SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(C)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Amendment No. 1)
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
[ ] Definitive Information Statement
LINC Capital, Inc.
(Name of Registrant As Specified in Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11
(1) Title of each class of securities to which transaction applies:
________________________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
________________________________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
Filing Fee: $14,780.00. Fee determined pursuant to Rule 0-11(c)(2) based
upon bona fide estimate of aggregate proceeds of $73,900,000 upon the sale
of substantially all assets.
________________________________________________________________________________
(4) Proposed maximum aggregate value of transaction: $73,900,000.00
________________________________________________________________________________
(5) Total fee paid: $14,780.00, paid with preliminary materials filed
October 23, 2000
________________________________________________________________________________
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
________________________________________________________________________________
(2) Form, Schedule or Registration Statement No.:
________________________________________________________________________________
(3) Filing Party: LINC Capital, Inc.
________________________________________________________________________________
(4) Date Filed: November 6, 2000
<PAGE>
Preliminary Filing- Not for Distribution
LINC CAPITAL, INC.
303 East Wacker Drive
Ninth Floor
Chicago, Illinois 60601
(312) 946-1000
INFORMATION STATEMENT
Summary Term Sheet
LINC Capital, Inc. is engaging in the sale of its assets in order to
repay its debts. Under Delaware law, this action may constitute the sales
of all or substantially all of LINC's assets. Because of this, the
Securities and Exchange Commission requires that LINC provide all
stockholders with information about the sales in this information
statement.
The following are some of the questions that you, as a stockholder of
LINC, may have and our answers to those questions. Additional important
information is contained in the remainder of this information statement. We
urge you to read carefully the entire information statement.
What is the purpose of the sales?
Because LINC's financial situation has deteriorated, we have
experienced difficulties in meeting our financial obligations. Since March
2000, we have been in default of covenants under our loan and
securitization agreements. Substantially all of the assets owned by LINC,
and not held by securitizations entities, are pledged to lenders under its
revolving credit agreement to secure borrowings under that agreement. We
have negotiated a forbearance agreement with these lenders under which they
have agreed not to accelerate our indebtedness and foreclose on our assets
so long as we meet certain conditions. However, under the original terms of
the revolving credit agreement we are obligated to repay the remaining
$73.9 million balance under our revolving credit agreement by December 31,
2000. The sales of assets being undertaken by LINC are intended to permit
us to raise funds to fulfill the terms of the agreement and pay down our
revolving credit debt on schedule. However, there is no assurance that the
proceeds of these sales will be sufficient to fully repay the balance of
our secured debt and to provide for payment of amounts that are owed to
unsecured creditors. See the "Background Information" section of this
information statement.
Which of LINC's assets will be sold?
The board of directors has determined to either sell or realize the
proceeds from our assets in lieu of sale, such as collecting lease payments
on leases which cannot be sold for what the board considers a fair and
reasonable price, so as to meet our financial obligations. The available
assets include the assets of our rental and distribution business, equity
securities held by our select growth leasing division, lease portfolios
owned by LINC and the related equipment residual values, as well as LINC's
ownership interests in lease securitization entities. See the "Sales
Process" section of this information statement.
What are the terms of the sales?
LINC has entered into a non-binding letter of intent to sell
substantially all of the assets of its analytical instrument rental and
distribution business. Since completion of this sale is subject to a number
of contingencies, including the completion of due diligence and obtaining
financing, it is not certain that it will be completed. However, if it is
completed, the sale proceeds available to repay debt are expected to range
from $20 to $22 million. We are also in the process of negotiating the
terms of a number of potential sales of our lease portfolios and other
assets. The specific terms of those sales will be determined as the
negotiations proceed. The asset sales in process may conceivably result in
proceeds which, when taken together with the proceeds from selling or
realizing other assets, may or may not be sufficient to pay our revolving
credit indebtedness. See the "Sales Process" section in this information
statement.
Has the board of directors approved of the sales?
The board of directors and the holders of voting rights for the
majority of LINC's common stock have approved the proposed sales of assets
to pay down debt. See the "Approval of Board of Directors" section of this
information statement.
Will the stockholders receive any of the proceeds from the sales?
