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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended Commission File Number
April 30, 1997 33-65814
EQUIPMENT LEASING CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
DELAWARE 23-2408914
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
501 SILVERSIDE ROAD, STE. 76, WILMINGTON, DE 19809
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 798-2335
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes / X / No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / X /
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference
to the price at which the stock was sold, or the average bid and asked prices
of such stock, as of a specified date within 60 days prior to the date of
filing:
No voting stock is held by non-affiliates of the Registrant.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities Act
of 1934 subsequent to the distribution of securities under a plan confirmed by
a court. / X / Yes / / No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of July 31, 1997, there were 1,000 shares of the Registrant's common stock,
$1.00 par value, outstanding. The Registrant has no other classes of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE - NONE
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PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
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
Equipment Leasing Co., Inc., a Delaware Corporation ("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.
As a result of the inability of ELCOA and Walnut to meet requests for
redemptions of their respective debt securities on or after July 7, 1997, each
company filed voluntary petitions for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in the Eastern District of Pennsylvania on August 8, 1997.
ELCOA and Walnut are managing their businesses as debtors-in-possession subject
to the control and supervision of the Bankruptcy Court. See "Item 1.
Business-Method of Financing", "Item 3. Legal Proceedings", and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Form 10-K.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
ELCOA conducts business in only one industry segment, the leasing of
commercial equipment. See the Financial Statements included in Item 8 to this
report.
(c) NARRATIVE DESCRIPTION OF BUSINESS
ELCOA's principal business is the acquisition of commercial and industrial
equipment from Walnut 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 two to five
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. The
recorded residual value ranges from $1 to approximately 10% of the Company's
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original equipment cost. 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 Walnut's standard non-cancellable lease for its direct
finance leases, the terms and conditions of which vary slightly from
transaction to transaction. These leases are commonly referred to as "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, 1997, ELCOA had 5,802 direct finance leases which have an average initial
term of approximately 37 months, with an average remaining lease receivable
balance of $3,098. Of these leases, 492 had balances between $6,000 and
$10,000 with an aggregate balance of $3,618,625 and 208 had balances in excess
of $10,000 with an aggregate balance of $3,544,342. Total aggregate leases
outstanding at April 30, 1997 was $18,409,854. 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.
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
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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 .8 percent of the outstanding
lease portfolio. All equipment purchased for lease is solely for use by
businesses, and not for lease to consumers. ELCOA estimates the total cost of
equipment purchased from Walnut for lease comprising 5% or more of the total
purchases during the twelve months ended April 30, 1997, 1996, and 1995 as
follows:
April 30, April 30, April 30,
INDUSTRY 1997 1996 1995
-------- -------- --------
Food/Hospitality Service 39% 45% 39%
Industrial Equipment 22% 20% 21%
Auto After Market and Test Equipment 17% 9% 13%
Office Machines and Copiers 8% 11% 8%
Computers and Peripheral Hardware --- 5% 7%
Audio Visual and Communications --- --- 5%
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, 1997:
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Region $ %
-------------- ------------ -----
New England $ 2,359,156 10.31
Mid Atlantic 6,370,407 27.84
Southeast 4,040,998 17.66
Midwest 3,089,098 13.50
South 2,116,604 9.25
Rocky Mountain 533,155 2.33
West Coast 1,494,208 6.53
Southwest 2,878,582 12.58
------------ -----
$ 22,882,208 100.0%
============ =====
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 had previously used regional
offices, direct mail programs, telemarketing and cooperative mailing efforts
with certain equipment manufacturers as marketing vehicles all of which have
been phased out due to poor results in relation to costs associated with these
efforts. Walnut believes that it must further modify its marketing efforts to
attract an increased number of dealers and distributors (i.e. "vendors"), who
will become aware of the option of using leasing as a sales tool, which in turn
will increase the generation of new leases by Walnut thereby increasing the
amount of leases available for purchase by ELCOA. As of August 11, 1997,
Walnut maintained a staff of 4 account executives who maintain close
relationships with the approximately 647 equipment vendors who generate new
lease applications in any given month. Walnut rarely entertains 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.
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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), for the three fiscal years ended April 30, 1997, ELCOA was 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. Management is currently reassessing the
cost of originating new leases which may result in an increase to this fee in
the future.
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. For the three fiscal years ended
April 30, 1997, as consideration for these general and administrative services,
ELCOA was charged a monthly servicing fee of $6.50 for each account outstanding
at the end of each month. Management is reassessing the cost of servicing the
present portfolio and may need to increase the service fee in light of the
current number of leases outstanding and the current out of pocket costs to the
servicer.
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 may include the personal guaranty of the owners and principal
shareholders (and their spouses) of sole proprietorships, partnerships, and
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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. Beginning in July, 1997, Walnut implemented the utilization of
a scoring system based on the "Fair Issac" method utilized in the credit
industry to eliminate those applicants whose credit score is below a certian
minimum threshold, while utilization of scoring is expected to initially
increase the percentage of rejected applications and new leases, it is expected
that the rate of new delinquencies will decrease in the future.
As of August 11, 1997, Walnut employed approximately 9 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. 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 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, 1997, 1996, and 1995. 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,
---------------------------------------------------------------
1997 1996 1995
$ % $ % $ %
----------- ------ ----------- ----- ----------- -----
Aggregate Future
Lease Receivables $18,409,854 100.00 $16,667,226 100.00 $17,267,612 100.0
----------- ------ ----------- ------ ----------- -----
Current 11,331,054 61.55 9,993,204 59.96 10,908,170 63.2
Past due - Two Monthly
Payments 990,978 5.38 942,432 5.65 1,156,730 6.7
Past due - Three Monthly
Payments 503,016 2.73 403,153 2.42 465,480 2.7
Past due - Four or More
Monthly Payments 5,584,806 30.34 5,328,437 31.97 4,737,232 27.4
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ANALYSIS OF BAD DEBT WRITE-OFFS
Fiscal Years Ended April 30,
1997 1996 1995
----------- ----------- -----------
Aggregate Future
Lease Receivables $18,409,854 $16,667,226 $17,267,612
Provisions for
Doubtful Accounts 1,044,080 957,063 1,057,634
Net Charge-Offs 986,675 731,829 1,257,058
Average Gross Lease
Receivables 17,538,540 16,967,419 17,617,021
Percent of Net Charge-
Offs to Average Gross
Lease Receivables 5.6% 4.3% 7.1%
Allowance for Doubtful
Lease Receivables 1,808,926 1,751,521 1,526,287
Percent of Allowance for
Doubtful Lease Receivables
to Aggregate Future Lease
Receivables 9.8% 10.5% 8.8%
Percent of Allowance for
Doubtful Lease Receivables
to Receivables Past Due
Four or More Monthly
Payments 32.4% 32.9% 32.2%
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As of April 30, 1997 and 1996, lease payments in arrears on receivables
four or more monthly payments past due (included in the contractual balances
due of $5,584,806 and $5,328,437) were $3,617,211 and $3,423,728, respectively.
