Page 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)*
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1994 or [ ] Transition
-------------
report pursuant to section 13 or 15(d) of the Securities Exchange Act of
1934 for the transition period from to
-------- --------
Commission file number 0-20405
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ALCO CAPITAL RESOURCE, INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
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 offices)
(Zip Code)
(912) 471-2300
- - --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NONE
- - --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
--- ---
* Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ---
* Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 31, 1994.
Common Stock, $.01 par value per share 1,000 shares
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is, therefore, filing with the reduced disclosure format
contemplated thereby.
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INDEX
ALCO CAPITAL RESOURCE, INC.
PART I. FINANCIAL INFORMATION
- - ------------------------------
Item 1. Financial Statements (Unaudited)
Balance Sheets--June 30, 1994 and
September 30, 1993
Statements of Income--Three months ended
June 30, 1994 and June 30, 1993; Nine months
ended June 30, 1994 and June 30, 1993
Statements of Cash Flows--Nine months ended
June 30, 1994 and June 30, 1993
Notes to Financial Statements--June 30, 1994
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
- - ---------------------------
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
- - ----------
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PART I. FINANCIAL INFORMATION
-----------------------------
Item 1: Financial Statements
- - ----------------------------
Alco Capital Resource, Inc.
Balance Sheets
(in thousands)
June 30 September 30
1994 1993
----------- ------------
(Unaudited)
Assets
Investments in leases:
Direct financing leases $ 587,849 $ 467,199
Less: Unearned income (82,824) (71,703)
--------- --------
505,025 395,496
Funded leases 88,225 76,499
--------- --------
593,250 471,995
Accounts receivable 13,647 9,863
Due from Alco Standard Corporation 552
Prepaid income taxes and other expenses 2,861 282
Property and equipment at cost, less accumulated
depreciation of: 6/94 - $1,848 and 9/93 - $1,572 1,306 677
--------- --------
Total assets $ 611,064 $ 483,369
========= ========
Liabilities and shareholder's equity
Liabilities:
Accounts payable and accrued expenses $ 5,028 $ 2,866
Accrued interest 3,882 5,337
Due to Alco Standard Corporation 32,912
Notes payable 466,000 395,000
Deferred income taxes 19,151 14,209
--------- --------
Total liabilities 526,973 417,412
Shareholder's equity:
Common Stock - $.01 par value, 1,000 shares
authorized, issued, and outstanding
Contributed capital 53,415 45,115
Retained earnings 30,676 20,842
--------- --------
Total shareholder's equity 84,091 65,957
--------- --------
Total liabilities and shareholder's equity $ 611,064 $ 483,369
========= ========
See accompanying notes.
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Alco Capital Resource, Inc.
Statements of Income
(in thousands)
Three Months Ended Nine Months Ended
June 30 June 30
-------------------------- --------------------------
1994 1993 1994 1993
---- ---- ---- ----
Revenues:
Lease finance income $ 15,780 $ 12,097 $ 44,028 $ 34,006
Interest on Alco income tax deferrals 960 689 2,610 1,934
Other income 808 609 2,216 1,703
------- ------ ------- -------
17,548 13,395 48,854 37,643
Expenses:
Interest 6,246 5,745 18,453 16,862
General and administrative 5,402 3,479 14,509 9,850
------- ------ ------- -------
11,648 9,224 32,962 26,712
------- ------ ------- -------
Income before income taxes and
cumulative effect of change in
accounting principle 5,900 4,171 15,892 10,931
Provision for income taxes:
Current 419 298 1,116 775
Deferred 1,909 1,370 5,082 3,595
------- ------ ------- -------
2,328 1,668 6,198 4,370
------- ------ ------- -------
Income before cumulative effect of
change in accounting principle 3,572 2,503 9,694 6,561
Cumulative effect of change in
accounting for income taxes 140
------- ------ ------- -------
Net income $ 3,572 $ 2,503 $ 9,834 $ 6,561
======= ====== ======= =======
See accompanying notes.
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Alco Capital Resource, Inc.
