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 quarterly period ended January 31, 1996
----------------
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
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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 February 29, 1995: $1.00 par value common stock - 1,000
shares.
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WALNUT EQUIPMENT LEASING CO., INC.
INDEX
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Part I. Financial Information Page Number
- ------------------------------ -----------
Item 1. Financial Statements
Consolidated Balance Sheets; January 31, 1996
(unaudited) and April 30, 1995 1
Consolidated Statements of Operations;
Nine months ended January 31, 1996 and
1995 (unaudited) and Three months ended
January 31, 1996 and 1995 (unaudited) 3
Consolidated Statement of Changes in
Shareholders' Deficit; Nine months ended
January 31, 1996 (unaudited) 4
Consolidated Statements of Cash Flows;
Nine months ended January 31, 1996 and
1995 (unaudited) 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
3
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, 1996 April 30, 1995
--------------- --------------
(unaudited)
ASSETS
Direct finance Leases:
Aggregate future amounts receivable
under lease contracts $ 18,192,181 $ 18,829,268
Estimated residual value of equipment 1,756,725 1,976,244
Less:
Unearned income under lease contracts ( 3,175,343) ( 3,436,458)
Advance payments (568,435) (579,965)
------------- ------------
16,205,128 16,789,089
Allowance for doubtful lease receivables (1,331,694) (1,413,389)
------------- ------------
14,873,434 15,375,700
------------- ------------
Operating Leases:
Equipment at cost, Less accumulated depreciation of
$11,855 and $6,680, respectively 36,915 23,316
Cash and Cash Equivalents 9,905,794 8,957,949
Other assets (Includes $637,479 paid to or receivable
from related parties at April 30, 1995.) 1,062,561 1,086,402
------------- ------------
Total assets $ 25,878,704 $ 25,443,367
============= ============
SEE ACCOMPANYING NOTES
-1-
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WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
January 31, 1996 April 30, 1995
---------------- --------------
(unaudited)
LIABILITIES
Amounts payable to equipment suppliers $ 590,650 $ 477,296
Other accounts payable and accrued expenses 260,211 252,361
Demand, Fixed Rate and Money Market Thrift
Certificates (Includes $181,266 at
April 30, 1995 payable to related parties) 26,494,498 24,521,875
Senior Thrift Certificates (includes $697,706
at April 30, 1995 payable to related parties) 20,558,773 18,783,578
Subordinated Thrift Certificates
(Includes $555,844 at April 30, 1995 payable
to related parties) 5,608,927 6,025,366
Accrued interest 6,260,567 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
----------- -----------
59,786,027 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 (34,009,379) (30,145,172)
----------- -----------
(33,907,323) (30,043,116)
----------- -----------
Total liabilities and shareholders' deficit $25,878,704 $25,443,367
=========== ===========
See accompanying notes
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WALNUT EQUIPMENT LEASING CO., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Nine Months Ended January 31, For The Three Months Ended January 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue:
Income earned under direct finance lease contracts $ 2,821,202 $ 3,049,667 $ 903,546 $ 955,955
Operating lease rentals 14,187 21,590 2,092 14,746
----------- ----------- ----------- -----------
Total revenue 2,835,389 3,071,257 905,638 970,701
Costs and expenses:
Interest 3,637,212 3,209,568 1,235,867 1,083,899
Lease origination expenses 829,932 816,469 288,103 273,727
General and administrative expenses 1,648,064 1,497,799 565,996 513,538
Provision for doubtful lease receivables 579,213 901,314 192,378 373,141
Depreciation of operating lease equipment 5,175 5,393 2,178 1,552
----------- ----------- ----------- -----------
Total costs and expenses 6,699,596 6,430,543 2,284,522 2,245,857
----------- ----------- ----------- -----------
Loss before provision for income taxes (3,864,207) (3,359,286) (1,378,884) (1,275,156)
Provision for income taxes (See Note 2) --- --- --- ---
----------- ----------- ----------- -----------
Net Loss $(3,864,207) $(3,359,286) $(1,378,884) $(1,275,156)
=========== =========== =========== ===========
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 nine month
period ended January 31, 1996
(unaudited) --- --- --- --- --- (3,864,207) (3,864,207)
---- ---- ---- ------- -------- ------------ ------------