Although the balance of delinquent receivables increased during the fiscal year
ended April 30, 1997, management believes that the likelihood of collection may
be greater as the credit criteria for new leases has been enhanced. As of
April 30, 1997, and 1996, approximately $3,669,000 or 19.9% and $3,510,000 or
21.1%, 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. The utilization of a
credit scoring system of new applicants may reduce the percentage of new
delinquencies in the future. As of April 30, 1997 and 1996, ELCOA maintained
an allowance for doubtful lease receivables of $1,808,926, and $1,751,521,
respectively, which management believes is adequate for future write-offs on
the Company's aggregate gross lease receivables. These reserves totaled 9.8%
and 10.5%, respectively, of the total gross lease receivables outstanding at
April 30, 1997 and 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, 1997, 1996 and 1995,
the allowance for doubtful accounts increased by provisions for doubtful lease
receivables annually in the amounts of $1,044,080, $957,063, and $1,057,634,
respectively. The amounts written off in each of the three fiscal years ended
April 30, 1997, 1996 and 1995, were $986,675, $731,829, and $1,257,058,
respectively, or 5.6%, 4.3%, 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 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. Management attributes the increase in delinquencies to increased
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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 remained consistent during the past three fiscal years.
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 resulted from management's decision to
discontinue collection efforts in certain cases where the legal costs of
pursuing collection would be more 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 often 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. For the three fiscal years
ended April 30, 1997, ELCOA reimbursed Walnut $500 weekly for performance of
these services. Management is currently reassessing this weekly fee which may
be increased due to current costs incurred to perform 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. In the past, the funds for
such purchases have been generated primarily from the sale of the Debentures
and receipt of rental payments. During the fiscal year ended April 30, 1997,
the proceeds from the issuance of Demand and Fixed Rate Certificates decreased
to $5,370,047 from proceeds of $9,620,233 during the fiscal year ended April
30, 1996 as sales of securities were suspended from September 1, 1996 to
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January 31, 1997 pending the registration of the securities. See the
Statements of Cash Flows on page 27. Sales of securities were again suspended
during April, 1997. As a result of the requests by certificate holders for
redemptions which exceeded ELCOA'S cash and cash equivalents, ELCOA was unable
to meet the requests for redemption of its Demand, Fixed Rate and Money Market
Thrift Certificates beginning July 7, 1997 and thereafter. Management has
reviewed the Trust Indentures covering the registered offerings of these debt
securities and has concluded that failure to effect such redemptions may
constitute grounds for default by ELCOA under the Trust Indenture. On August
8, 1997, Walnut and ELCOA separately filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. ELCOA and Walnut
are managing their businesses as debtors-in-possession subject to the
supervision and control of the U.S. Bankruptcy Court for the Eastern District
of Pennsylvania. Pending resolution of these proceedings, there will be no
payments of interest or principal on outstanding debt securities. See Items 3
and 7 to this Form 10-K. In the future, ELCOA expects to fund its operating
expenses from the receipt of rental payments from outstanding leases. In
addition, Walnut, on ELCOA's behalf, has been negotiating with other financial
institutions that have expressed an interest in purchasing pools of leases from
ELCOA by discounting the anticipated lease receivables and residual values at a
rate which would generate additional income and cash flows that would be
available to purchase additional leases from Walnut. To date, no such sales
have been consummated, although negotiations are continuing. Cash realized
from the sale of leases would immediately be available to invest in new lease
business to carry an increased lease portfolio.
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 that ELCOA pays on any borrowed funds increase,
ELCOA must pay any such increased cost without having the ability to increase
its rental charges on existing leases.
ELCOA had sold Demand, Fixed Rate, and Money Market Thrift Certificates
pursuant to prior offerings, of which $24,128,483 were outstanding at April
30, 1997. Of these, $1,237,302 were payable upon demand, and $22,891,181 of
fixed-term certificates were due as follows:
Year Ending April 30,
---------------------
1998 $12,463,977
1999 4,764,066
2000 2,254,299
2001 1,075,594
2002 & thereafter 2,333,245
-----------
$22,891,181
===========
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.
11
13
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
commitments as may be necessary, which are not expected to be a significant
amount of time, to ensure that ELCOA to the best of its ability 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. Kenneth S. Shapiro is also a licensed certified public accountant.
Both officers are 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.
ITEM 2. PROPERTIES
ELCOA leases office space and conference room facilities at 501 Silverside
Road, Wilmington, Delaware. The lease for this space continues on a month to
month basis with 60 days notice by either landlord or tenant required to
terminate it.
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ITEM 3. LEGAL PROCEEDINGS
On August 8, 1997, ELCOA and Walnut filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the Eastern
district of Pennsylvania. These filings are being jointly administered by the
Bankruptcy Court. ELCOA and Walnut are managing their businesses as
debtors-in-possession subject to the control and supervision of the Bankruptcy
Court. See "Item 1. Business-Method of Financing" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Result of Operations".
The discussion below sets forth various aspects of the Chapter 11
Proceeding, but is not intended to be an exhaustive summary. For additional
information regarding the effect of the Chapter 11 Proceeding, reference should
be made to the Bankruptcy Code.
Under Chapter 11, ELCOA and Walnut as debtors-in-possession, are authorized
to continue to operate their businesses; however, they may not engage in
transactions outside the ordinary course of business without first complying
with the notice and hearing provisions of the Bankruptcy Code and obtaining
Bankruptcy Court approval where and when necessary.
Under Chapter 11, all litigation and claims against ELCOA and Walnut
(including those of the holders of outstanding debt securities) at the date of
the filing have been stayed while ELCOA and Walnut continue business operations
as debtors-in-possession. The Bankruptcy Code prohibits creditors who are
subject to the jurisdiction of the Bankruptcy Court from suing ELCOA or Walnut;
either by commencement or continuation of a lawsuit or otherwise, unless the
Bankruptcy Court terminates or modifies the automatic stay of litigation or
otherwise authorizes payments by ELCOA or Walnut.
Under Chapter 11, an official committee of unsecured creditors for each
company may be appointed and such committees have the right to review and
object to certain business transactions and can participate in the formulation
of any plan of reorganization. The Creditors' Committee will be entitled to
retain counsel and other professionals, in each case at the expense of ELCOA or
Walnut, if they are retained pursuant to an order of the Bankruptcy Court.
As debtors-in-possession, ELCOA and Walnut have the right, subject to
Bankruptcy Court approval and certain other limitations, to assume or reject
certain executory contracts and unexpired leases. In this context,
"assumption" means that ELCOA or Walnut agree to perform their obligations
under the contract or lease, and "rejection" means that ELCOA or Walnut are
relieved of its obligations to perform further under the contract or lease and
is subject only to a claim for damages resulting from the breach thereof. Any
such damage claims are treated as general unsecured claims in the
reorganization proceedings. ELCOA and Walnut are studying executory contracts
and unexpired leases to determine whether assumption or rejection is
appropriate.
