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FORM OF PROSPECTUS SUPPLEMENT REGARDING CURRENT
INTEREST RATES ON THE CERTIFICATES TO BE OFFERED
EQUIPMENT LEASING CORPORATION OF AMERICA
VARIABLE RATE / DEMAND
---------------------------
Annual Rate Effective Annual Yield*
----------- ----------------------
Effective January 31, 1997 7.25% 7.50%
- -------------------------------------------------------------------------------
FIXED TERM, FIXED RATE
----------------------
Annual Rate Effective Annual Yield*
----------- ----------------------
3-5 Months 7.65% 7.92%
6-11 Months 8.00% 8.30%
12-23 Months 8.25% 8.57%
24-35 Months 8.50% 8.84%
36-47 Months 8.75% 9.11%
48-59 Months 9.00% 9.38%
60-83 Months 9.50% 9.92%
84-107 Months 9.65% 10.09%
108-120 Months 9.75% 10.20%
* The Effective annual yield is based on the rates listed. It assumes the
reinvestment of principal and interest at the same rate at maturity for
fixed term certificates of one year or less. Fixed term rates are subject to
change at renewal. This should not be considered a representation of future
rates.
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EQUIPMENT LEASING CORPORATION OF AMERICA
$45,200,000 CERTIFICATES
DEMAND CERTIFICATES
(Interest Rate - At least 1% above 6-Month U.S. Treasury Bill rate)*
-------------------------------------------------------------------
FIXED RATE CERTIFICATES
FOR PERIODS OF 3 THROUGH 120 MONTHS
Terms Interest Rate*
- ----- --------------
3 to 24 Months At least 1% above 6-Month U.S. Treasury Bill rate
25 to 60 Months At least 2% above 6-Month U.S. Treasury Bill rate
61 to 120 Months At least 3% above 6-Month U.S. Treasury Bill rate
*For a description of the 6-Month U.S. Treasury Bill rate calculation,
including the minimum interest rate payable on the Certificates, see
"DESCRIPTION OF SECURITIES-DEBENTURES; General". There is no maximum interest
rate which may be payable.
This offering relates to an aggregate of $50,000,000 in principal amount of
debentures referred to as "Demand and Fixed Rate Certificates" (the
"Debentures") being offered by Equipment Leasing Corporation of America
("ELCOA"), less $4,800,000 sold prior to the date of this Prospectus. The
minimum investment in these Debentures is $100. This offering is being made on
a continuous, on-going basis. Purchasers have the option of purchasing either
a Demand Certificate, or a Fixed Rate Certificate with a maturity ranging from
three to one-hundred twenty months. This election is made by the purchaser as
they subscribe for the Certificates. The current interest rates being offered
pursuant to the current supplement attached to this Prospectus reflect the
interest rates being offered on Certificates purchased within given ranges of
maturity, i.e. three to five months, six to eleven months, up to one-hundred
twenty months in duration. The Debentures will be issued pursuant to the terms
of a supplemental trust indenture dated as of May 15, 1996 to an Indenture
dated as of September 19, 1986 and supplements thereto between ELCOA and Summit
Bank (successor by merger to First Valley Bank), Bethlehem, Pennsylvania, as
Trustee. See "DESCRIPTION OF SECURITIES - DEBENTURES". ELCOA's primary
business objective is to specialize as a nationwide commercial lease funding
source for small equipment. Approximately $3,510,000 or 21.1% of the direct
finance lease receivables of ELCOA were 12 or more months past due on April 30,
1996. See "SUMMARY OF THE OFFERING" and "BUSINESS".
POTENTIAL INVESTORS IN THE DEBENTURES SHOULD CAREFULLY CONSIDER THE
MATERIAL RISKS IN A CONTEMPLATED INVESTMENT, INCLUDING GENERAL OPERATIONAL
RISKS, PREPAYMENT PENALTIES AND ILLIQUIDITY AS MORE FULLY DISCLOSED IN THIS
PROSPECTUS. SEE "RISK FACTORS" ON PAGES 7 THROUGH 13 OF THIS PROSPECTUS.
INVESTORS CONSIDERING A PURCHASE OF THESE CERTIFICATES SHOULD CONSIDER THE
FOLLOWING:
-FOR THE THREE FISCAL YEARS ENDED APRIL 30, 1996, 1995 AND 1994 AND THE SIX
MONTHS ENDED OCTOBER 31, 1996, THE COMPANY HAD OPERATING LOSSES, AND
EARNINGS WERE INADEQUATE TO COVER INTEREST EXPENSE.
-DURING THE FISCAL YEARS ENDED APRIL 30, 1996 AND 1995, AND AT OCTOBER 31,
1996, ELCOA REPORTED ACCUMULATED DEFICITS.
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-AGGREGATE OUTSTANDING LEASE RECEIVABLES AT APRIL 30, 1996 AND OCTOBER 31,
1996 WERE INSUFFICIENT TO REACH A BREAK-EVEN LEVEL OF OPERATIONS.
ACCORDINGLY, THE LEVEL OF NEW LEASES GENERATED MUST BE INCREASED TO
INCREASE EARNINGS SUFFICIENT TO COVER THE COSTS OF OPERATIONS. SEE RISK
FACTOR #1 ON PAGE 7 OF THIS PROSPECTUS.
-APPROXIMATELY $15,204,000 IN PRINCIPAL AMOUNT OF PREVIOUSLY ISSUED DEMAND,
FIXED RATE, AND MONEY MARKET THRIFT CERTIFICATES WILL BECOME DUE DURING
FISCAL 1997. ALTHOUGH THE PROCEEDS OF THIS OFFERING ARE NOT EXPECTED TO BE
USED TO REDEEM OUTSTANDING DEBENTURES, MANAGEMENT CANNOT PREDICT WITH
CERTAINTY WHAT PERCENTAGE OF HOLDERS WILL ROLLOVER THEIR DEBENTURES, OR THE
ACTUAL AMOUNT TO BE COLLECTED FROM OUTSTANDING LEASE RECEIVABLES DURING
FISCAL 1997. IF ROLLOVERS, CASH COLLECTIONS FROM OUTSTANDING LEASE
RECEIVABLES, AND OTHER RESOURCES ARE LESS THAN MANAGEMENT'S EXPECTATIONS,
EXCESS FUNDS RECEIVED FROM THE PROCEEDS OF SALES OF DEBENTURES MAY BE USED
TO RETIRE PREVIOUSLY ISSUED DEBT. SEE "RISK FACTORS" BEGINING ON PAGE 7,
"USE OF PROCEEDS" ON PAGE 13, AND "CAPITAL RESOURCES AND LIQUIDITY" ON PAGE
31 OF THIS PROSPECTUS.
THE DEBENTURES ARE UNSECURED OBLIGATIONS OF ELCOA WHICH DO NOT REPRESENT AN
INTEREST IN A MONEY MARKET FUND AND WHICH ARE NOT SUBJECT TO STATE OR FEDERAL
REGULATIONS, INCLUDING (BUT NOT LIMITED TO) REGULATIONS APPLICABLE TO BANKS
AND SAVINGS AND LOAN ASSOCIATIONS WITH REGARD TO THE MAINTENANCE OF RESERVES,
AND DO NOT HAVE THE SAFETY OR INSURANCE FEATURES OF CONVENTIONAL SAVINGS
ACCOUNTS AND BANK CERTIFICATES OF DEPOSIT.
Debenture holders will be unsecured creditors of ELCOA and will acquire no
proprietary interest in ELCOA. See "DESCRIPTION OF SECURITIES - DEBENTURES".
ELCOA reserves the right to reject any application to purchase the
Debentures, in whole or in part, and to modify the terms of the offering
prospectively, from time to time, provided that the terms of any Debentures
offered under the Indenture described herein can be modified only in accordance
with the provisions of such document. Applications for purchase are accepted
from purchasers residing in states where the Certificates are registered for
sale (or exempt from registration). Certain states may impose objective
suitability standards, with minimum income requirements ranging from $20,000 to
$50,000 and minimum net worth (exclusive of home, home furnishings or
automobiles) ranging from $50,000 to $450,000, as will be noted on the
prospectus supplement attached to this prospectus. In addition, subjective
suitability standards as required by the NASD Regulation, Inc. ("NASD"),
including but not limited to the purchaser's income, net worth, occupation, and
stated investment objective, may be considered by the Underwriter in relation
to the size of the purchase before accepting any application for purchase. The
decision to accept or reject any application for purchase is made on the same
business day as an application and funds are received. Funds will not be
deposited unless an application for purchase has been accepted. See
"DESCRIPTION OF SECURITIES - DEBENTURES". Payment on debentures payable on
demand or for the early redemption of fixed term debentures will be made on the
fifth day of the following calendar month, or such shorter period of time as
determined by ELCOA, subject to a penalty. See "DESCRIPTION OF SECURITIES -
DEBENTURES; Right to Request Early Payment." It is ELCOA's present policy,
subject to availability of funds, to pay the principal and accrued interest on
Demand Certificates and Fixed Rate Certificates redeemed prior to maturity
within five business days after demand for redemption is received, although the
policy regarding the five business day period may be changed at any time
without notice to Debenture holders. Redemption of Demand Certificates is
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subject to a $300,000 monthly limitation. See "DESCRIPTION OF SECURITIES -
DEBENTURES; General" and "Redemption-Limitation on Redemptions". The
Debentures will be fully registered as to principal and interest, and will be
in negotiable form, although it is not expected that any trading market will
develop for them. ELCOA reserves the right to redeem the Debentures at any
time at its own discretion on 60 days written notice. For a description of the
right of a holder to receive early payment, see "DESCRIPTION OF SECURITIES -
DEBENTURES; Right to Request Early Payment".
THESE DEBENTURES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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Underwriter Proceeds
Price to Public Discounts and to
Commissions ELCOA (2)
- ------------------------------------------------------------------------------
Per Debenture... 100% None to 8% (1) (3)
Total........... $45,200,000 (1) (3)
- ------------------------------------------------------------------------------
(1) The offering is being made by ELCOA through Welco Securities, Inc.
("Welco" or the "Underwriter"), an affiliate of ELCOA, on a continuous,
"best-efforts" basis. It will terminate upon sale of all Debentures
registered hereunder, which is expected to be within one year from the date of
this prospectus. This Prospectus may not be used after August 31, 1997.
There is no minimum amount of Debentures which must be sold. Welco may enter
into selected dealer agreements with member firms of the NASD Regulation, Inc.
("NASD") and from the commissions received from ELCOA, Welco passes through a
sales concession to such firms of up to eight percent (8%) of the principal
amount of Debentures sold. In addition, ELCOA has agreed to reimburse Welco
for any out-of-pocket expenses incurred in connection with the offer and sale
of the Securities, and to pay Welco commissions of 1/15% multiplied by the
number of months in the term of the Debenture multiplied by the principal
amount of each Debenture sold (i.e., commissions ranging from 0.2% to 8.0% for
terms ranging from 3 months to 120 months), on an accountable basis. No
commissions will be paid in connection with Demand Certificates. ELCOA has
agreed to indemnify the underwriter with respect to certain matters in
connection with this offering. See "PLAN OF DISTRIBUTION." An opinion
regarding the pricing of this offering from J.E. Liss & Company, Inc., a
qualified independent underwriter pursuant to Rule 2720 of the NASD Rules of
Conduct (previously Schedule E of the NASD By-laws), has been obtained by Welco.
See "PLAN OF DISTRIBUTION".
(2) Before deducting expenses estimated at approximately $130,000.
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(3) The proceeds to ELCOA will be 100% of the amount of Debentures sold
through Welco, less reimbursement of expenses and commissions paid to Welco
which are not expected to exceed 8% of the amount of the offering. Debentures
sold through other member firms of the NASD are subject to payment of
commissions and reallowances paid of up to 8% of the principal amount of the
offering price. Since the Debentures are sold on a best-efforts basis with no
minimum, ELCOA is unable to calculate the amount of proceeds which it will
receive.
WELCO SECURITIES, INC.
The Date of this Prospectus is January 31, 1997.
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The Debentures are offered by ELCOA and the Underwriter as agent for ELCOA
subject to prior sale, withdrawal, and cancellation or modification of the
offering, without notice, at any time by ELCOA, or the Underwriter prior to
the release or delivery of any proceeds of this offering to ELCOA, whether or
not a confirmation of sale of Debentures offered by this Prospectus has been
issued by the Underwriter or any dealer. The right is reserved by ELCOA, the
Underwriter and the dealers to reject any and all offers to purchase and to
cancel any and all confirmations of sale of any Debentures offered hereby, in
whole or in part, for cause or without cause, at any time prior to delivery of
the Debentures to the subscriber.
No person is authorized by ELCOA to give any information or make any
representation other than as contained in this Prospectus in connection with
the offering made hereby, and, if given or made, such information or
representation must not be relied upon as having been authorized by ELCOA.
This Prospectus does not constitute an offer to sell to or a solicitation of
an offer to buy from any person in any state or jurisdiction in which it is
unlawful to make such offer or solicitation. Neither delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create
any implication that there has been no change in the affairs of ELCOA since
the date hereof. This Prospectus speaks as of the date hereof and the
delivery of this Prospectus at any time does not imply that information herein
is correct as to any date subsequent to that date.
AVAILABLE INFORMATION
ELCOA is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Reports and other information filed by the Company can be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549; 14th Floor, Seven World Trade Center, New York, New York 10048;
and 500 West Madison Street, Suite 1400, Northwestern Atrium Center, Chicago,
Illinois 60661. The Commission maintains an Internet web site address at
(http://www.sec.gov).
ELCOA has filed with the Commission a Registration Statement under the
Securities Act of 1933, as amended, with respect to the Debentures offered
hereby. This Prospectus does not contain all the information included in such
Registration Statement, certain items of which are omitted in accordance with
the Rules and Regulations of the Commission. For further information with
respect to ELCOA and the Debentures offered hereby, reference is made to the
Registration Statement and the Exhibits thereto.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission pursuant to Section
15(d) of the Exchange Act, as amended, are incorporated herein by reference in
this Prospectus:
(a) Annual Report on Form 10-K for the fiscal year ended April 30, 1996.
(Filed July 26, 1996; amended by the filing of Form 10-K/A on
September 11, 1996 and December 23, 1996).
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(b) Quarterly Report on Form 10-Q for the three month period ended July
31, 1996 (filed September 16, 1996; amended by the filing of Form
10-Q/A on December 23, 1996).
(c) Quarterly Report on Form 10-Q for the three month period ended
October 31, 1996 (filed December 23, 1996). See pages 6, 29 through
30, and pages 63 through 71 of this Prospectus.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus
to the extent that a statement contained herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
ELCOA will provide, without charge to each person to whom this Prospectus
is delivered, on the written or oral request of such person, a copy of any or
all of the documents incorporated herein by reference (not including exhibits
to the information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that the
Prospectus incorporates). Requests should be directed to Equipment Leasing
Corporation of America, Suite 76, 501 Silverside Road, Wilmington, Delaware
19809, Attention: William Shapiro; telephone number (302)-798-2335.
Notwithstanding the fact that ELCOA may not be required to deliver an
annual report to security holders, ELCOA, will, upon the written request of
any security holder, without charge, furnish an annual report on Form 10-K
containing audited financial information that will have been examined by
independent certified public accountants, and any quarterly report on Form
10-Q containing unaudited financial information. In addition, ELCOA may
furnish such other reports as may be authorized, from time to time, by its
Board of Directors.
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TABLE OF CONTENTS
Summary of the Offering.......... 1 Management.........................
The Company.................. 133
The Offering................. 1 Directors and
Selected Financial Data...... 6 Executive Officers..........
Risk Factors..................... 7 33
General...................... 7 Executive Compensation.........
Relative to Debentures.......12 35
Use of Proceeds..................13 Description of Securities..........
Business.........................14 35
Description of Lease General........................
Portfolio....................14 36
Nature of Leases and Tax Withholding................
Marketing....................16 37
Lease Origination and Redemption.....................
Administration...............17 38
Option Agreement.............17 Company Election...............
Servicing Agreement..........18 38
Credit Policy and Holder's Election..............
Delinquencies................18 38
Bookkeeping and Data Limitations on Redemptions.....
Processing...................23 39
Method of Financing..........23 Automatic Extension............
Employees....................24 39
Competition..................25 Right to Request Early Payment.
Federal Income Tax 39
Considerations...............25 Option to Receive Compound
Management's Discussion and
Analysis of Financial Interest...................39
Condition and Results of Interest 6-Month United States
Operations...................26
Principal Shareholder............33 Treasury Bill Rate.........40
Restrictions on Merger.........
41
Modification of the Indenture..
41
Covenant as to Repair..........
41
Events of Default..............
41
Transactions with the
Trustee....................42
Plan of Distribution...............
42
Litigation.........................
43
Legal Opinion......................
43
Experts............................
44
Additional Information.............
44
Index to Financial
Statements.....................
45
Financial Statements...............
48
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SUMMARY OF THE OFFERING
This summary does not purport to be complete and is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus and by reference to the information contained in the materials
filed as Exhibits to a registration statement of which this Prospectus is a
part. Prospective purchasers of the securities offered herein are urged to
read the entire Prospectus, including the investment considerations detailed
in "RISK FACTORS" before making any decisions relating to the purchase of any
securities.
THE COMPANY
ELCOA is a Delaware corporation, organized on May 6, 1986, primarily to
acquire, hold and retain general commercial and industrial equipment for lease
throughout the United States. The principal business objective of ELCOA in
offering the Debentures hereunder is to invest the proceeds from sale of the
Debentures in commercial and industrial equipment for lease, and to minimize
its investment risks by diversification as to geography, type of equipment,
and size of leasing transactions. ELCOA believes that major financial
institutions, because of their size, have ignored or have not fully met the
needs of manufacturers and distributors of equipment costing less than
$25,000, as most consider only transactions exceeding this size. Equipment
distributors use leasing as a means by which they offer their equipment for
sale to business users. ELCOA will use the net proceeds from this offering
for the purchase of equipment and leases. See "USE OF PROCEEDS." ELCOA's
parent, Walnut Equipment Leasing Co., Inc. ("WALNUT") provides lease
origination and lease administration and collection services to ELCOA for a
fee. See "BUSINESS." Walnut markets its services to manufacturers and their
distributors of small equipment nationwide, making it easier for the equipment
user to finance the acquisitions of equipment. For a further discussion of
ELCOA's operating results for the three years ended April 30, 1996, and six
months ended October 31, 1996, along with steps being taken to improve these
results, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - RESULTS OF OPERATIONS" on page 26 of this Prospectus.
It will lease such equipment principally under full payout direct
financing leases to businesses determined to be credit-worthy. The
determination of whether a business is credit worthy is made by Walnut. See
"BUSINESS" for a discussion of the procedures for selection, origination and
servicing of the leases by Walnut. See also Risk Factor #7 appearing on page
10 of this Prospectus. ELCOA's principal executive office is located at Suite
76, Silverside-Carr Executive Center, 501 Silverside Road, Wilmington,
Delaware 19809. ELCOA's telephone number is (302)-798-2335.
THE OFFERING
This offering relates to the following Debentures:
Demand Certificates...... These Debentures bear interest at a rate to
be determined monthly by ELCOA of at least
1% above the 6-month U.S. Treasury Bill rate
established by the U.S. Treasury weekly
auction on or immediately prior to the first
day of the month for which interest is to be
paid. The percentage above the 6-month
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United States Treasury Bill rate is to be
determined at the beginning of the month by
ELCOA (or in the absence of any
determination, such percentage shall be
deemed to be 1% above the 6-month United
States Treasury Bill rate.) If in any month
the 6-month U.S. Treasury Bill rate as set
forth above shall fall below 6% per annum or
if there shall be no such U.S. Treasury Bill
rate in effect, such 6-month U.S. Treasury
Bill rate shall be deemed to be 6% per
annum. Thus, the minimum interest on these
Debentures shall be 7% per annum. See
"DESCRIPTION OF SECURITIES-DEBENTURES;
Interest 6-month U.S. Treasury Bill Rate."
