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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended Commission file number
APRIL 30, 1997 2-65101
WALNUT EQUIPMENT LEASING CO., INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-1712443
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
SUITE 200, ONE BELMONT AVENUE, BALA CYNWYD, PA 19004
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 668-0700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes / X / No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / X /
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference
to the price at which the stock was sold, or the average bid and asked prices
of such stock, as of a specified date within 60 days prior to the date of
filing.
No voting stock is held by non-affiliates of the Registrant.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities Act
of 1934 subsequent to the distribution of securities under a plan confirmed by
a court. / X / Yes / / No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of July 31, 1997, there were 1,000 shares of the Registrant's common
stock, $1.00 par value, outstanding. The Registrant has no other
classes of common stock.
DOCUMENTS INCORPORATED BY REFERENCE - NONE
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PART I
Item 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Walnut Equipment Leasing Co., Inc. (the "Company" or "Walnut"), which was
incorporated in Pennsylvania in 1969, commenced business in 1960 through its
predecessor and sole common stockholder, Walnut Associates, Inc., a Delaware
Corporation. It primarily engages in the business of acquiring general
commercial equipment for lease throughout the United States. Effective April
29, 1977, the Company changed the situs of incorporation to the State of
Delaware. The Company conducts its operations principally through
wholly-owned subsidiaries in 48 states. The term "Company" refers
collectively to the present Delaware corporation, its predecessors and its
wholly-owned subsidiaries, unless the context otherwise indicates. On May 6,
1986, the Company formed a subsidiary, Equipment Leasing Corporation of
America ("ELCOA") which the Company capitalized on May 23, 1986 with equipment
costing $1,000,000 and related direct financing leases, in exchange for all of
that subsidiary's voting common stock. ELCOA is operated as a separate
entity, with its own Board of Directors, a majority of the members of which
are independent of the Company.
As a result of the inability of ELCOA and Walnut to meet requests for
redemptions of their respective debt securities on or after July 7, 1997, each
company filed voluntary petitions for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in the Eastern District of Pennsylvania on August 8,
1997. The Company and ELCOA are managing their businesses as
debtors-in-possession subject to the control and supervision of the Bankruptcy
Court. See "Item 1. Business-Method of Financing", "Item 3. Legal
Proceedings", and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Form 10-K.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company conducts business in only one industry segment, the leasing of
commercial equipment. See the Consolidated Financial Statements included in
Item 8 to this report.
The Company's principal business is the acquisition of commercial and
industrial equipment for business use which it leases under full-payout direct
financing leases to what it considers credit-worthy lessees. See "Marketing"
and "Credit Policy." The Company services the needs of manufacturers and
distributors of small commercial equipment by offering them the opportunity to
use leasing as a sales tool. See "Marketing." The Company acquires the
equipment only after leases have been consummated. The Company ordinarily
writes leases for periods of one to five years for equipment costing $750 or
more, but which does not usually exceed $6,000. The lease agreements entered
into between the Company and the lessees contemplate the payment of funds
sufficient to recover the Company's investment and to provide a profit over
the terms of the leases. The Company recognizes as income over the entire
term of the leases the difference between the total rents scheduled to be
collected along with the estimated residual value of the equipment at the end
of the lease term, less the cost of the equipment. The Company recognizes
income from each lease over its respective term, even if payments are
delinquent for any number of months. The Company sets aside from its income a
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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) 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, 1997, the Company entered into 2,210 direct finance
leases which had an average initial term of approximately 36 months,
representing aggregate contractual lease receivables of $13,063,415. Of these,
a technical event of default in the terms of the lease contract occurred in 610
leases having an aggregate contractual lease receivable of $3,114,582, of which
128 having an aggregate contractual lease receivable of $661,304 (included in
the 610 leases) were serious enough to require the Company to declare the
entire unpaid balance of rentals due and payable immediately. A technical
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default occurs when lease payments are more than fifteen days in arrears. This
problem, while recurring, is to be expected in the ordinary course of business
under the contractual method. Management has recently taken steps which may
decrease the percentage of lease applications which meet stricter credit
criteria which is intended to reduce the likelihood of future delinquencies
from new leases. See "Marketing", "Credit Policy," and "Analysis of
Delinquencies."
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, 1997, the net book
value of equipment subject to operating leases was $17,303. As of that date,
the Company had contracts for operating leases in the aggregate remaining
balance of $5,307 all of which are due during the fiscal year ended April 30,
1998.
The Company (including ELCOA), as of April 30, 1997, owned 6,348 direct
financing leases with an aggregate balance of $20,917,123, on a consolidated
basis, with an average lease receivable balance of $3,295. Of these leases,
606 had balances between $6,000 and $9,999 with an aggregate balance of
$4,475,308, and 258 had balances in excess of $10,000 with an aggregate balance
of $4,437,004. Leases over $6,000 accounted for 13.6% of the total number of
leases outstanding and 42.6% of the total dollar amount of lease receivables
outstanding at April 30, 1997. On occasion, the Company enters into more than
one lease agreement with a particular lessee. As of April 30, 1997, the three
largest lessees had balances of $142,150, $94,293, and $61,146. Accordingly,
no single lessee represents over .7 percent of the outstanding lease portfolio.
As of April 30, 1997, ELCOA owned 5,802 direct financing leases which had an
aggregate lease receivable balance of $18,409,854, and an average lease
receivable balance of $3,173. Of ELCOA's leases, 492 had balances between
$6,000 and $9,999 with an aggregate balance of $3,618,625 and 208 had balances
in excess of $10,000 with an aggregate balance of $3,544,342.
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". 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
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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 obtaining adequate financing for the cost of newly
acquired equipment. See "Methods of Financing."
During the three fiscal years ended April 30, 1997, 1996, and 1995, the
gross rents charged over the "net investment" in direct finance leases were
147%, 146% and 145%, respectively. Gross rents are calculated as the aggregate
rentals contracted to be received over the terms of all leases entered during
the respective years, and are not on an annual basis. Factors considered by
the Company in determining the rents to be charged are the net equipment cost,
marketing expenses, credit investigation, document processing, invoicing and
collections, potential bad debt write-offs, the Company's cost of funds, term
of the lease, and a profit margin.
The Company's leasing activities are not generally oriented towards
creating tax benefits, and therefore changes in recent tax legislation since
1986 have only a marginal benefit to the Company. The Company believes that
some of the Company's competitors lost the benefit of using excess tax
deductions and credits generated by their leasing operations to offset income
from other sources, which in the past allowed them to offer lower leasing rates
than the Company. To the extent the changes mentioned above reduced the
benefits of equipment ownership, the Company believes that businesses might be
more inclined to lease because deductibility of rental payments by the lessees
remain unaffected, while purchases no longer provide certain tax advantages.
Management believes that changes under the Tax Reform Act of 1986, as amended,
have had no material impact on the Company's operations.
MARKETING
Since its inception, the Company has concentrated on seeking lessees
desiring to lease equipment costing $6,000 or less under direct finance leases,
because it believes that there is less competition for small leases. In
addition, the Company is able to spread risk of loss from defaulted leases over
a greater number of leases. It leases items such as office equipment, business
machines, graphic arts equipment, scientific and medical instrumentation,
material handling equipment, microfilm equipment, automobile test equipment,
cash registers, restaurant and food-service equipment, and other business,
industrial and commercial equipment and does not concentrate in any one type.
The Company estimates the total cost of equipment purchased for lease
comprising 5% or more of the total purchases during the twelve months ended
April 30, 1997, 1996, and 1995 as follows:
April 30, April 30, April 30,
INDUSTRY 1997 1996 1995
--------- --------- ---------
Food/Hospitality Service 39% 45% 39%
Industrial Equipment 22% 20% 21%
Auto After Market and Test Equipment 17% 9% 13%
Office Machines and Copiers 8% 11% 8%
Computers and Peripheral Hardware --- 5% 7%
Audio Visual and Communications --- --- 5%
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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 efforts to reach salesmen, dealers,
distributors and branch offices of companies selling equipment similar to that
described above for lease to appropriate lessees. The Company had previously
used regional offices, direct mail programs, telemarketing, and cooperative
mailing efforts with certain equipment manufacturers, all of which have been
phased out due to poor results in relation to the costs associated with these
efforts. The Company believes that it must further modify its marketing
efforts to attract an increased number of dealers and distributors (i.e.
"vendors") to 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 while
at the same time reducing the costs of lease origination in comparison to the
volume of leases to be generated. See "Further Refinements in Marketing
Strategy and Efforts to Reduce Operating Losses". The Company currently
actively conducts business on a monthly basis through approximately 647
equipment vendors, distributors, and branch outlets of manufacturers.
"Active", as defined by the company, is any vendor who has generated at least
one lease during the eleven months ended April 30, 1997. None supply more than
5% of the Company's new business.
The following table reflects the aggregate dollar amount of rentals
represented by new leases and the number of such leases written during each of
the last three years, on a quarterly basis.
Fiscal Years Ended April 30,
1997 1996 1995
----------- ----------- -----------
Aggregate Lease Rentals $13,063,415 $10,025,786 $10,189,624
Number of New Leases 2,210 1,880 2,170
Average Amount per New Lease $5,911 $5,333 $4,696
New Leases
Entered Quarterly
- -----------------
First Quarter $ 3,084,225 $ 2,500,771 $ 2,824,902
Second Quarter 3,455,800 2,730,560 2,371,098
Third Quarter 3,051,635 2,066,380 2,596,150
Fourth Quarter 3,471,755 2,728,075 2,397,474
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
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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 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, 1995 and 1996. 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 were intended to further increase the Company's
marketing efforts, but have been recently phased out in light of the high cost
of direct mail (comprised of printing expenses and bulk mail postage). The
Company presently relies on electronic commerce (i.e. broadcast fax) to
maintain contacts with its lists of manufacturer, vendor, and dealer prospects
in order to increase awareness of its programs. Management anticipates that as
other leasing companies raise their minimum transaction size, the Company
expects 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 26% over the three fiscal years ended April 30, 1997,
of which approximately 48% of this increase is related to the fiscal year ended
April 30, 1997.
The Company markets its leases throughout the United States. The following
is a breakdown as of April 30, 1997 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 $22,882,208 in original equipment
cost is owned by ELCOA, and managed by the Company. See "BUSINESS - Methods of
Financing."
Amount %
----------- ------
New England $ 2,559,192 10.14
Mid Atlantic 6,874,988 27.24
Southeast 4,449,561 17.63
Midwest 3,493,019 13.84
South 2,400,189 9.51
Rocky Mountain 600,678 2.38
West Coast 1,690,985 6.70
Southwest 3,169,965 12.56
----------- ------
$25,238,577 100.0%
=========== ======
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
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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 2,200 leases to all types
and sizes of businesses during the fiscal year ended April 30, 1997, 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.
Beginning in July, 1997, the Company implemented the utilization of a
scoring system based on the "Fair Isaac" method utilized in the credit industry
to eliminate those applicants whose credit score is below a certain minimum
threshold. While utilization of scoring is expected to initially increase the
percentage of rejected applications from new leases, it is expected that the
rate of new delinquencies as a result of implementing a scoring system may
decrease in the future.
