1
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 period ended October 31, 1995
----------------
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: 2-65101
WALNUT EQUIPMENT LEASING CO., INC.
----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-1712443
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Suite 200, One Belmont Avenue, Bala Cynwyd, Pennsylvania 19004
---------------------------------------------------------------
(Address of Principal executive offices) (Zip Code)
(610) 668-0700
(800) 866-0809
--------------
(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 shares outstanding of each of the issuer's class of
common stock, as of December 15, 1995: $1.00 par value common stock - 1,000
shares.
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WALNUT EQUIPMENT LEASING CO., INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
- ------------------------------ -----------
Item 1. Financial Statements
Consolidated Balance Sheets; October 31, 1995
(unaudited) and April 30, 1995 1-2
Consolidated Statements of Operations;
Six months ended October 31, 1995 and
1994 and Three months ended October 31, 1995
and 1994 (unaudited) 3
Consolidated Statement of Changes in
Shareholders' Deficit; Six months ended
October 31, 1995 (unaudited) 4
Consolidated Statements of Cash Flows;
Six months ended October 31, 1995 and
1994 (unaudited) 5-6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
PART II. OTHER INFORMATION
- --------------------------
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
3
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 1995 April 30, 1995
---------------- --------------
(unaudited)
ASSETS
Direct finance Leases:
Aggregate future amounts receivable
under lease contracts $ 18,617,660 $ 18,829,268
Estimated residual value of equipment 1,854,653 1,976,244
Less:
Unearned income under lease contracts (3,390,289) ( 3,436,458)
Advance payments (577,073) (579,965)
------------- ------------
16,504,951 16,789,089
Allowance for doubtful lease receivables (1,332,810) (1,413,389)
------------- ------------
15,172,141 15,375,700
------------- ------------
Operating Leases:
Equipment at cost,
Less accumulated depreciation of
$9,677 and $6,680, respectively 33,349 23,316
Cash and cash equivalents 10,399,281 8,957,949
Other assets (Includes $637,479 paid
to or receivable from related
parties at April 30, 1995) 1,169,046 1,086,402
------------- ------------
Total assets $ 26,773,817 $ 25,443,367
============= ============
SEE ACCOMPANY NOTES
1
4
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
October 31, 1995 April 30, 1995
--------------- --------------
(unaudited)
LIABILITIES
Amounts payable to equipment suppliers $ 621,049 $ 477,296
Other accounts payable and accrued expenses 237,159 252,361
Demand, Fixed Rate and Money Market Thrift
Certificates (Includes $181,266 at
April 30, 1995 payable to related parties) 26,297,140 24,521,875
Senior Thrift Certificates (includes $697,706
at April 30, 1995 payable to related parties) 20,478,266 18,783,578
Subordinated Thrift Certificates
(Includes $555,844 at April 30, 1995
payable to related parties) 5,636,404 6,025,366
Accrued interest 6,019,837 5,411,748
Subordinated debentures (Includes $4,000 at
April 30, 1995 payable to related parties) 4,000 5,858
State income taxes payable 8,401 8,401
------------- -----------
59,302,256 55,486,483
------------- -----------
SHAREHOLDERS' DEFICIT
Prime Rate Cumulative Preferred Shares,
$1 par value, $100 per share liquidation
preference, 50,000 shares authorized,
281 shares, issued and outstanding
(liquidation preference $28,100) 281 281
Adjustable Rate Cumulative Preferred Shares,
$1 par value, $1000 per share liquidation
preference. 1,000 shares authorized,
275 shares issued and outstanding
(liquidation preference $275,000) 275 275
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding 101,500 101,500
Accumulated Deficit (32,630,495) (30,145,172)
------------- -----------
(32,528,439) (30,043,116)
------------- -----------
Total liabilities and shareholders' deficit $26,773,817 $25,443,367
============= ===========
See accompanying notes
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5
WALNUT EQUIPMENT LEASING CO., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Six Months Ended October 31, For The Three Months Ended October 31,
1995 1994 1995 1994
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue:
Income earned under direct
finance lease contracts $ 1,917,656 $ 2,093,712 $ 942,691 $ 1,034,449
Operating lease rentals 12,095 6,844 5,344 6,538
------------ ----------- ----------- -----------
Total revenue 1,929,751 2,100,556 948,035 1,040,987
Costs and expenses:
