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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 1995
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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, 1995
[_]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 OFFICES) (ZIP CODE)
(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 15, 1995 was 1,000, all of which were indirectly owned by Alco
Standard Corporation.
Registered debt outstanding as of December 15, 1995 was $722,000,000.
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.
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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. FINANCIAL INFORMATION...................................... 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE................................... 15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS........................... 15
ITEM 11. EXECUTIVE COMPENSATION..................................... 15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................. 15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K................................................... 16
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 Alco Office Products ("AOP"),
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 with two
business segments--AOP and Unisource. AOP is the largest independent copier
distribution network in North America and the United Kingdom, with locations in
48 states, six Canadian provinces and in Europe. AOP also provides equipment
services and supplies and specialized document copying services. Unisource is
North America's largest marketer and distributor of paper and imaging products
and supply systems, which includes disposable paper and plastic products,
packaging systems and maintenance supplies. Unisource has facilities in every
major metropolitan market in the United States, every province of Canada and in
Mexico. Alco's fiscal 1995 revenues were $9.9 billion, of which $2.9 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 office
equipment dealers ("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 1995 fiscal year, 56% 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,
Oce, Ricoh, and Sharp. Currently 79% of the equipment financed by the Company
represents copiers, 15% fax machines, and 6% 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 $13,900 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 performs billing,
collection, property and sales tax filings, and 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 21% of the Company's leases as of
September 30, 1995. 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, 1995. 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, 1995, the average equipment residual value for
all leases in the Company's portfolio was 4.6%. Upon early termination of the
lease or at the normal end of the 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.
Leased Equipment
The Company also offers from time to time financing of the cost of office
equipment that the AOP dealers maintain in inventory for short-term rental to
customers. This category of leased equipment also includes
4
equipment currently rented to customers where the rental agreements are
considered to be cancelable by the customer, based on the terms and conditions
of the rental contracts in effect. Under operating guidelines in effect, any
equipment not physically on rental to customers for a period exceeding 120
continuous days must be repurchased by the AOP dealers at its current book
value.
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 below.
Support Agreements
The Company and Alco are parties to an 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 generally include
covenants that it will not amend the 1994 Support Agreement except under
certain circumstances. (See "1994 Support Agreement", below).
The Company and Alco are also 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 generally 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. Such loan
agreements will mature over the next several years, with the latest maturity
occurring in August 1998, at which time the Company and Alco intend to
terminate the 1991 Maintenance and Operating Agreements.
1. THE 1994 SUPPORT AGREEMENT
The 1994 Support Agreement between the Company and Alco, which was 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, which is further described on page 6,
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 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 generally 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.
5
2. THE 1991 MAINTENANCE AND OPERATING AGREEMENTS
The 1991 Maintenance Agreement provides 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 $29 million in 1995, $8.3 million in 1994
and $2.6 million in 1993.
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. The Company has generally agreed with its
lenders in loan agreements entered into prior to June 1, 1994, however, that it
will not amend the 1991 Maintenance and Operating Agreements without each such
lender's consent. Such loan agreements are scheduled to expire over the next
several years, with the latest maturity occurring in August 1998, at which time
the Company and Alco intend to terminate the 1991 Maintenance and Operating
Agreements.
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 in a net deposit condition with Alco
during 1995 and earned interest income of approximately $1.5 million. The
Company was a net borrower in 1994 and 1993 incurring net interest costs of
$496,000 and $579,000, 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 $552,000 in
1995, $396,000 in 1994 and $360,000 in 1993.
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 $145 million at the end of fiscal 1995. Alco pays the Company
interest on the portion of these tax deferrals (approximately $112 million at
the end of fiscal 1995) which arise from tax deferrals on intercompany sales.
In fiscal 1995 interest was earned by the Company at a rate consistent with the
Company's weighted average outside borrowing rate of interest. Under this
method, the Company
6
earned interest at an average rate of 6.7% in 1995 totaling $5.9 million. In
fiscal 1994 and 1993, interest was earned by the Company at a rate of 6% and
totalled $3.8 million and $2.9 million, respectively.
