SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of class
--------------
Common Stock, $.001 par value
<PAGE>
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates was
approximately $19,558,824 million based upon the sale price of registrant's
Common Stock as of March 12, 1999. For purposes of the foregoing calculation
only, each of the issuer's officers and directors is deemed an affiliate.
At March 12, 1999, 5,235,674 shares of the Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of LINC Capital, Inc.'s definitive Proxy Statement for the Annual
Meeting of Stockholders to be held May 26, 1999 to be filed within 120 days of
fiscal year end are incorporated by reference into Part III.
<PAGE>
LINC CAPITAL, INC.
TABLE OF CONTENTS
Page
PART I.
Item 1. Business ............................................... 1
Item 2. Properties.............................................. 17
Item 3. Legal Proceedings....................................... 17
Item 4. Submission of Matters to Vote of Security Holders....... 17
PART II.
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters......................... 18
Item 6. Selected Financial Data................................. 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 22
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk....................................... 30
Item 8. Financial Statements and Supplementary Data............. 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 33
PART III.
Item 10. Directors and Executive Officers of the Registrant...... 34
Item 11. Executive Compensation.................................. 34
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 34
Item 13. Certain Relationships and Related Transactions.......... 34
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..................................... 34
SIGNATURES................................................................. 38
<PAGE>
Part I
Item 1. Business
General
LINC Capital, Inc. (the "Company") is a specialty finance company that
provides leasing, asset-based financing, and equipment rental and distribution
services to growing businesses. Through the following four business units, the
Company provides specialized financing services, including the leasing of
equipment and other asset based financing to emerging growth companies,
customized leasing and rental programs to vendors and distributors of analytical
instruments and other equipment.
o Select Growth Finance (or "Select Growth") directly originates equipment
leases and other asset-based financing to emerging growth companies
primarily in the healthcare and information technology industries. The
Company frequently receives warrants or other equity participation rights
in the lessee in addition to its rights as an equipment lessor in the
residual value of the equipment.
o Portfolio Finance purchases or finances leases originated by smaller
companies within the highly fragmented leasing industry thru warehouse and
portfolio purchase programs. Since its re-entry into the Portfolio Finance
business in October 1997, the Company has formed lease and lease portfolio
purchase relationships with over 20 lessors and has financed over $155
million in leases. By financing the business generated by this target
market, the Company provides such companies with access to the capital
markets and back office services.
o Rental and Distribution facilitates the short-term trial, use, and
acquisition of analytical instruments and related equipment by companies in
the environmental and biotechnology industries through rentals, leasing and
distribution of such equipment. The Company is a distributor for some of
the most significant manufacturers of these types of equipment, including
Hewlett-Packard, The Perkin-Elmer Corporation and Varian Associates Inc.
o Vendor Finance assists the sales efforts of manufacturers and distributors
by developing leasing programs for the users of equipment sold by the
manufacturers and distributors. Since the beginning of 1998, the Company
has made four acquisitions of smaller leasing companies having significant
levels of vendor relationships.
The Company primarily conducts its business throughout the United States.
California and Texas each account for approximately 15% of the Company's
revenues. Otherwise, no state accounts for more than 10% of the Company's
revenues. The Company believes, based on its own research and management's
extensive knowledge of and experience in the equipment leasing industry, that it
is a leading provider of equipment leasing, rental and other services in its
specialized markets and its position as such provides significant opportunities
for internal and external growth. 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
potential competitive advantage over other sources of such services. For
information regarding segment reporting, see note 15 to the Consolidated
Financial Statements.
<PAGE>
Background
The Company's predecessor was organized in 1975 and, from its organization
through September 1994, focused its activities primarily in the leasing of
equipment to businesses engaged in the healthcare industry. The Company believes
that through internal growth and its acquisition of Scientific Leasing Inc. in
1988, it became the largest independent lessor of healthcare equipment in the
United States with over $500 million in assets owned or managed in 1993. Based
on statements made to the Company by individuals familiar with the
securitization industry as well as its own research, the Company believes that
it was the first equipment lessor in the U.S. to securitize healthcare equipment
leases and related residual values.
The Company commenced its Select Growth Finance operations 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 Select Growth Finance on leasing essential operating
equipment to such emerging companies for its own account. The Company originated
over $52 million in new leases through its Select Growth Finance activities in
1998 and has originated over $138 million in such leases since 1993.
The Company first entered the Portfolio Finance business in 1988 through
the acquisition of Scientific Leasing Inc., the majority of whose assets
consisted of a portfolio of leases of healthcare equipment. In 1994, the Company
sold its healthcare equipment leasing and portfolio acquisition and servicing
business to LINC Anthem Corporation ("LINC Anthem"), a subsidiary of Anthem
Insurance Companies, Inc. In connection with the sale, the Company entered into
a non-competition agreement that effectively restricted the Company from
participating in Portfolio Finance activities and from originating leases other
than to emerging growth companies until September 1997 (the "Non-Compete
Agreement"). The Company's Chief Executive Officer, Mr. Zimmerman, and Executive
Vice President and Chief Financial Officer, Mr. Palles, participated in the
management of LINC Anthem until it was sold in 1996 to an affiliate Newcourt
Credit Group (USA), Inc. From 1988 through the end of 1996, the Company and LINC
Anthem Corporation purchased or financed over $600 million in leases originated
by other smaller lessors. After the sale, Messrs. Zimmerman and Palles returned
to the Company on a full-time basis to pursue opportunities in its Select Growth
Finance and Rental and Distribution activities. Upon the expiration of the
Non-Compete Agreement, the Company reinitiated its Portfolio Finance operations.
In 1998 Portfolio Finance originated lease volume in excess of $146 million.
The Company's Rental and Distribution activities were developed through the
acquisition in 1991 of a business founded by 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. During 1997, the
Company purchased the minority interest in its subsidiary, LINC Quantum
Analytics, Inc., which conducts the Company's Rental and Distribution
activities, from certain officers of the Company including Mr. Laing.
<PAGE>
The expiration of the Non-Compete Agreement allowed the Company to
reinitiate its Portfolio Finance business and to establish its Vendor Finance
business unit in 1998. The Company believes that its Select Growth Finance,
Portfolio Finance, and Instrument Rental and Distribution units assist the sales
efforts of equipment manufacturers and distributors. Therefore, management
believes that Vendor Finance represents a complementary strategic focus, and,
given the highly fragmented nature of the equipment leasing market, an
opportunity exists to acquire and consolidate smaller leasing companies with
significant vendor relationships. Since the beginning of 1998, the Company has
developed its Vendor Finance business unit through the acquisition of the
following companies.
o Comstock Leasing Inc., acquired by the Company in February 1998, with
offices in Minneapolis and San Francisco, specializes in leasing
office-based information technology equipment.
o Monex Leasing, Ltd., acquired by the Company in March 1998, headquartered
in Houston, is a lessor of telecommunications and business equipment.
o Spectra Precision Credit Corp., acquired by the Company in June 1998 and
based in Dayton, Ohio, was formerly the finance subsidiary of Spectra
Precision Group, an international manufacturer of laser-based leveling,
alignment and surveying instruments and software.
o Connor Capital Corporation, acquired by the Company in January 1999, is a
Chicago area lessor that specializes in developing finance programs for
equipment vendors.
As a result of these acquisitions, the Company now has relationships with
nearly 200 vendors and distributors.
In November 1997, the Company completed its initial public offering of
2,300,000 shares of common stock. The initial public offering gave the Company
the additional equity capital required for future internal and external growth.
The Company used a combination of equity and debt to finance the 1998
acquisitions and develop its Vendor Finance business unit.
Equipment Leasing Industry
The U.S. leasing industry has expanded at a compounded annual growth rate
of 15% since 1988, according to data supplied by the Monitor. The Equipment
Leasing Association of America (the "ELA") notes that approximately 80% of all
U.S. businesses use leasing to acquire some of their assets. Leasing is
advantageous since it enables a company to obtain the equipment it needs while
preserving cash flow, and may offer favorable accounting and tax treatment.
These factors, in management's opinion, are contributing to greater acceptance
of leasing as a major financing component of equipment investment. In
particular, the emergence of small, growth and technology-oriented businesses in
the U.S. economy continues to broaden the market for leasing companies. In fact,
industry penetration - based on the percentage of all U.S. business investments
that are derived from leases - has increased from 15% in 1978 to 31% in 1998.
Recent trends indicate that approximately 30% to 35% of all U.S. business
investments in equipment is financed through leasing transactions. Specifically,
the ELA notes that leasing financed approximately $180 billion of the $582
billion spent by the U.S. economy on productive assets in 1997.
<PAGE>
The highly fragmented leasing industry is dominated by small companies; 59%
of leasing companies in the U.S. have lease origination volume of under $50
million. This statistic implies that many companies in the leasing industry can
be characterized as small and perhaps thinly capitalized. Many of these
companies fill the important industry niche of "small ticket" (under $250,000
size) transactions. Based on these statistics, management believes that
opportunities exist for the Company to acquire leasing companies or finance
their lease portfolios.
Management believes consolidation in the leasing industry will be driven by
(1) basic economies of scale, (2) specialization factors, and (3) the capital
constraints of small companies.
Economies of scale exist in operational and back office functions,
especially those that relate to technological platforms. The increasing level of
automation often allows companies to increasingly rely on technology to perform
tasks previously performed by individuals. Thus, more efficient leasing
companies can acquire less efficient leasing companies and spread the costs of
technology over larger lease portfolios.
Specialization will also drive consolidation, as smaller players will be
disadvantaged relative to their larger peers who often have better resources -
including the skill set and customer service capabilities necessary to attract
meaningful partnerships with manufacturers. Consequently, management expects
competitive pressures from the larger independent leasing companies to drive
smaller companies to seek strategic merger partners.
Capital availability is primary to the success of any financial services
company. The larger leasing companies again have the advantages of lower cost of
funds and diversification of funding sources relative to smaller players who can
face capital constraints, especially during periods of tight credit. Therefore,
larger lessors can acquire smaller companies that benefit from a lower cost of
capital.
Select Growth Finance
General. The Company's Select Growth Finance activities consist primarily
of the direct origination of non-cancelable, full-payout leases and other
asset-based financing (primarily accounts receivable) to emerging growth
companies in the healthcare and information technology industries. Such
companies include device manufacturers, specialized healthcare service
companies, extended care providers, manufacturers and developers of
technological products, software developers, information service providers, and
Internet and telecommunications service companies. Since 1993, the Company has
provided leasing to over 125 companies including Bridge Data Corporation,
Cardiac Pathways Corporation, Earthlink Network, Inc., Interlink Electronics,
Inc., ProBusiness, Inc., Transitional Health Services, and WinStar
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 Essex Venture Partners, Oak Investment Partners, Menlo Ventures, Weiss,
Peck & Greer, and Welsh Carson Anderson & Stowe.
<PAGE>
Leases to individual customers typically include items with an aggregate cost
ranging from $250,000 to $3.0 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 1998 compared to 1997, Select Growth Finance lease
fundings increased to $52.4 million from $32.6 million.
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 Finance 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 credit quality. In a significant number of its
Select Growth Finance transactions, the Company receives warrants or other
equity participation rights that provide additional opportunities for
profitability upon the sale of such rights.
Sales and Marketing. Leases are originated by representatives located in
Chicago, San Francisco, Boston and Austin, often through a network of
independent lease brokers and referrals from institutional private equity
investors. The Company has been able to identify prospective clients through
marketing personnel having investment banking, financial analysis and industry
specific experience; attention to selective information regarding venture
capital investments in the healthcare and information technology industries;
direct mail advertising and representation at major venture capital conferences
and symposia.
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 trained in structuring Select Growth Finance
transactions.
Underwriting. The Company has adopted Credit Policies and Procedures
applicable to each of its business units that are periodically reviewed by the
Credit Policy Committee of its Board of Directors. In addition, the Company has
established a Commitments Committee, the senior members of which are the
Company's Chairman and CEO, its President and its Chief Financial Officer.
Because of the nature of its Select Growth Finance activities the preponderance
of the transactions originated by its Select Growth Finance business unit are
reviewed prior to approval by the Company's Commitment's Committee. Based on its
12 years of experience in serving emerging growth companies primarily in the
healthcare and information technology industries, as well as its over 23 years
in the equipment leasing industry, the Company has developed underwriting and
operations criteria, including a specialized credit rating system, for its
Select Growth Finance business that have been effective in the selection of
lessees and in controlling the Company's exposure to loss. The Company's Select
Growth Finance underwriting process is based on 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.
<PAGE>
Portfolio Finance
General. The Company reinitiated its Portfolio Finance activities upon the
expiration of the Non-Compete Agreement on September 29, 1997. The Portfolio
Finance division finances the leases generated by other equipment lessors. In
1998, its first full year of operations since the expiration of the Non-Compete
Agreement, the Portfolio Finance division originated over $146 million of
leasing volume. The Company has portfolio finance relationships with more than
20 companies and a total portfolio of over 60,000 leases.
The Company believes there are substantial opportunities in Portfolio
Finance due to the fragmented nature of the leasing industry, the inability of
small equipment leasing companies to access the cost-efficient asset-backed
securities markets to finance their portfolios, and the cost of implementing new
technologies to remain competitive. The Company finances leasing companies
characterized by: (i) strong customer or vendor relationships; (ii) lease
transactions which range in size from $1,000 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.
Sales and Marketing. In connection with the acquisition and financing of
lease portfolios, the Company offers two distinct programs to its customers.
