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Alco Capital Resource, Inc.
FORM 10-K
September 30, 1994
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X]Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] for the fiscal year ended September 30, 1994
[_]Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from _ to _
COMMISSION FILE NUMBER 0-20405
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ALCO CAPITAL RESOURCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 23-2493042
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1738 BASS ROAD, MACON, GEORGIA 31210
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(912) 471-2300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
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 [_]
The number of shares of common stock, par value $.01 per share, outstanding
as of December 1, 1994 was 1,000, all of which were indirectly owned by Alco
Standard Corporation.
Documents incorporated by reference:
NONE
The registrant meets the conditions set forth in General Instruction
(J)(1)(a) and (b) of Form 10-K and is therefore filing with the reduced
disclosure format contemplated thereby.
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TABLE OF CONTENTS
PART I
PAGE NO.
--------
ITEM 1. BUSINESS................................................... 3
ITEM 2. PROPERTIES................................................. 9
ITEM 3. LEGAL PROCEEDINGS.......................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................ 9
ITEM 6. SELECTED FINANCIAL DATA.................................... 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................. 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................... 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS........................... 14
ITEM 11. EXECUTIVE COMPENSATION..................................... 14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................. 14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K................................................... 14
2
PART I
ITEM 1. BUSINESS
GENERAL
Alco Capital Resource, Inc. ("Alco Capital" or the "Company") was formed in
1987 to provide lease financing to customers of the office products segment of
Alco Standard Corporation ("Alco"). The Company's offices are located at 1738
Bass Road, Macon, Georgia, 31210 (telephone number 912-471-2300). The Company
is a wholly-owned indirect subsidiary of Alco.
Alco is a public company headquartered in Valley Forge, Pennsylvania which
markets and distributes office equipment (copiers and fax machines) and paper
through two business segments, Alco Office Products ("AOP") and Unisource
Worldwide, Inc. ("Unisource"). AOP is the largest independent office equipment
distribution network in North America, with locations in 47 states and four
Canadian provinces. AOP also has several locations in the United Kingdom,
Germany, Denmark and France. Unisource is the largest distributor of printing
paper in North America with facilities in every major metropolitan market in
the United States and Canada. Alco's fiscal 1994 revenues were $8 billion, of
which $2.2 billion were generated by AOP.
The Company is engaged in the business of arranging lease financing
exclusively for office equipment marketed by AOP's wholly-owned operating units
("AOP dealers"), which sell and service copier equipment and facsimile
machines. The ability to offer lease financing on this equipment through Alco
Capital is considered a competitive marketing advantage which more closely ties
AOP to its customer base. During the 1994 fiscal year, 47% of new equipment
sold by AOP dealers was financed through the Company. The Company and AOP will
seek to increase this percentage in the future, as leasing enhances the overall
profit margin on equipment and is considered an important customer retention
strategy.
The equipment financed by the Company consists of copiers, facsimile
machines, and related accessories and peripheral equipment, the majority of
which are produced by major office equipment manufacturers including Canon,
Ricoh, and Sharp. Currently 79% of the equipment financed by the Company
represents copiers, 16% fax machines, and 5% other equipment. Although
equipment models vary, AOP is increasingly focusing its marketing efforts on
the sale of higher segment equipment, such as copiers which produce 50 or more
impressions per minute.
The Company provides AOP dealers with standard lease rates for use in
customer quotes. However, AOP dealers may charge the customer more or less than
Alco Capital's standard rates, and the AOP dealer would absorb any difference
resulting from any such variances from Alco Capital's standard rates.
The Company's customer base (which consists of the end users of the
equipment) is widely dispersed, with the ten largest customers representing
less than 2% of the Company's total lease portfolio. The typical new lease
financed by the Company averages $11,600 in amount and 43 months in duration.
Although 96% of the leases are scheduled for regular monthly payments,
customers are also offered quarterly, semi-annual, and other customized payment
terms. In connection with its leasing activities, the Company also performs
billing, collection, property and sales tax filings, and also provides quotes
on equipment upgrades and lease-end notification. The Company also provides
certain financial reporting services to the AOP dealers, such as a monthly
report of dealer increases in leasing activity and related statistics.
Alco and the Company entered into a support agreement on June 1, 1994 (the
"1994 Support Agreement") pursuant to which Alco will make payments to the
Company, if necessary, to enable the Company to maintain (i) a ratio of income
before interest expense and taxes to interest expense of 1.25 times and (ii) a
minimum consolidated tangible net worth of $1.00 at all times. In addition, the
Company and Alco are currently parties to a maintenance agreement dated August
15, 1991, (the "1991 Maintenance Agreement") and an operating agreement dated
August 15, 1991, (the "1991 Operating Agreement") (collectively, the "1991
Maintenance and Operating Agreements") which require Alco to make payments to
3
the Company, if necessary, to meet a specified minimum fixed charge coverage
ratio and a maximum debt-to-equity ratio. In addition, the 1991 Operating
Agreement requires the AOP dealers to repurchase all defaulted lease contracts.
Although the AOP dealers are not subject to such repurchase obligation under
the terms of the 1994 Support Agreement, Alco and the Company presently intend
to continue such repurchase obligation. (See "Relationship with Alco Standard
Corporation" below).
TYPES OF LEASES
The lease portfolio of the Company includes direct financing leases and
funded leases. Direct financing leases are contractual obligations between the
Company and the AOP customer and represent the majority of the Company's lease
portfolio. Funded leases are contractual obligations between the AOP dealer and
the AOP customer which have been financed by the Company.
Funded leases represented approximately 19% of the Company's leases as of
September 30, 1994. The AOP dealers have assigned to the Company, with full
recourse, their rights under the funded leases including the right to receive
lease and rental payments as well as a security interest in the related
equipment.
Direct financing leases and funded leases are structured as either tax leases
(from the Company's perspective) or conditional sales contracts, depending on
the customer's (or, for funded leases, the AOP dealer's) needs. The customer
(or the AOP dealer for funded leases) decides which of the two structures is
desired. Under either structure, the total cost of the equipment to the
customer (or to the AOP dealer) is substantially the same (assuming the
exercise of the purchase option).
Tax Leases
Tax leases represented 94% of the Company's total lease portfolio as of
September 30, 1994. The Company or the AOP dealer is considered to be the owner
of the equipment for tax purposes during the life of these leases and receives
the tax benefit associated with equipment depreciation. Tax leases are
structured with a fair market value purchase option. Generally, the customer
may return the equipment, continue to rent the equipment or purchase the
equipment for its fair market value at the end of the lease.
Each tax lease has a stated equipment residual value generally ranging from
0% to 10%. As of September 30, 1994, the average equipment residual value for
all leases in the Company's portfolio was 3.5% and by AOP policy cannot exceed
8%. Upon early termination of the lease or at normal end of lease term, the
Company charges the AOP dealer for the stated residual position, if any, and
the equipment is returned to the AOP dealer. Any gain or loss on the
equipment's residual value is realized by the AOP dealer.
Conditional Sales Contracts
Conditional sales contracts account for the remaining 6% of the total leases
in the Company's portfolio. Under these arrangements, the customer is
considered to be the owner of the equipment for tax purposes and would receive
any tax benefit associated with equipment depreciation. Each conditional sales
contract has a stated residual value of 0%. Conditional sales contracts are
customarily structured with higher monthly lease payments than the tax leases
and have a $1 purchase option for the equipment at lease-end. Thus, because of
the higher monthly payments, the cost of the equipment to the customer (or, for
funded leases, to the AOP dealer) under a conditional sales contract is
substantially the same as under a tax lease (assuming the exercise of the
purchase option). Although the customer has the option of returning or
continuing to rent the equipment at lease-end, the customer almost always
exercises the $1 purchase option at the end of the lease term.
