1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended January 31, 1997
----------------
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
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WALNUT EQUIPMENT LEASING CO., INC.
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-1712443
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Suite 200, One Belmont Avenue, Bala Cynwyd, Pennsylvania 19004
--------------------------------------------------------------
(Address of Principal executive offices) (Zip Code)
(610) 668-0700
(800) 866-0809
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes / X / No / /
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of February 15, 1997: $1.00 par value common stock - 1,000
shares.
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WALNUT EQUIPMENT LEASING CO., INC.
INDEX
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Part I. Financial Information Page Number
- ------------------------------ -----------
Item 1. Financial Statements
Consolidated Balance Sheets; January 31, 1997
(unaudited) and April 30, 1996 1
Consolidated Statements of Operations;
Nine months ended January 31, 1997 and
1996 (unaudited) and Three months ended
January 31, 1997 and 1996 (unaudited) 3
Consolidated Statement of Changes in
Shareholders' Deficit; Nine months ended
January 31, 1997 (unaudited) 4
Consolidated Statements of Cash Flows;
Nine months ended January 31, 1997 and
1996 (unaudited) 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
3
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, 1997 April 30, 1996
--------------- --------------
(unaudited)
ASSETS
Direct finance Leases:
Aggregate future amounts receivable
under lease contracts $ 20,121,142 $ 18,423,816
Estimated residual value of equipment 1,534,573 1,704,915
Initial direct costs, net 571,612 474,059
Less:
Unearned income under lease contracts (4,463,210) ( 3,829,859)
Advance payments (596,780) (568,715)
------------- ------------
17,167,337 16,204,216
Allowance for doubtful lease receivables (2,112,375) (2,069,855)
------------- ------------
15,054,962 14,134,361
------------- ------------
Operating Leases:
Equipment at cost, less accumulated depreciation of
$21,583 and $14,413, respectively 20,548 19,420
Accounts receivable 5,869 1,112
Cash and cash equivalents 2,766,203 9,207,905
Other assets (Includes $618,293 paid to or receivable
from related parties at April 30, 1996) 1,119,333 1,132,587
------------- ------------
Total assets $ 18,966,915 $ 24,495,385
============= ============
SEE ACCOMPANYING NOTES
-1-
4
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
January 31, 1997 April 30, 1996
---------------- --------------
(unaudited)
LIABILITIES
Amounts payable to equipment suppliers $ 830,556 $ 802,956
Other accounts payable and accrued expenses 240,502 268,169
Demand, Fixed Rate and Money Market Thrift
Certificates (Includes $183,805 at
April 30, 1996 payable to related parties) 24,716,644 26,407,959
Senior Thrift Certificates (includes $812,773
at April 30, 1996 payable to related parties) 21,072,761 21,394,687
Subordinated Thrift Certificates
(Includes $397,136 at April 30, 1996 payable
to related parties) 5,372,147 5,523,118
Accrued interest 7,645,963 6,309,733
Subordinated debentures (Includes $4,000 at
April 30, 1996 payable to related parties) --- 4,000
----------- -----------
59,878,573 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 (41,013,714) (36,317,293)
----------- -----------
(40,911,658) (36,215,237)
----------- -----------
Total liabilities and shareholders' deficit $18,966,915 $24,495,385
=========== ===========
See accompanying notes
-2-
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WALNUT EQUIPMENT LEASING CO., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Nine Months Ended January 31, For The Three Months Ended January 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue:
Income earned under direct finance lease contracts $ 2,720,734 $ 2,821,202 $ 878,863 $ 903,546
Operating lease rentals 21,924 14,187 11,552 2,092
----------- ----------- ----------- -----------
Total revenue 2,742,658 2,835,389 890,415 905,638
Costs and expenses:
Interest Expense (net) 3,924,669 3,637,212 1,313,862 1,235,867
Lease origination expenses 955,403 829,932 306,393 288,103
General and administrative expenses 1,609,047 1,648,064 507,965 565,996
Provision for doubtful lease receivables 939,295 579,213 333,123 192,378
Depreciation of operating lease equipment 10,665 5,175 3,555 2,178
----------- ----------- ----------- -----------
Total costs and expenses 7,439,079 6,699,596 2,464,898 2,284,522
----------- ----------- ----------- -----------
Loss from operations before provision for
federal and state income taxes (4,696,421) (3,864,207) (1,574,483) (1,378,884)
Provision for ferderal and state income taxes
(See Note 2) --- --- --- ---
----------- ----------- ----------- -----------