Statements of Cash Flows
(in thousands)
Nine Months Ended
June 30
-----------------
1994 1993
---- ----
Operating activities
Net income $ 9,834 $ 6,561
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 276 285
Cumulative effect of change in accounting
principle (140)
Provision for deferred taxes 5,082 3,595
Changes in operating assets and liabilities:
Accounts receivable (3,784) (754)
Prepaid income taxes and other expenses (2,579) (3,097)
Accounts payable and accrued expenses 2,162 601
Accrued interest (1,455) (371)
-------- --------
Net cash provided by operating activities 9,396 6,820
Investing activities
Purchases of property and equipment, net (905) (95)
Direct financing leases:
Additions (306,235) (211,457)
Cancellations 46,008 31,504
Collections 150,698 90,082
Funded leases:
Additions (42,625) (20,365)
Cancellations 8,119 7,200
Collections 22,780 23,826
-------- --------
Net cash used by investing activities (122,160) (79,305)
Financing activities
Proceeds from bank borrowings 148,000 135,000
Payments on bank borrowings (77,000) (60,000)
Contributed capital 8,300
-------- --------
Net cash provided by financing activities 79,300 75,000
-------- --------
Increase in amounts due to Alco (33,464) 2,515
Due (to) from Alco at beginning of period 552 (9,549)
-------- --------
Due to Alco at end of period $(32,912) $ (7,034)
======== ========
See accompanying notes.
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Alco Capital Resource, Inc.
Notes to Financial Statements
June 30, 1994
Note 1: Accounting Change
-----------------
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 quarter of fiscal 1994.
Note 2: The 1994 Support Agreement
--------------------------
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.
The 1994 Support Agreement provides that Alco will make a cash payment to
the Company (or an investment in the form of equity or subordinated notes) as
needed 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, amend or terminate 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, amendment or
termination that the Company's debt rating would not be downgraded as a result
of such assignment.
Unlike the Company's 1991 Maintenance and Operating Agreement (which
governs the debt incurred by the Company prior to June 1, 1994), 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 also 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.
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Alco Capital Resource, Inc.
Notes to Financial Statements
June 30, 1994
Note 3: Medium Term Note Program
------------------------
As of July 1, 1994, the Company may offer from time to time Medium Term
Notes having an aggregate initial offering price not exceeding $500 million or
the equivalent thereof in foreign currency. These notes will be offered at
varying maturities of nine months or more from their dates of issue and may be
subject to redemption at the option of the Company or repayment at the option of
the Holder, in whole or in part, prior to the maturity date in conjunction with
meeting specified provisions. Interest rates will be determined based on market
conditions at the time of issuance.
Note 4: Supplemental Information to Statements of Cash Flows
----------------------------------------------------
Interest paid for the nine months ended June 30, 1994 and 1993 was
$19,908,000 and $17,233,000, respectively. Cash paid for income taxes was
$2,715,000 and $2,909,000 for the nine months ended June 30, 1994 and 1993,
respectively.
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Item 2. Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
Pursuant to General Instruction H(2)(a) of Form 10-Q, 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.
Three Months Ended June 30, 1994 compared with the
Three Months Ended June 30, 1993
--------------------------------------------------
Comparative summarized results of operation for the three months ended June
30, 1994 and 1993 are set forth in the table below. This table also shows the
increase in the dollar amounts of major revenue and expense items between
periods, as well as the related percentage increase.
(dollars in thousands) Three Months
Ended June 30 Increase
---------------- ---------
1994 1993 Amount Percent
------- ------- ------ ---------
Revenues
Lease Finance Income $15,780 $12,097 $3,683 30.4%
Interest on Alco Income Tax
Deferral 960 689 271 39.3
Other Income 808 609 199 32.7
------- ------- ------
17,548 13,395 4,153 31.0
Expenses
Interest 6,246 5,745 501 8.7
General & Administrative 5,402 3,479 1,923 55.3
------- ------- ------
Income Before Income Taxes 5,900 4,171 1,729 41.4
Income Taxes 2,328 1,668 660 39.6
------- ------- ------
Net Income $ 3,572 $ 2,503 $1,069 42.7%
======= ======= ======
Revenues
- - --------
Total revenues increased $4.1 million or 31% from the three month period ended
June 30, 1993 to the three month period ended June 30, 1994. This increase was
primarily due to the improvement in lease finance income, reflecting the
continued growth of the lease portfolio, which increased 34% from June 1993 to
June 1994. Comparing the three months ended June 1994 to the three months ended
June 1993, new lease fundings increased $66 million of which $55 million was
originated through existing AOP dealers, while $11 million was originated
through AOP dealers recently acquired by Alco.