Interest expense (net) 2,401,345 2,125,669 1,218,986 1,087,530
Lease origination expenses 541,829 542,742 272,315 236,867
General and administrative expenses 1,082,068 984,260 577,553 490,880
Provision for doubtful lease receivables 386,835 528,173 196,639 356,224
Depreciation of operating lease equipment 2,997 3,841 1,613 1,710
------------ ----------- ----------- -----------
Total costs and expenses 4,415,074 4,184,685 2,267,106 2,173,211
------------ ----------- ----------- -----------
Loss before provision for income tax expense (2,485,323) (2,084,129) (1,319,071) (1,132,224)
Provision for income tax expense (See Note 2) --- --- ---- (897)
----------- ----------- ----------- -----------
Net Loss (See Note 2) $(2,485,323) (2,084,129) $(1,319,071) $(1,131,327)
=========== ============ =========== ===========
SEE ACCOMPANYING NOTES
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WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
Prime Rate Adjustable Rate Total
Cumulative Cumulative Common Accumulated Shareholders'
Preferred Shares Preferred Share Stock Deficit Deficit
---------------- --------------- ------ ----------- -------------
No. of Shares No. of Shares
Issued Amount Issued Amount
------ ------ ------ ------
Balance, April 30, 1995 281 $ 281 275 $ 275 $101,500 $(30,145,172) $(30,043,116)
Net loss for the six month
period ended October 31,
1995 (unaudited) --- --- --- --- --- (2,485,323) (2,485,323)
---- ------- ----- ------- -------- ------------- -------------
Balance, October 31, 1995
(unaudited) 281 $ 281 275 $ 275 $101,500 $(32,630,495) $(32,528,439)
==== ======= ==== ======= ======== ============ ============
SEE ACCOMPANYING NOTES
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WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended October 31,
1995 1994
----------- -----------
(unaudited) (unaudited)
OPERATING ACTIVITIES
- --------------------
Net Loss $(2,485,323) $(2,084,129)
Adjustments to Reconcile
Net Loss to Net Cash
Used in Operating Activities:
Depreciation 2,998 3,841
Amortization of Deferred Debt Expenses 65,318 57,074
Provision for doubtful
Lease receivables 386,835 528,173
Effects of Changes
in other Operating Items:
Accrued Interest 608,089 666,063
Amounts Payable to Equipment Suppliers 143,753 29,723
Other (net), principally
increase in other Assets (163,191) (271,162)
----------- -----------
Net Cash used in Operating Activities (1,441,521) (1,070,417)
----------- -----------
INVESTING ACTIVITIES
- --------------------
Excess of Cash Received Over Lease Income
Recorded 3,675,696 3,589,729
Increase (Decrese) in Advance Payments (2,892) ---
Purchase of Equipment for Lease (3,869,084) (3,884,028)
Purchase of U.S. Government Securities --- (7,639,343)
----------- -----------
Net Cash Used in Investing Activities (196,280) (7,933,642)
----------- -----------
SEE ACCOMPANYING NOTES
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WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
For the Six Months Ended October 31,
1995 1994
----------- -----------
(unaudited) (unaudited)
FINANCING ACTIVITIES
- --------------------
Proceeds for Issuance of:
Demand, Fixed Rate, and Money
Market Thrift Certificates $ 5,533,126 $ 5,145,079
Senior Thrift Certificates 3,347,090 2,599,225
Redemption of:
Demand, Fixed Rate, and Money
Market Thrift Certificates (3,757,861) (3,769,062)
Subordinated Thrift Certificates (388,962) (47,723)
Senior Thrift Certificates (1,652,402) (1,426,203)
Subordinated Debentures (1,858) ---
----------- ------------
Net Cash Provided By
Financing Activities 3,079,133 2,501,316
----------- ------------
Increase (decrease) in cash and cash equivalents 1,441,332 (6,502,743)
Cash and cash equivalents,
Beginning of Year 8,957,949 7,598,151
----------- ------------
Cash and cash equivalents,
End of Year $10,399,281 $ 1,095,408
----------- ------------
SEE ACCOMPANYING NOTES
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Walnut Equipment Leasing Co., Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
1. FINANCIAL STATEMENT PRESENTATION
The unaudited interim financial statements presented herein have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles. These statements should be read in
conjunction with the audited financial statements and notes thereto for the
year ended April 30, 1995. The accompanying interim financial statements
have not been audited by independent certified public accountants, but in
the opinion of management, such financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary to
summarize fairly the results of operations, and are not necessarily
indicative of the results to be expected for the full year.