As of August 11, 1997, the Company employed 6 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
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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, 1997, 1996 and 1995, the allowance for doubtful accounts was increased
annually by provisions in the amounts of $1,165,905, $1,045,089, and
$1,463,752, respectively. The amounts written off in each of the three fiscal
years ended April 30, 1997, 1996 and 1995 were $1,103,685, $940,243, and
$2,111,032, or 5.61%, 5.05%, and 10.61% of average gross lease receivables,
respectively. 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 fiscal year ended April 30, 1996 in comparison
to the prior year. The Company aggressively takes legal action with respect to
each delinquent lease irrespective of the amount at controversy and believes
this approach is an important part of the collection effort. Obligations are
not written off until there is either an adverse court decision, bankruptcy or
settlement, and local counsel has determined that the obligation cannot be
recovered. As a result, delinquent receivable balances appear higher than
industry averages because of the Company's decision to report them on a
contractual basis, and to pursue delinquent lessees until all collection
efforts have been completely exhausted. Once collection efforts are
discontinued, any likelihood of recovering the equipment, to the extent not
previously repossessed, is considered remote.
The Company makes a practice of assessing and collecting late charges on
all delinquent accounts, if possible. Late charges are assessed on all
delinquent accounts at the rate of 5% monthly of the delinquent past due
payments. Late charges collected and included in revenue for the fiscal years
ended April 30, 1997, 1996 and 1995 were approximately $407,000, $411,000, and
$418,000, respectively. Amounts collected and remitted by the law firm
handling collections from delinquent lease receivables were $1,632,000,
$1,508,000 and $1,379,000 during the fiscal years ended April 30, 1997, 1996
and 1995, respectively. 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 nature of the types of lessees
that the Company accepts for lease. 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
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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, 1997 may be greater than those
previously written-off. Management attributes easy access to credit cards
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 overextension of credit to 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 easy credit policies during the past three fiscal years. The
utilization of credit scoring new lease applications is expected to reduce the
percentage of new delinquencies in the future. See "Credit Policy". 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. As a result of the Company's shift in marketing direction
towards more technical equipment being leased to larger companies, and a shift
away from smaller, retail businesses, management believes that it can lower its
delinquency rates. See "FURTHER REFINEMENTS IN MARKETING STRATEGY AND EFFORTS
TO REDUCE OPERATING LOSSES" on page 23.
The allowance for doubtful accounts was 10.2% of total finance lease
receivables at April 30, 1997 which management believes is adequate for future
write-offs on the Company's aggregate lease receivables as of April 30, 1997.
See Note 1 to the Consolidated Financial Statements. Charge-offs as a
percentage of average aggregate future lease receivables were 5.61%, 5.05%,
10.61%, 4.20%, and 4.37% for the fiscal years ended April 30, 1997, 1996, 1995,
1994 and 1993, respectively. 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
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the type of leases previously entered into to be a contributing factor to the
increased writeoffs.
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. 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, 1997 and 1996, approximately
$4,003,241 and $3,859,127, respectively, of direct finance lease receivables
based on a strict total contractual basis of the aggregate balance remaining of
each lease (not based upon recency of last payment) were 12 or more months past
due. During the fiscal years ended April 30, 1997 and 1996, net collections
from cases referred to local attorneys for suit were approximately $1,632,000
and $1,508,000, 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,
1997, the Company maintained an inventory of repossessed equipment in the
amount of $81,134, and established reserves of $70,568 to reduce the carrying
value to the equipment's estimated, realizable forced sale value.
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ANALYSIS OF DELINQUENCIES, continued
1997 1996 1995
$ % $ % $ %
-------------------- ------------------- -------------------
Aggregate Future Lease Receivables $20,917,123 100.0 $18,423,816 100.0 $18,829,268 100.0
Current 13,362,057 64.0 11,219,452 60.9 11,763,768 62.4
Past Due - Two Monthly Payments 1,042,997 5.0 973,864 5.3 1,178,983 6.3
Past Due - Three Monthly Payments 507,185 2.4 409,693 2.2 485,901 2.6
Past Due - Four or More Monthly Payments 6,004,884 28.6 5,820,807 31.6 5,400,616 28.7
Aggregate Future Lease
Receivables - Twelve or More
Months Past Due (1) 4,003,241 19.1 3,859,127 20.9 3,723,593 19.8
Aggregate Future Lease
Receivables - Twenty-Four
or More Months Past Due (2) 2,208,844 10.6 2,466,333 13.4 2,394,188 12.7
(1) Leases contractually past due
(2) Leases past due by recency of payment
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ANALYSIS OF BAD DEBT WRITE-OFFS
Fiscal Years Ended April 30,
1997 1996 1995
----------- ----------- -----------
Aggregate Future
Lease Receivables $20,917,123 $18,423,816 $18,829,268
Provisions for
Doubtful Accounts 1,165,905 1,045,089 1,463,752
Gross Charge-Offs 1,123,516 948,842 2,118,607
Gross Recoveries 19,831 8,599 7,575
Net Charge-Offs 1,103,685 940,243 2,111,032
Average Outstanding Future
Lease Receivables 19,670,470 18,626,542 19,904,593
Percent of Net Charge-Offs
to Average Aggregate Lease
Receivables 5.61% 5.05% 10.61%
Allowance for Doubtful
Lease Receivables 2,132,075 2,069,855 1,965,009
Percent of Allowance for
Doubtful Lease Receivables
to Aggregate Future Lease
Receivables 10.2% 11.2% 10.4%
Percent of Allowance for
Doubtful Lease Receivables
to Aggregate Future Lease
Receivables Past Due Four or
More Monthly Payments 35.5% 35.6% 36.4%
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.
As noted in the Statements of Cash Flows on page 34, the proceeds from
issuance of Demand and Fixed Rate Certificates issued by ELCOA and Senior
Thrift Certificates offered by the Company decreased from $16,142,574 during
the fiscal year ended April 30, 1996 to $10,333,474 during the fiscal year
ended April 30, 1997. Sales of ELCOA's debt securities were suspended during
April, 1997 and sales of the Company's Senior Thrift Certificates were
suspended on July 3, 1997. As a result of the requests by certificate holders
for redemptions which exceeded the Company's cash and cash equivalents, the
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Company was unable to meet the requests for redemption of its Senior Thrift
Certificates and Subordinated Thrift Certificates beginning July 7, 1997 and
thereafter, and ELCOA was unable to meet requests for redemption of its Demand,
Fixed Rate, and Money Market Thrift Certificates on that date. Management has
reviewed the Trust Indentures covering the registered offerings of these debt
securities and has concluded that failure to effect such redemptions may
constitute grounds for default by the Company under the Trust Indenture. On
August 8, 1997, the Company and ELCOA filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. The Company and
ELCOA are managing their business as debtors-in-possession subject to the
supervision and control of the U.S. Bankruptcy Court for the Eastern District
of Pennsylvania. Pending resolution of these proceedings, there will be no
payments of interest or principal on outstanding debt securities. See Items 3
and 7 to this Form 10-K. As a result, the Company (and ELCOA) must generate
additional cash from sources other than the sale of debt securities. In the
future, the Company expects to fund its operating expenses from cash flow from
existing outstanding leases and sales of leases to third party asset
securitizers. The Company has been negotiating with other financial
institutions that have expressed an interest in purchasing pools of leases from
the Company by discounting the anticipated lease receivables and residual
values at a rate which would generate additional income and cash flows that
would be available for purchases of additional equipment for lease. To date,
the Company has not consummated any such sales, although negotiations are
continuing.
During the three fiscal years ended April 30, 1997, the Company was
approached from time-to-time 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, 1997, the Company earned
$36,780 from collections of these lease receivables, which had 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
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15
commissions to equipment vendors, for the three fiscal years ended April 30,
1997. Management is reassessing the cost of originating new leases in order to
charge ELCOA for its current out of pocket expenses. 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
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. For the three fiscal years ended April
30, 1997, the Company received 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. Management is
reassessing the cost of servicing the present portfolio and may need to
increase the service fee in light of the current number of leases outstanding
and the current out-of-pocket costs to the servicer. All rentals received on
behalf of ELCOA are segregated, processed and deposited into an escrow account
pursuant to a written agreement.
Historically, although the Company's rental income from its lessees is
fixed at the inception of each lease, its net 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
increase, the Company must pay any such increased cost without having the
ability to increase its rental charges on existing leases.
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 may 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 sales
of leases must provide the additional funding for the purchase of equipment.
The Company anticipates that such sales under a lease securitization program
may commence during the fiscal year ending April 30, 1998, although no such
sales have occurred to date.
EMPLOYEES
As of April 30, 1997, the Company employed 60 full and part-time employees.
Subsequent to the filing of a petition for reorganization under Chapter 11 of
the U.S. Bankruptcy Code, as of August 11, 1997, the Company reduced the number
of employees to 40.
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DATA PROCESSING
Almost all of the Company's bookkeeping or recordkeeping is performed by
electronic data processing utilizing programs developed and owned by Financial
Data, Inc., a subsidiary of Walnut Associates, Inc. Walnut Associates Inc. is
an affiliate of ELCOA and also the owner of all of the outstanding stock of the
Company. See Footnote 10 to the Consolidated Financial Statements. The
programs are designed to permit the growth of the Company's business without a
significant increase in bookkeeping or recordkeeping costs. In the opinion of
management, the Company maintains sufficient duplicate records to safeguard its
information.
COMPETITION
Equipment leasing and related businesses are highly competitive, and
competition may increase. A number of concerns are engaged in the same types
of business as the Company, including: (1) finance divisions, affiliates or
subsidiaries of suppliers which sell products leased by the Company; (2) banks
or their affiliates; (3) other leasing and finance companies, including ELCOA;
and (4) independently-formed partnerships operated for the specific purpose of
leasing equipment. Many of these organizations have greater financial or other
resources than the Company and, therefore, may be able to obtain funds on terms
more favorable than those available to the Company. This may permit such
organizations to offer lease terms which the Company could not match. Also,
such organizations may have competitive advantages including their affiliation
with vendors and their nationwide leasing organizations, or their ability to
offer "floor planning" programs which is the financing of an equipment vendor's
unsold inventory.
The Company seeks to compete primarily on the basis of service (by
providing simplified documents, prompt credit decisions, and by accepting a
multitude of types of equipment for lease) to a particular segment of the
industry, (i.e. small-ticket items), and by making its services available
nationwide (both urban and rural). It does not limit itself geographically to
regional sales offices as do some of its competitors, but extends its services
through use of toll-free telephone lines, facsimile transmission, and the mail.
The Company cannot compete for larger ticket items where rate is a factor
because of its higher cost of funds, and therefore must limit itself to the
small-ticket market.
Item 2. PROPERTIES
The Company subleases from Walnut Associates, Inc. approximately 10,150
rentable square feet at its headquarters located at Suite 200, One Belmont
Avenue, Bala Cynwyd, PA. Walnut Associates, Inc. sublets 1400 square feet to
Welco Securities, Inc. (Suite 105), and 1,400 to the law offices of William
Shapiro, Esq., P.C. (Suite 202), all of which are affiliates of the Company.
Effective September 1, 1997, the lease with Welco Securities will be
terminated. Future minimum rental payments from the Company are anticipated
to be due as follows:
15
17
Fiscal Year Ending
April 30, Amount
------------------ ----------
1998 207,784
1999 214,949
2000 222,115
2001 229,280
2002 and beyond 434,873
----------
Total $1,309,001
==========
The Company also leases approximately 4,300 square feet of warehouse and
print shop facilities at 15 South 4th Street, Fernwood, Pennsylvania, from
Walnut Associates, Inc., the Company's sole shareholder of common stock. The
terms of the lease is on a month-to-month basis with a monthly rental of $3.00
per square foot payable at $1,075 per month.
ELCOA leases its own office space and conference room facilities at 501
Silverside Road, Wilmington, Delaware. The lease for this space continues on a
month-to-month basis with 60 days' notice.
