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As Filed with the Securities and Exchange Commission on July 30, 1996
Registration No. 333-xxxxx
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-2
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
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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)
ONE BELMONT AVENUE WILLIAM SHAPIRO, ESQ., P.C.
SUITE 200 ONE BELMONT AVENUE, SUITE 202
BALA CYNWYD, PA 19004 BALA CYNWYD, PA 19004
(610) - 668 - 0700 (610) - 668 - 0707
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(Address, including zip code, (Name, Address, including zip code and
and telephone number, including telephone number, including area code,
area code, of registrant's of agent for service)
principal executive offices)
COPY OF COMMUNICATIONS TO:
William Shapiro, Esq., P.C. Kenneth S. Shapiro, President
Suite 202, One Belmont Avenue Welco Securities, Inc.
Bala Cynwyd, Pennsylvania 19004 Suite 105, One Belmont Avenue
Telephone Number (610)668-0707 Telephone Number (610)668-0709
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / X /
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this Form, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
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If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act check the following box and list the Securities Act
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
CALCULATION OF REGISTRATION FEE
Proposed
maximum
Title of each of Proposed maximum aggregate Amount of
securities to be Amount to be offering price offering registration
registered registered per unit (1) price (1) fee
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Demand and Fixed
Term Senior Thrift
Certificates $35,500,000 $100-$25,000 $35,500,000 $12,241.38
(1) Estimated solely for the purpose of determining the registration fee.
* The Registrant is hereby proposing to register a new offering of Senior
Thrift Certificates in the principal amount of $35,500,000 and is hereby
amending Registration No. 33-81630 pursuant to Rule 429 of which approximately
$4,500,000 of Senior Thrift Certificates will remain unsold. The registration
fee is calculated on the amount being registered hereunder.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said section
8(a), may determine.
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WALNUT EQUIPMENT LEASING CO., INC.
Cross Reference Sheet Pursuant to Reg. Sec. 229.501(b)
Item Number and Caption Caption in Prospectus
----------------------- ---------------------
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus...... Facing Page, Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................... Inside Front Cover Page,
Table of Contents
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.......... The Company, Risk Factors,
Selected Financial Data
4. Use of Proceeds............................. Use of Proceeds
5. Determination of Offering Price............. Not Applicable
6. Dilution.................................... Not Applicable
7. Selling Security Holders.................... Not Applicable
8. Plan of Distribution........................ Cover Page, Risk Factors,
Plan of Distribution
9. Description of Securities to be Registered.. Description of Securities
10. Interests of Named Experts and Counsel...... Legal Opinion
11. Information With Respect to the Registrant.. Business, Risk Factors,
Financial Statements,
Selected Financial Data,
Management's Discussion
and Analysis of Financial
Condition and Results of
Operations, Plan of
Distribution, Experts
12. Incorporation of Certain Information
by Reference................................ Inside Front Cover Page
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................. Not Applicable
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Subject to Completion, July 30, 1996
WALNUT EQUIPMENT LEASING CO., INC.
$40,000,000 SENIOR THRIFT CERTIFICATES
Demand Senior Thrift Certificates
(Subject to Certain Limitation or Restriction on Redemptions)
Fixed Term Senior Thrift Certificates
For Periods of 6 through 120 months
The minimum denomination of these securities which will be offered and sold
by the terms of this prospectus is $100. The Interest rate on Demand Senior
Thrift Certificates shall be at least 1% above the 6-Month U.S. Treasury Bill
Rate. The rate of interest on Fixed-Term Senior Thrift Certificates shall be
at least 1% above the 6-Month U.S. Treasury Bill Rate for certificates issued
for 24 months or less, at least 2% above the 6-month U.S. Treasury Bill Rate
for Certificates issued for 25 to 60 months, and at least 3% above the 6-Month
U.S. Treasury Bill rate for those issued for periods exceeding 60 months.
These securities which are unsecured obligations of the Company are being
offered on a continuous, on-going "best-efforts" basis with no minimum amount
guaranteed to be sold. As such, the Company is unable to assure that any of
these securities will be sold nor is the Company able to calculate the amount
of proceeds, if any, it will receive from this offering. Purchasers have the
option of purchasing either a Demand Certificate, or a Fixed Rate Certificate
with a maturity ranging from six to one-hundred twenty months. This
election is made by the purchaser as they subscribe for the Certificates. The
current interest rates being offered pursuant to the current supplement
attached to this Prospectus reflect the interest rates being offered on
Certificates purchased within given ranges of maturity, i.e. six to eleven
months and up to one-hundred twenty months in duration.
For a description of the 6-Month U.S. Treasury Bill Rate calculation,
including the minimum interest rate, see "DESCRIPTION OF SECURITIES -
CERTIFICATES; Interest 6-Month U.S. Treasury Bill Rate".
AN INVESTMENT IN THE SENIOR THRIFT CERTIFICATES INVOLVES CERTAIN INVESTMENT
RISKS, INCLUDING THE RISK OF LOSS OF A SIZEABLE PORTION OF ANY INVESTMENT IF
THE COMPANY WERE TO LIQUIDATE IMMEDIATELY. THE COMPANY'S ABILITY TO CONTINUE
IN EXISTENCE IS DEPENDENT UPON ITS ABILITY TO REVERSE ITS LOSSES BY INCREASING
NEW LEASE BUSINESS AND OBTAINING ADEQUATE FINANCING SOURCES. THE COMPANY'S
CONTINUED OPERATIONS ARE CONTINGENT UPON THE ABILITY TO OBTAIN FINANCING
THROUGH THE OFFER AND SALE OF THESE SECURITIES, AS WELL AS FROM THE ISSUANCE
OF DEMAND AND FIXED RATE CERTIFICATES BEING OFFERED BY THE COMPANY'S
WHOLLY-OWNED SUBSIDIARY, EQUIPMENT LEASING CORPORATION OF AMERICA ("ELCOA"),
THE OFFER AND SALE OF WHICH THERE CAN BE NO ASSURANCES. PROCEEDS OF THIS
OFFERING WILL BE USED TO REDEEM OR PAY INTEREST ON PREVIOUSLY ISSUED
SECURITIES. INVESTORS CONSIDERING A PURCHASE OF THESE CERTIFICATES SHOULD
CONSIDER THE FOLLOWING SIGNIFICANT RISK FACTORS:
- THE PROJECTED CASH FLOWS FROM ALL OF THE COMPANY'S REVENUE SOURCES WILL
NOT BE SUFFICIENT TO PAY OFF THE COMPANY'S OUTSTANDING DEBT. SEE
"SUMMARY OF THE OFFERING - THE COMPANY" ON PAGE 1.
- FOR THE YEARS 1996 THROUGH 1980, EARNINGS WERE INADEQUATE TO COVER
INTEREST EXPENSE AND PREFERRED STOCK DIVIDENDS.
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- DURING EACH OF THE PAST 16 YEARS, THE COMPANY HAS HAD SIGNIFICANT
LOSSES AND ACCUMULATED DEFICITS.
- DURING THE THREE FISCAL YEARS ENDED APRIL 30, 1996, 1995, AND 1994,
APPROXIMATELY 75%, 71%, and 59% RESPECTIVELY, OF THE PROCEEDS OF
CERTIFICATES SOLD BY THE COMPANY WERE USED FOR THE REDEMPTION OF
PREVIOUSLY ISSUED DEBT.
- APPROXIMATELY $15,544,525 IN PRINCIPAL AMOUNT OF PREVIOUSLY ISSUED
SENIOR THRIFT CERTIFICATES, ALONG WITH APPROXIMATELY $4,354,626 OF
PREVIOUSLY ISSUED SUBORDINATED THRIFT CERTIFICATES OF THE COMPANY WILL
BECOME DUE DURING FISCAL 1997. THE COMPANY MUST ROLLOVER AN ESTIMATED
$8,900,000 OF CERTIFICATES COMING DUE IN FISCAL 1997, AND TO THE EXTENT
SUCH DEBT IS NOT ROLLED OVER MUST USE THE PROCEEDS OF THE SALE OF
CERTIFICATES TO PAY OFF SUCH DEBT. SEE "SUMMARY OF THE OFFERING - THE
COMPANY" ON PAGE 1.
- THE COMPANY ESTIMATES THAT IT MUST GENERATE APPROXIMATELY $34,800,000
OF NEW LEASE RECEIVABLES IN ORDER TO REACH A "BREAK-EVEN" LEVEL OF
OPERATIONS, ALTHOUGH IT HAS NEVER GENERATED MORE THAN $13,218,230 IN
NEW LEASES IN ANY ONE YEAR, AND THE LEVEL OF NEW LEASES GENERATED HAS
REMAINED RELATIVELY CONSTANT OVER THE LAST THREE FISCAL YEARS. SEE
"SUMMARY OF THE OFFERING" AND RISK FACTOR #3 ON PAGE 18.
IN ADDITION, REPAYMENT OF PRINCIPAL OR INTEREST ON THE CERTIFICATES WILL, IN
LARGE PART, BE DEPENDENT UPON THE COMPANY'S ABILITY TO OFFER AND SELL
ADDITIONAL CERTIFICATES IN THE FUTURE. AT APRIL 30, 1996, APPROXIMATELY
$3,859,000 OR 20.9% OF LEASE RECEIVABLES OUTSTANDING ON A CONTRACTUAL BASIS
WERE 12 OR MORE MONTHS PAST DUE. FOR A DISCUSSION OF CERTAIN MATTERS THAT
SHOULD BE CONSIDERED IN EVALUATING A CONTEMPLATED INVESTMENT, SEE "RISK
FACTORS".
This offering (the "Offering") relates to an aggregate of $40,000,000 in
principal amount of a class of debt securities having priority in liquidation
over certain previously issued Subordinated Thrift Certificates, designated as
Senior Thrift Certificates (the "Certificates"), being offered by Walnut
Equipment Leasing Co., Inc., a Delaware corporation, (the "Company"). The
Certificates offered hereunder rank on parity upon liquidation with other
unsecured creditors. As of April 30, 1996, total liabilities to these
creditors were $1,062,724, along with $21,394,687 in outstanding Senior Thrift
Certificates which ranked on parity therewith. The Certificates are senior in
liquidation preference to prior issuances of Subordinated Thrift Certificates
by the Company in the principal amount of $5,523,118, and $4,000 of
Subordinated debentures, outstanding as of April 30, 1996, and are obligations
of the Company only. Certificate holders will be unsecured creditors and
acquire no proprietary interest in the Company or any of its subsidiaries.
See "DESCRIPTION OF SECURITIES - CERTIFICATES". Contemporaneous with the
offering of Certificates, ELCOA is also offering debt securities in the
principal amount of $50,000,000 to the public pursuant to a Registration
statement which will become effective on or about August 31, 1996 under the
Securities Act of 1933, as amended. ELCOA's debt securities are not
guaranteed by the Company nor offered by the Company as a co-issuer. See
"BUSINESS - Method of Financing." As of April 30, 1996, ELCOA's outstanding
principal amount of debt securities totaled $26,407,959, along with
$2,767,158 in accrued interest.
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THE CERTIFICATES ARE UNSECURED OBLIGATIONS OF THE COMPANY WHICH DO NOT
REPRESENT AN INTEREST IN A MONEY MARKET FUND, THRIFT INSTITUTION, GOVERNMENTAL
AGENCY, OR INSTRUMENTALITY AND ARE NOT INSURED BY ANY OF THE FOREGOING, NOR
SUBJECT TO STATE OR FEDERAL REGULATIONS, INCLUDING (BUT NOT LIMITED TO)
REGULATIONS APPLICABLE TO BANKS AND SAVINGS AND LOAN ASSOCIATION WITH REGARD
TO THE MAINTENANCE OF RESERVES, THE QUALITY OR CONDITION OF ITS ASSETS AND
OTHER MATTERS. THE CERTIFICATES DO NOT HAVE THE SAFETY OR INSURANCE FEATURES
OF CONVENTIONAL SAVINGS ACCOUNTS AND BANK CERTIFICATES OF DEPOSIT.
The Company reserves the right to reject any application to purchase the
Certificates, in whole or in part, and to modify the terms of the offering
prospectively from time to time only as to any unissued debt securities
offered in the future, provided that the terms of any Certificate offered
under the Indenture described herein can be modified only in accordance with
the provisions of such document. The decision to accept or reject any
application for purchase is made on the same business day as funds are
received before any checks are deposited by the Company. Funds will not be
deposited unless an application for purchase has been accepted. Applications
for purchase are accepted from purchasers residing in states where the
Certificates are registered for sale (or exempt from registration). Certain
states may impose objective suitability standards, with minimum income
requirements ranging from $20,000 to $50,000 and minimum net worth (exclusive
of home, home furnishings or automobiles) ranging from $45,000 to $450,000, as
will be noted on the prospectus supplement attached to this prospectus. In
addition, subjective suitability standards as required by the National
Association of Securities Dealers, Inc. ("NASD"), including but not limited to
the purchaser's income, net worth, occupation, and stated investment
objective, may be considered by the Underwriter in relation to the size of the
purchase before accepting any application for purchase. See "DESCRIPTION OF
SECURITIES - CERTIFICATES". The Certificates will be fully registered as to
principal and interest, and will be in negotiable form. The Company reserves
the right to redeem the Certificates at any time at its own discretion on 60
days written notice. For a description of the right of a holder to receive
early payment, see "DESCRIPTION OF SECURITIES - CERTIFICATES; Right to Request
Early Payment". It is the Company's present policy, subject to availability
of funds, to pay the principal and accrued interest of any Demand Certificate
within five business days after demand for redemption is received, although
this policy may be changed at any time without notice to Certificate holders.
The Company is not obligated to redeem Demand Certificates, or to redeem Fixed
Term Certificates prior to maturity at the request of the holder, in excess of
an aggregate of $250,000 in principal amount in any calendar month. For a
more complete discussion regarding redemption of Certificates, including the
$250,000 monthly limitation on redemption of Demand and Fixed Term
Certificates redeemed prior to maturity, see "DESCRIPTION OF SECURITIES -
Redemption". A prepayment penalty is deducted from the principal amount of
any fixed rate certificate redeemed at the request of the holder prior to
maturity. See "Right to Request Early Payment." There is no active trading
market for the Certificates, nor is any trading market expected to develop.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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Underwriter
Price to Discounts and Proceeds to
Public Commissions Company (2)
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Per Certificate..... 100% None to 8% (1) (3)
Total............... $40,000,000 (1) (3)
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(1) The offering is being made by the Company through Welco Securities, Inc.