2. ACCOUNTING POLICIES
METHOD OF CONSOLIDATION
The unaudited interim consolidated financial statements of Walnut Equipment
Leasing Co., Inc. for the six month periods ended October 31, 1995 and
1994, respectively, include the operating results of its wholly-owned
subsidiary, Equipment Leasing Corporation of America ("ELCOA"). All
intercompany items have been eliminated for purposes of preparing the
consolidated financial statements contained herein.
ACCOUNTING FOR LEASES
The Company's lease contracts provide for total noncancellable rentals
which exceed the cost of the leased equipment plus anticipated financing
charges and, accordingly, are accounted for as financing leases. At the
inception of each new lease, the Company records the gross lease
receivable, the estimated residual value of the leased equipment, and the
unearned lease income. The unearned lease income represents the excess of
the gross lease receivable plus the estimated residual value over the cost
of the equipment leased. For leases originated after April 30, 1988, the
Company has changed its method of accounting to conform with the
requirements of FAS No. 91 "Accounting for Non Refundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Cost of
Leases". Under this method, commissions paid in the amounts of $31,791 and
$19,549 for the six months ended October 31, 1995 and 1994, respectively,
were accounted for as part of the Investment in Direct Financing leases.
Unearned income is earned and initial direct costs are amortized to
direct finance lease income using the interest (or "effective") method over
the term of each lease.
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10
An allowance for doubtful direct finance lease receivables has been
maintained at a level considered adequate to provide for estimated losses
that will be incurred in the collection of these receivables. The
allowance is increased by provisions charged to operating expense and
reduced by charge-offs based upon a periodic evaluation, performed at least
quarterly, of delinquent finance lease receivables. Pursuant to FAS 91,
reserves are established to reflect losses anticipated from delinquencies
and impairments that have already occurred rather than ultimate losses
expected over the life of the lease portfolio. Total write-offs charged
against this reserve for the six months ended October 31, 1995 and 1994
were $467,414 and $1,364,749, respectively, while the Company increased
these reserves by charges of $386,835 and $528,173, respectively, to
maintain reserves considered adequate for losses anticipated from remaining
outstanding delinquent lease receivables.
INCOME TAXES EXPENSE
Effective May 1, 1993, the Company adopted Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" (SFAS 109),
which requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expenses is the
tax payable or refundable for the period plus or minus the change during
the period in deferred tax assets and liabilities.
The net deferred tax asset as of April 30, 1995 includes deferred tax
assets (liabilities) attributable to the following temporary deductible
(taxable) differences:
Operating lease method vs. direct financial method $3,000,800
Provision for doubtful lease receivables 473,200
Other (35,000)
----------
Net deferred tax asset 3,439,000
Valuation allowance (3,439,000)
----------
Net deferred tax asset after valuation allowance $ ---
==========
A valuation allowance was required as of April 30, 1995 due to the net
operating loss carryover of approximately $21,182,000 and investment tax
credit carryover of approximately $1,284,000, and due to the valuation
allowance for the carryforwards there is no net change in deferred tax
assets for the six months ended October 31, 1995.