Net Loss (See Note 2) $(4,696,421) $(3,864,207) $(1,574,483) $(1,378,884)
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES
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6
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 nine month
period ended January 31, 1997
(unaudited) --- --- --- --- --- (4,696,421) (4,696,421)
---- ---- ---- ------- -------- ------------ ------------
Balance, January 31, 1997 (unaudited) 281 $ 281 275 $ 275 $101,500 $(41,013,714) $(40,911,658)
==== ======= ==== ======= ======== ============ ============
SEE ACCOMPANYING NOTES
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WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended January 31,
1997 1996
----------- -----------
(unaudited) (unaudited)
OPERATING ACTIVITIES
- --------------------
Net Loss $(4,696,421) $(3,864,207)
Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:
Depreciation 10,665 5,175
Amortization of Deferred Debt Expenses 74,314 95,274
Provision for doubtful
Lease receivables 939,295 579,213
Effects of Changes
in other Operating Items:
Accrued Interest 1,336,230 848,819
Amounts Payable to Equipment Suppliers 27,600 113,354
Other (net), principally
increase in other Assets (88,543) (62,553)
----------- -----------
Net Cash Used in Operating Activities (2,396,860) (2,284,925)
----------- -----------
INVESTING ACTIVITIES
- --------------------
Excess of Cash Received Over Lease Income
Recorded 5,006,067 5,269,296
Increase (Decrease) in Advance Payments 28,065 (11,530)
Purchase of Equipment for Lease (6,910,762) (5,354,517)
----------- -----------
Net Cash Used in Investing Activities $(1,876,630) $ (96,751)
----------- -----------
SEE ACCOMPANYING NOTES
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WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
For the Nine Months Ended January 31,
1997 1996
----------- -----------
(unaudited) (unaudited)
FINANCING ACTIVITIES
- --------------------
Proceeds for Issuance of:
Demand, Fixed Rate and Money
Market Thrift Certificates $ 3,351,242 $ 7,168,313
Senior Thrift Certificates 2,424,200 4,508,455
Redemption of:
Demand, Fixed Rate, and Money
Market Thrift Certificates (5,042,557) (5,195,690)
Subordinated Thrift Certificates (150,971) (416,439)
Senior Thrift Certificates (2,746,126) (2,733,260)
Subordinated Debentures (4,000) (1,858)
----------- -----------
Net Cash Provided By (used in)
Financing Activities (2,168,212) 3,329,521
----------- -----------
Increase (Decrease) in Cash
and Cash Equivalents (6,441,702) 947,845
Cash and Cash Equivalents,
Beginning of Year 9,207,905 8,957,949
----------- -----------
Cash and Cash Equivalents,
End of Year $ 2,766,203 $ 9,905,794
----------- -----------
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 nine month periods ended January 31, 1997 and
1996, 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 $59,375 and
$41,286 for the nine months ended January 31, 1997 and 1996, 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. Total write-offs
charged against this reserve for the nine months ended January 31, 1997 and
1996 were $896,775 and $660,908 respectively, while the Company increased
these reserves by charges of $939,295 and $579,213, 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 finance 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 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 nine months ended January 31, 1997.
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WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED JANUARY 31, 1997 AND 1996
REVENUES FROM LEASE CONTRACTS
Total revenues from direct finance leases for the nine months ended
January 31, 1997 decreased 3.6% or $100,468 as compared to the nine months
ended January 31, 1996. This decrease occurred even though the amount of
outstanding lease receivables increased during the nine months ended
Janaury 31, 1997. Management attributes the decrease in total revenues to
a change in the composition of the aging of the outstanding lease
portfolio. See the paragraph below for a further explanation of the
variances in the rate of 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 $2,293,949 or 31.4% to
$9,591,660 for the nine months ended January 31, 1997 from $7,297,711 for
the nine months ended January 31, 1996. Management attributes this
increase to its marketing strategy that emphasizes direct mail solicitation
of its leasing programs through manufacturers and other identified groups
of equipment vendors. The Company expects this increase to continue
throughout the fiscal year and 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 nine months ended January 31, 1997, net of
initial direct costs, increased by $535,798 in comparison to a decrease of
$261,115 for the nine months ended January 31, 1996. During the nine month
periods ended January 31, 1997 and 1996, the gross rents charged over the
"net investment" in direct finance leases were 146% and 144%, respectively.