RELATIONSHIP WITH ALCO STANDARD CORPORATION
The Company, as the captive finance subsidiary of Alco, derives its customer
base from the business sourced by its affiliates within Alco (the AOP dealers).
There are several agreements and programs between the Company and Alco, which
are described on the following page.
4
Support Agreements
The Company and Alco are parties to a Maintenance Agreement dated August 15,
1991 and an Operating Agreement dated August 15, 1991 (the "1991 Maintenance
and Operating Agreements"), which are further described below. The Company has
agreed with its lenders pursuant to loan agreements entered into before June 1,
1994 that it will not amend the 1991 Maintenance and Operating Agreements
without each such lender's consent.
The Company and Alco have entered into a new agreement (the "1994 Support
Agreement"), dated as of June 1, 1994. The Company's agreements with
noteholders and other lenders entered into after June 1, 1994 include covenants
that it will not amend the 1994 Support Agreement except under certain
circumstances. (See "1994 Support Agreement", below).
1. THE 1991 MAINTENANCE AND OPERATING AGREEMENTS
The terms of the 1991 Maintenance Agreement provide that Alco will make a
cash payment to the Company (or an investment in the form of equity or
subordinated notes) as needed in amounts sufficient to meet a specified minimum
fixed charge coverage ratio and a maximum debt-to-equity ratio. Earnings before
fixed charges (primarily interest) must be at least 1.3 times fixed charges.
The Company has satisfied this requirement independently without requiring
payment or an investment from Alco. The Company's debt-to-equity ratio is
limited to 6 to 1 according to the terms of the Maintenance Agreement. The
Company must also maintain minimum tangible net worth of not less than $1.00.
Pursuant to the terms of the 1991 Maintenance Agreement, the Company received
capital contributions from Alco of $8,300,000 in 1994, $2,615,000 in 1993 and
none in 1992.
The 1991 Operating Agreement requires the AOP dealers to repurchase all
defaulted lease contracts. A default is defined in the 1991 Operating Agreement
as any receivable which is past due for 120 days or is otherwise reasonably
declared uncollectible by the Company. The repurchase amount is identified as
the net book value of a lease on the default date.
The 1991 Maintenance and Operating Agreements provide for modification or
amendment with both parties' consent and provide for cancellation by either
party upon 90 days written notice.
2. THE 1994 SUPPORT AGREEMENT
The 1994 Support Agreement between the Company and Alco, which is effective
as of June 1, 1994, provides that Alco will make a cash payment to the Company
(or an investment in the form of equity or subordinated notes) as needed to
comply with two requirements: i) that the Company will maintain a pre-tax
interest coverage ratio (income before interest expense and taxes divided by
interest expense) so that the Company's pre-tax income plus interest expense
will not be less than 1.25 times interest expense, and ii) that the Company
will maintain a minimum tangible net worth of $1.00. The 1994 Support Agreement
further provides that Alco may not assign the 1994 Support Agreement unless:
(a) all the outstanding debt of the Company is repaid or (b) both Moody's
Investors Service and Standard & Poor's Ratings Group confirm in writing prior
to the effectiveness of any such assignment that the Company's debt rating
would not be downgraded as a result of such assignment.
Unlike the 1991 Operating Agreement, the 1994 Support Agreement does not
contain a requirement that the AOP dealers repurchase all defaulted lease
contracts. The 1994 Support Agreement does not include the repurchase
requirement because the Company and Alco wish to preserve the flexibility, on a
prospective basis, to allow the credit risk for defaulted contracts to remain
with the Company. In such event, the credit decision and reserves for defaulted
contracts would become the responsibility of the Company. If the
5
Company were responsible for the credit risk and costs associated with
defaulted contracts, the Company would reduce the lease bonus to AOP dealers or
increase its current lease rates in order to offset these increased costs.
Consequently, the Company believes that the impact of any future shift of the
credit risk from the AOP dealers to the Company would not be material to the
Company's future results of operations. The Company's (and Alco's) present
intention, however, is to continue the repurchase arrangement with the AOP
dealers as currently in effect.
The Company has provided in loan and note agreements entered into after June
1, 1994 (and will provide in the loan and note agreements governing future
debt) that the 1994 Support Agreement cannot be amended or terminated without
the consent of noteholders or other lenders unless either i) all the
outstanding debt of the Company is repaid, or ii) both Moody's Investor
Services and Standard & Poor's Ratings Group confirm in writing prior to the
effectiveness of any such amendment or termination that the Company's debt
rating would not be downgraded as a result of such amendment or termination.
Cash Management Program
The Company participates in Alco's domestic Cash Management program. Under
this program, the Company has an account with Alco through which cash in excess
of current operating requirements is temporarily placed on deposit. Similarly,
amounts are periodically borrowed from Alco. Interest is paid (or charged) by
Alco on these amounts. The Company was a net borrower in 1994, 1993, and 1992
incurring net interest costs of $496,000, $579,000, and $1,090,000,
respectively under this program.
Management Fee
The Company is charged a management fee by Alco to cover certain corporate
overhead expenses. These charges are included as general and administrative
expenses in the Company's financial statements and amounted to $396,000 in
1994, $360,000 in 1993 and $192,000 in 1992.
Federal Income Tax Allocation Agreement
Alco and the Company participate in a Federal Income Tax Allocation Agreement
dated June 30, 1989, in which the Company consents to the filing of
consolidated federal income tax returns with Alco. Alco agrees to collect from
or pay to the Company its allocated share of any consolidated federal income
tax liability or refund applicable to any period for which the Company is
included in Alco's consolidated federal income tax return.
Interest on Income Tax Deferrals
The Company provides substantial tax benefits to Alco through the use of the
installment sales method on equipment financed through the Company. Taxes
deferred by Alco due to this tax treatment totalled a cumulative amount of
approximately $96,000,000 at the end of fiscal 1994. Alco pays the Company
interest on the portion of these tax deferrals (approximately $76,000,000 at
the end of fiscal 1994) which arise from tax deferrals on intercompany sales.
In fiscal 1994 and 1993, interest was earned by the Company at a rate of 6% and
totalled $3,753,000 and $2,926,000 respectively. In fiscal 1992, the interest
earned amounted to $3,050,000, computed at a 9% rate.
Lease Bonus Program
In January 1992, a lease bonus subsidy program was initiated which provides
incentives to AOP dealers when AOP customers lease equipment from the Company.
The payments under this program can be reduced or eliminated by the Company at
any time. In fiscal 1992, the program was nine months in duration, and
$3,300,000 in bonus payments were made to the AOP dealers for leases of certain
higher industry segment equipment. Fiscal 1993 bonus payments were calculated
on the basis of the AOP dealer's increase in the
6
percentage of equipment sales leased through the Company, and totalled
$5,900,000 . Fiscal year 1994 lease bonus payments are calculated on the same
basis as the 1993 payments; the lease bonus payments were $8,800,000 in fiscal
1994.
Credit Policies and Loss Experience
Each AOP dealer is responsible for developing and maintaining a formal credit
policy that governs credit practices and procedures. In addition, the credit
practices of the individual AOP dealers must be consistent with Alco's overall
policies for leasing and credit approval.
The Company presently has full recourse to the AOP dealer for any lease which
becomes past due by 120 days or more. Excluding the effect of recoveries, the
gross value of leases charged back to AOP dealers was $14,400,000 in fiscal
1994 and $13,300,000 in fiscal 1993. For fiscal 1994 and 1993, the gross
chargebacks represented 2.7% and 3.2%, respectively, of the average portfolio
balances during the year.