The interest rate paid will vary from month
to month depending upon the U.S. Treasury
bill auctions, prevailing market conditions
for interest rates in general, and ELCOA's
need for funds for the purchase of equipment
for new leases as these opportunities become
available. Interest is payable monthly on
the 10th day of the calendar month for the
prior month or part thereof and is due along
with principal on the 5th business day of
the month after the month during which
demand for payment is received. The minimum
investment is $100 per Debenture. Repayment
of principal is due on the fifth day of the
calendar month following the month in which
such request is made. It is the present
policy of ELCOA, which may be discontinued
at any future date without notice, subject
to the availability of funds as the Board of
Directors determines in its own discretion,
to pay the principal to the holder within 5
business days after demand for redemption is
received. Absent this policy, ELCOA is
required to redeem Demand Certificates on
the fifth day of the next calendar month
after a written request for redemption is
received, subject to a limitation of
$300,000 per month. See "DESCRIPTION of
SECURITIES - Limitations on Redemptions."
Fixed Rate Certificates. . . . These Debentures bear interest at rates
determined by ELCOA at least equal to 1%
above the 6-month U.S. Treasury Bill Rate
for Debentures with maturities of 24 months
or less, at least equal to 2% above the
6-month U.S. Treasury Bill Rate for
Debentures with maturities of 25 to 60
months, inclusive, and at least equal to 3%
above the 6-month U.S. Treasury Bill Rate
for Debentures with maturities exceeding 60
months. If in any month the 6-month U.S.
Treasury Bill Rate as set forth above
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should fall below 6% per annum, or if there
is no such U.S. Treasury Bill rate in
effect, the rate of such 6-month U.S.
Treasury Bill shall be deemed to be 6% per
annum. Thus, the minimum interest on these
Debentures shall be 7% per annum for
Debentures with maturities of 24 months or
less, 8% for Debentures with maturities of
25 to 60 months, inclusive, and 9% per annum
for Debentures with maturities exceeding 60
months. The percentage above the 6-month
U.S. Treasury Bill Rate is to be determined
weekly by ELCOA's order, based upon
prevailing market conditions, interest rates
in general, and ELCOA's need for funds for
the purchase of equipment for new leases as
these opportunities become available. See
"DESCRIPTION OF SECURITIES - DEBENTURES;
Interest 6-Month U.S. Treasury Bill Rate".
The 6-month U.S. Treasury Bill Rate used to
calculate the interest rate applicable to a
particular Debenture will be the rate in
effect during the week in which the purchase
price for such Debenture is received by
ELCOA. The minimum investment is $100 per
Debenture and interest is payable monthly on
the 10th day of the calendar month for the
prior month or part thereof.
These Debentures consist of Certificates
issued with maturities of any number of
whole calendar months from 3 to 120 (which
term is to be selected by the purchaser at
the time of purchase).
Provisions Relating to all Debentures
General. . . . . . . . . . . All Debentures will bear interest from the
date investor funds are accepted by ELCOA.
Holders of Debentures may elect to receive
interest which is paid or accumulated
monthly, or in the alternative, bi-monthly,
quarterly, semiannually, annually, or at
maturity with interest compounded monthly
and accruing to the date of payment.
Notifications reminding holders of the
maturity dates of their Fixed Rate
Debentures will be made by ELCOA by mail to
the registered holder approximately one
month in advance of the maturity date.
ELCOA may reduce the stated rate of interest
on any Debenture, change the maturity date
of the principal, or make certain other
changes in the terms of the Debentures with
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the consent of all holders in aggregate
principal amount of the outstanding
Debentures, but not otherwise. See
"DESCRIPTION OF SECURITIES-DEBENTURES;
Modification of the Indenture".
The Debentures will not be secured by a lien
on the assets of ELCOA and will have no
sinking fund provisions. The debt evidenced
by the Debentures will be on parity with
other issues of debentures currently or to
be outstanding under the terms of this
offering, and are not subordinate to any
other of the Company's existing
indebtedness. See "DESCRIPTION OF
SECURITIES - DEBENTURES". ELCOA is not
obligated to redeem Demand Certificates, or
Fixed Rate Certificates prior to maturity,
in excess of $300,000 in principal amount in
any month. See "DESCRIPTION OF
SECURITIES-DEBENTURES; Redemption".
ELCOA reserves the right to redeem the
Debentures, in whole or in part from time to
time, upon not less than 60 days written
notice to the holder, at the principal
amount thereof plus interest accruing to the
date of redemption. No interest shall
accrue after the redemption date. See
"DESCRIPTION OF SECURITIES DEBENTURES" for
information relating to early repayment.
Amount Offered. . . . The total principal amount of Debentures
being offered pursuant to this Prospectus is
$50,000,000, less $4,800,000 sold prior to
the date of this Prospectus. Within this
aggregate limit, there are no limitations on
the respective types or principal amounts of
Debentures which may be sold.
There is no assurance that all or any
portion of the Debentures offered will be
sold. There is no minimum amount of
Debentures that must be sold.
Modification, Termination
or Extension of Offering. . . ELCOA reserves the right to modify at any
time the terms of the offering. Any such
modification will apply only to Debentures
offered after the date of such modification
and shall comply with the terms of the trust
indenture, and any supplement thereto. See
"DESCRIPTION OF SECURITIES - DEBENTURES;
4
13
Modification of the Indenture." If
required, such modifications will be
reflected in an amendment to this
Prospectus. ELCOA reserves the right to
terminate this offering at any time.
Trustee. . . . . . . . . . The Certificates are to be issued under the
terms of a sixth supplemental indenture
dated as of May 15, 1996 to a trust
indenture dated as of August 5, 1986 and
first supplemental indenture dated as of
September 19, 1986, second supplemental
indenture dated as of September 20, 1988,
third supplemental indenture dated as of
September 13, 1989, fourth supplemental
indenture dated as of August 17, 1990, and
fifth supplemental indenture dated as of
August 18, 1993 between ELCOA and Summit
Bank (successor by merger to First Valley
Bank) of Bethlehem, Pennsylvania, as
Trustee.
Use of Proceeds
By ELCOA. . . . . . . . . . ELCOA intends to apply the proceeds of this
offering principally for the purchase of
commercial equipment to be leased, in the
ordinary course of business. See "USE OF
PROCEEDS".
Risk Factors. . . . . . . . Potential investors should carefully
consider the investment risks associated
with the Debentures. See "RISK FACTORS."
5
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SELECTED FINANCIAL DATA
The following summarizes certain financial information with respect to ELCOA for the five years ended April 30, 1996
(audited), and for the six months ended October 31, 1996 and 1995 (which have not been audited). This data should be read
in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the
"Financial Statements" appearing elsewhere.
For the Fiscal Year Ending April 30, Six Months Ended October 31,
1996 1995 1994 1993 1992 1996 1995
- ----------------------------------------------------------------------
Operating Revenues $2,610,450 $2,945,151 $3,009,864 $3,057,645 $2,398,169 $1,253,468 $1,362,988
Net Income (Loss) (2) (701,713) (481,794) (198,906) (226,801) 166,191 (440,193) (171,136)
Total Assets (2) 28,814,547 27,196,206 24,761,558 20,791,433 15,913,103 28,354,385 29,066,973
Demand, Fixed Rate and Money
Market Thrift Certificates
Outstanding 26,407,959 24,521,875 21,810,991 18,041,504 12,867,678 25,931,241 26,297,140
Shareholder's Equity
(Deficit) (2) (435,128) 266,585 748,379 947,285 1,774,086 (875,321) 95,449
Ratio of Earnings to
Fixed Charges (1) (2) --- --- --- --- 1.16 --- ---
<FN>
(1) The Ratios of earnings to fixed charges were computed by dividing pre-tax income plus fixed charges. For the years
ended April 30, 1996, 1995, 1994 and 1993 the ratio of earnings to fixed charges was less than "1", due to the net loss
of $701,713, $481,794, $198,906, and $226,801 respectively. For the six months ended October 31, 1996 and 1995, the
ratio of earnings to fixed charges were less than "1" due to the net loss of $440,193 and $171,136, respectively.
(2) Restated for information previously available which was not used in estimating the allowance for doubtful accounts.
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RISK FACTORS
Investors in the Debentures offered hereby should carefully consider the
following factors in their investment decision.
GENERAL
1. RESULTS OF OPERATIONS/RECENT LOSSES
Revenues decreased during the fiscal years ended April 30, 1996, 1995 and
1994 as a result of a decline in new leases generated, and also decreased
during the six months ended October 31, 1996 in comparison to the six months
ended October 31, 1995. Net income and the ratio of earnings to fixed charges
were less than "1" during the three fiscal years ended April 30, 1996, and the
six months ended October 31, 1996. The losses during these respective periods
were due in part to additions to the provisions for doubtful lease receivables,
lack of growth in the generation of new lease receivables, and excess available
funds awaiting investment in leases at lower interest rates than those being
paid on the Certificates outstanding. See "SELECTED FINANCIAL DATA." General
and administrative expenses have remained relatively fixed as total assets
increased during these periods. As a result of the decline in new lease volume
during the fiscal years ended April 30, 1996 and 1995, lease receivables
declined from each prior year. Lease receivables generated during the six
months ended October 31, 1996 increased by approximately 14% over the six
months ended October 31, 1995. As ELCOA's outstanding lease receivables
continue to grow, the use of borrowed funds will be necessary to fund equipment
purchases. To the extent that the lease portfolio expands in size, revenues
will increase. Interest expense will increase in relation to the levels of
debt outstanding and fluctuations in interest rates in general, may impact
profitability. The ability of the Company to repay purchasers of the
Debentures is dependent upon achieving a level of profitable operations. ELCOA
can give no assurance either as to its level of future new business or
profitability for 1997 or thereafter. See also "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
2. DEPENDENCE UPON PARENT CORPORATION AND MANAGEMENT
All decisions with respect to the day-to-day management of ELCOA are made
exclusively by its officers, who are also officers and directors of Walnut,
which primarily is responsible for the acquisition of equipment for lease and
the invoicing and collection of rentals due, as well as other administrative
services. See "BUSINESS". However, ELCOA is not restricted from obtaining
these services from outside sources. Management believes that should Walnut
cease operations or be unable to fulfill its obligations in the organization
and servicing of ELCOA's leases that ELCOA could purchase leases of similar
term and cost from outside sources and could service its leases by contracting
with outside entities. See "MANAGEMENT" and "BUSINESS".
There are no limitations on dividends or other cash flows which may be paid
or transferred from ELCOA to Walnut. No dividends were paid by ELCOA to Walnut
for the three fiscal years ended April 30, 1996 or for the six months ended
October 31, 1996.
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The equipment and related leases to be purchased from Walnut are expected
to be similar in type, size and geographical location as that purchased by
Walnut for its own use, which is primarily new commercial and industrial
equipment for business use only. See "BUSINESS - Nature of Leases and
Marketing". All leases so purchased will not be delinquent in any payments at
the time of purchase. The yield to ELCOA on its investment in the leases is
expected to exceed its costs of operations, principally interest on its debt
incurred in connection therewith, at the time of purchase. Prior to the sale
of equipment and assignment of related leases to ELCOA, Walnut will have
conducted credit investigations of each lessee, and will have purchased the
equipment and entered into lease agreements with each lessee. ELCOA does not
perform any independent credit review for leases purchased from Walnut. In the
event that Walnut is unable to perform its credit investigation, ELCOA would be
required to incur its own credit investigation and document processing
expenses, which may exceed the amount it pays Walnut for lease origination.
See "BUSINESS - Nature of Leases and Marketing" and "Option Agreement".
3. INDEPENDENT AUDITOR'S COMMENTS ON THE FINANCIAL CONDITION OF THE COMPANY
The accompanying financial statements have been prepared from the separate
records maintained by Equipment Leasing Corporation of America. However, these
may not necessarily be indicative of the financial condition that would have
existed or the results of operations if the Company had been operated as an
unaffiliated entity. As discussed in Note 8 to the financial statements,
certain expenses represent allocations made from or transactions with related
parties. With respect to the risk associated with these transactions, see Risk
Factor #4 which follows. See the Independent Auditor's Report and Note 1 to
the Financial Statements with regards to the Company's ability to continue as a
going-concern.
4. RISK CONCERNING PARENT CORPORATION'S ABILITY TO CONTINUE AS A GOING CONCERN
Since 1980, Walnut has suffered losses for financial statement purposes,
and as of October 31, 1996, it had a shareholders' deficit of $39,337,175
(176.5% of assets), and reported losses of $5,620,501, $4,891,955 and
$3,988,920 for the three fiscal years ended April 30, 1996, 1995, and 1994, and
losses of $3,121,938 and $2,485,323 for the six months ended October 31, 1996
and 1995, respectively. Walnut attributes its history of losses to
insufficient revenues from its outstanding lease portfolio to offset its costs
of operations. As a substantial portion of its costs are fixed, the lack of
growth in new leases during this period is the primary reason that revenues
have not increased to levels sufficient to offset operating expenses. If
Walnut continues to incur losses, there can be no assurance that Walnut will be
able to meet future financial and contractual obligations as they come due.
During the fiscal years which ended April 30, 1996, 1995 and 1994, Walnut's
financial statements were prepared on a "going concern" basis, which assumes
that Walnut has the ability to become profitable and to obtain adequate
financing for future growth in its leasing business, of which assumptions there
is no assurance, and accordingly, there are substantial doubts regarding its
ability to continue its operations. Accordingly, the recoverability of
Walnut's assets at their recorded value remains in doubt.
Should Walnut cease to do business in its present form or be unable to
fulfill its responsibilities under its servicing agreement with ELCOA, there is
no assurance that ELCOA would be able to obtain in a timely manner qualified
assistance in lease administration and origination on terms as favorable as
those being provided by Walnut. The monthly servicing fee paid to Walnut
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includes reimbursement for officers' compensation for services performed on
ELCOA's behalf. In the event Walnut does not generate enough leases for its
purposes, ELCOA will be required to purchase equipment and related leases from
other sources, such as other leasing companies, manufacturers and vendors of
capital equipment. There are no assurances that leases meeting ELCOA's credit
or other requirements would be available for purchase. In the event of
Walnut's bankruptcy, Walnut's creditors might assert a claim that the sale of
leases to ELCOA was an ineffectual transfer, resulting in the substantive
consolidation in bankruptcy of the two companies. Although Walnut owns 100%
of ELCOA's voting common stock, each company has a separate board of directors
in that a majority of the members of the Board of Directors of ELCOA are not
members of the Board of Directors of Walnut, Walnut does not finance the
operations of ELCOA, ELCOA was not inadequately capitalized, each entity pays
its own operating expenses, and maintains separate books and records, and the
formal requirements of separate and independent corporate existence are
observed. Each entity also maintains separate corporate offices. Both
William Shapiro and Kenneth Shapiro are officers of each Company. See Risk
Factor #7. Walnut operates primarily to originate, sell and service an
outstanding lease portfolio, while ELCOA's business purpose as stated on page
14 of this Prospectus is to generate funds through the offer and sale of its
securities to maintain a portfolio of small equipment leases. Management
believes, in its own opinion without the benefit of independent counsel, that
it has taken the necessary steps to prevent such consolidations from
occurring, of which there can be no assurances given. If the two companies
were to be consolidated in bankruptcy, the determination of the priorities
respecting liquidation would be determined by the Bankruptcy Court. This may
result in the holders of ELCOA's debt securities receiving less than the face
amount of principal and accrued interest on their debt securities.
Since 1980, Walnut has offered to the public debt securities similar to
the Debentures offered herein. On September 14, 1995, Walnut registered for
sale an additional offering of debt securities known as "Senior Thrift
Certificates", which were offered through August 31, 1996. Approximately
$21,730,000 in principal amount of Senior Thrift Certificates were outstanding
at April 30, 1996. Walnut is also offering $40,000,000 of these debt
securities to the public pursuant to a Registration Statement which was
declared effective on January 31, 1997. Walnut is expected to continue to
sell these debt securities on a continuous basis in the future. In the event
that Walnut should enter into bankruptcy, liquidation or reorganization,
holders of Walnut's debt could assume voting common stock ownership and force
a liquidation of ELCOA. In that event, however, the holders of the Debentures
would be entitled to repayment of interest and principal before any payment
would be made to the voting common stockholders, but such repayments might be
made before the maturity dates on which they were due.
5. RISKS ASSOCIATED WITH ELCOA'S EQUIPMENT LEASING BUSINESS
The success of ELCOA will in certain respects depend upon the quality of
the equipment, the viability of the equipment dealers and manufacturers, the
timing of the purchases of equipment by Walnut on ELCOA's behalf, the
creditworthiness of the lessees and their ability to meet their rental payment
obligations as they become due and ELCOA's loss experience. Equipment leasing
is subject to the risk of technological and economic equipment obsolescence
and the attendant risks upon defaults by lessees. While Walnut, as ELCOA's
agent, will investigate prospective lessees to ascertain whether they will be
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able to meet their obligations under proposed leases, ELCOA has not
established any independent credit standards for its prospective lessees. As
a result, the ability of ELCOA's lessees to meet their lease obligations might
be subject to risks, such as general economic conditions nationwide, over
which ELCOA has little influence or control. Repayment of interest and
principal on the Debentures is dependent on ELCOA's ability to collect the
balances due on its outstanding lease receivables. Although Walnut has been
an active participant in the industry since 1969, (1960 through its
predecessor), neither Walnut nor ELCOA have any way of determining their share
of the leasing market.
6. RISKS ASSOCIATED WITH PAST DUE LEASE RECEIVABLES
At April 30, 1996, and 1995, and at October 31, 1996 approximately 40%,
37%, and 39% respectively, of ELCOA's then outstanding lease receivables were
past due as reported on the contractual basis. Approximately $3,510,000 or
21.1% of the direct finance lease receivables of the registrant were 12 or
more months past due on April 30, 1996. Management reviews these accounts on
a periodic basis and has provided what it believes to be an adequate reserve
for potential losses thereof by a corresponding charge against operations.
During the fiscal year ended April 30, 1996, and the six month period ended
October 31, 1996 the percentage of net charge-offs to average gross lease
receivables were 4.3% and 7.1%, respectively. During the fiscal year ended
April 30, 1995, write-offs were 7.1% of average gross lease receivables.
During the fiscal year ended April 30, 1995, and during the six months ended
October 31, 1996, management determined that the costs and legal efforts in
pursuing a number of delinquent accounts were more than the anticipated
recoveries to be achieved, resulting in an increased amount of write-offs
during these respective periods. See also "BUSINESS - Credit Policy and
Delinquencies." While management does not expect future write-off percentages
to increase, any increase in future write-offs in excess of reserves
established may adversely impact the profitability of ELCOA and the ability to
repay Debenture holders.
7. RISKS ASSOCIATED WITH CONFLICTS OF INTEREST
ELCOA and Walnut are affiliated with each other and with the Underwriter
Welco Securities, Inc. and the Law Firm of William Shapiro, Esq., P.C. and
share the same officers and a director. See also "Principal Shareholder" on
page 33 of this Prospectus, "MANAGEMENT" on pages 33 to 35 of this Prospectus,
"PLAN OF DISTRIBUTION" on page 42 of this Prospectus, and Footnote 8 to the
Financial Statments. Certain conflicts of interests may arise between the
companies. The purchasers of the Debentures must, to a great extent, rely on
the integrity and corporate responsibilities of ELCOA's officers and directors
to assure themselves that they will not abuse their discretion making business
decisions. The officers and directors will not devote their exclusive
attention to the affairs of ELCOA, and ELCOA may compete with Walnut 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 Walnut and the investment objectives of ELCOA and Walnut.
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 ELCOA and Walnut, (b) the current and long
term liabilities of each company and (c) the effect of such acquisition on the
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diversification of each company's equipment and lease portfolio. ELCOA has
the right of first refusal in any equipment that Walnut wishes to sell. Since
Walnut is the sole shareholder of ELCOA, ELCOA's right of first refusal may
not provide any protection due to the potential conflict of interest. See
"BUSINESS-Option Agreement." An additional conflict may exist since Walnut
has been engaged in the collection of delinquent accounts on behalf of ELCOA
and Walnut will continue to receive servicing fees during its collection
efforts, although ELCOA may not recognize any income beyond the original lease
term. Since ELCOA purchases its leases from Walnut, Walnut receives a benefit
in the collection of origination and servicing fees from ELCOA, irrespective
of whether the lease is delinquent in payments. These conflicts may adversely
impact the ability of ELCOA to increase growth in its lease portfolio and to
collect the balances due from its outstanding leases.