Lease Bonus Program
The Company sponsors a lease bonus subsidy program which provides incentives
to AOP dealers when AOP customers lease equipment from the Company. Payments
under this program can be reduced or eliminated at any time by joint agreement
of the Company and Alco. During fiscal 1995, 1994 and 1993 bonus payments were
calculated on the basis of the AOP dealer's increase in the percentage of
equipment sales leased through the Company, and totalled $7.3 million, $8.8
million and $5.9 million, respectively.
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 $20.9 million in fiscal
1995, $14.4 million in fiscal 1994 and $13.3 million in fiscal 1993. For fiscal
1995, 1994 and 1993, the gross chargebacks represented 2.4%, 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 loss 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 being serviced by the Company). Reserves maintained
for fiscal 1995 and 1994, as a percentage of the leasing portfolio at fiscal
year end, were 4.3% and 5.0%, respectively.
Delinquencies remained at a consistent level for fiscal 1995 and 1994. During
this two-year period, accounts classified as current (less than 30 days past
due) ranged from 86% to 91% of the total portfolio balance on a monthly basis.
The aging of the Company's lease portfolio receivables at September 30, 1995
(excluding $125 million of net lease receivables sold under an asset
securitization agreement being serviced by the Company) was as follows:
(DOLLARS IN
MILLIONS)
Current........................................................ $ 910.8 87.9%
Over 30 days................................................... 83.9 8.1%
Over 60 days................................................... 25.9 2.5%
Over 90 days................................................... 15.5 1.5%
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$1,036.1 100.0%
======
Less:
Unearned interest............................................ (164.7)
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$ 871.4
========
7
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 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, 1995, the amounts outstanding under
these note agreements totalled $173 million.
Prior to July 1994, the only other funding sources for the Company were
capital contributions and advances received from Alco. As of September 30,
1995, the Company's total shareholder's equity was $129.9 million, of which
$82.4 million consisted of contributed capital.
Effective July 1, 1994, the Company commenced a medium term note program of
$500 million which was fully subscribed as of July 1995. On June 30, 1995, the
Company increased the amount available to be offered under this medium term
notes program by $1 billion or the equivalent thereof in foreign currency. The
program allows the Company to offer to the public from time to time medium term
notes having an aggregate initial offering price not exceeding the total
program amount. 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, 1995, $602 million of medium term notes were
outstanding with a weighted average interest rate of 7.0%.
In September 1994, the Company entered into an agreement to sell, under an
asset securitization program, an undivided ownership interest in $125 million
of eligible direct financing lease receivables. The agreement, which expires in
September 1996, 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 million. The
weighted average interest rate on the agreement, which is partially fixed by
three interest rate swap agreements totaling a principal/notional amount of $90
million is 7.0% at September 30, 1995. In fiscal year 1995, the Company sold
$67 million in leases, replacing leases liquidated during the year and
recognized a pretax gain of $1.2 million. Under the terms of the sales
agreement, the Company will continue to service the lease portfolio sold.
EMPLOYEES
At September 30, 1995, the Company had approximately 150 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
8
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.
ITEM 2. PROPERTIES
The Company's operations are located in Macon, Georgia and occupy
approximately 37,000 square feet. The Company uses this 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.
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
Alco Office Systems, Inc., a subsidiary of MDR Corporation, which is a
subsidiary of Alco. Therefore, there is no market for the Company's common
stock. No dividends were paid in fiscal 1995, however, 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 Alco 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 1995 COMPARED WITH FISCAL 1994
Comparative summarized results of operations for the fiscal years ended
September 30, 1995 and 1994 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 (DECREASE)
------------------- ----------------------
1995 1994 AMOUNT PERCENT
--------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
Revenues:
Lease finance income.............. $76,528 $61,297 $15,231 24.8%
Rental income..................... 7,029 7,029
Interest on Alco income tax
deferrals........................ 5,933 3,753 2,180 58.1
Other income...................... 4,618 3,061 1,557 50.9
--------- --------- ----------
94,108 68,111 25,997 38.2
Expenses:
Interest.......................... 36,400 25,559 10,841 42.4
General and administrative........ 26,566 20,829 5,737 27.5
--------- --------- ----------
62,966 46,388 16,578 35.7
--------- --------- ----------
Gain on sale of lease receivables... 1,194 3,702 (2,508) (67.7)
--------- --------- ----------
Income before income taxes and
cumulative effect of change in
accounting principle............... 32,336 25,425 6,911 27.2
Income taxes........................ 14,476 9,794 4,682 47.8
--------- --------- ----------
Income before cumulative effect of
change in accounting principle..... 17,860 15,631 2,229 14.3
Cumulative effect of change in
accounting for income taxes........ 140 (140)
--------- --------- ----------
Net income.......................... $17,860 $15,771 $ 2,089 13.2
========= ========= ==========
Revenues
Total revenues increased $26 million or 38.2% in fiscal 1995 from fiscal
1994. Approximately 58.6% or $15.2 million of this increase in revenues was a
result of increased lease finance income due to growth in the portfolio of
direct financing and funded leases. During the twelve-month period from October
1, 1994 to September 30, 1995, the portfolio grew at a 62.7% rate, net of lease
receivables that were sold in asset securitization transactions.
