-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, W4melpcOxamnQxOvKVcdheJyo0YaU0W8REx716NqsfoY3UmHZW0u/SdH7jexul/Q WFpxy0Cu6IZy4cEh8jy4LA== 0000950109-94-001087.txt : 19940701 0000950109-94-001087.hdr.sgml : 19940701 ACCESSION NUMBER: 0000950109-94-001087 CONFORMED SUBMISSION TYPE: 10-12G/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19940629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALCO CAPITAL RESOURCE INC CENTRAL INDEX KEY: 0000922255 STANDARD INDUSTRIAL CLASSIFICATION: 5110 IRS NUMBER: 232493042 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-12G/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-20405 FILM NUMBER: 94536393 BUSINESS ADDRESS: STREET 1: 1738 BASS RD CITY: MACON STATE: GA ZIP: 31210 BUSINESS PHONE: 2152968000 MAIL ADDRESS: STREET 1: BOX 834 CITY: VALLEY FORGE STATE: PA ZIP: 19482 10-12G/A 1 FORM 10 AS FILED WITH THE COMMISSION ON JUNE 29, 1994 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-12G/A AMENDMENT TO APPLICATION OR REPORT GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------------- ALCO CAPITAL RESOURCE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- 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 to be Registered Pursuant to Section 12(b) of the Act: NONE Securities to be Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE (TITLE OF CLASS) 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. The registrant hereby amends its Registration Statement on Form 10 (filed on May 4, 1994, Form 10-12G/A (filed on May 27, 1994), Form 10-12G/A (filed on June 16, 1994) and Form 10-12 G/A (filed on June 17, 1994) in the manner set forth herein. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE NO. -------- ITEM 1 BUSINESS.................................................... 3 ITEM 2 FINANCIAL INFORMATION....................................... 8 ITEM 3 PROPERTIES.................................................. 11 ITEM 4 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................. 11 ITEM 5 DIRECTORS AND EXECUTIVE OFFICERS............................ 11 ITEM 6 EXECUTIVE COMPENSATION...................................... 12 ITEM 7 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 12 ITEM 8 LEGAL PROCEEDINGS........................................... 12 ITEM 9 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................... 12 ITEM 10 RECENT SALES OF UNREGISTERED SECURITIES..................... 12 ITEM 11 DESCRIPTION OF THE REGISTRANT'S SECURITIES TO BE REGISTERED. 12 ITEM 12 INDEMNIFICATION OF DIRECTORS AND OFFICERS................... 13 ITEM 13 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 13 ITEM 14 DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................................. 13 ITEM 15 FINANCIAL STATEMENTS AND EXHIBITS........................... 13 SIGNATURE PAGE....................................................... 24
2 ITEM 1. BUSINESS GENERAL Alco Capital Resource, Inc. (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 45 states and 6 Canadian provinces. AOP also has several locations in the United Kingdom and Germany. 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 1993 revenues were $6.4 billion, of which $1.6 billion was 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 1993 fiscal year, 46% 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 $11,000 in amount and 42 months in duration. Although 97% 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 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" on page 4 hereof). 3 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 15% of the Company's leases as of March 31, 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 93% of the Company's total lease portfolio as of March 31, 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 March 31, 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 7% 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 oriented 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 below. 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 until all outstanding debt under such loan agreements shall have been paid. 4 The Company and Alco have entered into a new agreement (the "1994 Support Agreement"), dated as of June 1, 1994. The Company intends to covenant with noteholders and other lenders after June 1, 1994 that it will not amend the 1994 Support Agreement except under certain circumstances. (See "1994 Support Agreement on page 5 hereof). 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. The fixed charge coverage ratio requirement is defined as earnings before fixed charges (primarily interest) and must be at least 1.3 times fixed charges. The Company has satisfied this requirement independently (without requiring payment or an investment from Alco) for the last three fiscal years. 