SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
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 Identification No.)
incorporation or organization)
303 East Wacker Drive, Chicago, Illinois 60601
(Address of principal executive offices) (Zip Code)
(312) 946-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At September 30, 2000, 5,265,050 shares of the Registrant's Common Stock were
outstanding.
<PAGE>
LINC CAPITAL, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 (unaudited) .............. 3
Consolidated Statements of Operations -
Three and nine months ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows -
Three and nine months ended September 30, 2000 and 1999 (unaudited) 5
Notes to Consolidated Financial Statements ......................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................ 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk ......... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 20
Item 2. Changes in Securities and Use of Proceeds ......................... 20
Item 3. Defaults Upon Senior Securities ................................... 21
Item 5. Other Information ................................................. 21
Item 6. Exhibits and Reports on Form 8-K .................................. 21
SIGNATURES ................................................................... 22
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LINC Capital, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except share data)
<S> <C> <C>
September 30, December 31,
2000 1999
------------ ------------
ASSETS
Net investment in direct finance leases and loans ....................... $ 321,911 $ 436,820
Equipment held for rental and operating leases, net ..................... 22,857 26,115
Accounts receivable ..................................................... 8,109 13,354
Restricted cash ......................................................... 9,048 11,254
Investments in marketable securities..................................... 20,382 2,448
Other assets ............................................................ 10,746 15,278
Goodwill ................................................................ --- 3,225
Cash and cash equivalents ............................................... 3,412 4,394
------------ ------------
Total assets ............................................................ $ 396,465 $ 512,888
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior credit facility and other senior notes payable ................... $ 80,428 $ 102,754
Recourse debt ........................................................... 1,861 3,152
Nonrecourse debt ........................................................ 276,328 348,098
Accounts payable ........................................................ 9,641 15,208
Accrued expenses ........................................................ 6,316 8,795
Customer holdbacks ...................................................... 5,457 7,607
Subordinated debentures ................................................. 6,377 6,059
----------- -----------
Total liabilities ....................................................... $ 386,408 $ 491,673
----------- -----------
Redeemable preferred stock, $25,000 par value, 225
shares authorized, issued and
outstanding, stated at redemption value ............................... 5,960 -
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 15,000,000 shares
authorized; 5,330,953 shares issued;
5,265,050 shares outstanding .......................................... 5 5
Additional paid-in capital .............................................. 29,462 29,797
Deferred compensation from issuance of options .......................... (11) (12)
Stock note receivable ................................................... (182) (182)
Treasury stock, at cost; 65,903 shares .................................. (287) (287)
Accumulated other comprehensive income .................................. 20,359 932
Accumulated deficit ..................................................... (45,249) (9,038)
------------- ------------
Total stockholders' equity $ 4,097 $ 21,215
------------- ------------
Total liabilities and stockholders equity $ 396,465 $ 512,888
============= ============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
LINC Capital, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
Three Months ended Nine Months ended
September 30, September 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
REVENUES:
Sales of equipment .............................. $ 7,778 $ 6,053 $ 28,401 $ 22,062
Direct finance lease income ..................... 8,510 9,981 28,168 22,914
Interest income ................................. 481 803 2,270 2,441
Rental and operating lease revenue .............. 2,010 2,918 6,268 8,295
Servicing fees and other income ................. 527 1,411 2,217 5,359
Gain (loss) on sale of lease receivables ........ - - - 648 (9) 1,003
Gain on equipment residual values ............... 247 275 688 838
Gain on sale of equity participation rights ..... 14 150 342 1,388
----------- ----------- --------- ----------
Total revenues .................................... 19,567 22,239 68,345 64,300
----------- ----------- --------- ----------
EXPENSES:
Cost of equipment sold .......................... 6,213 $ 4,781 $ 22,788 $ 17,848
Selling, general and administrative ............. 6,037 6,097 19,646 17,658
Interest ........................................ 6,654 6,939 23,316 15,969
Depreciation of equipment under rental agreements
and operating leases .......................... 1,514 1,967 4,525 5,520
Amortization of intangibles ..................... 374 342 1,239 852
Provision for credit losses and impairment in
value of securitization retained interest...... 18,672 4,313 26,938 7,201
Impairment loss on assets ....................... 1,595 - - - 6,104 - - -
Restructuring charges ........................... - - - 700 - - - 700
-------------- ---------- --------- ---------
Total expenses ....................................... 41,059 25,139 104,556 65,748
-------------- ---------- --------- ---------
Loss before income taxes .............................. (21,492) (2,900) (36,211) (1,448)
Income tax benefit..................................... - - - 1,529 - - - 1,123
-------------- ---------- --------- ---------
Net loss............................................... $ (21,492) $ (1,371) $ (36,211) $ (325)
Net loss per common share:
Basic........................................... $ (4.11) $ (0.26) $ (6.94) $ (0.06)
Diluted......................................... $ (4.11) $ (0.26) $ (6.94) $ (0.06)
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
LINC Capital, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
Three Months ended Nine Months ended
September 30, September 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
Cash flows from operating activities:
Net loss ..................................................... $ (21,492) $ (1,371) $ (36,211) $ (325)
