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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended Commission file number
APRIL 30, 1996 2-65101
WALNUT EQUIPMENT LEASING CO., INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 23-1712443
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
SUITE 200, ONE BELMONT AVENUE, BALA CYNWYD, PA 19004
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 668-0700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / X /
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within 60 days
prior to the date of filing.
No voting stock is held by non-affiliates of the Registrant.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of June 30, 1996, there were 1,000 shares of the Registrant's common
stock, $1.00 par value, outstanding. The Registrant has no other
classes of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
Item 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Walnut Equipment Leasing Co., Inc. (the "Company" or "Walnut"), which was
incorporated in Pennsylvania in 1969, commenced business in 1960 through its
predecessor and sole common stockholder, Walnut Associates, Inc., a Delaware
Corporation. It primarily engages in the business of acquiring general
commercial equipment for lease throughout the United States. Effective April
29, 1977, the Company changed the situs of incorporation to the State of
Delaware. The Company conducts its operations principally through
wholly-owned subsidiaries in 48 states. The term "Company" refers
collectively to the present Delaware corporation, its predecessors and its
wholly-owned subsidiaries, unless the context otherwise indicates. On May 6,
1986, the Company formed a subsidiary, Equipment Leasing Corporation of
America ("ELCOA") which the Company capitalized on May 23, 1986 with equipment
costing $1,000,000 and related direct financing leases, in exchange for all of
that subsidiary's voting common stock. ELCOA is operated as a separate
entity, with its own Board of Directors, a majority of the members of which
are independent of the Company.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company conducts business in only one industry segment, the leasing of
commercial equipment. See the Consolidated Financial Statements included in
Item 8 to this report.
The Company's principal business is the acquisition of commercial and
industrial equipment for business use which it leases under full-payout direct
financing leases to what it considers credit-worthy lessees. See "Marketing"
and "Credit Policy." The Company services the needs of manufacturers and
distributors of small commercial equipment by offering them the opportunity to
use leasing as a sales tool. See "Marketing." The Company acquires the
equipment only after leases have been consummated. The Company ordinarily
writes leases for periods of one to five years for equipment costing $750 or
more, but which does not usually exceed $6,000. The lease agreements entered
into between the Company and the lessees contemplate the payment of funds
sufficient to recover the Company's investment and to provide a profit over
the terms of the leases. The Company recognizes as income over the entire
term of the leases the difference between the total rents scheduled to be
collected along with the estimated residual value of the equipment at the end
of the lease term, less the cost of the equipment. The Company recognizes
income from each lease over its respective term, even if payments are
delinquent for any number of months. The Company sets aside from its income a
provision for anticipated losses from delinquencies. See Footnote 1 to the
Consolidated Financial Statements. The lease agreements do not contain an
express purchase option. The Company has offered the equipment for sale to
the former lessee at the recorded residual value, after expiration of the
lease, which ranges from $1 to approximately 10% of the Company's original
equipment cost. Substantially all leased equipment has been sold to the
lessees at termination of their leases. See "Marketing".
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The leases require that the lessee maintain and insure the equipment. The
Company disclaims any obligation to repair or maintain the equipment. The
lessee relies solely on warranties or services from the vendor or the
manufacturer of the equipment. In leasing equipment the Company relies
principally on the credit of the lessee to recapture its cost of equipment
rather than the residual value of the equipment. Due to the small size of
each individual lease, the Company does not conduct an actual physical
inspection of the equipment prior to or during the term of the lease, but
relies instead upon both written and oral representations by the lessees
regarding satisfactory acceptance of the equipment, prior to commencement of
the lease and payment of the vendor's invoice by the Company. The Company
carries its own insurance in the event the lessee fails to insure, and also
maintains insurance which management believes is adequate against liability
from the anticipated use, or loss by fire or otherwise of the equipment by the
lessees. These leases are commonly referred to as direct finance leases.
The Company uses a standard non-cancellable lease for its direct finance
leases, the terms and conditions of which vary slightly from transaction to
transaction. These leases are commonly referred to as "full-payout", "hell or
high water", or finance leases pursuant to Article 2A of the Uniform
Commercial Code. As such, the lessees are unconditionally obligated to make
monthly rental payments to the Company irrespective of the condition, use, or
maintenance of the equipment under lease. In management's opinion, the
lessees have no legal or equitable defenses that may be asserted against the
Company in the event the leased equipment does not function properly. In
substantially all cases, the lease states that lessees are obligated to (1)
remit all rents due, regardless of the performance of the equipment; (2)
operate the equipment in a careful and proper manner and in compliance with
applicable governmental rules and regulations; (3) maintain and service the
equipment; (4) insure the equipment against casualty losses and public
liability, bodily injury and property damage; and (5) pay directly or
reimburse the Company for any taxes associated with the equipment, its use,
possession or lease, except those relating to net income derived by the
Company therefrom.
Under terms of the lease contract, the lessees are prohibited from
assigning or subletting the equipment or appurtenant lease to any third party
without the express written consent of the Company. The lease provides that
the Company, in the event of a default by the lessee, may declare the entire
unpaid balance of rentals due and payable immediately and may seize and remove
the equipment for subsequent sale, release or other disposition. During the
fiscal year ended April 30, 1996, the Company entered into 1,880 direct
finance leases which had an average initial term of approximately 34 months,
representing aggregate contractual lease receivables of $10,025,786. Of
these, a technical event of default in the terms of the lease contract
occurred in 530 leases having an aggregate contractual lease receivable of
$2,677,080, of which 79 having an aggregate contractual lease receivable of
$375,710 (included in the 530 leases) were serious enough to require the
Company to declare the entire unpaid balance of rentals due and payable
immediately. See "Marketing".
The Company has, from time to time, leased equipment under renewable
leases which do not contemplate full recovery of the Company's original costs
during their initial one year term. These leases are referred to as operating
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leases, intended primarily for large corporate and governmental lessees that
are restricted from entering into leases with terms longer than one year. The
leases are automatically renewed for an additional year, and so on from year
to year, unless terminated upon ninety days' prior written notice. Under the
operating lease the lessee is granted an option to purchase the equipment for
the original invoice price less a credit for a portion of the rentals paid.
The Company requires equipment vendors to refrain from replacing for two years
the equipment should the lessee cancel after the initial one year term. The
monthly rental is calculated as 6% of the equipment cost monthly. Total
annual rentals charged by the Company equals 72% of the original equipment
cost. The repurchase price is equal to the original cost of the equipment,
less a credit for a portion of the rentals received from the lessee. There
are no assurances that the Company's costs will be recovered. As of April 30,
1996, the net book value of equipment subject to operating leases was $19,420.
As of that date, the Company had contracts for operating leases in the
aggregate remaining balance of $10,433 all of which are due during the fiscal
year ended April 30, 1997.
The Company (including ELCOA), as of April 30, 1996, owned 7,104 direct
financing leases with an aggregate balance of $18,423,816, on a consolidated
basis, with an average lease receivable balance of $2,593. Of these leases,
504 had balances between $6,000 and $9,999 with an aggregate balance of
$3,781,021, and 160 had balances in excess of $10,000 with an aggregate
balance of $2,570,715. Leases over $6,000 accounted for 9.4% of the total
number of leases outstanding and 34.5% of the total dollar amount of lease
receivables outstanding at April 30, 1996. On occasion, the Company enters
into more than one lease agreement with a particular lessee. As of April 30,
1996, the three largest lessees were Mica Metals, Inc. with a balance of
$76,161, Miller Freeman, Inc. with a balance of $55,265 and Greenbriar
Restaurant with a balance of $46,648. All three leases were generated as a
result of Co-Operative Agreements with Manufacturers. Accordingly, no single
lessee represents over .4 percent of the outstanding lease portfolio. As of
April 30, 1996, ELCOA owned 6,644 direct financing leases which had an
aggregate lease receivable balance of $16,667,226, and an average lease
receivable balance of $2,509. Of these leases, 408 had balances between
$6,000 and $9,999 with an aggregate balance of $3,032,573 and 127 and balances
in excess of $10,000 with an aggregate balance of $2,057,444.
The Company purchases its equipment for lease from a variety of equipment
vendors located throughout the United States, none of which was responsible
for supplying the company with 5% or more of its equipment purchases. See
"Marketing". There are no back-log orders for equipment purchase commitments.
The Company believes it is in a competitive position within its industry
because of its ability to carry a large number of small equipment leases
through the extensive utilization of electronic data processing and its "back
office" facilities. Electronic data processing includes proprietary computer
programs developed exclusively for the Company, which enable it to maintain
detailed records of each lease contract presently outstanding and can likely
service by at least ten fold its present number of contracts without
modification. Other "back-office" facilities include credit investigation,
documentation, bookkeeping and collection departments, all centrally located
in the Company's headquarters which eliminate the need to contract outside
services to perform these duties now and in the future. However, future
growth is dependent upon sources of adequate financing for the cost of newly
acquired equipment, including the proceeds from the sale of Senior Thrift
Certificates and the sale of debt securities by ELCOA, the Company's
wholly-owned subsidiary. See "Methods of Financing."
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During the three fiscal years ended April 30, 1996, 1995, and 1994, the
gross rents charged over the "net investment" in direct finance leases were
146%, 145% and 147%, respectively. Gross rents are calculated as the
aggregate rentals contracted to be received over the terms of all leases
entered during the respective years, and are not on an annual basis. Factors
considered by the Company in determining the rents to be charged are the net
equipment cost, marketing expenses, credit investigation, document processing,
invoicing and collections, potential bad debt write-offs, the Company's cost
of funds, term of the lease, and a profit margin.
The Company's leasing activities are not generally oriented towards
creating tax benefits, and therefore changes in recent tax legislation since
1986 have only a marginal benefit to the Company. The Company believes that
some of the Company's competitors lost the benefit of using excess tax
deductions and credits generated by their leasing operations to offset income
from other sources, which in the past allowed them to offer lower leasing
rates than the Company. To the extent the changes mentioned above reduced the
benefits of equipment ownership, the Company believes that businesses might be
more inclined to lease because deductibility of rental payments by the lessees
remain unaffected, while purchases no longer provide certain tax advantages.
Management believes that changes under the Tax Reform Act of 1986, as amended,
have had no material impact on the Company's operations.
MARKETING
Since its inception, the Company has concentrated on seeking lessees
desiring to lease equipment costing $6,000 or less under direct finance
leases, because it believes that there is less competition for small leases.
In addition, the Company is able to spread risk of loss from defaulted leases
over a greater number of leases. It leases items such as office equipment,
business machines, graphic arts equipment, scientific and medical
instrumentation, material handling equipment, microfilm equipment, automobile
test equipment, cash registers, restaurant and food-service equipment, and
other business, industrial and commercial equipment and does not concentrate
in any one type. The Company estimates the total cost of equipment purchased
for lease comprising 5% or more of the total purchases during the twelve
months ended April 30, 1996 and 1995 as follows:
INDUSTRY April 30, 1996 April 30, 1995
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Food/Hospitality Service 45% 39%
Industrial Equipment 20% 21%
Auto After Market and Test Equipment 9% 13%
Office Machines and Copiers 11% 8%
Computers and Peripheral Hardware 5% 7%
Audio Visual and Communications --- 5%
These amounts vary from year to year, and may not be indicative of future
purchases. The equipment purchased is primarily newly manufactured equipment,
but on occasion the Company will purchase used equipment for lease at its then
fair market value. The equipment is located throughout the United States
without undue concentration in any one area. The Company's historical
experience indicates that the equipment under lease does not generally become
obsolete at the conclusion of the lease term.
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The Company concentrates its marketing effort to reach salesmen, dealers,
distributors and branch offices of companies selling equipment similar to that
described above for lease to appropriate lessees. The Company has previously
used regional offices, direct mail programs, and telemarketing, all of which
have been phased out in favor of the Company's current marketing strategy that
emphasizes direct contact with manufacturers in promoting leasing as a sales
tool to their dealers. The Company believes that with the cooperative efforts
of equipment manufacturers, an increased number of dealers and distributors
(i.e. "vendors") will become aware of the option of using leasing as a sales
tool, which in turn will increase the generation of new leases by the Company.
The Company currently actively conducts business on a monthly basis through
approximately 180 equipment vendors, distributors, and branch outlets of
manufacturers. None supply more than 5% of the Company's new business.
The following table reflects the aggregate dollar amount of rentals
represented by new leases and the number of such leases written during each of
the last three years, on a quarterly basis.
Fiscal Years Ended April 30,
1996 1995 1994
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Aggregate Lease Rentals $10,025,786 $10,189,624 $10,168,874
Number of New Leases 1,880 2,170 2,242
Average Amount per New Lease $5,333 $4,696 $4,536
New Leases
Entered Quarterly
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First Quarter $ 2,500,771 $ 2,824,902 $ 2,744,959
Second Quarter 2,730,560 2,371,098 2,299,854
Third Quarter 2,066,380 2,596,150 2,286,672
Fourth Quarter 2,728,075 2,397,474 2,837,389
During the beginning of the third quarter of the fiscal year ended April
30, 1993, management eliminated certain types of equipment that it previously
considered for lease, such as credit-card machines, commercial water coolers
and security surveillance equipment. Management believed that these, as well
as other types of equipment it considered to be over-priced, were a factor in
the increased amount of delinquencies during the fiscal year ended April 30,
1993. In addition, management restricted the submission of lease applications
through brokers as the ratios of consummated leases to the number of
applications submitted was unacceptable. These factors, in conjunction with a
weak nationwide economy, led to the decline in new lease volume during the
remainder of the fiscal year, which trend continued into the fiscal years
ended April 30, 1994 and 1995. The Company estimates that its share of the
"small-ticket" leasing market for commercial equipment costing less than
$25,000 is less than 1%.
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During the fourth quarter of the fiscal year ended April 30, 1994, the
Company refined its marketing efforts aimed at equipment manufacturers,
encouraging them to cooperate with the Company in educating their dealer or
branch office distribution networks with using leasing as a sales tool.
During the last three months of the fiscal year ended April 30, 1995, the
Company began to target equipment manufacturers with sales in excess of
$5 million and an established distribution network to offer them a "private
label lease program". These programs are intended to further increase the
Company's marketing efforts. For a more complete discussion of these efforts,
see "Further Refinements in Marketing Strategy and Efforts to Reduce Operating
Losses" on page 23. Management anticipates that these programs will continue,
and as other leasing companies raise their minimum transaction size, the
Company expects to gain from an increase in size of new lease applications
being submitted. As noted by the table above, the average size of each new
lease receivable has increased approximately 18% over the three fiscal years
ended April 30, 1996, of which approximately 80% of this increase is related
to the fiscal year ended April 30, 1996. Management expects this trend to
continue as its cooperative efforts with equipment manufacturers continue to
mature. See "Further Refinements in Marketing Strategy and Efforts to Reduce
Operating Losses" on page 23.
The Company markets its leases throughout the United States. The
following is a breakdown as of April 30, 1996 of the original cost of
equipment, net of residual value, that the Company owns or manages on behalf
of ELCOA in various areas of the United States. Approximately $22,480,933 in
original equipment cost is owned by ELCOA, and managed by the Company. See
"BUSINESS - Methods of Financing."
