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 March 31, 1999
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 May 12, 1999, 5,265,050 shares of the Registrant's Common Stock were
outstanding.
<PAGE>
LINC CAPITAL, INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets-
March 31, 1999 (unaudited) and December 31, 1998............. 3
Consolidated Statements of Earnings-
Three months ended March 31, 1999 and 1998 (unaudited)....... 4
Consolidated Statements of Cash Flows-
Three months ended March 31, 1999 and 1998 (unaudited)....... 5
Notes to Consolidated Financial Statements....................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 17
SIGNATURES.................................................................. 17
<PAGE>
LINC Capital, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
March 31, December 31,
----------- ------------
ASSETS 1999 1998
------ ---- ----
(Unaudited) (Audited)
Net investment in direct finance leases and loans..........$252,216 $163,966
Equipment held for rental and operating leases, net ....... 30,995 30,659
Accounts receivable ....................................... 8,916 7,593
Securitization retained interest .......................... 14,946 17,026
Other assets .............................................. 18,270 17,474
Goodwill .................................................. 13,295 10,738
Cash and cash equivalents ................................. 118 1,428
--------- ---------
Total assets ....................................$ 338,756 $248,884
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Senior credit facility and other senior notes payable ....$ 108,579 $ 96,646
Recourse debt ............................................ 7,455 8,017
Nonrecourse debt ......................................... 144,538 68,616
Accounts payable ......................................... 11,180 7,443
Accrued expenses ......................................... 7,850 8,775
Customer holdbacks ....................................... 9,178 10,328
Subordinated debentures .................................. 5,780 5,694
Deferred income taxes .................................... 2,030 1,924
--------- ---------
Total liabilities .................................$ 296,590 $207,443
--------- ---------
Stockholders' equity:
Common stock, $0.001 par value, 15,000,000 shares
authorized; 5,330,953 and 5,249,591 shares issued;
5,265,050 and 5,183,688 shares outstanding .......... 5 5
Additional paid-in capital ........................... 29,852 29,567
Deferred compensation from issuance of options ....... (40) (124)
Stock note receivable ................................ (182) (182)
Treasury stock, at cost; 65,903 shares ............... (287) (287)
Accumulated other comprehensive loss ................. (103) (34)
Retained earnings .................................... 12,921 12,496
--------- --------
Total stockholders' equity ........................ 42,166 41,441
--------- --------
Total liabilities and stockholders' equity ............... $338,756 $248,884
========= ========
See accompanying notes to consolidated financial statements.
<PAGE>
PART I - FINANCIAL INFORMATION
LINC Capital, Inc. and Subsidiaries
Consolidated Statements of Earnings (Unaudited)
(Dollars in thousands, except per share data)
Three months ended
March 31,
--------------------
1999 1998
------- ------
REVENUES:
Sales of equipment ........................... $ 6,899 $5,720
Direct finance lease income .................. 5,838 2,108
Interest income .............................. 819 426
Rental and operating lease revenue ........... 2,699 2,456
Servicing fees and other income .............. 2,702 483
Gain on sale of lease receivables ............ -- 697
Gain on equipment residual values ............ 251 247
Gain on equity participation rights .......... 234 2,068
------- -----
Total revenues ........................... 19,442 14,205
------- -----
Expenses:
Cost of equipment sold ....................... 5,498 4,700
Selling, general and administrative .......... 6,199 3,665
Interest ..................................... 4,081 1,670
Depreciation of equipment under rental
agreements and operating leases ............. 1,783 1,505
Goodwill amortization......................... 208 16
Provision for credit losses .................. 1,086 603
------- -----
Total expenses ............................ 18,855 12,159
------- -----
Earnings before income taxes........................ 587 2,046
Income tax expense ............................... 162 790
------- -----
Net earnings ..................................... $ 425 $1,256
======= =====
Net earnings per common share:
Basic....................................... $ .08 $ .24
Diluted..................................... $ .08 $ .24
See accompanying notes to consolidated financial statements.
