10-Q 1 mar01_q10.txt TELMARK 10Q PERIOD ENDING MARCH 31, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE --- ACT OF 1934 For the quarterly period ended March 31, 2001 -------------- 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 May 9, 2001 --------------------------------------- -------------------------------- 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

2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TELMARK LLC AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS) ASSETS

See accompanying notes to condensed consolidated financial statements. 3 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)

See accompanying notes to condensed consolidated financial statements. 4 PART I. FINANCIAL INFORMATION (CONTINUED) ITEM 1. FINANCIAL STATEMENTS TELMARK LLC AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS OF DOLLARS) (UNAUDITED) Increase (Decrease) in Cash

See accompanying notes to condensed consolidated financial statements. 5 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 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 and nine-month periods ended March 31, 2001 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 March 31, 2001 restricted cash was $8,200 compared to $10,100 on June 30, 2000. NOTE 3 - BORROWINGS As of March 31, 2001, we had credit facilities available from banks which allow us to borrow up to an aggregate of $387,700. Uncommitted short-term line of credit agreements permit us to borrow up to $87,700 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 stock in a cooperative bank) revolving 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. As of March 31, 2001, our total outstanding debt under the short-term lines of credit and the revolving loan facility was $46,700 and $196,200, 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 $87,700 of uncommitted lines of credit all have terms expiring during the next 12 months. The $300,000 revolving term loan facility is available through August 1, 2002. In November 2000, we issued $61,000 of unsecured senior notes to institutional investors. The terms of the note agreement are similar to the terms of other unsecured senior notes. We had balances outstanding on all unsecured senior notes from private placements totaling $159,000 at March 31, 2001 and $122,000 at June 30, 2000. The principal bears interest at fixed rates ranging from 6.7% to 8.7%. We must pay interest semiannually on each senior note. We pay principal payments on both a semiannual and an annual basis. The notes have various maturities through December 31, 2012. The note agreements are similar to one another and each contains specific financial covenants that must be complied with by us. Through two wholly owned special purpose subsidiaries, we have lease-backed notes outstanding totaling $98,900 and $118,300 at March 31, 2001 and June 30, 2000, respectively, payable to institutional investors. Interest rates on these classes of notes range from 6.5% to 9.1%. 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 and the notes are further collateralized by the residual values of these leases and by segregated cash accounts. 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. The offering of the debentures is not underwritten and there can be no guarantee as to the amount of debentures, if any, that will be sold. Our subordinated debentures bear interest at a rate that is the greater of the stated rate or a rate based upon an average discount rate for U.S. Government Treasury Bills, with maturities of 26 weeks. Our debentures outstanding as of March 31, 2001 of approximately $40,700 are due through March 2009 and bear a weighted average interest rate of 8%. 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 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 favorable to Telmark. 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 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 nine-month periods ended March 31, 2001 compared to the corresponding periods of the prior year are as follows: This Year Last Year $ Increase % Increase --------- --------- ---------- ---------- Three-months $21,600 $19,300 2,300 11.9 Nine-months $63,600 $56,600 7,000 12.4 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 nine-month periods ended March 31, 2001 compared to the corresponding periods of the prior year are as follows: This Year Last Year $ Increase % Increase --------- --------- ---------- ---------- Three-months $692,100 $615,400 76,700 12.5 Nine-months $682,500 $604,100 78,400 13.0 Average debt for the three-month and nine-month periods ended March 31, 2001 compared to the corresponding periods of the prior year are as follows: This Year Last Year $ Increase % Increase --------- --------- ---------- ---------- Three-months $545,100 $479,600 65,500 13.7 Nine-months $539,600 $465,000 74,600 16.0 Interest expense for the three-month and nine-month periods ending March 31, 2001 were as follows: This Year Last Year $ Increase % Increase --------- --------- ---------- ---------- Three-months $ 8,600 $ 6,900 1,700 24.6 Nine-months $27,700 $22,800 4,900 21.5 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 and higher interest rates on new and replacement debt than the same periods in the prior year. 7 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) Selling, general, and administrative expense for the three-month and nine-month periods ended March 31, 2001 compared to