SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-23309
LINC CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0850149
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 East Wacker Drive, Suite 1000,
Chicago, Illinois 60601
(Address of principal executive offices) (Zip Code)
(312) 946-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
At August 12, 1998, 5,183,688 shares of the Registrant's Common Stock were
outstanding.
<PAGE>
LINC CAPITAL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations -
Three and six months ended June 30, 1997 and 1998
(unaudited)..................................................3
Consolidated Balance Sheets -
December 31, 1997 (audited) and June 30, 1998
(unaudited)..................................................4
Consolidated Statements of Cash Flows -
Three and six months ended June 30, 1997 and 1998
(unaudited)..................................................5
Notes to Consolidated Financial Statements.....................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..............18
Item 6. Exhibits and Reports on Form 8-K.................................18
SIGNATURES ............................................................18
<PAGE>
PART I - FINANCIAL INFORMATION
LINC Capital, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
-------- --------
1997 1998 1997 1998
---- ---- ---- ----
Net Revenues:
Sales of equipment....................... $4,741 9,080 10,252 14,800
Cost of equipment sold................... 3,739 7,397 8,222 12,097
----- ----- ----- ------
Gross profit from sales of equipment..... 1,002 1,683 2,030 2,703
Rental and operating lease revenue....... 1,740 2,258 3,164 4,714
Direct finance lease income.............. 1,529 3,160 2,598 5,268
Fee income............................... 390 338 789 594
Gain on sale of lease financing
receivables........................... -- 2,891 -- 3,588
Gain on remarketing of leased equipment.. 88 540 277 787
Gain on equity participation rights...... 23 610 97 2,678
Interest income.......................... 128 378 338 804
Other income............................. 240 294 300 521
----- ------ ----- ------
Total net revenues............... 5,140 12,152 9,593 21,657
----- ------ ----- ------
Expenses:
Selling, general and administrative...... 2,035 4,174 3,963 7,855
Interest................................. 1,026 2,366 1,844 4,036
Depreciation of equipment under rental
agreements and operating leases....... 957 1,397 1,858 2,902
Provision for credit losses.............. 245 1,724 479 2,327
----- ----- ----- ------
Total expenses................... 4,263 9,661 8,144 17,120
----- ----- ----- ------
Income from continuing operations before
income taxes and minority interest....... 877 2,491 1,449 4,537
Income tax expense.......................... 322 985 534 1,775
--- --- --- -----
Income from continuing operations before
minority interest........................ 555 1,506 915 2,762
Minority interest........................... -- -- (13) --
---- ----- ---- ----
Net income from continuing operations....... 555 1,506 902 2,762
Discontinued operations:
Income (loss) from discontinued
operations, net of income tax (benefit)
for the three months ended June 30, 1997
of $94, and the six months ended
June 30, 1997 of ($3).................... 63 -- (55) --
==== ===== ==== ====
Net income.................................. $618 1,506 847 2,762
==== ===== ==== =====
Per common share:
Net income from continuing operations
Basic............................ $0.19 0.29 0.31 0.54
Diluted.......................... $0.18 0.28 0.30 0.52
Net income
Basic............................ $0.21 0.29 0.29 0.54
Diluted.......................... $0.20 0.28 0.28 0.52
See accompanying notes to consolidated financial statements.
<PAGE>
LINC Capital, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
December 31, June 30,
------------ --------
ASSETS 1997 1998
------ ---- ----
(Audited) (Unaudited)
Net investment in direct finance leases and loans..... $67,264 111,004
Equipment held for rental and operating leases, net... 22,007 24,892
Accounts receivable................................... 6,583 7,737
Securitization residual interest...................... 3,017 13,415
Other assets.......................................... 8,210 15,763
Goodwill.............................................. 1,896 8,749
Cash and cash equivalents............................. -- 5,883
-------- --------
Total assets.................................. $108,977 187,443
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Senior credit facility and other senior notes payable.. $38,117 90,446
Recourse debt.......................................... 2,955 12,861
Nonrecourse debt....................................... 17,951 16,418
Accounts payable....................................... 2,985 7,190
Accrued expenses....................................... 2,905 6,030
Customer holdbacks..................................... 1,738 7,424
Subordinated debentures................................ 5,386 5,534
Deferred income taxes.................................. 236 1,257
------- -----
Total liabilities.............................. $72,273 147,160
------- -------
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; 5,199,591 and 5,249,591
shares issued; 5,133,688 and 5,183,688 outstanding. 5 5
Additional paid-in capital.......................... 28,840 29,567
Deferred compensation from issuance of options...... (171) (146)
Stock note receivable............................... (511) (182)
Treasury stock, at cost; 65,903 shares.............. (287) (287)
Retained earnings................................... 7,902 10,664
Accumulated other comprehensive income.............. 926 662
------ ------
Total stockholders' equity..................... 36,704 40,283
-------- -------
Total liabilities and stockholders' equity............. $108,977 187,443
======== =======
See accompanying notes to consolidated financial statements.