The recognition of direct finance lease income reflects the composite aging
of the underlying leases in the portfolio, as well as application of FAS
No. 91, to outstanding leases after May 1, 1988 which affects leases
originated after April 30, 1988, and changes the method used to recognize
income and expense items. FAS No. 91 does not change the total income and
expenses ultimately to be recognized from each transaction. Further
increases in new lease volume are expected to increase the levels of
unearned income in the future. 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 recognizd 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, the Company has contacted
equipment manufacturers with the expectation that it would 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, and target other
homogeneous groups of equipment sellers with direct mail solicitations.
See "Further Refinements in Marketing Strategy and Efforts to Reduce
Operating Losses", below.
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12
The limited use of the operating lease equipment program resulted in
$11,977 of equipment being purchased for operating leases for the nine
months ended January 31, 1997, and $23,133 for the nine months ended
January 31, 1996. Operating lease rental income increased by $7,737 in the
nine months ended January 31, 1997 as compared to the nine months ended
January 31, 1996.
INTEREST EXPENSE
For the nine months ended January 31, 1997, interest expense increased
$287,457 or 7.9% as compared to the nine months ended January 31, 1996.
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, and a decrease in interest income from
its investment in short-term U.S. government securities having three month
maturities. Excess funds are maintained in highly liquid U.S. Government
Securities, which currently yield less interest income than the interest
expense being paid on debt securities from which the excess funds were
provided. Total interest expense (disregarding interest income of $237,750
and $374,585, respectively, during the nine month periods ended January 31,
1997 and 1996) averaged 9.37% on average total borrowings (including
accrued interest) of $59,223,506 for the nine months ended January 31, 1997
as compared to 9.41% on average total borrowings (including accrued
interest) of $56,837,595 for the nine months ended January 31, 1996. The
interest rate on three month U.S. Treasury Bills was 5.0% at January 31,
1997 and 1996.
OTHER EXPENSES
Lease origination expenses increased 15.1% or $125,471 for the nine
months ended January 31, 1997, compared to the corresponding period ended a
year earlier, as a result of increased costs associated with the Company's
direct mail marketing program and an additional employee hired to supervise
the Company's advertising department. Lease origination expenses,
including capitalized commissions paid, were 10.6% of new direct financing
lease receivables during the nine months ended January 31, 1997 as compared
to 11.9% for the nine months ended January 31, 1996. The decreased
percentage in the period ended January 31, 1997 is primarily the result of
relatively fixed costs in a period of increasing lease volume. The
Company's efforts in increasing new lease volume are continuing, and at the
same time the Company is attempting to minimize these costs whenever
possible. See "Further Refinements in Marketing Strategy and Efforts to
Reduce Operating Losses". During the nine months ended January 31, 1997
and 1996, commissions of $59,375 and $41,286, respectively, were paid and
capitalized as initial direct costs. 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 further decrease the overall percentage
of total lease origination costs in comparison to new lease volume in the
future.
General and administrative expenses decreased by $39,017 or 2.4% for
the nine months ended January 31, 1997, as compared to the corresponding
period in 1996, due in part to expenses associated with the sale of debt
securities by the Company and ELCOA which were suspended from September 1,
1996 to January 31, 1997. See "Other Information" below.