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 $3,900,000 in the first six months of 1994, $2,615,000 in 1993 and none in 1992. In 1991, the Company received capital contributions from Alco of $13,250,000 as a result of the combined effect of rapid lease portfolio growth in 1991, compliance with a more conservative debt- to-equity ratio and payment of an intercompany dividend. 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 Company were responsible for the credit risk and costs associated with defaulted contracts, the Company would 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 will provide in the indenture or other documentation 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 5 Standard & Poor's Rating 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 1993, 1992, and 1991 incurring net interest costs of $579,000, $1,090,000, and $510,000, 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 $360,000 in 1993, $192,000 in 1992, and $180,000 in 1991. 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 $67,000,000 at the end of fiscal 1993. Alco pays the Company interest on the portion of these tax deferrals (approximately $53,000,000 at the end of fiscal 1993) which arise from tax deferrals on intercompany sales. In fiscal 1993, interest was earned by the Company at a rate of 6% and totalled $2,926,000. In fiscal 1992 and 1991, the interest earned amounted to $3,050,000 and $1,800,000, respectively, and was 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 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 $3,600,000 for the first six months of 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 $13,300,000 in fiscal 1993 and $9,700,000 in fiscal 1992. For both fiscal 1993 and 1992, the gross chargebacks represented 3.2% of the average portfolio balances during the year. Chargeback recoveries are pursued by each AOP dealer, not by the Company. During fiscal 1993, recoveries by AOP dealers on chargebacks which occurred during the fiscal year totalled approximately $5,000,000. Recoveries on chargebacks which occurred during fiscal 1992 totalled approximately $4,100,000. As a percentage of gross chargebacks during 1993 and 1992, the recoveries represented 38% and 42%, respectively. The credit loss ratios as a percentage of the average portfolio balance at September 30, 1993 and 1992 were 2.0% and 1.9%, respectively, after adjusting for recoveries. 6 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. Reserves maintained for fiscal 1994 (first six months), 1993, 1992 and 1991 were as follows:
ENDING TOTAL FISCAL PORTFOLIO DEFAULT % OF PERIOD BALANCE RESERVE PORTFOLIO ------ --------- ------- --------- (DOLLARS IN MILLIONS) 1994 (first six months)............................ $543.7 $26.8 4.9% 1993............................................... $472.0 $25.2 5.3% 1992............................................... $363.5 $17.2 4.7% 1991............................................... $265.7 $10.3 3.9%
Delinquencies remained at a consistent level for fiscal 1993 and 1992. 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 March 31, 1994 was as follows:
(DOLLARS IN MILLIONS) Current.......................................................... $569.3 90.6% Over 30 days..................................................... 40.2 6.4% Over 60 days..................................................... 12.9 2.1% Over 90 days..................................................... 5.7 0.9% ------ ------ $628.1 100.0% ====== Less: Unearned interest.............................................. (84.4) ------ $543.7 ======
FUNDING The majority of the Company's debt funding has been through privately placed term notes with banks and an insurance company. The Company has followed 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 pages 20 and 21 hereof). Covenants in the note agreements with Existing Lenders 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 note agreement which requires each Existing 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, 1993, the amounts outstanding under the Company's note agreements totalled $395,000,000. Historically, the only other funding source for the Company has been capital contributions received from Alco. As of September 30, 1993, the Company's total shareholders' equity was $65,957,000, of which $45,115,000 consisted of contributed capital. The Company is presently considering an additional source of outside funding through the sale of $125,000,000 of lease contracts. This would be in the form of an asset securitization program which is in the process of being evaluated by the Company. EMPLOYEES At March 31, 1994, the Company had approximately 110 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. 7 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. ITEM 2. 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. SIX MONTHS ENDED MARCH 31, 1994 COMPARED WITH THE SIX MONTHS ENDED MARCH 31, 1993 Comparative summarized results of operation for the six months ended March 31, 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.