Balance, January 31, 1996 (unaudited) 281 $ 281 275 $ 275 $101,500 $(34,009,379) $(33,907,323)
==== ======= ==== ======= ======== ============ ============
SEE ACCOMPANYING NOTES
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WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended January 31,
1996 1995
----------- -----------
(unaudited) (unaudited)
OPERATING ACTIVITIES
- --------------------
Net Loss $(3,864,207) $(3,359,286)
Adjustments to Reconcile
Net Loss to Net Cash
Used in Operating Activities:
Depreciation 5,175 5,393
Amortization of Deferred Debt Expenses 95,274 83,557
Provision for doubtful
Lease receivables 579,213 901,314
Effects of Changes
in other Operating Items:
Accrued Interest 848,819 842,196
Amounts Payable to Equipment Suppliers 113,354 (79,435)
Other (net), principally
increase in other Assets (62,553) (257,077)
----------- -----------
Net Cash Used in Operating Activities (2,284,925) (1,863,338)
----------- -----------
INVESTING ACTIVITIES
- --------------------
Excess of Cash Received Over Lease Income
Recorded 5,269,296 5,578,377
Decrease in Advance Payments (11,530) (27,970)
Purchase of Equipment for Lease (5,354,517) (5,777,167)
----------- -----------
Net Cash Used in Investing Activities $ (96,751) $ (226,760)
----------- -----------
SEE ACCOMPANYING NOTES
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WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
For the Nine Months Ended January 31,
1996 1995
----------- -----------
(unaudited) (unaudited)
FINANCING ACTIVITIES
- --------------------
Proceeds for Issuance of:
Demand, Fixed Rate and Money
Market Thrift Certificates $ 7,168,313 $ 7,826,763
Senior Thrift Certificates 4,508,455 3,366,600
Redemption of:
Demand, Fixed Rate, and Money
Market Thrift Certificates (5,195,690) (6,041,348)
Subordinated Thrift Certificates
and Debentures (418,297) (68,810)
Senior Thrift Certificates (2,733,260) (2,345,800)
----------- -----------
Net Cash Provided By
Financing Activities 3,329,521 2,737,405
----------- -----------
Increase in Cash
and Cash Equivalents 947,845 647,307
Cash and Cash Equivalents,
Beginning of Year 8,957,949 7,598,151
----------- -----------
Cash and Cash Equivalents,
End of Year $ 9,905,794 $ 8,245,458
----------- -----------
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 nine month periods ended January 31, 1996 and
1995, 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 $41,286 and
$31,410 for the nine months ended January 31, 1996 and 1995, 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 nine months ended January 31, 1996 and 1995
were $660,908 and $1,957,171 respectively, while the Company increased
these reserves by charges of $579,213 and $901,314, 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 nine months ended January 31, 1996.
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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 NINE MONTHS ENDED JANUARY 31, 1996 AND 1995
REVENUES FROM LEASE CONTRACTS
Total revenues from direct finance leases for the nine months ended
January 31, 1996 decreased 7.49% or $228,465 as compared to the nine months
ended January 31, 1995. This decrease resulted from a decrease in the
amount of outstanding lease receivables during the nine months ended
January 31, 1996 in comparison to the prior year. Aggregate new lease
receivables entered decreased $494,439 or 6.35% to $7,297,711 for the nine
months ended January 31, 1996 from $7,792,150 for the nine months ended
January 31, 1995. Management attributes this decrease to a general
slowdown in the economy as a result of harsh weather conditions throughout
the United States during the winter of 1996. 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 nine months ended January 31, 1996
decreased by $261,115 in comparison to a decrease of $347,403 for the nine
months ended January 31, 1995. During the nine month periods ended January
31, 1996 and 1995, the gross rents charged over the "net investment" in
direct finance leases were 144% and 145%, 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. In an effort 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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The limited use of the operating lease equipment program resulted in
$23,133 of equipment being purchased for operating leases for the nine
months ended January 31, 1996, and $12,915 for the nine months ended
January 31, 1995. Operating lease rental income decreased by $7,403 in the
nine months ended January 31, 1996 as compared to the nine months ended
January 31, 1995, primarily due to increased retirements of expiring leases
which offset any increase resulting from the purchase of additional
equipment.