Under its Warehouse Line Programs, the Company provides limited warehouse
facilities to lessors on a recourse basis. Following a warehouse period that
typically will not exceed six months, the Company purchases the related pool of
warehoused leases from the lessor on either a partial recourse or nonrecourse
basis. Under its Portfolio Finance Programs, the Company acquires portfolios
originated over a specified period of time by an unrelated lessor. The purchase
is usually credit enhanced by either a holdback reserve and/or, if the
creditworthiness of the originating lessor is acceptable, a recourse obligation
of the originating lessor. Such credit enhancement is intended to reduce losses
under this program. Substantially all of the leases the Company acquires are
non-cancelable, full-payout leases. The Company expanded its sales and marketing
organization in this segment during 1998.
Underwriting. The Company has developed established underwriting processes
for the management of its Portfolio Finance activities based on the prior
experience of its management. The Company performs a detailed due diligence
review of each potential customer prior to approval of a Warehouse Line or
Portfolio Finance Program. The due diligence process includes 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 utilizes credit
applications and credit scoring systems to underwrite each transaction to be
financed or purchased. In connection with Portfolio Finance Programs, the
Company re-underwrites the transactions in each portfolio utilizing its credit
scoring systems.
<PAGE>
Rental and Distribution Activities
General. The Company's Rental and 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 each 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.
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
has allowed it to become a 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 Perkin-Elmer Corporation
and Varian Associates Inc. The Company is a designated "Premier Channel Partner"
for Hewlett-Packard and believes, based on its own research, that it is the
largest independent source of analytical instruments in the U.S. 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 made ready for use by the Company. The Company
typically delivers equipment from its centralized warehouse within 24 hours of
receipt of an order. The Company services over 2,500 analytical instrument
customers through its sales force of product specialists and orders directed to
the Company by its vendors. The Company's customers include environmental
testing laboratories, pharmaceutical and chemical manufacturers and
biotechnology companies. The Company's five largest Rental and Distribution
customers are New York City Medical Examiner, Quanterrra Environmental Services,
Inc., State of Minnesota, Commonwealth of Virginia, and Catalytica, Inc. The
Company will seek opportunities to capitalize on its distribution and rental
expertise and its knowledge of the healthcare market by developing relationships
with vendors of medical equipment and acquiring other established rental and
distribution companies.
The Company offers its Rental and Distribution customers generally three
types of rental and leasing arrangements: (i) short-term rentals with terms
ranging from as short as two weeks to one year; (ii) operating leases with terms
ranging from 12 to 48 months; and (iii) full-payout leases 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.
<PAGE>
To further promote awareness of its Rental and 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. Product-specific marketing literature 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 customers' needs through a complete repair
and reconditioning facility.
The Company utilizes a combination of proprietary software and software
licensed to it by a third party in its rental and distribution activities. All
items in the Company's Rental and 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.
Vendor Finance
General. As part of the sale of its healthcare equipment leasing and
portfolio acquisition and servicing businesses in October 1994, the Company
entered into the Non-Compete Agreement that effectively restricted the Company
from originating leases other than to emerging growth companies until September
1997. On September 29, 1997 this Non-Compete Agreement expired and the Company
began to develop a Vendor Finance business unit that management believes
strategically complements the Select Growth Finance, Portfolio Finance, and
Rental and Distribution business units. Because of the high fragmentation of the
equipment leasing industry, management believes that the Company can grow its
Vendor Finance business through selecting acquisitions of smaller leasing
companies with significant vendor relationships and through their internal
growth.
Acquisitions. The Company focuses on acquiring smaller leasing companies
that have potential to grow significantly with access to the Company's lower
cost of capital and established infrastructure. In addition, potential
acquisitions must have strong management that has demonstrated its ability to
develop and execute attractive business plans. These acquisitions are intended
to give the Company significant vendor relationships that the Company can
leverage in its other three business segments. Management believes that
acquisitions should increase the institutional knowledge of the Company by
adding equipment and marketing expertise and diversifying the Company's leasing
portfolio. The Company has begun to execute this strategy in 1998 and expects to
continue to pursue 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.
<PAGE>
Since the expiration of the Non-Compete Agreement the Company has acquired
four leasing companies which fit the parameters of its acquisition strategy.
These acquisitions compliment the Company's core competencies in customizing
lease financing arrangements to respond to the needs of vendors and equipment
end-users, and in training the vendor's staff in the use of the Company's lease
financing products to provide an additional flow of financing volume.
Acquisition synergies include allowing management of the acquired companies to
focus their activities on marketing, providing a lower cost of funds, permitting
products offered to vendors to include rentals and financing to emerging growth
companies and providing access to sophisticated lease servicing. The Company
expects to continue to expand its Vendor Finance business through expansion and
integration of these acquired businesses, as well as through additional
acquisitions.
Comstock Leasing Inc. In February 1998 the Company acquired Comstock
Leasing Corporation ("LINC Comstock"), a small-ticket lessor with offices in
Minneapolis and San Francisco. LINC Comstock supports vendors as a lessor of
office-based information technology. As part of the acquisition, the Company
acquired the $7.9 million leasing portfolio of LINC Comstock. LINC Comstock
originates its leasing volume through approximately 12 vendor relationships in
the information technology industry. The majority of its lease volume is
concentrated in Minnesota and California. The average lease transaction has an
original equipment cost of $25,000.
Monex Leasing, Ltd. In March of 1998, the Company acquired Monex Leasing,
Ltd. ("LINC Monex"), a vendor-driven equipment lessor headquartered in Houston,
Texas. LINC Monex works with distributors and vendors of telecommunications,
business and medical equipment, primarily in the Texas market. As part of the
acquisition, the Company acquired the $20.6 million lease portfolio of LINC
Monex.
LINC Monex originates leasing volume through its direct relationships with
vendors and distributors. Vendors are motivated to promote leasing since LINC
Monex will pay the vendor immediately for the equipment and then service the
lease with the end user, alleviating the vendor's concerns regarding payment
from the end-user. The vendor's salespeople often find that monthly lease
payments over time are less daunting to a customer than paying the full purchase
price up front and therefore rely on leasing to increase their sales volumes.
The average lease has an original equipment cost of $25,000.
Spectra Precision Credit Corp. The Company acquired substantially all of
the assets and business of Spectra Precision Credit Corp. ("Spectra Credit") in
June 1998, including its $34.7 million lease portfolio. Prior to the
acquisition, Spectra Credit was the finance subsidiary of Spectra Precision,
Inc. ("Spectra Precision"), a division of Sweden-based Spectra Precision Group,
an international manufacturer of laser-based leveling, alignment and surveying
instruments and software used in the construction, agricultural and surveying
markets. As part of the acquisition, the Company and Spectra Precision entered
into a seven-year vendor agreement in which the Company will have exclusive
rights to provide financing services to Spectra Precision's clients in the
United States, Canada, and Europe.
The acquisition of Spectra Credit which has become the LINC Vendor Services
Division of the Company ("LINC Vendor Services") expanded the Company's vendor
financing business, introduced the Company to new equipment and end-user
markets, and provided an international presence with LINC Vendor Service's
office in the United Kingdom. Through its formal agreement with Spectra
Precision, LINC Vendor Services provides a sophisticated array of leasing
options, progress payment programs, floor plan financing and rental services to
24 direct sales offices and more than 140 dealer/distributors of Spectra
Precision's products throughout the world. The leases originated by LINC Vendor
Services have an average original equipment cost of $18,000.
LINC Vendor Services believes that it can significantly increase its
leasing volume by setting up additional leasing programs with distributors in
other niche industries such as medical and dental equipment, broadcasting and
telecommunications, and materials handling. The company targets middle-market
manufacturers that do not have existing finance programs and works with these
companies in developing strategies that will increase unit sales and margins. As
part of these efforts, LINC Vendor Services provides the manufacturers with
inventory management assistance that focuses on business growth and sales
seminars aimed at developing more effective salespeople through reduced sales
cycles, increased selling efficiencies, and wider margins.
Connor Capital Corporation. In January 1999, the Company acquired Connor
Capital Corporation ("LINC Connor"), located in suburban Chicago. LINC Connor is
an equipment leasing company specializing in captive vendor finance programs. At
the time of its acquisition by the Company, LINC Connor had an approximately $10
million leasing portfolio.
LINC Connor focuses on developing captive finance programs for equipment
vendors. The strategy of LINC Connor is to create a virtual company that acts as
a leasing arm for its equipment vendors. The virtual company responds to leasing
inquiries generated by the vendors and allows each vendor to represent that it
has a captive finance subsidiary. Management believes that the virtual company
concept, combined with a vendor revenue sharing program, has created demand for
LINC Connor's services.
During 1998, following their acquisition by the Company these businesses
collectively generated new equipment leases of $48.0 million.
Lease Portfolio Composition
Equipment Type. The following table sets forth the Company's percentage of
net investment in direct finance leases and loans and the net book value of
operating leases, including leases securitized, as of December 31, 1998, by
equipment type:
<TABLE>
<CAPTION>
% Of
Equipment Type Examples Portfolio
- -------------- -------- ---------
<S> <C> <C>
Point-of-Sale Devices Credit card verification equipment 27.3%
Information Systems Personal computers, area networks and workstations 14.9
Laser Surveying Laser-based leveling and alignment instruments, machine control
systems, and surveying instruments 11.8
Production Pharmaceutical manufacturing, labeling and dispensing equipment 9.7
Analytical Instruments Gas and liquid chromatographs and mass spectrometers 9.2
Telecommunications Microwave transmitters, multiplexing equipment and telephone
systems 7.1
Medical X-ray machines, infusion pumps and surgical equipment 6.9
Furniture and Fixtures Medical and other office furniture 5.0
Miscellaneous Various equipment accessories and other 8.1
-------
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 essential 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 typically
automatically incorporated into and deemed a part of the equipment financed.
Residual Values. Residual equipment values on the Company's balance sheet
as of December 31, 1998 totaled approximately $15.5 million. The Company's
experience in remarketing equipment and conservative policies toward estimating
residual values has resulted in the Company consistently recognizing gains on
the remarketing of leased equipment on a historical basis.
Equity Participation Rights Held in Select Growth Finance Lessees. The
Company frequently receives warrants or other equity participation rights from
Select Growth Finance clients in connection with its leases to them. Such
warrants or rights entitle the 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
rights 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 December 31, 1998, the Company held equity participation rights in 55
companies, nine of which were publicly traded. During 1998, the Company realized
an aggregate of $3.8 million in gain from the sale of equity participation
rights in three publicly traded companies, approximately $3.4 million of which
related to one such company. These results may not be indicative of future
performance. At December 31, 1998, the estimated fair value of these securities
was $1.1 million inclusive of gross unrealized gains of $0.1 million. Potential
gains on both residual values and sale of equity participation rights provide
additional sources of revenue to offset the possibility of losses, which may be
incurred on Select Growth Finance lessees.
Loss Experience. The following table sets forth the amount of deliquencies
as a percentage of Gross Contract Balance of leases 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 the loss reserves provided for on the Gross Contract
Balance as well as holdback reserves on portfolio acquisitions as of the end of
the period indicated.
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1998 1997 1996
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Select Growth Finance:
Gross Contract Balance $75,882 $56,654 $30,095
31 - 60 days past due 3.07% 11.31% 1.05%
61 - 90 days past due 0.07% - -
Over 90 days past due 1.52% - -
Portfolio Finance:
Gross Contract Balance $175,885 $31,630 $2,791
31 - 60 days past due 2.13% 0.39% -
61 - 90 days past due 1.27% 0.18% -
Over 90 days past due 0.20% 0.02% -
Rental and Distribution:
Gross Contract Balance $10,064 $9,352 $10,282
31 - 60 days past due 8.88% 11.70% 5.50%
61 - 90 days past due - 5.76% 0.78%
Over 90 days past due - 9.98% 1.94%
Vendor Finance:
Gross Contract Balance $92,478 $ - $ -
31 - 60 days past due 3.37% - -
61 - 90 days past due 0.61% - -
Over 90 days past due 1.16% - -
Totals:
Gross Contract Balance $354,309 $97,636 $43,168
31 - 60 days past due 2.85% 7.81% 2.04%
61 - 90 days past due 0.81% 0.61% 0.19%
Over 90 days past due 0.73% 0.96% 0.46%
Average net investment in leases and
loans owned and managed $242,757 $61,069 $27,407
Net charge-offs 3,116 171 433
Net charge-off percentage 1.28% 0.28% 1.58%
Allowance for Doubtful receivables included in:
Net investment in direct finance leases
and loans $3,791 $2,173 $1,294
Securitization residual interest 1,808 328 -
Holdback reserves on portfolio acquisitions 6,104 603 -
----------- ----------- -----------
Total allowance and holdbacks $11,703 $3,104 $1,294
=========== =========== ===========
</TABLE>
<PAGE>
Rental Inventory Composition
Equipment Type. As of December 31, 1998 and 1997, the Company owned and
managed an inventory of analytical instruments having an original cost of $26.0
million and $21.7 million, respectively. The Company's inventory of equipment at
December 31, 1998 includes over 4,000 items representing more than 500 model
types and has an average age of approximately 21 months.
The following table sets forth the composition of the Company's rental
inventory by equipment type as of December 31, 1998:
<TABLE>
<CAPTION>
% of
Equipment Type Use Price Range Inventory
- -------------- --- ----------- ---------
<S> <C> <C> <C> <C>
Gas Chromatographs Analysis of evaporated organic compounds $15,000 $20,000 51.7%
Mass Spectrometers Separation and analysis of organic compounds 50,000 60,000 15.4
Liquid Chromatographs Analysis of dissolved organic compounds 15,000 50,000 12.8
Atomic Absorption Systems Analysis of metals 25,000 125,000 5.3
Portable Test Units Analysis of organic vapor 5,000 60,000 3.3
Accessories Accessories and automatic samplers 8,000 12,000 11.5
-----
Total 100.0%
=====
</TABLE>
Customers. The following table sets forth the Company's percentage of 1998
revenues from the rental and sale of analytical instruments by customer
industry:
Type Of Customer % of Revenue
Environmental 39.7%
Biotechnology 17.4
Manufacturing 11.1
Government 11.1
Chemical 9.6
Pharmaceutical 5.0
Other 6.1
---
Total 100.0%
=====
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 two weeks 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 funds its activities through a secured warehouse, revolving
credit and term loan facility provided to it by a syndicate of banks under its
Senior Credit Facility, as well as recourse and non-recourse loans provided by
various financial institutions and a securitization facility. As of December 31,
1998, the Company had $155.0 million available for borrowing under the Senior
Credit Facility, of which the Company had borrowed $91.7 million, and the
weighted-average interest rate on borrowings under the Senior Credit Facility
was 6.58%.
