10-Q 1 dec01_10q.txt TELMARKS FORM 10Q FOR PERIOD ENDING DEC 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 December 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 January 30, 2002 -------------------------------- -------------------------------- Membership Certificate One * Telmark is a direct wholly owned 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 (CONTINUED) 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 (CONTINUED) 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 (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 and six-month periods ended December 31, 2001 are not necessarily indicative of the results that may be expected for the year ended June 30, 2002. 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, 2001. NOTE 2 - RESTRICTED CASH Certain cash accounts amounting to $11,956 and $8,306 at December 31, 2001 and June 30, 2001, respectively, collateralize lease-backed notes payable. This cash is held in segregated cash accounts pending distribution and is restricted in its use. NOTE 3 - BORROWINGS Lines of Credit and Revolving Loans As of December 31, 2001, we had credit facilities available from banks which allow us to borrow up to an aggregate of $449,100. Uncommitted short-term bank line of credit agreements permit borrowing up to $74,100 on an unsecured basis with interest paid upon maturity. The lines bear interest at money market variable rates. A committed partially collateralized 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. In November 2001, this revolving loan facility was increased from $300,000 to $375,000. The total amount outstanding as of December 31, 2001, under the short-term bank lines of credit and the revolving loan facility was $59,707 and $258,400, respectively. The revolving loan facility of $375,000 is partially collateralized by our investment in a cooperative bank having a book value of $14,695 at December 31, 2001. We borrow under our short-term line of credit agreements and our revolving loan 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 $74,100 of uncommitted lines of credit all have terms expiring during the next 12 months. One of those lines totaling $10,000 expires on January 31, 2002 and will not be renewed. The $375,000 revolving loan facility is available through August 1, 2002. Unsecured Notes Payable to Insurance Companies On December 31, 2001 and June 30, 2001, we had balances outstanding on unsecured senior note private placements totaling $129,500 and $149,500 respectively. We must pay interest semiannually on each senior note. We pay principal payments on either a semiannual and an annual basis. The principal bears interest at fixed rates ranging from 6.55% to 8.72% and the notes have various maturities through December 2012. The note agreements are similar to each other and each contains specific financial covenants that must be complied with by us. As of December 31, 2001, Telmark has complied with all covenants contained in its borrowing agreements. 6 PART I. FINANCIAL INFORMATION (CONTINUED) ITEM 1. FINANCIAL STATEMENTS (CONTINUED) TELMARK LLC AND CONSOLIDATED SUBSIDIARIES NOTES TO CONDENSED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS) (UNAUDITED) Lease-Backed Notes Payable to Insurance Companies We have lease-backed notes, through two wholly owned, fully consolidated, special purpose funding subsidiaries, totaling $73,259 and $90,760 at December 31, 2001 and June 30, 2001, respectively. 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 principal bears interest at fixed rates ranging from 6.54% to 9.05% and have various final scheduled maturities ending in December 2008. Subordinated Debentures We offer subordinated debentures to the public on a continuing basis. The debentures are unsecured and are subordinate to all our senior debt. The interest on the debentures is payable quarterly on January 1, April 1, July 1, and October 1 and may, at the holder's option, be reinvested. 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 a maturity of 26 weeks. As of December 31, 2001, $50,741 of debentures were outstanding. Those debentures are due through March 2009 and bear a weighted average interest rate of 8.29%. Management conducts ongoing discussions and negotiations with existing and potential lenders for future financing needs. We have been successful in arranging our past financing needs and believe that our current financial arrangements are adequate to meet our foreseeable operating requirements. There can be no assurance, however, that we will be able to obtain future financing in amounts, or on terms, that are favorable to Telmark. 