UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
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ACT OF 1934
For the quarterly period ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----
ACT OF 1934
For the transition period from to
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Commission file number 33-70732
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TELMARK LLC*
(Exact name of registrant as specified in its charter)
Delaware 16-1551523
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 Butternut Drive, DeWitt, New York 13214
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(Address of principal executive offices) (Zip Code)
315-449-7935
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of membership interests outstanding of each of the issuer's
classes of membership interests, as of the latest practicable date.
Class Outstanding at February 7, 2000
- ---------------------------------- ---------------------------------
Membership Certificate One
* Telmark is a direct wholly owned subsidiary of Agway Holdings, Inc., a
subsidiary of Agway, Inc., which is a reporting Company under the
Securities Exchange Act of 1934, and meets the conditions set forth in
General Instructions H(1)(a) and (b) of Form 10-Q and is therefore
filing this form with the reduced disclosure format.
1
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TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
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Pages
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ITEM 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets, December 31, 1999 and June 30, 1999........................ 3
Condensed Consolidated Statements of Income and Member's Equity, for the three months and
six months ended December 31, 1999 and 1998....................................................... 4
Condensed Consolidated Statements of Cash Flows for the six months ended
December 31, 1999 and 1998........................................................................ 5
Notes to Condensed Consolidated Financial Statements.............................................. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........................................ 10
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................................................................. 11
SIGNATURES.................................................................................................. 12
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
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<S> <C> <C>
(Unaudited)
Restricted Cash.......................................................... $ 4,960 $ 4,480
Leases and notes......................................................... 813,292 768,580
Unearned interest and finance charges.................................... (213,201) (199,122)
Net deferred origination costs........................................... 12,258 11,591
--------------- ---------------
Net investment..................................................... 612,349 581,049
Allowance for credit losses............................................. (31,865) (29,978)
--------------- ---------------
Leases and notes, net.............................................. 580,484 551,071
Investments.............................................................. 12,780 12,780
Equipment, net........................................................... 671 868
Deferred income taxes.................................................... 6,525 5,443
Other assets............................................................. 1,545 1,345
--------------- ---------------
Total Assets.......................................................... $ 606,965 $ 575,987
=============== ===============
LIABILITIES AND MEMBER'S EQUITY
Accounts payable......................................................... 4,256 6,692
Payable to Agway Inc. and subsidiaries .................................. 3,356 22,337
Accrued expenses, including interest of
$3,250 - December 31 and $3,258 - June 30 ......................... 7,002 7,658
Borrowings under short term lines of credit.............................. 15,902 35,000
Borrowings under revolving line of credit................................ 246,100 156,300
Term debt................................................................ 178,418 204,801
Subordinated debentures.................................................. 41,458 37,633
--------------- ---------------
Total liabilities.............................................. 496,492 470,421
Commitments & contingencies
Member's equity...................................................... 110,473 105,566
--------------- ---------------
Total liabilities and member's equity.......................... $ 606,965 $ 575,987
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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PART I. FINANCIAL INFORMATION (continued)
ITEM 1. FINANCIAL STATEMENTS
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS of INCOME and MEMBER'S EQUITY
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
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1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Revenues:
Interest and finance charges $ 18,648 $17,194 $ 36,572 $33,742
Service fees and other income 408 389 755 754
--------------- ---------------- --------------- ---------------
Total revenues 19,056 17,583 37,327 34,496
Expenses:
Interest expense 8,179 7,189 15,880 14,554
Provision for credit losses 2,048 2,020 3,917 3,570
Selling, general and administrative 4,272 4,353 9,131 8,930
--------------- ---------------- --------------- ---------------