("Welco" or the "Underwriter"), an affiliate of the Company on a
continuous "best efforts" basis. As such, the underwriter has made no
contractual commitment to sell any minimum amount of Certificates, and the
Company has no assurance that it will receive any minimum amount of
proceeds as a result of sales of Certificates in the offering. This
offering will terminate upon sale of all Certificates registered
hereunder. This prospectus may only be used through August 31, 1997. The
Underwriter will receive a commission equal to 1/15 of 1% of the principal
amount for each month of the term of all fixed term Certificates sold by
the Underwriter, ranging from .4% for a 6-month certificate to 8.0% for a
120 month certificate. There is no minimum amount of Certificates which
must be sold. Welco may enter into selected dealer agreements with member
firms of the National Association of Securities Dealers, Inc. ("NASD") and
pay a sales commission to such firms, determined on the same basis as the
underwriting commissions, up to eight percent (8%) of the principal amount
of Certificates sold. Any such member who participates in the offering
may be deemed to be an "underwriter" within the meaning of the Securities
Act of 1933. The Company has agreed to reimburse Welco for any
out-of-pocket expenses incurred in connection with the offer and sale of
the Certificates, including commissions or concessions paid by Welco, and
has agreed to indemnify the underwriter with respect to certain matters in
connection with this offering. See "PLAN OF DISTRIBUTION". An opinion
regarding the pricing of this offering from J.E. Liss & Company, Inc., a
qualified independent underwriter pursuant to Schedule E of the NASD
By-Laws, has been obtained by Welco. See "PLAN OF DISTRIBUTION".
(2) Before deducting expenses estimated at approximately $80,000.
(3) The proceeds to the Company will be 100% of the amount of Certificates
sold through Welco, less reimbursement of expenses and commissions to
Welco. Certificates sold through other member firms of the NASD are
subject to payment of commissions and reallowances paid up to 8% of the
principal amount of the offering price, as the case may be. Since the
Certificates are sold on a best efforts basis with no minimum, the Company
is unable to calculate the amount of proceeds which it will receive.
WELCO SECURITIES, INC.
The Date of this Prospectus is August, 1996
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The Certificates are offered by the Company and the Underwriter as agent
for the Company subject to prior sale, withdrawal, and cancellation or
modification of the offering, without notice, at any time by the Company, or
the Underwriter prior to the release or delivery of any proceeds of this
offering to the Company, whether or not a confirmation of sale of Certificates
offered by this Prospectus has been issued by the Underwriter or any dealer.
The right is reserved by the Company, the Underwriter and the dealers to
reject any and all offers to purchase and to cancel any and all confirmations
of sale of any Certificates offered hereby, in whole or in part, for cause or
without cause, at any time prior to delivery of the Certificates to the
subscriber.
No person is authorized by the Company to give any information or make any
representation other than as contained in this Prospectus in connection with
the offering made hereby, and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer to sell to or a
solicitation of an offer to buy from any person in any state or jurisdiction
in which it is unlawful to make such offer or solicitation. Neither delivery
of this Prospectus nor any sale made hereunder shall under any circumstance
create any implication that there has been no change in the affairs of the
Company since the date hereof. This Prospectus speaks as of the date hereof
and the delivery of this Prospectus at any time does not imply that
information herein is correct as to any date subsequent to that date.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports and other information filed by the
Company can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549; 14th Floor, Seven World Trade Center, New
York, New York 10048; and 500 West Madison Street, Suite 1400, Northwestern
Atrium Center, Chicago, Illinois 60661.
The Company has filed with the Commission a Registration Statement under
the Securities Act of 1933, as amended, with respect to the Certificates
offered hereby. This Prospectus does not contain all the information included
in such Registration Statement, certain items of which are omitted in
accordance with the Rules and Regulations of the Commission. For further
information with respect to the Company and the Certificates offered hereby,
reference is made to the Registration Statement and the Exhibits thereto.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission pursuant to Section 15(d) of
the Exchange Act, as amended, are incorporated herein by reference in this
Prospectus:
(a) Annual Report on Form 10-K for the fiscal year ended April 30, 1996.
(Filed July 26, 1996).
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Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus
to the extent that a statement contained herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide, without charge to each person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the documents incorporated herein by reference (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
the Prospectus incorporates). Requests should be directed to Walnut Equipment
Leasing Co., Inc., P.O. Box 1050, Bala Cynwyd, PA 19004, Attention: William
Shapiro; telephone number (610) 668-0700.
Notwithstanding the fact that the Company may not be required to deliver
an annual report to security holders, the Company, will, upon the request of
any security holder, without charge, furnish an annual report on Form 10-K
containing audited financial information that will have been examined by
independent certified public accountants, and any quarterly report on Form
10-Q containing unaudited information. In addition, the Company may furnish
such other reports as may be authorized, from time to time, by its Board of
Directors.
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TABLE OF CONTENTS
PAGE PAGE
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Summary of the Offering 1 Description of Securities 52
The Company 10 Certificates 52
The Offering 11 General 52
Selected Financial Data 16 Redemption 54
Risk Factors 17 Senior Debt 55
General 17 Automatic Extension 56
Relative to Certificates 22 Right to Request Early Payment 56
Use of Proceeds 24 Option to Receive
Business 25 Compound Interest 56
Marketing 28 Interest 6-Month United States
Credit Policy 30 Treasury Bill Rate 57
Analysis of Delinquencies 33 Restrictions on Merger 58
Analysis of Bad Debt Modification of the Indenture 58
Write-offs 36 Covenant as to Repair 58
Methods of Financing 36 Events of Default 58
Employees 39 Transactions with the Trustee 59
Data Processing 39 Plan of Distribution 59
Competition 39 Legal Opinion 60
Management's Discussion and Experts 61
Analysis of Financial Condition Independent Auditor's
and Results of Operations: Report 63
Results of Operations 40 Financial Statements 64
Capital Resources and
Liquidity 47
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SUMMARY OF THE OFFERING
The following summary of the Company's business and the principal terms of
the Certificates being offered hereby is qualified in its entirety by the
detailed information appearing elsewhere in this Prospectus. This Prospectus
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "RISK FACTORS":
SUMMARY OF THE COMPANY'S EFFORTS TO REDUCE PROJECTED CASH FLOW DEFICIENCY
As of April 30, 1996, the Company projected a cash flow deficiency of
approximately $30,300,000 in principal amount of debt and interest over the
next five fiscal years. In fiscal year ending April 30, 1997, an aggregate
principal amount of debt and interest of $41,416,858 will be coming due. The
Company must "rollover" and renew an estimated $27,383,557 or 78% of its
Certificates coming due in fiscal 1997, and to the extent such debt is not
rolled over must use the proceeds of the sale of its debt securities to pay off
such debt.
To overcome the projected cash flow deficiency in the future, the Company
estimates that it must be able to generate new leases annually of approximately
$72,000,000 or approximately $6,000,000 per month. The Company has never
generated more than $13,218,230 in new leases in any one year, and the amount
of new leases generated has remained relatively constant over the last three
fiscal years. During the fiscal year ended April 30, 1996, the Company's new
leases generated averaged approximately $835,000 per month. Despite this fact,
the Company's plans to securitize sufficient leases to overcome its projected
cash deficiency assume that it can generate $4,000,000 of additional leases for
this purpose. The Company estimates that if new lease volume increases between
7% and 10% per month, it would take between 17 to 23 months to achieve this
benchmark. If the Company achieves a greater level of success as a result of
its marketing efforts, the time period would be reduced, and if the efforts are
less than anticipated, the time necessary to achieve this benchmark may be
greater. The Company's past marketing efforts were inadequate to generate
sufficient new leases, resulting in the projected deficiency.
The Company's past marketing efforts through means of indirect solicitation
were achieved from less than 1% of the total estimated market for leases of the
type and dollar size that the Company solicits. During the fiscal year ended
April 30, 1995, the Company began to modify its marketing efforts to emphasize
direct solicitation of equipment vendors and manufacturers in targeted
industries. The Company believes that the approximately 180 equipment vendors
monthly which supplied its new volume of business during the fiscal year ended
April 30, 1996 represents only a small fraction of the small-ticket equipment
marketplace. The Company's past marketing efforts which emphasized the use of
direct mail as the primary marketing tool were not successful in increasing the
number of equipment vendors using the Company's leasing services. See
"BUSINESS - Marketing". The Company's marketing strategy now emphasizes the
establishment of joint, cooperative efforts with equipment manufacturers
nationwide in an effort to promote leasing as a sales tool to the distribution
network selling each manufacturer's equipment. To achieve the volume of new
leases essential to reduce the projected deficiency, the Company needs to
increase the number of equipment vendors that use its leasing services on a
regular monthly basis from approximately 180 to 900 equipment vendors.
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During the second half of the current fiscal year ending April 30, 1995, the
Company began to intensify its marketing efforts to achieve this goal. In
this regard, the Company now targets equipment manufacturers with a broad
sales distribution network to offer them "private label lease programs"
customized to their distributors' needs. The Company believes that the
cooperation of equipment manufacturers in emphasizing leasing as a sales tool
to their equipment distribution network will be more effective than
unsolicited direct mail in raising the level of equipment vendors routinely
submitting new lease applications for consideration. As of July 5, 1995, 23
manufacturers had agreed to join with the Company in this program. As of June
30, 1996, the number had grown to 75 manufacturers entered into co-operative
manufacturer agreements with the company, with the Company actively soliciting
additional manufacturers on an ongoing basis. See also "Further Refinements
in Marketing Strategy and Efforts to Reduce Operating Losses" on page 45 of
this Prospectus. The Company's recent experience in direct telephone contact
with targeted equipment sellers indicates that while it was more effective
than direct mail in generating vendor interest in using the Company's leasing
services as a marketing tool to increase equipment sales, the cooperation of
the equipment manufacturer is crucial to increasing the awareness of
distributors of the Company's services. The Company is beginning to
experience an increase in new lease volume as a result of these efforts. In
this regard, see "Further Refinements in Marketing Strategy and Efforts to
Reduce Operating Losses" on page 45.
The Company plans to sell certain leases and rental contracts to be
generated in the future, along with the related equipment, to third party
financial institutions who would purchase the lease and rental contracts for
an amount in excess of the Company's original investment. The third-party
purchaser would collect the receivables, and the Company would have no further
obligation to the third party purchaser, but would not receive any further
income from the leases after sale. The Company estimates that it would
generate gross profits of 12.4% of the total anticipated lease contract
receivables sold through this process, sometimes called the "securitization"
process. The Company did not pursue this process of selling lease and rental
contracts to third parties in the past because it was unable to generate
sufficient new leases in amounts attractive to lease securities for sale.
Because of its recent shift in marketing strategy which now emphasizes
cooperation with equipment manufacturers, and direct telephone contact with
equipment sellers rather than indirect solicitation, the Company expects the
number of equipment vendors and manufacturers utilizing the Company's leasing
services to increase. Consequently, the number and amount of new leases would
increase to amounts which would be attractive to third-party purchasers
seeking larger pools of leases for purchase. When the Company retains lease
contracts in its own portfolio, the income which will be recognized over the
term of the lease is intended to offset the costs of funds and necessary cost
of the Company's operations to originate and service these leases. The
analysis which follows indicates that the implicit rate of return on the
Company's investment in leases retained is approximately 21% per annum, while
the anticipated costs of funds is approximately 9%, resulting in an
anticipated gross profit yield of 12% over the term of the lease contracts
retained. At past levels of new leases being generated, the sale of lease
contracts and rentals would not generate sufficient long term income necessary
to offset the Company's fixed costs. See "BUSINESS". The analysis which
follows illustrates the manner in which the Company expects to utilize the
sale of an additional $2,700,000 of debt securities in the aggregate to
purchase the equipment necessary to maintain ongoing, monthly sales of
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equipment to third-party financial institutions, sometimes referred to as
"asset securitizers". The Company will commence these sales of leases to
asset securitizers after it has utilized the excess cash on hand through
investment in new equipment for lease. The sales of additional leases to
asset securitizers are expected to commence during fiscal 1997. When these
sales commence on a regular basis, the Company estimates that it would earn a
monthly gross profit of approximately $400,000 via the securitization process
over the next 10 years. The Company expects to purchase with all of the
proceeds of sale of an additional $2,700,000 of Certificates additional
equipment for lease contracts aggregating approximately $4,000,000 of new
lease receivables. Proceeds from sale of these leases to an asset securitizer
would be approximately $3,100,000, which is a recovery of the initial
$2,700,000 investment in equipment, along with a gross profit of approximately
$400,000. The Company would then reinvest the $2,700,000 from such sale in
additional equipment to be leased and subsequently sold to an asset
securitizer on a monthly basis. See also Footnote 7 on page 10 which follows.
The Company does not expect recent increases in market interest rates in
general to have a material impact on these calculations, because the Company
will raise the rates charged on new leases in an amount sufficient to offset
any increase in interest rates, as will its competitors in the leasing
industry. See Footnotes 4 and 7 to the table on pages 9 and 10 which follows.
This table indicates that if the Company is able to achieve these intentions,
it would take ten years to reduce the projected deficiency. The type of
assets underlying the leases which the Company anticipates selling are as one
of the same general type as those that it has originated to date. See
"BUSINESS - Marketing and Credit Policy" for a description of the number and
dollar amount of such leases generated in the past fiscal year. The Company
believes it can generate the lease of the type and number illustrated above in
the following analysis as a result of revisions in its marketing strategy
outlined and referenced above, and more fully disclosed in this Prospectus.
In this regard, see also "Further Refinements in Marketing Strategy and
Efforts to Reduce Operating Losses" on page 45.
ANALYSIS OF ELEMENTS ESSENTIAL TO REDUCTION OF PROJECTED CASH FLOW DEFICIT
THE PROJECTED CASH FLOWS FROM ALL OF THE COMPANY'S HISTORICAL REVENUE
SOURCES WILL NOT BE SUFFICIENT TO PAY OFF THE COMPANY'S OUTSTANDING DEBT. The
following table discloses the differences between the Company's anticipated
cash flows and the principal amount of debt coming due under the assumption
that no existing certificate holders will continue to rollover their
outstanding debt securities:
Fiscal Year Ending April 30,
2001 and
1997 1998 1999 2000 beyond Totals
----------- ---------- ---------- ---------- ---------- -----------
Scheduled
Aggregate
Future
Amounts
Receivable
Under Lease
Contracts $9,359,537 $5,370,900 $2,614,370 $ 778,285 $ 300,724 $18,423,816
3
14
Estimated
Receipt of
Residual Value
of Leased
Equipment (1) 866,119 497,016 241,930 72,021 27,829 1,704,915
Cash on Hand
and US Government
Securities at April
30, 1996 9,207,905 --- --- --- --- 9,207,905
----------- ---------- ---------- ---------- ---------- -----------
Subtotal (2) 19,433,561 5,867,916 2,856,300 850,306 328,553 29,336,636
Aggregate
Principal
Amount of
Debt and
Accrued
Interest
Coming Due 41,416,858 6,891,029 4,811,539 2,538,297 3,981,774 59,639,497
----------- ---------- ---------- ---------- ---------- -----------
Deficiency $21,983,297 1,023,113 1,955,239 $1,687,991 $3,653,221 $30,302,861
----------- ---------- ---------- ----------- ---------- -----------
<FN>
(1) There is no residual cash flow anticipated from sale of equipment in
excess of the estimated receipt of residual values as stated.
