Exhibit 13
FINANCIAL SECTION
24 Management's Responsibility for Financial Reporting
24 Report of Ernst & Young LLP, Independent Auditors
25 Consolidated Financial Statements
40 Financial Review
44 Corporate Financial Summary
46 Segment Data
48 Quarterly Data
ALCO STANDARD CORPORATION AND SUBSIDIARIES 23
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Alco Standard Corporation is responsible for the preparation
and presentation of the financial statements and related financial information
included in this annual report. The financial statements include amounts that
are based on management's best estimates and judgements. These statements have
been prepared in conformity with generally accepted accounting principles
consistently applied and have been audited by Ernst & Young LLP, independent
auditors.
Management is also responsible for maintaining systems of internal
accounting controls that are designed to provide reasonable assurance as to the
integrity of the financial records and the protection of corporate assets. Alco
Standard Corporation supports an active program of auditing to monitor the
proper functioning of its systems. The reports issued by the Alco Audit
Department, as well as comment letters from Ernst & Young LLP, are reviewed
regularly by the Audit Committee of the Board of Directors, which is composed of
four directors who are not employees of the Company. The Audit Committee meets
periodically with Ernst & Young LLP, the Alco Audit Department and management to
review audit scope, timing and results.
/s/ Kurt E. Dinkelacker
Kurt E. Dinkelacker
Executive Vice President
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Alco Standard Corporation
We have audited the accompanying consolidated balance sheets of Alco Standard
Corporation and subsidiaries as of September 30, 1995 and 1994, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended September 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Alco Standard Corporation and subsidiaries at September 30, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 1995, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
October 17, 1995,
except for the stock split described
in note 1, as to which the date is
November 9, 1995
24 ALCO STANDARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended September 30 (in thousands except per share data)
1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------------------------
REVENUES
Net sales $9,794,186 $7,925,784 $6,387,078
Dividends, interest and other income 4,621 3,537 6,332
Finance subsidiaries (note 12) 93,019 66,731 51,149
- - ----------------------------------------------------------------------------------------------------------------------------
9,891,826 7,996,052 6,444,559
- - ----------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of goods sold 7,326,721 5,884,819 4,799,757
Selling and administrative 2,109,148 1,765,483 1,378,814
Interest 55,838 43,802 40,189
Finance subsidiaries interest (note 12) 40,216 27,978 23,662
Restructuring costs (note 15) 175,000
- - ----------------------------------------------------------------------------------------------------------------------------
9,531,923 7,722,082 6,417,422
- - ----------------------------------------------------------------------------------------------------------------------------
LOSS FROM UNCONSOLIDATED AFFILIATE (note 4) (117,158) (2,538)
- - ----------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES 359,903 156,812 24,599
TAXES ON INCOME (note 7) 140,630 86,203 16,984
- - ----------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 219,273 70,609 7,615
LOSS FROM DISCONTINUED OPERATIONS, net of taxes (note 2) (16,541) (7,515)
- - ----------------------------------------------------------------------------------------------------------------------------
NET INCOME 202,732 70,609 100
PREFERRED DIVIDENDS (note 6) 15,209 11,572 9,571
- - ----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 187,523 $ 59,037 $ (9,471)
============================================================================================================================
EARNINGS (LOSS) PER SHARE (note 1)
Continuing operations $ 1.81 $ .55 $ (.02)
Discontinued operations (.14) (.08)
- - ----------------------------------------------------------------------------------------------------------------------------
$ 1.67 $ .55 $ (.10)
============================================================================================================================
See notes to consolidated financial statements.
ALCO STANDARD CORPORATION AND SUBSIDIARIES 25
CONSOLIDATED BALANCE SHEETS
September 30 (dollars in thousands)
1995 1994
- - -------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 90,106 $ 53,369
Accounts receivable, less allowance for doubtful accounts:
1995-$48,628; 1994-$29,428 (note 13) 1,175,699 915,495
Inventories (note 1) 747,895 609,974
Prepaid expenses and deferred taxes 146,867 131,638
- - -------------------------------------------------------------------------------------------------------
Total current assets 2,160,567 1,710,476
- - -------------------------------------------------------------------------------------------------------
OTHER INVESTMENTS AND LONG-TERM RECEIVABLES 56,086 68,472
PROPERTY AND EQUIPMENT, at cost (note 5)
Land 30,717 29,308
Buildings and improvements 225,011 213,037
Machinery and equipment 489,507 411,377
- - -------------------------------------------------------------------------------------------------------
745,235 653,722
Less accumulated depreciation 375,285 299,775
- - -------------------------------------------------------------------------------------------------------
369,950 353,947
- - -------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill (note 1) 1,058,214 747,629
Miscellaneous 109,436 59,331
- - -------------------------------------------------------------------------------------------------------
1,167,650 806,960
- - -------------------------------------------------------------------------------------------------------
FINANCE SUBSIDIARIES ASSETS (note 12) 983,322 562,403
- - -------------------------------------------------------------------------------------------------------
$4,737,575 $3,502,258
=======================================================================================================
26 ALCO STANDARD CORPORATION AND SUBSIDIARIES
September 30 (dollars in thousands)
1995 1994
- - -------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 26,319 $ 12,299
Notes payable (note 5) 280,832 91,999
Trade accounts payable 501,316 500,166
Accrued salaries, wages and commissions 115,874 96,987
Deferred revenues 172,900 134,485
Restructuring costs (note 15) 33,302 56,971
Other accrued expenses 259,534 164,023
- - -------------------------------------------------------------------------------------------------------
Total current liabilities 1,390,077 1,056,930
- - -------------------------------------------------------------------------------------------------------
LONG-TERM DEBT (note 5) 325,314 340,771
DEFERRED TAXES AND OTHER LIABILITIES
Deferred taxes 96,082 32,192
Restructuring costs (note 15) 6,000 50,000
Other long-term liabilities 178,782 156,511
- - -------------------------------------------------------------------------------------------------------
280,864 238,703
- - -------------------------------------------------------------------------------------------------------
FINANCE SUBSIDIARIES LIABILITIES (note 12) 872,783 498,710
SHAREHOLDERS' EQUITY (note 6)
Series AA convertible preferred stock, no par value:
4,025,000 depositary shares issued and outstanding 201,924 199,912
Series BB conversion preferred stock, no par value:
3,877,200 depositary shares issued and outstanding 290,152
Common stock, no par value: authorized 150,000,000 shares;
issued 1995-112,182,000 shares;1994-109,044,000 shares 637,414 551,215
Retained earnings 765,309 642,634
Foreign currency translation adjustment (21,536) (22,550)
Cost of common shares in treasury: 1995-118,000 shares;
1994-148,000 shares (4,726) (4,067)
- - -------------------------------------------------------------------------------------------------------
1,868,537 1,367,144
- - -------------------------------------------------------------------------------------------------------
$4,737,575 $3,502,258
=======================================================================================================
See notes to consolidated financial statements.
ALCO STANDARD CORPORATION AND SUBSIDIARIES 27
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Fiscal Year Ended September 30 (in thousands except per share data)
1995 1994 1993
- - ---------------------------------------------------------------------------------------------------------------------------------
Shares Amounts Shares Amounts Shares Amounts
- - ---------------------------------------------------------------------------------------------------------------------------------
SERIES AA CONVERTIBLE PREFERRED STOCK
Balance, beginning of year 4,025 $199,912 4,025 $197,900
Issued in public offering 4,025 $196,335
Dividend accretion 2,012 2,012 1,565
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 4,025 $201,924 4,025 $199,912 4,025 $197,900
=================================================================================================================================
SERIES BB CONVERSION PREFERRED STOCK
Issued in public offering 3,877 $290,152
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 3,877 $290,152
=================================================================================================================================
COMMON STOCK
Balance, beginning of year 109,044 $551,215 97,544 $259,031 97,544 $257,069
Issued in public offering 11,500 293,500
Mergers, acquisitions and other 3,138 81,478 (4,104)
Tax benefit relating to stock plans 4,721 2,788 1,962
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 112,182 $637,414 109,044 $551,215 97,544 $259,031
=================================================================================================================================
RETAINED EARNINGS
Balance, beginning of year $642,634 $651,373 $699,015
Net income 202,732 70,609 100
Cash dividends declared:
Series AA preferred stock, per share:
1995-$2.875; 1994-$2.875;
1993-$2.236 (11,572) (11,572) (9,571)
Series BB preferred stock, per share:
1995-$.938 (3,637)
Common stock, per share: 1995-$.52;
1994-$.50; 1993-$.48 (57,267) (52,222) (44,858)
Pooled companies, prior to merger (1,259) (2,408)
Credits (charges) from issuance of
treasury shares and other (6,322) (13,146) 6,687
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $765,309 $642,634 $651,373
=================================================================================================================================
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance, beginning of year $(22,550) $(23,640) $ (6,622)
Translation adjustment 1,014 (1,347) (17,018)
Sale of investment in unconsolidated affiliate 2,437
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $(21,536) $(22,550) $(23,640)
=================================================================================================================================
COST OF COMMON SHARES IN TREASURY
Balance, beginning of year 148 $ (4,067) 3,616 $(64,048) 5,646 $(89,099)
Purchases 2,783 (91,430) 1,774 (47,733) 1,512 (32,389)
Reissued for
Exercise of options (544) 16,652 (908) 18,027 (810) 13,063
Sales to employee stock plans (2,267) 74,067 (2,344) 47,799 (2,500) 40,564
Mergers, acquisitions and other (2) 52 (1,990) 41,888 (232) 3,813
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 118 $ (4,726) 148 $ (4,067) 3,616 $(64,048)
=================================================================================================================================
See notes to consolidated financial statements.
