1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended October 31, 1996
----------------
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from --------------- to ---------------
Commission File Number: 33-16599
WALNUT EQUIPMENT LEASING CO., INC.
----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-1712443
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Suite 200, One Belmont Avenue, Bala Cynwyd, Pennsylvania 19004
---------------------------------------------------------------
(Address of Principal executive offices) (Zip Code)
(610) 668-0700
(800) 866-0809
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes / X / No / /
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of December 15, 1996: $1.00 par value common stock - 1,000
shares.
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WALNUT EQUIPMENT LEASING CO., INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
- ------------------------------ -----------
Item 1. Financial Statements
Consolidated Balance Sheets; October 31, 1996
(unaudited) and April 30, 1996 1-2
Consolidated Statements of Operations;
Six months ended October 31, 1996 and
1995 and Three months ended October 31, 1996
and 1995 (unaudited) 3
Consolidated Statement of Changes in
Shareholders' Deficit; Six months ended
October 31, 1996 (unaudited) 4
Consolidated Statements of Cash Flows;
Six months ended October 31, 1996 and
1995 (unaudited) 5-6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
PART II. OTHER INFORMATION
- --------------------------
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
3
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 1996 April 30, 1996
---------------- --------------
(unaudited)
ASSETS
Direct finance Leases:
Aggregate future amounts receivable
under lease contracts $ 19,592,591 $ 18,423,816
Estimated residual value of equipment 1,568,038 1,704,915
Initial direct costs, net 522,472 474,059
Less:
Unearned income under lease contracts (4,259,016) ( 3,829,859)
Advance payments (583,721) (568,715)
------------- ------------
16,840,364 16,204,216
Allowance for doubtful lease receivables (2,005,341) (2,069,855)
------------- ------------
14,835,023 14,134,361
------------- ------------
Operating Leases:
Equipment at cost,
Less accumulated depreciation of
$18,028 and $14,413, respectively 24,103 19,420
Accounts Receivable 3,000 1,112
Cash and cash equivalents 6,276,981 9,207,905
Other assets (Includes $618,293 paid
to or receivable from related
parties at April 30, 1996) 1,150,944 1,132,587
------------- ------------
Total assets $ 22,290,051 $ 24,495,385
============= ============
SEE ACCOMPANY NOTES
1
4
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
October 31, 1996 April 30, 1996
--------------- --------------
(unaudited)
LIABILITIES
Amounts payable to equipment suppliers $ 1,062,628 $ 802,956
Other accounts payable and accrued expenses 211,092 268,169
Demand, Fixed Rate and Money Market Thrift
Certificates (Includes $183,805 at
April 30, 1996 payable to related parties) 25,931,241 26,407,959
Senior Thrift Certificates (includes $812,773
at April 30, 1996 payable to related parties) 21,732,797 21,394,687
Subordinated Thrift Certificates
(Includes $397,136 at April 30, 1996
payable to related parties) 5,419,879 5,523,118
Accrued interest 7,269,589 6,309,733
Subordinated debentures (Includes $4,000 at
April 30, 1996 payable to related parties) ----- 4,000
------------- -----------
61,627,226 60,710,622
------------- -----------
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 (39,439,231) (36,317,293)
------------- -----------
(39,337,175) (36,215,237)
------------- -----------
Total liabilities and shareholders' deficit $22,290,051 $24,495,385
============= ===========
See accompanying notes
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5
WALNUT EQUIPMENT LEASING CO., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Six Months Ended October 31, For The Three Months Ended October 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue:
Income earned under direct
finance lease contracts $ 1,841,871 $ 1,917,656 $ 921,999 $ 942,691
Operating lease rentals 10,372 12,095 3,549 5,344
------------ ----------- ----------- -----------
Total revenue 1,852,243 1,929,751 925,548 948,035
Costs and expenses:
Interest expense (net) 2,610,807 2,401,345 1,315,819 1,218,986
Lease origination expenses 649,010 541,829 289,934 272,315
General and administrative expenses 1,101,082 1,082,068 550,143 577,553
