<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
THE LINC GROUP, INC.
(TO BE RENAMED LINC CAPITAL, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 6159 36-3135040
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
303 EAST WACKER DRIVE
CHICAGO, ILLINOIS 60601
(312) 946-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
ALLEN P. PALLES
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
THE LINC GROUP, INC.
(TO BE RENAMED LINC CAPITAL, INC.)
303 EAST WACKER DRIVE
CHICAGO, ILLINOIS 60601
(312) 946-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS, INCLUDING COMMUNICATIONS SENT TO AGENT FOR
SERVICE, SHOULD BE SENT TO:
CARTER W. EMERSON, ESQ. WILLIAM J. GRANT, JR., ESQ.
KIRKLAND & ELLIS WILLKIE FARR & GALLAGHER
200 EAST RANDOLPH DRIVE 153 E. 53RD STREET
CHICAGO, IL 60601 NEW YORK, NY 10022
(312) 861-2052 (212) 821-8223
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE (1)(2) REGISTRATION FEE
- -------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $0.001
per share....................... $36,800,000 $11,151.52
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes shares that the Underwriters have the option to purchase from the
Company to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 29, 1997
PROSPECTUS
2,000,000 SHARES
LINC CAPITAL, INC.
COMMON STOCK
LOGO
All of the shares of Common Stock, par value $0.001 per share ("Common
Stock"), offered hereby (the "Offering") are being sold by LINC Capital, Inc.
(the "Company").
Prior to the Offering, there has been no public market for the Common Stock.
It is anticipated that the initial public offering price per share of Common
Stock will be between $14 and $16. See "Underwriting" for factors considered in
determining the initial public offering price. Application will be made for
quotation of the Common Stock on the Nasdaq National Market under the symbol
"LNCI."
This Prospectus sets forth the information about the Company that a
prospective investor should know before purchasing Common Stock. Prospective
investors are advised to read this Prospectus and retain it for future
reference.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS PROSPECTUS FOR INFORMATION
THAT PROSPECTIVE INVESTORS SHOULD CONSIDER IN CONNECTION WITH THEIR INVESTMENT
DECISION, INCLUDING INFORMATION RELATING TO THE DILUTION THAT SUCH INVESTORS
WILL INCUR.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............ $ $ $
- ------------------------------------------------------------------------------
Total (3)............ $ $ $
</TABLE>
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- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including certain liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted a 30-day option to the Underwriters to purchase up
to an aggregate of 300,000 additional shares of Common Stock on the same
terms and conditions as set forth above, solely to cover over-allotments,
if any. If all of such shares are purchased, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
-----------
The shares are being offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters, and subject to various prior
conditions, including the right to reject orders in whole or in part. It is
expected that delivery of share certificates will be made against payment
therefor at the offices of Furman Selz LLC in New York, New York on or about
, 1997.
FURMAN SELZ EVEREN SECURITIES, INC.
-----------
The date of this Prospectus is , 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING
THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors,"
appearing elsewhere in this Prospectus, and the financial statements and notes
hereto. In addition to such other information, the following summary should be
considered carefully by prospective investors in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby. Except
for historical information contained herein, this Prospectus contains forward-
looking statements that involve risks and uncertainties, such as statements of
the Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this Prospectus. The
Company's actual results could differ materially from those discussed herein.
Unless otherwise indicated, the information set forth in this Prospectus does
not give effect to the exercise of the Underwriters' over-allotment option.
THE COMPANY
GENERAL
LINC Capital, Inc. (the "Company") is a finance company specializing in the
origination, acquisition, securitization and servicing of equipment leases and
in the rental and distribution of analytical instruments. The Company's
principal businesses are (i) the direct origination of leases of a broad range
of equipment to emerging growth companies primarily serving the healthcare and
information technology industries ("Select Growth Leasing" activities) and (ii)
the rental and distribution of analytical instruments to companies serving the
environmental, chemical, pharmaceutical and biotechnology industries
("Instrument Rental & Distribution" activities). The Company believes that its
position as a leading provider of equipment leasing, rental and other services
to its specialized markets provides significant opportunities for internal
growth, as well as growth through the acquisition and financing of lease
portfolios originated by other lessors and the acquisition of leasing companies
which can capitalize on the existing capabilities and significant management
experience of the Company ("Portfolio Finance & Lessor Acquisition"
activities). The Company believes that its extensive experience in these
markets and its flexibility in structuring transactions to meet the needs of
both its leasing and rental customers provide it with a competitive advantage
over other sources of such services.
BACKGROUND
The Company's management team has extensive experience in the development of
specialty finance companies, with each of its three senior officers having over
25 years experience in the equipment leasing or rental industry. Since its
founding in 1975 by Mr. Martin E. Zimmerman, the Company's Chairman and Chief
Executive Officer, the Company and companies previously managed by Mr.
Zimmerman and Mr. Allen P. Palles, the Company's Executive Vice President and
Chief Financial Officer, have originated over $1.5 billion in equipment leases,
have acquired and serviced over $600 million in lease portfolios originated by
other lessors and have financed over $650 million of assets through
securitizations and other limited recourse financings. Under the management of
Messrs. Zimmerman and Palles, the Company became, it believes, the largest
independent lessor of healthcare equipment in the United States with over $500
million in assets owned and managed in 1993 and believes that it was the first
company in the U.S. to securitize healthcare equipment leases and related
residual values. The Company sold its healthcare equipment leasing and
portfolio acquisition and servicing business in 1994 to a subsidiary of Anthem
Insurance Companies, Inc. (the "1994 Sale") which Messrs. Zimmerman and Palles
managed until late 1996 after its sale (the "1996 Sale") to Newcourt Credit
Group (USA), Inc. ("Newcourt"). After the 1996 Sale, Messrs. Zimmerman and
Palles returned to the Company on a full-time basis to pursue opportunities in
its Select Growth Leasing and Instrument Rental & Distribution activities. The
Company has also engaged in a number of other successful activities serving the
healthcare industry, including a business providing receivables-based lending
to healthcare providers which was sold to The FINOVA Group in 1996.
3
<PAGE>
Pursuant to a non-competition agreement associated with the 1994 Sale (the
"Non-Compete Agreement"), the Company has been effectively restricted from
participating in Portfolio Finance & Lessor Acquisition activities and from
originating leases other than to emerging growth companies. The Company will
pursue such opportunities upon the expiration of the Non-Compete Agreement in
September 1997. The Company will also continue to expand its Select Growth
Leasing activities which were initiated in response to fundamental changes in
the healthcare and information technology industries, which management believes
enhanced the growth dynamics for lessors serving these industries. The Company
will also continue to pursue expansion of its Instrument Rental & Distribution
activities, which have marketing, financing and administrative synergies with
its Select Growth Leasing activities. The Company's Instrument Rental &
Distribution activities were developed through the acquisition in 1991 of a
business founded by Mr. Robert E. Laing, the Company's President and Chief
Operating Officer, and the acquisition in 1992 of the analytical instruments
business of AT&T Capital Corporation ("AT&T Capital"). Prior to founding this
business, Mr. Laing spent 17 years with U.S. Leasing International Inc. ("U.S.
Leasing"), then one of the largest equipment lessors in the U.S., and was its
senior executive responsible for its extensive rental activities.
BUSINESS ACTIVITIES
Select Growth Leasing. The Company's Select Growth Leasing activities consist
primarily of the direct origination of non-cancelable, full-payout leases to
middle and late stage emerging growth companies in the healthcare and
information technology industries. Such companies include physician practice
management organizations, rehabilitation service companies, extended care
providers, healthcare claims administrators and information service providers
and Internet and telecommunications service companies. The Company has provided
leasing to over 75 companies, including Cardiac Pathways Corporation, Mariner
Health Group, Inc., Transitional Health Services, Earthlink Network, Inc.,
Bridge Data Corporation and Intermedia Communications, Inc. A majority of the
Company's Select Growth Leasing clients are supported by institutional private
equity investors which provide capital and management resources to such
customers. Such private equity investors include Welsh Carson Anderson & Stowe,
Weiss, Peck & Greer, Essex Venture Partners and Oak Investment Partners.
Leases to individual customers typically include multiple items with an
aggregate total cost ranging from $250,000 to $2.0 million and cover a broad
variety of equipment, each with original purchase prices which are generally
less than $100,000 per item. These leases generally cover essential operating
equipment, including data processing equipment, production equipment,
analytical instruments and medical equipment. Leases are originated by
representatives located in Chicago, San Francisco and Boston and are often the
result of a network of independent lease brokers and referrals from
institutional private equity investors. For the first six months of 1997
compared with the same period in 1996, new lease originations increased from
$11.5 million to $26.6 million and backlog of unfunded leases increased from
$6.4 million to $19.9 million. The Company's Select Growth Leasing activities
are expected to continue to grow due to the Company's ability to provide such
services to more established companies, which is currently restricted by the
Non-Compete Agreement.
The Company believes that regulatory reform, consolidations, outsourcing and
other fundamental changes in the healthcare industry, expansion of the
information technology industry and development of new technologies have
promoted the formation and growth of new companies of the type served by its
Select Growth Leasing activities. Such companies typically have limited access
to financing from commercial banks, diversified finance companies and
traditional leasing companies. The Company's experience in serving the
healthcare and the information technology industries enables it to serve the
specific needs of its customer base more effectively than its competitors by
providing a variety of financing alternatives, such as flexible lease
structures, asset-based financing, sale-leaseback transactions and secured
credit lines, while maintaining a high degree of credit quality. In a majority
of its Select Growth Leasing transactions, the Company receives warrants or
other equity participation rights which provide additional opportunities for
profitability upon the sale of such rights. As of June 30, 1997, the Company
held equity participation rights in 39 companies, 13 of which were publicly
traded.
4
<PAGE>
Since the initiation of the Company's Select Growth Leasing activities in
1993, credit losses have been less than 2.0% of lease receivables originated.
Management believes that the low level of credit losses achieved by the Company
are a result of its: (i) due diligence and credit scoring procedures
specifically designed to analyze lease transactions with emerging growth
companies in the healthcare and information technology industries; (ii)
extensive monitoring and review of such transactions by senior executives of
the Company; (iii) proactive approach to addressing delinquencies; (iv)
transaction structuring experience; (v) advanced hardware and software systems;
and (vi) extensive experience in servicing lease portfolios. As of June 30,
1997, the Company had loss reserves of 4.9% of its net investment in lease
receivables, which was well in excess of its historical experience of credit
losses. In addition, the Company's extensive experience in remarketing
equipment and conservative policies toward estimating residual values has
resulted in the Company recognizing substantial gains on the remarketing of
leased equipment. Since 1981, the Company and companies previously managed by
Messrs. Zimmerman and Palles have remarketed equipment with an original cost of
over $1.0 billion in equipment following lease expirations and realized over
$280 million in residual proceeds, more than 150% of the original estimates.
Instrument Rental & Distribution. The Company's Instrument Rental &
Distribution activities consist primarily of the rental and distribution of
analytical instruments, such as gas and liquid chromatographs, mass
spectrometers and atomic absorption systems. Such instruments typically cost
between $15,000 and $60,000 and are used by companies serving the
environmental, chemical, pharmaceutical and biotechnology industries to measure
the chemical composition of a variety of substances. The Company is a
distributor for most of the significant manufacturers of this type of
equipment, including Hewlett-Packard Company ("Hewlett-Packard"), the largest
manufacturer in this industry, The Perkin-Elmer Corporation and Varian
Associates Inc. The Company believes that it is the largest independent source
of analytical instruments in the U.S. and that it is the only independent
company authorized to rent Hewlett-Packard analytical instruments. Such
instruments have relatively long economic lives and have not been subject to
rapid obsolescence.
Certain segments of the market for analytical instruments have undergone a
fundamental change over the past several years in that vendors have
increasingly relied upon independent companies, such as the Company, to take
responsibility for the distribution and rental of such equipment. This is
consistent with a trend toward outsourcing among providers of a variety of
products and services and is largely the result of customer demand for
analytical instruments which are specifically tailored with certain
enhancements to meet their needs and continued customer support. These vendors
have increasingly focused on the manufacture of such equipment and allowed
independent companies to focus on other functions such as rental, inventory
management and distribution. The Company believes that its expertise in all of
these areas has allowed it to become the leading independent distribution and
rental company in the analytical instrument market.
The Company provides analytical instruments which are customized, calibrated
and ready for use and typically delivers equipment from its centralized
warehouse within 24 hours of receipt of an order. The Company services over
2,300 analytical instrument customers through its sales force of product
specialists and orders directed by its vendors. The Company's product
specialists have immediate access via laptop computers to a proprietary sales
management system which provides up-to-the-minute tracking of each item of
inventory. The Company will seek opportunities to capitalize on its
distribution and rental expertise and its knowledge of the healthcare market by
developing similar relationships with vendors of medical equipment and
acquiring other established rental and distribution companies.
Portfolio Finance & Lessor Acquisition. Since 1988, the Company and companies
previously managed by Messrs. Zimmerman and Palles have acquired approximately
$325 million in lease portfolios and companies which had lease receivables of
approximately $300 million. The Company expects to reinitiate its Portfolio
Finance & Lessor Acquisition activities upon the expiration of the Non-Compete
Agreement in September 1997. The Company believes there are substantial
opportunities for such activities due to the fragmented nature of the leasing
industry, the inability of a significant number of small equipment leasing
companies to efficiently finance
5
<PAGE>
their portfolios and obtain more favorable financing rates through the asset-
backed securities markets and the cost of implementing new technologies to
remain competitive. The leasing companies which the Company expects to finance
or acquire are characterized by: (i) strong customer or vendor relationships;
(ii) lease transactions which range in size from $5,000 to $250,000; (iii)
needs for committed financing and servicing relationships; and (iv) a focus on
customers which are not effectively served by more traditional funding sources.
The Company also expects to pursue selective acquisitions of companies meeting
these criteria which can be integrated into the Company's organizational
structure and which can recognize synergies from the Company's operating
systems and geographic presence. Based on data available from the Equipment
Leasing Association (the "ELA"), the Company believes that there are over 150
independent leasing companies in the U.S. with less than $50 million in annual
lease originations. The Company believes that many of these companies are
likely candidates for the Company's Portfolio Finance & Lessor Acquisition
activities.
FINANCING
The Company currently funds its activities through warehouse, revolving
credit and term loan facilities provided by a group of banks under its senior
credit facility (the "Senior Credit Facility"), as well as recourse and non-
recourse loans provided by various financial institutions. Upon achieving a
sufficient portfolio size of lease receivables, the Company expects to sell or
finance a portion of such receivables in the public and private markets,
largely through securitizations or other limited recourse financings. Since
1987, the Company and companies previously managed by Messrs. Zimmerman and
Palles have completed 20 securitizations and other limited recourse financings
generating over $650 million in proceeds. The Company's financing objective is
to maximize the spread between the yield received on its leases and its cost of
funds by obtaining favorable terms on its various financing transactions.
Effective as of the consummation of the Offering, the Company expects to amend
the Senior Credit Facility to provide the Company with reduced interest rates,
increased borrowing availability and a securitization facility. As a result of
the Company's established track record in the specialty finance industry, the
Company believes that new terms of the Senior Credit Facility will be superior
to the terms obtained by many other companies in its industry of similar size
and with similar credit statistics.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.. 2,000,000 shares
Common Stock to be outstanding after 4,824,326 shares (1)
the Offering........................
Use of Proceeds...................... To repay indebtedness under the Company's
Senior Credit Facility. See "Use of
Proceeds."
Proposed Nasdaq National Market "LNCI"
symbol..............................
</TABLE>
- --------
(1) Does not include 475,000 shares of Common Stock reserved for issuance under
the Company's 1997 Stock Option Plan and Non-Employee Director Option Plan
and 175,674 shares reserved for issuance under options previously granted
under its 1994 Stock Option Plan. See "Management--Stock Option Plans."
6
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth summary financial and operating data for the
Company as of the dates and for the periods indicated. Data relating to certain
assets not used in the Company's business as described herein, and which will
be distributed to certain stockholders prior to consummation of the Offering,
have been excluded from these amounts. The summary financial data as of and for
the years ended December 31, 1994, 1995 and 1996 and as of and for the six
months ended June 30, 1997 are derived from financial statements audited by
KPMG Peat Marwick LLP. The summary pro forma statement of operations data and
the as adjusted balance sheet data give effect to (i) the borrowing of
approximately $4.9 million under the Senior Credit Facility to redeem the
preferred stock of a subsidiary of the Company (the "Subsidiary Preferred
Stock") and approximately $0.8 million borrowed to purchase certain executives'
minority interests in a subsidiary of the Company; (ii) the repayment by an
affiliated company of its portion of the borrowings under the Senior Credit
Facility; (iii) the Offering; (iv) the application of the estimated net
proceeds from the Offering to repay the Company's indebtedness under the Senior
Credit Facility; and (v) anticipated changes in the compensation of senior
management. See "Use of Proceeds" and "Management--Employment and Non-
Competition Agreements." The summary pro forma and as adjusted data are not
necessarily indicative of results which would have been obtained had these
events actually occurred or of the Company's future results. This table should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues:
Sales of equipment..... $ 8,060 $10,596 $15,836 $13,852 $22,595 $ 9,962 $ 10,252
Cost of equipment sold. 6,828 8,992 13,312 11,477 18,242 7,988 8,222
------- ------- ------- ------- ------- ------- --------
Gross profit from sales
of equipment.......... 1,232 1,604 2,524 2,375 4,353 1,974 2,030
Rental and operating
lease revenue......... 8,071 7,464 8,531 9,102 7,167 3,803 3,164
Direct finance lease
income................ -- -- 339 1,467 3,055 1,289 2,598
Fee income............. -- -- 580 2,378 1,869 1,130 648
Gain on remarketing of
leased equipment...... -- -- 5 44 450 13 277
Gain on equity
participation rights.. -- -- -- -- 263 -- 97
Interest and other
income................ -- -- 352 778 657 350 779
------- ------- ------- ------- ------- ------- --------
Total net revenues..... 9,303 9,068 12,331 16,144 17,814 8,559 9,593
------- ------- ------- ------- ------- ------- --------
Expenses:
Selling, general and
administrative........ 4,480 5,257 6,842 7,524 8,008 3,717 3,963
Interest............... 782 995 1,138 1,962 2,771 1,304 1,844
Depreciation of
equipment............. 2,627 2,822 3,512 4,054 3,647 1,892 1,858
Provision for credit
losses................ 166 35 247 1,060 749 338 479
------- ------- ------- ------- ------- ------- --------
Total expenses......... 8,055 9,109 11,739 14,600 15,175 7,251 8,144
------- ------- ------- ------- ------- ------- --------
Net income before
provision for income
taxes and minority
interest............... 1,248 (41) 592 1,544 2,639 1,308 1,449
Income tax expense...... 494 4 257 747 1,084 532 534
------- ------- ------- ------- ------- ------- --------
Net income before
minority interest...... 754 (45) 335 797 1,555 776 915
Minority interest....... 291 141 338 292 498 228 202
------- ------- ------- ------- ------- ------- --------
Net income (loss)....... $ 463 $ (186) $ (3) $ 505 $ 1,057 $ 548 $ 713
======= ======= ======= ======= ======= ======= ========
Pro forma information:
Net income before provision for income taxes........... $ 4,189 $ 2,083 $ 2,437
Net income............................................. 2,486 1,240 1,517
Net income per common share............................ $ 0.49 $ 0.25 $ 0.30
Shares used in computing net income per common share... 5,070 5,018 4,976
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Leasing:
Lease originations..... $ -- $ 9,548 $21,642 $20,479 $24,073 $ 11,518 $ 26,886
Backlog of unfunded
leases (1)............ -- 5,153 8,351 8,609 5,864 6,447 19,860
Net investment in
direct finance leases
(1)................... -- -- 8,296 17,144 31,763 23,700 43,395
Net charge-off
percentage (2)........ -- -- 0.1% 0.6% 0.9% -- 0.1%
Rental and Distribution:
Net margin on sales of
equipment............. 15.3% 15.1% 15.9% 17.1% 19.3% 19.8% 19.8%
Equipment held for
rental and operating
leases, net (1)....... $12,611 $13,840 $15,780 $18,500 $15,048 $ 15,579 $ 16,087
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Assets:
Net investment in direct finance leases................... $43,395 $43,395
Equipment held for rental and operating leases, net....... 16,087 16,087
Receivable from affiliate................................. 3,375 --
Accounts and notes receivable............................. 9,703 9,703
Deferred income taxes..................................... 1,068 1,068
Goodwill.................................................. 1,188 1,188
Other assets.............................................. 4,020 4,020
Cash and cash equivalents................................. -- --
------- -------
Total assets............................................. $78,836 $75,461
======= =======
Liabilities and Stockholders' Equity:
Senior credit facility and other senior notes payable..... $46,763 $21,723
Recourse debt............................................. 2,386 2,386
Non-recourse debt......................................... 6,913 6,913
Accounts payable.......................................... 3,805 3,039
Accrued expenses and customer deposits.................... 1,689 1,689
Subordinated debentures................................... 5,251 5,251
------- -------
Total liabilities........................................ 66,807 41,001
Redeemable preferred stock of subsidiary.................. 4,869 --
Stockholders' equity...................................... 7,160 34,460
------- -------
Total liabilities and stockholders' equity............... $78,836 $75,461
======= =======
</TABLE>
- --------
(1) At period end.
(2) As a percentage of net investment in direct finance leases before allowance
for doubtful accounts.
8
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully by prospective investors in evaluating
the Company and its business before purchasing shares of the Common Stock
offered hereby.