Effective October 1, 1994, the Company began offering a new operating lease
program to the AOP dealer network, whereby office equipment placed on rental
with a customer, with cancellable terms, could be funded through the Company
and rented back to the AOP dealer. In prior years, this equipment was funded by
the respective AOP dealer instead of the Company. At September 30, 1995,
equipment with a net book value of $25.2 million was leased under this program.
This new funding program contributed $7 million in rental income during fiscal
1995.
10
Effective October 1, 1995, management decided to revert back to the strategy
for funding this equipment utilized in prior fiscal years where the majority of
equipment, with the exception of large transactions generally exceeding
$250,000 in amount, would once again be funded by the respective Alco dealer,
instead of through the Company. Accordingly, management expects operating
leases funded through the Company to be at a reduced level during fiscal 1996.
During fiscal 1995, Alco changed the interest rate on deferred taxes, so that
the Company earns interest at a rate consistent with the Company's weighted
average outside borrowing rate of interest. This change resulted in an average
interest rate of 6.7% for fiscal 1995 compared to 6% for fiscal 1994. In
addition, the deferred tax base upon which interest payments are calculated
increased 46.9% to $111.9 million at September 30, 1995 from $76.2 million at
September 30, 1994. Due to the combined effect of the increased rate of
interest and the increased deferred tax balances, interest income on deferred
taxes rose $2.2 million or 58.1% when comparing fiscal 1995 to fiscal 1994.
Other income consists primarily of late payment charges and various billing
fees. The structure of these fees has remained basically unchanged in fiscal
1995 from fiscal 1994. The growth in other income from fees is primarily due to
the increased size of the lease portfolio upon which these fees are based.
Overall, fee income from these sources grew by $1.6 million or 50.9%, when
comparing fiscal 1995 to fiscal 1994.
Expenses
Average borrowings to finance the lease portfolio in the form of loans from
major banks and the issuance of medium term notes in the public markets grew by
30.4%, to average borrowings of $596 million during fiscal 1995, from average
borrowings of $457 million during fiscal 1994. Due to the combined effect of
increased borrowing to fund the portfolio and an increase in the Company's
overall weighted average interest rate on all borrowings, interest expense grew
by $10.8 million or 42.4%, when comparing fiscal 1995 to fiscal 1994. For
comparative purposes, the Company's combined weighted average interest rate on
all borrowings for fiscal 1995 was 6.7% as compared to 5.8% for fiscal 1994. At
September 30, 1995, the Company's debt to equity ratio, including intercompany
amounts due from Alco, was 5.8 to 1.
During June 1995, the Company completed the filing of a new medium term note
registration in the amount of $1 billion, designed to meet the Company's
anticipated portfolio funding needs over the next eighteen to twenty-four
months. This new note program was structured similar to the original $500
million medium term note program that was filed in June 1994, which was used to
meet the Company's portfolio funding needs during the period from July 1994 to
June 1995. The new program allows for the issuance of medium term notes in the
public market with maturities of at least nine months, through four nationally
recognized investment firms. At September 30, 1995, $602 million of medium term
notes were outstanding under these two programs with a weighted average
interest rate of 7.0%.
Loans through major banks declined by $157 million to $173 million
outstanding at September 30, 1995, from $330 million outstanding at September
30, 1994, at a weighted average rate of 5.6%.