Upon achieving a sufficient portfolio size of lease receivables, the
Company sells or finances 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 the receivables to
the financing parties on a limited recourse basis) or other structured
financings (in which the receivables are sold or pledged directly to the
financing party on a limited recourse basis). In December 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. Under the
Securitization Facility, the Company securitized leases during 1998 and 1997
with a book value of $200.2 million and $15.2 million, respectively. At December
31, 1998, $170.7 million of the facility was utilized.
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. As a result of the Company's established
track record in the specialty finance industry, the Company believes that terms
of its Senior Credit Facility and Securitization Facility are superior or
comparable to the terms obtained by other companies in its industry of similar
size and credit characteristics. Additionally, during 1999, the Company expects
to supplement existing capital resources through raising debt and or/equity
financing from other providers.
<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 March 12, 1999, the Company employed 172 people on a full-time basis.
Sixty-four personnel were involved in marketing and sales, 103 were in lease and
rental processing, servicing and administrative support and five were corporate
executive employees. No employees of the Company are represented by a labor
union. The Company believes that its relations with its employees are good.
Executive Officers of the Registrant
The executive officers of the Company and their ages as of December 31,
1998 are as follows:
Name Age Position
------ --- ----------
Martin E. Zimmerman 60 Chairman of the Board and Chief Executive Officer
Robert E. Laing 53 President, Chief Operating Officer and Director
Allen P. Palles 57 Executive Vice President, Chief Financial Officer
and Director
William F. DeMars 49 Senior Vice President--Select Growth Finance
William J. Erbes 48 Senior Vice President--Vendor Finance
Gerard M. Farren 57 Senior Vice President--Rental and Distribution
Mark A. Arvin 51 Senior Vice President, Finance
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. Mr.
Zimmerman earned a B.S. degree in electrical engineering from M.I.T. in 1959 and
an M.B.A. in finance from Columbia University Graduate School of Business; where
he was a Kennecott Copper Fellow and McKinsey Scholar in 1961.
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
<PAGE>
Executive Vice President and Group Executive, Retail Group, President of U.S.
Instrument Rental and Distribution, 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 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.
William F. DeMars serves as Senior Vice President--Select Growth
Finance of the Company. Mr. DeMars joined the Company in April 1998. Before
joining the Company, Mr. DeMars spent six years as Executive Vice President and
Chief Operating Officer of a manufacturing company. From 1973 to 1991, Mr.
DeMars held various positions with Marine Midland Bank, most recently as senior
vice president.
William J. Erbes serves as Senior Vice President--Vendor Finance of the
Company. Mr. Erbes joined the Company in 1993 and served as Senior Vice
President--Business Development from 1995 to 1998. In January 1999 he was
promoted to his current position. 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.
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.
Mark A. Arvin serves as Senior Vice President, Finance of the Company. Mr.
Arvin joined the Company in December 1998. Before joining the Company, over the
prior six years Mr. Arvin was a co-founder and co-owner of three companies
specializing in leasing and equipment finance. From 1988 to 1992, he was
Executive Vice President and Chief Financial Officer of Meridian Leasing
Corporation. Prior to 1988, he was a Partner with the public accounting firm
KPMG Peat Marwick.
Forward-Looking Statements and Associated Risks
This Form 10-K contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Form 10-K, the words and
phrases "expects", "intends", "believes", "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. The Company's actual results,
performance or achievements could differ materially from the results,
<PAGE>
performance or achievements expressed in, or implied by, these forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, the Company's ability to identify suitable acquisition
candidates or to complete acquisitions on acceptable terms and assimilate the
operations, services, products, and personnel of acquired companies, the
Company's ability to attract, evaluate, finance, acquire and service increasing
volumes of leases of suitable yield and credit quality, and the Company's
dependence to a significant degree upon the continued contributions of members
of its senior management. These and other risks are more fully described in the
"Risk Factors" section of the Company's registration statement (333-34729) on
Form S-1 filed by the Company with the Securities and Exchange Commission on
August 29, 1997, as amended. In light of these risks and uncertainties, there
can be no assurance that the performance and results referred to in the
forward-looking statements contained herein will in fact occur.
Item 2. Properties
The Company's principal executive offices and its Select Growth Finance and
Portfolio Finance activities are located at 303 East Wacker Drive, Chicago,
Illinois 60601 and occupy approximately 26,000 square feet of office space.
Although the lease for the facility expires on September 30, 1999, the Company
has committed to enter into a new lease expiring on June 30, 2006 for
approximately 44,000 square feet of office space that includes the majority of
the current office space as well as additional office space at the same
location. An unrelated third party has committed to sublease 8,200 square feet
of this space through June 30, 2006. The Company's Rental and Distribution
activities are located in Foster City, California and occupy approximately
23,500 square feet of warehouse, laboratory and office space under a lease,
which expires on May 31, 2002. The Company's Vendor Finance activities operate
out of four full service offices (where marketing, credit analysis, and other
functions are performed) located in Minneapolis, Minnesota; Houston, Texas,
Dayton, Ohio; and Wheeling, Illinois, each of which occupies approximately 2,000
to 9,000 square feet of office space and are leased under leases that expire at
various dates through August 31, 2003. The Company believes that its current
facilities are adequate for its existing needs and that additional suitable
space will be available as required.
Item 3. Legal Proceedings
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to its business, to which the Company is a party
or of which any of its property is the subject.
Item 4. Submission of Matters to Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
<PAGE>
Price Range of Common Stock
The Company's Common Stock commenced trading on November 9, 1997 and is
traded on the Nasdaq National Market under the symbol "LNCC". The following
table sets forth for the periods indicated the high and low sale prices for the
Company's Common Stock as reported by the Nasdaq National Market.
High Low
---- ---
1998
----
First Quarter $18.75 $16.50
Second Quarter $20.50 $16.25
Third Quarter $18.75 $8.00
Fourth Quarter $9.63 $6.00
1997
----
Fourth Quarter (Nov. 9 - Dec. 31) $20.50 $6.50
At March 12, 1999, there were approximately 30 holders of record of the
Common Stock. The Company believes that the beneficial ownership of the Common
Stock is substantially greater than the number of holders of record.
Dividend Policy
The Company did not pay any dividends in 1998 or 1997. 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.
Recent Sales of Unregistered Securities
On March 31, 1998, the Company issued 50,000 shares of Common Stock, valued
at $14.50 per share, to the former owner of Monex Leasing, Ltd. as part of the
consideration for the acquisition of Monex Leasing Ltd, which was exempt from
registration under the Securities Act of 1933 pursuant to Section 4(z).
Item 6. Selected Financial Data
The selected financial data set forth below should be read in conjunction
with the Company's Financial Statements and related notes thereto and with "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Sales of equipment $32,929 $23,131 $22,595 $13,852 $15,836
Direct finance lease income 12,300 5,981 3,055 1,467 339
Interest income 2,194 877 283 47 --
Rental and operating lease revenue 9,412 7,492 7,034 9,043 8,531
Fee income 2,360 1,360 1,869 2,378 580
Gain on sale of lease receivables 6,839 880 -- -- --
Gain on equipment residual values 1,752 860 450 44 5
Gain on equity participation rights 3,824 430 263 -- --
Other income 1,432 666 507 790 352
------------- ------------- ------------- ------------- -------------
Total revenues 73,042 41,677 36,056 27,621 25,643
------------- ------------- ------------- ------------- -------------
Expenses:
Cost of equipment sold 26,789 18,549 18,242 11,477 13,312
Selling, general and administrative 17,824 8,973 8,008 7,524 6,842
Interest 9,172 4,511 2,771 1,962 1,138
Depreciation of equipment 6,073 4,226 3,647 4,054 3,512
Goodwill amortization 286 67 -- -- --
Provision for credit losses 5,280 1,253 749 1,060 247
------------- ------------- ------------- ------------- -------------
Total expenses 65,424 37,579 33,417 26,077 25,051
------------- ------------- ------------- ------------- -------------
Net earnings from continuing operations
before provision for income taxes and
minority interest 7,618 4,098 2,639 1,544 592
Income tax expense 3,024 1,627 1,084 747 257
------------- ------------- ------------- ------------- -------------
Net earnings from continuing operations
before minority interest 4,594 2,471 1,555 797 335
Minority interest -- (13) (120) 34 80
------------- ------------- ------------- ------------- -------------
Net earnings from continuing operations $ 4,594 $ 2,458 $ 1,435 $ 763 $ 255
============ ============= ============= ============= =============
Net earnings from continuing operations
per common share:
Basic $ .89 $ .73 $ .48 $ 0.25 $ 0.08
Diluted .86 .72 .45 0.25 0.08
Shares used in computing net income
per common share:
Basic 5,171 3,372 2,991 3,006 3,104
Diluted 5,347 3,397 3,162 3,103 3,113
Dividends declared per common share -- -- $ .26 -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Operating Data:
Leasing:
Lease fundings:
Select Growth Finance $52,405 $32,568 $16,604 $16,320 $14,900
Portfolio Finance 146,051 39,671 1,795 -- --
Rental and Distribution 6,916 7,001 5,674 4,159 6,742
Vendor Finance (1) 48,012 -- -- -- --
------------- ------------- ------------- ------------- -------------
Total fundings (1) 253,384 79,240 24,073 20,479 21,642
Backlog of unfunded leases (2) 48,426 31,170 5,864 8,609 8,351
Net investment in direct finance leases
and loans (2) 163,966 67,264 34,554 17,861 8,296
Unearned lease income, net (2) 31,847 13,276 6,820 4,333 2,016
Leases and loans owned and
managed (2) 307,843 84,127 34,554 17,861 8,296
Net charge-off percentage (3) 1.3% 0.3% 1.6% 0.8% 0.1%
Rental and Distribution:
Net margin on sales of equipment 18.6% 19.8% 19.3% 17.1% 15.9%
Equipment held for rental and
operating leases, net (2) $30,659 $22,007 $15,048 $18,500 $15,780
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Net investment in direct finance leases and
loans $163,966 $67,264 $34,554 $17,861 $ 8,296
Equipment held for rental and operating
leases, net 30,659 22,007 15,048 18,500 15,780
Securitization retained interest 17,026 3,017 -- -- --
Total assets 248,884 108,977 67,200 58,604 41,386
Senior credit facility and other senior
notes payable 96,646 38,117 29,605 31,914 19,400
Recourse debt 8,017 2,955 3,361 882 --
Nonrecourse debt 68,616 17,951 8,276 4,997 --
Subordinated debentures 5,694 5,386 5,127 4,953 4,767
Total liabilities 207,443 72,273 53,258 46,411 30,097
Stockholders' equity $41,441 $36,704 $13,942 $12,193 $11,289
- --------------------
(1) Excludes lease portfolios acquired in connection with company acquistions totaling $55.7 Million.
(2) At period end.
(3) As a percentage of net investment in direct finance leases and loans owned
and managed before allowance for doubtful accounts.
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information contained in this section, which relates only to the
Company's continuing operations, should be read in conjunction with the
Consolidated Financial Statements and notes thereto.
Introduction
The Company's Select Growth Finance, Portfolio Finance and Vendor
Finance activities consist largely of direct finance leases and loans. The
Company funds these leases and loans through its revolving credit and
securitization facilities and other recourse and nonrecourse debt. In its Rental
and Distribution activities, the Company rents, leases and sells new and used
analytical instruments and related equipment and funds these activities
primarily through its revolving credit facility. 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 and amortized over the lease term. The Company records direct finance
leases as "Net investment in direct finance leases and loans." At the end of the
lease, a remarketing gain or loss is recorded to the extent the proceeds of sale
or re-leasing of the equipment exceed or are less than the originally estimated
residual value. When the Company leases analytical instruments, such leases are
accounted for similarly to direct finance leases 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 ("sales type leases").
Secured Loans. Loans made by the Company, which are secured by
equipment or other assets of the borrowers, are recorded as "Net investment in
direct finance leases and loans" at the present value of the future note
payments. Initial direct costs incurred in originating loans are capitalized as
part of the net investment and amortized over the term. Income is recognized
over the term of the note by applying a constant periodic rate of return to the
declining note balance and is recorded as "Interest income".
<PAGE>
Rentals and Operating Leases. All rental and lease contracts that do
not meet the criteria of direct finance leases are accounted for as operating
leases. Terms on rental contracts are shorter than twelve months, while terms on
operating leases are longer. Rental and lease payments are recorded as "Rental
and operating lease revenue." Related 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 this life.
The Company has realized gains from the sale of used analytical instruments each
year since the inception of its Rental and Distribution activities. Other leased
equipment is depreciated over its estimated useful life to its salvage or
residual value.
Equity Participation Rights. The Company frequently receives warrants
or other equity participation rights in connection with leases to Select Growth
Finance clients. Such warrants or rights entitle the 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 at cost. The Company
does not recognize gain or loss on such securities until they are sold. The
Company periodically reviews its portfolio of equity participation rights based
on its evaluation of the market trends for the related clients' equity
securities. The Company expects to sell its equity participation rights as its
portfolio companies mature.