DEPENDENCE ON CREDITWORTHINESS OF LESSEES
The Company provides financing to emerging growth companies. Although the
Company intends, after the expiration of the Non-Compete Agreement in
September 1997, to expand the types of companies to which it leases equipment
and to begin acquiring lease portfolios and other lessors, it will continue to
specialize in leases to smaller and mid-sized businesses. Leasing to small
businesses presents a somewhat greater risk of non-performance than leasing to
larger companies which are generally more creditworthy and more readily able
to utilize more traditional financing sources. The failure of the Company's
lessees to perform under their leases would result in their leases becoming
ineligible for funding under the Senior Credit Facility and excessive
delinquencies and defaults would adversely affect the Company's ability to
obtain funding and therefore its financial condition and results of operation.
No assurance can be given that the Company's experience, criteria or
procedures will afford adequate protection against such risks. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
RISK RELATED TO UTILIZATION OF RENTAL PORTFOLIO
The profitability of the Company's Instrument Rental & Distribution
activities depends, in part, on the demand for the rental and sale of specific
items in the Company's Instrument Rental & Distribution inventory and the cost
of maintaining inventory in ready to use condition. In addition, the Company's
rentals of analytical instruments are generally of short duration and the
Company's ability to profit from its investment in analytical instruments held
for rental is dependent in large part on its ability to continue to rent or
profitably sell such equipment. A decline in the demand for such equipment or
failure to rent or profitably sell such equipment could have a material
adverse effect on the Company's financial condition and results of operations.
See "Business--Instrument Rental & Distribution Activities."
DEPENDENCE ON VENDOR RELATIONSHIP
A material portion of the Company's net revenues and net income from its
Instrument Rental & Distribution activities depends on its relationship with
Hewlett-Packard as a distributor. In 1994, 1995 and 1996, approximately 46%,
52% and 46%, respectively, of the Company's net revenues were derived from the
rental, leasing and sales of analytical instruments manufactured by Hewlett-
Packard. The Company's agreement with Hewlett-Packard is renewable annually
and the current term expires on September 30, 1997. In the event that the
Company's relationship with Hewlett-Packard were to be terminated, such
failure could have a material adverse effect on the Company's financial
condition and results of operations. See "Business--Instrument Rental &
Distribution Activities."
ABILITY TO SUSTAIN INCREASING VOLUMES OF RECEIVABLES
The Company's ability to sustain continued growth is dependent on its
capacity to attract, evaluate, finance, acquire and service increasing volumes
of leases of suitable yield and credit quality. Accomplishing this on a cost-
effective basis is largely a function of the Company's ability to market its
products effectively, to manage the credit evaluation process to assure
adequate portfolio quality, to provide competent, attentive and efficient
servicing and to maintain access to institutional financing sources to achieve
an acceptable cost of funds for its financing programs. Failure by the Company
to do any of these things could have a material adverse effect on the
Company's financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Business--Lease Portfolio Composition--
Capital Resources and Securitizations."
9
<PAGE>
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of members of its senior management, particularly Messrs.
Zimmerman, Laing and Palles, as well as other officers and key personnel, many
of whom would be difficult to replace. The future success of the Company also
depends, in part, on its ability to identify, attract and retain additional
qualified personnel. Although the Company has employment agreements with
Messrs. Zimmerman, Laing and Palles, and maintains key man life insurance on
Messrs. Zimmerman and Palles, the loss of any of such executives or of other
officers or key personnel could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management."
DEPENDENCE ON EXTERNAL FINANCING
The Company funds substantially all of the equipment leases that it acquires
or originates through its warehouse facilities. The Company depends on the
pooling of leases in securitizations for refinancing of amounts outstanding
under its warehouse facilities. Any adverse impact on the Company's ability to
complete securitizations, or to otherwise permanently finance its leases,
could have a material adverse effect on the Company's ability to obtain or
maintain warehouse financing facilities or the amount available under such
facilities. Any failure by the Company to renew its existing warehouse
facilities or obtain additional warehouse facilities or other financings with
pricing, advance rates and other terms consistent with its existing facilities
could have a material adverse effect on the Company's financial condition and
results of operations.
Several factors affect the Company's ability to complete securitizations,
including conditions in the securities markets generally, conditions in the
asset-backed securities markets, the credit quality of the Company's lease
portfolio, compliance of the Company's leases with the eligibility
requirements established in connection with the securitizations, the Company's
ability to obtain third-party credit enhancement and the ability of the
Company to adequately service its lease portfolio. Any substantial reduction
in the availability of the securitization market for the Company's leases or
any adverse change in the terms of such securitizations could have a material
adverse effect on the Company's financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
INTEREST RATE RISKS
Leases originated or acquired by the Company are non-cancelable and require
payments to be made by the lessee at fixed rates for specified terms. The
rates charged by the Company are based on interest rates prevailing in the
market at the time of lease commencement or acquisition. Until the Company's
leases are securitized or otherwise sold or permanently financed, the Company
generally funds such leases under its warehouse facilities or from working
capital. Should the Company be unable to securitize or otherwise sell or
permanently finance leases with fixed rates within a reasonable period of time
after funding, the Company's operating margins could be adversely affected by
increases in interest rates. The Company expects to undertake to hedge against
the risk of interest rate increases when its equipment lease portfolio exceeds
certain amounts. Such hedging activities limit the Company's ability to
participate in the benefits of lower interest rates with respect to the hedged
portfolio of leases. In addition, there can be no assurance that the Company's
hedging activities will adequately insulate the Company from interest rate
risks. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
RISKS RELATED TO RESIDUAL VALUES
The Company retains a residual interest in the equipment covered by certain
of its leases. The estimated fair market value of the equipment at the end of
the contract term of the lease, if any, is reflected as an asset on the
Company's balance sheet. The Company's results of operations depend, to some
degree, upon its ability to realize these residual values. Realization of
residual values depends on many factors, several of which are outside
10
<PAGE>
the Company's control, including general market conditions at the time of
expiration of the lease, whether there has been unusual wear and tear on, or
use of, the equipment, the cost of comparable new equipment, the extent, if
any, to which the equipment has become technologically or economically
obsolete during the contract term and the effects of any additional or amended
government regulations. If, upon the expiration of a lease, the Company sells
or refinances the underlying equipment and the amount realized is less than
the recorded value of the residual interest in such equipment, a loss
reflecting the difference will be recognized and could have a material adverse
effect on the Company's financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Lease Portfolio Composition."
ACQUISITION RISKS
An important component of the Company's growth strategy is the acquisition
of equipment leasing and rental companies. The inability of the Company to
identify suitable acquisition candidates or to complete acquisitions on
acceptable terms could adversely affect the Company's ability to expand its
business. Acquisitions made by the Company may result in potentially dilutive
issuances of equity securities, the incurrence of additional debt and expenses
related to goodwill and other intangible assets. The Company also may
experience difficulties in the assimilation of the operations, services,
products and personnel of acquired companies, an inability to sustain or
improve the historical levels of revenue and profitability of acquired
companies, the diversion of management's attention from ongoing business
operations and the potential loss of key employees of such acquired companies.
The Company currently has no agreements with regard to any acquisitions and
there can be no assurance that any will be consummated. See "Business--
Portfolio Finance & Lessor Acquisition Activities."
RISKS RELATED TO EQUITY PARTICIPATION RIGHTS
The Company frequently obtains warrants or other equity participation rights
in its Select Growth Leasing clients. While the Company generally makes no
material investment in these rights and does not assign a material carrying
value to them, failure of the Company to realize gains from their sale may
have a material adverse effect on the future growth of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
INDUSTRY CONCENTRATION
A substantial portion of the Company's revenues are derived from customers
in the healthcare, information technology and environmental services
industries. To the extent that such industries are adversely affected by
economic or regulatory factors, the Company's results of operation and
financial condition may be adversely impacted. See "Business."
COMPETITION
The Company competes with leasing companies, commercial banks and other
financial institutions to provide lease financing to clients and to acquire
other leasing portfolios and leasing companies. In addition, the Company's
competitors in its Instrument Rental & Distribution activities include
manufacturers of analytical instruments. A substantial number of the Company's
competitors are significantly larger and have greater resources than the
Company. See "Business--Competition."
FLUCTUATIONS IN QUARTERLY RESULTS
The Company may experience significant fluctuations in quarterly operating
results due to a number of factors, including, among others, the timing and
volume of origination of leases, the size and timing of completion of
securitizations and the timing of sale of equity participation rights in
customers.
11
<PAGE>
CONCENTRATION OF OWNERSHIP
Upon completion of this Offering, Mr. Zimmerman and members of his family
will beneficially own (including shares held by other members of management
for which Mr. Zimmerman holds proxies) approximately 54.0% of the outstanding
shares of Common Stock (approximately 50.8% if the Underwriters' over-
allotment option is exercised in full). Accordingly, these stockholders will
have the ability to control or significantly influence all matters requiring
approval by the stockholders of the Company, including the election of
directors and approval of significant corporate transactions. Such a level of
ownership may have the effect of delaying, deferring, or preventing a change
in the control of the Company. See "Principal Stockholders" and "Description
of Capital Stock--Proxies and Rights of First Refusal."
SUBSTANTIAL DILUTION
Investors in the Common Stock offered hereby will experience immediate and
substantial dilution in net tangible book value per share of $8.10. See
"Dilution."
ABSENCE OF DIVIDENDS
Following the Offering, the Company intends to retain earnings to finance
the growth and development of its business. Additionally, the Senior Credit
Facility contains certain restrictions on the Company's ability to pay
dividends on its Common Stock. Accordingly, the Company does not anticipate
paying cash dividends on the Common Stock in the foreseeable future. See
"Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 4,824,326 shares of
Common Stock outstanding. The shares of Common Stock offered hereby will be
freely tradeable without restriction or further registration under the
Securities Act of 1933 (the "Securities Act"), except for shares sold by
persons deemed to be "affiliates" of the Company or acting as "underwriters,"
as those terms are defined in the Securities Act. Following the expiration of
the lock-up period described below, all of the remaining outstanding shares of
Common Stock will be freely tradeable subject to the restrictions on resale
imposed upon "affiliates" by Rule 144 under the Securities Act. The Company,
its executive officers and directors and certain other stockholders of the
Company have agreed not to sell, offer to sell, contract to sell, pledge or
otherwise dispose of or transfer any shares of Common Stock, or any securities
convertible into or exchangeable or exercisable for, or any rights to purchase
or acquire, Common Stock for a period of 180 days commencing on the date of
this Prospectus without the prior written consent of Furman Selz LLC, other
than the issuance of options to purchase Common Stock or shares of Common
Stock issuable upon the exercise thereof in connection with the Company's
stock option plans, provided that such shares shall not be transferable prior
to the end of the 180-day period, and other than the issuance by the Company
of capital stock in connection with acquisitions, provided that such shares
shall not be transferable prior to the end of the 180-day period. See "Shares
Eligible for Future Sale" and "Underwriting."
NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
There can be no assurance that an active market for the Common Stock will
develop upon completion of the Offering or, if developed, that such market
will be sustained. The initial public offering price of the Common Stock was
determined through negotiations between the Company and the representatives of
the underwriters and may bear no relationship to the market price of the
Common Stock after the Offering. Prices for the Common Stock after the
Offering may be influenced by a number of factors, including the liquidity of
the market for the Common Stock, investor perceptions of the Company and the
specialty financing industry in general and general economic and other
conditions. Sales of substantial amounts of Common Stock in the public market
subsequent to the Offering could adversely affect the market price of the
Common Stock. For information relating to the factors considered in
determining the initial public offering price, see "Underwriting." The trading
price of the Common Stock could be subject to wide fluctuations in response to
variations in financial estimates by securities analysts and other events or
facts. See "Underwriting."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the issuance and sale of
the Common Stock offered hereby, after deducting the underwriting discount and
estimated offering expenses, are estimated (based upon the midpoint of the
Offering price range set forth on the cover page of this Prospectus) to be
approximately $27.3 million, or $31.5 million if the Underwriters' over-
allotment option is exercised in full. All of such net proceeds will be used
to repay indebtedness under the Company's Senior Credit Facility, including
approximately $4.9 million borrowed to redeem the Subsidiary Preferred Stock
and approximately $0.8 million borrowed to purchase certain executive's
minority interests in a subsidiary of the Company. See "Certain Transactions."
Borrowings under the current Senior Credit Facility bear interest at the prime
rate established from time to time by Fleet Bank, N.A. as its primary lender
plus up to 0.50% depending on certain financial tests or, at the Company's
option, LIBOR plus 1.75% to 2.25% depending on such tests and mature on July
15, 1998. As of June 30, 1997, the weighted average interest rate on
borrowings under the Senior Credit Facility was approximately 7.9%. Upon
consummation of the Offering, the Company expects that the Senior Credit
Facility will be amended to reduce such interest rates, increased borrowing
availability and establish a securitization facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
13
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1997 and as adjusted to give effect to (i) the borrowing of
approximately $4.9 million under the Senior Credit Facility to redeem the
Subsidiary Preferred Stock and approximately $0.8 million borrowed to purchase
certain executives' minority interests in a subsidiary of the Company; (ii)
the repayment by an affiliated company of its portion of the borrowings under
the Senior Credit Facility; (iii) the Offering; and (iv) the application of
the estimated net proceeds from the Offering to repay the Company's
indebtedness under the Senior Credit Facility. This table should be read in
conjunction with the financial information appearing elsewhere in this
Prospectus. See "Use of Proceeds" and "Certain Transactions."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
--------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Debt:
Senior credit facility and other senior notes payable... $46,763 $21,723
Recourse debt........................................... 2,386 2,386
Non-recourse debt....................................... 6,913 6,913
Subordinated debentures................................. 5,251 5,251
------- -------
Total debt (1)........................................ 61,313 36,273
------- -------
Redeemable subsidiary preferred stock; none outstanding as
adjusted................................................. 4,869 --
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; none outstanding........................... -- --
Common stock, $0.001 par value; 15,000,000 shares
authorized; 2,824,326 shares outstanding; as adjusted
4,824,326 shares outstanding (2)....................... 3 5
Additional paid-in capital.............................. 6,302 33,600
Deferred compensation from issuance of options.......... (221) (221)
Stock note receivable................................... (497) (497)
Treasury stock.......................................... (287) (287)
Unrealized gain on securities........................... 328 328
Retained earnings....................................... 1,532 1,532
------- -------
Total stockholders' equity............................ 7,160 34,460
------- -------
Total capitalization.................................. $73,342 $70,733
======= =======
</TABLE>
- --------
(1) See Note 7 to the Consolidated Financial Statements appearing elsewhere
herein.
(2) Does not include 475,000 shares of Common Stock reserved for issuance
under the Company's 1997 Stock Option Plan and Non-Employee Director
Option Plan and 175,674 shares reserved for issuance under options
previously granted under its 1994 Stock Option Plan. See "Management--
Stock Option Plans."
14
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1997,
after giving effect to the redemption of the Subsidiary Preferred Stock using
additional borrowings under the Senior Credit Facility, was $6.0 million or
$2.11 per share of Common Stock. Net tangible book value per share represents
the amount of total tangible assets less total liabilities, divided by the
number of shares of Common Stock outstanding. After giving effect to the sale
by the Company of the shares of Common Stock offered hereby and the
application of the estimated net proceeds therefrom, the pro forma net
tangible book value of the Company at June 30, 1997 would have been $33.3
million or $6.90 per share. This represents an immediate increase in net
tangible book value of $4.79 per share to existing stockholders and an
immediate dilution in net tangible book value of $8.10 per share to purchasers
of Common Stock in the Offering ("New Investors"). The following table
illustrates the dilution in net tangible book value per share to New
Investors:
<TABLE>
<S> <C> <C>
Initial public offering price...................................... $15.00
Pro forma net tangible book value per share at June 30, 1997..... $2.11
Increase per share attributable to New Investors................. 4.79
-----
Pro forma net tangible book value per share after the Offering..... 6.90
------
Net tangible book value dilution per share to New Investors........ $ 8.10
======
</TABLE>
The following table sets forth as of June 30, 1997, the difference between
existing stockholders and New Investors with respect to the number of shares
purchased from the Company, the total consideration paid to the Company and
the average price paid per share, giving pro forma effect to the sale of
Common Stock offered hereby:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE PAID
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 2,824,326 58.5% $ 5,300,000 15.0% $ 1.88
New Investors.................. 2,000,000 41.5 30,000,000 85.0 15.00
--------- ----- ----------- -----
Total...................... 4,824,326 100.0% $35,300,000 100.0%
========= ===== =========== =====
</TABLE>
15
<PAGE>
DIVIDEND POLICY
Following the Offering, the Company intends to retain any earnings for use
in the operation and expansion of its business and therefore does not
anticipate declaring any cash dividends in the foreseeable future. The payment
of dividends, if any, will be made at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's future
earnings, operations, capital requirements and financial condition, as well as
general business conditions and other factors. The Senior Credit Facility also
contains provisions limiting the Company's ability to pay dividends. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Liquidity and Capital Resources."
16
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating data for the
Company as of the dates and for the periods indicated. Data relating to certain
assets not used in the Company's business as described herein, and which will
be distributed to certain stockholders prior to consummation of the Offering,
have been excluded from the amounts. The selected financial data as of and for
the years ended December 31, 1994, 1995 and 1996 and as of and for the six
months ended June 30, 1997 are derived from financial statements audited by
KPMG Peat Marwick LLP. The selected pro forma statement of operations data
gives effect to (i) the borrowing of approximately $4.9 million under the
Senior Credit Facility to redeem the Subsidiary Preferred Stock and
approximately $0.8 million borrowed to purchase certain executives' minority
interests in a subsidiary of the Company; (ii) the repayment by an affiliated
company of its portion of the borrowings under the Senior Credit Facility;
(iii) the Offering; (iv) the application of the estimated net proceeds from the
Offering to repay the Company's indebtedness under the Senior Credit Facility;
and (v) anticipated changes in the compensation of senior management. See "Use
of Proceeds," "Management--Employment and Non-Competition Agreements" and
"Certain Transactions." The selected pro forma data is not necessarily
indicative of results which would have been obtained had these events actually
occurred or of the Company's future results. This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and notes
thereto included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- --------------
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues:
Sales of equipment..... $8,060 $10,596 $15,836 $13,852 $22,595 $9,962 $10,252
Cost of equipment sold. 6,828 8,992 13,312 11,477 18,242 7,988 8,222
------ ------- ------- ------- ------- ------ -------
Gross profit from sales
of equipment.......... 1,232 1,604 2,524 2,375 4,353 1,974 2,030
Rental and operating
lease revenue......... 8,071 7,464 8,531 9,102 7,167 3,803 3,164
Direct finance lease
income................ -- -- 339 1,467 3,055 1,289 2,598
Fee income............. -- -- 580 2,378 1,869 1,130 648
Gain on remarketing of
leased equipment...... -- -- 5 44 450 13 277
Gain on equity
participation rights.. -- -- -- -- 263 -- 97
Interest and other
income................ -- -- 352 778 657 350 779
------ ------- ------- ------- ------- ------ -------
Total net revenues..... 9,303 9,068 12,331 16,144 17,814 8,559 9,593
------ ------- ------- ------- ------- ------ -------
Expenses:
Selling, general and
administrative........ 4,480 5,257 6,842 7,524 8,008 3,717 3,963
Interest............... 782 995 1,138 1,962 2,771 1,304 1,844
Depreciation of
equipment............. 2,627 2,822 3,512 4,054 3,647 1,892 1,858
Provision for credit
losses................ 166 35 247 1,060 749 338 479
------ ------- ------- ------- ------- ------ -------
Total expenses......... 8,055 9,109 11,739 14,600 15,175 7,251 8,144
------ ------- ------- ------- ------- ------ -------
Net income before
provision for income
taxes and minority
interest............... 1,248 (41) 592 1,544 2,639 1,308 1,449
Income tax expense...... 494 4 257 747 1,084 532 534
------ ------- ------- ------- ------- ------ -------
Net income before
minority interest...... 754 (45) 335 797 1,555 776 915
Minority interest....... 291 141 338 292 498 228 202
------ ------- ------- ------- ------- ------ -------
Net income (loss)....... $ 463 $ (186) $ (3) $ 505 $ 1,057 $ 548 $ 713
====== ======= ======= ======= ======= ====== =======
Net income (loss) per
common share........... $ 0.16 $ (0.06) $ -- $ 0.17 $ 0.34 $ 0.18 $ 0.24
Shares used in computing
net income (loss) per
common share........... 2,924 2,932 3,022 3,011 3,070 3,018 2,976
Pro forma information:
Net income before provision for income taxes.......... $ 4,189 $2,083 $ 2,437
Net income............................................ 2,486 1,240 1,517
Net income per common share........................... $ 0.49 $ 0.25 $ 0.30
Shares used in computing net income per common share.. 5,070 5,018 4,976
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Leasing:
Lease originations..... $ -- $ 9,548 $21,642 $20,479 $24,073 $11,518 $26,886
Backlog of unfunded
leases (1)............ -- 5,153 8,351 8,609 5,864 6,447 19,860
Net investment in
direct finance leases
(1)................... -- -- 8,296 17,144 31,763 23,700 43,395
Net charge-off
percentage (2)........ -- -- 0.1% 0.6% 0.9% -- 0.1%
Rental and Distribution:
Net margin on sales of
equipment............. 15.3% 15.1% 15.9% 17.1% 19.3% 19.8% 19.8%
Equipment held for
rental and operating
leases, net (1)....... $12,611 $13,840 $15,780 $18,500 $15,048 $15,579 $16,087
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
--------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets:
Net investment in
direct finance leases. $ -- $ -- $ 8,296 $17,144 $31,763 $23,700 $43,395
Equipment held for
rental and operating
leases, net........... 12,611 13,840 15,780 18,500 15,048 15,579 16,087
Receivable from
affiliate............. -- -- 2,224 6,007 3,624 2,707 3,375
Accounts and notes
receivable............ 3,141 2,944 4,679 4,655 8,235 7,667 9,703
Deferred income taxes.. 2,235 2,403 2,502 1,995 1,310 1,628 1,068
Goodwill............... 882 875 869 862 851 876 1,188
Other assets........... 1,071 1,641 1,677 4,419 3,523 4,054 4,020
Cash and cash
equivalents........... 10 9 90 1,668 -- -- --
------- ------- ------- ------- ------- ------- -------
Total assets.......... $19,950 $21,712 $36,117 $55,250 $64,354 $56,211 $78,836
======= ======= ======= ======= ======= ======= =======
Liabilities and
Stockholders' Equity:
Senior credit facility
and other senior notes
payable............... $11,541 $10,917 $19,400 $31,914 $29,605 $27,547 $46,763
Recourse debt.......... -- -- -- 882 3,361 727 2,386
Non-recourse debt...... -- -- -- 4,997 8,276 4,122 6,913
Accounts payable....... 1,021 1,182 3,685 1,518 4,355 4,691 3,805
Accrued expenses and
customer deposits..... 767 1,039 2,245 2,147 2,534 2,060 1,689
Subordinated
debentures............ 4,449 4,599 4,767 4,953 5,127 5,013 5,251
------- ------- ------- ------- ------- ------- -------
Total liabilities..... 17,778 17,737 30,097 46,411 53,258 44,160 66,807
Redeemable preferred
stock of subsidiary... 1,683 3,183 3,183 4,025 4,718 5,689 4,869
Stockholders' equity... 489 792 2,837 4,814 6,378 6,362 7,160
------- ------- ------- ------- ------- ------- -------
Total liabilities and
stockholders' equity. $19,950 $21,712 $36,117 $55,250 $64,354 $56,211 $78,836
======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------
(1) At period end.