SIX MONTHS ENDED MARCH 31 INCREASE --------------- -------------- 1994 1993 AMOUNT PERCENT ------- ------- ------ ------- (DOLLARS IN THOUSANDS) Revenues Lease finance income.......................... $28,248 $21,909 $6,339 28.9% Interest on Alco income tax deferral.......... 1,650 1,245 405 32.5 Other income.................................. 1,408 1,094 314 28.7 ------- ------- ------ 31,306 24,248 7,058 29.1 Expenses Interest...................................... 12,207 11,117 1,090 9.8 General & administrative...................... 9,107 6,371 2,736 42.9 ------- ------- ------ Income before income taxes and cumulative effect of change in accounting principle.............. 9,992 6,760 3,232 47.8 Income taxes.................................... 3,870 2,702 1,168 43.2 ------- ------- ------ Income before cumulative effect of change in accounting principle........................... 6,122 4,058 2,064 50.9 Cumulative effect of change in accounting for income taxes................................... 140 140 ------- ------- ------ Net income...................................... $ 6,262 $ 4,058 $2,204 54.3% ======= ======= ======
Revenues Total revenues increased $7.1 million or 29.1% from the first six months of fiscal 1993 to the first six months of fiscal 1994. This increase was primarily due to the improvement in lease finance income, reflecting the continued growth of the lease portfolio, which increased 30.8% from March 31, 1993 to March 31, 1994. The increase in the lease portfolio is a result of a 34% increase in lease fundings of which 28.5% was originated through existing AOP dealers, while 5.5% was originated through AOP dealers recently acquired by Alco. 8 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 $405,000 or 32.5%, when comparing the six months ended March 31, 1993 to the six months ended March 31, 1994. This increase was due to an increased deferred tax base upon which the interest payment is calculated. Other income, which consists primarily of late payment and billing fees, increased by $314,000 or 28.7%, 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 31.7%, from $322 million during the first half of fiscal 1993 to $424 million during the first half of fiscal 1994. As a result, interest expense grew by $1.1 million or 9.8%. Reductions in the Company's incremental borrowing 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 rate on borrowings at March 31, 1993 was 7.06% as compared to 5.84% at March 31, 1994. The general and administrative expense category includes dealer lease bonus payments based on new lease volume. These payments were $2.8 million for the first half of fiscal 1993 and $3.6 million for the first half of fiscal 1994. This increase in lease bonus expense was due to increased lease volume in fiscal 1994. Excluding the effect of the lease bonus program, the remaining general and administrative expenses rose $1.9 million or 52.8% from the first half of fiscal 1993 to the first half of 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 $800,000 for the first six months of fiscal 1994 as compared to $100,000 for the first six months of 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 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. Income Before Taxes Income before taxes increased $3.2 million or 47.8%, when comparing the first half of fiscal 1993 to the first half of fiscal 1994. This increase is essentially the net effect of higher earnings on a larger portfolio offset by lower borrowing costs. Taxes on Income/Accounting Changes The increase of $1.2 million in income taxes was attributable to increased income before taxes for the first half of fiscal 1994, as compared to the first half of 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 in the first half of fiscal 1994. This amount represented the cumulative effect of this accounting change recorded in the first quarter of fiscal 1994. 9 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 deferral......................... 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 $12,300,000 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 $363,500,000 to $472,000,000. 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 $1,200,000 or 105.3% in fiscal 1993, reflecting the growth in the lease portfolio base upon which these fees are applied. Expenses Interest expense grew $2,600,000 or 13.1% during fiscal 1993, reflecting an increase in average borrowings to finance the lease portfolio of $346,600,000 in fiscal 1993 from $253,500,000 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 $5,900,000 in fiscal 1993 from $3,300,000 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 $2,100,000 or 34.9% during fiscal 1993, $1,900,000 of which corresponds to the growth of the lease portfolio 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. Pre-tax Income Fiscal 1993 pre-tax income increased $5,000,000 or 47% as compared to fiscal 1992. As previously discussed, this increase is primarily due to the lease income on a larger lease portfolio. 10 Income Taxes The increase of $2,185,000 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. Quarterly Data The following table shows comparative summarized quarterly results for fiscal 1994 (first two quarters only), 1993 and 1992.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- ------- ------- (IN THOUSANDS) 1994 Lease finance income................... $13,668 $14,580 $ $ $28,248 Interest expense....................... 5,994 6,213 12,207 Income before income taxes............. 4,773 5,219 9,992 Net income............................. 3,052 3,210 6,262 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 1992 Lease finance income................... $ 7,963 $ 8,567 $ 9,226 $ 9,937 $35,693 Interest expense....................... 4,673 4,870 5,056 5,469 20,068 Income before income taxes............. 2,702 2,310 2,457 3,111 10,580 Net income............................. 1,675 1,432 1,524 1,916 6,547