Amount %
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New England $ 2,880,054 11.84
Mid Atlantic 7,010,403 28.82
Southeast 4,249,540 17.47
Midwest 2,826,540 11.62
South 2,264,637 9.31
Rocky Mountain 547,308 2.25
West Coast 1,748,952 7.19
Southwest 2,797,350 11.50
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$24,324,784 100.0%
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CREDIT POLICY
In order to conduct a business dealing in leases principally under $10,000,
the Company has developed what it considers to be an efficient method of
determining credit risks. The Company bases its decision to accept an
application from a potential lessee on the Company's assessment of the lessee's
ability to meet its obligations for payments as set forth under the lease and
not upon the resale value of the equipment in the event of the lessee's
default. The Company's lessees range from newly formed businesses (less than
two years in business) to major corporations. Lease rental rates are
established based upon the Company's assessment of credit risk, as newly formed
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and smaller businesses pay a higher rate in general than would established
companies. As the Company entered into an excess of 1,800 leases to all types
and sizes of businesses during the fiscal year ended April 30, 1996, it is
unable to quantify with any certainty the general material characteristics of
all of its lessees. The Company believes that at least a majority of its
lessees are small to medium size businesses with between $100,000 and
$2,000,000 in annual sales and less than 50 employees. The Company relies
heavily on bank references, trade references, personal credit reports on the
principals of the lessee, number of years in business, property searches and
other credit bureau reports. In addition to the credit investigation, the
Company generally requires the owners and principal shareholders (and their
spouses) of sole proprietorships, partnerships, and closely-held corporations
which have been in business less than three years, or have fewer than 20
employees, to personally guarantee the obligations of the lessee. Additional
rental prepayments are required if the lessee has been in business for less
than two years. Most credit decisions are made within one day of the initial
credit application. The Company has found that credit evaluation is essential
as the equipment has a substantially reduced value on resale or releasing.
Consequently, it must rely primarily on its initial credit judgment. The
Company employs 8 people in its Credit and Collection Departments, and has a
policy of litigating all claims against lessees for unpaid rentals. These
claims are usually settled in favor of the Company, as the lease contract
provides that in the event of default by the lessee, the Company is entitled to
the accelerated balance of the remaining contractual lease payments, late
charges and, in the event of litigation, reimbursement for collection costs and
reasonable attorney's fees. Historically, the amount recovered from
collections of delinquent leases has exceeded the legal fees incurred in
connection therewith. The Company reimbursed the law firm of William Shapiro,
Esq., P.C., an affiliate, for payroll costs of its staff attorneys and any
required advances for court costs, and did not pay any other fees on either a
contingent or hourly basis. Neither William nor Kenneth Shapiro who are
officers and directors of the Company are included in the law firm's payroll.
William Shapiro is the sole shareholder of the law firm. See Note 10 to the
Consolidated Financial Statements.
Prior to May 1, 1988, at the inception of each new lease, an allowance was
established for potential future losses. The level of the allowance was based
upon historical experience of collections, management's evaluation of estimated
losses as well as prevailing and anticipated economic conditions. Management
evaluated the adequacy of the resulting allowance annually. The allowance is
currently based upon a periodic evaluation, performed at least quarterly, of
delinquent finance lease receivables to reflect anticipated losses from
delinquencies and impairments that have already occurred. See Note 1 to the
Consolidated Financial Statements. During the three fiscal years ended April
30, 1996, 1995 and 1994, the allowance for doubtful accounts was increased
annually by provisions in the amounts of $1,055,997, $1,635,963, and $792,879,
respectively. The amounts written off in each of the three fiscal years ended
April 30, 1996, 1995 and 1994 were $940,243, $2,111,032, and $897,098, or
5.05%, 10.61%, and 4.20% of average gross lease receivables, respectively. The
Company expects the percentage of net charge-offs to average gross lease
receivables to continue to decline from fiscal 1996 into fiscal 1997. During
the fiscal year ended April 30, 1995, the Company conducted an extensive review
of the collectibility of all past due accounts, and increased write-offs in
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those situations where further costs in pursuing legal remedies were
unwarranted. This resulted in an extraordinary level of write-offs of older
delinquent accounts as evidenced by the $1,170,789 or 55.5% decrease in
write-offs for the current fiscal year ended April 30, 1996 in comparison to
the prior year. The Company aggressively takes legal recourse with respect to
each delinquent lease irrespective of the amount at controversy and believes
this approach is an important part of the collection effort. Obligations are
not written off until there is either an adverse court decision, bankruptcy or
settlement, and local counsel has determined that the obligation cannot be
recovered. As a result, delinquent receivable balances appear higher than
industry averages because of the Company's decision to report them on a
contractual basis, and to pursue delinquent lessees until all collection
efforts have been completely exhausted. Once collection efforts are
discontinued, any likelihood of recovering the equipment, to the extent not
previously repossessed, is considered remote.
The Company makes a practice of assessing and collecting late charges on
all delinquent accounts, if possible. Late charges are assessed on all
delinquent accounts at the rate of 5% monthly of the delinquent past due
payments. Late charges collected and included in revenue for the fiscal years
ended April 30, 1996, 1995 and 1994 were approximately $411,000, $418,000,
$372,000, respectively. Increased emphasis on collections accounted for the
increase in late charges during the fiscal years ended April 30, 1996 and 1995
in comparison to the fiscal year ended April 30, 1994. In addition, the
Company has historically recovered at least the recorded amount of residual
values at the conclusion of each lease, unless written-off as uncollectible.
See Note 1 to the Consolidated Financial Statements.
The Company believes that its loss experience and delinquency rate are
reasonable for its operations. The Company's rates charged on its leases tend
to be higher than industry averages due to the relative lack of competition in
small-ticket leasing. The higher rates are intended to offset the increased
credit risks and processing costs associated with small-ticket leases.
Although the Company's loss experience measured as a percentage of net
charge-offs to average lease receivables outstanding is consistent with
industry averages, its delinquency rate is higher than industry averages
because of its market, i.e. primarily small to medium sized business. In
addition, delinquent receivable balances appear higher than industry average
because of the Company's decision to pursue delinquent lessees until all
collection efforts have been completely exhausted.
The implications of these higher percentages require the Company to
continue its collection efforts diligently to minimize its actual losses from
delinquent accounts. The Company notes that because of recent changes in
bankruptcy laws and delays in state court systems nationwide, the time
necessary to litigate and collect on any judgment has increased during the past
five years. Experience over the five years, measured as a percentage of net
charge-offs, remained fairly constant. The increase in net charge-offs during
the fiscal year ended April 30, 1995 resulted primarily from the exhaustion of
legal efforts to collect certain delinquent leases arising prior to May, 1989,
for which management believed further attempts to collect to be futile. Other
factors such as evolving changes in case and statutory law in some states
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favoring debtors rights (notably Florida, Texas, Alabama, South Carolina, and
California), post-judgment filing costs associated with continuing litigation
and pursuit in collections, economic conditions in certain geographical areas,
and the age of the delinquent lease receivables being collected also can be
attributed to the increase in write-offs during fiscal 1995. As the credit
criteria for new leases in those states favoring debtors rights have been
enhanced, management believes that the likelihood of collecting the remaining
delinquent lease receivables at April 30, 1996 is greater than those previously
written-off. Management attributes the slowdown in the economy nationwide as a
principal reason for the increase in new delinquencies during fiscal 1994, as
well as to lessee dissatisfaction with equipment the Company no longer
considers for lease. These include credit card processing machinery, water
coolers, and surveillance equipment, which management considered to be
overpriced (considered to be a factor in less than 10% of the cases in
litigation). See "Marketing". The management of receivables during the past
three years in light of relatively weak economic conditions and overextension
of small and medium-size businesses continues to pose a demanding challenge
upon financial institutions in general. Business failures, bankruptcies, and
the trend toward slower payment increased when compared to prior years. The
Company's lessees, many of them owners of small and medium-sized businesses,
have been particularly affected by the economic malaise during the past three
fiscal years. However, because of the diversification of the Company's leases
in dollar amount and geographical location, any continued weakening in the
economy should have no material impact on the Company's overall cash flow. The
collection of delinquent lease balances remains one of the Company's top
priorities, resulting in a shifting of staff priorities to the collection and
legal functions.
The allowance for doubtful accounts was 8.3% of total finance lease
receivables at April 30, 1996 which management believes is adequate for future
write-offs on the Company's aggregate lease receivables as of April 30, 1996.
See Note 1 to the Consolidated Financial Statements. Charge-offs as a
percentage of average aggregate future lease receivables were 5.05%, 10.61%,
4.20%, 4.37%, and 2.55% for the fiscal years ended April 30, 1996, 1995, 1994,
1993 and 1992, respectively. Gross chargeoffs increased during the fiscal year
ended April 30, 1993 as a result of the change from a manual to computerized
legal tracking system in the legal area, prompting additional charge-offs of
leases deemed uncollectible as a result of an additional review of all
delinquent accounts undertaken during the conversion. During the fiscal year
ended April 30, 1995, management conducted an extensive review of the
collectibility of all past due accounts, and further increased the amount of
write-offs in those situations where further costs in pursuing legal remedies
in collection were unwarranted. This analysis considered the post-judgment
filing costs associated with the Company's methods of collection, including but
not limited to bank, wage, personal property, and real estate foreclosure, and
the possibility of recovery exceeding those costs based upon the financial
condition of the lessee. As a result, the amount of write-offs during the
fiscal year ended April 30, 1995 represents a dramatic increase, while the
amount of past-due accounts decreased proportionately. While the writeoffs of
delinquent lease receivables increased dramatically during the fiscal year
ended April 30, 1995, management considers the type of leases previously
entered into to be a contributing factor to the increased writeoffs. As the
credit quality and character of new leases generated improved during the fiscal
year ended April 30, 1996, the percentage of writeoffs decreased.
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ANALYSIS OF DELINQUENCIES
The Company's collection department follows a seven day cycle with regard
to collection of delinquent leases and maintains status reports of each
contact. During the fiscal year ended April 30, 1994, management integrated
its data processing capabilities with its collection efforts to make the
collection effort more efficient. On the 7th, 14th and 21st day after a
delinquent lease payment is due, a reminder is sent requesting payment. On the
28th and 35th day after a payment is due, a written collection letter is sent
to the lessee. On the 42nd day after the due date, a mailgram is sent from the
collection department demanding payment of the delinquent balance. On the
49th, 56th and 63rd day after payments are initially due, additional letters
are sent demanding immediate payment. On the 70th and 77th day, an attorney's
letter is sent informing the lessee that suit will commence if payment is not
received immediately. On the 84th day after the due date, an attorney letter
informing the lessee of immediate suit is sent. On the 91st day, the case is
referred to local counsel for suit. As of April 30, 1996 and 1995,
approximately $3,859,127 and $3,723,593, respectively, of direct finance lease
receivables based on a strict total contractual basis of the aggregate balance
remaining of each lease (not based upon recency of last payment) were 12 or
more months past due. During the fiscal years ended April 30, 1996 and 1995,
net collections from cases referred to local attorneys for suit were
approximately $1,508,000 and $1,379,000, respectively. The amount collected
during fiscal 1996 increased in proportion to the overall increase in past due
lease receivables reflected in the chart which follows. This increase is the
result of management's implementation of procedures to increase accountability
of local attorneys employed to collect delinquent receivables.
The Company recognizes as income over the entire term of the leases the
difference between the total rents scheduled to be collected along with the
estimated residual value of the equipment at the end of the lease term, less
the cost of the equipment. The income from all leases continue to be
recognized, even if payments are delinquent for any number of months. The
Company sets aside from its income a provision for anticipated losses from
delinquencies. See Footnote 1 to the Consolidated Financial Statements.
Leases are written-off only if there is an adverse court decision,
bankruptcy, settlement, or unwarranted further costs of collecting
insignificant lease balances, and assigned counsel in the state where the
lessee does business has determined that further action in recovering the debt
is unwarranted. The Company does not repossess equipment on underlying
delinquent leases (except for certain instances under federal bankruptcy laws)
which may be over 24 months past due as repossession would compromise the
Company's ability to recover a money judgment equal to the total remaining
payments due under the lease contract. When the equipment is returned to the
Company, the Company maintains an inventory of the repossessed equipment until
it can be re-let or sold. The Company writes down the carrying value of this
equipment to its forced sale value when it is repossessed. As of April 30,
1996, the Company maintained an inventory of repossessed equipment in the
amount of $75,734, and established reserves of $63,168 to reduce the carrying
value to the equipment's estimated, realizable forced sale value.
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ANALYSIS OF DELINQUENCIES, continued
1996 1995 1994
$ % $ % $ %
------------------- ------------------- -------------------
Aggregate Future Lease Receivables $18,423,816 100.0 $18,829,268 100.0 $20,979,917 100.0
Current 11,219,452 60.9 11,763,768 62.4 13,003,138 62.0
Past Due - Two Monthly Payments 973,864 5.3 1,178,983 6.3 1,017,320 4.8
Past Due - Three Monthly Payments 409,693 2.2 485,901 2.6 359,982 1.7
Past Due - Four or More Monthly Payments 5,820,807 31.6 5,400,616 28.7 6,599,477 31.5
Aggregate Future Lease
Receivables - Twelve or More
Months Past Due 3,859,127 20.9 3,723,593 19.8 4,709,748 22.4
Aggregate Future Lease
Receivables - Twenty-Four
or More Months Past Due 2,466,333 13.4 2,394,188 12.7 2,957,453 14.1
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ANALYSIS OF BAD DEBT WRITE-OFFS
Fiscal Years Ended April 30,
1996 1995 1994
----------- ----------- -----------
Aggregate Future
Lease Receivables $18,423,816 $18,829,268 $20,979,917
Provisions for
Doubtful Accounts 1,055,997 1,635,963 792,879
Gross Charge-Offs 948,842 2,118,607 899,690
Gross Recoveries 8,599 7,575 2,592
Net Charge-Offs 940,243 2,111,032 897,098
Average Outstanding Future
Lease Receivables 18,626,542 19,904,593 21,359,759
Percent of Net Charge-Offs
to Average Aggregate Lease
Receivables 5.05% 10.61% 4.20%
Allowance for Doubtful
Lease Receivables 1,529,143 1,413,389 1,888,458
Percent of Allowance for
Doubtful Lease Receivables
to Aggregate Future Lease
Receivables 8.3% 7.5% 9.0%
Percent of Allowance for
Doubtful Lease Receivables
to Aggregate Future Lease
Receivables Past Due Four or
More Monthly Payments 26.3% 26.2% 28.6%
METHODS OF FINANCING
The Company, in order to conduct its business, must have the financial
resources with which to purchase the equipment it leases. The funds for such
purchases have been generated during the past three fiscal years primarily
from net proceeds from sale of debt securities and receipt of rental payments.
In the past, the Company and ELCOA have registered and sold debt securities to
the public to fund the purchase of equipment for lease.
The Company intends to continue its registration and sale of Senior Thrift
Certificates during the next fiscal year. It does not intend to issue any
securities which will be senior to the Senior Thrift Certificates previously
issued and currently outstanding absent any unforeseeable circumstances,
although there are no restrictions on any such issuances of additional debt.
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These senior debt securities will carry interest rates which are expected to
be lower than the outstanding subordinated debt obligations. ELCOA's offer
and sale of Demand and Fixed Rate Certificates are also expected to provide a
substantial source of funds. Proceeds of sale from these securities will
replace existing indebtedness at maturity, and provide additional funds for
the purchase of equipment for lease. See Notes 3, 4 and 5 to the Consolidated
Financial Statements.
In an effort to increase the utilization of its lease origination,
administrative, and servicing capabilities, and to reduce the cost per lease
for providing these services, the Company could, in the future, market these
services on a fee basis to other companies, including financial institutions.
The Company believes this would allow it to offset certain fixed costs without
requiring increases in new funds raised through sales of its senior debt or
other financing.
During the three fiscal years ended April 30, 1996, the Company was
approached by other organizations seeking to sell all or a portion of their
small-ticket leasing portfolios, including savings & loans and other small
leasing companies. Management determined that the offers received were
unacceptable due to problems with documentation, original credit investigations,
lack of any warranties associated with any contemplated purchase, and yield
requirements of the sellers. During the fiscal year ended April 30, 1995,
management responded to a solicitation for bids to purchase a portfolio of
leases taken by the Pennsylvania Insurance Commission in connection with the
rehabilitation of a domiciled insurance company that operated a small-ticket
leasing company. While the Company determined that a cash bid was
unwarranted, it submitted an acceptable bid to collect and administer the
portfolio of leases for a contingency fee of fifty percent (50%) of the gross
leases collected. On May 18, 1995, the Company signed an agreement with the
Office of Liquidations and Rehabilitations of the Pennsylvania Insurance
Commission to collect and administer this portfolio of approximately 75 leases
having an aggregate lease balance of approximately $1,800,000. During the
fiscal year ended April 30, 1996, the Company earned $4,113 from collections
of these lease receivables, which has been included in earned income from
direct finance leases. Due to the material delinquencies associated with a
portion of this portfolio, management is not yet able to determine what, if
any, amounts are anticipated to be collected in the next fiscal year from its
efforts. However, management does not believe that it will incur any
additional costs in the administration and collection of these leases as a
result of its established back-office personnel and procedures.
