10-Q 1 sept02_10q.txt TELMARK 10-Q QUARTERLY PERIOD ENDED 9/30/02 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, 2002 ------------------ 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 8, 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 TELMARK LLC AND CONSOLIDATED SUBSIDIARIES ITEM 1. CONDENSED CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS) ASSETS

See accompanying notes to condensed consolidated financial statements. 3 PART I. FINANCIAL INFORMATION (CONTINUED) TELMARK LLC AND CONSOLIDATED SUBSIDIARIES ITEM 1. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND MEMBER'S EQUITY (UNAUDITED) (THOUSANDS OF DOLLARS)

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

See accompanying notes to condensed consolidated financial statements. 5 PART I. FINANCIAL INFORMATION (CONTINUED) TELMARK LLC AND CONSOLIDATED SUBSIDIARIES ITEM 1. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (THOUSANDS OF DOLLARS) NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES 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, 2002 are not necessarily indicative of the results that may be expected for the year ended June 30, 2003. 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, 2002. On March 6, 2002, Agway announced its intention to pursue the sale of Telmark to a third party as part of a plan that would have Agway focus on fewer businesses. Goldman Sachs & Co. is assisting Agway in exploring strategic alternatives for Telmark. Agway's membership interest in Telmark has been pledged to certain of Agway's lenders in order to secure Agway's obligations to those lenders. On October 1, 2002, Agway Inc. and certain of its subsidiaries voluntarily filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code ("Chapter 11 Proceedings"). This filing DID NOT include Telmark LLC. Telmark is separately financed and does not guarantee any debt of Agway Inc. Telmark and Agway have certain business arrangements, including approximately $16,200 in leases which we do not expect to be impacted by this filing. However, the ultimate impact of Agway's Chapter 11 Proceedings on Telmark's business, financial condition, and results of operation cannot be determined at this time. For more information concerning recent developments in Telmark's financing arrangements see Note 2 below. Basis of Consolidation The consolidated financial statements include the accounts of all wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Business Segments Telmark operates in one reportable segment of direct finance leasing of agricultural related equipment, vehicles and buildings to farmers or other rural businesses that serve the agricultural marketplace. Leases and notes outside the United States represent less than one half of 1% of the total assets of Telmark. Reclassifications Certain amounts in prior years' financial statements have been reclassified to conform to the current year's consolidated financial statement presentation. Cash and Equivalents Telmark considers all investments with a maturity of three months or less when purchased to be cash equivalents. Restricted Cash Certain cash accounts amounting to $5,697 and $6,014 at September 30 and June 30, 2002, respectively, collateralize lease-backed notes payable. This cash is held in segregated cash accounts pending distribution and is restricted in its use. 6 PART I. FINANCIAL INFORMATION (CONTINUED) TELMARK LLC AND CONSOLIDATED SUBSIDIARIES ITEM 1. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (THOUSANDS OF DOLLARS) NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued) Lease Accounting Completed lease contracts, which qualify as direct finance leases as defined by Statement of Financial Accounting Standards ("SFAS") No. 13 "Accounting for Leases," are accounted for by recording on the balance sheet the total future minimum lease payments receivable, plus the estimated unguaranteed residual value of leased equipment, less the unearned interest and finance charges. Unearned interest and finance charges represent the excess of the total future minimum lease payments plus the estimated unguaranteed residual value expected to be realized at the end of the lease term over the cost of the related equipment. Interest and finance charge income is recognized as revenue, by using the interest method over the term of the lease, which for most commercial and agricultural leases is 60 months or less with a maximum of 180 months for buildings. Income recognition is suspended on all leases and notes which become past due greater than 120 days. As of September 30 and June 30, 2002, the recognition of interest income was suspended on leases and notes totaling $8,975 and $7,391, respectively. Certain initial direct costs incurred in consummating a lease as defined by SFAS No. 91 "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Costs of Leases" are capitalized and amortized over the life of the lease. This deferral of