<PAGE>
LINC Capital, Inc. and Subsidiaries
Consolidated Cash Flow Statements (Unaudited)
(Dollars in thousands)
Three months ended
March 31,
----------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net earnings......................................... $ 425 $ 1,256
Adjustments to reconcile net earnings
to net cash provided by operations:
Depreciation and amortization ................. 2,252 1,595
Direct finance lease income ................... (5,838) (2,108)
Payments on direct finance leases ............. 21,042 7,153
Deferred income taxes ......................... 162 547
Provision for credit losses ................... 1,086 603
Gain on sale of lease receivables ............. -- (697)
Gain on equity participation rights ........... (234) (2,068)
Amortization of discount ...................... 86 73
Deferred compensation ......................... (26) 25
Changes in assets and liabilities:
Increase in receivables ....................... (1,249) (335)
Increase in other assets....................... (663) (2,859)
Increase in accounts payable .................. 3,689 1,553
Decrease in accrued expenses .................. (981) (30)
Decrease in customer holdbacks ................ (1,150) (12)
-------- -------
Cash provided by operating
activities ......................................... 18,601 4,696
-------- -------
Cash flows from investing activities:
Cost of equipment acquired for lease
and rental ....................................... (96,096) (34,185)
Cash used in acquisitions, net of
cash acquired .................................... (1,497) (2,699)
Funding of securitization retained interest......... -- (2,177)
Receipts on securitization retained interest........ 2,388 319
Fixed assets purchased ............................. (474) (177)
Proceeds from sale of investments .................. 234 2,068
-------- -------
Net cash used in investing activities ................ (95,445) (36,851)
-------- -------
See accompanying notes to consolidated financial statements.
<PAGE>
LINC Capital, Inc. and Subsidiaries
Consolidated Cash Flow Statements (Unaudited) - (Continued)
(Dollars in thousands)
Three months ended
March 31,
----------------------
1999 1998
-------- -------
Cash flows from financing activities:
Net increase in notes payable .................... 11,933 24,300
Proceeds from recourse and
nonrecourse debt ................................ 86,100 1,220
Repayment of recourse and nonrecourse
debt ............................................ (22,894) (7,363)
Proceeds from sales of lease
receivables ..................................... -- 18,427
Proceeds from stock notes receivable ............. -- 329
Sale of stock .................................... 395 --
------ -------
Net cash provided by financing
activities ....................................... 75,534 36,913
------ -------
Net increase (decrease) in cash ...................... (1,310) 4,758
Cash at beginning of period .......................... 1,428 --
------ ------
Cash at end of period ................................ $ 118 $ 4,758
====== =======
Supplemental disclosures of cash flow information:
Interest paid .................................... $ 2,706 $ 1,384
Income taxes paid ................................ $ 287 $ 681
See accompanying notes to consolidated financial statements.
<PAGE>
LINC Capital Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(1) The Company
LINC Capital, Inc. (the "Company") is a finance company that provides
leasing, asset-based financing, and equipment rental and distribution services
to growing businesses. The Company's principal businesses are (i) the direct
origination of leases and accounts receivable and other asset-backed financing
to middle and late stage emerging growth companies primarily serving the
healthcare and information technology industries ("Select Growth Finance"), (ii)
the financing of leases generated by smaller equipment lessors ("Portfolio
Finance"), (iii) the rental, leasing and distribution of analytical instruments
and related equipment to companies serving the environmental, pharmaceutical and
biotechnology industries ("Instrument Rental and Distribution"), and (iv) the
establishment of leasing programs for manufacturers and distributors ("Vendor
Finance").
(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, 1998. The results for
the three-month period ended March 31, 1999 are not necessarily indicative of
the results that may be expected for the full year ending December 31, 1999.
The balance sheet at December 31, 1998 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, 1998.
