<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------------------------
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
COMMISSION FILE NUMBER 0-25774
ARCH LEASING CORPORATION TRUST
A DELAWARE BUSINESS TRUST
I.R.S. EMPLOYER IDENTIFICATION NO. 43-1679795
16144 WESTWOODS BUSINESS PARK, ELLISVILLE, MO 63021
REGISTRANT'S TELEPHONE NUMBER: (314) 391-5152
Securities Registered Pursuant to Section 12(b) or 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed with the Commission by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve months (or 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
------------ ---------------
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-K is not contained in this form and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference to Part III of this Form 10-K
or any amendment to this Form 10-K. (X)
No documents are incorporated into the text by reference.
Yes No X
------------ ---------------
Exhibit Index is located on Page 12
<PAGE> 2
<TABLE>
TABLE OF CONTENTS
<S> <C>
PART 1
ITEM 1 BUSINESS 3
ITEM 2 PROPERTIES 3
ITEM 3 LEGAL PROCEEDINGS 4
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 4
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS 5
ITEM 6 SELECTED FINANCIAL DATA 5
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS 6
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 8
ITEM 9 CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 8
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 9
ITEM 11 EXECUTIVE COMPENSATION 10
ITEM 12 PARTNERSHIP INTEREST OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT 10
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 10
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 11
INDEX TO EXHIBITS 12
SIGNATURES 13
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
--------
Arch Leasing Corporation Trust ("Trust") was formed in August, 1994, under
the laws of the State of Delaware pursuant to the Trust Agreement to engage
in the initiation, acquisition, ownership, management and disposition of
equipment, leases and other assets and in the issuance of (and related debt
service obligations with respect to) its bonds. The Trust leases computer
equipment to customers all over the United States and Puerto Rico.
The Trust offered Series 1 Collateral Trust Bonds to the public in April
1995, pursuant to a Registration Statement filed under the securities Act of
1934. The Trust raised $14,011,000 in bond proceeds and, thereafter,
invested in computer equipment and began its leasing operations. The sale of
Collateral Trust Bonds was terminated on November 30, 1995.
The Trust does not employ any persons. Alternatively, the Trust pays a
marketing fee and a service fee to two affiliates for their services to
market and find the leases, buy the equipment for the leases, acquire the
financing on the equipment, invoice the lessees, collect the lease payments,
remit the note payable payments and remarket the equipment upon lease
expiration.
In January, 1996 one of the affiliates, St. Louis Leasing Corporation, filed
for bankruptcy under Chapter 11. In August of 1996, the Court accepted the
Plan of Reorganization (see Item 3 for more details).
The industry that the Trust is involved in has not been subject to
seasonality.
ITEM 2. PROPERTIES
----------
As of March 31, 1997, the Trust does not own any property. The Trust pays an
affiliate a monthly "servicing fee" which encompasses all monthly expenses,
including the use of the affiliate's building. This building is located at
16144 Westwoods Business Park, Ellisville, Missouri 63021.
3
<PAGE> 4
ITEM 3. LEGAL PROCEEDINGS
-----------------
As of March 31, 1997, there were no pending legal proceedings against the
Trust. On January 2, 1996, the Trust's affiliate, St. Louis Leasing
Corporation, filed for bankruptcy under Chapter 11 with the United States
Bankruptcy Court Eastern District of Missouri, Eastern division. Provisions
were made within this bankruptcy agreement for St. Louis Leasing Corporation
to pay the Trust any amounts owed to them first, before all other creditors.
Therefore, within this fiscal year ended March 31, 1997 all amounts due from
St. Louis Leasing Corporation were paid in full, and there is no amount due
as of March 31, 1997. Interested parties should request and read St. Louis
Leasing Corporation's plan of reorganization and disclosure statement filed
with the Eastern District of the U.S. Bankruptcy Court on June 28, 1996, with
the effective date of the Court's acceptance of the Plan on August 9, 1996.
Effective August 1, 1996, St. Louis Leasing Corporation entered into an asset
purchase agreement to sell certain of its assets in connection with the Plan
of Reorganization. The purchaser was Varilease Capital Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
As of March 31, 1997, there were no submissions of matters to a vote of
security holders.