28 ALCO STANDARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended September 30 (in thousands)
1995 1994 1993
- - -----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 202,732 $ 70,609 $ 100
Additions (deductions) to reconcile net income to
net cash provided by operating activities
Depreciation 75,765 70,037 57,272
Amortization 33,959 26,791 22,137
Provision for losses on accounts receivable 21,900 19,668 19,702
Provision (benefit) for deferred income taxes 68,298 22,487 (55,042)
Change in deferred liabilities 32,513 2,816 15,232
Restructuring costs (60,364) (46,588) 169,939
Loss on sale of
Investment in unconsolidated affiliate 115,265
Alco Diversified Services 9,841
Changes in operating assets and liabilities
Decrease (increase) in
Accounts receivable (193,717) (74,369) (72,064)
Inventories (111,933) 3,154 (52,877)
Prepaid expenses (10,407) (17,873) (5,083)
Increase (decrease) in accounts payable,
deferred revenues, and accrued expenses 59,979 79,855 (52,563)
Miscellaneous (3,808) 364 (13,267)
- - -----------------------------------------------------------------------------------------------------------------------
Net cash provided 114,917 272,216 43,327
- - -----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sale (net of cash retained) of
Investment in unconsolidated affiliate 8,226
Alco Diversified Services 69,836
Cost of companies acquired, net of cash acquired (299,840) (46,705) (439,447)
Proceeds from sale of property and equipment 25,926 24,833 21,769
Expenditures for property and equipment (99,234) (107,969) (83,789)
Payments received on long-term receivables 6,837 9,251 5,369
Purchases of miscellaneous assets (51,445) (7,973) (10,702)
Finance subsidiaries receivables - Additions (696,217) (408,412) (278,503)
Finance subsidiaries receivables - Collections 247,798 210,969 166,274
- - -----------------------------------------------------------------------------------------------------------------------
Net cash used (866,175) (317,780) (549,193)
- - -----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from
Issuance of long-term debt 42,813 20,835 319,338
Issuance of Series BB conversion preferred stock, net 290,152
Issuance of common stock, net 293,500
Issuance of Series AA convertible preferred stock, net 196,335
Option exercises and sale of treasury shares 91,848 69,914 62,284
Sale of finance subsidiaries lease receivables 66,677 125,000
Life insurance borrowings 3,342 31,055
Issuance (repayment) of short-term borrowings, net 158,569 (68,278) 163,563
Proceeds (repayments) of accounts receivable sold 10,741 14,985 (3,440)
Long-term debt repayments (66,956) (369,238) (241,827)
Finance subsidiaries debt - Issuance 534,717 248,098 228,307
Finance subsidiaries debt - Repayments (182,014) (196,308) (124,201)
Dividends paid (70,464) (59,392) (49,995)
Purchase of treasury shares (91,430) (47,733) (32,389)
- - -----------------------------------------------------------------------------------------------------------------------
Net cash provided 787,995 62,438 517,975
- - -----------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 36,737 16,874 12,109
- - -----------------------------------------------------------------------------------------------------------------------
CASH AT BEGINNING OF YEAR 53,369 36,495 24,386
- - -----------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 90,106 $ 53,369 $ 36,495
=======================================================================================================================
See notes to consolidated financial statements.
ALCO STANDARD CORPORATION AND SUBSIDIARIES 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Alco Standard
Corporation and its wholly owned subsidiaries (the Company). Significant
intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Revenues are recorded at the time of shipment of products or performance of
services. Revenues from service contracts are recognized in earnings over the
term of the contract. The present values of payments due under sales-type lease
contracts are recorded as revenues and cost of goods sold is charged with the
book value of the equipment at the time of shipment. Future interest income is
deferred and recognized over the related lease term.
Inventories
Inventories are stated at the lower of cost or market and consist of finished
goods available for sale. The Company uses the LIFO method of determining cost
for approximately 60% of its inventories and the FIFO method for the balance. If
the FIFO method of accounting had been used for all inventories, these balances
would have been $92,590,000 higher at September 30, 1995 and $36,877,000 higher
at September 30, 1994.
Goodwill
Substantially all goodwill (excess of cost of acquired companies over equity) is
amortized over 40 years by the straight-line method. The recoverability of
goodwill is evaluated at the operating unit level by an analysis of operating
results and consideration of other significant events or changes in the business
environment. If an operating unit has current operating losses and based upon
projections there is a likelihood that such operating losses will continue, the
Company will evaluate whether impairment exists on the basis of undiscounted
expected future cash flows from operations before interest for the remaining
amortization period. If impairment exists, the carrying amount of the goodwill
is reduced by the estimated shortfall of cash flows.
Depreciation
Properties and equipment are depreciated over their useful lives by the
straight-line method.
Earnings (Loss) Per Share
Earnings (loss) per share are based on 112,520,000 weighted average shares in
1995, 107,458,000 shares in 1994 and 94,792,000 shares in 1993, and include the
dilutive effect of common stock equivalents, principally stock options.
Reclassifications
Certain prior-year amounts have been reclassified to conform with the current-
year presentation.
Foreign Currency Translation
All assets and liabilities of foreign subsidiaries are translated into US
dollars at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the fiscal year. The
resulting translation adjustments are recorded as a component of shareholders'
equity.
Accounting Changes
During fiscal 1994, the Company changed its methods of accounting for income
taxes and retiree healthcare benefits. The cumulative effect of adopting each of
these new accounting methods was immaterial.
Pending Accounting Change
In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt Statement 121
in the first quarter of fiscal 1996 and, based on current circumstances, does
not believe the effect of adoption will be material.
Interest Rate Swap Agreements
The Company has entered into several interest rate swap agreements as a means of
managing its interest rate exposure. These agreements have the effect of
converting certain of the Company's variable rate obligations to fixed rate
obligations. Net amounts paid or received are reflected as adjustments to
interest expense.
Stock Split
All common shares and per share amounts have been adjusted to give retroactive
effect to a two-for-one stock split effected in the form of a stock dividend
distributed on November 9, 1995 to holders of record on October 27, 1995.
2 DISCONTINUED OPERATIONS AND DIVESTITURES
The Company has owned several manufacturing and industrial businesses, all of
which have been sold. There are currently environmental remediation claims
pending for manufacturing or landfill sites in the United States that relate to
these discontinued operations. As a result of several recent environmental
remediation claims, and increased estimated costs associated with existing
environmental remediation sites, primarily related to discontinued manufacturing
operations divested by the Company in 1991 and prior, the Company took a fourth
quarter charge in fiscal 1995 to increase its liabilities for environmental
remediation. The discontinued operations charge was $23,630,000 ($16,541,000 net
of tax) or $.14 per share. The adjustment reflects management's best estimate,
based on information currently available, of costs to be incurred for existing
and probable environmental claims of discontinued operations.
In July 1993, the Company completed the sale of the Alco Diversified
Services (ADS) assets of approximately $102,000,000 to an investor group for
$84,000,000 in cash and notes. Accordingly, ADS results for fiscal 1993 are
reported in the accompanying Statements of Income as discontinued operations. In
fiscal 1993, ADS had revenues of $153,063,000, an operating loss of $3,946,000,
a loss on disposal of $9,841,000, and tax benefits of $6,272,000, resulting in a
net loss from discontinued operations of $7,515,000.
30 ALCO STANDARD CORPORATION AND SUBSIDIARIES
2. DISCONTINUED OPERATIONS AND DIVESTITURES (CONTINUED)
In September 1995, the Company divested Central Products Company for
$80,000,000 in cash and notes, and recorded a continuing operations pretax gain
of approximately $4,000,000 on the sale. Also included in the Company's
continuing operations and related to Central Products Company are fiscal 1995
revenues of $120,219,000 and net income from operations of $2,668,000.
During 1995, the Company agreed to pay $10,000,000 to settle a claim by a
former subsidiary, which had asserted that the Company was liable for certain
employee liabilities. This amount has been primarily charged against existing
reserves for discontinued operations. The Company paid $5,000,000 during 1995
with the remaining $5,000,000 to be paid over the next four years.
3 ACQUISITIONS
In June 1995, Erskine Limited, a U.K. subsidiary of the Company, purchased all
of the outstanding shares of Southern Business Group PLC (renamed A:Copy (UK)
PLC on October 1, 1995), for approximately $133,800,000. A:Copy (UK) sells,
leases, services and remanufactures copiers and other office equipment in
Southern England. Total assets acquired were $163,359,000, which includes
goodwill of $119,556,000. In addition, 111 other acquisitions were made in
fiscal 1995 for an aggregate purchase price of $266,773,000 in cash, notes and
stock. Total assets related to these 111 acquisitions were $368,836,000,
including goodwill of $244,668,000. The Company also issued 675,106 common
shares for two acquisitions accounted for as poolings-of-interests and their
results of operations were included from the beginning of the fiscal year.
$4,998,000 of additional cash was paid and capitalized in fiscal 1995 relating
to prior-years' acquisitions.
In fiscal 1994, the Company issued 1,397,350 common shares from treasury
for three acquisitions accounted for as poolings-of-interests and their results
of operations were included from the beginning of the fiscal year. Also during
fiscal 1994, 47 other acquisitions were made for an aggregate purchase price of
$62,009,000 in cash, notes and stock. Total assets related to these 47
acquisitions were $111,099,000, including goodwill of $55,165,000. An additional
$4,900,000 was paid and capitalized in fiscal 1994 relating to prior-years'
acquisitions.
In June 1993, the Company acquired over 90% of the outstanding shares of
Erskine House Group PLC (Erskine), a United States and European distributor of
office products, and the remaining outstanding shares were acquired during the
fourth quarter of fiscal 1993. The purchase price was approximately
$103,000,000, plus the assumption of approximately $101,000,000 of debt and
redeemable preferred stock. Total assets acquired were $278,975,000, including
goodwill of $180,408,000.
In July 1993, the Company acquired the paper distribution businesses of
Butler Paper Company for a purchase price of $140,000,000. Total assets acquired
were $277,843,000 and negative goodwill (excess of acquired equity over cost) of
approximately $37,157,000 was allocated to fixed assets.
During fiscal 1993, 21 other acquisitions were made for an aggregate
purchase price of $50,606,000 in cash and stock. Total assets acquired were
$68,878,000 including goodwill of $30,645,000. An additional $30,236,000 was
paid and capitalized in 1993 relating to prior-years' acquisitions.
All acquisitions, unless otherwise noted, are included in results of
operations from their dates of acquisition.
Had the purchase acquisitions been made at the beginning of the fiscal year
prior to their acquisition and the poolings been made on October 1, 1992, pro
forma results from continuing operations would have been:
Fiscal Year Ended September 30
(in thousands except per share data)
1995 1994 1993
- - --------------------------------------------------------------------------------
Revenues $10,294,905 $8,753,729 $7,754,354
Income from
continuing
operations 256,452 122,244 25,636
Earnings per share $1.98 $.81 $.13
- - --------------------------------------------------------------------------------
The pro forma results assume that $290,000,000 of the purchase price of
1995 acquisitions was funded by the proceeds from issuance of Series BB
conversion preferred stock, while $285,000,000 of the total purchase price of
1994 and 1993 acquisitions was funded by the proceeds from issuance of common
stock in December 1993 and $201,250,000 of the purchase price of 1993
acquisitions was funded by the proceeds from issuance of the Series AA
convertible preferred stock.
4 LOSS FROM UNCONSOLIDATED AFFILIATE
In October 1992, the Company purchased a 49.9% interest in IMM Office Systems
GmbH (IMMOS), a European distributor of office products, for $122,500,000 in
cash, which included goodwill of $107,478,000. In September 1994, the Company
completed the sale of this investment for cash plus a passive interest in any
subsequent sale of IMMOS for five years. The Company retains no ongoing
liability in the joint venture and the parties exchanged complete mutual
releases for past actions. In addition, the Company was relieved of the covenant
not to compete in Europe contained in the joint venture agreement, although the
parties will not compete with each other for a period expiring on December 31,
1995. As part of the transaction, the Company acquired profitable operations in
Denmark and France and retained limited operations in Germany. The Company
recognized a loss on the sale of its investment in IMMOS in the quarter ended
June 30, 1994, recording a pretax loss of $115,300,000 ($95,100,000, net of tax)
equating to a loss per share of $.87 in the quarter ended June 30, 1994 and $.88
for the fiscal year ended September 30, 1994. This loss represents the write-off
of the Company's investment in IMMOS, plus certain transactional costs less the
cash proceeds from the sale together with related tax benefits. In addition, the
Company recorded losses totaling $1,900,000, which represent the Company's share
of IMMOS operating losses for the first half of fiscal 1994.