Adjustments to reconcile net loss to net cash
provided by operations:
Depreciation and amortization....................... 1,978 2,327 6,428 6,802
Direct finance lease income......................... (8,510) (9,981) (28,168) (22,914)
Payments on direct finance leases................... 45,464 48,912 163,745 107,318
Deferred income taxes............................... - - - (2,126) - - - (1,414)
Provision for credit losses and impairment in value
of securitization retained interest.............. 18,672 4,313 26,938 7,201
(Gain) loss on sale of lease receivables............ - - - (648) 9 (1,003)
Gain on equity participation rights................. (14) (150) (342) (1,388)
Impairment loss on assets........................... 1,595 - - - 6,104 - - -
Amortization of discount................ ........... 111 93 318 268
Deferred compensation............................... - - - 4 1 (15)
Changes in assets and liabilities:
Decrease (increase) in receivables.................. 2,993 (473) 5,245 (2,719)
Decrease (increase) in restricted cash.............. 236 (2,453) 2,206 (5,944)
Decrease (increase) in investments, other assets
and goodwill...................................... 5,897 (5,809) 1,215 (6,544)
Increase (decrease) in accounts payable............. (4,984) 973 (5,567) 6,199
Increase (decrease) in accrued expenses............. (589) 907 (2,478) 755
Decrease in customer holdbacks...................... (2) (2,853) (2,150) (4,271)
Cash provided by operating activities............................ 41,355 31,665 137,293 82,006
Cash flows from investing activities:
Cost of equipment acquired for lease and rental............ (2,387) (68,733) (65,518) (266,337)
Cash used in acquisitions, net of cash acquired............ - - - (2,545) - - - (4,042)
Receipts on securitization retained interest............... - - - 727 88 5,622
Fixed assets purchased..................................... - - - (415) (630) (1,094)
Proceeds from sale of investments.......................... 14 1,154 454 1,388
Net cash used in investing activities ........................... (2,373) (69,812) (65,606) (264,463)
(continued on following page)
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
LINC Capital, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited) - (Continued)
(Dollars in thousands)
Three Months ended Nine Months ended
September 30, September 30,
2000 1999 2000 1999
---------------------------------------------
Cash flows from financing activities:
<S> <C> <C> <C> <C>
Net decrease in notes payable............................. (6,752) (9,111) (21,862) (1,556)
Proceeds from recourse and nonrecourse debt............... - - - 257,597 63,803 436,132
Repayments of recourse and nonrecourse debt............... (33,984) (142,255) (137,328) (190,055)
Proceeds from sales of lease receivables.................. - - - 22,224 17,093 26,421
Proceeds from issuance of redeemable preferred stock...... - - - - - - 5,625 - - -
Repurchase of receivables from conduit facility, net of
securitization retained interest ........................ - - - (81,183) - - - (81,183)
Sale of stock............................................. - - - - - - - - - 395
-------- -------- -------- --------
Net cash provided by (used in) financing activities............. (40,736) 47,272 (72,669) 190,154
-------- ------ -------- -------
Net increase (decrease) in cash................................. (1,754) 9,125 (982) 7,697
Cash at beginning of period..................................... 5,166 - - - 4,394 1,428
-------- -------- -------- --------
Cash at end of period........................................... $ 3,412 $ 9,125 $ 3,412 $ 9,125
======== ========= ========= =========
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 6,654 $ 7,174 $ 23,855 $ 16,355
Income taxes paid......................................... $ - - - $ 185 $ 286 $ 754
See accompanying notes to consolidated financial statements.
</TABLE>
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(1) The Company
LINC Capital, Inc. (the "Company") is a finance company that provides
leasing, asset-based financing, and equipment rental and distribution services
to businesses. Prior to April, 2000, the Company's principal activities were (i)
the direct origination of leases and accounts receivable and other asset-backed
financing to emerging growth companies primarily serving the telecommunications,
high-tech manufacturing, Internet-related 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 and the
leasing and distribution of equipment to Internet-related businesses ("Rental
and Distribution"), and (iv) the establishment of leasing programs for
manufacturers and distributors ("Vendor Finance").
The Company has ceased operations in its Select Growth Finance, Portfolio
Finance and Vendor Finance business units, which constitute substantially all of
the Company's leasing activities, and has transferred servicing of the lease
portfolio to an outside party. The Company is continuing the operations of its
analytical instrument Rental and Distribution business, pending its sale. See
Note 3.
(2) Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and the
rules and regulations of the Securities and Exchange Commission for interim
financial statements. Accordingly, the interim statements do not include all of
the information and disclosures required for annual financial statements. In the
opinion of the Company's management, all adjustments (consisting solely of
adjustments of a normal recurring nature) necessary for a fair presentation of
these interim results have been included. Inter-company accounts and
transactions have been eliminated. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999. The results for
the three-month and nine-month periods ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
Reclassifications
Certain reclassifications have been made in the 1999 financial statements
to conform to the 2000 presentation.
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
(3) Debt Covenant Violations, Standstill Agreement and Continuance of the
Company as a Going Concern
The Company is in violation of the minimum tangible net worth, minimum
earnings, leverage and interest coverage covenants under its senior revolving
credit facility (the "Loan Agreement"). The violations under the Loan Agreement
have also resulted in cross-defaults in the agreements relating to the Company's
commercial paper conduit securitization facility (the "Conduit Facility") and
its term securitization completed in July 1999 (the "Term Securitization"). In
April 2000, the lenders delivered a default letter that terminated the lenders'
commitment to advance funds under the Loan Agreement. New lease originations
have therefore been suspended, with the exception of a small number of leases
originated as a by-product of the Company's Rental and Distribution activities,
which the Company continues to operate.