<PAGE>
LINC Capital, Inc. and Subsidiaries
Consolidated Cash Flow Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------- --------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................... $618 1,506 847 2,762
Adjustments to reconcile net income to net cash
provided by continuing operations
Net (income) loss from discontinued operations........... (63) -- 55 --
Depreciation and amortization ........................... 1,030 1,569 1,933 3,164
Direct finance lease income.............................. (1,529) (3,160) (2,598) (5,268)
Payments on direct finance leases ....................... 5,479 21,083 9,839 28,236
Deferred income taxes ................................... 338 474 464 1,021
Provision for credit losses.............................. 245 1,724 479 2,327
Gain on sale of lease financing receivables ............. -- (2,891) -- (3,588)
Gain on equity participation rights...................... (23) (610) (97) (2,678)
Amortization of discount................................. 63 75 124 148
Deferred compensation ................................... -- -- -- 25
Minority interest ....................................... -- -- 202 --
Changes in assets and liabilities
Decrease (increase) in receivables....................... 1,123 (1,303) (726) (1,638)
Increase in securitization residual interest............. -- (8,540) -- (10,398)
Increase in other assets ................................ (3,523) (10,448) (633) (13,307)
Increase (decrease) in accounts payable.................. (1,443) 109 (550) 1,662
Increase (decrease) in accrued expenses ................. 1,623 576 (434) 546
Increase (decrease) in customer holdbacks ............... (3,096) 5,698 (646) 5,686
------ ----- ---- -----
Cash provided by continuing operations ......................... 842 5,862 8,259 8,700
Cash flows from discontinued operations....................... 3,881 -- 7,851 --
----- ----- ----- -----
Cash provided by operating activities........................... 4,723 5,862 16,110 8,700
----- ----- ------ -----
Cash flows from investing activities:
Cost of equipment acquired for lease and rental .............. (12,147) (70,001) (22,784) (101,925)
Fixed assets purchased ....................................... (107) (291) (503) (468)
Cash used in acquisitions, net of cash acquired .............. -- (36,481) -- (39,180)
Proceeds from sale of investments ............................ 23 610 97 2,678
------- --------- -------- ---------
Net cash used in investing activities .......................... (12,231) (106,163) (23,190) (138,895)
------- --------- ------- ---------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
LINC Capital, Inc. and Subsidiaries
Consolidated Cash Flow Statements (Unaudited) - (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------- --------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase in notes payable................................ 9,050 32,187 17,550 56,487
Proceeds from recourse and nonrecourse debt.................. -- 3,477 -- 4,697
Repayment of recourse and nonrecourse debt................... (1,303) (5,914) (2,481) (13,277)
Proceeds from sales of lease financing receivables,
net of securitization residual interest.................... -- 71,676 -- 87,842
Purchase of stock ........................................... -- -- (17) --
Sale of stock ............................................... 106 -- 106 --
Proceeds from stock notes receivable ........................ -- -- -- 329
Payment of notes from discontinued operations................ (5,036) -- (8,078) --
------ ------- ------ -------
Net cash provided by financing activities....................... 2,817 101,426 7,080 136,078
------ ------- ----- -------
Net increase (decrease) in cash................................. (4,691) 1,125 -- 5,883
Cash at beginning of period .................................... 4,691 4,758 -- --
===== ===== ===== =====
Cash at end of period .......................................... $-- 5,883 -- 5,883
====== ===== ===== =====
Supplemental disclosures of cash flow information:
Interest paid ............................................... $1,080 2,354 1,844 3,738
Income taxes paid ........................................... $45 167 70 848
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
LINC Capital Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(1) The Company
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 the healthcare and information technology industries
("Select Growth Leasing" activities), (ii) the acquisition and financing of
lease portfolios originated by other lessors and the acquisition of leasing
companies ("Portfolio Finance & Lessor Acquisition" activities) and (iii) the
rental and distribution of analytical instruments to companies serving the
environmental, chemical, pharmaceutical and biotechnology industries
("Instrument Rental and Distribution" activities).