(2) These amounts represent cash flows before operating costs, and the actual
amounts available to repay existing debt are likely to be substantially less
than the amounts presented.
The Company plans to utilize the benefits of the asset securitization
market by selling pools of leases to third party specialists who assemble
smaller pools into a large pool for sale to major institutional investors to
generate additional cash flows and income to repay current certificate
holders, in addition to cash flows from its existing assets, rather than
relying solely on additional cash from new purchasers of its debt securities.
Asset securitization allows the Company to pool together certain leases, and
to sell that portfolio of leases to a third party at a rate of return to the
purchaser which is less than the rate that the Company originally contracted
with each lessee. This excess becomes a cash profit to the Company upon sale,
and provides the Company with the return of its original investment plus its
profit which would be available for reinvestment in additional leases for sale
into the asset securitization market. Leases originated for the purpose of
securitization are not expected to be held to the end of their contractual
term, but would be transferred and sold in a relatively short period. This
procedure will enable the Company to enter into a number of asset
securitization sales in the future, based upon the success of the Company's
marketing efforts in generating additional new leases. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". To
the extent that securitized leases are sold to unrelated third parties, new
investors in the Certificates would not receive any preferential position in
4
15
the Company's assets, and would rank on parity with previous purchasers of the
Certificates. The Company does not intend to securitize its existing
portfolio of leases, but to hold them for their remaining contractual terms.
The table above reflects a net deficiency in cash flows over scheduled
debt maturities of $30,302,861 over the next five fiscal years. Based upon
the gross rents charged over the "net investment" in direct finance leases
during the three years ended April 30, 1996, the implicit rate of return by
the Company on its net investment was approximately 21% per annum. For a more
complete discussion of the market for the Company's leasing services see
"BUSINESS - Marketing" and "Credit Policy". During the three fiscal years
ended April 30, 1996, 1995, and 1994, the Company's average rate of interest
on total debt outstanding was 9.3%, 9.0%, and 9.3%, respectively. The Company
estimates that the interest expense associated with its outstanding debt
securities, as well as for increased borrowings anticipated to be incurred,
will be approximately 9%. The difference would leave the Company with an
expected spread of 12%. Based upon expected operating expenses (consisting of
lease origination and general and administrative expenses, along with an
adequate provision for doubtful lease receivables) at anticipated levels of
approximately $4,200,000 per year, the Company projects that it currently has
the financial resources to increase the outstanding aggregate lease
receivables to $33,900,000 provided that the lease rate on new receivables to
be originated remains relatively the same as the past three fiscal years. If
the Company can increase the generation of new lease receivables by an amount
necessary to provide additional operating revenues equal to the loss of
approximately $5,600,000 at April 30, 1996, its operations will reach a
"break-even" point after which it will begin to generate an operating profit.
The table below summarizes the Company's expectations of the operating results
should the Company's outstanding lease receivables exceed $33,900,000, based
on the assumptions contained in the footnotes which follow. Assuming that the
same percentage of existing Certificate holders continue to rollover
outstanding certificates based on historical experience, (which, for the
fiscal year ended April 30, 1996 was 78%) the Company believes that it would
be able to repay the above deficiency by securitizing at least $24,200,000 of
additional leases per year over the next ten fiscal years. This is based upon
an implicit rate of purchase by an asset securitizer, usually a financial
institution purchasing a pool of leases from the Company, of approximately 14%
based on current market conditions, of which there can be no assurances in
each respect, and would generate additional operating income of approximately
$4,000,000 per year.
The Company intends to repay the projected deficit of $30,302,861 at April
30, 1996, and to increase annual operating revenues in a sufficient amount to
offset the operating loss for the fiscal year ended April 30, 1996 through the
acceleration of its marketing efforts to increase the amount of new leases
generated over current levels. The Company believes that its current
operating facilities have the excess capacity to handle the origination and
servicing of a larger portfolio of leases with minimal incremental costs, and
that it has sufficient cash on hand to fund an increased portfolio of new
leases necessary to meet the Company's intentions. The following table, and
the footnotes contained below, depict the projected results from increasing
new leases and the sale to third party asset securitizers of the associated
lease rentals.
5
16
The Company has investigated the current marketplace of asset securitizers
seeking to purchase lease portfolios of between $2,000,000 to $5,000,000 by
researching recent equipment leasing trade journals and newsletters in which
financial institutions seeking to purchases similar portfolios have advertised
regularly for portfolio sellers. In addition, the Company has received
brochures by mail and telephone solicitations from asset securitizers seeking
to purchase portfolios of leases from the Company. In particular, the Company
has contacted or been approached by a variety of asset securitizers throughout
the United States to ascertain the validity of their interest to purchase
lease portfolios of the size and quality that the Company anticipates selling.
Based on a recent preliminary assessment by the Company, the implicit rate of
return on lease portfolios currently sought by asset securitizers should be no
more than 14% at current market conditions based on portfolios of the size and
type that the Company expects to sell. The Company has not engaged in any
transactions with asset securitizers to date.
In order to achieve its intentions, the Company would be required, based
upon the assumptions as set forth below, to generate at least $47,600,000 in
net leases available for sale through securitization to third parties, which
is more than twice the amount of lease receivables currently reported on the
Company's balance sheet as of April 30, 1996. Reference is made to the
"BUSINESS - Marketing" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Revenues from Lease Contracts and
Rentals" for a discussion of the Company's ongoing efforts to increase the
volume of new leases to be generated in the future.
The table which follows depicts the Company's intentions regarding the
realization of the projected deficit.
The Company intends to sell its pools of leases to third parties who are
in the business of acquiring smaller pools of between $2,000,000 to $5,000,000
of lease receivables for resale as larger portfolios, and transferring to the
asset securitizer the responsibility for administering, collecting and
liquidating these pools for which the asset securitizer would be entitled to
receiving a servicing fee from the rentals collected. These third parties
also take overcollateralization into consideration in pricing their pools for
sale to third party investors, and factor this requirement into their implicit
rate at which they would purchase pools from the Company.
6
17
(All figures rounded to Generation of Additional
the nearest $100,000) Operating Income to Offset
A. Through Increase in the Amount of Operating Projected
Outstanding Leases Losses Deficit
--------------------------------- --------- ---------
Amount of Aggregate Lease Receivables
Outstanding at April 30, 1996 $18,400,000
Increase in amount outstanding from
investment of available cash at April 30,
1996, plus additional prepayments and
security deposits from lessees (1) 15,500,000(1) $ 2,700,000(2)
-----------
Projected Amount of Aggregate
Leases Receivables Outstanding $33,900,000
B. Through Sale of Additional Leases
Through Securitization
---------------------------------
Estimated aggregate new lease
receivables necessary annually to
generate sufficient operating revenues
to offset operating losses and
projected deficit at April 30, 1996 $72,000,000
Less: Reinvestment of rentals received
from existing portfolio of leases
outstanding at April 30, 1996 (3) (8,900,000)(6)
Increase in amount of leases outstanding
through investment of cash at April 30,
1996, plus additional prepayments and
security deposits as noted above (15,500,000)(1)(6)
-----------
Net leases available for sale through
securitization to third parties 47,600,000
Income to be generated from sale of assets
through securitization of net leases
available for sale
(a) In an amount necessary to offset
operating loss at April 30, 1996 (4) 23,400,000 2,900,000
(b) Remaining leases to be sold through
securitization by the Company to reduce
the projected deficit reflected above (4) 24,200,000 3,000,000
-----------
47,600,000
7
18
Multiplied by number of years estimated
by the Company necessary to repay X 10
projected deficit ----------- ----------
Additional operating revenues
to be generated as reflected above (5) $ 5,600,000 $30,000,000
Less: Operating loss at April 30, 1996 5,600,000
Less: Projected deficit at April 30, 1996
as reflected above 30,000,000
----------- -----------
Net Result -0- -0-
<FN>
(1) Based upon investment of cash and U.S. Government Securities on hand of
approximately $9,200,000 at April 30, 1996, along with prepayments and security deposits
in the estimated amount of $1,400,000 which will be collected at inception of additional
new lease contracts to be entered into and available for investment in additional
equipment for lease. Taken together these resources aggregating $10,600,000 would be
available for the origination of $15,500,000 in new leases, assuming that the
relationship of the gross rents to be charged over the "net investment" in direct
finance leases remains at 146%.
(2) The increase in annual operating revenue is based upon the relationship between
operating revenues recognized over the outstanding aggregate leases which at April 30,
1996 was approximately 20%, multiplied by an increase of $15,500,000 of outstanding
lease receivables, or $3,000,000.
The projected increase in aggregate lease receivables requires no additional
interest expense, as the funds necessary for any projected increase through the purchase
of equipment were on hand at April 30, 1996. Lease origination costs associated with
any increase in new leases generally would be considered direct costs under SFAS 91, and
capitalized as part of the equipment cost. Any increase in general and administrative
expenses associated with an increase in lease receivables would be offset by the
increase in late charges and other fees to be collected by the Company. The Company
estimates that for purposes of this calculation, the additional write-offs for doubtful
accounts on an annual basis for the incremental increase in new leases would be
approximately $800,000. As such, the additional revenues of $3,000,000 less expenses of
$300,000 would result in net additional income of $2,700,000 annually.
(3) Reinvestment of rentals is the amount of new leases to be generated from
reinvestment of the receipts from scheduled collections, less anticipated annual costs
of operations of the existing lease portfolio at April 30, 1996. The calculation of
reinvested rentals is deducted from the $72,000,000 amount disclosed on the table as
these leases would not be available for sale to an asset securitizer, but rather to
maintain the portfolio of leases at April 30, 1996 levels. This amount is estimated by
anticipated scheduled receipts from rentals of $9,400,000 and residual values of
$900,000 as set forth on page 4, less anticipated costs of operations and bad debts
totalling approximately $4,200,000. This leaves approximately $6,100,000 available for
investment in equipment, which multiplied by 146% generates new gross lease receivables
of approximately $8,900,000.
8
19
(4) The additional operating income to be generated by the Company through
asset sales for securitization with third parties would be calculated as the
amount paid by a third party for the anticipated lease collections to be
received, less the initial investment in the equipment by the Company. The
purchaser would base its offering price upon a yield that it expects to
receive on its investment in the lease receivables purchased over their
remaining contractual term. For purposes of this calculation, the Company has
assumed that the purchaser would seek an implicit rate of 14% on its
investment. The Company bases its estimate of its gross profit of 12.4% on
its lease receivables to be sold as follows. Assuming a $1,000 investment in
equipment cost, anticipated lease receipts would be $1,475, based on
historical experience. The Company expects to be able to sell the anticipated
receipts applicable to that lease for $1,183, based upon the net present value
of these receipts at a 14% implicit rate of return to the purchaser. The
gross profit would be $183 or 12.4% of the total anticipated lease receipts to
be sold of $1,475 (as $183 divided by $1,475 equals 12.4%). To the extent
that the asset purchaser bases its offering price on an implicit rate of
return in excess of the Company's expectations, or that the Company's implicit
rate on new leases is less than 21%, the gross profit to the Company would be
less. In the alternative, if the rate offered by the asset purchaser is less
than 14%, or the Company's implicit return on new leases is greater than 21%,
the Company's gross profit on the sale of a pool of leases would be greater.
The costs associated with asset securitization are relatively immaterial.
Interest expense would not increase since the Company would be recovering an
immediate return of its cash investment at time of sale which would be
available for reinvestment in additional leases. Any lease origination costs
would be considered direct and capitalized in accordance with SFAS 91. There
would be no additional costs for general and administrative expenses, or any
provision for doubtful lease receivables as the Company would transfer both
the obligations of servicing the lease receivables and collection to the
outside third party purchaser. As such, any calculation of the costs
associated with the Company's anticipated asset sales to third party
purchasers, (which are expected to be immaterial), other expenses typically
associated with public securities offerings, as well as
"overcollateralization" of assets as a credit enhancement to institutional
investors, have been ignored for purposes of this calculation.
(5) This calculation ignores the reduction of the Company's interest expense
associated with repayment of outstanding indebtedness from profits generated
from asset securitization sales, which would be devoted toward servicing the
Company's debt deficiency. As such, the time period necessary to reduce the
projected deficit would be shortened to the extent that savings in interest
expense would also be directed towards that reduction.
(6) This calculation assumes that the Company's historical experience with
respect to rollovers of maturing Certificates will continue at similar levels.
To the extent that rollovers are less than historical levels, the Company
would be required to replace maturing debt securities with proceeds from sale
of Certificates or other debt. See "BUSINESS - Methods of Financing" and
"Capital Resources and Liquidity" along with Risk Factor #7 on page 20 of this
Prospectus for a more detailed discussion.
9
20
(7) The table above reflects approximately $47,600,000 in leases which would
be available annually for sale to third-party asset securitizers. The Company
contemplates monthly sales of lease portfolios of approximately $4,000,000
(after dividing the $47,600,000 in leases available for sale by twelve months
per year). Based upon a gross profit percentage of 12.4% of the total
anticipated lease receipts to be sold (as set forth in Footnote 4, above),
each sale would provide the Company monthly with approximately $3,100,000 in
proceeds from each sale. The equipment cost of each lease portfolio to be
sold of approximately $2,700,000 would be recovered as part of the sale
proceeds, along with a gross profit each month of $400,000 (i.e. $3,100,000
less $2,700,000) which would be directed towards a reduction of operating
losses and the projected deficit. As such, the Company would require
additional sales of debt securities in the aggregate principal amount of
$2,700,000 initially to purchase the equipment necessary to maintain ongoing,
monthly sales of equipment to a third-party asset securitizer. Of the proceeds
of sales monthly, $2,700,000 would be reinvested in additional equipment
intended for sale. This process would continue monthly, without requiring
additional sales of debt securities. The annual interest requirement of the
additional debt securities of $2,700,000, assuming an interest expense of 9%,
would be approximately $243,000 per year. The annual savings of reduction of
outstanding debt of $4,000,000 as set forth in the table would save the
Company $360,000 annually based on a 9% interest rate. Principal repayment of
the $2,700,000 would be available each time a portfolio of leases is sold.
The tables above disregard the additional interest expense and principal
repayments on the additional $2,700,000 in debt securities as the savings in
interest expense on the reduction of the debt associated with the net
projected deficit would more than offset any such interest and principal
repayment requirements. The table reflected above, based upon the assumptions
as set forth, contemplate approximately 10 years to eliminate the net
projected deficit.