Item 3. LEGAL PROCEEDINGS
On August 8, 1997, the Company and ELCOA filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the Eastern
district of Pennsylvania. These filings are being jointly administered by the
Bankruptcy Court. The Company and ELCOA are managing their businesses as
debtors-in-possession subject to the control and supervision of the Bankruptcy
Court. See "Item 1. Business-Method of Financing" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Result of Operations".
The discussion below sets forth various aspects of the Chapter 11
Proceeding, but is not intended to be an exhaustive summary. For additional
information regarding the effect of the Chapter 11 Proceeding, reference
should be made to the Bankruptcy Code.
Under Chapter 11, the Company and ELCOA as a debtors-in-possession, are
authorized to continue to operate their businesses; however, they may not
engage in transactions outside the ordinary course of business without first
complying with the notice and hearing provisions of the Bankruptcy Code and
obtaining Bankruptcy Court approval where and when necessary.
Under Chapter 11, all litigation and claims against the Company and ELCOA
(including those of the holders of debt securities) at the date of the filing
have been stayed while the Company and ELCOA continue business operations as
debtors-in-possession. The Bankruptcy Code prohibits creditors who are
subject to the jurisdiction of the Bankruptcy Court from suing the Company or
ELCOA; either by commencement or continuation of a lawsuit or otherwise,
unless the Bankruptcy Court terminates or modifies the automatic stay of
litigation or otherwise authorizes payments by the Company or ELCOA.
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Under Chapter 11, an official committee of unsecured creditors for each
company may be appointed and such committees have the right to review and
object to certain business transactions and can participate in the formulation
of any plan of reorganization. The Creditors' Committee will be entitled to
retain counsel and other professionals, in each case at the expense of the
Company or ELCOA, if they are retained pursuant to an order of the Bankruptcy
Court.
As a debtors-in-possession, the Company and ELCOA have the right, subject
to Bankruptcy Court approval and certain other limitations, to assume or
reject certain executory contracts and unexpired leases. In this context,
"assumption" means that the Company or ELCOA agree to perform their
obligations under the contract or lease, and "rejection" means that the
Company or ELCOA is relieved of its obligations to perform further under the
contract or lease and is subject only to a claim for damages resulting from
the breach thereof. Any such damage claims are treated as general unsecured
claims in the reorganization proceedings. The Company and ELCOA are studying
executory contracts and unexpired leases to determine whether assumption or
rejection is appropriate.
Under the Bankruptcy Code, a creditor's claim is treated as secured only
to the extent of the value of such creditor's collateral, and the balance of
such creditor's claim is treated as unsecured. Claims which were contingent
or unliquidated at the commencement of the Chapter 11 Proceeding are generally
allowable against the Company or ELCOA.
Although the Company is routinely involved in matters relative to the
litigation of delinquent leases against the lessee, there are no other legal
proceedings or actions pending or threatened against the Company, or to which
its property is subject, which management believes would have a materially
adverse effect on the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
As of June 30, 1997, the Company's common stock was held by one entity as
set forth in Item 12 of this Form 10-K. There is no public market for the
Company's common stock. The Company has paid no dividends during the past two
years with respect to its common stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following summarizes certain financial information with respect to the Company for the five years ended April 30, 1997,
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,
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
OPERATING RESULTS:
Operating Revenue $ 3,672,280 $3,619,831 $3,979,146 $3,960,337 $4,027,780
Interest Expense, net 5,223,856 4,844,532 4,313,253 4,094,189 3,637,908
Net Loss (6,167,552) (5,620,501) (4,891,955) (3,988,920) (4,249,792)
BALANCE SHEET DATA:
Total Assets 17,154,186 24,495,385 24,891,747 24,755,268 24,460,530
Demand, Fixed Rate, and
Money Market Thrift
Certificates 24,128,483 26,407,959 24,521,875 21,810,991 18,041,504
Senior Thrift
Certificates 21,844,864 21,394,687 18,783,578 16,650,670 14,085,849
Subordinated Thrift
Certificates 5,343,945 5,523,118 6,025,366 6,038,409 6,138,830
Subordinated Debentures --- 4,000 5,858 5,858 7,718
Shareholders' Deficit (2) (42,382,789) (36,215,237) (30,594,736) (25,702,781) (21,713,861)
OTHER FINANCIAL DATA
% of Interest Expense
to Operating Revenue 142.3% 133.8% 108.4% 103.4% 90.3%
Ratio of Earnings
to Fixed Charges (1) --- --- --- --- ---
Aggregate New Leases
Entered 13,063,415 10,025,786 10,189,624 10,168,874 11,293,059
Aggregate Finance Lease
Receivables 20,917,123 18,423,816 18,829,268 20,979,917 21,739,601
<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,
1997, 1996, 1995, 1994, and 1993, 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 $6,167,552, $5,620,501, $4,891,955,
$3,988,920, and $4,249,792, respectively.
(2) See "Consolidated Statements of Changes in Shareholders' Deficit" for the three fiscal years ended April 30, 1997.
18
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE YEARS ENDED APRIL 30, 1997
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 $3,672,280, $3,619,831, and
$3,979,146, for the three fiscal years ended April 30, 1997, 1996, and 1995,
respectively. Revenues increased by $52,449, or 1.4% during the fiscal year
ended April 30, 1997 as a result of the increase in the outstanding amount of
direct finance lease receivables. Revenues decreased during the fiscal year
ended April 30, 1996 by $359,315, or 9.0% as a result of the decrease in
outstanding lease receivables during that fiscal year. See Footnote 1 to the
Consolidated Financial Statements. Management attributes the increased
operating losses during the three fiscal years ended 1997 to the lack of growth
in revenues in conjunction with an increase in interest expense associated with
funding the Company's increasing deficit. The increase in the provision for
doubtful lease receivables and interest expense also accounted for the
increased losses from operations during the fiscal year ended April 30, 1995
over 1994.
Aggregate new finance lease receivables increased by $3,037,629 to
$13,063,415, a 30.3% increase, during the fiscal year ended April 30, 1997,
over the prior year. New lease volume had either remained stagnant or
decreased during the past two fiscal years, in part due to the lack of a
dramatic increase in new lease volume irrespective of the implementation of
enhancements in its marketing efforts. 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 may lead to increasing numbers of applications for new leases.
However, recent implementation of the use of credit scoring to eliminate
sub-standard lease applications based on industry recognized standards will
result in a reduction of new leases during the first quarter of the fiscal year
ended April 30, 1998. For a further discussion of the Company's efforts to
increase the generation of new lease receivables, see "FURTHER REFINEMENTS IN
MARKETING STRATEGY AND EFFORTS TO REDUCE OPERATING LOSSES" on page 23.
The average new lease receivable entered during the fiscal year ended April
30, 1997 was $5,911 representing an increase of 10.8% from the prior year.
Since a significant portion of the costs associated with the origination of new
leases is fixed in nature, to the extent that the Company's marketing efforts
can be expected to increase the average size of new leases, the Company may
experience a decrease in the cost of lease origination on a lease-by-lease
basis.
Income earned under direct finance lease contracts was $3,636,479,
$3,609,620, and $3,965,846 for the three fiscal years ended April 30, 1997,
1996 and 1995, respectively. Total aggregate lease receivables outstanding
were $20,917,123, $18,423,816, and $18,829,268 at April 30, 1997, 1996 and
1995, respectively. The Company's average net investment in direct finance
leases, defined as the average aggregate future amounts receivable under lease
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contracts plus average estimated residual value of equipment, less average
unearned income under lease contracts and average advance payments, was
$16,943,220, $16,496,653, and $17,735,138 during the fiscal years ended April
30, 1997, 1996 and 1995, respectively. Recognized revenues taken as a
percentage of the Company's average net investment in direct finance leases was
21.5%, 21.9%, and 22.4%, respectively, during the fiscal years ended April 30,
1997, 1996 and 1995, respectively. 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.
On August 8, 1997, the Company and its subsidiaries filed separate
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. As noted in the Independent Auditor's Report on page 29 and Note 1 to
the Consolidated Financial Statements, in the event the plan of reorganization
is confirmed, the Company's ability to continue as a going concern is dependent
in part on the Company's ability to achieve sufficient cash flow to meet its
restructured debt obligations. This depends on achieving a higher level of new
lease volume than current levels of new business, and the proceeds from sale of
lease pools created from the existing portfolio of leases, 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
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 reduce lease origination expenses. 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 by using electronic commerce
(i.e. broadcast fax) rather than rely on indirect means such as mass bulk
mailings to generate new leases. 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".
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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, 1997 and 1996.
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.
INTEREST EXPENSE
Increased borrowings contributed to the increase in interest expense for
the fiscal years ended April 30, 1997, 1996, and 1995. The effect of interest
rates on the Company during the three years ended April 30, 1997 can be
illustrated as follows:
Years Ended April 30,
1997 1996 1995
---------- ---------- ----------
Interest Expense, net $5,223,856 $4,844,532 $4,313,253
Average Rate of Interest
Paid by the Company on
Total Average Debt Outstanding 9.3% 9.3% 9.0%
Percentage of Interest
Expense to Operating Revenues 142.3% 133.8% 108.4%
Aggregate average borrowings, including accrued interest, were $59,010,965,
$57,193,963, and $52,028,899, at April 30, 1997, 1996, and 1995, respectively.
Rates on outstanding debt securities during the three fiscal years ended April
30, 1997 correspond to interest rates in general over the period. The
increases in debt outstanding during the fiscal years ended April 30, 1997,
resulted from increased amounts of outstanding debt securities, which were used
both to fund the costs of operations and 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 those fiscal years. Since excess funds are
invested at lower rates than the interest paid on these funds, the Company
incurred 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, 1997, 1996 and 1995 also were used to fund
current operations and debt redemptions. Beginning May 1, 1994, excess funds
21
23
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 $111,740 or 9.5%, after having
increased by $111,276 or 10.4% during the fiscal years ended April 30, 1997 and
1996, 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, produced brochures for the
manufacturers to mail to their dealer distribution network. These costs were
expensed as current period charges in conjunction with the Company's lease
origination efforts. 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, 1997.
Lease origination expenses, including capitalized commissions, totaled
10.6%, 12.3%, and 11.0% of new lease receivables entered during the fiscal
years ended April 30, 1997, 1996, and 1995, respectively. During the fiscal
years ended April 30, 1997, 1996 and 1995, commissions paid of $87,282,
$56,921, and $52,049, 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 decreased $12,253 or .6% during the
fiscal year ended April 30, 1997, after having increased $138,223 or 6.8%
during the fiscal year ended April 30, 1996. 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 1998, 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 1997 and 1996, 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. The 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."
22
24
Total provisions for doubtful lease receivables for the fiscal years ended
April 30, 1997, 1996, and 1995 were $1,165,905, $1,045,089, and $1,463,752,
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 28.6%
decrease in the provisions during the fiscal year ended April 30, 1996. Also,
as of April 30, 1997, 1996 and 1995, the ratio of the Allowance for Doubtful
Lease Receivables to Aggregate Future Lease Receivables was 10.2%, 11.2%, and
10.4%, respectively. During these periods, the ratio of the Allowance for
Doubtful Lease Receivables expressed as a percentage of delinquent receivables
more than 90 days past due was 35.5%, 35.6%, and 36.4%, respectively. The
Company attributes the decreased percentages in fiscal 1997 and 1996 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 5.61%, 5.05%, and 10.61% during the fiscal years ended April
30, 1997, 1996 and 1995, respectively. Management is unable to predict with
any reasonable certainty the percentage of charge-offs from delinquent lease
receivables during fiscal 1998. See "BUSINESS - Analysis of Delinquencies" and
"Analysis of Bad Debt Write-Offs."