(2) Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and the
rules and regulations of the Securities and Exchange Commission for interim
financial statements. Accordingly, the interim statements do not include all of
the information and disclosures required for annual financial statements. In the
opinion of the Company's management, all adjustments (consisting solely of
adjustments of a normal recurring nature) necessary for a fair presentation of
these interim results have been included. Inter-company accounts and
transactions have been eliminated. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. The results for
the three-month and six-month periods ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the full year ending December
31, 1998.
The balance sheet at December 31, 1997 has been derived from the audited
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
Earnings Per Share
Earnings per share amounts have been determined in accordance with the
provisions of SFAS No. 128 and reflect the application of Staff Accounting
Bulletin No. 98 issued by the Securities and Exchange Commission effective
February 3, 1998. SFAS No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effect of options. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented and restated to conform to the SFAS No. 128
requirements. See note 9.
<PAGE>
Reclassifications
Certain reclassifications have been made to the 1997 financial statements
to conform to the 1998 presentation.
(3) Acquisitions
Effective January 31, 1998, the Company purchased all of the outstanding
common stock of Comstock Leasing, Inc., a small-ticket lessor specializing in
office-based information technology equipment. Additionally, effective March 31,
1998, the Company acquired the assets of Monex Leasing, Ltd., a Texas-based
lessor of telecommunications, business, and other equipment. The aggregate
consideration for these two acquisitions included $2,699,000 in cash payments,
net of cash acquired, $2,678,000 in installment notes, 50,000 shares of the
Company's common stock valued at approximately $725,000, and future contingent
payments of up to $3,900,000 in cash and 48,528 shares of the Company's common
stock. The fair value of assets purchased and liabilities assumed in the
acquisitions were $30,389,000 and $25,864,000, respectively. Both acquisitions
have been accounted for using the purchase method of accounting and the results
of operations of the acquired businesses have been included in the consolidated
financial statements since the dates of acquisition. These acquisitions had no
significant impact on results of operations for the six months ended June 30,
1998.
Effective June 30, 1998, the Company acquired the assets and business of
Spectra Precision Credit Corp. (Spectra), the finance subsidiary of Spectra
Precision, Inc. Spectra Precision, Inc. is an international manufacturer of
laser-based leveling and alignment instruments, machine control systems,
surveying instruments and software. Spectra provides leasing, financing, and
rental services to direct sales offices and dealer/distributors of Spectra
Precision's products. The consideration paid was $39,939,000, net of cash
acquired, including the assumption of $3,458,000 of Spectra's liabilities, plus
future contingent consideration of up to $3,500,000. The fair value of assets
purchased in the acquisition was $35,829,000. The acquisition has been accounted
for using the purchase method of accounting and the results of operations of the
acquired business has been included in the consolidated financial statements
since the date of acquisition.
The following unaudited pro forma consolidated results of operations for
the six months ended June 30, 1997 and 1998 are presented as if the Spectra
acquisition had been made at the beginning of each period presented. The
unaudited pro forma information is not necessarily indicative of either the
results of operations that would have occurred had the purchase been made during
the periods presented or the future results of the combined operations.
Pro Forma
Six months ended June 30,
1997 1998
---- ----
(In thousands,
except per share amounts)
Pro forma net revenues...................... $11,768 $24,233
Pro forma net income from continuing
operations................................. 1,063 2,530
Pro forma net income from continuing
operations per common share
Basic.................................... $0.36 $0.49
Diluted.................................. $0.35 $0.47
(4) Net Investment in Direct Finance Leases and Loans
Net investment in direct finance leases and loans is as follows:
December 31, June 30,
1997 1998
------------- -----------
(In thousands)
Lease and loan contracts receivable in
installments ......................... $ 78,036 $ 127,594
Estimated residual value of leased
equipment ............................. 4,677 8,802
Unearned income ........................... (13,276) (22,430)
Allowance for doubtful receivables ....... (2,173) (2,962)
-------- ---------
Net investment ........................... $ 67,264 $ 111,004
======== =========
<PAGE>
At June 30, 1998 future lease and loan contract payments to be received on
direct finance leases and loans are as follows:
Amount
------------
(In thousands)
Year Ending December 31,
1998................................... $ 29,712
1999................................... 40,030
2000................................... 30,220
2001................................... 17,654
2002 and thereafter.................... 9,978
------------
Future lease contract payments.............. $ 127,594
============
At June 30, 1998 certain future lease contract payments have been assigned
to financial institutions (note 8).