(2) As a percentage of net investment in direct finance leases before allowance
for doubtful accounts.
18
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this section should be read in conjunction with
the Consolidated Financial Statements and notes thereto appearing in this
Prospectus.
INTRODUCTION
The Company has engaged and will engage in several types of financial
transactions, each of which is reflected in a different manner in the
Company's financial statements. In its Select Growth Leasing activities,
substantially all of the leases are direct finance leases and the Company
currently funds these leases primarily with recourse and non-recourse debt. In
its Instrument Rental & Distribution activities, the Company rents and sells
new and used instruments and funds such activities primarily through its
revolving credit facility. Substantially all of the leases involved in the
Company's Portfolio Finance & Lessor Acquisition activities will also be
direct finance leases. The Company will fund such activities through its
warehouse and securitization facilities. The following briefly describes some
of the principal accounting practices applicable to the Company's business.
Direct Finance Leases. Direct finance leases transfer substantially all
benefits and risks of equipment ownership to the lessee. A lease is accounted
for as a direct finance lease if the collectibility of lease payments is
reasonably certain and it meets one of the following criteria: (i) the lease
transfers ownership of the equipment to the lessee by the end of the lease
term; (ii) the lease contains a bargain purchase option; (iii) the lease term
at inception is at least 75% of the estimated economic life of the leased
equipment; or (iv) the present value of the minimum lease payments is at least
90% of the fair value of the leased equipment at inception of the lease. The
present value of the future lease payments and the present value of the
residual value are recorded as the initial investment in such leases. This
initial investment generally represents the cost of leased equipment. Unearned
lease income is equal to the difference between (i) the future lease payments
and residual value and (ii) their corresponding present values. Unearned lease
income is amortized and recorded as revenue over the term of the lease by
applying a constant periodic rate of return to the declining net investment.
Initial direct costs incurred in originating leases, such as salaries for
marketing personnel and commissions, are capitalized as part of the net
investment in direct finance leases and amortized over the lease term. The
Company records direct finance lease receivables as "Net investment in direct
finance leases." At the end of the lease, a remarketing gain or loss is
recorded to the extent the proceeds of sale of the equipment exceed or are
less than the originally estimated residual value. When the Company leases
analytical instruments under direct finance leases, such leases are accounted
for in the same way except that the Company records the sales value of the
instruments as revenue and the carrying value as cost of equipment sold, thus
recognizing its distribution margin. The Company's direct finance lease income
has increased substantially over the last three years due to increased
marketing and selling activities.
Rentals and Operating Leases. All rental and lease contracts which do not
meet the criteria of direct finance leases are accounted for as operating
leases. Rental arrangements are for fewer than 12 months and operating leases
have longer terms. Monthly rental and lease payments are recorded as "Rental
and operating lease revenue." Rental and leased equipment is recorded at the
Company's cost as "Equipment held for rental and operating leases" and
depreciated on a straight-line basis. The Company depreciates analytical
instruments over a seven-year life, assuming no salvage or residual value at
the end of such period. The Company has realized gains from the sale of used
analytical instruments in each year since the inception of its Instrument
Rental & Distribution activities. Rental and operating lease revenue has
decreased in the recent past due to the consolidation of the environmental
testing industry and the tendency of larger environmental testing companies to
purchase, rather than rent, analytical instruments. This trend, in addition to
the Company's increased market penetration of pharmaceutical and biotechnology
industries, which customers also typically purchase analytical instruments,
have resulted in a significant increase in sales of equipment since 1995.
Equity Participation Rights. The Company frequently receives warrants or
other equity participation rights from Select Growth Leasing clients in
connection with its leases to them. Such warrants or rights entitle the
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Company to purchase common stock or other equity securities of the client at a
price generally based on the most recent price paid by the client's private
equity investors. The Company typically obtains the right to have such shares
included in registered public offerings of the client's stock. At the time of
receipt, the warrant or other equity participation right is recorded as an
investment. The Company does not recognize gain or loss on such securities
until they are sold. The Company periodically evaluates its portfolio of
equity participation rights and expects to sell its equity participation
rights as its portfolio companies mature based on its evaluation of the market
trends for the related clients' equity securities. As of June 30, 1997, the
Company held equity participation rights in 39 companies, 13 of which were
publicly traded.
Realization of Residual Values. Residual values are estimated at the
inception of a lease and reviewed periodically over the term of the lease.
Estimated residual values of leased equipment may be adjusted downward, but
not increased. Decreases in estimated residual values are made as the change
in residual value becomes apparent and are reflected by increased depreciation
expense for operating leases or by decreased earned lease income for direct
finance leases. When equipment is sold, the net proceeds realized in excess of
the estimated residual value are recorded as a "Gain on remarketing of leased
equipment," or the amount by which the estimated residual value exceeds the
net proceeds is recorded as a loss. To date, the Company has not had a net
loss from the realization of residual values for any quarterly period.
Servicing Fees. The Company has engaged in the business of servicing lease
portfolios originated by third parties since 1992, but because of the Non-
Compete Agreement has not entered into a new agreement to service leases for
third parties since December 1994. The Company expects to reinitiate this
activity in connection with its Portfolio Finance & Lessor Acquisition
activities following expiration of the Non-Compete Agreement in September
1997. In addition, the Company expects to realize servicing revenue from the
securitizations that it expects to complete in the future. Revenues from these
activities are classified as "Fee income."
Securitizations of Lease Portfolios. Prior to the 1994 Sale, the Company
permanently financed the substantial majority of its origination of healthcare
equipment leases and acquisition of lease portfolios through securitizations.
Following the expiration of the Non-Compete Agreement, the Company intends to
securitize the leases it acquires or originates. In a securitization
transaction, the Company sells a pool of leases to a wholly-owned, special
purpose subsidiary. The special purpose subsidiary simultaneously transfers an
interest in the leases to a trust which issues beneficial interests in the
trust. These beneficial interests may be of a single class or of multiple
classes of senior and subordinated securities. The Company generally retains
the right to receive any excess cash flows of the trust. When the Company
sells leases in securitizations, it will recognize gain equal to the excess of
the net proceeds from the sale of the securities, after deducting issuance
expenses, over the cost basis of such leases.
Provision for Credit Losses. Each of the Company's activities involves risk
of credit loss. Management evaluates the collectibility of the Company's
leases based on the creditworthiness of the related lessee, delinquency
statistics, historical loss experience, current economic conditions and other
relevant factors. The Company provides an allowance for credit losses at the
time that the lease commences and periodically evaluates the related reserve
for credit losses, based on then current delinquency experience and the
financial status of its lessees. As of June 30, 1997, the Company had loss
reserves of 4.9% of its net investment in Select Growth Leasing receivables,
which was well in excess of its historical experience of credit losses.
Net Operating Losses. As of June 30, 1997, the Company had net operating
loss carry-forwards available to reduce future taxable income of $17.7
million.
RESULTS OF OPERATIONS
Six Months ended June 30, 1997 Compared to Six Months ended June 30, 1996
Sales of equipment increased from $10.0 million to $10.3 million, while
rental and operating lease revenue declined from $3.8 million to $3.2 million.
These changes were primarily a result of the increase in market penetration in
the pharmaceutical and biotechnology industries and consolidation in the
environmental testing industry. In addition, the Company believes that sales
of equipment in the first half of 1996 were unseasonably high due to a number
of large sales in June 1996.
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Cost of equipment sold increased from $8.0 million to $8.2 million. Net
margin on sales of analytical instruments was 19.8% in the 1996 period and
19.8% in the 1997 period.
Direct finance lease income increased from $1.3 million to $2.6 million as a
result of a substantially higher level of finance lease receivables
outstanding. Net investment in direct finance leases increased from $23.7
million to $43.4 million due to increased marketing and selling activities.
New lease originations increased 130% and backlog of unfunded lease
commitments increased 208% from period to period.
As a consequence of the continuing decline in the number of leases serviced
by the Company for unrelated parties due to the Non-Compete Agreement, which
expires in September 1997, fee income declined from $1.1 million to $0.6
million.
During the first six months of 1997, gains on remarketing of leased
equipment of $0.3 million were realized. The increase in gains from the
comparable period in 1996 resulted from increased lease maturities in 1997.
During the first six months of 1997, the Company sold certain of its equity
participation rights realizing a gain of $0.1 million. No equity participation
rights were sold during the 1996 period.
Other income, which consists primarily of interest income and fees earned in
connection with Select Growth Leasing commitments, increased from $0.4 million
to $0.8 million. This was attributable to an increase in interest income
associated with the increase in interest-bearing notes receivable held by the
Company, as well as increased fees related to its Select Growth Leasing
activities.
Selling, general and administrative expenses increased from $3.7 million to
$4.0 million due primarily to increases in operations, marketing and sales
personnel associated with the Company's Select Growth Leasing activities and
preparation for the re-initiation of Portfolio Finance & Lessor Acquisition
activities, as well as increases in information systems expenditures.
Interest expense increased from $1.3 million to $1.8 million due primarily
to increased direct finance lease originations and the resulting increase in
average borrowings.
Depreciation of equipment, primarily depreciation of analytical instruments,
was $1.9 million in both periods.
The provision for credit losses increased from $0.3 million to $0.5 million
due to the volume of new leases originated. However, such provision declined
from 1.4% to 1.1% of direct finance lease receivables at the end of the
respective periods, as a result of the continued increase in the Company's
outstanding direct finance lease portfolio described above.
The Company's effective tax rate decreased from 40.7% to 36.9% resulting
from a reduction in the applicable state income tax rates in 1997 and the
corresponding reduction in deferred taxes for prior periods.
1996 Compared to 1995
Sales of equipment increased from $13.9 million to $22.6 million, while
rental and operating lease revenue declined from $9.1 million to $7.2 million.
These changes were a result of the increase in market penetration in the
pharmaceutical and biotechnology industries and consolidation in the
environmental testing industry.
Cost of equipment sold increased from $11.5 million to $18.2 million. Net
margin on sales of analytical instruments increased from 17.1% to 19.3%
primarily due to a favorable change in product mix from the prior period.
Direct finance lease income increased from $1.5 million to $3.1 million
which resulted from a substantially higher level of finance lease receivables
outstanding. Net investment in direct finance leases increased from $17.1
million to $31.8 million due to increased marketing and selling activities.
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As a consequence of the decline in the number of leases serviced by the
Company for unrelated parties due to the Non-Compete Agreement, which expires
in September 1997, fee income declined from $2.4 million to $1.9 million.
Gains from remarketing of leased equipment increased from $44,000 to $0.5
million as a consequence of increased lease maturities in 1996.
Gain on equity participation rights for 1996 was $0.3 million. No gains were
realized in 1995. The change is a reflection of the growing maturity of the
Company's Select Growth Leasing portfolio.
Selling, general and administrative expenses increased from $7.5 million to
$8.0 million due primarily to increases in operations, marketing and sales
personnel associated with the Company's Select Growth Leasing and Instrument
Rental & Distribution activities.
Interest expense increased from $2.0 million to $2.8 million due primarily
to increased direct finance lease originations and the resulting increase in
average borrowings.
Depreciation of equipment declined from $4.1 million to $3.6 million
primarily due to a decrease of $3.5 million in inventory held for rental.
The provision for credit losses declined from $1.1 million to $0.7 million
primarily due to a decline in anticipated lease charge-offs.
The Company's effective tax rate decreased from 48.4% to 41.1% due to a
decrease in nondeductible expenses.
1995 Compared to 1994
Sales of equipment declined in 1995 from $15.8 million to $13.9 million
while rental and operating lease revenue increased from $8.5 million to $9.1
million. The decline in sales of equipment was attributable to reduced demand
by environmental laboratories. The increase in rental revenue was primarily
attributable to the addition of a large customer during this period.
Cost of equipment sold declined from $13.3 million to $11.5 million
reflecting the decline in sales of analytical instruments. Net margin on the
sale of analytical instruments increased from 15.9% to 17.1% due to higher
manufacturer discounts as a result of higher volume of purchases by the
Company.
Direct finance lease income increased from $0.3 million in 1994 to $1.5
million in 1995 due to an increase in the Company's net investment in direct
finance leases from $8.3 million to $17.1 million. While leases funded in 1995
remained relatively unchanged from 1994 levels, the majority of the leases
funded in 1994 were sold in that year to an unaffiliated entity, while in
1995, all of the Company's lease originations were retained.
Fee income increased from $0.6 million in 1994 to $2.4 million in 1995. This
was attributable to the acquisition by the Company in December 1994 of a
contract to service a lease portfolio on behalf of a group of financial
institutions, as well as the increase in the number of leases serviced on
behalf of an unrelated entity.
Selling, general and administrative expenses increased from $6.8 million to
$7.5 million. This was attributable primarily to the increase in staffing of
the Company's Select Growth Leasing activities.
Interest expense increased from $1.1 million to $2.0 million, reflecting
higher borrowings attributable to the increase in direct finance leases and
rental inventory.
Depreciation of equipment increased from $3.5 million to $4.1 million
primarily as a result of the increase in the Company's net investment in its
analytical instrument rental portfolio.
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The provision for credit losses increased from $0.2 million to $1.1 million
due to an increase in net investment in direct finance leases and a partial
charge-off of one lease resulting from a default.
The Company's effective tax rate increased from 43.4% to 48.4% due to an
increase in nondeductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company's Select Growth Leasing and Instrument Rental & Distribution
activities are capital intensive and require access to a substantial amount of
credit to fund new equipment leases. The Company has funded its operations
primarily through cash flow from operations, borrowings under the Senior
Credit Facility, non-recourse and recourse loans and the sale of equity to the
Company's existing stockholders. The Company will continue to require access
to significant additional capital to maintain and expand its volume of leases
originated and portfolio of rental equipment as well as re-initiate its
Portfolio Finance & Lessor Acquisition activities. The Company believes that
cash flow from its operations, the net proceeds of the Offering, the net
proceeds from future securitization transactions and other borrowings and
amounts available under its Senior Credit Facility will be sufficient to fund
the Company's operations for the foreseeable future.
Cash Flow
Cash flows from operating and financing activities are generated primarily
from receipts on direct finance leases and rentals of analytical instruments,
gross profit on the sale of analytical instruments, realization of residual
values and the financing of new lease originations and rental inventory. Cash
flows from such activities were $12.3 million for the first six months of 1996
and $22.6 million for the first six months of 1997 and for 1994, 1995 and 1996
were $14.7 million, $25.8 million and $28.0 million, respectively. The period
to period increases result primarily from the growth in the Company's Select
Growth Leasing direct finance lease activities.
Credit Facilities
The Company utilizes secured warehouse, revolving credit and term loan
facilities provided to it under the Senior Credit Facility by a group of
banks, including Fleet Bank N.A. as agent, to fund the acquisition and
origination of leases and the purchase of analytical instruments. As of June
30, 1997, the Company had a maximum of $54.5 million available for borrowing
under the Senior Credit Facility, of which the Company had borrowed $45.1
million. In July 1997, the amount available under the Senior Credit Facility
was increased to $75.0 million. Borrowings under the Senior Credit Facility
bear interest at LIBOR plus 1.75% to 2.25% or, at the Company's option, the
rate established by Fleet Bank, N.A. as its prime rate plus up to 0.50%
dependent on certain leverage ratio tests. Upon completion of the Offering,
the Company expects that the Senior Credit Facility will be increased to $100
million and the interest rate will be reduced. The Senior Credit Facility will
mature and may be converted to a term loan on July 21, 1998.
Recourse and Non-Recourse Debt
Since 1995, the Company has permanently financed a substantial portion of
the direct finance leases originated in its Select Growth Leasing and
Instrument Rental & Distribution activities using secured recourse and non-
recourse loans provided by financial institutions. The interest rate on these
loans range from 8.18% to 9.07% and they mature on various dates from June
1999 to August 2002.
Securitizations
The Company intends to capitalize on its management's prior experience in
securitizations. Upon completion of the Offering, the Company expects to
obtain commitments for up to $100 million in available securitization
facilities. The securitization facilities will provide for transfer of
eligible leases to a special purpose subsidiary not less frequently than
monthly. The terms of the these facilities will permit the securitization of
substantially all of the leases originated in the Company's Portfolio Finance
& Lessor Acquisition activities and Instrument Rental & Distribution
activities as well as the substantial majority of the leases originated in the
Company's Select Growth Leasing activities. See "Business--Capital Resources
and Securitizations."
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BUSINESS
GENERAL
The Company is a finance company specializing in the origination,
acquisition, securitization and servicing of equipment leases and in the
rental and distribution of analytical instruments. The Company's principal
businesses are (i) the direct origination of leases of a broad range of
equipment to emerging growth companies primarily serving the healthcare and
information technology industries and (ii) the rental and distribution of
analytical instruments to companies serving the environmental, chemical,
pharmaceutical and biotechnology industries. The Company believes that its
position as a leading provider of equipment leasing, rental and other services
to its specialized markets provides significant opportunities for internal
growth, as well as growth through the acquisition and financing of lease
portfolios originated by other lessors and the acquisition of leasing
companies which can capitalize on the existing capabilities and significant
management experience of the Company. The Company believes that its extensive
experience in these markets and its flexibility in structuring transactions to
meet the needs of both its leasing and rental customers provide it with a
competitive advantage over other sources of such services. For information
regarding segment reporting, see Note 13 to the Consolidated Financial
Statements.
BACKGROUND
The Company's management team has extensive experience in the development of
specialty finance companies, with each of its three senior officers having
over 25 years experience in the equipment leasing or rental industry. Since
its founding in 1975 by Mr. Zimmerman, the Company and companies previously
managed by Messrs. Zimmerman and Palles have originated over $1.5 billion in
equipment leases and have financed over $650 million of assets through
securitizations and other limited recourse financings to finance their
activities. The Company believes that it was the first company in the U.S. to
securitize healthcare equipment leases and related residual values.
The Company commenced its Select Growth Leasing activities in 1986 through
its sponsorship and management of limited partnerships, a portion of whose
business was providing equipment lease financing to emerging growth companies
primarily in the healthcare and information technology industries. Beginning
in 1992, the Company focused its Select Growth Leasing activities on leasing
essential operating equipment to such emerging companies. Since 1993, the
Company has originated over $78 million in new leases through its Select
Growth Leasing activities.
The Company's Instrument Rental & Distribution activities were developed
through the acquisition in 1991 of a business founded by Mr. Laing and the
acquisition in 1992 of the analytical instruments business of AT&T Capital.
The Company has also engaged in a number of other successful activities
serving the healthcare industry, including a business providing receivables-
based lending to healthcare providers which was sold to The FINOVA Group in
1996.
The Company first entered the Portfolio Finance & Lessor Acquisition
business in 1988 through the acquisition of Scientific Leasing, Inc. The
majority of these assets consisted of a portfolio of leases of healthcare
equipment. Under the management of Messrs. Zimmerman and Palles, the Company
became, it believes, the largest independent lessor of healthcare equipment in
the U.S. with over $500 million in assets owned and managed in 1993. Since
1988, the Company and companies previously managed by Messrs. Zimmerman and
Palles have acquired approximately $325 million in lease portfolios and
companies which had lease receivables of approximately $300 million. The
Company sold its healthcare equipment leasing and portfolio acquisition and
servicing business in the 1994 Sale to LINC Anthem Corporation ("LINC
Anthem"), a subsidiary of Anthem Insurance Companies, Inc. Messrs. Zimmerman
and Palles managed LINC Anthem until the 1996 Sale at which time they returned
to the Company on a full-time basis to pursue opportunities in its Select
Growth Leasing and Instrument Rental & Distribution activities.
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EQUIPMENT LEASING INDUSTRY
The equipment leasing and financing industry has grown rapidly since 1986
and is a major factor in the financing of business investment in equipment.
The ELA reports that business investment in equipment exceeded $560 billion in
1996 and that equipment leasing accounted for approximately $169 billion of
total business investment in equipment, compared to business investment of
$267 billion and equipment leasing activity of $85 billion in 1986. The ELA
estimates that 80% of all U.S. businesses use leasing or financing to acquire
capital assets.
The ELA reports that over 35% of equipment leases originated in 1995
consisted of computers, office equipment, telecommunication equipment, medical
equipment and other information technology and manufacturing equipment. The
Company believes that the equipment leasing market for these and other types
of small-ticket equipment (items with a unit cost of less than $250,000) is
growing more rapidly than other leasing segments primarily as a result of (i)
declines in the per unit cost of telecommunications, computer, medical and
office equipment; (ii) improved technology making instant credit approval
possible at the point of sale; and (iii) the trend of manufacturers and
distributors of small-ticket equipment to stimulate sales by providing various
financing alternatives to their customers. These growing segments of the
equipment leasing industry are a primary focus of the Company's growth
strategy for its Select Growth Leasing and Portfolio Finance & Lessor
Acquisition activities.