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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 nine months ended January 31, 1997 and 1996 were $896,775 and $660,908,
respectively. See Footnote 2 to the Interim Consolidated Financial
Statements. For the nine months ended January 31, 1997 and 1996, the
Company recognized expenses of $939,295 and $579,213 respectively, for its
doubtful lease receivable provisions. These provisions were recognized in
order to maintain an adequate allowance, based upon management's belief and
historical experience, for anticipated delinquencies and impairments from
doubtful direct finance lease receivables outstanding as of January 31,
1997 and 1996. During the nine months ended January 31, 1997, the company
re-analyzed its method of calculating its allowance for doubtful lease
receivables which resulted in the restatement of the allowance for the
previous five years in addition to increasing the provision for the current
nine month period. In this regard, reference is made to Footnote 12 to the
Consolidated Financial Statements for the three fiscal years ended April
30, 1996, included in Form 10-K/A as filed December 23, 1996. Management
is continuing in its efforts in pursuit of collections of all past due
lease receivables.
FURTHER REFINEMENTS IN MARKETING STRATEGY AND EFFORTS TO REDUCE OPERATING
LOSSES
Management has continued to refine its marketing strategy during the
first nine months of the current fiscal year that it believes resulted in
an increase in new leases originated during the period and 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. As of November 30, 1996, 91 manufacturers had
entered into co-operative manufacturer agreements with the Company, of
which 69 have adopted the private label lease program. 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. During the three months ended
January 31, 1997, the Company reassessed its level of success with the
manufacturers engaged in this program. Mailings were suspended to those
manufacturers where no new leases had been generated as a result of this
program. As of March 14, 1997, the Company continues to solicit
approximately 35 of these manufacturers on a cooperative basis.
Beginning in December, 1996, the Company further refined its marketing
program by utilizing CD-ROM and other search facilities to identify
equipment sellers and branch affiliations without the necessity of
contacting the manufacturer before initiating a direct mail program. A
series of nine different marketing brochures are sent on a bi-weekly basis
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14
to target groups in order to solicit indications of interest for leasing
services that the Company provides. Equipment sellers are segregated into
homogeneous groups, of which as of March 14, 1997, there were 42 groups
comprising approximately 35,000 target vendors. Increased mailing costs
during the three months ended January 31, 1997 can be attributed to the
increased lease origination costs during this period. The Company notes
that as new lease originations increase, the percentage of these marketing
costs to total new leases originated have decreased. See "Other Expenses"
as disclosed above.
The Company estimates that the time delay between the first
solicitation of either a targeted group or 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 nine months ended January 31, 1997, the
average new lease receivable further increased to $5,965. This growth in
the average size of new leases is directly attributable to the size of new
leases being generated from the efforts of solicitation efforts with
equipment vendors and 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 continue 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 will continue to refine its marketing strategy to
further increase lease volume. During the three months ended January 31,
1997 the Company has introduced industry specified mailings to
manufacturers who have been identified as having a potential for repeat
business. Also during that 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 on a selective basis to increase volume.
COMPARISON OF THREE MONTHS ENDED JANUARY 31, 1997 AND 1996
REVENUES
Total revenues from direct financing leases for the three months ended
January 31, 1997 decreased 2.7% or $24,683 as compared to the three months
ended January 31, 1996. This decrease 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 $3,051,635 or
47.7% for the three months ended January 31, 1997 as compared to $2,066,380
for the three months ended January 31, 1996 as a result of leases generated
through the Company's marketing efforts described above. See "Further
Refinements in Marketing Strategy". Deferred income from outstanding
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direct finance leases increased by $204,194 during the three months ended
January 31, 1997, after having decreased by $214,946 during the three
months ended January 31, 1996.
INTEREST EXPENSE
For the three months ended January 31, 1997, interest expense
increased $77,995 or 6.3% as compared to the three months ended January 31,
1996. Management attributes this increase to additional debt securities
outstanding and the decrease in interest income from its investment in
short-term U.S. government securities having three month maturities.
Excess funds are maintained in highly liquid U.S. Government securities of
three month maturities, which currently yield less interest income than the
interest expense being paid on excess funds. Total interest expense
(disregarding interest income of $50,008 and $124,708 during the three
month periods ended January 31, 1997 and 1996, respectively) averaged 9.2%
on average total borrowings (including accrued interest) of $59,580,511 for
the three months ended January 31, 1997 as compared to 9.3% on average
total borrowings (including accrued interest) of $58,681,206 for the three
months ended January 31, 1996.