The Company charges Alco interest at a 6% rate on the benefit Alco receives for
income tax deferrals associated with the Company's leasing transactions. Due to
an increase in the deferred tax base upon which these payments are calculated,
interest earned on deferred taxes rose $271,000 or 39.3% when comparing the
third quarter of fiscal 1993 to the third quarter of fiscal 1994.
Other income, which consists primarily of late payments and various billing fees
also increased because of the larger portfolio upon which these fees are based.
Overall, fee income from these sources grew by $199,000 or 32.7%.
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Expenses
- - --------
Average borrowings to finance the lease portfolio grew by 34.7%, from $357.7
million during the third quarter of fiscal 1993 to $482 million during the third
quarter of fiscal 1994. As a result, interest expense on these borrowings also
increased by $501,000 or 8.7%.
The Company has experienced favorable incremental borrowing rates during the
twelve months preceding June 30, 1994. The weighted average interest rate
applicable to all outside borrowings decreased from 6.33% at June 30, 1993 to
5.46% at June 30, 1994. This reduction in the weighted average rate allowed
interest expense to increase at a slower pace than the growth in borrowings.
General and administrative expenses include the dealer lease bonus program which
represents special bonus payments to Alco Office Products companies based on
their lease volume. For the three months ended June 30, 1994, the lease bonus
payments were $2.3 million as compared to $1.6 million for the three months
ended June 30, 1993, an increase of 43.8%.
Excluding the effect of the lease bonus program, general and administrative
expenses grew $1.2 million or 63.2% when comparing the third quarter of fiscal
1993 to the third quarter of fiscal 1994. The increase in general and
administrative expenses is indicative of the continued growth of the lease
portfolio and the related rise in the portfolio servicing costs 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 $500,000 for the third quarter of
fiscal 1994 as compared to $200,000 for the third quarter of fiscal 1993.
Income Before Taxes
- - -------------------
Income before taxes for the quarter ended June 30, 1994 grew by $1.7 million or
41.4%, as compared to the third quarter of fiscal 1993. This increase in income
before taxes is essentially the net effect of higher earnings on a larger lease
portfolio.
Taxes on Income
- - ---------------
The $660,000 or 39.6% increase in income taxes from the three month period ended
June 30, 1993 to the three month period ending June 30, 1994 is directly
attributable to the higher income before taxes in fiscal 1994 as compared to
fiscal 1993.
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Nine Months Ended June 30, 1994 compared with the
Nine Months Ended June 30, 1993
-------------------------------------------------
Comparative summarized results of operation for the nine months ended June
30, 1994 and 1993 are set forth in the table below. This table also shows the
increase in the dollar amounts of major revenue and expense items between
periods, as well as the related percentage increase.
(dollars in thousands) Nine Months
Ended June 30 Increase
---------------- ---------
1994 1993 Amount Percent
------- ------- ------- ---------
Revenues
Lease Finance Income $44,028 $34,006 $10,022 29.5%
Interest on Alco Income Tax
Deferral 2,610 1,934 676 35.0
Other Income 2,216 1,703 513 30.1
------ ------ ------
48,854 37,643 11,211 29.8
Expenses
Interest 18,453 16,862 1,591 9.4
General & Administrative 14,509 9,850 4,659 47.3
------ ------ ------
Income Before Income Taxes and
Cumulative Effect of Change
in Accounting Principle 15,892 10,931 4,961 45.4
Income Taxes 6,198 4,370 1,828 41.8
------ ------ ------
Income Before Cumulative Effect
of Change in Accounting
Principle 9,694 6,561 3,133 47.7
Cumulative Effect of Change
in Accounting Principle for
Income Taxes 140 140
------ ------ ------
Net Income $ 9,834 $ 6,561 $ 3,273 49.9%
====== ====== ======
Revenues
- - --------
Total revenues increased $11.2 million or 29.8% in the nine month period ended
June 30, 1993 as compared to the nine month period ended June 30, 1994. This
increase was principally a result of the $10 million or 29.5% growth in lease
finance income during the first nine months of fiscal 1994 as compared to fiscal
1993, because of a $151 million or 34% increase in the net lease portfolio.