(5) Equipment Held for Rental and Operating Leases, Net
The net book value of equipment held for rental and operating leases is as
follows:
December 31, June 30,
------------- ----------
1997 1998
--------- --------
(In thousands)
Equipment under operating leases......... $ 6,649 $ 7,253
Equipment under rental agreements........ 15,358 17,639
-------- --------
Net book value........................... $22,007 $24,892
========= =========
The book values presented in the above table are net of accumulated
depreciation of $7,067,000, and $8,054,000 at December 31, 1997 and June 30,
1998, respectively. Equipment under rental agreements is comprised primarily of
analytical instruments.
At June 30, 1998 future contract payments to be received on operating
leases are as follows:
Amount
----------
(In thousands)
Year Ending December 31,
1998................................... $ 1,306
1999................................... 2,327
2000................................... 1,089
2001................................... 515
2002 and thereafter.................... 452
------------
Future contract lease payments to be received $ 5,689
============
At June 30, 1998 certain future contract payments have been assigned to
financial institutions (note 8).
(6) Securitization Facility
Under the Company's securitization facility, the Company sells and
transfers a pool of leases to a wholly-owned, bankruptcy remote, special purpose
subsidiary established for the purpose of purchasing the Company's leases. This
subsidiary in turn simultaneously sells and transfers its interest in the leases
to a bank conduit facility which issues securities to investors. The securities
are collateralized by an undivided interest in the leases, the leased equipment,
and certain collateral accounts. A securitization is treated as a sale and a
gain on sale of lease financing receivables is recognized upon the
securitization. The difference between the aggregate principal balance and the
proceeds received, net of an allowance for doubtful receivables, is reflected on
the balance sheet as the securitization residual interest. A portion of the
proceeds from the sale of leases is required to be held in a separate restricted
account as collateral for the leases sold. This amount is recorded as restricted
cash and included in other assets on the balance sheet at June 30, 1998.
During June 1998, the Company securitized leases with a net book value of
$80,367,000. The securitization was treated as a sale and a gain on sale of
lease financing receivables of $2,891,000 was recognized.
<PAGE>
(7) Loss Experience and Reserves
The following table sets forth the amount of delinquencies as a percentage
of Gross Contract Balance of leases and loans included in the Company's owned
and securitized lease portfolio as of the period indicated and net charge-offs
as a percentage of the Company's remaining net investment in direct finance
leases and loans as of the end of the period indicated. Additionally, the table
sets forth loss reserves provided for on the Gross Contract Balance as well as
holdback reserves on portfolio acquisitions as of December 31, 1997 and June 30,
1998.
December 31, June 30,
1997 1998
------------ ----------
(In thousands)
Select Growth:
Gross Contract Balance...................... $56,654 $64,842
31 - 60 days past due....................... 11.31% 2.38%
61 - 90 days past due....................... 0.00% 0.58%
Over 90 days past due....................... 0.00% 0.00%
Portfolio Finance:
Gross Contract Balance...................... $31,630 $91,723
31 - 60 days past due....................... 0.39% 1.15%
61 - 90 days past due....................... 0.18% 0.33%
Over 90 days past due....................... 0.02% 0.28%
Small Ticket and Vendor:
Gross Contract Balance...................... $9,352 $83,738
31 - 60 days past due....................... 11.70% 1.65%
61 - 90 days past due....................... 5.76% 1.59%
Over 90 days past due....................... 9.98% 0.54%
Totals:
Gross Contract Balance...................... $97,636 $240,303
31 - 60 days past due....................... 7.81% 1.65%
61 - 90 days past due....................... 0.61% 0.84%
Over 90 days past due....................... 0.96% 0.30%
Average net investment in leases and loans owned
& managed........................................ $58,234 $153,512
Net charge-offs................................... 171 1,666
Net charge-off percentage......................... 0.29% 1.09%
Allowance for doubtful receivables included in:
Net investment in direct finance leases and loans $2,173 $2,962
Securitization residual interest 328 1,141
Holdback reserves on portfolio
acquisitions 603 4,544
---------- ----------
Total allowance and holdbacks $3,104 $8,647
========== ==========
The decrease in delinquencies as a percentage of Gross Contract Balance at
June 30, 1998 from year end is attributable to improvement in collections and
charge-offs taken on certain delinquent Select Growth leases. During the
quarter, the Company recovered the assets related to three Select Growth leases
and either sold the assets or wrote them down to net realizable vlaue.