The equipment leasing industry is highly fragmented, with over 700 member
companies in the ELA alone. The Company estimates that over 20% of the members
of the ELA originate less than $50 million in equipment leasing volume
annually and believes that this segment of the industry is characterized by
small, thinly-capitalized companies who generally have experienced management
and good customer relationships. The Company believes that there are numerous
additional small lessors who are not members of the ELA and that such industry
fragmentation presents substantial opportunities for its Portfolio Finance &
Lessor Acquisition activities.
GROWTH STRATEGY
The Company's goal is to be the leading specialty finance company in its
targeted markets by taking advantage of its significant management experience
and existing operating systems and capabilities. From September 1994 to
September 1997 the Non-Compete Agreement restricted the Company's Portfolio
Finance & Lessor Acquisition and Select Growth Leasing activities. Upon the
expiration of the Non-Compete Agreement, the Company will once again pursue
the substantial opportunities in these areas. The Company's strategy for
growth is based on the following key elements:
Select Growth Leasing
. developing leasing relationships with more established clients which fit
the Company's Select Growth Leasing profile;
. developing new products, including inventory and accounts receivable
financing;
Instrument Rental & Distribution
. broadening the customer base of analytical instruments in the chemical,
biotechnology and pharmaceutical industries;
. developing similar relationships with vendors of medical equipment and
acquiring other established rental and distribution companies;
Portfolio Finance & Lessor Acquisition
. taking advantage of the Company's securitization capabilities, lower
financing costs and the credit and servicing experience of its management
by acquiring and financing lease portfolios originated by smaller
independent leasing companies which are not efficiently served by
traditional financing sources; and
. leveraging the Company's existing servicing, financing and management
infrastructure by acquiring leasing companies which provide healthcare
and information technology equipment.
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SELECT GROWTH LEASING ACTIVITIES
General. The Company's Select Growth Leasing activities consist primarily of
the direct origination of non-cancelable, full-payout leases to middle and
late stage emerging growth companies in the healthcare and information
technology industries. Such companies include physician practice management
organizations, rehabilitation service companies, extended care providers,
healthcare claims administrators and information service providers and
Internet and telecommunications service companies. The Company has provided
leasing to over 75 companies including Cardiac Pathways Corporation, Mariner
Health Group, Inc., Transitional Health Services, Earthlink Network, Inc.,
Bridge Data Corporation and Intermedia Communications, Inc. A majority of the
Company's Select Growth Leasing clients are supported by institutional private
equity investors which provide capital and management resources to such
customers. Such private equity investors include Welsh Carson Anderson &
Stowe, Weiss, Peck & Greer, Essex Venture Partners and Oak Investment
Partners.
Leases to individual customers typically include items with an aggregate
cost ranging from $250,000 to $2.0 million and cover a broad variety of
equipment, each with original purchase prices which are generally less than
$100,000 per item. These leases are generally for essential operating
equipment, including data processing equipment, production equipment,
analytical instruments and medical equipment. For the first six months of 1997
compared with the same period in 1996, new lease originations increased from
$11.5 million to $26.9 million and backlog of unfunded leases increased from
$6.4 million to $19.9 million. The Company's Select Growth Leasing activities
are expected to continue to grow due to the Company's ability to provide such
services to more established companies, which is currently restricted by the
Non-Compete Agreement.
The Company believes that regulatory reform, consolidations, outsourcing and
other fundamental changes in the healthcare industry, expansion of the
information technology industry and development of new technologies have
promoted the formation and growth of new companies of the type served by its
Select Growth Leasing activities. Such companies typically have limited access
to financing from commercial banks, diversified finance companies and
traditional leasing companies. The Company's experience in serving the
healthcare and information technology industries enables it to serve the
specific needs of its customer base more effectively than its competitors by
providing a variety of financing alternatives, such as flexible lease
structures, asset-based financing, sale-leaseback transactions and secured
credit lines, while maintaining a high degree of credit quality. In a majority
of its Select Growth Leasing transactions, the Company receives warrants or
other equity participation rights which provide additional opportunities for
profitability upon the sale of such rights. As of June 30, 1997, the Company
held equity participation rights in 39 companies, 13 of which were publicly
traded.
Sales and Marketing. Leases are originated by representatives located in
Chicago, San Francisco and Boston and are often the result of a network of
independent lease brokers and referrals from institutional private equity
investors. The Company has been able to identify prospective clients through
the retention of marketing personnel having investment banking, financial
analysis and industry specific experience, the analysis of selective
information regarding venture capital investment in the healthcare and
information technology industry, direct mail advertising and representation at
major venture capital conferences and symposia. The Company has also developed
a network of independent lease brokers and investors who routinely refer
transactions to the Company.
To insure prompt customer response, the Company's marketing personnel have
direct access to the Company's customer information data bases which assist
them in responding to sales leads, preparing lease proposals and monitoring
the progress of a transaction through the underwriting process. In addition,
the Company's sales personnel are highly trained in the structuring of Select
Growth Leasing transactions.
Underwriting and Operating Systems. Based on its ten years of experience in
serving emerging growth companies primarily in the healthcare and information
technology industry, as well as its over 22 years in the equipment leasing
industry, the Company has developed underwriting and operations criteria,
including a specialized credit rating system, for its Select Growth Leasing
business that have been effective in the selection of lessees and in
minimizing the Company's exposure to loss. The Company's Select Growth Leasing
underwriting process is based on a high level of due diligence regarding a
potential customer's business, management, product, cash flows and
institutional investors, as well as the type of equipment to be leased.
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The Company is typically reimbursed by the potential Select Growth Leasing
client for its out-of-pocket due diligence costs. For each transaction in
excess of $500,000 site visits are made to the potential client by the
Company's investment managers or due diligence specialists. The Company
generally interviews the potential customer's institutional investors,
management and customers. Following completion of a due diligence memorandum,
each transaction is reviewed by at least one member of the Company's
Commitments Committee, consisting of Messrs. Zimmerman, Laing and Palles,
prior to approval. All transactions in excess of $1.5 million require the
unanimous approval of the Company's Commitments Committee.
Once a transaction has been approved, the Company uses its standardized
lease or loan documentation tailored to the requirements of each particular
transaction to insure protection of its equipment or collateral. In addition,
the Company utilizes the InfoLease System, the most broadly utilized lease
processing software and an industry standard, to monitor the progress of a
transaction through the documentation process and to provide servicing
information, invoicing, collection and aging status, tax information and
analytical information regarding its Select Growth Leasing portfolio following
completion of a transaction. The Company receives updated financial
information regarding customers in its Select Growth Leasing portfolio and
reviews each company in its portfolio meeting specified criteria not less
frequently than quarterly. See "--Lease Portfolio Composition."
INSTRUMENT RENTAL & DISTRIBUTION ACTIVITIES
General. The Company's Instrument Rental & Distribution activities consist
primarily of the rental and distribution of analytical instruments, such as
gas and liquid chromatographs, mass spectrometers and atomic absorption
systems. Such instruments typically cost between $15,000 and $60,000 and are
used by companies serving the environmental, chemical, pharmaceutical and
biotechnology industries to measure the chemical composition of a variety of
substances.
Certain segments of the market for analytical instruments have undergone a
fundamental change over the past several years in that vendors have
increasingly relied upon independent companies, such as the Company, to take
responsibility for the distribution and rental of such equipment. This is
consistent with a trend toward outsourcing among providers of a variety of
products and services and is largely the result of customer demand for
analytical instruments which are specifically tailored with certain
enhancements to meet their needs and continued customer support. These vendors
have increasingly focused on the manufacture of such equipment and allowed
independent companies to focus on other functions such as rental, inventory
management and distribution. The Company believes that its expertise in all of
these areas has allowed it to become the leading independent distribution and
rental company in the analytical instrument market.
The Company is a distributor for most of the significant manufacturers of
this type of equipment including Hewlett-Packard, the largest manufacturer in
this industry, The Perkin-Elmer Corporation and Varian Associates Inc. The
Company believes that it is the largest independent source of analytical
instruments in the U.S. and that it is the only independent company authorized
to rent Hewlett-Packard analytical instruments. In April 1996, the Company
entered into a pilot program with Hewlett-Packard to exclusively rent and
distribute Hewlett-Packard's line of analytical instrumentation to its
environmental laboratory customers. As an outgrowth of its relationship with
Hewlett-Packard, the Company, in concert with Hewlett-Packard, has extended
its sales and rental programs in Europe to accommodate U.S.-based and new
European customers. The Company's position as a distributor of certain types
of equipment allows it to purchase such equipment at a discount which varies
from manufacturer to manufacturer.
Sales and Marketing. The Company provides analytical instruments which are
customized, calibrated and ready for use and typically delivers equipment from
its centralized warehouse within 24 hours of receipt of an order. The Company
services over 2,300 analytical instrument customers through its sales force of
product specialists and orders directed by its vendors. The Company's
customers include environmental testing laboratories, pharmaceutical and
chemical manufacturers and biotechnology companies. The Company's five largest
Instrument Rental & Distribution customers are Bausch & Lomb, Inc., Applied
Analytical Industries, Inc.,
27
<PAGE>
Alza Corporation, Intel Corporation and Battell Memorial Institute. The
Company's product specialists have immediate access via laptop computers to a
proprietary sales management system which provides up-to-the-minute tracking
of each item of inventory. The Company's field sales force of eight people is
supported by an inside sales group of five people. The inside sales group
interacts directly with customers providing same-day quotations by fax and
converting quotations to orders as received. In addition, a significant effort
is spent developing strong relationships with the Company's major vendors'
sales people. During 1995 and 1996, the Company increased its sales force and
realigned its sales territory to increase its penetration in the biotechnology
and pharmaceutical industries. The Company will seek opportunities to
capitalize on its distribution and rental expertise and its knowledge of the
healthcare market by developing similar relationships with vendors of medical
equipment and acquiring other established rental and distribution companies.
The Company offers its Instrument Rental & Distribution customers three
types of rental and leasing arrangements: (i) short-term rental arrangements
with terms ranging from as short as a few days to one year; (ii) operating
leases with terms ranging from one year to 48 months; and (iii) full-payout
lease programs with terms ranging from 36 to 60 months. Customers under rental
arrangements and operating leases are also offered incentives to purchase the
related analytical instrument either during the term of the lease or at the
end of the lease by applying a portion of the rental payments made by the
customer to the purchase price of the equipment. The Company believes that its
ability to provide a wide range of rental, leasing and purchase options
provides it with a competitive advantage over other providers of analytical
instruments.
To further promote awareness of its Instrument Rental & Distribution
activities, the Company advertises in trade publications targeted at key
customer groups and participates in numerous trade shows worldwide. In
addition, specific mailing lists targeting selected market segments are
purchased from specialized database providers. A desktop publishing system is
used to generate product-specific marketing literature which is mailed on a
regular basis to target segments of the Company's over 15,000 account mailing
list. Direct mail targeted at prospective users of analytical equipment has
proven to be a cost effective way to attract rent, lease and sale customers
and to increase awareness and stimulate demand.
Operations. When the Company sells new analytical instruments, the equipment
is subject to a manufacturer's warranty. When the Company sells used
analytical instruments, it typically reconditions the equipment and provides a
90-day warranty. When the Company rents such instruments, it exchanges any
instruments requiring service with units from its centralized inventory or
provides for on-site service from the manufacturer or an independent service
organization. The Company maintains its rental inventory and customizes
analytical instruments to meet its particular customers' needs through one of
the most complete repair and reconditioning facilities in the industry.
The Company utilizes a combination of proprietary software and third-party
software licensed to it by a third-party in its rental and distribution
activities. All items in the Company's Instrument Rental & Distribution
inventory are separately bar-coded and tracked. Its systems permit users to
access information regarding account history, current activity, status of
items in its inventory, utilization, pricing, billing and collections on-line.
The Company believes that the long term experience of it and its management in
utilizing these systems provides it with the ability to rapidly respond to
customer inquiries and a high level of control over its rental inventory.
PORTFOLIO FINANCE & LESSOR ACQUISITION ACTIVITIES
General. Since 1988, the Company and companies previously managed by Messrs.
Zimmerman and Palles have acquired approximately $325 million in lease
portfolios and companies which had lease receivables of approximately $300
million. The Company expects to reinitiate its Portfolio Finance & Lessor
Acquisition activities upon the expiration of the Non-Compete Agreement in
September 1997. The Company believes there are substantial opportunities for
such activities due to the fragmented nature of the leasing industry, the
inability of a significant number of small equipment leasing companies to
efficiently finance their portfolios and obtain more favorable financing rates
through the asset-backed securities markets and the cost of implementing new
technologies to remain competitive. The leasing companies which the Company
expects to finance or acquire are
28
<PAGE>
characterized by: (i) strong customer or vendor relationships; (ii) lease
transactions which range in size from $5,000 to $250,000; (iii) needs for
committed financing and servicing relationships; and (iv) a focus on customers
which are not effectively served by more traditional funding sources. The
Company also expects to pursue selective acquisitions of companies meeting
these criteria which can be integrated into the Company's organizational
structure and which can recognize synergies from the Company's operating
systems and geographic presence. Based on data available from the ELA, the
Company believes that there are over 150 independent leasing companies in the
U.S. with less than $50 million in annual lease originations. The Company
believes that many of these companies are likely candidates for the Company's
Portfolio Finance & Lessor Acquisition activities.
Sales and Marketing. In connection with acquisition and financing of lease
portfolios, the Company will offer two distinct programs to its customers.
Under its Warehouse Line Programs, the Company will provide limited warehouse
facilities (generally less than $1 million) to lessors on a recourse basis.
Following a warehouse period which typically will not exceed six months, the
Company will purchase the related pool of warehoused leases from the lessor on
either a partial recourse or non-recourse basis. Under its Portfolio Finance
Programs, the Company plans to acquire portfolios originated over a specified
period of time by an originator. The purchase will be credit enhanced by
either a holdback reserve or, if the creditworthiness of the originator is
acceptable, a recourse obligation of the originator. Such credit enhancement
is intended to reduce losses under this program. The Company intends that
substantially all of the leases to be acquired by it will be non-cancelable,
full-payout leases.
Underwriting and Operating Systems. The Company has developed established
underwriting processes for the management of its Portfolio Finance & Lessor
Acquisition activities based on the prior experience of its management.
Utilizing criteria previously developed by management, the Company will
perform a detailed due diligence review of each potential customer prior to
approval of a Warehouse Line or Portfolio Finance Program. The due diligence
process will include extensive site visits, a review of the potential
customer's documentation standards, credit policies, customer base, management
team, equipment focus and servicing capabilities. In connection with a
Warehouse Line Program, the Company will utilize credit application and credit
scoring systems previously developed by its management, as well as systems
developed by Dun & Bradstreet to underwrite each transaction to be financed or
purchased. It will utilize documents for each lease that meet the standards
for leases entered into directly by the Company. In connection with Portfolio
Finance Programs, the Company will re-underwrite substantially all of the
transactions in each portfolio utilizing credit scoring systems previously
developed by the Company. It will structure each Portfolio Finance Program to
utilize credit enhancement such as over-collateralization, reserves and
limited recourse obligations. The credit policies and procedures and
underwriting standards for each of the Company's activities will be reviewed
by the Credit Policy Committee of the Company's Board of Directors.
The Company intends to utilize the InfoLease system to service each lease
financed or acquired in connection with a Warehouse Line or Portfolio Finance
Program. The Company's operations and information systems management has
extensive experience in the utilization of InfoLease to manage portfolios
purchased from others. It is experienced in the critical process of rapidly
and accurately converting portfolios utilizing other systems to the Company's
own operations systems.
29
<PAGE>
LEASE PORTFOLIO COMPOSITION
Equipment Type. The following table sets forth the Company's percentage of
original cost of equipment under direct finance leases, which totaled $64.0
million as of June 30, 1997, by equipment type:
<TABLE>
<CAPTION>
% OF
EQUIPMENT TYPE EXAMPLES PORTFOLIO
-------------- -------- ---------
<C> <S> <C>
Information Systems Personal computers, area networks and
workstations.............................. 31.1%
Production Pharmaceutical manufacturing, labeling and
dispensing equipment...................... 20.4
Analytical Instruments Gas and liquid chromatographs and mass
spectrometers............................. 16.9
Medical X-ray machines, infusion pumps and surgical
equipment................................. 11.2
Telecommunications Microwave transmitters, multiplexing
equipment and telephone systems........... 7.5
Furniture and Fixtures Medical and other office furniture......... 7.2
Laboratory Microscopes, incubators and sterilizers.... 4.3
Miscellaneous Various equipment accessories.............. 1.4
-----
Total....................................................... 100.0%
=====
</TABLE>
Customers. The following table sets forth the Company's percentage of net
investment in direct finance leases, which totaled $43.4 million as of June
30, 1997, by lessee industry:
<TABLE>
<CAPTION>
% OF
TYPE OF CUSTOMER PORTFOLIO
---------------- ---------
<S> <C>
Healthcare and Healthcare Services.............................. 28.6%
Information Technology & Communications......................... 27.5
Environmental Laboratories...................................... 18.1
Service......................................................... 13.9
Biotechnology................................................... 3.3
Food Processing................................................. 2.0
Electronic Manufacturing........................................ 1.8
Other........................................................... 4.8
-----
Total....................................................... 100.0%
=====
</TABLE>
Terms of Equipment Leases. Substantially all equipment leases originated by
the Company are net leases with specified non-cancelable terms ranging from
three to six years. The terms and conditions of all of the Company's leases
are substantially similar. In most cases, the lessees are contractually
required to: (i) maintain, service and operate the equipment in accordance
with the manufacturer's and government-mandated procedures; (ii) insure the
equipment against property and casualty loss; (iii) pay all taxes associated
with the equipment; and (iv) make all scheduled contract payments regardless
of the performance of the equipment. The Company's standard forms of leases
provide that in the event of a default by the lessee, the Company can require
payment of liquidated damages and can seize and remove the equipment for
subsequent sale, refinancing or other disposal at its discretion. Any
additions, modifications or upgrades to the equipment, regardless of the
source of payment, are automatically incorporated into and deemed a part of
the equipment financed.
Residual Values. Unless the residual value of the leased equipment is sold
in connection with the securitization or sale of the lease, the estimated
residual equipment value remains on the Company's balance sheet and is
recognized as direct financing lease income over the life of the lease using
the interest method. Residual equipment values on the Company's balance sheet
as of June 30, 1997 totaled approximately $3.5 million. The Company's
extensive experience in remarketing equipment and conservative policies toward
estimating residual values has resulted in the Company recognizing substantial
gains on the remarketing of leased equipment. Since 1981, the Company and the
companies previously managed by Messrs. Zimmerman and Palles have remarketed
equipment with an original cost of over $1.0 billion in equipment following
lease expirations and realized over $280 million in residual proceeds, more
than 155% of the original estimates.
30
<PAGE>
Loss Experience. Since the initiation of the Company's leasing activities in
1993, credit losses have been less than 2.0% of lease receivables originated.
The following table reflects net charge-offs since 1994:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER ENDED
31, JUNE 30,
---------------------- ---------------
1994 1995 1996 1996 1997
------ ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net investment in direct finance
leases (before allowance for doubtful
accounts).............................. $8,047 $18,248 $33,057 $22,332 $45,239
Net charge-offs......................... 6 104 308 -- 62
Net charge-off percentage............... 0.1% 0.6% 0.9% -- 0.1%
Number of leases........................ 1 3 1 -- 1
</TABLE>
Management believes that the low level of credit losses achieved by the
Company are a result of its: (i) due diligence and credit scoring procedures
specifically designed to analyze lease transactions with emerging growth
companies in the healthcare and information technology industries; (ii)
extensive monitoring and review of such transactions by senior executives of
the Company; (iii) proactive approach to addressing delinquencies; (iv)
transaction structuring experience; (v) advanced hardware and software
systems; and (vi) extensive experience in servicing lease portfolios. As of
June 30, 1997, the Company had total delinquencies of 30 to 60 days of 3.64%,
of 60 to 90 days of 0.41% and over 90 days of 0.22% of gross contract balance.
Lease Servicing. The Company's Select Growth Leasing activities currently
utilize and its Portfolio Finance & Lessor Acquisition activities will utilize
the InfoLease lease processing system. This system was licensed to the Company
in 1985 on a non-exclusive basis from its developer, Decision Systems, Inc.
("DSI"), thus making the Company DSI's second non-bank licensee. The Company
was a Beta site for the development of portions of the InfoLease system. DSI
currently employs over 200 people and has over 180 licensees of the InfoLease
software. Management believes that InfoLease is the most broadly utilized
lease processing software and is thus an industry standard. The Company has
continually upgraded the InfoLease system since 1985. The Company and
companies previously managed by Messrs. Zimmerman and Palles have successfully
utilized InfoLease to process all lease originations as well as the majority
of lease portfolios financed by them.
The Company has successfully utilized InfoLease to service the lease
portfolios held by five limited partnerships and eight securitization vehicles
sponsored by the Company. The Company believes there are significant
opportunities to provide servicing of lease and loan portfolios of emerging
growth companies to larger financing sources which do not have expertise in
this market. In addition, the Company's management has had extensive
experience in the servicing of securitizations of lease portfolios acquired
from others. Management believes that its utilization of an "industry
standard" system, coupled with its extensive experience in operating and
enhancing the InfoLease system provides a competitive advantage in the
acquisition of lease portfolios and in the servicing of securitizations.
31
<PAGE>
RENTAL INVENTORY COMPOSITION
Equipment Type. As of June 30, 1997, the Company owned and managed an
inventory of analytical instruments having an original cost of $21.9 million.
The Company's inventory of equipment includes over 3,000 items representing
more than 500 model types and has an average age of less than 18 months.