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WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED OCTOBER 31, 1995 AND 1994
REVENUES FROM LEASE CONTRACTS
Total revenues from direct finance leases for the six months ended October
31, 1995 decreased 8.41% or $176,056 as compared to the six months ended
October 31, 1994. This decrease resulted from a decrease in the amount of
outstanding lease receivables, offset in part by an increase in late charges
and other fees recognized from collection of delinquent lease receivables
during the six months ended October 31, 1995 in comparison to the prior year.
Aggregate new lease receivables entered increased $35,331 or .68% to $5,231,331
for the six months ended October 31, 1995 from $5,196,000 for the six months
ended October 31, 1994. Management is currently refining a marketing strategy
that began during the fourth quarter of the fiscal year ended April 30, 1995
that emphasizes "private label" leasing programs with manufacturers. Although
the company is experiencing a delay in the realization of these marketing
efforts during the current initiation period of the program, a dramatic
increase in volume beyond current levels is expected once the program is fully
implemented. See "Further Refinements in Marketing Strategy and Efforts to
Reduce Operating Losses", below.
Unearned income during the six months ended October 31, 1995 decreased by
$46,169 in comparison to a decrease of $247,793 for the six months ended
October 31, 1994. During the six month periods ended October 31, 1995 and
1994, the gross rents charged over the "net investment" in direct finance
leases were 144% and 144%, respectively. The recognition of direct finance
lease income reflects the composite aging of the underlying leases in the
portfolio, as well as application of FAS No. 91, to outstanding leases after
May 1, 1988 which affects leases originated after April 30, 1988, and changes
the method used to recognize income and expense items. FAS No. 91 does not
change the total income and expenses ultimately to be recognized from each
transaction. Further increases in new lease volume are expected to increase
the levels of unearned income in the future. The Company is continuing to
increase its efforts to contact new equipment vendors to further increase the
level of new business. As noted below, in an effort to further increase new
business during the current fiscal year, the Company has been in the process of
contacting equipment manufacturers with the expectation that it will jointly
market its leasing services to the customers by using its in-house printing and
direct-mail facilities, and when warranted, create a "private label lease
program" specifically for a given manufacturer. See "Further Refinements in
Marketing Strategy and Efforts to Reduce Operating Losses", below.
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12
The limited use of the operating lease equipment program resulted in
$13,031 of equipment being purchased for operating leases for the six months
ended October 31, 1995, and $12,915 for the six months ended October 31, 1994.
Operating lease rental income increased by $5,251 in the six months ended
October 31, 1995 as compared to the six months ended October 31, 1994,
primarily due to the purchase of additional equipment, and fewer retirements of
expiring leases.
INTEREST EXPENSE
For the six months ended October 31, 1995, interest expense increased
$275,676 or 13.0% as compared to the six months ended October 31, 1994.
Management attributes the increase to additional debt securities outstanding
and excess funds on hand from sale of debt securities awaiting investment in
new lease receivables, offset in part by the increase in interest income from
its investment in short-term U.S. government securities having maturities of
three months or less. Excess funds are maintained in highly liquid U.S.
government securities, which currently yield less interest income than the
interest expense being paid on debt securities from which the excess funds were
provided. Total interest expense (disregarding interest income of $249,877 and
$183,431, respectively, during the six month periods ended October 31, 1995 and
1994) averaged 9.4% on average total borrowings (including accrued interest) of
$56,592,036 for the six months ended October 31, 1995 as compared to 9.1% on
average total borrowings (including accrued interest) of $50,893,062 for the
six months ended October 31, 1994. The interest rate on three month U.S.
Treasury Bills was 5.31% at October 31, 1995 which represents a decrease of
3.63% over the 5.51% rate on similar securities at October 31, 1994.
OTHER EXPENSES
Lease origination expenses decreased .17% or $913 for the six months ended
October 31, 1995, compared to the corresponding period ended a year earlier.