Under the Bankruptcy Code, a creditor's claim is treated as secured only to
the extent of the value of such creditor's collateral, and the balance of such
creditor's claim is treated as unsecured. Claims which were contingent or
unliquidated at the commencement of the Chapter 11 Proceeding are generally
allowable against the ELCOA or Walnut.
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There are no other legal proceedings or actions pending or threatened
against ELCOA, or to which its property is subject, which management believes
would have a materially adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
As of July 31, 1997, ELCOA's common stock was held by one entity as set
forth in item 12 of this Form 10-K. There is no public market for the
Company's common stock. The Company has paid no dividends during the past two
years with respect to its common stock.
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PART II
ITEM 6. SELECTED FINANCIAL DATA
The following summarizes certain financial information with respect to ELCOA for the five years ended April
30, 1997 (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,
1997 1996 1995 1994 1993 ---------- ----------
- ------------------------------
Operating Revenues $2,546,452 $2,610,450 $2,945,151 $3,009,864 $3,057,645
Net Loss (1,539,208) (1,238,047) (847,232) (406,137) (424,608)
Total Assets 14,960,268 22,735,988 23,204,220 22,260,742 19,131,427
Demand, Fixed Rate and Money
Market Thrift Certificates
Outstanding 24,128,483 26,407,959 24,521,875 21,810,991 18,041,504
Shareholder's Deficit (12,247,708) (6,513,687) (3,725,401) (1,752,437) (712,721)
Ratio of Earnings to
Fixed Charges (1) --- --- --- --- ---
<FN>
(1) The Ratios of earnings to fixed charges were computed by dividing pre-tax income plus fixed charges by the
amount of fixed charges. For the years ended April 30, 1997, 1996, 1995, 1994, and 1993 the ratio of
earnings to fixed charges was less than "1", due to the net loss of $1,539,208, $1,238,047, $847,232,
$406,137, and $424,608, respectively.
15
17
ITEM 7. MANAGEMENT'S NARRATIVE DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE FISCAL YEARS ENDED APRIL 30, 1997
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,
1997, 1996 and 1995, aggregate new lease receivables were $10,896,610,
$8,676,271, and $9,674,906, respectively, new equipment purchased for lease was
$8,137,205, $6,561,611, and $7,321,620, respectively, and recognized revenues
from direct finance leases totalled $2,546,452, $2,610,450, and $2,945,151,
respectively. During the three fiscal years ended April 30, 1997, 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, 1997. ELCOA attributes the increase in new lease
receivables entered in the fiscal year ended April 30, 1997 to an increase in
the amount of leases offered by sale from Walnut. The income earned under
direct finance lease contracts decreased 2.5% during the fiscal year ended
April 30, 1997 after having decreased, 11.4%, and 2.2% during the fiscal years
ended April 30, 1996 and 1995, respectively. The decrease in the growth of
earned revenues during the two 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, 1997, 1996 and 1995 to a variety of factors including, but not limited to,
increased reliance on borrowed funds, provisions for doubtful lease receivable
associated with an aging portfolio of leases, and excess interest incurred on
certificates over interest earned on excess cash and investment balances during
the fiscal year. 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 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, 1997, the Company's costs of operations were
funded from rentals collected. Net proceeds from the sale of debt securities
were used for redemptions of previously issued debt securities and the purchase
of equipment for lease during the fiscal years ended April 30, 1997, 1996 and
1995, 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, 1997, after experiencing a
decline during the fiscal year ended April 30, 1996. Aggregate new lease
receivables increased by $2,220,339 or approximately 25.6% during the fiscal
year ended April 30, 1997 and decreased by $998,635 or approximately 10.3%
during the fiscal year ended April 30, 1996. In analyzing ELCOA's Financial
Statements, it is therefore important to note the relationships between new
16
18
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 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 for the three fiscal years ended April 30, 1997. Management is
currently reassessing the cost of originating new leases and may increase the
origination fee in the future. 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, 1997, 1996 and 1995
were $312,970, $252,370, and $281,531, respectively.
For the fiscal years ended April 30, 1997, 1996 and 1995, ELCOA incurred
$886,313, $972,678, and $1,054,460, in general and administrative expenses,
respectively. Monthly servicing and bookkeeping fees paid to Walnut in the
amount of $501,722, $592,638, and $676,228 during the fiscal years ended April
30, 1997, 1996, and 1995, respectively, were a primary component of general and
administrative expenses. The $90,916 decrease from the fiscal year ending
April 30, 1996 in comparison to the fiscal year ending April 30, 1997 is
attributable to a reduction in the number of finance leases outstanding which
were 5,802 at April 30, 1997, a decrease from 6,644 at April 30, 1996. This
decrease corresponds to the $86,365 or 8.9% overall reduction in general and
administration expenses. Also included in the general and administrative
expenses during the fiscal years ended April 30, 1997, 1996 and 1995 were
$244,662, $241,323, and $247,561, 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 $98,926,
$106,589, and $99,595, during the fiscal years ending April 30, 1997, 1996 and
1995, 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.
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19
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
recorded provisions for doubtful lease receivables of $1,044,080, $957,063, and
$1,057,634 for the fiscal years ended April 30, 1997, 1996 and 1995,
respectively, resulting from increases in delinquent accounts outstanding
during these periods. At April 30, 1997, approximately 38% 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. 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, 1997, 1996, and 1995, ELCOA
incurred $2,155,267, $1,918,756, and $1,679,929, respectively, in interest
expense, net of interest income of $255,135, $480,262, and $376,233,
respectively, on average debt (including accrued interest thereon) of
$28,429,677, $28,442,700, and $25,258,751, 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 8.5%, 8.4%, and 8.1%, respectively. The interest
expense before calculation of any offset from interest income increased each
year as a result of the increase in the average amount of issued and
outstanding debt securities of ELCOA.
During the fiscal years ended April 30, 1997, 1996 and 1995, ELCOA
recognized provisions for state income taxes in the amounts of $0, $0, and
$360, 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 any
applicable Servicing Agreement with Walnut. However, increased reliance on any
variable rate borrowings subjects ELCOA to increased exposure to inflation
because of the risk of increased interest rates. 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 lease.
In order to reduce operating losses, and improve operating profitability,
management continues to take steps to increase the generation of new lease
receivables that it deems 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 co-owners be
personally responsible for the obligation under lease contracts. Walnut's
recent implementation of a scoring system to analyze new lease applications may
result in a future reduction in delinquent receivables. The percentage of
delinquent lease receivables decreased during fiscal 1997, in part, as a result
of the increase in the outstanding amount of aggregate lease receivables during
18
20
the year. If the level of outstanding lease receivables increases and the
quality of new leases improves, management believes that the percentage of
severely delinquent leases may decrease.