Reserves for credit losses are maintained by the AOP dealers and AOP. On a
monthly basis, the Company reports the respective net investment value of the
lease portfolio to each AOP dealer so the AOP dealer can properly accrue the
credit reserve balance. In accordance with AOP policy, each AOP dealer must
maintain aggregate reserves of at least 3% of the AOP dealer's total portfolio
(including $125 million of net leases sold under an asset securitization
agreement in 1994 being serviced by the Company). Reserves maintained for
fiscal 1994, 1993 and 1992 were as follows:
ENDING
NET
SERVICE TOTAL
PORTFOLIO DEFAULT % OF
SEPTEMBER 30 BALANCE RESERVE PORTFOLIO
- ------------ --------- ------- ---------
(DOLLARS IN MILLIONS)
1994............................................... $660.5 $32.7 5.0%
1993............................................... $472.0 $25.2 5.3%
1992............................................... $363.5 $17.2 4.7%
Delinquencies remained at a consistent level for fiscal 1994 and 1993. During
this two-year period, accounts classified as current (less than 30 days past
due) ranged from 88% to 91% of the total portfolio balance on a monthly basis.
The aging of the Company's lease portfolio receivables at September 30, 1994
(excluding $125 million of net lease receivables sold under an asset
securitization agreement in 1994 being serviced by the Company) was as follows:
(DOLLARS IN
MILLIONS)
Current.......................................................... $572.4 88.7%
Over 30 days..................................................... 48.3 7.5%
Over 60 days..................................................... 16.0 2.5%
Over 90 days..................................................... 8.2 1.3%
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$644.9 100.0%
======
Less:
Unearned interest.............................................. (109.4)
------
$535.5
======
FUNDING
Prior to July 1994, the majority of the Company's debt funding was through
privately placed term notes with banks and an insurance company. The Company
follows a policy of matching the maturities of borrowed funds to the average
life of the leases being financed in order to minimize the impact of interest
rate changes on its operations. All notes carry terms of one to three years and
are either at fixed interest rates or have had the interest rate risk
eliminated through interest rate swap contracts. (See Note 5 to the Company's
Financial Statements on page F-8 hereof). Covenants in the note agreements
entered into before July 1994 include a minimum fixed charge coverage
requirement of 1.3 times fixed charges and a maximum debt-to-equity ratio
7
of 6 to 1. Also, there is a covenant in each such note agreement which requires
each lender's consent to any amendment to the 1991 Maintenance and Operating
Agreements (see page 5 hereof for a description of the 1991 Maintenance and
Operating Agreements). As of September 30, 1994, the amounts outstanding under
these note agreements totalled $330,000,000.
Prior to July 1994, the only other funding sources for the Company were
capital contributions and advances received from Alco. As of September 30,
1994, the Company's total shareholder's equity was $83,028,000, of which
$53,415,000 consisted of contributed capital.
Effective July 1, 1994, the Company may offer to the public from time to time
medium term notes having an aggregate initial offering price not exceeding
$500,000,000 or the equivalent thereof in foreign currency. These notes are
offered at varying maturities of nine months or more from their dates of issue
and may be subject to redemption at the option of the Company or repayment at
the option of the holder, in whole or in part, prior to the maturity date in
conjunction with meeting specified provisions. Interest rates are determined
based on market conditions at the time of issuance. As of September 30, 1994,
$105,000,000 of medium term notes were outstanding with a weighted average
interest rate of 6.9%.
In September 1994, the Company entered into an agreement to sell, under an
asset securitization program, an undivided ownership interest in $125,000,000
of eligible direct financing lease receivables. This sale resulted in a pretax
gain of $3,702,000 in the fourth quarter of fiscal 1994. The agreement, which
expires in September 1995, contains limited recourse provisions which require
the Company to assign an additional undivided interest in leases to cover any
potential losses to the purchaser due to uncollectible leases. As collections
reduce previously sold interests, new leases can be sold up to $125,000,000. As
of September 30, 1994, $125,000,000 of leases had been sold pursuant to the
agreement. Under the terms of the sales agreement, the Company will continue to
service the lease portfolio sold.
EMPLOYEES
At September 30, 1994, the Company had approximately 121 employees. Employee
relations are considered to be excellent.
COMPETITION AND GOVERNMENT REGULATION
The finance business in which the Company is engaged is highly competitive.
Competitors include leasing companies, commercial finance companies, commercial
banks and other financial institutions.
The Company competes primarily on the basis of financing rates, customer
convenience and quality customer service. AOP dealers offer financing by the
Company at the time equipment is leased or sold to the customer, reducing the
likelihood that the customer will contact outside funding sources. There is a
communications network between the Company and the AOP dealers to allow prompt
transmittal of customer and product information. Contract documentation is
straightforward and clearly written, so that financings are completed quickly
and to the customer's satisfaction. Finally, both the Company and the AOP
dealers are firmly committed to providing excellent customer service over the
duration of the contract.
Certain states have enacted retail installment sales or installment loan
statutes relating to consumer credit, the terms of which vary from state to
state. The Company does not generally extend consumer credit as defined in
those statutes.
The financing activities of the Company are dependent upon sales or leases of
office equipment by the AOP dealers, who are subject to substantial competition
by both independent office equipment dealers and the direct sales forces of
office equipment manufacturers. AOP is the largest network of independent
copier and office equipment dealers in North America and in the United Kingdom,
and represents the only independent distribution network with national scope.
AOP dealers compete on the basis of price, quality of service and product
performance.
8
ITEM 2. PROPERTIES
The Company's operations are located in Macon, Georgia and until August 1994
occupied approximately 19,000 square feet. In August 1994, the Company
completed construction of a new adjoining facility to allow expansion of its
operations into an additional 18,000 square feet of space. The facility was
constructed in order to accommodate the Company's future portfolio growth and
to improve current operations; the Company intends to use the new facility for
normal operating activities such as lease processing, customer service, billing
and collections. Certain specialized services (such as legal, accounting,
treasury, tax and audit services) are also performed for the Company at Alco's
corporate headquarters located in Valley Forge, Pennsylvania. The Company's
facilities are deemed adequate by management to conduct the Company's business.
See Note 6 of Notes to Financial Statements under Item 14 for additional
information as to the Company's properties.
Any additional information called for by this item has been omitted pursuant
to General Instruction J(2)(d).
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party (or to which any of its property is subject). To the Company's knowledge,
no material legal proceedings are contemplated by governmental authorities
against the Company or its properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No response to this item is required.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All outstanding shares of the Company's common stock are currently owned by
AOP, Inc., a subsidiary of MDR Corporation, which is a subsidiary of Alco.
Therefore, there is no market for the Company's common stock. The Company paid
a dividend of $7 million to its parent in the fourth quarter of fiscal 1994.
The Company and Alco will, from time to time, determine the appropriate
capitalization for the Company, which will, in part, affect any future payment
of dividends to or capital contributions to the Company.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by this item has been omitted pursuant to General
Instruction J(2)(a).
9
ITEM 7. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Pursuant to General Instruction J(2)(a) of Form 10-K, the following analysis
of the results of operations is presented in lieu of Management's Discussion
and Analysis of Financial Condition and Results of Operations.
FISCAL 1994 COMPARED WITH FISCAL 1993
Comparative summarized results of operation for the fiscal years ended
September 30, 1994 and 1993 are set forth in the table below. This table also
shows the increase in the dollar amounts of major revenue and expense items
between periods, as well as the related percentage change.