The Company has been engaged to perform certain lease origination
functions (i.e. marketing, credit investigation, and documentation processing)
on behalf of its wholly-owned subsidiary, ELCOA, for which it has been paid an
amount equal to four percent (4%) of the gross equipment purchases by the
Company for lease, plus reimbursement for any direct selling expenses,
principally commissions to equipment vendors. ELCOA purchases its equipment
for lease from Walnut. Walnut relies upon a variety of equipment vendors
located throughout the United States, none of which is responsible for
supplying 5% or more of their total equipment purchases. ELCOA relies upon
Walnut's facilities and staff to develop its leases. Under terms of an option
agreement, ELCOA has the continuing right of first refusal to purchase newly
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acquired equipment, as well as the related leases, when Walnut has equipment
available for sale. This agreement continues until terminated by the mutual
agreement of the parties in writing. In addition, the Company will receive
six dollars fifty cents ($6.50) per month per outstanding lease for performing
certain administrative functions for ELCOA, notably invoicing of monthly
rentals, collection of lease receivables and residual values, management
guidance, personnel, financing, and the furnishing of office and computer
facilities, under a Service Contract. All rentals received on behalf of ELCOA
are segregated, processed and deposited into an escrow account pursuant to a
written agreement. Management believes that the terms of purchase are at
least as favorable as those available from unaffiliated third parties.
It should be noted that although the Company's rental income from its
lessees is fixed at the inception of each lease, its income from a given lease
is affected by changes in the interest rate it pays on borrowed funds. To the
extent that the interest rates charged by any financial institution that may
hypothecate leases or the interest rates that the Company pays on its debt
securities increase, the Company must pay any such increased cost without
having the ability to increase its rental charges on existing leases.
ELCOA registered for sale on June 10, 1996 a $50,000,000 offering of
Demand and Fixed Rate Certificates. ELCOA's sale of additional debt
securities, which are similar to Walnut's Senior Thrift Certificates, will
allow the Company to increase the funds of the consolidated group thereby
enabling the Company to increase the amount of equipment purchased for lease.
The Company anticipates ELCOA's cost of funds in connection with the sale of
ELCOA's securities to be less than the Company's, thus allowing the Company
and ELCOA to maintain competitive lease rates in the market to attract new
business. This will result in increased cost efficiencies in lease
origination and administration expenses to the consolidated group, as fixed
costs of operations would be allocated over a greater number of new leases
generated.
ELCOA's costs of operations are in direct proportion to the size of its
lease portfolio. Since ELCOA is a subsidiary of the Company, both companies
are consolidated for financial statement purposes in accordance with generally
accepted accounting principles, whereby all intercompany accounts are
eliminated in the preparation of consolidated financial statements. The
transfer of assets that capitalized ELCOA did not change the total assets,
liabilities, or shareholders' deficit of the Company on May 23, 1986.
However, in the event of the reorganization or liquidation of the Company, the
claims of holders of ELCOA's debt securities would have a higher priority than
claims which would be asserted by a holder of the Company's debt against
ELCOA's assets.
To the extent that the volume of new lease receivables to be generated in
the future increases as management anticipates, the Company believes that
lease securitization may provide both the additional funding for and increased
revenues in conjunction with future growth. Reference is made to the "Summary
of the Offering" section of 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 the fiscal year ending April 30, 1997, although no such sales
have occurred to date, as a result of a lack of any increase in new lease
volume, and excess cash on hand.
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EMPLOYEES
The Company employs approximately 60 full and part-time employees and
considers its relationship with its employees to be satisfactory.
DATA PROCESSING
Almost all of the Company's bookkeeping or recordkeeping is performed by
electronic data processing utilizing programs developed and owned by Financial
Data, Inc., a subsidiary of Walnut Associates, Inc. Walnut Associates Inc. is
an affiliate of ELCOA and also the owner of all of the outstanding stock of
the Company. See Footnote 10 to the Consolidated Financial Statements. The
programs are designed to permit the growth of the Company's business without a
significant increase in bookkeeping or recordkeeping costs. In the opinion of
management, the Company maintains sufficient duplicate records to safeguard
its information.
COMPETITION
Equipment leasing and related businesses are highly competitive, and
competition may increase. A number of concerns are engaged in the same types
of business as the Company, including: (1) finance divisions, affiliates or
subsidiaries of suppliers which sell products leased by the Company; (2) banks
or their affiliates; (3) other leasing and finance companies, including ELCOA;
and (4) independently-formed partnerships operated for the specific purpose of
leasing equipment. Many of these organizations have greater financial or
other resources than the Company and, therefore, may be able to obtain funds
on terms more favorable than those available to the Company. This may permit
such organizations to offer lease terms which the Company could not match.
Also, such organizations may have competitive advantages including their
affiliation with vendors and their nationwide leasing organizations, or their
ability to offer "floor planning" programs which is the financing of an
equipment vendor's unsold inventory.
The Company seeks to compete primarily on the basis of service (by
providing simplified documents, prompt credit decisions, and by accepting a
multitude of types of equipment for lease) to a particular segment of the
industry, (i.e. small-ticket items), and by making its services available
nationwide (both urban and rural). It does not limit itself geographically to
regional sales offices as do some of its competitors, but extends its services
through use of toll-free telephone lines, facsimile transmission, and the
mail. The Company cannot compete for larger ticket items where rate is a
factor because of its higher cost of funds, and therefore must limit itself to
the small-ticket market.
Item 2. PROPERTIES
The Company subleases from Walnut Associates, Inc. approximately 10,150
rentable square feet at its headquarters located at Suite 200, One Belmont
Avenue, Bala Cynwyd, PA. Walnut Associates, Inc. sublets 1400 square feet to
Welco Securities, Inc. (Suite 105), and 1,400 to the law offices of William
Shapiro, Esq., P.C. (Suite 202), all of which are affiliates of the Company.
Future minimum rental payments from the Company are anticipated to be due as
follows:
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Fiscal Year Ending
April 30, Amount
------------------ ------
1997 $ 200,619
1998 207,784
1999 214,949
2000 222,115
2001 and beyond 664,154
----------
Total $1,509,620
==========
The Company also leases approximately 4,300 square feet of warehouse and
print shop facilities at 15 South 4th Street, Fernwood, Pennsylvania, from
Walnut Associates, Inc., the Company's sole shareholder of common stock. The
terms of the lease provide for an annual rental of $3.00 per square foot
payable at $1,075 per month for the period from April 1, 1992 through March
31, 1997, with an option for an additional five year renewal thereafter.
Commitments for rental payments are due as follows:
Fiscal Year Ending
April 30, Amount
------------------ ------
1997 $11,825
ELCOA leases its own office space and conference room facilities at 501
Silverside Road, Wilmington, Delaware. The lease for this space continues on
a month-to-month basis with 60 days' notice.
Item 3. LEGAL PROCEEDINGS
There are no legal proceedings or actions pending or threatened against
the Company, or to which its property is subject, which management believes
would have a materially adverse effect on the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
As of June 30, 1996, the Company's common stock was held by one entity as
set forth in Item 12 of this Form 10-K. There is no public market for the
Company's common stock. The Company has paid no dividends during the past two
years with respect to its common stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following summarizes certain financial information with respect to the Company for the five years ended April 30, 1996,
and should be read in conjunction with the discussion at "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and the "Consolidated Financial Statements."
Year Ended April 30,
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
OPERATING RESULTS:
Operating Revenue $3,619,831 $3,979,146 $3,960,337 $4,027,780 $3,577,772
Interest Expense, net 4,844,532 4,313,253 4,094,189 3,637,908 3,205,121
Net Loss (5,631,409) (5,064,166) (4,082,175) (3,864,576) (3,078,250)
BALANCE SHEET DATA:
Total Assets 25,036,097 25,443,367 25,479,099 22,277,616 18,246,128
Demand, Fixed Rate, and
Money Market Thrift
Certificates 26,407,959 24,521,875 21,810,991 18,041,504 12,867,678
Senior Thrift
Certificates 21,394,687 18,783,578 16,650,670 14,085,849 11,713,791
Subordinated Thrift
Certificates 5,523,118 6,025,366 6,038,409 6,138,830 6,390,450
Subordinated Debentures 4,000 5,858 5,858 7,718 7,718
Shareholders' Deficit (2) (35,674,525) (30,043,116) (24,978,950) (20,896,775) (17,030,006)
OTHER FINANCIAL DATA
% of Interest Expense
to Operating Revenue 133.8% 108.4% 103.4% 90.3% 89.6%
Ratio of Earnings
to Fixed Charges (1) --- --- --- --- ---
Aggregate New Leases
Entered 10,025,786 10,189,624 10,168,874 11,293,059 13,218,230
Aggregate Finance Lease
Receivables 18,423,816 18,829,268 20,979,917 21,739,601 20,957,501
<FN>
(1) The ratios of earnings to fixed charges were computed by dividing pre-tax income plus fixed charges and preferred
dividend requirements by the amount of fixed charges and preferred dividend requirements. For the years ended April 30,
1996, 1995, 1994, 1993, and 1992, the ratio of earnings to fixed charges was less than "1." During those years, earnings
were inadequate to cover fixed charges (including preferred dividend requirements) by $5,631,409, $5,064,166, $4,082,175,
$3,866,769, and $3,081,059, respectively.
(2) See "Consolidated Statements of Changes in Shareholders' Deficit" for the three fiscal years ended April 30, 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE YEARS ENDED APRIL 30, 1996
REVENUES FROM LEASE CONTRACTS AND RENTALS
The consolidated financial statements and references herein include the
operations and obligations of the Company, including ELCOA, its wholly-owned
subsidiary. Total operating revenues were $3,619,831, $3,979,146, $3,960,337,
for the three fiscal years ended April 30, 1996, 1995, and 1994, respectively.
Revenues decreased by $359,315, or 9.0% during the fiscal year ended April 30,
1996 as a result of the reduction in the outstanding amount of direct finance
lease receivables. Revenues increased during the fiscal year ended April 30,
1995 by 18,809, or .47% as a result of the increase in new leases generated
during the fiscal year. See Footnote 1 to the Consolidated Financial
Statements. Management attributes the increased operating losses during the
three fiscal years ended 1996 to decreasing revenues in conjunction with an
increase in interest expense, due in part to excess interest paid on higher
cash balances awaiting investment in leases over yields from investment of
those funds in short-term, liquid investments. The increase in the provision
for doubtful lease receivables and interest expense accounted for the increased
losses from operations during the fiscal year ended April 30, 1995 over 1994.
Aggregate new finance lease receivables decreased by $163,838 to
$10,025,786, a 1.61% decrease, during the fiscal year ended April 30, 1996.
New lease volume has either remained stagnant or decreased during the past two
fiscal years, in part due to the delays associated with the implementation of
enhancements in its marketing efforts, and the impact of the Company's decision
during the second quarter of the fiscal year ended April 30, 1993 to
discontinue accepting new lease applications for equipment it considers
overpriced, including but not limited to credit card processing machinery,
water coolers, and security surveillance systems. The Company recognized
during the middle of the fiscal year ended April 30, 1993 that certain types of
equipment resulted in higher delinquencies and charge-offs due to general
dissatisfaction with this equipment by the lessees. In eliminating these types
of equipment, therefore, the Company had to seek other sources of commercial
equipment for lease. New lease volume during the second half of the fiscal
year ended April 30, 1993 of $4,760,456 increased to $5,124,061 during the last
half of the fiscal year ended April 30, 1994. This reflected the beginning of
some success in the Company's revised marketing strategy and shift in emphasis,
which is to diversify the types of equipment being leased. The Company
believes that increased solicitation of equipment vendors selling business
computers, office equipment, scientific and medical, food service, as well as
industrial production equipment, will lead to increasing numbers of
applications for new leases. For a further discussion of the Company's efforts
to increase the generation of new lease receivables, see "FURTHER REFINEMENTS
IN MARKETING STRATEGY AND EFFORTS TO REDUCE OPERATING LOSSES" on page 23.
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20
The average new lease receivable entered during the fiscal year ended April
30, 1996 was $5,333, representing an increase of 13.6% from the prior year.
Since a significant portion of the costs associated with the origination of new
leases is fixed in nature, the Company's recent marketing efforts are expected
to increase the average size of new leases, which will result in a decrease in
the cost of lease origination on a lease-by-lease basis.
Income earned under direct finance lease contracts was $3,609,620,
$3,965,846, and $3,947,213 for the three fiscal years ended April 30, 1996,
1995 and 1994, respectively. Total aggregate lease receivables outstanding
were $18,423,816, $18,829,268, and $20,979,917 at April 30, 1996, 1995 and
1994, respectively. The Company's average net investment in direct finance
leases, defined as the average aggregate future amounts receivable under lease
contracts plus average estimated residual value of equipment, less average
unearned income under lease contracts and average advance payments, was
$16,496,653, $17,735,138, and $18,852,262 during the fiscal years ended April
30, 1996, 1995 and 1994, respectively. Recognized revenues taken as a
percentage of the Company's average net investment in direct finance leases was
21.9%, 22.4%, and 20.9%, respectively, during the fiscal years ended April 30,
1996, 1995 and 1994, respectively. An increase in late charges collected
during the fiscal years ended April 30, 1996 and 1995 over previous years
accounted for the increase in the percentage of recognized revenues in
comparison to the fiscal year ended April 30, 1994. See also Note 1 to the
Consolidated Financial Statements.
In analyzing the Company's Consolidated Financial Statements, it is
therefore important to note the relationship between new lease volume added
during an accounting period and the net lease revenue and income reported for
that period. Net lease revenue recognized by the Company during an accounting
period is defined to be the income earned under direct finance lease contracts.
New lease volume is the total of all new lease contracts added to the portfolio
during the period. As a consequence, during a period in which the rate of
growth of new lease volume increases, the growth rate of net lease revenue in
that period will be less than the rate of growth in new lease volume, because
the income earned from new lease volume is recognized over the term of each
lease contract and not in the year the contract is entered. On the other hand,
certain expenses recognized by the Company during an accounting period, such as
the provision for doubtful lease receivables, are more directly related to the
aggregate amount of outstanding leases during that period. Thus,
current-period expenses are more dramatically impacted by the growth in new
lease receivables than is net lease revenue. As a result of the foregoing
factors, net lease revenue will in turn grow at a slower rate than the rate of
growth in net lease volume during periods of increasing rates of growth in new
lease volume. In periods of decreased rates of lease volume growth, the
foregoing relationships would be reversed.
As noted in the Independent Auditor's Report on page 31 and Note 1 to the
Consolidated Financial Statements, the Company's ability to continue as a going
concern is dependent in part upon achievement of sustained profitable
operations and obtaining adequate financing sources. This depends on achieving
a higher level of new lease volume than current levels of new business, and the
raising of additional funds through the sale of the Certificates, the proceeds
of which cannot be assured. The Company is unable to ascertain the minimum net
proceeds required to remove any threat to the continuation of the Company's
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business. Management has initiated measures as detailed below which it
believes will result in an increase in direct finance leases entered in the
next fiscal year, along with a corresponding increase in operating revenues.
In addition, management is attempting to limit the growth, if any, in related
lease origination expenses. Increased new lease volume is expected to result
from continuing to maintain relationships with equipment manufacturers. In an
effort to continue as a going concern, the Company has expanded its marketing
efforts to increase its future volume of new leases to greater utilize its
fixed cost "back-office" facilities. To the extent the Company's marketing
efforts result in a greater volume of new business, the fixed cost
"back-office" facilities will become a proportionately smaller cost as a
percentage of each new lease. Management believes that as a result of the
relatively fixed nature of these costs, a further increase in new lease
receivables will not increase lease origination and administrative expenses by
a proportionate percentage. See also "BUSINESS".