Reclassifications
Certain reclassifications have been made in the 1998 financial statements
to conform to the 1999 presentation.
(3) Acquisitions
Effective January 1, 1999, the Company purchased all of the outstanding
common stock of Connor Capital Corporation, a lessor specializing in developing
captive finance programs for equipment vendors. The acquisition has been
accounted for using the purchase method of accounting and the results of
operations of the acquired business have been included in the consolidated
financial statements since the date of acquisition.
The consideration for the acquisition included $1,497,000 in cash payments,
net of cash acquired, and future contingent cash payments of up to $5,500,000.
The fair value of assets purchased and liabilities assumed in the acquisition
were $10,973,000 and $12,228,000, respectively.
(4) Net Investment in Direct Finance Leases and Loans
Net investment in direct finance leases and loans is as follows:
March 31, December 31,
1999 1998
------------- ------------
(In thousands)
Lease and loan contracts receivable in
installments ....................... $ 293,951 $ 191,278
Estimated residual value of leased
equipment .......................... 8,360 8,326
Initial direct costs................... 2,354 2,447
Unearned lease income ................. (47,401) (34,294)
Allowance for doubtful receivables .... (5,048) (3,791)
--------- ----------
Net investment ........................ $252,216 $ 163,966
========= ==========
<PAGE>
(5) Equipment Held for Rental and Operating Leases, Net
The net book value of equipment held for rental and operating leases is as
follows:
March 31, December 31,
1999 1998
--------- ------------
(In thousands)
Equipment under operating leases......... $ 14,513 $13,905
Equipment under rental agreements........ 16,482 16,754
--------- --------
Net book value........................... $ 30,995 $30,659
========= ========
The book values presented in the above table are net of accumulated
depreciation of $9,839,000 and $8,058,000 at March 31, 1999 and December 31,
1998, respectively. Equipment under rental agreements is comprised primarily of
analytical instruments.
(6) Loss Experience Reserves
The following table sets forth delinquencies as a percentage of gross
remaining receivables on leases included in the Company's owned and managed
lease portfolio and net charge-offs as a percentage of the Company's remaining
net investment in direct finance leases and loans as of the ends of the periods
indicated. Additionally, the table sets forth the allowance for doubtful
receivables provided, as well as holdback reserves on portfolios acquired, as of
the ends of the periods indicated.
<PAGE>
March 31, December 31,
1999 1998
-------------- --------------
(Dollars in thousands)
Select Growth Finance:
Gross Receivable Balance $81,936 $75,882
31 - 60 days past due 0.25% 3.07%
61 - 90 days past due 0.52% 0.07%
Over 90 days past due 1.25% 1.52%
Portfolio Finance:
Gross Receivable Balance $223,902 $175,885
31 - 60 days past due 2.05% 2.13%
61 - 90 days past due 1.09% 1.27%
Over 90 days past due 0.23% 0.20%
Rental and Distribution:
Gross Receivable Balance $9,152 $10,064
31 - 60 days past due 3.23% 8.88%
61 - 90 days past due 1.31% -
Over 90 days past due - -
Vendor Finance:
Gross Receivable Balance $120,143 $92,478
31 - 60 days past due 2.46% 3.37%
61 - 90 days past due 1.23% 0.61%
Over 90 days past due 1.38% 1.16%
Totals:
Gross Receivable Balance $435,133 $354,309
31 - 60 days past due 1.85% 2.85%
61 - 90 days past due 1.03% 0.81%
Over 90 days past due 0.73% 0.73%
Average net investment in leases and
loans owned and managed $345,640 $242,757
Net charge-offs 634 3,116
Net charge-off percentage 0.18% 1.28%
Allowance for doubtful receivables included in:
Net investment in direct finance leases
and loans $ 5,048 $ 3,791
Securitization retained interest 1,501 1,808
Holdback reserves on portfolios acquired 5,141 6,104
---------- ----------
Total allowance and holdbacks $11,690 $11,703
========== ==========
In addition to the allowance for doubtful receivables and holdback
reserves, in connection with its Portfolio Finance activities the Company has
recourse to certain of its Portfolio Finance customers. At March 31, 1999 and
December 31, 1998 the aggregate amount of recourse was $16,572,000 and
$10,407,000, in support of gross remaining receivables totaling $162,262,000 and
$117,399,000, respectively.