INTEREST EXPENSE
For the nine months ended January 31, 1996, interest expense increased
$427,644 or 13.32% as compared to the nine months ended January 31, 1995.
Management attributes the increase to additional debt securities
outstanding and the 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 three month maturities. 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 $374,585 and $277,791,
respectively, during the nine month periods ended January 31, 1996 and
1995) averaged 9.41% on average total borrowings (including accrued
interest) of $56,837,595 for the nine months ended January 31, 1996 as
compared to 9.1% on average total borrowings (including accrued interest)
of $51,099,173 for the nine months ended January 31, 1995. The interest
rate on three month U.S. Treasury bills was 5.01% and 5.80% at January 31,
1996, and January 31, 1995, respectively.
OTHER EXPENSES
Lease origination expenses increased 1.65% or $13,463 for the nine
months ended January 31, 1996, compared to the corresponding period ended a
year earlier, as a result of increased direct mail costs associated with
the Company's marketing program. Lease origination expenses, including
capitalized commissions paid, were 11.9% of new direct financing lease
receivables during the nine months ended January 31, 1996 as compared to
10.94% for the nine months ended January 31, 1995. The increased
percentage in the period ended January 31, 1996 is primarily attributable
to increased direct mail costs resulting from the solicitation of the
distribution networks of the equipment manufacturers who have signed
co-operative manufacturer agreements with Walnut. 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 it's goals. See "Further Refinements in Marketing Strategy
and Efforts to Reduce Operating Losses". During the nine months ended
January 31, 1996 and 1995, commissions of $41,286 and $31,410,
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.
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General and administrative expenses increased by $150,265 or 10.03%
for the nine months ended January 31, 1996, as compared to the
corresponding period in 1995, 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.
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 nine months ended January 31, 1996 and 1995 were $660,908 and
$1,957,171, respectively. See Footnote 2 to the Interim Consolidated
Financial Statements. For the nine months ended January 31, 1996 and 1995,
the Company recognized expenses of $579,213 and $901,314 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 January 31,
1996 and 1995. During the nine months ended January 31, 1995, 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 $1,296,263 or 66.2% decrease in write-offs
for the current period ended January 31, 1996. Management is continuing in
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 nine months ended January 31, 1996 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 March, 1996, 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
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customized 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 from the equipment manufacturers, and
intends to further emphasize this program as a means towards increasing new
lease volume. 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.
In conjunction with its efforts in reaching additional equipment
manufacturers, the Company began during January, 1996, to compile a listing
by industry of equipment distributors, dealers, and other salespeople
according to their standard industry classification (SIC) code. To date,
the Company has compiled a list of approximately 300,000 names of these
prospects. By utilizing its in-house advertising and direct mail
facilities, the Company has targeted up to twenty-thousand general
solicitation mailings to be sent each week on a revolving basis to this
target group of commercial equipment dealers and distributors. These
mailings, which commenced during the later part of January, 1996, will be
made in conjunction with the mailings currently being sent to the
distribution networks of each of the equipment manufacturers described
above. Although these general solicitations targeted by industry will
increase the amount of lease origination expenses, management believes that
these costs (principally bulk mail postage, printing paper and supplies)
will be more than offset by any increase in new leases generated from
commercial equipment sellers who are presently unaware of the Company's
services.