FURTHER REFINEMENTS IN MARKETING STRATEGY AND EFFORTS TO REDUCE OPERATING
LOSSES
Management continues to implement certain measures to refine its marketing
strategy 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, reduce its costs of lease origination and administration and sell pools
of leases to third party purchasers in order to reduce its operating losses.
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 the Company's
marketing 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 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 cooperative "private label
lease program" customized for their distributors' needs. Manufacturers were
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
23
25
point-of-sale equipment and the Company 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 had adopted the "private label lease" facilities to their benefit. This
program did not generate the volume of new leases that the Company had expected
as a result of the Company's efforts.
As of July 1, 1996, 75 manufacturers had entered into co-operative
manufacturer agreements with the Company, of which 51 had 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.
During the first half of the fiscal year ended April 30, 1997, 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 third quarter of the fiscal year ended April 30, 1997, the
Company ceased its efforts to attract additional manufacturers as it concluded
that the costs associated with these efforts had not resulted in a dramatic
increase in new lease volume. The Company has continued to maintain a
relationship through direct mailings to those equipment distributors who as a
result of this program had previously indicated an interest in utilizing the
Company's services. The Company used its in-house printing and direct mail
facilities to produce flyers and brochures which were distributed throughout
each manufacturers' sales distribution network illustrating the benefits of
leasing, to facilitate sales of the manufacturers' equipment.
During the fourth quarter of the fiscal year ended April 30, 1997, new
lease volume reached the highest level for any quarter during the past five
fiscal years. However, new lease volume had not reached levels necessary in
management's opinion to reduce the operating losses of the Company. The
Company had been sending approximately 20,000 pieces of direct mail to
equipment manufacturers and distributors weekly in an effort to increase new
lease volume. The costs associated with direct mail, taking into consideration
printing costs, overhead allocation, and bulk mail postage, result in an
average cost per mailing of $.30. In addition, the use of bulk mail results in
an unacceptable delay in time from when the mailings are first prepared to when
the recipient actually indicates an interest to the Company (either by mailing
back a response card or using the Company's toll-free telephone lines) of up to
six weeks. In addition, the Company discovered that the lists of names
provided by the manufacturers were not maintained by them on a current basis,
as in some instances it was discovered that the number of inaccurate addresses
24
26
was as high as 30% of the lists provided from the manufacturers. Consequently,
the level of mailings was reduced in favor of using other alternative means of
communicating with both existing and prospective equipment vendors.
In this regard, the Company has been successfully experimenting since the
middle of May, 1997, with using telefax transmission to its equipment
manufacturers and distributors at a reduced cost per response (typically $.05
to $.07 per response). As the Company further expands this program to more
equipment manufacturers and distributors on a repetitive basis, new lease
applications are expected to increase from additional sources not previously
contacted due to the higher costs associated with direct mail.
The Company also expects to hire experienced leasing professionals with
established manufacturers and equipment vendor relationships during the fiscal
year ended April 30, 1998 in order to further increase new lease volume. This
is in contrast to utilizing indirect means as in past fiscal years to attract
equipment manufacturers and distributors towards using its services. The
compensation to be paid to these individuals is dependent on their ability to
increase the generation of new lease volume; consequently any increase in lease
origination expenses associated with the hiring of these individuals would be
expected to correspond to an increase in new lease volume.
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.
During the three fiscal years ended April 30, 1997, 1996 and 1995, new
Certificates of ELCOA in the approximate amounts of $5,400,000, $8,300,000, and
$8,900,000, respectively, funded costs of operations and new equipment
purchases for the Company. During the three fiscal years ended April 30, 1997,
the Company did not experience any difficulty in financing the purchase of
equipment that it leased.
The Company expects in the future to utilize the receipt of rental payments
from its outstanding leases to provide the funds necessary to fund its
operations and the purchase of new equipment for lease. The Company's existing
lease contracts as of April 30, 1997, schedule the receipt of approximately
$10,637,000 during the twelve months ending April 30, 1998 of which
approximately $4,081,000 are scheduled receipts from accounts which are two or
more months past due. At April 30, 1997 aggregate future amounts receivable
under lease contracts were $20,917,123 of which approximately $4,003,000 are
future amounts receivable from accounts which were 12 or more months past due
on a strict contractual basis (of which approximately $3,669,000 relate to
ELCOA's leases.)
Accounts payable and accrued expenses at April 30, 1997, excluding accrued
interest on debt, totaled $1,154,542 of which accounts payable of $885,658
included therein represent the Company's obligation for commitments for
purchase of equipment for lease which has not yet been delivered.
25
27
As of April 30, 1997 the Company and ELCOA also had unhypothecated leases
which could be sold to third-party purchasers, on a discounted basis, to obtain
funds. As noted in the Statements of Cash Flows on page 34, sales of Demand
and Fixed Rate Certificates have decreased during the fiscal year ended April
30, 1997. Subsequently, receipt of requests for redemptions of Certificates
exceeded cash on hand to repay such borrowings, and the Company was unable to
maintain its operations absent judicial or other statutory equitable relief.
See "Methods of Financing" on page 12 of this report on Form 10-K.
Senior and subordinated borrowings issued by the Company aggregating
$24,255,338 (including accrued interest), as well as Demand, Fixed Rate, and
Money Market Thrift Certificates issued by ELCOA aggregating $16,695,706
(including accrued interest), were scheduled to become due during the twelve
months ending April 30, 1998. See Notes 3, 4, and 5 to the Consolidated
Financial Statements. Accrued interest included therein in the amount of
$7,065,141 is due on demand. During the fiscal years ended April 30, 1997 and
1996, approximately 76% and 78%, respectively, of all previously issued Senior
Thrift Certificate issued by the Company coming due were renewed and "rolled
over" into new indebtedness, and approximately 57% and 54% 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 34
and 35, the proceeds from sales of debt securities by the Company and ELCOA
decreased by 36% during fiscal 1997 from fiscal 1996, while redemptions of debt
securities remained constant. This trend has resulted in reduced levels of
liquidity, and was a factor in the decision to file a petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. See "Methods of
Financing".
The number of accounts, at April 30, 1997, holding senior and subordinated
certificates of the Company was 2,704. Of these, 102 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 $547,593, $445,993 and $400,000 as of April 30,
1997. As of April 30, 1997, there were 3,577 accounts holding Demand, Fixed
Rate and Money Market Thrift Certificates, of which 74 held accounts
aggregating $50,000 or more. The three largest holders of Demand, Fixed Rate
and Money Market Thrift Certificates held aggregate principal amounts of
$519,383, $284,523 and $234,000 at April 30, 1997. 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.
The Company believes that in order to fund an increased level of new lease
volume, it must sell a portion of its lease portfolio to other financial
institutions seeking to increase their asset-based receivable portfolio through
the securitization process. If the Company is successful in these efforts, 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, enabling the Company
to carry an increased lease portfolio.
26
28
Taking into consideration the fact that the Company may no longer rely on
its sale of senior debt and the sale of Demand and Fixed Rate Certificates by
ELCOA, in order to fund new business, it must rely on funds generated from
outside financial institutions, including, but not limited to ELCOA. In view
of the Company's history of losses, the uncertainty with respect to generation
and securitization of new lease receivables, management is unable to estimate
the Company's profitability and liquidity beyond the current fiscal year.
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.
Although the Company has reported losses since 1980 for financial statement
purposes, it has supported operations in the past through rentals received from
its lessees and the sale of debt securities. However, in view of its high
degree of leverage and losses, the Company determined it was unable to continue
to service its debt and, on August 8, 1997, filed a petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. The Company and ELCOA are
managing their businesses as debtors-in-possession subject to the supervision
and control of the Federal Bankruptcy Court for the Eastern District of
Pennsylvania. The Company believes that in order to achieve a profitable level
of operations, it must increase the origination of new lease receivables
without any appreciable increase in lease origination or general and
administrative expenses. 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 during the fiscal years ended April 30, 1997, 1996 and 1995
had been invested in low yielding but highly liquid investments. These funds
had been held solely for the purpose of awaiting investment in new lease
receivables. During the fiscal year ended April 30, 1997, the average interest
rate earned by the Company on these funds was approximately 5.6%, while the
average interest rate paid on outstanding certificates attributable to the
funds was 9.3%, resulting in a negative spread of 3.7%. During the fiscal year
ended April 30, 1997, the average rate of return on the Company's investment in
its lease receivables was approximately 21%.
Prior to April 30, 1997, neither the Company nor ELCOA had 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, and requests for early repayment of
interest or principal had never been later than five business days after demand
for redemption was received. During the month of June, 1997, as a result of
reductions in the Company's available cash, requests for early redemption of
demand and fixed rate certificates prior to maturity were deferred to July 5,
1997. As of July 7, 1997, both the Company and ELCOA were unable to meet
request for these redemptions, resulting in what may have been determined to be
a default under terms of each respective trust indenture. On Friday August 8,
1997, in order to protect the viability of the Company, the Company and ELCOA
filed for protection under Chapter 11 of the U.S. Bankruptcy Code. These
proceedings were filed in the U.S. Bankruptcy Court for the Eastern District of
Pennsylvania. Pending the resolution of this proceeding, no further
redemptions or payments of interest will occur. In order to continue its
operations, the Company and ELCOA must generate additional sources of liquidity
to fund new business, of which there can be no assurance. See "Methods of
Financing".
27
29
STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, the matters
discussed in Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations or elsewhere in this annual report on Form
10-K, are forward looking statements that are dependent upon a number of risks
and uncertainties that could cause actual results to differ materially from
those in the forward looking statements. These risks and uncertainties are
more fully discussed in Note 1 to the Consolidated Financial Statements. The
Company does not intend to provide updated information about the matters
referred to in these forward looking statements, other than in the context of
management's discussion and analysis in the Company's quarterly and annual
reports on Form 10-Q and 10-K.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index To Financial Statements
Page
----
(a) Independent Auditor's Report 29
(b) Consolidated Balance Sheets at April 30,
1997 and 1996. 30
(c) Consolidated Statements of Operations for
the years ended April 30, 1997, 1996 and 1995. 32
(d) Consolidated Statement of Changes in
Shareholders' Deficit for the years
ended April 30, 1997, 1996 and 1995. 33
(e) Consolidated Statements of Cash Flows
for the years ended April 30, 1997, 1996
and 1995. 34
(f) Notes to Consolidated Financial Statements. 36
See Item 14 on Page 50 for Financial Statement Schedules
28
30
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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended April 30, 1997, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Walnut Equipment Leasing Co., Inc. will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the Company has
incurred recurring losses, has been unable to meet the requests for redemption
of its certificates beginning July 7, 1997 and, in addition, on August 8, 1997,
the Company and its Subsidiary have filed separate voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also discussed in
Note 1. In the event the plan of reorganization is confirmed, continuation of
the business thereafter is dependent on the Company's ability to achieve
sufficient cash flow to meet its restructured debt obligations. As a result of
the reorganization proceedings, the Company may sell or otherwise realize
assets and liquidate or settle liabilities for amounts other than those
reflected in the consolidated financial statements. Further, the confirmation
of a plan of reorganization could materially change the amounts currently
recorded in the consolidated financial statements. If no reorganization plan
is approved, it is possible that the Company's assets could be liquidated. The
consolidated financial statements do not included any adjustments that might
result from the outcome of these uncertainties.
/s/ Cogen Sklar LLP
COGEN SKLAR LLP
Bala Cynwyd, Pennsylvania
July 1, 1997, except for Note 1, Management Plans,
as to which the date is August 8, 1997.