Any additional information required by this item has been omitted pursuant to General Instruction J(2)(a) of Form 10-K. ITEM 3. PROPERTIES The Company's operations are located in a leased facility located in Macon, Georgia occupying approximately 19,000 square feet. In August 1994, the Company will complete construction of a new adjoining facility to allow expansion of its operations into an additional 18,000 square feet of space. The facility is being 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 15 for additional information as to lease commitments. Any additional information called for by this item has been omitted pursuant to General Instruction J(2)(d). ITEM 4. 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). ITEM 5. 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. 11 ROBERT M. KEARNS II, age 40, 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 44, 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 6. EXECUTIVE COMPENSATION The information called for by this item has been omitted pursuant to General Instruction J(2)(c). ITEM 7. 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). ITEM 8. 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 9. MARKET PRICE OF AND DIVIDENDS ON 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. In the first quarter of 1992, the Company paid a dividend of $182,000 to its parent and there have been no subsequent dividends paid by the Company. 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 10. RECENT SALES OF UNREGISTERED SECURITIES None ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED The class of securities to be registered is the Common Stock, par value of $.01 per share, of the Company. There are 1,000 shares of authorized Common Stock, of which 1000 shares are issued, outstanding, fully paid and nonassessable. Each holder of Common Stock of the Company is entitled (a) to receive dividends if, as, and when declared payable by the Board of Directors out of funds legally available for such payment, and (b) to one vote for each share held on all matters submitted for a stockholder vote. There are no cumulative voting rights. The Board of Directors is not classified. The Common Stock has no preemptive rights or conversion rights and is not subject to any redemption or sinking fund provisions. Upon liquidation, the holders of the Common Stock are entitled to share pro rata in any liquidating distributions to stockholders. 12 There are no provisions discriminating against any existing or prospective holder of Common Stock as a result of any holder of Common Stock owning a substantial amount of Common Stock. ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by Delaware law, under which the Company is incorporated, the Company's Articles of Incorporation and By-Laws provide that officers and directors of the Company shall be indemnified for expenses (including attorneys' fees) reasonably incurred in the successful defense of a suit or proceeding brought by reason of such persons being officers or directors of the Company. If unsuccessful in defense of a third-party civil suit or a criminal suit, or if such a suit is settled, such a person shall be indemnified under the By-Laws against both (1) expenses (including attorneys' fees) and (2) judgments, fines and amounts paid in settlement if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company, and with respect to any criminal action, if he had no reasonable cause to believe his conduct was unlawful. If unsuccessful in defense of a suit brought by or in the right of the Company, or if such suit is settled, such a person may be indemnified under state law only against expenses (including attorneys' fees) incurred in the defense or settlement of such suit if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company except that if such a person is adjudged to be liable in such a suit for negligence or misconduct in the performance of his duty to the Company, he cannot be indemnified unless specific court approval is obtained. The Company has purchased liability insurance policies covering its directors and officers to provide protection where the Company cannot legally indemnify a director or officer and where a claim arises under the Employee Retirement Income Security Act of 1974 against a director or officer based upon an alleged breach of fiduciary duty or other wrongful act. ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by this item are listed in Item 15. ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS (a) 1. Financial Statements
PAGE ---- Report of Ernst & Young, Independent Auditors.......................... Balance Sheets at March 31, 1994 (unaudited) and September 30, 1993 and 1992.................................................................. Statements of Income for the six months ended March 31, 1994 and 1993 (unaudited) and fiscal years ended September 30, 1993, 1992 and 1991.. Statements of Changes in Shareholder's Equity for the six months ended March 31, 1994, (unaudited) and the fiscal years ended September 30, 1993, 1992 and 1991................................................... Statements of Cash Flows for the six months ended March 31, 1994 and 1993 (unaudited) and fiscal years ended September 30, 1993, 1992 and 1991.................................................................. Notes to Financial Statements..........................................