FISCAL YEAR
ENDED SEPTEMBER 30 INCREASE
------------------- ---------------
1994 1993 AMOUNT PERCENT
--------- --------- ------- -------
(DOLLARS IN THOUSANDS)
Revenues
Lease finance income..................... $ 61,297 $ 46,880 $14,417 30.8%
Interest on Alco income tax deferrals.... 3,753 2,926 827 28.3%
Other income............................. 3,061 2,377 684 28.8%
--------- --------- -------
68,111 52,183 15,928 30.5%
Expenses
Interest................................. 25,559 22,701 2,858 12.6%
General & administrative................. 20,829 13,928 6,901 49.5%
--------- --------- -------
46,388 36,629 9,759 26.6%
Gain on sale of lease receivables.......... 3,702 3,702
--------- --------- -------
Income before income taxes and cumulative
effect of change in accounting principle.. 25,425 15,554 9,871 63.5%
Income taxes............................... 9,794 6,218 3,576 57.5%
--------- --------- -------
Income before cumulative effect of change
in accounting principle................... 15,631 9,336 6,295 67.4%
Cumulative effect of change in accounting
for income taxes.......................... 140 140
--------- --------- -------
Net income................................. $ 15,771 $ 9,336 $ 6,435 68.9%
========= ========= =======
Revenues
Total revenues increased $15.9 million or 30.5% from fiscal 1993 to fiscal
1994. This increase was primarily due to the improvement in lease finance
income, reflecting the continued growth in the average lease portfolio of 32.8%
from fiscal 1993 to fiscal 1994. This increase in the lease portfolio is a
result of a 47% increase in lease fundings of which 43.9% was originated
through existing AOP dealers while 3.1% was originated through AOP dealers
recently acquired by Alco.
The Company charges Alco interest at a 6% rate on the benefit Alco receives
for income tax deferrals associated with the Company's leasing transactions.
Interest income on deferred taxes rose $827,000 or 28.3%, when comparing fiscal
1994 to fiscal 1993. This increase was due to an increased deferred income tax
base upon which the interest payment is calculated.
Other income, which consists primarily of late payment and billing fees,
increased by $684,000 or 28.8%, due to the increased size of the lease
portfolio upon which these fees are earned.
10
Expenses
Average borrowings to finance the lease portfolio grew by 32%, from $347
million during fiscal 1993 to $457 million during fiscal 1994. As a result,
interest expense grew by $2.9 million or 12.6%.
Reductions in the Company's incremental interest rate largely offset the
increase in average borrowings, and allowed interest expense to grow at a
slower pace than the average borrowings. For comparative purposes, the weighted
average interest rate on borrowings for fiscal 1994 was 5.8% as compared to
6.9% for fiscal 1993.
The general and administrative expense category includes dealer lease bonus
payments based on new lease volume generated by AOP dealers. These payments
were $8.8 million for fiscal 1994 and $5.9 million for fiscal 1993. This
increase in lease bonus expense was due to increased AOP dealer lease volume in
fiscal 1994.
Excluding the effect of the lease bonus program, the remaining general and
administrative expenses rose $4 million or 50% from fiscal 1993 to fiscal 1994.
This expense growth continues to be indicative of the overall growth of the
lease portfolio and its effects on the operations of the Company. Also
reflected in general and administrative expenses are costs related to several
initiatives, including facility expansion, a reengineering of the leasing
computer software and the development of several new products such as cost per
copy leasing, credit scoring, and automation of the lease input process. Such
costs amounted to approximately $1.2 million for fiscal 1994 as compared to
$200,000 for fiscal 1993.
Unlike the 1991 Operating Agreement, the 1994 Support Agreement does not
contain a requirement that the AOP dealers repurchase all defaulted lease
contracts. The Support Agreement does not include the repurchase requirement
because the Company and Alco wish to preserve the flexibility, on a prospective
basis, to allow the credit risk for defaulted contracts to remain with the
Company. In such event, the credit decision and reserves for defaulted
contracts would become the responsibility of the Company. If the Company were
responsible for the credit risk and costs associated with defaulted contracts,
the Company would reduce the lease bonus to AOP dealers or increase its current
lease rates in order to offset these increased costs. Consequently, the Company
believes that the impact of any future shift of the credit risk from the AOP
dealers to the Company would not be material to the Company's future results of
operations. The Company's (and Alco's) present intention, however, is to
continue the repurchase arrangement with the AOP dealers as currently in
effect.
Gain on Sale of Lease Receivables
Under an asset securitization program entered into in September 1994 the
Company sold $125 million of eligible direct financing lease receivables and
recognized a pre-tax gain of $3,702,000 ($2,301,000, net of taxes) in the
fourth quarter of fiscal 1994.
Income Before Income Taxes
Income before income taxes increased $9.9 million or 63.5%, when comparing
fiscal 1994 to fiscal 1993. This increase includes the net effect of higher
revenues on a larger portfolio and the $3.7 million pre-tax gain on the sale of
$125 million of lease receivables offset by higher borrowing costs and general
and administrative expenses.
Income Taxes/Accounting Change
The increase of $3.6 million in income taxes for fiscal 1994 was directly
attributable to increased income before income taxes for fiscal 1994, as
compared to fiscal 1993.
In the first quarter of fiscal 1994, the Company adopted the provisions of
SFAS No. 109, "Accounting for Income Taxes", which resulted in an increase in
net income of $140,000 for fiscal 1994. This amount represented the cumulative
effect of this accounting change and was recorded in the first quarter of
fiscal 1994.
11
FISCAL YEAR 1993 COMPARED WITH FISCAL YEAR 1992
Comparative summarized results of operation for the fiscal years ended
September 30, 1993 and September 30, 1992 are set forth in the table below.
This table also shows the increase or decrease in the dollar amounts of major
revenue and expense items between years, as well as the percentage
increase/decrease.
FISCAL YEAR
ENDED SEPT. 30 INCREASE(DECREASE)
--------------- ---------------------
1993 1992 AMOUNT PERCENT
------- ------- ---------- ---------
(DOLLARS IN THOUSANDS)
Revenues
Lease finance income.... $46,880 $35,693 $ 11,187 31.3%
Interest on Alco income
tax deferrals.......... 2,926 3,050 (124) (4.1)
Other income............ 2,377 1,158 1,219 105.3
------- ------- ----------
52,183 39,901 12,282 30.8
Expenses
Interest................ 22,701 20,068 2,633 13.1
General &
administrative......... 13,928 9,253 4,675 50.5
------- ------- ----------
Income before income
taxes.................... 15,554 10,580 4,974 47.0
Income taxes.............. 6,218 4,033 2,185 54.2
------- ------- ----------
Net income................ $ 9,336 $ 6,547 $ 2,789 42.6%
======= ======= ==========
Revenues
Overall revenues increased $12.3 million during fiscal 1993 or 30.8%, which
was primarily a result of the growth in the lease portfolio. The net lease
portfolio increased 29.8% during fiscal 1993 from $364 million to $472 million.
There were no significant changes in the lease rates charged by the Company
during fiscal 1993; accordingly, lease finance income grew 31.3% in fiscal 1993
as compared to fiscal 1992 as a direct result of the growth in the lease
portfolio, which was due almost entirely to new lease fundings originated by
existing AOP dealers.
The Company charges Alco interest on the benefit Alco receives for income tax
deferrals associated with the Company's leasing transactions. The interest rate
is set each year by agreement between Alco and the Company. The $124,000 or
4.1% decline in the interest income during fiscal 1993 is due to a reduction in
the interest rate from 9% in fiscal 1992 to 6% in fiscal 1993.