8. RISKS ASSOCIATED WITH COMPETITION
The equipment leasing industry is highly competitive. However, the number
of larger competitors in the "small-ticket" market for equipment costing under
$10,000 is decreasing. In initiating its leasing transactions, ELCOA will
compete with leasing companies, manufacturers that lease their products
directly, equipment lease brokers and dealers, and financial institutions,
including commercial banks and insurance companies. Many competitors will be
larger than ELCOA and will have access to more favorable financing. WALNUT IS
A COMPETITOR OF ELCOA IN THIS REGARD. SEE RISK FACTOR #7. Competitive
factors in the equipment leasing business primarily involve pricing and other
financial arrangements. Competition may also adversely impact the generation
of new lease receivables and the resulting yields from investment of ELCOA's
resources in new leases.
9. HEAVY DEPENDENCE UPON BORROWED FUNDS/LACK OF ESTABLISHED LINES OF CREDIT
ELCOA will depend heavily upon borrowed funds through the sale of the
Debentures offered hereunder in its operations and is highly leveraged (i.e.,
a substantial portion of ELCOA's operations will be financed through
borrowings arising from the sale of the Debentures). Although ELCOA's lease
income is fixed at the time a lease commences, ELCOA's income may be adversely
affected by increases in both the prime and the U.S. Treasury Bill rates. In
the event ELCOA's interest costs increase, ELCOA will not be able to increase
its rental income on existing leases to cover such additional interest
expense. In such event, existing leases may become unprofitable after
expenses and cause ELCOA to suffer increased losses. If such losses on
existing leases are substantial, the result may be a reduction in ELCOA's
overall profitability or the recognition of additional losses. The leases
purchased from Walnut have already been consummated with fixed rates of
return, which cannot be renegotiated by ELCOA, with fixed annual rates of
return ranging from approximately 14% to 44%. Accordingly, the level of risk
is increased in proportion to the length of the term of the Debentures.
ELCOA's financing is dependent primarily upon the sale of Debentures, the
ability to sell leases to third-parties or "securitization", and to a lesser
extent its ability to pledge leases as collateral for bank borrowing or other
lending institutions, to obtain additional funds at terms which permit it to
earn a rate of return on the leased equipment that permit the loans to be
repaid from the rental payments pursuant to the leases. ELCOA has no present
intention to seek bank lines of credit, and expects to grow primarily through
the sale of the Debentures. There can be no assurance that ELCOA will be able
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to raise sufficient funds through the sale of Debentures offered hereunder, or
borrow sufficient funds from lending institutions to be able to fund an
increased level of new lease business. Should this occur, ELCOA's growth will
be limited to the funds received from rentals on existing leases, less funds
necessary to meet redemptions on Debentures at maturity, as well as to meet
normal operating expenses. All funds received from the sale of Debentures are
expected to be used for the purchase of new equipment subject to lease
agreements. See "USE OF PROCEEDS". As of the date of this Prospectus, ELCOA
has not yet established any formal lines of credit. Accordingly, this lack of
established credit could inhibit ELCOA's growth and profitability.
RELATIVE TO DEBENTURES
1. PREPAYMENT PENALTY:
In the event a holder of any Fixed Rate Certificate requests payment prior
to maturity, a prepayment penalty will be charged in accordance with a
prescribed formula. See "DESCRIPTION OF SECURITIES - DEBENTURES; Right to
Request Early Payment".
2. RESTRICTION ON REDEMPTION OF DEBENTURES:
It is the present policy of ELCOA, subject to availability of funds as
determined by the Board of Directors in its sole discretion, to pay the
principal of any Demand Certificate or any Fixed Rate Certificate for which the
holder requests redemption prior to maturity, within five business days after
demand for redemption is received. This policy has been followed consistently,
without exception, since the commencement of ELCOA's public offering of
securities in 1986. ELCOA may, however, change this policy at any future date
without notice to the holders of the Debentures. See "DESCRIPTION OF
SECURITIES - DEBENTURES; General". ELCOA has no restriction on the redemption
of Fixed Rate Certificates at maturity, but it does have a $300,000 monthly
limitation on redemption of Demand Certificates and on the redemption prior to
maturity of Fixed Rate Certificates once demand for redemption prior to
maturity has been made. A penalty is charged on the early redemption of Fixed
Rate Certificates prior to maturity. See "DESCRIPTION OF SECURITIES -
DEBENTURES; Right to Request Early Payment." If this limitation is invoked by
ELCOA, requests for redemption will be honored in the order in which such
demands are received, with demands received on the same day being redeemed on a
pro-rata basis. To the extent that the Debentures submitted for redemption are
not paid in any given calendar month, such Debentures will be given first
priority (in the order in which the demands were received) in the next
succeeding calendar month or months until such Debentures are fully redeemed.
If a substantial portion of the holders of the Demand Certificates demand
repayment and/or the holders of the Fixed Rate Certificates redeem prior to
maturity, there is no assurance that ELCOA will be able to satisfy such
requests at the time of such demand. In this event, requests for redemption on
Debentures will be honored in successive calendar months in the order of which
such demands are received. This may result in a delay in the remittance of
principal to some of the holders. See "DESCRIPTION OF SECURITIES - DEBENTURES;
Limitations on Redemptions". Other than the one early redemption by the estate
of a deceased certificate holder during the fiscal year ended April 30, 1995 in
the principal amount of $306,000, all other early redemptions have not been
material either individually or in the aggregate.
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3. ABSENCE OF INSURANCE AND GUARANTEES:
The Debentures are neither insured by any governmental agency, as are
certain investments in financial institutions such as banks, savings and loans
or credit unions, nor are they guaranteed by any public agency or private
entity. It should also be noted that ELCOA is not subject to any generally
applicable governmental limitations on its own borrowing which are designed to
protect investors. The risk of loss to investors in ELCOA's Debentures is
thus higher than the risk incurred by investors in such insured financial
institutions. In addition, there are no provisions for a sinking fund or
reserve for repayment of the Debentures. Since the Debentures represent
unsecured indebtedness of ELCOA, there are no liens created on the assets of
ELCOA by these Debentures.
4. ABSENCE OF TRADING MARKET AND ARBITRARY OFFERING PRICE:
No trading market for the Debentures currently exists, and it is not
anticipated that a trading market for any of the Debentures being offered will
develop. There can be no assurance that all or a significant portion of the
Debentures being offered hereunder will be sold. There is no minimum
principal amount of Debentures which must be sold. The interest rates on the
Debentures have been arbitrarily determined by ELCOA with the concurrence of
Welco, and bear no direct relation of ELCOA's assets, book value, net worth or
any other established criteria of value.
5. OTHER FACTORS POTENTIALLY AFFECTING SALE OF DEBENTURES:
The ability of ELCOA to maintain its leasing operations is affected by
general economic conditions, as well as marketing success in attracting new
business. Future sales of Debentures are affected by the money markets, and
recent and potential changes in government regulations, including interest
rate limitations which have been substantially phased out. The relative
attractiveness of the Debentures is influenced by changes in the terms on
which cash can be invested by members of the public in other interest bearing
investments, such as savings accounts, interest bearing checking accounts,
individual retirement accounts, "money market funds", certificates of deposit,
commercial paper, government securities and other types of debt obligations,
which afford less risk to the investors. These factors may inhibit the
ability of the Company to sell the Certificates offered hereunder.
USE OF PROCEEDS
ELCOA intends to apply the net proceeds remaining after payment of
expenses of this offering to the purchase of general commercial and industrial
equipment for lease pursuant to the assignment of related leases to ELCOA,
from Walnut. See "BUSINESS." The maximum amount which may be realized from
the offering is $50,000,000, less $4,800,000 sold prior to the date of this
Prospectus, less anticipated expenses of approximately $130,000 and
commissions to be paid to the Underwriter. It is the present policy of the
companies that all leases entered into by Walnut for periods of two years or
more are sold to ELCOA. This policy may be changed at any time. Under this
policy, leases of shorter duration are retained by Walnut. In addition
thereto, ELCOA may purchase equipment and related leases from outside sources,
such as manufacturers, distributors, and independent lease brokers, although
ELCOA has not done so to date. All purchases from Walnut will be at prices no
greater than those paid to independent sources for similar equipment and/or
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leases. Since the offering of the Debentures is made on a "best-efforts" basis
with no minimum amount which must be sold, ELCOA is unable to calculate with
any certainty the proceeds to be realized from this offering. As a result of
the varying sources of cash from rental receipts, sale of residual values of
leased equipment, and sale of Debentures, ELCOA is unable to determine with any
accuracy the dollar amount of equipment purchased to date solely from proceeds
of the offering. Although ELCOA reported losses for financial statement
purposes during the three fiscal years ended April 30, 1996, and for the six
months ended October 31, 1996, it reported a positive cash flow from
operations. While sufficient to cover interest payments on outstanding
Debentures, cash flows solely from operations were not sufficient to cover
redemptions of outstanding Debentures. Redemptions of outstanding Debentures
were derived from a variety of sources, including cash on hand and its
equivalents, as well as the excess of cash received over lease income recorded.
See "Statements of Cash Flows" for the three fiscal years ended April 30, 1996
on page 52 and for the six months ended October 31, 1996 on page 67 of this
Prospectus. Consequently, while priority is given to the purchase of equipment
for lease, excess cash flows from sale of Debentures over redemptions may be
used to retire previously issued debt securities. Pending such use, the net
proceeds of this offering may be invested in U.S. Government obligations having
three month maturities, bank certificates of deposit, or other high quality,
interest bearing investments in investment grade securities, and will not be
invested in securities issued by its affiliates.
BUSINESS
ELCOA is a Delaware corporation, incorporated on May 6, 1986 for the
primary purpose of acquiring general commercial and business equipment for
lease. All of the outstanding common stock of ELCOA is owned by Walnut, which
has been continually engaged in equipment leasing since 1969 (and prior thereto
commenced business in 1960 through its predecessor). ELCOA's primary purpose
is to raise funds necessary to maintain a portfolio of small equipment leases,
diversified as to type of business user, type of equipment, and geographical
location, recognizing the income between its rate of return on the investment
in the leases, less interest and other related expenses of operations. ELCOA's
primary business purpose differs from Walnut in that ELCOA was formed to
finance a portfolio of longer term lease contracts and equipment while Walnut
is primarily engaged in the business of originating, selling, and servicing
equipment lease contracts. Walnut retains leases of short duration, typically
one year or less, without regard to the credit quality of the leases retained
or sold. See also Risk Factor #7 on page 10 of this Prospectus. For a further
discussion of the collection process, and the allocation of amounts collected
by Walnut, See "CREDIT POLICIES AND DELINQUENCIES" beginning on page 18. The
Debentures offered by this Prospectus will not be guaranteed by Walnut, or any
other affiliate of ELCOA. ELCOA's principal executive offices are located at
Suite 76, Silverside-Carr Executive Center, 501 Silverside Road, Wilmington,
Delaware 19809. Its telephone number is (302) 798-2335.
DESCRIPTION OF LEASE PORTFOLIO
ELCOA's principal business is the acquisition of commercial and industrial
equipment for business use which is to be contemporaneously leased to
credit-worthy lessees. In order to determine the credit-worthiness of a
prospective lessee, factors such as time in business, financial strength,
reports from credit reporting bureaus, and trade references are considered.
ELCOA acquires the equipment only after leases on the equipment to be purchased
for lease have been consummated. Leases are written for periods of one to five
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years for equipment costing $1,000 to $25,000, and only on occasion more than
$25,000. The lease agreements entered into between ELCOA or its agents and the
lessees contemplate the payment of funds sufficient to recover ELCOA's
investment in the equipment plus a profit over the term of the leases. The
lease specifically does not give the lessee any option to purchase the
equipment. However, ELCOA has offered the lessee at the expiration of the
lease the opportunity to purchase the leased equipment at its approximate fair
market value, which historically has approximated the estimated residual values
which have been established by ELCOA at the inception of each lease.
Substantially all leased equipment has been sold to the lessees at the
termination of the leases. The leases require that the lessee maintain and
insure the equipment and provide that ELCOA has no 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,
ELCOA relies principally on the credit of the lessee to recapture the cost of
equipment rather than the residual value of the equipment. Since the leases
are small, it is therefore impractical to conduct a physical inspection of the
equipment prior to commencement or during use by the lessee. ELCOA therefore
relies upon a written certificate of acceptance and oral representations by
telephone from the lessees regarding the conditions, use, and maintenance of
the equipment prior to inception of each lease. These leases are commonly
referred to as direct finance leases.
ELCOA has adopted a standard non-cancelable 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 "hell or high water",
full-payout, 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 leases, in management's opinion, and have no
legal or equitable defenses that may be asserted against the Company in the
event the leased equipment does not properly function. 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 ELCOA for any taxes
associated with the equipment, its use, possession or lease except those
relating to net income derived by ELCOA 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 lessor. In the event of a default by a lessee, it 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. As of April
30, 1996, ELCOA had 6,644 direct finance leases which have an average initial
term of approximately 37 months, with an average remaining lease receivable
balance of $2,406. Of these leases, 408 had balances between $6,000 and
$10,000 with an aggregate balance of $3,032,573 and 127 had balances in excess
of $10,000 with an aggregate balance of $2,057,444. Total aggregate leases
outstanding at April 30, 1996 was $16,667,226. At October 31, 1996, ELCOA had
6,104 leases with an aggregate balance of $17,003,620 outstanding (with an
average lease balance of $2,786). All leases cover equipment leased for
commercial use only by businesses throughout the United States. None of the
equipment leased is intended for use by consumers. This equipment is typically
characterized by the leasing industry as "small-ticket" equipment.
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ELCOA, from time to time, may also lease equipment under renewable leases
which do not contemplate full recovery of ELCOA'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 will be automatically renewed for an additional year, and so on from
year to year, unless terminated upon ninety days prior written notice. 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. ELCOA may require
equipment vendors to repurchase the equipment should the lessee cancel after
the initial one year term. 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 ELCOA's costs will be recovered.
Presently, ELCOA has no operating leases and therefore there are no obligations
whereby a vendor currently is required to repurchase the equipment should the
lessee cancel after the initial term.
NATURE OF LEASES AND MARKETING
ELCOA primarily purchases its equipment for lease from Walnut, which in
turn relies on a variety of equipment vendors located throughout the United
States, none of which is expected to be responsible for supplying Walnut or
ELCOA with 5% or more of their equipment purchases. Management of ELCOA
believes that the terms of purchase from Walnut are at least as favorable as
those available from unaffiliated third parties.
ELCOA believes it will be in a competitive position within its industry
because of its ability to carry a large number of small equipment leases
through extensive utilization of electronic data processing by Walnut, under
its servicing agreement described below. (See "Servicing Agreement" described
herein).
ELCOA concentrates on seeking lessees desiring to lease equipment generally
costing $25,000 or less under direct finance leases, with terms ranging from
two to five years, because it believes that there is less competition from
larger competitors for small leases, and it believes that it can spread the
risk of loss from defaulted leases over a greater number of lessees.
Accordingly, no single lessee represents over .5 percent of the outstanding
lease portfolio. All equipment purchased for lease is solely for use by
businesses, and not for lease to consumers. Of the equipment purchased from
Walnut comprising 5% or more of the total purchases during the past twelve
months, approximately 45% were for food/hospitality service and related
equipment, 20% for industrial equipment, 11% was for office machines and
copiers, 9% was for auto after-market and test equipment, and 5% was for
computers and peripheral hardware. 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, ELCOA will purchase used
equipment at its then fair market value. The equipment will not be obsolete or
have been repossessed from any of Walnut's delinquent lessees. The equipment is
located throughout the United States without undue concentration in any one
area. ELCOA's historical experience indicates that the equipment under lease
does not become obsolete at the conclusion of the lease term.
ELCOA's lease portfolio is diversified in location throughout the United
States. The following is a geographical breakdown of the location of ELCOA's
equipment at its original, undepreciated cost, less estimated residual value,
outstanding as of April 30, 1996.
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Region $ %
-------------- ------------ -----
New England $ 2,672,983 11.89
Mid Atlantic 6,607,147 29,39
Southeast 3,913,930 17.41
Midwest 2,580,811 11.48
South 2,005,299 8.92
Rocky Mountain 456,363 2.03
West Coast 1,661,341 7.39
Southwest 2,583,059 11.49
------------ -----
$ 22,480,933 100.0%
============ =====
Walnut markets its lease origination program by providing equipment
manufacturers and dealers with the ability to utilize leasing as a sales tool.
It approaches equipment manufacturers, dealers and branch outlets with
promotional programs with the expectation that the ultimate customer will
lease equipment through Walnut. Walnut also receives requests from its
lessees for additional leases of new equipment. Walnut maintains a staff of 7
account executives who maintain close relationships with the approximately 140
equipment vendors who generate new lease applications in any given month, and
utilizes its direct mail and marketing facilities to increase new vendors and
ultimately the generation of new leases. Walnut does not entertain lease
application from outside lease brokers. The success of Walnut's marketing
program depends to a large extent on the lease rates offered to its customers;
these rates in turn depend on competition in the marketplace and on Walnut's
ability to raise sufficient financing at reasonable rates of interest.
LEASE ORIGINATION AND ADMINISTRATION
Pursuant to an Option Agreement with Walnut, ELCOA purchases equipment for
lease from Walnut, in exchange for a fee for such lease origination. Under
terms of this arrangement, Walnut provides marketing services, credit
investigation and processing of all necessary lease documents. ELCOA
purchases such equipment only within 90 days of the date on which it is first
placed in service by the lessee. The purchase price paid by ELCOA to Walnut
is the out-of-pocket cost expended by Walnut, without profit, along with a
lease origination fee. See "Option Agreement." The criteria for selection of
leases to be sold are those long-term leases having a minimum term of two
years in duration. Title to the equipment is irrevocably transferred to ELCOA
at the time of settlement for each purchase. There are no backlog orders for
equipment purchase commitments.
OPTION AGREEMENT
ELCOA has the continuing right of first refusal to purchase newly acquired
equipment, as well as the related leases, from Walnut when Walnut has
equipment available to sell. In consideration of Walnut's marketing, credit,
and processing department functions (commonly referred to as lease origination
expenses), ELCOA is charged by Walnut a lease origination fee equal to 4% of
the initial equipment cost as a fee, exclusive of any additional fees paid to
independent third party lease broker firms. This agreement continues until
terminated by the mutual agreement of the parties in writing.
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It is intended that all equipment under lease is to be transferred to
ELCOA, shortly after being placed in service by lessees. In such case, Walnut
reduces the purchase price by the amount of any funds received through advance
rentals, prepayments or security deposits received from the lessee of the
equipment prior to the assignment of a lease and transfer of title to ELCOA.
SERVICING AGREEMENT
Walnut, as ELCOA's agent under a service contract dated May 23, 1986 (the
"Agreement"), invoices the lessee monthly for any rentals due, rentals in
arrears, and necessary state or local sales, use, or personal property taxes.
All monies received by Walnut as agent for ELCOA are segregated, processed and
deposited into an escrow account pursuant to an agreement dated May 23, 1986,
established for ELCOA's benefit. These monies may not, under any
circumstances, be commingled with any of Walnut's general funds. Walnut remits
all sales, use, and personal property taxes directly to the proper taxing
authority from this account. Monthly, Walnut renders a listing of the net
rentals collected on behalf of ELCOA, along with a remittance of the net
escrowed funds, no later than the fifth business day following the end of each
calendar month. Walnut also uses its best efforts to re-lease the equipment at
the termination of any lease or negotiate and collect the anticipated residual
value of any equipment at the termination of each initial lease; remitting said
payments in kind to ELCOA as provided above, without reduction. Walnut also
maintains insurance which management believes is adequate against liability or
damage from losses as a result of the lessee's anticipated utilization of the
equipment against loss by fire or otherwise. As consideration for these
general and administrative services, ELCOA is charged a monthly servicing fee
of $6.50 for each account outstanding at the end of each month.
CREDIT POLICY AND DELINQUENCIES
ELCOA, through Walnut, expects to follow a policy that it considers to be
an efficient method of determining credit risks. Walnut relies heavily on bank
references, trade references, number of years in business, various credit
bureau reports, and personal credit references of the principals involved with
the lessee. In addition to the credit investigation, the leases purchased by
ELCOA generally will include the personal guaranty of 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. Most credit decisions are made within a few days
of the initial credit application. ELCOA believes that credit evaluation is
essential inasmuch as the equipment has a substantially reduced value on resale
or re-leasing. Consequently, ELCOA must initially rely primarily on Walnut's
initial credit judgment. Walnut employs approximately 12 people in its credit,
processing and collection departments. It has adopted a policy of
litigating all claims against lessees for unpaid rentals and only settling any
such obligations in favor of the lessor. As a result, delinquent receivables
balances which are reported on a contractual basis appear higher than industry
averages because of ELCOA's decision to pursue delinquent lessees until all
collection efforts have been completely exhausted. See also RISK FACTOR #6 on
page 10 of this Prospectus. Historically, the amounts recovered from
collections of delinquent leases have exceeded the legal fees incurred in
connection therewith. Walnut reimburses 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 does not pay any other fees on either a
contingent or hourly basis. Neither William nor Kenneth Shapiro are included
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in the law firm's payroll. In consideration of these services, Walnut is
entitled to retain any late charges collected to offset these costs of
collection and litigation on behalf of ELCOA. Walnut does not refund any of
the fees collected from ELCOA in those instances when a lessee defaults and
collection efforts are discontinued. Once collection efforts are discontinued,
any likelihood of recovering the equipment, to the extent not previously
repossessed, is considered remote.