Realization of Residual Values. Residual values are estimated at the
inception of a lease and reviewed periodically over the lease term. Estimated
residual values of leased equipment may be subsequently reduced, but not
increased. Reductions in estimated residual values are made as the need 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 equipment residual values," or the amount by
which the estimated residual value exceeds the net proceeds is recorded as a
loss. The Company has not had a net loss from the realization of residual values
for any quarterly period.
Servicing Fees. The Company realizes revenue for lease receivables
serviced under the terms of its securitization facility. Additionally, the
Company engages in the business of servicing lease portfolios originated by
third parties but has not entered into a new agreement to service leases for
third parties since December 1994. Revenues from these activities are classified
as "Fee income."
Securitizations of Lease Portfolios. In a securitization transaction,
the Company sells a pool of leases to a wholly-owned special purpose entity
which then transfers or pledges the leases to the lender. The Company generally
retains the right to receive any excess cash flows of the special purpose
entity. Until October 1, 1998, the Company recognized a gain on 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 sold.
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 a non-recourse debt instrument under generally
accepted accounting principles.
<PAGE>
Accordingly, no gain on sale of lease receivables in securitization
transactions was recorded during the fourth quarter of 1998.
Provision for Credit Losses. Each of the Company's activities involves
risk of credit loss. Management evaluates the collectibility of the Company's
leases and loans based on the creditworthiness of the related lessee or obligor,
delinquency statistics, historical loss experience, current economic conditions
and other relevant factors. The Company provides a reserve for credit losses at
the time that the lease or loan commences and periodically evaluates the reserve
based on current delinquency experience and the financial status of its lessees
or obligors.
Results of Operations
1998 Compared to 1997
Net earnings from continuing operations ("net earnings") for the year
ended December 31, 1998 was $4.6 million, or $0.86 per diluted common share,
compared to $2.5 million, or $0.72 per diluted common share for the year ended
December 31, 1997. The increase in net earnings for 1998 compared to the prior
year is primarily due to gains recognized during the first nine months of the
year on the securitization of lease receivables, gains recognized on the sale of
equity participation rights, and increased earnings contributions from the
Company's Rental and Distribution activities. New lease originations grew from
$79.2 million in 1997 to $309.0 million (including leases funded in connection
with acquisitions) in 1998. Interest expense increased as a result of an
increase in borrowings to fund new lease originations. Selling, general, and
administrative expenses increased as a result of three acquisitions and the
building of the Company's sales and operations organizations. Additionally, the
provision for doubtful accounts increased from $1.3 million in 1997 to $5.3
million in 1998, in proportion to the increase in the size of the Company's
lease portfolio. Earnings per diluted common share for 1998 was impacted by the
Company's issuance of 2.3 million common shares in November 1997, which has
increased the average weighted number of shares outstanding in 1998.
Sales of equipment increased from $23.1 million to $32.9 million and
costs of analytical instruments sold increased from $18.5 million to $26.8
million, due to an increase in volume. Net margins on sales of analytical
instruments declined from 19.8% to 18.6% primarily as a result of lower gross
margins on sales type leases originated in the Company's Rental and Distribution
segment during the first half of 1998.
Direct finance lease income more than doubled from $6.0 million to
$12.3 million as a result of a substantially higher level of finance lease
receivables outstanding, coming from acquisitions and from internal lease
originations Average finance lease receivables outstanding increased 134%.
Interest income increased from $0.9 million to $2.2 million, primarily
due to an increase in interest-bearing notes receivable and equipment loans held
by the Company, as well as the income recognized on the Company's securitization
retained interest.
<PAGE>
Rental and operating lease revenue increased from $7.5 million to $9.4
million primarily due to acquisitions of portfolios of operating leases upon the
Company's re-entry in the Portfolio Finance segment after the expiration of a
non-compete agreement in September 1997.
Fee income increased from $1.4 million to $2.4 million, due to
increases in servicing fees relating to a third party lease portfolio serviced
by the Company and an increase in fees received in connection with servicing
securitized leases. This increase was partially offset by the decline in the
number of leases serviced by the Company for unrelated parties.
During 1998 and 1997, the Company securitized leases with a book value
of $200.2 million and $15.2 million, respectively, net of bad debt reserves and
customer holdbacks of $7.7 million and $ 0.3 million. In connection with these
securitizations, the Company realized gains on the sale of lease receivables of
$6.8 million and $0.9 million in 1998 and 1997, respectively. 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 lease receivables was recorded during the fourth
quarter of 1998.
Gains from sale and re-leasing of leased equipment increased from $0.9
million to $1.8 million. The increase was the result of a greater number of
leases maturing in 1998.
During 1998, the Company experienced increases in the value of certain
equity participation rights held by the Company and consequently elected to sell
a portion of these rights, realizing a gain of $3.8 million. During 1997, the
Company sold certain equity participation rights, realizing a gain of $0.4
million.
Other income, which consists primarily of interim rents received by
Select Growth Finance and late fees, increased from $0.7 million to $1.4
million, primarily due to the increase in the volume of Select Growth Finance
leases originated and late fees collected by Vendor Finance.
Selling, general and administrative expenses increased from $9.0
million to $17.8 million, net of initial direct costs capitalized. The increase
resulted primarily from additional operations, marketing and sales personnel
associated with the Company's re-entry into Portfolio Finance, senior and middle
management personnel added to support the Company's growth, three acquisitions
completed in 1998, and increased activity in the Company's other business
segments. The number of people employed, including employees of companies
acquired, increased 75% to 147 during1998.
Interest expense increased from $4.5 million to $9.2 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 290% over
the prior year.
Depreciation of equipment increased from $4.2 million to $6.1 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 42% over the prior year.
<PAGE>
Goodwill amortization of $0.3 million increased from less than $0.1
million in 1997, due to three acquisitions completed in the first half of 1998.
The provision for credit losses increased from $1.3 million to $5.3
million, due to a substantially higher volume of new leases originated and
re-evaluation of reserves. Lease fundings, excluding portfolios acquired in
connection with the Company's acquisitions, increased 220% over the prior year.
The Company's effective tax rate was 39.7% for 1998 and 1997.
1997 Compared to 1996
Net earnings for the year ended December 31, 1997 was $2.5 million,
or $0.72 per diluted common share compared to $1.4 million, or $0.45 per diluted
common share for the year ended December 31, 1996. The increase in net earnings
in 1997 compared to 1996 is primarily a result of a substantially higher level
of finance lease receivables and the completion of a securitization in 1997,
offset somewhat by a higher level of average borrowings and an increase in
selling, general and administrative expense in the Company's Select Growth
Finance and Portfolio Finance activities and increased earnings contributions
from the Company's Rental and Distribution activities.
Sales of equipment increased from $22.6 million to $23.1 million and
costs of analytical instruments sold increased from $18.2 million to $18.5
million due to an increase in market penetration in the pharmaceutical and
biotechnology industries, offset by the consolidation in the environmental
testing industry. Net margin on sales of analytical instruments was 19.3% in
1996 and 19.8% in 1997.
Direct finance lease income increased from $3.1 million to $6.0 million
as a result of a substantially higher level of finance lease receivables
outstanding. Net investment in direct finance leases and loans increased from
$34.6 million to $67.3 million due to increased marketing and selling
activities. New lease origination's increased 229% period to period.
Interest income increased from $0.3 million to $0.9 million primarily
due to an increase in interest-bearing notes receivable held by the Company.
Rental and operating lease revenue increased from $7.0 million to $7.5
million. The increase in operating lease revenue is primarily a result of the
Company re-entering the portfolio finance and lease acquisition business upon
the expiration of a non-compete agreement in September 1997.
As a consequence of the continuing decline in the number of leases
serviced by the Company for unrelated parties, fee income declined from $1.9
million to $1.4 million.
During 1997, the Company securitized leases with a book value of $15.2
million, net of bad debt reserves of $0.3 million. In connection with the
securitization, the Company realized a gain on the sale of lease receivables of
$0.9 million. No securitization occurred in 1996.
<PAGE>
Gains from sale and re-leasing of leased equipment increased from $0.5
million to $0.9 million. The increase in gains from 1996 resulted from increased
lease maturities in 1997.
The Company sold certain of its equity participation rights, realizing
gains of $0.3 million and $0.4 million in 1996 and 1997, respectively.
Other income, which consists primarily of interim rents received and
fees earned in connection with Select Growth Finance commitments, increased from
$0.5 million to $0.7 million, primarily due to the increase in the volume of
Select Growth Finance leases originated by the Company in 1997.
Selling, general and administrative expenses increased from $8.0
million to $9.0 million. This increase is primarily attributable to increases in
operations, marketing and sales personnel associated with the Company's Select
Growth Finance activities and the re-initiation of Portfolio Finance activities,
as well as increases in information systems expenditures, partially offset by a
decrease in expenses of Rental and Distribution activities.
Interest expense increased from $2.8 million to $4.5 million, due
primarily to an increase in average borrowings. The increase in average
borrowings resulted from increased direct finance lease originations by Select
Growth Finance as well as leases added by Portfolio Finance. Average borrowings
for 1997 benefited somewhat from the utilization of the proceeds from the
offering in November 1997 to reduce borrowings under the senior credit facility.
Depreciation of equipment increased from $3.6 million to $4.2 million
as a result of the increase in equipment under rental agreements related to
Rental and Distribution activities and an increase in operating leases as the
result of Portfolio Finance activities.
Goodwill amortization increased to $0.1 million, due to the purchase of
the minority interest in a subsidiary of the Company in 1997.
The provision for credit losses increased from $0.7 million to $1.3
million, due to the volume of new leases originated. However, such provisions
declined from 2.3% to 2.1% of direct finance lease receivables at the end of the
respective periods, as a result of the lower loss provisions related to the
Company's Portfolio Finance activities.
The Company's effective tax rate decreased from 41.1% to 39.7%,
resulting from a reduction in state income tax rates in 1997 and the
corresponding reduction in deferred taxes for prior periods.
<PAGE>
Liquidity and Capital Resources
General
The Company's activities are capital intensive and require access to
substantial amounts of credit to fund new equipment leases. The Company has
financed its operations to date primarily through cash flow from operations,
through borrowings under its senior credit facility, its 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.
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, and financing of new lease origination's and rental
inventory through credit facilities and securitizations. Cash flows from
operating and financing activities for 1998, 1997 and 1996 were $326.1 million,
$79.8 million and $21.5 million, respectively. The period to period increases
result primarily from securitizations completed in 1997 and 1998 and additional
borrowings under the Company's credit facilities.
Credit Facilities
The Company utilizes 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 December 31, 1998, the
Company had a maximum of $155 million available for borrowing under this
facility, of which the Company had borrowed $91.7 million. 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 December 31, 1998, $170.7 million of the facility was
utilized. 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. At the time of
placing leases in the securitization facility, the Company enters into interest
rate cap and interest rate swap agreements to manage interest rate risk.
<PAGE>
Other
Recent 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 its consolidated financial
statements.
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 are year 2000
compliant except for certain of the systems of the companies acquired in 1998.
As part of its integration strategy, the Company is currently converting the
information on the non-compliant systems of the acquired companies onto its own
systems. The Company also has several other systems, including voice mail and
phone systems, which use dates electronically that are being reviewed for
compliance. The Company expects to have all systems year 2000 compliant by the
end of the first quarter of 1999 and plans to complete comprehensive, full
system testing in the second quarter of 1999. The Company is making 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.
Based on information available at this time, including the year 2000
compliance status of information technology systems as well as the anticipated
replacement costs for non-compliant systems, the Company has concluded that
the costs for the correction of year 2000 issues 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.
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposure is interest rate risk,
largely related to the Company's senior credit facility and securitization
retained interest. Otherwise, the Company is able to mitigate the effects of
changes in interest rates through financing leases or loans on a nonrecourse or
partial recourse basis at fixed interest rates, which maintains the spread on
lease or loan transactions over their terms. In addition, the Company manages
exposure to fluctuations in interest rates by establishing fixed interest rates
on the lease portfolios in the Company's securitization facility through
interest rate swap and cap agreements. Interest rates associated with new
originations of leases or loans can be adjusted to compensate for changes in the
interest rate environment. The Company does not use derivative financial
instruments for trading purposes.
The Company is exposed to adverse fluctuations in interest rates as
they relate to the Company's securitization retained interest and to leases and
loans funded under its senior credit facility. Additionally, the Company could
be negatively impacted by the early termination of its interest rate swap or
interest rate cap agreements based on the fair value of these derivative
financial instruments on the date of termination. At December 31, 1998,
termination of the interest rate swap and interest rate cap agreements would
have resulted in a charge to earnings of $1.1 million.
The Company's securitization retained interest is classified as a
trading investment, and consequently, is recorded on the balance sheet at market
value, net of an allowance for doubtful receivables, with unrealized gains or
losses reported in the statement of earnings. Fluctuations in interest rates
affect the market value of the investment since the market value is estimated
based on a discounted cash flow approach using the interest rate the Company
would expect to apply in a sale of the investment at period end. Changes in loss
expectancy arising from defaults could also affect the market value and
ultimately the recoverability of the securitization retained interest. The
Company continuously monitors loss expectancy and would record a charge to
earnings for any material decrease in the expected recoverability of the
securitization retained interest in the period in which such event occurred. At
December 31, 1998, the net effect of a 100 basis point decrease or increase in
three-year treasury rates over a twelve-month period would result in a $0.3
million unrealized gain or loss reported in the statement of earnings.