THE COMPANY
The Company, which was incorporated in Pennsylvania in 1969, commenced
business in 1960 through its predecessor, and sole common shareholder, Walnut
Associates, Inc. Effective April 29, 1977, the situs of incorporation of the
Company was changed to Delaware. The Company conducts its operations
principally through wholly-owned subsidiaries in 48 states. See "BUSINESS."
The term "Company" refers collectively to the present Delaware corporation,
its predecessors and its wholly-owned subsidiaries, unless the context
otherwise indicates.
The Company is engaged directly and through its wholly-owned subsidiary,
ELCOA, in the business of financing and administering the purchase of general
commercial equipment, principally as the lessor under non-cancellable direct
financing leases. See "BUSINESS". Equipment is purchased by the Company only
after a lease agreement with regard to the equipment has been executed. ELCOA
purchases certain newly acquired equipment and related leases from the Company
and pays to the Company an origination fee for performing this service. The
Company invoices the lessees pursuant to a servicing agreement between the
Company and ELCOA and collects and deposits rentals received into an escrow
account established for ELCOA's benefit. A monthly fee is paid to the Company
10
21
for performing this service. See "BUSINESS - Methods of Financing". As of
April 30, 1996, the Company carried or managed on behalf of its affiliates
6,644 leases, each with an average lease receivable balance of $2,406. The
purchase of equipment for lease by the Company has been funded primarily in
the past from the proceeds of the sale of debt securities referred to as
subordinated thrift certificates ("Subordinated Thrift Certificates"), and
since December 1, 1987 from proceeds of senior thrift certificates ("Senior
Thrift Certificates").
The Company and ELCOA, expect a significant portion of their future leased
equipment to be funded through sales of certain debt obligations referred to
herein as "Demand and Fixed Rate Certificates" to be issued by ELCOA, as well
as from the certificates offered hereunder.
Since 1980, the Company has registered and sold Senior and Subordinated
Thrift Certificates to the public. As of April 30, 1996, there were 2,744
holders of Senior and Subordinated Thrift Certificates of the Company who held
an aggregate principal amount of $26,917,805 of these certificates and 3,932
holders of the Demand, Fixed Rate and Money Market Thrift Certificates of
ELCOA, aggregating $26,407,959 in principal amount.
The Company's principal executive office is located at Suite 200, One
Belmont Avenue, Bala Cynwyd, Pennsylvania 19004. The Company's telephone
number is (610) 668-0700.
THE OFFERING
The Company will offer under this offering two forms of certificates,
Demand Senior Thrift Certificates ("Demand Certificates") and Fixed Term
Senior Thrift Certificates ("Fixed Term Certificates") which have the
following characteristics.
SENIOR THRIFT CERTIFICATES
Demand Senior Thrift Certificates... The Demand Certificates bear interest
at rates determined monthly by the
Company which are at least 1% above the
6-month U.S. Treasury Bill Rate
established by the U.S. Treasury weekly
auction on or immediately prior to the
first day of the month for which
interest is to be paid. See
"DESCRIPTION OF SECURITIES -
CERTIFICATES; Interest 6-month U.S.
Treasury Bill Rate". The interest rate
paid will vary from month to month
depending upon the U.S. Treasury Bill
auctions. If in any month the 6-Month
U.S. Treasury Bill Rate as set forth
above falls below 6% per annum at such
auction or if there shall be no such
U.S. Treasury Bill Rate in effect, the
11
22
U.S. Treasury Bill Rate shall be deemed
to be 6% per annum. Interest is payable
monthly on the 10th day of the calendar
month for the prior month or part
thereof and is due, along with
principal on the 5th business day of
the month after the month during which
demand for payment is received. The
minimum investment is $100 per
certificate. The percentage above the
6-month United States Treasury Bill
Rate is to be determined at the
beginning of the month by the Company
(or in the absence of any
determination, such percentage shall be
deemed to be 1% above the six-month
United States Treasury Bill Rate).
Thus, the minimum interest on these
certificates shall be 7% per annum.
Repayment of principal is due on the
fifth day of the calendar month
following the month in which such
request is made. It is the present
policy of the Company, which may be
discontinued at any future date without
notice, subject to the availability of
funds as the Board of Directors
determines in its own discretion, to
pay the principal to the holder within
5 business days after demand for
redemption is received.
Fixed Term Senior
Thrift Certificates............. The Fixed Term Certificates bear
interest at rates determined by the
Company, which are at least equal to 1%
above the 6-month U.S. Treasury Bill
Rate for Certificates with maturities
of 24 months or less, at least 2% above
the 6-month U.S. Treasury Bill Rate for
Certificates with maturities of 25 to
60 months, and at least 3% above the
6-month U.S. Treasury Bill Rate for
Certificates with maturities exceeding
60 months. See "DESCRIPTION OF
SECURITIES - CERTIFICATES; Interest
6-month U.S. Treasury Bill Rate". The
6-month U.S. Treasury Bill Rate used to
calculate the interest rate applicable
to a particular Certificate will be the
rate in effect during the week in which
the purchase price for such Certificate
is received by the Company. The
minimum investment is $100 per
12
23
certificate and interest is payable
monthly on the 10th day of the calendar
month for the prior month or part
thereof. If in any month the 6-month
U.S. Treasury Bill Rate as set forth
above shall fall below 6% per annum, or
if there is no such U.S. Treasury Bill
Rate in effect, the 6-month U.S.
Treasury Bill Rate shall be deemed to
be 6% per annum. Thus, the minimum
interest on these Certificates shall be
7% per annum for certificates with
maturities of 24 months or less, 8% per
annum for Certificates with maturities
of 25 to 60 months, and 9% per annum
for Certificates with maturities
exceeding 60 months. The fixed term
certificates consist of 6 through 120
month Senior Thrift Certificates, as
selected by the purchaser for any
number of whole calendar months within
those terms.
Provisions Relating to All Certificates
General............................ All Certificates will bear interest
from the date investor funds are
accepted by the Company. Holders of
Certificates may elect to receive
interest which is paid or accumulated
monthly, or in the alternative,
bi-monthly, quarterly, semi-annually,
annually, or at maturity with interest
compounded monthly and accruing to the
date of payment. Notifications
reminding holders of the maturity dates
of their Fixed Term Certificates will
be made to the registered holder by the
Company by mail approximately one month
in advance of the maturity date. Only
with the consent of all holders of the
Certificates can the Company reduce the
stated rate of interest on any
certificate or change the maturity date
or the principal amount of any
certificate. However, with the consent
of at least 75% in aggregate principal
amount of the outstanding Certificates,
it may make certain other changes in
the terms of the Certificates. See
"DESCRIPTION OF SECURITIES -
CERTIFICATES; Modification of The
Indenture".
13
24
The Certificates will be considered
"Senior Debt" as defined, but will not
be secured by any lien on the assets of
the Company and will have no sinking
fund provisions. The debt evidenced by
the Certificates will be Senior in
priority in the event of liquidation to
all Subordinated Thrift Certificates
and subordinated debentures, as well as
to accrued interest thereon, and
preferred and common stock; however,
the Certificates would be junior in
priority to holders of $26,407,959 in
principal amount, plus $2,767,158 of
accrued interest, of ELCOA's debt
securities outstanding as of April 30,
1996 in liquidation of ELCOA's assets.
See "DESCRIPTION OF SECURITIES - SENIOR
DEBT". As of April 30, 1996,
$5,523,118 in principal amount of
Subordinated Thrift Certificates, and
$4,000 in subordinated debentures, was
outstanding. See "RISK FACTORS-
General; Relative Priorities of Holders
of the Company's Debt."
The Company is not obligated to redeem
Demand Senior Thrift Certificates, or
Fixed Term Senior Thrift Certificates
prior to maturity, in excess of
$250,000 in principal amount in any
month. See "DESCRIPTION OF SECURITIES
- CERTIFICATES; Redemption".
Amount Offered..................... The total principal amount of
Certificates being offered pursuant to
this Prospectus is $40,000,000. Within
this aggregate limit, there are no
limitations on the respective types or
amounts of Certificates which may be
sold. There is no minimum principal
amount of Certificates that must sold.
Modification, Termination or
Extension of Offering.............. The Company reserves the right to
modify at any time, the terms of this
offering. Any such modification will
apply only to Certificates offered
after the date of such modification and
shall comply with the terms of the
trust indenture, and any supplement
14
25
thereto. If required, such
modification will be reflected in an
amendment to this Prospectus. The
Company reserves the right to terminate
the offering at any time.
Trustee............................ The Certificates are to be issued under
the terms of a sixth supplemental
indenture dated as of August xx, 1996
to a trust indenture dated October 7,
1987 between the Company and Summit
Bank (successor by merger to First
Valley Bank) of Bethlehem,
Pennsylvania.
Risk Factors....................... There are substantial risks associated
with this offering. See "RISK
FACTORS".
Use of Proceeds.................... The proceeds of this offering will be
used primarily to acquire commercial
equipment for lease in connection with
the Company's business, and possibly
for redemptions of previously issued
debt securities that may mature during
the period of this offering. See "USE
OF PROCEEDS".
15
26
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,
OPERATING RESULTS: 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
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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RISK FACTORS
Investors in the Certificates offered hereby should consider the following
factors in their investment decision:
GENERAL
1. RISKS ATTRIBUTABLE TO CONTINUOUS LOSSES AND ACCUMULATED DEFICIT: The
Company reported losses, on a consolidated basis, of $5,631,409 $5,064,166,
and $4,082,175 during the years ended April 30, 1996, 1995 and 1994,
respectively, and reported negative cash flow from operations during the three
years ended April 30, 1996. Additionally, at April 30, 1996 it had a
shareholders' deficit of $35,674,525 (142.5% of assets) and an accumulated
deficit of $35,776,581 (142.9% of assets). See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". With the exception
of Equipment Leasing Corporation of America ("ELCOA") the Company's
wholly-owned Delaware subsidiary, the Company conducts its operations
principally through wholly-owned subsidiaries of the same name each of which
is incorporated separately in 48 states in which they conduct business. The
subsidiaries are accounted for on a consolidated basis, and are only separated
for state corporate income tax purposes. As of April 30, 1996, ELCOA reported
total assets of $29,355,259, shareholder's equity of $105,584 and a loss from
operations for the year ended April 30, 1996 of $712,621 which are
consolidated into the Company's consolidated financial statements.
The Company's continued viability is dependent upon increasing the volume
of purchases of equipment for lease. The Company's financial viability is
dependent upon approximately 78% of the current Certificate holders continuing
to rollover their outstanding debt securities on an annual basis. The
Company's continuing operations are therefore contingent upon the ability to
sell its debt securities beyond the next fiscal year in anticipation of
funding new equipment purchases for lease. The Company can give no assurance
either as to its level of future new business or profitability for 1997 or
thereafter. Accordingly, management can give no assurance that the operating
results of 1997 will not result in a loss.
2. HIGH DELINQUENCY RATE ON DIRECT FINANCE LEASE RECEIVABLES: Subsequent to
April 30, 1988, the reserve for anticipated losses from delinquent leases has
been increased by provisions charged against earnings based upon a review not
less than quarterly of the Company's delinquent accounts, which resulted in
additional reserves charged during the fiscal year ended April 30, 1996, based
upon impairments of delinquencies that have or are expected to occur, on past
due accounts. The Company generally leases "small ticket" commercial
equipment costing generally between $1,000 to $25,000 to small to medium sized
companies whose instability is historically greater than larger established
businesses. For a discussion of the provision for doubtful lease receivables,
see "BUSINESS-Credit Policy and Analysis of Delinquencies".
As of April 30, 1996 and 1995, approximately $3,859,000 or 20.9% and
$3,724,000 or 19.8%, respectively, of the contractual total remaining lease
payments due and to become due of direct finance lease receivables were 12 or
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more months past due. For a discussion of the Company's historical experience
in regard to delinquencies and bad debt write-offs, see "BUSINESS-Analysis of
Delinquencies" and "Bad Debt Write-offs". See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a discussion of
the Company's lack of profitability, as well as Note 1 to the Consolidated
Financial Statements.
3. THE CONTINUED VIABILITY OF THE COMPANY IS DEPENDENT UPON INCREASING THE
VOLUME OF NEW LEASES GENERATED: The Company estimates that it must generate
approximately $34,800,000 of new lease receivables annually in order to reach
a "break-even" level of operations. In order to achieve a level of profitable
operations and to repay the projected cash flow deficiency at April 30, 1996,
the Company estimates that it must be able to generate new leases annually of
approximately $72,000,000, or approximately $6,000,000 per month. The Company
has never generated more than $13,218,230 in new leases in any one year, and
the amount of new leases generated has remained relatively constant over the
last two fiscal years. The Company is refining its marketing efforts to
achieve these goals. In this regard, see "SUMMARY OF THE OFFERING" on page 1
and "FURTHER REFINEMENTS IN MARKETING STRATEGY AND EFFORTS TO REDUCE OPERATING
LOSSES" on page 45.
4. USE OF LEVERAGE AND EFFECT OF FLUCTUATION OF INTEREST CHARGES ON
OPERATIONS: The Company has depended heavily upon borrowed funds in its
operations and is highly leveraged (i.e. a substantial portion of the
Company's operations are financed through borrowings). Annual interest
expense as a percentage of annual operating revenue has steadily increased
since 1992, and for the fiscal year ended April 30, 1996, annual interest
expense represented 133.8% of operating revenues. In view of the Company's
high leverage, continued losses could affect the Company's ability to meet its
principal and interest obligations on its outstanding debt, which at April 30,
1996, consisted in part of $21,394,687 in Senior Thrift Certificates,
$5,527,118 in principal amount of Subordinated Debentures and Subordinated
Thrift Certificates, and $26,407,959 in principal amount of Demand, Fixed Rate
and Money Market Thrift Certificates, issued by ELCOA. Accordingly, the level
of risk is increased in proportion to the length of the terms of the
Certificates, and any election by the holder to accumulate interest. The
Company's obligation to pay its debts will increase its exposure to possible
loss, since fixed payments on debt service must be made on specific dates. At
April 30, 1996 its shareholders' deficit was $35,674,525 and its outstanding
liabilities were $60,710,622. See Notes 3, 4 and 5 to the Consolidated
Financial Statements.
Since 1980, the Company has experienced significant operating losses.
Significant uncertainties presently exist, such as whether or not sufficient
new business can be generated to achieve profitable operations and eliminate
the accumulated deficit, whether or not sufficient financing can be obtained
to purchase equipment and whether or not a significant number of debtholders
will request redemption or "roll-over" of their certificates at maturity. In
light of the Company's financial position, its ability to generate cash
through the sale of Senior Thrift Certificates may be adversely affected and
it may be more difficult to obtain bank financing should such a need arise.