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 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. NET INCOME Our net income for the three-month and six-month periods ended December 31, 2001 compared to the corresponding periods of the prior year are as follows: THIS YEAR LAST YEAR $ INCREASE % INCREASE --------- --------- ---------- ---------- Three-months $3,800 $2,800 1,000 35.7% Six-months $6,900 $5,300 1,600 30.2% The increase was principally due to increased revenue from a larger average outstanding portfolio of leases during this year as compared to last year, and overall lower interest rates on the outstanding debt compared to the prior year, all of which was partially offset by an increase in the provision for credit losses, as discussed below. TOTAL REVENUES Total revenues for the three-month and six-month periods ended December 31, 2001 compared to the corresponding periods of the prior year are as follows: THIS YEAR LAST YEAR $ INCREASE % INCREASE --------- --------- ---------- ---------- Three-months $23,300 $21,500 1,800 8.4% Six-months $45,800 $42,000 3,800 9.0% The increase in our total revenues this year is mostly due to an increase in our average investment in leases and notes, as compared to the prior year, and a higher income rate on the outstanding portfolio. Average net investment in leases and notes for the three-months and six-months ended December 31, 2001 compared to the corresponding periods of the prior year are as follows: THIS YEAR LAST YEAR $ INCREASE % INCREASE --------- --------- ---------- ---------- Three-months $737,800 $690,000 47,800 6.9% Six-months $734,000 $678,800 55,200 8.1% INTEREST EXPENSE Total interest expense for the three-month and six-month periods ended December 31, 2001 compared to the corresponding periods of the prior year are as follows: THIS YEAR LAST YEAR $(DECREASE) %(DECREASE) --------- --------- ----------- ----------- Three-months $ 9,100 $ 9,800 (700) (7.1%) Six-months $18,700 $19,200 (500) (2.6%) 8 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) INTEREST EXPENSE (CONTINUED) The decrease in our interest expense is due to lower interest rates on the outstanding debt compared to the prior year, which was partially offset by an increase in the average amount of debt required to finance the increase in the amount of net leases and notes. Average debt for the three-month and six-month periods ended December 31, 2001 compared to the corresponding periods of the prior year are as follows: THIS YEAR LAST YEAR $ INCREASE % INCREASE --------- --------- ---------- ---------- Three-months $579,500 $548,900 30,600 5.6% Six-months $576,200 $538,500 37,700 7.0% SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the three-month and six-month periods ended December 31, 2001 compared to the corresponding periods of the prior year are as follows: THIS YEAR LAST YEAR $ INCREASE % INCREASE --------- --------- ---------- ---------- Three-months $ 4,900 $4,700 200 4.3% Six-months $10,400 $9,900 500 5.1% The increase was primarily the result of additional personnel and incentive costs relating to overall profitability, retention of business, and profitability of new business. PROVISION FOR CREDIT LOSSES The provision for credit losses for the three-month and six-month periods ended December 31, 2001 compared to the corresponding periods of the prior year are as follows: THIS YEAR LAST YEAR $ INCREASE % INCREASE --------- --------- ---------- ---------- Three-months $2,800 $2,200 600 27.3% Six-months $5,000 $3,900 1,100 28.2% This 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 December 31, 2001 the allowance for credit losses was $35,900 compared to $33,100 at December 31, 2000. A summary of the changes in the allowance for credit losses is as follows: THIS YEAR LAST YEAR ---------- ---------- Balance, June 30 $ 35,500 $ 32,500 Provision for credit losses 5,000 3,900 Charge-offs (7,800) (4,600) Recoveries 3,200 1,300 ---------- ---------- Balance, December 31 $ 35,900 $ 33,100 ========== ========== During 2001 and 2000, the total amount of non-earning accounts increased from $5,200 in December 2000 to $7,400 in December 2001, which as a percentage of the lease portfolio increased from 0.8% in 2000 to 1.0% in 2001. Additionally, the average level of current accounts for the twelve-months ended December 2001 was 97.3%, which is slightly below the average level of current accounts during the twelve-months ended December 2000 of 97.5%. Charge- offs net of recoveries were $4,600 for the six-month period ended December 2001 versus $3,300 for the corresponding period of 2000, due, in part, to a general weakening in the transportation and forestry sectors. The allowance for credit losses is established at a level management believes is sufficient to cover estimated losses in the portfolio. 9 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) PROVISION FOR INCOME TAXES (CONTINUED) The provision for income taxes of $4,900 for the six-month period ended December 31, 2001 as compared to $3,800 in the corresponding period of 2000 results in an effective tax rate of 41.4% for each period. Telmark is currently included in consolidated federal and state tax returns filed by Agway. Under Telmark's tax sharing agreement with Agway, the provision for income taxes is calculated and billed to Telmark as if it were on a separate company basis. 