The Company funds a portion of its lease portfolio under its senior
credit facility. The senior credit facility 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 the Fed Funds rate plus 1.30% to 1.80%, with the precise rate dependent
on certain leverage tests. An increase in these interest rates would cause a
decrease in the spread between the yield on the lease or loan contract and the
Company's borrowing costs. At December 31, 1998, the net effect of a 100 basis
point decrease or increase in LIBOR over a twelve-month period would result in a
$0.9 million decrease or increase in interest expense for the period.
If actual interest rates are different from those estimated by the
Company, the net impact of interest rate risk on the Company's earnings may be
materially different than disclosed above.
The Company is also subject to foreign currency rate risk relating to a
limited number of leases denominated in Canadian dollars and British pounds. The
Company has determined that hedging of these assets is not cost effective and
instead attempts to minimize currency exposure risk through working capital
management. The Company does not believe that any foreseeable change in currency
rates would have a material effect on its financial position or results of
operations.
<PAGE>
The table below presents the principal (or notional) amounts and
related weighted average interest rates of the Company's securitization retained
interest, debt obligations, and derivative financial instruments by expected
year of maturity.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total
--------- --------- -------- -------- -------- ------------ -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Securitization retained
interest $ 6,603 $ 5,981 $ 4,502 $1,548 $ 199 $- $18,834
Weighted average
interest rate 7.25%
Liabilities:
Senior credit facility $91,700 $- $- $- $- $- $91,700
Variable rate 6.58% - - - - - 6.58%
Other notes payable $ 1,499 $ 2,178 $ 769 $ 500 - - $4,946
Weighted average
interest rate 8.31% 8.46% 10.00% 10.00% - - 8.81%
Recourse and
nonrecourse debt $26,142 $22,683 $16,396 $9,153 $2,258 - $76,632
Weighted average
interest rate 8.37% 8.34% 8.31% 8.17% 8.08% - 8.32%
Subordinated debt - - - $1,581 $6,178 - $7,759
Weighted average
interest rate - - - 8.25% 8.25% - 8.25%
Off-balance sheet financial instruments:
Interest rate swaps $25,798 $50,028 $43,558 $32,129 $11,791 $ 2,272 $165,576
Weighted average fixed
interest rate 5.67% 5.57% 5.55% 5.55% 5.52% 5.21% 5.62%
Interest rate caps $2,579 $5,003 $4,356 $3,213 $1,179 $227 $16,557
Weighted average fixed
interest rate 5.67% 5.57% 5.55% 5.55% 5.52% 5.21% 5.62%
</TABLE>
The table above reflects the expected maturity of the Company's
retained interest, debt obligations, and derivative financial instruments as of
December 31, 1998 and does not reflect changes which could arise after that
time. Additionally, because the Company's lease portfolio is not presented in
the table above, the information presented therein has limited predictive value.
As a result, the Company's ultimate realized gain or loss with respect to
interest rate fluctuations will depend on exposures that arise during the
respective period, the Company's hedging strategies at the time, and actual
interest rates. For information regarding the fair value of financial
instruments, see note 9 to the Consolidated Financial Statements.
Item 8. Financial Statements and Supplementary Data
The financial statements begin on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item with respect to the identity and
business experience of the Company's executive officers is set forth in Part I,
Item 1 under the caption "Executive Officers of the Registrant." Other
information required by Item 10 will be contained in a definitive proxy
statement which the Registrant anticipates will be filed no later than 120 days
subsequent to the Company's fiscal year end, and thus this part has been omitted
in accordance with General Instruction G(3) to Form 10-K.
Items 11, 12 and 13. Executive Compensation, Security Ownership of Certain
Beneficial Owners and Management and Certain Relationships
and Related Transactions
The information required by Item 11, Item 12 and Item 13 will be
contained in a definitive proxy statement which the Registrant anticipates will
be filed no later than 120 days subsequent to the Company's fiscal year end, and
thus has been omitted in accordance with General Instruction G(3) to Form 10-K.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
See Index to Financial Statements at page F-1.
(2) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts is at page S-2. All
schedules, other than those included herein, are omitted because they are not
applicable or the required information is shown in the financial statements or
notes.
<PAGE>
(3) Exhibits
Exhibit
Number Document Description
------ --------------------
3.1 Form of Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-34729) ("Registration Statement 333-34729")
3.2 Form of Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 on Registration Statement
333-34729
4.1 Form of certificate representing shares of Common Stock,
$0.001 par value per share (incorporated by reference to
Exhibit 4.1 on Registration Statement 333-34729)
10.1(a) Third Amended and Restated Loan Agreement, among the
Company, the various lending institutions named therein
and Fleet Bank, N.A., as Agent (incorporated by reference
to Exhibit 10.1(a) on Registration Statement 333-34729)
10.1(b) Amendment No. 1 to Third Amended and Restated Loan
Agreement, among the Company, the various lending
institutions named therein and Fleet Bank, N.A., as Agent
(incorporated by reference to Exhibit 10.1(b) on
Registration Statement 333-34729)
10.1(c) Amendment No. 5 to Third Amended and Restated Loan
Agreement, among the Company, and various lending
institutions named therein and Fleet Bank, N.A., as Agent
(incorporated by reference to the Company's Form 10-Q for
the quarterly period ended September 30, 1998)
10.2 Agreement between the Company and LINC Finance Corporation
("LFC") regarding distribution of LFC shares and related
matters (incorporated by reference to Exhibit 10.2 on
Registration Statement 333-34729)
10.3 Employment Agreement for Mr. Zimmerman (incorporated by
reference to Exhibit 10.3 on Registration Statement
333-34729)
10.4 Form of Employment Agreements for Messrs. Palles, Laing,
Erbes and Dr. Farren (incorporated by reference to Exhibit
10.4 on Registration Statement 333-34729)
10.5 Non-Employee Director Option Plan (incorporated by
reference to Exhibit 10.5 on Registration Statement
333-34729)
10.6 Executive Incentive Compensation Plan (incorporated by
reference to Exhibit 10.6 on Registration Statement
333-34729)
10.7 1994 Stock Option Plan (incorporated by reference to
Exhibit 10.7 on Registration Statement 333-34729)
10.8 1997 Stock Incentive Plan (incorporated by reference to
Exhibit 10.8 on Registration Statement 333-34729)
10.9 Consulting Agreement for Mr. Quinn (incorporated by
reference to Exhibit 10.9 on Registration Statement
333-34729)
10.10 Form of Indemnification Agreement for Non-Employee
Directors (incorporated by reference to Exhibit 10.10 on
Registration Statement 333-34729)
10.11(a) Receivables Purchase Agreement, among the Company, LINC
Receivables Corporation, Blue Keel Funding, LLC, and Fleet
Bank, N.A., as agent (incorporated by reference to the
Company's Form 10-Q for the quarterly period ended
September 30, 1998)
10.11(b) Second Amendment to Receivables Purchase Agreement, among
the Company, LINC Receivables Corporation, Blue Keel
Funding, LLC, and Fleet Bank, N.A., as agent (incorporated
by reference to the Company's Form 10-Q for the quarterly
period ended September 30, 1998)
10.11(c) Fourth Amendment to Receivables Purchase Agreement, among
the Company, LINC Receivables Corporation, Blue Keel
Funding, LLC, and Fleet Bank, N.A., as agent
10.12 Asset Purchase Agreement by and among LINC Capital, Inc.,
Spectra Precision Credit Corp., Spectra Precision Funding
Corporation, and Spectra Precision, Inc. dated June 30,
1998 (incorporated by reference to the Company's Form 8-K
dated June 30, 1998)
21.1 Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 on Registration Statement 333-34729)
27.1 Financial Data Schedule
<PAGE>
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the last
quarter of the fiscal year ended December 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) 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: March 30, 1999
By: /s/ Martin E. Zimmerman
--------------------------------
Martin E. Zimmerman
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below on March 30, 1999, by the following persons on
behalf of the Registrant and in the capacities indicated.
Signature Capacity
--------- --------
/s/ Martin E. Zimmerman
-----------------------
Martin E. Zimmerman Chairman of the Board and Chief Executive Officer
(principal executive officer)
/s/ Allen P. Palles
-------------------
Allen P. Palles Chief Financial Officer and Director
(principal financial officer)
/s/ Robert E. Laing
-------------------
Robert E. Laing Director
/s/ Charles J. Aschauer
-----------------------
Charles J. Aschauer Director
/s/ Stanley Green
-----------------------
Stanley Green Director
/s/ Terrence J. Quinn
---------------------
Terrence J. Quinn Director
/s/ Curtis S. Lane
------------------
Curtis S. Lane Director
/s/ Mark A. Arvin
-----------------
Mark A. Arvin Senior Vice President, Finance
(principal accounting officer)
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
Index to
Consolidated Financial Statements
Page
----
Independent Auditors' Report......................................... F-2
Consolidated Balance Sheets, December 31, 1998 and 1997.............. F-3
Consolidated Statements of Earnings, years ended
December 31, 1998, 1997, and 1996................................... F-4
Consolidated Statements of Stockholders' Equity, years ended
December 31, 1998, 1997, and 1996................................... F-5
Consolidated Statements of Cash Flows, years ended
December 31, 1998, 1997 and 1996.................................... F-6
Notes to Consolidated Financial Statements........................... F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
LINC Capital, Inc.:
We have audited the accompanying consolidated balance sheets of LINC
Capital, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/S/ KPMG LLP
Chicago, Illinois
February 17, 1999
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
December 31,
-------------------
ASSETS 1998 1997
-------- ---------
Net investment in direct finance leases and loans...... $163,966 $67,264
Equipment held for rental and operating leases, net.... 30,659 22,007
Accounts receivable.................................... 7,593 6,741
Securitization retained interest....................... 17,026 3,017
Other assets........................................... 17,474 8,052
Goodwill .............................................. 10,738 1,896
Cash and cash equivalents.............................. 1,428 --
-------- ---------
Total assets..................................... $248,884 $108,977
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior credit facility and other senior notes payable.. $96,646 38,117
Recourse debt.......................................... 8,017 2,955
Nonrecourse debt....................................... 68,616 17,951
Accounts payable....................................... 7,443 2,985
Accrued expenses....................................... 8,775 2,905
Customer holdbacks..................................... 10,328 1,738
Subordinated debentures................................ 5,694 5,386
Deferred income taxes.................................. 1,924 236
-------- --------
Total liabilities............................... $207,443 $72,273
======== ========
Stockholders' equity:
Common stock, $0.001 par value, 15,000,000 shares...
authorized;5,249,591 and 5,199,591 shares issued;..
5,183,688 and 5,133,688 shares outstanding......... 5 5
Additional paid-in capital.......................... 29,567 28,840
Deferred compensation from issuance of options...... (124) (171)
Stock note receivable............................... (182) (511)
Treasury stock, at cost; 65,903 shares.............. (287) (287)
Accumulated other comprehensive income (loss)....... (34) 926
Retained earnings................................... 12,496 7,902
--------- --------
Total stockholders' equity....................... 41,441 36,704
--------- ---------
Total liabilities and stockholders' equity....... $248,884 $108,977
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share data)
Year ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
Revenues:
Sales of equipment.......................... $32,929 $23,131 $22,595
Direct finance lease income................. 12,300 5,981 3,055
Interest income............................. 2,194 877 283
Rental and operating lease revenue.......... 9,412 7,492 7,034
Fee income.................................. 2,360 1,360 1,869
Gain on sale of lease receivables........... 6,839 880 --
Gain on equipment residual values........... 1,752 860 450
Gain on equity participation rights......... 3,824 430 263
Other income................................ 1,432 666 507
-------- -------- -------
Total revenues........................... 73,042 41,677 36,056
-------- -------- -------
Expenses:
Cost of equipment sold...................... 26,789 18,549 18,242
Selling, general and administrative......... 17,824 8,973 8,008
Interest .................................. 9,172 4,511 2,771
Depreciation of equipment under rental
agreements and operating leases........... 6,073 4,226 3,647
Goodwill amortization....................... 286 67 --
Provision for credit losses................. 5,280 1,253 749
-------- -------- -------
Total expenses........................... 65,424 37,579 33,417
-------- -------- -------
Earnings from continuing operations before
income taxes and minority interest............ 7,618 4,098 2,639
Income tax expense............................. 3,024 1,627 1,084
------- ------- ------
Earnings from continuing operations before 4,594 2,471 1,555
minority interest.............................