4
<PAGE> 5
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S BONDS
---------------------------------
There is at present no public market for the Series 1 Collateral Trust Bonds
(the Bonds), and no assurance can be given that such a market will be
developed or, if developed, maintained. Therefore, Bondholders may not be
able to liquidate their investment in the Bonds in the event of an emergency
or for any other reason.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following summary of selected financial data should be read in
conjunction with ITEM 14, herein, which also includes a summary of the
Trust's significant accounting policies.
<TABLE>
<CAPTION>
OPERATIONS YEAR ENDED MARCH 31, 1997 YEAR ENDED MARCH 31, 1996
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $14,719,473 $12,268,452
- - --------------------------------------------------------------------------------------------------------------
Depreciation (11,099,763) (8,804,979)
- - --------------------------------------------------------------------------------------------------------------
Operating Expenses (4,185,092) (3,174,879)
---------- ----------
- - --------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (565,382) $ 288,594
============= ===========
- - --------------------------------------------------------------------------------------------------------------
<CAPTION>
- - ------------------------------
FINANCIAL POSITION MARCH 31, 1997 MARCH 31, 1996
- - --------------------------------------------------------------------------------------------------------------
Total Assets $27,105,931 $41,182,217
=========== ==========
- - --------------------------------------------------------------------------------------------------------------
Total Current Liabilities $10,663,789 $13,496,284
- - ------------------------------
Long-Term Debt $16,718,930 $27,397,339
- - --------------------------------------------------------------------------------------------------------------
Equity (Deficit) $ (276,788) $ 288,594
----------- -----------
- - --------------------------------------------------------------------------------------------------------------
Total Liabilities and Equity $27,105,931 $41,182,217
=========== ===========
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
The Trust was formed in April 1994, however activity began for the Trust when
the Bonds were sold, which began in April 1995. Therefore the table above
represents the only years of operations for the Trust. The results of
operations for the year ended March 31, 1996 represents only a partial year
for a majority of the leases (see Item 7 for further descriptions).
5
<PAGE> 6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
----------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Liquidity and Capital Resources
- - -------------------------------
The Trust offered Series 1 Collateral Trust Bonds to the public in April
1995, pursuant to a Registration Statement filed under the securities Act of
1934. The Trust raised $14,011,000 in bond proceeds and, thereafter,
invested in computer equipment and began its leasing operations. The bond
principal is payable on dates ranging from May through November 1998. These
proceeds served as the original principal source of capital. The Trust's
primary source of liquidity will continue to be the payments on the Leases
and the proceeds upon the disposition of equipment at the conclusion of
Leases
As of March 31, 1997, the Trust has approximately 900 active leases.
The market for leasing and remarketing equipment throughout the country has
continued to grow. The growth in this industry is due to the increasing costs
of equipment, the inability to secure financing and the quickly changing
technology, especially related to computer equipment. Management believes
that the overall leasing market conditions will improve further in 1997 along
with the continued improvement in general economic conditions. In addition,
the recent increases in market interest rate levels will make new equipment
more expensive to finance, which should continue to increase the market for
leased equipment.
Under the Trust's marketing and servicing agreement, the Trust must pay its
affiliates fees for marketing and servicing the leases. One of the Trust's
affiliates, St. Louis Leasing Corporation, filed for Chapter 11 bankruptcy in
January 1996, with the effective date of the Court's acceptance of the Plan
of Reorganization being August 9, 1996. Due to St. Louis Leasing
Corporation's Plan of Reorganization, the company Varilease Capital
Corporation has taken over the duties of marketer and servicer for the Trust.
As of March 1996, there was a large amount due from St. Louis Leasing
Corporation on the Trust's books. Per the bankruptcy agreement this amount
was guaranteed to be provided for in the payment of residual value of
equipment. Therefore, within the fiscal year ended March 31, 1997, the Trust
received residual values of equipment, from St. Louis Leasing Corporation,
with a value that was sufficient to cover the amount due from them,
therefore relieving this receivable amount in its entirety. Allocated
administrative (marketing and servicing) expenses paid or accrued to its
affiliates represent reimbursement for the actual cost of the equipment,
salaries, related payroll costs and other administrative items incurred or
allocated, and direct expenses incurred invoicing and collecting on the
leases and in rendering legal, and accounting/bookkeeping services.
The Trust has available an irrevocable commitment with a financial
corporation to provide financing for the benefit of the bondholders, to aid
in the timely payment of principal and interest on the bonds, up to a maximum
of $1,000,000. The Trust had no borrowings on this agreement as of March 31,
1997 and 1996.