ALCO STANDARD CORPORATION AND SUBSIDIARIES 31
5 NOTES PAYABLE AND LONG-TERM DEBT
Notes payable consisted of:
September 30 (in thousands) 1995 1994
- - -------------------------------------------------------------------------------
Notes payable to banks at
average interest rate:
1995-6.8%; 1994-5.5% $279,496 $ 91,419
Other notes payable at
average interest rate:
1995-7.2%; 1994-7.1% 1,336 580
- - -------------------------------------------------------------------------------
$280,832 $ 91,999
===============================================================================
Long-term debt consisted of:
September 30 (in thousands) 1995 1994
- - -------------------------------------------------------------------------------
Bond issue at interest rate of
8 7/8% due 2001 $150,000 $150,000
Private placement debt at
average interest rate:
1995-8.3%; 1994-8.2%;
due 1998 50,000 70,000
Notes payable to insurance
company at average interest
rate of 9.7% due 1997-2005 60,000 60,000
Industrial revenue bonds at
average interest rate:
1995-5.1%; 1994-8.4%;
due 1996-2001 10,328 10,537
Sundry notes, bonds and
mortgages at average
interest rate of 7.5%
due 1996-2005 51,893 38,341
Present value of capital lease
obligations (gross amount:
1995-$45,894; 1994-$40,928) 29,412 24,192
- - -------------------------------------------------------------------------------
351,633 353,070
Less current maturities 26,319 12,299
- - -------------------------------------------------------------------------------
Long-term debt $325,314 $340,771
===============================================================================
Long-term debt matures in fiscal years: 1996-$26,319,000; 1997-$17,507,000;
1998-$59,432,000; 1999-$7,791,000; 2000-$5,139,000; 2001-2005-$235,445,000.
On December 1, 1994, the Company entered into a credit agreement with 14
banks under which it may borrow up to $500,000,000. The agreement has two parts:
$150,000,000 is available for 364 days subject to annual renewal for successive
364-day periods through December 1, 1999; the other $350,000,000 terminates on
December 1, 1999. Facility fees of 8 basis points per annum on the 364-day
portion and 10 basis points per annum on the five-year portion are charged for
these commitments. The agreement provides that loans may be made under either
domestic or Eurocurrency notes at rates computed under a selection of rate
formulas including prime or Eurocurrency rates.
The Company may also borrow up to $100,000,000 or the Canadian dollar
equivalent under its amended April 1993 credit agreement with four banks. The
agreement has two parts: $50,000,000 is available for 364 days, subject to
annual renewal through April 19, 1996; the other $50,000,000 is available
through April 21, 1996. Facility fees of 8 basis points per annum on the 364-day
portion and 10 basis points per annum for the three-year portion are charged for
these commitments. Loans under the agreement may be made under a selection of
rate formulas including prime, the Eurodollar rate in the United States or
Canada, or the Canadian Bankers Acceptance rate.
At September 30, 1995, short-term borrowings supported by the combined
lines of credit totaled $252,496,000 leaving $347,504,000 unused and available.
The Company has entered into an agreement to borrow $55,000,000 in November
1995 with an interest rate of 7.15% maturing in November 2005. The proceeds will
be used to repay short-term notes payable.
The Company is in compliance with all covenants, including financial, for
all loan agreements. The industrial revenue bonds, capital lease obligations and
mortgages are secured by property and equipment that had a net book value of
$31,978,000 at September 30, 1995.
Interest paid, including finance subsidiaries, approximated $87,000,000,
$72,000,000 and $63,500,000 for fiscals 1995, 1994 and 1993, respectively.
32 ALCO STANDARD CORPORATION AND SUBSIDIARIES
6 SHAREHOLDERS' EQUITY
On July 25, 1995, the Company sold 3,877,200 depositary shares, each
representing 1/100th of a share of Series BB conversion preferred stock, for
$77.375 per depositary share totaling $299,998,350, and used the net proceeds to
reduce debt. Dividends are cumulative at $5.04 per year per depositary share.
This series of preferred stock has one vote per share (equivalent to 1/100 vote
per depositary share) and has a liquidation preference of $77.375 per depositary
share plus an amount equal to accrued and unpaid dividends. Prior to October 1,
1998, each depositary share is convertible at the option of the holder into
1.6393 shares of common stock of the Company. On October 1, 1998, unless
previously converted at the option of the holder, each of the outstanding
depositary shares will automatically convert into a number of shares of common
stock of the Company equal to (a) 1.6393 shares of common stock per depositary
share if the current market price of the Company's common stock is greater than
or equal to $47.20 per share, (b) between 1.6393 and two shares, equivalent to
the current market price of the common stock if the stock price is between
$47.20 and $38.6875, and (c) two shares of common stock per depositary share if
the current market price of the Company's common stock is at or below $38.6875
per share. The current market price to be used in the conversion calculation
will be the average closing price per share of common stock of the Company on
the twenty trading days immediately prior to, but not including, October 1,
1998. At September 30, 1995, 7,754,400 shares of common stock were reserved for
conversion of the Series BB conversion preferred stock.
In December 1993, the Company issued 11,500,000 shares of common stock in a
public offering. The net proceeds from the offering of $293,500,000 were used
for repayment of debt. Income and earnings per share from continuing operations
for fiscal 1993 would have been $13,288,000 and $.03, respectively, if the
offering had occurred on October 1, 1992. Income from continuing operations for
fiscal 1994 would have been $71,896,000 and earnings per share would have been
unchanged if the offering had occurred on October 1, 1993.
On December 22, 1992, the Company sold 4,025,000 depositary shares, each
representing 1/100th of a share of Series AA convertible preferred stock at
$50.00 per depositary share totaling $201,250,000, and used the net proceeds to
reduce debt. Dividends are cumulative at $2.375 per year per depositary share
through January 2, 1996 and $3.25 per depositary share per year thereafter. The
dividend is accrued on a straight-line basis ($2.875 per depositary share) and
accretion for the difference between the accrued and cash dividend amounting to
$5,589,000 at September 30, 1995 has been credited to Series AA convertible
preferred stock. This series of preferred stock has one vote per share
(equivalent to 1/100 vote per depositary share) and is convertible at a rate of
2.2402 shares of the Company's common stock per depositary share at any time.
The Series AA convertible preferred stock, unless previously converted into
common stock, is redeemable by issuance of common stock at the Company's option
at the rate of 2.2402 shares of common stock per depositary share (with certain
limitations) on or after January 9, 1996 through January 9, 2000. On or after
January 9, 2000, this series of preferred stock is redeemable at the Company's
option at $50.00 per depositary share. Upon liquidation, the Series AA
convertible preferred stock has preference equivalent to $50.00 per depositary
share plus an amount equal to accrued and unpaid dividends. At September 30,
1995, 9,016,806 shares of common stock were reserved for conversion of the
Series AA convertible preferred stock.
Employee stock options are granted at the market price at dates of grant
and expire in ten years. The proceeds of options exercised are credited to
shareholders' equity. There are no charges or credits to income in connection
with these options. A 1989 plan for the Company's directors enables participants
to receive their annual directors' fees in the form of options to purchase
shares of common stock at a discount. The discount is equivalent to the annual
directors' fees and is charged to expense.
Changes in common shares under option were:
Directors Employees
- - ----------------------------------------------------------------------------------------------------------------
Shares Option Price Range Shares Option Price Range
- - ----------------------------------------------------------------------------------------------------------------
September 30, 1992 173,366 $ 9.78 to $14.34 4,511,194 $ 8.06 to $19.13
Granted 49,338 15.09 to 20.13 1,135,634 17.63 to 20.13
Exercised (34,448) 9.78 to 13.17 (775,832) 8.06 to 19.13
Cancelled (423,434) 11.44 to 20.13
- - ----------------------------------------------------------------------------------------------------------------
September 30, 1993 188,256 9.78 to 20.13 4,447,562 8.06 to 20.13
Granted 34,832 21.14 to 28.19 924,670 24.50 to 31.00
Exercised (42,630) 9.78 to 20.13 (865,482) 8.06 to 20.13
Cancelled (1,520) 15.09 (21,102) 8.06 to 28.81
- - ----------------------------------------------------------------------------------------------------------------
September 30, 1994 178,938 9.78 to 28.19 4,485,648 9.09 to 31.00
Granted 32,604 24.56 to 32.75 789,632 28.62 to 40.31
Exercised (39,852) 9.78 to 15.09 (814,398) 9.09 to 28.19
Cancelled (46,214) 14.31 to 32.81
- - ----------------------------------------------------------------------------------------------------------------
September 30, 1995 171,690 $ 9.78 to $32.75 4,414,668 $ 9.09 to $40.31
================================================================================================================
ALCO STANDARD CORPORATION AND SUBSIDIARIES 33
6. SHAREHOLDERS' EQUITY (CONTINUED)
At September 30, 1995, options to purchase 2,291,248 shares were
exercisable (1995: employees - 2,144,162, directors - 147,086; 1994: employees -
2,199,040, directors - 144,106) and 6,028,870 shares were available for grant
(1995: employees - 5,131,744, directors - 897,126; 1994: employees - 367,534,
directors - 929,730).
In fiscal 1995, with Board of Director and shareholder approvals, the
Company amended and restated its Long Term Incentive Compensation Plan (LTIP).
The plan is intended to motivate, recognize and reward key management employees
for long-term performance at the corporate or group level. Under the plan, key
management employees are granted stock awards to receive company stock, which
are earned upon achieving predetermined performance objectives during three-year
intervals. The value of these awards is charged to expense over the related plan
period. In fiscal 1995, the Company granted 602,530 stock awards under the plan,
including 403,824 to replace stock options granted under the original LTIP. At
September 30, 1995, 128,818 of these awards had been earned.
One preferred share purchase right (Right) exists for each outstanding
share of common stock (the Shares). The Rights become exercisable ten days after
the earlier of a public announcement by another entity that it has acquired
beneficial ownership of 20% or more of the Shares or a public announcement of
another entity's intention to commence a tender offer to acquire beneficial
ownership of 30% or more of the Shares.
When the Rights become exercisable, each Right will entitle a holder to
purchase 1/100th of a share of Series 12 preferred stock for an exercise price
of $75. If the Company consolidates or merges with another entity, or sells
assets that aggregate 50% of its consolidated assets, or generates more than 50%
of its consolidated operating income or cash flow, then each Right holder will
have the right to purchase, for the exercise price, a number of shares of the
other entity having a then-current market value equal to twice the exercise
price.