The following table sets forth the composition of the Company's rental
inventory by equipment type as of June 30, 1997:
<TABLE>
<CAPTION>
% OF
EQUIPMENT TYPE USE PRICE RANGE INVENTORY
-------------- --- ----------- ---------
<C> <S> <C> <C>
Analysis of evaporated
Gas Chromatographs organic compounds....... $15,000 - $20,000 43.5%
Separation and analysis
Mass Spectrometers of organic compounds.... 50,000 - 60,000 18.0
Analysis of dissolved
Liquid Chromatographs organic compounds....... 15,000 - 50,000 10.4
Analysis of organic
Portable Test Units vapor................... 5,000 - 60,000 7.4
Atomic Absorption Systems Analysis of metals...... 25,000 - 125,000 6.8
Accessories and
Accessories automatic samplers...... 8,000 - 12,000 13.9
-----
Total......................................................... 100.0%
=====
</TABLE>
Customers. The following table sets forth the Company's percentage of 1996
revenues from the rental and sale of analytical instruments by customer
industry:
<TABLE>
<CAPTION>
% OF
TYPE OF CUSTOMER REVENUE
---------------- -------
<S> <C>
Environmental..................................................... 61.0%
Pharmaceutical.................................................... 11.9
Chemical.......................................................... 9.4
Manufacturing..................................................... 4.5
Analytical........................................................ 2.5
Biotechnology..................................................... 2.3
Food Processing................................................... 1.5
Government........................................................ 1.3
Other............................................................. 5.6
-----
Total......................................................... 100.0%
=====
</TABLE>
Terms of Equipment Rental Agreements. The terms and conditions of all of the
Company's rental agreements are substantially similar. Substantially all of
the rental agreements have terms ranging from a few days to one year. Unlike
the Company's typical lease, the rental agreements require the Company to: (i)
maintain, service and operate the equipment in accordance with the
manufacturer's and government-mandated procedures; (ii) insure the equipment
against property and casualty loss; and (iii) pay all taxes associated with
the equipment.
Remarketing. Analytical instruments rented by the Company have relatively
long economic lives and have not been subject to rapid obsolescence. The
Company generally depreciates its rental inventory over a seven-year period to
zero salvage value. The Company has realized gains from the sale of used
analytical instruments in each year since the inception of this business.
CAPITAL RESOURCES AND SECURITIZATIONS
The Company currently funds its activities through warehouse, revolving
credit and term loan facilities provided by a group of banks under its Senior
Credit Facility, as well as recourse and non-recourse loans provided by
various financial institutions. Upon achieving a sufficient portfolio size of
lease receivables, the Company expects to sell or finance a portion of such
receivables in the public and private markets, largely through securitizations
(in which receivables are first sold to a special purpose entity which then
sells or pledges
32
<PAGE>
the receivables to the financing parties on a limited recourse basis) or other
limited recourse financings (in which the receivables are sold or pledged
directly to the financing party on a limited recourse basis). Since 1987, the
Company and companies previously managed by Messrs. Zimmerman and Palles have
completed 20 securizations and other limited recourse financings generating
over $650 million in proceeds. The Company's financing objective is to
maximize the spread between the yield received on its leases and its cost of
funds by obtaining favorable terms on its various financing transactions.
Effective as of the consummation of the Offering, the Company expects to amend
the Senior Credit Facility to provide the Company with reduced interest rates,
increased borrowing availability and a securitization facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." As a result of the Company's
established track record in the specialty finance industry, the Company
believes that new terms of the Senior Credit Facility will be superior to the
terms obtained by many other companies in its industry of similar size and
with similar credit statistics.
The following tables set forth the securitizations and other limited
recourse financings completed by the Company and companies previously managed
by Messrs. Zimmerman and Palles since 1985:
SECURITIZATIONS
<TABLE>
<CAPTION>
DATE OF COMMITMENT
ISSUER RATING ISSUANCE AMOUNT
- ------ --------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Scientific Leasing Funding Corp.......... Not Rated Jul-87 $ 19,542
Scientific Leasing Funding Corp. II...... Not Rated Dec-87 10,187
LINC Finance Corporation................. AA- Jun-89 24,857
LINC Finance Corporation II.............. AA Jun-90 29,124
LINC Finance Corporation III............. A+ Jun-91 30,911
LINC Finance Corporation IV
Class A Notes.......................... AA-- Apr-92 28,972
Class B Notes.......................... Not Rated Apr-92 9,657
LINC Finance Corporation V............... Not Rated Dec-92 70,000
LINC Finance Corporation VI.............. Not Rated Apr-93 58,698
LINC Finance Corporation VII............. Not Rated Dec-93 23,250
LINC Finance Corporation VIII............ Not Rated May-94 60,000
LINC Finance Corporation IX.............. Not Rated Sep-94 31,154
Anthem Financial Receivables Corp. 1995.. AA- Jun-95 72,400
LINC Anthem Receivables Corp. 1995....... Not Rated Sep-95 16,000
Anthem Financial Receivables Corp. II
1995.................................... AA- Dec-95 80,100
Newcourt LINC Receivables Corp. 1996..... Not Rated Jun-96 25,400
--------
Total Securitizations................................... 590,252
--------
OTHER LIMITED RECOURSE FINANCINGS
<CAPTION>
FINANCING PARTY
- ---------------
<S> <C> <C> <C> <C> <C>
First Union National Bank of North Carolina........ Jun-88 38,300
Sanwa Business Credit Corporation.................. Dec-90 8,291
Sanwa Business Credit Corporation.................. Oct-95 6,087
European American Bank............................. Dec-96 8,016
Newcourt Credit Group.............................. Jul-97 13,906
--------
Total Other Limited Recourse Financings................. 74,600
--------
Total Securitizations and Other Limited Recourse
Financings............................................. $664,852
========
</TABLE>
33
<PAGE>
COMPETITION
The Company competes in the equipment financing market with a number of
national, regional and local finance companies. In addition, the Company's
competitors include those equipment manufacturers that finance the sale or
lease of their products themselves and other traditional types of financial
services companies, such as commercial banks and savings and loan
associations, all of which provide financing for the purchase of equipment.
The Company's competitors include many larger, more established companies that
may have access to capital markets and to other funding sources which may not
be available to the Company. Many of the Company's competitors have
substantially greater financial, marketing and operational resources and
longer operating histories than the Company.
EMPLOYEES
As of June 30, 1997, the Company employed 72 people on a full-time basis.
Twenty-three personnel were involved in marketing and sales, 45 were in lease
and rental processing, servicing and administrative support and four executive
employees. No employees of the Company are represented by a labor union. The
Company believes that its relations with its employees are good.
FACILITIES
The Company's principal executive offices and its Select Growth Leasing and
Portfolio Finance & Lessor Acquisition activities are located at 303 East
Wacker Drive, Chicago, Illinois 60601 (tel. 312-946-1000) and occupy
approximately 26,000 square feet of office space. The lease for the facility,
a portion of which is subleased from Newcourt, expires on September 30, 1999.
The Company's Instrument Rental & Distribution activities are located in
Foster City, California and occupy approximately 23,500 square feet of
warehouse, laboratory and office space. This space is leased under a lease
which expires on May 31, 2002. The Company believes that its current
facilities are adequate for its existing needs and that additional suitable
space will be available as required.
LEGAL PROCEEDINGS
The Company is currently not a party to any material litigation, although it
is involved from time to time in routine litigation incidental to its
business.
34
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The executive officers, key employees and directors of the Company and their
ages as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Martin E. Zimmerman..... 59 Chairman of the Board and Chief Executive Officer
Robert E. Laing......... 52 President, Chief Operating Officer and Director
Allen P. Palles......... 56 Executive Vice President, Chief Financial Officer and Director
Gerard M. Farren........ 56 Senior Vice President--Instrument Rental and Distribution
William J. Erbes........ 47 Senior Vice President--Business Development
Cameron Krueger......... 35 Senior Vice President--Information Systems and Portfolio Services
M. Eileen O'Brien....... 34 Vice President and Treasurer
Steven Byrnes........... 36 Vice President--Operations
Charles J. Aschauer (1). 69 Director
Stanley Green (1)(2).... 58 Director
Terrence J. Quinn
(1)(2)................. 45 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Martin E. Zimmerman serves as Chairman of the Board and Chief Executive
Officer of the Company. Mr. Zimmerman founded the Company in 1975 and has
served as Chairman of the Board and Chief Executive Officer since the
formation of the Company. From October 1994 until October 1996, he also served
as President and Chief Executive Officer of LINC Anthem and, after the sale of
LINC Anthem to Newcourt, its subsidiary Newcourt LINC Financial Inc.
("Newcourt LINC"). Before founding the Company, Mr. Zimmerman founded and
served for seven years as President of Telco Marketing Services, Inc., a
leader in the hospital equipment leasing field and the first independent
dealer in used medical equipment.
Robert E. Laing serves as President and Director of the Company. Mr. Laing
joined the Company in 1991 when it acquired his analytical instruments rental
and distribution business and has served as President, Chief Operating Officer
and Director of the Company since 1994. Prior to founding such business in
1989, he was employed for 17 years by U.S. Leasing in various capacities,
including Executive Vice President and Group Executive, Retail Group,
President of U.S. Instrument Rental, Chief Executive Officer of U.S. Portfolio
Leasing and Chief Operating Officer of U.S. Fleet Leasing. Previously, he held
marketing positions with Data Action Corporation and IBM Corporation.
Allen P. Palles serves as Executive Vice President, Chief Financial Officer
and Director of the Company. Mr. Palles joined the Company in 1983 and has
served as Chief Financial Officer since then and a Director of the Company
since 1984. From October 1994 until December 1996, he also served as Chief
Financial Officer of LINC Anthem and Newcourt LINC. Before joining the
Company, he was Treasurer of The Marmon Group, Inc. and held various senior
financial and tax positions at Pullman, Inc. Mr. Palles is a certified public
accountant and attorney and specializes in lease securitization.
Gerard M. Farren serves as Senior Vice President--Instrument Rental and
Distribution of the Company. Dr. Farren joined the Company in 1991 when the
Company acquired its analytical instrument rental and distribution business
and has served in his current position since that time. Previously, he was
Senior Vice President and General Manager of U.S. Analytical Instruments,
Inc., a division of U.S. Leasing, and worked with The Perkin-Elmer Corporation
in product development and sales management. Dr. Farren earned a Ph.D. in
physical chemistry from Ireland's Northern University.
35
<PAGE>
William J. Erbes serves as Senior Vice President--Business Development of
the Company. Mr. Erbes joined the Company in 1993 and has served in his
current position since that time. Before joining the Company, he was President
of Narco Medical Services, Inc. and Senior Vice President of Medirec Inc., a
leading medical equipment rental company.
Cameron Krueger serves as Senior Vice President--Information Systems and
Portfolio Services of the Company. Mr. Krueger re-joined the Company in 1997
in his current position after having been Senior Vice President of
Thoughtworks, Inc., a consulting and systems development firm, from 1995 to
1997. From 1991 until 1995 he served as Vice President of Information Systems
of the Company.
M. Eileen O'Brien serves as Vice President and Treasurer of the Company. Ms.
O'Brien has served in her current position since 1997, and since joining the
Company in 1988, has also served as Director of Financial Planning, Manager of
Budget and Portfolio Analysis, Vice President of Human Resources and Financial
Analyst.
Steven Byrnes serves as Vice President--Operations. Mr. Byrnes re-joined the
Company in 1997 in his current position after having been Vice President,
Portfolio Management of LINC Anthem and Newcourt LINC from 1994 to 1997. From
1992 to 1994, he served as Controller of the Company's Portfolio Finance &
Lessor Acquisition activities.
Charles J. Aschauer, a Director of the Company since 1989, acts as a
corporate director and business consultant. He was employed by Abbott
Laboratories, Inc. from 1971 until his retirement in 1989, and during the last
ten years of this period served as Executive Vice President and Director of
that company. Previously, he held senior positions with Whittaker Corporation,
Maremont Corporation and Mead Johnson and Company after serving as a Principal
with McKinsey & Company. He is also a Director of Boston Scientific
Corporation and Trustmark Insurance Company.
Stanley Green, a Director of the Company since 1996, was Senior Vice-
President of PacifiCorp Capital Corporation from 1987 until his retirement in
1993. Mr. Green served as President of Thomas Nationwide Computer Corporation,
a company he founded, until 1987 when it was sold to PacifiCorp Capital
Corporation. He is also a Director of BioSterile Technologies, Inc. and Thomas
Nationwide Computer Corporation.
Terrence J. Quinn, a Director of the Company since 1991, is President and
Chief Executive Officer of Quinn Capital Services, Inc., a financial advisory
firm. From March 1991 until December 1993, he was President of the Company.
Previously, he was President of Medirec Inc., Matrix Leasing International
Inc. and Churchill Capital Partners L.P.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon consummation of the Offering, the Board of Directors will establish a
Compensation Committee, an Audit Committee and a Credit Policy Committee. The
Compensation Committee, which will be comprised of Messrs. Aschauer, Green and
Quinn, will have the authority to determine compensation for the Company's
executive officers and to administer the Incentive Plan. Messrs. Aschauer,
Green and Quinn are "Non-Employee Directors" within the meaning of Rule 16b-3,
as amended from time to time, under the Exchange Act and "outside directors"
within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"). The Audit Committee, which will be comprised of Messrs.
Green and Quinn will have the authority to make recommendations concerning the
engagement of independent public accountants, review with the independent
public accountants the plan and results of the audit engagement, review the
independence of the independent public accountants, consider the range of
audit and non-audit fees and review the adequacy of the Company's internal
accounting controls. The Credit Policy Committee, which will be comprised of
Messrs. Zimmerman, Green and Quinn, will periodically review the Company's
credit policies and procedures and underwriting standards.
36
<PAGE>
DIRECTOR COMPENSATION
Outside directors are paid $15,000 annually. Upon election to the Board of
Directors, outside directors are granted options to purchase 5,000 shares of
Common Stock at the prevailing fair market value and are granted options to
purchase 5,000 shares of Common Stock at the prevailing fair market value
annually thereafter. See "--Stock Option Plans."
EXECUTIVE COMPENSATION
The following table presents certain information concerning compensation
earned for services rendered during 1996 to the Company by the Chief Executive
Officer and each of the other executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------ -----------------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL OTHER ANNUAL OPTIONS ALL OTHER
POSITIONS SALARY BONUS COMPENSATION (#) COMPENSATION
------------------ -------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Martin E. Zimmerman (1). $328,600 $637,771 $87,137(2) -- $ --
Chairman of the Board
and Chief Executive
Officer
Robert E. Laing (1)..... 272,100 495,000 -- 132,765 4,500
President and Chief
Operating Officer
Allen P. Palles (1)..... 55,450 181,686 -- 100,876 --
Executive Vice
President and Chief
Financial Officer
Gerard M. Farren........ 197,100 72,188 -- -- 4,500
Senior Vice President--
Instrument Rental and
Distribution
William J. Erbes........ 144,423 52,500 -- -- 4,500
Senior Vice President--
Business Development
</TABLE>
- --------
(1) Messrs. Zimmerman and Palles were employed for a substantial portion of
1996 by LINC Anthem and Newcourt LINC and were paid additional
compensation by them. Their compensation will be adjusted upon
consummation of the Offering. A substantial portion of the compensation
paid to Messrs. Zimmerman, Laing and Palles during 1996 was with respect
to certain operations no longer conducted by the Company. See "Certain
Transactions" and "--Employment and Non-Competition Agreements."
(2) This amount consists of life insurance premiums and tax preparation
services paid for by the Company.
The following table sets forth certain information concerning stock options
granted in 1996 to the Company's executive officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
NUMBER OF RATES OF STOCK
SECURITIES % OF TOTAL PRICE
UNDERLYING OPTIONS/SARS EXERCISE APPRECIATION FOR
OPTIONS GRANTED TO OR BASE OPTION TERM (1)
GRANTED EMPLOYEES IN PRICE EXPIRATION -----------------
NAME (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ---------- ------------ -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Laing.. 132,765 56.82% $2.22 9/30/2006 $185,359 $469,737
Allen P. Palles.. 100,876 43.18 2.22 9/30/2006 140,838 356,910
</TABLE>
- --------
(1) In calculating the potential realizable value, the Company used an
estimated market price of $2.22 per share as of the date of grant.
37
<PAGE>
None of the Company's executive officers exercised any stock options during
1996. The following table sets forth certain information regarding the stock
options held by them at the end of such years.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING
UNEXERCISED OPTIONS VALUE OF UNEXERCISED
AT FISCAL YEAR-END 1996 IN-THE-MONEY OPTIONS
(#) AT FISCAL YEAR-END ($)(1)
-------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert E. Laing............ 150,580(2) 146,170 $1,994,266 $1,977,625
Allen P. Palles............ 60,320(2) 40,556 770,890 518,306
William J. Erbes........... 7,835 5,223 105,694 70,458
</TABLE>
- --------
(1) Based upon the differences between the midpoint of the price range on the
cover of this Prospectus and the exercise price.
(2) All of such options were exercised by the executive on June 30, 1997.
EMPLOYMENT AND NON-COMPETITION AGREEMENTS
Effective as of the completion of the Offering, the Company will enter into
an employment contract with Mr. Zimmerman providing for (i) an annual base
salary of $275,000 per year, subject to increase at the discretion of the
Board of Directors; (ii) reimbursement of premiums at an annual estimated cost
of approximately $50,000 for a life insurance policy in the amount of
$2,019,000; and (iii) customary benefits and perquisites. The agreement's
initial term will be three years with three year extensions unless either the
Company or Mr. Zimmerman gives ninety days' notice of termination. If the
agreement is terminated by the Company during the initial term, Mr. Zimmerman
will be entitled to severance pay equal to three times his base salary during
the 12 months preceding such termination. If the agreement is terminated by
the Company after the initial term has expired, Mr. Zimmerman will be entitled
to severance pay equal to his base salary during the 12 months preceding such
termination. The agreement prohibits Mr. Zimmerman from competing with the
Company for one year following the termination of his employment with the
Company. Also, effective as of the Offering, the Company will enter into
employment contracts with Messrs. Laing, Palles, Erbes and Dr. Farren
providing for (i) an annual base salary of $250,000 for Mr. Laing, $185,000
for Mr. Palles, $195,000 for Dr. Farren and $142,500 for Mr. Erbes, all
subject to increase at the discretion of the Board of Directors; and (ii)
customary benefits and perquisites. The agreements will have an initial term
of one year with one-year extensions unless either the Company or Mr. Laing,
Mr. Palles, Dr. Farren or Mr. Erbes, respectively, gives ninety days' notice.
If the agreements are terminated by the Company at any time other than for
cause, each of Mr. Laing, Mr. Palles, Dr. Farren and Mr. Erbes will be
entitled to severance pay equal to his base salary for the 12 months preceding
such termination. The agreements prohibit Messrs. Laing, Palles, Erbes and Dr.
Farren from competing with the Company for one year following the termination
of their employment with the Company. Such employment agreements will require
that Messrs. Zimmerman, Palles, Laing, Erbes and Dr. Farren devote
substantially all of their business time to the Company's affairs.
EXECUTIVE INCENTIVE COMPENSATION PLAN
Effective as of the Offering, the Board of Directors adopted an Executive
Incentive Compensation Plan (the "Incentive Plan"). The Incentive Plan
provides for the payment of additional annual cash bonuses if the Company's
after-tax earnings for the fiscal year (determined without regard to payments
under the Incentive Plan) exceeds 17.5% of the Company's Average Common Equity
(as defined below) for such fiscal year. If the threshold is satisfied in any
given fiscal year, the aggregate award compensation that will be paid under
the
38
<PAGE>
Incentive Plan for that particular fiscal year (the "Incentive Pool") will be
equal to 2.5% of the excess, if any, of the Company's pre-tax earnings for
such fiscal year (determined without regard to payments under the Incentive
Plan) over 17.5% of the Company's Average Common Equity for such fiscal year.
The Average Common Equity for a fiscal year is the average of the balance of
equity attributable to the outstanding Common Stock of the Company (including
par value, additional paid in capital and retained earnings), as reflected in
the financial statements of the Company at the end of each quarter during the
fiscal year. The entire amount in each Incentive Pool will be paid in cash to
the Incentive Plan participants within two and one-half months after the last
day of the fiscal year to which such Incentive Pool relates. Not more than 75%
of the Incentive Pool will be paid to the Chief Executive Officer, the
President and the Chief Financial Officer of the Company, with each such
individual's share of such aggregate amount to be determined by the Chief
Executive Officer and subject to the approval of the Board of Directors. The
balance of the Incentive Pool will be paid to other senior management
employees of the Company as determined by the Chief Executive Officer and
subject to the approval of the Board of Directors.
STOCK OPTION PLANS
The Company adopted its 1994 and 1997 Stock Option Plan to align the
interests of the executives and employees of the Company with those of its
stockholders. Options covering 488,928 shares of Common Stock were granted
pursuant to the 1994 Stock Option Plan and no further options will be granted
under such Plan. The 1997 Stock Option Plan permits the grant of options
qualified as incentive stock options under the Internal Revenue Code, other
stock options and other equity-based awards. 375,000 shares have been reserved
for issuance under the 1997 Stock Option Plan. Stock options may be granted to
executives and employees of the Company and its subsidiaries. The exercise
price of stock options will be determined by the Board of Directors or a
committee thereof and will not be less than the fair market value of the
Common Stock on the date the option is granted. Subject to the terms of the
1997 Stock Option Plan, the Board of Directors or the Compensation Committee
is authorized to select the recipients of stock options and other awards from
among those eligible and to establish the exercise price, the number of shares
that may be issued and other terms. The exercise price of an option maybe paid
in cash, in shares of Common Stock (valued at fair market value on the date of
exercise) or by a combination thereof.
