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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K405
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended Commission file number
APRIL 30, 1995 2-65101
WALNUT EQUIPMENT LEASING CO., INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-1712443
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
SUITE 2128, 101 WEST CITY AVENUE, BALA CYNWYD, PA 19004
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610)_668-0700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes / X / No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / X /
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within 60 days
prior to the date of filing.
No voting stock is held by non-affiliates of the Registrant.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of June 30, 1995, there were 1,000 shares of the Registrant's common
stock, $1.00 par value, outstanding. The Registrant has no other
classes of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
Item 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Walnut Equipment Leasing Co., Inc. (the "Company" or "Walnut"), which was
incorporated in Pennsylvania in 1969, commenced business in 1960 through its
predecessor and sole common stockholder, Walnut Associates, Inc., a Delaware
Corporation. It primarily engages in the business of acquiring general
commercial equipment for lease throughout the United States. Effective April
29, 1977, the Company changed the situs of incorporation to the State of
Delaware. The Company conducts its operations principally through
wholly-owned subsidiaries in 48 states. The term "Company" refers
collectively to the present Delaware corporation, its predecessors and its
wholly-owned subsidiaries, unless the context otherwise indicates. On May 6,
1986, the Company formed a subsidiary, Equipment Leasing Corporation of
America ("ELCOA") which the Company capitalized on May 23, 1986 with equipment
costing $1,000,000 and related direct financing leases, in exchange for all of
that subsidiary's voting common stock. ELCOA is operated as a separate
entity, with its own Board of Directors, a majority of the members of which
are independent of the Company.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company conducts business in only one industry segment, the leasing of
commercial equipment. See the Consolidated Financial Statements included in
Item 8 to this report.
The Company's principal business is the acquisition of commercial and
industrial equipment for business use which it leases under full-payout direct
financing leases to what it considers credit-worthy lessees. See "Marketing"
and "Credit Policy." The Company services the needs of manufacturers and
distributors of small commercial equipment by offering them the opportunity to
use leasing as a sales tool. See "Marketing." The Company acquires the
equipment only after leases have been consummated. The Company ordinarily
writes leases for periods of one to five years for equipment costing $750 or
more, but which did not usually exceed $6,000. The lease agreements entered
into between the Company and the lessees contemplate the payment of funds
sufficient to recover the Company's investment and to provide a profit over
the terms of the leases. The Company recognizes as income over the entire
term of the leases the difference between the total rents scheduled to be
collected along with the estimated residual value of the equipment at the end
of the lease term, less the cost of the equipment. The Company recognizes
income from each lease over it's respective term, even if payments are
delinquent for any number of months. The Company sets aside from its income a
provision for anticipated losses from delinquencies. See Footnote 1 to the
Consolidated Financial Statements. The lease agreements do not contain an
express purchase option. The Company has offered the equipment for sale to
the former lessee after expiration of the lease at approximately 10% of the
Company's original equipment cost, which is sufficient to recover the recorded
residual value. Substantially all leased equipment has been sold to the
lessees at termination of their leases. See "Marketing".
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The leases require that the lessee maintain and insure the equipment. The
Company disclaims any obligation to repair or maintain the equipment. The
lessee relies solely on warranties or services from the vendor or the
manufacturer of the equipment. In leasing equipment the Company relies
principally on the credit of the lessee to recapture its cost of equipment
rather than the residual value of the equipment. Due to the small size of
each individual lease, the Company does not conduct an actual physical
inspection of the equipment prior to or during the term of the lease, but
relies instead upon both written and oral representations by the lessees
regarding satisfactory acceptance of the equipment, prior to commencement of
the lease and payment of the vendor's invoice by the Company. The Company
carries its own insurance in the event the lessee fails to insure, and also
maintains insurance which management believes is adequate against liability
from the anticipated use, or loss by fire or otherwise of the equipment by the
lessees. These leases are commonly referred to as direct finance leases.
The Company uses a standard non-cancellable lease for its direct finance
leases, the terms and conditions of which vary slightly from transaction to
transaction. These leases are commonly referred to as "full-payout", "hell or
high water", or finance leases pursuant to Article 2A of the Uniform
Commercial Code. As such, the lessees are unconditionally obligated to make
monthly rental payments to the Company irrespective of the condition, use, or
maintenance of the equipment under lease. In management's opinion, the
lessees have no legal or equitable defenses that may be asserted against the
Company in the event the leased equipment does not function properly. In
substantially all cases, the lease states that lessees are obligated to (1)
remit all rents due, regardless of the performance of the equipment; (2)
operate the equipment in a careful and proper manner and in compliance with
applicable governmental rules and regulations; (3) maintain and service the
equipment; (4) insure the equipment against casualty losses and public
liability, bodily injury and property damage; and (5) pay directly or
reimburse the Company for any taxes associated with the equipment, its use,
possession or lease, except those relating to net income derived by the
Company therefrom.
Under terms of the lease contract, the lessees are prohibited from
assigning or subletting the equipment or appurtenant lease to any third party
without the express written consent of the Company. The lease provides that
the Company, in the event of a default by the lessee, may declare the entire
unpaid balance of rentals due and payable immediately and may seize and remove
the equipment for subsequent sale, release or other disposition. During the
fiscal year ended April 30, 1995, the Company entered into 2,170 direct
finance leases which had an average initial term of approximately 34 months
representing aggregate contractual lease receivables of $10,189,624. Of
these, a technical event of default in the terms of the lease contract
occurred in 688 leases having an aggregate contractual lease receivable of
$2,840,871, of which 109 having an aggregate contractual lease receivable of
$314,225 (included in the 688 leases) were serious enough to require the
Company to declare the entire unpaid balance of rentals due and payable
immediately. See "Marketing".
The Company has, from time to time, leased equipment under renewable
leases which do not contemplate full recovery of the Company's original costs
during their initial one year term. These leases are referred to as operating
leases, intended primarily for large corporate and governmental lessees that
are restricted from entering into leases with terms longer than one year. The
leases are automatically renewed for an additional year, and so on from year
to year, unless terminated upon ninety days' prior written notice.
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Under the operating lease the lessee is granted an option to purchase the
equipment for the original invoice price less a credit for a portion of the
rentals paid. The Company requires equipment vendors to refrain from
replacing for two years the equipment should the lessee cancel after the
initial one year term. The monthly rental is calculated as 6% of the
equipment cost monthly. Total annual rentals charged by the Company equals
72% of the original equipment cost. The repurchase price is equal to the
original cost of the equipment, less a credit for a portion of the rentals
received from the lessee. There are no assurances that the Company's costs
will be recovered. As of April 30, 1995, the net book value of equipment
subject to operating leases was $23,316. As of that date, the Company had
contracts for operating leases in the aggregate remaining balance of $3,346
all of which are due during the fiscal year ended April 30, 1996.
The Company (including ELCOA), as of April 30, 1995, owned 8,474 direct
financing leases with an aggregate balance of $18,829,268, on a consolidated
basis, with an average lease receivable balance of $2,222. Of these leases,
467 had balances between $6,000 and $9,999 with an aggregate balance of
$3,423,095, and 123 had balances in excess of $10,000 with an aggregate
balance of $1,814,062. Leases over $6,000 accounted for 7.0% of the total
number of leases outstanding and 27.8% of the total dollar amount of lease
receivables outstanding at April 30, 1995. On occasion, the Company enters
into more than one lease agreement with a particular lessee. The three
largest lessees held leases with aggregate balances of $42,606, $40,095 and
$34,518 as of April 30, 1995. Accordingly, no single lessee represents over
.2 percent of the outstanding lease portfolio. As of April 30, 1995, ELCOA
owned 7,964 direct financing leases which had an aggregate lease receivable
balance of $17,267,612, and an average lease receivable balance of $2,168. Of
these leases, 404 had balances between $6,000 and $9,999 with an aggregate
balance of $2,950,921 and 88 had balances in excess of $10,000 with an
aggregate balance of $1,348,968.
The Company purchases its equipment for lease from a variety of equipment
vendors located throughout the United States, none of which was responsible
for supplying the Company with 5% or more of its equipment purchases. See
"Marketing". There are no back-log orders for equipment purchase commitments.
The Company believes it is in a competitive position within its industry
because of its ability to carry a large number of small equipment leases
through the extensive utilization of electronic data processing and its "back
office" facilities. Electronic data processing includes proprietary computer
programs developed exclusively for the Company, which enable it to maintain
detailed records of each lease contract presently outstanding and can likely
service by at least ten fold its present number of contracts without
modification. Other "back-office" facilities include credit investigation,
documentation, bookkeeping and collection departments, all centrally located
in the Company's headquarters which eliminate the need to contract outside
services to perform these duties now and in the future. However, future
growth is dependent upon sources of adequate financing for the cost of newly
acquired equipment, including the proceeds from the sale of Senior Thrift
Certificates and the sale of debt securities by ELCOA, the Company's
wholly-owned subsidiary. See "Methods of Financing."
During the three fiscal years ended April 30, 1995, 1994, and 1993, the
gross rents charged over the "net investment" in direct finance leases were
145%, 147% and 149%, respectively. Gross rents are calculated as the
aggregate rentals contracted to be received over the terms of all leases
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entered during the respective years, and are not on an annual basis. The
overall decrease in interest rates over the three fiscal years ended April 30,
1995 contributed to a small decrease in the overall rates charged on new
leases. Factors considered by the Company in determining the rents to be
charged are the net equipment cost, marketing expenses, credit investigation,
document processing, invoicing and collections, potential bad debt write-offs,
the Company's cost of funds, term of the lease, and a profit margin.
The Company's leasing activities are not generally oriented towards
creating tax benefits, and therefore changes in recent tax legislation since
1986 have only a marginal benefit to the Company. The Company believes that
some of the Company's competitors lost the benefit of using excess tax
deductions and credits generated by their leasing operations to offset income
from other sources, which in the past allowed them to offer lower leasing
rates than the Company. To the extent the changes mentioned above reduced the
benefits of equipment ownership, the Company believes that businesses might be
more inclined to lease because deductibility of rental payments by the lessees
remain unaffected, while purchases no longer provide certain tax advantages.
Management believes that changes under the Tax Reform Act of 1986, as amended,
have had no material impact on the Company's operations.
MARKETING
Since its inception, the Company has concentrated on seeking lessees
desiring to lease equipment costing $6,000 or less under direct finance
leases, because it believes that there is less competition for small leases.
In addition, the Company is able to spread risk of loss from defaulted leases
over a greater number of leases. It leases items such as office equipment,
business machines, graphic arts equipment, scientific and medical
instrumentation, material handling equipment, microfilm equipment, automobile
test equipment, cash registers, restaurant and food-service equipment, and
other business, industrial and commercial equipment and does not concentrate
in any one type. The equipment purchased is primarily newly manufactured
equipment, but on occasion the Company will purchase used equipment for lease
at its then fair market value. The equipment is located throughout the United
States without undue concentration in any one area. The Company's historical
experience indicates that the equipment under lease does not generally become
obsolete at the conclusion of the lease term.
The Company concentrates its marketing effort to reach salesmen, dealers
distributors and branch offices of companies selling equipment similar to that
described above for lease to appropriate lessees. The Company has previously
used regional offices, direct mail programs, and telemarketing, all of which
have been phased out in favor of the Company's current marketing strategy that
emphasizes direct contact with manufacturers in promoting leasing as a sales
tool to their dealers. The Company believes that with the cooperative efforts
of equipment manufacturers, an increased number of dealers and distributors
(i.e. "vendors") will become aware of the option of using leasing as a sales
tool, which in turn will increase the generation of new leases by the Company.
The Company currently actively conducts business on a monthly basis through
approximately 180 equipment vendors, distributors, and branch outlets of
manufacturers, none of which supply more than 5% of the Company's new
business.
The following table reflects the aggregate dollar amount of rentals
represented by new leases and the number of such leases written during each of
the last three years, on a quarterly basis.
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<TABLE>
<CAPTION>
Fiscal Years Ended April 30,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Aggregate Lease Rentals $10,189,624 $10,168,874 $11,293,059
Number of New Leases 2,170 2,242 3,060
Average Amount per New Lease $4,696 $4,536 $3,691
New Leases
Entered Quarterly
- -----------------
First Quarter $ 2,824,902 $ 2,744,959 $ 3,464,883
Second Quarter 2,371,098 2,299,854 3,067,690
Third Quarter 2,596,150 2,286,672 2,518,282
Fourth Quarter 2,397,474 2,837,389 2,242,204
</TABLE>
During the beginning of the third quarter of the fiscal year ended April
30, 1993, management eliminated certain types of equipment that it previously
considered for lease, such as credit-card machines, commercial water coolers
and security surveillance equipment. Management believed that these, as well
as other types of equipment it considered to be over-priced, were a factor in
the increased amount of delinquencies during the fiscal year ended April 30,
1993. In addition, management restricted the submission of lease applications
through brokers as the ratios of consummated leases to the number of
applications submitted was unacceptable. These factors, in conjunction with a
weak nationwide economy, led to the decline in new lease volume during the
remainder of the fiscal year, which trend continued into the fiscal years
ending April 30, 1994 and 1995. The Company estimates that its share of the
"small-ticket" leasing market for commercial equipment costing less than
$25,000 is less than 1%.
During the fourth quarter of the fiscal year ended April 30, 1994, the
Company refined its marketing efforts aimed at equipment manufacturers,
encouraging them to cooperate with the Company in educating their dealer or
branch office distribution networks with using leasing as a sales tool.
During the last three months of the fiscal year ended April 30, 1995, the
Company began to target equipment manufacturers with sales in excess of
$5 million and an established distribution network to offer them a "private
label lease program". These programs are intended to further increase the
Company's marketing efforts. For a more complete discussion of these efforts,
see "Further Refinements in Marketing Strategy and Efforts to Reduce Operating
Losses" on page 22. Management anticipates that these programs will continue,
and as other leasing companies raise their minimum transaction size, the
Company expects to gain from an increase in new lease applications being
submitted. As noted by the table above, the average new lease receivable has
increased approximately 27% over the three fiscal years ended April 30, 1995,
and management expects this trend to continue as its cooperative efforts with
equipment manufacturers mature. The decision to eliminate leases for credit
card machines and water coolers during the fiscal year ended April 30, 1993
also contributed to this trend.
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The Company markets its leases throughout the United States. The
following is a breakdown as of April 30, 1995 of the original cost of
equipment, net of residual value, that the Company owns or manages on behalf
of ELCOA in various areas of the United States. Approximately $23,702,713 in
original equipment cost is owned by ELCOA, and managed by the Company. See
"BUSINESS - Methods of Financing."
<TABLE>
<CAPTION>
Amount %
----------- ------
<S> <C> <C>
New England $ 2,805,186 11.02
Mid Atlantic 7,779,174 30.56
Southeast 4,533,609 17.81
Midwest 2,593,906 10.19
South 2,227,349 8.75
Rocky Mountain 534,564 2.10
West Coast 1,985,522 7.80
Southwest 2,996,102 11.77
----------- ------
$25,455,412 100.0%
=========== ======
</TABLE>
CREDIT POLICY
In order to conduct a business dealing in leases principally under $10,000,
the Company has developed what it considers to be an efficient method of
determining credit risks. The Company bases its decision to accept an
application from a potential lessee on the Company's assessment of the lessee's
ability to meet its obligations for payments as set forth under the lease and
not upon the resale value of the equipment in the event of the lessee's
default. The Company's lessees range from newly formed businesses (less than
two years in business) to major corporations. Lease rental rates are
established based upon the Company's assessment of credit risk, as newly formed
and smaller businesses pay a higher rate in general than would established
companies. As the Company entered into an excess of 2,100 leases to all types
and sizes of businesses during the fiscal year ended April 30, 1995, it is
unable to quantify with any certainty the general material characteristics of
all of its lessees. The Company believes that at least a majority of its
lessees are small to medium size businesses with between $100,000 and
$2,000,000 in annual sales and less than 50 employees. The Company relies
heavily on bank references, trade references, personal credit reports on the
principals of the lessee, number of years in business, property searches and
other credit bureau reports. In addition to the credit investigation, the
Company generally requires the owners and principal shareholders (and their
spouses) of sole proprietorships, partnerships, and closely-held corporations
which have been in business less than three years, or have fewer than 20
employees, to personally guarantee the obligations of the lessee. Additional
rental prepayments are required if the lessee has been in business for less
than two years. Most credit decisions are made within one day of the initial
credit application. The Company has found that credit evaluation is essential
as the equipment has a substantially reduced value on resale or releasing.
Consequently, it must rely primarily on its initial credit judgment. The
Company employs 7 people in its Credit and Collection Departments, and has a
policy of litigating all claims against lessees for unpaid rentals. These
claims are usually settled in favor of the Company, as the lease contract
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provides that in the event of default by the lessee, the Company is entitled to
the accelerated balance of the remaining contractual lease payments, late
charges and, in the event of litigation, reimbursement for collection costs and
reasonable attorney's fees. Historically, the amount recovered from
collections of delinquent leases has exceeded the legal fees incurred in
connection therewith. The Company reimbursed the law firm of William Shapiro,
Esq., P.C., an affiliate, for payroll costs of its staff attorneys and any
required advances for court costs, and did not pay any other fees on either a
contingent or hourly basis. Neither William nor Kenneth Shapiro who are
officers and directors of the Company are included in the law firm's payroll.
William Shapiro is the sole shareholder of the law firm. See Note 10 to the
Consolidated Financial Statements.
Prior to May 1, 1988, at the inception of each new lease, an allowance was
established for potential future losses. The level of the allowance was based
upon historical experience of collections, management's evaluation of estimated
losses as well as prevailing and anticipated economic conditions. Management
evaluated the adequacy of the resulting allowance annually. The allowance is
currently based upon a periodic evaluation, performed at least quarterly, of
delinquent finance lease receivables to reflect anticipated losses from
delinquencies and impairments that have already occurred. See Note 1 to the
Consolidated Financial Statements. During the three fiscal years ended April
30, 1995, 1994 and 1993, the allowance for doubtful accounts was increased
annually by provisions in the amounts of $1,635,963, $792,879 and $1,143,471,
respectively. The amounts written off in each of the three fiscal years ended
April 30, 1995, 1994 and 1993 were $2,111,032, $897,098 and $932,194,
respectively. The Company aggressively takes legal recourse with respect to
each delinquent lease irrespective of the amount at controversy and believes
this approach is an important part of the collection effort. Obligations are
not written off until there is either an adverse court decision, bankruptcy or
settlement, and local counsel has determined that the obligation cannot be
recovered.
The Company makes a practice of assessing and collecting late charges on
all delinquent accounts, if possible. Late charges are assessed on all
delinquent accounts at the rate of 5% monthly of the delinquent past due
payments. Late charges collected and included in revenue for the fiscal years
ended April 30, 1995, 1994 and 1993 were approximately $418,000, $372,000 and
$323,000, respectively. Increased emphasis on collections accounted for the
increase in late charges for the three fiscal years ended April 30, 1995. In
addition, the Company has historically recovered at least the recorded amount
of residual values at the conclusion of each lease, unless written-off as
uncollectible. See Note 1 to the Consolidated Financial Statements.
The Company believes that its loss experience and delinquency rate are
reasonable for its operations. The Company's rates charged on its leases tend
to be higher than industry averages due to the relative lack of competition in
small-ticket leasing. The higher rates are intended to offset the increased
credit risks and processing costs associated with small-ticket leases.
Although the Company's loss experience measured as a percentage of net
charge-offs to average lease receivables outstanding is consistent with
industry averages, its delinquency rate is higher than industry averages
because of its market, i.e. primarily small to medium sized business. In
addition, delinquent receivable balances appear higher than industry average
because of the Company's decision to pursue delinquent lessees until all
collection efforts have been completely exhausted.
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The implications of these higher percentages require the Company to
continue its collection efforts diligently to minimize its actual losses from
delinquent accounts. The Company notes that because of recent changes in
bankruptcy laws and delays in state court systems nationwide, the time
necessary to litigate and collect on any judgment has increased during the past
five years. Experience over the five years, measured as a percentage of net
charge-offs, remained fairly constant. The increase in net charge-offs during
the fiscal year ended April 30, 1995 resulted from the exhaustion of legal
efforts to collect certain delinquencies arising prior to May, 1989, for which
management believed further attempts to collect to be futile. Management
attributes the increase during fiscal 1993 from fiscal 1992 to the increased
size of the Company's outstanding lease portfolio, and losses from problems
associated with discontinued types of equipment being leased. See "Marketing".