6
<PAGE> 7
Results of Operations
- - ---------------------
The Trust was formed in April 1994, with its activity beginning when the
first bonds were sold through the public offering in April 1995.
1997
- - ----
For the fiscal year ended March 31, 1997, the Trust had $14,829,993 in
leasing revenues, a 22% increase over 1996, due to the fact that in 1996 the
leases began all throughout the year and the current year represents a full
year of income. Other income/(expense) in the amount of $(110,520)
represents a loss from sale of leased equipment of $121,756 and interest
income of $11,236. In 1996, there was other income in the amount of $84,142.
The increase in the loss from sale of leased equipment is mainly due to an
increase in the terminations of month to month leases, which resulted in more
costs this year from the sale of month to month equipment than last year.
Depreciation on the leased equipment amounted to $11,099,763, a 26% increase
over last year, also due to the fact that this year is the first full year of
depreciation on the leases. Other operating expenses, including interest
expense, amortization and service fee expense, amounted to $4,185,092, a 32%
increase over 1996, again due to the fact that this year is a full year of
expense for these items. This year's activity resulted in a net loss of
$565,382 versus net income of $288,594 in 1996. This decrease in net income
is a result of total revenues increasing 20%, while operating expenses
increased 28%, due to the fact that the depreciation, interest and service
fee expenses are outweighing the related lease income. Per management's
original projections, net losses were anticipated in the first years of the
Trust. In the future years of the Trust, it is anticipated that the leasing
revenues will begin to outweigh the related operating expenses, due to the
fact that the interest expense paid on the equipment debt is lower in the
later years of the lease.
During 1997, the Trust had net cash provided by operating activities of
$11,644,024, mainly due to depreciation and amortization expense of
$12,015,428. Investing activities resulted in cash provided in the amount of
$1,684,557, which is the result of proceeds from sale of leased equipment of
$1,737,834 net with payments made for marketing fees of $53,277. Financing
activities resulted in cash used in the amount of $13,309,949, exclusively
due to the payment on notes payable.
1996
- - ----
For the fiscal year ended March 31, 1996, the Trust recorded leasing revenues
in the amount of $12,184,310. Other income in the amount of $84,142 resulted
from the gain on sale of leased equipment and interest income. Depreciation
on the leased equipment amounted to $8,804,979. Operating expenses, namely
service fee expense, amortization and interest expense, amounted to
$3,174,879. The year's activity resulted in net income in the amount of
$288,594.
Inflation
- - ---------
Inflation is not expected to have a material adverse impact on the Trust's
operations.
7
<PAGE> 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements at March 31, 1997 and 1996 together with the report of
the independent auditors thereon are incorporated by reference from the
Registrant's Financial Statements on pages indicated in Item 14.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Effective February, 1996, the Trust engaged Rubin, Brown, Gornstein & Co.
LLP, to perform the audit of the Trust's financial statements as of and for
the year ending March 31, 1996. The Trust had no prior auditor, as this was
the first year of activity for the Trust. There has been no change in
accountants.
There are no known disagreements on any matter of accounting principles or
practices or financial statement disclosure with the current auditors.
8
<PAGE> 9
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The Trust has no officers or directors. The key people for the Trust are the
directors and executive officers of the Managing Trustee (Arch Management
Corporation), the Marketer (Varilease Capital Corporation since August 1996,
prior to this date it was St. Louis Leasing Corporation) and the Servicer
(Varilease Capital Corporation since August 1996, prior to this date it was
Arch Leasing Corporation), all of which are affiliates of the Trust.
Varilease Capital Corporation became the marketer and servicer of the Trust
upon the bankruptcy of St. Louis Leasing Corporation (see Item 3 for more
details), and subsequent asset purchase of St. Louis Leasing Corporation by
Varilease Capital Corporation effective August 1, 1996.
These directors and executive officers are as follows:
ROBERT A. CHLEBOWSKI, age 48, has been the President, Treasurer and a
director of the Managing Trustee, Arch Management Corporation, since its
inception in August, 1994. Mr. Chlebowski has been the President, Chief
Executive Officer and a director of the former Marketer, St. Louis Leasing
Corporation, since its inception in 1986, and now currently holds these
positions for Varilease Capital Corporation since its inception in August
1996. He is also a director of the Service/Administrator, Arch Leasing
Corporation, since its inception in 1994.