The Company has adopted, effective upon consummation of the Offering, a Non-
Employee Director Option Plan. Under such plan, each member of the Board of
Directors who is not employed by the Company will automatically be granted a
stock option covering 5,000 shares at each annual meeting at which he is
elected. The exercise price of each such option will be the fair market value
of the Common Stock on the date the option is granted. Such options will have
a ten-year term and will vest over the five years following the grant based on
continued Board membership. The Company has reserved 100,000 shares for
issuance under such plan.
39
<PAGE>
CERTAIN TRANSACTIONS
Prior to consummation of the Offering, the Company will distribute to
Messrs. Zimmerman and Palles in redemption of 571,923 shares and 46,372
shares, respectively, of Common Stock of the Company held by them, all of the
stock of a subsidiary which owns a portfolio of healthcare leases and other
assets not used in the Company's business described herein (the "Affiliate
Group"). All numbers and percentages of shares contained herein reflect,
unless otherwise indicated, such redemption. Pursuant to an agreement (the
"Servicing Agreement") with the Affiliate Group, the Company will provide
limited servicing, including billing, collection and invoicing, for the
portfolio of leases owned by the Affiliate Group until December 31, 1999 for
$83,250 for the last quarter of 1997, $270,250 for 1998 and $212,250 for 1999,
and the Affiliate Group will sub-lease from the Company approximately 2,500
square feet of space at the Company's executive offices for approximately
$68,000 per year, which is equal to the Company's cost for such space. If the
Company renews its own sub-lease for the space, it will permit the Affiliate
Group to renew such sub-lease. In addition, the Servicing Agreement will
prohibit the Affiliate Group from competing with the Company for the longer of
(i) three years or (ii) the period of time during which Messrs. Zimmerman or
Palles are employed by the Company plus one year. The Servicing Agreement will
require the Affiliate Group to refer all lease origination opportunities it
encounters to the Company.
In connection with the distribution of the stock of the Affiliate Group to
Messrs. Zimmerman and Palles, (i) the Affiliate Group will agree to pay the
Company an aggregate of $2,508,000 until the maturity of the Company's 8 1/4%
Subordinated Debentures due 2003 (the principal balance of such Debentures
shown in the Company's financial data herein is net of such amount); (ii) the
Affiliate Group will, upon consummation of the Offering, repay its portion of
the outstanding borrowings under the Senior Credit Facility (which portion at
June 30, 1997 was $3,375,000); and (iii) the Company will cause the Subsidiary
Preferred Stock, all of which will be held by the Affiliate Group, to be
redeemed for approximately $4.9 million. Messrs. Zimmerman and Palles will
serve as directors of the Affiliate Group, with Mr. Zimmerman as Chairman, and
they will be compensated by the Affiliate Group for their services to it. Such
services will not interfere with the devotion of their full business time to
the Company's affairs. Any other material transactions between the Affiliate
Group and the Company will be subject to the approval of the independent
directors of the Company.
Upon consummation of the Offering, the Company will purchase the minority
interests in a subsidiary of the Company from each of Dr. Farren and Mr. Laing
for $417,690 and $348,439, respectively. In addition, $400,000 was paid by the
Company to Mr. Laing for a portion of his minority interest in such subsidiary
in March 1997.
40
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of August 25, 1997, and
as adjusted to reflect completion of the Offering, by: (i) each person or
entity known by the Company to own beneficially five percent or more of the
outstanding Common Stock; (ii) each member of the Board of Directors of the
Company; (iii) each executive officer of the Company; and (iv) all executive
officers of the Company and all members of the Board of Directors as a group.
Unless otherwise indicated, the address of the stockholders shown as
beneficially owing more than five percent of the Common Stock listed below is
that of the Company's principal executive offices. Except as indicated in the
footnotes to the table, the persons and entities named in the table have sole
voting and investment power with respect to all shares beneficially owned.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
THE OFFERING OFFERING
----------------- -----------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------ --------- ------- --------- -------
<S> <C> <C> <C> <C>
Martin E. Zimmerman (1).................... 2,604,830 92.2% 2,604,830 54.0%
Robert E. Laing (2)........................ 190,843 6.8 190,843 4.0
Allen P. Palles (2)........................ 273,445 9.7 273,445 5.7
William J. Erbes........................... 7,835 * 7,835 *
Charles J. Aschauer (3).................... 55,493 2.0 55,493 1.2
Stanley Green (4).......................... 46,877 1.7 46,877 *
Terrence J. Quinn.......................... 39,175 1.4 39,175 *
--------- ---- --------- ----
All directors and executive offices as a
group
(8 persons)............................... 2,754,210 97.2% 2,754,210 57.0%
========= ==== ========= ====
</TABLE>
- --------
* Represents less than 1%.
(1) Includes 624,676 shares held by Mr. Zimmerman as trustee under trusts for
the benefit of his children and 611,274 shares held by Mr. Laing, Mr.
Palles and one other employee of the Company for which Mr. Zimmerman holds
proxies.
(2) All shares are subject to a proxy and right of first refusal held by Mr.
Zimmerman.
(3) All shares held by Mr. Aschauer are held by him as trustee in a living
trust the beneficiaries of which are his children.
(4) Includes 39,042 shares held by Mr. Green as trustee under a trust for the
benefit of Justine Zimmerman, a family member of Mr. Zimmerman.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 15,000,000 shares of
Common Stock, par value $0.001 per share, and 1,000,000 shares of blank check
preferred stock, par value $0.01 per share. As of the date of this Prospectus,
there are 4,824,326 shares of Common Stock outstanding and held of record by
twelve stockholders and no shares of preferred stock are issued and
outstanding.
COMMON STOCK
General
Holders of shares of Common Stock are entitled to share ratably in such
dividends as may be declared by the Board of Directors and paid by the Company
out of funds legally available therefor, subject to prior rights of
outstanding shares of any preferred stock and certain restrictions under
agreements governing the Company's indebtedness. See "Dividend Policy,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." In the event of any dissolution,
liquidation or winding up of the Company, holders of shares of Common Stock
are entitled to share ratably in assets remaining after payment of all
liabilities and liquidation preferences, if any.
Except as otherwise required by law, the holders of Common Stock are
entitled to one vote per share on all matters voted on by stockholders,
including the election of directors. The holders of a majority of Common Stock
represented at a meeting of stockholders can elect all of the directors to be
elected at such meeting.
Holders of shares of Common Stock have no preemptive, cumulative voting,
subscription, redemption or conversion rights. The currently outstanding
shares of Common Stock are fully paid and nonassessable, and the shares of
Common Stock to be outstanding upon completion of the Offering will be fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to the rights of any series of preferred stock which
the Company may issue in the future.
Transfer Agent and Registrar
Upon consummation of the Offering, the registrar and transfer agent for the
Common Stock will be LaSalle National Bank.
PREFERRED STOCK
The Board of Directors may, without further action by the Company's
stockholders, from time to time, authorize the issuance of shares of preferred
stock in one or more classes or series and may, at the time of issuance,
determine the powers, rights, preferences, qualifications and limitations of
any such class or series. Satisfaction of any dividend preferences on
outstanding shares of preferred stock would reduce the amount of funds
available for the payment of dividends on Common Stock. Also, holders of
preferred stock would be entitled to receive a preference payment in the event
of any liquidation, dissolution or winding up of the company before any
payment is made to the holders of Common Stock. Under certain circumstances,
the issuance of such preferred stock may render more difficult or tend to
discourage a merger, tender offer or proxy contest, the assumption of control
by a holder of a large block of the Company's securities or the removal of
incumbent directors.
PROXIES AND RIGHTS OF FIRST REFUSAL
Mr. Martin E. Zimmerman, the Company's Chairman and Chief Executive Officer,
holds proxies entitling him to vote all of the shares of Common Stock held by
certain employees of the Company, including any which may be issued upon the
exercise of stock options and holds rights of first refusal covering such
shares. Such proxies and rights may render more difficult or tend to
discourage a merger, tender offer or proxy contest, the assumption of control
by a holder of a large block of the Company's securities or the removal of an
incumbent director. See "Principal Stockholders."
42
<PAGE>
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINEES
The Bylaws of the Company include certain provisions that could have anti-
takeover effects. The provisions are intended to enhance the likelihood of
continuity and stability in the composition of, and in the policies formulated
by, the Board of Directors. The Bylaws establish an advance notice procedure
with regard to business proposed to be submitted by a stockholder at any
annual or special meeting of stockholders of the Company, including the
nomination of candidates for election as directors. The procedure provides
that a notice of proposed stockholder business must be delivered to, or mailed
and received at, the principal executive offices of the Company not less than
60 days nor more than 90 days prior to such meeting or, if less then 70 days'
notice was given for the meeting, within 10 days following the date on which
such notice was given. These advance notice procedures are designed so that
the Board of Directors will have sufficient time to review the proposal, to
develop appropriate alternatives to the proposal, and to act in what the Board
of Directors believes to be the best interests of the Company and its
stockholders. The foregoing provisions of the Bylaws may not be amended or
repealed by the stockholders of the Company except upon the vote, at a regular
or special stockholders' meeting, of the holders of at least a majority of the
outstanding shares of each class of the Company's capital stock then entitled
to vote thereon.
LIMITATIONS ON DIRECTORS' LIABILITY
The Company's Certificate of Incorporation provides that, to the fullest
extent permitted by Delaware law, no director shall be liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty as a
director. By virtue of these provisions, a director of the Company is not
personally liable for monetary damages for a breach of such director's
fiduciary duty except for liability for (i) breach of the duty of loyalty to
the Company or to its stockholders; (ii) acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law; (iii)
dividends or stock repurchases or redemptions that are unlawful under the
Delaware General Corporate Law ("DGCL"); and (iv) any transaction from which
such director receives an improper personal benefit. In addition, the
Certificate of Incorporation provides that if the DGCL is amended to authorize
the further elimination or limitation of the liability of a director, then the
liability of the directors will be eliminated or limited to the fullest extent
permitted by the DGCL, as amended.
DELAWARE STATUTE
The Company has elected to be subject to Section 203 of the DGCL ("Section
203"). Under Section 203, certain transactions and business combinations
between a corporation and an "interested stockholder" owning 15% or more of
the corporation's outstanding voting stock are restricted for a period of
three years from the date the stockholder becomes an interested stockholder.
Generally, Section 203 prohibits significant business transactions such as a
merger with, disposition of assets to, or receipt of disproportionate
financial benefits by, the interested stockholder, or any other transaction
that would increase the interested stockholders proportionate ownership of any
class or series of the Company's capital stock unless: (i) the transaction
resulting in a person's becoming an interested stockholder, or the business
combination, has been approved by the Board of Directors before the person
becomes an interested stockholder; (ii) the interested stockholder acquires
85% or more of the outstanding voting stock of the Company in the same
transaction that makes it an interested stockholder; or (iii) on or after the
date the person becomes an interested stockholder, the business combination is
approved by the Board of Directors or by the holders of at least two-thirds of
the Company's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder.
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, 4,824,326 shares of Common Stock will be
outstanding. Of these shares, the 2,000,000 shares sold in the Offering will
be freely tradeable without restriction or further registration under the
Securities Act, except that any shares purchased by "affiliates" of the
Company, as that term is defined in Rule 144 ("Affiliates"), may generally
only be sold in compliance with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
All of the remaining 2,824,326 shares of Common Stock held by existing
stockholders are deemed "Restricted Shares" under Rule 144. Subject to the 180
day lock-up agreement, the Restricted Shares will be eligible for sales
pursuant to Rule 144 in the public market following the consummation of the
Offering.
In general under Rule 144 as currently in effect, a person (or person are
aggregated), including an Affiliate, who has beneficially owned Restricted
Shares for at least one year is entitled to sell, within any three-month
period, a number of such shares that does not exceed the greater of 1% of the
then outstanding shares of Common Stock (approximately 48,243 shares
immediately after the Offering), or the average weekly trading volume in the
Common Stock in the Nasdaq National Market during the four calendar weeks
preceding the date on which notice of such sale is filed under Rule 144. In
addition, under Rule 144(k), a person who is not an Affiliate and has not been
an Affiliate for at least three months prior to the sale and who has
beneficially owned Restricted Shares for at least two years may resell such
shares without compliance with the foregoing requirements. In calculating the
holding periods described above, a holder of Restricted Shares can include the
holding periods of a prior owner who was not an Affiliate.
However, the Company, all of its officers and directors and certain other
stockholders, who in the aggregate own 2,763,658 shares of Common Stock, have
agreed to sign the 180 day lock-up agreement.
OPTIONS
Rule 701 under the Securities Act provides that shares of Common Stock
acquired on the exercise of outstanding options may be resold by persons other
than Affiliates, beginning 90 days after the date of this Prospectus, subject
only to the manner of sale provisions of Rule 144, and by Affiliates under
Rule 144 without compliance with its one-year minimum holding period, subject
to certain limitations. The Company intends to file one or more registration
statements on Form S-8 under the Securities Act to register all of the 175,674
shares of Common Stock subject to outstanding stock options and Common Stock
issuable pursuant to the Company's stock option plans which do not qualify for
an exemption under Rule 701 from the registration requirements of the
Securities Act. The Company expects to file these registration statements as
soon as practicable after the closing of the Offering, and such registration
statements are expected to become effective upon filing. Shares covered by
these registration statements will thereupon be eligible for sale in the
public markets, subject to the lock-up agreements described above, if
applicable.
44
<PAGE>
UNDERWRITING
Each of the Underwriters named below (collectively, the "Underwriters"), for
which Furman Selz LLC and EVEREN Securities, Inc. are acting as
representatives (the "Representatives"), has severally agreed, subject to the
terms and conditions set forth in the underwriting agreement dated as of
, 1997 (the "Underwriting Agreement"), to purchase, and the Company
has agreed to sell to each of the Underwriters, the aggregate number of shares
of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Furman Selz LLC.................................................
EVEREN Securities, Inc..........................................
---------
Total....................................................... 2,000,000
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to the approval of certain legal matters by counsel
and various other conditions. The nature of the Underwriters' obligations is
such that they are committed to purchase all of the above shares if any are
purchased. The Representatives have advised the Company that the Underwriters
propose to offer the shares of Common Stock directly to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may re-allow, a concession
not in excess of $ per share to certain other dealers. After the
Offering, the offering price and other selling terms may be changed by the
Representatives.
Prior to the Offering made hereby, there has been no public market for the
Common Stock. Accordingly, the initial public offering price for the Common
Stock will be determined by negotiations among the Company and the
Representatives. Among the factors to be considered in such negotiations are
the Company's results of operations and current financial condition, estimates
of the business potential and prospects of the Company, the experience of the
Company's management, the economics of the industry in general, the general
condition of the equities market and other relevant factors. There can be no
assurance that any active trading market will develop for the Common Stock or
as to the price at which the Common Stock may trade in the public market from
time to time subsequent to the Offering.
Certain persons participating in the Offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids or effecting syndicate
covering transactions. A stabilizing bid means the placing of any bid or the
effecting of any purchase, for the purpose of pegging, fixing or maintaining
the price of the Common Stock. A syndicate covering transaction means the
placing of any bid on behalf of the underwriting syndicate or the effecting of
any purchase to reduce a short position created in connection with the
Offering. Such transactions may be effected on the Nasdaq National Market, in
the over-the-counter market, or otherwise. Such stabilizing, if commenced, may
be discontinued at any time.
The Company has granted to the Underwriters an option, expiring 30 days from
the date of this Prospectus, to purchase up to 300,000 additional shares of
Common Stock on the same terms as set forth on the cover page of this
prospectus, solely to cover over-allotments, if any, incurred in the sale of
the shares of Common Stock offered hereby. If the Underwriters exercise the
option, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase such number of additional shares of Common Stock as is
proportionate to such Underwriter's initial commitment to purchase shares from
the Company.
The Company has agreed that for a period of 180 days following the date of
this Prospectus, it will not, without the prior written consent of Furman Selz
LLC, directly or indirectly offer for sale, sell, contract to sell, or grant
any option to purchase or otherwise dispose of any shares of the Common Stock,
except for options granted under the 1997 Stock Option Plan or Non-Employee
Director Option Plan or shares issued pursuant to the exercise of outstanding
options.
45
<PAGE>
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
The principal address of Furman Selz LLC is 230 Park Avenue, New York, New
York 10169. The principal address of EVEREN Securities, Inc. is 77 West Wacker
Drive, Chicago, Illinois 60601.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Kirkland & Ellis (a partnership which includes professional
corporations), Chicago, Illinois. Certain legal matters in connection with the
Offering will be passed upon for the Underwriters by Willkie Farr & Gallagher,
New York, New York.
EXPERTS
The Consolidated Financial Statements and schedule of the Company as of
December 31, 1995 and 1996 and June 30, 1997, and for each of the years in the
three-year period ended December 31, 1996 and the six months ended June 30,
1997, have been included herein and in the registration statement in reliance
upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein and in the registration statement, and
upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement," which term shall include all amendments, exhibits, annexes and
schedules thereto) under the Securities Act with respect to the shares of
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement. Certain items are omitted
in accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to the Registration Statement, including exhibits,
schedules and reports filed as part thereof. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement, including the exhibits and
schedules thereto, may be inspected without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Room 1024, Washington, D.C. 20549 and at the Commission's Regional
Offices located at the Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material may be obtained at prescribed
rates by mail from the public reference section of the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The Commission
maintains a web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with
Commission, including the Company. The address is http://www.sec.gov.
46
<PAGE>
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets, December 31, 1995 and 1996 and June 30, 1997. F-3
Consolidated Statements of Operations, years ended December 31, 1994, 1995
and 1996,
and six months ended June 30, 1996 (unaudited) and 1997.................. F-4
Consolidated Statements of Stockholders' Equity, years ended December 31,
1994, 1995 and 1996,
and six months ended June 30, 1996 (unaudited) and 1997.................. F-5
Consolidated Statements of Cash Flows, years ended December 31, 1994, 1995
and 1996,
and six months ended June 30, 1996 (unaudited) and June 30, 1997......... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
When the transaction referred to in the last paragraph of note (1)(a) of
Notes to Consolidated Financial Statements has been consummated, we will be in
a position to render the following report:
/s/ KPMG Peat Marwick LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors
LINC Capital, Inc.:
We have audited the accompanying consolidated balance sheets of LINC
Capital, Inc. and subsidiaries as of December 31, 1995 and 1996 and June 30,
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996 and the six months ended June 30, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 financial position of LINC
Capital, Inc. and subsidiaries as of December 31, 1995 and 1996 and June 30,
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996 and the six months
ended June 30, 1997 in conformity with generally accepted accounting
principles.