OTHER EXPENSES
Lease origination expense increased 6.3% or $18,290 for the three
months ended January 31, 1997 compared to the corresponding period ended a
year earlier. Lease origination expenses, including capitalized
commissions paid outside leasing brokers, were 10.9% of new financing lease
receivables during the three months ended January 31, 1997 as compared to
14.4% for the three months ended January 31, 1996. This increase in costs
resulted from the costs associated with the Company's direct mail efforts
in cooperation with equipment manufacturers and other targeted groups of
equipment vendors during the three months ended January 31, 1997. The
percentage decrease in lease origination expenses as a percentage of newly
originated finance leases is the result of relatively fixed costs in a
period of growth of the outstanding lease portfolio. In addition, $24,580
and $9,495 in commissions were paid during the three months ended January
31, 1997 and 1996, respectively, and were capitalized as initial direct
costs.
General and administrative expenses decreased by $58,031 or 10.3% for
the three months ended January 31, 1997, compared to the corresponding
period in 1996, due to a decrease in costs associated with the solicitation
of certificates. Sales of certificates were suspended from September 1,
1996 to January 31, 1997. See "Other Information" below.
An allowance for doubtful direct finance lease receivables is
maintained at a level considered adequate to provide for estimated losses
that will be incurred in the collection of these receivables. The
allowance is increased by the provisions charged to operating expense and
reduced by charge-offs. As a result of the Company's extensive review of
the collectibility of all past due accounts which continued during the
three months ended January 31, 1997, write-offs of delinquent lease
receivables were $226,089, in comparison to $193,494 during the three
months ended January 31, 1996. The Company provided additional provisions
against these reserves in the amount of $333,123 and $192,378,
respectively, during the three month periods ended January 31, 1997 and
13
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1996. See Footnote 2 to the Interim Consolidated Financial Statements for
a more detailed discussion of the accounting for the provision for
uncollectable accounts.
CAPITAL RESOURCES AND LIQUIDITY
The Company has financed its growth to date primarily from proceeds of
3debt securities offered to the public. The Company has not experienced
any difficulty in financing the purchase of equipment that it leases at
current levels.
Taking into consideration new business, the Company's cash and
unhypothecated leases on hand, cash available from sale of leases to ELCOA,
anticipated renewal of a portion of the Company's borrowings, anticipated
sales of senior debt and other resources, it is management's opinion that
its cash will be sufficient to conduct its business and meet its
anticipated obligations during the current fiscal year. 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 nine months ended
January 31, 1997 resulted from sales of the Company's Senior Thrift
Certificates and ELCOA's Demand and Fixed Rate Certificates being suspended
from September 1, 1996 until January 31, 1997 pending the declaration of
effectiveness of a new registration statement and post-effective amendment,
respectively. These Registration Statements were declared effective on
January 31, 1997. See "Other Information" below.
In view of the Company's history of losses, the uncertainty with
respect to future interest rates to holders of its unsecured borrowings,
the potential redemption of senior and subordinated borrowings and the
uncertainty as to the sale of its offering of Senior Thrift Certificates,
and of the sale of the Demand and Fixed Rate Certificates, management is
unable to estimate the Company's future profitability and liquidity beyond
the current fiscal year. If the Company continues to have losses, it may
have difficulty in servicing its debt in future years. Management
attributes its losses during the current fiscal year to the size of its
lease portfolio relative to its fixed costs, including interest on
outstanding debt. Management is currently exploring various means of
increasing its new leases entered and the outstanding lease portfolio. See
"Consolidated Statements of Cash Flows" on page 5 of this report for an
analysis of the sources and uses of cash by the Company during the nine
month periods ended January 31, 1997 and 1996, 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 and
amended on September 11, 1996 and December 23, 1996 for the fiscal year
ended April 30, 1996.
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PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On July 30, 1996, September 11, 1996, December 23, 1996, January 21, 1997,
and January 30, 1997 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 was declared effective
on January 31, 1997 after which the offering to the public re-commenced.
On July 30, 1996, September 1, 1996, December 23, 1996, January 21, 1997,
and January 30, 1997 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 was declared effective January 31, 1997 after which the offering to
the public re-commenced.
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/A 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 three month period ended
January 31, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
March 17, 1997 WALNUT EQUIPMENT LEASING CO., INC.
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Date
/s/ William Shapiro
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William Shapiro, President and
Chief Financial Officer