Also, redemptions of borrowings may exceed historical experience and/or cash
received from rentals on outstanding leases. These may be lower than
management's expectations, which would result in insufficient cash for
operations.
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29
Based upon these uncertainties, the Company is unable to estimate its
liquidity beyond the next fiscal year. Therefore, a substantial doubt remains
with regard to the Company's ability to continue in existence and accordingly,
the recoverability of its assets at their recorded value is in doubt. Should
the Company be unable to continue its operations, in the event of liquidation,
additional adjustments to the financial statements could reduce the recorded
amount of assets available for distribution to holders of Certificates offered
hereunder, although these Certificates would be senior in liquidation to the
Subordinated Thrift Certificates. See the Independent Auditor's Reports (with
regard to the Company's ability to continue as a going-concern which is
dependent in part upon its ability to achieve profitable operations and obtain
adequate financing sources), Note 1 to Consolidated Financial Statements, and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS".
Substantially all of the Company's assets are invested in "small-ticket"
equipment subject to fixed term, fixed rate leases. The Company's income may
be adversely affected by increases in both prime and U.S. Treasury Bill rates.
Rates on the Company's senior and subordinated debt may vary with the U.S.
Treasury Bill rate. In the event the Company's interest costs increase, the
Company will not be able to increase its rental income on existing leases to
cover such additional interest expense. In such event, existing leases may
become unprofitable after expenses and cause the Company to suffer additional
losses.
5. AVAILABILITY OF CREDIT AND LIQUIDITY: The Company's method of
financing is dependent primarily upon the sale of the Certificates offered
hereunder and the sales of debt securities offered by ELCOA, and to a lesser
extent its belief that it could pledge leases as collateral with banks or
other lending institutions to obtain additional funds at terms which permit it
to earn a return on the funds invested in the leased equipment and for periods
that permit the loans to be repaid from the rental payments pursuant to the
leases. Due to the Company's history of losses since 1980, current revenue
derived from operations is inadequate to service the Company's obligations
absent the proceeds to be derived from the offering of debt securities to the
public. There can be no assurance that the Company will be able to raise
sufficient funds through the sale of the Certificates. In addition, there can
be no assurances that the Company will be able to borrow sufficient funds from
lending institutions, or sell groups of leases to other financial institutions
for required amounts of cash. Accordingly, this could inhibit the Company's
viability, as the Company's future growth in new leases is dependent upon
increasing sources of adequate financing in order to purchase equipment for
lease. As such, continuing operations are contingent upon the Company's
ability to sell its debt securities beyond the next fiscal year. See "Summary
of the Offering" and "BUSINESS - Methods of Financing".
The Company expects to continue to offer to ELCOA the option of purchasing
new leases to the extent that ELCOA realizes funds from the sale of its debt
securities. There is no assurance that ELCOA will be successful in its sale
of these debt securities. As of April 30, 1996, $26,407,959 in principal
amount of these debt securities were outstanding. See "BUSINESS - Methods of
Financing", and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS; Capital Resources and Liquidity".
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30
6. DEFICIENCY IN RATIO OF EARNINGS TO FIXED CHARGES: During the past five
fiscal years ended April 30, 1996, the Company's earnings for financial
statement purposes, before fixed charges (principally interest on its debt
obligations) were less than the amount of those fixed charges, and the ratio
of earnings to fixed charges was less than "1". See "SUMMARY OF THE OFFERING
- - Selected Financial Data" and the notes thereto. If the Company continues to
have losses, its ratio of earnings to fixed charges will continue to be less
than "1" and it may experience difficulty in meeting its obligations,
including interest on the Certificates in the future years. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
7. POSSIBLE USE OF PROCEEDS TO REDEEM DEBT SECURITIES: The proceeds of
Certificates sold pursuant to this offering may be used to redeem or pay
interest on previously issued securities, as well as on the Certificates
registered herein. See "USE OF PROCEEDS." During the three fiscal years ended
April 30, 1996, 1995, and 1994 approximately 75%, 71%, and 59%, respectively,
of the proceeds of sale of securities by the Company were used for the
redemption of principal and interest on previously issued debt. The Company
expects that the percentage of proceeds from the sale of securities used for
the redemption of previously issued debt will be similar during fiscal 1997 to
recent years. Previously issued Subordinated Thrift Certificates with a total
principal amount of over $4,355,000 are due in the current fiscal year of
which over $481,176 is payable on demand. Approximately $1,839,000 of accrued
interest is payable on demand on previously issued Subordinated Thrift
Certificates. Approximately $15,545,000 in principal amount of previously
issued Senior Thrift Certificates will mature between May 1, 1996 and April
30, 1997. The proceeds of the offering of Certificates may be used to redeem
these amounts of previously issued debt securities. Approximately $606,885 of
Senior and Subordinated Certificates payable to related parties are due in the
current fiscal year, as well as $146,848 of accrued interest thereon at April
30, 1996. See Notes 4, 5 and 10 to the Consolidated Financial Statements.
For a complete discussion of the resources available for the repayment of
previously issued debt which will mature during the fiscal year ending April
30, 1997, see "Capital Resources and Liquidity".
8. RISKS ASSOCIATED WITH THE EQUIPMENT LEASING BUSINESS: The success of
the Company will in certain respects depend upon the quality of the equipment,
the viability of the equipment dealers and manufacturers, the timing of the
purchases of equipment by the Company, the credit-worthiness of the lessees
and their ability to meet their rental payment obligations as they become due
and the Company's loss experience. Equipment leasing is subject to the risk
of technological and economic equipment obsolescence and the attendant risks
upon defaults by lessees. While the Company investigates prospective lessees
to ascertain whether they will be able to meet their obligations under
proposed leases, there exists no established specific credit standards for
prospective lessees. See "BUSINESS-Credit Policy." As a result, the ability
of the Company's lessees to meet their lease obligations is subject to risks,
such as general economic conditions nationwide, over which the Company has
little influence or control.
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31
9. TRANSACTIONS WITH AFFILIATES AND POTENTIAL CONFLICTS OF INTEREST: The
Company pays a management service fee of $5,750 per month to Walnut
Associates, Inc. (which is 100% owned by William Shapiro, President of the
Company), leases its print-shop and storage facilities from Walnut Associates,
Inc., reimburses Financial Data, Inc. (which is 100% owned by Walnut
Associates, Inc.) for costs to perform certain programming and production work
and reimburses the law firm of William Shapiro, Esq., P.C., of which William
Shapiro is the principal shareholder, for legal costs and expenditures
incurred for legal services involving collections of defaulted leases. The
underwriter, Welco Securities, Inc., is also an affiliate of the Company. See
Note 10 to the Consolidated Financial Statements for complete discussion of
the nature of the transactions and the amount of these expenditures during the
three years ended April 30, 1996. The Company believes these transactions to
be on terms which are at least as favorable as the Company could obtain from
non-affiliates.
Since the Company and ELCOA are affiliated and share the same officers and
directors, certain conflicts of interest may arise between the Companies. The
purchasers of the Certificates must, to a great extent, rely on the integrity
and corporate responsibilities of the Company's officers and directors to
assure themselves that such individuals will not abuse their discretion in
making business decisions.
ELCOA may compete 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 the 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 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.
10. RELATIVE PRIORITIES OF HOLDERS OF THE COMPANY'S DEBT: The
Certificates are senior in priority in the event of liquidation of the Company
to the outstanding Subordinated Thrift Certificates and subordinated
debentures of the Company, which were $5,523,118 and $4,000, respectively, at
April 30, 1996, as well as to accrued interest thereon, preferred and common
stock of the Company. The Certificates rank on parity with $21,394,687 in
outstanding Senior Thrift Certificates, plus accrued interest thereon, at
April 30, 1996. However, in the event of liquidation of ELCOA, holders of
ELCOA's debt securities would be senior in priority in liquidation to ELCOA's
assets. There are no provisions for a sinking fund or lien on the assets of
the Company in favor of the holders of the Certificates or subordinated debt
of the Company. To the extent that holders of the subordinated debt redeem
their securities or "rollover" into the Certificates, the preference in favor
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32
of the holders of the Certificates would be reduced. The Company is unable to
estimate to what extent holders of the subordinated debt will redeem their
certificates or "rollover" into the Certificates.
In addition, should the Company continue to suffer continuous operating
losses as it has in the past, it may become necessary to cease making
principal payments either at maturity or upon a holder's election to redeem,
or to suspend required payments of interest to all holders. To date, neither
the Company nor ELCOA have ever defaulted in the repayment of principal or
interest as scheduled on any loans or debt securities under the provisions of
any trust indenture. See "DESCRIPTION OF SECURITIES: Events of Default".
There are no restrictions upon the Company's ability to issue debt senior
to the Senior Thrift Certificates or additional debt which may be secured by a
lien on the Company's assets. See "DESCRIPTION OF SECURITIES - Senior Debt".
11. KEY EXECUTIVE AND CONTROL: Mr. William Shapiro, the Company's
President and founder, has played a key role in the Company's development.
Although the Company employs what it believes to be competent management and
supervisory personnel to oversee its daily operations, the loss of Mr.
Shapiro's services, might have an adverse effect on the Company's operations
and prospects, and might affect its ability to implement its strategic plans.
There can be no assurance that the Company would be able to employ qualified
personnel on acceptable terms to replace Mr. Shapiro, nor is the Company the
beneficiary of any life insurance policies covering Mr. Shapiro. Mr. Shapiro
has not entered into any written employment agreement with the Company.
12. COMPETITION IN THE EQUIPMENT LEASING INDUSTRY: The equipment leasing
industry is highly competitive. In initiating its leasing transactions, the
Company will compete with leasing companies, manufacturers that lease their
products directly, equipment brokers and dealers, and financial institutions,
including commercial banks and insurance companies. Many competitors will be
larger than the Company and will have access to more favorable financing.
Competitive factors in the equipment leasing business primarily involve
pricing and other financial arrangements.
RELATIVE TO CERTIFICATES
1. PREPAYMENT PENALTY: In the event a holder of any Fixed Term
Certificate requests payment prior to maturity, a prepayment penalty will be
charged in accordance with a prescribed formula. The Company's present policy
is to repay principal and interest on early repayment within five business
days after demand, although this policy may change without notice to security
holders. Absent this policy, the Company is required to redeem Demand
Certificates on the fifth day of the next calendar month after a written
request for redemption is received, subject to a limitation of $250,000 per
month. See "DESCRIPTION OF SECURITIES - CERTIFICATES; Right to Request Early
Payment and "Limitations on Redemptions."
2. RESTRICTION ON REDEMPTION OF CERTIFICATES: The Company is not
obligated to redeem in any calendar month an amount in excess of $250,000 in
principal in the aggregate of Demand Certificates, together with Fixed Term
Certificates for which the holder requests redemption prior to maturity. In
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addition, an aggregate $300,000 monthly limitation applies to redemption of
similar Subordinated Thrift Certificates. If a substantial portion of the
Demand Certificates demand repayment and/or the holders of the Fixed Term
Certificates redeem prior to maturity, there is no assurance that the Company
will be able to satisfy such requests at the time of such demand. The Company
estimates that on April 30, 1996, the Company and ELCOA had available to it
cash and short-term U.S. Government Securities of approximately $9,200,000 and
additional funds that could be borrowed or generated through sale with respect
to unhypothecated leases of approximately $8,820,000 to satisfy such requests.
In addition, the Company can call the Certificates on sixty days notice to the
holder for redemption. See "DESCRIPTION OF SECURITIES - CERTIFICATES;
Redemption".
3. ABSENCE OF INSURANCE AND GUARANTEES: The Certificates are neither
insured by any governmental agency, as are certain investments in financial
institutions such as banks, savings and loans or credit unions, nor are they
guaranteed by any public agency or private entity. It should also be noted
that the Company is not subject to any generally applicable governmental
limitations on its own borrowing which are designed to protect investors.
4. ABSENCE OF TRADING MARKETS AND ARBITRARY OFFERING PRICE: No current
trading market for the Certificates exists, and it is not anticipated that any
trading market for any of the Certificates being offered will develop. There
can be no assurance that all or a significant portion of the Certificates
being offered hereunder will be sold. The offering price of the Certificates
has been arbitrarily determined by the Company with the concurrence of Welco,
and bears no relation to the Company's assets, book value, deficit, or any
other established criteria of value.
5. OTHER FACTORS POTENTIALLY AFFECTING SALE OF CERTIFICATES: Future
sales of Certificates are affected by the money markets, and recent and
potential changes in government regulation, including interest rate
limitations which have been phased out and which may be paid by banks and
savings institutions. The relative attractiveness of the Certificates is
influenced by changes in the terms on which cash can be invested by members of
the public in other interest bearing investments, such as savings accounts,
interest bearing checking accounts (NOW accounts), Individual Retirement
Accounts, "money market" funds, certificates of deposit, commercial paper,
government securities and other types of debt obligations, which afford less
risks to the investors.
In addition, since the Company and ELCOA may compete in the financial
market for funds, this may have an adverse effect on the Company's ability to
increase its source of funds available to purchase equipment for lease. These
factors may inhibit the ability of the Company to sell the certificates
offered hereunder.
There is no minimum amount of Certificates which must be sold under this
offering.
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USE OF PROCEEDS
The Company intends to apply the net proceeds remaining after payment of
expenses of this offering for the purchase of commercial and industrial
equipment for lease, and for redemption of previously issued securities
together with interest. See "BUSINESS" on page 25 and Risk Factor #4 on page
18 of this Prospectus. The maximum amount which may be realized from the
offering is $40,000,000, less anticipated expenses of $80,000 and commissions
to be paid to the Underwriter. The Company's primary business is the purchase
of general commercial and industrial equipment which is to be leased to the
Company's customers. As Certificates are sold, the proceeds are used for the
redemption of previously issued debt together with interest with any excess
proceeds received daily allocated to that day's purchase of equipment for
lease on a daily continuous basis. In the event that the net proceeds
realized from this offering are less than or equal to the principal amounts
that will mature on or before April 30, 1997, the Company will give first
priority to the redemption of maturing certificates over the purchase of
equipment to be leased. Since the offering is on a "best efforts", continuous
basis with no minimum amount to be sold, the Company intends to apply the
proceeds of this offering to the purchase of equipment, but is unable to
calculate with any certainty the allocation of proceeds for any of the
foregoing purposes.
Approximately $4,355,000 in principal amount of Subordinated Thrift
Certificates will mature between May 1, 1996 and April 30, 1997 with interest
rates ranging from 10.00% to 13.10%. Approximately $15,545,000 in principal
amount of Senior Thrift Certificates will mature between May 1, 1996 and April
30, 1997, with interest rates ranging from 7.00 to 13.10%. The Company
believes that these amounts become due ratably, on a daily basis, over the
twelve months ended April 30, 1997. Proceeds of this offering may be used in
part to redeem these enumerated amounts of debt securities previously issued.