If another entity owning 20% or more of the Shares (a) engages in certain
transactions with the Company, or (b) causes the Company to forgo or reduce
quarterly dividends or take an action that would result in a more than 2%
increase in the other entity's proportionate share of the outstanding shares; or
if another entity becomes the beneficial owner of 30% or more of the outstanding
shares; then each Right holder (other than the other entity) will have the right
to purchase, for the exercise price, a number of shares of the Company having a
then-current market value equal to twice the exercise price.
The Rights are redeemable by the Company prior to becoming exercisable at
$.05 per Right and expire on February 10, 1998.
7 TAXES ON INCOME - CONTINUING OPERATIONS
Effective October 1, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 permitted
the Company to recognize the benefit of certain deferred tax assets that could
not be recognized under the previous standard, SFAS No. 96, which the Company
adopted in fiscal 1988. The cumulative effect of adopting SFAS No. 109 as of
October 1, 1993 was to increase net income by $1,421,000 or $.01 per share in
fiscal 1994. As permitted under SFAS No. 109, prior-years' financial statements
have not been restated.
Provision for income taxes:
Fiscal Year Ended September 30 (in thousands)
1995 1994 1993
- - --------------------------------------------------------------------------------------------------------------------------
Current Deferred Current Deferred Current Deferred
- - --------------------------------------------------------------------------------------------------------------------------
Federal $38,904 $66,793 $46,349 $29,421 $57,200 $(48,149)
Foreign 10,869 9,911 11,862 (7,855) 6,602 (948)
State 15,470 (1,317) 5,505 921 3,706 (1,427)
- - --------------------------------------------------------------------------------------------------------------------------
Taxes on income $65,243 $75,387 $63,716 $22,487 $67,508 $(50,524)
==========================================================================================================================
34 ALCO STANDARD CORPORATION AND SUBSIDIARIES
7. TAXES ON INCOME - CONTINUING OPERATIONS (CONTINUED)
The components of deferred income tax assets and liabilities, including
finance subsidiaries, were as follows:
September 30 (in thousands) 1995 1994
- - -------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and amortization $ 74,118 $ 62,487
Lease income recognition 119,783 82,837
Total deferred tax liabilities 193,901 145,324
- - -------------------------------------------------------------------------------
Deferred tax assets:
Nondeductible reserves 143,257 145,067
Net operating loss carryforwards 29,516 29,510
Other-net 1,511 12,092
- - -------------------------------------------------------------------------------
Total deferred tax assets 174,284 186,669
Valuation allowance (31,048) (28,587)
- - -------------------------------------------------------------------------------
Net deferred tax assets 143,236 158,082
- - -------------------------------------------------------------------------------
Net deferred tax liabilities (assets) $ 50,665 $(12,758)
===============================================================================
Net operating loss carryforwards consist primarily of foreign carryforwards
of $50,858,000 principally expiring in years 1996 through 2000.
Deferred taxes resulting from temporary differences between financial and
tax accounting, which have not been restated for SFAS No.109 as of September 30,
1993, were as follows (in thousands):
Depreciation $4,741
Lease income recognition 11,993
Nondeductible reserves (67,115)
Other (143)
- - -------------------------------------------------------------------------------
Deferred taxes $(50,524)
===============================================================================
Components of the effective income tax rate:
Fiscal Year Ended September 30
1995 1994 1993
- - -------------------------------------------------------------------------------
Federal 35.0% 35.0% 34.8%
State 2.6 2.3 6.1
Goodwill 1.8 3.5 16.1
Foreign .2 1.0 8.2
Effect of sale of IMMOS 12.9
Other (.5) .3 3.8
- - -------------------------------------------------------------------------------
Effective income tax rate 39.1% 55.0% 69.0%
===============================================================================
The effective tax rate for the fiscal year ended September 30, 1994,
excluding the effects of the loss on the sale of the investment in IMMOS, is
39.1%. The effective tax rate for the fiscal year ended September 30, 1993,
excluding the effects of the restructuring costs, is 39.6%.
Net income tax payments for all operations amounted to $30,436,000, net of
$30,000,000 refund, in 1995, $62,270,000 in 1994 and $77,487,000 in 1993.
Undistributed earnings of the Company's foreign subsidiaries were
approximately $45,656,000 at September 30, 1995. Those earnings are considered
to be indefinitely reinvested and, therefore, no provision has been recorded for
U.S. federal and state income taxes.
8 PENSION AND STOCK PURCHASE PLANS
The Company sponsors defined benefit pension plans for the majority of its
employees. The benefits generally are based on years of service and
compensation. The Company funds at least the minimum amount required by
government regulations. The cost of these plans, together with contributions to
multiemployer and defined contribution pension plans ($4,915,000 in 1995,
$6,880,000 in 1994 and $5,134,000 in 1993) charged to continuing operations
amounted to $25,396,000 for 1995, $18,283,000 for 1994 and $12,684,000 for 1993.
The components of net periodic pension cost for the Company-sponsored
defined benefit pension plans are:
Fiscal Year Ended September 30 (in thousands)
1995 1994 1993
- - -------------------------------------------------------------------------------
Service cost $ 21,506 $ 16,991 $ 11,123
Interest cost on
projected benefit
obligation 22,620 18,507 13,416
Actual return on
plan assets (60,170) (11,020) (34,238)
Net amortization
and deferral 36,525 (13,075) 17,249
- - -------------------------------------------------------------------------------
Net pension cost $ 20,481 $ 11,403 $ 7,550
===============================================================================
Assumptions used in accounting for the Company-sponsored defined benefit
pension plans were:
1995 1994 1993
- - -------------------------------------------------------------------------------
Weighted average
discount rates 7.50% 7.75% 7.25%
Rates of increase in
compensation levels 6.00% 6.25% 5.75%
Expected long-term
rate of return on
assets 10.00% 10.00% 10.00%
ALCO STANDARD CORPORATION AND SUBSIDIARIES 35
8. PENSION AND STOCK PURCHASE PLANS (CONTINUED)
The funded status and amounts recognized in the Consolidated Balance Sheets for
the Company-sponsored defined benefit pension plans are:
September 30 (in thousands) 1995 1994
- - -------------------------------------------------------------------------------
Actuarial present value of
benefit obligations
Vested $260,292 $237,874
===============================================================================
Accumulated $266,176 $241,069
===============================================================================
Projected $325,210 $277,500
Plan assets at fair value 285,788 256,610
- - -------------------------------------------------------------------------------
Plan assets less than
projected benefits (39,422) (20,890)
Items not yet recognized
Net gain (12,432) (3,873)
Prior service cost 19,409 11,657
Net asset existing
at transition date (14,424) (16,397)
Adjustment required to
recognize minimum liability (7,406) (8,385)
- - -------------------------------------------------------------------------------
Net pension liability $(54,275) $(37,888)
===============================================================================
Substantially all of the plan assets at September 30, 1995 are invested in
listed stocks, bonds and government securities including common stock of the
Company of $67,800,000.
The Company increased its net pension liability by $1,048,000 and
$5,949,000 in fiscal 1995 and 1994, respectively, due to early retirement
benefits granted to employees in connection with the Unisource restructuring
program (note 15).
The majority of the Company's employees were eligible to participate in the
Company's Stock Participation Plan, under which they were permitted to invest 2%
to 6% of regular compensation before taxes. The Company contributed an amount
equal to two-thirds of the employees' investments and all amounts were invested
in the Company's common shares. Effective October 2, 1995, the Stock
Participation Plan was replaced by a Retirement Savings Plan (RSP). The RSP will
allow employees to invest 1% to 16% of regular compensation before taxes in six
different investment funds. The Company will contribute an amount equal to two-
thirds of the employees' investments, up to 4% of the employees' regular
compensation. All Company contributions are invested in the Company's common
shares. Employees vest in a percentage of the Company's contribution after two
years of service, with full vesting at the completion of five years of service.
There is a similar plan for eligible management employees. The cost of the stock
participation plans charged to continuing operations amounted to $26,885,000 in
1995, $23,484,000 in 1994 and $16,174,000 in 1993.
9 SEGMENT REPORTING
A description of each of the Company's industry segments appears elsewhere in
this report. Dollar amounts for revenues, income before taxes, assets, capital
expenditures, and depreciation and amortization for each segment for 1995, 1994
and 1993 are reported on page 46.
Revenues, income before taxes and identifiable assets by geographic area
from continuing operations for the fiscal years ended September 30 are as
follows:
(in millions) 1995 1994 1993
- - ------------------------------------------------------------------------------
REVENUES
Domestic $8,805.6 $7,153.8 $5,649.8
Foreign 1,093.4 843.1 799.9
- - ------------------------------------------------------------------------------
Operating 9,899.0 7,996.9 6,449.7
Eliminations and
nonallocated (7.2) (.9) (5.1)
- - ------------------------------------------------------------------------------
Total $9,891.8 $7,996.0 $6,444.6
==============================================================================
INCOME BEFORE TAXES
Domestic $ 407.9 $ 332.6 $ 73.5
Foreign 69.0 29.1 27.3
- - ------------------------------------------------------------------------------
Operating 476.9 361.7 100.8
Unconsolidated affiliate (117.2) (2.5)
Nonallocated (117.0)* (87.7)* (73.7)*
- - ------------------------------------------------------------------------------
Total $359.9 $156.8 $24.6
==============================================================================
ASSETS
Domestic $3,775.1 $2,787.7 $2,547.5
Foreign 792.3 572.5 536.4
- - ------------------------------------------------------------------------------
Operating 4,567.4 3,360.2 3,083.9
Unconsolidated affiliate 118.1
Nonallocated 170.2 142.1 146.9
- - ------------------------------------------------------------------------------
Total $4,737.6 $3,502.3 $3,348.9
==============================================================================
* Includes interest costs and net corporate expenses.
Included in income before taxes for fiscal 1993 are restructuring costs of
$171,500,000 for domestic operations and $3,500,000 for foreign operations.
36 ALCO STANDARD CORPORATION AND SUBSIDIARIES
10 LEASES
Equipment acquired under capital leases is included in property and equipment in
the amount of $38,171,000 in 1995 and $37,160,000 in 1994 and the related
amounts of accumulated amortization are $15,657,000 in 1995 and $15,888,000 in
1994. Related obligations are in long-term debt and related amortization is
included in depreciation.
At September 30, 1995, future minimum payments under noncancelable
operating leases with initial or remaining terms of more than one year were:
1996-$88,430,000; 1997-$76,041,000; 1998-$61,576,000; 1999-$47,943,000; 2000-
$33,192,000; thereafter-$75,175,000.
Total rental expense was $103,891,000 in 1995, $89,998,000 in 1994 and
$68,293,000 in 1993.
11 CONTINGENCIES
There are contingent liabilities for taxes, guarantees, lawsuits, environmental
remediation claims relating to continuing and discontinued operations (see note
2) and various other matters occurring in the ordinary course of business. On
the basis of information furnished by counsel and others, management believes
that none of these contingencies will materially affect the Company.
12 FINANCE SUBSIDIARIES
The Company's wholly owned finance subsidiaries are engaged in purchasing office
equipment from Company dealers and leasing the equipment to customers under
direct financing leases.