Comparing the nine months ended June 1993 to the nine months ended June 1994,
new lease fundings increased $117 million, of which $98 million was originated
through existing AOP dealers, while $19 million was originated by AOP dealers
recently acquired by Alco.
There was a $676,000 or 35% increase in the interest income that the Company
earns from Alco on the tax deferrals associated with the Company's leasing
transactions. This increase resulted from further growth in the deferred tax
balance upon which the payments are based.
Other income, which is primarily late payment charges and various billing fees,
grew due to the lease portfolio growth and increased $513,000 or 30.1% during
the first nine months of fiscal 1994 over the same period of fiscal 1993.
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Expenses
- - --------
Average borrowings to finance the lease portfolio grew by 32.7%, from $334.2
million during the first nine months of fiscal 1993 to $443.6 million during the
first nine months of fiscal 1994. As a result, interest expense also grew by
$1.6 million or 9.4% during these comparative nine month periods.
Because of lower incremental borrowing rates during fiscal 1994 versus fiscal
1993, the growth rate of interest expense was measurably less than the growth
rate in average borrowings.
Total general and administrative expenses were $14.5 million for the first nine
months of fiscal 1994. This represents a $4.6 million or 47.3% increase over the
comparative nine months of fiscal 1993. Of this increase, $1.5 million was due
to increased lease bonus payments to AOP dealers which resulted from increased
new lease funding.
Excluding the lease bonus program, the remaining general and administrative
expenses rose $3.1 million or 56.4%, when comparing the first nine months of
fiscal 1994 to fiscal 1993. The growth in expenses continues to be indicative
of the overall growth of the lease portfolio and its effects on the operations
of the Company. Also reflected in general and administrative expenses are costs
related to several initiatives, including facility expansion, a reengineering of
the leasing computer software and the development of several new products such
as cost per copy leasing, credit scoring, and automation of the lease input
process. Such costs amounted to approximately $1,300,000 for the first nine
months of fiscal 1994 as compared to $300,000 for the first nine months of
fiscal 1993.
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.
The 1994 Support Agreement provides that Alco will make a cash payment to the
Company (or an investment in the form of equity or subordinated notes) as needed
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, amend or terminate 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, amendment or
termination that the Company's debt rating would not be downgraded as a result
of such assignment.
Page 12
Unlike the Company's 1991 Maintenance and Operating Agreement (which governs the
debt incurred by the Company prior to June 1, 1994), 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 also 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 $5 million or 45.4%, when comparing the first nine
months of fiscal 1994 to the first nine months of fiscal 1993. This increase is
essentially the net effect of higher earnings on a larger lease portfolio.
Taxes on Income/Accounting Changes
- - ----------------------------------
The increase of $1.8 million in income taxes was attributable to the increased
income before taxes for the first nine months of fiscal 1994 as compared to the
first nine months 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 nine months of fiscal 1994. This amount
represented the cumulative effect of this accounting change recorded in the
first quarter of fiscal 1994.
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PART II. OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K
- - -----------------------------------------
(a) The following Exhibits are furnished pursuant to
Item 601 of Regulation S-K:
Exhibit No. (1) Distribution agreement dated July 1, 1994
with respect to the Company's Medium-
Term Note Program
Exhibit No. (4) Form of Fixed Rate Note and Floating Rate
Note with respect to the Company's
Medium-Term Note Program
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BASIS OF PRESENTATION
---------------------
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10Q and Rule 10-01 of Regulation
S-X. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's report on Form 10 for
the year ended September 30, 1993.
Date August 12, 1994 /s/ Robert M. Kearns II
--------------------- ----------------------------------
Robert M. Kearns II
Vice President
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. This report has also been signed by the
undersigned in his capacity as the chief accounting officer of the Registrant.
ALCO STANDARD CORPORATION
Date August 12, 1994 /s/ Robert M. Kearns II
--------------------- ---------------------------------
Robert M. Kearns II
Vice President
(Chief Accounting Officer)
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Index to Exhibits
-----------------
Exhibit Number
- - --------------
(1) Distribution agreement dated July 1, 1994 with
respect to the Company's Medium-Term Note Program
(4) Form of Fixed Rate Note and Floating Rate Note
with respect to the Company's Medium-Term Note
Program