S> <C> <C> <C> <C>
Lines of Credit and Term Debt $479,932 $486,747 $396,101 $404,386
Subordinated Debentures 37,398 35,950 37,633 37,887
</TABLE>
The aggregate amounts of notes payable, and subordinated debentures maturing
after June 30, 2000, are as follows:
<TABLE>
<CAPTION>
Notes Payable
--------------------------------- Subordinated
Year Ending June 30, Bank Ins. Companies Debentures Total
--------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
2001 $ 148,676 $ 59,773 $ 5,497 $ 213,946
2002 25,000 79,257 7,321 111,578
2003 36,000 49,010 11,071 96,081
2004 30,000 39,842 6,096 75,938
2005 0 8,648 0 8,648
Thereafter 0 3,726 7,413 11,139
--------------- ---------------- ------------- -------------
$ 239,676 $ 240,256 $ 37,398 $ 517,330
=============== ================ ============= =============
</TABLE>
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
$1,500, $1,400, and $1,100 for the periods ended June 30, 2000, 1999, and 1998,
respectively.
7. RELATED PARTY TRANSACTIONS
Payable to Agway Inc.
During the quarter ended March 31, 2000 Telmark discontinued the use of the
depository and disbursement accounts of Agway and initiated its own independent
cash management system. The payable to Agway Inc. after this change is
principally any unpaid member equity distribution and/or any net income taxes
payable.
28
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
Inter-Company Transactions
Inter-company transactions related to leases with Agway, income taxes, and
Agway's employee benefit plans are separately disclosed in the financial
statements. Other inter-company transactions with Agway for the years ended June
30 are:
<TABLE>
<CAPTION>
(REVENUE) EXPENSE 2000 1999 1998
------- ------- --------
<S> <C> <C> <C>
Interest and finance charges $ (159) $ (27) $ (49)
Administrative and general expense 1,546 1,691 1,638
</TABLE>
Interest and finance charges are earned on equipment leases to Agway. The
administrative and general expense caption described above includes certain
shared expenses incurred by Agway on behalf of Telmark, including the corporate
insurance program, information services, payroll, benefits, accounts payable
administration, and facilities management. These expenses were allocated to
Telmark based on what management believes is a reasonable methodology.
During the year ended June 30, 2000, Telmark distributed $5,000 of member's
equity. During the years ended June 30, 1999 and 1998, there were no
distributions 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, 2000 amounted to
$4,415.
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.
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. Telmark uses the same credit and collateral policies in making
commitments as it does for on-balance sheet instruments.
29
<PAGE>
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THOUSANDS OF DOLLARS)
9. FINANCIAL INSTRUMENTS (CONTINUED)
Market Risk
Telmark's business is concentrated in agriculture industry 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 agriculture segments. As of June 30, 2000,
the largest concentration is in crops enterprises which represents 18% of the
portfolio, dairy enterprises which represents 17% of the portfolio, and wood
products enterprises which represents 11% of the portfolio. At June 30, 2000,
approximately 44% of our net lease investment is 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.
30
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<PAGE>