LYNNETTE A. FROWNFELTER, age 48, has been a Vice President, the Secretary
and a director of the Managing Trustee, Arch Management Corporation, since
its inception in August, 1994, and the President and a director of the
Servicer/Administrator, Arch Leasing Corporation, since its inception in May,
1994. From 1986 to 1994, she was Senior Vice President-Investment Services
and Administration of the former Marketer, St. Louis Leasing Corporation, and
now currently is Vice President for Varilease Capital Corporation since its
inception in August 1996.
CARYN S. RUDMAN, CPA, age 33, has been an Assistant Vice President and
the Controller of the Servicer/Administrator since its inception in May,
1994. She was also (since 1991) an Assistant Vice President and the
Controller of the former Marketer, St. Louis Leasing Corporation. She is the
current Controller for Varilease Capital Corporation, since its inception in
August 1996. From 1987 to 1991, Ms. Rudman was employed by the certified
public accounting firm of St. John, Mersmann & Company, P.C.
CHARLENE A. HERNANDEZ, age 38, was Assistant Vice President - Contracts
of the former Marketer, St. Louis Leasing Corporation, since January, 1995,
having joined them in 1989. She is currently the Assistant Vice President of
Debt Placement and Contracts of Varilease Capital Corporation, since its
inception in August 1996.
9
<PAGE> 10
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The Trust has no officers or directors. However, in connection with the
operations for the Trust, their Affiliates will receive certain fees as
defined in the marketing agreement with Varilease Capital Corporation,
formerly with St. Louis Leasing Corporation and in the servicing agreement
with Varilease Capital Corporation, formerly with Arch Leasing Corporation.
These fees are for the services in connection with the activities of the
Trust, including any compensation that it would take to keep the activities
of the Trust running.
During the fiscal year ended March 31, 1997, the Trust paid/accrued $148,534
to Arch Leasing Corporation and Varilease Capital Corporation for their
servicing services and $271,275 to Varilease Capital Corporation for their
marketing services for the year.
During the fiscal year ended March 31, 1996, the Trust paid/accrued $109,711
to Arch Leasing Corporation for their servicing services and $1,361,764 to
St. Louis Leasing Corporation for their marketing services for the year.
The directors and executives officers of the Trust's affiliates, listed
above, are paid their personal compensations out of the affiliates.
ITEM 12. PARTNERSHIP INTEREST OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------------------
MANAGEMENT
----------
The Trust is owned by its certificateholders. The original
certificateholders are as follows: Arch Leasing Corporation 21%, St. Louis
Leasing Corporation 70% and Chlebowski Investment Corporation 9%. Lynnette
Frownfelter is a 15% shareholder of Arch Leasing Corporation. Robert
Chlebowski was a 95% shareholder in Chlebowski Investment Corporation. The
9% ownership by Chlebowski Investment Corporation, was transferred to St.
Louis Leasing Corporation as of December 1995, when Chlebowski Investment
Corporation was merged with St. Louis Leasing Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Arch Leasing Corporation currently owns 21% of the Trust, and St. Louis
Leasing Corporation 79%. Both of these companies and Varilease Capital
Corporation received fees for their services in servicing and marketing the
leases for the Trust. These transactions are more particularly set forth in
the financial statements found under ITEM 14.
10
<PAGE> 11
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) Exhibits- See the Exhibit Index at page 12 of this report.
The exhibits listed in the accompanying index to exhibits are filed
or incorporated by reference as part of this annual report.
<TABLE>
<S> <C>
(b) Financial Statements:
The financial statements listed in the following index as set forth
in Item 8 of this report on Form 10-K are filed or incorporated by
reference as part of this annual report.
Independent Auditors' Reports F-1
Balance Sheets as of March 31, 1997 and 1996 F-2
Statements of Income for the Years Ended March 31, 1997 and 1996 F-3
Statements of Equity for the Years Ended March 31, 1997 and 1996 F-3
Statements of Cash Flows for the Years Ended March 31, 1997 and 1996 F-4
Notes to Financial Statements F-5
All other schedules are omitted because they are not applicable,
or the required information is shown in the financial
statements or notes thereto.
</TABLE>
(c) Reports on Form 8-K
Registrant has not filed with the Securities and Exchange Commission a
Current Report on Form 8-K during the year ended March 31, 1997, as there
were no transactions that required the filing.