LINC is not currently able to predict if there will be funds remaining
from the proceeds of the sales after the payment of revolving credit
indebtedness or other debts. Therefore, LINC's board of directors has not
yet determined whether, if there are any assets remaining after the sales
of assets contemplated to be undertaken through December 31, 2000, the
company should be restructured, reorganized, dissolved or liquidated. If it
is determined to dissolve and liquidate, any distributions to stockholders
would be made first to the holders of preferred stock to the extent of
their liquidation preference.
* * * * *
This information statement is being furnished to holders of shares of
common stock, par value $.001 per share, of LINC Capital, Inc., a Delaware
corporation, in connection with the written consent of the holders of the
voting rights for a majority of LINC's outstanding common stock to the sale
of its assets.
This information statement is first being mailed to stockholders on or
about _________, 2000. This information statement is furnished for
information purposes only. LINC IS NOT ASKING YOU FOR A PROXY AND YOU ARE
REQUESTED NOT TO SEND US A PROXY.
The Stockholder Consent
Section 271 of the Delaware General Corporation Law permits a Delaware
corporation to sell all or substantially all of its assets if the sale is
approved in writing by the holders of a majority of the shares of
outstanding common stock. Martin E. Zimmerman, the entities controlled by
him and members of senior executive management have the right to vote a
majority of the outstanding common stock of LINC and have consented in
writing to the proposed sales. This written consent satisfies the Delaware
law stockholder approval requirements.
Description of Business
LINC is a finance company that previously, until its financial
difficulties, provided leasing and asset-based financing and still provides
equipment rental and distribution services to businesses. LINC's principal
activities have included:
- 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, also known as the select growth
finance business;
- the financing of leases generated by other, generally smaller,
equipment lessors, also known as the portfolio finance business;
- 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, also known
as the rental and distribution business; and
- the establishment of leasing programs for manufacturers and
distributors, also known as the vendor finance business.
As a result of its financial difficulties, LINC has ceased lease
originations in its select growth finance, portfolio finance and
substantially all of its vendor finance business units. LINC continues the
operations of its analytical instrument rental and distribution business,
which represents the largest portion of the business activity. LINC has
continued operations on a substantially reduced basis at its LINC Monex
vendor business in Houston, Texas. As a consequence of the cessation of
substantially all of its leasing activities, LINC has reduced overall
employment to 74 persons as of October 15, 2000 from 221 persons at
December 31, 1999. Of those 74 persons, 38 are employed in the analytical
instrument rental and distribution business.
Background
For the fiscal year ended December 31, 1999, LINC reported a net loss of
$21.53 million, including provisions for impairment of assets of $14.2 million.
For the fiscal quarter ended June 30, 2000, LINC reported a net loss of $13.29
million, or $2.55 per share, including provisions for impairment of assets and
credit losses totaling $11.58 million, or $2.20 per share. For the six months
ended June 30, 2000, LINC reported a net loss of $14.72 million, or $2.83 per
share. On August 6, 2000, LINC's common stock, which traded under the symbol
"LNCC," was de-listed from the Nasdaq National Market due to failure to comply
with Nasdaq's minimum market capitalization requirements and certain other
conditions. LINC's common stock currently trades in the over-the-counter market.
On [________ __, 2000], the last trading day preceding the delivery of this
information statement, the high and low sale prices per share of common stock
were [$ . ] and [$ . ], respectively.
In the second quarter of 1999, the board of directors began consulting with
LINC's management as well as its financial and legal advisors to consider a
variety of options to raise the funds necessary to support LINC's increased new
business operations and to meet LINC's growing capital needs. In April 1999,
LINC commenced efforts to raise additional capital from private sources. In May
1999, LINC obtained an acceptable proposal for additional capital and extensive
due diligence was commenced by the potential investor in May 1999. In late July
1999, the potential private investor withdrew its proposal. In early August
1999, as a result of the withdrawal of that potential investor and because of
LINC's inability to access the needed additional capital on acceptable terms,
the board retained the services of US Bancorp Piper Jaffray to investigate
opportunities to optimize shareholder value. With Piper Jaffray's assistance,
the board concluded that the best available option to protect shareholder value
was to attempt to sell LINC, in its entirety, to a suitable buyer.
The board's determination to attempt to sell LINC to a larger, better
financed company was based on various factors including LINC's inability to
secure additional capital on acceptable terms in the second and third quarters
of 1999 which led LINC to substantially reduce its leasing business during the
last quarter of 1999 and in early 2000.