August 26, 1997, except as to the last paragraph of note (1)(a), which is as
of September , 1997
F-2
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
ASSETS 1995 1996 1997
------ ------- ------ --------
<S> <C> <C> <C>
Net investment in direct finance leases.............. $17,144 31,763 43,395
Equipment held for rental and operating leases, net.. 18,500 15,048 16,087
Accounts and notes receivable........................ 4,655 8,235 9,703
Receivable from affiliate............................ 6,007 3,624 3,375
Other assets......................................... 4,419 3,523 4,020
Deferred income taxes................................ 1,995 1,310 1,068
Goodwill............................................. 862 851 1,188
Cash and cash equivalents............................ 1,668 -- --
------- ------ ------
Total assets..................................... $55,250 64,354 78,836
======= ====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Senior credit facility and other senior notes
payable............................................. 31,914 29,605 46,763
Recourse debt........................................ 882 3,361 2,386
Nonrecourse debt..................................... 4,997 8,276 6,913
Accounts payable..................................... 1,518 4,355 3,805
Accrued expenses and customer deposits............... 2,147 2,534 1,689
Subordinated debentures.............................. 4,953 5,127 5,251
------- ------ ------
Total liabilities................................ 46,411 53,258 66,807
------- ------ ------
Redeemable preferred stock of subsidiary............. 4,025 4,718 4,869
------- ------ ------
Stockholders equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; none outstanding...................... -- -- --
Common stock, $.001 par value, 15,000,000 shares
authorized; 2,529,966, 2,529,966 and 2,890,230
shares issued; 2,529,965, 2,467,967, and 2,824,326
shares outstanding................................ 3 3 3
Additional paid-in capital......................... 4,478 5,478 6,302
Deferred compensation from issuance of options..... -- -- (221)
Stock note receivable.............................. (199) -- (497)
Treasury stock, at cost; 61,999 and 65,903 shares.. -- (270) (287)
Unrealized gain on securities...................... -- 348 328
Retained earnings.................................. 532 819 1,532
------- ------ ------
Total stockholders' equity....................... 4,814 6,378 7,160
------- ------ ------
Total liabilities and stockholders' equity....... $55,250 64,354 78,836
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
---------------------- ------------------
1994 1995 1996 1996 1997
------- ------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Sales of equipment................. $15,836 13,852 22,595 9,962 10,252
Cost of equipment sold............. 13,312 11,477 18,242 7,988 8,222
------- ------ ------ ----- ------
Gross profit from sales of
equipment......................... 2,524 2,375 4,353 1,974 2,030
Rental and operating lease revenue. 8,531 9,102 7,167 3,803 3,164
Direct finance lease income........ 339 1,467 3,055 1,289 2,598
Fee income......................... 580 2,378 1,869 1,130 648
Gain on remarketing of leased
equipment......................... 5 44 450 13 277
Gain on equity participation
rights............................ -- -- 263 -- 97
Interest and other income.......... 352 778 657 350 779
------- ------ ------ ----- ------
Total net revenues............... 12,331 16,144 17,814 8,559 9,593
------- ------ ------ ----- ------
Expenses:
Selling, general and
administrative.................... 6,842 7,524 8,008 3,717 3,963
Interest........................... 1,138 1,962 2,771 1,304 1,844
Depreciation of equipment under
rental agreements and operating
leases............................ 3,512 4,054 3,647 1,892 1,858
Provision for credit losses........ 247 1,060 749 338 479
------- ------ ------ ----- ------
Total expenses................... 11,739 14,600 15,175 7,251 8,144
------- ------ ------ ----- ------
Income before income taxes and
minority interest................... 592 1,544 2,639 1,308 1,449
Income tax expense................... 257 747 1,084 532 534
------- ------ ------ ----- ------
Income before minority interest...... 335 797 1,555 776 915
Minority interest.................... 338 292 498 228 202
------- ------ ------ ----- ------
Net income (loss).................... $ (3) 505 1,057 548 713
======= ====== ====== ===== ======
Net income (loss) per common share... $ -- 0.17 0.34 0.18 0.24
======= ====== ====== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND SIX MONTHS ENDED JUNE 30,
1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TREASURY
STOCK, AT
COMMON STOCK ADDITIONAL COST UNREALIZED
----------------- PAID-IN DEFERRED STOCK NOTE ------------- GAIN ON RETAINED
SHARES AMOUNT CAPITAL COMPENSATION RECEIVABLE SHARES AMOUNT SECURITIES EARNINGS TOTAL
--------- ------ ---------- ------------ ---------- ------ ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... 2,654,802 $ 3 $ 958 $ -- $(199) -- $ -- $-- $ 30 $ 792
Net loss................ -- -- -- -- -- -- -- -- (3) (3)
Purchase and sale of
stock, net............. (131,295) -- 48 -- -- -- -- -- -- 48
Capital contribution.... -- -- 2,000 -- -- -- -- -- -- 2,000
--------- --- ------ ----- ----- ------ ----- ---- ------ ------
Balance at December 31,
1994................... 2,523,507 3 3,006 -- (199) -- -- -- 27 2,837
Net income.............. -- -- -- -- -- -- -- -- 505 505
Purchase and sale of
stock, net............. 6,458 -- (28) -- -- -- -- -- -- (28)
Capital contribution.... -- -- 1,500 -- -- -- -- -- -- 1,500
--------- --- ------ ----- ----- ------ ----- ---- ------ ------
Balance at December 31,
1995................... 2,529,965 3 4,478 -- (199) -- -- -- 532 4,814
Net income.............. -- -- -- -- -- -- -- -- 1,057 1,057
Purchase and sale of
stock, net............. -- -- -- -- -- 61,999 (270) -- -- (270)
Capital contribution.... -- -- 1,000 -- -- -- -- -- -- 1,000
Common stock dividends,
.31 per share.......... -- -- -- -- -- -- -- -- (770) (770)
Unrealized gains on
securities............. -- -- -- -- -- -- -- 348 -- 348
Payment on note......... -- -- -- -- 199 -- -- -- -- 199
--------- --- ------ ----- ----- ------ ----- ---- ------ ------
Balance at December 31,
1996................... 2,529,965 3 5,478 -- -- 61,999 (270) 348 819 6,378
Net income.............. -- -- -- -- -- -- -- -- 713 713
Purchase and sale of
stock, net............. 360,264 -- 603 -- (497) 3,904 (17) -- -- 89
Unrealized loss on
securities............. -- -- -- -- -- -- -- (20) -- (20)
Deferred compensation
from issuance of stock
options................ -- -- 221 (221) -- -- -- -- -- --
--------- --- ------ ----- ----- ------ ----- ---- ------ ------
Balance at June 30,
1997................... 2,890,229 $ 3 $6,302 $(221) $(497) 65,903 $(287) $328 $1,532 $7,160
========= === ====== ===== ===== ====== ===== ==== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- -------------------
1994 1995 1996 1996 1997
-------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)........... $ (3) 505 1,057 548 713
Adjustments to reconcile net
income (loss) to net cash
provided in operating
activities:
Depreciation and
amortization............. 3,567 4,108 3,739 1,915 1,933
Direct finance lease
income................... (339) (1,467) (3,055) (1,289) (2,598)
Payments on direct finance
leases................... 878 9,527 17,682 9,421 9,839
Deferred income taxes..... 246 647 763 120 464
Provision for credit
losses................... 247 1,060 749 338 479
Amortization of discount.. 168 186 174 60 124
Minority interest......... 338 292 498 228 202
Changes in assets and
liabilities:
Decrease (increase) in
receivables.............. (1,758) (182) (4,138) (3,086) (1,422)
Decrease (increase) in
other assets............. 24 (3,069) 1,205 364 (633)
Increase (decrease) in
accounts payable......... 2,503 (2,167) 2,837 3,173 (550)
Increase (decrease) in
accrued expenses and
customer deposits........ 523 138 190 96 (1,080)
-------- ------- ------- ------- -------
Cash provided by
operating activities... 6,394 9,578 21,701 11,888 7,471
-------- ------- ------- ------- -------
Cash flows from investing
activities:
Cost of equipment acquired
for lease.................. (14,044) (23,979) (29,422) (13,825) (22,088)
Fixed assets purchased...... (576) (277) (252) (134) (503)
-------- ------- ------- ------- -------
Net cash used in
investing activities... (14,620) (24,256) (29,674) (13,959) (22,591)
-------- ------- ------- ------- -------
Cash flows from financing
activities:
Net increase (decrease) in
notes payable.............. 6,259 8,179 232 (1,000) 17,550
Proceeds from recourse and
nonrecourse debt........... -- 7,087 9,966 -- --
Repayment of recourse and
nonrecourse debt........... -- (444) (4,366) (1,097) (2,481)
Issuance of redeemable
preferred stock of
subsidiary................. -- -- 1,500 1,500 --
Preferred stock dividends of
subsidiary................. -- (38) (1,186) -- (38)
Capital contribution........ 2,000 1,500 1,000 1,000 --
Purchase and sale of stock,
net........................ 48 (28) (71) -- 89
Common stock dividends...... -- -- (770) -- --
-------- ------- ------- ------- -------
Net cash provided by
financing activities... 8,307 16,256 6,305 403 15,120
-------- ------- ------- ------- -------
Net increase (decrease) in
cash......................... 81 1,578 (1,668) (1,668) --
Cash at beginning of year..... 9 90 1,668 1,668 --
-------- ------- ------- ------- -------
Cash at end of year........... $ 90 1,668 -- -- --
======== ======= ======= ======= =======
Supplemental disclosures of
cash flow information:
Interest paid............... $ 1,138 1,962 2,771 1,304 1,844
Income taxes paid........... 11 100 325 270 70
======== ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND SIX MONTHS ENDED JUNE 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business and Basis of Presentation
LINC Capital, Inc. (the "Company") is a finance company specializing in the
origination, acquisition, securitization and servicing of equipment leases and
in the rental and distribution of analytical instruments. The Company's
principal businesses are (i) the direct origination of leases to emerging
growth companies primarily serving healthcare and information technology
industries ("Select Growth Leasing" activities) and (ii) the rental, leasing
and distribution of analytical instruments to companies serving the
environmental, pharmaceutical and biotechnology industries ("Instrument Rental
& Distribution" activities). The Company also engages in the business of
acquiring, financing and servicing equipment lease and loan portfolios
originated by other lessors ("Portfolio Finance & Lessor Acquisition"
activities).
The accompanying consolidated financial statements include the operations of
LINC Capital, Inc. and its subsidiaries engaged in the foregoing activities
and do not include the assets, liabilities, and results of operations
previously carried out by LINC Capital, Inc. and those of its subsidiaries
that are not part of such activities. Such assets and liabilities consist
primarily of the stock of a subsidiary which holds a portfolio of leases of
primarily healthcare equipment and other assets and related liabilities which
are not used in the Company's business described herein (the "Affiliate
Group"). The Company has adopted a plan to distribute the Affiliate Group to
certain of its existing shareholders in redemption of 618,295 shares of the
Common Stock of the Company and accordingly the Affiliate Group has been
excluded from the accompanying financial statements.
All numbers and percentages of shares contained herein reflect, unless
otherwise indicated, such redemptions.
The Company has allocated to and charged the Affiliate Group for certain
corporate overhead, facility costs and interest expenses. Corporate overhead,
primarily consisting of executive compensation, related fringe benefits and
professional services have been allocated primarily on the basis of estimates
of the time devoted by the Company's executives and professionals in the
respective periods to such entities and divisions and the contribution to the
performance of such subsidiary or division by the applicable executive.
Facility costs, consisting primarily of facility rent, depreciation of office
furniture and equipment, insurance, equipment maintenance and utilities have
been allocated on the basis of the space occupied by such subsidiary or
division in shared facilities or the number of full-time equivalent personnel
engaged in the applicable division or subsidiaries activities. Interest costs
have been charged to the applicable subsidiary or division based on the amount
of intra-company or inter-company indebtedness owed by such subsidiary or
division to the Company, generally utilizing the month end average cost of
short-term borrowings of the Company for the applicable period, plus the
amortization of the discount on the Company's 8 1/4% Subordinated Debentures.
Income tax expense applicable to the operations of the Affiliate Group,
computed generally on the basis that such operations filed separate income tax
returns, have also been charged to those operations. Management believes that
these allocations and charges are reasonable and such allocations have been
approved by a majority of the Company's shareholders.
Pursuant to an agreement (the "Servicing Agreement") with the Affiliate
Group, the Company will provide limited servicing, including billing,
collection and invoicing, for the portfolio of leases owned by the Affiliate
Group until December 31, 1999 for $83,250 for the last quarter of 1997,
$270,250 for 1998 and $212,250 for 1999, and the Affiliate Group will sub-
lease from the Company approximately 2,500 square feet of space at the
Company's executive offices for approximately $68,000 per year, which is equal
to the Company's cost for such space. If the Company renews its own sublease
for the space, it will permit the Affiliate Group to renew such sub-lease. In
addition, the Servicing Agreement will prohibit the Affiliate Group from
competing with the
F-7
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company for the longer of (i) three years or (ii) the period of time during
which certain officers are employed by the Company plus one year. The
Servicing Agreement will require the Affiliate Group to refer all lease
origination opportunities it encounters to the Company.
In connection with the distribution of the stock of the Affiliate Group, (i)
the Affiliate Group will agree to pay the Company an aggregate of $2,508,000
until the maturity of the Company's 8 1/4% Subordinated Debentures due 2003
(the principal balance of such Debentures shown in the Company's financial
statements herein is net of such amount); (ii) the Affiliate Group will, upon
consummation of the Offering, repay its portion of the outstanding borrowings
under the Senior Credit Facility (which portion at June 30, 1997 was
$3,375,000); and (iii) the Company will cause the Subsidiary Preferred Stock,
all of which will be held by the Affiliate Group, to be redeemed for $4.7
million plus accrued dividends.
All material intercompany accounts and transactions have been eliminated in
consolidation.
On September , 1997, the Company amended its articles of incorporation to
increase its authorized capital stock and change the name of the Company to
LINC Capital, Inc., and effected a reverse split of the shares of common stock
so that each share of common stock of the Company outstanding prior to such
reverse split was converted to .7808 shares of common stock. All references to
share and per share data in the accompanying consolidated financial statements
have been adjusted to reflect these events.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(c) Direct Finance Leases
For direct finance leases, the present value of the future lease payments
and the present value of the residual value are recorded as the initial
investment of such leases. This initial investment generally represents the
cost of leased equipment. Unearned lease income is equal to the difference
between (i) the future lease payments and residual value and (ii) their
corresponding present values. Unearned lease income is amortized and recorded
as revenue over the term of the lease by applying a constant periodic rate of
return to the declining net investment.
(d) Operating Leases
Rental income from operating leases having terms of twelve months or greater
is recognized as lease payments become due. Equipment under operating leases
is recorded at cost and depreciated on a straight-line basis to its estimated
salvage value at the end of the lease term.
The Company also rents equipment under short-term rental agreements (less
than 12 months). Such rentals are included in operating lease and other
rentals in the consolidated statement of operations.
(e) Initial Direct Costs
Initial direct costs incurred by the Company in originating direct finance
and operating leases have been deferred and capitalized at the time the lease
commenced. Such costs for direct finance leases are amortized over the term of
the lease by applying a constant periodic rate of return to the declining net
investment in each lease on a straight-line method.
F-8
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(f) Earnings Per Share
Earnings per common and common equivalent share are computed based on the
weighted average number of common and common equivalent shares outstanding
during each period. As required by Staff Accounting Bulletin No. 83 issued by
the Securities and Exchange Commission, common and common equivalent shares
issued by the Company during the twelve-month period preceding the initial
filing of the Registration Statement for the offering have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method and assuming the initial public offering price).
The number of common and common equivalent shares used in the computation of
net earnings per common share for the years ended December 31, 1994, 1995, and
1996 and the six months ended June 30, 1996 and June 30, 1997 were 3,022,156,
3,011,264, 3,070,258, 3,018,012, and 2,976,495, respectively.
(g) Goodwill
Goodwill is amortized using the straight-line method over 25 years.
(h) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(i) Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all short-
term investments with a maturity date of three months or less at date of
purchase to be cash equivalents.
(j) Financial Instruments
The fair value of the Company's financial instruments approximates their
carrying value.
(k) Investments
The Company has classified its entire portfolio as available-for-sale.
Available-for-sale securities are stated at fair value with unrealized gains
and losses included in stockholders' equity. Realized gains and losses are
included in gain on equity participation rights. The cost of securities sold is
based on the specific identification method. At June 30, 1997, the Company held
available-for-sale securities with estimated fair values of $1,102,000,
consisting of gross unrealized gains of $547,000 and a cost basis of $555,000.
Available-for-sale securities are reported in other assets.
(l) Stock-based Compensation
The Company utilizes the intrinsic value based method of accounting for its
stock-based compensation arrangements.
(m) Interim Financial Information
The financial statements for the six months ended June 30, 1996 are
unaudited; however, in the opinion of management, all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation have been
included.
F-9
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) NET INVESTMENT IN DIRECT FINANCE LEASES
Net investment in direct finance leases is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30, ---
1995 1996 1997
------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Lease contracts receivable in
installments.......................... $21,085 37,501 51,138
Estimated residual value of leased
equipment............................. 1,496 2,376 3,472
Unearned lease income.................. (4,333) (6,820) (9,371)
Allowance for doubtful receivables..... (1,104) (1,294) (1,844)
------- ------ ------
Net investment......................... $17,144 31,763 43,395
======= ====== ======
</TABLE>
At June 30, 1997 future lease contract payments to be received on direct
finance leases are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Year Ending December 31,
1997..................................................... $10,813
1998..................................................... 17,777
1999..................................................... 12,666
2000..................................................... 7,650
2001 and thereafter...................................... 2,232
-------
Future lease contract payments............................. $51,138
=======
</TABLE>
At June 30, 1997 certain future lease contract payments have been assigned to
financial institutions (note 7).
(3) EQUIPMENT HELD FOR RENTAL AND OPERATING LEASES, NET
The net book value of equipment held for rental and operating leases is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30, ---
1995 1996 1997
------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Equipment under operating leases.......... $ 646 430 561
Equipment under rental agreements......... 17,854 14,618 15,526
------- ------ ------
Net book value............................ $18,500 15,048 16,087
======= ====== ======
</TABLE>
The book values presented in the above table are net of accumulated
depreciation of $5,219,000, $6,297,000, and $7,507,000 at December 31, 1995,
1996 and June 30, 1997, respectively.
At June 30, 1997 future contract payments to be received on operating leases
are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Year Ending December 31,
1997..................................................... $224
1998..................................................... 60
----
Future lease contract payments to be received.............. $284
====
</TABLE>
At June 30, 1997 certain future contract payments have been assigned to
financial institutions (note 7).
F-10
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) ESTIMATED NET BOOK VALUE OF EQUIPMENT AT LEASE TERMINATION
The following table represents the Company's estimated net book value
(residual value) of equipment at lease termination. The residual values in the
following table are recorded as components of the Company's net investment in
direct finance leases, $3,472,000, equipment held for operating leases,
$322,000, and the managed leased equipment portfolio (which is included in
other assets), $139,000, in the consolidated balance sheet at June 30, 1997.
<TABLE>
<CAPTION>
YEAR OF ESTIMATED NET
EXPECTED BOOK VALUE AT
TERMINATION TERMINATION
----------- --------------
(IN THOUSANDS)
<S> <C>
1997....................................................... $ 667
1998....................................................... 1,113
1999....................................................... 895
2000....................................................... 934
2001 and thereafter........................................ 324
------
$3,933
======
</TABLE>
(5) DUE FROM AFFILIATES
Amounts receivable from affiliates of $6,007,000, $3,624,000 and $3,375,000
at December 31, 1995 and 1996 and June 30, 1997, respectively, represent
receivables from the Affiliate Group. Such receivables are due and payable to
the Company upon completion of the distribution of the Affiliate Group to
certain shareholders of the Company.
(6) OTHER ASSETS
Other assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1995 1996 1997
------ ----- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investments available-for-sale.................. $ -- 982 1,102
Restricted cash................................. 940 976 1,031
Deposits on equipment........................... 1,532 -- 433
Property and equipment, net..................... 571 395 557
Residual values of managed lease portfolio...... 45 61 139
Prepaid expenses and miscellaneous.............. 1,331 1,109 758
------ ----- -----
Total....................................... $4,419 3,523 4,020
====== ===== =====
</TABLE>
(7) DEBT
Notes Payable
Notes payable to banks were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30, ---
1995 1996 1997
------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Senior credit facility................... $31,150 28,000 45,100
Other.................................... 764 1,605 1,663
------- ------ ------
$31,914 29,605 46,763
======= ====== ======
</TABLE>
At December 31, 1995 and 1996 and June 30, 1997, the Company along with its
subsidiary, LINC Quantum Analytics, Inc. and its division, LINC Capital
Partners, ("the borrowers"), had available a senior credit facility
F-11
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in the amount of $41,500,000, $35,000,000, and $54,500,000, respectively, of
which $31,150,000, $28,000,000, and $45,100,000 at December 31, 1995 and 1996
and June 30, 1997, respectively, was outstanding. The weighted-average
interest rate on the senior credit facility at December 31, 1995 and 1996 and
June 30, 1997 was 8.38%, 7.82%, and 7.89%, respectively. In July 1997, the
facility was amended and increased to $75,000,000. The facility, as amended,
provides for interest at LIBOR plus 1 3/4% to 2 1/4% or, at the Company's
option, prime plus up to 1/2% with the precise rate dependent on certain
leverage tests. The facility is secured by substantially all of the assets of
the borrowers and is used by the borrowers to finance acquisition of equipment
pending completion of permanent financing and for normal working capital
purposes. The facility matures July 21, 1998 at which point in time the
remaining balance of the facility may be converted to a term loan maturing
July 21, 2000.
Recourse and Nonrecourse Debt
The Company permanently finances leases with financial institutions, on
either a nonrecourse and/or partial recourse basis. In connection with these
financings, the Company receives a cash payment equal to the discounted value
of the future rentals less, in certain cases, a holdback or cash reserve (note
6). In the event of default by a lessee under a lease which has been assigned
to a lender under these financings, the lender has recourse to the lessee and
to the underlying leased equipment but no recourse to the Company except to
the extent of the recourse portion of the financing.
Proceeds from the financing of leases are recorded as debt. Interest rates
in connection with these loans ranged from 8.18% to 9.07% at June 30, 1997.
At June 30, 1997 the future principal maturities of recourse and nonrecourse
debt are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Year Ending December 31,
1997..................................................... $2,561
1998..................................................... 4,547
1999..................................................... 1,855
2000..................................................... 309
2001 and thereafter...................................... 27
------
Total recourse and nonrecourse discounted lease
rentals............................................... $9,299
======
</TABLE>
Subordinated Debentures
Subordinated debentures of the Company, which bear interest at 8 1/4% per
annum, are due June 15, 2003. Interest is payable semiannually in June and in
December. Mandatory sinking fund payments of $1,875,000 are required annually
since June 15, 1993. Sinking fund requirements have been satisfied through
June 15, 2001. The 8 1/4% Subordinated Debentures are subordinated in right of
payment to all existing and future senior indebtedness of the Company. The
subordinated debentures are convertible into the right to receive $377.30, in
cash, per $1,000 face value of debentures. The remaining principal balances of
the debentures at December 31, 1995 and 1996 and June 30, 1997 net of discount
recorded in 1988 in connection with the Company's acquisition of Scientific
Leasing, Inc. under the purchase accounting requirements of APB Opinion 16 are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30, ---
1995 1996 1997
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Subordinated debentures. $7,831 7,759 7,759
Less discount........... (2,878) (2,632) (2,508)
------ ------ ------
$4,953 5,127 5,251
====== ====== ======
</TABLE>
F-12
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Covenants and Restrictions
The Company's various debt agreements contain restrictions on, among other
things, the payment of dividends, repurchase of capital stock, and the amount
of recourse indebtedness that can be incurred. Under the most restrictive
agreement, common stock dividends and capital expenditures are subject to
limitations so long as indebtedness under the agreement is outstanding.
Furthermore, the Company is required to maintain a minimum adjusted tangible
net worth (as defined), and the Company may not exceed a specified ratio of
total recourse liabilities (as defined) to adjusted tangible net worth and is
required to maintain minimum debt service coverage rations (as defined). The
Company is in compliance with these covenants.
(8) MINORITY INTEREST AND REDEEMABLE SUBSIDIARY PREFERRED STOCK
As of June 30, 1997, a subsidiary of the Company had issued 45,000 shares of
$1.00 par value Series A Senior 8% redeemable cumulative preferred stock, and
3,366 shares of $.01 par value Series B 10% redeemable cumulative preferred
stock, of which 3,060 shares have been issued and 1,820 are outstanding at June
30, 1997. All dividends declared that are payable to the preferred stock
shareholders are classified within minority interest on the statement of
operations. The Series A and Series B Preferred Stock has been transferred to
an affiliate of the Company in connection with the Plan adopted by the Company
to distribute the Affiliate Group and will be redeemed by the Company upon
completion of such distribution. As of June 30, 1997, the Company owns 93.37%
of the outstanding common shares of the subsidiary and the remaining 6.63% is
held by a current officer of the subsidiary; to date all common shares have
been issued at $1.00 per share.