An allowance for doubtful lease receivables is calculated 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 (at least quarterly) of delinquent finance lease receivables.
The following table sets forth ELCOA's lease receivable delinquencies on a
strict contractual basis as of April 30, 1996, 1995, and 1994, and at October
31, 1996. References to payments past due two monthly payments means payments
which are at least 31, but not more than 60 days past due. Payments past due
three monthly payments means payments which are at least 61, but not more than
90 days past due, while payments four or more mean 91 or more days past due on
the contractual basis.
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April 30,
---------------------------------------------------------------
1996 1995 1994 October 31, 1996
$ % $ % $ % $ %
----------- ------ ----------- ----- ----------- ----- ----------- -----
Aggregate Future
Lease Receivables $16,667,226 100.00 $17,267,612 100.0 $17,966,429 100.0 $17,003,620 100.0
----------- ------ ----------- ----- ----------- ----- ----------- -----
Current 9,993,204 59.96 10,908,170 63.2 11,625,626 64.7 10,384,860 61.1
Past due - Two Monthly
Payments 942,432 5.65 1,156,730 6.7 984,582 5.5 964,947 5.7
Past due - Three Monthly
Payments 403,153 2.42 465,480 2.7 347,329 1.9 462,786 2.7
Past due - Four or More
Monthly Payments 5,328,437 31.97 4,737,232 27.4 5,008,892 27.9 5,191,027 30.5
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ANALYSIS OF BAD DEBT WRITE-OFFS
Six Months
Fiscal Years Ended April 30, Ended
1996 1995 1994 October 31, 1996
----------- ----------- ----------- ----------------
Aggregate Future
Lease Receivables $16,667,226 $17,267,612 $17,966,429 $17,003,620
Provisions for
Doubtful Accounts 957,063 1,057,634 613,907 543,998
Net Charge-Offs 731,829 1,257,058 496,088 595,669
Average Gross Lease
Receivables 16,967,419 17,617,021 18,314,447 16,835,423
Percent of Net Charge-
Offs to Average Gross
Lease Receivables 4.3% 7.1% 2.7% 7.1%
Allowance for Doubtful
Lease Receivables 1,751,521 1,526,287 1,725,711 1,699,850
Percent of Allowance for
Doubtful Lease Receivables
to Aggregate Future Lease
Receivables 10.5% 8.8% 9.6% 10.0%
Percent of Allowance for
Doubtful Lease Receivables
to Receivables Past Due
Four or More Monthly
Payments 32.9% 32.2% 34.5% 32.8%
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As of April 30, 1996 and 1995, lease payments in arrears on receivables
four or more monthly payments past due (included in the contractual balances
due of $5,328,437 and $4,737,232) were $3,423,728 and $3,068,340,
respectively. Although the balance of delinquent receivables increased during
the fiscal year ended April 30, 1996, management believes that the likelihood
of collection is greater as the credit criteria for new leases has been
enhanced. As of April 30, 1996, and 1995, approximately $3,510,000 or 21.1%
and $3,189,000 or 18.5%, respectively, of direct finance lease receivables on
a strict total contractual basis were 12 or more months past due.
ELCOA believes that its loss experience and delinquency rate is reasonable
for its operations in that the provisions for doubtful accounts charged
against operations typically equal or exceed net charge-offs on an historical
basis. Delinquent receivable balances expressed as a total of lease
receivables appears to be high because of its market, i.e., primarily small to
medium sized businesses, and the decision to pursue delinquent lessees until
all reasonable collection efforts have been completely exhausted. The
implication of these higher percentages requires ELCOA to continue its
collection efforts diligently to minimize its actual losses from delinquent
accounts. As of April 30, 1996 and 1995 and at October 31, 1996, ELCOA
maintained an allowance for doubtful lease receivables of $1,751,521,
$1,526,287, and $1,699,850 respectively, which management believes is adequate
for future write-offs on the Company's aggregate gross lease receivables.
These reserves totaled 10.5%, 8.8%, and 10.0% respectively, of the total gross
lease receivables outstanding at April 30, 1996 and 1995, and at October 31,
1996. The allowance is based upon management's periodic analysis performed at
least quarterly of the lease portfolio, also taking into consideration ELCOA's
and Walnut's past experience in the management of delinquent lease
receivables. Total past due lease receivables as reflected in the above chart
represent the total amount of payments due as well as all aggregate future
payments to become due under terms of the underlying lease contracts. During
the three fiscal years ended April 30, 1996, 1995 and 1994, and during the six
months ended October 31, 1996, the allowance for doubtful accounts was
increased by provisions for doubtful lease receivables annually in the amounts
of $957,063, $1,057,634, $613,907, and $543,998, respectively. The amounts
written off in each of the three fiscal years ended April 30, 1996, 1995 and
1994, and during the six months ended October 31, 1996 were $731,829,
$1,257,058, $496,088, and $595,669, respectively, or 4.3%, 7.1%, 2.7% and 7.1%
of average gross lease receivables. ELCOA does not expect the percentage of
net charge-offs to average gross lease receivables to materially increase in
future fiscal years.
Walnut also utilizes its collection department and a law firm with which
it is affiliated to collect any and all delinquent payments on behalf of
ELCOA. Walnut is entitled to be compensated for the collection of delinquent
payments, by an amount equal to the delinquency and late charges collected
under terms of each delinquent lease agreement, with the net rentals remitted
to ELCOA. Walnut, in turn, compensates the law firm for its services from
funds so received. Therefore, if no collections are made on a certain
delinquent lease, ELCOA is charged only the monthly servicing fee for that
account.
ELCOA bears the risk of all loss of any lease rentals provided for under
the leases, the loss of any equipment owned by it, any loss of value of any
equipment, and all losses incurred in the sale of such equipment, no matter
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31
how such loss occurs. Consequently, ELCOA is required to maintain an
allowance for such losses, increases in which will result in corresponding
charges to operations. At October 31, 1996, approximately 39% of the then
outstanding lease receivables were past due as reported on a contractual
basis. Management attributes the increase in delinquencies to increased
credit card debt and unsecured debt owed by individuals and businesses in
general and has provided for additional reserves accordingly. This assertion
is based on ELCOA's historical experience of collections of its outstanding
lease receivables which has remained consistent during the past three fiscal
years, and for the six months ended October 31, 1996. Management reviews
these accounts at least quarterly and at year end provides what it believes to
be an adequate reserve for potential losses thereof by a corresponding charge
against operations. Leases are written-off only if there is an adverse court
decision, bankruptcy or settlement, and local counsel engaged in the
collection effort has determined that further action in recovering the debt is
unwarranted. The high level of write-offs during the fiscal year ended April
30, 1995 and six months ended October 31, 1996 resulted from management's
decision to discontinue collection efforts in certain cases where the legal
costs of pursuing collection would be less than the recoveries anticipated.
Factors such as evolving changes in case and statutory law in some states
favoring debtor's 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 can be
attributed to the larger percentage of write-offs. Management believes that
the likelihood of collecting the remaining delinquent lease receivables is
greater than those previously written-off, as the credit criteria for new
leases in those states favoring debtors rights have been enhanced. For small
businesses, the Company requires, to a greater extent, that all co-owners be
personally responsible for the obligations under lease contracts. In
addition, as a result of a shift in marketing direction by Walnut towards more
technical equipment to be leased by larger companies, along with a shift away
from smaller, retail businesses, management believes that it can lower its
delinquency rates. If the equipment is returned to ELCOA, it will maintain an
inventory of the repossessed equipment until it can be re-let or sold. ELCOA
writes down the carrying value of this equipment to its forced sale value when
it is repossessed.
BOOKKEEPING AND DATA PROCESSING
Almost all of ELCOA's bookkeeping and record-keeping functions are
performed by Walnut utilizing electronic data processing programs developed
and owned by Walnut Associates, Inc., the owner of all of the outstanding
common stock of Walnut. It is anticipated that Walnut will maintain
sufficient duplicate records to safeguard its information. ELCOA reimburses
Walnut $500 weekly for performance of these services.
ELCOA believes the fees to be charged by Walnut in connection with the
above arrangements to be no higher than those charged by outside sources for
similar services.
METHOD OF FINANCING
ELCOA, in order to conduct its business, must have the financial resources
with which to purchase the equipment it leases. The funds for such purchases
will be generated primarily from the sale of the Debentures, receipt of rental
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32
payments, the sale of lease receivables to third-parties through
"securitization", and, to a lesser extent, funds which may be borrowed in the
normal course of business from lending institutions. ELCOA may therefore
establish credit relationships with third-party asset "securitizers" or other
lending institutions which may be necessary for the conduct of its business,
although no such relationships existed as of the date of this Prospectus. The
terms of the securitization or other borrowings would differ depending upon
prevailing interest rates and the arrangements made with each lending
institution. Such institutions may secure their interests in leases pledged
as collateral but, except in connection with the specific leases used as
collateral, this debt will rank on parity with the Debentures offered herein.
Through securitization, ELCOA could offer to sell leases to third-party
financial institutions for a fee, recognizing as current income the difference
between the net present value of the future rentals due at an agreed upon
discount rate, less ELCOA's investment in the equipment under lease.
It should be noted that although ELCOA's rental income from its lessees is
fixed at the inception of each lease, ELCOA's 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 bank that may hypothecate leases
or the interest rates that ELCOA pays on its Debentures increase, ELCOA must
pay any such increased cost without having the ability to increase its rental
charges on existing leases.
ELCOA has sold Demand, Fixed Rate, and Money Market Thrift Certificates
pursuant to prior offerings, of which $26,407,959 were outstanding at April
30, 1996. Of these, $1,331,985 are payable upon demand, and $25,075,974 of
fixed-term certificates were due as follows:
Year Ending
April 30
-----------
1997 $13,871,989
1998 3,934,697
1999 2,815,391
2000 1,759,532
2001 & thereafter 2,694,365
-----------
$25,075,974
===========
Approximately .7% of these certificates were held by William Shapiro, the
Company's President, members of his immediate family, or companies in which he
maintains a majority interest. Certificates held by these affiliates were
purchased for cash under terms of the prior offerings of these securities at
the public offering price. See also Note 8 to the Financial Statements.
EMPLOYEES
It is currently anticipated that the officers of ELCOA will continue to
devote substantially all of their time to their duties related to their
respective positions with Walnut and its affiliates. ELCOA has no full-time
employees. However, the officers and directors of ELCOA will make such time
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33
commitments as may be necessary, which are not expected to be a significant
amount of time, to ensure that ELCOA fulfills its duties under the Indenture
and such other duties as the officers and directors shall deem necessary to
protect the interest of ELCOA's creditors, principally the Debenture holders,
or which may be required by law. Mr. William Shapiro, President of ELCOA, has
over 30 years experience in "small-ticket" leasing. Mr. Kenneth S. Shapiro,
Vice-President of ELCOA, has over 15 years experience in leasing. Both
officers are also licensed certified public accountants and attorneys. See
"MANAGEMENT".
COMPETITION
Equipment leasing and related businesses are highly competitive and that
competition may increase. A number of concerns are engaged in the same type of
business as ELCOA, including: (1) finance divisions, affiliates or
subsidiaries of suppliers which sell products leased by ELCOA, (2) banks or
their affiliates, (3) other leasing and finance companies, including Walnut,
and (4) independently formed partnerships operating for the specific purpose of
leasing equipment. Many of these organizations have greater financial or other
resources than ELCOA and, therefore, may be able to obtain funds on terms more
favorable than those available to ELCOA. This may permit such organizations to
offer lease terms which ELCOA could not match. Also, such organizations may
have competitive advantages including their affiliation with vendors and their
nationwide leasing organizations. Although ELCOA has a right of first refusal
to purchase new equipment and leases which Walnut wishes to sell, Walnut may
compete with ELCOA for future business.
Factors that effect competition include convenience, rate, terms, speed of
credit approval, nature and type of equipment to be leased, and size of lease.
ELCOA has no way of determining its share of the leasing market.
FEDERAL INCOME TAX CONSIDERATIONS
ELCOA's leasing activities are not generally oriented toward creating tax
benefits. The recently enacted Revenue Reconciliation Act of 1993 is expected
to have no material impact on ELCOA's operations. To the extent that the
current tax law reduces the benefits of equipment ownership, equipment users
might be more inclined to lease because deductibility of rental payments by the
lessee would remain unaffected, while purchases of equipment would no longer
provide certain tax advantages.
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34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE FISCAL YEARS ENDED APRIL 30, 1996
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with ELCOA's financial statements and
notes thereto appearing elsewhere herein. As regards transactions with
affiliates, see Note 8 to the Financial Statements.
ELCOA began operations on May 23, 1986 by the assignment of approximately
$1,000,000 in equipment and related leases from Walnut in exchange for all of
ELCOA's outstanding common stock. During the fiscal years ended April 30,
1996, 1995 and 1994, aggregate new lease receivables were $8,676,271,
$9,674,906 and $8,782,656, respectively, new equipment purchased for lease was
$6,561,611, $7,321,620 and $6,680,452, respectively, and recognized revenues
from direct finance leases totalled $2,610,450, $2,945,151 and $3,009,864,
respectively. During the three fiscal years ended April 30, 1996, all (100%)
of the equipment and leases purchased were from Walnut. See "CREDIT POLICIES
AND DELINQUENCIES" for a discussion of the delinquency status as respects these
leases as of April 30, 1996. ELCOA attributes the decrease in new lease
receivables entered in the fiscal year ended April 30, 1996 to a reduction in
the amount of leases offered by sale from Walnut. The income earned under
direct finance lease contracts decreased 11.4%, 2.2% and 1.6% during the fiscal
years ended April 30, 1996, 1995 and 1994, respectively. The decrease in the
growth of earned revenues during the three fiscal years ended April 30, 1996
was the result of a decrease in the amount of lease contracts outstanding
during these years. Management attributes the loss reported for the fiscal
years ended April 30, 1996, 1995 and 1994 to a variety of factors including but
not limited to increased reliance on borrowed funds, increased general and
administrative expenses, provisions for doubtful lease receivable associated
with an aging portfolio of leases, and excess interest paid on excess cash and
investment balances during the fiscal year. See "RISK FACTORS". In order to
improve operating results, ELCOA will have to increase the amount of its
outstanding lease receivables. This remedy may be achieved by the purchase of
lease receivable portfolios from third parties, as well as the expected
increase in purchases of leases from Walnut. See "Credit Policies and
Delinquencies" for a discussion of steps being taken to improve the credit
quality of new leases. During the three fiscal years ended April 30, 1996, the
Company's costs of operations were funded from rentals collected. Net proceeds
from the sale of debt securities were used for the purchase of equipment for
lease during the fiscal years ended April 30, 1996, 1995 and 1994, with excess
funds being retained in low-yield but highly liquid investments, including U.S.
government securities with terms not exceeding six months in length.
ELCOA experienced growth in the volume of new leases added to its portfolio
during the fiscal year ended April 30, 1995, but declined during the fiscal
years ended April 30, 1996 and 1994. Aggregate new lease receivables decreased
by $998,635 or approximately 10.3% during the fiscal year ended April 30, 1996
and increased by $892,250 or approximately 10% during the fiscal year ended
April 30, 1995. In analyzing ELCOA's Financial Statements, it is therefore
important to note the relationships between new lease volume added during an
accounting period and the net lease revenue and income before income taxes
reported for that period. Net lease revenue recognized by ELCOA during an
accounting period is defined to be the income earned under direct finance
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35
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 ELCOA during an accounting
period, such as the provision for losses, are more directly related to the
aggregate amount of outstanding leases during that period. Thus,
current-period expenses are more dramatically impacted by volume growth than is
net lease revenue. As a result of the foregoing factors, reported income
before income taxes will in turn grow at a slower rate than the rate of growth
in net lease revenue during periods of increasing rates of growth in new lease
volume. In periods of decreased rates of lease volume growth, the foregoing
relationship would be reversed.
Lease origination expenditures which represent fees incurred in the
acquisition of new lease receivables from Walnut were 4% of the equipment
acquired by ELCOA from Walnut, plus any commissions paid to vendors and outside
leasing brokers. Effective May 1, 1990, Walnut included as part of the
equipment cost any commissions paid vendors or leasing brokers in the
acquisition of the equipment. As such, these costs are no longer reimbursed
separately by ELCOA, but paid as part of the equipment cost. See Note 1 to the
Financial Statements for a discussion of the impact of SFAS 91 on accounting
for lease origination costs. Total amounts paid Walnut under the option
agreement during the three fiscal years ending April 30, 1996, 1995 and 1994
were $252,370, $281,531 and $256,940, respectively.
For the fiscal years ended April 30, 1996, 1995 and 1994, ELCOA incurred
$972,678, $1,054,460, and $1,031,825 in general and administrative expenses,
respectively. Monthly servicing and bookkeeping fees paid to Walnut in the
amount of $592,638, $676,228, and $704,522 during the fiscal years ended April
30, 1996, 1995, and 1994, respectively, were a primary component of general and
administrative expenses. The $83,590 decrease from the fiscal year ending
April 30, 1995 in comparison to the fiscal year ending April 30, 1996 is
attributable to a reduction in the amount of finance leases outstanding to
6,644 at April 30, 1996 from 7,964 at April 30, 1995. This decrease
corresponds to the $81,782 or 7.8% overall reduction in general and
administration expenses. Also included in the general and administrative
expenses during the fiscal years ended April 30, 1996, 1995 and 1994 were
$241,323, $247,561 and $188,209, respectively, of amortization of the deferred
debt registration and solicitation expenses, which include amortization of
commissions paid on account of sales of Demand, Fixed Rate, and Money Market
Thrift Certificates. Fees paid to Financial Data, Inc., a registered transfer
agent and affiliate of the Company, for services rendered in connection with
the Demand, Fixed Rate and Money Market Thrift Certificates, were $106,589,
$99,595 and $105,334, during the fiscal years ending April 30, 1996, 1995 and
1994, respectively. In the event that Walnut should cease operations or be
unable to fulfill its obligations in origination and servicing of ELCOA's
leases, ELCOA's costs to perform these services might increase, reducing
profitability. See "RISK FACTOR #2" on page 7.
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 expenses and reduced by chargeoffs. ELCOA
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recorded provisions for doubtful lease receivables of $957,063, $1,057,634 and
$613,907 for the fiscal years ended April 30, 1996, 1995 and 1994,
respectively, resulting from increases in delinquent accounts outstanding
during these periods. At April 30, 1996, approximately 40% of the then
outstanding lease receivables were past due as reported on a contractual basis.
ELCOA expects that the percentage of delinquencies will decrease as the
aggregate amount of lease receivables increases in the future. Management has
reviewed these accounts at year end and has provided what it believes to be an
adequate reserve for potential losses thereof on an impairment basis by a
corresponding charge against operations. Management does not expect the
percentage of write-offs from delinquent lease receivables during fiscal 1997
to increase from the rate during fiscal 1996. See also "BUSINESS - Credit
Policy and Delinquencies." For a further discussion of the legal efforts being
conducted to collect delinquent lease receivables, see Footnote 8 to the
Financial Statements.
During the fiscal years ended April 30, 1996, 1995, and 1994 ELCOA incurred
$1,382,422, $1,314,491 and $1,563,038, respectively, in interest expense, net
of interest income of $1,016,596, $741,671, and $374,025, respectively, on
average debt (including accrued interest thereon) of $28,442,700, $25,258,751
and $22,287,797, respectively, based upon the amounts of debt outstanding
computed on a quarterly basis. Average interest rates on average outstanding
debt, including accrued interest, but disregarding interest income on excess
funds, were 8.4%, 8.1%, and 8.6%, respectively. The interest expense before
calculation of any offset from interest income increased each year as a result
of the increase in the amount of issued and outstanding debt securities of
ELCOA.
