10-Q 1 nov01_10q.txt TELMARK FORM 10-Q 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, 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 November 12, 2001 --------------------------- -------------------------------- 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 period ended September 30, 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 $7,351 and $8,306 at September 30, 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 September 30, 2001, we had credit facilities available from banks which allow us to borrow up to an aggregate of $389,200. Uncommitted short-term bank line of credit agreements permit borrowing up to $89,200 on an unsecured basis with interest paid upon maturity. The lines bear interest at money market variable rates. A committed $300,000 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. The total amount outstanding as of September 30, 2001, under the short-term bank lines of credit and the revolving loan facility was $76,903 and $228,400, respectively. The revolving loan facility of $300,000 is partially collateralized by our investment in a cooperative bank having a book value of $14,695 at September 30, 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 $89,200 of uncommitted lines of credit all have terms expiring during the next 12 months. The $300,000 revolving loan facility is available through May 1, 2002. Unsecured Notes Payable to Insurance Companies On both September 30, 2001 and June 30, 2001, we had balances outstanding on unsecured senior note private placements totaling $149,500. We must pay interest semiannually on each senior note. We pay principal payments on both 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 September 30, 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 issued lease-backed notes, through two wholly owned special purpose funding subsidiaries, totaling $82,267 and $90,760 at September 30, 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. 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 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 September 30, 2001, $41,544 of debentures were outstanding. Those debentures are due through March 2009 and bear a weighted average interest rate of 8.2%. 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 increased by $600 (24.0%) from $2,500 for the three-month period ended September 30, 2000 to $3,100 in for the three-month period ended September 30, 2001.

The increase was principally due to increased revenue from a larger 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 of $22,500 for the three-month period ended September 30, 2001 increased $2,000 (9.8%) as compared to total revenues of $20,500 in the corresponding period of 2000.

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 quarter ended September 30, 2001 compared to the prior year is as follows:

INTEREST EXPENSE Total interest expense of $9,500 for the three-month period ended September 30, 2001 increased $100 (1.1%) as compared to interest expense of $9,400 in the corresponding period of 2000.

The increase in our interest expense is due to an increase in the average amount of debt required to finance the increase in the amount of net leases and notes, which was partially offset by lower interest rates on the outstanding debt compared to the prior year. Average debt for the quarter ended September 30, 2001 compared to the prior year is as follows:

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 OPERATION (CONTINUED) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses of $5,500 for the three-month period ended September 30, 2001 increased by $300 (5.8%) compared to expenses of $5,200 in the corresponding period of 2000.

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 of $2,200 for the three-month period ended September 30, 2001 represents an increase of $500 (29.4%) compared to a provision for credit losses of $1,700 in the corresponding period of 2000.

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 September 30, 2001 the allowance for credit losses was $35,100 compared to $32,600 at September 30, 2000. A summary of the changes in the allowance for credit losses is as follows:

During 2001 and 2000, the total value of non-earning accounts increased from $5,700 in September 2000 to $6,400 in September 2001, which as a percentage of the lease portfolio remained unchanged at 0.9% for both 2000 and 2001. Additionally, the average level of current accounts for the twelve-months ended September 2001 was 97.3%, which is slightly below with the average level of current accounts during the twelve-months ended September 2000 of 97.5%. Charge-offs net of recoveries were $2,600 for the three-month period ended September 2001 versus $1,600 for the corresponding period of 2000, due to a general weakening in the transportation and forestry sectors. Reserves are established at a level management believes is sufficient to cover estimated losses in the portfolio. PROVISION FOR INCOME TAXES The provision for income taxes of $2,200 for the three-month period ended September 30, 2001 as compared to $1,700 in the corresponding period of 2000 results in an effective tax rate of 41.3% for each period. Telmark is included in a consolidated federal tax return filed by Agway and through June 30, 2001, the consolidated state tax return of AHI. In Agway's revised corporate structure that was effective July 1, 2001, Telmark will be included in the consolidated state tax return of Agway. Under Telmark's tax sharing agreement with Agway, the provision for income taxes is calculated and billed to Telmark on a separate company basis. 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) 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. CASH IN FLOWS THIS YEAR LAST YEAR --------- --------- Cash flows from operations $ 4,500 $ 8,400 Cash flows from financing 12,700 15,700 --------- --------- Total cash in flows $ 17,200 $ 24,100 ========= ========= CASH OUT FLOWS Cash flows from investing $(17,200) $(24,100) --------- --------- Total cash out flows $(17,200) $(24,100) ========= ========= 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 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 The Company did not file any reports on Form 8-K during the three-months ended September 30, 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 NOVEMBER 12, 2001 BY /S/ DANIEL J. EDINGER ----------------- ---------------------------------------- DANIEL J. EDINGER, PRESIDENT (PRINCIPAL EXECUTIVE OFFICER) DATE NOVEMBER 12, 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