Other income, which consists primarily of late charges and billing fees, grew
$1.2 million or 105.3% in fiscal 1993, reflecting the growth in the lease
portfolio base upon which these fees are applied.
Expenses
Interest expense grew $2.6 million or 13.1% during fiscal 1993, reflecting an
increase in average borrowings to finance the lease portfolio to $347 million
in fiscal 1993 from $254 million in fiscal 1992. This increase was offset by a
reduction in borrowing rates during 1993. The weighted average rate of loans
outstanding at September 30, 1993 was 6.01% as compared to 7.40% at September
30, 1992.
The increase in general and administrative expenses includes an increase of
79% in the lease bonus program payments made to AOP dealers to $5.9 million in
fiscal 1993 from $3.3 million in fiscal 1992. Fiscal 1993 represented the first
full year of the lease bonus program, which was in effect for only the last
nine months of fiscal 1992.
Excluding the effect of the lease bonus program, remaining general and
administrative expenses rose $2.1 million or 34.9% during fiscal 1993, $1.9
million of which corresponds to the growth of the lease portfolio
12
during this period, and $200,000 of which was incurred for new leasing programs
and services on-line that will increase effectiveness and fee income in the
future.
Income before Income Taxes
Fiscal 1993 pre-tax income increased $5 million or 47% as compared to fiscal
1992. As previously discussed, this increase is primarily due to the lease
income on a larger lease portfolio.
Income Taxes
The increase of $2.2 million in income taxes was attributable to the increase
in pre-tax income and an increase in the statutory federal rate to 35% during
fiscal 1993 from 34% in fiscal 1992.
Any additional information required by this item has been omitted pursuant to
General Instruction J(2)(a) of Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of Alco Capital Resource, Inc. are submitted
herewith on Pages F-1 through F-11 of this report.
QUARTERLY DATA
The following table shows comparative summarized quarterly results for fiscal
1994 and 1993.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS)
1994
Lease finance income.............. $13,668 $14,580 $15,780 $17,269 $61,297
Interest expense.................. 5,994 6,213 6,246 7,106 25,559
Income before income taxes........ 4,773 5,219 5,900 9,533(1) 25,425(1)
Net income........................ 3,052 3,210 3,572 5,937(1) 15,771(1)
1993
Lease finance income.............. $10,596 $11,313 $12,097 $12,874 $46,880
Interest expense.................. 5,735 5,382 5,745 5,839 22,701
Income before income taxes........ 2,885 3,875 4,171 4,623 15,554
Net income........................ 1,732 2,326 2,503 2,775 9,336
- --------
(1) Includes $3.7 million gain on sale of lease receivables ($2.3 million, net
of tax).
Any additional information required by this item has been omitted pursuant to
General Instruction J(2)(a) of Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
RICHARD P. MAIER, age 43, has been President of the Company since 1989. He
joined the Company's parent, Alco Standard Corporation, in 1981 as Controller
of the Alco Automotive Group and was promoted to Division Controller of Alco
Office Products in 1983. He served as Vice President of Acme Business Products
(an AOP dealer) from 1984 to 1988 and became Vice President of Alco Capital in
1988.
ROBERT M. KEARNS II, age 41, has been Vice President of the Company since
1993. He was also appointed Vice President--Finance of the Alco Office Products
Group of Alco Standard Corporation (which includes all of the AOP dealers) in
1993. From 1983 through 1993, Mr. Kearns was Vice President--Finance of
Copyrite, an AOP dealer located in Indianapolis, Indiana which was acquired by
Alco in 1988.
JAMES E. HEAD, age 49, was appointed the sole director of the Company and
President of the Alco Office Products Group of Alco Standard Corporation (which
includes all of the AOP dealers) in 1993. From 1983 through 1993, Mr. Head was
President of Copyrite, an AOP dealer located in Indianapolis, Indiana which was
acquired by Alco in 1988.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item has been omitted pursuant to General
Instruction J(2)(c) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item has been omitted pursuant to General
Instruction J(2)(c) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 1 hereof for information concerning the relationship between the
Company, Alco and the AOP dealers.
Any additional information required by this item has been omitted pursuant to
General Instruction J(2)(c) of Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
PAGE
----
Report of Ernst & Young LLP, Independent Auditors...................... F-1
Balance Sheets at September 30, 1994 and 1993.......................... F-2
Statements of Income for Fiscal Years Ended September 30, 1994, 1993
and 1992.............................................................. F-3
Statements of Changes in Shareholder's Equity for the Fiscal Years
Ended September 30, 1994, 1993 and 1992............................... F-4
Statements of Cash Flows for Fiscal Years Ended September 30, 1994,
1993 and 1992......................................................... F-5
Notes to Financial Statements.......................................... F-6
Financial Statements and Schedules other than those listed above are omitted
because the required information is included in the financial statements or the
notes thereto or because they are inapplicable.
(b) Exhibits
The exhibits required by Item 601 of Regulation S-K are listed in the
accompanying exhibit index.
(c) Reports on Form 8-K.
None
14
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Alco Standard Corporation
We have audited the accompanying balance sheets of Alco Capital Resource,
Inc. (a wholly-owned subsidiary of Alco Standard Corporation) as of September
30, 1994 and 1993, and the related statements of income, changes in
shareholder's equity, and cash flows for each of the three years in the period
ended September 30, 1994. 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. 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 Alco Capital Resource, Inc. at
September 30, 1994 and 1993, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1994, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
_____________________________________
Ernst & Young LLP
Philadelphia, Pennsylvania
October 17, 1994
F-1
ALCO CAPITAL RESOURCE, INC.
BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30
------------------
1994 1993
-------- --------
ASSETS
Investments in leases (notes 3 and 4):
Direct financing leases...................................... $521,061 $467,199
Less: Unearned income........................................ (89,385) (71,703)
-------- --------
431,676 395,496
Funded leases, net........................................... 103,797 76,499
-------- --------
535,473 471,995
Accounts receivable............................................ 17,700 9,863
Due from Alco Standard Corporation (note 3).................... 552
Prepaid expenses and other assets.............................. 5,037 282
Property and equipment at cost, less accumulated depreciation
of: 1994--$1,939; 1993--$1,572 (note 2)....................... 3,418 677
-------- --------
Total assets............................................... $561,628 $483,369
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Accounts payable and accrued expenses........................ $ 6,438 $ 2,866
Accrued interest............................................. 5,342 5,337
Due to Alco Standard Corporation (note 3).................... 11,419
Income taxes payable......................................... 353
Notes payable to Banks (note 5).............................. 330,000 395,000
Medium Term Notes (note 5)................................... 105,000
Deferred income taxes (note 7)............................... 20,048 14,209
-------- --------
Total liabilities.......................................... 478,600 417,412
Shareholder's equity:
Common Stock--$.01 par value, 1,000 shares authorized,
issued, and outstanding
Contributed capital.......................................... 53,415 45,115
Retained earnings............................................ 29,613 20,842
-------- --------
Total shareholder's equity................................. 83,028 65,957
-------- --------
Total liabilities and shareholder's equity..................... $561,628 $483,369
======== ========
See accompanying notes.