11
<PAGE> 12
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-K
<TABLE>
<CAPTION>
Exhibit Number Description
- - -------------- -----------
<C> <S>
11 Omitted - Inapplicable
12 Omitted - Inapplicable
13 Omitted - Inapplicable
16 Omitted - Inapplicable
18 Omitted - Inapplicable
21 Omitted - Inapplicable
23 Omitted - Inapplicable
27 Financial Data Schedule
</TABLE>
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this amendment to be
signed on its behalf by the undersigned, thereunto duly authorized.
ARCH LEASING CORPORATION TRUST
By: Robert A. Chlebowski, as President,
Treasurer and Director of the Managing
Trustee
Date: June 25, 1997 /s/ Robert A. Chlebowski
-------------------------- ----------------------------------------
and
Lynnette Frownfelter, as President and a
director of Arch Leasing Corporation
Date: June 25, 1997 /s/ Lynnette Frownfelter
-------------------------- ----------------------------------------
13
<PAGE> 14
INDEPENDENT AUDITORS' REPORT
Board of Directors
Arch Leasing Corporation Trust
St. Louis, Missouri
We have audited the accompanying balance sheets of Arch Leasing Corporation
Trust as of March 31, 1997 and 1996 and the related statements of income,
equity and cash flows for the years then ended. These financial statements
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Arch Leasing Corporation
Trust as of March 31, 1997 and 1996 and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ Rubin, Brown, Gornstein & Co. LLP
April 30, 1997
F-1
<PAGE> 15
<TABLE>
ARCH LEASING CORPORATION TRUST
- - ----------------------------------------------------------------------------------------------------------------
BALANCE SHEETS
<CAPTION>
ASSETS
MARCH 31,
1997 1996
<S> <C> <C>
LEASED PROPERTY (NOTES 3, 4 AND 5) $ 23,123,142 $ 36,082,495
OTHER ASSETS
Cash (Note 5) 305,764 287,132
Accounts receivable 38,659 263,830
Inventory 34,729 105,794
Due from related parties (Note 9) 0 2,071,828
Purchased residual values (Note 9) 2,094,887 0
Marketing fee (net of accumulated amortization
of $653,216 in 1997 and $258,735 in 1996) - (Note 9) 761,825 1,103,029
Deferred bond issuance costs (net of accumulated
amortization of $881,856 in 1997 and $360,672 in 1996) 746,925 1,268,109
TOTAL OTHER ASSETS 3,982,789 5,099,722
$ 27,105,931 $ 41,182,217
LIABILITIES AND EQUITY
LIABILITIES
Notes payable (Note 4) $ 13,091,129 $ 26,401,078
Bonds payable (Note 5) 14,011,000 14,011,000
Due to related parties (Note 9) 25,970 0
Accrued expenses 63,276 63,276
Deferred income 191,344 418,269
TOTAL LIABILITIES 27,382,719 40,893,623
EQUITY (DEFICIT)
Certificate holders' equity (deficit) (276,788) 288,594
$ 27,105,931 $ 41,182,217
</TABLE>
F-2
- - --------------------------------------------------------------------------------
See the accompanying notes to financial statements. Page 2
<PAGE> 16
<TABLE>
ARCH LEASING CORPORATION TRUST
- - ----------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME AND EQUITY (DEFICIT)
<CAPTION>
STATEMENT OF INCOME
FOR THE YEARS
ENDED MARCH 31,
1997 1996
<S> <C> <C>
REVENUES
Lease revenues $ 14,829,993 $ 12,184,310
Gain (loss) on sale of leased equipment (121,756) 75,421
Interest income 11,236 8,721
TOTAL REVENUES 14,719,473 12,268,452
OPERATING EXPENSES
Depreciation 11,099,763 8,804,981
Interest expense 3,120,893 2,445,759
Amortization 915,665 619,407
Service fee expense (Note 9) 148,534 109,711
TOTAL OPERATING EXPENSES 15,284,855 11,979,858
NET INCOME (LOSS) $ (565,382) $ 288,594
STATEMENT OF EQUITY (DEFICIT)
BALANCE - BEGINNING OF YEAR $ 288,594 $ --
NET INCOME (LOSS) (565,382) 288,594
BALANCE - END OF YEAR $ (276,788) $ 288,594
</TABLE>
F-3
- - --------------------------------------------------------------------------------
See the accompanying notes to financial statements. Page 3
<PAGE> 17
<TABLE>
ARCH LEASING CORPORATION TRUST
- - ----------------------------------------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
<CAPTION>
FOR THE YEARS
ENDED MARCH 31,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (565,382) $ 288,594
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 12,015,428 9,424,388
(Gain) loss on sale of leased equipment 121,756 (75,421)
Change in assets and liabilities:
(Increase) decrease in accounts receivable 225,171 (263,830)
(Increase) decrease in inventory 71,065 (105,794)
(Increase) decrease in due from related parties 2,911 (10,752,901)
Increase in accrued expenses -- 63,276
Increase (decrease) in deferred income (226,925) 418,269