Summarized financial information of the finance subsidiaries is as follows:
September 30 (in thousands) 1995 1994
- - -------------------------------------------------------------------------------
Future minimum lease
payments receivable $1,084,967 $ 645,083
Less: Unearned income (165,492) (109,416)
- - -------------------------------------------------------------------------------
Lease receivables 919,475 535,667
Accounts receivable and other assets 63,847 26,736
- - -------------------------------------------------------------------------------
Finance subsidiaries assets $ 983,322 $ 562,403
===============================================================================
Debt at average interest rate:
1995-6.8%; 1994-5.8%
due 1996-2000 $ 817,585 $ 464,882
Other liabilities 55,198 33,828
- - -------------------------------------------------------------------------------
Finance subsidiaries liabilities $ 872,783 $ 498,710
===============================================================================
Net income of the finance subsidiaries included in the Company's
consolidated results of operations was $14,472,000 in 1995, $13,347,000 in 1994,
and $8,180,000 in 1993.
At September 30, 1995, future minimum payments to be received under direct
financing leases were: 1996-$396,931,000; 1997-$334,613,000; 1998-$206,212,000;
1999-$103,880,000; 2000-$42,248,000; thereafter-$1,083,000.
On June 30, 1995, Alco Capital Resource, Inc. (Alco Capital), a wholly
owned finance subsidiary of the Company, increased the amount available to be
offered under its medium term notes program by $1,000,000,000 or the equivalent
thereof in foreign currency. The medium term note program effective July 1, 1994
of $500,000,000 was fully subscribed as of July 1995. The program allows Alco
Capital to offer to the public from time to time medium term notes having an
aggregate initial offering price not exceeding the total program amount. These
notes 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 Alco Capital or
repayment at the option of the holder, in whole or in part, prior to the
maturity date in conjunction with meeting specified provisions. Interest rates
are determined based on market conditions at the time of issuance. As of
September 30, 1995, $602,000,000 of medium term notes are outstanding with a
weighted average interest rate of 7.0%.
Alco Capital has followed a policy of matching the maturities of borrowed
funds to the underlying direct financing leases in order to minimize the impact
of interest rate changes on its operations. Alco Capital has therefore entered
into interest rate swap agreements to eliminate the impact of interest rate
changes on its variable rate notes payable. The interest rate swap agreements
effectively convert the variable rate notes into fixed rate obligations. During
fiscal 1995, there were two variable rate notes outstanding and two related
interest rate swap agreements on a principal/notional amount of $57,000,000. The
weighted average interest rate on these variable rate notes and related interest
rate swap agreements was 6.58% and 4.76%, respectively, during 1995.
In September 1994, Alco Capital entered into an agreement to sell, under an
asset securitization program, an undivided ownership interest in $125,000,000 of
eligible direct financing lease receivables. The agreement, which expires in
September 1996, contains limited recourse provisions that require Alco Capital
to assign an additional undivided interest in leases to cover any potential
losses to the purchaser due to uncollectible leases. As collections reduce
previously sold interests, new leases can be sold up to $125,000,000. The
weighted average interest rate on the agreement, which is partially fixed by
three interest rate swap agreements totaling a principal/notional amount of
$90,000,000 is 7.0% at September 30, 1995. In fiscal 1995, Alco Capital sold
$67,000,000 in leases, replacing leases liquidated during the year.
ALCO STANDARD CORPORATION AND SUBSIDIARIES 37
13 SALE OF ACCOUNTS RECEIVABLE
The Company entered into an agreement to sell, with limited recourse, up to
CN$95,000,000 of certain eligible Canadian accounts receivable through
December 1, 1995. The agreement, which is expected to be extended, provides
limited recourse to the Company in the event that any of the previously sold
receivables become uncollectible. As collections reduce previously sold
interests, new receivables will be sold up to CN$95,000,000. The amount of
receivables sold under the agreement was CN$95,000,000 (US$71,000,000) and
CN$80,000,000 (US$60,000,000) at September 30, 1995 and 1994, respectively.
14 FINANCIAL INSTRUMENTS
The Company uses financial instruments in the normal course of its business.
These financial instruments include debt, commitments to extend credit and
interest rate swap agreements. The notional or contractual amounts of these
commitments and other financial instruments are discussed below.
Concentration of Credit Risk
The Company is subject to credit risk through trade receivables and short-term
cash investments. Credit risk with respect to trade receivables is minimized
because of a large customer base and its geographic dispersion. Short-term cash
investments are placed with high credit quality financial institutions and in
short duration corporate and government debt securities funds. By policy, the
Company limits the amount of credit exposure in any one type of investment
instrument.
Interest Rate Swap Agreements
In addition to the interest rate swap agreements related to finance subsidiaries
financial instruments discussed in note 12, the Company has several other
interest rate swap agreements. These agreements have a total principal/notional
amount of $47,000,000 and have fixed rates from 6.99% to 7.855%. The Company is
required to make payments to the counterparties at the fixed rate stated in the
agreements and in return the Company receives payments at variable rates
(LIBOR).
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 following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments.
Cash, Notes Payable and Long-Term Receivables
The carrying amounts reported in the consolidated balance sheets approximate
fair value.
Long-Term Debt
The fair value of long-term debt instruments is estimated using a discounted
cash flow analysis. For more information on these instruments, refer to note 5.
Off-Balance-Sheet Instruments
Fair values for the Company's off-balance-sheet instruments (interest rate
swaps) are based on the termination of the agreements.
The carrying amounts and fair values of the Company's financial instruments
are as follows:
1995 1994
- - ------------------------------------------------------------------------------------------------------------------
September 30 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value
- - ------------------------------------------------------------------------------------------------------------------
Long-term debt:
Bond issue $150,000 $165,311 $150,000 $156,833
Private placement debt 50,000 52,043 70,000 71,837
Notes payable to insurance company 60,000 65,286 60,000 62,614
Industrial revenue bonds 10,328 9,765 10,537 11,442
Sundry notes, bonds and mortgages 51,893 53,160 38,341 36,786
Finance subsidiaries debt 817,585 824,989 464,882 455,674
Interest rate swaps (3,671) 1,426
38 ALCO STANDARD CORPORATION AND SUBSIDIARIES
15 RESTRUCTURING COSTS
On September 29, 1993, the Company adopted a plan to restructure paper
distribution business including the following: installation of a customer-
focused information system, redesigning of warehouse and transportation
management functions, regionalization of management and administrative support
functions and consolidation of service center locations. In connection with
certain elements of the restructuring plan, the Company recorded a charge to
earnings of $175,000,000 ($112,875,000 net of taxes or $1.19 per share) in the
fourth quarter of fiscal 1993. The charge provided for facility consolidation
($60,700,000), severance costs ($48,000,000) and related organizational and
system redesign ($22,000,000).
At September 30, 1995, the remaining restructuring reserve is $39,302,000,
which management believes is adequate to complete the restructuring plan by mid-
fiscal 1997. As of September 30, 1995, 84 facility consolidations had been
substantially completed. The estimated cost to complete the facility
consolidations is $17,000,000 of which a significant portion relates to costs to
dispose and maintain facilities that have been or will be vacated. Severance
costs have been incurred during 1995 and 1994 in accordance with the plan and
$10,000,000 is the estimated balance for severance costs. The related
organizational and system redesign is estimated to have a remaining cost of
$6,000,000. The Company estimates the remaining cash expenditures for the
restructuring plan will be $31,000,000 and will be spent in fiscal 1996 and
early fiscal 1997.
16 COMMITMENTS
Effective January 1, 1994, the Company entered into an outsourcing agreement
that will provide the information technology system to be implemented as part of
the Unisource restructuring plan (note 15). This agreement calls for the payment
of $300,000,000 over a ten-year period. At September 30, 1995, the remaining
commitment under the agreement is $217,000,000.
ALCO STANDARD CORPORATION AND SUBSIDIARIES 39
FINANCIAL REVIEW
The discussion of the results of operations for the three years ended
September 30, 1995 reviews the continuing operations of the Company as contained
in the Consolidated Statements of Income.
RESULTS OF OPERATIONS - 1995
Revenues and income before taxes by segment for fiscal years ended September 30,
1995 and September 30, 1994 and the percentage change for 1995 versus 1994 were:
Revenues Income Before Taxes
- - -----------------------------------------------------------------------------------------------------------------------
(in millions) 1995 1994 %Change 1995 1994 %Change
- - -----------------------------------------------------------------------------------------------------------------------
Alco Office Products $2,912 $2,240 30.0% $251.8 $199.4 26.3%
Unisource
United States 6,183 5,108 21.0 184.1 148.8 23.7
Canada 804 649 23.9 41.0 13.5 203.7
- - -----------------------------------------------------------------------------------------------------------------------
Total Unisource 6,987 5,757 21.4 225.1 162.3 38.7
- - -----------------------------------------------------------------------------------------------------------------------
Operating 9,899 7,997 23.8 476.9 361.7 31.8
Unconsolidated affiliate (117.2)
Eliminations and nonallocated (7) (1) (117.0)* (87.7)*
- - -----------------------------------------------------------------------------------------------------------------------
$9,892 $7,996 23.7 $359.9 $156.8
=======================================================================================================================
* Includes interest costs and net corporate expenses.
FISCAL 1995 COMPARED TO FISCAL 1994
The Company increased revenues $1.9 billion to $9.9 billion in fiscal 1995 from
$8 billion in fiscal 1994. Income before taxes increased from $156.8 million in
fiscal 1994 to $359.9 million in fiscal 1995. Earnings per share increased from
$.55 to $1.67. Earnings per share from continuing operations in fiscal 1995 were
$1.81, a 26.6% increase over $1.43 per share in 1994, excluding the loss on the
sale of IMM Office Systems (IMMOS).
Alco Office Products (AOP) generated $672 million in increased revenues of
which $387 million is related to AOP's base companies, while $68 million relates
to fiscal 1994 acquisitions and $217 million to current-year acquisitions.
Internal growth in AOP's base companies continues to be across all revenue
segments but primarily in equipment sales, outsourcing and supplies. Revenues
from Unisource's US operations increased $1.1 billion, of which $74 million
relates to current- and prior-year acquisitions. Unisource's Canadian operations
increased revenues $155 million, which is net of a negative impact of
approximately $12 million relating to foreign currency rate fluctuations.
Increased revenue at Unisource is primarily related to substantial price
increases experienced in the paper industry during fiscal 1995, as well as sales
volume increases.
AOP's operating income increase of $52.4 million includes $6.1 million from
fiscal 1994 acquisitions and $20.2 million from current-year acquisitions. The
remaining $26.1 million increase from its base companies is primarily the result
of higher operating contributions from the equipment, outsourcing and supply
areas of AOP's businesses, along with increased operating income relating to its
leasing activities through Alco Capital Resource, Inc. (Alco Capital), net of
transformation program costs. Operating margins were 8.6% in 1995 compared to
8.9% in 1994. Excluding costs related to the AOP transformation program, the
operating margin for 1995 was 9.0%.
