10-Q 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE --- ACT OF 1934 For the quarterly period ended September 30, 2000 ------------------ OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE --- ACT OF 1934 For the transition period from to ---------- ---------- Commission file number 33-70732 TELMARK LLC* -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 16-1551523 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 333 Butternut Drive, DeWitt, New York 13214 -------------------------------------------------------------------------------- (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 --- --- 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 November 6, 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 TELMARK LLC AND CONSOLIDATED SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION
Pages ----- ITEM 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets, September 30, 2000 and June 30, 2000....................... 3 Condensed Consolidated Statements of Income and Member's Equity, for the three months ended September 30, 2000 and 1999................................................................. 4 Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2000 and 1999....................................................................... 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
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TELMARK LLC AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Thousands of Dollars) ASSETS
September 30, June 30, 2000 2000 --------------- --------------- (Unaudited) Restricted Cash..........................................................$ 9,286 $ 10,103 Leases and notes......................................................... 911,617 886,251 Unearned interest and finance charges.................................... (243,839) (240,745) Net deferred origination costs........................................... 13,773 13,568 --------------- --------------- Net investment..................................................... 681,551 659,074 Allowance for credit losses............................................. (32,641) (32,536) --------------- --------------- Leases and notes, net.............................................. 648,910 626,538 Receivables from Agway Inc. and Subsidiaries............................. 862 0 Investments.............................................................. 13,606 13,606 Equipment, net........................................................... 397 483 Other assets............................................................. 1,902 1,753 --------------- --------------- Total Assets.......................................................... $ 674,963 $ 652,483 =============== =============== LIABILITIES AND MEMBER'S EQUITY Accounts payable..................................................... 8,101 9,666 Payable to Agway Inc. and subsidiaries .............................. 0 5,114 Accrued expenses, including interest of $8,147 - September 30, 2000 and $4,020 - June 30, 2000 ........ 12,112 8,061 Deferred Income Taxes................................................ 2,737 39 Borrowings under short term lines of credit.......................... 85,664 75,176 Borrowings under revolving line of credit............................ 177,600 164,500 Term debt............................................................ 235,609 240,256 Subordinated debentures.............................................. 38,396 37,398 --------------- --------------- Total liabilities.............................................. 560,219 540,210 Commitments & contingencies Member's equity...................................................... 114,744 112,273 --------------- --------------- Total liabilities and member's equity.......................... $ 674,963 $ 652,483 =============== ===============
See accompanying notes to condensed consolidated financial statements. 3 PART I. FINANCIAL INFORMATION (continued) ITEM 1. FINANCIAL STATEMENTS (continued) TELMARK LLC AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS of INCOME and MEMBER'S EQUITY (Thousands of Dollars) (Unaudited)
Three Months Ended September 30, 2000 1999 ------------- ------------- Revenues: Interest and finance charges..................$ 20,175 $ 17,924 Service fees and other income................. 369 347 ------------- ------------- Total revenues............................ 20,544 18,271 Expenses: Interest expense.............................. 9,369 7,701 Provision for credit losses................... 1,739 1,869 Selling, general and administrative........... 5,224 4,859 ------------- ------------- Total expenses............................ 16,332 14,429 ------------- ------------- Income before income taxes......................... 4,212 3,842 Provision for income taxes......................... 1,741 1,593 ------------- ------------- Net income......................................... 2,471 2,249 Member's equity, beginning of period............... 112,273 105,566 ------------- ------------- Member's equity, end of period.....................$114,744 $107,815 ============= =============
See accompanying notes to condensed consolidated financial statements. 4 PART I. FINANCIAL INFORMATION (continued) ITEM 1. FINANCIAL STATEMENTS (continued) TELMARK LLC AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS (Thousands of Dollars) (Unaudited) Increase (Decrease) in Cash
Three Months Ended September 30, 2000 1999 ------------- ------------- Net cash flow provided by operating activities:............................... $ 8,385 $ 8,746 ------------- ------------- Cash flows from investing activities: Leases originated........................................................ (76,727) (68,426) Leases repaid............................................................ 52,616 47,450 ------------- ------------- Net cash flow used in investing activities........................... (24,111) (20,976) ------------- ------------- Cash flows from financing activities: Net increase (decrease) in borrowings under short term lines of credit... 10,488 35,000 Net increase (decrease) in borrowings under revolving line of credit..... 13,100 (10,000) Repayment of term debt................................................... (4,647) (1,129) Net increase (decrease) payable to Agway Inc. and subsidiaries........... (5,030) (13,744) Proceeds from sale of debentures......................................... 998 1,541 ------------- ------------- Net cash flow provided by financing activities....................... 14,909 11,668 ------------- ------------- Net change in restricted cash............................................ (817) (562) Restricted cash at beginning of period .................................. 10,103 4,480 ------------- ------------- Restricted cash at end of period......................................... $ 9,286 $ 3,918 ------------- -------------