Charge-offs for these accounts totaled $1,456,000 on an net investment of
$5,799,000.
<PAGE>
(8) Debt
Notes Payable
Notes payable to banks and others were as follows:
December 31, June 30,
1997 1998
------------ ----------
(In thousands)
Senior credit facility.................. $35,850 $85,500
Other................................... 2,267 4,946
-------- --------
$38,117 $90,446
Total.............................. ======== ========
At December 31, 1997 and June 30, 1998, the Company along with its
divisions LINC Quantum Analytics and LINC Capital Partners, ("the Borrowers"),
had available a senior credit facility in the amount of $100,000,000, of which
$35,850,000, and $85,500,000 at December 31, 1997 and June 30, 1998,
respectively, was outstanding. The weighted-average interest rate on the senior
credit facility at December 31, 1997 and June 30, 1998 was 7.32% and 7.00%,
respectively. In August 1998, the facility was amended and increased to
$125,000,000. The facility, as amended, provides for interest at LIBOR plus
1.25% to 1.75% or, at the Company's option, prime plus up to 0.25% with the
precise rate dependent on certain leverage tests. Additionally, the facility
calls for the Company to pay a quarterly commitment fee of 0.25% on the unused
daily balance below $25,000,000 and 0.50% on the unused daily balance above
$25,000,000. 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 October 31, 1998 at which point in time the
remaining balance of the facility may be converted to a term loan maturing
October 31, 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. 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.
At June 30, 1998 the future principal maturities of recourse and
nonrecourse debt are as follows:
Amount
-------------
(In thousands)
Year Ending December 31,
1998................................... $ 7,315
1999................................... 10,785
2000................................... 6,734
2001................................... 3,516
2002 and thereafter.................... 929
-------------
Total recourse and nonrecourse
discounted lease rentals................. $ 29,279
=============
<PAGE>
(9) Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share from continuing operations.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- -------------------------
1997 1998 1997 1998
---------- ------------ ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings
per share from continuing operations
Net income from continuing operations $555 1,506 902 2,762
---------- ------------ ----------- -----------
Denominator for basic earnings per share
Weighted average shares 2,946,854 5,183,688 2,948,234 5,158,826
Effect of dilutive stock options 102,926 203,387 102,926 201,389
---------- ------------ ----------- -----------
Denominator for diluted earning per share
Adjusted weighted average shares 3,049,780 5,387,075 3,051,160 5,360,215
---------- ------------ ----------- -----------
Net income from continuing operations:
Basic earnings per share $.19 .29 .31 .54
========== =========== =========== ===========
Diluted earnings per share $.18 .28 .30 .52
========== ============ =========== ===========
</TABLE>
(10) Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the reporting and
presentation of comprehensive income and its components in financial statements
by requiring minimum pension liability adjustments, unrealized gains or losses
on available-for-sale securities and foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive earnings.
The components of comprehensive income, net of related tax, for the six
months ended June 30, 1997 and 1998 are as follows:
Six months ended June 30,
------------------------------
1997 1998
---------- ----------
(In thousands)
Net income .............................. $847 $2,762
Other comprehensive income, net of tax:
Unrealized holding loss arising
during period net of reclassification
adjustment for gains included
in net income ........................ (20) (264)
---- ------
Comprehensive income .................... $827 $2,498
==== ======
Accumulated other comprehensive income, net of tax, at December 31, 1997
and June 30, 1998 consists of unrealized gains on securities of $926,000 and
$662,000, respectively.
<PAGE>
(11) 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 includes Instrument Rental & Distribution activities.