From September 1999 to February 2000, Piper Jaffray sought proposals from
over twenty companies. During this period, indications of interest were received
from five companies. These indications were narrowed down to two proposals that
would have led to the sale of LINC in its entirety or a merger with a larger,
better capitalized specialty finance company. Each of these proposals were
acceptable to the board of directors and the holders of voting rights over a
majority of our common stock. From December 1999 through late February 2000,
each of the potential acquirers performed due diligence on our operations.
In the fourth quarter of 1999, LINC terminated origination of leases in its
portfolio finance business. In December 1999, LINC determined that it would
terminate new lease originations in its select growth leasing business and
substantially reduce new lease origination goals in its vendor finance business.
At that time, we determined to continue the operations of our profitable rental
and distribution business. We were further faced with the scheduled expiration
of our revolving credit facility in January 2000 as well as an industry-wide
reduction in liquidity to companies in the specialty finance sector in which
LINC competed. In January 2000, in order to supplement our capital base while
the efforts to sell LINC were continuing and as a condition of renewal of LINC's
revolving credit agreement, LINC issued $5,250,000 in Series A Redeemable
Preferred Stock, 42.6% of which was purchased by LINC management.
In February 2000 one of the potential purchasers of LINC withdrew its
proposal. Extensive negotiations continued with the second potential acquirer
until mid-March 2000 at which time it became apparent that completion of the
acquisition would involve material regulatory difficulties, an extended period
of time and an extremely uncertain likelihood of completing the sale. As a
consequence, negotiations were terminated by mutual agreement. The board
concluded that a sale of LINC in its entirety could not be accomplished on
acceptable terms within an acceptable time frame because of the lack of success
in such sales effort to that point and in view of the impact industry-wide
illiquidity was having on other companies which might otherwise have had an
interest in acquiring LINC.
Toward the end of the first quarter of 2000, we found significant
unanticipated credit losses and delinquencies in two of our small vendor finance
businesses acquired in 1998 and 1999 which put further stress on LINC's capital
structure. As a result of those events and LINC's deteriorating financial
condition, on March 25, 2000, LINC notified its revolving credit lenders and
securitization liquidity providers that it would be in default of certain
covenants under its revolving credit agreement and securitization facilities. As
a result of these defaults, LINC was no longer permitted by its lenders to fund
new leases and LINC's ability to continue operations of its profitable rental
and distribution businesses was limited.
From March 2000 through the date of this filing, the lenders under LINC's
revolving credit agreement have refrained from accelerating our debt
obligations, foreclosing on assets in which they have security interests, and
exercising other remedies. In addition, the liquidity providers to LINC's
commercial paper conduit securitization facility have refrained from exercising
their rights to increase the interest rate under that facility and to require
that the securitized lease portfolio be sold. However, amortization of amounts
outstanding on our commercial paper conduit securitization facility and on the
term securitization facility has been accelerated resulting in an interruption
in the cash flow available to LINC from these facilities. In addition, in
connection with the agreements reached with our revolving credit lenders and the
providers of our securitization facilities, we have been required to outsource
the servicing of substantially all of our owned and securitized lease
portfolios. This outsourcing has resulted in elimination of the servicing fees
we received from the securitization entities. However, we believe that we have
reduced our expenses at least proportionately.
The board of directors, in dealing with the financial deterioration of
LINC, has closely monitored the developments and difficulties LINC faced by
meeting six times as a full board and three times through its special committee
of the board in 1999 and twenty times as a full board and three times through
its special committee of the board in 2000 to date. Further, in March 2000, the
board accepted the resignation of LINC's chairman and chief executive officer
and created an office of the chairman to deal with the challenges presented by
LINC's unanticipated decline in financial condition.
When LINC defaulted on its revolving credit loan and securitization
agreements in March 2000, we chose to seek alternative means of refinancing or
repaying indebtedness in order to avoid a lengthy and costly bankruptcy process.
Additionally, in choosing to reach an out of court settlement with our primary
secured creditors under a forbearance agreement rather than seek bankruptcy
protection, LINC has been able to reduce overhead costs more quickly and reduce
the costs of professional and other fees, which would have grown substantially
in a bankruptcy proceeding. The board concluded that an out of court
restructuring under the recently concluded forbearance agreement provides LINC
with an opportunity to seek to obtain the highest values for its assets without
the administrative costs of a bankruptcy proceeding.