The management of receivables during the past three years in light of
relatively weak economic conditions and overextension of small and medium-size
businesses continues to pose a demanding challenge upon financial institutions
in general. Business failures, bankruptcies, and the trend toward slower
payment increased when compared to prior years. The Company's lessees, many of
them owners of small and medium-sized businesses, have been particularly
affected by the economic malaise during the past three fiscal years. However,
because of the diversification of the Company's leases in dollar amount and
geographical location, any continued weakening in the economy should have no
material impact on the Company's overall cash flow. The collection of
delinquent lease balances remains one of the Company's top priorities,
resulting in a shifting of staff priorities to the collection and legal
functions.
The allowance for doubtful accounts was 7.5% of total finance lease
receivables at April 30, 1995 which management believes is adequate for future
write-offs on the Company's aggregate lease receivables as of April 30, 1995.
See Note 1 to the Consolidated Financial Statements. Charge-offs as a
percentage of average aggregate future lease receivables were 10.61%, 4.20%,
4.37%, 2.55%, and 2.14% for the fiscal years ended April 30, 1995, 1994, 1993,
1992 and 1991, respectively. Gross chargeoffs increased during the fiscal year
ended April 30, 1993 as a result of the change from a manual to computerized
legal tracking system in the legal area, prompting additional charge-offs of
leases deemed uncollectible as a result of an additional review of all
delinquent accounts undertaken during the conversion. During the fiscal year
ended April 30, 1995, management conducted an extensive review of the
collectibility of all past due accounts, and further increased the amount of
write-offs in those situations where further costs in pursuing legal remedies
in collection were unwarranted. This analysis considered the post-judgment
filing costs associated with the Company's methods of collection, including but
not limited to bank, wage, personal property, and real estate foreclosure, and
the possibility of recovery exceeding those costs based upon the financial
condition of the lessee. As a result, the amount of write-offs during the
fiscal year ended April 30, 1995 represents a dramatic increase, while the
amount of past-due accounts decreased proportionately. While the writeoffs of
delinquent lease receivables increased dramatically during the fiscal year
ended April 30, 1995, management considers the type of leases previously
entered into to be a contributing factor to the increased writeoffs. As the
credit quality and character of new leases to be generated improves, the
percentage of future writeoffs is expected to decrease as the need for
continuing provisions for doubtful accounts is reduced.
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ANALYSIS OF DELINQUENCIES
The Company's collection department follows a seven day cycle with regard
to collection of delinquent leases and maintains status reports of each
contact. During the fiscal year ended April 30, 1994, management integrated
its data processing capabilities with its collection efforts to make the
collection effort more efficient. On the 7th, 14th and 21st day after a
delinquent lease payment is due, a reminder is sent requesting payment. On the
28th and 35th day after a payment is due, a written collection letter is sent
to the lessee. On the 42nd day after the due date, a mailgram is sent from the
collection department demanding payment of the delinquent balance. On the
49th, 56th and 63rd day after payments are initially due, additional letters
are sent demanding immediate payment. On the 70th and 77th day, an attorney's
letter is sent informing the lessee that suit will commence if payment is not
received immediately. On the 84th day after the due date, an attorney letter
informing the lessee of immediate suit is sent. On the 91st day, the case is
referred to local counsel for suit. As of April 30, 1995 and 1994,
approximately $3,723,593 and $4,709,748, respectively, of direct finance lease
receivables based on a strict total contractual basis of the aggregate balance
remaining of each lease (not based upon recency of last payment) were 12 or
more months past due. During the fiscal years ended April 30, 1995 and 1994,
net collections from cases referred to local attorneys for suit were
approximately $1,379,000 and $1,626,000, respectively. The amount collected
during fiscal 1995 decreased in proportion to the overall decrease in past due
lease receivables reflected in the chart which follows. An increase during
fiscal 1994 resulted from changes in the attorneys engaged in the collection of
delinquent receivables and management's efforts in streamlining the procedures
employed in collections by local attorneys. The results of these efforts are
reflected in the decrease in payments delinquent four or more months past due
in the table which follows.
The Company recognizes as income over the entire term of the leases the
difference between the total rents scheduled to be collected along with the
estimated residual value of the equipment at the end of the lease term, less
the cost of the equipment. The income from all leases continue to be
recognized, even if payments are delinquent for any number of months. The
Company sets aside from its income a provision for anticipated losses from
delinquencies. See Footnote 1 to the Consolidated Financial Statements.
Leases are written-off only if there is an adverse court decision,
bankruptcy, settlement, or unwarranted further costs of collecting
insignificant lease balances, and assigned counsel in the state where the
lessee does business has determined that further action in recovering the debt
is unwarranted. The Company does not repossess equipment on underlying
delinquent leases (except for certain instances under federal bankruptcy laws)
which may be over 24 months past due as repossession would compromise the
Company's ability to recover a money judgment equal to the total remaining
payments due under the lease contract. When the equipment is returned to the
Company, the Company maintains an inventory of the repossessed equipment until
it can be re-let or sold. The Company writes down the carrying value of this
equipment to its forced sale value when it is repossessed. As of April 30,
1995, the Company maintained an inventory of repossessed equipment in the
amount of $90,854, and established reserves of $81,108 to reduce the carrying
value to the equipment's estimated, realizable forced sale value.
9
<PAGE>
<PAGE>11
<TABLE>
<CAPTION>
ANALYSIS OF DELINQUENCIES, continued
1995 1994 1993
$ % $ % $ %
------------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Aggregate Future Lease Receivables $18,829,268 100.0 $20,979,917 100.0 $21,739,601 100.0
Current 11,763,768 62.4 13,003,138 62.0 13,451,303 61.9
Past Due - Two Monthly Payments 1,178,983 6.3 1,017,320 4.8 1,074,887 4.9
Past Due - Three Monthly Payments 485,901 2.6 359,982 1.7 402,282 1.9
Past Due - Four or More Monthly Payments 5,400,616 28.7 6,599,477 31.5 6,811,129 31.3
Aggregate Future Lease
Receivables - Twelve or More
Months Past Due 3,723,593 19.8 4,709,748 22.4 4,762,421 21.9
Aggregate Future Lease
Receivables - Twenty-Four
or More Months Past Due 2,394,188 12.7 2,957,453 14.1 *
<FN>
* Information Unavailable
</TABLE>
10
<PAGE>
<PAGE>12
<TABLE>
ANALYSIS OF BAD DEBT WRITE-OFFS
<CAPTION>
Fiscal Years Ended April 30,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Aggregate Future
Lease Receivables $18,829,268 $20,979,917 $21,739,601
Provisions for
Doubtful Accounts 1,635,963 792,879 1,143,471
Gross Charge-Offs 2,118,607 899,690 932,546
Gross Recoveries 7,575 2,592 352
Net Charge-Offs 2,111,032 897,098 932,194
Average Outstanding Future
Lease Receivables 19,904,593 21,359,759 21,348,751
Percent of Net Charge-Offs
to Average Net Lease
Receivables 10.61% 4.20% 4.37%
Allowance for Doubtful
Lease Receivables 1,413,389 1,888,458 1,992,677
Percent of Allowance for
Doubtful Lease Receivables
to Aggregate Future Lease
Receivables 7.5% 9.0% 9.2%
Percent of Allowance for
Doubtful Lease Receivables
to Aggregate Future Lease
Receivables Past Due Four or
More Monthly Payments 26.2% 28.6% 29.3%
</TABLE>
METHODS OF FINANCING
The Company, in order to conduct its business, must have the financial
resources with which to purchase the equipment it leases. The funds for such
purchases have been generated during the past three fiscal years primarily
from net proceeds from sale of debt securities and receipt of rental payments.
In the past, the Company and ELCOA have registered and sold debt securities to
the public to fund the purchase of equipment for lease.
The Company intends to continue its registration and sale of Senior Thrift
Certificates during the next fiscal year. It does not intend to issue any
securities which will be senior to the Senior Thrift Certificates previously
issued and currently outstanding absent any unforeseeable circumstances,
although there are no restrictions on any such issuances of additional debt.
These senior debt securities will carry interest rates which are expected to
be lower than the outstanding subordinated debt obligations. ELCOA's offer
and sale of Demand and Fixed Rate Certificates are also expected to provide a
11
<PAGE>
<PAGE>13
substantial source of funds. Proceeds of sale from these securities will
replace existing indebtedness at maturity, and provide additional funds for
the purchase of equipment for lease. See Notes 3, 4 and 5 to the Consolidated
Financial Statements.
In an effort to increase the utilization of its lease origination,
administrative, and servicing capabilities, and to reduce the cost per lease
for providing these services, the Company could, in the future, market these
services on a fee basis to other companies, including financial institutions.
The Company believes this would allow it to offset certain fixed costs without
requiring increases in new funds raised through sales of its senior debt or
other financing.
During the fiscal years ended April 30, 1995 and 1994, the Company was
approached by other organizations seeking to sell all or a portion of their
small-ticket leasing portfolios, including savings & loans and other small
leasing companies. Management determined that the offers received were
unacceptable due to problems with documentations, original credit
investigations, lack of any warranties associated with any contemplated
purchase, and yield requirements of the sellers. During the fiscal year
ended April 30, 1995, management responded to a solicitation for bids to
purchase a portfolio of leases taken by the Pennsylvania Insurance Commission
in connection with the rehabilitation of a domiciled insurance company that
operated a small-ticket leasing company. While the Company determined that a
cash bid was unwarranted, it submitted an acceptable bid to collect and
administer the portfolio of leases for a contingency fee of fifty percent (50%)
of the gross leases collected. On May 18, 1995, the Company signed an
agreement with the Office of Liquidations and Rehabilitations of the
Pennsylvania Insurance Commission to collect and administer this portfolio of
approximately 75 leases having an aggregate lease balance of approximately
$1,800,000. Due to the material delinquencies associated with a portion of
this portfolio, management is not yet able to determine what, if any, amounts
are anticipated to be collected in the next fiscal year from its efforts.
However, management does not believe that it will incur any additional costs
in the administration and collection of these leases as a result of its
established back-office personnel and procedures.
The Company has been engaged to perform certain lease origination
functions (i.e. marketing, credit investigation, and documentation processing)
on behalf of its wholly-owned subsidiary, ELCOA, for which it will be paid an
amount equal to four percent (4%) of the gross equipment purchases by the
Company for lease, plus reimbursement for any direct selling expenses,
principally commissions to outside lease brokers. ELCOA purchases its
equipment for lease from Walnut. Walnut relies upon a variety of equipment
vendors located throughout the United States, none of which is responsible for
supplying 5% or more of their total equipment purchases. ELCOA relies upon
Walnut's facilities and staff to develop its leases. Under terms of an option
agreement, ELCOA has the continuing right of first refusal to purchase newly
acquired equipment, as well as the related leases, when Walnut has equipment
available for sale. This agreement continues until terminated by the mutual
agreement of the parties in writing. In addition, the Company will receive
six dollars fifty cents ($6.50) per month per outstanding lease for performing
certain administrative functions for ELCOA, notably invoicing of monthly
rentals, collection of lease receivables and residual values, management
guidance, personnel, financing, and the furnishing of office and computer
12
<PAGE>
<PAGE>14
facilities, under a Service Contract. All rentals received on behalf of ELCOA
are segregated, processed and deposited into an escrow account pursuant to a
written agreement. Management believes that the terms of purchase are at
least as favorable as those available from unaffiliated third parties.
It should be noted that although the Company's rental income from its
lessees is fixed at the inception of each lease, its net income from a given
lease is affected by changes in the interest rate it pays on borrowed funds.
To the extent that the interest rates charged by any financial institution
that may hypothecate leases or the interest rates that the Company pays on its
debt securities increase, the Company must pay any such increased cost without
having the ability to increase its rental charges on existing leases.
ELCOA registered for sale on January 6, 1995 a $29,000,000 offering of
Demand and Fixed Rate Certificates. As of June 1, 1995, approximately
$10,000,000 of these securities had been sold. ELCOA intends to register for
sale during the fiscal year ending April 30, 1996 additional debt securities
to supplant the balance remaining to be sold. ELCOA's sale of additional debt
securities, which are similar to Walnut's Senior Thrift Certificates, will
allow the Company to increase the funds of the consolidated group thereby
enabling the Company to increase the amount of equipment purchased for lease.
The Company anticipates ELCOA's cost of funds in connection with the sale of
ELCOA's securities to be less than the Company's, thus allowing the Company
and ELCOA to maintain competitive lease rates in the market to attract new
business. This will result in increased cost efficiencies in lease
origination and administration expenses to the consolidated group, as fixed
costs of operations would be allocated over a greater number of new leases
generated.
ELCOA's costs of operations are in direct proportion to the size of its
lease portfolio. Since ELCOA is a subsidiary of the Company, both companies
are consolidated for financial statement purposes in accordance with generally
accepted accounting principles, whereby all intercompany accounts are
eliminated in the preparation of consolidated financial statements. The
transfer of assets that capitalized ELCOA did not change the total assets,
liabilities, or shareholders' deficit of the Company on May 23, 1986.
However, in the event of the reorganization or liquidation of the Company, the
claims of holders of ELCOA's debt securities would have a higher priority than
claims which would be asserted by a holder of the Company's debt against
ELCOA's assets.
To the extent that the volume of new lease receivables to be generated in
the future increases as management anticipates, the Company believes that
lease securitization may provide both the additional funding for and increased
revenues in conjunction with future growth. Reference is made to the "Summary
of the Offering" section of the prospectus dated January 13, 1995 relative to
the offering and sale of the Company's Senior Thrift Certificates. The
Company anticipates that such sales under a lease securitization program may
commence during the fiscal year ending April 30, 1996, although no such sales
have occurred to date, as a result of a lack of any increase in new lease
volume, and excess cash on hand.
13
<PAGE>
<PAGE>15
EMPLOYEES
The Company employs approximately 60 full and part-time persons and
considers its relationship with its employees to be satisfactory.
DATA PROCESSING
Almost all of the Company's bookkeeping or recordkeeping is performed by
electronic data processing utilizing programs developed and owned by Financial
Data, Inc., a subsidiary of Walnut Associates, Inc. Walnut Associates Inc. is
an affiliate of ELCOA and also the owner of all of the outstanding stock of
the Company. See Footnote 10 to the Consolidated Financial Statements. The
programs are designed to permit the growth of the Company's business without a
significant increase in bookkeeping or recordkeeping costs. In the opinion of
management, the Company maintains sufficient duplicate records to safeguard
its information.
COMPETITION
Equipment leasing and related businesses are highly competitive, and
competition may increase. A number of concerns are engaged in the same types
of business as the Company, including: (1) finance divisions, affiliates or
subsidiaries of suppliers which sell products leased by the Company; (2) banks
or their affiliates; (3) other leasing and finance companies, including ELCOA;
and (4) independently-formed partnerships operated for the specific purpose of
leasing equipment. Many of these organizations have greater financial or
other resources than the Company and, therefore, may be able to obtain funds
on terms more favorable than those available to the Company. This may permit
such organizations to offer lease terms which the Company could not match.
Also, such organizations may have competitive advantages including their
affiliation with vendors and their nationwide leasing organizations, or their
ability to offer "floor planning" programs which is the financing of an
equipment vendor's unsold inventory.
The Company seeks to compete primarily on the basis of service (by
providing simplified documents, prompt credit decisions, and by accepting a
multitude of types of equipment for lease) to a particular segment of the
industry, (i.e. small-ticket items), and by making its services available
nationwide (both urban and rural). It does not limit itself geographically to
regional sales offices as do some of its competitors, but extends its services
through use of toll-free telephone lines, facsimile transmission, and the
mail. The Company cannot compete for larger ticket items where rate is a
factor, because of its higher cost of funds, and therefore must limit itself
to the small-ticket market.
Item 2. PROPERTIES
The Company subleases from Walnut Associates, Inc. approximately 12,600
rentable square feet at its headquarters located at 101 W. City Avenue, Bala
Cynwyd, PA. The lease for office space terminates on August 31, 1995 and will
not be renewed. The Company is presently in the final stages of negotiation
for new office space beginning September 1, 1995. Walnut Associates, Inc.
sublets 252 square feet to Welco Securities, Inc., 768 to Financial Data,
Inc., and 1,344 to the law offices of William Shapiro, Esq., P.C., all of
14
<PAGE>
<PAGE>16
which are affiliates of the Company. Future minimum rental payments from the
Company are anticipated to be due as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
April 30, Amount
------------------ ------
<S> <C>
1996 $ 65,636
</TABLE>
The Company also leases approximately 4,300 square feet of warehouse and
print shop facilities at 15 South 4th Street, Fernwood, Pennsylvania, from
Walnut Associates, Inc., the Company's sole shareholder of common stock. The
terms of the lease provide for an annual rental of $3.00 per square foot
payable at $1,075 per month for the period from April 1, 1992 through March
31, 1997, with an option for an additional five year renewal thereafter.
Commitments for rental payments are due as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
April 30, Amount
------------------ ------
<S> <C>
1996 $12,900
1997 11,825
-------
Total $24,725
=======
</TABLE>
ELCOA leases its own office space and conference room facilities at 501
Silverside Road, Wilmington, Delaware. The lease for this space continues on
a month to month basis with 60 days notice.
Item 3. LEGAL PROCEEDINGS
There are no legal proceedings or actions pending or threatened against
the Company or to which its property is subject, which management believes
would have a materially adverse effect on the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
As of June 30, 1995, the Company's common stock was held by one entity as
set forth in Item 12 of this Form 10-K. There is no public market for the
Company's common stock. The Company has paid no dividends during the past two
years with respect to its common stock.
15
<PAGE>
<PAGE>17
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The following summarizes certain financial information with respect to the Company for the five years ended April 30, 1995,
and should be read in conjunction with the discussion at "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and the "Consolidated Financial Statements."
<CAPTION>
Year Ended April 30,
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Operating Revenue $3,979,146 $3,960,337 $4,027,780 $3,577,772 $2,831,226
Interest Expense, net 4,313,253 4,094,189 3,637,908 3,205,121 2,775,715
Net Loss (5,064,166) (4,082,175) (3,864,576) (3,078,250) (2,950,490)
BALANCE SHEET DATA:
Total Assets 25,443,367 25,479,099 22,277,616 18,246,128 14,891,656
Demand, Fixed Rate, and
Money Market Thrift
Certificates 24,521,875 21,810,991 18,041,504 12,867,678 8,777,787
Senior Thrift
Certificates 18,783,578 16,650,670 14,085,849 11,713,791 9,631,291
Subordinated Thrift
Certificates 6,025,366 6,038,409 6,138,830 6,390,450 7,046,487
Subordinated Debentures 5,858 5,858 7,718 7,718 11,500
Shareholders' Deficit (2) (30,043,116) (24,978,950) (20,896,775) (17,030,006) (13,948,947)
OTHER FINANCIAL DATA
% of Interest Expense
to Operating Revenue 108.4% 103.4% 90.3% 89.6% 98.0%
Ratio of Earnings
to Fixed Charges (1) --- --- --- --- ---
Aggregate New Leases
Entered 10,189,624 10,168,874 11,293,059 13,218,230 8,771,452
Aggregate Finance Lease
Receivables 18,829,268 20,979,917 21,739,601 20,957,501 16,297,123
<FN>
(1) The ratios of earnings to fixed charges were computed by dividing pre-tax income plus fixed charges and preferred
dividend requirements by the amount of fixed charges and preferred dividend requirements. For the years ended April 30,
1995, 1994, 1993, 1992, and 1991, the ratio of earnings to fixed charges was less than "1." During those years, earnings
were inadequate to cover fixed charges (including preferred dividend requirements) by $5,064,166, $4,082,175, $3,866,769,
$3,081,059, and $2,989,980, respectively.
(2) See "Consolidated Statements of Changes in Shareholders' Deficit" for the three fiscal years ended April 30, 1995.