Lease origination expenses, including capitalized commissions paid, were 11.0%
of new direct financing lease receivables during the six months ended October
31, 1995 as compared to 10.9% for the six months ended October 31, 1994. The
company's efforts in increasing new lease volume are continuing and at the same
time the company is attempting to reduce these costs whenever possible without
compromising its goals. See "Further Refinements in Marketing Strategy and
Efforts to Reduce Operating Losses". During the six months ended October 31,
1995 and 1994, commissions of $31,791 and $19,549, respectively, were paid and
included as lease origination expenses during the period. The Company believes
that increasing new leases generated from repeat vendors and increasing the
number of new vendors utilizing its leasing services that are being attracted
through its marketing efforts will assist to decrease the overall percentage of
total lease origination costs in comparison to new lease volume in the future.
General and administrative expenses increased by $97,808 or 9.9% for the
six months ended October 31, 1995, as compared to the corresponding period in
1994, due in part to increased recognition of amortized expenses associated
with the sale of debt securities by the Company and ELCOA, and to a greater
extent an increase in legal costs necessary to facilitate collection of its
delinquent lease receivables.
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13
An allowance for doubtful direct finance lease receivables is maintained at
a level considered adequate to provide for estimated losses that will be
incurred in the collection of these receivables. The allowance is increased by
the provisions charged to operating expense and reduced by charge-offs. Total
write-offs charged against this reserve for the six months ended October 31,
1995 and 1994 were $467,414 and $1,364,749, respectively. See Footnote 2 to
the Interim Consolidated Financial Statements. For the six months ended
October 31, 1995 and 1994, the Company recognized expenses of $386,835 and
$528,173 respectively, for its doubtful lease receivable provisions. This
provision was recognized in order to maintain an adequate allowance, based upon
management's belief and historical experience, for anticipated delinquencies
and impairments from doubtful direct finance lease receivables outstanding as
of October 31, 1995 and 1994. During the three months ended October 31, 1994,
the Company conducted an extensive review of the collectibility of all past due
accounts, and increased the amount of write-offs in those situations where
further costs in pursuing legal remedies in collection were unwarranted. This
resulted in an extraordinary level of write-offs of older delinquent accounts,
as evidenced by the $897,335 or 65.8% decrease in write-offs for the current
period ended October 31, 1995. Management is continuing its efforts in pursuit
of collections of all past due lease receivables.
FURTHER REFINEMENTS IN MARKETING STRATEGY AND EFFORTS TO REDUCE OPERATING
LOSSES
Management further initiated certain measures to refine its marketing
strategy during the six months ended October 31, 1995 that it believes may
result in an increase in the levels of new leases to be generated in the
future. The Company must increase the level of new leases and control its
costs of lease origination and administration in order to reduce its operating
losses.
During the three months ended April 30, 1995, the Company began to target
equipment manufacturers having a broad sales distribution network (primarily
those with at least $5 million in annual sales and at lease one hundred
equipment distributors and vendors) to offer them a "private label lease
program" customized for their distributors' needs. As of June 30, 1995,
relationships had been established with twenty-three manufacturers. The
Company's efforts in establishing relationships with additional manufacturers
continued, as the Company has entered into agreements with approximately fifty
such manufacturers as of December, 1995, and has solicited indications of
sincere interest from others. Once a relationship is established, the
manufacturer allows the Company to use its list of dealers and other sales
people for solicitation purposes. In this way, the Company accepts
responsibility for the origination, servicing, and funding for lease
transactions from each manufacturer for new leases from the manufacturers
distributors using the Company's forms and documentation, customized in some
cases with the equipment manufacturers' name. The Company uses its in-house
printing and direct mail facilities to produce flyers and brochures to be
distributed throughout each manufacturers' sales distribution network
illustrating the benefits of leasing, to facilitate sales of the manufacturers'
equipment. The Company is encouraged by the initial positive reaction received
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from the equipment manufacturers, and intends to further emphasize this program
as a means towards increasing new lease volume. The results of this program
were immaterial through April 30, 1995. They began in a small measure to be
recognized during the six months ended October 31, 1995, as more leases were
generated from these resources. Management is currently refining this program
to facilitate the amount of mailings to distributors of equipment, and is
actively seeking additional manufacturers to be added to the program.