expenses has the effect of reducing the expense recorded in the period the lease is booked, and increasing the expense recognized over the remaining life of the lease. Provisions for credit losses are charged to income in amounts sufficient to maintain the allowance at a level considered adequate to cover losses in the existing portfolio. The net investment in a lease is charged against the allowance for credit losses when determined to be uncollectible, generally within one year of becoming past due. Income Taxes Telmark provides for income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes" on a separate company basis. Under the liability method specified by SFAS No. 109, deferred tax assets and liabilities are based on the difference between the financial statement and tax basis of assets and liabilities as measured by the tax rates which are anticipated to be in effect when these differences reverse. The deferred tax provision represents the net change in the assets and liabilities for deferred tax. A valuation allowance is established when it is necessary on a separate company basis to reduce deferred tax assets to amounts for which realization is reasonably assumed. Realization of deferred tax assets and payment of deferred tax liabilities result from interaction with Agway Inc. through the tax sharing arrangement. Telmark is currently included in consolidated federal and state tax returns filed by Agway. For the period July 1, 1998 through June 30, 2001, for state income tax filing purposes, Telmark is included as a business division of Agway Holdings Inc., a former subsidiary of Agway that was merged into Agway effective July 1, 2001. Effective July 1, 2001, for state income tax filing purposes, Telmark is included as a business of Agway Inc. Under Telmark's tax sharing arrangement with Agway, the provision for income taxes and related credits and carry forwards are calculated on a separate company basis and billed to Telmark as appropriate on an interim basis. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 7 PART I. FINANCIAL INFORMATION (CONTINUED) TELMARK LLC AND CONSOLIDATED SUBSIDIARIES ITEM 1. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (THOUSANDS OF DOLLARS) NOTE 2 - BORROWINGS Lines of Credit and Revolving Loans As of September 30, 2002, we had credit facilities available from banks which allow us to borrow up to an aggregate of $387,200. Uncommitted short-term bank line of credit agreements permitted borrowing up to $37,200 on an unsecured basis with interest paid upon maturity. The lines bear interest at money market variable rates. A committed $350,000 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, 2002, under the short-term bank lines of credit and the revolving loan facility was $34,000 and $248,200, respectively. The revolving loan facility of $350,000 is partially collateralized by our investment in a cooperative bank having a book value of $15,784 at September 30, 2002. Telmark borrows under its short-term line of credit agreements and its revolving term agreement from time to time to fund its operations. Short-term debt serves as interim financing between the issuances of long-term debt. On August 1, 2002, Telmark issued $100,000 of unsecured senior notes to insurance companies. Proceeds of these notes were used to pay down the revolving term loan facility, increasing the availability under the lines of credit and revolving loans. Telmark normally renews its lines of credit annually. Due principally to the uncertainty related to the potential sale of the Company and the Agway Chapter 11 Proceedings, substantially all of the banks that had provided the $54,300 short term lines of credit as of June 30, 2002 have requested borrowings under their lines of credit be repaid. As of September 30, 2002 we had repaid $17,000 of these lines and based on requests are in process of repaying an additional $24,000. The $350,000 revolving loan facility has been extended and is available through March 31, 2003. Telmark has financing availability as of November 12, 2002 of approximately $79,000, which includes a $10,000 short-term line of credit which will expire on January 31, 2003. We believe Telmark's available financing is adequate to meet its needs through March 31, 2003. Unsecured Notes Payable to Insurance Companies On September 30, 2002, we had balances outstanding on unsecured senior note private placements totaling $206,667, including the above mentioned $100,000 of unsecured senior notes issued to insurance companies on August 1, 2002. We 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 4.34% 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, 2002, Telmark has complied with all covenants contained in its borrowing agreements. 8 PART I. FINANCIAL INFORMATION (CONTINUED) TELMARK LLC AND CONSOLIDATED SUBSIDIARIES ITEM 1. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (THOUSANDS OF DOLLARS) NOTE 2 - BORROWINGS (continued) Lease-Backed Notes Payable to Insurance Companies We have issued lease-backed notes, through two wholly owned consolidated special purpose funding subsidiaries, totaling $46,083 at September 30, 2002. 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 have historically offered 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, 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 September 30, 2002, $45,137 of debentures were outstanding. Those debentures have various final scheduled maturities through March 2010 and bear a weighted average interest rate of 8.53%. In anticipation of the possible sale of Telmark, effective as of March 6, 2002, Telmark ceased issuing debentures to the public, other than pursuant to the interest reinvestment option of the debentures. Under that option, debenture holders may elect to receive interest on debentures either in cash or in the form of additional principal on the debentures. However, once a debenture reaches maturity, the holder will not be permitted to invest the proceeds in additional debentures. Pledge of Telmark Membership Interest Agway's membership interest in Telmark had been pledged as collateral in connection with certain senior debt obligations of Agway and has continued as pledged collateral under a new $125,000 Debtor-in-Possession financing agreement ("DIP Facility") for Agway from the same senior lenders effective in October 2002. 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. Agway has indicated to Telmark that it believes the covenants, as revised under Agway's DIP Facility, are appropriate to Agway's current circumstances. Foreclosure on Telmark stock would require a default under the DIP Facility. While there can be no assurances, Agway has indicated to Telmark that the possibility of foreclosure is considered remote. Availability of Financing 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. 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. Due to the ongoing process relating to the potential sale of the Company and to the Agway Chapter 11 Proceedings, there can be no assurance, however, that we will be able to obtain future financing in amounts, or on terms, that are acceptable. We note that we have lost a number of short-term credit lines since June 30, 2002 and currently rely principally on a single facility for our revolving credit lines. Our inability to obtain adequate financing would have a material adverse effect on our operations. 9 PART I. FINANCIAL INFORMATION (CONTINUED) TELMARK LLC AND CONSOLIDATED SUBSIDIARIES ITEM 1. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (THOUSANDS OF DOLLARS) NOTE 2 - BORROWINGS (continued) Availability of Financing (continued) If Agway is successful in finding a buyer for Telmark, a change of control of Telmark and ownership by a new owner might result in changes to the operations and capital structure of Telmark. In particular, a buyer may have different financing needs than Telmark currently has, may have available to it lower-cost financing alternatives than those currently available to Telmark or may be required by our lenders to repay outstanding debt. As a result, a buyer might choose to or be required to replace some or all of Telmark's sources of capital, which could involve redeeming outstanding debentures and repaying outstanding debt in accordance with their terms. Such repayment may involve certain costs in addition to the repayment of principal and interest, such as termination fees or "make whole" payments. NOTE 3 - COMMITMENT AND CONTINGENCIES Commitments Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Outstanding commitments to extend lease financing at September 30, 2002 amounted to $20,907. Legal Proceedings Telmark is not a party to any litigation or legal proceedings pending, or to the best of its knowledge threatened, which, in the opinion of its management, individually or in the aggregate, would have a material adverse affect on its results of operations, financial position or liquidity. NOTE 4 - RELATED PARTY LEASES As of September 30, 2002, Telmark had entered into leases with Agway and certain of its subsidiaries representing a net investment of approximately $16,200, which represents Telmark's greatest exposure to a single customer. The inability of Agway or its subsidiaries to pay those leases on time could have a material adverse effect of Telmark's operating results and liquidity. Notwithstanding Agway's Chapter 11 Proceedings discussed above, it is expected that these leases will continue to be paid in accordance with their terms. 10 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) CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 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. RESULTS OF OPERATIONS NET INCOME Our net income increased by $500 (16.1%) from $3,100 for the three-month period ended September 30, 2001 to $3,600 in for the three-month period ended September 30, 2002.