CAPITAL RESOURCES AND LIQUIDITY
ELCOA had financed its new business primarily from the proceeds from its
sale of Certificates, as well as from rentals received from lease contracts
outstanding. During the three fiscal years ended April 30, 1997, 1996, and
1995, approximately 0%, 29% and 37%, respectively of the equipment purchases
were funded from sale of securities, and 100%, 71%, and 63%, respectively were
funded from rental collections and cash on hand. Approximately $16,696,000 in
principal amount, including accrued interest on the $24,128,483 in Debentures
outstanding at April 30, 1997, is subject to redemption within one year of that
date. Scheduled receipts from lease contracts total approximately $9,823,000
during this period. See Footnotes 2 and 6 to the Financial Statements.
Redemptions of Debentures previously issued decreased to $7,649,524 from
$7,734,149 during the fiscal years ended April 30, 1997 and 1996, respectively.
The proceeds of sale from Debentures decreased to $5,370,047 for the fiscal
year ended April 30, 1997 from $9,620,233 for the fiscal year ended April 30,
1996. Sales of these securities were voluntarily suspended as of April 18,
1997. As of April 30, 1997, ELCOA had approximately $533,000 of cash on hand,
and had a receivable from Walnut of approximately $8,777,000 for funds
previously advanced. See the Statement of Cash Flows for the three fiscal
years ended April 30, 1997.
Excess funds have historically been invested in low yielding but highly
liquid investments. During the fiscal year ended April 30, 1997, the average
interest rate earned by ELCOA on these funds was approximately 5.6%, while the
average interest rate paid on outstanding certificates was 8.5%, resulting in a
negative spread of 2.9%. Any decision by the Federal Reserve to increase rates
in general may reduce this "negative spread". During the fiscal year ended
April 30, 1997, the average rate of return on ELCOA's investment in its lease
receivables was 16.7%.
As noted in the Statements of Cash Flows on page 27, sales of Demand and
Fixed Rate Certificates have decreased over the three fiscal years ended April
30, 1997. Redemption of these securities have remained relatively consistent.
Prior to April 30, 1997, ELCOA had not defaulted on any contractual payment
of interest or principal on any Demand, Fixed Rate and Money Market Thrift
Certificates issued to the public, and requests for early repayment of interest
or principal had never been later than five business days after demand for
redemption was received. During the month of June, 1997, as a result of
reductions in the Company's available cash, requests for early redemption of
Demand and Fixed Rate certificates prior to maturity were deferred to July 5,
1997. As a result of the requests by certificate holders for redemptions which
exceeded ELCOA's cash and cash equivalents, ELCOA was unable to meet the
requests for redemption of its Demand, Fixed Rate and Money Market Thrift
Certificates beginning July 7, 1997 and thereafter. Management has reviewed
the Trust Indentures covering the registered offerings of these debt securities
and has concluded that a default may have occurred in the redemption
provisions. On August 8, 1997, ELCOA and Walnut filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. ELCOA and Walnut
are managing their businesses as debtors-in-possession subject to the
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21
supervision and control of the Federal Bankruptcy Court for the Eastern
District of Pennsylvania. Pending the resolution of this proceeding, no
further redemptions or payments of interest will occur. In order to continue
its operations, ELCOA must generate additional sources of liquidity to fund new
business, of which there can be no assurance. See "Methods of Financing".
STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, the matters
discussed in Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations or elsewhere in this annual report on Form
10-K, are forward looking statements that are dependent upon a number of risks
and uncertainties that could cause actual results to differ materially from
those in the forward looking statements. These risks and uncertainties are
more fully discussed in Note 1 to the Financial Statements. The Company does
not intend to provide updated information about the matters referred to in
these forward looking statements, other than in the context of management's
discussion and analysis in the Company's quarterly and annual reports on Form
10-Q and 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements. Page
----
Independent Auditor's Report. 21
Balance Sheets as of April 30, 1997 and 1996. 23
Statements of Operations for the years ended April 30, 25
1997, 1996 and 1995.
Statement of Changes in Shareholder's Deficit for
the years ended April 30, 1997, 1996 and 1995. 26
Statements of Cash Flows for the years ended April 27
30, 1997, 1996 and 1995.
Notes to Financial Statements 29
See Item 14 on page 41 for Index of Financial Statement Schedules
20
22
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, 1997 and 1996 and the related statements of
operations, changes in shareholder's deficit and cash flows for each of the
three years in the period ended April 30, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
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, 1997 and 1996 and the results of its operations and
its cash flows for each of the three years in the period ended April 30, 1997
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. As
discussed in Note 1 to the financial statements, the Company has incurred
recurring losses, has a receivable from its Parent whose realization is
uncertain and has been unable to meet the requests for redemption of its
certificates beginning July 7, 1997. In addition, on August 8, 1997, the
Company and its Parent have filed separate voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also discussed in
Note 1. In the event the plan of reorganization is confirmed, continuation of
the business thereafter is dependent on the Company's ability to achieve
sufficient cash flow to meet its restructured debt obligations. As a result of
the reorganization proceedings, the Company may sell or otherwise realize
assets and liquidate or settle liabilities for amounts other than those
reflected in the financial statements. Further, the confirmation of a plan of
reorganization could materially change the amounts currently recorded in the
financial statements. If no reorganization plan is approved, it is possible
21
23
that the Company's assets could be liquidated. The financial statements do not
included any adjustments that might result from the outcome of these
uncertainties.
/s/ Cogen Sklar LLP
COGEN SKLAR LLP
Bala Cynwyd, Pennsylvania
July 1, 1997, except for Note 1, Management's Plans,
as to which the date is August 8, 1997.
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24
EQUIPMENT LEASING CORPORATION OF AMERICA
(a Wholly-Owned Subsidiary of
Walnut Equipment Leasing Co., Inc.)
BALANCE SHEETS
-----------------
As of April 30,
1997 1996
----------- -----------
ASSETS
Direct finance leases:
Aggregate future amounts
receivable under lease
contracts $18,409,854 $16,667,226
Estimated residual value
of equipment 1,369,844 1,577,174
Initial direct costs, net 434,603 393,897
Less:
Unearned income under
lease contracts (3,851,248) (3,347,395)
----------- -----------
16,363,053 15,290,902
Advance payments (562,777) (516,658)
----------- -----------
15,800,276 14,774,244
Allowance for doubtful
lease receivables (1,808,926) (1,751,521)
----------- -----------
13,991,350 13,022,723
Cash and cash equivalents 532,710 9,260,482
Other assets 436,208 452,783
----------- -----------
TOTAL ASSETS $14,960,268 $22,735,988
=========== ===========
SEE ACCOMPANYING NOTES
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25
EQUIPMENT LEASING CORPORATION OF AMERICA
(a Wholly-Owned Subsidiary of
Walnut Equipment Leasing Co., Inc.)