On September 27, 2000, the Company entered into a Standstill Agreement with
the lenders under the Loan Agreement. The Standstill Agreement became effective
in late October 2000 when various conditions precedent had been satisfied. Under
the terms of the Standstill Agreement, the interest rate on amounts outstanding
under the Loan Agreement have been increased by 1.25%. The Standstill Agreement
includes provisions that restrict the Company's access to cash, except for a
monthly allocation to cover operating expenses and payments to suppliers of
equipment to its analytical instrument Rental and Distribution business, and
requires that the revolving debt, which stood at $78.4 million on September 30,
2000, be reduced to $76 million by October 3, 2000, $70 million by October 31,
2000, $63 million by November 30, 2000 and zero by December 31, 2000. Repayment
of this debt will require the sale of substantial amounts of the Company's
assets, including its Rental and Distribution business. The Standstill Agreement
provides for the payment of a standstill fee of up to $1 million, of which
$500,000 was paid on October 23, 2000. The balance of the Standstill fee is due
on termination of the Standstill Agreement, which is the earlier of a default
under the Standstill Agreement or December 31, 2000. If the revolving debt is
fully repaid by December 15, 2000, the forbearance fee will be reduced by
$250,000. The forbearance fee will be taken as an expense for financial
reporting purposes in the quarter ending December 31, 2000.
The commercial paper liquidity facility available to support the Conduit
Facility has been extended by the liquidity providers to December 19, 2000. The
Company has been precluded from funding new lease transactions into the Conduit
Facility since March 31, 2000. Should liquidity not be available to the Conduit
Facility beyond December 19, 2000, the interest rate on this facility would
immediately increase by approximately 300 basis points, with further increases
over time, and the Company may be required by the liquidity providers to sell
the lease portfolio held by the Conduit Facility.
The Company has entered into agreements providing for the servicing of
substantially all of its lease portfolio by a third party, effective in August
2000. As a consequence of the transfer of servicing of lease portfolios held by
the Term Securitization and the Conduit Facility to this third party, the
Company will no longer receive servicing fees from either the Term
Securitization or the Conduit Facility. Such servicing fees in the year 2000
were $980,000. The outsourcing of servicing of the lease portfolio has permitted
the Company to substantially reduce its overhead. Employee headcount has been
reduced from 221 at December 31, 1999, including 53 in the Rental and
Distribution operations, to 72 at November 16, 2000, including 38 in Rental and
Distribution.
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
As a result of the defaults in the Term Securitization and the Conduit
Facility, all cash flow from the leases owned by the Term Securitization and the
Conduit Facility is being used to amortize the debt certificates issued by the
Term Securitization and the amount owed to the Conduit Facility, respectively.
As a consequence, recovery of the Company's retained interest in the Term
Securitization and the Conduit Facility has been deferred from its originally
expected recovery period. Because of the substantial extension of the period
over which recovery of the Company's retained interest in the Term
Securitization and the Conduit Facility is expected and the relatively high
level of delinquencies and defaults experienced in the lease portfolio during
the period from July 1, 2000 to September 30, 2000, the Company has established
reserves equal to $6.1 million against the retained interest in the Conduit
Facility and $11 million against the Class C Certificate held by the Company in
the Term Securitization. These reserves increased the allowance for doubtful
receivables, which is a component of the Company's net investment in direct
finance leases and loans. The Company has not established a reserve for the
Class B-2 Certificate that it holds in the Term Securitization, which has a
carrying value of approximately $2.3 million at September 30, 2000. Recovery of
the value of the Class B-2 Certificate is dependent on future performance of the
portfolio.
In the event that the Company is unable to successfully comply with the
terms of the Standstill Agreement, the Company may be required to seek
protection under the Bankruptcy Code. Also, if various unsecured creditors whose
obligations are past due were to enforce their claims, the Company could be
forced into bankruptcy. In addition, even if the Company were to comply with the
Standstill Agreement and forestall action by its unsecured creditors, there can
be no assurance that the Company will have sufficient liquidity and capital
resources to continue operating as a going concern. While the accompanying
financial statements reflect substantial valuation adjustments for impaired
assets, they may not fully reflect the adjustments that would be necessary if
the Company ceased to be a going concern.
(4) Impairment of Assets
During the quarter ended June 30, 2000, as a result of the discontinuance
of its leasing activities and substantial downsizing, the Company recognized an
impairment loss of $4,509,000. Included in the impairment loss was $1,600,000
relating to the estimated excess cost of the space lease for the Company's
corporate headquarters and $1,240,000 on furniture, fixtures, computers and
other office equipment, equal to the difference between the net book value of
these assets and their estimated fair value. Also included in the impairment
loss was $1,669,000 relating to the goodwill associated with the acquisition of
LINC IF+E in August 1999, part of the Company's Rental and Distribution business
unit, as the estimated expected future cash flows are less than the carrying
value.
During the quarter ended September 30, 2000, the Company recorded an
additional impairment loss of $1,595,000, equal to the goodwill associated with
the remainder of the Company's Rental and Distribution business, as the
estimated expected future cash flows are less than the carrying value.
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
<TABLE>
<CAPTION>
(5) Net Investment in Direct Finance Leases and Loans
Net investment in direct finance leases and loans is as follows:
<S> <C> <C>
September 30, December 31,
2000 1999
---------- -----------
(In thousands)
Lease and loan contracts receivable in installements $387,621 $501,557
Estimated residual value of leased equipment.......... 18,548 17,386
Broker fees........................................... 3,749 3,857
Initial direct costs.................................. 3,440 4,482
Unearned lease income................................. (59,136) (78,544)
Allowance for doubtful receivables.................... (32,311) (11,918)
-------------- -------------
Net Investment........................................ $321,911 $436,820
============== =============
</TABLE>
At September 30, 2000, $52.0 million of lease receivables were more than 30
days past due, of which $22.8 million were more than 90 days past due.
