1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended July 31, 1997
-------------
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ............... to ....................
Commission File Number: 33-16599
--------
WALNUT EQUIPMENT LEASING CO., INC.
----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-1712443
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
SUITE 200, ONE BELMONT AVENUE, BALA CYNWYD, PENNSYLVANIA 19004
--------------------------------------------------------------
(Address of Principal executive offices) (Zip Code)
(610) 668-0700
(800) 866-0809
-------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes / X / No / /
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of August 31, 1997: $1.00 par value common stock - 1,000
shares.
2
WALNUT EQUIPMENT LEASING CO., INC.
(DEBTOR-IN-POSSESSION)
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
- ------------------------------ -----------
Item 1. Financial Statements
Consolidated Balance Sheets; July 31, 1997
(unaudited) and April 30, 1997 1-2
Consolidated Statements of Operations;
Three Months ended July 31, 1997 and
1996 (unaudited) 3
Consolidated Statement of Changes in
Shareholders' Deficit; Three Months ended
July 31, 1997 (unaudited) 4
Consolidated Statements of Cash Flows;
Three Months ended July 31, 1997 and
1996 (unaudited) 5-6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 14
Item 3. Defaults Upon Senior Securities 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
3
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
(Debtor-In-Possession)
CONSOLIDATED BALANCE SHEETS
July 31, 1997 April 30, 1997
------------- --------------
(unaudited)
ASSETS
Direct Finance Leases:
Aggregate future amounts
receivable under lease contracts $ 20,411,011 $ 20,917,123
Estimated residual value of equipment 1,440,493 1,520,822
Initial direct costs, net 547,394 541,627
Less:
Unearned income under lease contracts (4,583,300) ( 4,663,898)
Advance payments ( 626,730) ( 633,450)
------------ ------------
17,188,868 17,682,224
Allowance for doubtful lease receivables (2,008,981) ( 2,132,075)
------------ ------------
15,179,887 15,550,149
Operating Leases:
Equipment at cost,
Less accumulated depreciation of
$20,221 and $18,028, respectively 15,110 17,303
Accounts receivable 2,058 7,954
Cash and cash equivalents 461,186 439,829
Other assets (Includes $50,363 receivable
from related party at April 30, 1997) 370,357 1,138,951
------------ ------------
Total assets $ 16,028,598 $ 17,154,186
============ ============
See accompanying notes
1
4
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
(ONSOLIDATED BALANCE SHEETS - (Continued)
July 31, 1997 April 30, 1997
------------- --------------
(unaudited)
LIABILITIES
Amounts payable to equipment suppliers $ 491,521 $ 885,658
Other accounts payable and accrued expenses 401,296 268,884
Demand, Fixed Rate and
Money Market Thrift Certificates
(Includes $177,250 at April 30, 1997
payable to related parties) 23,608,078 24,128,483
Senior Thrift Certificates
(includes $674,407 at April 30, 1997
payable to related parties) 22,952,463 21,844,864
Subordinated Thrift Certificates
(Includes $316,444 at April 30, 1997
payable to related parties) 5,340,286 5,343,945
Accrued interest 7,678,352 7,065,141
------------ ------------
60,471,996 59,536,975
------------ ------------
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 (44,545,454) (42,484,845)
------------ ------------
(44,443,398) (42,382,789)
------------ ------------
Total liabilities and shareholders' deficit $ 16,028,598 $ 17,154,186
============ ============
See accompanying notes
2
5
WALNUT EQUIPMENT LEASING CO., INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Months Ended July 31,
1997 1996
------------ -----------
(unaudited) (unaudited)
Revenue:
Income earned under direct
finance lease contracts $ 1,003,620 $ 919,872
Operating lease rentals 4,305 6,823
----------- -----------
Total revenue 1,007,925 926,695
----------- -----------
Costs and expenses:
Interest expense, net 1,336,091 1,294,988
Lease origination expenses 221,493 359,076
General and administrative expenses 463,006 550,939
Provision for doubtful lease receivables 315,216 315,604
Depreciation of operating lease equipment 2,193 3,555
Nonrecurring Item:
Charge-Off of Deferred solicitation and
registration expenses related to the
sale of Demand, Fixed Rate and
Senior Thrift Certificates 730,535 ---
----------- -----------
Total costs and expenses 3,068,534 2,524,162
----------- -----------
Loss from operations before provision for
federal and state income taxes (2,060,609) (1,597,467)