BALANCE SHEETS - (continued)
-----------------
As of April 30,
1997 1996
----------- -----------
LIABILITIES
Amounts payable to
equipment suppliers $ 8,749 $ 8,749
Accrued expenses and security
deposits 76,317 65,809
Demand, Fixed Rate, and Money
Market Thrift Certificates
(includes $177,250 and $183,805
held by related parties) 24,128,483 26,407,959
Accrued interest (includes $13,896
and $8,459, to related parties) 2,994,427 2,767,158
----------- -----------
SHAREHOLDER'S DEFICIT 27,207,976 29,249,675
----------- -----------
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
Due from parent (8,777,220) (4,582,407)
Accumulated Deficit (4,470,488) (2,931,280)
----------- -----------
(12,247,708) (6,513,687)
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDER'S DEFICIT $14,960,268 $22,735,988
=========== ===========
SEE ACCOMPANYING NOTES
24
26
EQUIPMENT LEASING CORPORATION OF AMERICA
(A Wholly-Owned Subsidiary of
Walnut Equipment Leasing Co., Inc.)
STATEMENTS OF OPERATIONS
--------------------------------
For the Years Ended April 30,
1997 1996 1995
----------- ---------- ----------
Revenue:
Income earned under
direct finance lease
contracts $ 2,546,452 $2,610,450 $2,945,151
----------- ---------- ----------
Costs and expenses:
Interest expense, net of
interest income of $255,135,
$480,262 and $376,233,
respectively 2,155,267 1,918,756 1,679,929
General and administrative
expenses (includes $750,980,
$881,382 and $946,465,
respectively, paid to related
parties) 886,313 972,678 1,054,460
Provision for doubtful
lease receivables 1,044,080 957,063 1,057,634
----------- ---------- ----------
Total costs and expenses 4,085,660 3,848,497 3,792,023
----------- ---------- ----------
Loss before provision
for state income taxes (1,539,208) (1,238,047) (846,872)
Provision for state income taxes --- --- 360
----------- ---------- ----------
Net Loss $(1,539,208) $(1,238,047) $ (847,232)
=========== ========== ==========
SEE ACCOMPANYING NOTES
25
27
EQUIPMENT LEASING CORPORATION OF AMERICA
(A Wholly-Owned Subsidiary of
Walnut Equipment Leasing Co., Inc.)
STATEMENT OF CHANGES IN SHAREHOLDER'S DEFICIT
Common Stock
($1.00 Par Value)
1,000 shares
Authorized Additional Total
No. of shares Paid-In Due From Accumulated Shareholder's
Issued Amount Capital Parent Deficit Deficit
------ ------ ---------- ----------- ------------ ---------------
Balance,
April 30, 1994 1,000 $1,000 $999,000 $(1,906,436) $ (846,001) $ (1,752,437)
Net Loss for the year
ended April 30, 1995 --- --- --- --- (847,232) (847,232)
Net advances to parent --- --- --- (1,125,732) --- (1,125,732)
----- ------ -------- ----------- ----------- ------------
Balance, April 30, 1995 1,000 $1,000 $999,000 $(3,032,168) $(1,693,233) $ (3,725,401)
Net Loss for the year
ended April 30, 1996 --- --- --- --- (1,238,047) (1,238,047)
Net advances to parent --- --- --- (1,550,239) --- (1,550,239)
----- ------ -------- ----------- ----------- ------------
Balance, April 30, 1996 1,000 $1,000 $999,000 $(4,582,407) $(2,931,280) $ (6,513,687)
Net Loss for the year
ended April 30, 1997 --- --- --- --- (1,539,208) (1,539,208)
Net advances to parent --- --- --- (4,194,813) --- (4,194,813)
----- ------ -------- ----------- ----------- ------------
Balance, April 30, 1997 1,000 $1,000 $999,000 $(8,777,220) $(4,470,488) $(12,247,708)
===== ====== ======== =========== =========== ============
SEE ACCOMPANYING NOTES
26
28
EQUIPMENT LEASING CORPORATION OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF
WALNUT EQUIPMENT LEASING CO., INC.)
STATEMENTS OF CASH FLOWS
-------------------
For the Years Ended April 30,
1997 1996 1995
----------- ----------- -----------
OPERATING ACTIVITIES
Net Loss $(1,539,208) $(1,238,047) $(847,232)
Adjustments to reconcile
net loss to net cash provided
by (used in) operating activites:
Amortization of
deferred debt expenses 244,662 241,323 247,561
Provision for doubtful
lease receivables 1,044,080 957,063 1,057,634
Effects of Changes
in other operating items:
Accrued expenses 10,509 (6,480) (26,820)
Accrued interest 227,269 440,450 232,378
Other assets (net) (228,087) (270,595) (232,922)
---------- ----------- -----------
Net cash provided by (used in)
operating activities (240,775) 123,714 430,599
---------- ----------- -----------
INVESTING ACTIVITIES
Excess of cash received
over lease income recorded 5,843,618 6,263,312 6,447,111
Increase in advance payments 280,880 190,424 179,692
Purchase of equipment
for direct finance leases (8,137,205) (6,561,611) (7,321,620)
---------- ----------- -----------
Net cash used in
investing activities $(2,012,707) $(107,875) $(694,817)
---------- ----------- -----------
SEE ACCOMPANYING NOTES
27
29
EQUIPMENT LEASING CORPORATION OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF
WALNUT EQUIPMENT LEASING CO., INC.)
STATEMENTS OF CASH FLOWS - (continued)
-------------------
For the Years Ended April 30,
1997 1996 1995
---------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance
of Demand and Fixed Rate
Certificates $5,370,047 $ 9,620,233 $10,983,417
Net advances to parent (4,194,813) (1,550,239) (1,125,732)
Redemption of Demand, Fixed
Rate, and Money Market
Thrift Certificates (7,649,524) (7,734,149) (8,272,533)
---------- ----------- -----------
Net cash provided by (used in)
financing activities (6,474,290) 335,845 1,585,152
---------- ----------- -----------
Increase (Decrease) in
Cash and Cash Equivalents (8,727,772) 351,684 1,320,934
Cash and Cash Equivalents,
Beginning of Year 9,260,482 8,908,798 7,587,864
Cash and Cash Equivalents, ---------- ----------- -----------
End of Year $ 532,710 $9,260,482 $8,908,798
========== =========== ===========
SEE ACCOMPANYING NOTES
28
30
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 AND MANAGEMENT'S PLANS
The financial statements of ELCOA have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. Accordingly, the financial
statements do not include any adjustments relating to the recoverability of
recorded assets, or the amount of liabilities that may be necessary should
ELCOA be unable to continue in the normal course of business.
During the years ended April 30, 1997, 1996 and 1995, ELCOA incurred losses
of $1,539,208, $1,238,047, and $847,232, respectively, and reported accumulated
deficits of $4,470,488 and $2,931,280 at April 30, 1997 and 1996, respectively.