(6) Equipment Held for Rental and Operating Leases, Net
The net book value of equipment held for rental and operating leases
is as follows:
September 30, December 31,
2000 1999
----------- ------------
(In thousands)
Equipment under operating leases............ $4,505 $6,993
Equipment under rental agreements........... 18,352 19,122
------------ ------------
Net book value.............................. $22,857 $26,115
============ =============
The book values presented in the above table are net of accumulated
depreciation of $10,775,000 and $10,128,000 at September 30, 2000 and December
31, 1999, respectively. Equipment under rental agreements is comprised primarily
of analytical instruments.
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
(7) Debt
Notes Payable
Notes Payable to banks and others were as follows:
September 30, December 31,
2000 1999
------------- ------------
(In thousands)
Senior credit facility.................. $78,400 $99,700
Other................................... 2,028 3,054
------------ ------------
Total................ $80,428 $102,754
============ ============
At September 30, 2000 and December 31, 1999, $78,400,000 and $99,700,000,
respectively, was outstanding under a senior credit facility (the "Loan
Agreement"). The weighted-average interest rate on the Loan Agreement at
September 30, 2000 and December 31, 1999 was 8.13% and 7.65%, respectively.
Under the terms of the Standstill Agreement, interest rates under the various
borrowing options have been increased 1.25% over the rates previously available
under the Loan Agreement. The facility is secured by substantially all of the
assets of the Company and was used by the Company to finance the acquisition of
equipment pending completion of permanent financing and for normal working
capital purposes. Since December 31, 1999, the Company has been in violation of
the covenants of its Loan Agreement relating to minimum earnings, minimum
tangible net worth, leverage and interest coverage. It was also in violation of
covenants contained in the agreements relating to the Conduit Facility and the
insurance policy that provides credit enhancement to the Term Securitization.
For further information, see Note 3.
Nonrecourse and Recourse Debt
At September 30, 2000 and December 31, 1999, the Company had $141,083,000
and $134,228,000 of nonrecourse debt recorded on its consolidated balance sheet
under its Conduit Facility, with weighted-average interest rates of 8.16% and
6.26%, respectively. Additionally, at September 30, 2000 and December 31, 1999,
$117,455,000 and $179,891,000 was recorded as nonrecourse debt under the Term
Securitization. The weighted-average interest rate on the Term Securitization is
6.24%. The Company also permanently finances leases with financial institutions,
on either a nonrecourse or partial recourse basis. At September 30, 2000 and
December 31, 1999, the Company had $19,651,000 and $37,131,000, respectively,
outstanding under these financings.
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
(8) Loss per Share
The following table sets forth the computation of basic and diluted loss
per share.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------ -------- ------- -------
(In thousands, except share data)
Net loss from operations. $ (21,492) $(1,371) $(36,211) $(325)
$ 133 - - - 335 - - -
----------- ------------- ----------- ----------
Numerator for basic and diluted loss per share
Net loss available to common stockholders.... $(21,625) $(1,371) $(36,546) $(325)
----------- ------------- ----------- ----------
Denominator for basic earnings per share-
weighted average shares outstanding...... 5,265,050 5,265,050 5,265,050 5,250,753
Effect of dilutive stock options............. - - - - - - - - - - - -
----------- ------------- ----------- ----------
Denominator for diluted loss per share............... 5,265,050 5,265,050 5,265,050 5,250,753
Net loss
Basic loss per share.......................... $(4.11) $(0.26) $(6.94) $(0.06)
=========== ============= =========== ==========
Diluted loss per share........................ $(4.11) $(0.26) $(6.94) $(0.06)
=========== ============= =========== ==========
</TABLE>
(9) Comprehensive Income
The components of comprehensive income (loss) for the three months and nine
months ended September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------- -------- -------- --------
(In thousands)
Net loss........................................... $(21,492) $(1,371) $(36,211) $(325)
Other comprehensive income (loss):
Unrealized gain on securities.............. 20,319 206 19,442 607
Foreign currency translation adjustment.... (41) 140 (16) 271
----------- ------------- ----------- ----------
Comprehensive income (loss)................... $(1,214) $(1,025) $(16,785) $553
=========== ============= =========== ==========
</TABLE>
Accumulated other comprehensive income (loss) at September 30, 2000 and
December 31, 1999 consists of unrealized gains (losses) on securities of
$20,213,000 and $771,000 and accumulated foreign currency translation
adjustments of $146,000 and $161,000, respectively. Included in unrealized gains
on securities at September 30, 2000 is $19,863,000 relating to Corvis
Corporation. Corvis Corporation completed an initial public offering in the
third quarter of 2000 and the Company exchanged warrants it owned in Corvis for
common stock.
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
The Company has 325,357 shares of Corvis common stock, which are subject to
a lockup agreement expiring in late January 2001. These shares have been
classified as "available for sale" at September 30, 2000 and valued at their
market price of $61.05 on that date, for a total of $19.9 million. The price has
materially fluctuated since that date. The price of the shares of Corvis at the
close of business on November 17, 2000 was $33.31, which would value the
Company's holdings at $10.8 million. The valuation of the Company's holdings in
Corvis may fluctuate materially in the future and the Company is not readily
able to dispose of its holdings until the expiration of the lockup period in
late January 2001.