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. 13 REPORT OF 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, 1993 and 1992, 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, 1993. 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, 1993 and 1992, and the results of its operations and its cash flows for each of the three years ended September 30, 1993, in conformity with generally accepted accounting principles. /s/ Ernst & Young ------------------------------------- Ernst & Young October 22, 1993 Philadelphia, Pennsylvania 14 ALCO CAPITAL RESOURCE, INC. BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER 30 MARCH 31 ------------------ 1994 1993 1992 ----------- -------- -------- (UNAUDITED) ASSETS Investments in leases (notes 3 and 4): Direct financing leases............................... $537,859 $467,199 $325,446 Less: Unearned income................................. (74,712) (71,703) (51,050) -------- -------- -------- 463,147 395,496 274,396 Funded leases, net.................................... 80,512 76,499 89,070 -------- -------- -------- 543,659 471,995 363,466 Accounts receivable..................................... 11,934 9,863 8,418 Due from Alco Standard Corporation (note 3)............. 552 Prepaid income taxes and other expenses................. 2,029 282 74 Property and equipment at cost, less accumulated depreciation of: 3/94--$1,740; 9/93--$1,572; 9/92-- $1,189 (note 2)........................................ 1,217 677 958 -------- -------- -------- Total assets........................................ $558,839 $483,369 $372,916 ======== ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Accounts payable and accrued expenses................. $ 5,032 $ 2,866 $ 2,739 Accrued interest...................................... 5,577 5,337 4,653 Due to Alco Standard Corporation (note 3)............. 23,869 9,549 Income taxes payable.................................. 1,867 Notes payable (note 5)................................ 431,000 395,000 290,000 Deferred income taxes (note 7)........................ 17,242 14,209 10,102 -------- -------- -------- Total liabilities................................... 482,720 417,412 318,910 Shareholder's equity: Common Stock--$.01 par value, 1,000 shares authorized, issued, and outstanding Contributed capital................................... 49,015 45,115 42,500 Retained earnings..................................... 27,104 20,842 11,506 -------- -------- -------- Total shareholder's equity.......................... 76,119 65,957 54,006 -------- -------- -------- Total liabilities and shareholder's equity.............. $558,839 $483,369 $372,916 ======== ======== ========
See accompanying notes. 15 ALCO CAPITAL RESOURCES, INC. STATEMENTS OF INCOME (IN THOUSANDS)
SIX MONTHS ENDED FISCAL YEAR ENDED MARCH 31 SEPTEMBER 30 ----------------- ----------------------- 1994 1993 1993 1992 1991 -------- -------- ------- ------- ------- (UNAUDITED) Revenues: Lease finance income (note 2).. $ 28,248 $ 21,909 $46,880 $35,693 $22,899 Rental contracts............... 1,489 Interest on Alco income tax deferrals (note 3)...................... 1,650 1,245 2,926 3,050 1,800 Other income................... 1,408 1,094 2,377 1,158 536 -------- -------- ------- ------- ------- 31,306 24,248 52,183 39,901 26,724 Expenses: Interest (note 3).............. 12,207 11,117 22,701 20,068 14,126 General and administrative (note 2)...................... 9,107 6,371 13,928 9,253 4,541 -------- -------- ------- ------- ------- 21,314 17,488 36,629 29,321 18,667 -------- -------- ------- ------- ------- Income before income taxes and cumulative effect of change in accounting principle............ 9,992 6,760 15,554 10,580 8,057 Provision for income taxes (note 7): Current........................ 697 477 1,118 1,831 203 Deferred....................... 3,173 2,225 5,100 2,202 2,952 -------- -------- ------- ------- ------- 3,870 2,702 6,218 4,033 3,155 -------- -------- ------- ------- ------- Income before cumulative effect of change in accounting principle....................... 6,122 4,058 9,336 6,547 4,902 Cumulative effect of change in accounting for income taxes (note 7)........................ 140 -------- -------- ------- ------- ------- Net income................... $ 6,262 $ 4,058 $ 9,336 $ 6,547 $ 4,902 ======== ======== ======= ======= =======
See accompanying notes. 16 ALCO CAPITAL RESOURCE, INC. STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (IN THOUSANDS)
COMMON CONTRIBUTED RETAINED STOCK CAPITAL EARNINGS TOTAL ------ ----------- -------- ------- Balance at October 1, 1990................ $ * $32,352 $ 4,330 $36,682 Net income................................ 4,902 4,902 Capital contribution from Alco............ 13,250 13,250 Dividends paid to Alco, including return of contributed capital, --$7.19 per share.................................... (3,102) (4,091) (7,193) --- ------- ------- ------- Balance at September 30, 1991............. 42,500 5,141 47,641 Net income................................ 6,547 6,547 Dividends paid to Alco--$.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................................ 6,262 6,262 Capital contributions from Alco........... 3,900 3,900 --- ------- ------- ------- Balance at March 31, 1994................. $ * $49,015 $27,104 $76,119 === ======= ======= =======