As a result of the requests by certificate holders for redemptions which
exceeded ELCOA's cash and cash equivalents, ELCOA was unable to meet the
requests for redemption of its Demand, Fixed Rate and Money Market Thrift
Certificates beginning July 7, 1997 and thereafter. Management reviewed the
Trust Indentures covering the registered offerings of these debt securities and
concluded that a default may have occurred in the redemption provisions. ELCOA
had previously suspended sales of its Demand and Fixed Rate Certificates on
April 18, 1997. On August 8, 1997, ELCOA and Walnut filed separate voluntary
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
ELCOA and Walnut are managing their businesses as debtors-in-possession subject
to the supervision and control of the Federal Bankruptcy Court for the Eastern
District of Pennsylvania. The independent auditor's report for Walnut for each
of the three years ended April 30, 1997 contained an explanatory paragraph
which indicated that Walnut has suffered recurring losses from operations and
has a shareholder's deficit which, along with the filing of the Chapter 11
petition, raises 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 which are not restricted as to their intended use, a receivable from
Walnut is reflected on the Company's balance sheet as a reduction of
shareholder's equity and not as an asset because of the relationship of the
parties, the control inherent in that relationship, and the terms of the
intercompany agreement. 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.
29
31
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)
The management of Walnut has initiated certain cost-saving and volume
building measures to improve the efficiency of the Company as the volume of new
leases generated increases. Walnut must increase the level of new leases and
control its costs of lease origination and administration in order to reduce
its operating expenses, and sell leases to third-party purchasers, along with
ELCOA, in order to continue as a going concern and to repay the balance of any
intercompany advances in the ordinary course of business.
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 other
entities. In addition, the Company anticipates that it will continue to
finance its new business primarily from the proceeds from rentals received from
lease contracts outstanding as well as through the sale of leases to
third-party asset securitizers.
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 ($312,970, $252,370, and $281,531 for the
years ended April 30, 1997, 1996 and 1995, 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.
30
32
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)
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 (which ranges from
$1 to approximately 10% of the original equipment cost). Residual value of
this equipment is generally established at the purchase option price offered.
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 $986,675, $731,829, and
$1,257,058 for the years ended April 30, 1997, 1996 and 1995, respectively.
FINANCIAL INSTRUMENTS:
The following method and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
Cash and cash equivalents, accounts payable to equipment suppliers, accrued
expenses and security deposits, demand certificates and accrued interest: the
carrying amounts reported in the balance sheet approximate the fair value
because of the short term maturity of these instruments.
Fixed Rate and Money Market Certificates: it was not practical to estimate
the fair value of the Fixed Rate and Money Market Certificates outstanding.
There is no market for this debt.
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.
31
33
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)
The net deferred tax asset as of April 30, 1997 and 1996 includes deferred
tax assets (liabilities) attributable to the following temporary deductible
(taxable) differences:
1997 1996
---------- ----------
Operating lease method vs.
direct financing method $1,295,000 $1,467,000
Provisions for doubtful
lease receivables 705,000 472,000
Other (42,000) (32,000)
---------- ----------
Net deferred tax asset 1,958,000 1,907,000
Valuation allowance (1,958,000) (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. There was no cumulative effect on income 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, 1997, 1996 and 1995 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, 1997. Amounts paid for interest
for the fiscal years ended April 30, 1997, 1996 and 1995 were $2,204,458,
$1,996,122, and $1,898,734, respectively. There were no amounts paid for
income taxes for the fiscal years ended April 30, 1997, 1996, and 1995.
32
34
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, 1997 are due as
follows:
Year ending
April 30, Amount
----------- -----------
1998 $ 9,822,703
1999 5,089,267
2000 2,421,616
2001 797,841
2002 & beyond 278,427
-----------
$18,409,854
===========
3. OTHER ASSETS:
Other assets of $436,208 and $452,783 at April 30, 1997 and 1996,
respectively, include $435,920 and $452,495 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. Included in deferred expenses are unamortized commissions of
$297,032 and $336,289 at April 30, 1997 and 1996 paid by ELCOA to Welco
Securities, Inc. Such expenses are being amortized on a straight-line basis
over the estimated average lives of the debt issued under the registration
statements and the term of the certificates. Amortization of deferred expenses
charged to income during the years ended April 30, 1997, 1996 and 1995, were
$244,662, $241,323, and $247,561, 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, 1997 and 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.
33
35
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, 1997, 1996 and 1995 due to the benefit of Walnut's net
operating loss carryforwards.
ELCOA has provided for $0, $0, and $360 in state income tax expense for the
fiscal years ended April 30, 1997, 1996 and 1995, respectively.
6. DEMAND, FIXED RATE, AND MONEY MARKET THRIFT CERTIFICATES
The Demand, Fixed Rate, and Money Market Thrift Certificates outstanding at
April 30, 1997 bear interest at rates ranging from 7.25% to 12.75%, and are due
as follows:
Year ending
April 30, Amount
----------- -----------
1998 $13,701,279
1999 4,764,066
2000 2,254,299
2001 1,075,594
2002 & beyond 2,333,245
-----------
$24,128,483
===========
Included in the amounts due in the year ended April 30, 1997 are $1,237,302
of certificates payable on demand. The accrued interest of $2,994,427 at April
30, 1997 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, 1997, 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 certificate
sold. ELCOA also reimburses Welco for its out-of-pocket costs associated with
34
36
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, 1997, 1996 and 1995,
were $150,332, $182,155, and $170,642, 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 $191,146 and $192,264 at
April 30, 1997 and 1996, 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 leases 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, 1997, 1996, and 1995 these origination costs totaled $312,970,
$252,370, and $281,531, respectively, which includes reimbursement for
commissions paid to outside lease brokers. During the years ended April 30,
1997, 1996, and 1995, 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 bookkeeping charges paid Walnut for the years ended
April 30, 1997, 1996 and 1995, were $501,722, $592,638, and $676,228,
respectively. As of April 30, 1997, the amount due ELCOA by Walnut of
$8,777,220 represents funds previously advanced to Walnut for general corporate
purposes included but not limited to purchase of equipment for lease and funds
necessary to maintain Walnut's operations. There are no restrictions on
Walnut's use of funds received from intercompany advances. Walnut has agreed
to pay interest on these outstanding advances, at the prime rate of interest
plus 2%, which amounted to $883,740, $536,334, and $365,438 for the fiscal
years ended April 30, 1997, 1996 and 1995, respectively. These amounts are not
reflected in the statement of operations but rather were recorded as reductions
to the intercompany receivable, because of the relationship of the parties, the
control inherent in that relationship, and the terms of the intercompany
agreement, and the accounting for parent company advances as a reduction of
shareholder's equity.
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
35
37
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)
costs and expenses incurred in these efforts. No expenses were incurred by
ELCOA during the fiscal years ended April 30, 1997, 1996, and 1995. Under
terms of the servicing agreement between Walnut and ELCOA, Walnut retained late
charges in the approximate amounts of $390,000, $388,000, and $390,000 for the
three fiscal years ended April 30, 1997, 1996 and 1995, 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, 1997, the relationship between
amounts recovered by the law firm from delinquent lease receivables (on a
consolidated basis for Walnut and ELCOA) and the costs paid the law firm by
Walnut to reimburse it for these efforts was as follows:
For The Three Fiscal Years Ended April 30,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
Amounts Collected and Remitted
by The Law Firm from Delinquent
Lease Receivables $1,632,000 $1,508,000 $1,379,000
- -------------------------------------------------------------------------------
Amounts Paid to the Law Firm by
Walnut For Legal Collection Efforts $ 419,040 $ 407,160 $ 354,783
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. For the
years ended April 30, 1997, 1996 and 1995, these expenses totaled $98,926,
$106,589, and $99,595, respectively.