</TABLE>
16
<PAGE>
<PAGE>18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE YEARS ENDED APRIL 30, 1995
REVENUES FROM LEASE CONTRACTS AND RENTALS
The consolidated financial statements and references herein include the
operations and obligations of the Company, including ELCOA, its wholly-owned
subsidiary. Total operating revenues were $3,979,146, $3,960,337, and
$4,027,780 for the three fiscal years ended April 30, 1995, 1994, and 1993,
respectively. Revenues increased by $18,809, or .47% during the fiscal year
ended April 30, 1995 as a result of the increase in new leases generated during
the fiscal year. Revenues decreased during the fiscal year ended April 30,
1994 as a result of the decline in both the level of new leases originated
during the year in comparison to the prior year, and the reduction in the
outstanding amount of direct finance lease receivables. See Footnote 1 to the
Consolidated Financial Statements. Management attributes the increased
operating losses during fiscal 1995 and 1994 to either stagnant or decreasing
revenues in conjunction with an increase in interest expense, due in part to
excess interest paid on higher cash balances awaiting investment in leases over
yields from investment of those funds in short-term, liquid investments. The
increase in the provision for doubtful lease receivables and interest expense
accounted for the increased losses from operations during the fiscal year ended
April 30, 1995 over 1994.
Aggregate new finance lease receivables increased by $20,750 to
$10,189,624, a .20% increase, during the fiscal year ended April 30, 1995. New
lease volume has either remained stagnant or decreased during the past two
fiscal years, in part due to a nationwide economic slowdown and reduction in
consumer confidence, the Company's decision during the second quarter of the
fiscal year ended April 30, 1993 to discontinue accepting new lease
applications for equipment it considers overpriced, including but not limited
to credit card processing machinery, water coolers, and security surveillance
systems, and the lack of success of the Company's prior marketing programs.
The Company recognized during the middle of the fiscal year ended April 30,
1993 that certain types of equipment resulted in higher delinquencies and
charge-offs due to general dissatisfaction with this equipment by the lessees.
In eliminating these types of equipment, therefore, the Company had to seek
other sources of commercial equipment for lease. Recognizing the need to
emphasize other types of equipment, the Company implemented an alternative
marketing plan during the last half of the fiscal year ended April 30 ,1993.
New lease volume during the second half of the fiscal year ended April 30, 1993
of $4,760,456 increased to $5,124,061 during the last half of the fiscal year
ended April 30, 1994. This reflected the beginning of some success in the
Company's revised marketing strategy and shift in emphasis. The emphasis is
to diversify the types of equipment being leased. The new types of equipment
include, but are not limited to business computers, office equipment,
scientific and medical, food service, as well as industrial production
equipment.
17
<PAGE>
<PAGE>19
The average new lease receivable entered during the fiscal year ended April
30, 1995 was $4,696, representing an increase of 3.6% from the prior year.
Since a significant portion of the costs associated with the origination of new
leases is fixed in nature, the Company's recent marketing efforts are expected
to increase the average size of new leases, which will result in a decrease in
the cost of lease origination on a lease-by-lease basis.
The Company expects to further refine its marketing strategy during fiscal
1996 as a result of its experiences during the past fiscal year. See "Further
Refinements in Marketing Strategy and Efforts to Reduce Operating Losses". As
a result of the previous lack in growth of new lease receivables, unearned
income under finance lease contracts decreased by $428,645 and $439,663 during
the fiscal years ended April 30, 1995 and 1994, respectively. See the
Consolidated Balance Sheet and Note 1 to the Consolidated Financial Statements.
Income earned under direct finance lease contracts were $3,965,846,
$3,947,213, and $4,032,273 for the three fiscal years ended April 30, 1995,
1994 and 1993, respectively. Total aggregate lease receivables outstanding
were $18,829,268, $20,979,917, and $21,739,601 at April 30, 1995, 1994 and
1993, respectively. The Company's average net investment in direct finance
leases, defined as the average aggregate future amounts receivable under lease
contracts plus average estimated residual value of equipment, less average
unearned income under lease contracts and average advance payments, was
$17,735,138, $18,852,262, and $18,485,952 during the fiscal years ended April
30, 1995, 1994 and 1993, respectively. Recognized revenues taken as a
percentage of the Company's average net investment in direct finance leases was
22.4%, 20.9%, and 21.8%, respectively, during the fiscal years ended April 30,
1995, 1994 and 1993, respectively. As the average size of new leases
increased, the yields on new leases reflected a slight decrease. An increase
in late charges during the fiscal years ended April 30, 1995 and 1994 accounted
for the increase in the percentage of recognized revenues during the period.
See also Note 1 to the Consolidated Financial Statements.
In analyzing the Company's Consolidated Financial Statements, it is
therefore important to note the relationship between new lease volume added
during an accounting period and the net lease revenue and income reported for
that period. Net lease revenue recognized by the Company during an accounting
period is defined to be the income earned under direct finance lease contracts.
New lease volume is the total of all new lease contracts added to the portfolio
during the period. As a consequence, during a period in which the rate of
growth of new lease volume increases, the growth rate of net lease revenue in
that period will be less than the rate of growth in new lease volume, because
the income earned from new lease volume is recognized over the term of each
lease contract and not in the year the contract is entered. On the other hand,
certain expenses recognized by the Company during an accounting period, such as
the provision for doubtful lease receivables, are more directly related to the
aggregate amount of outstanding leases during that period. Thus,
current-period expenses are more dramatically impacted by the growth in new
lease receivables than is net lease revenue. As a result of the foregoing
factors, net lease revenue will in turn grow at a slower rate than the rate of
growth in net lease volume during periods of increasing rates of growth in new
lease volume. In periods of decreased rates of lease volume growth, the
foregoing relationships would be reversed.
18
<PAGE>
<PAGE>20
As noted in the Independent Auditor's Report on page 29 and Note 1 to the
Consolidated Financial Statements, the Company's ability to continue as a going
concern is dependent in part upon achievement of sustained profitable
operations and obtaining adequate financing sources. This depends on achieving
a higher level of new lease volume than current levels of new business, and the
raising of additional funds through the sale of the Certificates, the proceeds
of which cannot be assured. The Company is unable to ascertain the minimum net
proceeds required to remove any threat to the continuation of the Company's
business. Management has initiated measures as detailed below which it
believes will result in an increase in direct finance leases entered in the
next fiscal year, along with a corresponding increase in operating revenues.
In addition, management is attempting to limit the growth, if any, in related
lease origination expenses. Increased new lease volume is expected to result
from continuing to maintain relationships with equipment manufacturers. In an
effort to continue as a going concern, the Company has expanded its marketing
efforts to increase its future volume of new leases to greater utilize its
fixed cost "back-office" facilities. To the extent the Company's marketing
efforts result in a greater volume of new business, the fixed cost
"back-office" facilities will become a proportionately smaller cost as a
percentage of each new lease. Management believes that as a result of the
relatively fixed nature of these costs, a further increase in new lease
receivables will not increase lease origination and administrative expenses by
a proportionate percentage. See also "BUSINESS".
If in the future the volume of leases exceeds the Company's ability to
finance such leases, it may sell the excess new business on a fee basis to
other financial institutions, giving first priority to its wholly-owned
subsidiary, ELCOA, as a result of its option agreement, and then to other
financial institutions through the securitization process seeking to increase
their asset-based portfolio of receivables. No assurances can be given as to
the ability to sell such excess new business. Since ELCOA's funds have
historically carried longer maturity dates than the Company's, the Company
expects to sell substantially all of its longer term leases (i.e. 24 months or
more) to ELCOA as its funds become available. Substantially all new leases
with terms of 24 months or more were sold to ELCOA during the fiscal years
ended April 30, 1995 and 1994.
The Company's income is set at the time a given lease contract is executed.
Consequently, inflation has no impact on revenue subsequent to the inception of
any given lease. In addition, inflation has not had a material effect on the
Company's operating expenses. However, the increased reliance on variable rate
borrowings resulting from the sale of senior debt subjects the Company to
increased exposure to inflation because of the risk of increased interest
rates. In the event that redemption of senior and subordinated debt exceeds
future sales of such debt, the Company may be required to replace the
indebtedness through other borrowings. To the extent that loans would be at
variable interest rates, inflation would have a significant adverse impact on
the company's operations through increased costs of borrowing.
INTEREST EXPENSE
Increased borrowings contributed to the increase in interest expense for
the fiscal years ended April 30, 1995, 1994, and 1993. The effect of interest
rates on the Company during the three years ended April 30, 1995 can be
illustrated as follows:
19
<PAGE>
<PAGE>21
<TABLE>
<CAPTION>
Years Ended April 30,
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest Expense, net $4,313,253 $4,094,189 $3,637,908
Average Rate of Interest
Paid by the Company on
Total Average Debt Outstanding 9.0% 9.3% 9.7%
Percentage of Interest
Expense to Operating Revenues 108.4% 103.4% 90.3%
</TABLE>
Aggregate average borrowings, including accrued interest, were $52,028,899,
$45,821,927 and $38,267,702, at April 30, 1995, 1994, and 1993, respectively.
Rates on outstanding debt securities decreased during the three fiscal years
ended April 30, 1995 in line with decreases in interest rates in general over
the period. The increase in debt outstanding during the fiscal year ended
April 30, 1993, resulted from increased sales of debt securities, which were
necessary to fund equipment purchases for new aggregate lease receivables
entered during that period. The increase in total debt during the fiscal years
ended April 30, 1995 and 1994 resulted in excess cash balances on hand at the
end of the fiscal year. Since excess funds are invested at lower rates than
the interest paid on these funds, the Company incurs additional expense on
excess funds. See "Consolidated Statements of Cash Flows and "Capital
Resources and Liquidity." Increased borrowings during the fiscal years ended
April 30, 1995, 1994 and 1993 also were used to fund current operations and
debt redemptions. Beginning May 1, 1994, excess funds have been maintained in
highly liquid U.S. government securities of six months or less, which yield
higher rates than comparable term bank investments but less than the Company's
cost of funds.
OTHER EXPENSES
Lease origination expenses decreased by $65,812 or 5.8%, after having
decreased by $31,151 or 2.7% during the fiscal years ended April 30, 1995 and
1994, respectively. The Company, utilizing its printing and graphic arts
facilities, produces brochures for the manufacturers to mail to their dealer
distribution network. These costs are expensed as current period charges in
conjunction with the Company's lease origination efforts. This program met
with limited success through 1993, as a number of manufacturers either
overlooked the distribution of these materials or lacked the technology and
machinery necessary to mail the brochures in bulk. During the months of
February and March, 1993, over 75 manufacturers representing less than 10
different industries were participating in this program. In an effort to
minimize the costs associated with the program, those manufacturers with whom
little, if any, new business was being generated were dropped from the mailing
list. By the end of the fiscal year ended April 30, 1993, the Company had
scaled back its efforts to less than 10 manufacturers. In an effort to
increase new lease volume during fiscal year ended April 30, 1994, the Company
utilized telemarketing by its account executives to contact equipment
manufacturers solely for the purpose of having the manufacturer cooperate with
the Company in contacting their dealers directly to acquaint them with using
leasing as a sales tool. The Company believed that repetitive contacts with an
increasing number of equipment dealers, generated either through the use of
direct mail or these cooperative efforts, would lead to further increase in new
20
<PAGE>
<PAGE>22
lease volume. See "Business - Marketing." See "Further Refinements in
Marketing Strategy and Efforts to Reduce Operating Losses" for a further
discussion of the Company's lease origination efforts during the fiscal year
ended April 30, 1995.
Lease origination expenses, including capitalized commissions, totaled
11.0%, 11.5%, and 11.1% of new lease receivables entered during the fiscal
years ended April 30, 1995, 1994, and 1993, respectively. During the fiscal
years ended April 30, 1995, 1994 and 1993, commissions paid of $52,049, $40,222
and $87,746, respectively, were capitalized as part of the equipment cost.
These commissions decreased during the fiscal year ended April 30, 1994, in
part, as a result of the Company's discontinuance of accepting new leases from
outside lease brokers. In accordance with SFAS 91, indirect expenses relating
to lease applications not booked are chargeable in the year incurred and are
not capitalized. See "BUSINESS-Marketing."
General and administrative expenses increased $652 or .03% during the
fiscal year ended April 30, 1995, after having increased $73,831 or 3.8% during
the fiscal year ended April 30, 1994. The increase for the fiscal year ended
April 30, 1994 is attributable to increases in legal costs principally
associated with collection of delinquent lease receivables. Routine salary
increases and costs paid for transfer service fees associated with the
Company's and ELCOA's offerings of debt securities accounted for the increase
during the fiscal year ended April 30, 1993. The Company expects general and
administrative expenses to remain relatively constant during fiscal 1996 as was
experienced in the previous year, due to the relatively fixed nature of these
costs. The Company considers the costs associated with receivable collections,
which accounted for approximately 30% and 29% of general and administrative
expenses during fiscal 1995 and 1994, respectively, to be principally fixed as
they already include occupancy costs sufficient for increased personnel,
management and supervisory personnel already hired, and computerized collection
and billing procedures already in place. The collections associated with
increased volume will require only additional clerical staff at an immaterial
incremental cost. These collections costs associated with legal collections
may increase due to court costs and associated fees.
An allowance for doubtful direct finance lease receivables is maintained at
a level considered adequate to provide for estimated losses that will be
incurred in the collection of these receivables. The allowance is increased by
provisions charged to operating expense and reduced by charge-offs. Beginning
May 1, 1988, the Company increased the allowance by provisions based upon a
periodic evaluation of the lease portfolio, performed at least quarterly, in
accordance with SFAS 91. See Note 1 to the Consolidated Financial Statements
and "BUSINESS - Credit Policy."
Total provisions for doubtful lease receivables for the fiscal years ended
April 30, 1995, 1994, and 1993 were $1,635,963, $792,879, and $1,143,471,
respectively. See Note 1 to the Consolidated Financial Statements. The
increased provisions for the fiscal year ended April 30, 1995 resulted from
additional write-offs of delinquent past due receivables in conjunction with an
intensive review of all delinquent accounts in comparing the costs of further
legal pursuit of the Company's remedies in collection where the anticipated
results were unwarranted in light of any recoveries expected. As a result, the
amount of outstanding past due receivables decreased during the fiscal year
ending April 30, 1995. Also, as of April 30, 1995, 1994 and 1993, the ratio of
21
<PAGE>
<PAGE>23
the Allowance for Doubtful Lease Receivables to Aggregate Future Lease
Receivables was 7.5%, 9.0% and 9.2%, respectively. During these periods, the
ratio of the Allowance for Doubtful Lease Receivables expressed as a percentage
of delinquent receivables 90 days or more past due was 26.2%, 28.6% and 29.3%,
respectively. The Company attributes the decreased percentages to its
intensified collection efforts, which resulted in a decrease in delinquent
lease receivables during the fiscal years ended April 30, 1995 and 1994. See
"BUSINESS - Analysis of Delinquencies" and "Analysis of Bad Debt Write-Offs."
FURTHER REFINEMENTS IN MARKETING STRATEGY AND EFFORTS TO REDUCE OPERATING
LOSSES
Management initiated certain measures to refine its marketing strategy
during the fiscal year ended April 30, 1995 that it believes may result in an
increase in the levels of new leases to be generated in the future. The
Company must increase the level of new leases and control its costs of lease
origination and administration in order to reduce its operating losses.
Management initiated certain changes beginning in September, 1994 to
enhance its previous direct mail marketing program. The Company began to
purchase and/or internally obtain from equipment manufacturers nationwide lists
of commercial equipment vendors in industries such as office machinery, light
industrial equipment, data processing and peripheral equipment, along with food
service and preparation equipment, among others. By October 31, 1994, the
Company had obtained in excess of 50,000 names and information of additional
potential equipment vendors, manufacturers, and other distributors which were
put into its computer database. The Company had eliminated the costs
associated with indirect mail solicitation in favor of utilizing its in-house
account executives who were responsible to contact vendors in target groups of
equipment sellers, and to solicit interest in their using the Company's leasing
services as a sales tool. Once a vendor expressed interest in receiving
further information, the Company's marketing materials were forwarded to the
equipment vendor. The account executives were expected to maintain further
contact with the equipment sellers to implement the relationships of the
equipment sellers with the Company, and the Company utilized direct mail solely
to send bi-weekly reminders to interested vendors to use the Company's
services.
As noted above, the level of new lease volume during the fiscal year ended
April 30, 1995 increased slightly from the prior year as a result of these
efforts. Management realized that repetitive telephone solicitation to remind
equipment vendors of the availability of the Company's services were dependent
on the timing of availability of new lease applications from equipment vendors.
Once an equipment vendor has been placed on the Company's database for
bi-weekly follow-up by mail, further telephone contact is useless until such
time as the need for the Company's services arises from the equipment vendor.
Management did note, however, that in situations where the equipment
manufacturer encouraged their vendors to utilize the Company's leasing services
to assist in closing equipment sales, the vendors were more receptive to
utilizing the Company's services.
In this regard, beginning during January, 1995, the Company began to target
equipment manufacturers having a broad sales distribution network (primarily
those with at least $5 million in annual sales and at lease one hundred
22
<PAGE>
<PAGE>24
equipment distributors and vendors) to offer them a "private label lease
program" customized for their distributors' needs. Manufacturers are given the
option of utilizing a personalized, i.e. "private label" to separately identify
themselves and the Company to their vendors. For example, a relationship
between TEC America, Inc., a manufacturer of cash registers and point-of-sale
equipment and the Company have created "TEC America Leasing" as a fictitious
name on behalf of the Company. This private label lease program is intended to
encourage TEC America Inc.'s dealers, branches and distributors to utilize the
Company's leasing services to implement their sales potential with the ultimate
users to implement their sales potential with the ultimate users of TEC America
Inc.'s equipment. As of July 5, 1995, the Company had entered into agreements
with twenty-three equipment manufacturers, of which thirteen have adopted the
"private label lease" facilities to their benefit. These manufacturers have
minimum sales of $5,000,000 annually, and as high as $1 billion or more. The
Company expects to continue these specific marketing efforts to increase the
number of manufacturers who will utilize these services. Because of the
evident need of this type of program by manufacturers, the Company is seeking
additional personnel to reach a larger number of manufacturers. In this way,
the Company accepts responsibility for the origination, servicing, and funding
for lease transactions from each manufacturer for new leases from the
manufacturers distributors using the Company's forms and documentation
customized with the equipment manufacturers' name. The Company uses its
in-house printing and direct mail facilities to produce flyers and brochures to
be distributed throughout each manufacturers' sales distribution network
illustrating the benefits of leasing, to facilitate sales of the manufactures'
equipment. The Company is encouraged by the initial positive reaction received
from the equipment manufacturers, and intends to further emphasize this program
during the fiscal year ended April 30, 1996 as a means towards increasing new
lease volume.
CAPITAL RESOURCES AND LIQUIDITY
The Company has financed its new business during the past three fiscal
years primarily from the proceeds of its senior borrowings, rental collections
from outstanding lease receivables, and the proceeds from sale of ELCOA's debt
securities.
The Certificates issued by ELCOA, the Company's wholly-owned subsidiary,
funded approximately 80% of new purchases of equipment for lease during the
fiscal year ended April 30, 1995. The registration and offering of additional
senior debt obligations by the Company will fund the remainder. See "BUSINESS
- - Methods of Financing." During the three fiscal years ended April 30, 1995,
1994 and 1993, new Certificates of ELCOA in the approximate amounts of
$6,100,000, $5,600,000, and $6,600,000, respectively, funded new equipment
purchases for the Company. The Company has not experienced any difficulty in
financing the purchase of equipment that it leases at current levels.
The Company's existing lease contracts, as of April 30, 1995, schedule the
receipt of approximately $10,450,000 during the twelve months ending April 30,
1996 of which approximately $3,835,000 are scheduled receipts from accounts
which are two or more months past due. At April 30, 1995 aggregate future
amounts receivable under lease contracts were $18,829,268 of which
approximately $3,724,000 all future amounts receivable from accounts which were
12 or more months past due on a strict contractual basis, (of which
approximately $3,189,000 relate to ELCOA's leases.)
23
<PAGE>
<PAGE>25
Accounts payable and accrued expenses at April 30, 1995 excluding accrued
interest on debt, totaled $729,657 of which accounts payable of $477,296
included therein represent the Company's obligation for commitments for
purchase of equipment for lease which has not yet been delivered.