(10) Segment Information
As previously indicated, the Company has ceased substantially all leasing
activities and the Company has entered into a non-binding letter of intent to
sell its analytical instrument Rental and Distribution business. Management's
focus is on selling assets to raise cash to repay debt. Under these
circumstances, the Company believes that the reporting of the activities of
business segments is no longer relevant or meaningful.
(11) Redeemable Preferred Stock
On February 1, 2000, the Company issued $5,625,000 of Series A 8%
Cumulative Redeemable Preferred Stock. The issuance of this series of preferred
stock was coupled with warrants to purchase 326,250 shares of the Company's
common stock at $5.49 per share. Additional warrants for 652,500 shares were
issuable at September 30, 2000, since the preferred shares were not redeemed
prior to that time. The Preferred Stock bears dividends at 8% per annum through
December 31, 2000, 10% per annum from January 1, 2001 through December 31, 2001
and 12% per annum thereafter. At September 30, 2000, $335,000 of accrued but
unpaid dividends are included in the preferred stock amount on the consolidated
balance sheet. The Preferred Stock is mandatorily redeemable upon a change of
control or on January 31, 2005, whichever occurs first. The Company has not paid
or declared the dividends payable as a result of defaults under the Loan
Agreement. As a consequence, the dividend rate has been increased to 9%.
(12) Subsequent Events
On October 15, 2000, the Company entered into a non-binding letter of
intent to sell its analytical instrument Rental and Distribution business. The
sale is subject to the completion of due diligence and financing arrangements as
well as execution of definitive binding agreements and approval by the Company's
lenders under the Loan Agreement.
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
At October 31, 2000, the Company was in violation of a provision of the
Standstill Agreement that limits the "over-advance" (as defined) under the Loan
Agreement to $12 million. At that date, the over-advance was approximately $12.1
million. In addition, at October 31, 2000, the principal outstanding under the
Loan Agreement was $73.9 million, as compared to the required balance of $70
million. The Company has requested that the lenders under the Loan Agreement
extend the standstill period from December 31, 2000 to January 31, 2001 and
adjust the over-advance and permitted maximum principal balance outstanding to
higher levels than those currently required. The lenders are considering the
Company's request. If the lenders elect not to amend the Standstill Agreement or
to waive the above described events of default, the balance due under the Loan
Agreement will be immediately due and payable. In such case, the Company may be
required to seek protection under the Bankruptcy Code.
At September 30, 2000, the Company's holdings in Corvis Corporation, which
are classified as "available for sale" securities were valued at $19.9 million.
At November 17, 2000 such holdings were valued at $10.8 million. The valuation
of the Company's holdings in Corvis, as well as its other holdings in warrants
of private companies can be expected to fluctuate in value materially. On the
basis of the current value of Corvis Corporation, the likely net proceeds from
the pending sale of its Analytical Instrument Rental and Distribution business,
the net proceeds that may be realized from the sale or collection of its lease
portfolio and the estimated value of its other assets, the Company does not
believe that such proceeds will be sufficient to satisfy its remaining secured
indebtedness under the Loan Agreement. Accordingly, the Company currently
expects that there will no assets available to satisfy the claims of its
unsecured creditors, including, but not limited to the holders of the Company's
8.25% Subordinated Debentures, or the holders of its Series A Cumulative
Preferred Stock.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months ended September 30, 2000 compared to Three Months ended September
30, 1999
Sales of equipment increased to $7.8 million from $6.1 million, while cost
of equipment sold increased to $6.2 million from $4.8 million due to the
acquisition of Internet Finance & Equipment, Inc. in August 1999 (now LINC
IF+E), which distributes and leases telecommunications, routing and Internet
enabling equipment, and an increase in sales of analytical instruments in the
Company's other Rental and Distribution business. In September 2000, the Company
discontinued the activities of LINC IF+E. The net margin on sales decreased
slightly to 20.1% from 21%.
Direct finance lease income decreased to $8.5 million from $10.0 million
and interest income declined from $0.8 million to $0.5 million. Both declines
are as result of the decline in leases and loans outstanding. At September 30,
1999, the Company's net investment in leases and loans was $411.9 million versus
$321.9 million at September 30, 2000.
Direct finance lease income and interest income, minus interest expense,
was $2.3 million, or 26.0% of direct finance lease income and interest income
(the "Interest Margin") compared to $3.8 million, or 35.7%, in the prior year
period. The decrease in the Interest Margin is due to an increase in interest
rates beginning in the second half of 1999 and, beginning in April 2000, the
inability of the Company to move leases from its relatively more expensive
revolving line of credit into a securitization facility.
Rental and operating lease revenue decreased to $2.0 million from $2.9 due
to a declining portfolio of equipment held for rental and operating leases.
Servicing fees and other income decreased to $0.5 million from $1.4
million. Servicing fees and other income primarily consists of fees received for
servicing off-balance sheet securitized leases, fees received for servicing
third party lease portfolios, interim rents received by Select Growth Finance,
and late fees. The decrease over the prior year period relates to a decrease in
each of these types of income.
There were no gains on sale of lease receivables in the quarter ended
September 30, 2000, versus $0.6 million in the same period of the prior year.
These amounts represent gains or losses on lease receivables sold to third
parties and fluctuate based on the volume of lease receivables sold in a given
period.
Gains on equipment residual values were approximately $0.3 million for each
period. Gains on equipment residual values fluctuate based on the dollar volume
of leases maturing in a given period and the economics of those sales.
During the third quarter of 2000, the Company recognized negligible gains
on equity participation rights versus a gain of $0.2 million in the comparable
prior year period. Equity participation gains and losses fluctuate from period
to period based on the value of securities in the Company's portfolio and the
timing of the sale of these securities.