- -------- * Amount is less than one thousand dollars. See accompanying notes. 17 ALCO CAPITAL RESOURCE, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED FISCAL YEAR ENDED MARCH 31 SEPTEMBER 30 -------------------- ---------------------------- 1994 1993 1993 1992 1991 --------- --------- -------- -------- -------- (UNAUDITED) Operating activities Net income.............. $ 6,262 $ 4,058 $ 9,336 $ 6,547 $ 4,902 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......... 171 194 383 428 358 Cumulative effect of change in accounting principle............ (140) Provision for deferred taxes................ 3,173 2,225 5,100 2,202 2,952 Changes in operating assets and liabilities: Accounts receivable. (2,071) (409) (1,445) (3,290) (2,030) Prepaid income taxes and other expenses. (1,747) 1,758 (3,068) (2,976) 2,628 Accounts payable and accrued expenses... 2,166 200 127 867 451 Accrued interest.... 240 (22) 684 561 1,785 --------- --------- -------- -------- -------- Net cash provided by operating activities... 8,054 8,004 11,117 4,339 11,046 Investing activities Purchases of property and equipment, net... (711) (85) (102) (515) (239) Direct financing leases: Additions............. (179,632) (139,811) (289,289) (230,898) (96,639) Cancellations......... 27,108 17,018 37,184 22,978 12,841 Collections........... 84,873 61,089 131,005 91,444 58,327 Funded leases: Additions............. (21,794) (10,533) (29,912) (23,410) (107,773) Cancellations......... 4,784 4,800 9,296 10,324 6,043 Collections........... 12,997 14,484 33,187 31,833 13,325 Rental contract additions, net of cancellations.......... (4,032) Rental contract collections............ 16,160 --------- --------- -------- -------- -------- Net cash used by investing activities... (72,375) (53,038) (108,631) (98,244) (101,987) Financing activities Proceeds from bank borrowings........... 48,000 40,000 180,000 122,000 105,000 Payments on bank borrowings........... (12,000) (34,000) (75,000) (48,000) (13,000) Contributed capital... 3,900 2,615 13,250 Dividends paid, including return of contributed capital.. (182) (7,193) --------- --------- -------- -------- -------- Net cash provided by financing activities... 39,900 6,000 107,615 73,818 98,057 --------- --------- -------- -------- -------- Decrease (increase) in amounts due to Alco.... (24,421) (39,034) 10,101 (20,087) 7,116 Due (to) from Alco at beginning of period.... 552 (9,549) (9,549) 10,538 3,422 --------- --------- -------- -------- -------- Due from (to) Alco at end of period.......... $ (23,869) $ (48,583) $ 552 $ (9,549) $ 10,538 ========= ========= ======== ======== ========
See accompanying notes. 18 ALCO CAPITAL RESOURCE, INC. NOTES TO FINANCIAL STATEMENTS (ALL REFERENCES TO MARCH 31, 1994 AND 1993 ARE UNAUDITED) 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 noncancellable 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 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 working capital 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 1993, 1992 and 1991 and incurred net interest costs of $579,000, $1,090,000 and $510,000, 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 $360,000, $192,000 and $180,000 in fiscal years 1993, 1992 and 1991, respectively. These corporate charges represent management's estimate of costs incurred by Alco on behalf of ACR. 19 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 1993 and 9% in 1992 and 1991. Operating Agreement 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 March 31, 1994 and September 30, 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. Maintenance Agreement 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). 4. INVESTMENT 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, 1993, 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 --------- -------- 1994................................................ $183,549 $ 34,147 1995................................................ 144,828 26,940 1996................................................ 89,845 16,696 1997................................................ 38,913 7,223 1998................................................ 10,064 1,892 -------- -------- 467,199 86,898 Less unearned interest................................ (71,703) (10,399) -------- -------- $395,496 $ 76,499 ======== ========
5. NOTES PAYABLE Notes payable to various banks at September 30, 1993 bear interest at rates ranging from 4.01% to 8.62% (5.32% to 9.45% at September 30, 1992) and mature on various dates through September 30, 1996. The weighted average interest rate for the notes outstanding at September 30, 1993 was 6.01% (7.40% at September 30, 1992). 20 ALCO CAPITAL RESOURCE, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Future maturities of all notes payable outstanding at September 30, 1993 are as follows (in thousands): Fiscal 1994..................................................... $113,000 1995.......................................................... 167,000 1996.......................................................... 115,000 -------- $395,000 ========
The Company has followed 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. At September 30, 1993, there were four variable rate notes outstanding and four related interest rate swap agreements, on a total principal/notional amount of $92 million. Interest rates on the variable rate notes ranged from 6 month LIBOR plus 37.5 basis points to 6 month LIBOR plus 53 basis points. During fiscal 1993, the interest rates on the variable rate notes ranged from 3.75% to 4.66%, and the weighted average variable rate was 4.18%. The interest rate swap agreements effectively convert these floating rates to fixed rates ranging from 4.69% to 8.43%. The weighted average fixed rate of the four obligations, including the effect of the swap agreements, is 6.16%. 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 $1,844,000 in fiscal 1993, $883,000 in 1992 and $71,000 in 1991. 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. Among other things, 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. Interest paid amounted to $11,967,000 and $11,139,000 for the six months ended March 31, 1994 and 1993, respectively, and $22,122,000, $19,507,000 and $12,340,000 for the fiscal years ended September 30, 1993, 1992 and 1991, respectively. At September 30, 1993, the fair value of the Company's notes payable is estimated to be $398,860,000 using a discounted cash flow analysis. Fair values for the Company's interest rate swaps (off-balance sheet instruments) are estimated to be $1,241,000 based on the estimated costs to terminate the agreements. 