Provision for doubtful lease receivables 606,172 386,835 290,568 196,639
Depreciation of operating lease equipment 7,110 2,997 3,555 1,613
------------ ----------- ----------- -----------
Total costs and expenses 4,974,181 4,415,074 2,450,019 2,267,106
------------ ----------- ----------- -----------
Loss from operations before provision for
federal and state income taxes (3,121,938) (2,485,323) (1,524,471) (1,319,071)
Provision for federal and state income taxes
(See Note 2) --- --- ---- ---
------------ ----------- ----------- -----------
Net Loss (See Note 2) $ (3,121,938) (2,485,323) $(1,524,471) $(1,319,071)
============ ============ =========== ===========
SEE ACCOMPANYING NOTES
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WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
Prime Rate Adjustable Rate Total
Cumulative Cumulative Common Accumulated Shareholders'
Preferred Shares Preferred Share Stock Deficit Deficit
---------------- --------------- ------ ----------- -------------
No. of Shares No. of Shares
Issued Amount Issued Amount
------ ------ ------ ------
Balance, April 30, 1996 281 $ 281 275 $ 275 $101,500 $(36,317,293) $(36,215,237)
Net loss for the six month
period ended October 31,
1996 (unaudited) --- --- --- --- --- (3,121,938) (3,121,938)
---- ------- ----- ------- -------- ------------- -------------
Balance, October 31, 1996
(unaudited) 281 $ 281 275 $ 275 $101,500 $(39,439,231) $(39,337,175)
==== ======= ==== ======= ======== ============ ============
SEE ACCOMPANYING NOTES
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WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended October 31,
1996 1995
----------- -----------
(unaudited) (unaudited)
OPERATING ACTIVITIES
- --------------------
Net Loss $(3,121,938) $(2,485,323)
Adjustments to Reconcile
Net Loss to Net Cash
Used in Operating Activities:
Depreciation 7,110 2,997
Amortization of Deferred Debt Expenses 54,081 65,318
Provision for doubtful
Lease receivables 606,172 386,835
Effects of Changes
in other Operating Items:
Accrued Interest 959,856 608,089
Amounts Payable to Equipment Suppliers 259,672 143,753
Other (net), principally
increase in other Assets (129,331) (163,190)
----------- -----------
Net Cash Used in Operating Activities (1,364,378) (1,441,521)
----------- -----------
INVESTING ACTIVITIES
- --------------------
Excess of Cash Received Over Lease Income
Recorded 3,445,535 3,675,696
Increase (Decrease) in Advance Payments 15,006 (2,892)
Purchase of Equipment for Lease (4,781,240) (3,869,084)
----------- -----------
Net Cash Used in Investing Activities (1,320,699) (196,280)
----------- -----------
SEE ACCOMPANYING NOTES
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WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
For the Six Months Ended October 31,
1996 1995
----------- -----------
(unaudited) (unaudited)
FINANCING ACTIVITIES
- --------------------
Proceeds for Issuance of:
Demand, Fixed Rate, and Money
Market Thrift Certificates $ 3,096,902 $ 5,533,126
Senior Thrift Certificates 2,101,118 3,347,090
Redemption of:
Demand, Fixed Rate, and Money
Market Thrift Certificates (3,573,620) (3,757,861)
Subordinated Thrift Certificates (103,239) (388,962)
Senior Thrift Certificates (1,763,008) (1,652,402)
Subordinated Debentures (4,000) (1,858)
- -----------------------
Net Cash Provided By (Used in)
Financing Activities (245,847) 3,079,133
----------- ------------
Increase (decrease) in cash and cash equivalents (2,930,924) 1,441,332
Cash and cash equivalents,
Beginning of Year 9,207,905 8,957,949
----------- ------------
Cash and cash equivalents,
End of Year $ 6,276,981 $ 10,399,281
----------- ------------
SEE ACCOMPANYING NOTES
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Walnut Equipment Leasing Co., Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
1. FINANCIAL STATEMENT PRESENTATION
The unaudited interim financial statements presented herein have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles. These statements should be read in
conjunction with the audited financial statements and notes thereto for the
year ended April 30, 1996. The accompanying interim financial statements
have not been audited by independent certified public accountants, but in
the opinion of management, such financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary to
summarize fairly the results of operations, and are not necessarily
indicative of the results to be expected for the full year.
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.