The increase was principally due to overall lower interest rates on the outstanding debt compared to the prior year, and a decrease in the provision for credit losses, as discussed below. This expense decrease is partially offset by a decrease in revenue. TOTAL REVENUES Total revenues of $22,300 for the three-month period ended September 30, 2002 decreased $200 (0.9%) as compared to total revenues of $22,500 in the corresponding period of 2001.

The decrease in our total revenues this year is mostly due to a lower income rate even though there was an increase in our average investment in leases and notes, as compared to the prior year. The lower income rate is a result of a lower average cost of funds to Telmark which is reflected in the rate charged to customers. Average net investment in leases and notes for the quarter ended September 30, 2002 compared to the prior year is as follows:

INTEREST EXPENSE Total interest expense of $8,700 for the three-month period ended September 30, 2002 decreased $800 (8.4%) as compared to interest expense of $9,500 in the corresponding period of 2001.

The decrease in our interest expense is due to lower interest rates on the outstanding debt compared to the prior year, which is partially offset by costs associated with an increase in the average amount of debt required to finance the net leases and notes. Average debt for the quarter ended September 30, 2002 compared to the prior year is as follows:

11 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 $5,800 for the three-month period ended September 30, 2002 increased by $300 (5.5%) compared to expenses of $5,500 in the corresponding period of 2001.

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 $1,600 for the three-month period ended September 30, 2002 represents an decrease of $600 (27.3%) compared to a provision for credit losses of $2,200 in the corresponding period of 2001.

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, 2002 the allowance for credit losses was $37,100 compared to $35,100 at September 30, 2001. A summary of the changes in the allowance for credit losses is as follows: THIS YEAR LAST YEAR --------- --------- Balance, June 30 $ 37,100 $ 35,500 Provision for credit losses 1,600 2,200 Charge-offs (2,700) (3,900) Recoveries 1,100 1,300 --------- --------- Balance, September 30 $ 37,100 $ 35,100 ========= ========= During 2002 and 2001, the total value of non-earning accounts increased from $6,400 in September 2001 to $9,000 in September 2002, which as a percentage of the lease portfolio increased by .33% from 2001 to 2002. Additionally, the average level of current accounts for the twelve-months ended September 2002 was 97.1%, which is slightly below the average level of current accounts during the twelve-months ended September 2001 of 97.3%. Charge-offs net of recoveries were $1,600 for the three-month period ended September 2002 versus $2,600 for the corresponding period of 2001. The charge-offs for both periods reflect a general softness 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 $2,500 for the three-month period ended September 30, 2002 as compared to $2,200 in the corresponding period of 2001 results in an effective tax rate of 41.2% for each period. 12 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 other term debt, subordinated debentures, lease backed notes, principal collections on leases and cash provided from operations.

Virtually all of the cash flows from operations have historically been invested in growth of the lease portfolio, repayment of debt and dividends to Agway. We have been successful in arranging our past financing needs and believes that our current financing arrangements are adequate to meet our foreseeable operating requirements. Due to the ongoing process relating to the potential sale of the Company and to the Agway Chapter 11 Proceedings, there can be no assurance, 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. We note that we have lost substantially all of our uncommitted short term credit lines since June 30, 2002 and currently rely principally on a single facility for our revolving credit lines.