<TABLE>
<CAPTION>
Select
Growth/ Instrument
Portfolio Rental &
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 from continuing operations before
income taxes and minority interest...... 1,073 376 1,449
Capital expenditures...................... 20,889 2,398 23,287
Total assets.............................. 60,976 20,689 81,665
Six months ended June 30, 1998
Total net revenues........................ $15,609 6,048 21,657
Depreciation and amortization expense..... 1,197 1,892 3,089
Total expenses............................ 12,098 5,022 17,120
Income from continuing operations before
income taxes and minority interest...... 3,511 1,026 4,537
Capital expenditures...................... 98,309 4,084 102,393
Total assets.............................. 161,382 26,061 187,443
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net Income
Net income from continuing operations ("net income") for the three months
ended June 30, 1998 was $1.5 million, or $0.28 per diluted common share compared
to $555,000, or $0.18 per diluted common share for the comparable period in
1997. Net income for the six months ended June 30, 1998 was $2.8 million or
$0.52 per diluted common share compared to $902,000 or $0.30 per diluted common
share for the six months ended June 30, 1997. The increase in net income in the
three and six months ended June 30, 1998 compared to the earlier period is
primarily due to increased earnings from the completion of securitizations,
gains recognized on the sale of equity participation rights, and increased
earnings contributions from the Company's Instrument Rental & Distribution
activities. New lease originations grew from $23.9 million for the six months
ended June 30, 1997 to $107.8 million (excluding leases funded in connection
with acquisitions) for the six months ended June 30, 1998. Interest expense
increased as a result of an increase in borrowings to fund new lease
originations, and selling, general, and administrative expenses increased as a
result of two acquisitions and the building of the Company's sales and
operations organization. Additionally, the provision for doubtful accounts
increased from 5.0% of net revenues for the six months ended June 30, 1997 to
10.7% of net revenues of the comparable current year period.
Results of Continuing Operations
Three Months ended June 30, 1997 Compared to Three Months ended June 30,
1998
Income before taxes and minority interest for the Company's Select Growth
Leasing and Portfolio Finance & Lessor Acquisition activities increased $1.1
million for the three months ended June 30, 1998 from $0.6 million for June 30,
1997 to $1.7 million for June 30, 1998. Income before taxes and minority
interest for the Company's Instrument Rental & Distribution activities increased
from $0.3 million to $0.8 million for the three months ended June 30, 1998.
Sales of analytical instruments increased from $4.7 million to $9.1 million
and costs of analytical instruments sold increased from $3.7 million to $7.4
million due to an increase in volume resulting from increased market penetration
and a promotional trade-in program offered by Hewlett-Packard, the Company's
largest supplier. However, net margins on sales of analytical instruments
declined from 21.1% to 18.5% primarily as a result of lower gross margins on
sale type leases originated in the Company's Instrument Rental & Distribution
activities during the three months ended June 30, 1998.
Rental and operating lease revenue increased from $1.7 million to $2.3
million primarily due to acquisitions of portfolios of operating leases upon the
Company's re-entry into Portfolio Finance & Lessor Acquisition activities after
the expiration of a non-compete agreement in September 1997.
Direct finance lease income increased from $1.5 million to $3.2 million due
to a substantially higher level of finance lease receivables outstanding
resulting from the acquisitions of Comstock Leasing and Monex Leasing and an
increase in lease originations in the Company's other leasing businesses. The
average finance lease receivables outstanding increased 132%.
As a consequence of the decline in the number of leases serviced by the
Company for unrelated parties due to a non-compete agreement, which expired in
September 1997, fee income, for the three-month period, declined from $0.4
million to $0.3 million. The total decline was partially offset by an increase
in servicing fees received in connection with the servicing of the securitized
leases.
During the second quarter of 1998, the Company securitized leases with a
net book value of $80.4 million realizing a gain on the sale of lease financing
receivables of $2.9 million. No leasese were securitized by the Company in the
second quarter of 1997.
Gains on remarketing of leased equipment of $0.5 million were realized in
the three months ended June 30, 1998 compared to $0.1 million in the comparable
period in 1997. The increase resulted from increased lease maturities in 1998.
Gains on equity participation rights of $0.6 million were realized in the
three months ended June 30, 1998. Gains on equity participation rights fluctuate
based on the timing of the sale of the Company's equity participation rights and
their related value.
Interest income increased from $0.1 million to $0.4 million primarily due
to an increase in interest-bearing notes receivable and equipment loans held by
the Company.
Other income, which consists primarily of interim rents received in
connection with Select Growth Leasing activities, increased from $0.2 million to
$0.3 million primarily due to the increase in the volume of Select Growth leases
originated by the Company.
Net selling, general and administrative expenses increased from $2.0
million to $4.2 million primarily as a result of additional operations,
marketing and sales personnel associated with the Company's re-entry into
Portfolio Finance & Lessor Acquisition activities, increased business activity
and the acquisitions completed in the first quarter of 1998.
Interest expense increased from $1.0 million to $2.4 million due primarily
to an increase in average borrowings. The increase in average borrowings
resulted from increased lease originations and the acquisitions of two
businesses in the first quarter.
Depreciation of equipment, increased from $1.0 million to $1.4 million.