Operating income for Unisource's US operations increased $35.3 million.
This increase includes $3.9 million contributed by current- and prior-year
acquisitions. The remaining $31.4 million is from base companies, reflecting the
impact of price and volume increases along with the net benefits realized from
its restructuring program. Operating income for the Canadian paper operations
increased $27.5 million primarily as a result of price increases and growth in
the fine paper distribution business and restructuring benefits. Unisource's
operating margins increased to 3.2% in fiscal 1995, from 2.8% in the prior year.
The Company's foreign operations of AOP and Unisource generated $1.1
billion in revenues for fiscal 1995 compared with $843 million for the same
period of the prior fiscal year. The Canadian paper distribution business
represents $155 million or 62% of the total increase. The increase also includes
$78 million from AOP's European operations and $17 million from AOP's Canadian
operations. Operating income from foreign operations was $69 million for 1995,
up $40 million from the prior year primarily as a result of the increase in
operating income of the Canadian paper distribution business. In fiscal 1994,
the Company recorded a total pretax loss of $117.2 million from its investment
in IMMOS.
In September 1995, the Company divested Central Products Company for $80
million in cash and notes and recorded a continuing operations pretax gain of
approximately $4 million on the sale. Also included in the Company's continuing
operations, and related to Central
40 ALCO STANDARD CORPORATION AND SUBSIDIARIES
Products Company, are fiscal 1995 revenues of approximately $120 million and net
income of $2.7 million.
Interest expense increased $12 million from the comparable period in fiscal
1994, as a result of higher interest rates and borrowing levels during the year
to fund acquisitions and working capital requirements, offset by the effect of
the debt reductions resulting from the Company's conversion preferred stock
offering in July 1995. The increase in income from continuing operations before
taxes of $203.1 million consists of $85.9 million relating to the combined
effect of improved operations from base companies and earnings contributed by
acquisitions, net of increased interest costs and other corporate items and the
$117.2 million loss on the investment in IMMOS recorded in 1994. The effective
income tax rate for the current period is 39.1%. The effective tax rate for 1994
was 55%; however, excluding the IMMOS loss, the effective rate was 39.1%. Fiscal
1995 weighted average shares were 5.1 million shares greater than the 107.5
million shares for fiscal 1994, primarily the result of issuance of shares for
acquisitions.
The Company has owned several manufacturing and industrial businesses, all
of which have been sold. There are currently environmental remediation claims,
pending for manufacturing or landfill sites in the United States that relate to
these discontinued operations. As a result of several recent environmental
remediation claims and increased estimated costs associated with existing
environmental remediation sites, primarily related to discontinued manufacturing
operations divested by the Company in 1991 and prior, the Company took a fourth
quarter charge in fiscal 1995 to increase its liabilities for environmental
remediation. The discontinued operations charge was $24 million ($17 million net
of tax), or $.14 per share. The adjustment is management's best estimate, based
on information currently available, of costs to be incurred for existing and
probable environmental claims of discontinued operations. The Company presently
does not expect that additional environmental remediation charges for these
sites will be required in the future.
The major components of the Unisource restructuring plan are proceeding as
planned. Unisource management has reduced the pace at which certain changes are
being made in order to better control the transformation process, thereby
affecting the pace of planned headcount reductions and the timing of originally
anticipated net benefits. Unisource expects to achieve the full benefit of the
projected $100 million net annual benefits resulting from the completion of the
restructuring in fiscal 1997. The restructuring reserve at September 30, 1995 is
$39.3 million, which management believes is adequate to complete the
restructuring plan.
AOP has initiated a three-year transformation program to change its
organization into a more cohesive and efficient network by building a uniform
information technology system and implementing best practices for critically
important management functions throughout the AOP companies. The initiative will
include the exploration of new vendor alliances, the establishment of a national
identity for the group and a targeted national accounts program.
The Company was in arbitration with a former subsidiary, which had asserted
that the Company was liable for certain employee liabilities. During the second
quarter of fiscal 1995, the Company agreed to pay $10 million to the former
subsidiary to settle this claim, which primarily has been charged against
existing reserves for discontinued operations. The Company paid $5 million
during the second quarter with the remaining $5 million to be paid over the next
four years.
In fiscal 1996, the Company plans to early adopt Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." The effect on earnings of
this accounting change is expected to be immaterial.
RESULTS OF OPERATIONS - 1994
Revenues and income before taxes by segment for fiscal years ended September 30,
1994 and September 30, 1993 and the percentage change for 1994 versus 1993 were:
Revenues Income Before Taxes
- - ---------------------------------------------------------------------------------------------------------------------
(in millions) 1994 1993 %Change 1994 1993 %Change
- - ---------------------------------------------------------------------------------------------------------------------
Alco Office Products $2,240 $1,586 41.2% $199.4 $138.8 43.7%
Unisource
United States 5,108 4,174 22.4 148.8 118.7 25.4
Canada 649 690 (5.9) 13.5 18.3 (26.2)
Restructuring costs (175.0)
- - ---------------------------------------------------------------------------------------------------------------------
Total Unisource 5,757 4,864 18.4 162.3 (38.0)
- - ---------------------------------------------------------------------------------------------------------------------
Operating 7,997 6,450 24.0 361.7 100.8
Unconsolidated affiliate (117.2) (2.5)
Eliminations and nonallocated (1) (5) (87.7)* (73.7)*
- - ---------------------------------------------------------------------------------------------------------------------
$7,996 $6,445 24.1 $156.8 $ 24.6
=====================================================================================================================
* Includes interest costs and net corporate expenses.
ALCO STANDARD CORPORATION AND SUBSIDIARIES 41
FISCAL 1994 COMPARED WITH FISCAL 1993
The Company's revenues for fiscal 1994 were $8 billion, an increase of $1.5
billion over fiscal 1993 revenues of $6.5 billion. Income before taxes from
operations increased to $361.7 million from $100.8 million in fiscal 1993, which
included a restructuring charge of $175 million related to the Unisource
operations. Earnings per share from continuing operations for fiscal 1994 were
$.55 compared to $(.02) for fiscal 1993 which included a loss of $1.19 per share
resulting from the Unisource restructuring charge. Earnings per share excluding
the loss on the sale of the investment in IMMOS in fiscal 1994 and the effect of
the restructuring charge in fiscal 1993 were $1.43 and $1.17, respectively.
AOP generated $654 million in increased revenues, of which $288 million
relates to fiscal 1993 acquisitions and $134 million to fiscal 1994
acquisitions. The remaining $232 million increase reflects continued internal
growth in all revenue areas of AOP's base companies, particularly in its
equipment, service and outsourcing businesses. The $934 million increase in
revenues from Unisource's US operations includes $764 million from acquisitions
(primarily Butler Paper) and $170 million of internal growth from its base
companies. The $41 million revenue decrease in the Unisource Canadian paper
businesses is primarily attributable to a 5.9% decrease in the average foreign
exchange rate.
AOP's operating income increase of $60.6 million includes $16.4 million
from prior-year acquisitions and $10.2 million from current-year acquisitions.
The remaining $34 million increase reflects continued internal growth from its
base companies, which is primarily the result of higher operating contributions
from the service, supply and outsourcing areas of AOP's businesses, along with
increased operating income related to its leasing activities through Alco
Capital. Operating income from Unisource's US paper operations increased $30.1
million. This increase represents a contribution of $17.6 million from prior-
year acquisitions and $12.5 million from its base companies. The internal growth
is attributable to improved gross margins and expense reductions realized in the
last half of the fiscal year offset primarily by lower comparable margins
experienced in the first half of the year. The Canadian paper distribution
business decrease in operating income of $4.8 million is the result of the
carryover of certain incremental merger costs related to the Canadian merger
plan implemented in fiscal 1993, gross margin erosion in the first half of the
fiscal year and the effects of the declining foreign exchange rates.
Geographically, revenues from the Company's paper and office products
operations outside the U.S. were $843 million for fiscal 1994 compared to $800
million for the prior fiscal year. The increase reflects $77 million from the
European operations of Erskine acquired in fiscal 1993 along with $7 million
from AOP internal growth, offset by a decrease of $41 million from the Canadian
paper distribution business. Operating income from foreign operations was $29.1
million for fiscal 1994, an increase of $1.8 million from the prior year, the
result of increased AOP foreign operations, offset by the decrease in operating
income of the Canadian paper distribution business.
The 49.9% investment in IMMOS in October 1992 marked the entry of the
Company into the European market, and it was to serve as a base for further
expansion in Europe. The venture agreement provided the Company with the option
of acquiring the remaining shares of IMMOS over a three-year period beginning in
1996 if IMMOS achieved certain operating goals. However, the capital structure
and organizational complexities of IMMOS, exacerbated by the distressed European
economy and operational differences among the venture partners, had prevented
IMMOS from progressing toward those goals. As a result, in September 1994, the
Company sold its 49.9% interest in IMMOS for cash plus a passive interest in any
subsequent sale of IMMOS for five years. The Company retains no ongoing
liability in the joint venture and the parties exchanged complete mutual
releases for past actions. In addition, the Company was relieved of the covenant
not to compete in Europe contained in the joint venture agreement, although the
parties will not compete with each other for a period expiring on December 31,
1995. As part of the transaction, the Company acquired profitable operations in
Denmark and France and retained limited operations in Germany. The Company
recognized a loss on the sale of its interest in IMMOS in the quarter ended June
30, 1994, and recorded a pretax loss of $115.3 million ($95.1 million, net of
tax) equating to a loss per share of $.87 for the quarter ($.88 for fiscal
1994). This charge represents the write-off of the Company's investment in IMMOS
plus certain transactional costs less cash proceeds from the sale together with
related tax benefits. For the fiscal year ended September 30, 1994, the Company
recorded a total pretax loss of $117.2 million from its investment in an
unconsolidated affiliate. This includes a pretax loss of $115.3 million relating
to the sale previously discussed and a $1.9 million operating loss on its
investment through March 31, 1994.
Interest expense increased by $3.6 million from fiscal 1993, a result of
higher interest rates and borrowing levels during the year. Income before taxes
from continuing operations increased by $132.2 million, which reflects the net
effect of the $115.3 million loss on the sale of IMMOS in fiscal 1994 and the
$175 million charge for restructuring costs in fiscal 1993. Income before taxes
from continuing operations also includes improved operating results from base
companies and earnings contributed by current- and prior-year acquisitions net
of increased interest costs and other corporate items. The effective income tax
rate for fiscal 1994 was 55% com-
42 ALCO STANDARD CORPORATION AND SUBSIDIARIES
pared to 69% in fiscal 1993. The effective income tax rate for fiscal 1994,
excluding the effect of the sale of IMMOS, was 39.1% compared with 39.6% in
fiscal 1993, excluding the effect of the restructuring costs. Fiscal 1994
weighted average shares were 12.7 million shares greater than the 94.8 million
shares for fiscal 1993, primarily the result of a public offering of common
stock in December 1993.