As of April 30, 1995 the Company and ELCOA also had unhypothecated leases
which could be hypothecated, on a discounted basis, to obtain funds of
approximately $9,500,000, cash of approximately $2,600,000, and an investment
in short term U.S. government securities (net) of approximately $6,350,000.
Available cash is intended to fund increases in new equipment to be purchased
for lease, of which there are no assurances. To the extent that the Company
retains excess cash in liquid investments such as bank money market accounts or
short-term U.S. government securities, its interest expense associated with the
funds will exceed any investment income, thereby increasing the cost of
maintaining such funds prior to investment in new lease receivables. The
Company's ability to invest excess funds is dependent upon its success with its
lease marketing efforts. See "Business - Marketing" and "Further Refinements
in Marketing Strategy and Efforts to Reduce Operating Losses." Hypothecation
is the use of lease contract receivables, on a discounted basis, as collateral
for the borrowing of funds from third parties, based on the eligible net lease
receivables (excluding delinquent lease receivables) for the remaining lease
term, which are pledged as collateral. To date, unhypothecated lease contracts
have not been pledged as collateral. Should the Company hypothecate leases for
the purposes of raising funds, such actions require approval and authorization
of the Company's Board of Directors only. The Company also expects ELCOA, its
wholly-owned subsidiary, based on historical experience and efforts being
undertaken by Welco in its solicitation efforts as underwriter for ELCOA's debt
securities, to be able to generate increased funds for the purchase of
equipment for lease which the Company will originate and service for lease.
As noted in the Statements of Cash Flows on page 34, sales of Demand and Fixed
Rate Certificates have increased over the three fiscal years ended April 30,
1995, along with a corresponding increase in the redemption of these securities
at their respective maturities. In the event that future redemptions of
Certificates exceed future sales of the Certificates to be offered, ELCOA may
utilize its excess cash to repay such borrowings. ELCOA believes that it has
sufficient cash resources to meet its normal operating requirements during the
fiscal year ending April 30, 1996. ELCOA registered for sale $29,000,000 of
debt securities on January 6, 1995, of which $10,000,000 were issued through
May 31, 1995. ELCOA's debt securities range in terms of demand to 120 months.
ELCOA has sold similar securities since 1986. Welco utilizes public
advertising in soliciting for prospective purchasers for these debt securities.
Welco also has entered into selected dealer agreements with other NASD firms
who have sold ELCOA's securities to their customers. See "BUSINESS - Methods
of Financing."
Senior and subordinated borrowings issued by the Company aggregating
$22,171,378, as well as Demand, Fixed Rate, and Money Market Thrift
Certificates issued by ELCOA aggregating $17,024,697 are due during the twelve
months ending April 30, 1996. See Notes 3, 4, and 5 to the Consolidated
Financial Statements. These certificates may be renewed at the option of the
holder into new indebtedness at the maturity of the original certificate.
Accrued interest included therein in the amount of $5,411,748 is due on demand.
The Company anticipates that based on historical experience a significant
portion of the senior and subordinated debt and Demand, Fixed Rate
24
<PAGE>
<PAGE>26
and Money Market Thrift Certificates previously issued by ELCOA coming due
should be renewed or "rolled over" into senior debt or ELCOA Certificates by
the security holders, although there are no assurances in this regard. Should
debt due in fiscal 1996 not be rolled over into new indebtedness by the holder,
repayment will be made to the holder from available cash on hand, liquidation
of receivables in the ordinary course of business, possible hypothecation of
leases, and from proceeds of sale of Certificates. Due to the continuous
nature of the offering of Certificates, outstanding securities mature daily
rather than a large percentage maturing at any given day. Outstanding lease
contracts are payable on a monthly basis at varying terms. As such, the
Company is unable to estimate with any certainty the relationship between the
available sources of funds to be allocated specifically for redemption of
maturing securities, especially in light of prescribed limitations on
redemptions. During the fiscal years ended April 30, 1995 and 1994,
approximately 86% and 81%, respectively, of all debt issued by the Company
coming due was renewed and "rolled over" into new indebtedness, and
approximately 50% and 59% of ELCOA's Demand, Fixed Rate, and Money Market
Thrift Certificates matured and were reinvested during these respective
periods. Management attributes the lower percentage during fiscal 1994 to a
slight decline in interest rates in general.
The number of accounts, at April 30, 1995, holding senior and subordinated
certificates of the Company was 2,616. Of these, 84 accounts held certificates
aggregating $50,000 or more. For purposes of these calculations, all accounts
for each separate holder have been aggregated as a single account holder. The
three largest senior and subordinated certificate holders held aggregate
principal amounts of $636,964, $526,938 and $224,032 as of April 30, 1995. As
of April 30, 1995, there were 3,815 accounts holding Demand, Fixed Rate and
Money Market Thrift Certificates, of which 71 held accounts aggregating $50,000
or more. The three largest holders of Demand, Fixed Rate and Money Market
Thrift Certificates held aggregate principal amounts of $413,500, $245,077 and
$210,682 at April 30, 1995. The Company does not believe that this results in
an undue concentration of debt being held by relatively few individuals. In
the event of ELCOA's liquidation, holders of Demand, Fixed Rate and Money
Market Thrift Certificates would be senior in priority to claims against
ELCOA's assets. Therefore, they would effectively be senior to the
Certificates. There are no other debt securities issued by the Company which
are senior to the Certificates.
In addition to the Company's expectation of renewals, the Company intends
to raise additional financing to fund increases in new lease volume through the
sale of debt securities. See "BUSINESS - Methods of Financing." The Company
could also sell a portion of its lease portfolio to other financial
institutions seeking to increase their asset-based receivable portfolio through
the securitization process. In such event, the Company would immediately
recognize as income the net present value of the remaining lease payments at an
agreeable discounted rate, less its investment in the cost of the equipment
being leased. Cash realized from sale would immediately be available to invest
in new lease business, or meet redemptions of debt securities, thus reducing
reliance on additional debt to carry an increased lease portfolio.
25
<PAGE>
<PAGE>27
The Company would not expect to borrow funds from financial institutions,
but expects in the alternative to sell certain leases rather than carrying them
for the remaining term of the leases, providing additional liquidity to meet
redemptions of debt securities in excess of the Company's expectations, of
which there are no assurances. The long term effect of utilizing these
proceeds to meet redemptions would be the reduction of outstanding receivables
and related income therefrom.
Taking into consideration the Company's prior experience in the sale of
senior debt based on historical expectations and the sale of Demand and Fixed
Rate Certificates by ELCOA (of which there is no assurance), as well as new
business, available credit, the Company's available cash, anticipated renewal
or "roll over" of a portion of the Company's senior and subordinated
borrowings, and the potential from funds generated from outside financial
institutions, including, but not limited to ELCOA, it is management's belief
that its cash will be sufficient to conduct its business and meet its
anticipated obligations during the next fiscal year. No assurance can be
given, however, that the redemption of senior and subordinated borrowings will
not exceed the Company's expectations or that a significant amount of senior
debt will be sold. In view of the Company's history of losses, the uncertainty
with respect to generation of new lease receivables and future interest rates
paid to banks and holders of senior and subordinated borrowings, the potential
redemption of senior and subordinated borrowings and Demand, Fixed Rate and
Money Market Thrift Certificates and the uncertainty as to the sale of future
offerings of securities, management is unable to estimate the Company's
profitability and liquidity beyond the current fiscal year. If the Company
continues to have losses, it may be unable to service its debts in future
years. Reference is made to Notes 2, 3, 4, and 5 of the Consolidated Financial
Statements for information relating to future amounts receivable under lease
contracts, the Company's senior and subordinated borrowings and ELCOA's Demand,
Fixed Rate and Money Market Thrift Certificates.
Although the Company has reported losses since 1980 for financial statement
purposes, it has supported operations through rentals received from its lessees
and the sale of debt securities. However, in view of its high degree of
leverage and history of losses, future losses could jeopardize its leasing
operations and the ability to service its debt. The Company believes that
increases in new lease receivables without any appreciable increase in lease
origination or general and administrative expenses will reduce the level of its
operating losses in the future. Due to the current shareholders' deficit, if
the Company were to liquidate in the near future, holders of the subordinated
thrift certificates probably would lose substantially all of their investment,
with holders of the outstanding preferred and common stock losing all of their
investment.
Excess funds have historically been invested in low yielding but highly
liquid investments. These funds have been held solely for the purpose of
awaiting investment in new lease receivables. During the fiscal year ended
April 30, 1995, the average interest rate earned by the Company on these funds
was approximately 4.9%, while the average interest rate paid on outstanding
certificates attributable to the funds was 9.0%, resulting in a negative spread
of 4.1%. The decision by the Federal Reserve during the first quarter of
calendar year 1994 to increase rates in general may have reduced this "negative
spread". However, there are no assurances of either future increases or
26
<PAGE>
<PAGE>28
decreases in interest rates. Management has placed a high priority of
increasing the purchase of equipment for lease in order to reduce the available
amount of cash on hand.
To date, neither the Company nor ELCOA has ever defaulted on any
contractual payment of interest or principal on any bank borrowings, senior or
subordinated debt obligations, or Demand, Fixed Rate and Money Market Thrift
Certificates issued to the public. All requests for early repayment of
interest or principal have never been later than five business days after
demand for redemption was received.
27
<PAGE>
<PAGE>29
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
Index To Financial Statements
<CAPTION>
Page
----
<S> <C>
(a) Independent Auditor's Reports 29
(b) Consolidated Balance Sheets at April 30,
1995 and 1994. 30-31
(c) Consolidated Statement of Operations for
the years ended April 30, 1995, 1994 and 1993. 32
(d) Consolidated Statement of Changes in
Shareholders' Deficit for the years
ended April 30, 1995, 1994 and 1993. 33
(e) Consolidated Statements of Cash Flows
for the years ended April 30, 1995, 1994,
and 1993. 34-35
(f) Notes to Consolidated Financial Statements. 36
</TABLE>
See Item 14 on Page 50 for Financial Statement Schedules
28
<PAGE>
<PAGE>30
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors
of Walnut Equipment Leasing Co., Inc.
We have audited the accompanying consolidated balance sheets of Walnut
Equipment Leasing Co., Inc. (a wholly-owned subsidiary of Walnut Associates,
Inc.) and subsidiaries as of April 30, 1995 and 1994, and the related
consolidated statements of operations, changes in shareholders' deficit and
cash flows for each of the three years in the period ended April 30, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Walnut
Equipment Leasing Co., Inc. and subsidiaries as of April 30, 1995 and 1994,
and the results of their operations and their cash flows for each of the three
years in the period ended April 30, 1995, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that Walnut
Equipment Leasing Co., Inc. and subsidiaries will continue as a going concern
and, accordingly, contemplate the realization of assets and liquidation of
liabilities in the ordinary course of business. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
and experienced negative cash flows from operations and has a shareholders'
deficit. Additionally, the Company's ability to meet its obligations is
dependent in part upon its ability to obtain borrowings adequate to fund its
cash flow needs. These uncertainties raise substantial doubt about the
entity's ability to continue as a going concern. Management's plans in regard
to these matters are also discussed in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome
of these uncertainties.
/s/ Cogen Sklar LLP
COGEN SKLAR LLP
(formerly, Cogen Sklar Levick)
Bala Cynwyd, Pennsylvania
July 7, 1995
29
<PAGE>
<PAGE>31
<TABLE>
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION>
April 30,
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Direct finance leases:
Aggregate future amounts receivable under lease contracts $18,829,268 $20,979,917
Estimated residual value of equipment 1,976,244 2,178,259
Less:
Unearned income under lease contracts (3,436,458) (3,865,103)
Advance payments ( 579,965) ( 611,887)
---------- ----------
16,789,089 18,681,186
Allowance for doubtful lease receivables (1,413,389) (1,888,458)
---------- ----------
15,375,700 16,792,728
---------- ----------
Operating leases:
Equipment at cost, less accumulated depreciation of
$6,680 and $19,184, respectively 23,316 23,579
Accounts receivable --- 7,166
Cash and cash equivalents 8,957,949 7,598,151
Other assets (includes $637,479 and $634,567, respectively,
paid to or receivable from related parties) 1,086,402 1,057,475
----------- -----------
Total assets $25,443,367 $25,479,099
=========== ===========
<FN>
See accompanying notes
</TABLE>
30
<PAGE>
<PAGE>32
<TABLE>
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (continued)
<CAPTION>
April 30,
1995 1994
----------- -----------
<S> <C> <C>
LIABILITIES
Amounts payable to equipment suppliers $ 477,296 $ 701,508
Other accounts payable and accrued expenses 252,361 438,768
Demand, Fixed Rate and Money Market Thrift Certificates
(includes $181,266, and $167,617,
respectively, held by related parties) 24,521,875 21,810,991
Senior Thrift Certificates (includes $697,706 and
$583,372, respectively, held by related parties) 18,783,578 16,650,670
Subordinated Thrift Certificates (includes $555,844 and
$438,624, respectively, held by related parties) 6,025,366 6,038,409
Accrued interest 5,411,748 4,803,444
Subordinated debentures (includes $4,000 and $4,000,
respectively, held by related parties) 5,858 5,858
State income taxes payable 8,401 8,401
---------- ----------
55,486,483 50,458,049
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Prime Rate Cumulative Preferred Shares, $1 par value,
$100 per share liquidation preference, 50,000 shares
authorized, 281 shares issued and outstanding
(liquidation preference $28,100) 281 281
Adjustable Rate Cumulative Preferred Shares, $1 par value,
$1000 per share liquidation preference. 1,000 shares
authorized, 275 shares issued and outstanding
(liquidation preference $275,000) 275 275
Common stock, $1.00 par value, 1,000 shares authorized,
issued and outstanding 101,500 101,500
Accumulated Deficit (30,145,172) (25,081,006)
----------- -----------
(30,043,116) (24,978,950)
----------- -----------
Total liabilities and shareholders' deficit $25,443,367 $25,479,099
=========== ===========
<FN>
See accompanying notes
</TABLE>
31
<PAGE>
<PAGE>33
<TABLE>
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
For the Years Ended April 30,
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Income earned under
direct finance lease
contracts $3,965,846 $3,947,213 $4,032,273
Operating lease rentals 13,300 13,124 (4,493)
---------- ---------- ----------
3,979,146 3,960,337 4,027,780
---------- ---------- ----------
Costs and expenses:
Interest expense, net of
interest income of $380,370,
$170,963 and $59,224, respectively 4,313,253 4,094,189 3,637,908
Lease origination
expenses 1,067,962 1,133,774 1,164,925
General and
administrative expenses
(includes $800,864, $802,323
and $716,313, respectively,
paid to related parties) 2,019,029 2,018,377 1,944,546
Provision for doubtful
lease receivables 1,635,963 792,879 1,143,471
Depreciation on operating
lease equipment 7,105 3,293 578
---------- ---------- ----------
9,043,312 8,042,512 7,891,428
Loss from operations ---------- ---------- ----------
before provision for
state income taxes (5,064,166) (4,082,175) (3,863,648)
Provision for state
income taxes --- --- 928
----------- ----------- -----------
Net Loss $(5,064,166) $(4,082,175) ($3,864,576)
=========== =========== ===========
<FN>
See accompanying notes
</TABLE>
32
<PAGE>
<PAGE>34
<TABLE>
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
For the Years Ended April 30, 1995, 1994 and 1993
<CAPTION>
Prime Rate Adjustable Rate Total
Cumulative Cumulative Common Accumulated Shareholders'
Preferred Shares Preferred Shares Stock Deficit Deficit
---------------- ---------------- ------ ----------- ------------
Shares Shares
Issued Amount Issued Amount
------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 30, 1992 281 $ 2,474 275 $ 275 $101,500 $(17,134,255) $(17,030,006)
Net loss for the year ended
April 30, 1993 --- --- --- --- --- (3,864,576) (3,864,576)
Preferred Shares
Cash distributions paid on
Prime Rate Cumulative
Preferred Shares --- (2,193) --- --- --- --- (2,193)
----- ------ ----- ------ ------- ----------- ------------
Balance, April 30, 1993 281 281 275 275 101,500 (20,998,831) (20,896,775)
Net loss for the year ended
April 30, 1994 --- --- --- --- --- (4,082,175) (4,082,175)
----- ------ ----- ------ ------- ----------- ------------
Balance, April 30, 1994 281 281 275 275 101,500 (25,081,006) (24,978,950)
Net loss for the year ended
April 30 1995 --- --- --- --- --- (5,064,166) (5,064,166)
----- ------- ----- ------ -------- ------------ -----------
Balance, April 30, 1995 281 $ 281 275 $ 275 $101,500 $(30,145,172) $(30,043,116)
===== ======= ===== ====== ======== ============= =============
<FN>
See accompanying notes
</TABLE>
33
<PAGE>
<PAGE>35
<TABLE>
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the Years Ended April 30,
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Loss $(5,064,166) $(4,082,175) $(3,864,576)
Adjustments to reconcile
net loss income to net cash
used in operating activities:
Depreciation 7,105 3,293 578
Amortization of deferred debt
registration expenses 121,402 120,187 116,857
Provision for doubtful
lease receivables 1,635,963 792,879 1,143,471
Effects of changes
in other operating items:
Accrued interest 608,304 742,864 839,295
Amounts payable to
equipment suppliers (224,212) 225,129 (244,907)
Other (net), principally
increase in other assets (330,663) (130,041) (73,736)
Net cash used in ----------- ---------- -----------
operating activities (3,246,267) (2,327,864) (2,083,018)
----------- ---------- -----------
INVESTING ACTIVITIES
Excess of cash received over
lease income recorded 7,374,851 6,958,716 6,071,318
Increase (decrease) in
advance payments (31,922) 14,282 (7,281)
Purchase of equipment
for lease (7,567,613) (7,548,795) (8,064,528)
Net cash used in investing ----------- ---------- -----------
activities (224,684) (575,797) (2,000,491)
----------- ---------- -----------
<FN>
See accompanying notes
</TABLE>
34
<PAGE>
<PAGE>36
<TABLE>
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
<CAPTION>
For the Years Ended April 30,
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of:
Demand and Fixed Rate
Certificates 10,983,417 9,267,808 9,350,863
Senior Thrift Certificates 5,488,212 5,827,132 4,381,209
Redemption of:
Subordinated Debentures --- (1,860) ---
Demand, Fixed Rate and
Money Market Thrift
Certificates (8,272,533) (5,498,321) (4,177,037)
Senior Thrift Certificates (3,355,304) (3,262,311) (2,009,151)
Subordinated Thrift
Certificates (13,043) (100,421) (251,620)
Distributions Paid:
Prime Rate Cumulative
Preferred Shares --- --- (2,193)
----------- ---------- ----------
Net cash provided by
financing activities 4,830,749 6,232,027 7,292,071
----------- ---------- ----------
Increase in Cash
and Cash Equivalents 1,359,798 3,328,366 3,208,562
Cash and Cash Equivalents,
Beginning of Year 7,598,151 4,269,785 1,061,223
----------- ---------- ----------
Cash and Cash Equivalents,
End of Year $8,957,949 $7,598,151 $4,269,785
=========== ========== ==========
<FN>
See accompanying notes
</TABLE>
35
<PAGE>
<PAGE>37
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF FINANCIAL STATEMENT PRESENTATION:
The consolidated financial statements of the Company have been prepared on
a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. Accordingly, the
consolidated financial statements do not include any adjustments relating to
the recoverability of recorded assets, or the amount of liabilities that may be
necessary should the Company be unable to continue in the normal course of
business.
During the years ended April 30, 1995, 1994 and 1993, the Company incurred
losses of $5,064,166, $4,082,175, and $3,864,576, respectively, had negative
cash flows from operations during those years, and reported accumulated
deficits of $30,145,172 and $25,081,006 at April 30, 1995 and 1994,
respectively. The Company's current results of operations, financial position
and the uncertainties which exist as to future levels of new business, interest
rates and potential redemptions of senior and subordinated borrowings currently
outstanding, and its ability to sell additional debt securities as may be
required, may result in the Company's inability to continue operating in the
normal course of business. Continuation of the Company's operations in their
present form is dependent upon the achievement of sustained profitable
operations, through increased new business generated by the Company, continued
ability to service debts as they mature, and the ability to generate sufficient
cash resources to support future operations. If the Company continues to incur
losses, or is unable to obtain additional funds, it may be unable to continue
servicing its debts.