Total expenses 14,499 13,562 28,928 27,054
--------------- ---------------- --------------- ---------------
Income before income taxes 4,557 4,021 8,399 7,442
Provision for income taxes 1,899 1,632 3,492 3,052
--------------- ---------------- --------------- ---------------
Net income 2,658 2,389 4,907 4,390
Member's equity, beginning of period 107,815 97,165 105,566 95,164
--------------- ---------------- --------------- ---------------
Member's equity, end of period $110,473 $99,554 $110,473 $99,554
=============== ================ =============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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PART I. FINANCIAL INFORMATION (continued)
ITEM 1. FINANCIAL STATEMENTS
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS
SIX MONTHS ENDED DECEMBER 31,
(Thousands of Dollars)
(Unaudited)
Increase (Decrease) in Cash
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<CAPTION>
1999 1998
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<S> <C> <C>
Net cash flow provided by operating activities:............................... $ 4,404 $ 10,937
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Cash flows from investing activities:
Leases originated........................................................ (134,705) (119,754)
Leases repaid............................................................ 101,376 98,362
Purchases of equipment................................................... 0 (12)
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Net cash flow used in investing activities........................... (33,329) (21,404)
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Cash flows from financing activities:
Net increase (decrease) in borrowings under short term lines of credit... (19,098) (10,000)
Net increase (decrease) in borrowings under revolving line of credit..... 89,800 13,000
Repayment of term debt................................................... (26,383) (9,964)
Net increase (decrease) payable to Agway Inc. and subsidiaries........... (18,739) 16,006
Proceeds from sale of debentures......................................... 3,825 2,435
Net increase (decrease) in restricted cash............................... (480) (1,010)
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Net cash flow provided by financing activities....................... 28,925 10,467
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Net increase (decrease) in cash...................................... 0 0
Cash at beginning of period................................................... 0 0
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Cash at end of period......................................................... $ 0 $ 0
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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PART I. FINANCIAL INFORMATION (continued)
ITEM 1. FINANCIAL STATEMENTS
TELMARK LLC AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Thousands of Dollars)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
We have prepared the accompanying unaudited condensed consolidated
financial statements pursuant to generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of our
management, we have included all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation. Operating
results for the three-month and six-month periods ended December 31, 1999
are not necessarily indicative of the results that may be expected for the
year ended June 30, 2000. For further information, refer to the
consolidated financial statements and notes thereto included in the annual
report on Form 10-K for the year ended June 30, 1999.
NOTE 2 - RESTRICTED CASH
We hold and restrict the use of cash related to securitized leases in
segregated accounts pending distribution to the lease-backed note holders.
On December 31, 1999 restricted cash was $4,960 compared to $4,480 on June
30, 1999.
NOTE 3 - CASH MANAGEMENT
Instead of having our own cash account, we use the depository accounts of
Agway Inc. and subsidiaries, drawing checks against these accounts and
making deposits to them. The balance in the Payable to Agway Inc. and
subsidiaries account varies on a daily basis depending on the timing of
deposits and the drawing of checks.
6
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PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(In 000's rounded to nearest hundred thousand)
RESULTS OF OPERATIONS
We are including the following cautionary statement in this Form 10-Q to make
applicable and take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statement made
by us, or on our behalf. Where any such forward-looking statement includes a
statement of the assumptions or basis underlying such forward-looking statement,
we caution that, while we believe such assumptions or basis to be reasonable and
make them in good faith, assumed facts or basis almost always vary from actual
results, and the differences between assumed facts or basis and actual results
can be material, depending upon the circumstances. Certain factors that could
cause actual results to differ materially from those projected have been
discussed in this report and include the factors set forth below. Other factors
that could cause actual results to differ materially include uncertainties of
economic, competitive and market decisions and future business decisions, all of
which are difficult or impossible to predict accurately and many of which are
beyond our control. Where, in any forward-looking statement, we, or our
management, express an expectation or belief as to future results, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but we cannot assure you 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.