Minority interest.............................. -- (13) (120)
-------- --------- -------
Net earnings from continuing operations........ 4,594 2,458 1,435
Discontinued operations:
Loss from discontinued operations, net of
income tax benefit for the years ended 1997
and 1996 of $258 and $479, respectively.... -- (402) (706)
Net gain from disposal of discontinued
operations, net of income taxes of $1,009.. -- -- 1,513
--------- --------- -------
Net earnings................................... $4,594 $2,056 $2,242
========= ========= =======
Per common share:
Net earnings from continuing operations
Basic.................................... $ .89 $ .73 $ .48
Diluted.................................. .86 .72 .45
Net earnings
Basic..................................... .89 .61 .75
Diluted................................... .86 .61 .71
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
LINC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands, except per share data)
Accumulated
Additional Stock Treasury Stock, Other
Common Stock Paid-in Deferred Note at cost Comprehensive Retained Comprehensive
Shares Amount Capital Compensation Receivable Shares Amount Income(Loss) Earnings Income(Loss) Total
------- ------ ------- ------------ ---------- ------- ------ ------------ -------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 3,012,757 $3 $978 $ - $(199) - $- $11,411 $ - $12,193
Comprehensive income:
Net income $ 2,242 2,242 - 2,242
Other comprehensive
income:
Unrealized gains
on securities - - - - - - - 348 - 348 348
-------
Comprehensive income - - - - - - - $ 2,590 - -
=======
Purchase and sale of
stock, net - - - - - 61,999 (270) - - (270)
Common stock dividends,
$.26 per share - - - - - - - (770) - (770)
Payment on note - - - - 199 - - - - 199
--------- ------ ------- ------------ ---------- ------- ----- -------- ------------ -------
Balance at
December 31,1996 3,012,757 3 978 - - 61,999 (270) 12,883 348 13,942
--------- ------ ------- ------------ ---------- ------- ----- -------- ------------ -------
Comprehensive income:
Net income - - - - $ 2,056 2,056 2,056
Other comprehensive
income:
Unrealized gains
on securities - - - - - - - 578 - 578 578
--------
Comprehensive income - - - - - - - $ 2,634 - -
========
Purchase and sale of
stock, net 2,669,626 2 27,672 - (511) 3,904 (17) - - 27,146
Distribution of LFC
Capital, Inc. (482,792) - (81) - - - - (7,037) - (7,118)
Income tax benefit
from stock options
exercised - - 50 - - - - - - 50
Deferred compensation
from issuance of
stock options - - 221 (171) - 50
---------- ----- -------- ------------ --------- ------- ----- -------- ------------ -------
Balance at
December 31, 1997 5,199,591 5 28,840 (171) (511) 65,903 (287) 7,902 926 36,704
---------- ----- -------- ------------ ---------- ------- ----- -------- ------------ -------
Comprehensive income:
Net income - - - - - - - $ 4,594 4,594 - 4,594
-------
Other comprehensive
income:
Unrealized loss
on securities - - - - - - - (862) - -
Translation
adjustment - - - - - - - (98) - -
--------
Other comprehensive
loss - - - - - - - (960) - (960) (960)
--------
Comprehensive income - - - - - - - $ 3,634 - -
========
Purchase and sale of
stock, net 50,000 - 727 - - 727
Payment received on note - - - - 329 - - - - 329
Deferred compensation
from issuance of
stock options - - - 47 - - - - - 47
---------- ----- -------- ------------ ---------- ------- ----- -------- ------------ -------
Balance at
December 31, 1998 5,249,591 $5 $29,567 $(124) $(182) 65,903 $(287) $12,496 $(34) $41,441
========== ===== ======== ============ ========== ======= ====== ======== =========== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year ended December 31,
-----------------------------
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net earnings $4,594 $2,056 $2,242
Adjustments to reconcile net earnings to net
cash provided by continuing operations:
Net(earnings)loss from discontinued
operations............................. -- 402 (807)
Depreciation and amortization............ 6,904 4,665 3,739
Direct finance lease income.............. (12,300) (5,981) (3,055)
Payments on direct finance leases........ 66,961 27,148 17,682
Deferred income taxes.................... 2,269 1,194 763
Provision for credit losses.............. 5,280 1,253 749
Gain on sale of lease receivables........ (6,839) (880) --
Gain on equity participation rights...... (3,824) (430) (263)
Amortization of discount................. 308 259 174
Deferred compensation.................... 47 50 --
Minority interest........................ 13 498
Changes in assets and liabilities:
Decrease(increase) in receivables........ 44 (4,688) (2,064)
Decrease(increase) in other assets....... (9,371) (4,818) 1,205
Increase(decrease) in accounts payable... 1,334 (119) 2,837
Increase in accrued expenses............. 2,855 843 190
Increase in customer deposits............ 6,993 417 --
--------- -------- --------
Cash provided by continuing operations......... 65,255 21,384 23,890
Cash flows from discontinued operations..... --- 10,198 15,052
-------- -------- -------
Cash provided by operating activities........... 65,255 31,582 38,942
--------- -------- -------
Cash flows from investing activities:
Cost of equipment acquired for lease
and rental.................................. (274,304) (78,366) (31,496)
Cash used in acquisitions, net of cash
acquired.................................... (39,180) -- --
Funding of securitization retained
interest.................................... (20,077) (3,381) --
Receipts on securitization retained
interest.................................... 6,121 -- --
Fixed assets purchased...................... (1,092) (753) (252)
Proceeds from disposal of discontinues
operation................................. -- 2,265 8,327
Proceeds from sale of investments........... 3,824 430 263
-------- -------- -------
Net cash used in investing activities.... (324,708) (79,805) (23,158)
--------- -------- --------
See accompanying notes to consolidated financial statements.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(Dollars in thousands)
Years ended December 31,
--------------------------------
1998 1997 1996
-------- -------- -------
Cash flows from financing activities:
Net increase in notes payable............... 55,850 8,512 232
Proceeds from recourse and nonrecourse
debt....................................... 63,214 17,285 9,966
Repayment of recourse and nonrecourse
debt....................................... (23,507) (8,016) (4,366)
Proceeds from sale of lease receivables..... 164,995 16,822 --
Proceeds from stock notes receivables....... 329 -- --
Purchase of stock........................... -- (38) (312)
Sale of stock............................... -- 27,184 241
Common stock dividends...................... -- -- (770)
Proceeds from notes of discontinued
operations................................. -- -- 3,146
Payment of notes from discontinued
operations................................. -- (13,526) (25,589)
--------- -------- --------
Net cash provided by (used in) financing
activities........................... 260,881 48,223 (17,452)
--------- -------- --------
Net increase(decrease) in cash................. 1,428 -- (1,668)
Cash at beginning of year...................... -- -- 1,668
--------- -------- --------
Cash at end of year............................ $1,428 $-- $--
========= ======== ========
Supplemental disclosures of cash flow information:
Interest paid............................... $8,542 $4,644 $2,771
Income taxes paid........................... 898 275 325
See accompanying notes to consolidated financial statements.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
(1) Summary of Significant Accounting Policies
Nature of Business and Basis of Presentation
LINC Capital, Inc. (the "Company") is a specialty 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
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 ("Rental and Distribution"), and (iv) the establishment
of leasing programs for manufacturers and distributors ("Vendor Finance").
The accompanying consolidated financial statements include the operations of
the Company and all of its subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
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.
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
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.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Operating Leases
Rental income from operating leases with terms of twelve months or greater
and short term rentals of less than twelve months is recognized as lease
payments become due. Such rentals are included in rental and operating lease
revenue in the consolidated statement of earnings.
Depreciation
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 majority of rental equipment is fully depreciated over seven years.
Initial Direct Costs
Initial direct costs incurred by the Company in originating direct finance
and operating leases are capitalized at lease commencement. 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.
Such costs for operating leases are amortized over the lease term on a
straight-line method.
Securitization retained interest
Securitization retained interest represents amounts receivable from assets
securitized. Income from the securitization retained interest is recognized over
the life of the securitized leases using the interest method.
Through September 30, 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. 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.
Earnings Per Share
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the periods. Diluted earnings per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the periods.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Goodwill
Goodwill is amortized using the straight-line method over 20 years.
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.
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.
Investments
The Company has classified its entire portfolio of securities as
available-for-sale. Available-for-sale securities are stated at fair value with
unrealized gains and losses included in stockholders' equity. Fair value of the
securities is determined based on market prices. Securities for which no readily
determinable market price is available are recorded at cost. 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 December 31,
1998, the Company held available-for-sale securities with estimated fair values
of $1,087,000, consisting of gross unrealized gains on warrants or common stock
of $107,000, and a cost basis of $980,000. Cash proceeds received and gross
realized gains on the sale of investments for the years ended December 31, 1998,
1997 and 1996 were $3,824,000, $430,000, and $263,000, respectively.
Available-for-sale securities are included in other assets.
Stock-based Compensation
The Company utilizes the intrinsic value based method of accounting for its
stock-based compensation arrangements.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of Assets
The Company recognizes impairment losses on equipment held for rental and
operating leases and residual values of direct finance leases when the expected
future cash flows are less than the asset's carrying value, in which case the
asset is written down to its estimated recoverable value. The Company also
recognizes impairment losses on goodwill when expected future cash flows from
the related operations are less than the carrying value. The Company has not
recorded an impairment loss during any of the operating periods presented in the
accompanying financial statements.
Derivative Financial Instruments
The Company uses interest rate swap and interest rate cap agreements to
establish fixed interest rates on securitized leases to reduce its exposure to
adverse fluctuations in interest rates. Gains or losses resulting from the early
termination of off-balance sheet interest rate swaps or caps would be included
in the statement of earnings in the period of termination.
Reclassifications
Certain reclassifications have been made in the 1997 and 1996 financial
statements to conform to the 1998 presentation.
(2) 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.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 service 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
year ended December 31, 1998 and 1997 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
Year ended December 31,
1998 1997
-------- --------
(In thousands, except per share amount)
Pro forma revenues...................... $75,618 $46,347
Pro forma net earnings from continuing
operations............................. 4,359 2,730
Pro forma net earnings from continuing
operations per common share............
Basic.......................... 0.81 0.84
Diluted........................ 0.80 0.82
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Net Investment in Direct Finance Leases and Loans
Net investment in direct finance leases and loans is as follows:
December 31,
1998 1997
-------- --------
(In thousands)
Lease and loan contracts receivable
in installments.......................... $191,278 $78,036
Estimated residual value of leased
equipment................................ 8,326 4,677
Initial direct costs...................... 2,447 1,071
Unearned lease income..................... (34,294) (14,347)
Allowance for doubtful receivables........ (3,791) (2,173)
---------- --------
Net investment............................ $163,966 $67,264
========== ========
At December 31, 1998 future payments to be received on direct finance leases
and loans are as follows:
Amount
-----------
(In thousands)
Year Ending December 31,
1999................................ $ 67,322
2000................................ 52,906
2001................................ 40,065
2002................................ 21,610
2003 and thereafter................. 9,375
-----------
Future payments......................... $ 191,278
===========
At December 31, 1998 certain future lease contract payments have been
assigned to financial institutions (note 8).
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) 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,
-------------------
1998 1997
------- --------
(In thousands)
Equipment under operating leases................. $13,905 $ 8,783
Equipment under rental agreements................ 16,754 13,224
-------- --------
Net book value................................... $30,659 $22,007
======== ========
The book values presented above are net of accumulated depreciation of
$8,058,000,and $7,067,000 at December 31,1998 and 1997, respectively. Equipment
under rental agreements is comprised primarily of analytical instruments.
At December 31, 1998 future contract payments to be received on operating
leases are as follows:
Amount
-----------
(In thousands)
Year Ending December 31,
1999......................................... $ 4,447
2000......................................... 3,127
2001......................................... 1,309
2002......................................... 452
2003 and thereafter.......................... --
---------
Future contract lease payments................... $ 9,335
=========
At December 31, 1998 certain future contract payments have been assigned to
financial institutions (note 8).
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) 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 and loans of $8,326,000 and equipment held for operating
leases of $7,123,000 in the consolidated balance sheet at December 31, 1998.
Year of Estimated net
expected book value at
termination termination
----------- -------------
(In thousands)
1999......................................... $ 3,090
2000......................................... 3,470
2001......................................... 4,963
2002......................................... 2,118
2003 and thereafter.......................... 1,808
-----------
Future contract lease payments to be received.... $ 15,449
===========
(6) Other Assets
Other assets are as follows:
December 31,
--------------------
1998 1997
--------- -------
(In thousands)
Inventory........................................ $4,392 $ --
Restricted cash ................................ 3,935 2,481
Deposits on equipment ........................... 3,082 712
Property and equipment, net...................... 1,555 756
Holdback on lease fundings....................... 1,349 311
Available-for-sale securities.................... 1,087 2,353
Prepaid expenses and miscellaneous............... 2,074 1,439
--------- -------
Total...................... $17,474 $8,052
========= =======
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Securitization Facility
The Company has a securitization facility providing for funding up to
$225,000,000. At December 31, 1998, $170,712,000 was utilized. 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 from 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 (note 6).
Through September 30, 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. 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.
During 1998 and 1997, the Company securitized leases with a book value of
$200,166,000 and $15,209,000, respectively. These amounts are net of bad debt
reserves and customer holdbacks of $7,686,000 and $328,000 for 1998 and 1997,
respectively. Under gain-on-sale treatment in effect through September 30, 1998,
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 December 31, 1998, the securitization retained interest of $17,026,000
was recorded at the Company's estimate of its market value using a discounted
cash flow approach. It included customer holdbacks of $3,934,000 and was net of
an allowance for doubtful receivables of $1,808,000. Subsequent to eliminating
gain-on-sale treatment, the Company recorded nonrecourse debt equal to the cash
received of $44,676,000 from the securitization of leases during the fourth
quarter of 1998 (note 8).
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the securitizations, the Company entered into amortizing
interest rate cap agreements and interest rate swap agreements for aggregate
notional amounts, equal to the initial aggregate principal balances of the
leases securitized, of $16,559,000 and $165,586,00, respectively. These
agreements effectively established fixed interest rates ranging from 4.98% to
6.03% on all of the Company's off-balance sheet debt to limit its exposure to
adverse fluctuations in interest rates. In February 1999, the Company entered
into an amortizing interest rate cap agreement and interest rate swap agreement
for aggregate notional amounts of $6,835,000 and $68,354,000, respectively, to
establish a fixed interest rate of 5.32% on the Company's nonrecourse debt
recorded in connection with the securitizations completed during the fourth
quarter of 1998 and January 1999.
(8) Debt
Notes Payable
Notes payable to banks and others were as follows:
December 31,
------------------
1998 1997
------- -------
(In thousands)
Senior credit facility............. $91,700 $35,850
Other.............................. 4,946 2,267
------- -------
Total.......................... $96,646 $38,117
======= =======
At December 31, 1998 and 1997, the Company had available a senior credit
facility in the amount of $155,000,000, and $100,000,000, respectively of which
$91,700,000, and $35,850,000 at December 31, 1998 and 1997, was outstanding. The
weighted-average interest rate on the senior credit facility at December 31,
1998 and 1997 was 6.58%, and 7.32%, 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 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 quarterly a per annum 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 time the remaining
balance of the facility may be converted to a term loan maturing October 31,
2002.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the acquisition of Monex Leasing, Ltd., the Company issued
a $2,679,000 note payable to the former owner of the company. Such note bears
interest at 8% with principal payments over a three-year period. 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
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, including any holdback or cash
reserve. Proceeds from the financing of leases are recorded as debt. Interest
rates in connection with these loans ranged from 6.97% to 10.19% at December 31,
1998.
