<PAGE>
AS FILED WITH THE COMMISSION ON JUNE 17, 1994
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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)
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DELAWARE 23-2493042
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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), and Form 10-12G/A (filed on
June 16, 1994) in the manner set forth herein.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<C> <S> <C>
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
</TABLE>
2
<PAGE>
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
<PAGE>
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 either tax oriented or non-tax
oriented in nature, as described below.
Tax Oriented Leases
Tax oriented leases represented 93% of the Company's total lease portfolio as
of March 31, 1994. The Company (for direct financing leases) or the AOP dealer
(for funded leases) is considered to be the owner of the equipment for tax
purposes during the life of these leases. Tax oriented 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 oriented 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.
Non-Tax Oriented Leases
Non-tax oriented leases and 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. Non-tax leases 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. The customer generally exercises the 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.
On June 1, 1994, the Company and Alco entered into a new agreement (the "1994
Support Agreement"). 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).
4
<PAGE>
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 the parties
entered into on 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) two
nationally recognized securities rating organizations 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 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) two nationally recognized
securities rating organizations 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
5
<PAGE>
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.
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:
6
<PAGE>
<TABLE>
<CAPTION>
ENDING TOTAL
FISCAL PORTFOLIO DEFAULT % OF
PERIOD BALANCE RESERVE PORTFOLIO
------ --------- ------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
(DOLLARS IN
MILLIONS)
<S> <C> <C>
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
======
</TABLE>
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, beginning on page 13 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.
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
7
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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.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31 INCREASE
--------------- --------------
1994 1993 AMOUNT PERCENT
------- ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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%
======= ======= ======
</TABLE>
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
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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 30.1%, from $322
million during the first half of fiscal 1993 to $419 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 5.67% 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
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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.
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED SEPT. 30 INCREASE(DECREASE)
------------------ ---------------------
1993 1992 AMOUNT PERCENT
-------- -------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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%
======== ======== ==========
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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. Before assuming his current responsibilities, Mr. Kearns
was Vice President--Finance of Copyrite, an AOP dealer located in
Indianapolis, Indiana.
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. Before assuming his
current responsibilities, Mr. Head was President of Copyrite, an AOP dealer
located in Indianapolis, Indiana.
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
<PAGE>
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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..........................................
</TABLE>
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
<PAGE>
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
<PAGE>
ALCO CAPITAL RESOURCE, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30
MARCH 31 ------------------
1994 1993 1992
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
See accompanying notes.
15
<PAGE>
ALCO CAPITAL RESOURCES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED FISCAL YEAR ENDED
MARCH 31 SEPTEMBER 30
----------------- -----------------------
1994 1993 1993 1992 1991
-------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
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
======== ======== ======= ======= =======
</TABLE>
See accompanying notes.
16
<PAGE>
ALCO CAPITAL RESOURCE, INC.
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON CONTRIBUTED RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ----------- -------- -------
<S> <C> <C> <C> <C>
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
=== ======= ======= =======
</TABLE>
- --------
* Amount is less than one thousand dollars.
See accompanying notes.
17
<PAGE>
ALCO CAPITAL RESOURCE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED FISCAL YEAR ENDED
MARCH 31 SEPTEMBER 30
-------------------- ----------------------------
1994 1993 1993 1992 1991
--------- --------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
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
========= ========= ======== ======== ========
</TABLE>
See accompanying notes.
18
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
DIRECT
FINANCING FUNDED
LEASES LEASES
--------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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
<PAGE>
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):
<TABLE>
<S> <C>
Fiscal 1994..................................................... $113,000
1995.......................................................... 167,000
1996.......................................................... 115,000
--------
$395,000
========
</TABLE>
The Company has 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 to 6 month LIBOR plus 53 basis points. 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 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. The Company also leases various office equipment and computer
software under operating leases. Total rent expense under all such operating
leases aggregated $319,000 in 1993, $234,000 in 1992 and $180,000 in 1991.
Future minimum rent commitments under operating lease agreements as of
September 30, 1993 are as follows (in thousands):
<TABLE>
<S> <C>
1994............................................................... $ 198
1995............................................................... 176
1996............................................................... 190
1997............................................................... 167
1998............................................................... 167
Thereafter......................................................... 334
------
Total.............................................................. $1,232
======
</TABLE>
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.
21
<PAGE>
ALCO CAPITAL RESOURCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Provision for income taxes:
FISCAL YEAR ENDED SEPTEMBER 30 (IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1992 1991
----------------- ------------------ -----------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
----------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ======= =========
</TABLE>
Deferred taxes resulting from temporary differences between financial and tax
accounting:
FISCAL YEAR ENDED SEPTEMBER 30 (IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Lease income recognition........................... $5,190 $2,400 $3,290
Other.............................................. (90) (198) (338)
------ ------ ------
Deferred taxes..................................... $5,100 $2,202 $2,952
====== ====== ======
</TABLE>
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.
A reconciliation of income taxes provided with those calculated at the
statutory federal rate is as follows:
FISCAL YEAR ENDED SEPTEMBER 30
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
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%
==== ==== ====
</TABLE>
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.
22
<PAGE>
ALCO CAPITAL RESOURCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
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
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30
--------------------------------
ITEM 1993 1992 1991
---- ---------- ---------- ----------
<S> <C> <C> <C>
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.......................... * * *
</TABLE>
- --------
* Less than 1% of total revenues
23
<PAGE>
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.
/s/ Robert M. Kearns II
By: _________________________________
Date: June 17, 1994 Robert M. Kearns II
Vice President
24
<PAGE>
ALCO CAPITAL RESOURCE, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE PAGE
----------- ----- ----
<C> <S> <C>
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 1994 Support Agreement, dated as of June 1, 1994, between
the Company and Alco Standard Corporation, filed on May 27,
1994 as Exhibit 10.4 to the Company's Amendment on Form 10-
12G/A to its Registration Statement on Form 10 (filed on
May 4, 1994), is incorporated herein by reference.
</TABLE>
25