Our total revenues for the three-month and six-month periods ended December 31,
1999 compared to the corresponding periods of the prior year are as follows:
This Year Last Year $ Increase % Increase
--------- --------- ---------- ----------
Three-months $19,100 $17,600 1,500 8.5
Six-months $37,300 $34,500 2,800 8.1
The increase in our total revenues this year is mostly due to an increase in our
investment in leases and notes, as compared to the comparable period of the
prior year partly offset by a lower income rate on new and replacement leases
and notes. Average net investment in leases and notes for the three-month and
six-month periods ended December 31, 1999 compared to the corresponding periods
of the prior year are as follows:
This Year Last Year $ Increase % Increase
--------- --------- ---------- ----------
Three-months $607,700 $544,500 63,300 11.6
Six-months $598,800 $536,900 61,900 11.5
Increases and (decreases) in our expenses for the three-month and six-month
periods ended December 31, 1999 compared to the corresponding periods in the
prior year are as follows:
Three-months Six-months
Increase (Decrease) Increase (Decrease)
------------------- -------------------
$ % $ %
Interest expense $1,000 13.8% $1,300 9.1%
Selling, general, and
administrative expenses ($100) (1.9%) 200 2.3%
Provision for credit losses 0 0 300 9.7%
------------------- -------------------
Total expenses $ 900 6.9% $1,800 6.9%
The increase in our interest expense is due to an increase in the amount of debt
required to finance the increase in the amount of net leases and notes, partly
offset by lower interest rates on new and replacement debt than the same periods
in the prior year.
Selling, general, and administrative expenses which we determine are related to
origination of new lease business are not included in our current expenses.
These expenses are deferred and will be recorded as expenses over the term of
the new leases. We incurred higher total selling, general, and administrative
expenses in both the three-month and six-month periods ended December 31, 1999:
$200 higher for the three-month period and $1,000 for the six-month period.
However, the amount of costs not included in current expenses (because we
identified them as related to new business) also increased for both the
three-month and six-month period ended December 31, 1999: $300 for the
three-month period and $800 for the six month period.
The provision for credit losses for the six months increased due to an increase
in the size of our lease portfolio.
7
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PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(In 000's rounded to nearest hundred thousand)
RESULTS OF OPERATIONS (continued)
Our net income for the three-months ended December 31, 1999 was $2,700, an
increase of $300 (13%) from the corresponding period in the prior year. For the
six-months ended December 31, 1999, our net income was $4,900, an increase of
$500 (11%) from the corresponding period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The ongoing availability of adequate financing to maintain the size of our
portfolio and to permit lease portfolio growth is key to our continuing
profitability and stability. We have principally financed our operations,
including the growth of our lease portfolio, through borrowings under our lines
of credit, private placements of debt with institutional investors and other
term debt, lease backed notes, principal collections on leases and cash provided
from operations.
Cash In Flows This Year Last Year
Cash flows from operations $ 4,400 $ 10,900
Cash flows from financing 28,900 10,500
Total cash in flows $ 33,300 $ 21,400
Cash Out Flows
Cash flows from investing $(33,300) $(21,400)
========= =========
We invested cash flows from both operations and financing activities into growth
of our lease portfolio. We have been successful in arranging our past financing
needs and believe that our current financing arrangements are adequate to meet
our foreseeable operating requirements. We cannot assure you, however, that we
will be able to obtain future financing in amounts or on terms that are
acceptable. Our inability to obtain adequate financing would have a material
adverse effect on our operations. Our management conducts ongoing discussions
and negotiations with existing and potential lenders for future financing needs.
Instead of having our own cash account, we use the depository accounts of Agway
Inc. and subsidiaries drawing checks against these accounts and making deposits
to them. The balance in the Payable to Agway Inc. and subsidiaries account
varies on a daily basis depending on the timing of deposits and the drawing of
checks.
As of December 31, 1999, we had credit facilities available from banks which
allow us to borrow up to an aggregate of $331,700. Uncommitted short-term line
of credit agreements permit us to borrow up to $81,700 on an unsecured basis
with interest paid upon maturity. The lines bear interest at money market
variable rates. A committed $250,000 partially collateralized (by stock in a
cooperative bank) revolving line of credit permits us to draw short-term funds
bearing interest at money market rates or draw long-term debt at rates
appropriate for the term of the note drawn. As of December 31, 1999, our total
outstanding debt under the short-term lines of credit and the revolving term
loan facility was $15,900 and $246,100, respectively.