During the fiscal years ended April 30, 1996, 1995 and 1994, ELCOA
recognized provisions for state income taxes in the amounts of $0, $360, and $0
respectively. See Footnote 1 to the Financial Statements. No provisions for
federal income taxes were necessary, due to the benefit of Walnut's net
operating loss carryforwards.
ELCOA's revenue is set at the time a given lease contract is executed.
Consequently, inflation is not expected to impact revenue subsequent to the
inception of any given lease. In addition, inflation will not have a material
effect on ELCOA's operating expenses as they are fixed based upon the Servicing
Agreement with Walnut. However, the increased reliance on variable rate
borrowings resulting from sale of the certificates subjects ELCOA to increased
exposure to inflation because of the risk of increased interest rates. In the
event that future redemptions of Debentures exceed future sales of the
Debentures being offered, ELCOA would be required to replace the indebtedness
through other borrowings. To the extent that ELCOA is able to obtain funds at
fixed interest rates, inflation will have no impact over the term of any given
loan. However, to the extent that the loans would be at variable interest
rates, inflation might have a significant adverse impact on ELCOA's operations
through increased costs of borrowing.
In order to reduce operating losses, and improve operating profitability,
management continues to take steps to increase the generation of new lease
receivables that are credit worthy, and increase collections from past due
lease receivables. In order to improve the overall quality of its future lease
receivables, the Company requires to a greater extent that all co-owners be
personally responsible for the obligation under lease contracts. In addition,
as a result of a shift in marketing direction by Walnut towards more technical
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equipment to be leased by larger companies, along with a shift away from
smaller retail businesses, management believes it can lower its delinquency
rates. The percentage of delinquent lease receivables increased during fiscal
1996, in part, as a result of the increase in delinquencies and, in part, as a
result of a decrease in the outstanding amount of aggregate lease receivables
during the year. As the level of outstanding lease receivables increases and
the quality of new leases improves, management believes that the percentage of
severely delinquent leases will decrease. As Walnut's ability to market its
leasing programs and services to and through equipment manufacturers matures,
the level of new receivables will increase as noted below during the six month
period ended October 31, 1996. Excess funds available for investment in leases
have decreased as the rates being paid on newly issued Debentures have not
increased while market rates in general have reflected slight increases.
Repayment of the Company's outstanding indebtedness will be dependent on
achieving profitable operations. See "Risk Factors" beginning on page 7 of
this Prospectus.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED OCTOBER 31, 1996 AND 1995.
Revenues of $1,253,468 and $1,362,988 were recognized during the six months
ended October 31, 1996 and 1995 respectively. Revenues decreased $109,520 or
8.04% as a result of changes in the composition of the aging of the outstanding
aggregate future receivables during these periods. The Company utilizes the
"effective" method in recognizing income from deferred income on its direct
finance lease portfolio. For a more detailed discussion of the manner in which
income is computed and recognized, see Footnote 2 to the Financial Statements
for the six months ended October 31, 1996 and 1995. During the six month
periods ended October 31, 1996 and 1995, $4,965,522 and $4,358,100,
respectively, in new gross finance lease receivables were added to the
portfolio of outstanding leases, corresponding to equipment purchases of
$3,735,425 and $3,344,014, respectively. Unearned income under direct finance
leases reflected a net increase of $132,377 during the six months ended October
31, 1996 after having decreased $163,948 during the six months ended October
31, 1995. During a period in which new lease volume grows, the rate of growth
in new lease volume and unearned income will exceed the rate of growth, if any,
of income earned under direct finance leases as unearned income is recognized
over the term of the lease and not necessarily in the year of origination.
Management attributes the increase in new leases generated during the six month
period ended October 31, 1996 to an increase in equipment available for
purchase from its parent, Walnut.
Amounts paid under the service contract for lease origination in the
amounts of $189,624 and $130,565, respectively, were capitalized in accordance
with FAS No. 91 during the six months ended October 31, 1996, and 1995. See
Footnote 2 to the Financial Statements for the six month interim period ended
October 31, 1996.
General and administrative expenses for the six month periods ended October
31, 1996 and 1995 were $457,673 and $484,448, respectively. Included in these
expenses were $245,466 and $297,505, respectively, in monthly servicing fees
which are to reimburse Walnut for the servicing and administration of ELCOA's
outstanding leases which are charged at $6.50 per account per month. As of
October 31, 1996 and 1995, there were 6,104 and 7,294 accounts outstanding,
respectively. Also included in general and administrative expenses for the six
months ended October 31, 1996 and 1995 are $130,329 and $108,024, respectively,
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which represents the amortization of the deferred registration and solicitation
expenses which are included in "Other Assets" on the Balance Sheet at October
31, 1996 and 1995. See Footnote 2 to the Financial Statements for the six
months ended October 31, 1996 and 1995 for a more detailed discussion of the
calculation of the amortization expense. ELCOA paid Walnut $13,000 during each
of the six month periods ended October 31, 1996 and 1995, for bookkeeping fees.
These fees are to reimburse Walnut for the routine bookkeeping functions
performed for ELCOA and are charged at $500 per week. Also included in general
and administrative expenses were $50,398 and $53,292 respectively, in transfer
service fees paid to Financial Data, Inc., an affiliate. These expenses
approximate the actual costs incurred in the services performed, which
decreased during the six months ended October 31, 1996 as a result of the
suspension of sales of certificates effective September 1, 1996 pending
effectiveness of a Post-effective amendment to a registration statement. See
"Other Information below.
For the six months ended October 31, 1996 and 1995, ELCOA recognized
expenses of $543,998 and $346,593, respectively, for its doubtful lease
receivable provision. See Footnote 2 to the Financial Statements for the six
months ended October 31, 1996 and 1995. This provision was recognized in order
to maintain an adequate allowance, based upon management's belief and
historical experience, for anticipated delinquencies and impairments from
doubtful direct finance lease receivables outstanding as of October 31, 1996
and 1995. During the three months ended October 31, 1996, ELCOA continued to
conduct an extensive review of the collectibility of all past due accounts, and
wrote-off those situations where further costs in pursuing legal remedies in
collection were considered to be unwarranted. As a result, past due accounts
four or more monthly payments past due (on a strict contractual basis) as of
October 31, 1996 were $5,191,027 or 30.53% of the $17,003,620 in aggregate
future lease receivables outstanding at that date. These delinquencies
decreased $137,410 or 2.58% from the amount of $5,328,437 (32.0% of aggregate
receivables) at April 30, 1996. Management is continuing its efforts in
pursuit of collections of all past due lease receivables.
During the six months ended October 31, 1996 and 1995, ELCOA incurred
$691,990 and $703,083, respectively in interest expense on the Demand, Fixed
Rate and Money Market Thrift Certificates. Accrued interest thereon of
$3,228,787 and $2,604,574, respectively, were outstanding at October 31, 1996
and 1995. These expenses were reduced by interest income of $550,421 and
$488,328, respectively during the six months ended October 31, 1996 and 1995.
ELCOA's excess cash is invested in short-term U.S. Government Treasury Bills
having maturities of three months, with interest rates of 5.0% and 5.3% at
October 31, 1996 and 1995, respectively. The average rates of interest paid on
the Certificates (including accrued interest thereon) during these periods were
approximately 8.5% and 8.6%, respectively, during the six month periods ended
October 31, 1996 and 1995. Effective January 1, 1991, ELCOA and Walnut, its
parent, agreed to pay each other interest on any intercompany advances during
each month. Interest will be charged at a rate equal to 2% above the
prevailing "prime" rate of interest at Meridian Bank, Reading, Pennsylvania.
During the six months ended October 31, 1996 and 1995, ELCOA included $364,015
and $240,887, respectively, as interest income under this agreement.
During the six month periods ended October 31, 1996 and 1995, ELCOA
recognized no provisions for state income taxes, or federal income taxes. See
Footnote 2 to the Financial Statements for the six months ended October 31,
1996 and 1995.
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CAPITAL RESOURCES AND LIQUIDITY
ELCOA has financed, and anticipates that it will continue to finance its
new business primarily from the proceeds from its sale of Certificates, as well
as from rentals received from lease contracts outstanding, and, if necessary,
from bank borrowings or sales of lease receivables to other financial
institutions. During the three fiscal years ended April 30, 1996, 1995, and
1994, approximately 29%, 37% and 56%, respectively of the equipment purchases
were funded from sale of securities, and 71%, 63%, and 44%, respectively were
funded from rental collections. Approximately $17,970,000 in principal amount,
including accrued interest on the $26,407,959 in Debentures outstanding at
April 30, 1996 is subject to redemption within one year of that date.
Scheduled receipts from lease contracts of approximately $9,134,000 during this
period, as well as cash and the investment in U.S. government securities on
hand at April 30, 1996 are expected to be sufficient to cover redemptions for
holders who do not elect to "rollover" at maturity into new Debentures. See
Footnotes 2 and 6 to the Financial Statements. During the fiscal years ended
April 30, 1996, 1995 and 1994, approximately 78%, 86% and 81%, respectively, of
all debt securities issued by Walnut coming due were renewed and "rolled over"
into new indebtedness, while approximately 54%, 50% and 59%, respectively, of
all Demand, Fixed Rate, and Money Market Thrift Certificates issued by ELCOA
which came due were "rolled over" during this period. ELCOA's rollover
percentage is lower as a result of its lower rates being offered on its
Certificates in comparison to those of Walnut. Management cannot predict with
any certainty what percentage will "roll over" during the fiscal year ending
April 30, 1997, and the percentage may be relatively comparable to prior year
experience. Redemptions of Debentures previously issued decreased to
$7,734,149 from $8,272,533 during the fiscal years ended April 30, 1996 and
1995, respectively. Redemptions were approximately the same as the prior year
taking into consideration the redemption of $306,000 of certificates paid to
the estate of a deceased certificate holder during the fiscal year ended April
30, 1995. See Statements of Cash Flows for the three fiscal years ended April
30, 1996 appearing on pages 52 and 53 of this Prospectus. In the event that
holders do not elect to "roll-over" their debt securities, the redemptions will
be met from cash and investments on hand and rentals received from outstanding
leases in the ordinary course of business. As such, the proceeds of this
offering are not expected to be used to redeem outstanding certificates. As of
October 31, 1996, ELCOA had approximately $6,177,000 of cash on hand or
invested in liquid short-term government securities, and had a receivable from
Walnut of approximately $8,567,000 for funds advanced for the purchase of
equipment for leases awaiting sale to ELCOA as of October 31, 1996. See Risk
Factor #9 on page 11 of this Prospectus.
Management believes that ELCOA has the capacity and ability to generate new
lease business to the extent that funds become available from these sources,
taking into effect historical cash flows from rental collections and sale of
debt securities, that exceeded the cost of operations. ELCOA could also
purchase equipment and leases from outside sources provided that the
documentation is acceptable to management. Management considered but found
unacceptable such leases in the past due to the inability to confirm the
documentation or likelihood of collection of such lease portfolios offered for
sale. The lag time between receipt of funds and the investment in equipment is
approximately two months. No assurance can be given that any future offering
of Demand and Fixed Rate Certificates can be sold or that satisfactory bank
relationships can be established, or that all funds raised from these sources
could be immediately invested in the purchase of equipment for lease. However,
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ELCOA presently has no commitments outstanding for any future equipment
purchases, and its anticipated cash flow from its outstanding portfolio of
leases will be sufficient to fund operations during the next fiscal year
without any reliance on capital to be generated by the sale of these
Debentures. Management believes that it could generate additional funds through
the securitization markets, or establish bank lines of credit or their
equivalent on a secured lending basis, since it has sufficient assets under
lease to adequately collateralize any line of credit. There are no material
capital purchase commitments or long term obligations which may be incurred
beyond the next twelve months. See the Statement of Cash Flows for the three
fiscal years ended April 30, 1996. See also "RISK FACTORS" for a complete
discussion of the relationships between ELCOA and its parent, Walnut, and its
financial condition. In this regard, if Walnut were to liquidate or cease
doing business, ELCOA's costs to continue operations may exceed the costs paid
Walnut under the origination and servicing agreements. In addition, the
holders of Walnut's debt securities acquiring an equity interest in ELCOA could
force a liquidation of ELCOA. In that event, holders of ELCOA's debt
securities would be paid their principal and accrued interest before any
payment in liquidation would be made to Walnut's creditors as owners of the
equity of ELCOA. See Risk Factor Number 4 on page 8 of this Prospectus.
As noted in the "USE OF PROCEEDS" section on page 13 of this Prospectus,
excess funds have historically been invested by the Trustee in low yielding but
highly liquid investments. These funds have been held solely for the purpose
of investment in new lease receivables. During the fiscal year ended April 30,
1996, the average interest rate earned by ELCOA on these funds was
approximately 5.2%, while the average interest rate paid on outstanding
certificates was 8.4%, resulting in a negative spread of 3.2%. Any decision by
the Federal Reserve to increase rates in general may reduce this "negative
spread". However, management has placed a high priority of increasing the
purchase of equipment for lease reducing the available amount of cash and
investments on hand. During the fiscal year ended April 30, 1996, the average
rate of return on ELCOA's investment in its lease receivables was 17.3%.
As noted in the Statements of Cash Flows on page 52, sales of Demand and
Fixed Rate Certificates have increased over the three fiscal years ended April
30, 1996, along with a corresponding increase in the redemption of these
securities at their respective maturities. In the event that future
redemptions of Certificates exceed future sales of the Certificates to be
offered, ELCOA may utilize its excess cash to repay such borrowings. See "USE
OF PROCEEDS." ELCOA believes that it has sufficient cash resources to meet its
normal operating requirements during the fiscal year ending April 30, 1997.
To the extent that ELCOA is able to obtain funds either through future
sales of Certificates or from other sources at fixed interest rates, inflation
will have no impact over the term of any given borrowing. However, to the
extent that the borrowings would be at variable interest rates, inflation may
have a significant adverse impact on ELCOA's operations through increased costs
of borrowing. The increased reliance on variable rate borrowings resulting
from sales of the Certificates subjects ELCOA to increased exposure to
inflation because of the risk of increased interest rates.
To date, neither ELCOA nor Walnut has ever defaulted on any contractual
payment of interest or principal due under the terms of any loan, bank
borrowing, or debt security obligation issued to the public. All requests for
early repayment of interest or principal have never been later than five
business days after demand for redemption was received.
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PRINCIPAL SHAREHOLDER
All of the common stock of ELCOA presently outstanding is owned by Walnut,
and 100% of the common stock of Walnut is owned by Walnut Associates, Inc., of
which Mr. William Shapiro is the sole shareholder. Therefore, Mr. Shapiro,
Walnut Associates, Inc., and Walnut may be deemed "parents" of ELCOA as that
term is so defined under the Securities Act of 1933, as amended. For a
discussion of the transactions between these affiliated parties, see Note 8 to
the Financial Statements for the three fiscal years ended April 30, 1996. The
address of Walnut and Walnut Associates, Inc. is Suite 200, One Belmont Avenue,
Bala Cynwyd, PA 19004. All future loans to company officers, directors,
affiliates and/or controlling shareholders will be made for bonafide business
purposes, and will be approved by a majority of the directors of ELCOA,
including a majority of those disinterested directors. All future transactions
with the above reference parties will be on terms no less favorable than could
be obtained from unaffiliated parties, and shall be approved by a majority of
the directors of ELCOA, including a majority of those disinterested directors.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table identifies the Directors and Officers of ELCOA.
NAME POSITION WITH ELCOA AGE
- ------------------ ---------------------------- ---
William Shapiro President 73
Kenneth S. Shapiro Vice-President 44
Lester D. Shapiro Secretary/Treasurer/Director 35
Nathan Tattar Director 75
John B. Orr Director 37
Adam Varrenti, Jr. Director 47
Directors' terms expire when their successors are duly elected by the sole
shareholder of ELCOA. Officers' terms shall continue until their successors
are selected by the Board of Directors.
William Shapiro, the father of Kenneth and Lester Shapiro, holds degrees
from Temple University Schools of Business and Law. He is a practicing
attorney and a Certified Public Accountant. He has been the President, Chief
Executive Officer and Director of Walnut since 1969, and devotes substantially
all of his time to those duties. For the last twenty-nine years, he has been
the President, Chief Executive Officer, Director and sole shareholder of Walnut
Associates, Inc., the sole shareholder of Walnut. He has been President of
William Shapiro, Esq., P.C., a law firm, since 1976. He was a Director of
Kulicke and Soffa Industries, Inc., a publicly held manufacturing company until
August, 1987. Mr. Shapiro is also an officer, Director and sole shareholder of
Welco Securities, Inc. since 1983, President of ELCOA since 1986, and President
and a Director of Financial Data, Inc.
Kenneth S. Shapiro, the son of William 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 Walnut and was employed as its Controller from September 1979 to 1983, when
he became its Vice-President. In addition to being Vice-President
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of Walnut, he is the President and a Director of Welco Securities, Inc. He had
been a member of the part-time faculty in Accounting and Taxation at Beaver
College, Glenside, Pennsylvania from September, 1978 to May, 1994.
Lester D. Shapiro, the son of William Shapiro and brother of Kenneth S.
Shapiro, is a graduate of New York University's College of Business and Public
Administration, having majored in accounting and management. He has also
received a Masters of Business Administration degree from New York University
in June 1985. Since 1981, he has also been engaged in the purchasing and
resale of used business equipment on his own behalf, and since March 1986, has
been the President and sole shareholder of Shapiro Business Machines, Inc., a
dealer in used business equipment. He has been a Director of Walnut since
September, 1983, and a Director and Secretary/Treasurer of ELCOA since
inception.
John B. Orr received his Bachelor of Science degree in Business
Administration from Drexel University in 1981. From 1983 to July, 1989 he
worked as an independent floor broker with Jordan Investments, and as a trader
with Susquehanna Investment Group, both members of the Philadelphia Stock
Exchange. From July 1989 through July, 1992, he was employed as a Vice
President, director and shareholder of Wynncroft Options, Inc., a specialist
trading firm on the floor of the Philadelphia Stock Exchange. From July,
1992, through April, 1994 he was employed with Group One Limited, an options
trading firm and member of various exchanges. His is now the President of
Tempest Trading Partners, Inc., an options trader on the floor of the
Philadelphia Stock Exchange. He has been a Director of ELCOA since inception.
Nathan Tattar received his Bachelor of Arts degree from Washington
College, Chestertown, Maryland; his C.L.U. (Chartered Life Underwriter) from
the American College in 1955; and the R.H.U. (Registered Health Underwriter)
designation from the Health Insurance Council in 1972. He is also a charter
recipient of the L.U.T.C.F. designation from the Life Underwriter's Training
Council. He has maintained his own life insurance agency since 1970 in
Philadelphia, Pennsylvania, and has been active for 40 years in the life,
health and pension insurance field. He is an active member in the Boy Scouts
of America and presently serves on its Executive Board. He is also a member
of the Insurance and Capital Fund Raising Committees of the Cradle of Liberty
Council, and presently serves on the Executive Board. He has been a Director
of ELCOA since inception. He is also licensed as a registered representative
and a Director with Welco Securities, Inc., a member firm of the NASD
Regulation, Inc., and Underwriter of the Debentures.
Adam Varrenti Jr., received his Bachelor of Science degree in Business
Administration from Villanova University. Since 1982, he has been the sole
proprietor of the Diversified Financial Group, West Chester, Pennsylvania.
Mr. Varrenti received his C.L.U. (Chartered Life Underwriter) and his ChFC
(Chartered Financial Consultant) designations from the American College in
1981 and 1985, respectively. He is also registered with the NASD through John
Hancock Distributors, Inc., as a mutual fund salesman. He has been a Director
of ELCOA since inception.
ELCOA's Certificate of Incorporation adopts a provision of the Delaware
General Corporation Law which provides that a director of a corporation will
not be personally liable to the corporation or it shareholders for monetary
damages for breach of fiduciary duty of care as a director, including breaches
which constitute gross negligence. However, this provision does not eliminate
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or limit the liability of a director of a corporation (i) for breach of the
director's duty of loyalty to the corporation or its shareholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law (relating to unlawful payments of dividends or unlawful stock
repurchases or redemptions), (iv) for any personal benefit derived or (v) for
breaches of a director's responsibilities under the federal securities laws.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provision, or otherwise, ELCOA has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. Reference is made to Item 17 of the Registration
Statement of which this Prospectus is a part for additional information
regarding the indemnification of officers and directors.