The Company believes that lease securitization may provide both the
additional funding for and increased revenues associated with any increase
in new lease volume. Reference is made to the prospectus 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 calendar year 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 JANUARY 31, 1996 AND 1995
REVENUES
Total revenues from direct financing leases for the three months ended
January 31, 1996 decreased 5.48% or $52,409 as compared to the three months
ended January 31, 1995. This decrease was attributable to a decrease in
the amount of outstanding leases during the current period. Aggregate new
lease receivables entered decreased to $2,066,380 for the three months
ended January 31, 1996 as compared to $2,596,150 for the three months ended
January 31, 1995 as a result of harsh winter conditions throughout the
United States, causing a general slowdown in the economy during the three
months ended January 31, 1996. See "Further Refinements in Marketing
Strategy", above, for a discussion of the Company's current efforts to
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increase the level of new leases being generated. Deferred income from
outstanding direct finance leases decreased by $214,946 during the three
months ended January 31, 1996, after having decreased by $99,610 during the
three months ended January 31, 1995.
INTEREST EXPENSE
For the three months ended January 31, 1996, interest expense
increased $151,968 or 14.02% as compared to the three months ended January
31, 1995. 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 three month maturities. 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 $124,708 and $94,360 during the three month periods
ended January 31, 1996 and 1995, respectively) averaged 9.3% on average
total borrowings (including accrued interest) of $58,681,206 for the three
months ended January 31, 1996 as compared to 8.9% on average total
borrowings (including accrued interest) of $52,682,862 for the three months
ended January 31, 1995.
OTHER EXPENSES
Lease origination expense increased 5.25% or $14,376 for the three
months ended January 31, 1996 compared to the corresponding period ended a
year earlier. Lease origination expenses, including capitalized
commissions paid outside leasing brokers, were 14.4% of new financing lease
receivables during the three months ended January 31, 1996 as compared to
11.0% for the three months ended January 31, 1995. This increase in costs
resulted from the costs associated with the Company's direct mail efforts
in cooperation with equipment manufacturers during the three months ended
January 31, 1996. In addition, $9,495 and $11,861 in commissions were paid
during the three months ended January 31, 1996 and 1995, respectively, and
were capitalized and not charged to expense.
General and administrative expenses increased by $52,458 or 10.22% for
the three months ended January 31, 1996, compared to the corresponding
period in 1995, 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 which continued during the
three months ended January 31, 1995, write-offs of delinquent lease
receivables were $592,422, in comparison to $193,494 during the three
months ended January 31, 1996. The Company provided additional provisions
against these reserves in the amount of $192,378 and $373,141,
respectively, during the three month periods ended January 31, 1996 and
1995. See Footnote 2 to the Interim Consolidated Financial Statements for
a more detailed discussion of the accounting for the provision for
uncollectable accounts.
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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, cash available from sale of leases to ELCOA,
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. Overall increased
proceeds form debt securities during the nine months ended January 31, 1996
resulted from the re-commencement of an offering to the public, the
registration of which was declared effective September 14, 1995. During
the three months ended January 31, 1995, sales of the certificates had been
suspended (from August 31, 1994 to January 6, 1995), pending the filing of
a post-effective amendment. This overall increase in Senior Thrift
Certificates sold was offset in part by a decrease in proceeds from ELCOA's
Demand and Fixed Rate Certificates as a result of management's efforts to
reduce the solicitation of Senior Thrift Certificates. The overall
decrease in the redemption of certificates during the nine month ended
January 31, 1996 as compared to the nine months ended January 31, 1995 is
attributable to a slight decrease in market rates in general during the
current third fiscal quarter, while, due to the Company's trust indenture
agreement, the Company was unable to drop its rates accordingly, thereby
making the Company's certificates more attractive. This overall decrease
is offset in part by redemptions from increased debt outstanding. 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
Equipment Leasing Corporation of America of its Demand and Fixed Rate
Certificates will be sold.
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 nine
month periods ended January 31, 1996 and 1995, 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.
14
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.
March 14, 1996 WALNUT EQUIPMENT LEASING CO., INC.
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Date
/s/ William Shapiro
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William Shapiro, President and
Chief Financial Officer