29
31
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30,
1997 1996
----------- -----------
ASSETS
Direct finance leases:
Aggregate future amounts receivable under lease contracts $20,917,123 $18,423,816
Estimated residual value of equipment 1,520,822 1,704,915
Initial direct costs, net 541,627 474,059
Less:
Unearned income under lease contracts (4,663,898) (3,829,859)
Advance payments (633,450) ( 568,715)
---------- ----------
17,682,224 16,204,216
Allowance for doubtful lease receivables (2,132,075) (2,069,855)
---------- ----------
15,550,149 14,134,361
Operating leases:
Equipment at cost, less accumulated depreciation of
$18,028 and $14,413, respectively 17,303 19,420
Accounts receivable 7,954 1,112
Cash and cash equivalents 439,829 9,207,905
Other assets (includes $50,363 and $63,794, respectively,
receivable from related party) 1,138,951 1,132,587
----------- -----------
Total assets $17,154,186 $24,495,385
=========== ===========
<FN>
See accompanying notes
30
32
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (continued)
April 30,
1997 1996
----------- ------------
LIABILITIES
Amounts payable to equipment suppliers $ 885,658 $ 802,956
Other accounts payable and accrued expenses 268,884 268,169
Demand, Fixed Rate and Money Market Thrift Certificates
(includes $177,250 and $183,805,
respectively, held by related parties) 24,128,483 26,407,959
Senior Thrift Certificates (includes $674,407 and
$812,773, respectively, held by related parties) 21,844,864 21,394,687
Subordinated Thrift Certificates (includes $316,444 and
$397,136, respectively, held by related parties) 5,343,945 5,523,118
Accrued interest (includes $186,067 and $159,306,
respectively, to related parties) 7,065,141 6,309,733
Subordinated debentures (includes $0 and $4,000,
respectively, held by related parties) --- 4,000
---------- -----------
59,536,975 60,710,622
---------- -----------
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 (42,484,845) (36,317,293)
----------- -----------
(42,382,789) (36,215,237)
----------- -----------
Total liabilities and shareholders' deficit $17,154,186 $24,495,385
=========== ===========
<FN>
See accompanying notes
31
33
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended April 30,
1997 1996 1995
---------- ---------- ----------
Revenue:
Income earned under
direct finance lease
contracts $3,636,479 $3,609,620 $3,965,846
Operating lease rentals 35,801 10,211 13,300
---------- ---------- ----------
3,672,280 3,619,831 3,979,146
---------- ---------- ----------
Costs and expenses:
Interest expense, net of
interest income of $257,973,
$484,713 and $380,377, respectively 5,223,856 4,844,532 4,313,253
Lease origination expenses 1,290,978 1,179,238 1,067,962
General and
administrative expenses
(includes $887,388, $905,451
and $800,864, respectively,
paid to related parties) 2,144,999 2,157,252 2,019,029
Provision for doubtful
lease receivables 1,165,905 1,045,089 1,463,752
Depreciation on operating
lease equipment 14,094 14,221 7,105
---------- ---------- ----------
9,839,832 9,240,332 8,871,101
Loss from operations ---------- ---------- ----------
before provision for federal and
state income taxes (6,167,552) (5,620,501) (4,891,955)
Provision for federal and state
income taxes --- --- ---
----------- ----------- -----------
Net Loss $(6,167,552) $(5,620,501) $(4,891,955)
=========== =========== ===========
<FN>
See accompanying notes
32
34
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
For the Years Ended April 30, 1997, 1996 and 1995
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, 1994, 281 $ 281 275 $ 275 $101,500 $(25,804,837) $(25,702,781)
Net loss for the year ended
April 30, 1995 --- --- --- --- --- (4,891,955) (4,891,955)
----- ------ ----- ------ -------- ------------ ------------
Balance, April 30, 1995 281 281 275 275 101,500 (30,696,792) (30,594,736)
Net loss for the year ended
April 30, 1996 --- --- --- --- --- (5,620,501) (5,620,501)
----- ------ ----- ------ -------- ------------ ------------
Balance, April 30, 1996 281 281 275 275 101,500 (36,317,293) (36,215,237)
Net loss for the year ended
April 30 1997 --- --- --- --- --- (6,167,552) (6,167,552)
----- ------- ----- ------ -------- ------------ ------------
Balance, April 30, 1997 281 $ 281 275 $ 275 $101,500 $(42,484,845) $(42,382,789)
===== ======= ===== ====== ======== ============= =============
<FN>
See accompanying notes
33
35
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended April 30,
1997 1996 1995
----------- ----------- ------------
OPERATING ACTIVITIES
Net Loss $(6,167,552) $(5,620,501) $(4,891,955)
Adjustments to reconcile
net loss to net cash
used in operating activities:
Depreciation 14,094 14,221 7,105
Amortization of deferred debt
registration expenses 111,514 126,533 121,402
Provision for doubtful
lease receivables 1,165,905 1,045,089 1,463,752
Effects of changes
in other operating items:
Accrued interest 755,407 897,985 608,304
Amounts payable to
equipment suppliers 82,702 325,660 (224,212)
Other (net), principally
increase in other assets (117,161) (152,503) (330,663)
Net cash used in ----------- ---------- -----------
operating activities (4,155,091) (3,363,516) (3,246,267)
----------- ---------- -----------
INVESTING ACTIVITIES
Excess of cash received over
lease income recorded 6,719,049 6,949,129 7,374,851
Increase (decrease) in
advance payments 64,735 (11,250) (31,922)
Purchase of equipment
for lease (9,384,295) (7,317,494) (7,567,613)
Net cash used in investing ----------- ---------- -----------
activities $(2,600,511) $ (379,615) $ 224,684)
----------- ----------- -----------
<FN>
See accompanying notes
34
36
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
For the Years Ended April 30,
1997 1996 1995
----------- ----------- ------------
FINANCING ACTIVITIES
Proceeds from issuance of:
Demand and Fixed Rate
Certificates $5,370,047 $9,620,233 $10,983,417
Senior Thrift Certificates 4,963,427 6,522,341 5,488,212
Redemption of:
Subordinated Debentures (4,000) (1,858) ---
Demand, Fixed Rate and
Money Market Thrift
Certificates (7,649,524) (7,734,149) (8,272,533)
Senior Thrift Certificates (4,513,250) (3,911,232) (3,355,304)
Subordinated Thrift
Certificates (179,174) (502,248) (13,043)
----------- ---------- -----------
Net cash provided by (used in)
financing activities (2,012,474) 3,993,087 4,830,749
----------- ---------- -----------
Increase (Decrease) in Cash
and Cash Equivalents (8,768,076) 249,956 1,359,798
Cash and Cash Equivalents,
Beginning of Year 9,207,905 8,957,949 7,598,151
----------- ---------- -----------
Cash and Cash Equivalents,
End of Year $ 439,829 $9,207,905 $8,957,949
=========== ========== ===========
<FN>
See accompanying notes
35
37
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 AND MANAGEMENT'S PLANS
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, 1997, 1996 and 1995, the Company incurred
losses of $6,167,552, $5,620,501, and $4,891,955, respectively, had negative
cash flows from operations during those years, and reported accumulated
deficits of $42,484,845 and $36,317,293 at April 30, 1997 and 1996,
respectively. As a result of the requests by certificate holders for
redemptions which exceeded the Company's and ELCOA's cash and cash equivalents,
the Company was unable to meet the requests for redemption of its Senior Thrift
Certificates and Subordinated Thrift Certificates, and ELCOA was unable to meet
the requests for redemption of its Demand, Fixed Rate, and Money Market Thrift
Certificates, beginning July 7, 1997 and thereafter. Management had reviewed
the Trust Indentures covering the registered offerings of these debt securities
and concluded that a default may have occurred in the redemption provisions.
On August 8, 1997 the Company and ELCOA filed separate voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. ELCOA and Walnut
are managing their businesses as debtors-in-possession subject to the
supervision and control of the U.S. Bankruptcy Court for the Eastern District
of Pennsylvania.
Continuation of the Company's operations is dependent upon the achievement
of sustained profitable operations, through increased new business generated by
the Company, a reduction in expenses, and the ability to generate sufficient
cash resources to support future operations. In response to the Company's
financial difficulties, management has implemented a number of cost-saving
measures, instituted procedures to improve the quality of the Company's
outstanding leases, and investigated new ways of increasing new lease business.
Among other things, the Company has (i) reduced the number of employees from 60
at April 30, 1997 to 40 employees effective August 11, 1997, (ii) closed the
in-house printing facilities, (iii) tightened credit criteria through the
utilization of a scoring system thereby eliminating lease applicants whose
credit score is below a certain minimum, (iv) increased reliance on electronic
commerce (i.e. broadcast fax) for advertising rather than bulk mailings ($.07
v.s. $.30 per direct mail piece) and (v) began an external search for
experienced leasing professionals to contribute to a further increase in lease
volume. Management believes that the Company's cash flow from the collections
from outstanding lease receivables and the sale of leases to third-party
securitizers will be adequate to meet operating needs during the ensuing year.
36
38
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
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.
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.
FINANCIAL INSTRUMENTS:
The following method and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
Cash and cash equivalents, accounts payable to equipment suppliers, accrued
expenses and security deposits, demand certificates and accrued interest: the
carrying amounts reported in the balance sheet approximate the fair value
because of the short term maturity of these instruments.
37
39
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Fixed Rate, Money Market, Senior and Subordinated Certificates: it was not
practical to estimate the fair value of the Fixed Rate, Money Market, Senior
and Subordinated Certificates outstanding. There is no market for this debt.
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 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, 1997 and 1996 includes deferred
tax assets (liabilities) attributable to the following temporary deductible
(taxable) differences:
1997 1996
---------- ----------
Operating lease method vs. direct finance method $2,738,000 $2,889,500
Provision for doubtful lease receivables 831,500 596,600
Operating loss carryforward 11,386,200 9,173,000
Other (42,000) (32,600)
---------- ----------
Net deferred tax asset 14,913,700 12,626,500
Valuation allowance (14,913,700) (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. As of April 30, 1997 the net
operating loss carryover amounted to approximately $33,489,000 expiring through
2012 and the investment tax credit carryover amounted to approximately $943,000
expiring through 2001.
38
40
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
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, 1997,
1996, and 1995, ELCOA recognized provisions for state income taxes in the
amount of $0, $0, and $360, respectively, on its separate income. No provision
for federal income taxes was necessary.
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 $407,000, $411,000, and $418,000 during the fiscal
years ended April 30, 1997, 1996 and 1995, 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, based upon a periodic evaluation, performed at least quarterly of
delinquent finance lease receivables. Charge-offs totaled $1,103,685, $940,243
and $2,111,032 for the years ended April 30, 1997, 1996 and 1995, respectively.
OTHER ASSETS
Included in other assets at April 30, 1997 and 1996, are deferred expenses
totaling $346,937 and $311,324 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, 1997
and 1996 are deferred expenses totaling $435,920 and $452,495, respectively,
net of accumulated amortization, representing costs related to ELCOA's
registration and sale of Demand and Fixed Rate Certificates. Included in
deferred expenses are unamortized commissions of $531,002 and $558,762 at April
30, 1997 and 1996 paid by the Company and ELCOA to Welco Securities, Inc. Such
expenses are being amortized on a straight-line basis over the estimated
average lives of the debt issued under the registration statements and the term
of the certificates. Amortization of the Company's deferred expenses charged
to income for the years ended April 30, 1997, 1996 and 1995 amounted to
approximately $111,500, $126,500, and $121,400, respectively.