If in the future the volume of leases exceeds the Company's ability to
finance such leases, it may sell the excess new business on a fee basis to
other financial institutions, giving first priority to its wholly-owned
subsidiary, ELCOA, as a result of its option agreement, and then to other
financial institutions through the securitization process seeking to increase
their asset-based portfolio of receivables. No assurances can be given as to
the ability to sell such excess new business. Since ELCOA's funds have
historically carried longer maturity dates than the Company's, the Company
expects to sell substantially all of its longer term leases (i.e. 24 months or
more) to ELCOA as its funds become available. Substantially all new leases
with terms of 24 months or more were sold to ELCOA during the fiscal years
ended April 30, 1996 and 1995.
The Company's income is set at the time a given lease contract is executed.
Consequently, inflation has no impact on revenue subsequent to the inception of
any given lease. In addition, inflation has not had a material effect on the
Company's operating expenses. However, the increased reliance on variable rate
borrowings resulting from the sale of senior debt subjects the Company to
increased exposure to inflation because of the risk of increased interest
rates. In the event that redemption of senior and subordinated debt exceeds
future sales of such debt, the Company may be required to replace the
indebtedness through other borrowings. To the extent that loans would be at
variable interest rates, inflation would have a significant adverse impact on
the company's operations through increased costs of borrowing.
INTEREST EXPENSE
Increased borrowings contributed to the increase in interest expense for
the fiscal years ended April 30, 1996, 1995, and 1994. The effect of interest
rates on the Company during the three years ended April 30, 1996 can be
illustrated as follows:
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Years Ended April 30,
1996 1995 1994
---------- ---------- ----------
Interest Expense, net $4,844,532 $4,313,253 $4,094,189
Average Rate of Interest
Paid by the Company on
Total Average Debt Outstanding 9.3% 9.0% 9.3%
Percentage of Interest
Expense to Operating Revenues 133.8% 108.4% 103.4%
Aggregate average borrowings, including accrued interest, were $57,193,963,
$52,028,899, and $45,821,927, at April 30, 1996, 1995, and 1994, respectively.
Rates on outstanding debt securities during the three fiscal years ended April
30, 1996 correspond to interest rates in general over the period. The
increases in debt outstanding during the fiscal years ended April 30, 1996,
resulted from increased sales of debt securities, and were used to fund
equipment purchases for new aggregate lease receivables entered during that
period. The increase in total debt during the fiscal years ended April 30,
1996 and 1995 resulted in excess cash balances on hand at the end of the fiscal
year. Since excess funds are invested at lower rates than the interest paid on
these funds, the Company incurs additional expense on excess funds. See
"Consolidated Statements of Cash Flows and "Capital Resources and Liquidity."
Increased borrowings during the fiscal years ended April 30, 1996, 1995 and
1994 also were used to fund current operations and debt redemptions. Beginning
May 1, 1994, excess funds have been maintained in highly liquid U.S. government
securities of three months or less, which yield higher rates than comparable
term bank investments but less than the Company's cost of funds.
OTHER EXPENSES
Lease origination expenses increased by $111,276 or 10.4%, after having
decreased by $65,812 or 5.8% during the fiscal years ended April 30, 1996 and
1995, respectively. The increase during the fiscal year ended April 30, 1996
resulted primarily from a $90,184 increase in postage costs from increased
mailings relating to the Company's marketing efforts. The Company, utilizing
its printing and graphic arts facilities, produces brochures for the
manufacturers to mail to their dealer distribution network. These costs are
expensed as current period charges in conjunction with the Company's lease
origination efforts. This program met with limited success through 1993, as a
number of manufacturers either overlooked the distribution of these materials
or lacked the technology and machinery necessary to mail the brochures in bulk.
During the months of February and March, 1993, over 75 manufacturers
representing less than 10 different industries were participating in this
program. In an effort to minimize the costs associated with the program, those
manufacturers with whom little, if any, new business was being generated were
dropped from the mailing list. By the end of the fiscal year ended April 30,
1993, the Company had scaled back its efforts to less than 10 manufacturers.
In an effort to increase new lease volume during fiscal year ended April 30,
1994, the Company utilized telemarketing by its account executives to contact
equipment manufacturers solely for the purpose of having the manufacturer
cooperate with the Company in contacting their dealers directly to acquaint
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them with using leasing as a sales tool. The Company believed that repetitive
contacts with an increasing number of equipment dealers, generated either
through the use of direct mail or these cooperative efforts, would lead to
further increase in new lease volume. See "Business - Marketing." See "Further
Refinements in Marketing Strategy and Efforts to Reduce Operating Losses" for a
further discussion of the Company's lease origination efforts during the fiscal
year ended April 30, 1996.
Lease origination expenses, including capitalized commissions, totaled
12.3%, 11.0%, and 11.5% of new lease receivables entered during the fiscal
years ended April 30, 1996, 1995, and 1994, respectively. During the fiscal
years ended April 30, 1996, 1995 and 1994, commissions paid of $56,921,
$52,049, and $40,222, respectively, were capitalized as part of the equipment
cost. In accordance with SFAS 91, indirect expenses relating to lease
applications not booked are chargeable in the year incurred and are not
capitalized. See "BUSINESS-Marketing."
General and administrative expenses increased $138,223 or 6.8% during the
fiscal year ended April 30, 1996, after having increased $652 or .03% during
the fiscal year ended April 30, 1995. Additional supervisory personnel,
routine salary increases, and increased legal costs associated with collecting
delinquent lease receivables accounted for the majority of the increase during
the fiscal year ended April 30, 1996. The Company expects general and
administrative expenses to remain relatively constant during fiscal 1997, due
to the relatively fixed nature of these costs. The Company considers the costs
associated with receivable collections, which accounted for approximately 30%
of general and administrative expenses during fiscal 1996 and 1995, to be
principally fixed as they already include occupancy costs sufficient for
increased personnel, management and supervisory personnel already hired, and
computerized collection and billing procedures already in place. The
collections associated with increased volume will require only additional
clerical staff at an immaterial incremental cost. These collection costs
associated with legal filing procedures may increase due to court costs and
associated fees.
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
provisions charged to operating expense and reduced by charge-offs. Beginning
May 1, 1988, the Company increased the allowance by provisions based upon a
periodic evaluation of the lease portfolio, performed at least quarterly, in
accordance with SFAS 91. See Note 1 to the Consolidated Financial Statements
and "BUSINESS - Credit Policy."
Total provisions for doubtful lease receivables for the fiscal years ended
April 30, 1996, 1995, and 1994 were $1,055,997, $1,635,963, and $792,879,
respectively. See Note 1 to the Consolidated Financial Statements. The
increased provisions for the fiscal year ended April 30, 1995 resulted from
additional write-offs of delinquent past due receivables in conjunction with an
intensive review of all delinquent accounts in comparing the costs of further
legal pursuit of the Company's remedies in collection where the anticipated
results were unwarranted in light of any recoveries expected. This was an
extraordinary write-off of older balances as may be evidenced by the 35.5%
22
24
decrease in the provisions during the fiscal year ended April 30, 1996. Also,
as of April 30, 1996, 1995 and 1994, the ratio of the Allowance for Doubtful
Lease Receivables to Aggregate Future Lease Receivables was 8.3%, 7.5%, and
9.0%, respectively. During these periods, the ratio of the Allowance for
Doubtful Lease Receivables expressed as a percentage of delinquent receivables
90 days or more past due was 26.3%, 26.2% and 28.6%, respectively. The Company
attributes the decreased percentages in fiscal 1996 and 1995 in comparison to
fiscal 1995 to its write-offs of older accounts which resulted in improving the
likelihood of collecting the remaining delinquent lease receivables in
comparison to those previously written-off. Charge-offs of delinquent lease
receivables expressed as a percentage of average net lease receivables were
5.05%, 10.61% and 4.20% during the fiscal years ended April 30, 1996, 1995 and
1994, respectively. Management expects the percentage of charge-offs from
delinquent lease receivables during fiscal 1996 to continue to decline during
fiscal 1997. See "BUSINESS - Analysis of Delinquencies" and "Analysis of Bad
Debt Write-Offs."
FURTHER REFINEMENTS IN MARKETING STRATEGY AND EFFORTS TO REDUCE OPERATING
LOSSES
Management initiated certain measures to refine its marketing strategy
during the fiscal year ended April 30, 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.
Management initiated certain changes beginning in September, 1994 to
enhance its previous direct mail marketing program. The Company began to
purchase and/or internally obtain from equipment manufacturers nationwide lists
of commercial equipment vendors in industries such as office machinery, light
industrial equipment, data processing and peripheral equipment, along with food
service and preparation equipment, among others. By October 31, 1994, the
Company had obtained in excess of 50,000 names and information of additional
potential equipment vendors, manufacturers, and other distributors which were
added to its computer database. The Company had eliminated the costs
associated with indirect mail solicitation in favor of utilizing its in-house
account executives who were responsible to contact vendors in target groups of
equipment sellers, and to solicit interest in their using the Company's leasing
services as a sales tool. Once a vendor expressed interest in receiving
further information, the Company's marketing materials were forwarded to the
equipment vendor. The account executives were expected to maintain further
contact with the equipment sellers to implement the relationships of the
equipment sellers with the Company, and the Company utilized direct mail solely
to send bi-weekly reminders to interested vendors to use the Company's
services.
As noted above, the level of new lease volume during the fiscal year ended
April 30, 1995 increased only slightly from the prior year as a result of these
efforts. Management realized that repetitive telephone solicitation to remind
equipment vendors of the availability of the Company's services were dependent
on the timing of availability of new lease applications from equipment vendors.
Once an equipment vendor had been placed on the Company's database for
bi-weekly follow-up by mail, management determined that further telephone
23
25
contact was useless until such time as the need for the Company's services
arose from the equipment vendor. Management did note, however, that in
situations where the equipment manufacturer encouraged its vendors to utilize
the Company's leasing services to assist in closing equipment sales, the
vendors were more receptive to utilizing the Company's services.
In this regard, beginning January, 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 least one hundred
equipment distributors and vendors) to offer them a "private label lease
program" customized for their distributors' needs. Manufacturers are given the
option of utilizing a personalized, i.e. "private label", to separately
identify themselves and the Company to their vendors. For example, a
relationship between TEC America, Inc., a manufacturer of cash registers and
point-of-sale equipment and the Company have created "TEC America Leasing" as a
fictitious name on behalf of the Company. This private label lease program was
intended to encourage TEC America Inc.'s dealers, branches and distributors to
utilize the Company's leasing services to implement their sales potential with
the ultimate users of TEC America Inc.'s equipment. As of July 5, 1995, the
Company had entered into agreements with 23 equipment manufacturers, of which
13 have adopted the "private label lease" facilities to their benefit.
During the fiscal year ended April 30, 1996, the Company focused on
increasing the number of manufacturers to develop mutual relationships in
promoting leasing as a tool to increase sales of equipment manufactured by
these cooperative companies. Although the Company to attempted to hire
additional in-house personnel to handle the solicitation efforts in locating
and nurturing relationships with equipment manufacturers, management determined
that personal face-to-face contact with senior level management of equipment
manufacturers was necessary to initiate an ongoing relationship. During the
end of the fourth quarter of the fiscal year ended April 30, 1996, the Company
began to advertise nationally for individuals in major metropolitan areas to
represent the Company locally promoting this program on a face-to-face basis
with manufacturer prospects developed through the Company. As of July 1, 1996
two individuals in the New York City Metropolitan area and one in Atlanta
agreed to represent the Company. They will be compensated on a fee basis for
each additional manufacturer added to the cooperative program. Additional
representatives in other areas will be added during the next fiscal year in an
effort to expedite the addition of more manufacturers into this program.
As of July 1, 1996, 75 manufacturers entered into co-operative manufacturer
agreements with the Company, of which 51 have adopted the private label lease
program. The Company is unable to quantify with any certainty the specific
results of new leases generated from direct mail or telephone contact, but
maintains records reflecting the amount of new leases generated from its
cooperative efforts with equipment manufacturers. While for the fiscal year
ended April 30, 1995, the results of these efforts were negligible, during the
12 months ended April 30, 1996, 213 leases aggregating $1,479,131 or 15% of
total new leases were generated directly from cooperative manufacturers and
those adopting the private label lease program. As there is a delay between
the time that a manufacturer agrees to the Company's efforts and when new
leases begin to be generated of at least six months in order to initiate the
program throughout each manufacturer's distribution network, monthly lease
volume is expected to increase during fiscal year 1997. While the average new
lease receivables entered monthly were approximately $835,000
24
26
per month during the fiscal year ended April 30, 1996, new lease volume during
the month of May, 1996 was approximately $1,125,000. During May, 1996, 24
leases aggregating $169,056 or 15% of total new lease were generated directly
from cooperative manufacturers and those adopting the private label lease
program. Most manufacturers have minimum sales of $5,000,000 annually, and
range as high as $1 billion or more. The Company expects to continue these
specific marketing efforts to increase the number of manufacturers who will
utilize these services through the efforts of its in-house personnel and
through representatives located throughout the United States who will represent
the Company on a fee basis for purposes of engaging new manufacturers. 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 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 estimates that the time delay between the first solicitation of
a manufacturer's sales distribution network and the receipt of new lease
applications can range from three to six months as the solicitation process to
newly engaged manufacturers is initiated. Although the lack of significant new
lease growth during the fiscal year ended April 30, 1996 can be attributed in
part to this delay, the Company is encouraged by the initial positive reaction
received from the equipment manufacturers, and intends to further emphasize
this program during the fiscal year ended April 30, 1997 as a means towards
increasing new lease volume. As noted in "BUSINESS-Marketing", the average new
lease receivable entered during the three fiscal years ended April 30, 1996
increased from $4,536 to $5,333, representing an increase of approximately 18%
over the period. This growth in the average size of new leases is directly
attributable to the size of new leases being generated from the efforts of
co-operative equipment manufacturers, some of which sell equipment retailing in
excess of $25,000 to larger companies. Management expects the size of its
average new lease receivables to increase during the fiscal year ending April
30, 1997 as a result of the size and types of equipment sold by the
manufacturers that have entered into agreements with the Company to solicit
their sales distribution network.
CAPITAL RESOURCES AND LIQUIDITY
The Company has financed its new business during the past three fiscal
years primarily from the proceeds of its senior borrowings, rental collections
from outstanding lease receivables, and the proceeds from sale of ELCOA's debt
securities.
The Certificates issued by ELCOA, the Company's wholly-owned subsidiary,
funded approximately 100% of new purchases of equipment for lease with an
additional portion invested in U.S. Government securities during the fiscal
year ended April 30, 1996. The registration and offering of additional senior
debt obligations by the Company will fund the remainder. See "BUSINESS -
Methods of Financing." During the three fiscal years ended April 30, 1996,
1995 and 1994, new Certificates of ELCOA in the approximate amounts of
25
27
$7,800,000, $6,100,000, and $5,600,000, respectively, funded new equipment
purchases for the Company. The Company has not experienced any difficulty in
financing the purchase of equipment that it leases at current levels.
The Company's existing lease contracts as of April 30, 1996, schedule the
receipt of approximately $9,371,000 during the twelve months ending April 30,
1997 of which approximately $3,989,000 are scheduled receipts from accounts
which are two or more months past due. At April 30, 1996 aggregate future
amounts receivable under lease contracts were $18,423,816 of which
approximately $3,859,000 are future amounts receivable from accounts which were
12 or more months past due on a strict contractual basis (of which
approximately $3,510,000 relate to ELCOA's leases.)
Accounts payable and accrued expenses at April 30, 1996, excluding accrued
interest on debt, totaled $1,062,724 of which accounts payable of $802,956
included therein represent the Company's obligation for commitments for
purchase of equipment for lease which has not yet been delivered.
As of April 30, 1996 the Company and ELCOA also had unhypothecated leases
which could be hypothecated, on a discounted basis, to obtain funds of
approximately $8,820,000, cash of approximately $1,109,000, and an investment
in short term U.S. government securities (net) of approximately $8,099,000.