Selling, general and administrative expenses, net of initial direct costs
capitalized, decreased to $6.0 million from $6.1 million. The cost savings from
the substantial reductions in employee headcount and other overhead expenses
were largely offset by severance and other termination related costs, incentives
necessary to retain key employees and professional fees.
Interest expense decreased to $6.7 million from $6.9 million, due to a
decline in interest-bearing debt ($435.9 million at September 30, 1999 compared
to $365.0 million at September 30, 2000), partially offset by an increase in
interest rates.
Depreciation of equipment decreased to $1.5 million from $2.0 million due
to a decrease in operating leases and rental equipment.
Amortization of intangibles increased to $0.4 million from $0.3 million due
to the amortization of issuance costs resulting from a term securitization
completed during the third quarter of 1999, partially offset by a decrease in
goodwill amortization due to the write-off at December 31, 1999 of goodwill
associated with the acquisitions of Comstock Leasing Inc., Monex Leasing, Ltd.,
Spectra Precision Credit Corp. and Connor Capital Corporation.
The provision for credit losses and impairment in value of securitization
retained interest increased to $18.7 million from $4.3 million. The increase in
the provision is the result of the Company's decision in the third quarter of
2000 to fully reserve for its retained interest in the Conduit Facility and for
the Class Certificate it holds in the Term Securitization, in the aggregate
amount of $17.1 million.
At September 30, 2000, the Company recorded a loss of $1.6 million relating
to the impairment of goodwill on its Rental and Distribution business. See Note
4 to Consolidated Financial Statements
The Company did not record a tax benefit on the pre-tax loss for the third
quarter of 2000 since realization of the tax benefit cannot be assured. The
Company recorded an income tax benefit of $1.5 million on a pre-tax loss of $2.9
million for the same period of the prior year.
Nine Months ended September 30, 2000 compared to Nine Months ended September 30,
1999
Sales of equipment increased to $28.4 million from $22.1 million and cost
of equipment sold increased to $22.8 million from $17.8 million as a result of
the acquisition of LINC IF+E in August 1999. Net margins on sales of equipment
increased to 19.8% from 19.1% due to higher margins obtained by LINC IF+E
compared to margins on the sale of analytical instruments, partially offset by
slightly lower margins achieved on the sale of analytical instruments.
Direct finance lease income increased to $28.2 million from $22.9 million
as a result of a substantially higher level of finance lease receivables
outstanding during the early part of 2000, arising from acquired companies and
from internal lease originations, a greater portion of which are retained on the
Company's balance sheet.
Interest income declined to $2.3 million from $2.4 million primarily due to
a decrease in interest-bearing notes receivable held by the Company during the
later part of the nine month period ended September 30, 2000. Direct finance
lease income and interest income, minus interest expense, was $7.1 million, or
23.4% of direct finance lease income and interest income (the "Interest Margin")
compared to $9.4 million, or 37.0%, in the prior year period. The decrease in
the Interest Margin is due to an increase in interest expense caused by higher
interest rates beginning in the second half of 1999 and a decrease in interest
income recorded on the Company's securitization retained interest, resulting
from the repurchase of lease receivables from the Company's commercial paper
conduit facility in connection with completion of a term securitization.
Rental and operating lease revenue decreased to $6.3 million from $8.3
million due to a substantial decline in the size of the portfolio of equipment
held for rental and operating leases.
Servicing fees and other income decreased to $2.2 million from $5.4
million. Servicing fees and other income primarily consists of fees received for
servicing off-balance sheet securitized leases, fees received for servicing
third party lease portfolios, interim rents received by Select Growth Finance,
and late fees. The decrease over the prior year period primarily relates to $1.2
million in deferred incentive fees realized in connection with servicing of a
portfolio owned by a third party during the first quarter of the prior year and
a decrease in fees received for servicing securitized leases resulting from a
reduction in off-balance sheet securitized leases. Additionally, interim rents
received by Select Growth Finance and late fees collected by Vendor Finance
decreased between periods.
Gain (loss) on the sale of lease receivables decreased to a negligible loss
from a gain of $1.0 million. These amounts represent gains or losses on lease
receivables sold to third parties and fluctuate based on the volume of lease
receivables sold in a given period and the economics of those sales.
Gains on equipment residual values decreased to $0.7 million from $0.8
million. Gains on equipment residual values fluctuate based on the dollar volume
of leases maturing in a given period.
During the first nine months of 2000, the Company recognized a gain of $0.3
million on certain equity participation rights versus a gain of $1.4 million in
the comparable prior year period. Equity participation gains and losses
fluctuate from period to period based on the value of securities in the
Company's portfolio and the timing of the sale of these securities.
Selling, general and administrative expenses, net of initial direct costs
capitalized, increased to $19.6 million from $17.7 million. The increase
resulted primarily from an increase in personnel and operating costs associated
with the acquisition of LINC IF+E in August 1999 in the Company's Rental and
Distribution business unit, professional fees incurred related to the Company's
violation of covenants under its Loan Agreement, Conduit Facility, and Term
Securitization, and a decrease in initial direct costs capitalized due to a
decrease in lease originations between periods.
Interest expense increased to $23.3 million from $16.0 million, due
primarily to increased borrowings resulting from growth in lease originations
and lease portfolios acquired, with the resulting increase in borrowings, and an
increase in the Company's weighted average interest rates on outstanding debt.
In addition, interest expense increased over the same period in the prior year
as a result of the repurchase by the Company during the quarter ended September
30, 1999 of $99.0 million in lease receivables previously sold to its commercial
paper conduit facility utilizing proceeds of a term securitization which
increased the level on nonrecourse debt.