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 11,644,024 (1,003,419)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of leased equipment 1,737,834 314,575
Increase in marketing fee (53,277) (1,361,764)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,684,557 (1,047,189)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable (13,309,949) (10,044,479)
Proceeds from issuance of bonds -- 14,011,000
Increase in deferred bond issuance costs -- (1,628,781)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (13,309,949) 2,337,740
NET INCREASE IN CASH 18,632 287,132
CASH - BEGINNING OF YEAR 287,132 --
CASH - END OF YEAR $ 305,764 $ 287,132
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 3,120,893 $ 2,382,483
Noncash investing and financing activities (Note 8)
</TABLE>
F-4
- - --------------------------------------------------------------------------------
See the accompanying notes to financial statements. Page 4
<PAGE> 18
ARCH LEASING CORPORATION TRUST
- - --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES AND ASSUMPTIONS
Management uses estimates and assumptions in preparing financial
statements. Those estimates and assumptions affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses.
LEASED PROPERTY
Leased property is carried at cost, less accumulated depreciation
computed using the straight-line method. The assets are depreciated
down to their residual value over the life of the lease, which ranges
from one to three years. The amounts designated as residual values are
estimates given to the Trust by a reputable appraisal company.
ACCOUNTS RECEIVABLE
The Trust follows the practice of writing off uncollectible accounts as
they are incurred. There is no allowance for uncollectible accounts
reflected in the financial statements. Trust management is of the
opinion that no allowance is necessary.
INVENTORY
Inventory is valued at the lower of cost or market using the
specific-identification method. Inventory consists of computer
equipment that is ready to be leased or will be sold.
MARKETING FEE
The marketing fee consists of the amounts paid to a related party (Note
9) for its services to originate and procure leases on behalf of the
Trust, and to sell or re-lease the leased equipment at the end of the
lease term. These costs are being capitalized and amortized on the
straight-line method over the life of the leases (most of which are
three years). Amortization of the marketing fee charged against income
amounted to $394,481 and $258,735 for the years ended March 31, 1997 and
1996, respectively.
F-5
- - --------------------------------------------------------------------------------
Page 5
<PAGE> 19
ARCH LEASING CORPORATION TRUST
- - --------------------------------------------------------------------------------
Notes To Financial Statements (Continued)
DEFERRED BOND ISSUANCE COSTS
Deferred bond issuance costs consist of the 8% broker's commissions paid
on the bond sales, and certain other expenses such as legal fees,
interest expense and documentation fees incurred to establish the trust
and issue the bonds. Interest in the amount of $84,860 incurred on
bridge loans prior to obtaining the final financing for the leased
equipment was capitalized. These costs are being amortized on the
straight-line method over the life of the bonds, which were issued over
a six-month period, each having a maturity of three years. Amortization
charged against income amounted to $521,184 and $360,672 for the years
ended March 31, 1997 and 1996, respectively.
DEFERRED INCOME
The Trust is recording deferred income upon the receipt of any prepaid
lease fees.
2. OPERATIONS
Arch Leasing Corporation Trust was formed in August 1994 and commenced
operations in April 1995. The principal operation of the Trust is to
lease computer equipment to customers located throughout the United
States and Puerto Rico. The Trust had a public offering of Series I
Collateral Trust Bonds (Note 5) in April 1995 and raised $14,011,000 in
proceeds that were used to fund the leasing operations. The sale of
Collateral Trust Bonds was terminated on November 30, 1995.
Per management's original projections, net losses were anticipated in
the first years of the Trust. In the future years of the Trust, it is
anticipated that the leasing revenues will begin to outweigh the related
operating expenses, due to the fact that the interest expense paid on
the equipment debt is lower in the later years of the lease.