6. LEASE COMMITMENTS The Company leases office space under a 10-year agreement which began October 1, 1990 from a joint venture in which a wholly-owned subsidiary of Alco has a 50% ownership, for an amount which management believes is not above the current market rate. Annual rent expense for the Company's current office space is $151,000 through 1995 and $167,000 beginning in 1996 through 2000. In addition to its office space, the Company began leasing computer software and office equipment under operating leases during 1991. The leased office equipment consists of a postage system and a payment processing system which have lease terms of thirty-six months and sixty months, respectively, and expire during 1994 and 1996, respectively. Total rent expense for the leased office equipment was approximately 21 ALCO CAPITAL RESOURCE, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) $61,000 in 1993 and 1992 and $15,000 in 1991. The computer software consists of an operating system which is leased on a month-to-month basis and has been upgraded during 1993 for a reengineering project. Total rent expense for the computer software was approximately $107,000, $22,000 and $14,000 for 1993, 1992 and 1991. Total rent expense under all operating leases (including the leases for the office space, computer software and office equipment previously described) aggregated $319,000 in 1993, $234,000 in 1992 and $180,000 in 1991. Future minimum rent commitments under operating lease agreements (excluding month-to-month leases) as of September 30, 1993 are as follows (in thousands): 1994............................................................... $ 198 1995............................................................... 176 1996............................................................... 190 1997............................................................... 167 1998............................................................... 167 Thereafter......................................................... 334 ------ Total.............................................................. $1,232 ======
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 were a separate taxpayer. Provision for income taxes: FISCAL YEAR ENDED SEPTEMBER 30 (IN THOUSANDS)
1993 1992 1991 ----------------- ------------------ ----------------- CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED ----------------- ------------------ ----------------- Federal.............. $ 702 $ 4,527 $ 1,913 $ 1,780 $ 20 $ 2,431 State................ 416 573 (82) 422 183 521 -------- -------- -------- -------- ------- --------- Taxes on income...... $ 1,118 $ 5,100 $ 1,831 $ 2,202 $ 203 $ 2,952 ======== ======== ======== ======== ======= =========
Deferred taxes resulting from temporary differences between financial and tax accounting: FISCAL YEAR ENDED SEPTEMBER 30 (IN THOUSANDS)
1993 1992 1991 ------ ------ ------ Lease income recognition........................... $5,190 $2,400 $3,290 Other.............................................. (90) (198) (338) ------ ------ ------ Deferred taxes..................................... $5,100 $2,202 $2,952 ====== ====== ======
The deferred tax expense and the related liability result primarily from differences in the method of recognizing income from investments in leases for financial reporting and income tax purposes. 22 ALCO CAPITAL RESOURCE, INC. NOTES TO FINANCIAL STATEMENTS--(CONCLUDED) A reconciliation of income taxes provided with those calculated at the statutory federal rate is as follows: FISCAL YEAR ENDED SEPTEMBER 30
1993 1992 1991 ---- ---- ---- Taxes at Federal statutory rate........................... 34.8% 34.0% 34.0% State taxes, net of federal benefit....................... 3.9 3.2 4.7 Increase in deferred tax liability due to increase in statutory rate........................................... 2.0 -- -- Other..................................................... (0.7) 0.9 0.4 ---- ---- ---- Effective income tax rate................................. 40.0% 38.1% 39.1% ==== ==== ====
The Company made net tax payments of $2,153,000 and $1,236,000 for the six months ended March 31, 1994 and 1993, respectively, and $4,214,000 and $4,706,000 in fiscal years 1993 and 1992, respectively. In fiscal 1991, the Company received net tax refunds from Alco of $2,859,000. 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 in the first six months of 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 1993, 1992 and 1991 was $12,000, $8,400 and $4,700, respectively. 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 cost of this plan amounted to $63,200, $46,500 and $33,900 in 1993, 1992 and 1991, 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 YEARS ENDED SEPTEMBER 30 -------------------------------- ITEM 1993 1992 1991 ---- ---------- ---------- ---------- Maintenance and repairs.................... $ * $ * $ * Depreciation and amortization of intangible assets, pre-operating costs and similar deferrals................................. * * 359 Taxes, other than payroll and income taxes: Property tax expense...................... * 510 301 Royalties.................................. * * * Advertising costs.......................... * * *
- -------- * Less than 1% of total revenues 23 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this amendment on Form 10-12G/A to its registration statement on Form 10 to be signed on its behalf by the undersigned, thereunto duly authorized. Alco Capital Resource, Inc. Date: June 29, 1994 By: /s/ Robert M. Kearns II --------------------------------- Robert M. Kearns II Vice President 24 ALCO CAPITAL RESOURCE, INC. INDEX TO EXHIBITS
EXHIBIT NO. TITLE PAGE ----------- ----- ---- 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 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.