During the first quarter of fiscal 1994, the Company adopted Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" and Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"; the individual and
combined effect on earnings of these accounting changes was immaterial.
FINANCIAL CONDITION AND LIQUIDITY
Debt, excluding finance subsidiaries, was $632 million at September 30, 1995, an
increase of $187 million from the Company's debt balance at September 30, 1994
of $445 million. This increase in borrowing levels was primarily to satisfy the
Company's working capital and acquisition requirements, net of the proceeds from
the July 1995 conversion preferred stock offering described below. On December
1, 1994, the Company entered into a credit agreement under which it may borrow
up to $500 million. The Company may also borrow up to $100 million under another
credit agreement. At September 30, 1995, short-term borrowings supported by
these two facilities totaled $252.5 million, leaving $347.5 million unused and
available. Debt as a percentage of capitalization was 25.3%, while the current
ratio was 1.6 to 1. In July 1995, Moody's Investor Services upgraded the
Company's debt rating to A3, from Baa1. At the end of fiscal 1995, the Company's
commitments for capital expenditures were approximately $23 million, all of
which are expected to be expended during fiscal 1996.
In July 1995, the Company completed a public offering of approximately 3.9
million depositary shares, each representing 1/100 of a share of Series BB
Conversion Preferred Stock. The Series BB Preferred Stock carries a dividend
yield of 6.5% and automatically converts into the Company's common stock on
October 1, 1998, unless previously converted at the option of the holder. The
purpose of the offering is to fund the Company's ongoing acquisition program.
Net proceeds of approximately $290 million were used to repay short-term
borrowings incurred to fund working capital requirements and acquisitions.
The Company recorded a pretax charge of approximately $24 million for
environmental claims associated with discontinued manufacturing operations
during the fourth quarter of fiscal 1995. Since most environmental claims are
paid over a period of years, the impact on annual cash flow is expected to be
minimal.
The Company's change in cash from operating activities during fiscal 1995
primarily relates to working capital requirements. Unisource's working capital
primarily reflects the effects of substantial price increases experienced in the
paper business along with the increased sales volume. Changes in AOP's working
capital primarily relate to inventory from growth in the business along with
supplier price increases.
The Company estimates that total cash expenditures in connection with the
Unisource restructuring plan will amount to $143 million, of which approximately
$112 million has been spent to date, with the $31 million balance anticipated to
be paid in fiscal 1996 and early fiscal 1997. Effective January 1, 1994,
Unisource entered into a ten-year agreement with ISSC for $300 million, to
provide the information technology system to be implemented as part of the
restructuring plan. At September 30, 1995, the remaining commitment under the
agreement is $217 million. The foregoing commitments are anticipated to be
funded from Unisource's operating cash flow.
Finance subsidiaries debt grew by $352.7 million from September 30, 1994, a
result of increased leasing activity. On June 30, 1995, Alco Capital increased
the amount available to be offered under its medium term note program by $1
billion or the equivalent thereof in foreign currency, of which $898 million is
unused and available. The program allows Alco Capital to offer to the public
from time to time medium term notes having an aggregate initial offering price
not exceeding the total program amount. These notes are offered at varying
maturities of nine months or more from their dates of issue and may be subject
to redemption at the option of Alco Capital or repayment at the option of the
holder, in whole or in part, prior to the maturity date in conjunction with
meeting specified provisions. Interest rates are determined based on market
conditions at the time of issuance. As of September 30, 1995, $602 million of
medium term notes bearing a weighted average interest rate of 7.0% were
outstanding.
In addition, Alco Capital entered into an agreement in September 1994 to
sell under an asset securitization program, an undivided ownership interest in
$125 million of eligible direct financing lease receivables. The agreement,
which expires in September 1996, contains limited recourse provisions that
require Alco Capital to assign an additional undivided interest in leases to
cover any potential losses to the purchaser due to uncollectible leases. As
collections reduce previously sold interests, new lease receivables can be sold
up to $125 million. During fiscal 1995, Alco Capital sold $67 million in direct
financing leases, replacing those leases liquidated and leaving the total amount
of contracts sold unchanged at $125 million.
The Company believes that its operating cash flow together with unused
lines of credit and other financing arrangements will be sufficient to finance
current operating requirements including capital expenditures, acquisitions and
restructuring and transformation programs.
ALCO STANDARD CORPORATION AND SUBSIDIARIES 43
CORPORATE FINANCIAL SUMMARY
(in millions except per share data, shareholders of record, employees)
Eight-Year
Compound Growth 1995 1994 1993
- - ---------------------------------------------------------------------------------------------------------------------------
CONTINUING OPERATIONS
Revenues 15.3% $9,891.8 $7,996.0 $6,444.6
Gross profit 18.6 2,524.9 2,083.3 1,621.1
% of revenues 25.5 26.1 25.2
Selling and administrative 18.2 2,109.1 1,765.5 1,378.8
% of gross profit 83.5 84.7 85.1
Operating income 22.3 476.9 361.7 100.8
% of revenues 4.8 4.5 1.6
Income before taxes 19.8 359.9 156.8 24.6
% of revenues 3.6 2.0 .4
Effective income tax rate (%) 39.1 55.0 69.0
Income 20.4 219.3 70.6 7.6
% of revenues 2.2 .9 .1
Earnings (loss) per share
Primary 1.81 .55 (.02)
Fully diluted (e) (e) (e)
Capital expenditures 13.5 99.2 108.0 78.8
Depreciation and amortization 14.8 109.7 96.8 76.1
- - ---------------------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
Income (loss) $ (16.6) $ (7.5)
Earnings (loss) per share
Primary (.14) (.08)
Fully diluted (e) (e)
- - ---------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATIONS
Net income 12.3% $ 202.7 $ 70.6 $ .1
Earnings (loss) per share
Primary 1.67 .55 (.10)
Fully diluted (e) (e) (e)
- - ---------------------------------------------------------------------------------------------------------------------------
SHARE ACTIVITY
Dividends per share 6.2% $ .52 $ .50 $ .48
Per share book value 8.9 12.28 10.72 8.76
Return on shareholders' equity (a) 16.0 14.8(b) 11.5(b)
Average common and common equivalent shares 112.5 107.5 94.8
Shareholders of record 15,099 14,348 13,999
- - ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY INFORMATION
Days sales outstanding 36.8 37.8 38.9
Inventory turns (FIFO basis) 6.1 6.3 6.3
Current ratio 1.6 1.6 1.5
Pretax return on capital employed 17.2 17.1(b) 14.7(b)
Pretax return on capital employed with
finance subsidiaries on equity method 21.3 18.4(b) 15.7(b)
Working capital 6.6% $ 770.5 $ 653.5 $ 556.6
Total assets 16.6 4,737.6 3,502.3 3,348.9
Total debt 25.9 1,450.1 910.0 1,207.4
% of capitalization 43.7 40.0 53.6
Total debt excluding finance subsidiaries 15.1 632.5 445.1 794.3
% of capitalization 25.3 24.6 43.2
Serial preferred stock .3
Employees 36,500 30,600 28,500
- - ---------------------------------------------------------------------------------------------------------------------------
(a) From continuing operations.
(b) Excludes the effect of the sale of IMMOS (note 4) in fiscal 1994 and
restructuring costs (note 15) in fiscal 1993.
(c) Includes the sale of an automobile leasing subsidiary that resulted in a
pretax gain of $17,637,000.
(d) Includes unusual pretax charges relating to the Hillman Companies of
$10,323,000.
(e) Dilution is immaterial after 1987; therefore no disclosure.
(f) Excludes gain on sale of Alco Health Services Corporation of pretax -
$96,800,000; net income - $61,900,000.
Note: All share and per share amounts are post-stock split.
44 ALCO STANDARD CORPORATION AND SUBSIDIARIES
1992 1991 1990 1989 1988 1987
- - --------------------------------------------------------------------------------------------------------------------------------
CONTINUING OPERATIONS
Revenues $4,925.1 $4,516.0 $4,293.4 $3,783.6 $3,379.4 $3,173.7
Gross profit 1,267.1 1,110.0 1,022.4 841.9 690.3 646.8
% of revenues 25.7 24.6 23.8 22.3 20.4 20.4
Selling and administrative 1,069.6 946.8 864.4 711.1 584.7 552.1
% of gross profit 84.4 85.3 84.5 84.5 84.7 85.4
Operating income 225.7 195.3 190.0 153.0 128.4 95.2
% of revenues 4.6 4.3 4.4 4.0 3.8 3.0
Income before taxes 172.5 125.8 111.5(d) 97.8 90.2 84.7(c)
% of revenues 3.5 2.8 2.6 2.6 2.7 2.7
Effective income tax rate (%) 39.6 39.1 42.3 17.1 18.2 38.3
Income 104.2 76.7 64.3(d) 81.1 72.5 49.7(c)
% of revenues 2.1 1.7 1.5 2.1 2.1 1.6
Earnings (loss) per share
Primary 1.11 .85 .72(d) .90 .74 .55(c)
Fully diluted (e) (e) (e) (e) (e) .52(c)
Capital expenditures 54.8 47.4 57.9 57.1 38.3 35.9
Depreciation and amortization 59.3 58.2 49.5 43.8 37.3 36.4
- - --------------------------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
Income (loss) $ (8.4) $ 40.9 $ 29.2 $ 85.5 $ 37.0 $ 30.5
Earnings (loss) per share
Primary (.09) .45 .33 .94 .38 .34
Fully diluted (e) (e) (e) (e) (e) .31
- - --------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATIONS
Net income $ 95.8 $ 117.6 $ 93.5(d) $ 166.6 $ 109.5 $ 80.2(c)
Earnings (loss) per share
Primary 1.02 1.30 1.05(d) 1.84 1.12 .89(c)
Fully diluted (e) (e) (e) (e) (e) .83(c)
- - --------------------------------------------------------------------------------------------------------------------------------
SHARE ACTIVITY
Dividends per share $ .46 $ .44 $ .42 $ .38 $ .34 $ .32
Per share book value 9.36 9.20 8.47 7.48 7.04 6.21
Return on shareholders' equity (a) 11.4 15.0 13.5 16.9(f) 16.9 15.8
Average common and common equivalent shares 93.8 90.1 89.1 90.4 97.5 90.3
Shareholders of record 13,726 14,096 14,152 13,410 14,103 12,875
- - --------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY INFORMATION
Days sales outstanding 37.8 38.6 39.7 39.3 38.5 38.9
Inventory turns (FIFO basis) 5.9 5.7 5.7 5.7 5.6 5.3
Current ratio 1.7 1.9 1.7 1.6 1.9 2.1
Pretax return on capital employed 15.3 20.8 20.1 20.8(f) 19.9 21.3
Pretax return on capital employed with
finance subsidiaries on equity method 16.2 22.5 21.6 21.7(f) 20.3 21.3
Working capital $ 496.0 $ 516.0 $ 404.3 $ 342.8 $ 412.3 $ 462.5
Total assets 2,444.8 2,020.6 1,916.5 1,623.9 1,512.4 1,389.3
Total debt 782.2 524.9 450.6 378.0 253.6 229.4
% of capitalization 47.6 38.9 37.4 36.9 26.6 26.3
Total debt excluding finance subsidiaries 481.7 304.2 291.0 283.5 201.4 205.8
% of capitalization 35.8 27.0 27.8 30.5 22.4 24.2
Serial preferred stock 1.6 2.9 4.9 7.4 9.9 11.4
Employees 23,500 18,800 20,900 19,800 17,300 17,300
- - --------------------------------------------------------------------------------------------------------------------------------
Note: Unless otherwise noted, ratios and operating results include the effect
of: fiscal 1994 - loss on sale of investment in IMMOS (note 4), pretax income
($115,265,000), net income ($95,086,000), earnings per share ($.88); fiscal
1993 - restructuring costs (note 15), operating income ($175,000,000), net
income ($112,875,000), earnings per share ($1.19).