Provision for federal and state income taxes
(See Note 2) --- ---
----------- -----------
Net Loss (See Note 2) $(2,060,609) $(1,597,467)
=========== ===========
SEE ACCOMPANYING NOTES
3
6
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
Prime Rate Adjustable Rate Total
Cumulative Cumulative Common Accumulated Shareholders'
Preferred Shares Preferred Shares Stock Deficit Deficit
---------------- ---------------- ------ ----------- ------------
No. of Shares No. of Share
Issued Amount Issued Amount
------ ------ ------ ------
Balance April 30, 1997,
previously reported 281 $ 281 275 $ 275 $101,500 $(42,484,845) $(42,382,789)
Net loss for the three month
period ended July 31, 1997
(unaudited) --- --- --- --- --- (2,060,609) (2,060,609)
---- ------- ----- ------- -------- ------------ ------------
Balance, July 31, 1997 (unaudited) 281 $ 281 275 $ 275 $101,500 $(44,545,454) $(44,443,398)
==== ======= ===== ======= ======== ============ ============
SEE ACCOMPANYING NOTES
4
7
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended July 31,
1997 1996
----------- -----------
(unaudited) (unaudited)
OPERATING ACTIVITIES
- --------------------
Net Loss $(2,060,609) $(1,597,467)
Adjustments to Reconcile Net Loss
to Net Cash Used in Operating Activities:
Nonrecurring Item 730,535 ---
Depreciation 2,193 ---
Amortization of Deferred Debt
Registration Expenses 37,199 30,444
Provision for doubtful
lease receivables 315,216 315,604
Effects of Changes
in other Operating Items:
Accrued Interest 613,211 319,659
Amounts Payable to Equipment Suppliers (394,136) (39,085)
Other (net), principally
increase in other Assets 133,271 (113,179)
----------- ------------
Net Cash Used in Operating Activities (623,120) (1,084,024)
----------- ------------
INVESTING ACTIVITIES
- --------------------
Excess of Cash Received Over
Lease Income Recorded 1,439,130 1,820,829
Increase (Decrease) in Advance Payments (6,720) 3,188
Purchase of Equipment for Lease (1,371,468) (2,289,317)
----------- ------------
Net Cash Provided by (Used in)
Investing Activities $ 60,942 $ (465,300)
----------- ------------
See accompanying notes
5
8
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
For the Three Months Ended July 31,
1997 1996
----------- -----------
(unaudited) (unaudited)
FINANCING ACTIVITIES
- --------------------
Proceeds from Issuance of:
Demand, and Fixed Rate Certificates $ --- $ 2,363,448
Senior Thrift Certificates 1,444,834 1,399,289
Redemption of:
Demand, Fixed Rate, and Money
Market Thrift Certificates (520,405) (2,211,313)
Subordinated Thrift Certificates
and Debentures (3,659) (66,730)
Senior Thrift Certificates (337,235) (668,762)
----------- -----------
Net Cash Provided By
Financing Activities 583,535 815,932
----------- -----------
Increase (Decrease) in Cash
and Cash Equivalents 21,357 (733,392)
Cash and Cash Equivalents,
Beginning of Year 439,829 9,207,905
----------- -----------
Cash and Cash Equivalents,
End of Period $ 461,186 $ 8,474,513
=========== ===========
See accompanying notes
6
9
Walnut Equipment Leasing Co., Inc. and Subsidiaries
(Debtor-In-Possession)
Notes to Interim Consolidated Financial Statements
Three Months Ended July 31, 1997 and 1996
1. FINANCIAL STATEMENT PRESENTATION
The unaudited interim financial statements presented herein have been
prepared in accordance with the instructions to Form 10-Q and do not include
all of the information and note disclosures required by generally accepted
accounting principles. These statements should be read in conjunction with
the audited financial statements and notes thereto for the year ended April
30, 1997. The accompanying interim financial statements have not been
audited by independent certified public accountants, but in the opinion of
management, such financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary to summarize fairly the
results of operations, and are not necessarily indicative of the results to
be expected for the full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Although these estimates are based on management's knowledge of
current events and actions it may undertake in the future, they may
ultimately differ from actual results.
2. ACCOUNTING POLICIES
METHOD OF CONSOLIDATION
The unaudited interim consolidated financial statements of Walnut
Equipment Leasing Co., Inc. for the three month periods ended July 31, 1997
and 1996, respectively, include the operating results of its wholly-owned
subsidiary, Equipment Leasing Corporation of America ("ELCOA"). All
intercompany items have been eliminated for purposes of preparing the
consolidated financial statements contained herein.