Management has attempted to initiate measures to improve the operating
results and business levels through changes in its marketing strategy, and is
placing a high priority in these efforts. In 1986, in an effort to increase
the utilization of its lease origination, administrative, and servicing
capabilities, and to reduce the cost per lease of providing these services, the
Company decided to commence the marketing of these services on a fee basis to
other companies, including ELCOA. To date, this service has generated no
significant revenues from unrelated parties. See also Note 10, below. In
addition, management believes that the Company's cash flow through the sale of
securities, anticipated renewal of existing indebtedness, and from collections
from outstanding lease receivables, will be adequate to meet operating needs
during the ensuing year. See further discussions contained in "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company,
(with its subsidiaries, including ELCOA, the "Company"), all of which are
wholly-owned. All intercompany transactions have been eliminated.
36
<PAGE>
<PAGE>38
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
LEASE ACCOUNTING:
The Company is in the business of leasing equipment which is specifically
acquired for each lease. For financial reporting purposes, the Company
primarily uses the direct financing method and records at the inception of the
lease (a) the estimated unguaranteed residual value of the leased equipment and
the aggregate amount of rentals due under the lease as the gross investment in
the lease, and (b) the unearned income arising from the lease, represented by
the excess of (a) over the cost of the leased equipment. The unearned income
is recognized as income over the term of the lease on the effective or
"interest" method in accordance with Statement of Financial Accounting
Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases" ("SFAS
91"). In addition, under this method, a portion of the initial direct costs as
defined by SFAS 91 are accounted for as part of the investment in direct
financing leases. All the other costs are included as lease origination
expenses in the period when incurred.
Where the lease qualifies as an operating lease pursuant to the
requirements of SFAS No. 13, "Accounting for Leases", the Company recognizes
lease rental payments as income in the period earned and depreciates the cost
of equipment subject to the lease over its estimated useful life using an
accelerated method of depreciation.
INCOME TAXES:
The Company computes and records income taxes currently payable based upon
the determination of taxable income using the "operating method" for all
leases, which is different from the method used in the determination of pretax
income for financial statement purposes (as described above). Under the
"operating method" the Company reports as income the amount of rentals received
or accrued and deducts the amount of depreciation (principally under the
Accelerated Cost Recovery System) of the equipment over its estimated useful
life. Other expenses are recognized utilizing the accrual method of
accounting.
Effective May 1, 1993, the Company adopted Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" (SFAS 109), which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or refundable
for the period plus or minus the change during the period in deferred tax
assets and liabilities.
37
<PAGE>
<PAGE>39
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
The net deferred tax asset as of April 30, 1995 and 1994 includes deferred
tax assets (liabilities) attributable to the following temporary deductible
(taxable) differences:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Operating lease method vs. direct finance method $3,000,800 $3,002,200
Provision for doubtful lease receivables 473,200 736,500
Other (35,000) (24,700)
---------- ----------
Net deferred tax asset 3,439,000 3,714,000
Valuation allowance (3,439,000) (3,714,000)
---------- ----------
Net deferred tax asset after valuation allowance $ --- $ ---
========== ==========
</TABLE>
A valuation allowance was required as of April 30, 1995 and 1994 due to the
net operating loss carryover of approximately $21,182,000 and $15,609,000,
respectively, and investment tax credit carryover of approximately $1,284,000,
and $1,395,000, respectively. Due to the valuation allowance for the
carryforwards there is no net change in deferred tax assets for the fiscal year
ended April 30, 1995. There was no cumulative effect on income for prior years
upon the adopting of SFAS 109 for the year ended April 30, 1994 since there was
no existing deferred tax asset as of May 1, 1993.
Both the Company and ELCOA will be included in a consolidated federal
income tax return. If the consolidated group incurs a federal income tax
liability, each company's share will be based upon the tax allocation policy of
the consolidated group. However, the Company and ELCOA will not file a
consolidated income tax return for state income tax purposes. Each company
will be subject to state income taxation on each Company's separate income as
computed for state tax purposes. During the fiscal years ended April 30, 1995,
1994, and 1993, ELCOA recognized provisions for state income taxes in the
amount of $0, $0 and $928 respectively, on its separate income. No provision
for federal income taxes was necessary.
LATE CHARGES:
Terms of the Company's lease contracts include provisions for assessing a
monthly late charge on any past due amounts. Revenues from late charges
collected were approximately $418,000, $372,000, and $323,000 during the fiscal
years ended April 30, 1995, 1994 and 1993, respectively.
38
<PAGE>
<PAGE>40
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued)
ESTIMATED RESIDUAL VALUES OF EQUIPMENT UNDER DIRECT FINANCE LEASES:
The Company generally offers an option to purchase the leased equipment
upon expiration of the lease term at fair market value, approximately 10% of
the original equipment cost. Residual value of this equipment is generally
established at the anticipated purchase option price. The estimated
unguaranteed residual values are reviewed at least quarterly by the Company.
ALLOWANCE FOR DOUBTFUL LEASE RECEIVABLES:
An allowance for doubtful direct finance lease receivables has been
maintained at a level considered adequate to provide for estimated losses that
will be incurred in the collection of these receivables. The allowance is
increased by provisions charged to operating expense and reduced by
charge-offs.
In accordance with SFAS 91, the allowance was increased by provisions
charged to operating expense based upon a periodic evaluation, performed at
least quarterly, of delinquent finance lease receivables, to reflect losses
anticipated from delinquencies and impairments that have already occurred
rather than ultimate losses expected over the life of the lease portfolio.
Each direct finance lease provides that an event of default occurs when a
lessee fails to remit the required periodic rental payment after 15 days of the
contractual due date. The Company considers the contractual amount impaired
after 90 days past the contractual due date. The contractual amount is
considered to be the past due and accelerated payments to become due through
the end of the contractual lease term.
OTHER ASETTS
Included in other assets at April 30, 1995 and 1994, are deferred expenses
totaling $308,159 and $261,711 net of amortization, respectively, representing
costs directly related to the Company's registration and sale of Senior Thrift
Certificates. Also included in other assets at April 30, 1995 and 1994 are
deferred expenses totaling $423,223 and $437,812, respectively, net of
amortization, representing costs related to ELCOA's registration and sale of
Demand and Fixed Rate Certificates. Such expenses are being amortized on a
straight-line basis over the estimated average lives of the debt issued under
the registration statements. Amortization of the Company's deferred expenses
charged to income for the years ended April 30, 1995, 1994 and 1993 amounted to
approximately $121,400, $120,200 and $116,900, respectively.
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, 1995 cash equivalents, consisting of U.S. Government
Securities amounted to $6,349,693. The Company had no cash equivalents at
April 30, 1994. Interest paid for the fiscal years ended April 30, 1995, 1994
and 1993 was $4,085,326, $3,522,288 and $2,857,837, respectively. Income taxes
paid were $0, $411 and $4,194, respectively.
39
<PAGE>
<PAGE>41
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 diversity of equipment types,
lessees, and geographic location.
2. AGGREGATE FUTURE AMOUNTS RECEIVABLE UNDER LEASE CONTRACTS:
Receivables under financing lease contracts at April 30, 1995 are due as
follows:
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- -----------
<S> <C>
1996 $10,448,003
1997 5,361,504
1998 2,323,441
1999 516,623
2000 and beyond 179,697
-----------
$18,829,268
===========
</TABLE>
Future rentals due under operating lease contracts are all due within one
year and, excluding those rentals reflected in operating lease accounts
receivable, total $3,346 and $6,587 at April 30, 1995 and 1994, respectively.
3. DEMAND, FIXED RATE AND MONEY MARKET THRIFT CERTIFICATES:
The Demand, Fixed Rate and Money Market Thrift Certificates outstanding at
April 30, 1995 were issued by ELCOA, with outstanding certificates bearing
interest at rates ranging from 7.0% to 12.75%. Beginning September 1, 1990,
the name of these debt securities was changed from Money Market Thrift
Certificates to Demand and Fixed Rate Certificates. In the event of
liquidation of ELCOA, holders of these debt securities would be senior in
priority in liquidation as respects ELCOA's assets. Holders of ELCOA's debt
securities have no right in liquidation as respects the assets of its parent,
he Company. All of these certificates rank on parity with each other. There
are no restrictive covenants relative to this debt, nor is ELCOA restricted
from the payment of cash dividends, loans or advances to the Company. The
certificates at April 30, 1995 are due as follows:
40
<PAGE>
<PAGE>42
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DEMAND, FIXED RATE AND MONEY MARKET THRIFT CERTIFICATES: (Continued)
<TABLE>
<CAPTION>
Year Ending April 30, Amount
--------------------- -----------
<S> <C>
1996 $14,697,989
1997 3,138,288
1998 1,146,431
1999 2,156,743
2000 and beyond 3,382,424
-----------
$24,521,875
===========
</TABLE>
Included in the amount due in the year ending April 30, 1996 are $2,135,337
of certificates payable on demand. Additionally, accrued interest of
$2,326,708 at April 30, 1995 is payable upon demand.
4. SENIOR THRIFT CERTIFICATES:
Outstanding Senior Thrift Certificates bear interest at rates ranging from
9.00% to 15.50% at April 30, 1995, and in the event of liquidation are senior
in priority to all outstanding Subordinated Thrift Certificates. Senior Thrift
Certificates at April 30, 1995 are due as follows:
<TABLE>
<CAPTION>
Year Ending April 30, Amount
--------------------- -----------
<S> <C>
1996 $14,089,450
1997 1,907,727
1998 904,794
1999 604,903
2000 and beyond 1,276,704
-----------
$18,783,578
===========
</TABLE>
Included in the amount due in the year ending April 30, 1996 are
approximately $736,786 in certificates payable on demand. Accrued interest on
the Senior Thrift Certificates of $1,337,056 at April 30, 1995 is payable on
demand.
41
<PAGE>
<PAGE>43
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. SUBORDINATED THRIFT CERTIFICATES: (Continued)
Outstanding Subordinated Thrift Certificates bear interest at rates ranging
from 10.00% to 15.8% at April 30, 1995. All thrift certificates are
subordinated to any indebtedness defined by the Trust Indenture as "Senior
Debt" which includes Senior Thrift Certificates, borrowings from banks, trust
companies and other financial institutions, but excludes subordinated
debentures.
Subordinated Thrift Certificates at April 30, 1995 are due as follows:
<TABLE>
<CAPTION>
Year Ending April 30, Amount
--------------------- ----------
<S> <C>
1996 $4,996,887
1997 432,704
1998 266,942
1999 160,927
2000 and beyond 167,906
----------
$6,025,366
==========
</TABLE>
Included in the amount due in the year ending April 30, 1996 are
approximately $503,390 of certificates payable on demand. Accrued interest on
the Subordinated Thrift Certificates of $1,747,984 at April 30, 1995 is payable
on demand.
6. PREFERRED SHARES:
In 1982, the Company authorized the issuance of 1,000 shares of $1 par
value preferred shares of the Company to be referred to as "Adjustable Rate
Cumulative Preferred Shares." The President and members of his immediate
family exchanged $128,900 in principal amount of Subordinated debentures and
$146,100 in principal amount of Subordinated Thrift Certificates for 275 shares
of Preferred Stock in 1982. The issuance of the shares was exempt from federal
and state securities law registration.
The Adjustable Rate Cumulative Preferred Shares, which have a $1,000 per
share liquidation preference, are redeemable at the option of the Company at
$1,000 per share, plus accrued dividends. Distributions are cumulative and
declared and paid monthly at a rate equal to the prime rate but not less than
12% per annum nor greater than 18% per annum. There were no distributions
during the three fiscal years ended April 30, 1995.
"Prime Rate Cumulative Preferred Shares" have a $100 liquidation preference
and are redeemable solely at the option of the Company at $105 per share, plus
accrued dividends. Distributions are cumulative and are declared and paid
monthly at a rate equal to the prime rate of interest but not less than 10% nor
greater than 18% per annum. During the year ended April 30, 1993 $2,193 in
distributions were paid out of contributed capital in excess of the par value
of these shares.
42
<PAGE>
<PAGE>44
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES:
The Company has available for federal income tax purposes net operating
loss carryovers aggregating approximately $21,182,000 ($30,145,000 for
financial statement purposes) at April 30, 1995. Such loss carryovers may be
used to offset future taxable income, if any, until their expiration in varying
amounts from 2001 to 2008. The Company also has investment tax credit
carryovers of approximately $1,284,000 at April 30, 1995 which are available to
reduce federal income tax liabilities, if any. Such carryovers expire, if not
previously utilized, in varying amounts from 1995 through 2002.
8. INITIAL DIRECT COSTS:
Initial direct costs consist principally of commissions, processing, and
credit approval costs. In accordance with SFAS No. 91, initial direct costs
are accounted for as part of the investment in direct financing leases.
Initial direct costs as defined by SFAS No. 91 amounted to $52,049, $40,222 and
$87,746, for the fiscal years ended April 30, 1995, 1994 and 1993,
respectively, consisting principally of commissions paid to outside lease
brokers and salesmen.
9. COMMITMENTS AND CONTINGENCIES:
The Company leases office space and equipment under noncancellable
operating lease agreements. Total rental expense charged to operations for the
years ended April 30, 1995, 1994 and 1993 was approximately $235,200, $226,700
and $233,400, respectively.
As of April 30, 1995, the future minimum rental payments under leases are
as follows:
<TABLE>
<CAPTION>
Fiscal Year Amount
---------- --------
<S> <C>
1996 $ 78,536
1997 11,825
--------
Total $ 90,361
========
</TABLE>
10. TRANSACTIONS WITH RELATED PARTIES:
The Company is a wholly-owned subsidiary of Walnut Associates, Inc., which
is wholly-owned by Mr. William Shapiro, the President of Walnut Equipment
Leasing Co., Inc.
The President received no salary in fiscal years 1995, 1994 and 1993.
However, the Company paid management fees of $69,000 during each of the fiscal
years ended April 30, 1995, 1994 and 1993, respectively to Walnut Associates,
Inc., primarily to reimburse it for the services of the President.
Outstanding Adjustable Rate Cumulative Preferred Shares, Prime Rate
Cumulative Preferred Shares, Subordinated Debentures, Senior and Subordinated
Thrift Certificates and Demand, Fixed Rate and Money Market Thrift Certificates
43
<PAGE>
<PAGE>45
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. TRANSACTIONS WITH RELATED PARTIES: (Continued)
held by the President, members of his family or companies in which he is the
majority shareholder at April 30, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Adjustable Rate Cumulative
Preferred Shares $ 275 $ 275
Prime Rate Cumulative Preferred Shares 281 281
Senior Thrift Certificates 697,706 583,372
Demand, Fixed Rate and
Money Market Thrift Certificates 181,266 167,617
Subordinated Debentures 4,000 4,000
Subordinated Thrift Certificates 555,845 438,985
</TABLE>
For the years ended April 30, 1995, 1994 and 1993, the Company paid Welco
Securities, Inc., ("Welco") an affiliated registered broker/dealer in
securities owned by the President of the Company, $135,593, $136,848 and
$121,833 respectively, for commissions paid in connection with the offering and
sale of Senior Thrift Certificates. The Company pays Welco a commission from
0.2% to 8.0% of the sale price of all Fixed Term Senior Thrift Certificates,
and amortizes this expense over the term of each certificate. ELCOA paid Welco
$170,642, $165,581 and $143,611 for commissions incurred in the solicitation of
Demand, Fixed Rate and Money Market Thrift Certificates during the fiscal years
ended April 30, 1995, 1994 and 1993, respectively. ELCOA pays a commission to
Welco of 0.2% to 8.0% of the sale price on all Demand and Fixed Rate
Certificates sold, and amortizes this expense over the term of each
certificate. During the fiscal year ended April 30, 1995, 1994 and 1993, Welco
paid rentals of approximately $8,500, $10,200 and $7,200, respectively, on
equipment leased from the Company.
The Company expensed $354,783, $342,186 and $304,296 in 1995, 1994 and
1993, respectively, to a law firm in which the President is the principal
shareholder. These payments primarily represent fees for legal services to
associate attorneys, costs and expenditures relating to collections on
defaulted leases.
During the fiscal years ended April 30, 1995 and 1994, the Company incurred
$69,943 and $81,965, respectively, in transfer agent service fees for the
issuance and redemption of its Senior and Subordinated Thrift Certificates.
These fees were paid monthly to Financial Data, Inc., a subsidiary of Walnut
Associates, Inc. The monthly amount charged by Financial Data, Inc. is the sum
of $2.00 per certificate holder account maintained, $1.00 per new or rollover
certificate issued during the month, or a minimum of $1,000 per month,
whichever is greater. Prior to January 1, 1994, the monthly charge per
44
<PAGE>
<PAGE>46
WALNUT EQUIPMENT LEASING CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. TRANSACTIONS WITH RELATED PARTIES: (Continued)
certificate holder was $2.50. During the fiscal years ended April 30, 1995
and 1994, ELCOA paid $99,595 and $105,334 respectively, to Financial Data,
Inc. for similar services rendered in connection with its outstanding Demand,
Fixed Rate and Money Market Thrift Certificates.
The Company charges Financial Data, Inc. for the use of the Company's
computer facilities, space, telephone, and personnel. The amounts charged to
Financial Data, Inc. during the fiscal years ended April 30, 1995 and 1994
were $111,592 and $111,491 respectively. As of April 30, 1995, the Company had
a receivable of $88,264 from Financial Data, Inc. The ability of Financial
Data, Inc. to repay this amount is dependent upon increases in the number of
holders of Demand, Fixed Rate, and Senior Thrift Certificates and related
charges therefrom.
On March 6, 1987, the Company entered into a lease agreement with Walnut
Associates, Inc. covering approximately 4,300 square feet of warehouse and
print shop facilities for a five year term, renewable for an additional five
year term, at an annual rental of $3.00 per square foot for the initial term.
This lease was renewed for an additional five year term at the same monthly
rental through March 31, 1997. During the fiscal years ended April 30, 1995,
1994 and 1993, $12,900 in rents each year were paid by the Company to Walnut
Associates, Inc.
11. SUBSEQUENT EVENT
The Board of Directors of the Company have authorized the filing of a
post-effective amendment to a previously registered registration statement for
the Company to register the remaining portion of the offering of Senior Thrift
Certificates which will remain unsold as of August 31, 1995.
45
<PAGE>
<PAGE>47
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and Executive Officers of the Company are:
William Shapiro (age 72) President and Director
Kenneth S. Shapiro (age 43) Vice President
and Director
Deljean Shapiro (age 67) Secretary-Treasurer
and Director
Dr. Thomas Matcovich (age 66) Director
Philip R. Bagley (age 68) Director
Lester D. Shapiro (age 34) Director
Director's terms expire May 1, 1996, or when their successors are duly
elected at the next annual meeting of the stockholders. The executive
officers' terms expire when their successors are duly appointed by the Board of
Directors.
William Shapiro, the husband of Deljean Shapiro and father of Kenneth and
Lester Shapiro, holds degrees from the Temple University Schools of Business
and Law. He is a practicing attorney and a Certified Public Accountant. He
has been the President, Chief Executive Officer and Director of the Company
since 1969 and devotes substantially all of his time to those duties. For the
last thirty-three years, he has been the President, Chief Executive Officer and
a Director of Walnut Associates, Inc., the parent of the Company. He has been
President of William Shapiro, Esq., P.C., a law firm since 1976. He was also a
Director of Kulicke and Soffa Industries, Inc. a publicly held manufacturing
company, through August 1987. Mr. William Shapiro is the Secretary/Treasurer
and Director of Welco Securities, Inc. since 1983, the President of Equipment
Leasing Corporation of America since May, 1986, and President and Director of
Financial Data, Inc. since 1972.
Kenneth S. Shapiro, the son of William and Deljean Shapiro and brother of
Lester Shapiro, is a graduate of Boston University's School of Business and
School of Law. He is a practicing attorney and a Certified Public Accountant.
Upon graduation from law school in 1977, he was employed by Touche Ross & Co.,
Certified Public Accountants, as a Tax Consultant. In 1977 he became a
Director of the Company and was employed as its Controller from September 1979
to 1983, when he became its Vice-President. In addition to being the
Vice-President of Walnut, he is the President and a Director of Welco
Securities, Inc. He is also on the part-time faculty in Accounting and
Taxation at Beaver College, Glenside, Pennsylvania. He also serves as
Vice-President for Equipment Leasing Corporation of America.