3. LEASED PROPERTY
Leased property consists of:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Leased equipment $ 41,461,185 $ 44,500,403
Less: Accumulated depreciation 18,338,043 8,417,908
$ 23,123,142 $ 36,082,495
</TABLE>
Depreciation charged against income amounted to $11,099,763 and
$8,804,981 for the years ended March 31, 1997 and 1996, respectively.
- - --------------------------------------------------------------------------------
Page 6
<PAGE> 20
ARCH LEASING CORPORATION TRUST
- - --------------------------------------------------------------------------------
Notes To Financial Statements (Continued)
As of March 31, 1997, there are approximately 900 leases entered into
for the above leased property. The estimated future lease payments to
be received on these leases are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
1998 $ 11,291,447
1999 2,916,033
2000 19,706
$ 14,227,186
</TABLE>
4. NOTES PAYABLE
Notes payable - banks are secured by leased equipment and assignment of
leases. The notes are payable in monthly installments ranging from $12
to $26,019, for 827 loans, including principal and interest at rates
ranging from 6.35% to 11% annually. Balances are due on various dates
through January 2000.
The scheduled maturities of notes payable at March 31, 1997 are as
follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
1998 $ 10,383,199
1999 2,688,724
2000 19,206
$ 13,091,129
</TABLE>
Interest expense on the above debt amounted to $1,649,738 and $1,511,789
for the years ended March 31, 1997 and 1996, respectively.
- - --------------------------------------------------------------------------------
Page 7
<PAGE> 21
ARCH LEASING CORPORATION TRUST
- - --------------------------------------------------------------------------------
Notes To Financial Statements (Continued)
5. BONDS PAYABLE
The Trust issued Series I Collateral Trust Bonds at par value of $1,000
on various dates ranging from May 1995 through November 1995. Bond
principal is payable three years from the date of issuance. Therefore,
the principal will be due on dates ranging from May 1998 through
November 1998. The bonds bear interest at the rate of 10-1/2% per
annum. Interest is payable on the 15th day of each month. The bonds are
collateralized by the leased computer equipment, assignment of the
leases and cash. The security interest of the bondholders is
subordinate only to the lien of lenders that provide financing in
connection with the acquisition of equipment. All cash accounts are
handled by the trustee, Magna Bank, and are restricted for the principal
and interest payments to the bondholders and certain other fees.
Commencing two years following issuance, the bonds are redeemable at the
option of the Trust. The bonds may be redeemed in full at any time or
in part from time to time, upon payment of 103% of the principal amount,
plus interest accrued to the date of redemption.
The bonds payable at March 31, 1997 and 1996 in the amount of
$14,011,000 are scheduled to mature at dates ranging from May through
November 1998.
Interest expense on the bonds payable amounted to $1,471,155 and
$933,970 for the years ended March 31, 1997 and 1996, respectively.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
ACCOUNTS RECEIVABLE
The carrying amount approximates fair value.
DUE FROM (TO) RELATED PARTIES
The carrying amount approximates fair value due to the short-term nature
of the receivable and/or payable.
NOTES PAYABLE
The carrying amounts approximate the fair values due to the fact that
the interest rates approximate the current rates at which the Trust
could borrow funds with similar terms.
- - --------------------------------------------------------------------------------
Page 8
<PAGE> 22
ARCH LEASING CORPORATION TRUST
- - --------------------------------------------------------------------------------
Notes To Financial Statements (Continued)
BONDS PAYABLE
It is not practicable to estimate the fair value of the bonds payable
without incurring excessive costs. Information pertinent to estimating
the fair values is disclosed in Note 5.
7. INCOME TAXES
The Trust is treated as a partnership for federal income tax purposes.
Therefore, no provision for income taxes is reflected in the
accompanying financial statements.
8. SUPPLEMENTAL CASH FLOW INFORMATION
The Trust had the following noncash investing and financing activities:
During 1996, the Trust received equipment to be leased, from one of its
affiliates in the amount of $45,126,630, and related notes payable on
the equipment in the amount of $36,445,557. These transactions were
recorded as increases or decreases to the amount due from related
parties.
During 1997, the Trust received residual values in the amount of
$2,094,877 in exchange for relieving the amount due from a related
party.
9. RELATED PARTY TRANSACTIONS
The Trust has received management and administrative services, since
August 1996, from an affiliated company, Varilease Capital Corporation.