2. ACCOUNTING POLICIES
METHOD OF CONSOLIDATION
The unaudited interim consolidated financial statements of Walnut Equipment
Leasing Co., Inc. for the six month periods ended October 31, 1996 and
1995, respectively, include the operating results of its wholly-owned
subsidiary, Equipment Leasing Corporation of America ("ELCOA"). All
intercompany items have been eliminated for purposes of preparing the
consolidated financial statements contained herein.
ACCOUNTING FOR LEASES
The Company's lease contracts provide for total noncancellable rentals
which exceed the cost of the leased equipment plus anticipated financing
charges and, accordingly, are accounted for as financing leases. At the
inception of each new lease, the Company records the gross lease
receivable, the estimated residual value of the leased equipment, and the
unearned lease income. The unearned lease income represents the excess of
the gross lease receivable plus the estimated residual value over the cost
of the equipment leased. For leases originated after April 30, 1988, the
Company has changed its method of accounting to conform with the
requirements of FAS No. 91 "Accounting for Non Refundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Cost of
Leases". Under this method, commissions paid in the amounts of $34,795 and
$31,791 for the six months ended October 31, 1996 and 1995, respectively,
were accounted for as part of the Investment in Direct Financing leases.
Unearned income is earned and initial direct costs are amortized to
direct finance lease income using the interest (or "effective") method over
the term of each lease.
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10
An allowance for doubtful direct finance lease receivables has been
maintained at a level considered adequate to provide for estimated losses
that will be incurred in the collection of these receivables. The
allowance is increased by provisions charged to operating expense and
reduced by charge-offs based upon a periodic evaluation, performed at least
quarterly, of delinquent finance lease receivables. Pursuant to FAS 91,
reserves are established to reflect losses anticipated from delinquencies
and impairments that have already occurred rather than ultimate losses
expected over the life of the lease portfolio. Total write-offs charged
against this reserve for the six months ended October 31, 1996 and 1995
were $670,686 and $467,414, respectively, while the Company increased these
reserves by charges of $606,172 and $386,835, respectively, to maintain
reserves considered adequate for losses anticipated from remaining
outstanding delinquent lease receivables.
INCOME TAXES EXPENSE
Effective May 1, 1993, the Company adopted Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" (SFAS 109),
which requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expenses is the
tax payable or refundable for the period plus or minus the change during
the period in deferred tax assets and liabilities.
The net deferred tax asset as of April 30, 1996 includes deferred tax
assets (liabilities) attributable to the following temporary deductible
(taxable) differences:
Operating lease method vs. direct financial method $ 2,889,500
Provision for doubtful lease receivables 596,600
Operating loss carryforward 9,173,000
Other (32,600)
-----------
Net deferred tax asset 12,626,500
Valuation allowance (12,626,500)
-----------
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. A valuation
allowance was required as of April 30, 1996 due to the net operating loss
carryover of approximately $26,979,000 and investment tax credit carryover
of approximately $1,075,000, and due to the valuation allowance for the
carryforwards there is no net change in deferred tax assets for the six
months ended October 31, 1996.
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WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED OCTOBER 31, 1996 AND 1995
REVENUES FROM LEASE CONTRACTS
Total revenues from direct finance leases for the six months ended October
31, 1996 decreased 4.0% or $75,785 as compared to the six months ended October
31, 1995. This decrease occurred even though the amount of outstanding lease
receivables increased due to a change in the composition of the aging of the
lease portfolio. See the paragraph below for a further explanation of the
rate growth of lease revenue in comparison to growth in the outstanding lease
portfolio during a period of increasing lease volume. Aggregate new lease
receivables entered increased $1,308,694 or 25.02% to $6,540,025 for the six
months ended October 31, 1996 from $5,231,331 for the six months ended October
31, 1995. Management attributes this increase to its marketing strategy that
emphasizes "private label" leasing programs with manufacturers. The Company
expects this increase to continue throughout the fiscal year to further
increase lease volume beyond current levels. See "Further Refinements in
Marketing Strategy and Efforts to Reduce Operating Losses", below.
Unearned income during the six months ended October 31, 1996 increased by
$429,157 after having decreased $46,169 during the six months ended October 31,
1995. During the six month periods ended October 31, 1996 and 1995, the gross
rents charged over the "net investment" in direct finance leases were 144%.