Available cash is intended to fund increases in new equipment to be purchased
for lease, of which there are no assurances. To the extent that the Company
retains excess cash in liquid investments such as bank money market accounts or
short-term U.S. government securities, its interest expense associated with the
funds will exceed any investment income, thereby increasing the cost of
maintaining such funds prior to investment in new lease receivables. The
Company's ability to invest excess funds is dependent upon its success with its
lease marketing efforts. See "Business - Marketing" and "Further Refinements
in Marketing Strategy and Efforts to Reduce Operating Losses." Hypothecation
is the use of lease contract receivables, on a discounted basis, as collateral
for the borrowing of funds from third parties, based on the eligible net lease
receivables (excluding delinquent lease receivables) for the remaining lease
term, which are pledged as collateral. To date, unhypothecated lease contracts
have not been pledged as collateral. Should the Company hypothecate leases for
the purposes of raising funds, such actions require approval and authorization
of the Company's Board of Directors only. The Company also expects ELCOA, its
wholly-owned subsidiary, based on historical experience and efforts being
undertaken by Welco in its solicitation efforts as underwriter for ELCOA's debt
securities, to be able to generate increased funds for the purchase of
equipment for lease which the Company will originate and service for lease.
As noted in the Statements of Cash Flows on page 37, sales of Demand and Fixed
Rate Certificates have decreased during the fiscal year ended April 30, 1996,
as a result of management's efforts to slow down the solicitation of
certificate sales. In the event that future redemptions of Certificates exceed
future sales of the Certificates to be offered, ELCOA may utilize its excess
cash to repay such borrowings. ELCOA believes that it has sufficient cash
resources to meet its normal operating requirements during the fiscal year
ending April 30, 1997. ELCOA registered for sale a new offering of $50,000,000
of debt securities on June 10, 1996. ELCOA's debt securities range in terms
from demand to 120 months. ELCOA has sold similar securities since 1986.
Welco Securities, Inc. ("Welco") utilizes public advertising in soliciting for
26
28
prospective purchasers for these debt securities. Welco also has entered into
selected dealer agreements with other NASD firms who have sold ELCOA's
securities to their customers. See "BUSINESS - Methods of Financing."
Senior and subordinated borrowings issued by the Company aggregating
$23,441,726, as well as Demand, Fixed Rate, and Money Market Thrift
Certificates issued by ELCOA aggregating $17,971,133 are due during the twelve
months ending April 30, 1997. See Notes 3, 4, and 5 to the Consolidated
Financial Statements. These certificates may be renewed at the option of the
holder into new indebtedness at the maturity of the original certificate.
Accrued interest included therein in the amount of $6,309,733 is due on demand.
The Company anticipates that based on historical experience a significant
portion of the senior and subordinated debt and Demand, Fixed Rate and Money
Market Thrift Certificates previously issued by ELCOA coming due should be
renewed or "rolled over" into senior debt or ELCOA Certificates by the security
holders, although there are no assurances in this regard. Should debt due in
fiscal 1997 not be rolled over into new indebtedness by the holder, repayment
will be made to the holder from available cash on hand, liquidation of
receivables in the ordinary course of business, possible hypothecation of
leases, and from proceeds of sale of Certificates. Due to the continuous
nature of the offering of Certificates, outstanding securities mature daily
rather than a large percentage maturing on any given day. Outstanding lease
contracts are payable on a monthly basis at varying terms. As such, the
Company is unable to estimate with any certainty the relationship between the
available sources of funds to be allocated specifically for redemption of
maturing securities, especially in light of prescribed limitations on
redemptions. During the fiscal years ended April 30, 1996 and 1995,
approximately 78% and 86%, respectively, of all previously issued Senior Thrift
Certificate issued by the Company coming due were renewed and "rolled over"
into new indebtedness, and approximately 54% and 50% of ELCOA's Demand, Fixed
Rate, and Money Market Thrift Certificates matured and were reinvested during
these respective periods.
As noted in the Consolidated Statements of Cash Flows appearing on pages 36
and 37, the proceeds from sales of debt securities by the Company and ELCOA
decreased slightly by 2% during fiscal 1996 from fiscal 1995, while redemptions
of debt securities remained constant. Management attributes the 33% increase
in redemptions during fiscal 1995 from fiscal 1994 to be based in part on the
attractiveness of returns in the equity markets during fiscal 1995, along with
mutual funds, in comparison to the returns offered through fixed income
securities, including these debt securities. So long as the benefits from
investing in the equity markets either directly or through mutual funds
continues, management believes that redemptions may continue at the levels of
fiscal 1996 and 1995.
The number of accounts, at April 30, 1996, holding senior and subordinated
certificates of the Company was 2,744. Of these, 96 accounts held certificates
aggregating $50,000 or more. For purposes of these calculations, all accounts
for each separate holder have been aggregated as a single account holder. The
three largest senior and subordinated certificate holders held aggregate
principal amounts of $613,875, $589,940 and $350,000 as of April 30, 1996. As
of April 30, 1996, there were 3,932 accounts holding Demand, Fixed Rate and
Money Market Thrift Certificates, of which 81 held accounts aggregating $50,000
27
29
or more. The three largest holders of Demand, Fixed Rate and Money Market
Thrift Certificates held aggregate principal amounts of $500,000, $284,914 and
$278,337 at April 30, 1996. The Company does not believe that this results in
an undue concentration of debt being held by relatively few individuals. In
the event of ELCOA's liquidation, holders of Demand, Fixed Rate and Money
Market Thrift Certificates would be senior in priority to claims against
ELCOA's assets. Therefore, they would effectively be senior to the
Certificates. There are no other debt securities issued by the Company which
are senior to the Certificates.
In addition to the Company's expectation of renewals, the Company intends
to raise additional financing to fund increases in new lease volume through the
sale of debt securities. See "BUSINESS - Methods of Financing." The Company
could also sell a portion of its lease portfolio to other financial
institutions seeking to increase their asset-based receivable portfolio through
the securitization process. In such event, the Company would immediately
recognize as income the net present value of the remaining lease payments at an
agreeable discounted rate, less its investment in the cost of the equipment
being leased. Cash realized from sale would immediately be available to invest
in new lease business, or meet redemptions of debt securities, thus reducing
reliance on additional debt to carry an increased lease portfolio.
The Company would not expect to borrow funds from financial institutions,
but expects in the alternative to sell certain leases rather than carrying them
for the remaining term of the leases, providing additional liquidity to meet
redemptions of debt securities in excess of the Company's expectations, of
which there are no assurances. The long term effect of utilizing these
proceeds to meet redemptions would be the reduction of outstanding receivables
and related income therefrom.
Taking into consideration the Company's prior experience in the sale of
senior debt based on historical expectations and the sale of Demand and Fixed
Rate Certificates by ELCOA (of which there is no assurance), as well as new
business, available credit, the Company's available cash, anticipated renewal
or "roll over" of a portion of the Company's senior and subordinated
borrowings, and the potential from funds generated from outside financial
institutions, including, but not limited to ELCOA, it is management's belief
that its cash will be sufficient to conduct its business and meet its
anticipated obligations during the next fiscal year. No assurance can be
given, however, that the redemption of senior and subordinated borrowings will
not exceed the Company's expectations or that a significant amount of senior
debt will be sold. In view of the Company's history of losses, the uncertainty
with respect to generation of new lease receivables and future interest rates
paid to banks and holders of senior and subordinated borrowings, the potential
redemption of senior and subordinated borrowings and Demand, Fixed Rate and
Money Market Thrift Certificates and the uncertainty as to the sale of future
offerings of securities, management is unable to estimate the Company's
profitability and liquidity beyond the current fiscal year. If the Company
continues to have losses, it may be unable to service its debts in future
years. Reference is made to Notes 2, 3, 4, and 5 of the Consolidated Financial
Statements for information relating to future amounts receivable under lease
contracts, the Company's senior and subordinated borrowings and ELCOA's Demand,
Fixed Rate and Money Market Thrift Certificates.
28
30
Although the Company has reported losses since 1980 for financial statement
purposes, it has supported operations through rentals received from its lessees
and the sale of debt securities. However, in view of its high degree of
leverage and history of losses, future losses could jeopardize its leasing
operations and the ability to service its debt. The Company believes that
increases in new lease receivables without any appreciable increase in lease
origination or general and administrative expenses will reduce the level of its
operating losses in the future. Due to the current shareholders' deficit, if
the Company were to liquidate in the near future, holders of the subordinated
thrift certificates, and outstanding preferred and common stock would lose all
of their investment.
Excess funds have historically been invested in low yielding but highly
liquid investments. These funds have been held solely for the purpose of
awaiting investment in new lease receivables. During the fiscal year ended
April 30, 1996, the average interest rate earned by the Company on these funds
was approximately 5.3%, while the average interest rate paid on outstanding
certificates attributable to the funds was 9.3%, resulting in a negative spread
of 4.0%. There are no assurances of either future increases or decreases in
interest rates. Management has placed a high priority of increasing the
purchase of equipment for lease in order to reduce the available amount of cash
on hand. During the fiscal year ended April 30, 1996, the average rate of
return on the Company's investment in its lease receivables was approximately
21%.
To date, neither the Company nor ELCOA has ever defaulted on any
contractual payment of interest or principal on any bank borrowings, senior or
subordinated debt obligations, or Demand, Fixed Rate and Money Market Thrift
Certificates issued to the public. All requests for early repayment of
interest or principal have never been later than five business days after
demand for redemption was received.
29
31
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index To Financial Statements
Page
----
(a) Independent Auditor's Report 31
(b) Consolidated Balance Sheets at April 30,
1996 and 1995. 32-33
(c) Consolidated Statements of Operations for
the years ended April 30, 1996, 1995 and 1994. 34
(d) Consolidated Statement of Changes in
Shareholders' Deficit for the years
ended April 30, 1996, 1995 and 1994. 35
(e) Consolidated Statements of Cash Flows
for the years ended April 30, 1996, 1995,
and 1994. 36-37
(f) Notes to Consolidated Financial Statements. 38
See Item 14 on Page 52 for Financial Statement Schedules
30
32
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors
of Walnut Equipment Leasing Co., Inc.
We have audited the accompanying consolidated balance sheets of Walnut
Equipment Leasing Co., Inc. (a wholly-owned subsidiary of Walnut Associates,
Inc.) and subsidiaries as of April 30, 1996 and 1995, and the related
consolidated statements of operations, changes in shareholders' deficit and
cash flows for each of the three years in the period ended April 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Walnut
Equipment Leasing Co., Inc. and subsidiaries as of April 30, 1996 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended April 30, 1996, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that Walnut
Equipment Leasing Co., Inc. and subsidiaries will continue as a going concern
and, accordingly, contemplate the realization of assets and liquidation of
liabilities in the ordinary course of business. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
and experienced negative cash flows from operations and has a shareholders'
deficit. Additionally, the Company's ability to meet its obligations is
dependent in part upon its ability to obtain borrowings adequate to fund its
cash flow needs. These uncertainties raise substantial doubt about the
entity's ability to continue as a going concern. Management's plans in regard
to these matters are also discussed in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome
of these uncertainties.
/s/ Cogen Sklar LLP
COGEN SKLAR LLP
Bala Cynwyd, Pennsylvania
July 1, 1996
31
33
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30,
1996 1995
----------- -----------
ASSETS
Direct finance leases:
Aggregate future amounts receivable under lease contracts $18,423,816 $18,829,268
Estimated residual value of equipment 1,704,915 1,976,244
Less:
Unearned income under lease contracts (3,355,800) (3,436,458)
Advance payments ( 568,715) ( 579,965)
---------- ----------
16,204,216 16,789,089
Allowance for doubtful lease receivables (1,529,143) (1,413,389)
---------- ----------
14,675,073 15,375,700
Operating leases:
Equipment at cost, less accumulated depreciation of
$14,413 and $6,680, respectively 19,420 23,316
Accounts receivable 1,112 ---
Cash and cash equivalents 9,207,905 8,957,949
Other assets (includes $618,293 and $637,479, respectively,
paid to or receivable from related parties) 1,132,587 1,086,402
----------- -----------
Total assets $25,036,097 $25,443,367
=========== ===========
<FN>
See accompanying notes
32
34
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (continued)
April 30,
1996 1995
----------- ------------
LIABILITIES
Amounts payable to equipment suppliers $ 802,956 $ 477,296
Other accounts payable and accrued expenses 268,169 260,762
Demand, Fixed Rate and Money Market Thrift Certificates
(includes $183,805, and $174,907,
respectively, held by related parties) 26,407,959 24,521,875
Senior Thrift Certificates (includes $812,773 and
$749,961, respectively, held by related parties) 21,394,687 18,783,578
Subordinated Thrift Certificates (includes $397,136 and
$400,243, respectively, held by related parties) 5,523,118 6,025,366
Accrued interest 6,309,733 5,411,748
Subordinated debentures (includes $4,000 and $4,000,
respectively, held by related parties) 4,000 5,858
---------- ----------
60,710,622 55,486,483
---------- ----------
COMMITMENTS AND CONTINGENCIES
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 (35,776,581) (30,145,172)
----------- -----------
(35,674,525) (30,043,116)
----------- -----------
Total liabilities and shareholders' deficit $25,036,097 $25,443,367
=========== ===========
<FN>
See accompanying notes
33
35
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended April 30,
1996 1995 1994
---------- ---------- ----------
Revenue:
Income earned under
direct finance lease
contracts $3,609,620 $3,965,846 $3,947,213
Operating lease rentals 10,211 13,300 13,124
---------- ---------- ----------
3,619,831 3,979,146 3,960,337
---------- ---------- ----------
Costs and expenses:
Interest expense, net of
interest income of $484,713,
$380,377 and $170,963, respectively 4,844,532 4,313,253 4,094,189
Lease origination
expenses 1,179,238 1,067,962 1,133,774
General and
administrative expenses
(includes $905,451, $800,864
and $802,323, respectively,
paid to related parties) 2,157,252 2,019,029 2,018,377
Provision for doubtful
lease receivables 1,055,997 1,635,963 792,879
Depreciation on operating
lease equipment 14,221 7,105 3,293
---------- ---------- ----------
9,251,240 9,043,312 8,042,512
Loss from operations ---------- ---------- ----------
before provision for federal and
state income taxes (5,631,409) (5,064,166) (4,082,175)
Provision for federal and state
income taxes --- --- ---
----------- ----------- -----------
Net Loss $(5,631,409) $(5,064,166) $(4,082,175)
=========== =========== ===========
<FN>
See accompanying notes
34
36
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
For the Years Ended April 30, 1996, 1995 and 1994
Prime Rate Adjustable Rate Total
Cumulative Cumulative Common Accumulated Shareholders'
Preferred Shares Preferred Shares Stock Deficit Deficit
---------------- ---------------- -------- ------------ -------------
Shares Shares
Issued Amount Issued Amount
------ ------ ------ ------
Balance, April 30, 1993 281 $ 281 275 $ 275 $101,500 $(20,998,831) $(20,896,775)
Net loss for the year ended
April 30, 1994 --- --- --- --- --- (4,082,175) (4,082,175)
----- ------ ----- ------ -------- ------------ ------------
Balance, April 30, 1994 281 281 275 275 101,500 (25,081,006) (24,978,950)
Net loss for the year ended
April 30, 1995 --- --- --- --- --- (5,064,166) (5,064,166)
----- ------ ----- ------ -------- ------------ ------------
Balance, April 30, 1995 281 281 275 275 101,500 (30,145,172) (30,043,116)
Net loss for the year ended
April 30 1996 --- --- --- --- --- (5,631,409) (5,631,409)
----- ------- ----- ------ -------- ------------ ------------
Balance, April 30, 1996 281 $ 281 275 $ 275 $101,500 $(35,776,581) $(35,674,525)
===== ======= ===== ====== ======== ============= =============
<FN>
See accompanying notes
35
37
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended April 30,
1996 1995 1994
----------- ----------- ------------
OPERATING ACTIVITIES
Net Loss $(5,631,409) $(5,064,166) $(4,082,175)
Adjustments to reconcile
net loss to net cash
used in operating activities:
Depreciation 14,221 7,105 3,293
Amortization of deferred debt
registration expenses 126,533 121,402 120,187
Provision for doubtful
lease receivables 1,055,997 1,635,963 792,879
Effects of changes
in other operating items:
Accrued interest 897,985 608,304 742,864
Amounts payable to
equipment suppliers 325,660 (224,212) 225,129
Other (net), principally
increase in other assets (152,503) (330,663) (130,041)
Net cash used in ----------- ---------- -----------
operating activities (3,363,516) (3,246,267) (2,327,864)
----------- ---------- -----------
INVESTING ACTIVITIES
Excess of cash received over
lease income recorded 6,949,129 7,374,851 6,958,716
Increase (decrease) in
advance payments (11,250) (31,922) 14,282
Purchase of equipment
for lease (7,317,494) (7,567,613) (7,548,795)
Net cash used in investing ----------- ---------- -----------
activities $ (379,615) $ (224,684) $ (575,797)
----------- ----------- -----------
<FN>
See accompanying notes
36
38
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
For the Years Ended April 30,
1996 1995 1994
----------- ----------- ------------
FINANCING ACTIVITIES
Proceeds from issuance of:
Demand and Fixed Rate
Certificates $9,620,233 $10,983,417 $9,267,808
Senior Thrift Certificates 6,522,341 5,488,212 5,827,132
Redemption of:
Subordinated Debentures (1,858) --- (1,860)
Demand, Fixed Rate and
Money Market Thrift
Certificates (7,734,149) (8,272,533) (5,498,321)
Senior Thrift Certificates (3,911,232) (3,355,304) (3,262,311)
Subordinated Thrift
Certificates (502,248) (13,043) (100,421)
----------- ----------- -----------
Net cash provided by
financing activities 3,993,087 4,830,749 6,232,027
----------- ---------- -----------
Increase in Cash
and Cash Equivalents 249,956 1,359,798 3,328,366
Cash and Cash Equivalents,
Beginning of Year 8,957,949 7,598,151 4,269,785
----------- ---------- -----------
Cash and Cash Equivalents,
End of Year $9,207,905 $8,957,949 $7,598,151
=========== ========== ===========
<FN>
See accompanying notes
37
39
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS
The Company conducts business in one industry segment, acquiring commercial
equipment for lease throughout the United States.