EXECUTIVE COMPENSATION
All management decisions for ELCOA, including the purchase of equipment for
lease, are made by ELCOA by its officers under the direction of its Board of
Directors. It is expected that the officers of ELCOA will be required to
devote only a small portion of their time to the affairs of ELCOA and are not
expected to be compensated by ELCOA. ELCOA has no employee benefit plan.
No compensation has been paid to any director or officer of ELCOA since
incorporation, and none is likely without the approval of the Board of
Directors. The officers of ELCOA will not be compensated by ELCOA for their
services as directors, although the outside directors are paid $500 per meeting
attended and will be reimbursed for expenses reasonably incurred in connection
with their services on behalf of ELCOA. ELCOA's By-Laws provide that directors
and officers of ELCOA may be indemnified against liabilities incurred in
connection with their services on behalf of ELCOA.
DESCRIPTION OF SECURITIES
DEBENTURES
This offering relates to ELCOA's Demand and Fixed Rate Certificates. The
Debentures are to be issued under a Sixth Supplemental Indenture dated as of
May 15, 1996 to an Indenture dated as of August 5, 1986 and supplements thereto
dated September 19, 1986, September 20, 1988, September 13, 1989, August 17,
1990 and August 18, 1993 (collectively referred to as the "Indenture") between
ELCOA and Summit Bank (successor by merger to First Valley Bank) of Bethlehem,
Pennsylvania as Trustee ("Trustee"). The merger of First Valley Bank,
Bethlehem, Pennsylvania, into Summit Bank, whose principal place of business is
Princeton, New Jersey, became effective on July 15, 1996. Under terms of the
Indenture, both types of Debentures stand on parity as to each other and
neither shall be senior to the other in the event of dissolution or liquidation
of ELCOA. A copy of the Indenture is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The following statements are
brief summaries of all material provisions of the Indenture. Whenever
particular provisions of the Indenture or terms defined therein are referred to
herein, such provisions or definitions are incorporated by reference as part of
the statements made herein and all statements are, therefore, qualified in
their entirety by reference to such provisions or definitions.
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Certain terms of the Indenture as set forth below may be modified. See
"Modification of the Indenture", described herein. Additionally, ELCOA has
reserved the right to terminate this offering, or modify the terms of the
offering or the Debentures, at any time by an appropriate amendment to this
Prospectus. No such modification will affect the rights of the then
outstanding Debentures, except to the extent described below.
The Debentures are not secured by any collateral or lien, nor are there any
provisions for a sinking fund. Institutions lending funds to ELCOA may hold
security interests in certain leases as collateral and may have a priority
interest in those leases pledged as collateral, although none exist as of the
date hereof. Although the Indenture does not preclude future issuance of
securities senior to those registered herein, ELCOA does not anticipate or
intend in the immediate future, absent any unforeseeable circumstances, to
issue any securities senior to those registered herein.
There are no limitations on dividends or other cash flows which may be paid
or transferred from ELCOA to Walnut, its parent. ELCOA has not set up any
reserve for repayment of the Debentures, nor has it any minimum asset ratio
maintenance requirements or other restrictions on the issuance of additional
securities. In the event of Walnut's bankruptcy, Walnut's creditors may assert
claims against ELCOA's assets by attempting to consolidate Walnut and ELCOA
into a combined corporate entity, although management believes that such a
claim would be unsuccessful as ELCOA is not operated as the alter ego of
Walnut, because both corporations have taken steps to clearly separate their
activities as two corporations to prevent any attempt to merge the transactions
or corporate transactions into one. See Risk Factor #4 on page 8 of this
Prospectus.
In general, events which constitute a default are nonpayment of interest or
principal, non-performance of certain covenants, and other events, all of which
are more fully described on page 41 under "Events of Default." Should an event
of default occur, the Trustee or holders of at least 25% in principal amount of
Debentures may declare them due and payable by appropriate written notice. See
"Events of Default."
Parenthetical references appearing below refer to the applicable sections
of the Indenture.
GENERAL
Each Fixed-Rate Certificate shall mature from three (3) through one
hundred-twenty (120) months from the date of issuance. The specific term is
selected by the purchaser. The term can be for any term of whole calendar
months within this range. Demand Certificates shall mature on the fifth day of
the month following the month during which demand is made by the holder
(Section 301). ELCOA is required to redeem Demand Certificates on the fifth
day of the month following the month in which written notice of demand is
received. For a complete discussion of the terms and conditions regarding
redemption of Debentures, See "Redemption" on page 38 herein. It is the
present policy of ELCOA, subject to availability of funds as determined by the
Board of Directors in its sole discretion to pay the principal to the holder
within 5 business days after demand for redemption is received.
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45
ELCOA may however, change this policy at any future date without notice to
the holders of the Debentures. The Demand Certificates shall bear interest at
least 1% above the annualized 6-month U.S. Treasury Bill Rate for Treasury
Bills sold on the first day of the month or, if there is no auction on that
day, the interest rate established at the last auction prior to the first day
of the month. During the twelve month period ended April 30, 1996, the rate on
these certificates averaged approximately 1.8% above the 6-month U.S. Treasury
Bill Rate. Fixed Rate Certificates shall bear interest at a rate set by ELCOA
at the date of issuance, but shall not be less than 1% above the annualized
6-month Treasury Bill rate for Debentures with maturities of 24 months or less,
not less than 2% above the 6-month U.S. Treasury Bill Rate for Debentures with
maturities from 25 to 60 months, and not less than 3% above the 6-month U.S.
Treasury Bill Rate for Debentures with maturities exceeding 60 months (Section
301). There is no maximum interest rate which may be payable. During the
twelve month period ended April 30, 1996, rates on 6, 60 and 120 month
Debentures averaged approximately 2.29%, 4.05%, and 4.29%, respectively, over
the 6 month U.S. Treasury Bill Rate. Interest shall continue to be earned
until the principal amount of each certificate is paid or made available for
payment (Section 301). Principal and interest will be payable at the corporate
trust office of the Trustee, but unless other arrangements are made, interest
will be paid by check mailed to the registered holders of the Debentures at
their registered addresses (Sections 301, 1002). The Debentures are to be
issued only in registered form, without coupons, in denominations of at least
$100 and any additional amount approved by ELCOA (Section 302). The
denominations of the Debentures can be changed without service charge, other
than any tax or other governmental charge imposed in connection therewith,
subject to the limitations provided in the Indenture (Section 305). The
principal amount of the Debentures which may be issued under the Indenture is
to be determined, from time to time, by the Board of Directors of ELCOA. The
maximum amount to be offered hereunder is $50,000,000 less $4,800,000 sold
prior to the date of this Prospectus. The Debentures will be unsecured
obligations of ELCOA.
TAX WITHHOLDING
The Internal Revenue Code of 1986, as amended (the "Code"), generally
requires reporting and inclusion of interest as income to the security holder
and will, in certain instances, require backup withholding by the payor of
interest of 31% of all interest payments (or amounts equivalent thereto) on and
after December 31, 1984.
In general, ELCOA is required to file with the Internal Revenue Service
each year over the term of the Debentures a Form 1099 information return (with
a copy to the holder) reporting the amount of interest which is paid or which
is considered earned by the holder during each calendar year period, and the
holder is required to include such amount as income in his Federal Income Tax
Return for that year.
The Interest and Dividend Tax Compliance Act of 1983 provides for backup
withholding at a rate of 31% on certain payments of interest and dividends.
Backup withholding may apply only to dividend, interest, or certain other
payments made subsequent to 1983.
Under the backup withholding provisions, withholding on interest or
dividends may be imposed either:
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46
(1) after the Secretary of the Treasury has mailed four notices to the
taxpayer stating that the taxpayer has underreported his income, and, if
the taxpayer has filed a return for the taxable year in which he
underreported income, the Secretary has made a deficiency assessment
against the taxpayer;
(2) if the taxpayer fails to furnish a taxpayer identification number when
required to do so;
(3) If the Secretary notifies the payor that the taxpayer furnished an
incorrect taxpayer identification number; or
(4) with respect to instruments acquired after 1983, the taxpayer fails to
certify under penalty of perjury that he is not subject to backup
withholding as a consequence of having underreported his income.
Any payor required to withhold from interest or dividend payments on the
basis of taxpayer underreporting of income is required to notify the payee at
the time the withholding begins.
REDEMPTION
COMPANY ELECTION
ELCOA may, at its own discretion, call for the redemption of the Debentures
from time to time, either in whole or in part. Notice of the redemption shall
be given by first-class mail, postage prepaid, mailed to the holder not less
than 60 days prior to the redemption date, at the principal amount thereof,
plus interest accrued to the date of redemption. Debentures may be called for
redemption at any time after purchase. Therefore, the purchaser is entitled to
at least 60 days interest in the event of ELCOA's redemption. Accrued interest
on the Debentures so redeemed shall be payable at the time of redemption. No
further interest shall accrue on redeemed Debentures after the date of
redemption (Sections 301, 1101 through 1105).
HOLDER'S ELECTION
ELCOA is required to redeem any Fixed Rate Certificate at maturity without
restriction. Subject to the $300,000 monthly limitation set forth below, ELCOA
will redeem Demand Certificates after notice of demand is received and any
Fixed Rate Certificates before maturity after notice of demand is received less
a penalty, subject to the $300,000 monthly limitation established for the
redemption of these Debentures as set forth below. See "DESCRIPTION OF
SECURITIES - DEBENTURES; Right to Request Early Payment". ELCOA intends to
satisfy requests for redemption from cash on hand. If insufficient cash is
available, ELCOA may make use of funds available from possible hypothecation of
leases or sale of leases to third parties. Hypothecation is the borrowing of
funds from other financial institutions, assigning as security a portfolio of
leases. Requests for the redemption by mail should be addressed to either the
underwriter, Welco Securities, Inc., or ELCOA's offices at Suite 76,
Silverside-Carr Executive Center, 501 Silverside Road, Wilmington, Delaware
19809, or in person at the same addresses, and should include the original
certificate for redemption.
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LIMITATIONS ON REDEMPTIONS
Under the Indenture, ELCOA is not obligated to redeem Demand Certificates,
or Fixed Rate Certificates prior to maturity, in excess of an aggregate of
$300,000 in principal amount in any calendar month (Section 1101 (c)).
If this limitation is invoked by ELCOA, the Trustee and the holders of such
Debentures submitted for redemption, but not redeemed, will be so notified and
the Debentures will be redeemed thereafter in the order in which demands are
received by ELCOA, with those for which demands are received on the same day
being redeemed on a pro-rata basis. To the extent that Debentures submitted
for redemption are not paid in any given calendar month, such Debentures will
be given first priority (in the order in which the demands were received) in
the next succeeding calendar month or months until such Debentures are fully
redeemed. Interest continues to accrue through date of payment. For this
purpose, a demand made orally will be treated as having been made on the date
of the oral demand, if it is confirmed by a written demand received by ELCOA
within ten days after the date of the oral demand. (Section 1101). The
limitation has not been invoked to date.
AUTOMATIC EXTENSION
If, after its maturity date, a Fixed Rate Certificate is not presented for
payment by the holder, and ELCOA does not tender payment to the holder, such
Certificate shall be treated as a Demand Certificate, and the rights and other
terms such as the determination of interest rates and redemption provisions
applicable to Demand Certificates in general shall be applicable effective
after the maturity date of such Fixed Rate Certificate. ELCOA will give each
registered certificate holder one month's prior written notice of the time of
maturity, reminding him of the maturity date of his certificate and the fact
that the automatic extension provision will take effect unless he requests
payment (Section 301). ELCOA will advise, by monthly statement, Debenture
holders of the due date of all fixed term securities owned by them.
RIGHT TO REQUEST EARLY PAYMENT
Holders may request the redemption of any Fixed Rate Certificate offered
hereunder as of the end of the calendar month during which notice of a request
for early payment is received, subject to the $300,000 monthly limitation on
redemptions described above. Payment will be made on the fifth day of the
following calendar month, or such shorter period of time as determined by
ELCOA, on the following condition: A penalty, computed by multiplying the
number of months remaining to maturity by 1/8 of 1% and then multiplying the
product by the principal amount being redeemed prior to maturity, will be
deducted from the principal amount if redeemed; however the penalty shall not
be less than $25. For example, if 24 months prior to the due date, a holder
elected to redeem a $1,000 60-month Fixed Rate Certificate, ELCOA would deduct
a penalty of $30 from the principal repayment of $1,000 (1/8 of 1% multiplied
by 24 months multiplied by $1,000 equals $30).
OPTION TO RECEIVE COMPOUND INTEREST
Holders of Debentures have the option of electing to have interest on their
Debentures reinvested and compounded monthly (that is, interest at the original
rate shall be computed monthly on the new amount). There are no restrictions
on the use that ELCOA may make of the retained interest. Once made, such an
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48
election may not be changed without the consent of ELCOA. In the event a
holder elects to have interest compounded, interest will be paid, at the
holder's election, bimonthly, quarterly, semi-annually, annually or at maturity
of his certificate (Section 301). Reinvested interest will be an unsecured
obligation of ELCOA and will be subject to the same risks as the Debentures.
See "RISK FACTORS". Interest compounded, but unpaid to holders, will be
reportable as income for Federal income tax purposes, when earned, including
when it is compounded but unpaid. ELCOA will advise holders by January 31 of
each year concerning the amount of interest which must be reported as income
for the preceding calendar year. ELCOA does not believe that any "original
issue discount" as defined in the Internal Revenue Code of 1986, as amended,
arises from the sale of the Certificates, as the stated principal amount
redeemable at maturity equals the original issuance price for each certificate.
Purchasers of Debentures bearing compound interest should consult their tax
advisers concerning any applicable tax consequences. See "DESCRIPTION OF
SECURITIES - DEBENTURES; Tax Withholding".
INTEREST - 6-MONTH UNITED STATES TREASURY BILL RATE
Six-month United States Treasury Bills are auctioned weekly by the United
States Treasury Department, usually on Monday. The interest rate on the
6-month U.S. Treasury Bills, on a discount basis, based on the auction average,
is published widely in newspapers throughout the country, normally on the day
following the auction. During the five year period ended April 30, 1996, the
rates ranged from a low of 2.78% to a high of 6.42%. As of December 31, 1996,
the 6-month U.S. Treasury Bill rate was 5.11%.
The interest rate to be paid on the Demand Certificates offered hereunder
shall be at least 1% above the annualized interest rate paid on 6-month United
States Treasury Bills sold on the first day of the month, or if there is no
auction on that day, the interest rate established at the last auction prior to
the first day of the month. The rate will vary from month to month depending
upon the U.S. Treasury Bill sales. In the event that the 6-month U.S. Treasury
Bill Rate as set forth above shall fall below 6% per annum, or in the event
there shall be no such U.S. Treasury Bill Rate in effect, the rate of such
6-month U.S. Treasury Bill shall be deemed to be 6% per annum. The percentage
above the 6-month U.S. Treasury Bill Rate is to be determined at the beginning
of the month by ELCOA (or in the absence of any such determination, such
percentage shall be deemed to be 1% above the 6-month U.S. Treasury Bill rate),
based upon prevailing market conditions, interest rates in general, and ELCOA's
need for funds for the purchase of new equipment for lease as opportunities
arise. Therefore, the minimum interest which can be paid on Demand
Certificates shall be 7%.
The interest rate to be paid on the Fixed Rate Certificates shall be fixed
by ELCOA weekly at a rate at least equal to 1% above the annualized interest
rate paid on 6-month U.S. Treasury Bills for Debentures with maturities of 24
months or less, at least 2% above the annualized interest rate paid on 6-month
U.S. Treasury Bills for Debentures with terms ranging from 25 to 60 months, and
at least 3% above the annualized interest rate paid on 6-month U.S. Treasury
Bills for Debentures with maturities exceeding 60 months, based upon prevailing
market conditions, interest rates in general, and ELCOA's need for funds for
the purchase of new equipment for lease as opportunities arise. For the
purpose of computing the interest to be paid on a given issuance of Fixed Rate
Certificates, the annualized interest rate paid on 6-month U.S. Treasury Bills
shall be determined by reference to such rates in effect on the date that
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49
United States Treasury Bills are issued, or the date of the most recently
issued 6-month U.S. Treasury Bills, if investor money is not received on an
issue date of such U.S. Treasury Bill. Once established, the same rate of
interest will be paid for the term of the Debenture. In the event the 6-month
U.S. Treasury Bill Rate as set forth above shall fall below 6% per annum, or in
the event there shall be not such U.S. Treasury Bill Rate in effect, the rate
of such 6-month U.S. Treasury Bill shall be deemed to be 6% per annum.
Interest to be paid in any calendar month will be paid on the tenth day of
the succeeding calendar month.
RESTRICTIONS ON MERGER
ELCOA, subject to certain conditions intended to protect the interests of
the Debenture holders and contained in Section 801 of the Indenture, may
consolidate or merge with or into, or sell or transfer all or substantially all
of its property and assets to any other corporation other than Walnut, and may
consolidate or merge with or into, or sell or transfer all or substantially all
of its property and assets, provided that the Corporation (if other than
Walnut) formed by or resulting from any such property and assets, assumes
payment of principal and premium if any, and interest on the Debentures and
performs all obligations in observance with the terms of the Indenture, in form
satisfactory to the Trustee. No such merger may grant any lienholders
resulting from the merger a position in liquidation senior to the interest of
the holders of the Debentures. No approval of Debenture holders is required.
ELCOA has no present plans to effect any of the foregoing transactions. (See
Article VIII).
MODIFICATION OF THE INDENTURE
ELCOA may from time to time, enter into additional supplemental indentures
amending the terms of the Indenture with the consent of at least 75% in
aggregate principal amount of the outstanding Debentures. No supplemental
indenture without the consent of each holder of outstanding Debentures may
reduce the percentage of the Debenture holders necessary to modify or alter the
Indenture, waive any default under the Indenture, reduce the stated amount of
interest on any Debenture or change the maturity date of the principal, the
interest payment dates or other terms of payment. ELCOA may, without consent
of the holders of these Debentures, enter into supplemental indentures under
certain limited circumstances where the rights of the holders are not
materially affected (Sections 901, 902).
CONVENANT AS TO REPAIR
ELCOA has covenanted that it will cause its properties used or useful in
the business to be maintained and kept in good condition, repair and working
order, provided, however, that ELCOA may provide for any disposition of such
properties consistent with reasonable business judgment and not disadvantageous
in any material respect to the holders of the Debentures (Section 1005).
EVENTS OF DEFAULT
The following will be events of default: (a) default in the payment of any
interest when due, which is not cured for 30 days; (b) default in the payment
of principal or premium, if any, when due; (c) default in the performance of
any other covenant of ELCOA, continued for 60 days after occurrence of the
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50
default; and (d) certain events of bankruptcy, insolvency or reorganization
(Section 501). In the event that a default shall occur and not be cured within
the time period required, the Trustee or the holders of not less than 25% of
the principal amount of outstanding Debentures (including holders who may be
controlling persons) may declare the Debentures due and payable by appropriate
written notice (Section 502).
ELCOA will be required to furnish to the Trustee annually, a statement as
to the fulfillment, by ELCOA, of all of its obligations under the Indenture
(Section 1006).
TRANSACTIONS WITH THE TRUSTEE
ELCOA will maintain deposit accounts and banking relations with the
Trustee, Summit Bank (successor by merger to First Valley Bank) of Bethlehem,
Pennsylvania.
The Trustee also serves as a custodian for IRA and KEOGH accounts which may
hold Debentures on behalf of the participant or beneficiary. An annual service
charge of $30 per account is charged by the Trustee to the holder for custodial
services in maintaining said IRA/KEOGH account.
PLAN OF DISTRIBUTION
ELCOA has entered into an Underwriting Agreement with Welco Securities,
Inc., Suite 105, One Belmont Avenue, Bala Cynwyd, Pennsylvania 19004
(hereinafter referred to as the "Underwriter").