Prior to this date, these services were provided by the affiliate Arch
Leasing Corporation, under a servicing agreement. The fee for these
services is 1% per annum of the net assets held by the Trust valued on
the last day of the preceding month. Service fee expense amounted to
$148,534 and $109,711 for the years ended March 31, 1997 and 1996,
respectively.
Since August 1996, the Trust pays a related company, Varilease Capital
Corporation, a marketing fee equal to 3% of the sum of the asset base
price of all equipment purchased by the related party for the Trust, the
gross sales price of all equipment sold by the related party for the
Trust and the aggregate amount of lease payments received on equipment
re-leased at the end of the original lease term. Prior to this date,
these services were provided by the affiliate St. Louis Leasing
Corporation. Total marketing fees in 1997 and 1996 were $271,275 and
$1,361,764, respectively.
The related companies, considered the service and marketer for the
Trust, handle the day to day operations of the leases for the Trust.
These services include the purchase of equipment, including
- - --------------------------------------------------------------------------------
Page 9
<PAGE> 23
ARCH LEASING CORPORATION TRUST
- - --------------------------------------------------------------------------------
Notes To Financial Statements (Continued)
the acquisition of financing, marketing, invoicing and collection of
the lease payments, payment of the related debt and the remarketing
of equipment upon lease expiration.
On January 2, 1996, the related company, St. Louis Leasing Corporation,
filed for bankruptcy under Chapter 11 with the United States Bankruptcy
Court Eastern District of Missouri, Eastern Division. St. Louis Leasing
Corporation filed its plan of reorganization and disclosure statement
with the Eastern District of the U.S. Bankruptcy Court on June 28, 1996,
with the effective date of the Court's acceptance of this plan being
August 9, 1996. As of March 31, 1996, St. Louis Leasing Corporation
owed the Trust $2,094,877. Per the bankruptcy agreement, this amount was
guaranteed to be provided for in the payment of residual value of
equipment. Therefore, within the fiscal year ended March 31, 1997, the
Trust received residual values of equipment, from St. Louis Leasing
Corporation, with a value sufficient to cover the amount due.
Effective August 1, 1996, St. Louis Leasing Corporation entered into an
asset purchase agreement to sell certain of its assets in connection
with this Plan of Reorganization. The purchaser was Varilease Capital
Corporation
10. COMMITMENTS
The Trust has secured an irrevocable commitment with a financial
corporation to provide financing for the benefit of the bondholders, to
aid in the timely payment of principal and interest on the bonds. The
aggregate principal amount outstanding shall not exceed the lesser of
9.99% of the aggregate principal amount of the bonds outstanding, 9.99%
of the net asset value of the Trust or $1,000,000. At March 31, 1997
and 1996, there were no borrowings under this agreement.
11. MAJOR CUSTOMERS
The Trust had leasing revenue of approximately $1,455,000 and $1,323,000
from two customers for the year ended March 31, 1996 representing 12%
and 11%, of total lease revenues, respectively. The accounts receivable
due from these customers was $227,714 and $1,142 at March 31, 1996,
representing 86% and 0.4% respectively, of total accounts receivable.
The Trust had leasing revenue of approximately $2,775,000 and $1,860,000
from two customers for the year ended March 31, 1997 representing 19%
and 13%, of total lease revenue, respectively. The accounts receivable
due from these customers was $30,005 and $0 at March 31, 1997,
representing 78% and 0% respectively, of total accounts receivable.
- - --------------------------------------------------------------------------------
Page 10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 305,764
<SECURITIES> 0
<RECEIVABLES> 38,659
<ALLOWANCES> 0
<INVENTORY> 34,729
<CURRENT-ASSETS> 0
<PP&E> 41,461,185
<DEPRECIATION> 18,338,043
<TOTAL-ASSETS> 27,105,931
<CURRENT-LIABILITIES> 0
<BONDS> 14,011,000
<COMMON> 0
0
0
<OTHER-SE> (276,788)
<TOTAL-LIABILITY-AND-EQUITY> 27,105,931
<SALES> 0
<TOTAL-REVENUES> 14,719,473
<CGS> 0
<TOTAL-COSTS> 12,163,962
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,120,893
<INCOME-PRETAX> (565,382)
<INCOME-TAX> 0
<INCOME-CONTINUING> (565,382)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (565,382)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