Total general and administrative expenses grew by $5.7 million or 27.5%, when
comparing fiscal 1995 to fiscal 1994. However, the general and administrative
expense category for fiscal 1995 includes depreciation expense on leased
equipment totalling $5.9 million. There is no comparable depreciation expense
included in general and administrative expenses for fiscal 1994. In addition,
lease bonus subsidy payments to AOP dealers were approximately $1.5 million
less in fiscal 1995 than in fiscal 1994, due to a reduction in the bonus
subsidy percentage.
Excluding the effects of the addition of approximately $5.9 million of
depreciation expense on operating leases in fiscal 1995 and the reduction of
approximately $1.5 million in lease bonus payments in fiscal 1995, remaining
general and administrative expenses grew approximately $1.3 million, when
comparing fiscal 1995
11
to fiscal 1994. There have been no significant changes in the portfolio
servicing costs of the Company in fiscal 1995 from fiscal 1994; therefore, the
increase in general and administrative expenses between these two fiscal years
is a direct result of the growth of the lease service portfolio.
Gain on Sale of Lease Receivables
Under an asset securitization program entered into in September, 1994 the
Company sold an undivided ownership interest in $125 million of eligible direct
financing lease receivables. This agreement, which expires in September 1996,
was structured as a revolving securitization so that as collections reduce
previously sold interests, new leases can be sold up to $125 million. During
fiscal 1995, collections reduced previously sold interests by approximately
$66.7 million. The Company sold an additional $66.7 million in net eligible
direct financing leases and recognized gains of $1.2 million.
Income Before Taxes
Income before taxes grew by $6.9 million or 27.2%, when comparing pretax
earnings for fiscal 1995 to fiscal 1994. This increase in income before taxes
was essentially the effect of higher earnings on a larger portfolio base, that
was supplemented by strong growth in interest income on deferred taxes and in
other income. In addition, income before taxes was positively effected by a
slower growth rate in general and administrative expenses during fiscal 1995
than was experienced in fiscal 1994.
At the end of fiscal 1994, the Company entered into its existing $125 million
asset securitization program and recognized a pretax gain on sale of
approximately $3.7 million during fiscal 1994. As mentioned above,
securitization gains in fiscal 1995 were approximately $1.2 million on a pretax
basis. Excluding the effect of the securitization gains from pretax income for
both fiscal years 1995 and 1994, pretax income grew by 43.4% in fiscal 1995
from fiscal 1994.
Taxes on Income
Approximately $3.6 million of the increase in income taxes in fiscal 1995
from fiscal 1994 is directly attributable to the higher net income before taxes
in fiscal 1995 as compared to fiscal 1994, while $1.1 million relates to a
valuation allowance recorded in fiscal 1995 for certain state deferred tax
items. During fiscal 1995, the Company's effective federal and state income tax
rate was 44.8%, as compared to 38.5% (excluding the cumulative effect
adjustment) in fiscal 1994. Excluding the valuation allowance adjustment, the
fiscal 1995 effective tax rate was 42.8%.
12
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% in fiscal 1994 from fiscal
1993. This increase was primarily due to the improvement in lease finance
income, reflecting the continued growth in the average lease portfolio of 32.8%
in fiscal 1994 from fiscal 1993. 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 charged Alco interest at a 6% rate on the benefit Alco received
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.
Expenses
Average borrowings to finance the lease portfolio grew by 32%, to $457
million during fiscal 1994 from $347 million during fiscal 1993. 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
13
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% in fiscal 1994 from fiscal 1993.
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 pretax gain of $3.7 million ($2.3 million, 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.
Any additional information required by this item has been omitted pursuant to
General Instruction J(2)(a) of Form 10-K.
14
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
1995 and 1994.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS)
1995
Lease finance income.... $16,183(1) $17,614(1) $20,051(1) $22,680 $76,528
Interest expense........ 7,051 8,149 9,752 11,448 36,400
Income before income
taxes.................. 6,907 7,120 8,377 9,932 32,336
Net income.............. 4,213 4,437 5,071 4,139 17,860
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(2) 25,425(2)
Net income.............. 3,052 3,210 3,572 5,937(2) 15,771(2)
- --------
(1) Amounts have been reclassified to conform with current presentation.