BASIS OF FINANCIAL STATEMENT PRESENTATION:
The consolidated financial statements of the Company have been prepared on
a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. Accordingly, the
consolidated financial statements do not include any adjustments relating to
the recoverability of recorded assets, or the amount of liabilities that may be
necessary should the Company be unable to continue in the normal course of
business.
During the years ended April 30, 1996, 1995 and 1994, the Company incurred
losses of $5,631,409, $5,064,166, and $4,082,175, respectively, had negative
cash flows from operations during those years, and reported accumulated
deficits of $35,776,581 and $30,145,172 at April 30, 1996 and 1995,
respectively. The Company's current results of operations, financial position
and the uncertainties which exist as to future levels of new business, interest
rates and potential redemptions of senior and subordinated borrowings currently
outstanding, and its ability to sell additional debt securities as may be
required, may result in the Company's inability to continue operating in the
normal course of business. Continuation of the Company's operations in their
present form is dependent upon the achievement of sustained profitable
operations, through increased new business generated by the Company, continued
ability to service debts as they mature, and the ability to generate sufficient
cash resources to support future operations. If the Company continues to incur
losses, or is unable to obtain additional funds, it may be unable to continue
servicing its debts.
Management has attempted to initiate measures to improve the operating
results and business levels through changes in its marketing strategy, and is
placing a high priority in these efforts. In 1986, in an effort to increase
the utilization of its lease origination, administrative, and servicing
capabilities, and to reduce the cost per lease of providing these services, the
Company decided to commence the marketing of these services on a fee basis to
other companies, including ELCOA. To date, this service has generated no
significant revenues from unrelated parties. See also Note 10, below. In
addition, management believes that the Company's cash flow through the sale of
securities, anticipated renewal of existing indebtedness, and from collections
from outstanding lease receivables, will be adequate to meet operating needs
during the ensuing year. See further discussions contained in "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company,
(with its subsidiaries, including ELCOA, the "Company"), all of which are
wholly-owned. All intercompany transactions have been eliminated.
38
40
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
LEASE ACCOUNTING:
The Company is in the business of leasing equipment which is specifically
acquired for each lease. For financial reporting purposes, the Company
primarily uses the direct financing method and records at the inception of the
lease (a) the estimated unguaranteed residual value of the leased equipment and
the aggregate amount of rentals due under the lease as the gross investment in
the lease, and (b) the unearned income arising from the lease, represented by
the excess of (a) over the cost of the leased equipment. The unearned income
is recognized as income over the term of the lease on the effective or
"interest" method in accordance with Statement of Financial Accounting
Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases" ("SFAS
91"). In addition, under this method, a portion of the initial direct costs as
defined by SFAS 91 are accounted for as part of the investment in direct
financing leases. All the other costs are included as lease origination
expenses in the period when incurred.
Where the lease qualifies as an operating lease pursuant to the
requirements of SFAS No. 13, "Accounting for Leases", the Company recognizes
lease rental payments as income in the period earned and depreciates the cost
of equipment subject to the lease over its estimated useful life using an
accelerated method of depreciation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's
knowledge of current events and actions it may undertake in the future, they
may ultimately differ from actual results.
INCOME TAXES:
The Company computes and records income taxes currently payable based upon
the determination of taxable income using the "operating method" for all
leases, which is different from the method used in the determination of pretax
income for financial statement purposes (as described above). Under the
"operating method" the Company reports as income the amount of rentals received
or accrued and deducts the amount of depreciation (principally under the
Alternative Depreciation System) of the equipment over its estimated useful
life. Other expenses are recognized utilizing the accrual method of
accounting.
The Company utilizes 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
39
41
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
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 expense 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, 1996 and 1995 includes deferred
tax assets (liabilities) attributable to the following temporary deductible
(taxable) differences:
1996 1995
---------- ----------
Operating lease method vs. direct finance method $2,889,500 $3,000,800
Provision for doubtful lease receivables 596,600 473,200
Operating loss carryforward 9,173,000 7,202,000
Other (32,600) (35,000)
---------- ----------
Net deferred tax asset 12,626,500 10,641,000
Valuation allowance (12,626,500) (10,641,000)
---------- ----------
Net deferred tax asset after valuation allowance $ --- $ ---
========== ==========
A valuation allowance was considered necessary since it is more likely than
not that the Company will not realize the tax benefits of the deductible
differences and operating loss carryforward. As of April 30, 1996 the net
operating loss carryover amounted to approximately $26,979,000 expiring through
2011 and the investment tax credit carryover amounted to approximately
$1,075,000 expiring through 2001.
Both the Company and ELCOA will be included in a consolidated federal
income tax return. If the consolidated group incurs a federal income tax
liability, each company's share will be based upon the tax allocation policy of
the consolidated group. However, the Company and ELCOA will not file a
consolidated income tax return for state income tax purposes. Each company
will be subject to state income taxation on each Company's separate income as
computed for state tax purposes. During the fiscal years ended April 30, 1996,
1995, and 1994, ELCOA recognized provisions for state income taxes in the
amount of $0, $360, and $0, respectively, on its separate income. No
provision for federal income taxes was necessary.
40
42
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
LATE CHARGES:
Terms of the Company's lease contracts include provisions for assessing a
monthly late charge on any past due amounts. Revenues from late charges
collected were approximately $411,000, $418,000, and $372,000 during the fiscal
years ended April 30, 1996, 1995 and 1994, respectively.
ESTIMATED RESIDUAL VALUES OF EQUIPMENT UNDER DIRECT FINANCE LEASES:
The Company generally offers an option to purchase the leased equipment
upon expiration of the lease term at fair market value, approximately 10% of
the original equipment cost. Residual value of this equipment is generally
established at the anticipated purchase option price. The estimated
unguaranteed residual values are reviewed at least quarterly by the Company.
ALLOWANCE FOR DOUBTFUL LEASE RECEIVABLES:
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.
In accordance with SFAS 91, the allowance was increased by provisions
charged to operating expense based upon a periodic evaluation, performed at
least quarterly, of delinquent finance lease receivables, to reflect losses
anticipated from delinquencies and impairments that have already occurred
rather than ultimate losses expected over the life of the lease portfolio.
Each direct finance lease provides that an event of default occurs when a
lessee fails to remit the required periodic rental payment after 15 days of the
contractual due date. The Company considers the contractual amount impaired
after 90 days past the contractual due date. The contractual amount is
considered to be the past due and accelerated payments to become due through
the end of the contractual lease term.
OTHER ASSETS
Included in other assets at April 30, 1996 and 1995, are deferred expenses
totaling $311,324 and $308,159 net of accumulated amortization, respectively,
representing costs directly related to the Company's registration and sale of
Senior Thrift Certificates. Also included in other assets at April 30, 1996
and 1995 are deferred expenses totaling $452,495 and $423,223, respectively,
net of accumulated amortization, representing costs related to ELCOA's
registration and sale of Demand and Fixed Rate Certificates. Such expenses are
being amortized on a straight-line basis over the estimated average lives of
the debt issued under the registration statements. Amortization of the
Company's deferred expenses charged to income for the years ended April 30,
1996, 1995 and 1994 amounted to approximately $126,500, $121,400, and $120,200,
respectively.
41
43
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
CASH FLOW STATEMENTS
The Company considers cash invested in short-term, highly liquid
investments with original maturities of three months or less to be cash
equivalents. At April 30, 1996 and 1995 cash equivalents, consisting of U.S.
Government Securities amounted to $8,098,999 and $6,349,693, respectively. The
Company had no cash equivalents at April 30, 1994. Interest paid for the
fiscal years ended April 30, 1996, 1995 and 1994 was $4,431,260, $4,085,326,
$3,522,288, respectively. Income taxes paid were $0, $0, and $411,
respectively.
CONCENTRATION OF CREDIT RISK
The concentration of credit risk is limited since the Company's
small-ticket lease portfolio varies widely as to diversity of equipment types,
lessees, and geographic location.
2. AGGREGATE FUTURE AMOUNTS RECEIVABLE UNDER LEASE CONTRACTS:
Receivables under financing lease contracts at April 30, 1996 are due as
follows:
Year Ending April 30, Amount
--------------------- -----------
1997 $ 9,359,537
1998 5,370,900
1999 2,614,370
2000 778,285
2001 and beyond 300,724
-----------
$18,423,816
===========
Future rentals due under operating lease contracts are all due within one
year and, excluding those rentals reflected in operating lease accounts
receivable, total $10,433 and $3,346 at April 30, 1996 and 1995, respectively.
3. DEMAND, FIXED RATE AND MONEY MARKET THRIFT CERTIFICATES:
The Demand, Fixed Rate and Money Market Thrift Certificates outstanding at
April 30, 1996 were issued by ELCOA, with outstanding certificates bearing
interest at rates ranging from 7.0% to 12.75%. Beginning September 1, 1990,
the name of these debt securities was changed from Money Market Thrift
Certificates to Demand and Fixed Rate Certificates. In the event of
liquidation of ELCOA, holders of these debt securities would be senior in
priority in liquidation as respects ELCOA's assets. Holders of ELCOA's debt
securities have no right in liquidation as respects the assets of its parent,
the Company. All of these certificates rank on parity with each other. There
42
44
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DEMAND, FIXED RATE AND MONEY MARKET THRIFT CERTIFICATES: (Continued)
are no restrictive covenants relative to this debt, nor is ELCOA restricted
from the payment of cash dividends, loans or advances to the Company. The
certificates at April 30, 1996 are due as follows:
Year Ending April 30, Amount
--------------------- -----------
1997 $15,203,974
1998 3,934,697
1999 2,815,391
2000 1,759,532
2001 and beyond 2,694,365
-----------
$26,407,959
===========
Included in the amount due in the year ending April 30, 1997 are $1,331,985
of certificates payable on demand. Additionally, accrued interest of
$2,767,158 at April 30, 1996 is payable upon demand.
4. SENIOR THRIFT CERTIFICATES:
Outstanding Senior Thrift Certificates bear interest at rates ranging from
7.00% to 13.10% at April 30, 1996, and in the event of liquidation are senior
in priority to all outstanding Subordinated Thrift Certificates. Senior Thrift
Certificates at April 30, 1996 are due as follows:
Year Ending April 30, Amount
--------------------- -----------
1997 $15,544,525
1998 2,483,593
1999 1,633,039
2000 690,746
2001 and beyond 1,042,784
-----------
$21,394,687
===========
Included in the amount due in the year ending April 30, 1997 are
approximately $816,016 in certificates payable on demand. Accrued interest on
the Senior Thrift Certificates of $1,703,681 at April 30, 1996 is payable on
demand.
43
45
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. SUBORDINATED THRIFT CERTIFICATES:
Outstanding Subordinated Thrift Certificates bear interest at rates ranging
from 10.00% to 13.10% at April 30, 1996. All thrift certificates are
subordinated to any indebtedness defined by the Trust Indenture as "Senior
Debt" which includes Senior Thrift Certificates, borrowings from banks, trust
companies and other financial institutions, but excludes subordinated
debentures.
Subordinated Thrift Certificates at April 30, 1996 are due as follows:
Year Ending April 30, Amount
--------------------- ----------
1997 $4,354,626
1998 472,739
1999 363,109
2000 88,019
2001 and beyond 244,625
----------
$5,523,118
==========
Included in the amount due in the year ending April 30, 1997 are
approximately $481,176 of certificates payable on demand. Accrued interest on
the Subordinated Thrift Certificates of $1,838,895 at April 30, 1996 is payable
on demand.
6. PREFERRED SHARES:
In 1982, the Company authorized the issuance of 1,000 shares of $1 par
value preferred shares of the Company to be referred to as "Adjustable Rate
Cumulative Preferred Shares." The President and members of his immediate
family exchanged $128,900 in principal amount of Subordinated debentures and
$146,100 in principal amount of Subordinated Thrift Certificates for 275 shares
of Preferred Stock in 1982. The issuance of the shares was exempt from federal
and state securities law registration.
The Adjustable Rate Cumulative Preferred Shares, which have a $1,000 per
share liquidation preference, are redeemable at the option of the Company at
$1,000 per share, plus accrued dividends. Distributions are cumulative and
declared and paid monthly at a rate equal to the prime rate but not less than
12% per annum nor greater than 18% per annum. There were no distributions
during the three fiscal years ended April 30, 1996.
"Prime Rate Cumulative Preferred Shares" have a $100 liquidation preference
and are redeemable solely at the option of the Company at $105 per share, plus
accrued dividends. Distributions are cumulative and are declared and paid
monthly at a rate equal to the prime rate of interest but not less than 10% nor
greater than 18% per annum. There were no distributions during the three
fiscal years ended April 30, 1996.
44
46
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES:
The Company has available for federal income tax purposes net operating
loss carryovers aggregating approximately $26,979,000 ($35,656,581 for
financial statement purposes) at April 30, 1996. Such loss carryovers may be
used to offset future taxable income, if any, until their expiration in varying
amounts from 2001 to 2009. The Company also has investment tax credit
carryovers of approximately $1,075,000 at April 30, 1996 which are available to
reduce federal income tax liabilities, if any. Such carryovers expire, if not
previously utilized, in varying amounts from 1996 through 2002.
8. INITIAL DIRECT COSTS:
Initial direct costs consist principally of commissions, processing, and
credit approval costs. In accordance with SFAS No. 91, initial direct costs
are accounted for as part of the investment in direct financing leases.
Initial direct costs as defined by SFAS No. 91 amounted to $56,921, $52,049 and
$40,222, for the fiscal years ended April 30, 1996, 1995 and 1994,
respectively, consisting principally of commissions paid to outside lease
brokers and salesmen.