39
41
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, 1997. Interest paid for the
fiscal years ended April 30, 1997, 1996 and 1995 was $4,726,422, $4,431,260,
and $4,085,326, respectively. No income taxes were paid during the three
fiscal years ended April 30, 1997.
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, 1997 are due as
follows:
Year Ending April 30, Amount
--------------------- -----------
1998 $10,623,765
1999 5,874,243
2000 3,037,755
2001 985,925
2002 and beyond 395,435
-----------
$20,917,123
===========
Future rentals due under operating lease contracts are all due within one
year and, excluding those rentals reflected in operating lease accounts
receivable, total $5,307 and $10,433 at April 30, 1997 and 1996, respectively.
3. DEMAND, FIXED RATE AND MONEY MARKET THRIFT CERTIFICATES:
The Demand, Fixed Rate and Money Market Thrift Certificates outstanding at
April 30, 1997 were issued by ELCOA, with outstanding certificates bearing
interest at rates ranging from 7.25% 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 with respect to ELCOA's assets. Holders of ELCOA's
debt securities have no right in liquidation with respect to the assets of its
parent, the Company. All of these certificates rank on parity with each other.
There are no restrictive covenants relative to this debt, nor is ELCOA
40
42
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DEMAND, FIXED RATE AND MONEY MARKET THRIFT CERTIFICATES: (Continued)
restricted from the payment of cash dividends, loans or advances to the
Company. The certificates at April 30, 1997 are due as follows:
Year Ending April 30, Amount
--------------------- -----------
1998 $13,701,279
1999 4,764,066
2000 2,254,299
2001 1,075,594
2002 and beyond 2,333,245
-----------
$24,128,483
===========
Included in the amount due in the year ending April 30, 1998 are $1,237,302
of certificates payable on demand. Additionally, accrued interest of
$2,994,427 at April 30, 1997 is payable upon demand.
4. SENIOR THRIFT CERTIFICATES:
Outstanding Senior Thrift Certificates bear interest at rates ranging from
9.25% to 13.10% at April 30, 1997, and in the event of liquidation are senior
in priority to all outstanding Subordinated Thrift Certificates. Senior Thrift
Certificates at April 30, 1997 are due as follows:
Year Ending April 30, Amount
--------------------- -----------
1998 $15,833,319
1999 2,714,042
2000 1,766,400
2001 494,674
2002 and beyond 1,036,429
-----------
$21,844,864
===========
Included in the amount due in the year ending April 30, 1998 are
approximately $1,153,909 in certificates payable on demand. Accrued interest
on the Senior Thrift Certificates of $2,008,897 at April 30, 1997 is payable on
demand.
5. SUBORDINATED THRIFT CERTIFICATES:
Outstanding Subordinated Thrift Certificates bear interest at rates ranging
from 10.00% to 13.10% at April 30, 1997. All thrift certificates are
41
43
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997 are due as
follows:
Year Ending April 30, Amount
--------------------- ----------
1998 $4,351,306
1999 429,970
2000 205,657
2001 57,471
2002 and beyond 299,541
----------
$5,343,945
==========
Included in the amount due in the year ending April 30, 1998 are
approximately $465,544 of certificates payable on demand. Accrued interest on
the Subordinated Thrift Certificates of $2,061,816 at April 30, 1997 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, 1997.
"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, 1997.
7. INCOME TAXES:
The Company has available for federal income tax purposes net operating
loss carryovers aggregating approximately $33,489,000 at April 30, 1997. Such
loss carryovers may be used to offset future taxable income, if any, until
their expiration in varying amounts from 2001 to 2012. The Company also has
42
44
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
investment tax credit carryovers of approximately $943,000 at April 30, 1997
which are available to reduce federal income tax liabilities, if any. Such
carryovers expire, if not previously utilized, in varying amounts from 1998
through 2001.
8. INITIAL DIRECT COSTS:
Initial direct costs consist principally of commissions, processing, and
credit approval costs. In accordance with SFAS No. 91, a portion of the
initial direct costs have been deferred as part of the investment in direct
financing leases. These initial direct costs amounted to $400,252, $309,291,
and $333,580 for the fiscal years ended April 30, 1997, 1996 and 1995,
respectively.
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, 1997, 1996 and 1995 was approximately $208,200, $209,400,
and $235,200, respectively.
As of April 30, 1997, the future minimum rental payments under leases are
as follows:
Year Ending April 30, Amount
--------------------- ----------
1998 $ 207,784
1999 214,949
2000 222,115
2001 229,280
2002 and beyond 434,873
----------
Total $1,309,001
==========
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 1997, 1996 and 1995.
However, the Company paid management fees of $69,000 during each of the fiscal
years ended April 30, 1997, 1996 and 1995, respectively to Walnut Associates,
Inc., primarily to reimburse it for the services of the President.
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, 1997
and 1996 were as follows:
43
45
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. TRANSACTIONS WITH RELATED PARTIES: (Continued)
1997 1996
-------- -------
Adjustable Rate Cumulative
Preferred Shares $ 275 $ 275
Prime Rate Cumulative Preferred Shares 281 281
Senior Thrift Certificates 720,666 853,640
Demand, Fixed Rate and
Money Market Thrift Certificates 191,146 192,264
Subordinated Debentures 0 4,000
Subordinated Thrift Certificates 442,356 507,116
For the years ended April 30, 1997, 1996 and 1995, the Company paid Welco
Securities, Inc., ("Welco") an affiliated registered broker/dealer in
securities owned by the President of the Company, $191,998, $167,138, and
$135,593, 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 $150,332, $182,155, and $170,642 for commissions incurred in
the solicitation of Demand, Fixed Rate and Money Market Thrift Certificates
during the fiscal years ended April 30, 1997, 1996 and 1995, 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, 1997, 1996
and 1995, Welco paid rentals of approximately $23,900, $21,000, and $8,500,
respectively, on equipment leased from the Company.
The law firm of William Shapiro, Esq., P.C. has been engaged by Walnut
Equipment Leasing Co., Inc. to collect overdue delinquent receivables 90 days
or longer in arrears, on a contingency basis, and was reimbursed by Walnut for
costs and expenses incurred in these efforts. For the three fiscal years ended
April 30, 1997, the relationship between amounts recovered by the law firm from
delinquent lease receivables (on a consolidated basis for Walnut and ELCOA) and
the costs paid the law firm by Walnut to reimburse it for these efforts was as
follows:
44
46
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. TRANSACTIONS WITH RELATED PARTIES: (Continued)
For The Three Fiscal Years Ended April 30
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
Amounts Collected and Remitted
by the Law Firm from Delinquent
Lease Receivables $1,632,000 $1,508,000 $1,379,000
- ------------------------------------------------------------------------------
Amounts Paid to the Law Firm by
Walnut for Legal Collection Efforts $ 419,040 $ 407,160 $ 354,783
- ------------------------------------------------------------------------------
During the fiscal years ended April 30, 1997, 1996 and 1995 the Company
incurred $72,758, $75,732, and $69,943, 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. During the fiscal years ended April
30, 1997, 1996 and 1995 ELCOA paid $98,926, $106,589, and $99,595,
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, 1997, 1996, and
1995 were $116,967, $105,780, and $111,592, respectively. As of April 30,
1997 and 1996, the Company had a receivable of $50,363 and $63,794,
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 at which time the lease continued on a month to
month basis. During the fiscal years ended April 30, 1997, 1996 and 1995,
$12,900 in rents each year were paid by the Company to Walnut Associates, Inc.
45
47
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and Executive Officers of the Company are:
William Shapiro (age 73) President and Director
Kenneth S. Shapiro (age 45) Vice President
and Director
Deljean Shapiro (age 69) Secretary-Treasurer
and Director
Philip R. Bagley (age 70) Director
Lester D. Shapiro (age 36) Director
Director's terms expire May 1, 1997, or when their successors are duly
elected at the next annual meeting of the stockholders. The executive
officers' terms expire when their successors are duly appointed by the Board of
Directors.
William Shapiro, the husband of Deljean Shapiro and father of Kenneth and
Lester Shapiro, holds degrees from the Temple University Schools of Business
and Law. He is a practicing attorney. He has been the President, Chief
Executive Officer and Director of the Company since 1969 and devotes
substantially all of his time to those duties. For the last thirty-three
years, he has been the President, Chief Executive Officer and a Director of
Walnut Associates, Inc., the parent of the Company. He has been President of
William Shapiro, Esq., P.C., a law firm since 1976. He was also a Director of
Kulicke and Soffa Industries, Inc. a publicly held manufacturing company,
through August 1987. Mr. William Shapiro is the Secretary/Treasurer and
Director of Welco Securities, Inc. since 1983, the President of Equipment
Leasing Corporation of America since May, 1986, and President and Director of
Financial Data, Inc. since 1972.
Kenneth S. Shapiro, the son of William and Deljean Shapiro and brother of
Lester Shapiro, is a graduate of Boston University's School of Business and
School of Law. He is a practicing attorney and a Certified Public Accountant.
Upon graduation from law school in 1977, he was employed by Touche Ross & Co.,
Certified Public Accountants, as a Tax Consultant. In 1977 he became a
Director of the Company and was employed as its Controller from September 1979
to 1983, when he became its Vice-President. In addition to being the
Vice-President of Walnut, he is the President and a Director of Welco
Securities, Inc. He is also on the part-time faculty in Accounting and
Taxation at Beaver College, Glenside, Pennsylvania. He also serves as
Vice-President for Equipment Leasing Corporation of America.
Deljean Shapiro, the wife of William Shapiro, and mother of Kenneth and
Lester Shapiro, is a graduate of Temple University and has been the Office
Manager of Walnut Associates, Inc. since its incorporation in 1960. Prior
thereto she was a social worker for the Commonwealth of Pennsylvania. She has
been the Secretary-Treasurer and Director of the Company since 1969, and is
co-director of KYW's Call-For-Action program in Philadelphia.
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Philip R. Bagley received the degree of Master of Science from
Massachusetts Institute of Technology in 1951. He was from 1978 to 1984 an
assistant professor in computer and information sciences at Temple University,
Philadelphia, Pennsylvania. He was adjunct professor in computer and
information sciences at Temple University during the 1987-88 academic year.
With over 40 years experience in the data processing field, he has served as
President of Information Technology, Inc., (formerly Information Engineering)
from 1966 to 1977 (a computer systems design and operations center) and since
February 1980 has been President of the Automated Office, Inc., a firm
providing professional data processing consultation and services to outside
clients. He has been a Director of the Company since September, 1983.
Lester D. Shapiro, the son of William Shapiro and Deljean Shapiro and
brother of Kenneth S. Shapiro, is a graduate of New York University College of
Business and Public Administration, having majored in accounting and
management. He also received a Masters of Business Administration degree from
the New York University in June, 1985. Since 1981, he also has been engaged
in the purchase and resale of used business equipment on his behalf. He has
been a Director of the Company since September, 1983, and is also a Director
of Equipment Leasing Corporation of America, the Company's wholly-owned
subsidiary, since May, 1986.
Dr. Thomas Matcovich, a Director of the Company since September, 1983,
died during April, 1997. A replacement is being sought by the Company.
Item 11. EXECUTIVE COMPENSATION
No Officer or Director of the Company received from the Company aggregate
direct remuneration during the fiscal year ended April 30, 1997, equal to or
in excess of $62,400. The Company has no profit sharing, pension, stock
option plans or employment agreement in effect and does not expect to adopt
any such plan or agreement in the near future. All executive officers as a
group (consisting of two individuals) earned an aggregate of $129,800 in
direct or indirect remuneration during the fiscal year ending April 30, 1997
(consisting in part of a $69,000 annual management fee paid to Walnut
Associates, Inc., in consideration of the services of Mr. William Shapiro, its
sole shareholder). During the months of May, June, and July, 1997, the
management fee paid to Walnut Associates, Inc. was reduced to $2,750 monthly.