(2) 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
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
RICHARD P. MAIER, age 44, has been President of the Company since 1989. He
joined Alco (the Company's parent) in 1981 as Controller of the Alco Automotive
Group and was promoted to Division Controller of Alco Office Products (which
includes all of the AOP dealers) 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 42, has been Vice President of the Company since
1993. He was also appointed Vice President--Finance of Alco Office Products 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.
KURT E. DINKELACKER, age 42, was appointed the sole director of the Company
and President of Alco Office Products in 1995. He has also served as an
Executive Vice President of Alco since 1993. From 1993 to 1995, he was Chief
Financial Officer of Alco, and was Executive Vice President--Finance of Alco
Office Products from 1991 to 1993.
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.
15
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, 1995 and 1994.......................... F-2
Statements of Income for Fiscal Years Ended September 30, 1995, 1994
and 1993.............................................................. F-3
Statements of Changes in Shareholder's Equity for the Fiscal Years
Ended September 30, 1995, 1994 and 1993............................... F-4
Statements of Cash Flows for Fiscal Years Ended September 30, 1995,
1994 and 1993......................................................... 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
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 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.
16
10.5 Receivables Transfer Agreement dated September 23, 1994, portions of
which contain confidential material, filed as Exhibit 10.21 to Alco
Standard Corporation's Form 10-K/A for the fiscal year ended September
30, 1994, filed on March 17, 1995, 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.
10.7 Indenture dated as of July 1, 1995 between the Company and Chemical Bank,
N.A., as Trustee, filed as Exhibit 10.23 to Alco Standard Corporation's
Form 10-K for the fiscal year ended September 30, 1995, is incorporated
herein by reference.
10.8 Distribution Agreement dated as of June 30, 1995 between the Company and
various distribution agents, filed as Exhibit 10.21 to Alco Standard
Corporation's 10-K for the fiscal year ended September 30, 1995, 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
(c) Reports on Form 8-K.
None
17
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, 1995 and 1994, 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, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1995, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
_____________________________________
Ernst & Young LLP
Philadelphia, Pennsylvania
October 17, 1995
F-1
ALCO CAPITAL RESOURCE, INC.
BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30
------------------
1995 1994
-------- --------
ASSETS
Investments in leases (notes 3 and 4):
Direct financing leases...................................... $824,876 $508,365
Less: Unearned income........................................ (132,428) (76,689)
-------- --------
692,448 431,676
Funded leases, net........................................... 178,948 103,797
-------- --------
871,396 535,473
Accounts receivable............................................ 26,647 17,700
Due from Alco Standard Corporation (note 3).................... 26,577
Prepaid expenses and other assets.............................. 7,648 5,037
Leased equipment--Operating rentals at cost, less accumulated
depreciation of $5,912........................................ 25,247
Property and equipment at cost, less accumulated depreciation
of: 1995--$1,869; 1994--$1,939 (note 2)....................... 4,660 3,418
-------- --------
Total assets............................................... $962,175 $561,628
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Accounts payable and accrued expenses........................ $ 10,840 $ 6,438
Accrued interest............................................. 12,549 5,342
Due to Alco Standard Corporation (note 3).................... 11,419
Income taxes payable......................................... 353
Notes payable to Banks (note 5).............................. 173,000 330,000
Medium Term Notes (note 5)................................... 602,000 105,000
Deferred income taxes (note 7)............................... 33,898 20,048
-------- --------
Total liabilities.......................................... 832,287 478,600
Shareholder's equity:
Common Stock--$.01 par value, 1,000 shares authorized,
issued, and outstanding
Contributed capital.......................................... 82,415 53,415
Retained earnings............................................ 47,473 29,613
-------- --------
Total shareholder's equity................................. 129,888 83,028
-------- --------
Total liabilities and shareholder's equity..................... $962,175 $561,628
======== ========
See accompanying notes.