9. COMMITMENTS AND CONTINGENCIES:
The Company leases office space and equipment under noncancellable
operating lease agreements. Total rental expense charged to operations for the
years ended April 30, 1996, 1995 and 1994 was approximately $209,000, $235,200,
and $226,700, respectively.
As of April 30, 1996, the future minimum rental payments under leases are
as follows:
Year Ending April 30, Amount
--------------------- ----------
1997 $ 212,444
1998 207,784
1999 214,949
2000 222,116
2001 and beyond 664,154
----------
Total $1,521,447
==========
10. TRANSACTIONS WITH RELATED PARTIES:
The Company is a wholly-owned subsidiary of Walnut Associates, Inc., which
is wholly-owned by Mr. William Shapiro, the President of Walnut Equipment
Leasing Co., Inc.
The President received no salary in fiscal years 1996, 1995 and 1994.
However, the Company paid management fees of $69,000 during each of the fiscal
years ended April 30, 1996, 1995 and 1994, respectively to Walnut Associates,
Inc., primarily to reimburse it for the services of the President.
45
47
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. TRANSACTIONS WITH RELATED PARTIES: (Continued)
Outstanding Adjustable Rate Cumulative Preferred Shares, Prime Rate
Cumulative Preferred Shares, Subordinated Debentures, Senior and Subordinated
Thrift Certificates and Demand, Fixed Rate and Money Market Thrift
Certificates, including accrued interest, held by the President, members of his
family or companies in which he is the majority shareholder at April 30, 1996
and 1995 were as follows:
1996 1995
-------- -------
Adjustable Rate Cumulative
Preferred Shares $ 275 $ 275
Prime Rate Cumulative Preferred Shares 281 281
Senior Thrift Certificates 853,640 778,231
Demand, Fixed Rate and
Money Market Thrift Certificates 192,264 181,921
Subordinated Debentures 4,000 4,000
Subordinated Thrift Certificates 507,116 506,311
For the years ended April 30, 1996, 1995 and 1994, the Company paid Welco
Securities, Inc., ("Welco") an affiliated registered broker/dealer in
securities owned by the President of the Company, $167,138, $135,593, and
$136,848 respectively, for commissions paid in connection with the offering and
sale of Senior Thrift Certificates. The Company pays Welco a commission from
0.2% to 8.0% of the sale price of all Fixed Term Senior Thrift Certificates,
and amortizes this expense over the term of each certificate. ELCOA paid Welco
$182,155, $170,642, and $165,581 for commissions incurred in the solicitation
of Demand, Fixed Rate and Money Market Thrift Certificates during the fiscal
years ended April 30, 1996, 1995 and 1994, respectively. ELCOA pays a
commission to Welco of 0.2% to 8.0% of the sale price on all Demand and Fixed
Rate Certificates sold, and amortizes this expense over the term of each
certificate. During the fiscal year ended April 30, 1996, 1995 and 1994, Welco
paid rentals of approximately $21,000, $8,500 and $10,200, respectively, on
equipment leased from the Company.
The Company expensed $407,160, $354,783, and $342,186 in 1996, 1995 and
1994, respectively, to a law firm in which the President is the principal
shareholder. These payments primarily represent fees for legal services to
associate attorneys, costs and expenditures relating to collections on
defaulted leases.
46
48
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. TRANSACTIONS WITH RELATED PARTIES: (Continued)
During the fiscal years ended April 30, 1996, 1995 and 1994 the Company
incurred $75,732, $69,943, and $81,965, respectively, in transfer agent
service fees for the issuance and redemption of its Senior and Subordinated
Thrift Certificates. These fees were paid monthly to Financial Data, Inc., a
subsidiary of Walnut Associates, Inc. The monthly amount charged by Financial
Data, Inc. is the sum of $2.00 per certificate holder account maintained,
$1.00 per new or rollover certificate issued during the month, or a minimum of
$1,000 per month, whichever is greater. Prior to January 1, 1994, the monthly
charge per certificate holder was $2.50. During the fiscal years ended April
30, 1996, 1995 and 1994 ELCOA paid $106,589, $99,595 and $105,334,
respectively, to Financial Data, Inc. for similar services rendered in
connection with its outstanding Demand, Fixed Rate and Money Market Thrift
Certificates.
The Company charges Financial Data, Inc. for the use of the Company's
computer facilities, space, telephone, and personnel. The amounts charged to
Financial Data, Inc. during the fiscal years ended April 30, 1996, 1995, and
1994 were $105,780, $111,592 and $111,491, respectively. As of April 30, 1996
and 1995, the Company had a receivable of $59,351 and $88,264, respectively
from Financial Data, Inc. The ability of Financial Data, Inc. to repay this
amount is dependent upon increases in the number of holders of Demand, Fixed
Rate, and Senior Thrift Certificates and related charges therefrom.
On March 6, 1987, the Company entered into a lease agreement with Walnut
Associates, Inc. covering approximately 4,300 square feet of warehouse and
print shop facilities for a five year term, renewable for an additional five
year term, at an annual rental of $3.00 per square foot for the initial term.
This lease was renewed for an additional five year term at the same monthly
rental through March 31, 1997. During the fiscal years ended April 30, 1996,
1995 and 1994, $12,900 in rents each year were paid by the Company to Walnut
Associates, Inc.
11. SUBSEQUENT EVENT
The Board of Directors of the Company have authorized the filing of a new
registration statement for the Company to register an additional $40,000,000
of Senior Thrift Certificates. The current registration statement will expire
August 31, 1996.
47
49
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and Executive Officers of the Company are:
William Shapiro (age 73) President and Director
Kenneth S. Shapiro (age 44) Vice President
and Director
Deljean Shapiro (age 68) Secretary-Treasurer
and Director
Dr. Thomas Matcovich (age 67) Director
Philip R. Bagley (age 69) Director
Lester D. Shapiro (age 35) Director
Director's terms expire May 1, 1997, or when their successors are duly
elected at the next annual meeting of the stockholders. The executive
officers' terms expire when their successors are duly appointed by the Board of
Directors.
William Shapiro, the husband of Deljean Shapiro and father of Kenneth and
Lester Shapiro, holds degrees from the Temple University Schools of Business
and Law. He is a practicing attorney and a Certified Public Accountant. He
has been the President, Chief Executive Officer and Director of the Company
since 1969 and devotes substantially all of his time to those duties. For the
last thirty-three years, he has been the President, Chief Executive Officer and
a Director of Walnut Associates, Inc., the parent of the Company. He has been
President of William Shapiro, Esq., P.C., a law firm since 1976. He was also a
Director of Kulicke and Soffa Industries, Inc. a publicly held manufacturing
company, through August 1987. Mr. William Shapiro is the Secretary/Treasurer
and Director of Welco Securities, Inc. since 1983, the President of Equipment
Leasing Corporation of America since May, 1986, and President and Director of
Financial Data, Inc. since 1972.
Kenneth S. Shapiro, the son of William and Deljean Shapiro and brother of
Lester Shapiro, is a graduate of Boston University's School of Business and
School of Law. He is a practicing attorney and a Certified Public Accountant.
Upon graduation from law school in 1977, he was employed by Touche Ross & Co.,
Certified Public Accountants, as a Tax Consultant. In 1977 he became a
Director of the Company and was employed as its Controller from September 1979
to 1983, when he became its Vice-President. In addition to being the
Vice-President of Walnut, he is the President and a Director of Welco
Securities, Inc. He is also on the part-time faculty in Accounting and
Taxation at Beaver College, Glenside, Pennsylvania. He also serves as
Vice-President for Equipment Leasing Corporation of America.
48
50
Deljean Shapiro, the wife of William Shapiro, and mother of Kenneth and
Lester Shapiro, is a graduate of Temple University and has been the Office
Manager of Walnut Associates, Inc. since its incorporation in 1960. Prior
thereto she was a social worker for the Commonwealth of Pennsylvania. She has
been the Secretary-Treasurer and Director of the Company since 1969, and is
co-director of KYW's Call-For-Action program in Philadelphia.
Dr. Thomas Matcovich was, for more than five years prior hereto, a
Professor of Electrical Engineering at Drexel University, Philadelphia,
Pennsylvania. He was also a Director of Kulicke and Soffa Industries, Inc., a
publicly held manufacturing company, through August, 1987. He is President of
Applied Microelectronics, Inc., (a research and development firm) since its
incorporation in January 1983, and President of Sportronics, Inc., a
manufacturer of automated diagnostic baseball bats, since January, 1990. He
has been a Director of the Company since September, 1983.
Philip R. Bagley received the degree of Master of Science from
Massachusetts Institute of Technology in 1951. He was from 1978 to 1984 an
assistant professor in computer and information sciences at Temple University,
Philadelphia, Pennsylvania. He was adjunct professor in computer and
information sciences at Temple University during the 1987-88 academic year.
With over 40 years experience in the data processing field, he has served as
President of Information Technology, Inc., (formerly Information Engineering)
from 1966 to 1977 (a computer systems design and operations center) and since
February 1980 has been President of the Automated Office, Inc., a firm
providing professional data processing consultation and services to outside
clients. He has been a Director of the Company since September, 1983.
Lester D. Shapiro, the son of William Shapiro and Deljean Shapiro and
brother of Kenneth S. Shapiro, is a graduate of New York University College of
Business and Public Administration, having majored in accounting and
management. He also received a Masters of Business Administration degree from
the New York University in June, 1985. Since 1981, he also has been engaged
in the purchase and resale of used business equipment on his behalf. He has
been a Director of the Company since September, 1983, and is also a Director
of Equipment Leasing Corporation of America, the Company's wholly-owned
subsidiary, since May, 1986.
Item 11. EXECUTIVE COMPENSATION
No Officer or Director of the Company received from the Company aggregate
direct remuneration during the fiscal year ended April 30, 1996, equal to or
in excess of $60,000. The Company has no profit sharing, pension, stock
option plans or employment agreement in effect and does not expect to adopt
any such plan or agreement in the near future. All executive officers as a
group (consisting of two individuals) earned an aggregate of $128,143 in
direct or indirect remuneration during the fiscal year ending April 30, 1996
(consisting in part of a $69,000 annual management fee paid to Walnut
Associates, Inc., in consideration of the services of Mr. William Shapiro, its
sole shareholder). The Company pays directors' fees to outside directors in
the amount of $500 per director per meeting.
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51
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the common stock of the Company presently outstanding is owned by
Walnut Associates, Inc. and 100% of the common stock of Walnut Associates,
Inc., is beneficially owned by William Shapiro, the President, Director, and
Chief Executive Officer of the Company. The principal business address of
Walnut Associates, Inc. is Suite 200, One Belmont Avenue, Bala Cynwyd,
Pennsylvania 19004. As the sole shareholder, William Shapiro and Walnut
Associates, Inc., may be deemed "parents" of the Company as that term is
defined under the Securities Act of 1933, as amended. All of the Company's
presently outstanding Adjustable Rate Cumulative Preferred Shares are held by
Mr. William Shapiro and members of his immediate family, individually or in
joint ownership, as well as $281 in legal capital of Prime Rate Cumulative
Preferred Shares at April 30, 1996.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no employment contracts with any of the Officers or Directors of
the Company.
For the three fiscal years ended April 30, 1996, the Company paid yearly
management service fees of $69,000 to Walnut Associates, Inc. (which is 100%
owned by William Shapiro). Management service fees have continued since June,
1991 at the rate of $5,750 per month, which approximates the monthly operating
costs and expenses of Walnut Associates, Inc. These fees are primarily to
reimburse Walnut Associates for the services provided to the Company by Mr.
William Shapiro. The management and servicing activities of Walnut Associates,
Inc. for which such charges are made also cover broad areas, including
management guidance, financing and furnishing of office and computer
facilities.
Financial Data, Inc., an affiliate of the Company, performs transfer agent
duties for both the Company and ELCOA and receives monthly fees from both
companies for its services, which amounted to $182,321 for the fiscal year
ended April 30, 1996. Financial Data, Inc. is obligated to reimburse the
Company for the use of its computer facilities, personnel and miscellaneous
office expenses, including rent and telephone. Accrued reimbursements totaled
$115,223 for the fiscal year ended April 30, 1996. Financial Data, Inc. owed
the Company $59,351 at that date.
Legal services involving collections on defaulted leases were performed for
the Company and ELCOA by a law firm in which William Shapiro is a principal.
During fiscal year 1996, Mr. Shapiro's firm received $407,160 as reimbursement
for legal costs and expenditures incurred on behalf of the Company. Neither
William Shapiro nor Kenneth Shapiro are included on the law firm's payroll.
During fiscal 1996 the Company reimbursed Welco Securities, Inc. ("WELCO")
an affiliate owned by Mr. William Shapiro, for out-of-pocket expenses incurred
in connection with the offering and sale of Senior Thrift Certificates. Both
Companies pay Welco commissions between 0.2% and 8.0% of the sale price of the
certificates sold on behalf of the companies. See Footnote 10 to the
Consolidated Financial Statements. Both the Company and ELCOA amortize these
commissions over the terms of the certificates. During fiscal 1996 and 1995,
the Company and ELCOA paid Welco Securities, Inc. $349,293 and $306,235,
50
52
respectively, for commissions and reimbursements of out-of-pocket expenses.
Neither Kenneth Shapiro nor William Shapiro received any remuneration from
Welco associated with the sale of these securities. As of April 30, 1996,
Welco owed the Company $5,896 for printing and mailing costs paid by the
Company on Welco's behalf. During the fiscal year ended April 30, 1996, Welco
paid rentals of $20,969 on equipment leased from the Company.
On May 6, 1986, the Company formed a subsidiary, Equipment Leasing
Corporation of America ("ELCOA") which the Company capitalized initially with
$1,000,000 in equipment cost and related direct financing leases, in exchange
for all of the subsidiary's voting common stock. ELCOA is operated as a
separate entity, with its own Board of Directors, a majority of the members of
which are independent of the Company, and maintains its principal office in
Wilmington, Delaware. ELCOA has entered into a Service Contract and other
related agreements with the Company, under the terms of which the Company and
its present employees will originate, administer and service all of ELCOA's
leases for a fee. In addition, the Company has granted to ELCOA a right of
first refusal to purchase certain equipment and associated leases from the
Company in excess of the Company's requirements. See also "BUSINESS - Methods
of Financing."
The Company also leases certain warehouse and print shop facilities from
Walnut Associates, Inc. Rents paid by the Company to Walnut Associates, Inc.
totaled $12,900 for the fiscal year ended April 30, 1996. See also Item 2 to
this Form 10-K.
The Company believes the above transactions to have been on terms at least
as favorable as the Company could have obtained from non-affiliated parties.
Since the Company and ELCOA are affiliated and share the same officers and
directors, certain conflicts of interest may arise between the Companies.
ELCOA competes with the Company in the equipment leasing business. Should
both companies have funds available at the same time for acquiring equipment
and related leases, conflicts of interest may arise as to which company should
hold and retain the equipment and related leases. In such situations, the
officers will analyze the equipment already purchased by the Company and
investment objectives of the Company and ELCOA. The officers will make the
decision as to which company will ultimately retain the equipment and related
leases, based upon such factors among others, as (a) the amount of cash
available to the Company and ELCOA, (b) the current and long term liabilities
of each company, and (c) the effect of such acquisition on the diversification
of each company's equipment and lease portfolio. ELCOA has the right of first
refusal in any equipment and appurtenant leases the Company wishes to sell,
based upon an Option Agreement between the parties. An additional conflict may
exist since the Company has been engaged in the collection of delinquent
accounts on behalf of ELCOA and will continue to receive servicing fees during
its collection efforts, although ELCOA may not recognize any income beyond the
original lease term.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS (Included in Item 8 of this Report):
Page
----
(a) Independent Auditor's Report 31
(b) Consolidated Balance Sheets at April 30,
1996 and 1995. 32-33
(c) Consolidated Statements of Operations for
the years ended April 30, 1996, 1995 and 1994. 34
(d) Consolidated Statement of Changes in
Shareholders' Deficit for the years
ended April 30, 1996, 1995 and 1994. 35
(e) Consolidated Statements of Cash Flows
for the years ended April 30, 1996, 1995
and 1994. 36-37
(f) Notes to Consolidated Financial Statements. 38
(2) FINANCIAL STATEMENT SCHEDULE (attached hereto):
(a) Report on Schedule. 59
(b) Schedule VIII - Valuation and Qualifying
Accounts. 60
All other schedules for which provision is made in the applicable
regulation of the Securities and Exchange Commission have been omitted because
they are not required under the related instructions or are inapplicable.