the corresponding periods of the prior year are as follows: This Year Last Year $ Increase % Increase --------- --------- ---------- ---------- Three-months $ 4,700 $ 4,100 600 14.6 Nine-months $14,600 $13,200 1,400 10.6 The increases in selling, general, and administrative expense is principally due to incentives, paid to certain employees relating to overall profitability, retention of business, and profitability of new business. The 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 $33,700 at March 31, 2001. The total value of non-earning accounts was as follows: Value of Non-Earning Accounts % of Portfolio -------------------- -------------- June 30, 1999 $4,900 0.9% June 30, 2000 $6,000 0.9% March 31, 2001 $5,100 0.8% Reserves are established at a level management believes is sufficient to cover estimated losses in the portfolio. Based on our analysis of the portfolio the provision for credit losses during the three-month and nine-month periods ended March 31, 2001 were as follows: This Year Last Year $ Increase % Increase (Decrease) (Decrease) --------- --------- ---------- ---------- Three-months $2,100 $2,400 (300) (12.5) Nine-months $6,000 $6,300 (300) (4.8) Our total expenses for the three-months ended March 31, 2001 were $15,300, an increase of $1,900 (14%) from the corresponding period in the prior year. For the nine-months ended March 31, 2001, our total expenses were $48,300, an increase of $6,000 (14.2%) from the corresponding period in the prior year. Our net income for the three-months ended March 31, 2001 was $3,700, an increase of $300 (8.8%) from the corresponding period in the prior year. For the nine-months ended March 31, 2001, our net income was $9,000, an increase of $700 (8.4%) 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. FIRST 9 MONTHS ---------------------------- CASH IN FLOWS THIS YEAR LAST YEAR --------- --------- Cash flows from operations $ 26,400 $ 21,800 Cash flows from financing 17,400 28,600 --------- --------- Total cash in flows $ 43,800 $ 50,400 ========= ========= CASH OUT FLOWS Cash flows from investing $(43,800) $(50,400) ========= ========= The net cash flows from both operations and financing activities were invested in growth of the lease portfolio. Our inability to obtain adequate financing would have a material adverse effect on our operations. 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) As of March 31, 2001, we had credit facilities available from banks which allow us to borrow up to an aggregate of $387,700. Uncommitted short-term line of credit agreements permit us to borrow up to $87,700 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 stock in a cooperative bank) revolving 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. As of March 31, 2001, our total outstanding debt under the short-term lines of credit and the revolving loan facility was $46,700 and $196,200, 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 $87,700 of uncommitted lines of credit all have terms expiring during the next 12 months. The $300,000 revolving term loan facility is available through August 1, 2002. In November 2000, we issued $61,000 of unsecured senior notes to institutional investors. The terms of the note agreement are similar to the terms of other unsecured senior notes. We had balances outstanding on all unsecured senior notes from private placements totaling $159,000 at March 31, 2001 and $122,000 at June 30, 2000. The principal bears interest at fixed rates ranging from 6.7% to 8.7%. We must pay interest semiannually on each senior note. We pay principal payments on both a semiannual and an annual basis. The notes have various maturities through December 31, 2012. The note agreements are similar to one another and each contains specific financial covenants that must be complied with by us. Through two wholly owned special purpose subsidiaries, we have lease-backed notes outstanding totaling $98,900 and $118,300 at March 31, 2001 and June 30, 2000, respectively, payable to institutional investors. Interest rates on these classes of notes range from 6.5% to 9.1%. 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 and the notes are further collateralized by the residual values of these leases and by segregated cash accounts. 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. The offering of the debentures is not underwritten and there can be no guarantee as to the amount of debentures, if any, that will be sold. Our subordinated debentures bear interest at a rate that is the greater of the stated rate or a rate based upon an average discount rate for U.S. Government Treasury Bills, with maturities of 26 weeks. Our debentures outstanding as of March 31, 2001 of approximately $40,700 are due at various dates through March 2009 and bear a weighted average interest rate of 8%. 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 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 favorable to Telmark. 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 March 31, 2001. 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 MAY 9, 2001 BY /S/DANIEL J. EDINGER ------------------- ---------------------------------------- DANIEL J. EDINGER, PRESIDENT (PRINCIPAL EXECUTIVE OFFICER) DATE MAY 9, 2001 BY /S/PETER J. O'NEILL ------------------- ---------------------------------------- PETER J. O'NEILL, SENIOR VICE PRESIDENT, FINANCE AND CONTROL (PRINCIPAL ACCOUNTING OFFICER) 12

TELMARK LLC 10-Q