ACCOUNTING FOR LEASES
The Company's lease contracts provide for total noncancellable rentals
which exceed the cost of the leased equipment plus anticipated financing
charges and, accordingly, are accounted for as financing leases. At the
inception of each new lease, the Company records the gross lease receivable,
the estimated residual value of the leased equipment, and the unearned lease
income. The unearned lease income represents the excess of the gross lease
receivable at inception of the contract plus the estimated residual value
over the cost of the equipment being leased. For leases originated after
April 30, 1988, the Company has changed its method of accounting to conform
with the requirements of FAS No. 91 "Accounting for Non Refundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Cost
of Leases". Under this method, a portion of commissions, processing and
credit approval costs in the amounts of $97,369 and $92,106 for the three
months ended July 31, 1997 and 1996, respectively, have been deferred as part
of the Investment in Direct Financing Leases.
Unearned income is earned and initial direct costs are amortized to
direct finance lease income using the interest (or "effective") method over
the term of each lease.
7
10
An allowance for doubtful direct finance lease receivables has been
maintained at a level considered adequate to provide for estimated losses
that will be incurred in the collection of these receivables. The allowance
is increased by provisions charged to operating expense and reduced by
charge-offs based upon a periodic evaluation, performed at least quarterly,
of delinquent finance lease receivables. Pursuant to FAS 91, reserves are
established to reflect losses anticipated from delinquencies and impairments
that have already occurred rather than ultimate losses expected over the life
of the lease portfolio. Total write-offs charged against the reserve for the
three months ended July 31, 1997 and 1996 were $441,890 and $317,311,
respectively, while the Company increased these reserves by charges of
$315,216 and $315,604, respectively, to maintain reserves considered adequate
for losses anticipated from remaining outstanding delinquent lease
receivables.
INCOME TAXES EXPENSE
Effective May 1, 1993, the Company adopted Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" (SFAS 109), which
requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expenses is the tax
payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
The net deferred tax asset as of April 30, 1997 includes deferred tax
assets (liabilities) attributable to the following temporary deductible
(taxable) differences:
Operating lease method vs. direct finance method $ 2,738,000
Provision for doubtful lease receivables 831,500
Operating loss carryforward 11,386,200
Other (42,000)
-----------
Net deferred tax asset 14,913,700
Valuation allowance (14,913,700)
-----------
Net deferred tax asset after valuation allowance $ ---
===========
A valuation allowance was considered necessary since it is more likely
than not that the Company will not realize the tax benefits of the deductible
differences and operating loss carryforward. A valuation allowance was
required as of April 30, 1997 due to the net operating loss carryover of
approximately $33,489,000 expiring through 2012 and investment tax credit
carryover of approximately $943,000 expiring through 2001, and due to the
valuation allowance for the carryforwards there is no net change in deferred
tax assets for the three months ended July 31, 1997.
8
<PAGE 11>
3. BANKRUPTCY PROCEEDINGS
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. For further information in this regard, see Item 3 to Form
10-K as filed August 14, 1997 for the fiscal year ended April 30, 1997.
4. NONRECURRING ITEM
As a result of requests by certificate holders for redemptions which exceeded
the Company and ELCOA'S cash and cash equivalents, the Company was unable to
meet 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 reviewed the Trust
Indentures covering the registered offering of these debt securities and
concluded that a default may have occurred in the redemption provision.
Prior to July 31, 1997, sales of the Company's and ELCOA's debt securities
had been suspended, and were not expected to recommence in the future.
Accordingly, during the three month period ended July 31, 1997, the Company
recognized a nonrecurring charge to operations the amount of $730,535
representing $222,693 of capitalized commissions previously paid and $102,916
of capitalized registration expenses related to the prior registration and
sales of Senior Thrift Certificates and $258,482 of capitalized commissions
previously paid and $146,444 of capitalized registration expenses related to
the prior registration and sale of Demand and Fixed Rate Certificates.
9
12
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RECENT DEVELOPMENTS, CHAPTER 11 PROCEEDING
As described in the Company's annual report on Form 10-K for the year ended
April 30, 1997 (the "1997 10-K"), on August 8, 1997 the Company and ELCOA
filed voluntary petitions for reorganization (the "Chapter 11 Petition")
under Chapter 11 of the Federal Bankruptcy Code (the "Chapter 11
Proceeding"). Both 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 "Bankruptcy
Court"). As a result of these limitations the Company and ELCOA have
implemented a number of cost-saving measures. Among other things, since the
filing of the Chapter 11 Petitions, Walnut has (i) tightened the criteria
under which it is willing to originate new lease receivables (ii) received
fewer new lease applications for consideration and (iii) reduced its
workforce. See Forms 10-K for the fiscal years ended April 30, 1997 as filed
by ELCOA and Walnut.