As of September 30, 2002, Telmark had entered into leases with Agway and certain of its subsidiaries representing a net investment of approximately $16,200, which represents Telmark's greatest exposure to a single customer. The inability of Agway or its subsidiaries to pay those leases on time could have a material adverse effect of Telmark's operating results and liquidity. Notwithstanding Agway's Chapter 11 Proceedings discussed above, it is expected that these leases will continue to be paid in accordance with their terms. See Note 2 - "Borrowings" for a full description of our financing arrangements. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those accounting policies that are very important to the portrayal of the Company's financial condition and results which require management's most difficult, subjective or complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company believes the following to be critical and could result in materially different amounts being reported under different conditions or using different assumptions. 13 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) CRITICAL ACCOUNTING POLICIES (CONTINUED) Lease Accounting Completed lease contracts, which qualify as direct finance leases as defined by Statement of Financial Accounting Standards ("SFAS") No. 13 "Accounting for Leases," are accounted for by recording on the balance sheet the total future minimum lease payments receivable, plus the estimated unguaranteed residual value of leased equipment, less the unearned interest and finance charges. Unearned interest and finance charges represent the excess of the total future minimum lease payments plus the estimated unguaranteed residual value expected to be realized at the end of the lease term over the cost of the related equipment. Interest and finance charge income is recognized as revenue, by using the interest method over the term of the lease, which for most commercial and agricultural leases is 60 months or less with a maximum of 180 months for buildings. Income recognition is suspended on all leases and notes which become past due greater than 120 days. Initial direct costs incurred in consummating a lease are not expensed when the lease is originated. The expense is capitalized and amortized over the life of the lease. This deferral of expenses has the effect of reducing the expense recorded in the period the lease is booked, and increasing the expense recognized over the remaining life of the lease. Provision for Credit Loss 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. To evaluate the adequacy of the allowance for losses, the Company utilizes certain estimates and assumptions. Management bases these estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances applying different estimates on assumptions could produce materially different results from those reported by the Company. The allowance for credit losses was $37,100 at September 30 and June 30, 2002. Income Taxes Telmark provides for income taxes in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under the liability method specified by SFAS No. 109, deferred tax assets and liabilities are based on the difference between the financial statement and tax basis of assets and liabilities as measured by the tax rates which are anticipated to be in effect when these differences reverse. The deferred tax provision represents the net change in the assets and liabilities for deferred tax. A valuation allowance is established when it is necessary on a separate company basis to reduce deferred tax assets to amounts for which realization is reasonably assumed. Realization of deferred tax assets and payment of deferred tax liabilities result from interaction with Agway Inc. through the tax sharing arrangement. Telmark is currently included in consolidated federal and state tax returns filed by Agway. Under Telmark's tax sharing arrangement, the provision for income taxes and related credits and carry forwards are calculated on a separate company basis and billed to Telmark as appropriate on an interim basis. 14 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. We try to limit the effects of changes in interest rates by matching as closely as possible, on an ongoing basis, the maturity and cost of the funds we borrow to finance our leasing activities with the maturity and repricing characteristics of our lease portfolio. However, a rise in interest rates would increase the cost of funds we borrow to finance our lease portfolio, including that portion of the debt which is not precisely matched to the characteristics of the portfolio. Telmark has a formal risk management policy which limits the short-term exposure to an amount which is immaterial to the results of operations or cash flows. During the three months ended September 30, 2002, the components of the Company's borrowings were modified as described in Note 2. As a result, the principal cash flows of the Company's loans have changed since our disclosure in Form 10-K as of June 30, 2002. The following table provides information about Telmark's debt securities and loans that are sensitive to changes in interest rates. The table presents principal cash flows (in 000's) and related weighted average interest rates by contractual maturity dates by fiscal year as of September 30, 2002.