See accompanying notes to condensed consolidated financial statements. 5 PART I. FINANCIAL INFORMATION (continued) ITEM 1. FINANCIAL STATEMENTS (continued) TELMARK LLC AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED FINANCIAL STATEMENTS (Thousands of Dollars) (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Telmark have been prepared in accordance with 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 period ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ended June 30, 2001. 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, 2000. NOTE 2 - RESTRICTED CASH Cash related to securitized leases is held in segregated accounts pending distribution to the lease backed note holders and is restricted in its use. On September 30, 2000 restricted cash was $9,300 compared to $10,100 on June 30, 2000. 6 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 conditions 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 period ended September 30, 2000 compared to the corresponding period of 1999 are as follows:
This Year Last Year $ Increase % Increase --------- --------- ---------- ---------- $20,500 $18,300 2,200 12.0%
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 which was partly offset by a slightly lower income rate on new and replacement leases and notes. Average net investment in leases and notes for the three-month period ended September 30, 2000 compared to the corresponding period of the prior year are as follows:
This Year Last Year $ Increase % Increase --------- --------- ---------- ---------- $670,300 $591,500 78,800 13.3%
Increases in our expenses for the three-month period ended September 30, 2000 compared to the corresponding period in the prior year are as follows:
This Year Last Year $ Increase % Increase --------- --------- ---------- ---------- Interest expense $ 9,400 7,700 1,700 22.1% Selling, general, and administrative expenses 5,200 4,900 300 6.1% Provision for credit losses 1,700 1,900 (200) (10.5%) --------- --------- ---------- ---------- Total expenses $16,300 14,500 $1,800 12.4% ========= ========= ========== ==========
The change in 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 outstanding, and by higher interest rates on new and replacement debt than the same period last year. Selling, general and administrative expense increased due to incentives paid to certain employees relating to overall profitability, retention of business, and profitability of new business. 7 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) RESULTS OF OPERATIONS (continued) The quarterly provision for credit losses is based on our analysis of the allowance 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 $32,600 at September 30, 2000. During 2000 and 1999, the general economy remained strong and the total value of non-earning accounts increased from $5,600 at September 30, 1999 to $5,700 at September 30, 2000 and as a percentage of the lease portfolio remained unchanged at 0.9%. Reserves are established at a level management believes is sufficient to cover estimated losses in the portfolio. Net income for the three-months ended September 30, 2000 was $2,500, an increase of $300 (13.6%) from the corresponding period last 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 $ 8,400 $ 8,700 Cash flows from financing 14,900 11,700 --------- --------- Total cash in flows $ 23,300 $ 20,400 ========= ========= Cash Out Flows Cash flows from investing $(24,100) $(21,000) Cash flows to restricted cash 800 600 --------- --------- Total cash out flows (23,300) (20,400) ========= =========
The net cash flows from both operations and financing activities were invested in growth of the lease portfolio and payout of restricted cash to note holders. 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. Telmark has been successful in arranging its past financing needs and believes that its current financing arrangements are adequate to meet its forseeable operating requirements. There can be no assurance, however, that Telmark will be able to obtain future financing in amounts or on terms that are favorable to Telmark. As of September 30, 2000, we had credit facilities available from banks which allow us to borrow up to an aggregate of $386,700 which reflects an increase in the revolving line of credit of $50,000 since June 30, 2000. Uncommitted short-term line of credit agreements permit us to borrow up to $86,700 on an unsecured basis with interest paid upon maturity. The lines bear interest at money market variable rates. A committed $300,000 partially collateralized (by $13,600 book value in stock of 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 September 30, 2000, our total outstanding debt under the short-term lines of credit and the revolving term loan facility was $85,700 and $177,600, 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 $86,700 of lines of credit all have terms expiring at various times during the next 12 months. The $300,000 revolving term loan facility is available through August 1, 2001. We had balances outstanding on unsecured senior notes from private placements totaling $122,000 at both June 30, 2000 and September 30, 2000. The principal bears interest at fixed annual rates ranging form 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 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 three wholly owned special purpose subsidiaries, we have lease-backed notes outstanding totaling $113,600 and $118,300 at September 30, 2000 and June 30, 2000, respectively, payable to insurance companies. Interest rates on these classes of notes range from 6.54% to 9.05%. The notes are collateralized by leases, which were sold to those subsidiaries, having an aggregate present value of contractual lease payments equal to or greater than the principal balance of the notes. The final scheduled maturity of these notes is December 2008. We offer subordinated debentures to the public. The debentures are unsecured and subordinated to all of our senior debt. The interest on the subordinated debentures 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 interim funding needs. 9 PART I. FINANCIAL INFORMATION (continued) ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not use derivatives or other financial instruments to hedge interest rate risk in our portfolio. 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, 2000. 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, 2000. 10 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 September 30, 2000. 11 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 November 6, 2000 By /s/ Daniel J. Edinger -------------------- ---------------------- Daniel J. Edinger, President (Principal Executive Officer) Date November 6, 2000 By /s/ Peter J. O'Neill -------------------- ---------------------- Peter J. O'Neill, Senior Vice President, Finance and Control (Principal Accounting Officer) 12