The Underwriter is an affiliate of ELCOA, and is wholly-owned by William
Shapiro, ELCOA's President. The principals and officers of the Underwriter,
William Shapiro and Kenneth S. Shapiro, are registered as licensed securities
principals and agents and are also officers of ELCOA. See Note 8 to the
Financial Statements for the fiscal year ended April 30, 1996. The principal
business function of the Underwriter has been to sell registered securities for
Walnut and ELCOA as their agent. As a result of the affiliations between ELCOA
and the Underwriter, the Underwriting Agreement cannot be deemed to have been
negotiated at arm's length. The offering prices of the Debentures have been
arbitrarily determined by ELCOA with the concurrence of the Underwriter and
bear no direct relation to ELCOA's assets, book value, net worth or any other
established criteria of value. Among the factors considered in such
determinations were the history of and prospects for the industry in which
ELCOA competes, estimates of the business potential of ELCOA, the present state
of its development, its financial conditions, risks associated with the leasing
industry in general, interest rates in general during the time of the offering
and demand for similar securities of comparable companies.
Under the terms of the Underwriting Agreement, ELCOA has retained the
Underwriter as its agent and the Underwriter has agreed to use its best efforts
to offer to the public on a continuous basis the Debentures described herein at
those prices specified on the cover of this Prospectus. The Underwriter has
made no commitment to purchase any of the Debentures offered herein, and will
not make any market for the Debentures. There is no minimum amount of
Debentures which must be sold in order for this offering to go forward.
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No commission or other expense of the offering will be paid by any
purchaser of the Debentures offered hereunder. The Underwriter is to be paid a
commission equal to 1/15 of 1% per month for each month of the initial term of
any new fixed-term Debenture sold (ranging from 0.2% for 3-month Debentures
sold to 8.0% for 120 month Debentures), as the case may be, sold through the
Underwriter. Rollovers of Debentures at maturity are considered as new sales.
ELCOA agrees to reimburse the Underwriter for all accountable expenses and
commissions incurred in connection with the offer and sale of Debentures.
Neither William Shapiro nor Kenneth S. Shapiro receive any direct remuneration
from Welco Securities, Inc. relative to the sale of these securities, as
commissions are used by the Underwriter for expenses incurred in the
solicitation and sale of the Debentures. The Underwriter may re-allow to
certain dealers who are members of the NASD Regulation, Inc. ("NASD") and
certain foreign dealers who are not eligible for membership in the NASD, a
commission of up to 0.2% to 8.0% of the principal amount of Debentures,
depending on the term of each Fixed Rate Certificate sold by such dealers. No
commissions shall be paid on account of the sale of any Demand Certificates.
After the commencement of the offering, the commissions and reallowances, if
any, may be changed if for example, a major securities underwriter should offer
to sell a significant portion of the unsold securities.
ELCOA will indemnify the Underwriter and all other brokers and dealers who
enter into agreements with ELCOA against certain civil liabilities, including
certain liabilities under the Securities Act of 1933, as amended.
The foregoing discussion sets forth a summary of all material provisions of
the Underwriting Agreement. For a complete description of the terms of the
Underwriting Agreement, reference is made to the Underwriting Agreement which
is filed as an exhibit to the Registration Statement, of which this Prospectus
is a part.
The Underwriter as a member of the NASD, is subject to Rule 2720 of the
NASD Rules of Conduct (previously Schedule E of the By-laws of the NASD) which
deals with its participation in soliciting sales of securities for ELCOA.
Rule 2720 requires, in part, that an outside independent underwriter be engaged
to perform due diligence and render an opinion that the yield on the Debentures
being offered through the Prospectus are no lower than that recommended by a
qualified independent underwriter. The Underwriter has obtained an opinion
dated June 4, 1996 from J.E. Liss & Company, Inc., Milwaukee, Wisconsin, an
NASD member which has participated in the preparation of the offering documents,
conducted its due diligence review of the offering, and agreed in exchange for
compensation, totalling $25,000, reimbursed by ELCOA for services rendered to
perform the services described above, that the proposed offering terms of the
Debentures being offered meet this fairness objective.
LITIGATION
There are no material legal proceedings or actions pending or threatened
against ELCOA or to which its property is subject.
LEGAL OPINION
The law firm of William Shapiro, Esq., P.C. of Bala Cynwyd, Pennsylvania,
has rendered an opinion that pursuant to the Indenture between ELCOA and Summit
Bank (successor by merger to First Valley Bank) as Trustee, and appropriate
Company Orders, the Debentures, when issued and sold pursuant to the Indenture
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and in the matter contemplated by the Prospectus, will be valid and binding
obligations of ELCOA.
Both William Shapiro and Kenneth S. Shapiro, officers of ELCOA and officers
and Directors of Walnut, are associated with said law firm as attorneys, of
which Mr. William Shapiro is the sole shareholder of the professional
corporation. Mr. William Shapiro is also sole shareholder, Secretary/Treasurer
and a Director of Welco Securities, Inc., the Underwriter, of which Kenneth S.
Shapiro is President and a Director.
EXPERTS
The balance sheets of Equipment Leasing Corporation of America at April 30,
1996 and 1995 and the related statements of operations, changes in
shareholder's equity and cash flows for each of the three years in the period
ended April 30, 1996 have been audited by Cogen Sklar LLP, Independent
Certified Public Accountants. The financial statements appearing in the
Registration Statement and this Prospectus are included in reliance on the
reports of such firm and upon the authority of such firm as experts in auditing
and accounting.
ADDITIONAL INFORMATION
ELCOA has filed with Securities and Exchange Commission in Washington, D.C.
a Registration Statement under the Securities Act of 1933, as amended, with
respect to the Debentures offered by this Prospectus. This Prospectus does not
contain all of the information set forth in that Registration Statement. For
further information with respect to ELCOA and the Debentures, reference is made
to that Registration Statement and to the exhibits and schedules filed
therewith.
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INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditor's Report. 46
Balance Sheets as of April 30, 1996 and 1995. 48
Statements of Operations for the years
ended April 30, 1996, 1995 and 1994. 50
Statement of Changes in Shareholder's Equity (Deficit)
for the years ended April 30, 1996, 1995 and 1994. 51
Statements of Cash Flows for the years
ended April 30, 1996 and 1995 and 1994. 52
Notes to Financial Statements for the fiscal years
ended April 30, 1996, 1995 and 1994. 54
Balance Sheets as of October 31, 1996 (unaudited)
and April 30, 1996. 63
Statements of Operations for the six months ended
October 31, 1996 and 1995 and three months ended
October 31, 1996 and 1995 (unaudited). 65
Statement of Changes in Shareholder's Deficit
for the six months ended October 31, 1996 (unaudited). 66
Statements of Cash Flows for the six months ended
October 31, 1996 (unaudited). 67
Notes to Financial Statements for the six months
ended October 31, 1996 (unaudited). 69
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INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholder
of Equipment Leasing Corporation of America
We have audited the accompanying balance sheets of Equipment Leasing
Corporation of America (a wholly-owned subsidiary of Walnut Equipment Leasing
Co., Inc.) as of April 30, 1996 and 1995 and the related statements of
operations, changes in shareholder's equity and cash flows for each of the
three years in the period ended April 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
The accompanying financial statements have been prepared from the separate
records maintained by Equipment Leasing Corporation of America. However, these
may not necessarily be indicative of the financial condition that would have
existed or the results of operations if the Company had been operated as an
unaffiliated entity. As discussed in Note 8 to the financial statements,
certain expenses represent allocations made from or transactions with related
parties.
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 financial statements referred to above present fairly, in
all material respects, the financial position of Equipment Leasing Corporation
of America as of April 30, 1996 and 1995 and the results of its operations and
its cash flows for each of the three years in the period ended April 30, 1996
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Equipment Leasing Corporation of America will continue as a going concern, and
accordingly, contemplate the realization of assets and liquidation of
liabilities in the ordinary course of business. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses. In addition,
our opinion dated July 1, 1996 on the consolidated financial statements of
Walnut Equipment Leasing Co., Inc. (parent of the company) and subsidiaries
contained an explanatory paragraph which discussed the substantial doubt about
Walnut Equipment Leasing Co., Inc.'s ability to continue as a going concern
which raises an uncertainty as to the realization of the receivable from its
parent company. These uncertainties raise substantial doubt about the entity's
ability to continue as a going concern. Management's plans in regard to these
matters are also discussed in Note 1. The financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
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55
As described in Note 9 to the financial statements, Equipment Leasing
Corporation of America has restated the above mentioned financial statements
for information previously available which was not used in estimating the
allowance for doubtful lease receivables.
/s/ Cogen Sklar LLP
COGEN SKLAR LLP
Bala Cynwyd, Pennsylvania
July 1, 1996, except for Note 9
as to which the date is
December 20, 1996
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EQUIPMENT LEASING CORPORATION OF AMERICA
(a Wholly-Owned Subsidiary of
Walnut Equipment Leasing Co., Inc.)
BALANCE SHEETS
-----------------
(Restated)
As of April 30,
1996 1995
----------- -----------
ASSETS
Direct finance leases:
Aggregate future amounts
receivable under lease
contracts $16,667,226 $17,267,612
Estimated residual value
of equipment 1,577,174 1,831,613
Initial direct costs, net 393,897 414,426
Less:
Unearned income under
lease contracts ( 3,347,395) ( 3,587,139)
----------- -----------
15,290,902 15,926,512
Advance payments ( 516,658) ( 528,314)
----------- -----------
14,774,244 15,398,198
Allowance for doubtful
lease receivables ( 1,751,521) ( 1,526,287)
----------- -----------
13,022,723 13,871,911
Due from parent 6,078,559 3,991,986
Cash and cash equivalents 9,260,482 8,908,798
Other assets(includes $336,392 and
$331,180 paid to related parties) 452,783 423,511
----------- -----------
TOTAL ASSETS $28,814,547 $27,196,206
=========== ===========
SEE ACCOMPANYING NOTES
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57
EQUIPMENT LEASING CORPORATION OF AMERICA
(a Wholly-Owned Subsidiary of
Walnut Equipment Leasing Co., Inc.)
BALANCE SHEETS - (continued)
-----------------
(Restated)
As of April 30,
1996 1995
----------- -----------
LIABILITIES
Amounts payable to
equipment suppliers $ 8,749 $ 8,749
Accrued expenses and
security deposits 65,809 72,289
Demand, Fixed Rate, and
Money Market Thrift
Certificates(includes $183,805
and $174,907 held by
related parties) 26,407,959 24,521,875
Accrued interest 2,767,158 2,326,708
----------- -----------
29,249,675 26,929,621
----------- -----------
SHAREHOLDER'S EQUITY (DEFICIT)
Common Stock $1 par value,
1,000 shares authorized,
issued and outstanding 1,000 1,000
Variable Rate Cumulative
Prefered Stock, Series A, $1
par value, 50,000 shares
authorized, none issued --- ---
Additional paid - in capital 999,000 999,000
Accumulated Deficit ( 1,435,128) ( 733,415)
----------- -----------
(435,128) 266,585
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY (DEFICIT)$28,814,547 $27,196,206
=========== ===========
SEE ACCOMPANYING NOTES
49
58
EQUIPMENT LEASING CORPORATION OF AMERICA
(A Wholly-Owned Subsidiary of
Walnut Equipment Leasing Co., Inc.)
STATEMENTS OF OPERATIONS
--------------------------------
(Restated)
For the Years Ended April 30,
1996 1995 1994
---------- ---------- ----------
Revenue:
Income earned under
direct finance lease
contracts $2,610,450 $2,945,151 $3,009,864
---------- ---------- ----------
Costs and expenses:
Interest expense, net of
interest income of $1,016,596,
$741,671 and $374,025,
respectively 1,382,422 1,314,491 1,563,038
General and administrative
expenses (includes
$881,382, $946,465 and $934,695,
respectively, paid to related
parties) 972,678 1,054,460 1,031,825
Provision for doubtful
lease receivables 957,063 1,057,634 613,907
---------- ---------- ----------
Total costs and expenses 3,312,163 3,426,585 3,208,770
---------- ---------- ----------
Loss before provision
for state income taxes (701,713) (481,434) (198,906)
Provision for state income taxes --- 360 ---
---------- ---------- ----------
Net Loss $( 701,713) $( 481,794) $( 198,906)
========== ========== ==========
SEE ACCOMPANYING NOTES
50
59
EQUIPMENT LEASING CORPORATION OF AMERICA
(A Wholly-Owned Subsidiary of
Walnut Equipment Leasing Co., Inc.)
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (DEFICIT)
(Restated)
Common Stock
($1.00 Par Value)
1,000 shares Retained
Authorized Additional Earnings Total
No. of shares Paid-In (Accumulated Shareholder's
Issued Amount Capital Deficit) Equity (Deficit)
---------------- ---------- ----------- ---------------
Balance,
April 30,
1993, previously
reported 1,000 $1,000 $999,000 $ 764,371 $ 1,764,371
Prior Year Effect
of restatement of
provision for
doubtful lease
receivables --- --- --- (817,086) (817,086)
----- ------ -------- ---------- ------------
Balance, May 1,
1993, as restated 1,000 1,000 999,000 (52,715) 947,285
Net Loss for
the year ended
April 30, 1994 --- --- --- (198,906) (198,906)
----- ----- ------- -------- --------
Balance,
April 30,
1994 1,000 1,000 999,000 (251,621) 748,379
Net Loss for the
year ended
April 30, 1995 --- --- --- (481,794) (481,794)
----- ------ -------- --------- ---------
Balance,
April 30,
1995 1,000 1,000 999,000 (733,415) 266,585
Net Loss for
the year ended
April 30, 1996 --- --- --- (701,713) (701,713)
------ ------ -------- --------- ---------
Balance,
April 30,
1996 1,000 $1,000 $999,000 $(1,435,128) $ (435,128)
===== ====== ======== =========== =============
SEE ACCOMPANYING NOTES
51
60
EQUIPMENT LEASING CORPORATION OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF
WALNUT EQUIPMENT LEASING CO., INC.)
STATEMENTS OF CASH FLOWS
-------------------
(Restated)
For the Years Ended April 30,
1996 1995 1994
---------- ----------- -----------
OPERATING ACTIVITIES
Net Loss $(701,713) $(481,794) $(198,906)
Adjustments to reconcile
net loss to net cash
provided by operating activites:
Amortization of
deferred debt expenses 241,323 247,561 188,209
Provision for doubtful
lease receivables 957,063 1,057,634 613,907
Effects of Changes
in other operating items:
Accrued expenses ( 6,480) (26,820) (22,691)
Accrued interest 440,450 232,378 422,646
Other assets (net) (270,595) (232,922) (252,895)
---------- ----------- -----------
Net cash provided by
operating activities 660,048 796,037 750,270
---------- ----------- -----------
INVESTING ACTIVITIES
Excess of cash received
over lease income recorded 6,263,312 6,447,111 6,207,106
Increase in
advance payments 190,424 179,692 119,765
Purchase of equipment
for direct finance leases (6,561,611) (7,321,620) (6,680,452)
---------- ----------- -----------
Net cash used in
investing activities $(107,875) $(694,817) $(353,581)
---------- ----------- -----------
SEE ACCOMPANYING NOTES
52
61
EQUIPMENT LEASING CORPORATION OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF
WALNUT EQUIPMENT LEASING CO., INC.)
STATEMENTS OF CASH FLOWS - (continued)
-------------------
(Restated)
For the Years Ended April 30,
1996 1995 1994
---------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance
of Demand and Fixed Rate
Certificates $9,620,233 $10,983,417 $9,267,808
Net advances to parent (2,086,573) (1,491,170) (840,810)
Redemption of Demand, Fixed
Rate, and Money Market
Thrift Certificates (7,734,149) (8,272,533) (5,498,321)
---------- ----------- ----------
Net cash provided by (used in)
financing activities (200,489) 1,219,714 2,928,677
---------- ----------- ----------
Increase in
Cash and Cash Equivalents 351,684 1,320,934 3,325,366
Cash and Cash Equivalents,
Beginning of Year 8,908,798 7,587,864 4,262,498
Cash and Cash Equivalents, ---------- ----------- ----------
End of Year $9,260,482 $8,908,798 $7,587,864
========== =========== ==========
SEE ACCOMPANYING NOTES
53
62
EQUIPMENT LEASING CORPORATION OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF
WALNUT EQUIPMENT LEASING CO., INC.)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND NATURE OF OPERATIONS:
Equipment Leasing Corporation of America ("ELCOA") was incorporated as a
Delaware corporation on May 6, 1986 and commenced operations on May 23, 1986.
ELCOA is a wholly-owned subsidiary of Walnut Equipment Leasing Co., Inc.
("WALNUT"), a Delaware corporation. ELCOA was formed primarily to purchase
general commercial equipment for lease throughout the United States, utilizing
the proceeds of sale of certain debentures referred to as "Demand, Fixed Rate,
or Money Market Thrift Certificates." See Note 6.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The 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. Acccordingly, the financial
statements do not include any adjustments relating to the recoverability of
recorded assets, or the amount of liabilities that many be necessary should the
Company be unable to continue in the normal course of business.
During the years ended April 30, 1996, 1995 and 1994, the Company incurred
losses of $701,713, $481,794 and $198,906, respectively, and reported
accumulated deficits of $1,435,128 and $733,415 at April 30, 1996 and 1995,
respectively. The independent auditor's report for Walnut for each of the
three years ended April 30, 1996 contained an explanatory paragraph which
indicated that Walnut has suffered recurring losses from operations and has a
shareholder's deficit that raise substantial doubt about that entity's ability
to continue as a going concern. As a result of the transactions between the
Company and Walnut in the ordinary course of business, including but not
limited to advances to Walnut for future purchases of equipment for lease, a
receivable from Walnut is reflected on the Company's balance sheet. Walnut's
ability to continue as a going concern raises an uncertainty as to the
realization of the Company's receivable from its parent company.
The management of Walnut has initiated certain measures to refine its
marketing strategy during the fiscal year ended April 30, 1996 that it believes
may result in an increase in the levels of new leases to be generated in the
future. Walnut must increase the level of new leases and control its costs of
lease origination and administration in order to reduce its operating expenses
to continue as a going concern.
Management believes that should Walnut cease operations or be unable to
fulfill its obligations in the organization and servicing of the Company's
leases, that the Company could purchase leases of similar term and cost from
outside sources and could service its leases by contracting with outside
entities. In addition, the Company has financed, and anticipates that it will
continue to finance its new business primarily from the proceeds its sale of
54
63
EQUIPMENT LEASING CORPORATION OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF
WALNUT EQUIPMENT LEASING CO., INC.)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
certificates, as well as from rentals received from lease contracts
outstanding. Management believes that its cash flow through the sale of
securities, anticipated renewal of existing indebtedness and collections from
outstanding lease receivables will be adequate to meet operating needs during
the ensuing year.
LEASE ACCOUNTING:
ELCOA is in the business of leasing commercial equipment which is
specifically acquired for each lease. For financial reporting purposes, ELCOA
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 the requirements of Statement of Financial
Accounting Standards No. 91 "Accounting for Non Refundable 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 ($252,370, $281,531, and $256,940 for the
years ended April 30, 1996, 1995 and 1994, respectively) are accounted for as
part of the Investment in Direct Financing Leases. These expenses are 4% of
the original equipment cost. Unearned income is earned and initial direct
costs are amortized to reduce income using the effective method over the terms
of each respective lease.
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.
ESTIMATED RESIDUAL VALUES OF EQUIPMENT UNDER DIRECT FINANCE LEASES:
ELCOA generally offers an option to purchase the leased equipment upon
expiration of the lease term at its then fair market value (usually not less
than 10% of the original equipment cost). Residual value of this equipment is
generally established at the purchase option price offered.
55
64
EQUIPMENT LEASING CORPORATION OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF
WALNUT EQUIPMENT LEASING CO., INC.)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
ALLOWANCE FOR DOUBTFUL LEASE RECEIVABLES:
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 delinquent lease 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 $731,829, $1,257,058, and
$496,088 for the years ended April 30, 1996, 1995 and 1994, respectively.
INCOME TAXES:
ELCOA 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 for financial statement purposes (as
described above). Under the "operating method", ELCOA reports as income the
amount of rentals received and deducts the appropriate amount of depreciation
of the equipment over its estimated useful life.
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, 1996 and 1995 includes deferred
tax assets (liabilities) attributable to the following temporary deductible
(taxable) differences:
56
65
EQUIPMENT LEASING CORPORATION OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF
WALNUT EQUIPMENT LEASING CO. INC.)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
1996 1995
---------- ----------
Operating lease method vs.
direct financing method $1,467,000 $1,576,000
Provisions for doubtful
lease receivables 472,000 341,000
Other (32,000) (34,000)
---------- ----------
Net deferred tax asset 1,907,000 1,883,000
Valuation allowance (1,907,000) (1,883,000)
---------- ----------
Net deferred tax asset
after valuation allowance $ --- $ ---
========== ==========
A valuation allowance was considered necessary since it is more likely
than not that the Company will not realize the tax benefits of the deductible
differences. There was no cumulative effect on income for prior years upon
the adoption of SFAS 109, for the year ended April 30, 1995 since there was no
existing deferred tax asset as of May 1, 1994.