Both series of preferred stock are nonvoting and have a liquidation value of
$100 per share. Preferred stock dividends accrue on a daily basis using the
shares' liquidation value and rates of 8% and 10% per annum for Series A and B,
respectively. However, so long as any share of the Series A stock is
outstanding, no dividends shall be paid on any Series B stock unless and until
all dividends (whether or not declared) and all other amounts due and payable
on or with respect to the Series A stock shall have been paid, unless otherwise
approved by the Board of Directors. In addition, no payments or distribution on
liquidation shall be made on or with respect to Series B stock until Series A
stockholders have been paid the preferential amounts which such holders are
entitled to receive in a liquidation. Both series have mandatory redemption
requirements in February 2001 at the redemption price of $100 per share plus
accrued and unpaid dividends.
In March, 1995, the subsidiary paid Series B dividends of $37,824. In
December, 1996, the subsidiary paid Series A dividends of $1,186,000. In
February, 1997, the subsidiary paid Series B dividends of $38,000. Accrued and
unpaid dividends on the Series A and Series B preferred stock were $842,000,
$35,000 and $186,000 at December 31, 1995 and 1996 and June 30, 1997,
respectively.
(9) STOCK OPTIONS
The Company sponsors two non-qualified stock option plans effective as of
November 23, 1988 (the "1988 Plan") and December 1, 1994 (the "1994 Plan"). The
1988 Plan was terminated effective as of December 31, 1993. The 1994 Plan
provides for the grant of options to purchase up to 1,000,000 shares of the
Company's common stock to certain key employees and directors.
At June 30, 1997, all options which had been issued under the 1988 Plan had
either lapsed or have been exercised. During the six month period ended June
30, 1997 options for 47,010 shares granted under the 1988 Plan were exercised.
Options granted under the 1988 Plan had exercise prices which ranged from $1.87
per share to $2.68 per share. The exercise price of options granted under the
1988 Plan is subject to adjustment in the event of the occurrence of certain
distributions which occur or are approved prior to exercise of the related
option. As a result of the plan adopted by the Company to distribute the
Affiliate Group, under the terms of the
F-13
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1988 Plan, the price of options exercised during 1997 was adjusted from $2.68
per share to $.57 per share. In the event that the distribution fails to occur
for any reason, pursuant to agreements entered into with the holders of the
options, the exercise price will be readjusted to $2.68 per share.
In 1995, options for 216,218 shares were granted under the 1994 Plan at an
exercise price of $3.62 per share. In 1996, options for an additional 241,476
shares were granted under the 1994 at prices which range from $4.33 per share
to $4.73 per share. In 1997 options for an additional 31,232 shares were
granted at $4.80 per share. During 1997 options for 313,254 shares were
exercised under the terms of the 1994 plan. As in the 1988 Plan, as a result
of the plan adopted by the Company to distribute the Affiliate Group, under
the terms of the 1994 Plan, the price of options exercised during 1997 and all
issued but unexercised options granted under the 1994 Plan were adjusted in
accordance with the following table:
<TABLE>
<CAPTION>
ORIGINAL EXERCISE PRICE ADJUSTED EXERCISE PRICE
----------------------- -----------------------
<S> <C>
$3.62 $1.51
4.33 2.22
4.73 2.61
4.80 2.69
</TABLE>
The unexercised options which have been granted under the 1994 Plan (175,674
shares) vest during the following periods:
<TABLE>
<S> <C>
December 31:
1997............................ 7,835
1998............................ 70,491
1999............................ 37,688
2000............................ 38,839
2001............................ 10,412
2002............................ 10,409
</TABLE>
The following table summarizes the activity under the Plans during the years
ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1997:
<TABLE>
<CAPTION>
1994 1995
------------------ ------------------
WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Outstanding at the beginning of the
period............................ 96,984 $1.14 65,750 $.79
Granted.......................... -- -- 216,218 1.51
Exercised........................ (31,234) 1.47 (9,370) 2.68
------- ----- ------- ----
Outstanding at the end of the
period............................ 65,750 .79 272,598 1.39
======= ===== ======= ====
Options exercisable at the end of
period............................ 33,795 .56 58,836 2.68
------- ----- ------- ----
Weighted average fair value of
options granted during the period. .15
====
</TABLE>
F-14
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1996 JUNE 30, 1997
------------------ -------------------
WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE(1)
------- --------- -------- ---------
<S> <C> <C> <C> <C>
Outstanding at the beginning of
the period....................... 272,598 $1.39 504,704 $1.77
Granted......................... 241,476 2.23 31,234 2.69
Exercised....................... (9,370) 2.68 (360,264) 1.67
------- ----- -------- -----
Outstanding at the end of the
period........................... 504,704 1.77 175,674 2.12
======= ===== ======== =====
Options exercisable at the end of
period........................... 368,099 1.67 7,835 1.51
------- ----- -------- -----
Weighted average fair value of
options granted during the
period........................... .43 1.17
===== =====
</TABLE>
- --------
(1) Weighted average exercise prices per share have been adjusted to reflect
the adjustment to option exercise price attributable to the redemption of
shares in connection with the distribution of the Affiliate Group.
The following table summarizes information about stock options outstanding
at June 30, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
REMAINING
NUMBER CONTRACTUAL NUMBER
EXERCISE PRICES OUTSTANDING LIFE EXERCISABLE
--------------- ----------- ----------- -----------
<S> <C> <C> <C>
1.51.................................. 45,861 6 7,835
2.22.................................. 98,579 9 --
2.69.................................. 31,234 10 --
</TABLE>
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Options granted under the 1988 Plan are not subject
to the reporting requirements of FASB Statement No. 123. Had the compensation
cost for the 1994 plan been determined consistent with FASB Statement No. 123,
the Company's net income would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEARS
ENDED
DECEMBER SIX MONTHS
31, ENDED
---------- JUNE 30,
1995 1996 1997
---- ----- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income
As reported............................... $505 1,057 713
Pro forma................................. 494 1,031 684
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method specified by FASB Statement No. 123. The assumptions
used for the grants in 1995, 1996 and 1997 are as follows:
<TABLE>
<S> <C>
Risk-free interest rate.......... 6%
Expected lives
Options vested through December
31, 1997...................... Period from date of grant to June 30, 1997
Options vested after December
31,
1997........................... Periods varying from four to nine years
based on exercise period permitted in
option grant.
Volatility....................... None
Dividend rate.................... None
</TABLE>
F-15
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) INCOME TAXES
The provisions for income tax expense were comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
--------------- JUNE 30,
1994 1995 1996 1997
---- ---- ----- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Continuing Operations
Current:
Federal................ $129 -- 276 224
State.................. -- -- 43 45
Deferred:
Federal................ 70 579 562 155
State.................. 58 168 203 110
---- --- ----- ---
Total income tax
expense............. $257 747 1,084 534
==== === ===== ===
</TABLE>
Deferred taxes relate principally to the difference in the method of lease
financing revenue recognition for financial reporting purposes over cash
received (rental revenue) net of depreciation or rent expense recognized for
tax purposes. The provision for income taxes differs from the expected income
tax provision (computed by applying the Federal tax rate of 35%) for the
following reasons.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED
--------------- JUNE 30,
1994 1995 1996 1997
---- ---- ----- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Expected tax provision...... $207 540 924 507
State taxes, net of Federal
tax benefit................ 30 78 132 58
Other....................... 20 129 28 (31)
---- --- ----- ---
Income tax expense.......... $257 747 1,084 534
==== === ===== ===
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1995 1996 1997
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $7,015 6,709 6,187
Investment tax carryforward.................... 2,741 2,741 2,741
Alternative minimum tax credit carryforwards... 129 445 669
------ ------ ------
Total gross deferred tax assets.............. 9,885 9,895 9,597
Less valuation allowance......................... (4,319) (4,319) (4,319)
------ ------ ------
Net deferred tax assets...................... 5,566 5,576 5,278
------ ------ ------
Deferred tax liabilities:
Investment in leased equipment................. (3,567) (4,008) (3,975)
Unrealized gain or securities.................. (4) (258) (235)
------ ------ ------
Total gross deferred tax liabilities......... (3,571) (4,266) (4,210)
------ ------ ------
Net deferred tax asset....................... $1,995 1,310 1,068
====== ====== ======
</TABLE>
F-16
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For income tax purposes, the Company has an available net operating loss
carryforward of approximately $17,677,000 which expires beginning in 2006. The
Company also has unused investment tax credit carryforwards of approximately
$2,741,000 available to offset future taxes payable; these carryforwards expire
beginning in 1998.
(11) OTHER COMMITMENTS
The Company leases several offices and a warehouse facility under
noncancelable operating leases. The future minimum rental payments due under
these leases are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Year Ending December 31,
1997.................... $ 493
1998.................... 1,056
1999.................... 901
2000.................... 430
2001.................... 439
2002.................... 221
------
Total................. $3,540
======
</TABLE>
The Company's total obligation for rent was $851,000, $341,000, $538,000 and
$448,000 for 1994, 1995, 1996, and the six months ended June 30, 1997,
respectively. A substantial portion of the Company's obligation for rent, set
forth above, during 1994, 1995, 1996, and the six months ended June 30, 1997
has been allocated and charged to the Affiliate Group. See Note 1.
The Company's corporate headquarters and its Select Growth Leasing and
Portfolio Finance & Lessor Acquisition activities are located in Chicago,
Illinois and occupy approximately 26,000 square feet of office space. This
space is occupied under a lease which expires on September 30, 1999. The
Company's Instrument Rental & Distribution activities are located in Foster
City, California and occupy approximately 23,500 square feet of office space.
This space is occupied under a lease which expires on May 31, 2002.
In June, 1995, the Company subleased a portion of the facility of its
Instrument Rental & Distribution activities for $51,360 per annum. This
sublease expired in May, 1997 and was renewed at that time until April, 1999
for an annual rent of $70,560.
(12) LITIGATION
The Company is engaged in legal action in the ordinary course of its
business. With respect to litigation, the Company believes that it has adequate
legal defenses and believes the ultimate outcome will not have a material
effect on the Company's consolidated financial position.
F-17
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) SEGMENT INFORMATION
The company's operations have been classified into two business segments:
select growth/portfolio finance and instrument rental and distribution. The
select growth/portfolio finance segment includes the Select Growth Leasing and
Portfolio Finance & Lessor Acquisition activities. The instrument rental and
distribution segment include Instrument Rental and Distribution activities.
<TABLE>
<CAPTION>
SELECT GROWTH/ INSTRUMENT
PORTFOLIO RENTAL AND
FINANCE DISTRIBUTION CONSOLIDATED
-------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1997
Total net revenues............ $ 4,490 $ 5,103 $ 9,593
Depreciation and amortization
expense...................... 209 1,724 1,933
Total expenses................ 3,417 4,727 8,144
Income before income taxes and
minority interest............ 1,073 376 1,449
Capital expenditures.......... 20,193 2,398 22,591
Total assets.................. 58,147 20,689 78,836
YEAR ENDED DECEMBER 31, 1996
Total net revenues............ $ 6,516 11,298 17,814
Depreciation and amortization
expense...................... 231 3,508 3,739
Total expenses................ 4,921 10,254 15,175
Income before income taxes and
minority interest............ 1,595 1,044 2,639
Capital expenditures.......... 26,985 2,689 29,674
Total assets.................. 42,331 22,023 64,354
YEAR ENDED DECEMBER 31, 1995
Total net revenues............ $ 4,760 11,384 16,144
Depreciation and amortization
expense...................... 205 3,903 4,108
Total expenses................ 3,730 10,870 14,600
Income before income taxes and
minority interest............ 1,030 514 1,544
Capital expenditures.......... 17,015 7,241 24,256
Total assets.................. 30,409 24,841 55,250
YEAR ENDED DECEMBER 31, 1994
Total net revenues............ $ 1,330 11,001 12,331
Depreciation and amortization
expense...................... 480 3,087 3,567
Total expenses................ 1,439 10,300 11,739
Income (loss) before income
taxes and minority interest.. (109) 701 592
Capital expenditures.......... 7,651 6,969 14,620
Total assets.................. 12,687 23,430 36,117
</TABLE>
F-18
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY LINC CAPITAL, INC. OR BY ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET
FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 13
Capitalization............................................................ 14
Dilution.................................................................. 15
Dividend Policy........................................................... 16
Selected Financial Data................................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 24
Management................................................................ 35
Certain Transactions...................................................... 40
Principal Stockholders.................................................... 41
Description of Capital Stock.............................................. 42
Shares Eligible for Future Sale........................................... 44
Underwriting.............................................................. 45
Legal Matters............................................................. 46
Experts................................................................... 46
Additional Information.................................................... 46
Consolidated Financial Statements......................................... F-1
</TABLE>
----------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,000,000 SHARES
LINC CAPITAL, INC.
COMMON STOCK
----------------
PROSPECTUS
----------------
FURMAN SELZ
EVEREN SECURITIES, INC.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of estimated expenses, to be paid solely by the
Company, of the issuance and distribution of the securities being registered:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $11,152
NASD filing fee.................................................. *
Nasdaq National Market original listing fee...................... *
Blue Sky fees and expenses (including attorneys' fees and
expenses)....................................................... *
Printing expenses................................................ *
Accounting fees and expenses..................................... *
Transfer agent's fees and expenses............................... *
Legal fees and expenses.......................................... *
Miscellaneous expenses........................................... *
-------
Total........................................................ $ *
=======
</TABLE>
- --------
* To be provided by Amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware. Section
145 of the General Corporation Law of the State of Delaware ("Section 145")
provides that a Delaware corporation may indemnify any persons who are, or are
threatened to be made, parties to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation), by reason of
the fact that such person was an officer, director, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding, provided such person acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the corporation's best interests and, with respect to any criminal action
or proceeding, had no reasonable cause to believe that his conduct was
illegal. A Delaware corporation may indemnify any persons who are, or are
threatened to be made, a party to any threatened, pending or completed action
or suit by or in the right of the corporation by reason of the fact that such
person was a director, officer, employee or agent of such corporation, or is
or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation or enterprise. The indemnity may
include expenses (including attorneys' fees) actually and reasonably incurred
by such person in connection with the defense or settlement of such action or
suit, provided such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests except
that no indemnification is permitted without judicial approval if the officer
or director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses
which such officer or director has actually and reasonably incurred.
The Company's Certificate of Incorporation and By-laws provide for the
indemnification of Directors and officers of the Company to the fullest extent
permitted by Section 145.
In that regard, the By-laws provide that the Company shall indemnify any
person whom it has the power to indemnify by Section 145 from or against any
and all of the expenses, liabilities or other matters referred to or covered
in Section 145, and such indemnification is not exclusive of other rights to
which such person shall be entitled under any By-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to
II-1
<PAGE>
action in such person's official capacity for or in behalf of the Company
and/or any subsidiary of the Company and as to action in another capacity
while holding such office and shall continue as to such person who has ceased
to be a director, officer, employee, or agent of the Company and/or subsidiary
of the Company and shall inure to the benefit of the heirs, executors, and
administrators of such person.
The Company expects to enter into indemnification agreements with each of
its executive officers and Directors prior to the completion of the Offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the last three years, the Company has issued shares of Common Stock
upon the exercise of employee and director stock options at prices ranging
from $0.56 to $2.61 in reliance upon exemptions contained in Section 4(2) of
the Securities Act and Rule 701 adopted under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
NUMBER
------
<C> <S> <C>
*1.1 Form of Underwriting Agreement
*3.1 Form of Restated Certificate of Incorporation of the Com-
pany
*3.2 Form of Restated Bylaws of the Company
*4.1 Form of certificate representing shares of Common Stock,
$0.001 par value per share
*5.1 Opinion and consent of Kirkland & Ellis
*10.1 Amended and Restated Loan Agreement, between the Company,
the various lending institutions named therein and Fleet
Bank, N.A., as Agent+
*10.2 Agreement between the Company and LINC Finance Corporation
("LFC") regarding distribution of LFC shares and related
matters
*10.3 Employment Agreement for Mr. Zimmerman
*10.4 Form of Employment Agreements for Messrs. Palles, Laing,
Erbes and Dr. Farren
*10.5 Non-Employee Director Option Plan
*10.6 Executive Incentive Compensation Plan
*10.7 1994 Stock Option Plan
*10.8 1997 Stock Option Plan
*11.1 Statement re computation of per share earnings
*21.1 Subsidiaries of the Company
*23.1 Consent of KPMG Peat Marwick LLP
*23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1)
24.1 Powers of Attorney (included in signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
+ The Company agrees to furnish supplementally to the Commission a copy of
any omitted schedule or exhibit to such agreement upon request by
Commission.
II-2
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules included in this Registration Statement:
Schedule II--Valuation and qualifying accounts for the periods from
January 1, 1994 through June 30, 1997.
All other schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related instructions,
are inapplicable or not material, or the information called for thereby is
otherwise included in the financial statements and therefore has been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriters
at closing and as specified in the Underwriting Agreement, certificates in
such denominations and registered in such names as requested by the
Underwriters to permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO, STATE OF
ILLINOIS, ON AUGUST 29, 1997.
The LINC Group, Inc.
(to be renamed LINC Capital, Inc.)
/s/ Martin E. Zimmerman
By: _________________________________
Martin E. Zimmerman
Chairman and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS MARTIN E. ZIMMERMAN AND ALLEN P. PALLES, AND
EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL
POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND
STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY OR ALL AMENDMENTS (INCLUDING
POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT (AND ANY
REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, FOR THE OFFERING WHICH THIS REGISTRATION STATEMENT
RELATES), AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS
IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING
UNTO SAID ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND
AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND
NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND
PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING
ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR OR HIS
SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE
HEREOF.
* * * * *
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED ON AUGUST 29,
1997, BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<S> <C>
/s/ Martin E. Zimmerman Chairman of the Board and Chief Executive
___________________________________________ Officer (principal executive officer)
Martin E. Zimmerman
/s/ Allen P. Palles Chief Financial Officer and Director
___________________________________________ (principal financial and accounting
Allen P. Palles officer)
/s/ Robert E. Laing Director
___________________________________________
Robert E. Laing
/s/ Charles J. Aschauer Director
___________________________________________
Charles J. Aschauer
/s/ Stanley Green Director
___________________________________________
Stanley Green
/s/ Terrence J. Quinn Director
___________________________________________
Terrence J. Quinn
</TABLE>
II-4
<PAGE>
WHEN THE TRANSACTION REFERRED TO IN THE LAST PARAGRAPH OF NOTE (1)(A) OF
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE IN
A POSITION TO RENDER THE FOLLOWING REPORT:
/s/ KPMG Peat Marwick LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors
LINC Capital, Inc.:
Under date of August 26, 1997, except as to the last paragraph of note
(1)(a), which is as of September , 1997, we reported on the consolidated
balance sheets of LINC Capital, Inc. and subsidiaries as of December 31, 1995
and 1996 and June 30, 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996 and the six months ended June 30,
1997, which are included in the prospectus. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule in the registration
statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
Chicago, Illinois
August 26, 1997, except as to thelast paragraph of note (1)(a),which is as of
September , 1997
S-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND RECOVERIES CHARGE- END
DESCRIPTION OF PERIOD EXPENSES AND OTHER OFFS OF PERIOD
- ----------- ---------- ---------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1994...................... -- 247 127 (125) 249
Year ended December 31,
1995...................... 249 1,060 247 (452) 1,104
Year ended December 31,
1996...................... 1,104 749 130 (689) 1,294
Six months ended June 30,
1997...................... 1,294 479 176 (105) 1,844
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
*1.1 Form of Underwriting Agreement
*3.1 Form of Restated Certificate of Incorporation of the Company
*3.2 Form of Restated Bylaws of the Company
*4.1 Form of certificate representing shares of Common Stock, $0.001 par
value per share
*5.1 Opinion and consent of Kirkland & Ellis
*10.1 Amended and Restated Loan Agreement, between the Company, the vari-
ous lending institutions named therein and Fleet Bank, N.A., as
Agent+
*10.2 Agreement between the Company and LINC Finance Corporation ("LFC")
regarding distribution of LFC shares and related matters
*10.3 Employment Agreement for Mr. Zimmerman
*10.4 Form of Employment Agreements for Messrs. Palles, Laing, Erbes and
Dr. Farren
*10.5 Non-Employee Director Option Plan
*10.6 Executive Incentive Compensation Plan
*10.7 1994 Stock Option Plan
*10.8 1997 Stock Option Plan
*11.1 Statement re computation of per share earnings
*21.1 Subsidiaries of the Company
*23.1 Consent of KPMG Peat Marwick LLP
*23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1)
24.1 Powers of Attorney (included in signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
+ The Company agrees to furnish supplementally to the Commission a copy of any
omitted schedule or exhibit to such agreement upon request by Commission.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from The
Consolidated Financial Statements of LINC CAPITAL, INC dated December 31, 1995
and 1996 and June 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 JUN-30-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 0 0
<SECURITIES> 982 1,102
<RECEIVABLES> 44,916 58,317
<ALLOWANCES> 1,294 1,844
<INVENTORY> 0 0
<CURRENT-ASSETS> 49,306 62,749
<PP&E> 21,345 23,594
<DEPRECIATION> 6,297 7,507
<TOTAL-ASSETS> 64,354 78,836
<CURRENT-LIABILITIES> 6,889 5,494
<BONDS> 46,369 61,313
4,718 4,869
0 0
<COMMON> 6,378 7,160
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 64,354 78,836
<SALES> 22,595 10,252
<TOTAL-REVENUES> 17,814 9,593
<CGS> 18,242 8,222
<TOTAL-COSTS> 18,242 8,222
<OTHER-EXPENSES> 11,655 5,821
<LOSS-PROVISION> 749 479
<INTEREST-EXPENSE> 2,771 1,844
<INCOME-PRETAX> 2,639 1,449
<INCOME-TAX> 1,084 534
<INCOME-CONTINUING> 1,555 915
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,057 713
<EPS-PRIMARY> 0.34 0.24
<EPS-DILUTED> 0.34 0.24
</TABLE>