In addition, at December 31, 1998, the Company had $44,676,000 of nonrecourse
debt at an interest rate of 5.63% under its securitization facility (note 7).
At December 31, 1998 the future principal maturities of recourse and
nonrecourse debt are as follows:
Amount
-----------
(In thousands)
Year Ending December 31,
1999.............................. $ 26,142
2000.............................. 22,683
2001.............................. 16,397
2002.............................. 9,153
2003 and thereafter............... 2,258
-----------
Total recourse and nonrecourse
discounted lease rentals........... $ 76,633
===========
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subordinated Debentures
Subordinated debentures of the Company, which bear interest at 8.25% 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 8.25% Subordinated Debentures are subordinated in right of payment
to all existing and future senior indebtedness of the Company. The subordinated
debentures are convertible prior to maturity 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, 1998 and 1997 are as follows:
December 31,
---------------------
1998 1997
--------- --------
(In thousands)
Subordinated debentures........... $7,759 $ 7,759
Less discount..................... (2,065) (2,373)
--------- --------
Total......................... $5,694 $ 5,386
========= ========
Covenants and Restrictions
The Company's various debt agreements contain restrictions on, among other
things, the payment of dividends, capital expenditures, repurchase of capital
stock, and the amount of recourse indebtedness that can be incurred.
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 ratios (as defined). The Company is in
compliance with these covenants.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Fair Value of Financial Instruments
The Company has determined the estimated fair value of financial instruments
using appropriate valuation methodologies or available market information. The
carrying values of accounts receivable, securitization retained interest,
restricted cash, available-for-sale securities, cash and cash equivalents,
borrowings under the senior credit facility, and subordinated debt approximate
fair values at December 31, 1998 and 1997 due to the short maturities, quoted
market prices, or the discounted expected cash flows of such financial
instruments.
The fair values of recourse and nonrecourse debt and other notes payable has
been estimated by discounting future cash flows using rates available at each
respective year end for debt with similar terms and remaining maturities.
December 31,
---------------------------------------
1998 1997
------------------- ------------------
(in thousands)
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- -------- ---------
Liabilities
Other notes payable $ 4,946 $ 5,362 $ 2,267 $ 2,346
Recourse and nonrecourse debt 76,633 76,769 20,906 20,775
The prior table excludes the notional amount outstanding and estimated fair
value of off-balance sheet financial instruments, which were as follows:
December 31,
--------------------------------------
1998 1997
------------------ ------------------
(in thousands)
Notional Fair Notional Fair
Amount Value Amount Value
--------- -------- --------- --------
Off-balance sheet financial instruments
Interest rate swap agreements $165,576 $(1,135) $15,326 $--
Interest rate cap agreements 16,557 50 1,533 --
The fair values of off-balance sheet financial instruments were estimated
based on their termination values.
<PAGE>
(10) Stockholders' Equity
Preferred Stock
During 1997, 1,000,000 shares of $0.01 par value preferred stock were
authorized. At December 31, 1998 no shares are outstanding.
Other Comprehensive Income
The changes in the components of other comprehensive income (loss) are
reported net of income taxes, as follows:
Pre-Tax Tax Expense/ Net-of-Tax
Amount (Benefit) Amount
-----------------------------------
(in thousands)
Year ended December 31, 1998
Unrealized gain (loss) on securities:
Unrealized holding gains $2,395 $951 $1,444
Reclassification adjustment
for gains realized in net (3,824) (1,518) (2,306)
----------------------------------
Net unrealized loss (1,429) (567) (862)
Foreign currency translation adjustments (163) (65) (98)
----------------------------------
Other comprehensive loss (1,592) (632) (960)
==================================
Year ended December 31, 1997
Unrealized gain on securities:
Unrealized holding gains $1,389 $552 $837
Reclassification adjustment
for gains realized in net earnings (430) (171) (259)
----------------------------------
Net unrealized gains 959 381 578
Foreign currency translation adjustments - - -
----------------------------------
Other comprehensive income 959 381 578
==================================
Year ended December 31, 1996
Unrealized gain (loss) on securities:
Unrealized holding gains $854 $351 $503
Reclassification adjustment
for gains realized in net earnings (263) (108) (155)
----------------------------------
Net unrealized gains 591 243 348
Foreign currency translation adjustments - - -
----------------------------------
Other comprehensive income 591 243 348
==================================
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accumulated other comprehensive income (loss), net of tax, at December 31,
1998, 1997, and 1996 consists of unrealized gains on securities of $64,000,
$926,000, and $348,000 and accumulated foreign currency adjustments of
$(98,000), $0, and $0, respectively.
(11) Stock Options
The Company has four non-qualified stock option plans -- the 1988 Stock
Option Plan ("1988 Plan"), the 1994 Stock Option Plan ("1994 Plan"), the 1997
Stock Incentive Plan, and the Non-Employee Director Option Plan. The 1988 and
1994 Plans have been terminated and no further options will be granted under
those plans. However, 166,304 options remain outstanding under the 1994 Plan
with exercise prices ranging from $1.51 per share to $2.69 per share. Options
granted under the 1994 Plan vest over various periods, but must be exercised
within 10 years after the grant date.
During 1997, the Company adopted the 1997 Stock Incentive Plan and the
Non-Employee Director Option Plan (collectively, the "1997 Plans"). The 1997
Stock Incentive Plan permits the grant of options and other equity-based awards
with respect to 375,000 shares of the Company's common stock and the
Non-Employee Director Option Plan permits the grant of options with respect to
100,000 shares of the Company's common stock. The 1997 Plans provide for grants
of options to employees and directors to purchase shares of the Company's common
stock at terms established by the Board of Directors or the Compensation
Committee. Options granted under the 1997 Plans were granted at an exercise
price equal to the fair value at the date of grant with ten-year terms and
vesting periods up to 4 years. In December 1998, the Company amended the 1997
Stock Incentive Plan to reduce the per share exercise price of 257,196 stock
options granted to employees, other than senior management officers, to $7.06
per share from the original grant price. The revised option grant price
represented the average fair value of the Company's common stock during the
twenty-day period prior to re-pricing. Additionally, the 1997 Stock Incentive
Plan was amended to reduce the per share exercise price of 30,000 stock options
granted to certain senior management officers to the lesser of either the
original grant price of $13.00 per share. The re-pricing of the stock options
has been presented in the table below as if the stock options were canceled and
an equal number of new options were granted.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the activity under the Plans during the year
ended December 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted-
Average Average Average
Number Exercise Number Exercise Number Exercise
of shares Price of Shares Price of Shares Price
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the
beginning of the year 376,482 $ 8.21 504,704 $ 1.77 272,598 $ 1.39
Granted............. 585,901 11.06 241,412 11.67 241,476 2.23
Exercised........... -- -- (369,634) 1.67 (9,370) 2.68
Forfeited........... (24,719) 9.69 -- -- -- --
Canceled............ (287,196) 15.08 -- -- -- --
-------- ----- ------- ---- ------- ----
Outstanding at the end
of year................ 650,468 7.70 376,482 8.21 504,704 1.77
------- ---- ------- ---- ------- ----
Options exercisable at
year-end............... 202,981 $ 7.29 -- $-- 312,755 $ 1.67
------- ------ --- --- ------- ------
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
of Contractual Exercise of Exercise
Range of exercise prices Shares Life Price Shares Price
- ------------------------ ------ ----- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$1.51 to 2.22 134,659 9.6 $2.09 62,121 $1.96
$2.69 23,426 8.5 2.69 - -
$6.88 to 7.94 334,051 9.4 7.24 94,192 7.72
$13.00 128,332 9.0 13.00 42,918 13.00
$19.25 30,000 9.4 19.25 3,750 19.25
------ --- ----- ----- -----
650,468 8.9 $7.70 202,981 $7.29
- -------------------------------------------------------------------- ------------------
</TABLE>
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the exercise price. During 1998, 1997, and
1996, the Company recognized $47,000, $50,000, and $0, respectively, in
compensation cost. Had compensation cost for the Company's stock option plans
been determined consisted with FASB Statement No. 123, the Company's net income
from continuing operations and earnings per share would have been reduced to the
pro forma amounts indicated below:
Years Ended December 31,
------------------------------
1998 1997 1996
------- -------- -------
(In thousands)
Net earnings from continuing operations
As reported............................ $4,594 $2,458 $1,435
Pro forma ............................. 4,131 2,366 1,409
Net earnings from continuing operations per
Common share--as reported:
Basic ................................. $.89 $.73 $.48
Diluted ............................... .86 .72 .45
Net earnings from continuing operations per
Common share--pro forma:
Basic ................................. $.80 $.70 $.47
Diluted ............................... .77 .70 .45
For purposes of calculating the compensation cost consistent with FASB
Statement No. 123, the fair value of each grant is estimated on the date of the
grant. For options granted under the 1988 Plan and the 1994 Plan, the fair value
of each options grant was calculated using the minimum value method specified by
FASB Statement No. 123 with the following assumptions: risk-free interest rate
of 6.0%, expected lives ranging from 3 to 9 years, and expected volatility and
dividend rate of 0%. For options granted under the 1997 Plans, the fair value of
each option grant in 1998 and 1997, respectively, was calculated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: risk-free interest rates of 5.3% and 5.8%, expected lives of 4.7
and 4.4 years, expected volatility of 35%, and a dividend rate of 0%.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average fair value of options granted during 1998 was $4.18 per
share. During 1997, 31,234 options were granted at an exercise price of $2.69
per share with a weighted average fair value of $1.17 per share and 210,178
options were granted at an exercise price of $13.00 per share with a weighted
average fair value of $4.93 per share. The weighted average fair value of
options granted during 1996 was $.43 per share.
(12) Earnings per share
The following table sets forth the computation of basic and diluted earnings
per share from continuing operations.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
(In thousands, except per share data)
<S> <C> <C> <C>
Numerator for basic and diluted earnings
per share from continuing operations
Net earnings from continuing operations $ 4,594 $ 2,458 $ 1,435
------------- ------------- -------------
Denominator for basic earnings per share
Weighted average shares 5,171,359 3,371,527 2,990,997
Effect of dilutive stock options 175,222 25,811 170,554
------------- ------------- ------------
Denominator for diluted earnings per share
Adjusted weighted average shares 5,346,581 3,397,338 3,161,551
------------- ------------- ------------
Net earnings from continuing operations:
Basic earnings per share $ .89 $ .73 $ .48
============= ============= =============
Diluted earnings per share $ .86 $ .72 $ .45
============= ============= =============
</TABLE>
Contingent shares issuable in connection with the acquisition of Monex
Leasing, Ltd. and stock options that could potentially dilute basic earnings per
share in the future that were not included in the computation of diluted
earnings per share because to do so would have been antidilutive were 78,528 0,
and 0, for the year ended December 31, 1998, 1997, and 1996, respectively.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(13) Income Taxes
The provisions for income tax expense for continuing operations were
comprised of the following:
Years Ended December 31,
------------------------------
1998 1997 1996
-------- -------- -------
(In thousands)
Current:
Federal................... $318 $367 $276
State..................... 437 66 43
Deferred:
Federal................... 2,318 852 562
State..................... (49) 342 203
-------- -------- -------
Total income tax expense. $3,024 $1,627 $1,084
======== ======== =======
Deferred tax expense relates principally to the difference in the method of
recognizing revenue and expense on direct finance leases for financial reporting
purposes versus 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.
Years Ended December 31,
-----------------------------
1998 1997 1996
------- --------- -------
(In thousands)
Expected tax provision................... $2,666 $1,434 $924
State taxes, net of Federal tax benefit.. 252 265 132
Other.................................... 106 (72) 28
------- --------- -------
Income tax expense................ $3,024 $1,627 $1,084
======= ========= =======
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below.
December 31,
------------------------------
1998 1997 1996
-------- -------- -------
(In thousands)
Deferred tax assets:
Net operating loss carry forwards........ $1,350 $5,159 $6,709
Investment tax credit carryforwards...... 2,409 2,741 2,741
Alternative minimum tax credit
carryforwards........................... 944 671 445
------ ------- ------
Total gross deferred tax assets....... 4,703 8,571 9,895
Less valuation allowance................. (3,632) (4,319) (4,319)
------- ------ -------
Net deferred tax assets............... 1,071 4,252 5,576
------- ------ ------
Deferred tax liabilities:
Investment in leased equipment........... (2,955) (3,873) (4,008)
Unrealized gain on securities............ (40) (615) (258)
------ -------- -------
Total gross deferred tax liabilities.. (2,995) (4,488) (4,266)
------ -------- -------
Net deferred tax asset (liability).... $(1,924) $(236) $1,310
======== ========= =======
For income tax purposes, the Company has an available net operating loss
carryforward of approximately $3,857,000, which expires beginning in 2007. The
Company also has unused investment tax credit carryforwards of approximately
$2,409,000 available to offset future taxes payable which expire beginning in
1999.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(14) Other Commitments
The Company leases several offices and a warehouse facility under
noncancelable operating leases. Additionally, the Company entered into a lease
commitment for additional office space at its corporate headquarters. The future
minimum rental payments due under these leases and the Company's lease
commitment for additional office space are as follows:
Amount
-------------
(In thousands)
Year Ending December 31,
1999.............................. $1,854,000
2000.............................. 1,879,000
2001.............................. 1,809,000
2002.............................. 1,594,000
2003 and thereafter............... 4,685,000
------------
Total........................... $11,821,000
============
The Company's total obligation for rent was $1,438,000, $1,042,000, and
$697,000 for 1998, 1997, and 1996, respectively. A portion of the Company's
obligation for rent, set forth above, during 1998, 1997 and 1996 has been
allocated and charged to LFC Capital, Inc., a related party (note 16).