Depreciation of equipment decreased to $4.5 million from $5.5 million due
to a decrease in equipment held for rental and operating leases.
Amortization of intangibles increased to $1.2 million from $0.9 million due
to the amortization of issuance costs resulting from a term securitization
completed during the third quarter of 1999, partially offset by a decrease in
goodwill amortization due to the write-off of goodwill associated with the
acquisitions of Comstock Leasing Inc., Monex Leasing, Ltd., Spectra Precision
Credit Corp. and Connor Capital Corporation at December 31, 1999 and the
write-off of goodwill associated with the acquisition of Internet Finance and
Equipment at June 30, 2000.
The provision for credit losses and impairment in value of securitization
retained interest increased to $26.9 million from $7.2 million. The increase is
the result of the Company's decision to substantially increase its bad debt
allowance as a percentage of its net investment in leases and loans due to the
increased level of deliquent and defaulted leases and to fully reserve its
retained interest in its Conduit Securitization and the Class C Certificate it
holds in its Term Securitization. The Company holds an interest in the Class B-2
Certificates issued by the Term Securitization that it carries at a value of
approximately $2.3 million at September 30, 2000.
At June 30, 2000, the Company recorded an impairment loss of $4.5 million
related to the impairment of goodwill associated with the acquisition of LINC
IF+E in August 1999, the impairment of furniture, fixtures, computers and other
office equipment, and an estimated loss on the Company's corporate headquarters'
lease agreement. At September 30, 2000, the Company recorded an additional
impairment loss of $1.6 million associated with the remainder of its Rental and
Distribution business. See Note 4 to Consolidated Financial Statements.
The Company did not record a tax benefit on the pre-tax loss of $36.2
million for the nine months ended September 30, 2000 since realization of the
tax benefit cannot be assured. The Company recorded income tax benefit of $1.1
million on a pre-tax loss of $1.4 million for the same period of the prior year.
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,
borrowings under its Loan Agreement with its senior lenders and its Conduit
Facility, other non-recourse and recourse loans, the Term Securitization and the
sale of equity. For further information, see Notes 3 and 12 to Consolidated
Financial Statements.
Cash Flow
Cash flows from operating and financing activities are generated primarily
from receipts on direct finance and operating leases, 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 the nine months ended September 30, 2000
and 1999 were a net of $64.6 million and $272.2 million, respectively. The
decrease in 2000 from 1999 results primarily from no new debt financing or
securitizations during the second and third quarters of 2000, as well as a
decrease in the volume of securitizations completed in the first quarter of
2000, partially offset by an increase in payments received on direct finance
leases.
Credit Facilities
In the past, the Company utilized its secured revolving credit facility
provided by a syndicate of banks under the Loan Agreement to fund the
acquisition and origination of leases and the purchase of rental and
distribution inventory. At September 30, 2000, the Company had borrowed $78.4
million, with a weighted-average interest rate of 8.13%. For further
information, see Note 3 to Consolidated Financial Statements.
Commercial Paper Conduit Securitization Facilities
The Company, through a special purpose subsidiary, has a commercial paper
conduit securitization facility in an amount of $289 million (the "Conduit
Facility").
At the time of placing leases in the securitization facilities, the Company
enters into interest rate cap and interest rate swap agreements to manage
interest rate risk. For further information, see Note 3 to Consolidated
Financial Statements.
Term Securitization
In July 1999, the Company, through a special purpose subsidiary, completed
a term securitization in the amount of $237 million (the "Term Securitization").
$199 million of A-1 Certificates rated AAA by Standard and Poor's and Fitch
IBCA, Inc. and Aaa by Moody's Investor Service, Inc., $9 million of B-1
Certificates rated BBB by Fitch IBCA, Inc., and $9 million of B-2 Certificates
rated BB by Fitch IBCA, Inc., were issued in the private market. A portion of
the B-2 Certificates (approximately $3 million) and the C Certificate of $17
million were retained by the Company. The remaining balance of the A-1
Certificates, the B-1 Certificates, and the B-2 Certificates at October 1, 2000
was $98.6 million, $6.4 million, and $8.9 million, respectively. The Company has
fully reserved its investment in the C Certificates. For further information,
see Note 3 to Consolidated Financial Statements.
Preferred Stock
On February 1, 2000, the Company issued $5,625,000 of Series A 8%
Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock"). The
issuance of this series of preferred stock was coupled with warrants to purchase
326,250 shares of the Company's common stock at $5.49 per share (the "Preferred
Stock Warrants"). Additional Preferred Stock Warrants for 652,500 shares were
issuable at September 30, 2000, since the Series A Preferred Stock was not
redeemed prior to that time. The Series A Preferred Stock accrues cumulative
preferred dividends at 8% per annum through December 31, 2000, 10% per annum
from January 1, 2001 through December 31, 2001 and 12% per annum thereafter. The
Series A Preferred Stock is required to be redeemed by the Company upon a change
of control or on January 31, 2005, whichever occurs first. As a result of the
violation of certain covenants under the Loan Agreement, the Company was unable
to declare or make payment of the dividend on the Series A Preferred Stock due
on March 31, June 30, 2000 or September 30, 2000. As a consequence, the Company
is in default of certain provisions of the terms and conditions of the Series A
Preferred Stock and the dividend rate on such preferred stock accruing after
March 31, 2000 has been increased by 1 percentage point. See also Note 12 to
Consolidated Financial Statements.