The Company expects that the percentage of proceeds from the sale of
securities used for the redemption of previously issued debt will be similar
during fiscal 1997 to recent years and during the three fiscal years ended
April 30, 1996, 1995 and 1994 such percentages were 75%, 71%, and 59%,
respectively. In addition, the percentage of proceeds from the sale of
securities used for the purchase of equipment for lease during the three
fiscal years ended April 30, 1996, 1995 and 1994 were 25%, 29%, and 41%,
respectively. The Company expects that the percentage of proceeds from the
sale of securities to be used for the purchase of equipment may be similar
during fiscal 1997. The weighted-average interest rate of outstanding
subordinated and Senior Thrift Certificates at April 30, 1996 was
approximately 8.6%. See Notes 4 and 5 to the Consolidated Financial
Statements. Since the offering of the Certificates is made on a
"best-efforts" basis with no minimum amount which must be sold, the Company is
unable to calculate with any certainty the proceeds to be realized from this
offering.
Pending such uses, the net proceeds of this offering may be invested in
short-term commercial bank "money market funds" or other high-grade liquid
interest-bearing investments such as U.S. Treasury bills not exceeding six
months in maturity.
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BUSINESS
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".
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)
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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
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,
26
37
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."
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.
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38
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
- -------- -------------- --------------
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.
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.
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39
Fiscal Years Ended April 30,
1996 1995 1994
----------- ----------- -----------
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
- -----------------
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%.
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 45. 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 45.
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40
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 %
----------- ------
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
----------- ------
$24,324,784 100.0%
=========== ======
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
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.
30
41
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
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
31
42
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
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
32
43
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.
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
33
44
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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45
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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46
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 Lease Receivables 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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47
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.
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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 45.
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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 63 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%
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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
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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 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
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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 manufacturer's sales distribution network
illustrating the benefits of leasing, to facilitate sales of the manufacturer's
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
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$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 69, 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
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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 68
and 69, 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
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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.
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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.
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DESCRIPTION OF SECURITIES
CERTIFICATES
This offering relates to an aggregate of $40,000,000 in principal amount
of the Company's Demand and Fixed Term Senior Thrift Certificates. The
Certificates are to be issued under a sixth supplemental indenture dated as of
August xx, 1996 to an Indenture dated October 7, 1987 and supplements thereto
(referred to collectively as the "Indenture") between the Company and Summit
Bank (successor by merger to First Valley Bank), Bethlehem, Pennsylvania as
Trustee ("Trustee"). The merger of First Valley Bank, Bethlehem,
Pennsylvania, into Summit Bank, whose principal place of business is
Princeton, New Jersey became effective on July 15, 1996. A copy of the
Indenture is filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The following statements are brief summaries of certain
provisions of the Indenture, and provide a summary of all material provisions
of the Indenture. Whenever particular provisions of the Indenture or terms
defined therein are referred to herein, such provisions or definitions are
incorporated by reference as part of the statements made herein and all
statements are therefore, qualified in their entirety by reference to such
provisions or definitions.
Certain terms of the Indenture as set forth below may be modified. See
"Modification of the Indenture". Additionally, the Company has reserved the
right to terminate this offering, or modify the terms of the offering or the
Certificates, at any time by an appropriate amendment to this Prospectus. No
such modification will affect the rights of the then outstanding Certificates,
except to the extent described below.
The Certificates are not secured by any collateral or lien, nor are there
any provisions for a sinking fund. Banks lending funds to the Company may
hold security interests in certain leases as collateral and may have a
priority interest in those leases pledged as collateral. Parenthetical
references appearing below are to the sections of the Indenture.
GENERAL
Demand Certificates are redeemable at any time after issuance at the
option of the holder. Each Fixed Term Certificate shall mature from six
through one hundred twenty months from the date of issuance, as selected by
the purchaser at the time of purchase, for any term of whole calendar months
within this range. Demand Certificates shall mature on the fifth day of the
month following the month during which demand is made by the holder (Section
2.13). The Company is required to redeem Demand Certificates and may redeem
Fixed Term Certificates for which redemption has been requested prior to
maturity on the fifth day of the month following the month in which written
notice of demand was received, subject to a $250,000 monthly limitation. See
"Redemption - Limitations on Redemptions" below. It is the present policy of
the Company, subject to the availability of funds as determined by the Board
of Directors in its sole discretion, to pay the principal to the holder within
5 business days after demand for redemption is received. The Company may,
however, change this policy at any future date without notice to the holders
of the Certificates. Absent this policy , the Company is required to redeem
Demand Certificates on the fifth day of the next calendar month after a
written request for redemption is received, subject to a limitation of
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$250,000 per month. See "DESCRIPTION of SECURITIES-Limitations on
Redemptions." The Demand Certificates shall bear interest at least 1% above
the annualized 6-month U.S. Treasury Bill rate for bills sold on the first day
of the month, or if there is no auction on that day, the interest rate
established at the last auction prior to the first day of the month. Fixed
Term Certificates shall bear interest at a rate set by the Company at the date
of issuance but shall not be less than 1% above the annualized 6-month U.S.
Treasury Bill rate for Certificates with maturities of less than 24 months,
not less than 2% above the annualized 6-months U.S. Treasury Bill rate for
Certificates with maturities of 25 to 60 months, and not less than 3% above
the annualized 6-month U.S. Treasury Bill rate for Certificates with
maturities exceeding 60 months (Section 2.13). Interest shall continue to be
earned until the principal amount of the Certificate is paid or made available
for payment (Section 2.13). There is no maximum interest rate on either type
of securities.
Principal and Interest will be payable at the offices of the Company or
its paying agent, but unless other arrangements are made, interest will be
paid by check mailed to the registered holders of the Certificates at such
addresses as shall appear on the Certificate Register. (Sections 2.06, 2.13).
The Certificates will be issued only in registered form, without coupons, in
denominations of $100 or any additional amount approved by the Company
(Section 2.13). The denominations of the Certificates can be changed without
service charge, other than any tax or other governmental charge imposed in
connection therewith. (Section 2.06). The principal amount of the
Certificates which may be issued under the Indenture is to be determined, from
time to time, by the Board of Directors of the Company. The maximum amount to
be offered hereunder is $40,000,000 (Section 2.07, 10.01). The Certificates
will be unsecured obligations of the Company.
The Interest and Dividend Tax Compliance Act of 1983 provides for backup
withholding at a rate of 31% on certain payments of interest and dividends.
Backup withholding may apply only to dividend, interest, or certain other
payments made subsequent to 1983.
Under the backup withholding provisions, withholding on interest or
dividend may be imposed either:
(1) after the Secretary of the Treasury has mailed four notices to the
taxpayer stating that the taxpayer has underreported his income, and, if the
taxpayer has filed a return for the taxable year in which he underreported
income, the Secretary has made a deficiency assessment against the taxpayer;
(2) if the taxpayer fails to furnish a taxpayer identification number when
required to do so;
(3) if the Secretary notifies the payor that the taxpayer furnished an
incorrect taxpayer identification number; or
(4) with respect to instruments acquired after 1983, the taxpayer fails to
certify under penalty of perjury that he is not subject to backup withholding
as a consequence of having underreported his income.
Any payor required to withhold from interest or dividend payments on the
basis of taxpayer underreporting of income is required to notify the payee at
the time the withholding begins.
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REDEMPTION
COMPANY ELECTION
The Company may, at its own discretion, call for the redemption of the
Certificates, from time to time, either in whole or in part. Notice of the
redemption shall be given by first-class mail, postage prepaid, mailed to the
holder not less than 60 days prior to the redemption date. The Company would
then redeem all Certificates subject to redemption at the principal amount
thereof, plus interest accrued to the date of redemption. Certificates may be
redeemed at any time after purchase. Therefore, the purchaser is entitled to
at least 60 days interest in the event of the Company's redemption. Accrued
interest on the Certificates so redeemed shall be payable at the time of
redemption. No further interest shall accrue on redeemed Certificates after
the date of redemption. (Sections 2.13, 3.01 through 3.08).
HOLDER'S ELECTION
The Company is required to redeem each Fixed Term Certificate at maturity
without restriction. Subject to the $250,000 monthly limitation set forth
below, the Company will redeem Demand Certificates which shall mature on the
fifth day of the month following the month in which notice of demand is
received (see "SUMMARY OF THE OFFERING - the Offering") and may, but is not
required to, redeem any Fixed Term Certificate before maturity after notice of
demand is received in writing from the holder, subject to the $250,000 monthly
limitation set forth below in the aggregate. (See "DESCRIPTION OF SECURITIES
- - CERTIFICATES; Right to Request Early Payment"). The Company intends to
satisfy requests for redemption from cash on hand. If insufficient cash is
available, the Company may sell existing lease contracts. Requests for
redemption by mail should be addressed to the Company's offices at One Belmont
Avenue, Suite 200, Bala Cynwyd, PA 19004, or in person at the same address,
and must include the original certificate for redemption.
LIMITATIONS ON REDEMPTIONS
Under the Indenture, the Company is not obligated to redeem in any
calendar month an amount in excess of $250,000 in principal amount in the
aggregate of Demand Certificates, together with Fixed Term Certificates for
which the holder requests redemption prior to maturity. (Section 3.01(c)).
In computing this $250,000 limitation, Senior Thrift Certificates only are
included. The Company has a similar $300,000 limitation regarding its
outstanding Subordinated Thrift Certificates currently outstanding. The
Company to date has not invoked this limitation with respect to redemption of
Subordinated Thrift Certificates regardless of the amount redeemed in any
month, and has historically redeemed all such certificates upon presentation
regardless of that $300,000 limitation. The Company gives no assurances with
regards to the future. See "RISK FACTORS." During the three fiscal years
ended April 30, 1996, the average amount of Variable Rate Money Market Demand
Subordinated Thrift Certificates, Fixed Term Money Market Subordinated Thrift
Certificates, Demand and Fixed Term Senior Thrift Certificates redeemed
monthly prior to maturity was approximately $95,700, of which the highest
monthly total during the period was $585,000. During this three year period,
the monthly redemptions of subordinated certificates or demand or fixed term
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certificates redeemed prior to maturity have not exceeded the $300,000
limitation, while the redemption of Senior Thrift Certificates on demand or
fixed term redeemed prior to maturity exceeded the $250,000 monthly limitation
two times.
If this limitation is invoked by the Company with respect to redemption of
Demand and Fixed Term Certificates redeemed prior to maturity, the Trustee and
the holders of such Certificates submitted for redemption, but not redeemed,
will be so notified and the Certificates will be redeemed thereafter in the
order in which demands are received by the Company, with those for which
demands are received on the same day being redeemed proportionately. To the
extent that Certificates submitted for redemption are not paid in any given
calendar month, such Certificates will be given first priority (within the
order in which demand is received) in the next succeeding calendar month or
months until such Certificates are fully redeemed. Interest accrues through
date of payment. For this purpose a demand made orally will be treated as
having been made on the date of the oral demand, if it is confirmed by a
written demand received by the Company within ten days after the date of the
oral demand.
SENIOR DEBT
The indebtedness evidenced by the Certificates and any interest thereon is
considered as "Senior Debt" of the Company, and will rank on parity with other
"Senior Debt." (Sections 11.02, 12.10). As of April 30, 1996, the
Certificates ranked on parity upon liquidation with other unsecured creditor
liabilities of $1,062,724, along with $21,394,687 in principal amount of
outstanding Senior Thrift Certificates at that date. Therefore, outstanding
"Senior Debt" totaled $22,457,411 at April 30, 1996. "Senior Debt" is defined
to include any indebtedness outstanding (whether outstanding on the date of
the execution of the Indenture or thereafter created) at any time except for
the Subordinated Thrift Certificates and any subordinated debentures which may
then be outstanding. There are no limitations on the issuance of additional
"Senior Debt" as defined.
Since the Company maintains an equity ownership in ELCOA, its wholly-owned
subsidiary, holders of the outstanding Demand, Fixed Rate and Money Market
Thrift Certificates of ELCOA would maintain a priority interest as to ELCOA's
assets superior to the rights of the holders of the Certificates as to ELCOA's
assets, in the event of liquidation or reorganization of ELCOA. As such, the
Company's rights to ELCOA's assets are junior to the rights of the creditors
of ELCOA to those assets.
All of the Certificates to be issued hereunder are on parity with each
other and with any other under the Indenture pursuant to which these
Certificates are being offered (Section 2.16).
In the event of any liquidation, dissolution or any other winding up of
the Company, or of any receivership, insolvency, bankruptcy, readjustment,
reorganization or similar proceeding under the Federal Bankruptcy Act or any
other applicable Federal or state law relating to bankruptcy or insolvency,
during the continuation of any Event of Default (as described below), no
payments of any kind may be made on the Subordinated Thrift Certificates and
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subordinated debentures until all "Senior Debt", including the Certificates
and any accrued interest thereon, has been repaid. (Section 11.03). For a
discussion of the maturity dates and interest rates on outstanding
Subordinated Thrift Certificates and subordinated debentures as of April 30,
1996, see Note 5 to the Consolidated Financial Statements.
AUTOMATIC EXTENSION
If, after its maturity date, a Fixed Term Certificate is not presented for
payment by the holder, and the Company does not tender payment to the holder,
such certificate shall be treated as a Demand Certificate, and the rate and
other terms applicable to such Demand Certificates shall be determined as the
maturity date of the Fixed Term Certificate. (Section 2.15) The Company will
give each certificate holder one month's prior written notice of the time of
maturity, reminding him of the maturity date of his security and the fact that
the automatic extension provision will take effect unless he requests payment
(Section 2.13). The Company will advise, by monthly statement, certificate
holders of the due date of all fixed term securities owned by them.
RIGHT TO REQUEST EARLY PAYMENT
The Company will redeem any Fixed Term Certificate offered hereunder as of
the end of the calendar month during which notice of a request for early
payment is received. Payment will be made on the fifth day of the following
calendar month, or such shorter period of time as determined by the Company,
on the following conditions: a penalty, computed by multiplying the number of
months remaining to maturity by 1/8 of 1% and then multiplying the product by
the principal amount being redeemed prior to maturity, will be deducted from
the principal amount redeemed; however, the penalty shall not be less than
$25. For example, if 24 months prior to the due date, a holder elected to
redeem a $1,000 five year Fixed Term Certificate, the Company would deduct a
penalty of $30 from the principal repayment of $1,000 (1/8 of 1% multiplied by
the number of months by $1,000, equals $30). (Section 2.13) Interest on any
certificate redeemed prior to maturity would be paid at the original rate as
stated on the certificate.