46
<PAGE>
<PAGE>48
Deljean Shapiro, the wife of William Shapiro, and mother of Kenneth and
Lester Shapiro, is a graduate of Temple University and has been the Office
Manager of Walnut Associates, Inc. since its incorporation in 1960. Prior
thereto she was a social worker for the Commonwealth of Pennsylvania. She has
been the Secretary-Treasurer and Director of the Company since 1969, and is
co-director of KYW's Call-For-Action program in Philadelphia.
Dr. Thomas Matcovich was, for more than five years prior hereto, a
Professor of Electrical Engineering at Drexel University, Philadelphia,
Pennsylvania. He was also a Director of Kulicke and Soffa Industries, Inc., a
publicly held manufacturing company, through August, 1987. He is President of
Applied Microelectronics, Inc., (a research and development firm) since its
incorporation in January 1983, and President of Sportronics, Inc., a
manufacturer of automated diagnostic baseball bats, since January, 1990. He
has been a Director of the Company since September, 1983.
Philip R. Bagley received the degree of Master of Science from
Massachusetts Institute of Technology in 1951. He was from 1978 to 1984 an
assistant professor in computer and information sciences at Temple University,
Philadelphia, Pennsylvania. He was adjunct professor in computer and
information sciences at Temple University during the 1987-88 academic year.
With over 40 years experience in the data processing field, he has served as
President of Information Technology, Inc., (formerly Information Engineering)
from 1966 to 1977 (a computer systems design and operations center) and since
February 1980 has been President of the Automated Office, Inc., a firm
providing professional data processing consultation and services to outside
clients. He has been a Director of the Company since September, 1983.
Lester D. Shapiro, the son of William Shapiro and Deljean Shapiro and
brother of Kenneth S. Shapiro, is a graduate of New York University College of
Business and Public Administration, having majored in accounting and
management. He also received a Masters of Business Administration degree from
the New York University in June, 1985. Since 1981, he also has been engaged
in the purchase and resale of used business equipment on his behalf. He has
been a Director of the Company since September, 1983, and is also a Director
of Equipment Leasing Corporation of America, the Company's wholly-owned
subsidiary, since May, 1986.
Item 11. EXECUTIVE COMPENSATION
No Officer or Director of the Company received from the Company aggregate
direct remuneration during the fiscal year ended April 30, 1995, equal to or
in excess of $60,000. The Company has no profit sharing, pension, stock
option plans or employment agreement in effect and does not expect to adopt
any such plan or agreement in the near future. All executive officers as a
group (consisting of two individuals) earned an aggregate of $127,500 in
direct or indirect remuneration during the fiscal year ending April 30, 1995
(consisting in part of a $69,000 annual management fee paid to Walnut
Associates, Inc., in consideration of the services of Mr. William Shapiro, its
sole shareholder). The Company pays directors' fees to outside directors in
the amount of $350 per director per meeting.
47
<PAGE>
<PAGE>49
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the common stock of the Company presently outstanding is owned by
Walnut Associates, Inc. and 100% of the common stock of Walnut Associates,
Inc., is beneficially owned by William Shapiro, the President, Director, and
Chief Executive Officer of the Company. The principal business address of
Walnut Associates, Inc. is Suite 2128, 101 West City Avenue, Bala Cynwyd,
Pennsylvania 19004. As the sole shareholder, William Shapiro and Walnut
Associates, Inc., may be deemed "parents" of the Company as that term is
defined under the Securities Act of 1933, as amended. All of the Company's
presently outstanding Adjustable Rate Cumulative Preferred Shares are held by
Mr. William Shapiro and members of his immediate family, individually or in
joint ownership, as well as $281 in legal capital of Prime Rate Cumulative
Preferred Shares at April 30, 1995.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no employment contracts with any of the Officers or Directors of
the Company.
For the three fiscal years ended April 30, 1995, the Company paid yearly
management service fees of $69,000 to Walnut Associates, Inc. (which is 100%
owned by William Shapiro). Management service fees have continued since June,
1991 at the rate of $5,750 per month, which approximates the monthly operating
costs and expenses of Walnut Associates, Inc. These fees are primarily to
reimburse Walnut Associates for the services provided to the Company by Mr.
William Shapiro. The management and servicing activities of Walnut Associates,
Inc. for which such charges are made also cover broad areas, including
management guidance, financing and furnishing of office and computer
facilities.
Financial Data, Inc., an affiliate of the Company, performs transfer agent
duties for both the Company and ELCOA and receives monthly fees from both
companies for its services, which amounted to $169,538 for the fiscal year
ended April 30, 1995. Financial Data, Inc. is obligated to reimburse the
Company for the use of its computer facilities, personnel and miscellaneous
office expenses, including rent and telephone. Accrued reimbursements totaled
$111,592 for the fiscal year ended April 30, 1995. Financial Data, Inc. owed
the Company $88,264 at that date.
Legal services involving collections on defaulted leases were performed for
the Company and ELCOA by a law firm in which William Shapiro is a principal.
During fiscal year 1995, Mr. Shapiro's firm received $354,783 as reimbursement
for legal costs and expenditures incurred on behalf of the Company. Neither
William Shapiro nor Kenneth Shapiro are included on the law firm's payroll.
During fiscal 1995 the Company reimbursed Welco Securities, Inc. ("WELCO")
an affiliate owned by Mr. William Shapiro, for out-of-pocket expenses incurred
in connection with the offering and sale of Senior Thrift Certificates. Both
Companies pay Welco commissions between 0.2% and 8.0% of the sale price of the
certificates sold on behalf of the companies. See Footnote 10 to the
Consolidated Financial Statements. Both the Company and ELCOA amortize these
commissions over the terms of the certificates. During fiscal 1995 and 1994,
the Company and ELCOA paid Welco Securities, Inc. $306,235 and $302,429,
48
<PAGE>
<PAGE>50
respectively, for commissions and reimbursements of out-of-pocket expenses.
Neither Kenneth Shapiro nor William Shapiro received any remuneration from
Welco associated with the sale of these securities. As of April 30, 1995,
Welco owed the Company $5,797 for printing and mailing costs paid by the
Company on Welco's behalf. During the fiscal year ended April 30, 1995, Welco
paid rentals of $8,441 on equipment leased from the Company.
On May 6, 1986, the Company formed a subsidiary, Equipment Leasing
Corporation of America ("ELCOA") which the Company capitalized initially with
$1,000,000 in equipment cost and related direct financing leases, in exchange
for all of the subsidiary's voting common stock. ELCOA is operated as a
separate entity, with its own Board of Directors, a majority of the members of
which are independent of the Company, and maintains its principal office in
Wilmington, Delaware. ELCOA has entered into a Service Contract and other
related agreements with the Company, under the terms of which the Company and
its present employees will originate, administer and service all of ELCOA's
leases for a fee. In addition, the Company has granted to ELCOA a right of
first refusal to purchase certain equipment and associated leases from the
Company in excess of the Company's requirements. See also "BUSINESS - Methods
of Financing."
The Company also leases certain warehouse and print shop facilities from
Walnut Associates, Inc. Rents paid by the Company to Walnut Associates, Inc.
totaled $12,900 for the fiscal year ended April 30, 1995. See also Item 2 to
this Form 10-K.
The Company believes the above transactions to have been on terms at least
as favorable as the Company could have obtained from non-affiliated parties.
Since the Company and ELCOA are affiliated and share the same officers and
directors, certain conflicts of interest may arise between the Companies.
ELCOA competes with the Company in the equipment leasing business. Should
both companies have funds available at the same time for acquiring equipment
and related leases, conflicts of interest may arise as to which company should
hold and retain the equipment and related leases. In such situations, the
officers will analyze the equipment already purchased by the Company and
investment objectives of the Company and ELCOA. The officers will make the
decision as to which company will ultimately retain the equipment and related
leases, based upon such factors among others, as (a) the amount of cash
available to the Company and ELCOA, (b) the current and long term liabilities
of each company, and (c) the effect of such acquisition on the diversification
of each company's equipment and lease portfolio. ELCOA has the right of first
refusal in any equipment and appurtenant leases the Company wishes to sell,
based upon an Option Agreement between the parties. An additional conflict may
exist since the Company has been engaged in the collection of delinquent
accounts on behalf of ELCOA and will continue to receive servicing fees during
its collection efforts, although ELCOA may not recognize any income beyond the
original lease term.
49
<PAGE>
<PAGE>51
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
(a) (1) FINANCIAL STATEMENTS (Included in Item 8 of this Report):
Page
----
<S> <C>
(a) Independent Auditor's Report 29
(b) Consolidated Balance Sheets at April 30,
1995 and 1994. 30-31
(c) Consolidated Statements of Operations for
the years ended April 30, 1995, 1994 and 1993. 32
(d) Consolidated Statement of Changes in
Shareholders' Deficit for the years
ended April 30, 1995, 1994 and 1993. 33
(e) Consolidated Statements of Cash Flows
for the years ended April 30, 1995, 1994
and 1993. 34-35
(f) Notes to Consolidated Financial Statements. 36
</TABLE>
<TABLE>
<CAPTION>
(2) FINANCIAL STATEMENT SCHEDULE (attached hereto):
<S> <C>
(a) Report on Schedule. 57
(b) Schedule VIII - Valuation and Qualifying
Accounts. 58
</TABLE>
All other schedules for which provision is made in the applicable
regulation of the Securities and Exchange Commission have been omitted because
they are not required under the related instructions or are inapplicable.
50
<PAGE>
<PAGE>52
3) EXHIBITS
3.1 - Certificate of Incorporation, as amended, incorporated by reference
to Exhibit 3.1 to Walnut's Annual Report on Form 10-K for the year
ended April 30, 1987 (File No. 2-65101; Filed July 29, 1987).
3.2 - By-Laws, as amended, Incorporated by reference to Exhibit 3.1 to
Walnut's Annual Report on Form 10-K for the year ended April 30,
1985. (File No. 2-65101; July 29, 1985).
4.1 - Specimen of Variable Rate Money Market Subordinated Demand Thrift
Certificate, incorporated by reference to Walnut's Registration
Statement on Form S-1 (File No. 2-78371; File July 9, 1982).
4.2 - Specimen of Fixed Term Money Market Subordinated Thrift
Certificates, incorporated by reference to Exhibit 4.1 to Walnut's
Registration Statement on Form S-1 (File No. 2-78371; Filed July 9,
1982).
4.3 - Specimen of ninety day demand Subordinated Thrift Certificate,
incorporated by reference to Exhibit 3.1 to Walnut's Registration
Statement on Form S-18 (File No. 2-65101; Filed October 24, 1979).
4.4 - Specimen of one, three and five year Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.2 to Walnut's
Registration Statement on Form S-18 (File No. 2-65101; Filed
October 24, 1979).
4.5 - Specimen of Variable Rate Money Market Demand Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.6 to Walnut's
Registration Statement on Form S-18 (File No. 2-65101; Filed April
15, 1980).
4.6 - Specimen of Fixed Rate Money Market Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.7 to Walnut's
Registration Statement on Form S-18 (File No. 2-65101; File April
15, 1980).
4.7 - Specimen of Variable Rate Money Market Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.1 of Walnut's
Registration Statement on Form S-18 (File No. 2-70326; Filed
December 19, 1980).
4.8 - Specimen of Fixed Term Money Market Subordinated Thrift
Certificate, incorporated by reference to Exhibit 3.2 to Walnut's
Registration Statement on Form S-18 (File No. 2-70326; Filed
December 19, 1980).
4.9 - Trust Indenture between Walnut and Fulton Bank, Trustee, dated
October 26, 1979 and amended by an Amendment dated April 14, 1980,
incorporated by reference to Exhibit 4.9 to Walnut's Registration
Statement on Form S-2 (File No. 2-92440; Filed September 5, 1986).
4.10 - Trust Indenture between Walnut and Fulton Bank, Trustee, dated as
of June 15, 1982, incorporated by reference to Exhibit 4.10 to
Walnut's Registration Statement on Form S-2 (File No. 2-92440;
Filed September 5, 1986).
51
<PAGE>
<PAGE>53
4.11 - Trust Indenture between Walnut and Fulton Bank, Trustee, dated as
of June 15, 1982, incorporated by reference to Exhibit 4.11 to
Walnut's Registration Statement on Form S-2 (File No. 2-92440;
Filed September 5, 1986).
4.12 - Subordination Agreement by William Shapiro and members of his
immediate family, incorporated by reference to Exhibit 3.9 to
Walnut's Registration Statement on Form S-18 (File No. 2-65101;
Filed May 19, 1980).
4.13 - Company Order dated June 8, 1980, incorporated by reference to
Exhibit 3.10 to Walnut's Registration Statement on Form S-18 (File
No. 2-65101; Filed June 9, 1980).
4.14 - Specimen of Adjustable Rate Cumulative Preferred Share Certificate,
incorporated by reference to Exhibit 4.14 to Form 8-K as filed by
Walnut, dated December 30, 1982 (File No. 2-65101).
4.15 - Specimen of Variable Rate Money Market Demand Subordinated Thrift
Certificate, incorporated by reference to Exhibit 4.15 to Walnut's
Registration Statement on Form S-2 (File No. 2-92440; Filed July
27, 1984).
4.16 - Specimen of Fixed Term Money Market Subordinated Thrift
Certificate, incorporated by reference to Exhibit 4.15 to Walnut's
Registration Statement on Form S-2. (File No. 2-92440; Filed July
27, 1984).
4.17 - Supplemental Trust Indenture dated July 24, 1984 to Trust Indenture
between Walnut and Fulton Bank, Trustee dated June 15, 1982,
incorporated by reference to Exhibit 4.17 to Walnut's Registration
Statement on Form S-2. (File No. 2-92440; Filed July 27, 1984).
4.18 - Specimen of Prime Rate Cumulative Preferred Stock Certificate,
incorporated by reference to Exhibit 4.18 to Walnut's Registration
Statement on Form S-2. (File No. 2-92440; Filed July 27, 1984).
4.19 - Certificate of designations, relative rights, preferences and
limitations of Prime Rate Cumulative Preferred Stock, incorporated
by reference to Exhibit 4.19 to Walnut's Registration Statement on
Form S-2. (File No. 2-92440; Filed July 27, 1984).
4.20 - Second Supplemental Trust Indenture dated September 3, 1986 to
Trust Indenture between Walnut and Fulton Bank, Trustee dated June
15, 1982, as supplemented July 24, 1984, incorporated by reference
to Exhibit 4.20 to Walnut's Registration Statement on Form S-2
(Filed September 5, 1986; File No. 2-92440).
4.21 - Trust Indenture dated as of October 7, 1987 between Walnut and
First Valley Bank, Bethlehem, Pennsylvania, Trustee, incorporated
by reference to Exhibit 4.21 to Walnut's Registration Statement on
Form S-2 (Filed October 9, 1987; File No 33-16599).
4.22 - Form of Specimen of Demand Senior Thrift Certificate; incorporated
by reference to Exhibit 4.22 to Walnut's Registration Statement on
Form S-2 (Filed October 9, 1987; File No. 33-16599).
52
<PAGE>
<PAGE>54
4.23 - Form of Specimen of Fixed Term Senior Thrift Certificate,
incorporated by reference to Exhibit 4.23 to Walnut's Registration
Statement on Form S-2(Filed October 9, 1987; File No. 33-16599).
4.24 - Form of First Supplemental Trust Indenture dated September 20, 1988
to Trust Indenture dated as of October 7, 1987 between Registrant
and First Valley Bank, Bethlehem, Pennsylvania, Trustee,
incorporated by reference to Exhibit 4.24 to Walnut's Registration
Statement on Form S-2. (File No. 33-23210; Filed July 21, 1988.)
4.25 - Form of Demand Senior Thrift Certificate, incorporated by reference
to Exhibit 4.25 to Walnut's Registration Statement on Forms S-2
(File No. 33-23210; Filed July 21, 1988.)
4.26 - Form of Fixed Term Senior Thrift Certificate, incorporated by
reference to Exhibit 4.26 to Walnut's Registration Statement on Form
S-2 (File No. 33-23210; Filed July 21, 1988.)
4.27 - Form of Second Supplemental Trust Indenture dated as of September
13, 1989 to Trust Indenture dated as of October 7, 1987 between
Registrant and First Valley Bank, Bethlehem, Pennsylvania, Trustee,
incorporated by reference to Exhibit 4.27 to Walnut's Registration
Statement on Form S-2. (File No. 33-29704; Filed July 10, 1989.)
4.28 - Form of Specimen of Demand Senior Thrift Certificate, incorporated
by reference to Exhibit 4.28 to Walnut's Registration Statement on
Form S-2 (File No. 33-29704; Filed July 10, 1989.)
4.29 - Form of Specimen of Fixed Term Senior Thrift Certificate,
incorporated by reference to Exhibit 4.29 to Walnut's Registration
Statement on Form S-2 (File No. 33-29704; Filed July 10, 1989.)
4.30 - Form of Third Supplemental Trust Indenture dated as of August 17,
1990 to Trust Indenture dated as of October 7, 1987 between
Registrant and First Valley Bank, Bethlehem, Pennsylvania, Trustee
(File No. 33-35663; Filed June 29, 1990.)
4.31 - Specimen of Demand Senior Thrift Certificate (incorporated by
reference to Exhibit 4.31 to Walnut's Registration Statement on Form
S-2 (File No. 33-35663; Filed June 29, 1990.)
4.32 - Specimen of Fixed Rate Senior Thrift (incorporated by references to
Exhibit to Walnut's Registration Statement on Form S-2 (File No.
33-35663; Filed July 29, 1990)
4.33 - Fourth Supplemental Trust Indenture dated as August 14, 1992 to
Trust Indenture dated as of October 7, 1987 between Registrant and
First Valley Bank, Bethlehem, Pennsylvania, Trustee. (File No.
33-49278; File August 18, 1992).
4.34 - Form of Specimen of Demand Senior Thrift Certificate. (File No.
33-49278; Filed July 6, 1992).
4.35 - Form of Specimen of Fixed Term Senior Thrift Certificate. (File No.
33-49278; Filed July 6, 1992).
53
<PAGE>
<PAGE>55
10.1 - Specimen of existing five year Subordinated Debenture, incorporated
by reference to Exhibit 11.2 to Walnut's Registration Statement on
Form S-18 (File No. 2-65101; Filed July 26, 1979).
10.2 - Form of equipment lease, incorporated by reference to Exhibit 11.3
to Walnut's Registration Statement on Form S-18 (File No. 2-65101;
Filed July 26, 1979).
10.3 - Agreement with Walnut Associates, Inc. as of February 1, 1979,
incorporated by reference to Exhibit 11.5 to Walnut's Registration
Statement on Form S-18 (File No. 2-65101; Filed July 26, 1979).
10.5 - Service Contract dated May 23, 1986 between Walnut and Equipment
Leasing Corporation of America; Incorporated by reference to Exhibit
10.5 to Equipment Leasing Corporation of America's Registration
Statement on Form S-1 (File No. 33-6259; Filed June 6, 1986).
10.6 - Escrow Agreement dated May 23, 1986 between Walnut and Equipment
Leasing Corporation of America re: Segregation of Funds;
incorporated by reference to Exhibit 10.6 to Equipment Leasing
Corporation of America's Registration Statement on Form S-1 (File
No. 33-6259; Filed June 6, 1986).
10.7 - Option Agreement dated May 23, 1986 between Walnut and Equipment
Leasing Corporation of America; incorporated by reference to
Equipment Leasing Corporation of America's Registration Statement on
Form S-1 (File No. 33-6259; Filed June 6, 1986).
10.8 - Agreement regarding sale of equipment and related leases to
Equipment Leasing Corporation of America in exchange for common
stock; Incorporated by reference to Exhibit 2.1 to Equipment Leasing
Corporation's Registration Statement of Form S-1 (File No. 33-6259;
Filed June 6, 1986).
10.9 - Lease Agreement dated as of March 6, 1987 between Walnut and Walnut
Associates, Inc. covering the premises located at 15 South 4th
Street, Fernwood, PA, incorporated by reference to Exhibit 10.23 to
Walnut's Registration Statement on Form S-2 (Filed 7/31/87; File No.