The recognition of direct finance lease income reflects the composite aging of
the underlying leases in the portfolio, as well as application of FAS No. 91,
to outstanding leases after May 1, 1988 which affects leases originated after
April 30, 1988, and changes the method used to recognize income and expense
items. FAS No. 91 does not change the total income and expenses ultimately to
be recognized from each transaction. Further increases in new lease volume are
expected to increase the levels of unearned income in the future. 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, as income earned from new lease volume is recognized over
the term of each lease contract and not necessarily in the year the contract is
entered.
The Company is continuing to increase its efforts to contact new equipment
vendors to further increase the level of new business. As noted below, in an
effort to further increase new business during the current fiscal year, the
Company has been contacting equipment manufacturers with the expectation that
it will jointly market its leasing services to the customers by using its
in-house printing and direct-mail facilities, and when warranted, create a
"private label lease program" specifically for a given manufacturer. See
"Further Refinements in Marketing Strategy and Efforts to Reduce Operating
Losses", below.
9
12
The limited use of the operating lease equipment program resulted in
$11,977 of equipment being purchased for operating leases for the six months
ended October 31, 1996, in comparison to $13,031 for the six months ended
October 31, 1995. Operating lease rental income decreased by $1,723 in the six
months ended October 31, 1996 as compared to the six months ended October 31,
1995, primarily due to a reduction in the purchase of equipment.
INTEREST EXPENSE
For the six months ended October 31, 1996, interest expense increased
$209,462 or 8.73% as compared to the six months ended October 31, 1995.
Management attributes the increase to additional debt securities outstanding
and excess funds on hand from sale of debt securities awaiting investment in
new lease receivables, offset in part by the increase in interest income from
its investment in short-term U.S. government securities having maturities of
three months. Excess funds are maintained in highly liquid U.S. government
securities, which currently yield less interest income than the interest
expense being paid on debt securities from which the excess funds were
provided. Total interest expense (disregarding interest income of $187,742 and
$249,877, respectively, during the six month periods ended October 31, 1996 and
1995) averaged 9.3% on average total borrowings (including accrued interest) of
$59,996,502 for the six months ended October 31, 1996 as compared to 9.4% on
average total borrowings (including accrued interest) of $56,592,036 for the
six months ended October 31, 1995. The interest rate on three month U.S.
Treasury Bills was 5.04% at October 31, 1996 which represents a decrease of
.27% over the 5.31% rate on similar securities at October 31, 1995.
OTHER EXPENSES
Lease origination expenses increased 19.8% or $107,181 for the six months
ended October 31, 1996, compared to the corresponding period ended a year
earlier. Lease origination expenses, including capitalized commissions paid,
were 10.5% of new direct financing lease receivables during the six months
ended October 31, 1996 as compared to 11.0% for the six months ended October
31, 1995. The company's efforts in increasing new lease volume are continuing
and at the same time the company is attempting to reduce these costs whenever
possible without compromising its goals. See "Further Refinements in Marketing
Strategy and Efforts to Reduce Operating Losses". During the six months ended
October 31, 1996 and 1995, commissions of $34,795 and $31,791, respectively,
were paid and included as lease origination expenses during the period. The
Company believes that increasing new leases generated from repeat vendors and
increasing the number of new vendors utilizing its leasing services that are
being attracted through its marketing efforts will assist to decrease the
overall percentage of total lease origination costs in comparison to new lease
volume in the future.
General and administrative expenses increased by $19,014 or 1.8% for the
six months ended October 31, 1996, as compared to the corresponding period in
1995, due to increased recognition of amortized expenses associated with the
sale of debt securities by the Company and ELCOA.
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13
An allowance for doubtful direct finance lease receivables is maintained at
a level considered adequate to provide for estimated losses that will be
incurred in the collection of these receivables. The allowance is increased by
the provisions charged to operating expense and reduced by charge-offs. Total
write-offs charged against this reserve for the six months ended October 31,
1996 and 1995 were $670,686 and $467,414, respectively. See Footnote 2 to the
Interim Consolidated Financial Statements. For the six months ended October
31, 1996 and 1995, the Company recognized expenses of $606,172 and $386,835
respectively, for its doubtful lease receivable provisions. This provision
was recognized in order to maintain an adequate allowance, based upon
management's belief and historical experience, for anticipated delinquencies
and impairments from doubtful direct finance lease receivables outstanding as
of October 31, 1996 and 1995. Management is continuing its efforts in pursuit
of collections of all past due lease receivables.