OPTION TO RECEIVE COMPOUND INTEREST
Holders of Certificates have the option of electing to have interest on
their Certificates reinvested and compounded monthly (that is, interest at the
original rate shall be computed monthly on the new amount). There are no
restrictions on the use that the Company may make of the retained interest.
Once made, such an election may not be changed without the consent of the
Company. In the event a holder elects to have interest compounded, interest
will be paid, at the holder's election, bi-monthly, quarterly, semi-annually,
annually, or at maturity of his certificate (Section 2.13). Reinvested
interest will be an unsecured obligation of the Company and will be subject to
the same risks as the Certificates, and will continue to be considered as
"Senior Debt" of the Company. See "RISK FACTORS - General; Lack of Sinking
Fund". Interest compounded but unpaid to holders will be reported by the
holder for Federal income tax purposes, when earned, including when it is
compounded but unpaid. The Company will advise holders prior to January 31 of
each year concerning the amount of interest which must be reported as income
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for the preceding year. The Company does not believe that any "original issue
discount" as defined in the Internal Revenue Code of 1986, as amended, arises
from the sale of the Certificates as the stated principal amount redeemable at
maturity equals the original issuance price for each certificate. Purchasers
of Certificates should make their own determinations concerning any applicable
tax consequences, and are encouraged to consult their own tax advisors.
INTEREST 6-MONTH UNITED STATES TREASURY BILL RATE
Six-month United States Treasury Bills are auctioned weekly by the United
States Treasury Department, usually on Monday. The interest rate on the
6-month U.S. Treasury Bills, on a discount basis, based on the auction
average, is published widely in newspapers throughout the country, normally on
the day following the auction. During the five year period ended April 30,
1996, the rates ranged from a low of 2.78% to a high of 6.42%. As of July 1,
1996, the 6-Month U.S. Treasury Bill rate was 5.22%.
The interest rate to be paid on the Demand Senior Thrift Certificates
offered hereunder shall be at least 1% above the annualized interest rate paid
on 6-month United States Treasury Bills sold on the first day of the month, or
if there is no auction on that day, the interest rate established at the last
auction prior to the first day of the month. The rate will vary from month to
month depending upon the U.S. Treasury Bill Rate. In the event that the U.S.
Treasury Bill rate as set forth above shall fall below 6% per annum, or in the
event there shall be no such 6-month U.S. Treasury Bill rate in effect, the
rate of such 6-month U.S. Treasury Bill shall be deemed to be 6% per annum.
The percentage above the 6-month U.S. Treasury Bill rate is to be determined
at the beginning of the month by the Company (or in the absence of any such
determination, such percentage shall be deemed to be 1% above the 6-month U.S.
Treasury rate), based upon prevailing market conditions, and interest rates in
general. Therefore, the minimum interest which can be paid on Demand Senior
Thrift Certificates shall be 7%. (Section 2.13)
The interest rate to be paid on the Fixed Term Certificates shall be fixed
by the Company at a rate at least equal to 1% above the annualized interest
rate paid on 6-month U.S. Treasury Bills for Certificates with maturities of
24 months or less, 2% above the annualized interest rates paid on 6-month U.S.
Treasury Bills for Certificates with maturities of 25 to 60 months, and 3%
above the annualized interest rates paid on 6-month U.S. Treasury Bills for
Certificates with maturities exceeding 60 months based upon prevailing market
conditions and interest rates in general. For the purpose of computing the
interest to be paid on a given issuance of Fixed Term Certificates, the
annualized interest rate paid on 6-month U.S. Treasury Bills shall be
determined by reference to such rate in effect on the date that investor money
is received by the Company if such a date is the date when United States
Treasury Bills are issued, or the date of the most recently issued 6-month
U.S. Treasury Bills if investor money is not received on an issued date of
6-month U.S. Treasury Bills. Once established, the same rate of interest will
be paid for the term of the Certificate. In the event the 6-month U.S.
Treasury Bill rate, as set forth above, shall fall below 6% per annum, or in
the event there shall be no such U.S. Treasury Bill rate in effect, the rate
of such 6-month U.S. Treasury Bill shall be deemed to be 6% per annum.
(Section 2.13).
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Interest to be paid in any calendar month will be paid on or before the
10th day of the succeeding calendar month.
RESTRICTIONS ON MERGER
The Company, subject to certain conditions contained in Section 5.01 of
the Indenture, may consolidate or merge with or into, or sell or transfer all
or substantially all of its property and assets to any other corporation,
provided that the corporation (if other than the Company) formed by or
resulting from any such consolidation or merger or which shall have received
the transfer of such property and assets, assumes payment of principal and
premium, if any, and interest on the Certificates and performs all obligations
in accordance with the terms of the Indenture. No approval of certificate
holders is required. The Company has no present plans to effect any of the
foregoing transactions. (See Article 5).
MODIFICATION OF THE INDENTURE
The Company may from time to time, enter into additional supplemental
indentures amending the terms of the Indenture with the consent of at least
75% in aggregate principal amount of the outstanding Certificates. No
supplemental indenture without the consent of each holder of outstanding
Certificates, may reduce the percentage of the Certificate holders necessary
to modify or alter the Indenture, waive any default under the Indenture,
reduce the stated amount of interest on any Certificate or change the maturity
date of the principal, the interest payment dates or other terms of payment.
The Company may, without consent of the holders of these Certificates, enter
into supplemental indentures under certain limited circumstances where the
rights of the holders are not materially affected. (Sections 9.01 through
9.03).
COVENANT AS TO REPAIR
The Company has covenanted that it will maintain and keep its properties
in good condition, repair and working order, provided, however, that the
Company may provide for any disposition of such properties consistent with
reasonable business judgment and not disadvantageous in any material respect
to the holders of the Certificates.
EVENTS OF DEFAULT
The following will be events of default: (a) default in the payment of any
interest when due which is not cured for 30 days; (b) default in payment of
principal (or premium, if any) when due; (c) default in the performance of any
other covenant of the Company, which is not cured within 60 days after
occurrence of the default and (d) certain events of bankruptcy, insolvency or
reorganization. (Section 6.01). If an Event of Default shall occur and not
be cured within the time period required, the Trustees or the holders of not
less than 25% of the principal amount of outstanding Certificates (including
holders who may be controlling persons) may declare the Certificates due and
payable by appropriate written notice. (Section 6.02).
58
69
The holders of a majority in principal amount of all outstanding
Certificates will have the right to exercise any remedy available to the
Trustee, provided such holders have offered to the Trustee reasonable
indemnity, and have given prior written notice to the Trustee of a continuing
Event of Default. (Section 6.05).
The Company will be required to furnish to the Trustee annually a
statement as to the absence of default and compliance by the Company with the
terms of the Indenture. (Section 4.03).
TRANSACTIONS WITH THE TRUSTEE
The Company maintains deposit accounts and banking relations with the
Trustee, Summit Bank (successor by merger to First Valley Bank) of Bethlehem,
Pennsylvania.
The Trustee also serves as custodian for IRA/KEOGH accounts for
participants maintaining a custodial account to hold Certificates. The Trustee
assesses a $30 annual maintenance charge per account on all IRA/KEOGH
custodial accounts.
PLAN OF DISTRIBUTION
The Company has entered into an Underwriting Agreement with Welco
Securities, Inc., Suite 105, One Belmont Avenue, Bala Cynwyd, Pennsylvania
19004 (hereinafter referred to as the "Underwriter").
The Underwriter, is an affiliate of the Company, and is wholly-owned by
William Shapiro, the Company's President. The officers of the Underwriter,
William Shapiro and Kenneth S. Shapiro, are registered as licensed securities
agents and are also full time employees of the Company, and members of its
Board of Directors. The Underwriter also has been engaged to sell the debt
securities offered by ELCOA, the Company's wholly-owned subsidiary. William
Shapiro and Kenneth Shapiro are also affiliated as attorneys with counsel for
the Company. See Note 10 to the Consolidated Financial Statements. The
principal business function of the Underwriter is to sell the registered
securities of the Company and ELCOA as their agent. As a result of the
affiliations between the Company and the Underwriter, the Underwriting
Agreement cannot be deemed to have been negotiated at arm's length. Among
the factors considered in such determinations were the history of, and
prospects for the industry in which the Company competes, estimates of the
business potential of the Company, the present state of its development, its
financial condition, risks associated with the leasing industry in general,
interest rates in general during the time of the offering and demand for
similar securities of comparable companies.
Under the terms of the Underwriting Agreement, the Company has retained
the Underwriter as its agent and the Underwriter has agreed to use its best
efforts to offer the public on a continuous basis the Certificates described
herein at those prices specified on the cover of this Prospectus. The
Underwriter has made no commitment to purchase any of the Certificates offered
hereby, and will not make any market for the Certificates. There is no
minimum amount of Certificates which must be sold in order for this offering
to go forward.
59
70
No sales charges, commissions, or other expenses of the offering will be
deducted from the principal amount of Certificates offered hereunder. The
Underwriter is to be paid a commission equal to 1/15 of 1% per month of the
principal amount of each Certificate purchased, for each month of the initial
term of any new fixed term Certificate sold through the Underwriter (ranging
from .4% for 6-month Certificates sold to 8.0% for 120 month Certificates) by
the Company from the proceeds of sales of the Certificates. Neither Kenneth
S. Shapiro nor William Shapiro receive any direct remuneration from the
Underwriter in connection with the sale of these securities, as commissions
are used by the Underwriter for expenses incurred in the solicitation and sale
of the Certificates. The Company has agreed to reimburse the Underwriter for
the fee of the qualified independent underwriter incurred in connection with
the offer and sale of the Certificates, which is $25,000.00. The Underwriter
may reallow to certain dealers who are members of the National Association of
Securities Dealers, Inc. ("NASD") and certain foreign dealers who are not
eligible for membership in the NASD, a commission of up to 8.0% of the
principal amount of Certificates sold by such dealers.
No commission shall be paid on account of the sale of any Demand
Certificate.
After the commencement of the offering, the commissions and reallowances,
if any, may be changed.
The Company will indemnify the Underwriter and all other brokers and
dealers who enter into agreements with the Underwriter against certain civil
liabilities, including certain liabilities under the Securities Act of 1933,
as amended.
The foregoing discussion sets forth a summary of all material provisions
of the Underwriting Agreement. For a complete description of the terms of the
Underwriting Agreement, reference is made to the Underwriting Agreement which
is filed as an exhibit to the Registration Statement, of which this Prospectus
is a part.
The Underwriter as a member of the NASD is subject to Schedule E of the
By-Laws of the NASD which deals with its participation in soliciting sales of
securities for the Company, its affiliate. Schedule E requires, in part, that
a qualified independent underwriter be engaged to render an opinion regarding
the fairness of the computation of the rates of interest being paid on
Certificates being offered through the Prospectus. The Underwriter has
obtained an opinion dated August xx, 1996 from J.E. Liss & Company, Inc. an
NASD member, which has participated in the preparation of the offering
documents, conducted its due diligence review of the offering, and is being
compensated with a fee of $25,000.00 by the Company for rendering the opinion
that the proposed offering terms, and the minimum rates at which these
Certificates may be offered, meet this fairness objective.
LEGAL OPINION
The law firm of William Shapiro, Esq., P.C. of Bala Cynwyd, Pennsylvania,
has rendered an opinion that pursuant to the Indenture between the Company and
Summit Bank (successor by merger to First Valley Bank) of Bethlehem,
Pennsylvania, as Trustee, and appropriate
60
71
Company orders, the Certificates, when issued and sold pursuant to the
Indenture and in the manner contemplated by the Prospectus, will be valid and
binding obligations of the Company, except that such opinion is subject to the
following qualifications: (a) no opinion is rendered as to the availability
of equitable remedies including, but not limited to, specific performance and
injunctive relief, (b) the effect of bankruptcy, reorganization, insolvency,
fraudulent conveyance, moratorium and other similar laws or equitable
principles affecting creditor's rights or remedies, and (c) the effect of
applicable laws and court decisions which may now or hereafter limit or render
unenforceable certain rights and remedies.
Both William Shapiro and Kenneth S. Shapiro, officers and directors of the
Company and officers of ELCOA, are associated with said law firm as attorneys,
of which Mr. William Shapiro is the sole stockholder of the professional
corporation. In addition, Kenneth S. Shapiro is President and director, and
William Shapiro is Secretary/Treasurer and director of Welco Securities, Inc.,
the Underwriter.
EXPERTS
The consolidated balance sheets of Walnut Equipment Leasing Co., 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, have been audited
by Cogen Sklar LLP, Independent Certified Public Accountants. The financial
statements appearing in the Registration Statement and this Prospectus are
included in reliance on the reports of such firm and upon the authority of
such firm as experts in auditing and accounting.
61
72
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT 63
Consolidated Balance Sheets as of April 30, 1996 and 1995 64-65
Consolidated Statements of Operations for the years
ended April 30, 1996, 1995 and 1994 66
Consolidated Statements of Changes in Shareholders'
Deficit for the years ended April 30, 1996, 1995
and 1994 67
Consolidated Statements of Cash Flows for the years
ended April 30, 1996 and 1995 and 1994 68-69
Notes to the Consolidated Financial Statements for
the fiscal years ended April 30, 1996, 1995 and 1994 70
62
73
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
63
74
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
64
75
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
65
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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
66
77
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
67
78
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
68
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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
69
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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.
70
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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
71
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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.
72
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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.
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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
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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.
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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.
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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.
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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.
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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.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14 - OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses of this offering are as follows:
Registration fee............................................$12,241.38
NASD Filing Fee............................................. 4,500.00
Accounting.................................................. 15,000.00
Legal....................................................... 5,000.00
Printing.................................................... 2,500.00
State Blue Sky Registration Fees
and Costs (including counsel fees)......................... 7,500.00
Authentication and Delivery of
Certificates and Expenses.................................. 2,500.00
Miscellaneous Expenses (includes
postage of $2,500.00, out-of-pocket
reimbursements of Welco Securities,
Inc. $25,000.00, advertising and
administrative costs of $3,258.62......................... 30,758.62
-----------
Total $ 80,000.00
===========
ITEM 15 - INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of Delaware provides that a
corporation shall have the power to indemnify any director, officer,
employee or agent of the Company who acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of
the Company ("Registrant"). No indemnification shall be made, however, in
respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance
of his duty to the Company unless and only to the extent that the court
shall determine such person is fairly and reasonably entitled to
indemnity.
Articles IX and X of Registrant's By-Laws provide for indemnification by
the Registrant of all persons whom it may indemnify pursuant to said
Section 145 as amended from time to time. The Company has so agreed to
indemnify its officers and directors.
The Company's Certificate of Incorporation adopts a provision of the
Delaware General Corporation Law which provides that a director of a
corporation will not be personally liable to the corporation or its
shareholders for monetary damages for breach of fiduciary duty of care as
a director, including breaches which constitute gross negligence.