<PAGE>
(7) Debt
Notes Payable
Notes payable to banks and others were as follows:
March 31, December 31,
1999 1998
------------ ----------
(In thousands)
Senior credit facility.................. $104,900 $91,700
Other................................... 3,679 4,946
-------- --------
Total................................ $108,579 $96,646
======== ========
At March 31, 1999 and December 31, 1998, the Company had available a senior
credit facility in the amount of $155,000,000, of which $104,900,000, and
$91,700,000 was outstanding at March 31, 1999 and December 31, 1998,
respectively. The weighted-average interest rate on the senior credit facility
at March 31, 1999 and December 31, 1998 was 6.53% and 6.58%, respectively. 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% or the CD rate or Fed Funds rate
plus 1.30% to 1.80% 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% of the facility and 0.50% on
the unused daily balance above 25%. The facility is secured by substantially all
of the assets of the Company and is used by the Company to finance the
acquisition of equipment pending completion of permanent financing and for
normal working capital purposes. The facility matures October 31, 1999 at which
point in time the remaining balance of the facility may be converted to a term
loan maturing October 31, 2002.
In connection with the acquisition of Monex Leasing, Ltd., the Company
issued a note payable to the former owner of the company. Such note bears
interest at 8% with principal payments over a three-year period. At March 31,
1999, $1,679,000 is outstanding. Additionally, the Company has notes payable to
a third party at an interest rate of 10% with various payment terms and maturity
dates.
Recourse and Nonrecourse Debt
At March 31, 1999, the Company had a securitization facility providing for
funding up to $225,000,000. This facility was increased to $300,000,000 in May
1999. Under the Company's securitization facility, the Company 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 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 portion of the proceeds form the securitization
of leases is required to be held in a separate restricted account as collateral
for the leases transferred. This amount is recorded as restricted cash.
During the three months ended March 31, 1999 and 1998, the Company
securitized leases with a net book value of $70,069,000 and $16,864,000, net of
an allowance for doubtful receivables and customer holdbacks of $994,000 and
$509,000, respectively. During the first quarter of 1998, the Company recognized
a gain upon the sale of leases in securitizations equal to the excess of the net
proceeds from the sale, after deducting issuance expenses, over the cost basis
of the leases. Under gain-on-sale treatment, the Company reflected the
difference between the aggregate principal balance of the leases securitized and
the proceeds received, net of an allowance for doubtful receivables, as the
securitization retained interest on the balance sheet. At March 31, 1999, the
securitization retained interest of $14,946,000 was recorded at the Company's
estimate of its market value using a discounted cash flow approach. It included
customer holdbacks of $3,409,000 and was net of an allowance for doubtful
receivables of $1,501,000. Effective, October 1, 1998, the Company eliminated
gain-on-sale treatment for securitized leases by modifying the structure of its
securitization facility such that it is considered nonrecourse debt under
generally accepted accounting principles. Subsequent to eliminating gain-on-sale
treatment, the Company recorded nonrecourse debt equal to the cash received. At
March 31, 1999 and December 31, 1998, $104,851,000 and $44,676,000,
respectively, was recorded as nonrecourse debt. The weighted-average interest
rate on the securitization facility at March 31, 1999 and December 31, 1998 was
5.34% and 5.63%, respectively.
The Company also permanently finances leases with financial
institutions, on either a nonrecourse 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, including any
holdback or cash reserve. Proceeds from the financing of leases are recorded as
debt.