36
38
Part II (continued)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 45
Lester D. Shapiro Secretary/Treasurer/Director 36
Nathan Tattar Director 76
John B. Orr Director 38
Adam Varrenti, Jr. Director 48
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. He has been the President, Chief Executive Officer and Director of
Walnut since 1969. 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 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,
37
39
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
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.
38
40
ITEM 11. 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 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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, 1997. 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 certificate
sold. ELCOA also reimburses Welco for its out-of-pocket costs associated with
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, 1997, 1996 and 1995,
were $150,332, $182,155, and $170,642, 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 leases 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, 1997, 1996, and 1995 these origination costs totaled $312,970,
39
41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (continued)
$252,370, and $281,531, respectively, which includes reimbursement for
commissions paid to outside lease brokers. During the years ended April 30,
1997, 1996, and 1995, 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 bookkeeping charges paid Walnut for the years ended
April 30, 1997, 1996 and 1995, were $501,722, $592,638, and $676,228,
respectively. As of April 30, 1997, the amount due ELCOA by Walnut of
$8,777,220 represents funds previously advanced to Walnut for general corporate
purposes included but not limited to purchase of equipment for lease and funds
necessary to maintain Walnut's operations. There are no restrictions on
Walnut's use of funds received from intercompany advances. Walnut has agreed
to pay interest on these outstanding advances, at the prime rate of interest
plus 2%, which amounted to $883,740, $536,334, and $365,438 for the fiscal
years ended April 30, 1997, 1996 and 1995, respectively. These amounts are not
reflected in the statement of operations but rather were recorded as reductions
to the intercompany receivable, because of the relationship of the parties, the
control inherent in that relationship, the terms of the intercompany agreement,
and the accounting for parent company advances as a reduction of shareholder's
equity.
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
outstanding 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. For the years ended April 30, 1997, 1996 and 1995, these expenses
totaled $98,926, $106,589, and $99,595, respectively.
40
42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
a) 1. FINANCIAL STATEMENTS
Included in Part II of this report:
Page
----
Independent Auditor's Reports 21
Balance Sheets 23
Statements of Operations 25
Statement of Changes in Shareholder's Deficit 26
Statements of Cash Flows 27
Notes to Financial Statements 29
2. FINANCIAL STATEMENT SCHEDULE
(a) Report on Schedule. 45
(b) Schedule VIII - Valuation and Qualifying Accounts. 46
All other schedules for which provisions are made in the applicable
regulation of the Securities and Exchange Commission have been omitted because
they are not required under the related instructions or are inapplicable.
3. EXHIBITS
3.1 - Articles of Incorporation, incorporated by reference to Exhibit 3.1
to Form 10-K filed by the registrant for the period ended April 30,
1987 (File No. 33-6259, Filed On July 28, 1987.)
3.2 - By-Laws, as amended, incorporated by reference to Exhibit 3.2 to
Registrant's Registration Statement on Form S-1. (File No. 33-6259,
Filed on June 6, 1986.)
4.1 - Specimen of Variable Rate Money Market Demand Thrift Certificate,
incorporated by reference to Exhibit 4.1 to Registrant's
Registration Statement on Form S-1. (File No. 33-6259; Filed on
September 26, 1986).
4.2 - Specimen of Fixed Term Money Market Thrift Certificate, incorporated
by reference to Exhibit 4.2 to Registrant's Registration Statement
on Form S-1. (File No. 33-6259; Filed on September 26, 1986).
4.3 - Trust Indenture between Registrant and First Valley Bank, Trustee,
dated as of August 5, 1986 incorporated by reference to Exhibit 4.3
to Registrant's Registration Statement on Form S-1. (File No.
33-6259; Filed August 8, 1986).
41
43
4.4 - Specimen of Variable Rate Cumulative Preferred Stock, Series A
Certificate, incorporated by reference to Exhibit 4.4 to
Registrant's Registration Statement on Form S-1. (File No. 33-6259;
Filed June 6, 1986).
4.5 - Certificate of Designation, Relative Rights, Preferences and
Limitations of Variable Rate Cumulative Preferred Stock, Series A,
incorporated by reference to Exhibit 4.5 of Registrant's
Registration Statement on Form S-1. (File No. 33-6259; Filed June
6, 1986).
4.6 - First Supplemental Trust Indenture dated as of September 19, 1986
between Registrant and First Valley Bank, Trustee, incorporated by
reference to Exhibit 4.6 to Registrant's Registration Statement on
Form S-1. (File No. 33-6259; Filed September 26, 1986).
4.7 - Specimen of Variable Rate Money Market Demand Thrift Certificate,
incorporated by reference to Exhibit 4.5 to Registrant's
Registration Statement on Form S-1. (File No. 33-23211; Filed on
July 21, 1988).
4.8 - Specimen of Fixed Term Money Market Thrift Certificate incorporated
by reference to Exhibit 4.6 to Registrant's Registration Statement
on Form S-1. (File No. 33-23211; Filed on July 21, 1988.)
4.9 - Second Supplement Trust Indenture dated September 20, 1988 between
Registrant and First Valley Bank, Trustee, incorporated by reference
to Exhibit 4.5 to Registrant's Registration Statement on Form S-1.
(File No. 33-23211 Filed July 21, 1988.)
4.10 Specimen of Variable Rate Money Market Demand Thrift Certificate
incorporated by reference to Exhibit 4.9 to Registrant's
Registration Statement on Form S-1. (File No. 33-29703; Filed July
10, 1989.)
4.11 - Specimen of Fixed Term Money Market Thrift Certificate, incorporated
by reference to Exhibit 4.16 to Registrant's Registration Statement
on Form S-1 (File No. 33-29703; Filed July 10, 1989.)
4.12 - Third Supplemental Trust Indenture dated as of September 13, 1989
between Registrant and First Valley Bank, Trustee, incorporated by
reference to Exhibit 4.8 to Registrant's Registration Statement on
Form S-1. (File No. 33-29703; Filed July 10, 1989).
4.13 - Fourth Supplemental Trust Indenture dated as of August 17, 1990
between Registrant and First Valley Bank, Trustee, incorporated by
reference to Exhibit 4.11 to Registrant's Registration Statement on
Form S-2. (File No. 33-35664; Filed July 3, 1990).
4.14 - Specimen of Demand Certificate (File No. 33-35664; Filed July 3,
1990).
4.15 - Specimen of Fixed Rate Certificate (File No. 33-35664; Filed July 3,
1990).