F-2
ALCO CAPITAL RESOURCE, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
FISCAL YEAR ENDED
SEPTEMBER 30
-----------------------
1995 1994 1993
------- ------- -------
Revenues:
Lease finance income (note 2)........................ $76,528 $61,297 $46,880
Rental income........................................ 7,029
Interest on Alco income tax deferrals (note 3)....... 5,933 3,753 2,926
Other income......................................... 4,618 3,061 2,377
------- ------- -------
94,108 68,111 52,183
Expenses:
Interest (note 3).................................... 36,400 25,559 22,701
General and administrative .......................... 26,566 20,829 13,928
------- ------- -------
62,966 46,388 36,629
Gain on sale of lease receivables (note 4)............. 1,194 3,702
------- ------- -------
Income before income taxes and cumulative effect of
change in accounting principle........................ 32,336 25,425 15,554
Provision for income taxes (note 7):
Current.............................................. 812 3,642 1,118
Deferred............................................. 13,664 6,152 5,100
------- ------- -------
14,476 9,794 6,218
------- ------- -------
Income before cumulative effect of change in accounting
principle............................................. 17,860 15,631 9,336
Cumulative effect of change in accounting for income
taxes (note 7)........................................ 140
------- ------- -------
Net income......................................... $17,860 $15,771 $ 9,336
======= ======= =======
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, 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
Net income........................... 17,860 17,860
Capital contributions from Alco...... 29,000 29,000
--- ------- ------- --------
Balance at September 30, 1995........ $ * $82,415 $47,473 $129,888
=== ======= ======= ========
- --------
* 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
----------------------------
1995 1994 1993
-------- -------- --------
Operating activities
Net income.......................... $ 17,860 $ 15,771 $ 9,336
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization..... 6,470 368 383
Cumulative effect of change in
accounting principle............. (140)
Provision for deferred taxes...... 13,850 6,152 5,100
Gain on sale of lease receivables. (1,194) (3,702)
Changes in operating assets and
liabilities:
Accounts receivable............. (8,947) (7,837) (1,445)
Prepaid expenses and other
assets......................... (1,770) (873) (3,068)
Accounts payable and accrued
expenses....................... 4,402 3,572 127
Accrued interest................ 7,207 5 684
-------- -------- --------
Net cash provided by operating
activities......................... 37,878 13,316 11,117
-------- -------- --------
Investing activities
Purchases of equipment for rental,
net.............................. (31,159)
Purchases of property and
equipment, net................... (1,800) (3,109) (102)
Direct financing leases:
Additions......................... (622,855) (396,218) (289,289)
Cancellations..................... 100,397 58,946 37,184
Collections....................... 195,009 176,092 131,005
Proceeds from sale................ 66,677 125,000
Funded leases:
Additions......................... (142,949) (73,791) (29,912)
Cancellations..................... 23,042 10,978 9,296
Collections....................... 44,756 35,515 33,187
-------- -------- --------
Net cash used by investing
activities......................... (368,882) (66,587) (108,631)
-------- -------- --------
Financing activities
Proceeds from bank borrowings..... 25,000 148,000 180,000
Payments on bank borrowings....... (182,000) (213,000) (75,000)
Proceeds from issuance of medium
term notes....................... 497,000 105,000
Contributed capital............... 29,000 8,300 2,615
Dividends paid.................... (7,000)
-------- -------- --------
Net cash provided by financing
activities......................... 369,000 41,300 107,615
-------- -------- --------
Increase (decrease) in amounts due
from Alco.......................... 37,996 (11,971) 10,101
Due (to) from Alco at beginning of
period............................. (11,419) 552 (9,549)
-------- -------- --------
Due from (to) Alco at end of period. $ 26,577 $(11,419) $ 552
======== ======== ========
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"), is engaged in the
business of arranging lease financing exclusively for office equipment marketed
by Alco Office Products ("AOP") dealers, which sell and service copier
equipment and facsimile machines.
2. SIGNIFICANT 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, including leased equipment, is carried on the basis
of cost. Depreciation is principally computed using the straight-line method
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).
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
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 an account 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 in a net deposit
position with Alco during 1995 and earned interest income of $1,545,000
(included in interest expense). The Company was a net borrower during fiscal
years 1994 and 1993 and incurred net interest costs of $496,000 and $579,000,
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".
Management Fee
Included in general and administrative expenses are corporate overhead
expenses charged by Alco of $552,000, $396,000 and $360,000 in fiscal years
1995, 1994 and 1993, 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 6.7%
in 1995 and 6% in 1994 and 1993.