(8) Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share.
Three months ended March 31,
----------------------------
1999 1998
---- ----
(in thousands, except share data)
Numerator for basic and diluted earnings
per share - net earnings ................ $ 425 $ 1,256
---------- -------
Denominator for basic earnings per share--
Weighted average shares outstanding.... 5,221,682 5,133,688
Effect of dilutive stock options........... 135,247 198,052
------- -------
Denominator for diluted earnings per share. 5,356,929 5,331,740
--------- ---------
Net earnings:
Basic earnings per share .............. $ .08 $ .24
========== =========
Diluted earnings per share ............ $ .08 $ .24
========== =========
(9) Comprehensive Income
The components of comprehensive income, net of related tax, for the three
months ended March 31, 1999 and 1998 are as follows:
Three months ended March 31
------------------------------
1999 1998
---------- ----------
(In thousands)
Net earnings ............................ $425 $1,256
Other comprehensive income, net of tax:
Unrealized loss on securities......... (96) (65)
Foreign currency translation
adjustment......................... 27 --
---- ------
Comprehensive income .................... $356 $1,191
==== ======
Accumulated other comprehensive loss, net of tax, at March 31, 1999 and
December 31, 1998 consists of unrealized gains (losses) on securities of
$(32,000) and $64,000 and accumulated foreign currency translation adjustments
of $(71,000) and $(98,000), respectively.
(10) Segment Information
The Company has four reportable segments: Select Growth Finance,
Portfolio Finance, Rental and Distribution, and Vendor Finance. The following
table presents certain information by segment.
<TABLE>
<CAPTION>
Select Rental
Growth Portfolio and Vendor
(Dollars in thousands) Finance Finance Distribution Finance Corporate Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Three months ended March 31, 1999
Total revenues...................... $2,776 $5,397 $8,784 $2,485 $- $19,442
Depreciation and
amortization expense.............. 101 545 1,136 209 - 1,991
Interest expense.................... 1,093 1,882 322 784 - 4,081
Earnings (loss) before income taxes. 237 1,904 156 (1,416) (294) 587
Total assets....................... 73,311 147,018 33,216 82,007 3,204 338,756
Lease fundings..................... $6,357 $63,093 $2,641 $24,005 $- $96,096
---------------------------------------------------------------------------------
Three months ended March 31, 1998
Total revenues..................... $4,133 $2,015 $7,427 $630 $- $14,205
Depreciation and
amortization expense............. 55 569 897 - - 1,521
Interest expense................... 708 640 239 83 - 1,670
Earnings (loss) before income taxes 2,196 (234) 119 166 (201) 2,046
Total assets....................... 51,154 44,562 23,569 26,611 8,161 154,084
Lease fundings..................... $8,054 $19,313 $1,404 $6,774 $- $35,545
---------------------------------------------------------------------------------
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months ended March 31, 1999 Compared to Three Months ended March 31,
1998
Sales of equipment increased to $6.9 million from $5.7 million and costs of
analytical instruments sold increased to $5.5 million from $4.7 million. Net
margins on sales of analytical instruments increased to 20.3% from 17.8% due to
manufacturer incentives received on equipment sold during the quarter. Net
margins on sales of analytical instruments during the remainder of the year are
expected to be at a lower level than that achieved during the first quarter.
Direct finance lease income increased to $5.8 million from $2.1 million as
a result of a substantially higher level of finance lease receivables
outstanding, coming from acquisitions and from internal lease originations, a
greater portion of which are retained on the Company's balance sheet. Average
finance lease receivables outstanding increased 155%.
Interest income increased to $0.8 million from $0.4 million primarily due
to an increase in interest-bearing notes receivable held by the Company.
Rental and operating lease revenue increased to $2.7 million from $2.5
million primarily due to acquisitions of portfolios of operating leases made
during 1998.