F-2
ALCO CAPITAL RESOURCE, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
FISCAL YEAR ENDED
SEPTEMBER 30
-----------------------
1994 1993 1992
------- ------- -------
Revenues:
Lease finance income (note 2)........................ $61,297 $46,880 $35,693
Interest on Alco income tax deferrals (note 3)....... 3,753 2,926 3,050
Other income......................................... 3,061 2,377 1,158
------- ------- -------
68,111 52,183 39,901
Expenses:
Interest (note 3).................................... 25,559 22,701 20,068
General and administrative (note 2).................. 20,829 13,928 9,253
------- ------- -------
46,388 36,629 29,321
Gain on sale of lease receivables...................... 3,702
------- ------- -------
Income before income taxes and cumulative effect of
change in accounting principle........................ 25,425 15,554 10,580
Provision for income taxes (note 7):
Current.............................................. 3,642 1,118 1,831
Deferred............................................. 6,152 5,100 2,202
------- ------- -------
9,794 6,218 4,033
------- ------- -------
Income before cumulative effect of change in accounting
principle............................................. 15,631 9,336 6,547
Cumulative effect of change in accounting for income
taxes (note 7)........................................ 140
------- ------- -------
Net income......................................... $15,771 $ 9,336 $ 6,547
======= ======= =======
See accompanying notes.
F-3
ALCO CAPITAL RESOURCE, INC.
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(IN THOUSANDS)
COMMON CONTRIBUTED RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ----------- -------- -------
Balance at October 1, 1991................. $ $42,500 $ 5,141 $47,641
Net income................................. 6,547 6,547
Dividend paid to Alco--$.18 per share...... (182) (182)
--- ------- ------- -------
Balance at September 30, 1992.............. 42,500 11,506 54,006
Net income................................. 9,336 9,336
Capital contribution from Alco............. 2,615 2,615
--- ------- ------- -------
Balance at September 30, 1993.............. 45,115 20,842 65,957
Net income................................. 15,771 15,771
Capital contributions from Alco............ 8,300 8,300
Dividend paid to Alco--$7.00 per share..... (7,000) (7,000)
--- ------- ------- -------
Balance at September 30, 1994.............. $ * $53,415 $29,613 $83,028
=== ======= ======= =======
- --------
* Amount is less than one thousand dollars.
See accompanying notes.
F-4
ALCO CAPITAL RESOURCE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED
SEPTEMBER 30
----------------------------
1994 1993 1992
-------- -------- --------
Operating activities
Net income.......................... $ 15,771 $ 9,336 $ 6,547
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization..... 368 383 428
Cumulative effect of change in
accounting principle............. (140)
Provision for deferred taxes...... 6,152 5,100 2,202
Gain on sale of lease receivables. (3,702)
Changes in operating assets and
liabilities:
Accounts receivable............. (7,837) (1,445) (3,290)
Prepaid expenses and other
assets......................... (873) (3,068) (2,976)
Accounts payable and accrued
expenses....................... 3,572 127 867
Accrued interest................ 5 684 561
-------- -------- --------
Net cash provided by operating
activities......................... 13,316 11,117 4,339
-------- -------- --------
Investing activities
Purchases of property and
equipment, net................... (3,109) (102) (515)
Direct financing leases:
Additions......................... (396,218) (289,289) (230,898)
Cancellations..................... 58,946 37,184 22,978
Collections....................... 176,092 131,005 91,444
Proceeds from sale................ 125,000
Funded leases:
Additions......................... (73,791) (29,912) (23,410)
Cancellations..................... 10,978 9,296 10,324
Collections....................... 35,515 33,187 31,833
-------- -------- --------
Net cash used by investing
activities......................... (66,587) (108,631) (98,244)
-------- -------- --------
Financing activities
Proceeds from bank borrowings..... 148,000 180,000 122,000
Payments on bank borrowings....... (213,000) (75,000) (48,000)
Proceeds from issuance of medium
term notes....................... 105,000
Contributed capital............... 8,300 2,615
Dividends paid, including return
of contributed capital........... (7,000) (182)
-------- -------- --------
Net cash provided by financing
activities......................... 41,300 107,615 73,818
-------- -------- --------
Decrease (increase) in amounts due
to Alco............................ (11,971) 10,101 (20,087)
Due (to) from Alco at beginning of
period............................. 552 (9,549) 10,538
-------- -------- --------
Due from (to) Alco at end of period. $(11,419) $ 552 $ (9,549)
======== ======== ========
See accompanying notes.
F-5
ALCO CAPITAL RESOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
Alco Capital Resource, Inc. ("ACR" or the "Company"), an indirect wholly-
owned subsidiary of Alco Standard Corporation ("Alco"), purchases office
equipment exclusively from dealers in Alco's Office Products Group ("AOP
dealers") and leases the equipment to third-party customers under direct
financing leases. The Company also funds direct financing leases and non-
cancellable rental contracts entered into by AOP dealers.
2. ACCOUNTING POLICIES
Revenue Recognition
Unearned lease finance income is amortized into revenue using the effective
interest method over the term of the lease agreements or non-cancellable rental
contracts.
Property and Equipment
Property and equipment is carried on the basis of cost. Depreciation is
computed using a combination of straight-line and accelerated methods over the
estimated useful lives of the assets.
Income Taxes
The Company's deferred tax expense and the related liability are primarily
the result of the difference between the financial statement and income tax
treatment of direct financing leases.
Fair Value Disclosures
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the Company has computed and disclosed the fair value of its notes
payable and interest rate swaps (Note 5).
3. AGREEMENTS BETWEEN ACR AND ALCO
Cash Management Program
The Company participates in Alco's domestic cash management program. Under
this program, the Company has accounts with Alco wherein cash temporarily in
excess of current operating requirements earns interest at rates established by
Alco. Similarly, amounts are periodically borrowed from Alco, with interest
charged at market rates on borrowed funds. The Company was a net borrower
during fiscal years 1994, 1993 and 1992 and incurred net interest costs of
$496,000, $579,000 and $1,090,000, respectively, under this program. The
Company considers its account with Alco to represent its cash balance.
Accordingly, the accompanying Statements of Cash Flows present the changes in
the caption "Due from (to) Alco".
Included in general and administrative expenses are corporate overhead
expenses charged by Alco of $396,000, $360,000 and $192,000 in fiscal years
1994, 1993 and 1992, respectively. These corporate charges represent
management's estimate of costs incurred by Alco on behalf of ACR.
F-6
ALCO CAPITAL RESOURCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Interest on Alco Income Tax Deferrals
The Company charges Alco interest on Alco's income tax deferrals associated
with the Company's leasing transactions. Such charges were calculated at 6% in
1994 and 1993 and 9% in 1992.
The 1991 Maintenance and Operating Agreements
The Maintenance Agreement between the Company and Alco provides that Alco
will pay fees and make capital contributions to the Company in amounts
sufficient to meet the restrictive financial covenants included in the
Company's loan agreements (Note 5).
In the event of default of any lease on equipment purchased by the Company
from AOP dealers, the Operating Agreement requires Alco to repurchase the
equipment at the net investment value of the lease on the default date. Default
is defined by the Operating Agreement as any receivable becoming 120 days past
due or otherwise being reasonably declared uncollectible by the Company. At
September 30, 1994, 1993 and 1992, all of the Company's accounts receivable and
direct financing leases, including residual values, were subject to such
repurchase terms. In view of the foregoing terms of the Operating Agreement,
the Company has made no provision in the accompanying financial statements for
uncollectible receivables.
The 1994 Support Agreement
The 1994 Support Agreement between the Company and Alco, which is effective
as of June 1, 1994, provides that Alco will make a cash payment to the Company
(or an investment in the form of equity or subordinated notes) as needed to
comply with certain requirements. This agreement does not contain a requirement
that the AOP dealers repurchase all defaulted lease contracts. In such event,
the credit decision and reserves for defaulted contracts would become the
responsibility of the Company.