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 the AOP dealer 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, 1995, 1994 and 1993, 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. The present intent of the Company and Alco,
however, is to continue the repurchase arrangement with the AOP dealers as
currently in effect.
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, 1995, 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
--------- --------
1996............................................... $ 301,319 $ 77,149
1997............................................... 243,634 62,380
1998............................................... 163,183 41,781
1999............................................... 82,415 21,101
2000............................................... 33,463 8,568
2001............................................... 862 221
--------- --------
824,876 211,200
Less unearned interest............................. (132,428) (32,252)
--------- --------
$ 692,448 $178,948
========= ========
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 1996, 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. The
weighted average interest rate on the agreement, which is partially fixed by
three interest rate swap agreements totaling a principal/notional amount of
$90,000,000 is 7.0% at September 30, 1995. In fiscal year 1995, the Company
sold $67,000,000 in leases, replacing leases liquidated during the year and
recognized a pretax gain of $1,194,000. A pretax gain of $3,702,000 was
recognized in the fourth quarter of fiscal 1994 relating to the original sales
transaction. Under the terms of the sales agreement, the Company will continue
to service the lease portfolio.
5. NOTES PAYABLE TO BANKS AND MEDIUM TERM NOTES
Notes payable at September 30, 1995 bear interest at rates ranging from 4.69%
to 6.56% (4.01% to 7.06% at September 30, 1994) and mature on various dates
through August 21, 1998. The weighted average interest rate for the notes
outstanding at September 30, 1995 was 5.59% (5.76% at September 30, 1994).
On June 30, 1995, the Company increased the amount available to be offered
under its medium term notes program by $1,000,000,000 or the equivalent thereof
in foreign currency. The medium term note program effective July 1, 1994 of
$500,000,000 was fully subscribed as of July 1995. The program allows the
Company to offer to the public from time to time medium term notes having an
aggregate initial offering price not exceeding the total program amount. 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, 1995, $602,000,000 of medium term notes are outstanding with a
weighted average interest rate of 7.0%.
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. During
fiscal 1995, there were two variable rate notes outstanding and two related
interest rate swap agreements on a principal/notional amount of $57,000,000.
The weighted average interest rate on these variable rate notes and related
interest rate swap agreements was 6.58% and 4.76%, respectively, during fiscal
1995. The Company's interest expense would have been higher in 1995 and lower
in 1994 and 1993 if the Company had chosen not to fix the interest rates
through the swap agreements. The underlying floating rate expense was higher
than the fixed rate by $1,037,000 in fiscal 1995 and lower than the fixed rate
by $1,575,000 in fiscal 1994 and $1,844,000 in 1993. 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)
F-8
ALCO CAPITAL RESOURCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 $29,193,000, $25,554,000 and $22,122,000 for the
fiscal years ended September 30, 1995, 1994 and 1993, respectively.
At September 30, 1995 and 1994, the fair value of the Company's notes payable
to banks and medium term notes is estimated to be $782,029,000 and
$425,792,000, respectively, using a discounted cash flow analysis. Fair values
for the Company's interest rate swaps (off-balance sheet instruments) are
estimated to be ($1,747,000) and $1,426,000 in fiscal 1995 and 1994,
respectively, based on termination of the agreements.
Future maturities of all notes payable and medium term notes outstanding at
September 30, 1995 are as follows (in thousands):
Fiscal 1996..................................................... $170,000
1997.......................................................... 314,000
1998.......................................................... 176,000
1999.......................................................... 35,000
2000.......................................................... 80,000
--------
$775,000
========
6. LEASE COMMITMENTS
Total rent expense under all operating leases aggregated $955,000 in 1995,
$342,000 in 1994, and $319,000 in 1993. At September 30, 1995, future minimum
payments under noncancellable operating leases with initial or remaining terms
of more than one year were: 1996-$437,000; 1997-$437,000.
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. The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes" effective October 1,
1993. The cummulative effect of adopting SFAS No. 109 was to increase net
income by $140,000 in fiscal 1994. As permitted under SFAS No. 109, prior
years' financial statements have not been restated.