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, subordinated debentures, lease backed notes, principal collections on leases and cash provided from operations. FIRST SIX-MONTHS --------------------------------- CASH IN FLOWS THIS YEAR LAST YEAR ---------- ---------- Cash flows from operations $ 11,200 $ 11,600 Cash flows from financing 3,100 26,900 ---------- ---------- Total cash in flows 14,300 $ 38,500 ---------- ---------- CASH OUT FLOWS Cash flows from investing ($ 10,900) ($37,600) ---------- ---------- Total cash out flows ($ 10,900) ($37,600) ---------- ---------- NET CHANGE IN CASH $ 3,400 $ 900 Virtually all of the cash flows from both operations and financing activities were invested in 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. In addition, Agway's membership interest in Telmark has been pledged as additional collateral with respect to certain obligations of Agway. While the terms of the pledge generally do not restrict Telmark's operations, Telmark has acknowledged and agreed to the pledge, has agreed to cooperate with Agway's lenders in respect to their rights under the pledge, and has agreed to refrain from creating any lien or encumbrance with respect to the equity of Telmark Subsidiaries. A foreclosure on the pledge following an event of default would result in a change of control, giving Telmark's senior lenders rights to demand repayment of existing outstanding debt. Depending upon the financial markets and Telmark's financial circumstances at that time, if the senior lenders chose to execute those rights, it could have a material adverse effect on Telmark's results of operations, liquidity and financial position. Management conducts ongoing discussions and negotiations with existing and potential lenders for future financing needs. See Note 3 to the Condensed Financial Statements "Borrowings." 10 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 for long-term borrowings have not materially changed since June 30, 2001. 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, 2001. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ITEM 6 (A) EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATION S-K THE FOLLOWING REQUIRED EXHIBITS ARE EITHER ATTACHED HERETO OR ARE HEREBY INCORPORATED BY REFERENCE TO PREVIOUSLY FILED REGISTRATION STATEMENTS ON FORM S-1 OR THE APPLICABLE FORM 10-K, 10-Q, OR 8-K FILED AS SPECIFIED. ARTICLES OF INCORPORATION 3(a) - Certificate of Incorporation of Telmark Inc. (predecessor to Telmark LLC) dated June 4, 1964, as amended September 8, 1964; January 15, 1975; and June 16, 1987, filed by reference to Exhibit 3 of the Registration Statement (Form S-1), File No. 33-70732, dated October 22, 1993. BY-LAWS 3(b) - By-laws of Telmark Inc. (predecessor to Telmark LLC) as amended September 19, 1995, filed by reference to Exhibit 3 of the Annual Report (Form 10-K) dated August 23, 1996. CERTIFICATE OF FORMATION 3(c) - Certificate of formation of Telmark LLC dated June 25, 1998, filed by reference to Item 14 of the Annual Report (Form 10-K) dated August 21, 1998. LIMITED LIABILITY COMPANY AGREEMENT 3(d) - Operating agreement of Telmark LLC dated July 1, 1998, filed by reference to Item 14 f the Annual Report (Form 10-K) dated August 21, 1998. CERTIFICATE OF MERGER 3(e) - Certificate of Merger of Telmark Inc. into Telmark LLC effective July 1, 1998, filed by reference to Item 14 of the Annual Report (Form 10-K) dated August 21, 1998. INSTRUMENT DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4(a) - The Indenture dated as of September 30, 1993, between Telmark Inc. and OnBank & Trust Co. of Syracuse, New York, Trustee, filed by reference to Exhibit 4 of the Registration Statement (Form S-1), File No. 33-70732, dated October 22, 1993. 4(b) - Telmark Inc. Board of Directors resolutions dated as of June 21, 1995, authorizing the issuance of Debentures under the Indenture filed by reference to Exhibit 4 of the post effective Amendment No. 1 to the Registration Statement (Form S-1), File No. 33-84442, dated August 28, 1995. 11 PART II. OTHER INFORMATION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ITEM 6 (A) EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATION S-K (CONTINUED) 4(c) - Supplemental Indenture dated as of June 30, 1998 between Telmark Inc. and Manufacturers and Trust Company, filed by reference to Exhibit 4 of the Current Report (Form 8-K), File No. 33-70732, dated July 6, 1998. 4(d) - Supplemental Indenture dated as of July 1, 1998 between Telmark Inc. and Telmark LLC and Manufacturers and Traders Trust Company, filed by reference to Exhibit 4 of the Current Report (Form 8-K), dated July 6, 1998. MATERIAL CONTRACTS 10(a)- Agway Inc. (Commission File Number 2-22791) Pledge Agreement with its lenders dated March 28, 2001, filed by reference to Exhibit 10(c) of Agway Inc. Form 10-Q as of March 24, 2001, dated May 8, 2001. 10(b)- Agway Inc. (Commission File Number 2-22791) Pledge Agreement with its lenders, dated September 14, 2001, filed by reference to Exhibit 10(g) of Agway Inc. Form 10-K as of June 30, 2001, dated September 18, 2001. ITEM 6 (B) REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the three-months ended December 31, 2001. 12 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 JANUARY 30, 2002 BY /S/DANIEL J. EDINGER ------------------- ---------------------------------------- DANIEL J. EDINGER, PRESIDENT (PRINCIPAL EXECUTIVE OFFICER) DATE JANUARY 30, 2002 BY /S/PETER J. O'NEILL ------------------- ---------------------------------------- PETER J. O'NEILL, SENIOR VICE PRESIDENT, FINANCE AND CONTROL (PRINCIPAL ACCOUNTING OFFICER) 13

TELMARK LLC 10-Q