The Company believes that lease securitization may provide both the
additional funding for and increased revenues associated with an increase in
new lease volume. Reference is made to the prospectus contained in the
Registration Statement dated September 14, 1995 relative to the offering and
sale of the Company's Senior Thrift Certificates. The Company anticipates that
such sales under a lease securitization program may commence during the fiscal
year ending April 30, 1996, although no such sales have occurred to date as a
result of the excess available funds the Company presently maintains awaiting
investment in new direct finance lease equipment.
COMPARISON OF THREE MONTHS ENDED OCTOBER 31, 1995 AND 1994
REVENUES
Total revenues from direct financing leases for the three months ended
October 31, 1995 decreased 8.9% or $91,758 as compared to the three months
ended October 31, 1994. This reduction was attributable to a decrease in the
amount of outstanding lease receivables. Aggregate new lease receivables
entered increased to $2,730,560 for the three months ended October 31, 1995 as
compared to $2,371,098 for the three months ended October 31, 1994, as a result
of leases generated through the Company's cooperative efforts with equipment
manufacturers. See "Further Refinements in Marketing Strategy and Efforts to
Reduce Operating Losses", above. Unearned income from outstanding direct
finance leases increased by $65,210 during the three months ended October 31,
1995, after having decreased by $183,654 during the three months ended October
31, 1994.
INTEREST EXPENSE
For the three months ended October 31, 1995, interest expense increased
$131,456 or 12.1% as compared to the three months ended October 31, 1994.
Management attributes this increase to additional debt securities outstanding
and excess funds on hand from sale of debt securities awaiting investment in
new lease receivables, offset in part by the increase in interest income from
its investment in short-term U.S. government securities having maturities of
three months or less. Excess funds are maintained in highly liquid U.S.
Government securities of three month maturities, which currently yield less
interest income than the interest expense being paid on excess funds. Total
interest expense (disregarding interest income of $130,494 and $95,941 during
the three month periods ended October 31, 1995 and 1994, respectively) averaged
9.3% on average total borrowings (including accrued interest) of $57,676,403
for the three months ended October 31, 1995 as compared to 9.1% on averaged
total borrowings (including accrued interest) of $51,951,361 for the three
months ended October 31, 1994.
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OTHER EXPENSES
Lease origination expense increased 15.0% or $35,448 for the three months
ended October 31, 1995 compared to the corresponding period ended a year
earlier. Lease origination expenses, including capitalized commissions paid
outside leasing brokers, were 10.5% of new financing lease receivables during
the three months ended October 31, 1995 as compared to 10.4% for the three
months ended October 31, 1994. This increase resulted from the costs
associated with the Company's direct mail efforts in cooperation with equipment
manufacturers during the three months ended October 31, 1995. Management
expects the benefits of these efforts to be recognized in subsequent periods.
In addition, $13,819 and $9,085 in commissions paid during the three months
ended October 31, 1995 and 1994, respectively, were capitalized and not charged
to expense.
General and administrative expenses increased by $86,673 or 17.7% for the
three months ended October 31, 1995, compared to the corresponding period in
1994, due to an increase in legal costs necessary to pursuit collections of all
past due receivables.
An allowance for doubtful direct finance lease receivables is maintained at
a level considered adequate to provide for estimated losses that will be
incurred in the collection of these receivables. The allowance is increased by
the provisions charged to operating expense and reduced by charge-offs. As a
result of the Company's extensive review of the collectibility of all past due
accounts during the three months ended October 31, 1994, write-offs of
delinquent lease receivables were $1,104,966, in comparison to $249,776 during
the three months ended October 31, 1995. The Company provided additional
provisions against these reserves in the amount of $196,639 and $356,224,
respectively, during the three month periods ended October 31, 1995 and 1994.