Provision for income taxes:
FISCAL YEAR ENDED SEPTEMBER 30 (IN THOUSANDS)
1995 1994 1993
---------------- ---------------- ----------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
------- -------- ------- -------- ------- --------
Federal................... $554 $ 9,756 $3,019 $5,667 $ 702 $4,527
State..................... 258 3,908 623 485 416 573
---- ------- ------ ------ ------ ------
Income Taxes.............. $812 $13,664 $3,642 $6,152 $1,118 $5,100
==== ======= ====== ====== ====== ======
F-9
ALCO CAPITAL RESOURCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of deferred income tax assets and liabilities were as follows:
SEPTEMBER 30 (IN THOUSANDS)
1995 1994
Deferred tax assets: -------- --------
Nondeductible reserves................................. $ 944 $ 658
Net operating loss and credit carryforwards............ 1,141 955
-------- --------
Total deferred tax assets............................ 2,085 1,613
Valuation allowance.................................... 1,110
-------- --------
Net deferred tax assets.............................. 975 1,613
Deferred tax liabilities:
Depreciation........................................... (163)
Lease income recognition............................... (34,710) (21,661)
-------- --------
Total deferred tax liabilities....................... (34,873) (21,661)
-------- --------
Net deferred tax liabilities............................. $(33,898) $(20,048)
======== ========
Deferred taxes resulting from temporary differences between financial and tax
accounting, which have not been restated for SFAS No. 109 as of September 30,
1993 were as follows (in thousands):
Lease income recognition............................................. $5,190
Other................................................................ (90)
------
Deferred taxes....................................................... $5,100
======
The components of the effective income tax rate were as follows:
FISCAL YEAR ENDED SEPTEMBER 30
1995 1994 1993
---- ---- ----
Taxes at Federal statutory rate........................... 35.0% 35.0% 34.8%
State taxes, net of federal benefit....................... 8.4 4.4 3.9
Increase in deferred tax liability due to increase in
statutory rate........................................... -- -- 2.0
Other..................................................... 1.4 (1.4) (0.7)
---- ---- ----
Effective income tax rate................................. 44.8% 38.0% 40.0%
==== ==== ====
The Company made net income tax payments of $1,862,000, $3,432,000 and
$4,214,000 in fiscal years 1995, 1994 and 1993, respectively.
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 1995, 1994 and 1993 was $43,000, $33,600
and $12,000, respectively.
The majority of the Company's employees were eligible to participate in
Alco's Stock Participation Plan under which they were permitted to invest 2% to
6% of regular compensation before taxes. The Company contributed an amount
equal to two-thirds of the employees' investments and all amounts were invested
in Alco's common shares. Effective October 2, 1995, the Stock Participation
Plan was replaced by a Retirement
F-10
ALCO CAPITAL RESOURCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Savings Plan (RSP). The RSP will allow employees to invest 1% to 16% of regular
compensation before taxes in six different investment funds. The Company will
contribute an amount equal to two-thirds of the employees' investments, up to
6% of regular compensation, for a maximum company match of 4%. All Company
contributions are invested in Alco's common shares. Employees vest in a
percentage of the Company's contribution after two years of service, with full
vesting at the completion of five years of service. In fiscal 1995, Alco
charged the Company for costs related to a similar plan for eligible management
employees. In prior years, this cost was paid by Alco. The Company's cost of
the stock participation plans amounted to $195,000, $98,100 and $63,200 in
1995, 1994 and 1993, respectively.
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, 1995 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED.
Alco Capital Resource, Inc.
Date: December 18, 1995
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 18, 1995 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)
*Kurt E. Dinkelacker Director
- ------------------------------------
(KURT E. DINKELACKER)
*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 18, 1995
- ------------------------------------
(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 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,
portions of which contain confidential material, filed as
Exhibit 10.21 to Alco Standard Corporation's Form 10-K/A
for the fiscal year ended September 30, 1994, filed on
March 17, 1995, 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.
10.7 Indenture dated as of July 1, 1995 between the Company and
Chemical Bank, N.A., as Trustee, filed as Exhibit 10.23 to
Alco Standard Corporation's Form 10-K for the fiscal year
ended September 30, 1995, is incorporated herein by
reference.
10.8 Distribution Agreement dated as of June 30, 1995 between
the Company and various distribution agents, filed as
Exhibit 10.21 to Alco Standard Corporation's 10-K for the
fiscal year ended September 30, 1995, 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