4. INVESTMENTS IN LEASES
The Company's funded leases include certain internal lease portfolios and
non-cancellable rental contracts for AOP dealers, which have been financed by
the Company. Under the terms of these financing arrangements, the AOP dealer
maintains the contractual relationship with the third-party customer. The AOP
dealers have assigned to the Company, with full recourse, their rights under
the funded leases, including the right to receive lease and rental payments and
a security interest in the related equipment.
At September 30, 1994, aggregate future minimum payments to be received,
including guaranteed residual values, for each of the succeeding fiscal years
under direct financing and funded leases are as follows (in thousands):
DIRECT
FINANCING FUNDED
LEASES LEASES
--------- --------
1995................................................ $206,834 $ 49,149
1996................................................ 159,689 37,946
1997................................................ 97,497 23,167
1998................................................ 42,229 10,035
1999................................................ 14,612 3,472
2000................................................ 200 47
-------- --------
521,061 123,816
Less unearned interest.............................. (89,385) (20,019)
-------- --------
$431,676 $103,797
======== ========
F-7
ALCO CAPITAL RESOURCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In September 1994, the Company entered into an agreement to sell, under an
asset securitization program, an undivided ownership interest in $125,000,000
of eligible direct financing lease receivables. The agreement, which expires in
September 1995, contains limited recourse provisions which require the Company
to assign an additional undivided interest in leases to cover any potential
losses to the purchaser due to uncollectible leases. As collections reduce
previously sold interests, new leases can be sold up to $125,000,000. As of
September 30, 1994, $125,000,000 of leases have been sold pursuant to the
agreement, resulting in a gain of $3,702,000 ($2,301,000, net of taxes) in the
fourth quarter of fiscal 1994. Under the terms of the sales agreement, the
Company will continue to service the lease portfolio sold.
5. NOTES PAYABLE TO BANKS AND MEDIUM TERM NOTES
Notes payable at September 30, 1994 bear interest at rates ranging from 4.01%
to 7.06% (4.01% to 8.62% at September 30, 1993) and mature on various dates
through July 30, 1997. The weighted average interest rate for the notes
outstanding at September 30, 1994 was 5.76% (6.01% at September 30, 1993).
Effective July 1, 1994, the Company may offer to the public from time to time
medium term notes having an aggregate initial offering price not exceeding
$500,000,000 or the equivalent thereof in foreign currency. These notes will be
offered at varying maturities of nine months or more from their dates of issue
and may be subject to redemption at the option of the Company or repayment at
the option of the holder, in whole or in part, prior to the maturity date in
conjunction with meeting specified provisions. Interest rates are determined
based on market conditions at the time of issuance. As of September 30, 1994,
$105,000,000 of medium term notes are outstanding with a weighted average
interest rate of 6.9%.
The Company follows a policy of matching the maturities of borrowed funds to
the average life of the leases being financed in order to minimize the impact
of interest rate changes on its operations. The Company has therefore entered
into interest rate swap agreements to eliminate the impact of interest rate
changes on its variable rate notes payable. The interest rate swap agreements
effectively convert the variable rate notes into fixed rate obligations. At
September 30, 1994, there were two variable rate notes outstanding and two
related interest rate swap agreements, on a total principal/notional amount of
$57,000,000. The weighted average interest rate on these variable rate notes
and related interest rate swap agreements was 5.48% and 5.04%, respectively, at
September 30, 1994. During fiscal 1994, there were four variable rate notes
outstanding and four related interest rate swap agreements on a weighted
average principal/notional amount of $88,000,000. The weighted average interest
rate on these variable rate notes and related interest rate swap agreements was
4.14% and 5.93%, respectively, during fiscal 1994. The Company's interest
expense would have been lower if the Company had chosen not to fix the interest
rates through the swap agreements. The underlying floating rate expense was
less than the fixed rate by $1,575,000 in fiscal 1994, $1,844,000 in 1993 and
$883,000 in 1992. The interest rate swap agreements mature at the time the
related notes mature. The Company is exposed to credit loss in the event of
nonperformance by the counterparties to the interest rate swap agreements.
However, the Company does not anticipate nonperformance by the counterparties.
The Company must comply with certain restrictive covenants under the terms of
its loan agreements. For loan agreements entered into before July 1, 1994, the
Company agrees to maintain earnings before fixed charges (primarily interest)
of not less than 1.3 times fixed charges, a ratio of debt to tangible net worth
not exceeding 6 to 1 and tangible net worth not less than $1. For loan
agreements (and medium-term notes) entered into after July 1, 1994, the Company
agrees to maintain earnings before fixed charges of not less than 1.25 times
fixed charges and a tangible net worth of not less than $1.
Interest paid amounted to $25,554,000, $22,122,000 and $19,507,000 for the
fiscal years ended September 30, 1994, 1993 and 1992, respectively.
At September 30, 1994, the fair value of the Company's notes payable is
estimated to be $425,792,000 using a discounted cash flow analysis. Fair values
for the Company's interest rate swaps (off-balance sheet instruments) are
estimated to be $1,426,000 based on termination of the agreements.
F-8
ALCO CAPITAL RESOURCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future maturities of all notes payable outstanding at September 30, 1994 are
as follows (in thousands):
Fiscal 1995..................................................... $182,000
1996.......................................................... 115,000
1997.......................................................... 138,000
--------
$435,000
========
6. LEASE COMMITMENTS
The Company leased office space under an agreement which began October 1,
1990 and terminated in October 1994 from a joint-venture, in which a wholly-
owned subsidiary of Alco had a 50% ownership interest. Management believed the
lease payments were reflective of current market rates. Annual rent expense for
the Company's office space was $149,000 for fiscal 1994. In October, 1994 the
Company exercised a purchase option associated with this lease, assuming a
mortgage payable of approximately $1.25 million.
In addition to its office space, the Company began leasing office equipment
and computer software under operating leases during 1991. The leased office
equipment consisted of a postage system and a payment processing system which
had original lease terms of thirty-six months and sixty months, respectively.
The postage machine reached lease end in fiscal 1994. The lease on the payment
processing system will expire during fiscal 1996. Total rent expense for the
leased office equipment was approximately $50,000 in 1994, and $61,000 in 1993
and 1992.
The computer software consists of an operating system which is leased on a
month-to-month basis and was upgraded during 1993 for a reengineering project.
Total rent expense for the computer software was approximately $143,000,
$107,000 and $22,000 for fiscal 1994, 1993, and 1992, respectively.
At 1994 fiscal year end, the Company entered into a new thirty-six month
operating lease to significantly upgrade the hardware and processing capacity
of its mainframe computer operations. This lease will expire in fiscal 1997.
Expenses under this lease did not start until fiscal 1995.
Total rent expense under all operating leases (including the leases for
office space, office equipment, and computer software previously described)
aggregated $342,000 in 1994, $319,000 in 1993, and $234,000 in 1992. Future
minimum rent commitments under operating lease agreements (excluding month-to-
month leases on computer software) as of September 30, 1994 are as follows (in
thousands):
1995............................................................... $ 379
1996............................................................... 377
1997............................................................... 354
------
Total.............................................................. $1,110
======
7. INCOME TAXES
Taxable income of the Company is included in the consolidated federal income
tax return of Alco and all estimated tax payments and refunds, if any, are made
through Alco. The provision for income taxes was determined as if the Company
was a separate taxpayer.