52
54
3) EXHIBITS
3.1 - Certificate of Incorporation, as amended, incorporated by reference
to Exhibit 3.1 to Walnut's Annual Report on Form 10-K for the year
ended April 30, 1987 (File No. 2-65101; Filed July 29, 1987).
3.2 - By-Laws, as amended, Incorporated by reference to Exhibit 3.1 to
Walnut's Annual Report on Form 10-K for the year ended April 30,
1985. (File No. 2-65101; July 29, 1985).
4.1 - Specimen of Variable Rate Money Market Subordinated Demand Thrift
Certificate, incorporated by reference to Walnut's Registration
Statement on Form S-1 (File No. 2-78371; File July 9, 1982).
4.2 - Specimen of Fixed Term Money Market Subordinated Thrift
Certificates, incorporated by reference to Exhibit 4.1 to Walnut's
Registration Statement on Form S-1 (File No. 2-78371; Filed July 9,
1982).
4.3 - Specimen of ninety day demand Subordinated Thrift Certificate,
incorporated by reference to Exhibit 3.1 to Walnut's Registration
Statement on Form S-18 (File No. 2-65101; Filed October 24, 1979).
4.4 - Specimen of one, three and five year Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.2 to Walnut's
Registration Statement on Form S-18 (File No. 2-65101; Filed
October 24, 1979).
4.5 - Specimen of Variable Rate Money Market Demand Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.6 to Walnut's
Registration Statement on Form S-18 (File No. 2-65101; Filed April
15, 1980).
4.6 - Specimen of Fixed Rate Money Market Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.7 to Walnut's
Registration Statement on Form S-18 (File No. 2-65101; File April
15, 1980).
4.7 - Specimen of Variable Rate Money Market Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.1 of Walnut's
Registration Statement on Form S-18 (File No. 2-70326; Filed
December 19, 1980).
4.8 - Specimen of Fixed Term Money Market Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.2 to Walnut's
Registration Statement on Form S-18 (File No. 2-70326; Filed
December 19, 1980).
4.9 - Trust Indenture between Walnut and Fulton Bank, Trustee, dated
October 26, 1979 and amended by an Amendment dated April 14, 1980,
incorporated by reference to Exhibit 4.9 to Walnut's Registration
Statement on Form S-2 (File No. 2-92440; Filed September 5, 1986).
4.10 - Trust Indenture between Walnut and Fulton Bank, Trustee, dated as
of June 15, 1982, incorporated by reference to Exhibit 4.10 to
Walnut's Registration Statement on Form S-2 (File No. 2-92440;
Filed September 5, 1986).
53
55
4.11 - Trust Indenture between Walnut and Fulton Bank, Trustee, dated as
of June 15, 1982, incorporated by reference to Exhibit 4.11 to
Walnut's Registration Statement on Form S-2 (File No. 2-92440;
Filed September 5, 1986).
4.12 - Subordination Agreement by William Shapiro and members of his
immediate family, incorporated by reference to Exhibit 3.9 to
Walnut's Registration Statement on Form S-18 (File No. 2-65101;
Filed May 19, 1980).
4.13 - Company Order dated June 8, 1980, incorporated by reference to
Exhibit 3.10 to Walnut's Registration Statement on Form S-18 (File
No. 2-65101; Filed June 9, 1980).
4.14 - Specimen of Adjustable Rate Cumulative Preferred Share Certificate,
incorporated by reference to Exhibit 4.14 to Form 8-K as filed by
Walnut, dated December 30, 1982 (File No. 2-65101).
4.15 - Specimen of Variable Rate Money Market Demand Subordinated Thrift
Certificate, incorporated by reference to Exhibit 4.15 to Walnut's
Registration Statement on Form S-2 (File No. 2-92440; Filed July
27, 1984).
4.16 - Specimen of Fixed Term Money Market Subordinated Thrift
Certificate, incorporated by reference to Exhibit 4.15 to Walnut's
Registration Statement on Form S-2. (File No. 2-92440; Filed July
27, 1984).
4.17 - Supplemental Trust Indenture dated July 24, 1984 to Trust Indenture
between Walnut and Fulton Bank, Trustee dated June 15, 1982,
incorporated by reference to Exhibit 4.17 to Walnut's Registration
Statement on Form S-2. (File No. 2-92440; Filed July 27, 1984).
4.18 - Specimen of Prime Rate Cumulative Preferred Stock Certificate,
incorporated by reference to Exhibit 4.18 to Walnut's Registration
Statement on Form S-2. (File No. 2-92440; Filed July 27, 1984).
4.19 - Certificate of designations, relative rights, preferences and
limitations of Prime Rate Cumulative Preferred Stock, incorporated
by reference to Exhibit 4.19 to Walnut's Registration Statement on
Form S-2. (File No. 2-92440; Filed July 27, 1984).
4.20 - Second Supplemental Trust Indenture dated September 3, 1986 to
Trust Indenture between Walnut and Fulton Bank, Trustee dated June
15, 1982, as supplemented July 24, 1984, incorporated by reference
to Exhibit 4.20 to Walnut's Registration Statement on Form S-2
(Filed September 5, 1986; File No. 2-92440).
4.21 - Trust Indenture dated as of October 7, 1987 between Walnut and
First Valley Bank, Bethlehem, Pennsylvania, Trustee, incorporated
by reference to Exhibit 4.21 to Walnut's Registration Statement on
Form S-2 (Filed October 9, 1987; File No 33-16599).
4.22 - Form of Specimen of Demand Senior Thrift Certificate; incorporated
by reference to Exhibit 4.22 to Walnut's Registration Statement on
Form S-2 (Filed October 9, 1987; File No. 33-16599).
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56
4.23 - Form of Specimen of Fixed Term Senior Thrift Certificate,
incorporated by reference to Exhibit 4.23 to Walnut's Registration
Statement on Form S-2(Filed October 9, 1987; File No. 33-16599).
4.24 - Form of First Supplemental Trust Indenture dated September 20, 1988
to Trust Indenture dated as of October 7, 1987 between Registrant
and First Valley Bank, Bethlehem, Pennsylvania, Trustee,
incorporated by reference to Exhibit 4.24 to Walnut's Registration
Statement on Form S-2. (File No. 33-23210; Filed July 21, 1988.)
4.25 - Form of Demand Senior Thrift Certificate, incorporated by reference
to Exhibit 4.25 to Walnut's Registration Statement on Forms S-2
(File No. 33-23210; Filed July 21, 1988.)
4.26 - Form of Fixed Term Senior Thrift Certificate, incorporated by
reference to Exhibit 4.26 to Walnut's Registration Statement on Form
S-2 (File No. 33-23210; Filed July 21, 1988.)
4.27 - Form of Second Supplemental Trust Indenture dated as of September
13, 1989 to Trust Indenture dated as of October 7, 1987 between
Registrant and First Valley Bank, Bethlehem, Pennsylvania, Trustee,
incorporated by reference to Exhibit 4.27 to Walnut's Registration
Statement on Form S-2. (File No. 33-29704; Filed July 10, 1989.)
4.28 - Form of Specimen of Demand Senior Thrift Certificate, incorporated
by reference to Exhibit 4.28 to Walnut's Registration Statement on
Form S-2 (File No. 33-29704; Filed July 10, 1989.)
4.29 - Form of Specimen of Fixed Term Senior Thrift Certificate,
incorporated by reference to Exhibit 4.29 to Walnut's Registration
Statement on Form S-2 (File No. 33-29704; Filed July 10, 1989.)
4.30 - Form of Third Supplemental Trust Indenture dated as of August 17,
1990 to Trust Indenture dated as of October 7, 1987 between
Registrant and First Valley Bank, Bethlehem, Pennsylvania, Trustee
(File No. 33-35663; Filed June 29, 1990.)
4.31 - Specimen of Demand Senior Thrift Certificate (incorporated by
reference to Exhibit 4.31 to Walnut's Registration Statement on Form
S-2 (File No. 33-35663; Filed June 29, 1990.)
4.32 - Specimen of Fixed Rate Senior Thrift (incorporated by references to
Exhibit to Walnut's Registration Statement on Form S-2 (File No.
33-35663; Filed July 29, 1990)
4.33 - Fourth Supplemental Trust Indenture dated as August 14, 1992 to
Trust Indenture dated as of October 7, 1987 between Registrant and
First Valley Bank, Bethlehem, Pennsylvania, Trustee. (File No.
33-49278; File August 18, 1992).
4.34 - Form of Specimen of Demand Senior Thrift Certificate. (File No.
33-49278; Filed July 6, 1992).
4.35 - Form of Specimen of Fixed Term Senior Thrift Certificate. (File No.
33-49278; Filed July 6, 1992).
55
57
10.1 - Specimen of existing five year Subordinated Debenture, incorporated
by reference to Exhibit 11.2 to Walnut's Registration Statement on
Form S-18 (File No. 2-65101; Filed July 26, 1979).
10.2 - Form of equipment lease, incorporated by reference to Exhibit 11.3
to Walnut's Registration Statement on Form S-18 (File No. 2-65101;
Filed July 26, 1979).
10.3 - Agreement with Walnut Associates, Inc. as of February 1, 1979,
incorporated by reference to Exhibit 11.5 to Walnut's Registration
Statement on Form S-18 (File No. 2-65101; Filed July 26, 1979).
10.5 - Service Contract dated May 23, 1986 between Walnut and Equipment
Leasing Corporation of America; Incorporated by reference to Exhibit
10.5 to Equipment Leasing Corporation of America's Registration
Statement on Form S-1 (File No. 33-6259; Filed June 6, 1986).
10.6 - Escrow Agreement dated May 23, 1986 between Walnut and Equipment
Leasing Corporation of America re: Segregation of Funds;
incorporated by reference to Exhibit 10.6 to Equipment Leasing
Corporation of America's Registration Statement on Form S-1 (File
No. 33-6259; Filed June 6, 1986).
10.7 - Option Agreement dated May 23, 1986 between Walnut and Equipment
Leasing Corporation of America; incorporated by reference to
Equipment Leasing Corporation of America's Registration Statement on
Form S-1 (File No. 33-6259; Filed June 6, 1986).
10.8 - Agreement regarding sale of equipment and related leases to
Equipment Leasing Corporation of America in exchange for common
stock; Incorporated by reference to Exhibit 2.1 to Equipment Leasing
Corporation's Registration Statement of Form S-1 (File No. 33-6259;
Filed June 6, 1986).
10.9 - Lease Agreement dated as of March 6, 1987 between Walnut and Walnut
Associates, Inc. covering the premises located at 15 South 4th
Street, Fernwood, PA, incorporated by reference to Exhibit 10.23 to
Walnut's Registration Statement on Form S-2 (Filed 7/31/87; File No.
2-92440).
10.10- Service Purchase Contract dated May 18, 1995 between Walnut and the
Pennsylvania Office of Liquidations and Rehabilitations regarding
servicing of performing lease files. (File No. 2-65101; Filed July
28, 1995).
10.11- Master Leasing Program Agreement dated as of June 9, 1995 between
TEC America, Inc. and the Company regarding a "private label
leasing" agreement between the parties. (File No 2-65101; Filed
July 28, 1995).
10.12- Sublease agreement dated as of July 7, 1995 between the Company and
Walnut Associates, Inc. covering office space located at Suite 200,
One Belmont Avenue, Bala Cynwyd, Pennsylvania, covering the period
from October 1, 1995 to January 31, 2003. Incorporated by reference
to Exhibit 10.12 to Walnut's Registration Statement on Form S-2
(File No. 33-81630; Filed September 12, 1995).
56
58
10.13- Memorandum of Office Building Lease dated as of August 3, 1995
between Walnut Associates, Inc. and WRGSB Associates, covering the
premises located at One Belmont Avenue, Bala Cynwyd, PA.
Incorporated by reference to Exhibit 10.13 to Walnut's Registration
Statement on Form S-2 (File No. 33-81630; Filed September 12, 1995).
12.1 - See "Consolidated Statements of Operation" in Item 8 to this report.
22.1 - Subsidiaries of Walnut.
*27.1 - Financial Data Schedule.
*99.1 - Listing of Manufacturers Engaged in Co-Op Manufacturing Marketing
Program (as of July 1, 1996).
* Filed with this Form-10K
(b) Reports on Form 8-K
(1) There were no reports filed on Form 8-K during the three months
ended April 30, 1996.
------------------------
Registrant has neither furnished to security holders any annual reports
covering the registrant's last fiscal year nor any proxy materials.
57
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to a
previously filed report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WALNUT EQUIPMENT LEASING CO., INC.
By: /s/ William Shapiro
----------------------------------
William Shapiro, President
Date: July 25, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the dates indicated.
Name Title
/s/ William Shapiro
- ----------------------- President, Chief Executive,
William Shapiro Principal Financial and
Accounting Officer; Director
Date: July 25, 1996
/s/ Kenneth S. Shapiro
- ----------------------- Vice-President; Director
Kenneth S. Shapiro
Date: July 25, 1996
/s/ Deljean Shapiro
- ----------------------- Secretary/Treasurer; Director
Deljean Shapiro
Date: July 25, 1996
/s/ Thomas Matcovich
- ----------------------- Director
Dr. Thomas Matcovich
Date: July 25, 1996
/s/ Philip R. Bagley
- ----------------------- Director
Philip R. Bagley
Date: July 25, 1996
/s/ Lester D. Shapiro
- ----------------------- Director
Lester D. Shapiro
Date: July 25, 1996
58
60
INDEPENDENT AUDITOR'S
REPORT ON FINANCIAL STATEMENT SCHEDULE
In connection with our audits of the consolidated financial statements of
Walnut Equipment Leasing Co., Inc. at April 30, 1996 and 1995 and for each of
the three years in the period ended April 30, 1996, we have also audited the
consolidated financial statement schedule included in this Form 10-K as listed
in Item 14(a)(2).
In our opinion, the consolidated financial statement schedule mentioned
above presents fairly the information required to be stated therein.
/s/ Cogen Sklar LLP
COGEN SKLAR LLP
Bala Cynwyd, Pennsylvania
July 1, 1996
59
61
WALNUT EQUIPMENT LEASING CO., INC.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
---------
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
- ---------------------------------------------------------------------------------------
Allowance for Doubtful
Lease Receivables (A)
- ----------------------
For the Fiscal Year Ended
April 30, 1994 $1,992,677 $ 792,879(B) $ 897,098(C) $1,888,458
For the Fiscal Year Ended
April 30, 1995 $1,888,458 $1,635,963(B) $2,111,032(C) $1,413,389
For the Fiscal Year Ended
April 30, 1996 $1,413,389 $1,055,997(B) $ 940,243(C) $1,529,143
<FN>
(A) Represents estimated losses that will be incurred in the collection of
receivables from direct finance leases. There are no allowances for doubtful
operating lease receivables.
(B) Provisions for estimated losses calculated on the basis of amounts necessary
to provide for anticipated losses on delinquent leases on an impairment basis.
(C) Write-offs of bad debts, net of recoveries.
60
62
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended Commission file number
APRIL 30, 1996 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 Identification No.)
incorporation or organization)
SUITE 200, ONE BELMONT AVENUE, BALA CYNWYD, PA 19004
(Address of principal executive offices) (Zip Code)
EXHIBIT
VOLUME
63
WALNUT EQUIPMENT LEASING CO., INC.
EXHIBIT INDEX
10-K
Exhibit Sequential
Number Description Page Number
- ------- ----------------------------------------------- -----------
27.1 Financial Data Schedule. 64
99.1 Listing of Manufacturers Engaged in Co-Op
Manufacturing Marketing Program (As of July 1,
1996). 65