The Company's corporate headquarters and its Select Growth Finance and
Portfolio Finance activities are located in Chicago, Illinois and occupy
approximately 29,000 square feet of office space. Although the lease for the
facility expires on September 30, 1999, the Company has committed to enter into
a new lease expiring on June 30, 2006 for 44,000 square feet of office that
includes the majority of the current office space as well as additional office
space at the same location. The Company's 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. The Company's Vendor Finance activities operate out of four offices
located in Minneapolis, Minnesota; Houston, Texas, Dayton, Ohio; and Wheeling,
Illinois, each of which occupies approximately 2,000 to 9,000 square feet of
office space and are leased under leases that expire at various dates through
August 31, 2003.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
An unrelated third party has committed to sublease approximately 8,000 square
feet of the office space at the Company's corporate headquarters through June
30, 2006 at $150,000 per annum. The Company also subleases a portion of the
facility of its Rental and Distribution activities under an annual sublease that
expires in April 1999 and a portion of its other office space under a sublease
agreement that expires in October 2000. Rent received under the sublease
agreements for 1998, 1997 and 1996 was $204,000, $191,000, and $177,000,
respectively.
(15) Segment Information
The Company has four reportable segments: Select Growth Finance, Portfolio
Finance, Rental and Distribution, and Vendor Finance. The Select Growth Finance
segment directly originates 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. The
Portfolio Finance segment finances leases generated by smaller equipment
lessors. The Rental and Distribution segment engages in rental, leasing, and
distribution of analytical instruments and related equipment to companies
serving the environmental, pharmaceutical and biotechnology industries. The
Vendor Finance segment establishes leasing programs for manufacturers and
distributors. The Company's reportable segments are strategic business units
that serve different markets and offer different products and services, which
complement each other. They are managed separately since each business requires
different pricing and marketing strategies. Each segment primarily generates
business in the U.S. The amount of revenues generated and assets held outside of
the U.S. are impracticable to disclose. Each segment's customer base is highly
diversified, with no significant customer concentrations.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. There are no intersegment
transactions. The Company evaluates performance of each segment based on
earnings from continuing operations before income taxes and minority interest.
Additionally, the Company evaluates performance of Select Growth Finance,
Portfolio Finance, and Vendor Finance based on lease fundings.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The corporate component of earnings from continuing operations before
income taxes and minority interest represents corporate selling, general and
administrative expenses for activities such as acquisition searches not
allocable to a segment. Certain selling, general and administrative expenses,
including depreciation expense on corporate property and equipment, are
allocated to each segment based on employee headcount or a combination of lease
and loan receivables and the number of contracts serviced. In the 1998
presentation, the results of Rental and Distribution have been restated to
includes its' direct finance leasing activity and conform to the Company's
selling, general, and administrative expense allocation policy. Corporate assets
consist of cash, including restricted cash; certain investments, property and
equipment, and other assets not identifiable with any particular segment; and in
1996, net assets of discontinued operations.
<TABLE>
<CAPTION>
Select Rental
Growth Portfolio and Vendor
(Dollars in thousands) Finance Finance Distribution Finance Corporate Consolidated
---------------------- ------- ------- ------------ ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Year end December 31, 1998
Total revenues $13,036 $11,059 $40,249 $8,698 $-- $73,042
Depreciation and
amortization expense 330 1,563 4,237 229 -- 6,359
Interest expense 3,276 2,330 1,079 2,487 -- 9,172
Earnings (loss) from
continuing operations before
income taxes and minority
interest 4,038 1,615 1,681 1,193 (909) 7,618
Total assets 72,757 82,911 30,725 56,622 5,869 248,884
Lease fundings $52,405 $146,051 $6,916 $48,012 $-- $253,384
----------------------------------------------------------------------------------
Year ended December 31, 1997
Total revenues $8,450 $2,847 $30,380 $-- $-- $41,677
Depreciation and
amortization expense 314 388 3,591 -- -- 4,293
Interest expense 2,449 819 1,243 -- -- 4,511
Earnings (loss) from
continuing operations before
income taxes and minority
interest 2,547 466 1,461 -- (376) 4,098
Total assets 45,530 36,548 23,432 -- 3,467 108,977
Lease fundings $32,568 $39,671 $7,001 $-- $-- $79,240
----------------------------------------------------------------------------------
Year ended December 31, 1996
Total revenues $4,885 $1,364 $29,807 $-- $-- $36,056
Depreciation and
amortization expense 193 -- 3,454 -- -- 3,647
Interest expense 1,442 105 1,224 -- -- 2,771
Earnings (loss) from
continuing operations before
income taxes and minority
interest 1,357 368 1,114 -- (200) 2,639
Total assets 26,461 3,062 28,437 -- 9,240 67,200
Lease fundings $16,604 $1,795 $5,674 $-- $-- $24,073
-----------------------------------------------------------------------------------
</TABLE>
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(16) Distributions to Certain Shareholders and Discontinued Operations
In 1997, the Company transferred to its wholly owned subsidiary, LFC Capital,
Inc. (formerly known as LINC Finance Corporation), certain assets and related
liabilities not used in the Company's continuing businesses and the preferred
stock issued by the Company's subsidiary, LINC Quantum Analytics, Inc. (the
"Subsidiary Preferred Stock").
Promptly following the transfer, the stock of LFC Capital, Inc. was
distributed to certain of the Company's shareholders in redemption of 482,792
shares of the Common Stock of the Company. Simultaneously with the distribution
of the stock of LFC Capital, Inc., (i) LFC Capital, Inc. agreed to pay the
Company an aggregate of $2,508,000 until maturity of the Company's 8.25%
Subordinated Debentures due 2003 (the principal balance of such Debentures shown
in the Company's financial statements herein is net of such amount); (ii) LFC
Capital, Inc. repaid a loan from the Company to it; and the Company caused the
Subsidiary Preferred Stock to be redeemed for $4,681,000 plus accrued dividends.
In connection with the distribution of the stock of LFC Capital, Inc., retained
earnings was reduced by $7,037,000, the Company's net investment in LFC Capital,
Inc. at the date of distribution. No gain or loss was recognized in connection
with such distribution, as the fair market value of the net assets of LFC
Capital, Inc. at such date was approximately equal to their net book value.
As a result of the distribution, the results of operation of LFC Capital,
Inc. and certain related businesses, including those related businesses disposed
of in prior years, have been classified as discontinued operations in the
accompanying financial statements. Revenues of such discontinued operations for
the years ended December 31, 1997 and 1996 were $7,405,000 and $24,450,000,
respectively. The principal assets of discontinued operations consisted of a
portfolio of leased diagnostic medical imaging equipment and an art collection.
The Company has agreed to provide certain limited lease servicing
activities to LFC Capital, Inc., including billing, collection and invoicing,
for the remaining portfolio of leases owned by LFC Capital, Inc. until December
31, 1999. The Company received $270,000 and $83,000 for such services performed
in 1998 and 1997, respectively. The Company has agreed to provide such services
to LFC Capital, Inc. for $156,000 in 1999. Additionally, LFC Capital, Inc.
subleased from the Company, approximately 2,500 square feet of space adjacent to
the Company's executive offices for approximately $68,000 in 1998 and 1997,
which was equal to the Company's cost for such space. In 1999, LFC Capital, Inc.
will sublease from the Company approximately 1,000 square feet for $27,000
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The agreements relating to the net assets of the discontinued operations
prohibits LFC Capital, Inc. from competing with the Company for the longer of
three years or the period of time during which certain officers are employed by
the Company plus one year. Such agreements require LFC Capital, Inc. to refer
all lease origination opportunities that its employees may encounter to the
Company.
(17) Related Party Transaction
A member of the Company's Board of Directors who is also president of LFC
Capital, Inc. served as a consultant to the Company with respect to various
aspects of the Company's business and strategic issues. Fees paid by the Company
for such services, including a referral fee paid in connection with the
acquisition of Comstock Leasing, Inc., during the years ended December 31, 1998,
1997, and 1996 were $188,000, $119,000, and $25,000, respectively.
(18) Subsequent Event
Effective January 1, 1999, the Company purchased all of the outstanding
common stock of Connor Capital Corporation. The acquisition, to be accounted for
under the purchase method, included a cash payment of $1,472,000 and future
contingent payments of up to $5,500,000.
<PAGE>
[KPMG Peat Marwick LLP Letterhead]
Independent Auditors' Report
The Board of Directors and Stockholders
LINC Capital, Inc.:
Under date of February 17, 1999, we reported on the consolidated balance sheets
of LINC Capital, Inc. and subsidiaries as of December 31, 1998 and 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, 1998, as
contained in the annual report on Form 10-K for the year 1998. In connection
with our audits of the aforementioned financial statements, we also audited the
related financial statement schedule. The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based on our audits.
In our opinion, the financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Chicago, Illinois
February 17, 1999
S-2
<PAGE>
Schedule II - Valuation and Qualifying Accounts
For the three years ended, December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance at
beginning of costs and Recoveries end
Description period expenses and other Charge offs of period
- ---------------------------------------- --------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Allowances for Doubtful Accounts
Year ended December 31, 1996 $1,104 $749 $130 $(689) $1,294
Year ended December 31, 1997 1,294 1,253 203 (198) 2,552
Year ended December 31, 1998 2,552 5,280 1,079 (3,312) 5,599
Inventory Reserve
Year ended December 31, 1996 $589 $ - $ - $(37) $552
Year ended December 31, 1997 552 123 - (105) 570
Year ended December 31, 1998 570 106 - (58) 618
</TABLE>
FOURTH AMENDMENT TO
RECEIVABLES PURCHASE AGREEMENT
This Fourth Amendment to Receivables Purchase Agreement, dated as of
December 18, 1998 (this "Amendment"), is among LINC RECEIVABLES CORPORATION, a
Delaware corporation ("Seller"), LINC CAPITAL, INC., a Delaware corporation
("LINC"), BLUE KEEL FUNDING, LLC, a Delaware limited liability company
("Purchaser"), and FLEET BANK, N.A., a national banking association, as agent
for Purchaser (in such capacity, the "Agent").
BACKGROUND
1. Seller, LINC, Purchaser and the Agent are parties to that certain
Receivables Purchase Agreement, dated as of December 30, 1997, as amended by the
First Amendment to Receivables Purchase Agreement, dated as of June 29, 1998, by
the Second Amendment to Receivables Purchase Agreement, dated as of August 14,
1998 and by the Third Amendment to Receivables Purchase Agreement, dated as of
November 1, 1998 (the "Receivables Purchase Agreement").
2. The parties hereto desire to amend the Receivables Purchase
Agreement in certain respects as set forth herein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt of sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Definitions. Capitalized terms used in this Amendment and
not otherwise defined herein shall have the meanings assigned thereto in the
Receivables Purchase Agreement.
SECTION 2. Purchase Limit. Section 2.2(a) of the Receivables Purchase
Agreement is hereby amended by (i) deleting the date "January 31, 1999" where it
appears therein and substituting therefor the date "March 31, 1999" and (ii)
deleting the number "$150,000,000" where it appears therein and substituting
therefor the number "$225,000,000".
SECTION 3. Representations. Seller and the Servicer hereby represent
and warrant that, after giving effect to this Amendment (i) the representations
and warranties of Seller and Servicer contained in Article VIII of the
Receivables Purchase Agreement are true and correct as of the date hereof and
(ii) no Termination Event or Unmatured Termination Event has occurred and is
continuing.
SECTION 4. Miscellaneous. The Receivables Purchase Agreement as amended
hereby, remains in full force and effect. Any reference to the Receivables
Purchase Agreement from and after the date hereof shall be deemed to refer to
the Receivables Purchase Agreement as amended hereby, unless otherwise expressly
stated. This Amendment shall be a contract made under and governed by the
internal laws of the State of Illinois without regard to any otherwise
applicable conflict of law principles thereof. This Amendment may be executed by
the parties hereto in several counterparts, each of which shall be deemed to be
an original, but all of which shall constitute together but one and the same
agreement.
[signature pages begin on next page]
<PAGE>
LINC RECEIVABLES CORPORATION
By
Name:
Title:
LINC CAPITAL, INC.
By
Name:
Title:
BLUE KEEL FUNDING, LLC, as Purchaser
By
Name:
Title:
FLEET BANK, N.A., as Agent
By
Name:
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000936094
<NAME> LINC Capital, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,428
<SECURITIES> 1,087
<RECEIVABLES> 7,593
<ALLOWANCES> 3,791
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 38,717
<DEPRECIATION> 8,058
<TOTAL-ASSETS> 248,884
<CURRENT-LIABILITIES> 0
<BONDS> 178,973
0
0
<COMMON> 29,285
<OTHER-SE> 12,156
<TOTAL-LIABILITY-AND-EQUITY> 248,884
<SALES> 32,929
<TOTAL-REVENUES> 73,042
<CGS> 26,789
<TOTAL-COSTS> 26,789
<OTHER-EXPENSES> 24,183
<LOSS-PROVISION> 5,280
<INTEREST-EXPENSE> 9,172
<INCOME-PRETAX> 7,618
<INCOME-TAX> 3,024
<INCOME-CONTINUING> 4,594
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,594
<EPS-PRIMARY> 0.89
<EPS-DILUTED> 0.86
</TABLE>