Such increase was attributable to a 55% increase in equipment held for rental
and operating leases primarily resulting from the acquisitions of portfolios of
operating leases referred to above.
The provision for credit losses increased from $0.2 million to $1.7 million
due to a six fold increase in lease originations from $11.8 million for the
three months ended June 30, 1997 to $72.3 million (excluding leases funded in
connection with the acquisition of Spectra Precision Credit Corporation) for the
three months ended June 30, 1998. The provision also increased in response to
certain charge offs made in the second quarter of 1998. The provision as a
percentage of lease originations, excluding the lease portfolio acquired in
connection with the acquisition, increased 15% from the comparable percentage in
the prior year period primarily as a result of the above referenced charge offs.
The Company's effective tax rate was 39.5% for the three month period ended
June 30, 1998 compared to 36.7% in the same period of 1997. The increase results
from the reduction in deferred taxes for prior periods recognized in 1997.
Six Months ended June 30, 1997 Compared to Six Months ended June 30, 1998
Income before taxes and minority interest for the Company's Select Growth
Leasing and Portfolio Finance & Lessor Acquisition activities increased $2.4
million from $1.1 million for the six months ended June 30, 1997 to $3.5 million
in the six months ended June 30, 1998. Income before taxes and minority interest
for the Company's Instrument Rental and Distribution activities increased from
$0.4 million to $1.0 million in the current period.
Sales of analytical instruments increased from $10.3 million to $14.8
million and costs of analytical instruments sold increased from $8.2 million to
$12.1 million due to an increase in volume during the second quarter resulting
from increased market penetration and a promotional trade-in program offered by
Hewlett-Packard, the Company's largest supplier. However, net margins on sales
of analytical instruments declined from 19.8% to 18.3% primarily as a result of
lower gross margins on sale type leases originated in the Company's Instrument
Rental & Distribution activities during the six months ended June 30, 1998.
Direct finance lease income more than doubled from $2.6 million to $5.3
million as a result of a substantially higher level of finance lease receivables
outstanding due to the acquisitions and increase in lease originations. Average
finance lease receivables outstanding increased 111%.
Fee income declined from $0.8 million to $0.6 million as a consequence of
the decline in the number of leases serviced by the Company for unrelated
parties due to a non-compete agreement, which expired in September 1997.
During the first half of 1998, the Company securitized leases with a book
value of $98.0 million realizing a gain on the sale of lease financing
receivables of $3.6 million. No leases were securitized by the Company in the
first half of 1997.
Gains on remarketing of leased equipment of $0.8 million were realized in
the six months ended June 30, 1998 compared to $0.3 million in the earlier
period. The increase in gains from the comparable period in 1997 resulted from
increased lease maturities in 1998.
During the first half of 1998, the Company experienced an increase in the
value of certain warrants held by the Company and consequently elected to sell a
portion of these warrants realizing a gain of $2.7 million. For the same period
in 1997, the Company sold certain equity participation rights realizing a gain
of $0.1 million.
Interest income increased from $0.3 million to $0.8 million due to an
increase in interest-bearing notes receivable and equipment loans held by the
Company.
Other income, which consists primarily of interim rents received in
connection with Select Growth Leasing activities, increased from $0.3 million to
$0.5 million primarily due to the increase in the volume of Select Growth leases
originated by the Company.
Net selling, general and administrative expenses increased from $4.0
million to $7.9 million. This increase primarily resulted from additional
operations, marketing and sales personnel associated with the Company's re-entry
into Portfolio Finance & Lessor Acquisition activities, increased business
activity and two acquisitions completed in the first quarter of 1998.
Interest expense increased from $1.8 million to $4.0 million due primarily
to increased direct finance lease originations and acquisitions and the
resulting increase in borrowings.
Depreciation of equipment increased from $1.9 million to $2.9 million. Such
increase was attributable to an increase in equipment held for rental and
operating leases primarily resulting from the acquisitions of portfolios of
operating leases referred to above.
The provision for credit losses increased from $0.5 million to $2.3 million
due to a substantially higher volume of new leases originated. The provision
also increased in response to certain charge offs made in the second quarter of
1998. Lease fundings, excluding portfolios acquired in connection with the
Company's acquisitions, increased 352% over the comparable period in the prior
year.
The Company's effective tax rate increased from 36.9% to 39.1% due
primarily from the reduction in deferred taxes for prior periods recognized in
1997.