The Company will be included in the consolidated federal income tax return
of its parent, Walnut Equipment Leasing Co., Inc.. Based on a tax allocation
agreement, current federal taxes otherwise refundable (payable) under a
separate company computation will be received from (paid to) its parent.
For the fiscal years ended April 30, 1996, 1995 and 1994 there was no
provision for either current or deferred federal income taxes.
CASH FLOW STATEMENTS:
The Company considers cash invested in short-term, highly liquid
investments with original maturities of three months or less to be cash
equivalents. At April 30, 1996 and 1995, cash equivalents consisting of U.S.
Government Securities amounted to $8,098,999 and $6,349,693, respectively. The
company had no cash equivalents at April 30, 1994. Amounts paid for interest
for the fiscal years ended April 30, 1996, 1995 and 1994 were $1,996,122,
$1,898,734, and $1,549,217, respectively. Amounts paid for income taxes for
the fiscal years ended April 30, 1996, 1995, and 1994 were $0, $0, and $411,
respectively.
57
66
EQUIPMENT LEASING CORPORATION OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF
WALNUT EQUIPMENT LEASING CO., INC.)
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
CONCENTRATION OF CREDIT RISK:
The concentration of credit risk is limited since the Company's small
ticket lease portfolio varies widely as to the diversity of equipment types,
lessees, and geographic location.
2. AGGREGATE FUTURE AMOUNTS RECEIVABLE UNDER LEASE CONTRACTS:
Receivables under direct finance lease contracts at April 30, 1996 are due as
follows:
Year ending
April 30, Amount
----------- -----------
1997 $ 9,133,987
1998 4,700,261
1999 2,110,727
2000 528,198
2001 & beyond 194,053
-----------
$16,667,226
===========
3. OTHER ASSETS:
Other assets of $452,783 and $423,511 at April 30, 1996 and 1995,
respectively, include $452,495 and $423,223 in deferred expenses, net of
accumulated amortization, representing costs directly related to ELCOA's
registration and sale of Demand, Fixed Rate, and Money Market Thrift
Certificates. Such expenses are being amortized on a straight-line basis over
the estimated average lives of the debt issued, and to be issued under the
registration statement. Amortization of deferred expenses charged to income
during the years ended April 30, 1996, 1995 and 1994, were $241,323, $247,561,
and $188,209, respectively, which includes commissions paid for sale of these
certificates.
4. AMOUNTS PAYABLE TO EQUIPMENT SUPPLIERS
Amounts payable to equipment suppliers in the amount of $8,749 as of April
30, 1996 and 1995 represents holdbacks from suppliers of equipment as
additional security for performance by the underlying lessee on the related
lease contract, and are payable at the termination of the contracts based upon
the lessee's compliance with terms of the lease contract.
58
67
EQUIPMENT LEASING CORPORATION OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF
WALNUT EQUIPMENT LEASING CO., INC.)
NOTES TO FINANCIAL STATEMENTS
5. INCOME TAXES
ELCOA will file a consolidated Federal income tax return with its parent,
Walnut. ELCOA has made no provision for Federal income tax expense for the
years ended April 30, 1996, 1995 and 1994 due to the benefit of Walnut's net
operating loss carryforwards.
ELCOA has provided for $0, $360, and $0 in state income tax expense for the
fiscal years ended April 30, 1996, 1995 and 1994, respectively.
6. DEMAND, FIXED RATE, AND MONEY MARKET THRIFT CERTIFICATES
The Demand, Fixed Rate, and Money Market Thrift Certificates outstanding at
April 30, 1996 bear interest at rates ranging from 7.0% to 12.75%, and are due
as follows:
Year ending
April 30, Amount
----------- -----------
1997 $15,203,974
1998 3,934,697
1999 2,815,391
2000 1,759,532
2001 & beyond 2,694,365
-----------
$26,407,959
===========
Included in the amounts due in the year ended April 30, 1997 are $1,331,985
of certificates payable on demand. The accrued interest of $2,767,158 at April
30, 1996 is payable upon demand.
7. CAPITALIZATION
On May 23, 1986, ELCOA issued all of its authorized shares of common stock
(1,000 shares, $1.00 par value per share) in exchange for certain lease assets
from Walnut. These shares are fully paid and nonassessable. ELCOA has also
authorized the issuance of 50,000 shares of preferred stock, $1.00 par value.
At April 30, 1996, no shares of preferred stock have been issued.
8. TRANSACTIONS WITH RELATED PARTIES
Welco Securities, Inc. ("Welco"), a registered broker/dealer and affiliate
of ELCOA, has been engaged as underwriter to sell certain debt securities to
the public. Under the terms of the agreement with Welco, ELCOA pays a
commission to Welco of between 0.2% and 8.0% of the sale price of securities
sold by Welco on ELCOA's behalf, depending upon the term of each cerificate
sold. ELCOA also reimburses Welco for its out-of-pocket costs associated with
59
68
EQUIPMENT LEASING CORPORATION OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF
WALNUT EQUIPMENT LEASING CO., INC.)
NOTES TO FINANCIAL STATEMENTS
8. TRANSACTIONS WITH RELATED PARTIES (Continued)
the offering of these securities. ELCOA amortizes the commissions paid to
Welco over the term of the certificates. Reimbursements for costs and
commissions paid to Welco for the years ended April 30, 1996, 1995 and 1994,
were $182,155, $170,642, and $165,581, respectively.
Outstanding 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 were $192,264 and $181,921 at
April 30, 1996 and 1995, respectively.
Walnut, ELCOA's parent, has been engaged to perform certain lease
origination functions (i.e. marketing, credit investigation, and documentation
processing) on behalf of ELCOA, for which it will be paid an amount equal to
four percent (4%) of the gross equipment purchased by ELCOA for lease. See
Footnote 1 to the Financial Statements. Since ELCOA has the right of selecting
which lease it is willing to purchase from Walnut, it has not given Walnut the
pre-approved authority to secure leases on its behalf. During the fiscal years
ended April 30, 1996, 1995, and 1994 these origination costs totaled $252,370,
$281,531, and $256,940, respectively, which includes reimbursement for
commissions paid to outside lease brokers. During the years ended April 30,
1996, 1995, and 1994, these costs were capitalized in accordance with SFAS No.
91. In addition, Walnut receives $6.50 per month per outstanding lease for
performing certain administrative functions for ELCOA, mainly, invoicing of
monthly rentals, collection of lease receivables and residual values,
management guidance, personnel, financing, and the furnishing of office and
computer facilities. Walnut also retains any late charges assessed delinquent
lessees as reimbursement for the legal costs of collection. ELCOA also pays
Walnut $500 per week for routine bookkeeping functions performed on ELCOA's
behalf. Servicing fees and bookeeping charges paid Walnut for the years ended
April 30, 1996, 1995 and 1994, were $592,638, $676,228, and $704,522,
respectively. As of April 30, 1996, the amount due ELCOA by Walnut of
$6,078,559 represents funds previously advanced mainly intended for the
purchase of equipment for lease subsequent to April 30, 1996. Walnut has
agreed to pay interest on these outstanding advances, at the prime rate of
interest plus 2%, which amounted to $536,334, $365,438, and $207,231 for the
fiscal years ended April 30, 1996, 1995 and 1994, respectively.
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. No expenses were incurred by
ELCOA during the fiscal years ended April 30, 1996, 1995, and 1994. Under
terms of the servicing agreement between Walnut and ELCOA, Walnut retained all
late charges collected in the approximate amounts of $388,000, $390,000, and
$368,000 for the three fiscal years ended April 30, 1996, 1995 and 1994,
respectively, to offset Walnut's contracted obligation for collection and
litigation costs paid or incurred on ELCOA's behalf. Neither Kenneth nor
William Shapiro, attorneys associated with the firm, received any compensation
for services rendered by the law firm nor does the law firm report any net
income from these activities. For the three fiscal years ended April 30, 1996,
the relationship between amounts recovered by the law firm from
60
69
EQUIPMENT LEASING CORPORATION OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF
WALNUT EQUIPMENT LEASING CO., INC.)
NOTES TO FINANCIAL STATEMENTS
8. TRANSACTIONS WITH RELATED PARTIES (Continued)
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:
For The Three Fiscal Years Ended April 30,
------------------------------------------
1996 1995 1994
---------- ---------- ----------
Amounts Collected and Remitted by
The Law Firm from Delinquent
Lease Receivables $1,508,000 $1,379,000 $1,626,000
- -------------------------------------------------------------------------------
Amounts Paid to the Law Firm by
Walnut For Legal Collection
Efforts $ 407,160 $ 354,783 $ 342,186
Financial Data, Inc., a registered transfer agent and affiliate of ELCOA,
performs all transfer agent duties and disburses all interest payments on
behalf of ELCOA. Financial Data, Inc., is paid monthly, pursuant to its
agreement with ELCOA, an amount equal to $2.00 per certificate holder per
month, along with $1.00 per each certificate issued or redeemed during the
month, or a minimum monthly charge of $1,000, whichever is greater. Prior to
January 1, 1994, the charges were $2.50 monthly per account, and $2.00 per
certificate issued or redeemed. For the years ended April 30, 1996, 1995 and
1994, these expenses totaled $106,589, $99,595, and $105,334, respectively.
9. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Subsequent to the issuance of ELCOA's financial statements for the fiscal year
ended April 30, 1996, ELCOA established certain objective criteria by which the
allowance for doubtful lease receivables at April 30, 1996 and for subsequent
periods could be determined. Although this information was previously
available, it was not used in estimating the original allowance for doubtful
lease receivables at the end of the previous fiscal reporting periods.
Accordingly, the previously reported financial statements for the fiscal years
ended April 30, 1996, 1995 and 1994 have been restated as follows:
For the Three Fiscal Years Ended April 30,
1996 1995 1994
---- ---- ----
Net Loss as Previously Reported $(712,621) $(654,005) $(292,161)
Effect of Restatement for
provision for doubtful lease
receivables 10,908 172,211 93,255
-------- -------- --------
Net Loss as Restated $(701,713) $(481,794) $(198,906)
======== ======== ========
61
70
As a result of this restatement, beginning Retained Earnings as originally
reported at April 30, 1993 of $764,371 has been restated to reflect an
adjustment of $817,086 resulting in a restated Accumulated Deficit of $52,715.
62
71
EQUIPMENT LEASING CORPORATION OF AMERICA
BALANCE SHEETS
------------
October 31, 1996 April 30, 1996
---------------- --------------
(unaudited)
ASSETS
Direct finance leases:
Aggregate future amounts
receivable under lease
contracts $17,003,620 $16,667,226
Estimated residual value
of equipment 1,421,899 1,577,174
Initial direct costs, net 435,863 393,897
Less:
Unearned income under
lease contracts (3,479,772) (3,347,395)
Advance payments (515,489) (516,658)
---------- ----------
14,866,121 14,774,244
Allowance for doubtful
lease receivables (1,699,850) (1,751,521)
---------- ----------
13,166,271 13,022,723
Due from parent 8,567,373 6,078,559
Cash and cash equivalents 6,176,821 9,260,482
Other assets 443,920 452,783
---------- ----------
TOTAL ASSETS $28,354,385 $28,814,547
=========== ===========
SEE ACCOMPANYING NOTES
63
72
EQUIPMENT LEASING CORPORATION OF AMERICA
BALANCE SHEETS - (Continued)
------------
October 31, 1996 April 30, 1996
---------------- --------------
(unaudited)
LIABILITIES
Amounts payable to
equipment suppliers $8,749 $8,749
Accrued expenses and
security deposits 60,929 65,809
Demand, Fixed Rate and
Money Market Thrift Certificates 25,931,241 26,407,959
Accrued interest 3,228,787 2,767,158
---------- ----------
29,229,706 29,249,675
SHAREHOLDER'S DEFICIT
Common stock $1 par value,
1,000 shares authorized,
issued and outstanding 1,000 1,000
Variable Rate Cumulative
Preferred Stock, Series A,
$1 par value, 50,000 shares
authorized, none issued --- ---
Additional paid - in capital 999,000 999,000
Accumulated deficit (1,875,321) (1,435,128)
---------- ----------
(875,321) (435,128)
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDER'S DEFICIT $28,354,385 $28,814,547
=========== ===========
SEE ACCOMPANYING NOTES
64
73
EQUIPMENT LEASING CORPORATION OF AMERICA
STATEMENTS OF OPERATIONS
For the Six Months Ended October 31, For the Three Months Ended October 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue:
Income earned under
direct finance lease contracts $1,253,468 $1,362,988 $ 640,898 $ 648,467
---------- ---------- ---------- ----------
Costs and expenses:
691,990 703,083 338,146 348,167
Interest expense, net
457,673 484,448 230,458 251,142
General and administrative expenses
543,998 346,593 259,632 171,952
Provision for doubtful lease receivables ---------- ---------- ---------- ----------
1,693,661 1,534,124 828,236 771,261
Total costs and expenses ---------- ---------- ---------- ----------
Loss before provision (440,193) (171,136) (187,338) (122,794)
for income tax expense
--- --- --- ---
Provision for state income tax expense ---------- ---------- ---------- ----------
$ (440,193) $ (171,136) $ (187,338) $ (122,794)
Net Loss ========== =========== =========== ===========
SEE ACCOMPANYING NOTES
65
74
EQUIPMENT LEASING CORPORATION OF AMERICA
STATEMENT OF CHANGES IN SHAREHOLDER'S DEFICIT
Common Stock
-----------------
($1.00 Par Value)
1,000 shares
Authorized
----------------- Additional Total
No. of shares Paid-In Accumulated Shareholder's
Issued Amount Capital Deficit Deficit
------ ------- ---------- ----------- ---------------
Balance, April 30, 1996 1,000 $1,000 $999,000 $(1,435,128) $ (435,128)
Net Loss for the
six month period
ended October 31, 1996
(unaudited) -- -- -- (440,193) (440,193)
----- ------ -------- ----------- --------
Balance, October 31, 1996 1,000 $1,000 $999,000 $(1,875,321) $ (875,321)
(unaudited) ===== ====== ======== =========== ==========
SEE ACCOMPANYING NOTES
66
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EQUIPMENT LEASING CORPORATION OF AMERICA
STATEMENTS OF CASH FLOWS
For the Six Months Ended October 31,
1996 1995
----------- -----------
(unaudited) (unaudited)
OPERATING ACTIVITIES
- --------------------
Net Loss $ (440,193) $ (171,136)
Adjustment to Reconcile
Net Loss to Net Cash Provided by
Operating Activities:
Amortization of Deferred Debt Expenses 130,329 108,024
Provision for doubtful lease receivables 543,998 346,593
Effects of Changes
in other Operating Items:
Accrued Expenses (4,880) (11,228)
Accrued Interest 461,629 277,866
Other (net) (121,466) (128,705)
---------- ----------
Net Cash Provided by Operating Activities 569,417 421,414
---------- ----------
INVESTING ACTIVITIES
- ---------------------
Excess of Cash Received
Over Lease Income Recorded 2,906,791 3,275,370
Receipt of Advance Payments 141,088 91,004
Purchase of Equipment
for Direct Finance Leases (3,735,425) (3,344,014)
---------- ----------
Net Cash Provided by (Used in)
Investing Activities $ (687,546) $ 22,360
---------- ----------
SEE ACCOMPANYING NOTES
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76
EQUIPMENT LEASING CORPORATION OF AMERICA
STATEMENTS OF CASH FLOWS - (Continued)
For the Six Months Ended October 31,
1996 1995
----------- -----------
(unaudited) (unaudited)
FINANCING ACTIVITIES
- --------------------
Proceeds from Issuance
of Demand and Fixed Rate Certificates $ 3,096,902 $ 5,533,126
Net Advances to Parent (2,488,814) (826,255)
Redemption of Demand, Fixed
Rate, and Money Market Thrift
Certificates (3,573,620) (3,757,861)
----------- -----------
Net Cash Provided by (Used in)
Financing Activities (2,965,532) 949,010
----------- -----------
Increase (Decrease) in Cash
and cash equivalents (3,083,661) 1,392,784
Cash and cash equivalents,
Beginning of year 9,260,482 8,908,798
----------- -----------
Cash and cash equivalents,
End of Period $ 6,176,821 $10,301,582
=========== ===========
SEE ACCOMPANYING NOTES
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77
EQUIPMENT LEASING CORPORATION OF AMERICA
Notes to Interim Financial Statements
Six Months Ended October 31, 1996 and 1995
1. FINANCIAL STATEMENT PRESENTATION
The unaudited 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 as of April 30,
1996. The accompanying financial statements have not been audited by
independent 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
ACCOUNTING FOR LEASES
Equipment Leasing Corporation of America ("ELCOA")'s lease contracts
provide for total noncancellable rentals which exceed the cost of leased
equipment and, accordingly, are accounted for as direct finance leases.
At inception, ELCOA 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. ELCOA utilizes the
"effective" or interest method in recognizing the remainder of unearned
income. 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 the initial direct costs as defined by FAS No. 91
($189,624 and $130,565 for the six months ended October 31, 1996 and 1995,
respectively), were accounted for as part of the Investment in Direct
Financing Leases. Unearned income is earned and initial direct costs are
amortized to income using the effective method over the term of the lease.
ELCOA provides a provision for doubtful accounts based upon a periodic
review (not less than quarterly) of its outstanding lease portfolio, and
provides a direct charge against operations to increase the amount of
stated reserves for uncollectable accounts. Any writeoffs of
uncollectable leases reduce the stated amount of ELCOA's reserves.
Write-offs of delinquent leases totaled $595,669 and $295,933 during the
six month periods ended October 31, 1996 and 1995, respectively, while
ELCOA increased these reserves by charges of $543,998 and $346,593 during
the six month periods ended October 31, 1996 and 1995, respectively.
69
78
EQUIPMENT LEASING CORPORATION OF AMERICA
Notes to Interim Financial Statements
Six Months Ended October 31, 1996 and 1995
INCOME TAXES
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 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 May 1, 1996 includes deferred tax assets
(liabilities) attributable to the following temporary deductible (taxable)
differences:
Operating lease method vs. direct financing method $1,467,000
Provision for doubtful lease receivables 472,000
Other (32,000)
----------
Net deferred tax asset 1,907,000
Valuation allowance (1,907,000)
----------
Net deferred tax asset after valuation allowance $ ----
==========
A valuation allowance was considered necessary since it is more likely
than not that the Company will not realize the tax benefits of the
deductible differences.
The Company will be included in the consolidated federal income tax return
of its parent, Walnut Equipment Leasing Co., Inc. Based on a tax
allocation agreement, current federal taxes otherwise refundable (payable)
under a separate company computation will be received from (paid to) its
parent.
For the six months ended October 31, 1996 and 1995, the provision for
federal and state income taxes consists of:
Six Months Ended October 31,
1996 1995
-------- --------
Current $416,627 $564,216
Deferred (416,627) (564,216)
-------- --------
$ --- $ ---
======== ========
The deferred tax benefit is the change in the net deferred tax asset
arising from the available carry-back claim from its parent.
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79
EQUIPMENT LEASING CORPORATION OF AMERICA
Notes to Interim Financial Statements
Six Months Ended October 31, 1996 and 1995
OTHER ASSETS AND LIABILITIES
Amounts payable to equipment suppliers in the amount of $8,749 as of
October 31, 1996 represents holdbacks from suppliers of equipment as
additional security for performance by the underlying lessee on the
related lease contract, and are payable at the termination of the
contracts based upon the lessee's compliance with terms of the lease
contract.
Other assets at October 31, 1996 include $443,631 in deferred expenses,
net of amortization, representing costs directly related to the Company's
registration and solicitation of Demand, Fixed Rate and Money Market
Thrift Certificates. Registration expenses of $140,099 at October 31,
1996 are being amortized on a straight-line basis over the estimated
average lives of the debt to be issued under the registration statement.
Amortization of these deferred registration expenses and solicitation
costs charged to income during the six month periods ended October 31,
1996 and 1995 were $130,329 and $108,024, respectively. Also, $303,532 in
commissions paid for sale of the Demand, Fixed Rate and Money Market
Thrift Certificates included in Other Assets at October 31, 1996 are being
amortized over the life of each respective certificate sold.
71