See Footnote 2 to the Interim Consolidated Financial Statements for a more
detailed discussion of the accounting for the provision for uncollectable
accounts.
CAPITAL RESOURCES AND LIQUIDITY
The Company has financed its growth to date primarily from proceeds of debt
securities offered to the public. The Company has not experienced any
difficulty in financing the purchase of equipment that it leases at current
levels.
Taking into consideration new business, the Company's cash and
unhypothecated leases on hand, anticipated renewal of a portion of the
Company's borrowings, anticipated sales of senior debt and other resources, it
is management's opinion that its cash will be sufficient to conduct its
business and meet its anticipated obligations during the current fiscal year.
The Company attributes the increased redemptions during the six months ended
October 31, 1995 to increased debt securities outstanding, and to a lesser
extent to rates of return in the equity markets and mutual funds in general.
No assurance can be given that the redemption of senior and subordinated
borrowings will not exceed the Company's expectation or that a substantial
portion of its offering of Senior Thrift Certificates or the offering by
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Equipment Leasing Corporation of America of its Demand and Fixed Rate
Certificates will be sold. Increased proceeds from debt securities during the
six months ended October 31, 1995 resulted from the re-commencement of an
offering to the public, the registration of which was declared effective
September 14, 1995. During the same period during the prior year, sales of the
certificates had been suspended from August 31, 1994 to October 31, 1994,
pending the filing of a post-effective ammendment to the Company's registration
statement.
In view of the Company's history of losses, the uncertainty with respect to
future interest rates to holders of its unsecured borrowings, the potential
redemption of senior and subordinated borrowings and the uncertainty as to the
sale of its offering of Senior Thrift Certificates, and of the sale of the
Demand and Fixed Rate Certificates, management is unable to estimate the
Company's future profitability and liquidity beyond the current fiscal year.
If the Company continues to have losses, it may have difficulty in servicing
its debt in future years. Management attributes its losses during the current
fiscal year to the size of its lease portfolio relative to its fixed costs,
including interest on outstanding debt. Management is currently exploring
various means of increasing its new leases entered and the outstanding lease
portfolio. See "Consolidated Statements of Cash Flows" on page 5 of this
report for an analysis of the sources and uses of cash by the Company during
the six month periods ended October 31, 1995 and 1994, respectively. See also
"Further Refinements in Marketing Strategy and Efforts to Reduce Operating
Losses" on page 11 of this report on Form 10-Q.
For a complete discussion of liquidity and capital resources for the fiscal
year ending April 30, 1995, reference is made to the "Capital Resources and
Liquidity" section of Form 10-K filed on July 28, 1995 for the fiscal year
ended April 30, 1995.
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17
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On August 2, 1995 and September 12, 1995, the Company filed post-effective
amendments in conjunction with a new registration statement to register for
sale to the public the principal amount of $22,400,000 in principal amount of
Senior Thrift Certificates. (SEC File #33-81630). The offering of these debt
securities was declared effective September 14, 1995 after which the offering
to the public re-commenced.
On August 2, 1995 and September 11, 1995, the company's wholly-owned
subsidiary, ELCOA, filed post-effective amendments to its registration
statement to register for sale to the public the remaining $13,5000,000 in
principal amount of its Demand and Fixed Rate Certificates SEC File #33-65814).
The offering of these debt securities was declared effective September 14,
1995, after which the offering to the public re-commenced.
The Company relocated its offices to One Belmont Avenue, Suite 200, Bala
Cynwyd, Pennsylvania, effective October 1, 1995. Its telephone numbers remain
the same. Reference is made to Footnote 12 to the Consolidated Financial
Statements filed as part of Post-Effective Amendment Number 2 filed September
12, 1995. (SEC File #33-81630).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K
There were no reports on Form 8-K filed during the six month period ended
October 31, 1995.
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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.
December 15, 1995 WALNUT EQUIPMENT LEASING CO., INC.
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Date
/s/ William Shapiro
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William Shapiro, President and
Chief Financial Officer