We borrow under our short-term line of credit agreements and our revolving term
agreement from time to time to fund our operations. Short-term debt provides us
with interim financing between the issuances of long-term debt. We renew our
lines of credit annually. The $81,700 of uncommitted lines of credit all have
terms expiring during the next 12 months. The $250,000 revolving term loan
facility is available through August 1, 2000.
We had balances outstanding on unsecured senior notes from private placements
totaling $122,000 at December 31, 1999 and $146,000 at June 30, 1999. The
principal bears interest at fixed rates ranging from 6.5% to 7.6%. We must pay
interest semiannually on each senior note. We pay principal payments on both a
semiannual and an annual basis. The note agreements are similar to one another
and each contains specific financial covenants that must be complied with by us.
8
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PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
(In 000's rounded to nearest hundred thousand)
LIQUIDITY AND CAPITAL RESOURCES (continued)
Through two wholly owned special purpose subsidiaries, we have lease-backed
notes outstanding totaling $56,400 and $58,800 at December 31, 1999, and June
30, 1999, respectively, payable to insurance companies. Interest rates on these
classes of notes range from 6.54% to 7.61%. The notes are collateralized by
leases, which were sold to those subsidiaries, having an aggregate present value
of contractual lease payments equal to the principal balance of the notes.
The final scheduled maturity of these notes is December 2007.
We offer subordinated debentures to the public. The debentures are unsecured and
subordinated to all of our senior debt. The interest on the debt is payable
quarterly on January 1, April 1, July 1 and October 1 and is allowed to be
reinvested.
We believe we have sufficient lines of credit in place to meet our interim
funding needs.
YEAR 2000 READINESS
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.
We had no material issues relating to the millennium date change on January 1,
2000. Based on this experience and the amount of work and testing we have
previously performed, we believe the likelihood of a year 2000 issue that would
have a material effect on the results of operations, liquidity, or financial
condition continues to be remote as we run month-end, leap year, quarter-end,
and year-end programs.
Our cost estimates relating to year 2000 efforts have not changed in light of
the fact that no issues have arisen to date. The conversion and testing of
existing applications and the replacement of hardware are estimated to have cost
us 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).
9
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PART I. FINANCIAL INFORMATION (continued)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use derivatives and other interest rate instruments. The principal
cash flow of our debt obligations and related weighted average interest rates by
contractual maturity dates have not materially changed since June 30, 1999.
Quantitative and Qualitative Disclosures about market risk are contained in Item
7a of our Annual Report on Form 10-K for the year ended June 30, 1999.
10
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the three months
ended December 31, 1999.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELMARK LLC
(Registrant)
Date February 8, 2000 By /s/ Daniel J. Edinger
-------------------- ----------------------------------------
Daniel J. Edinger, President
(Principal Executive Officer)
Date February 8, 2000 By /s/ Peter J. O'Neill
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Peter J. O'Neill, Senior Vice President,
Finance and Control
(Principal Accounting Officer)
12
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,960,007
<SECURITIES> 0
<RECEIVABLES> 813,291,834
<ALLOWANCES> 31,864,836
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,570,779
<DEPRECIATION> 1,899,670
<TOTAL-ASSETS> 606,965,154
<CURRENT-LIABILITIES> 0
<BONDS> 481,877,386
0
0
<COMMON> 0
<OTHER-SE> 110,473,619
<TOTAL-LIABILITY-AND-EQUITY> 606,965,154
<SALES> 0
<TOTAL-REVENUES> 37,327,488
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,916,885
<INTEREST-EXPENSE> 15,880,117
<INCOME-PRETAX> 8,398,947
<INCOME-TAX> 3,491,664
<INCOME-CONTINUING> 4,907,284
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,907,284
<EPS-BASIC> 0
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