On September 26, 1997 the Bankruptcy Court, upon the motion of the United
States Trustee, entered an order authorizing the appointment of examiner to
(i) investigate the acts, conduct, assets, liabilities, and current financial
condition of the Company and ELCOA, and the operation of their businesses,
among other things, (ii) determine the appropriateness of substantive
consolidation, and (iii) the desirability of the Company and ELCOA continuing
with their ongoing businesses under current management. The examiner is
expected to file the statement of this investigation on or before December 4,
1997. Management intends to continue operations in the ordinary course of
business at least until that date.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JULY 31, 1997 AND 1996
REVENUES FROM LEASE CONTRACTS
Total revenues from direct finance leases for the three months ended July
31, 1997 increased 9.1% or $83,748 as compared to the three months ended July
31, 1996. This increase resulted from an increase in the average amount of
outstanding lease receivables in comparison to the prior year. Aggregate new
lease receivables entered decreased $709,063 or 23.0% to $2,375,162 for the
three months ended July 31, 1997 from $3,084,225 for the three months ended
July 31, 1996. 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.
10
13
Unearned income during the three months ended July 31, 1997 decreased by
$80,598 after having increased by $103,355 during the three months ended July
31, 1996 as a result of the decrease in aggregate new lease receivables
entered. During the three months ended July 31, 1997 and 1996, the gross
rents charged over the "net investment" in direct finance leases were 180%
and 142%, respectively. The recognition of direct finance lease income
reflects the composite aging of the underlying leases in the portfolio, as
well as application of FAS No. 91, to outstanding leases after May 1, 1988
which affects leases originated after April 30, 1988, and changes the method
used to recognize income and expense items. FAS No. 91 does not change the
total income and expenses ultimately to be recognized from each transaction.
During a period in which the rate of growth of new lease volume increases,
the growth rate of net lease revenue in that period will be less than the
rate of growth in new lease volume, as income earned from new lease volume is
recognized over the term of each lease contract and not necessarily in the
year the contract is entered.
The limited use of the operating lease equipment program resulted in no
equipment being purchased for operating leases for the three months ended
July 31, 1997, and $7,894 for the three months ended July 31, 1996.
Operating lease rental income decreased by $2,518 in the three months ended
July 31, 1997 as compared to the three months ended July 31, 1996.
INTEREST EXPENSE
During the three months ended July 31, 1997 and 1996, the Company
incurred $1,336,091 and $1,294,988, respectively, in interest expense (net)
on its outstanding debt securities. Accrued interest thereon of $7,678,352
and $7,065,141, respectively, were outstanding at July 31, 1997 and 1996.
During the three months ended July 31, 1996 the Company's excess cash was
invested in short-term U.S. Government Treasury Bills, having maturities of
three months. During the three months ended July 31, 1997, no cash was
invested in U.S. Treasury Bills. Total interest expense (disregarding
interest income of $4,522 and $98,374, respectively, during the three month
periods ended July 31, 1997 and 1996) averaged 9.1% on average total
borrowings (including accrued interest) of $58,980,806 for the three months
ended July 31, 1997 as compared to 9.3% on average total borrowings
(including accrued interest) of $60,207,293 for the three months ended July
31, 1996.
OTHER EXPENSES
Lease origination expenses decreased 38.3% or $137,583 for the three
months ended July 31, 1997, compared to the corresponding period ended a year
earlier. Lease origination expenses, including capitalized commissions paid,
were 10.1% of new direct financing lease receivables during the three months
ended July 31, 1997 as compared to 12.2% for the three months ended July 31,
1996. The decreased percentage and amount in the period ended July 31, 1997
is directly attributable to the decreased costs associated with the Company's
direct mail efforts during the three months ended July 31, 1997. During the
three months ended July 31, 1996, the Company had been sending approximately
20,000 pieces of direct mail to equipment manufacturers and distributors
weekly. The costs associated with direct mail, taking into consideration
printing costs, overhead allocation, and bulk mail postage, resulted in an
11
14
average cost per mailing of $.30. During the current three months ended July
31, 1997, the Company has been successfully experimenting since the middle of
May, 1997, with using telefax transmissions to its equipment manufacturers
and distributors at a reduced cost per response of approximately $.05 to $.07
per response. During the three months ended July 31, 1997 and 1996,
commissions of $17,247 and $18,512, respectively, were paid and included as
lease origination expenses during the period.
General and administrative expenses decreased by $87,933 or 16.0% for the
three months ended July 31, 1997, as compared to the corresponding period in
1996, primarily due to decreased recognition of amortized expenses associated
with the registration and solicitation of debt securities by the Company and
ELCOA.