Liquidity and Capital Resources
General
The Company's activities are capital intensive and require access to a
substantial amount of credit to fund new equipment leases. The Company funds its
operations primarily through cash flow from operations, borrowings under the
Senior Credit Facility, proceeds from securitizations, and non-recourse and
recourse loans. 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 fund its Portfolio Finance & Lessor
Acquisition activities. The Company believes that cash flow from its operations,
net proceeds from 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 provided by continuing
operations 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, the financing of new lease
originations and rental inventory, and securitizations. Cash flows from such
activities increased from $23.3 million for the six months ended June 30, 1997
to $144.4 million for the six months ended June 30, 1998. The increase resulted
primarily from the growth in the Company's Portfolio Finance & Lessor
Acquisition activities and the securitizations completed in 1998.
Credit Facilities
As of June 30, 1998, the Company had $100 million available for borrowing
under its Senior Credit Facility of which $85.5 million was outstanding. In
August 1998, the facility was amended and increased to $125 million. The amended
facility provides for interest at LIBOR plus 1.25% to 1.75% or the prime rate
plus up to 0.25% depending on certain leverage tests, and matures on October 31,
1998.
In 1997, the Company entered into a Securitization Facility in an initial
amount of $60 million. In accordance with the terms of the facility, the Company
increased the facility to $100 million during the second quarter of 1998. At
June 30, 1998, $96.8 million of the facility was utilized. In August 1998, the
facility was increased to $150 million. The Securitization Facility provides for
an interest rate which is 0.55% in excess of 30 day LIBOR and may be converted
into an amortizing term facility at any time. The terms of the facility permits
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.
Recently Issued Accounting Pronouncements
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," will affect the disclosure requirements for the Company's 1998
financial statements. The Company does not expect that the adoption of the
disclosure requirements of this pronouncement will have a material impact on its
financial statements.
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for derivative
instruments and for hedging activities, and will not apply to the Company until
the year ended December 31, 2000. The Company has not yet evaluated the effect
of the pronouncement on its financial statements.
Note on Forward Looking Information
Certain statements in this Form 10-Q and in other filings by the Company
with the Securities and Exchange Commission and in the Company's written and
oral statements made by or with the approval of an authorized executive officer
constitute "forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
and the Company intends that such forward-looking statements be subject to the
safe harbors created thereby. The words "believe", "expect" and "anticipate" and
similar expressions identify forward-looking statements. These forward-looking
statements reflect the Company's current view with respect to future events and
financial performance, but are subject to many uncertainties and factors
relating to the Company's operations and business environment including, but not
limited to, those surrounding such forward looking statements and those
contained in the Company's other filings with the Commission including the Risk
Factors set forth in the Company's Registration Statement in Form S-1 (Reg. No
333-34729), which may cause the actual results of the Company to be materially
different from any future results expressed or implied by such forward-looking
statements. Examples of such uncertainties, include, but are not limited to, the
volume of new leases originated, the backlog of unfunded leases and the adequacy
of financial resources. The Company undertakes no obligation to publicly update
or revise any forward-looking statements whether as a result of new information,
future events or otherwise.
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
a) The Annual Meeting of Shareholders was held on May 19, 1998.
b) As set forth in the Company's Notice of Annual Meeting of Shareholders
and Proxy Statement dated April 22, 1998 as Item 1, all seven of the current
directors of the Company were elected to the Board of Directors of the Company
until the Annual Meeting of Shareholders in 1999. The directors elected were:
Martin E. Zimmerman, Robert E. Laing, Allen P. Palles, Charles J. Aschauer,
Stanley Green, Curtis S. Lane, and Terrence J. Quinn. There were 2,691,125 (52%)
common shares voted for and 2,492,563 (48%) common shares not voted for each
director elected.
c) As set forth in the Company's Notice of Annual Meeting of Shareholders
and Proxy Statement dated April 22, 1998, as Item 2, KPMG Peat Marwick LLP,
independent certified public accountants, as auditors, was approved to audit the
financial statements for the year ending December 31, 1998. There were 2,691,125
(52%) common shares voted for this proposal and 2,492,563 (48%) common shares
not voted.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Document Description
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LINC CAPITAL, INC.
Dated: August 13, 1998
By: /s/ Martin E. Zimmerman
-----------------------
Martin E. Zimmerman
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ Allen P. Palles
-------------------
Allen P. Palles
Executive Vice President and
Chief Financial Officer
(Principal Financial
and Accounting Officer)
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