ITEM 4. CONTROLS AND PROCEDURES Within the 90 day period prior to the filing date of this quarterly report, the chief executive officer and chief financial officer of Telmark LLC evaluated Telmark's disclosure controls and procedures related to the recording, processing, summarization and reporting of information in Telmark's reports that it files with the Securities and Exchange Commission (SEC). These disclosure controls and procedures have been designed to ensure that (a) material information relating to Telmark, including its consolidated subsidiaries, is made known to Telmark's management, including their officers, by other employees of Telmark and its subsidiaries, and (b) this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the SEC's rules and forms. Based on this evaluation, these officers concluded that the design of the disclosure controls and procedures is sufficient to accomplish their purpose. There have been no significant changes in Telmark's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 15 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATION S-K (I) THE FOLLOWING REQUIRED EXHIBITS ARE HEREBY INCORPORATED BY REFERENCE TO PREVIOUSLY FILED REGISTRATION STATEMENTS OR THE APPLICABLE FORM S-1, 10-K, 10-Q, OR 8-K FILED ON THE DATE AS SPECIFIED. THE COMPANY UNDERTAKES TO PROVIDE TO THE COMMISSION UPON REQUEST COPIES OF ANY INSTRUMENT WITH RESPECT TO LONG-TERM DEBT NOT BEING REGISTERED WHERE THE AMOUNT OF SECURITIES AUTHORIZED THEREUNDER DOES NOT EXCEED 10 PERCENT OF THE TOTAL ASSETS OF THE COMPANY AND ITS SUBORDINATES ON A CONSOLIDATED BASIS. 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 of 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. 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. 4(e) - Telmark LLC Note Agreement dated August 1, 2002, filed by reference to Exhibit 4(e) of the Annual Report (Form 10-K) dated September 30, 2002. MATERIAL CONTRACTS 10(a)- Agway Inc. (Commission File Number 2-22791) Pledge Agreement with its lenders dated October 4, 2002, filed by reference to Exhibit 99.6 of Agway Inc. Form 8-K, dated October 15, 2002. 10(b)- Amended and Restated Master Loan Agreement between CoBank, ACB and Telmark LLC dated June 29, 1998 and effective July 1, 1998, filed by reference to Exhibit 10(c) of the Annual Report (Form 10-K) dated September 30, 2002. 16 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATION S-K MATERIAL CONTRACTS (CONTINUED) 10(c)- Amendment dated November 19, 2001 of the Master Loan Agreement between CoBank, ACB and Telmark LLC, filed by reference to Exhibit 10(d) of the Annual Report (Form 10-K) dated September 30, 2002. 10(d)- Amendment dated July 31, 2002 of the Master Loan Agreement between CoBank, ACB and Telmark LLC, filed by reference to Exhibit 10(e) of the Annual Report (Form 10-K) dated September 30, 2002. 10(e)- Amendment dated September 27, 2002 of the Master Loan Agreement between CoBank, ACB and Telmark LLC, filed by reference to Exhibit 10(n) of the Annual Report (Form 10-K) dated September 30, 2002. 10(f)- Pay to Stay Arrangement between Daniel J. Edinger and Telmark LLC, filed by reference to Exhibit 10(f) of the Annual Report (Form 10-K) dated September 30, 2002. 10(g)- Annual Incentive Plan for Fiscal Year, Ending June 30, 2002 - Daniel J. Edinger, filed by reference to Exhibit 10(g) of the Annual Report (Form 10-K) dated September 30, 2002. 10(h)- Annual Incentive Plan for Fiscal Year, Ending June 30, 2003 - Daniel J. Edinger, filed by reference to Exhibit 10(h) of the Annual Report (Form 10-K) dated September 30, 2002. 10(i)- Pay to Stay Arrangement between Raymond G. Fuller and Telmark LLC, filed by reference to Exhibit 10(i) of the Annual Report (Form 10-K) dated September 30, 2002. 10(j)- Pay to Stay Arrangement between Jennifer L. Hicks and Telmark LLC, filed by reference to Exhibit 10(j) of the Annual Report (Form 10-K) dated September 30, 2002. 10(k)- Pay to Stay Arrangement between Richard A. Kalin and Telmark LLC, filed by reference to Exhibit 10(k) of the Annual Report (Form 10-K) dated September 30, 2002. 10(l)- Pay to Stay Arrangement between Kipp R. Weaver and Telmark LLC, filed by reference to Exhibit 10(l) of the Annual Report (Form 10-K) dated September 30, 2002. 10(m)- Telmark LLC Supplemental Severance Program, filed by reference to Exhibit 10(m) of the Annual Report (Form 10-K) dated September 30, 2002. (II) THE FOLLOWING EXHIBITS ARE FILED AS A SEPARATE SECTION OF THIS REPORT: OTHER EXHIBITS 99 Sarbanes - Oxley Act of 2002 - Certifications 99.1 Certification of Chief Executive Officer 99.2 Certification of Chief Financial Officer (B) REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the three months ended September 30, 2002. However, on October 11, 2002, Telmark filed Form 8-K confirming Telmark's parent Company, Agway Inc., filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code and that Telmark WAS NOT included in that filing. 17 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 14, 2002 BY /S/ DANIEL J. EDINGER ------------------- ---------------------------------------- DANIEL J. EDINGER, PRESIDENT (PRINCIPAL EXECUTIVE OFFICER) DATE NOVEMBER 14, 2002 BY /S/ PETER J. O'NEILL ------------------- ---------------------------------------- PETER J. O'NEILL, SENIOR VICE PRESIDENT, FINANCE AND CONTROL (PRINCIPAL ACCOUNTING OFFICER) 18 CERTIFICATIONS UNDER NEW EXCHANGE ACT RULES 13a-14 AND 15d-14 OF THE EXCHANGE ACT OF 1934 I, Daniel J. Edinger, certify that: 1. I have reviewed this quarterly report on Form 10-Q for the period ended September 30, 2002 of Telmark LLC; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 ------------------------------------------ /s/ Daniel J. Edinger ------------------------------------------ Daniel J. Edinger President (Principal Executive Officer) 19 CERTIFICATIONS UNDER NEW EXCHANGE ACT RULES 13a-14 AND 15d-14 OF THE EXCHANGE ACT OF 1934 I, Peter J. O'Neill, certify that: 1. I have reviewed this quarterly report on Form 10-Q for the period ended September 30, 2002 of Telmark LLC; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 ------------------------------------------ /s/ Peter J. O'Neill ------------------------------------------ Peter J. O'Neill Senior Vice President, Finance and Control Chairman of the Board and Director (Principal Financial Officer) 20

TELMARK LLC 10-Q