Servicing fees and other income increased to $2.7 million from $0.5
million. Servicing fees and other income primarily consists of fees received for
servicing securitized leases, fees received for servicing third party lease
portfolios, interim rents received by Select Growth Finance, and late fees. The
increase over the prior year period primarily relates to $1.2 million in
deferred incentive fees realized in connection with servicing of a portfolio
owned by a third party, an increase in fees received in connection with
servicing securitized leases, and an increase in late fees collected by Vendor
Finance.
During the first quarter of 1998, the Company completed a securitization,
realizing a gain on the sale of lease receivables of $0.7 million. Effective
October 1, 1998, the Company eliminated gain-on-sale treatment for securitized
leases by modifying the structure of its securitization facility such that it is
considered nonrecourse debt under generally accepted accounting principles.
Accordingly, no gain on sale of securitized receivables was recorded during the
first quarter of 1999.
Gains on equipment residual values of $0.2 million were consistent with the
comparable period in the prior year. Gains on equipment residual values
fluctuate based on the maturity of leases.
During the first quarter of 1999, the Company sold certain equity
participation rights, realizing a gain of $0.2 million. For the same period of
1998, the value of equity participation rights held by the Company increased and
consequently the Company elected to sell a portion of these equity participation
rights, realizing a gain of $2.1 million.
Selling, general and administrative expenses, net of initial direct costs
capitalized, increased to $6.2 million from $3.7 million. The increase resulted
primarily from four acquisitions completed since February 1998, senior and
middle management personnel added to support the Company's growth, and increased
activity in the Company's other business segments. The number of people
employed, including employees of companies acquired, increased 76% to 176
between March 31, 1998 and March 31, 1999.
Interest expense increased to $4.1 million from $1.7 million, due primarily
to increased lease originations, lease portfolios acquired, and retention of
more leases on the balance sheet following discontinuance of gain-on-sale
accounting, with the resulting increase in borrowings. Lease originations,
including portfolios of acquired companies, increased 90% over the prior year
period.
Depreciation of equipment, increased to $1.8 from $1.5 million, which was
attributable to an increase in equipment held for operating leases. The average
net book value of equipment held for rental and operating leases increased
approximately 30% over the prior year period.
Goodwill amortization of $0.2 million increased from less than $0.1 million
for the same period in 1998 due to four acquisitions completed since February
1998.
The provision for credit losses increased to $1.1 million from $0.6 million
due to a substantially higher volume of new leases originated. Lease
originations, excluding portfolios of acquired companies, increased 170% over
the prior year period.
The Company's effective tax rate was 27.6% for the three month period ended
March 31, 1999 compared to 38.6% in the same period of 1998. The decrease
results from the utilization of investment tax credits for which no benefit had
previously been recognized.
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 has
financed its operations to date primarily through cash flow from operations,
borrowings under the senior credit facility, the securitization facility, and
other non-recourse and recourse loans and through the sale of equity. The
Company will continue to require access to large amounts of capital to acquire
equipment for lease and rental, as well as to fund its Portfolio Finance
activities. The Company expects that its current sources of capital will
continue to be available, and anticipates raising debt and/or equity financing
from other providers during 1999 to supplement existing capital sources.
Additionally, the Company expects to complete a rated securitization exceeding
$200.0 million prior to the end of the second quarter.
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 equipment
residual values, the financing of new lease originations and rental inventory
through credit facilities and securitizations. Cash flows from operating and
financing activities for the three months ended March 31, 1999 and 1998 were
$94.1 million and $41.6 million, respectively. The period to period increase
results primarily from the increase in the volume of securitizations completed
in the first quarter of 1999, additional borrowings under the Company's credit
facilities, and payments received on direct finance leases.