ALCO STANDARD CORPORATION AND SUBSIDIARIES 45
SEGMENT DATA
(continuing operations, in millions)
Depreciation
Income Capital and
Revenues Before Taxes Assets Expenditures Amortization
- - --------------------------------------------------------------------------------------------------------------------------------
EIGHT-YEAR COMPOUND GROWTH
1987-1995
Alco Office Products 32.7% 39.5% 40.3% 14.0% 22.0%
Unisource 15.0 14.2 18.1 22.9 15.3
================================================================================================================================
1995
Alco Office Products $2,911.7 $ 251.8 $2,570.4 $ 48.4 $ 74.4
Unisource
United States 6,183.3 184.1 1,666.7 48.5 27.1
Canada 804.0 41.0 330.3 1.5 6.2
- - --------------------------------------------------------------------------------------------------------------------------------
Total Unisource 6,987.3 225.1 1,997.0 50.0 33.3
- - --------------------------------------------------------------------------------------------------------------------------------
Operating 9,899.0 476.9 4,567.4 98.4 107.7
Eliminations and nonallocated (7.2) (117.0)* 170.2 .8 2.0
- - --------------------------------------------------------------------------------------------------------------------------------
$9,891.8 $ 359.9 $4,737.6 $ 99.2 $109.7
================================================================================================================================
1994
Alco Office Products $2,240.4 $ 199.4 $1,672.2 $ 72.5 $ 62.7
Unisource
United States 5,107.6 148.8 1,391.5 30.5 26.1
Canada 648.9 13.5 296.5 3.4 6.4
- - --------------------------------------------------------------------------------------------------------------------------------
Total Unisource 5,756.5 162.3 1,688.0 33.9 32.5
- - --------------------------------------------------------------------------------------------------------------------------------
Operating 7,996.9 361.7 3,360.2 106.4 95.2
Unconsolidated affiliate (117.2)
Eliminations and nonallocated (.9) (87.7)* 142.1 1.6 1.6
- - --------------------------------------------------------------------------------------------------------------------------------
$7,996.0 $ 156.8 $3,502.3 $108.0 $ 96.8
================================================================================================================================
1993
Alco Office Products $1,585.6 $ 138.8 $1,450.0 $ 55.9 $ 45.4
Unisource
United States 4,173.7 118.7 1,319.6 18.8 22.3
Canada 690.4 18.3 314.3 2.9 6.9
Restructuring costs (175.0)
- - --------------------------------------------------------------------------------------------------------------------------------
Total Unisource 4,864.1 (38.0) 1,633.9 21.7 29.2
- - --------------------------------------------------------------------------------------------------------------------------------
Operating 6,449.7 100.8 3,083.9 77.6 74.6
Unconsolidated affiliate (2.5) 118.1
Eliminations and nonallocated (5.1) (73.7)* 146.9 1.2 1.5
- - --------------------------------------------------------------------------------------------------------------------------------
$6,444.6 $ 24.6 $3,348.9 $ 78.8 $ 76.1
================================================================================================================================
1992
Alco Office Products $1,259.2 $ 105.2 $967.5 $ 33.8 $ 37.0
Unisource
United States 3,585.1 118.2 988.7 19.1 20.0
Canada 82.8 2.3 295.8 1.1 .6
- - --------------------------------------------------------------------------------------------------------------------------------
Total Unisource 3,667.9 120.5 1,284.5 20.2 20.6
- - --------------------------------------------------------------------------------------------------------------------------------
Operating 4,927.1 225.7 2,252.0 54.0 57.6
Investment gain, net 6.7
Eliminations and nonallocated (2.0) (59.9)* 69.2 .8 1.7
- - --------------------------------------------------------------------------------------------------------------------------------
$4,925.1 $ 172.5 $2,321.2 $ 54.8 $ 59.3
================================================================================================================================
46 ALCO STANDARD CORPORATION AND SUBSIDIARIES
Depreciation
Income Capital and
Revenues Before Taxes Assets Expenditures Amortization
- - --------------------------------------------------------------------------------------------------------------------------------
1991
Alco Office Products $1,047.1 $ 79.6 $ 781.3 $ 28.6 $ 36.3
Unisource
United States 3,441.1 113.8 897.3 16.1 18.4
Canada 35.8 1.9 8.2 .2 .4
- - --------------------------------------------------------------------------------------------------------------------------------
Total Unisource 3,476.9 115.7 905.5 16.3 18.8
- - --------------------------------------------------------------------------------------------------------------------------------
Operating 4,524.0 195.3 1,686.8 44.9 55.1
Eliminations and nonallocated (8.0) (69.5)* 177.8 2.5 3.1
- - --------------------------------------------------------------------------------------------------------------------------------
$4,516.0 $125.8 $1,864.6 $ 47.4 $ 58.2
================================================================================================================================
1990
Alco Office Products $ 951.7 $ 58.9 $ 680.5 $ 32.3 $ 33.2
Unisource
United States 3,316.3 129.4 843.9 24.6 14.9
Canada 22.2 1.7 8.5 .1 .2
- - --------------------------------------------------------------------------------------------------------------------------------
Total Unisource 3,338.5 131.1 852.4 24.7 15.1
- - --------------------------------------------------------------------------------------------------------------------------------
Operating 4,290.2 190.0 1,532.9 57.0 48.3
Investment gain 5.6
Unusual charges (AOP) (10.3)
Eliminations and nonallocated 3.2 (73.8)* 88.8 .9 1.2
- - --------------------------------------------------------------------------------------------------------------------------------
$4,293.4 $111.5 $1,621.7 $ 57.9 $ 49.5
================================================================================================================================
1989
Alco Office Products $ 729.5 $ 41.3 $ 540.4 $ 26.5 $ 26.7
Unisource - United States 3,047.3 111.7 692.7 27.5 14.5
- - --------------------------------------------------------------------------------------------------------------------------------
Operating 3,776.8 153.0 1,233.1 54.0 41.2
Eliminations and nonallocated 6.8 (55.2)* 108.3 3.1 2.6
- - --------------------------------------------------------------------------------------------------------------------------------
$3,783.6 $ 97.8 $1,341.4 $ 57.1 $ 43.8
================================================================================================================================
1988
Alco Office Products $ 484.8 $ 28.9 $ 328.7 $ 19.6 $ 19.4
Unisource - United States 2,755.5 99.5 670.9 15.9 13.9
- - --------------------------------------------------------------------------------------------------------------------------------
Operating 3,240.3 128.4 999.6 35.5 33.3
Gains, net of losses, from divestitures 7.9
Eliminations and nonallocated 139.1 (46.1)* 140.0 2.8 4.0
- - --------------------------------------------------------------------------------------------------------------------------------
$3,379.4 $ 90.2 $1,139.6 $ 38.3 $ 37.3
================================================================================================================================
1987
Alco Office Products $ 303.7 $ 17.6 $ 171.0 $ 17.0 $ 15.2
Unisource - United States 2,281.7 77.6 528.8 9.6 10.7
- - --------------------------------------------------------------------------------------------------------------------------------
Operating 2,585.4 95.2 699.8 26.6 25.9
Gains, net of losses, from divestitures 17.6
Eliminations and nonallocated 588.3 (28.1)* 348.5 9.3 10.5
- - --------------------------------------------------------------------------------------------------------------------------------
$3,173.7 $ 84.7 $1,048.3 $ 35.9 $ 36.4
================================================================================================================================
* Includes interest costs and net corporate expenses.
ALCO STANDARD CORPORATION AND SUBSIDIARIES 47
QUARTERLY DATA
(unaudited, in millions except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
- - -----------------------------------------------------------------------------------------------------------------------------
1995
Revenues $2,181.6 $2,445.8 $2,595.9 $2,668.5 $9,891.8
Gross profit 565.8 619.6 658.0 681.5 2,524.9
Income before taxes 74.5 81.9 97.1 106.4 359.9
Income (loss)
Continuing operations 45.5 49.1 58.9 65.8 219.3
Discontinued operations (16.6)(a) (16.6)(a)
- - -----------------------------------------------------------------------------------------------------------------------------
Net income $ 45.5 $ 49.1 $ 58.9 $ 49.2 $ 202.7
=============================================================================================================================
Earnings (loss) per share
Continuing operations $ .38 $ .41 $ .50 $ .52 $ 1.81
Discontinued operations (.14)(a) (.14)(a)
- - -----------------------------------------------------------------------------------------------------------------------------
$ .38 $ .41 $ .50 $ .38 $ 1.67
=============================================================================================================================
Dividends per share $ .13 $ .13 $ .13 $ .13 $ .52
Common stock price
High/Low 31 7/8-26 1/2 36 7/8-30 7/8 40 1/8-34 3/8 43 5/8-38 1/4 43 5/8-26 1/2
- - -----------------------------------------------------------------------------------------------------------------------------
1994
Revenues $1,921.8 $1,969.4 $2,001.3 $2,103.5 $7,996.0
Gross profit 485.4 511.7 535.4 550.8 2,083.3
Income (loss) before taxes 53.4 63.0 (38.9)(b) 79.3 156.8(b)
Net income (loss) 31.9 38.0 (48.3)(b) 49.0 70.6(b)
=============================================================================================================================
Earnings (loss) per share .30 .32 (.48)(b) .42 .55(b)
=============================================================================================================================
Dividends per share $ .125 $ .125 $ .125 $ .125 $ .50
Common stock price
High/Low 27 3/8-21 3/4 29 3/8-25 3/4 30 1/8-24 3/4 32 3/4-28 1/2 32 3/4-21 3/4
(a) The Company recorded a pretax charge of $23,630,000 ($16,541,000 net of
taxes or $.14 per share) for environmental liabilities of discontinued
operations.
(b) Includes a pretax charge of $115,265,000 ($95,086,000 net of taxes or $.87
per share for the third quarter and $.88 for the fiscal year) for the sale
of the investment in IMMOS.
Note: All share and per share amounts are post-stock split.
48 ALCO STANDARD CORPORATION AND SUBSIDIARIES