Commencing August, 1, 1997, the management fee was eliminated and Mr. William
Shapiro is to be paid a weekly salary of $1,200 (or $62,400 per annum.) The
Company pays directors' fees to outside directors in the amount of $500 per
director per meeting.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the common stock of the Company presently outstanding is owned by
Walnut Associates, Inc. and 100% of the common stock of Walnut Associates,
Inc., is beneficially owned by William Shapiro, the President, Director, and
Chief Executive Officer of the Company. The principal business address of
Walnut Associates, Inc. is Suite 200, One Belmont Avenue, Bala Cynwyd,
Pennsylvania 19004. As the sole shareholder, William Shapiro and Walnut
Associates, Inc., may be deemed "parents" of the Company as that term is
defined under the Securities Act of 1933, as amended. All of the Company's
presently outstanding Adjustable Rate Cumulative Preferred Shares are held by
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49
Mr. William Shapiro and members of his immediate family, individually or in
joint ownership, as well as $281 in legal capital of Prime Rate Cumulative
Preferred Shares at April 30, 1997.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no employment contracts with any of the Officers or Directors of
the Company.
For the three fiscal years ended April 30, 1997, the Company paid yearly
management service fees of $69,000 to Walnut Associates, Inc. (which is 100%
owned by William Shapiro). Management service fees have continued since July,
1997 at the rate of $2,750 per month. These fees were primarily to reimburse
Walnut Associates for the services provided to the Company by Mr. William
Shapiro. The management and servicing activities of Walnut Associates, Inc.
for which such charges are made also cover broad areas, including management
guidance, financing and furnishing of office and computer facilities.
Commencing August 1, 1997, the management fee was eliminated in favor of a
salary to be paid Mr. William Shapiro of $62,400 per annum.
Financial Data, Inc., an affiliate of the Company, performs transfer agent
duties for both the Company and ELCOA and receives monthly fees from both
companies for its services, which amounted to $171,684 for the fiscal year
ended April 30, 1997. Financial Data, Inc. is obligated to reimburse the
Company for the use of its computer facilities, personnel and miscellaneous
office expenses, including rent and telephone. Accrued reimbursements totaled
$127,566 for the fiscal year ended April 30, 1997. Financial Data, Inc. owed
the Company $50,363 at that date.
Legal services involving collections on defaulted leases were performed for
the Company and ELCOA by a law firm in which William Shapiro is a principal.
During fiscal year 1997, Mr. Shapiro's firm received $419,040 as reimbursement
for legal costs and expenditures incurred on behalf of the Company. Neither
William Shapiro nor Kenneth Shapiro are included on the law firm's payroll.
During fiscal 1997 the Company reimbursed Welco Securities, Inc. ("WELCO")
an affiliate owned by Mr. William Shapiro, for out-of-pocket expenses incurred
in connection with the offering and sale of Senior Thrift Certificates. Both
Companies pay Welco commissions between 0.2% and 8.0% of the sale price of the
certificates sold on behalf of the companies. See Footnote 10 to the
Consolidated Financial Statements. Both the Company and ELCOA amortize these
commissions over the terms of the certificates. During fiscal 1997 and 1996,
the Company and ELCOA paid Welco Securities, Inc. $342,330 and $349,293,
respectively, for commissions and reimbursements of out-of-pocket expenses.
Neither Kenneth Shapiro nor William Shapiro received any remuneration from
Welco associated with the sale of these securities. As of April 30, 1997,
Welco owed the Company $5,888 for printing and mailing costs paid by the
Company on Welco's behalf. During the fiscal year ended April 30, 1997, Welco
paid rentals of $23,924 on equipment leased from the Company.
On May 6, 1986, the Company formed a subsidiary, Equipment Leasing
Corporation of America ("ELCOA") which the Company capitalized initially with
$1,000,000 in equipment cost and related direct financing leases, in exchange
for all of the subsidiary's voting common stock. ELCOA is operated as a
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separate entity, with its own Board of Directors, a majority of the members of
which are independent of the Company, and maintains its principal office in
Wilmington, Delaware. ELCOA has entered into a Service Contract and other
related agreements with the Company, under the terms of which the Company and
its present employees will originate, administer and service all of ELCOA's
leases for a fee. In addition, the Company has granted to ELCOA a right of
first refusal to purchase certain equipment and associated leases from the
Company in excess of the Company's requirements. See also "BUSINESS - Methods
of Financing."
The Company also leases certain warehouse and print shop facilities from
Walnut Associates, Inc. Rents paid by the Company to Walnut Associates, Inc.
totaled $12,900 for the fiscal year ended April 30, 1997. See also Item 2 to
this Form 10-K.
The Company believes the above transactions to have been on terms at least
as favorable as the Company could have obtained from non-affiliated parties.
Since the Company and ELCOA are affiliated and share the same officers and
directors, certain conflicts of interest may arise between the Companies.
ELCOA competes with the Company in the equipment leasing business. Should
both companies have funds available at the same time for acquiring equipment
and related leases, conflicts of interest may arise as to which company should
hold and retain the equipment and related leases. In such situations, the
officers will analyze the equipment already purchased by the Company and
investment objectives of the Company and ELCOA. The officers will make the
decision as to which company will ultimately retain the equipment and related
leases, based upon such factors among others, as (a) the amount of cash
available to the Company and ELCOA, (b) the current and long term liabilities
of each company, and (c) the effect of such acquisition on the diversification
of each company's equipment and lease portfolio. ELCOA has the right of first
refusal in any equipment and appurtenant leases the Company wishes to sell,
based upon an Option Agreement between the parties. An additional conflict may
exist since the Company has been engaged in the collection of delinquent
accounts on behalf of ELCOA and will continue to receive servicing fees during
its collection efforts, although ELCOA may not recognize any income beyond the
original lease term.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS (Included in Item 8 of this Report):
Page
----
(a) Independent Auditor's Report 29
(b) Consolidated Balance Sheets at April 30,
1997 and 1996. 30
(c) Consolidated Statements of Operations for
the years ended April 30, 1997, 1996 and 1995. 32
(d) Consolidated Statement of Changes in
Shareholders' Deficit for the years
ended April 30, 1997, 1996 and 1995. 33
(e) Consolidated Statements of Cash Flows
for the years ended April 30, 1997, 1996
and 1995. 34
(f) Notes to Consolidated Financial Statements. 36
(2) FINANCIAL STATEMENT SCHEDULE (attached hereto):
(a) Report on Schedule. 57
(b) Schedule VIII - Valuation and Qualifying
Accounts. 58
All other schedules for which provision is made in the applicable
regulation of the Securities and Exchange Commission have been omitted because
they are not required under the related instructions or are inapplicable.
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52
3) EXHIBITS
3.1 - Certificate of Incorporation, as amended, incorporated by reference
to Exhibit 3.1 to Walnut's Annual Report on Form 10-K for the year
ended April 30, 1987 (File No. 2-65101; Filed July 29, 1987).
3.2 - By-Laws, as amended, Incorporated by reference to Exhibit 3.1 to
Walnut's Annual Report on Form 10-K for the year ended April 30,
1985. (File No. 2-65101; July 29, 1985).
4.1 - Specimen of Variable Rate Money Market Subordinated Demand Thrift
Certificate, incorporated by reference to Walnut's Registration
Statement on Form S-1 (File No. 2-78371; File July 9, 1982).
4.2 - Specimen of Fixed Term Money Market Subordinated Thrift
Certificates, incorporated by reference to Exhibit 4.1 to Walnut's
Registration Statement on Form S-1 (File No. 2-78371; Filed July 9,
1982).
4.3 - Specimen of ninety day demand Subordinated Thrift Certificate,
incorporated by reference to Exhibit 3.1 to Walnut's Registration
Statement on Form S-18 (File No. 2-65101; Filed October 24, 1979).
4.4 - Specimen of one, three and five year Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.2 to Walnut's
Registration Statement on Form S-18 (File No. 2-65101; Filed
October 24, 1979).
4.5 - Specimen of Variable Rate Money Market Demand Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.6 to Walnut's
Registration Statement on Form S-18 (File No. 2-65101; Filed April
15, 1980).
4.6 - Specimen of Fixed Rate Money Market Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.7 to Walnut's
Registration Statement on Form S-18 (File No. 2-65101; File April
15, 1980).
4.7 - Specimen of Variable Rate Money Market Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.1 of Walnut's
Registration Statement on Form S-18 (File No. 2-70326; Filed
December 19, 1980).
4.8 - Specimen of Fixed Term Money Market Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.2 to Walnut's
Registration Statement on Form S-18 (File No. 2-70326; Filed
December 19, 1980).
4.9 - Trust Indenture between Walnut and Fulton Bank, Trustee, dated
October 26, 1979 and amended by an Amendment dated April 14, 1980,
incorporated by reference to Exhibit 4.9 to Walnut's Registration
Statement on Form S-2 (File No. 2-92440; Filed September 5, 1986).
4.10 - Trust Indenture between Walnut and Fulton Bank, Trustee, dated as
of June 15, 1982, incorporated by reference to Exhibit 4.10 to
Walnut's Registration Statement on Form S-2 (File No. 2-92440;
Filed September 5, 1986).
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53
4.11 - Trust Indenture between Walnut and Fulton Bank, Trustee, dated as
of June 15, 1982, incorporated by reference to Exhibit 4.11 to
Walnut's Registration Statement on Form S-2 (File No. 2-92440;
Filed September 5, 1986).
4.12 - Subordination Agreement by William Shapiro and members of his
immediate family, incorporated by reference to Exhibit 3.9 to
Walnut's Registration Statement on Form S-18 (File No. 2-65101;
Filed May 19, 1980).
4.13 - Company Order dated June 8, 1980, incorporated by reference to
Exhibit 3.10 to Walnut's Registration Statement on Form S-18 (File
No. 2-65101; Filed June 9, 1980).
4.14 - Specimen of Adjustable Rate Cumulative Preferred Share Certificate,
incorporated by reference to Exhibit 4.14 to Form 8-K as filed by
Walnut, dated December 30, 1982 (File No. 2-65101).
4.15 - Specimen of Variable Rate Money Market Demand Subordinated Thrift
Certificate, incorporated by reference to Exhibit 4.15 to Walnut's
Registration Statement on Form S-2 (File No. 2-92440; Filed July
27, 1984).
4.16 - Specimen of Fixed Term Money Market Subordinated Thrift
Certificate, incorporated by reference to Exhibit 4.15 to Walnut's
Registration Statement on Form S-2. (File No. 2-92440; Filed July
27, 1984).
4.17 - Supplemental Trust Indenture dated July 24, 1984 to Trust Indenture
between Walnut and Fulton Bank, Trustee dated June 15, 1982,
incorporated by reference to Exhibit 4.17 to Walnut's Registration
Statement on Form S-2. (File No. 2-92440; Filed July 27, 1984).
4.18 - Specimen of Prime Rate Cumulative Preferred Stock Certificate,
incorporated by reference to Exhibit 4.18 to Walnut's Registration
Statement on Form S-2. (File No. 2-92440; Filed July 27, 1984).
4.19 - Certificate of designations, relative rights, preferences and
limitations of Prime Rate Cumulative Preferred Stock, incorporated
by reference to Exhibit 4.19 to Walnut's Registration Statement on
Form S-2. (File No. 2-92440; Filed July 27, 1984).