42
44
4.16 - Fifth Supplemental Trust Indenture dated as of August 18, 1993
between Registrant and First Valley Bank, Bethlehem, Pennsylvania,
Trustee, incorporated by reference to Exhibit 4.14 to Registrant's
Registration Statement on Form S-2. (File No. 33-65814; Filed
August 25, 1993.)
4.17 - Form of Specimen of Demand Certificate; Incorporated by reference to
Exhibit 4.15 to Registrant's Registration Statement on Form S-2.
(File No. 33-65814; Filed July 9, 1993.)
4.18 - Form of Specimen of Fixed Rate Certificate; Incorporated by
reference to Exhibit 4.16 to Registrant's Registration Statement on
Form S-2. (File No. 33-65814; Filed July 9, 1993).
4.19 - Sixth Supplemental Trust Indenture dated as of May 15, 1996, between
Registrant and First Valley Bank, Bethlehem, Pennsylvania, Trustee,
incorporated by reference to Exhibit 4.17 to Registrant's
Registration Statement on Form S-2. (File No. 333-02497; Filed June
4, 1996)
4.20 - Form of Specimen of Demand Certificate; Incorporated by reference to
Exhibit 4.18 to Registrant's Registration Statement on Form S-2.
(File No. 333-02497; Filed April 15, 1996)
4.21 - Form of Specimen of Fixed Rate Certificate; Incorporated by
reference to Exhibit 4.19 to Registrant's Registration Statement on
Form S-2. (File No. 333-02497; Filed April 15, 1996)
10.1 - Specimen equipment lease agreement incorporated by reference to
Exhibit 10.1 to Registrant's Registration Statement on Form S-1.
(File No. 33-6259; Filed June 6, 1986).
10.2 - Specimen certificate of acceptance from lessee to registrant
incorporated by reference to Exhibit 10.2 to Registrant's
Registration Statement on Form S-1. (File No. 33-6259; Filed June
6, 1986).
10.3 - Specimen form of lessee guarantee incorporated by reference to
Exhibit 10.3 to Registrant's Registration Statement to Form S-1.
(File No. 33-6259; Filed June 6, 1986).
10.4 - Specimen form of Bill of Sale, and assignment for certain equipment
and leases to be purchased by registrant incorporated by reference
to Exhibit 10.4 to Registrant's Registration Statement on Form S-1.
(File No. 33-6259; Filed June 6, 1986).
10.5 - Service Contract dated May 23, 1986 between Walnut Equipment Leasing
Co., Inc. and Registrant incorporated by reference to Exhibit 10.5
to Registrant's Registration Statement on Form S-1. (File No.
33-6259; Filed June 6, 1986).
10.6 - Escrow agreement between Registrant and Walnut Equipment Leasing
Co., Inc. re: Segregation of Funds for the Company's benefit,
incorporated by reference to Exhibit 10.6 to Registrant's
Registration Statement on Form S-1. (File No. 33-6259; Filed June
6, 1986).
43
45
10.7 - Option Agreement between Registrant and Walnut Equipment Leasing Co.,
Inc. re: right of first refusal for future purchases of equipment
and related leases, incorporated by reference to Exhibit 10.8 to
Registrant's Registration Statement on Form S-1. (File No. 33-6259;
Filed June 6, 1986).
*27.1 Financial Data Schedule.
*99.1 Form of Press Release dated as of August 8, 1997.
*99.2 Form of Notice of filing petition for reorganization sent to holders
of ELCOA's debt securities.
* Filed with this Form 10-K.
b) Reports on Form 8-K
(1) There were no reports filed on Form 8-K during the three months ended
April 30, 1997.
44
46
INDEPENDENT AUDITOR'S
REPORT ON FINANCIAL STATEMENT SCHEDULE
In connection with our audits of the financial statements of Equipment
Leasing Corporation of America at April 30, 1997 and 1996 and for each of the
three years in the period ended April 30, 1997, we have also audited the
financial statement schedule included in the Form 10-K as listed in Item
14(a)(2).
In our opinion, the financial statement schedule mentioned above presents
fairly the information required to be stated therein.
/s/ Cogen Sklar LLP
Cogen Sklar LLP
Bala Cynwyd, Pennsylvania
July 1, 1997
45
47
EQUIPMENT LEASING CORPORATION OF AMERICA
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Additions Deductions
Balance at --------- ----------
Beginning Charged Amounts
of to Costs Written Balance at
Description Period and Expenses Off End of Period
- ----------- ---------- ------------ -------- -------------
Allowance for Doubtful Lease
Receivables (A)
- ---------------
For the Fiscal Year
Ended April 30, 1995 $1,725,711 $1,057,634(B) $1,257,058(C) $1,526,287
For the Fiscal Year
Ended April 30, 1996 $1,526,287 $ 957,063(B) $ 731,829(C) $1,751,521
For the Fiscal Year
Ended April 30, 1997 $1,751,521 $1,044,080(B) $ 986,675(C) $1,808,926
<FN>
(A) Represents estimated losses that will be incurred in the collection of
receivables from direct finance leases.
(B) Provisions for estimated losses calculated on the basis of amounts
necessary to provide for anticipated losses on delinquent leases on an
impairment basis.
(C) Write-offs of bad-debts, net of recoveries.
46
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report as amended to
be duly signed on its behalf by the undersigned, thereunto duly authorized.
/s/ William Shapiro
----------------------------------------
William Shapiro, President
EQUIPMENT LEASING CORPORATION OF AMERICA
Date: August 13, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title
/s/ William Shapiro
- ----------------------- President, Chief Executive,
William Shapiro Financial and Accounting Officer
Date: August 13, 1997
/s/ Kenneth S. Shapiro
- ----------------------- Vice-President
Kenneth S. Shapiro
Date: August 13, 1997
/s/ Lester D. Shapiro
- ----------------------- Secretary, Treasurer
Lester D. Shapiro and Director
Date: August 13, 1997
/s/ Nathan Tattar
- ----------------------- Director
Nathan Tattar
Date: August 13, 1997
/s/ John B. Orr
- ----------------------- Director
John B. Orr
Date: August 13, 1997
/s/ Adam Varrenti, Jr.
- ----------------------- Director
Adam Varrenti, Jr.
Date: August 13, 1997
49
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended Commission File Number
April 30, 1997 33-65814
EQUIPMENT LEASING CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
DELAWARE 23-2408914
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
501 SILVERSIDE ROAD, STE. 76, WILMINGTON, DE 19809
(Address of principal executive offices) (Zip Code)
EXHIBIT VOLUME
50
EQUIPMENT LEASING CORPORATION OF AMERICA
EXHIBIT INDEX
10-K
Exhibit Sequential
Number Description Page Number
- ------- ----------------------------------------------------- ------------
27.1 Financial Data Schedule. 51
99.1 Form of press release dated as of August 8, 1997. 52
99.2 Form of notice of filing petition for reorganization
sent to holders of ELCOA's debt securities. 53