2-92440).
10.10- Sublease agreement dated as of June, 1990 between Walnut and Walnut
Associates, Inc. covering the premises located at 101 W. City
Avenue, Bala Cynwyd, Pennsylvania, under and subject to a sublease
agreement between Walnut Associates, Inc., covering the period from
September 1, 1990 to August 31, 1995. Incorporated by reference to
Form 10-K filed for the fiscal year ended April 30, 1990 (Filed June
29, 1990.)
*10.11- Service Purchase Contract dated May 18, 1995 between Walnut and the
Pennsylvania Office of Liquidations and Rehabilitations regarding
servicing of performing lease files.
*10.12- Master Leasing Program Agreement dated as of June 9, 1995 between
TEC America, Inc. and the Company regarding a "private label
leasing" agreement between the parties.
54
<PAGE>
<PAGE>56
12.1 - See "Consolidated Statements of Operation" in Item 8 to this report.
22.1 -Subsidiaries of Walnut.
*27.1 - Financial Data Schedule.
* Filed with this Form-10K
(b) Reports on Form 8-K
None.
------------------------
Registrant has neither furnished to security holders any annual reports
covering the registrant's last fiscal year nor any proxy materials.
55
<PAGE>
<PAGE>57
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to a
previously filed report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WALNUT EQUIPMENT LEASING CO., INC.
By: /s/ William Shapiro
-----------------------------
William Shapiro, President
Date: July 24, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the dates indicated.
Name Title
/s/ William Shapiro
- ----------------------- President, Chief Executive,
William Shapiro Principal Financial and
Accounting Officer; Director
Date: July 24, 1995
/s/ Kenneth S. Shapiro
- ----------------------- Vice-President; Director
Kenneth S. Shapiro
Date: July 24, 1995
/s/ Deljean Shapiro
- ----------------------- Secretary/Treasurer; Director
Deljean Shapiro
Date: July 24, 1995
/s/ Thomas Matcovich
- ----------------------- Director
Dr. Thomas Matcovich
Date: July 24, 1995
/s/ Philip R. Bagley
- ----------------------- Director
Philip R. Bagley
Date: July 24, 1995
/s/ Lester D. Shapiro
- ----------------------- Director
Lester D. Shapiro
Date: July 24, 1995
56
<PAGE>
<PAGE>58
INDEPENDENT AUDITOR'S
REPORT ON FINANCIAL STATEMENT SCHEDULE
In connection with our audits of the consolidated financial statements of
Walnut Equipment Leasing Co., Inc. at April 30, 1995 and 1994 and for each of
the three years in the period ended April 30, 1995, we have also audited the
consolidated financial statement schedule included in this Form 10-K as listed
in Item 14(a)(2).
In our opinion, the consolidated financial statement schedule mentioned
above present fairly the information required to be stated therein.
/s/ Cogen Sklar LLP
COGEN SKLAR LLP
(formerly, Cogen Sklar Levick)
Bala Cynwyd, Pennsylvania
July 7, 1995
57
<PAGE>
<PAGE>59
<TABLE>
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
---------
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deductions Period
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended April 30, 1993
Allowance for Doubtful Lease Receivables
- ----------------------------------------
Direct Finance
Leases (A) $1,781,400 $1,143,471(C) $932,194(D) $1,992,677
Operating
Leases (B) --- --- --- ---
---------- ---------- -------- ----------
Total $1,781,400 $1,143,471 $932,194 $1,992,677
========== ========== ======== ==========
Year Ended April 30, 1994
Allowance for Doubtful Lease Receivables
- ----------------------------------------
Direct Finance
Leases (A) $1,992,677 $ 792,879(C) $897,098(D) $1,888,458
Operating
Leases (B) --- --- --- ---
---------- ---------- -------- ----------
Total $1,992,677 $ 792,879 $897,098 $1,888,458
========== ========== ======== ==========
Year Ended April 30, 1995
Allowance for Doubtful Lease Receivables
- ----------------------------------------
Direct Finance
Leases (A) $1,888,458 $1,635,963(C) $2,111,032(D) $1,413,389
Operating
Leases (B) --- --- --- ---
---------- ---------- ---------- ----------
Total $1,888,458 $1,635,963 $2,111,032 $1,413,389
========== ========== ========== ==========
<FN>
(A) Represents estimated losses that will be incurred in the collection
of receivables from finance leases.
(B) Represents estimated losses that will be incurred in the collection
of receivables from operating leases.
(C) Provisions for estimated losses calculated on the basis of amounts
necessary to provide for anticipated losses on delinquent leases on
an impairment basis.
(D) Write-offs of bad debts, net of recoveries.
</TABLE>
58
<PAGE>
<PAGE>60
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K405
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended Commission file number
APRIL 30, 1995 2-65101
WALNUT EQUIPMENT LEASING CO., INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-1712443
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
SUITE 2128, 101 WEST CITY AVENUE, BALA CYNWYD, PA 19004
(Address of principal executive offices) (Zip Code)
EXHIBIT
VOLUME
<PAGE>
<PAGE>61
<TABLE>
WALNUT EQUIPMENT LEASING CO., INC.
EXHIBIT INDEX
10-K
<CAPTION>
Exhibit Sequential
Number Description Page Number
- ------- ----------------------------------------------- -----------
<S> <C> <C>
10.11 Service Purchase Contract dated May 18, 1995
between Walnut and the Pennsylvania Office of
Liquidations and Rehabilitations. 62
10.12 Master Leasing Program Agreement dated as of June
9, 1995 between TEC America, Inc. and the Company. 72
27.1 Financial Data Schedule. 79
</TABLE>
<PAGE>62
OFFICE OF LIQUIDATION AND REHABILITATIONS SHOW THIS NUMBER ON INVOICE
SERVICE PURCHASE CONTRACT 1032
PROVIDE SERVICE TO AGENCY: BILL TO: (Provide original
and two(2) copies of invoice)
Bureau of Rehabilitation Admin
901 North Seventh Street Statutory Liquidator For
Harrisburg, Pennsylvania 17102 Corporate Life
901 N 7th Street
Harrisburg, PA 17102
CONTRACTOR INFORMATION Date Prepared: 04/03/95
Name: Walnut Equipment Leasing Co., Inc. Effective Date: 04/03/95
Address: 101 West City Ave., Suite 2146
Bala Cynwyd, PA 19004 Federal ID/SS #: 23-1712443
Tele #: (610) 668-0707 License/Registration #: n/a
Termination Date Anticipated Delivery Date Contract Not to Exceed
06/30/97 / / $contingent fee 50% + costs
SERVICES REQUESTED QUANTITY UNIT PRICE TOTAL PRICE
Servicing of performing 75 files valued 50% Contingency 906,271.00
lease files. Collection @ 1,812,542.75 est. court costs 5,000.00
of non-performing lease -----------
files. TOTAL $911,271.00
CONTRACTOR AGREES TO THE TERMS AND CONDITIONS ON THE ATTACHMENTS, IF ANY, WHICH
ARE PART OF THIS CONTRACT. THIS CONTRACT IS NOT VALID OR ENFORCEABLE UNTIL
FULLY EXECUTED, APPROVED, AND DELIVERED TO THE CONTRACTOR.
Other conditions or agreements.
Attachment A
Purpose and justification for above.
Tracee Gotwalt William Shapiro 5/18/95
Agency Contact Contractor's Signature Date
(717) 787-6009 President
Telephone Number Contractor's Title
AUTHORIZED AGENCY ATTORNEY AGENCY HEAD (Or Designee)
Signature: Signature:
Date: Date:
<PAGE>63
PA INSURANCE DEPARTMENT
Service Purchase Contract Office of Liquidations and Rehabilitations
Terms and Conditions
Contract No. 1032
A. COMPENSATION
1. Billing
a. The contractor shall submit monthly invoices to the attention of:
Office of Liquidations and Rehabilitations, Bureau of Liquidations
Administration, 901 North Seventh Street, Harrisburg, Pennsylvania
17102, Attention: Mark Leschik, for services performed during each such
period. The amount shown on each invoice for labor cost shall be in
accordance with the rates established in this contract.
b. Contractor billings must include personnel class, work hours, hourly
rate, and itemized expenses. Contractor will bill for actual services
rendered not to exceed the contract cap amount.
c. Any expenses incurred for travel must be billed in accordance with
Commonwealth Travel Regulations. The following is a summary of travel
regulations in force at the date of guideline issuance. (You will be
advised of any change in the Commonwealth Travel Regulations.):
* All travelers should minimize travel expenses to a reasonable degree.
Public transportation should be utilized if the cost of travel is less
than private transportation.
* You should attempt to obtain discounted, but not non-cancelable,
tickets.
* Hotel lodging is only authorized if it is necessary for you to stay
overnight and the overnight location is greater than fifty (50) miles
from your headquarters office.
* You should obtain lodging at the least expensive of three (3) hotels
with available space within a reasonable distance from your meeting
location.
* Receipts are required for all travel expenses greater than fifteen
($15.00) dollars, except for subsistence (meals).
* Non-subsistence is reimbursable for meals incurred on non-overnight
travel.
* Taxi-cab use is not authorized where airport limousine or shuttle
service is available.
d. All billable expenses are subject to audit by the Liquidator. Receipts
for all billable expenses may be requested prior to payment.
B. CONFLICT OF INTEREST
1. Notice of any actual or potential conflict of interest shall be given to
the Liquidator.
2. Any conflicts will be resolved in favor of the Liquidator, by the
Liquidator, or, in the alternative, the Liquidator shall have the option to
terminate this agreement if the conflict cannot be resolved.
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C. NON-DISCRIMINATION CLAUSE
During the term of this contract, the contractor agrees as follows:
1. The contractor shall not discriminate against any employee, applicant for
employment, independent contractor, or any other person because of race,
color, religious creed, handicap, ancestry, national origin, age, or sex.
The contractor shall take affirmative action to insure that applicants are
employed and that employees or agents are treated without regard to their
race, color, religious creed, handicap, ancestry, national origin, age, or
sex during employment. Such affirmative action shall include, but is not
limited to, employment, upgrading, demotion or transfer, recruitment or
recruitment advertising, layoff or termination, rates of pay or other forms
of compensation, and selection for training.
2. The contractor shall, in advertisements or requests for employment placed
by them or on its behalf, state that all qualified applicants will receive
consideration for employment without regard to race, color, religious
creed, handicap, ancestry, national origin, age, or sex.
3. The contractor shall send each labor union or workers representative with
which it has a collective bargaining agreement or other contract or
understanding, a notice advising said labor union or workers representative
of its commitment to this non-discrimination clause. Similar notice shall
be sent to every other source of recruitment regularly utilized by the
contractor.
4. It shall be no defense to a finding of non-compliance with this
non-discrimination clause that the contractor had delegated some of its
employment practices to any union, training program, or other source of
recruitment which prevents it from meeting its obligations. However, if the
evidence indicates that the contractor was not on notice of the third party
discrimination or made a good faith effort to correct it, such factor shall
be considered in mitigation in determining appropriate sanctions.
5. Where the practices of a union or any training program or other source of
recruitment will result in the exclusion of minority group persons, so that
the contractor will be unable to meet its obligations under this
non-discrimination clause, the contractor shall then employ and fill
vacancies through other non-discriminatory employment procedures.
6. The contractor shall comply with all state and federal laws prohibiting
discrimination in hiring or employment opportunities. In the event of the
contractor's non-compliance with the non-discrimination clause of this
contract or with any such laws, this contract may be terminated or
suspended, in whole or in part, and the contractor may be declared
temporarily ineligible for further Liquidator contracts, and other
sanctions may be imposed and remedies invoked.
7. The contractor shall furnish all necessary employment documents and records
to, and permit access to its books, records and accounts by the Liquidator,
for purposes of investigation to ascertain compliance with the provisions
of this clause. If the contractor does not possess documents or records
reflecting the necessary information requested, it shall furnish such
information on reporting forms supplied by the Liquidator.
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<PAGE>65
8. The contractor shall actively recruit minority and women subcontractors, as
well as subcontractors with substantial minority representation among their
employees.
9. The contractor shall include the provisions of this non-discrimination
clause in every subcontract so that such provisions will be binding upon
each subcontractor.
10. The contractor's obligations under this clause are limited to the firm's
offices within the state of Pennsylvania.
D. CONTRACTOR INTEGRITY PROVISIONS
1. The contractor shall not, in connection with this or any other agreement
with the Liquidator, directly or indirectly, offer, give, agree, or promise
to give anyone any gratuity for the benefit of or at the direction or
request of any officer or employee of the Liquidator.
2. Except with the consent of the Liquidator, neither the contractor nor
anyone in privity with the contractor shall accept or agree to accept from,
or give or agree to give to any person, any gratuity from any person in
connection with the performance of work under this agreement except as
provided herein.
3. Except with the consent of the Liquidator, the contractor shall not have a
financial interest involving any other party to this action.
4. The contractor, upon being informed that any violation of these provisions
has occurred, or may occur, shall immediately notify the Liquidator in
writing.
5. The contractor, by execution of this agreement and by the submission of any
bills or invoices for payment pursuant thereto, certifies and represents
that he has not violated any of these provisions.
6. For violation of any of the above provisions, the Liquidator may terminate
this and any other agreement with the contractor and claim liquidated
damages in an amount equal to the value of anything received in breech of
these provisions, claim damages for all expenses incurred in obtaining
another contractor to complete performance hereunder, and debar and suspend
the contractor from doing business with the Liquidator. These rights and
remedies are cumulative, and the use or non-use of any one shall not
preclude the use of all or any others. These rights and remedies are in
addition to those the Liquidator may have under law, statute, regulation,
or otherwise.
E. CONTRACTOR AUDIT PROVISIONS
1. This contract is subject to audit by the Liquidator and or its designated
representatives, including audits of actual costs incurred. The contractor
agrees to maintain records which will support the charges claimed against
the contract. At the direction of the Liquidator, all of the contractor's
books and records related to this contract will be made available for audit
at a site designated by the Liquidator.
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The contractor shall preserve books, documents, and records sufficient to
justify the charges billed to the Liquidator for three (3) years after
expiration of the contract, or until all questioned items are resolved after
the services are furnished under this contract. The contractor shall give full
and free access to all records to the Liquidator and or its authorized
representative.
2. Upon termination of this contract, the contractor will turn over to the
Liquidator all information and research developed pursuant to this
contract.
3. The contractor will make records in their possession pertaining to this
contract available for inspection at the offices of the Liquidator upon
request.
F. CONTRACTOR RESPONSIBILITY PROVISIONS
1. Contractor certifies that it is not currently under suspension or debarment
by the Commonwealth of Pennsylvania, any other state, or the federal
government.
2. If contractor enters into any subcontracts under this contract with
sub-contractors who are currently suspended or debarred by the Commonwealth
of Pennsylvania, any other state, or the federal government, or who became
suspended or debarred by the Commonwealth of Pennsylvania, any other state,
or the federal government during the term of this contract, or any renewals
thereof, the Liquidator shall have the right to require the contractor to
terminate such sub-contracts.
3. The contractor agrees that it shall be responsible for reimbursing the
Liquidator for all necessary and reasonable costs and expenses incurred by
the Office of the Inspector General relating to an investigation of the
contractor's compliance with the terms of this or any other agreement
between the contractor and the Liquidator which results in the suspension
or debarment of the contractor.
G. OFFSET PROVISION FOR LIQUIDATOR CONTRACTS
1. The contractor agrees that the Liquidator may offset the amount of any
state tax liability owed to the Commonwealth, or other debt of the
contractor, or its subsidiaries, that is owed to the Liquidator or the
Commonwealth, and not being contested on appeal against any payments due
the contractor under this or any other contract with the Liquidator.
H. PROVISIONS CONCERNING THE AMERICANS WITH DISABILITIES ACT
During the term of this contract, the contractor agrees as follows:
1. Pursuant to federal regulations promulgated under the authority of The
Americans With Disabilities Act, 28 C.F.R. Section 35.101 et seq., the
contractor understands and agrees that no individual with a disability
shall, on the basis of the disability, be excluded from participation in
this contract or from activities provided for under this contract. As a
condition of accepting and executing this contract, the contractor agrees
to comply with the General Prohibitions Against Discrimination, 28 C.F.R.
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<PAGE>67
Section 35.130, and all other regulations promulgated under "Title ll" of
The Americans With Disabilities Act which are applicable to the benefits,
services, programs, and activities provided by the Commonwealth of
Pennsylvania through contracts with outside contractors.
2. The contractor shall be responsible for and agree to indemnify and hold
harmless the Liquidator from all losses, damages, expenses, claims,
demands, suits, and actions brought by any party as a result of the
contractor's failure to comply with the provisions of paragraph 1, above.
I. LIQUIDATOR HELD HARMLESS
1. The contractor agrees to indemnify, defend, and save harmless the
Liquidator, its officers, agents, and employees from any and all claims,
suits, actions, judgments, and losses accruing or resulting to any and all
contractors, subcontractors, materialmen, laborers, and any other persons,
firms, or corporations furnishing or supplying work, services, materials or
supplies in connection with the performance of this contract, and from any
and all claims, losses, costs, and expenses accruing or resulting to any
person, firm, or corporation for injury, death, or property damage caused
by acts or omissions of the contractor, its employees, or agents in the
performance of this contract and against any liability including, without
limitations, costs and expenses for violation of proprietary rights, or
right of privacy, arising out of the publication, translation,
reproduction, delivery, performance, use, or disposition of any data
furnished under this contract or based on any libelous or other unlawful
matter contained in such data. The Liquidator agrees to notify the
contractor within a reasonable time of any written claims or demands for
which the contractor is responsible under this paragraph.
J. CONFIDENTIALITY
1. The contractor agrees to protect the confidentiality of any files, data, or
other materials provided by the Liquidator, any other party, or developed
in the course of its duties. Any such data or information shall be
restricted in use and purpose to the performance of this contract.
K. ENTIRE CONTRACT
1. This agreement constitutes the entire contract between the parties. There
are no promises, terms, conditions, or obligations other than those
contained herein, and this contract shall supersede all previous
communications, representations, or contracts, either oral or written,
between the parties hereto concerning the services set out herein.
2. This contract may be amended; however, no amendment to this contract shall
be effective unless it is in writing and signed by all parties to the
initial contract.
3. Contractor agrees to comply with all applicable laws and regulations of the
Commonwealth in carrying, out this contract.
4. Contractor, its agents and employees, shall act in an independent capacity,
and shall not act or be deemed to act as officers, employees or agents of
the Statutory Liquidator.
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<PAGE>68
5. Regardless of provisions to the contrary found elsewhere in the provisions
of this contract, the laws of the Commonwealth of Pennsylvania shall be
used in the interpretation of this contract and shall prevail over the laws
of any other state in the construction of this contract.
6. Performance of this contract is not assignable without prior written
consent of the Statutory Liquidator.
7. In carrying out the Contract, the Contractor shall minimize pollution and
shall strictly comply with all applicable environmental laws and
regulations.
8. Contractor and the Statutory Liquidator recognize that in actual economic
practice, overcharges by contractors suppliers resulting from violations of
state or federal antitrust laws are in fact borne by the Commonwealth. As
part of the consideration for the award of the contract, and intending to
be legally bound, contractor assigns to the Commonwealth all rights, title
and interest in and to any claims contractor now has or may hereafter
acquire under state or federal antitrust laws relating to the goods or
services which are the subject of this contract.
L. TERMINATION - AMENDMENT
1. This contract may be terminated, at will, by the Liquidator.
2. This contract may be terminated by the contractor upon thirty (30) days
written notice to the Liquidator.
3. This contract may be amended for additional service hours or expenses, or
may be extended if additional unanticipated work is required and
authorized.
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<PAGE>69
Attachment A
1. PURPOSE AND JUSTIFICATION
The purpose of this contract is to provide servicing of performing
equipment leases and collection of non-performing lease receivables.
This contract is justified because the Statutory Liquidator does not have
the expertise on staff to service equipment leases, recover and dispose of
residuals and collect non-performing lease obligations. Several firms were
invited to submit bids to either purchase the leases or service them for
the Liquidator. After due diligence, only two bids were received; both bids
asked for a 50% contingent fee from all sums recovered. Liquidators staff
feels Contractor can best provide the needed services.