Credit Facilities
The Company uses secured revolving credit and term loan facilities provided
by a syndicate of banks to fund the acquisition and origination of leases and
the purchase of analytical instruments. As of March 31, 1999, the Company had a
maximum of $155 million available for borrowing under this facility of which
$104.9 million was outstanding. The facility matures October 31, 1999 at which
time the remaining balance of the facility may be converted to a term loan
maturing October 31, 2002. The Company typically seeks to renew this facility
prior to maturity.
Securitization Facility
In 1997, the Company entered into a Securitization Facility in an initial
amount of $60 million. The facility was increased to $100 million, $150 million,
and $225 million during the second, third, and fourth quarters of 1998,
respectively. At March 31, 1999, $216.1 million of the facility was utilized. In
May 1999, the facility was increased to $300 million and expanded to include new
participants. The terms of the facility permit the securitization of
substantially all of the leases originated in the Company's Portfolio Finance,
Vendor Finance, and Rental and Distribution activities as well as the majority
of the leases originated in the Company's Select Growth Finance activities.
Year 2000 Compliance
Year 2000 compliance refers to the ability of computer hardware and
software to respond to the problems posed by the fact that computer programs
have traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer systems will not be
able to differentiate between the year 2000 and 1900. Failure to address this
problem could result in system failures and the generation of erroneous data.
The Company's lease tracking information technology systems have been certified
or contractually guaranteed to be year 2000 compliant by the software vendors.
The Company's financial and accounts payable information systems and several
other systems, including voice mail and phone systems, which use dates
electronically were or became year 2000 complaint during the first quarter. The
Company plans to complete comprehensive, full system testing in the second
quarter of 1999. The Company continues to make inquiries of significant third
parties, with which the Company conducts business, to determine their year 2000
readiness. Based on responses to date, the Company believes that these third
parties, including parties to the Company's credit facilities and its
significant Portfolio Finance customers, are year 2000 compliant or will be year
2000 compliant by the end of the third quarter.
To date, year 2000 costs have been immaterial and the Company believes
that future costs will not have a material adverse effect on the Company's
results of operations or financial condition. However, there can be no assurance
of unforeseen problems in its own computer systems or computer systems of third
parties with which the Company conducts business. Such problems, depending on
the extent and nature, could materially and adversely affect the Company's
operations and financial condition. Based on its assessment of the year 2000
issue to date, the Company has not developed a contingency plan for its own
systems. However, as part of the Company's routine back up servicing
capabilities, the Company has a contingency plan for system failures for its
significant Portfolio Finance customers. The Company believes it could provide
servicing of the lease portfolios purchased by the Company from its significant
Portfolio Finance customers on its own lease tracking systems if their systems
fail to meet the requirements of year 2000. Additionally, the Company continues
to assess the impact of year 2000 issues on its own systems and those of
significant third parties with which the Company conducts business and will
create additional contingency plans if considered warranted.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. The Company will adopt the standard
no later than the first quarter of year 2000 and is in the process of
determining the impact that adoption will have on it consolidated financial
statements.
Note on Forward Looking Information
Certain statements in this Form 10-Q and in the future 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 and phrases "expects", "intends",
"believe", "will seek", and "will realize" and similar expressions as they
relate to the Company or its management are intended to identify such
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 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
.........There have been no material changes from the 1998 Annual Report on Form
10-K related to the Company's exposure to market risk from interest rates except
for the termination value of the interest rate swap and interest rate cap
agreements related to the Company's securitization facility. At December 31,
1998, termination of the $153.8 million interest rate swap and interest rate cap
agreements would have resulted in a charge to earnings of $1.1 million. At March
31, 1999, termination of the $258.3 million interest rate swap and interest rate
cap agreements would have resulted in a charge to earnings of $0.4 million.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit
Number Document Description
27.1 Financial Data Schedule
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended March 31, 1999.
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: May 14, 1999
By: /s/ Allen P. Palles
-------------------
Allen P. Palles
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Mark A. Arvin
-------------------
Mark A. Arvin
Senior Vice President, Finance
(Principal Accounting Officer)
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