4.20 - Second Supplemental Trust Indenture dated September 3, 1986 to
Trust Indenture between Walnut and Fulton Bank, Trustee dated June
15, 1982, as supplemented July 24, 1984, incorporated by reference
to Exhibit 4.20 to Walnut's Registration Statement on Form S-2
(Filed September 5, 1986; File No. 2-92440).
4.21 - Trust Indenture dated as of October 7, 1987 between Walnut and
First Valley Bank, Bethlehem, Pennsylvania, Trustee, incorporated
by reference to Exhibit 4.21 to Walnut's Registration Statement on
Form S-2 (Filed October 9, 1987; File No 33-16599).
4.22 - Form of Specimen of Demand Senior Thrift Certificate; incorporated
by reference to Exhibit 4.22 to Walnut's Registration Statement on
Form S-2 (Filed October 9, 1987; File No. 33-16599).
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54
4.23 - Form of Specimen of Fixed Term Senior Thrift Certificate,
incorporated by reference to Exhibit 4.23 to Walnut's Registration
Statement on Form S-2(Filed October 9, 1987; File No. 33-16599).
4.24 - Form of First Supplemental Trust Indenture dated September 20, 1988
to Trust Indenture dated as of October 7, 1987 between Registrant
and First Valley Bank, Bethlehem, Pennsylvania, Trustee,
incorporated by reference to Exhibit 4.24 to Walnut's Registration
Statement on Form S-2. (File No. 33-23210; Filed July 21, 1988.)
4.25 - Form of Demand Senior Thrift Certificate, incorporated by reference
to Exhibit 4.25 to Walnut's Registration Statement on Forms S-2
(File No. 33-23210; Filed July 21, 1988.)
4.26 - Form of Fixed Term Senior Thrift Certificate, incorporated by
reference to Exhibit 4.26 to Walnut's Registration Statement on Form
S-2 (File No. 33-23210; Filed July 21, 1988.)
4.27 - Form of Second Supplemental Trust Indenture dated as of September
13, 1989 to Trust Indenture dated as of October 7, 1987 between
Registrant and First Valley Bank, Bethlehem, Pennsylvania, Trustee,
incorporated by reference to Exhibit 4.27 to Walnut's Registration
Statement on Form S-2. (File No. 33-29704; Filed July 10, 1989.)
4.28 - Form of Specimen of Demand Senior Thrift Certificate, incorporated
by reference to Exhibit 4.28 to Walnut's Registration Statement on
Form S-2 (File No. 33-29704; Filed July 10, 1989.)
4.29 - Form of Specimen of Fixed Term Senior Thrift Certificate,
incorporated by reference to Exhibit 4.29 to Walnut's Registration
Statement on Form S-2 (File No. 33-29704; Filed July 10, 1989.)
4.30 - Form of Third Supplemental Trust Indenture dated as of August 17,
1990 to Trust Indenture dated as of October 7, 1987 between
Registrant and First Valley Bank, Bethlehem, Pennsylvania, Trustee
(File No. 33-35663; Filed June 29, 1990.)
4.31 - Specimen of Demand Senior Thrift Certificate (incorporated by
reference to Exhibit 4.31 to Walnut's Registration Statement on Form
S-2 (File No. 33-35663; Filed June 29, 1990.)
4.32 - Specimen of Fixed Rate Senior Thrift (incorporated by references to
Exhibit to Walnut's Registration Statement on Form S-2 (File No.
33-35663; Filed July 29, 1990)
4.33 - Fourth Supplemental Trust Indenture dated as August 14, 1992 to
Trust Indenture dated as of October 7, 1987 between Registrant and
First Valley Bank, Bethlehem, Pennsylvania, Trustee. (File No.
33-49278; File August 18, 1992).
4.34 - Form of Specimen of Demand Senior Thrift Certificate. (File No.
33-49278; Filed July 6, 1992).
4.35 - Form of Specimen of Fixed Term Senior Thrift Certificate. (File No.
33-49278; Filed July 6, 1992).
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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 Sixth Supplemental Trust Indenture dated as of September 10, 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. (Filed September 11, 1996; Filed No.
333-09145)
4.40 Form of Specimen of Demand Senior Thrift Certificate. (Filed July
30, 1996; File No. 333-09145)
4.41 Form of Specimen of Fixed Term Senior Thrift Certificate. (Filed
July 30, 1996; File No. 333-09145)
10.1 - Specimen of existing five year Subordinated Debenture, incorporated
by reference to Exhibit 11.2 to Walnut's Registration Statement on
Form S-18 (File No. 2-65101; Filed July 26, 1979).
10.2 - Form of equipment lease, incorporated by reference to Exhibit 11.3
to Walnut's Registration Statement on Form S-18 (File No. 2-65101;
Filed July 26, 1979).
10.3 - Agreement with Walnut Associates, Inc. as of February 1, 1979,
incorporated by reference to Exhibit 11.5 to Walnut's Registration
Statement on Form S-18 (File No. 2-65101; Filed July 26, 1979).
10.5 - Service Contract dated May 23, 1986 between Walnut and Equipment
Leasing Corporation of America; Incorporated by reference to Exhibit
10.5 to Equipment Leasing Corporation of America's Registration
Statement on Form S-1 (File No. 33-6259; Filed June 6, 1986).
10.6 - Escrow Agreement dated May 23, 1986 between Walnut and Equipment
Leasing Corporation of America re: Segregation of Funds;
incorporated by reference to Exhibit 10.6 to Equipment Leasing
Corporation of America's Registration Statement on Form S-1 (File
No. 33-6259; Filed June 6, 1986).
10.7 - Option Agreement dated May 23, 1986 between Walnut and Equipment
Leasing Corporation of America; incorporated by reference to
Equipment Leasing Corporation of America's Registration Statement on
Form S-1 (File No. 33-6259; Filed June 6, 1986).
10.8 - Agreement regarding sale of equipment and related leases to
Equipment Leasing Corporation of America in exchange for common
stock; Incorporated by reference to Exhibit 2.1 to Equipment Leasing
Corporation's Registration Statement of Form S-1 (File No. 33-6259;
Filed June 6, 1986).
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10.9 - Lease Agreement dated as of March 6, 1987 between Walnut and Walnut
Associates, Inc. covering the premises located at 15 South 4th
Street, Fernwood, PA, incorporated by reference to Exhibit 10.23 to
Walnut's Registration Statement on Form S-2 (Filed 7/31/87; File No.
2-92440).
10.10- Service Purchase Contract dated May 18, 1995 between Walnut and the
Pennsylvania Office of Liquidations and Rehabilitations regarding
servicing of performing lease files. (File No. 2-65101; Filed July
28, 1995).
10.11- Master Leasing Program Agreement dated as of June 9, 1995 between
TEC America, Inc. and the Company regarding a "private label
leasing" agreement between the parties. (File No 2-65101; Filed
July 28, 1995).
10.12- Sublease agreement dated as of July 7, 1995 between the Company and
Walnut Associates, Inc. covering office space located at Suite 200,
One Belmont Avenue, Bala Cynwyd, Pennsylvania, covering the period
from October 1, 1995 to January 31, 2003. Incorporated by reference
to Exhibit 10.12 to Walnut's Registration Statement on Form S-2
(File No. 33-81630; Filed September 12, 1995).
10.13- Memorandum of Office Building Lease dated as of August 3, 1995
between Walnut Associates, Inc. and WRGSB Associates, covering the
premises located at One Belmont Avenue, Bala Cynwyd, PA.
Incorporated by reference to Exhibit 10.13 to Walnut's Registration
Statement on Form S-2 (File No. 33-81630; Filed September 12, 1995).
12.1 - See "Consolidated Statements of Operations" in Item 8 to this
report.
22.1 - Subsidiaries of Walnut.
*27.1 - Financial Data Schedule.
*99.1 Form of Press Release dated as of August 8, 1997.
*99.2 Form of Notice of filing petition for reorganization sent to holders
of Walnut's debt securities.
*99.3 Form of Notice of filing of petition for reorganization sent to
holders of ELCOA's debt securities.
* Filed with this Form-10K
(b) Reports on Form 8-K
(1) There were no reports filed on Form 8-K during the three months
ended April 30, 1997.
------------------------
Registrant has neither furnished to security holders any annual reports
covering the registrant's last fiscal year nor any proxy materials.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to a
previously filed report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WALNUT EQUIPMENT LEASING CO., INC.
By: /s/ William Shapiro
----------------------------------
William Shapiro, President
Date: August 13, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the dates indicated.
Name Title
/s/ William Shapiro
- ----------------------- President, Chief Executive,
William Shapiro Principal Financial and
Accounting Officer; Director
Date: August 13, 1997
/s/ Kenneth S. Shapiro
- ----------------------- Vice-President; Director
Kenneth S. Shapiro
Date: August 13, 1997
/s/ Deljean Shapiro
- ----------------------- Secretary/Treasurer; Director
Deljean Shapiro
Date: August 13, 1997
/s/ Philip R. Bagley
- ----------------------- Director
Philip R. Bagley
Date: August 13, 1997
/s/ Lester D. Shapiro
- ----------------------- Director
Lester D. Shapiro
Date: August 13, 1997
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58
INDEPENDENT AUDITOR'S
REPORT ON FINANCIAL STATEMENT SCHEDULE
In connection with our audits of the consolidated financial statements of
Walnut Equipment Leasing Co., Inc. at April 30, 1997 and 1996 and for each of
the three years in the period ended April 30, 1997, we have also audited the
consolidated financial statement schedule included in this Form 10-K as listed
in Item 14(a)(2).
In our opinion, the consolidated financial statement schedule mentioned
above presents fairly the information required to be stated therein.
/s/ Cogen Sklar LLP
COGEN SKLAR LLP
Bala Cynwyd, Pennsylvania
July 1, 1997
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WALNUT EQUIPMENT LEASING CO., INC.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
---------
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
- ---------------------------------------------------------------------------------------
Allowance for Doubtful
Lease Receivables (A)
- ----------------------
For the Fiscal Year Ended
April 30, 1995 $2,612,289 $1,463,752(B) $2,111,032(C) $1,965,009
For the Fiscal Year Ended
April 30, 1996 $1,965,009 $1,045,089(B) $ 940,243(C) $2,069,855
For the Fiscal Year Ended
April 30, 1997 $2,069,855 $1,165,905(B) $1,103,685(C) $2,132,075
<FN>
(A) Represents estimated losses that will be incurred in the collection of
receivables from direct finance leases. There are no allowances for doubtful
operating lease receivables.
(B) Provisions for estimated losses calculated on the basis of amounts necessary
to provide for anticipated losses on delinquent leases on an impairment basis.
(C) Write-offs of bad debts, net of recoveries.
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60
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended Commission file number
APRIL 30, 1997 2-65101
WALNUT EQUIPMENT LEASING CO., INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-1712443
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
SUITE 200, ONE BELMONT AVENUE, BALA CYNWYD, PA 19004
(Address of principal executive offices) (Zip Code)
EXHIBIT VOLUME
61
WALNUT EQUIPMENT LEASING CO., INC.
EXHIBIT INDEX
10-K
Exhibit Sequential
Number Description Page Number
- ------ -------------------------------------------------- -----------
27.1 Financial Data Schedule. 62
99.1 Form of press release dated as of August 8, 1997. 63
99.2Form of notice of filing petition for
reorganization sent to holders of Walnut's debt
securities. 64
99.3Form of notice of filing of petition for
reorganization sent to holders of ELCOA's debt
securities. 65