FURTHER REFINEMENTS IN MARKETING STRATEGY AND EFFORTS TO REDUCE OPERATING
LOSSES
Management initiated certain measures to refine its marketing strategy
during the first six months of the current fiscal year 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. As discussed in Form 10-K for the fiscal year ended April 30, 1996 as
further updated below, these efforts are continuing.
During the fiscal year April 30, 1995, 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 on a co-operative basis.
As of November 30, 1996, 91 manufacturers have entered into co-operative
manufacturer agreements with the Company, of which 69 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 form 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 per month during
the fiscal year ended April 30, 1996, average new lease volume during the six
months ended October 31, 1996 was $1,090,000. Management attributes this
growth in new lease volume during the current fiscal year to these efforts.
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14
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 utilized
these services through the efforts of its in-house personnel. 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. 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. During the six
months ended October 31, 1996, the average new lease receivable further
increased to $5,788. 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.
In addition to continued efforts in the manufacturer Co-Operative Program,
the Company has initiated new efforts to refine its marketing strategy and
further increase lease volume. During the six months ended October 31, 1996
the Company has introduced industry specified mailings to manufacturers who
have been identified as having a potential for repeat business. Also during
the current period, the Company has introduced a special incentive program
aimed at specified branch offices to entice new and repeat business. The
Company has also decided to reconsider lease applications from leasing brokers
to increase volume. As of December 1, 1996, the Company has agreed to consider
leases originated from 24 brokers, and this number is expected to continue to
increase.
COMPARISON OF THREE MONTHS ENDED OCTOBER 31, 1996 AND 1995
REVENUES
Total revenues from direct financing leases for the three months ended
October 31, 1996 decreased 2.2% or $20,692 as compared to the three months
ended October 31, 1995. This reduction occurred as a result of changes in
composition of the outstanding lease portfolio during this period of growth.
Aggregate new lease receivables entered increased to $3,455,800 for the three
12
15
months ended October 31, 1996 as compared to $2,730,560 for the three months
ended October 31, 1995, as a result of leases generated through the
Company's cooperative efforts with equipment manufacturers. See "Further
Refinements in Marketing Strategy and Efforts to Reduce Operating Losses",
above. Unearned income from outstanding direct finance leases increased by
$325,802 during the three months ended October 31, 1996, after having increased
by $65,210 during the three months ended October 31, 1995.
INTEREST EXPENSE
For the three months ended October 31, 1996, interest expense increased
$96,833 or 8.0% as compared to the three months ended October 31, 1995.
Management attributes this increase to additional debt securities outstanding
and excess funds on hand from sale of debt securities awaiting investment in
new lease receivables, offset in part by the increase in interest income from
its investment in short-term U.S. government securities having maturities of
three months or less. Excess funds are maintained in highly liquid U.S.
Government securities of three month maturities, which currently yield less
interest income than the interest expense being paid on excess funds. Total
interest expense (disregarding interest income of $89,368 and $130,494 during
the three month periods ended October 31, 1996 and 1995, respectively) averaged
9.3% on average total borrowings (including accrued interest) of $60,564,297
and $57,676,403 for the three months ended October 31, 1996 and 1995,
respectively.
OTHER EXPENSES
Lease origination expense increased 6.5% or $17,619 for the three months
ended October 31, 1996 compared to the corresponding period ended a year
earlier. Lease origination expenses, including capitalized commissions paid
outside leasing brokers, were 8.9% of new financing lease receivables during
the three months ended October 31, 1996 as compared to 10.5% for the three
months ended October 31, 1995. This percentage decrease occurred because lease
origination expenses did not increase at the same rate as new lease volume. In
addition, $16,283 and $13,819 in commissions paid during the three months ended
October 31, 1996 and 1995, respectively, were capitalized and not charged to
expense.
General and administrative expenses decreased by $27,410 or 4.75% for the
three months ended October 31, 1996, as a result of reductions in the
amortization of solicitation and registration costs associated with the
Company's debt securities.