2. DESCRIPTION OF SERVICES
A. Contractor will provide lease servicing which shall include but not be
limited to:
Collecting and accounting for lease payments recovering leased
equipment at the termination of the lease and disposing of the
equipment.
Collecting through judicial or non-judicial means rents due from
non-performing lessees.
B. Contractor will further:
Prepare on behalf of a given estate pursuant to authorization from the
Liquidator, necessary documents pertaining to the collections of the
above mentioned leases or arising out of such activity.
C. Contractor will further provide advice and a written recommendation to
the Liquidator if it is determined that it is no longer feasible to
pursue recovery of any particular lease.
D. Contractor will further brief the Liquidator as to any filings or court
appearances at least 90 days in advance, whenever possible, and if
possible, notify the Liquidator as soon as the firm receives
notification.
E. Contractor will provide the Liquidator with a quarterly report which
summarizes litigation events and any recommendations regarding
litigation, lists the status of each file including the recap of
collections and funds transmitted to the Liquidator. The report must
also total all contingent fees retained by the firm per calendar year
(January 1 through December 31).
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<PAGE>70
F. Contractor will obtain authorization from the Liquidator for any
compromise of her claim or for any payment plan longer than one year in
duration.
G. The Liquidator reserves the right to represent herself, on any specific
claims and determinations, as its sole judgement determines.
H. Contractor, on an as required basis, shall calculate sales tax due and
complete the necessary tax filings for submission by the Statutory
Liquidator.
3. COMPENSATION
A. Both parties to this agreement recognize the contingent nature of these
claims. Accordingly, Contractor will be compensated with a contingent
fee of fifty percent (50%) net of sales taxes for each claim for which
a recovery is obtained, payable at the time monies are recovered, as
the result of any settlement or verdict. If no recovery is made, the
firm shall bear the loss of all time invested. No hourly fee will be
billed or paid.
B. If Contractor recommends audit, accounting, actuarial or other outside
professional services, Contractor must submit to the Liquidator a
written description of the nature, scope, type and estimated number of
hours of professional services required. The Liquidator will review the
submission, make a determination, and proceed with negotiations with
the approved outside entity. The Liquidator will contract directly with
any outside vendors necessary to assist Contractor unless the
Liquidator expressly authorizes Contractor to do so, in writing.
C. Contractor shall submit quarterly itemized billings, consistent with
guidelines the Liquidator may periodically issue, which fully and
completely disclose reimbursable costs incurred. The bill shall include
a cover sheet detailing the matter assigned, the amount billed to date.
Separate matters being handled by Contractor shall be invoiced
individually. Each invoice shall be submitted to the estate for which
services were rendered.
D. "Reimbursable Costs" shall include only the filing fees, recording
fees, and service fees. No other costs shall be billed or reimbursed.
E. All recoveries shall be remitted to the Liquidator within thirty (30)
days of collection with a billing that show the total amount recovered,
the fifty percent (50%) contingent fee deducted, and the amount
remitted to the Liquidator. A copy of the check or other instrument
documenting the total amount recovered must be submitted along with the
billing. Only the contingent percentage and sales tax may be deducted
from the recovery. All reimbursable costs must be billed on a quarterly
basis.
F. For time invested in review and determination of the prospects of
collection, a fee of $100.00 will be paid on each lease which is deemed
uncollectible.
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<PAGE>71
G. All sales tax filings will be calculated by Contractor at no cost to
the Statutory Liquidator.
4. STATUTORY LIQUIDATOR BILLING GUIDELINES
A. All billing should be by specific assignment to include the name of the
liquidated company and the name of the specific case or claim, and the
claim or case number if one is assigned. Aggregating categories of
cases or a wide variety of activities under headings such as "direct
action matters" or "general" is unacceptable.
B. All billings for any reimbursable costs incurred should be submitted
quarterly on a regular and timely basis.
C. Bills are submitted to the Office of Liquidations & Rehabilitations for
review and approval. If billing clarifications or revisions are
requested, resubmit the clarification information or revised bill to
the Office of Liquidations & Rehabilitations, 901 North Seventh Street,
Harrisburg, Pa 17102, Attn: Tracee Gotwalt.
D. In a cover letter enclosing each bill, please indicate the total to
date billed by carrier, case, or claim as well as the total for the
current calendar year for each matter billed.
<PAGE>72
MASTER LEASING PROGRAM AGREEMENT
This Master Leasing Program Agreement ("Agreement") is entered into as June 9,
1995, by and between TEC America, Inc., a California corporation, having a
business office located at 4401-A Bankers Circle, Atlanta, Georgia 30360
("TEC") and Walnut Equipment Leasing Co., Inc., a Delaware corporation, having
a business office located at 101 West City Avenue, Suite 2128, P.O. Box 1050,
Bala Cynwyd, Pennsylvania 19004.
RECITALS
WHEREAS, TEC is engaged in the distribution of electronic cash registers, point
of sale systems, scale and scale systems, and bar code printers bearing the
"TEC" trademark (the "Products"), which Products are sold to the end users
thereof through a network of independent TEC authorized distributors and
dealers (individually, "Dealer" and collectively, "Dealers"), and TEC is the
owner of the trade name "TEC America" used in connection with its distribution
of the Products; and
WHEREAS, TEC and the Dealers desire to offer their customers (individually,
"Customer" and collectively, "Customers") the opportunity to lease, rent and/or
use the Products and TEC desires to offer Walnut the opportunity to enter into
lease agreements related thereto and/or other agreements (individually,
"Contract" and collectively, "Contracts") with such Customers for the Products;
and
WHEREAS, Walnut wishes to enter into Contracts with Customers on a private
label basis using the name "TEC America" or any other name TEC authorizes in
writing (TEC America Leasing"), but identifying the lessor as Walnut.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained in this Agreement, and for other valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, and intending to be legally
bound, the parties hereby agree as follows:
ARTICLE ONE
Documentation and Use of Trade Name
1.1 FORM OF CONTRACTS. All Contracts with the Customers and documentation
related to the Contracts shall be prepared by Walnut and shall include the
Trade Name. TEC shall have the right to review and approve the standard form of
the Contracts and such documentation.
1.2 USE OF TRADE NAME. TEC agrees to permit Walnut to use the Trade Name
as both a fictitious business name and service mark, on a non-exclusive and
non-transferable basis, for the limited purpose of leasing and promoting the
leasing of the Products to the Customers pursuant to Contracts; provided,
however, such use shall be in strict accordance with TEC policies and Walnut
shall promptly change the manner of such use if requested to do so by TEC. The
use of the Contracts and the use of the Trade Name shall only be in connection
with the Products and related products. The Trade Name shall not be used with
respect to any products produced or distributed by any entity under a trademark
other than "TEC" except to the extent such products constitute related products
and have been approved in writing by TEC.
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<PAGE>73
1.3 WALNUT ACKNOWLEDGEMENTS. Walnut acknowledges the exclusive right, title
and interest held by TEC in and to the trademark "TEC" and in and to the Trade
Name; and agrees to not do or cause any act or thing contesting or impairing
TEC's rights in the trademark "TEC" and in the Trade Name, either during the
term of this Agreement or thereafter Walnut further acknowledges that upon the
expiration or termination of this Agreement, Walnut shall immediately
discontinue its use of the Trade Name and shall not thereafter use any marks or
names which are, or any part of which are, confusingly similar thereto, for any
future leases, not withstanding any schedules.
ARTICLE TWO
Acceptance of Contracts
2.1 CONDITIONS PRECEDENT TO ACCEPTANCE OF A CONTRACT. The obligation of
Walnut to accept any Contract shall be subject to the satisfaction of the
following conditions precedent:
2.2
a. Walnut's receipt of all required credit-information and Contract documents
deemed necessary by Walnut, including, but not limited to, UCC-1 Financing
Statements and advance payments;
b. Walnut's credit approval of the Customer;
c. Walnut's confirmation that the Customer has accepted the Products or waived
its right to do so, as in the case of a Contract with progress payments; and
d. The seller of the Products (i.e., TEC or the relevant Dealer, as
applicable) shall have performed and complied in all material respects with all
covenants, agreements and conditions, if any, which are required to be
performed or complied with by such seller as of or prior to the date Walnut
accepts the Contract.
ARTICLE THREE
Representations and Warranties
3.1 MUTUAL REPRESENTATIONS AND WARRANTIES. Walnut and TEC each represents and
warrants to the other as follows:
a. It is a duly organized and validly existing corporation and has full power
to enter into this Agreement and to carry out the transactions contemplated
hereby and is in good standing in the state of its incorporation;
b. The execution and delivery of this Agreement and the performance by it of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action, and this Agreement constitutes a legal, valid and binding
obligation enforceable in accordance with its terms; and
c. Each party has all governmental approvals, permits, certificates,
inspections, consents and franchises necessary to conduct its respective
business, substantially as now conducted, and to own or finance and operate its
properties as now owned, financed or operated by it, except where the failure
to obtain any of the foregoing does not materially and adversely impair the
ability of each to operate its business or to perform its obligations under
this Agreement.
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<PAGE>74
3.3 REPRESENTATIONS AND WARRANTIES OF WALNUT. Walnut represents and warrants
to TEC that as of the date each Contract is accepted by Walnut and thereafter
as follows:
a. Walnut and its agents and employees have not made and will not make any
misrepresentations or false claims with respect to the Contract or the Products
and have not committed and will not commit any fraudulent act or activity in
connection with the execution and performance of the Contract.
b. The conduct of Walnut in processing any Contract application, including the
granting or denial of credit, and the servicing of the Contract has not
violated and will not violate in any material respect any federal or state law,
rule or regulation.
c. Walnut has and will conduct all of its activities relative to the Customer,
any guarantor, and the Contract, including without limitation, the collection
of payments due thereunder, reasonably, fairly, and in good faith, and
otherwise in such manner as to reflect favorably upon the name and reputation
of TEC.
ARTICLE FOUR
Limitations of Warranties
4.1 Products supplied to Walnut by TEC or the Dealers is warranted only in
accordance with the manufacturer's written warranty to consumers (the
"Manufacturer's Warranty"), which Manufacturer's Warranty will be supplied to
Walnut for distribution to Customers and which may be amended or modified from
time to time only by notice from TEC.
OTHER THAN THE WARRANTY CONTAINED IN THE MANUFACTURER'S WARRANTY, TEC DISCLAIMS
ANY OTHER WARRANTY, EXPRESS OR lMPLIED, lNCLUDlNG BUT NOT BY WAY OF LlMITATION,
THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR ANY PARTICULAR PURPOSE. TEC
ASSUMES NO RESPONSIBlLITY AND DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED,
WITH REGARD TO THIRD PARTY SOFTWARE PROVIDED OR RECOMMENDED FOR USE WITH THE
PRODUCTS, lNCLUDlNG BUT NOT BY WAY OF LIMITATION, THE WARRANTIES OF
MERCHANTABLITY AND FITNESS FOR ANY PARTICULAR PURPOSE. TEC DISCLAIMS ANY
LIABILITY FOR lNDIRECT, lNCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, LOSSES,
COSTS OR EXPENSES OF ANY KIND SUFFERED BY WALNUT, THE CUSTOMERS OR ANY
THIRD PARTY.
ARTICLE FIVE
Contract Servicing
5.1 SERVICING OF CONTRACTS. Walnut shall designate a team of specialists in
pricing, application processing, credit evaluation, documentation,
administration, collections and asset management to fulfill Walnut's
obligations hereunder. Walnut shall ensure that the Contracts are serviced in a
professional manner.
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<PAGE>75
5.2 ACCESS TO TEC'S SALES ORGANIZATION. To the extent reasonably necessary to
allow Walnut to more effectively market the Contracts, TEC agrees to provide
Walnut with the names of all sales representatives, manufacturers
representatives, wholesalers, distributors, Dealers, branch offices, suppliers,
vendors and employees of TEC as TEC, in its sole and absolute discretion,
determines appropriate. Such names shall be provided to Walnut solely for the
purpose of Walnut contacting such persons or entities for the purpose of
acquainting them with using leasing as a sales tool to increase sales of the
Products and for no other purpose, and such information shall be used by Walnut
solely during the term of this Agreement.
5.3 NONEXCLUSIVE. Walnut acknowledges that neither TEC nor its Dealers shall
at any time be required to refer their Customers to TEC and that TEC and its
Dealers may at any time refer their customers to any competitor of Walnut.
5.4 PORTFOLIO REPORTS. During the term of this Agreement, Walnut shall
provide monthly reports to TEC which detail the status of consumated
transactions, including each Customer's name, Dealer's name and address, which
Dealer is involved, the number, type and equipment cost of the Products, and
upon request, Walnut will provide accounting information (i.e., location of
equipment, structure of transaction, factors and percentages).
ARTICLE SIX
Indemnification
6.1 Indemnification.
a. TEC agrees to indemnify and hold harmless Walnut and its affiliates,
subsidiaries, employees, officers and agents (collectively, the "Walnut
Indemnitees") from any and all losses, claims, liabilities, demands and
expenses whatsoever including without limitation reasonable attorneys' fees
(all the aforesaid collectively, "Losses") sustained by the Walnut Indemnitees
in connection with or in any way related to the breach by TEC of any of its
covenants, agreements, warranties and representations contained in this
Agreement.
b. Walnut agrees to indemnify and hold harmless TEC and its affiliates,
subsidiaries, employees, officers, and agents (collectively, the"TEC
Indemnitees") from any Losses sustained by the TEC Indemnitees in connection
with or in any way related to (i) any breach by Walnut of any of its covenants,
agreements, representations or warranties contained in this Agreement and (ii)
any claims related to or in respect of Walnut's use of the Trade Name, any
Contract or any proposed Contract; provided, however, to the extent any such
claim arises as a result of a breach of any Manufacturer's Warranty then such
claim shall not be indemnifiable by Walnut to such extent.
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<PAGE>76
ARTICLE SEVEN
Confidentiality
7.1 Confidentiality.
a. PPOCEDURES. All information transmitted by one party to the other during
the existence of this Agreement or obtained by one party from or through the
other party pursuant to this Agreement, whether in written or oral form, shall
be deemed confidential ("Confidential Information"), shall not be used except
for purposes of this Agreement, and shall not be disclosed to anyone other than
employees or independent contractors of the recipient. The recipient shall
undertake to safeguard the Confidential Information, including without
limitation implementing the following procedures to preserve the
confidentiality of Confidential Information:
i. It shall limit access to Confidential Information to those who have need to
such access; and
ii. It shall inform those who use or otherwise have access to the Confidential
Information that they shall maintain such information as confidential.
b. Excluded Information. Section 7.1 shall not apply to information if such
information is:
i. Known to the recipient, as shown by its pre-existing written records, prior
to the time of receipt of such information under this Agreement;
ii. Publicly available other than through the fault of the recipient or its
employees or independent contractors; or
iii. Made available to the recipient from a source under no duty of
confidentiality to the transmitting party.
7.2 WALNUT ACKNOWLEDGEMENTS. Walnut acknowledges its responsibility for any
breach hereof by virtue of the acts or omissions of its employees or
independent contractors, and of its obligation to remedy any such breach.
Walnut further acknowledges that in the event of any unauthorized use or
disclosure of TEC Confidential Information or the threat thereof, injunctive
relief would be the appropriate remedy available to TEC.
ARTICLE EIGHT
Seller; Remarketing
8.1 SELLER. The parties contemplate that in most cases the Products will be
sold to Walnut by the Dealers and that in any case Walnut shall have no
recourse or claim against TEC with respect to the Products or the Contracts,
except to the extent of any Manufacturer's Warranty as provided in Section 4.1
hereof .With respect to those Customers that TEC deals with directly, such as
government accounts, OEM accounts, major retail accounts, value added
resellers, cooperative marketing opportunity vendors and others, and in the
event that TEC agrees to directly sell the Products to Walnut, the Products
shall be sold to Walnut pursuant to the sales agreement in the form of Exhibit
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A attached hereto ("Sales Agreement"). With respect to sales of Products
pursuant to any such Sales Agreement, TEC shall have no liability or
responsibility to Walnut except as expressly set forth in this Agreement or in
such Sales Agreement. In the event of any inconsistency between the terms of
this Agreement and the terms of the Sales Agreement, the parties agree that the
terms of this Agreement shall be controlling.
8.2 REMARKETING. TEC is not required or responsible to assist Walnut in
remarketing (including reselling or releasing) or to itself remarket any of the
Products upon the expiration or termination of any Contract; nor is TEC
required or responsible to repurchase any of the Products upon the expiration
or termination of any Contract.
ARTICLE NINE
General Provisions
9.1 INDEPENDENT CONTRACTORS. Walnut and TEC are separate and independent
entities, who have entered into this Agreement for independent business
reasons. Neither Walnut nor TEC have acted, act, or shall be deemed to have
acted or act, as an agent for or joint venturer or partner with the other.
9.2 DEALERS. Walnut hereby acknowledges that TEC and the Dealers are separate
and independent entities and the Dealers shall not be deemed to act as the
agents for TEC or Walnut. TEC shall have no liability or responsibility for any
obligation of, representation, warranty or statement made by, or any action or
inaction, of any Dealer to Walnut or to the Customers.
9.3 TERM AND TERMINATION. This Agreement shall be deemed effective upon
execution by Walnut and TEC. The terrn of this Agreement shall continue from
such effective date for one (1) year and shall automatically renew for
additional one-year periods unless earlier terminated by TEC or Walnut as
provided herein. TEC may terminate this Agreement at will, at any time during
the initial term or any renewal thereof, in its sole and absolute discretion,
by giving Walnut at least twenty four (24) hours written notice of such
termination. In the event of a material default hereunder, Walnut may terminate
this Agreement upon sixty [60] days prior written notice of such material
default to TEC provided such material default has not been cured within said
time frame.
9.4 SURVIVAL. The obligations and agreements set forth in Sections 1.3, 4.1,
6.1, 7.1 and 7.2 shall survive for an indefinite period after the termination
or expiration of this Agreement.
9.5 ASSIGNABILITY. The rights and obligations of the parties hereunder may
not be assigned or transferred without the prior written consent of the other
party. Walnut may not assign or transfer its rights and obligations under any
of the Contracts without the prior written consent of TEC.
9.6 NOTICES. Notices under this Agreement shall be deemed to have been given
if mailed, postage prepaid, by registered or certified mail, return receipt
requested, or delivered by courier service to the other party at the address
stated below or such other address as such party may have provided by written
notice. In addition to written notice, the parties shall endeavor to provide
notices via facsimile transmission.
<PAGE>
<PAGE>78
If to Walnut: Walnut Equipment Leasing Co., Inc.
101 West City Avenue, Suite 2128
P.O. Box 1050
Bala Cynwyd, PA 19004
Attn: Kenneth S. Shapiro, V.P.
Fax: (610) 667-4591
If to TEC: TEC America, Inc.
4401-A Bankers Circle
Atlanta, Georgia 30360
Attn: Jeff Warren, Controller
Fax: (404) 449-1152
a. Section headings appearing in this Agreement are for convenience of
reference only and shall not modify, define, expand or limit any of the terms
or provisions hereof.
b. The parties agree that this Agreement has been executed and delivered in,
and shall be construed in accordance with the laws of the State of Georgia.
c. If at any time any provision of this Agreement shall be held by any court
of competent jurisdiction to be illegal, void or unenforceable, such provision
shall be of no force and effect, but the illegality or unenforceability of such
provision shall have no effect upon and shall not impair the enforceability of
any other provision of this Agreement.
d. This Agreement constitutes the entire agreement between the parties
concerning the subject matter hereof and incorporates all representations made
in connection with negotiation of the same.
e. The terms hereof may not be terminated, amended, supplemented or modified
orally, but only by an instrument duly authorized and executed by each of the
parties hereto.
f. This Agreement and any amendments hereto shall be binding upon and inure to
the benefit of the parties hereto and their respective permitted successors and
assigns.
g. This Agreement may be executed by one or more of the parties on any number
of separate counterparts each of which counterparts shall be an original, but
all of which when together shall be deemed to constitute one and the same
instrument.
TEC AMERICA, INC.
BY:s/John W Canary
PRINT NAME:JOHN W CANARY
TITLE: President
WALNUT EQUIPMENT LEASING CO., INC.
BY: s/William Shapiro
PRINT NAME: WILLIAM SHAPIRO
TITLE:President
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