Provision for income taxes:
FISCAL YEAR ENDED SEPTEMBER 30 (IN THOUSANDS)
1994 1993 1992
---------------- ---------------- -----------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
------- -------- ------- -------- ------- --------
Federal................... $3,019 $5,667 $ 702 $4,527 $1,913 $1,780
State..................... 623 485 416 573 (82) 422
------ ------ ------ ------ ------ ------
Income Taxes.............. $3,642 $6,152 $1,118 $5,100 $1,831 $2,202
====== ====== ====== ====== ====== ======
F-9
ALCO CAPITAL RESOURCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred taxes resulting from temporary differences between financial and tax
accounting, which have not been restated for SFAS No. 109 were as follows:
FISCAL YEAR ENDED SEPTEMBER 30 (IN THOUSANDS)
1993 1992
------ ------
Lease income recognition..................................... $5,190 $2,400
Other........................................................ (90) (198)
------ ------
Deferred taxes............................................... $5,100 $2,202
====== ======
The components of deferred income tax assets and liabilities as of September
30, 1994 were as follows (in thousands):
Deferred tax assets:
Nondeductible reserves........................................... $ 658
Net operating loss and credit carryforwards...................... 955
--------
Total deferred tax assets...................................... 1,613
--------
Deferred tax liabilities:
Lease income recognition......................................... (21,661)
--------
Total deferred tax liabilities................................. (21,661)
--------
Net deferred tax liabilities....................................... $(20,048)
========
Substantially all of the deferred tax expense and the related liability
result from differences in the method of recognizing income from investments in
leases for financial reporting and income tax purposes.
A reconciliation of income taxes provided with those calculated at the
statutory federal rate is as follows:
FISCAL YEAR ENDED SEPTEMBER 30
1994 1993 1992
---- ---- ----
Taxes at Federal statutory rate........................... 35.0% 34.8% 34.0%
State taxes, net of federal benefit....................... 4.4 3.9 3.2
Increase in deferred tax liability due to increase in
statutory rate........................................... -- 2.0 --
Other..................................................... (1.4) (0.7) 0.9
---- ---- ----
Effective income tax rate................................. 38.0% 40.0% 38.1%
==== ==== ====
The Company made net tax payments of $3,432,000, $4,214,000 and $4,706,000 in
fiscal years 1994, 1993 and 1992, respectively.
Effective October 1, 1993, the Company adopted the provisions of SFAS No.
109, "Accounting for Income Taxes". The cumulative effect of adopting SFAS No.
109 was to increase net income by $140,000 for fiscal 1994.
8. PENSION AND STOCK PURCHASE PLAN
The Company participates in Alco's defined benefit pension plan covering the
majority of its employees. The Company's policy is to fund pension costs as
accrued. Pension expense recorded in 1994, 1993 and 1992 was $33,600, $12,000
and $8,400, respectively.
F-10
ALCO CAPITAL RESOURCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
The majority of the Company's employees are also eligible to participate in
Alco's Stock Participation Plan. They may invest 2% to 6% of regular
compensation before taxes. The Company contributes an amount equal to two-
thirds of the employees' investments and all amounts are invested in Alco's
common shares. Employees fully vest in the Company's contributions upon the
completion of five years of service. The Company's cost of this plan amounted
to $98,100, $63,200 and $46,500 in 1994, 1993 and 1992, respectively.
9. SUPPLEMENTARY INCOME STATEMENT INFORMATION
The following supplementary information is provided pursuant to Regulation S-
X Section 210.5-04 (in thousands):
CHARGED TO COST AND EXPENSES
FISCAL YEAR ENDED SEPTEMBER 30
--------------------------------
ITEM 1994 1993 1992
---- ---------- ---------- ----------
Maintenance and repairs.................... $ * $ * $ *
Depreciation and amortization of intangible
assets, pre-operating costs and similar
deferrals................................. * * *
Taxes, other than payroll and income taxes:
Property tax expense...................... * * 510
Royalties.................................. * * *
Advertising costs.......................... * * *
- --------
* Less than 1% of total revenues
F-11
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS FORM 10-K FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1994 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED.
Alco Capital Resource, Inc.
Date: December 19, 1994
By /s/ Robert M. Kearns
---------------------------------
(ROBERT M. KEARNS)
VICE PRESIDENT--FINANCE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
FORM 10-K HAS BEEN SIGNED BELOW ON DECEMBER 19, 1994 BY THE FOLLOWING PERSONS
ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
SIGNATURES TITLE
---------- -----
*Richard P. Maier President (Principal Executive
- ------------------------------------- Officer)
(RICHARD P. MAIER)
/s/ Robert M. Kearns Vice President--Finance (Principal
- ------------------------------------- Financial Officer and Principal
(ROBERT M. KEARNS) Accounting Officer)
*James E. Head Director
- -------------------------------------
(JAMES E. HEAD)
*By his signature set forth below, Robert M. Kearns, pursuant to duly
executed Powers of Attorney duly filed with the Securities and Exchange
Commission, has signed this Form 10-K on behalf of the persons whose
signatures are printed above, in the capacities set forth opposite their
respective names.
/s/ Robert M. Kearns December 19, 1994
- -------------------------------------
(ROBERT M. KEARNS)
ALCO CAPITAL RESOURCE, INC.
INDEX TO EXHIBITS
EXHIBIT NO. TITLE PAGE
----------- ----- ----
1 Distribution Agreement dated July 1, 1994, filed as Exhibit
1 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1994 is incorporated herein by reference.
3.1 Articles of Incorporation of the Company, filed on May 4,
1994 as Exhibit 3.1 to the Company's Registration Statement
on Form 10, are incorporated herein by reference.
3.2 Bylaws of the Company, filed on May 4, 1994 as Exhibit 3.2
to the Company's Registration Statement on Form 10, are
incorporated herein by reference.
4.1 Form of Fixed Rate Note and Floating Rate Note with respect
to the Company's Medium-Term Note Program, filed as Exhibit
4 to the Company's Form 10-Q for the fiscal quarter ended
June 30, 1994, is incorporated herein by reference.
4.2 Pursuant to Regulation S-K item 601 (b)(4)(iii), the
Company agrees to furnish to the Commission, upon request,
a copy of instruments defining the rights of holders of
long-term debt of the Company.
10.1 Federal Income Tax Allocation Agreement, filed on May 4,
1994 as Exhibit 10.1 to the Company's Registration
Statement on Form 10, is incorporated herein by reference.
10.2 Maintenance Agreement, dated as of August 15, 1991, between
the Company and Alco Standard Corporation, filed on May 4,
1994 as Exhibit 10.2 to the Company's Registration
Statement on Form 10, is incorporated herein by reference.
10.3 Operating Agreement, dated as of August 15, 1991, between
the Company and Alco Standard Corporation, filed on May 4,
1994 as Exhibit 10.3 to the Company's Registration
Statement on Form 10, is incorporated herein by reference.
10.4 Amended and Restated 1994 Support Agreement, filed as
Exhibit 10.4 to the Company's Form 10-12G/A dated June 29,
1994 is incorporated herein by reference.
10.5 Receivables Transfer Agreement dated September 23, 1994,
filed as Exhibit 10.21 to Alco Standard Corporation's Form
10-K for the fiscal year ended September 30, 1994, is
incorporated herein by reference.
10.6 Indenture dated as of July 1, 1994 between the Company and
Nations Bank, N.A., as Trustee, filed as Exhibit 4 to the
Company's Registration Statement No. 33-53779 on Form S-3,
is incorporated herein by reference.
12 Ratio of Earnings to Fixed Charges
23 Auditors' Consent
24 Powers of Attorney; certified resolution re: Powers of
Attorney
27 Financial Data Schedule