An allowance for doubtful direct finance lease receivables is maintained at
a level considered adequate to provide for estimated losses that will be
incurred in the collection of these receivables. The allowance is increased by
the provisions charged to operating expense and reduced by charge-offs. As a
result of the Company's extensive review of the collectibility of all past due
accounts during the three months ended October 31, 1996, write-offs of
delinquent lease receivables were $353,375, in comparison to $249,776 during
the three months ended October 31, 1995. The Company provided additional
provisions against these reserves in the amount of $290,568 and $196,639,
respectively, during the three month periods ended October 31, 1996 and 1995.
See Footnote 2 to the Interim Consolidated Financial Statements for a more
detailed discussion of the accounting for the provision for uncollectable
accounts.
13
16
CAPITAL RESOURCES AND LIQUIDITY
The Company has financed its growth to date primarily from proceeds of debt
securities offered to the public. The Company has not experienced any
difficulty in financing the purchase of equipment that it leases at current
levels.
Taking into consideration new business, the Company's cash and
unhypothecated leases on hand, anticipated renewal of a portion of the
Company's borrowings, anticipated sales of senior debt and other resources, it
is management's opinion that its cash will be sufficient to conduct its
business and meet its anticipated obligations during the current fiscal year.
No assurance can be given that the redemption of senior and subordinated
borrowings will not exceed the Company's expectation or that a substantial
portion of its offering of Senior Thrift Certificates or the offering by
Equipment Leasing Corporation of America of its Demand and Fixed Rate
Certificates will be sold. Decreased proceeds from debt securities during the
six months ended October 31, 1996 resulted from sales of the Company's Senior
Thrift Certificates and ELCOA's Demand and Fixed Rate Certificates being
suspended effective September 1, 1996, pending the declaration of effectiveness
of a new registration statement and post-effective amendment, respectively,
which is expected to occur during December, 1996.
In view of the Company's history of losses, the uncertainty with respect to
future interest rates to holders of its unsecured borrowings, the potential
redemption of senior and subordinated borrowings and the uncertainty as to the
sale of its offering of Senior Thrift Certificates, and of the sale of the
Demand and Fixed Rate Certificates, management is unable to estimate the
Company's future profitability and liquidity beyond the current fiscal year.
If the Company continues to have losses, it may have difficulty in servicing
its debt in future years. Management attributes its losses during the current
fiscal year to the size of its lease portfolio relative to its fixed costs,
including interest on outstanding debt. Management is currently exploring
various means of increasing its new leases entered and the outstanding lease
portfolio. See "Consolidated Statements of Cash Flows" on page 5 of this
report for an analysis of the sources and uses of cash by the Company during
the six month periods ended October 31, 1996 and 1995, respectively. See also
"Further Refinements in Marketing Strategy and Efforts to Reduce Operating
Losses" on page 11 of this report on Form 10-Q.
For a complete discussion of liquidity and capital resources for the fiscal
year ending April 30, 1996, reference is made to the "Capital Resources and
Liquidity" section of Form 10-K filed on July 26, 1996 amended on September 11,
1996 and December 20, 1996 for the fiscal year ended April 30, 1996.
14
17
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On July 30, 1996, September 11, 1996, and December 23, 1996 the Company
filed a new registration statement and amendments, respectively, to register
for sale to the public the principal amount of $40,000,000 in principal amount
of Senior Thrift Certificates. (SEC File #333-09145). The offering of these
debt securities is expected to be declared effective during December, 1996 or
January, 1997 after which the offering to the public will re-commence.
On July 30, 1996, September 11, 1996, and December 23, 1996 the company's
wholly-owned subsidiary, ELCOA, filed post-effective amendments to its
registration statement to register for sale to the public the remaining
$45,200,000 in principal amount of its Demand and Fixed Rate Certificates (SEC
File #333-02497). The offering of these debt securities is expected to be
declared effective during December, 1996 or January, 1997 after which the
offering to the public will re-commence.
The amendments to the registration statements noted above that were filed
on December 23, 1996 included restated consolidated financial statements for
the three fiscal years ended April 30, 1996. In this regard, the Company and
ELCOA filed amended annual reports on Form 10-K on December 23, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K
There were no reports on Form 8-K filed during the six month period ended
October 31, 1996.
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18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
December 20, 1996 WALNUT EQUIPMENT LEASING CO., INC.
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Date
/s/ William Shapiro
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William Shapiro, President and
Chief Financial Officer