25 EX-10.4 2 EXHIBIT 10.4 EXHIBIT 10.4 AMENDED AND RESTATED 1994 SUPPORT AGREEMENT BY AND BETWEEN ALCO STANDARD CORPORATION AND ALCO CAPITAL RESOURCE, INC. SUPPORT AGREEMENT, dated as of this 1st day of June, 1994 by and between ALCO STANDARD CORPORATION, an Ohio corporation ("Alco") and ALCO CAPITAL RESOURCE, INC., a Delaware corporation ("ACR"). Alco, in consideration of $10 and other good and valuable consideration, receipt and adequacy of which is hereby acknowledged, and to induce ACR to provide leasing services with respect to products sold and serviced by Alco, hereby agrees with ACR as set forth below. 1. Pretax Interest Coverage. From and after the execution of this Support Agreement, Alco will, within 45 days after the last day of each annual fiscal period of ACR, make, or cause to be made, a determination of the ratio of Income Before Interest Expense and Taxes to Interest Expense for such period. If said ratio of Income Before Interest Expense and Taxes to Interest Expense shall be less than 1.25 to 1, Alco will, within 10 days after the date of such determination, pay to ACR a fee (the "Support Fee") in an amount at least sufficient to increase said ratio of Income Before Interest Expense and Taxes to 1.25 to 1. 2. Maintenance of Net Worth. From and after the execution of this Support Agreement, Alco will, within 45 days after the last day of each quarter end period, make, or cause to be made such payment to ACR as shall be necessary to enable ACR to have a Tangible Net Worth of at least one dollar ($1.00). 3. Definitions. As used in this Agreement, the following terms have the meanings indicated: "Interest Expense" of ACR and its subsidiaries shall mean the annual interest charges on the aggregate principal amount of consolidated indebtedness of ACR and its subsidiaries, including intercompany debt owed to Alco. "Income Before Interest Expense and Taxes" shall mean the consolidated net income of ACR and its subsidiaries determined in accordance with generally accepted accounting principles, except that such determination shall be made before any deduction for Interest Expense or provisions for taxes in respect of income. "Tangible Net Worth" shall mean an amount equal to the capital stock and surplus accounts (including retained earnings) of ACR and its subsidiaries after deducting therefrom the book amount of all assets of ACR and its subsidiaries which would be treated as intangible assets, all determined on a consolidated basis in accordance with generally accepted accounting principles. 4. Termination Amendment and Waiver. This agreement, or any term, covenant, agreement or condition hereof may be amended or terminated by either party hereto upon not less than ninety (90) days written notice and provided that either: (i) all the outstanding debt of ACR 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 ACR's debt rating would not be downgraded as a result of such amendment or termination. 5. Assignment. This Agreement (or any rights herein) may not be assigned by Alco unless: (i) all the outstanding debt of ACR 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 assignment that ACR's debt rating would not be downgraded as a result of such assignment. 6. Successors and Assigns. This Agreement shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 7. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. Executed this 27th day of June, 1994. Alco Standard Corporation By __________________________________ O. Gordon Brewer, Jr. Vice President-Finance Accepted and agreed to by Alco Capital Resource, Inc. By __________________________________ Richard P. Maier President -----END PRIVACY-ENHANCED MESSAGE-----