Note on Forward Looking Information
Certain statements in this Form 10-Q and in the future filings by the
Company with the Securities and Exchange Commission and in the Company's written
and oral statements made by or with the approval of an authorized executive
officer constitute "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, and the Company intends that such forward-looking statements be subject
to the safe harbors created thereby. The words and phrases "expects", "intends",
"believe", "will seek", and "will realize" and similar expressions as they
relate to the Company or its management are intended to identify such
forward-looking statements. These forward-looking statements reflect the
Company's current view with respect to future events and financial performance,
but are subject to many uncertainties and factors relating to the Company's
operations and business environment which may cause the actual results of the
Company to be materially different from results expressed or implied by such
forward-looking statements. Examples of such uncertainties, include, but are not
limited to, the Company's plans for reducing overhead and for selling portfolios
of leases, the Company's plans and intentions with regard to its rental and
distribution operations, and the availability of financial resources. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements whether as a result of new information, future events
or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes from the 1999 Annual Report on Form
10-K related to the Company's exposure to market risk from interest rates. At
December 31, 1999, termination of the interest rate swap and interest rate cap
agreements would have resulted in a credit to earnings of $2.1 million. At
September 30, 2000, termination of the interest rate swap and interest rate cap
agreements would have resulted in a credit to earnings of $0.3 million.
Part II - Other Information
Item 1. Legal Proceedings
The Company is the subject of lawsuits alleging that the Company has not
made timely payment of amounts owed for services provided to the Company or for
equipment purchased by the Company in the ordinary course. The aggregate amount
owed with respect to these claims is approximately $175,000.
The Company is in default of certain of its obligations relating to the
acquisition of one of its Vendor Finance origination units and has been
threatened with litigation as a consequence of such default. The Company has
been advised by the former owner of one of its Vendor Finance origination units
that certain claims asserted by those owners have been submitted for
arbitration. A Demand For Arbitration and Statement of Claim has been filed with
the American Arbitration Association in Chicago, Illinois by Monex Leasing,
Ltd., Monex Group, Inc., Catherine Ross and Monex Finance. The aggregate amount
alleged to be due and owing to such former owner is approximately $3,649,584.
The Company is in the process of defending such claims.
In addition, the former owner of the Company's LINC Comstock unit has
alleged that he believes that the Company is in default of a settlement
agreement entered into between the Company and such former owner relating to
disputed contingent payments. This former owner has threatened litigation with
respect to such alleged default. The Company does not believe that it is in
default of the settlement agreement.
Item 2. Changes in Securities and Use of Proceeds
On February 1, 2000, the Company issued $5,625,000 of Series A 8%
Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock"). The
issuance of this series of preferred stock was coupled with warrants to purchase
326,250 shares of the Company's common stock at $5.49 per share. Additional
warrants for 652,500 shares were issuable at September 30, 2000, since the
Series A Preferred Stock was not redeemed prior to that time. The Series A
Preferred Stock accrues cumulative preferred dividends at 8% per annum through
December 31, 2000, 10% per annum from January 1, 2001 through December 31, 2001
and 12% per annum thereafter. The Series A Preferred Stock is required to be
redeemed by the Company upon a change of control or on January 31, 2005,
whichever occurs first. As a result of the violation of certain covenants under
the Loan Agreement, the Company has been unable to declare or make payment of
the dividends on the Series A Preferred Stock. As a consequence, the Company may
be in default of certain provisions of the terms and conditions of the Series A
Preferred Stock and the dividend rate on such preferred stock accruing after
March 31, 2000 has been increased by 1 percentage point. The total arrearage in
the payment of dividends on November 16, 2000 was $335,000.
Item 3. Defaults Upon Senior Securities
The Company has been in violation of the minimum tangible net worth,
minimum earnings, leverage and interest coverage covenants under its Loan
Agreement since December 31, 1999. On September 27, 2000, the Company entered
into a Standstill Agreement with the lenders under the Loan Agreement, which
became effective in late October 2000 when various conditions precedent had been
satisfied. The violations under the Loan Agreement have also resulted in
cross-defaults in the agreements relating to the Conduit Facility and the Term
Securitization. The amount outstanding under the Loan Agreement at November 16,
2000 was $73.9 million. The amount outstanding under the Conduit Facility and
the Term Securitization at October 20, 2000, the most recent settlement date,
was $118.9 million and $113.9 million (of which $2.3 million is held by the
Company), respectively. For further information, see Note 3 to Consolidated
Financial Statements and Management's Discussion and Analysis - Liquidity and
Capital Resources.
The Company is in default with respect to certain of its obligations under
the Standstill Agreement. Negotiations are in progress to obtain a waiver of
such defaults and an amendment of the terms of the Standstill Agreement. See
Notes 3 and 12 to Consolidated Financial Statements.
Item 5. Other Information
Annual Meeting
The Company has not scheduled an Annual Meeting of Shareholders at this
time due to the time commitment and costs associated with such a meeting.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit
Number Document Description
------- ------------------------
27.1 Financial Data Schedule
Reports on Form 8-K
On October 16, 2000, the Company filed a current report on Form 8-K,
reporting under Item 5 and Item 7. The filing contained information relating to
the Standstill Agreement, the letter of intent to sell the Rental and
Distribution business, and other matters.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LINC CAPITAL, INC.
Dated: November 20, 2000
By: /s/ Allen P. Palles
---------------------
Allen P. Palles
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Mark A. Arvin
----------------------
Mark A. Arvin
Senior Vice President, Finance
(Principal Accounting Officer)