However, this provision does not eliminate or limit the liability of a
director of a corporation (i) for breach of the director's duty of loyalty
to the corporation or its shareholders, (ii) for acts or omissions not in
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91
good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the Delaware General Corporation Law
(relating to unlawful payments of dividends or unlawful stock repurchases
or redemptions), (iv) for any personal benefit derived or (v) for breaches
of a director's responsibilities under the federal securities laws.
Reference is made to Item 17 of this Registration Statement for additional
information regarding the indemnification of officers and directors.
ITEM 16 - EXHIBITS
*1.1 Form of Underwriting Agreement to be entered into between Walnut
Equipment Leasing Co., Inc. and Welco Securities, Inc.
*1.2 Form of Selected Dealer's Agreement.
*1.3 Form of Pricing Opinion of J.E. Liss & Company, Inc. to be delivered
to Welco Securities, Inc.
*1.4 Form of Agreement to Act as Qualified Independent Underwriter with
J. E. Liss & Company, Inc. to be delivered to Welco Securities, Inc.
4.1 Specimen of Variable Rate Money Market Subordinated Demand Thrift
Certificate, incorporated by reference to Exhibit 4.1 to
Registrant's Registration Statement on Form S-1 (File No. 2-78371,
Filed 7/9/82)
4.2 Specimen of Fixed Term Money Market Subordinated Thrift
Certificate, incorporated by reference to Exhibit 4.1 to
Registrant's Registration Statement on Form S-1 (File No. 2-78371,
Filed 7/9/82).
4.3 Specimen of ninety day demand Subordinated Thrift Certificate,
incorporated by reference to Exhibit 3.1 to Registrant's
Registration Statement on Form S-18 (Filed October 24, 1979; File
No. 2-65101).
4.4 Specimen of one, three and five year Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.2 to
Registrant's Registration Statement on Form S-18 (Filed October 24,
1979; File No. 2-65101).
4.5 Specimen of Variable Rate Money Market Demand Thrift Certificate,
incorporated by reference to Exhibit 3.6 to Registrant's
Registration Statement on Form S-18 (Filed April 15, 1980; File No.
2-65101).
4.6 Specimen of Fixed Rate Money Market Thrift Certificate,
incorporated by reference to Exhibit 3.7 to Registrant's
Registration Statement on Form S-18 (Filed April 15, 1980; File No.
2-65101).
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4.7 Specimen of Variable Rate Money Market Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.1 of
Registrant's Registration Statement on Form S-18 (Filed 12/19/80;
File No. 2-70326).
4.8 Specimen of Fixed Term Money Market Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.2 to
Registrant's Registration Statement on Form S-18 (Filed 12/19/80;
File No. 2-70326).
4.9 Trust Indenture between Registrant and Fulton Bank, Trustee, dated
October 26, 1979, supplemented by an Amendment April 14, 1980,
incorporated by reference to Exhibit 4.9 to Registrant's
Registration Statement on Form S-2 (Filed 9/5/86; File No.
2-92440).
4.10 Trust Indenture between Registrant and Fulton Bank, Trustee, dated
December 15, 1980, incorporated by reference to Exhibit 4.10 to
Registrant's Registration Statement on Form S-2 (Filed 9/5/86; File
No. 2-92440).
4.11 Trust Indenture between Registrant and Fulton Bank, Trustee, dated
as of June 15, 1982, incorporated by reference to Exhibit 4.11 to
Registrant's Registration Statement on Form S-2 (Filed 9/5/86; File
No. 2-92440).
4.12 Subordination Agreement by William Shapiro and members of his
immediate family, incorporated by reference to Exhibit 3.9 to
Registrant's Registration Statement on Form S-18 (Filed May 19,
1980; File No. 2-65101).
4.13 Company Order dated June 8, 1980, incorporated by reference to
Exhibit 3.10 to Registrant's Registration Statement on Form S-18
(Filed June 9, 1980; File No. 2-65101).
4.14 Specimen Adjustable Rate Cumulative Preferred Share Certificate,
incorporated by reference to Exhibit 4.14 to Form 8-K 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
Registrant's Registration Statement on Form S-2 (Filed July 27,
1984; File No. 2-92440).
4.16 Specimen of Fixed Term Money Market Subordinated Thrift
Certificate, incorporated by reference to Exhibit 4.16 to
Registrant's Registration Statement on Form S-2 (Filed July 27
1984; File No. 2-92440).
4.17 Supplemental Trust Indenture dated July 24, 1984 to Trust Indenture
between Registrant and Fulton Bank, Trustee, dated June 15, 1982,
incorporated by reference to Exhibit 4.17 to Registrant's
Registration Statement on Form S-2 (Filed July 24, 1984; File No.
2-92440).
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4.18 Specimen of Prime Rate Cumulative Preferred Stock Certificate,
incorporated by reference to Exhibit 4.18 to Registrant's
Registration Statement on Form S-2 (Filed July 24, 1984; File No.
2-92440).
4.19 Certificate of designation, relative rights, preferences and
limitations of Prime Rate Cumulative Preferred Stock, incorporated
by reference to Exhibit 4.19 to Registrant's Registration Statement
on Form S-2 (Filed July 24, 1984; File No. 2-92440).
4.20 Second Supplemental Trust Indenture dated September 3, 1986 to
Trust Indenture between Registrant and Fulton Bank, Trustee dated
June 15, 1982, as supplemented July 24, 1984, incorporated by
reference to Exhibit 4.20 to Registrant'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 Registrant and
First Valley Bank, Bethlehem, Pennsylvania, Trustee, incorporated
by reference to Exhibit 4.21 to Registrant's Registration Statement
on Form S-2 (Filed October 9, 1987; File No. 33-16599).
4.22 Specimen of Demand Senior Thrift Certificate, incorporated by
reference to Exhibit 4.22 to Registrant's Registration Statement on
Form S-2 (Filed October 9, 1987; File No. 33-16599).
4.23 Specimen of Fixed Term Senior Thrift Certificate, incorporated by
reference to Exhibit 4.23 to Registrant'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 Registrant's
Registration Statement on Form S-2 (File No. 33-23210; Filed July
21, 1988.)
4.25 Form of Specimen of Demand Senior Thrift Certificate incorporated
by reference to Exhibit 4.25 to Registrant's Registration Statement
on Form S-2 (File No. 33-23210; Filed July 21, 1988.)
4.26 Form of Specimen of Fixed Term Senior Thrift Certificate
incorporated by reference to Exhibit 4.26 to Registrant'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 Registrant's
Registration Statement on Form S-2 (File No. 33-23210; Filed July
10, 1989.)
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4.28 Form of Specimen of Demand Senior Thrift Certificate, incorporated
by reference to Exhibit 4.28 to Registrant's Registration Statement
on Form S-2 (File No. 33-23210; Filed July 10, 1989.)
4.29 Form of Specimen of Fixed Term Senior Thrift Certificate,
incorporated by reference to Exhibit 4.29 to Registrant's
Registration Statement on Form S-2 (File No. 33-23210; 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 Form of Specimen of Demand Senior Thrift Certificate (File No.
33-35663; Filed June 29, 1990.)
4.32 Form of Specimen of Fixed Term Senior Thrift Certificate (File No.
33-35663; Filed June 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; Filed 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)
4.36 Fifth Supplemental Trust Indenture dated as of August 23, 1994 to
Trust Indenture dated as of October 7, 1987 between Registrant and
First Valley Bank, Bethlehem, Pennsylvania, Trustee. (File No.
33-81630; Filed August 25, 1994.)
4.37 Form of Specimen of Demand Senior Thrift Certificate. (File No.
33-81630; Filed July 18, 1994).
4.38 Form of Specimen of Fixed Term Senior Thrift Certificate. (File
No. 33-81630; Filed July 18, 1994).
*4.39 Form of Sixth Supplemental Trust Indenture dated as of August xx,
1996 to Trust Indenture dated as of October 7, 1987 between
Registrant and Summit Bank (successor by merger to First Valley
Bank), Bethlehem, Pennsylvania, as Trustee.
*4.40 Form of Specimen of Demand Senior Thrift Certificate.
*4.41 Form of Specimen of Fixed Term Senior Thrift Certificate.
*5.1 Form of Opinion of Counsel re: legality of issuance of Certificates.
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95
10.1 Specimen of existing five-year Subordinated Debenture, incorporated
by reference to Exhibit 11.2 to Registrant's Registration Statement
on Form S-18 (Filed July 26, 1979; File No. 2-65101).
10.2 Form of equipment lease, incorporated by reference to Exhibit 11.3
to Registrant's Registration Statement on Form S-18 (Filed 7/26/79;
File No. 2-65101).
10.3 Agreement with Walnut Associates, Inc. as of February 1, 1979,
incorporated by reference to Exhibit 11.5 to Registrant's
Registration Statement on Form S-18 (Filed 7/26/79; File No.
2-65101).
10.4 Agreement with Walnut Associates, Inc. dated May 16, 1969,
incorporated by reference to Exhibit 11.8 to Registrant's
Registration Statement on Form S-18 (Filed 7/26/79; File No.
2-65101).
10.5 Service Contract dated May 23, 1986 between Registrant 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 Registrant 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 Registrant 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 Lease Agreement dated as of March 6, 1987 between Registrant and
Walnut Associates, Inc. covering the premises located at 15 South
4th Street, Fernwood, PA, incorporated by reference to Exhibit
10.23 to Registrant's Registration Statement on Form S-2 (Filed
7/31/87; File No. 2-92440).
10.9 Service Purchase Contract dated May 18, 1995 between Walnut and the
Pennsylvania Office of Liquidations and Rehabitations regarding
servicing of performing lease files. (Filed as Exhibit 10.11 to
Form 10-K for the fiscal year ended April 30, 1995).
10.10 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. (Filed as Exhibit 10.13 to
Form 10-K for the fiscal year ended April 30, 1995).
10.11 Sublease Agreement dated as of July 7, 1995 between the Company and
Walnut Associates, Inc. covering offices space located at Suite
200, One Belmont Avenue, Bala Cynwyd, Pennsylvania. (File No.
33-81630; Filed September 12, 1995)
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10.12 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. (File No.
33-81630; Filed September 12, 1995)
*12.1 Statement re: Computation of ratios.
13.1 Form 10-K for the fiscal year ended April 30, 1996. (Filed July
26, 1996).
21.1 Subsidiaries of the Registrant. Incorporated by reference to
Exhibit 22.1 to Form 10-K as filed by the Registrant for the fiscal
year ended April 30, 1994.
*23.1 The consent of William Shapiro, Esq., P.C. is filed as part of
their opinion which is filed as Exhibit 5.1, hereof.
*23.2 Consent of J.E. Liss & Company, Inc. is filed as part of their
opinion which is filed as Exhibit 1.3, hereof.
*23.3 Consent of Cogen Sklar LLP, Independent Certified Public
Accountants.
*25.1 Form T-1, Statement of Eligibility and Qualification of Summit Bank
(successor by merger to First Valley Bank), Bethlehem, Pennsylvania
as Trustee under an Indenture to be qualified under the Trust
Indenture Act of 1939. (As amended).
27.1 Financial Data Schedule. See Exhibit 27.1 to Form 10-K filed July
26, 1996.
99.1 Listing of Manufacturers Engaged in Co-Op Manufacturing Marketing
Program. (As of July 1, 1996) (Filed as Exhibit 99.1 to Form 10-K
for the Fiscal Year Ended April 30, 1996; Filed July 26, 1996).
* Filed with this Form S-2
ITEM 17 - UNDERTAKING
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers of sales are being made of
the securities registered, a post-effective amendment to this Registration
Statement:
(i) to include any prospectus required by Section 10 (a)(3) of the
Securities Act of 1933;
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97
(ii) to reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona-fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona-fide offering
thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provision, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Township of Lower Merion, County of Montgomery,
Commonwealth of Pennsylvania on the 29th day of July, 1996.
WALNUT EQUIPMENT LEASING CO., INC.
By: /s/ William Shapiro
---------------------------------
William Shapiro, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and the dates indicated.
SIGNATURES TITLE DATE
President and Director
/s/ William Shapiro Chief Executive,
- ---------------------------- Financial and
(William Shapiro) Accounting Officer July 29, 1996
/s/ Kenneth S. Shapiro Vice-President and
- ---------------------------- Director July 29, 1996
(Kenneth S. Shapiro)
/s/ Deljean Shapiro Secretary, Treasurer
- ---------------------------- and Director July 29, 1996
(Deljean Shapiro)
/s/ Dr. Thomas Matcovich
- ---------------------------- Director July 29, 1996
(Dr. Thomas Matcovich)
/s/ Philip R. Bagley
- ---------------------------- Director July 29, 1996
(Philip R. Bagley)
/s/ Lester D. Shapiro
- ---------------------------- Director July 29, 1996
(Lester D. Shapiro)
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As Filed with the Securities and Exchange Commission on July 30, 1996
Registration No. 333-xxxxx
- ------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM S-2
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
----------
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)
ONE BELMONT AVENUE WILLIAM SHAPIRO, ESQ., P.C.
SUITE 200 ONE BELMONT AVENUE, SUITE 202
BALA CYNWYD, PA 19004 BALA CYNWYD, PA 19004
(610) - 668 - 0700 (610) - 668 - 0707
(Address, including zip code, (Name, Address, including zip code and
and telephone number, including telephone number, including area code,
area code, of registrant's of agent for service)
principal executive offices)
COPY OF COMMUNICATIONS TO:
William Shapiro, Esq., P.C. Kenneth S. Shapiro, President
Suite 202, One Belmont Avenue Welco Securities, Inc.
Bala Cynwyd, Pennsylvania 19004 Suite 105, One Belmont Avenue
Telephone Number (610)668-0707 Telephone Number (610)668-0709
EXHIBIT VOLUME
100
WALNUT EQUIPMENT LEASING CO., INC.
Exhibit Index
Form S-2
Exhibit Sequential Page
Number Description Number
------- ------------------------------------------ ---------------
1.1 Form of Underwriting Agreement 101
1.2 Form of Selected Dealers' Agreement 117
1.3 Form of Pricing Opinion of J.E. Liss &
Company, Inc. 121
1.4 Form of Agreement to Act as Qualified
Independent Underwriter 122
4.39 Form of Sixth Supplemental Trust Indenture 131
4.40 Form of Specimen of Demand Certificate 142
4.41 Form of Specimen of Fixed Rate Certificate 146
5.1 Form of Opinion of Counsel re: Legality of
Issuance of Certificates 150
12.1 Statement re: Computation of Ratios 152
23.3 Consent of Cogen Sklar, LLP, Independent
Certified Public Accountants 153
"P" 25.1 Statement of Eligibility & Qualification
of Summit Bank (successor by merger to
First Valley Bank) Filed as Form T-1 154