An allowance for doubtful direct finance lease receivables is maintained
at a level considered adequate to provide for estimated losses that will be
incurred in the collection of these receivables. The allowance is increased
by the provisions charged to operating expense and reduced by charge-offs.
See Footnote 2 to the Interim Consolidated Financial Statements for a more
detailed discussion of the accounting for the provision for doubtful
accounts.
NONRECURRING ITEMS
During the three month period ended July 31, 1997, the company recognized
a nonrecurring charge of $730,535 representing the charge-off of $222,693 of
capitalized commissions paid and $102,916 of capitalized registration
expenses related to the sale of Senior Thrift Certificates and $258,482 of
capitalized commissions paid and $146,444 of capitalized registration
expensed related to the sale of Demand and Fixed Rate Certificates. See Note
3 to the financial statements for a more detailed discussion.
FURTHER REFINEMENTS IN MARKETING STRATEGY AND EFFORTS TO REDUCE OPERATING
LOSSES
See pages 23 to 25 of the Company's 10-K for the fiscal year ended April
30, 1997, filed August 14, 1997, for a detailed discussion of Refinements in
Marketing Strategy.
CAPITAL RESOURCES AND LIQUIDITY
The Company has financed its growth to date primarily from proceeds of
debt securities offered to the public, as well as from rental receipts from
its outstanding lease portfolio.
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 sales 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
12
15
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.
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. 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 period.
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 obligation, 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 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 operation, the Company and
ELCOA must generate additional sources of liquidity to fund new business, of
which there can be no assurance.
See "Consolidated Statements of Cash Flows" on page 5 of this report for
an analysis of the sources and uses of cash by the Company during the three
month periods ended July 31, 1997 and 1996, respectively.
For a complete discussion of liquidity and capital resources for the
fiscal year ending April 30, 1997, reference is made to the "Capital
Resources and Liquidity" section of Form 10-K filed on August 14, 1997 for
the fiscal year ended April 30, 1997.
STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, the matters
discussed in Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations or elsewhere in this quarterly report on
Form 10-Q, 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 Financial statements for the fiscal
year ended April 30, 1997 as contained in Form 10-K as filed , and elsewhere
in this Form 10-Q. 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.
13
16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Pursuant to an Order to Show Cause dated August 4, 1997 (the "Order"), the
Pennsylvania Securities Commission (the "PSC") instituted an Administrative
Proceeding regarding the Company, ELCOA, WELCO Securities, Inc., a registered
broker-dealer, William Shapiro (President of the Company), Kenneth S. Shapiro
(Vice-President of the Company), and John J. McGarry, a registered agent for
First Allied Securities of Warren, Pennsylvania.
The Order alleges that the named parties (other than ELCOA and McGarry)
violated provisions of the Pennsylvania Securities Act of 1972 in connection
with certain offers and sales of the Company's Demand Senior Thrift
Certificates and Fixed Term Senior Thrift Certificates. The Order also
alleges violations by the named parties (other than the Company) of the
Pennsylvania Securities Act of 1972 in conjunction with certain offers and
sales of ELCOA Demand Certificates and Fixed Rate Certificates. The Company,
ELCOA, William Shapiro and Kenneth S. Shapiro have answered the Order by
denying the PSC's allegations.
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 Federal Bankruptcy Court for the Eastern
District of Pennsylvania. For further information in this regard, see Item 3
to Form 10-K as filed August 14, 1997 for the fiscal year ended April 30,
1997, as well as information contained elsewhere in this Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Reference is made to "CAPITAL RESOURCES AND LIQUIDITY", appearing above, as
respects the Company's default in the terms and conditions of certain Trust
Indentures covering the issuance of its Senior and Subordinated Thrift
Certificates, and Demand, Fixed Rate, and Money Market Thrift Certificates
issued by ELCOA.
ITEM 5. OTHER INFORMATION
On August 8, 1997, ELCOA AND Walnut filed voluntary petitions for
reorganization under Chapter 11, of the U.S. Bankruptcy Code. ELCOA and
Walnut are managing their business as debtors-in-possession subject to the
supervision and control of the Federal Bankruptcy Court for the Eastern
District of Pennsylvania.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated July 30, 1997 with
respect to the Company's inability to meet the requests for redemption of its
Senior and Subordinated Thrift Certificates beginning July 7, 1997 and
thereafter and concluded that a default may have occurred in the redemption
provisions. As of July 3, 1997, the Company suspended sales of its Senior
Thrift Certificates.
14
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
October 24, 1997 WALNUT EQUIPMENT LEASING CO., INC.
- ------------------ ----------------------------------
Date
/s/ William Shapiro
----------------------------------
William Shapiro, President and
Chief Financial Officer