In April 2000, LINC made its initial proposal to its secured creditors that
would result in an out of court restructuring through termination of all leasing
activities, outsourcing of servicing of its lease portfolio to reduce overhead,
sale or refinancing of its owned and non-securitized lease portfolio and a sale
or refinancing of its analytical instrument rental and distribution business. In
order to maintain value in its profitable analytical instrument rental and
distribution business, LINC proposed that its secured creditors permit the
continuation of this business in the ordinary course. LINC's lenders have
refrained from accelerating their indebtedness and foreclosing on their
collateral while LINC has implemented this proposal.
In April 2000, LINC engaged Piper Jaffray to assist in selling or
refinancing its lease portfolios and its analytical instrument rental and
distribution business and also engaged KPMG to assist it in its negotiations
with lenders.
In March and April 2000, as a result of the defaults under its revolving
credit agreement and commercial paper securitization facility, LINC terminated
all new portfolio finance and vendor finance leasing activities. In May 2000,
LINC sold a large proportion of its remaining select growth lease portfolio at a
modest profit to a large specialty finance company and terminated all select
growth operations. In connection with this sale, LINC has retained a portion of
its select growth portfolio which LINC is continuing to collect and LINC
retained a portfolio of equity securities in its select growth lessees that it
believes has substantial value. This sale avoided certain employee costs for
those employees who resigned from LINC to join the purchaser of the select
growth portfolio.
In September 2000, LINC completed the outsourcing of servicing of its lease
portfolio and entered into a definitive forbearance agreement with its lenders.
Since April 1, 2000, LINC has reduced indebtedness under the revolving credit
agreement and the balance of its commercial paper conduit securitizations
facility to $73.9 million and $122 million, respectively, at September 30, 2000
and from $101 million and $178 million, respectively, at March 31, 2000 through
sales and the scheduled amortization of portions of its lease portfolios. LINC
has reduced its corporate and leasing head count to 36 persons at October 15,
2000 from 182 persons at December 31, 1999. Head count in its analytical
instrument rental and distribution business has remained essentially unchanged
from December 1999 levels at 38 people.
Under the forbearance agreement between LINC and its lenders under the
revolving credit agreement, LINC must repay the outstanding balance by December
31, 2000 in accordance with the original terms of the revolving credit
agreement. The forbearance agreement requires that the balance outstanding under
the credit agreement be reduced to $70 million by October 31, 2000, $63 million
by November 30, 2000 and to be repaid in full by December 31, 2000. The
agreement provides for the payment of up to $1 million in fees to the lenders
under certain circumstances and for an increase in the interest rate under the
agreement to 3.00% over LIBOR from its former interest rate of 1.75% over LIBOR.
The forbearance agreement contains provisions that permit the lenders to
immediately accelerate their indebtedness and exercise their remedies under the
revolving credit agreement, in the event of certain events of default, including
such events as:
- failure to pay the loans down as scheduled;
- the exercise by other creditors of LINC who are owed over $500,000 of
their remedies or their obtaining a judgment against LINC;
- the failure of LINC to meet 120% of its operating expense budgets; and
- the loans outstanding under the revolving credit agreement exceeding
the borrowing base formula by $12 million at any time.
It is possible that LINC may not be able to meet all of the criteria or
maintain compliance with all the conditions established by the forbearance
agreement on a timely basis or at all. In this case, LINC may be required to
file for protection under the Bankruptcy Code. In addition, because LINC has a
number of unsecured creditors whose debts are past due, it is possible that
certain of these creditors could claim that the contemplated sales of assets
will violate their contractual rights or exercise other legal remedies. Any such
action would result in further deterioration of LINC's financial condition and
reduce the possibility that LINC would have any value in excess of its
indebtedness.
Approval of Board of Directors
The board of directors has concluded that LINC cannot continue its existing
businesses as such businesses are currently operated and that orderly, out of
court sales of its businesses and assets rather than the commencement of
bankruptcy proceedings or other alternatives is in the best interests of LINC's
creditors and stockholders. As a consequence, the board of directors has
approved sales of assets or, if some of the leases and related residual values
cannot be sold for what we consider reasonable prices, the collection of
receivables under those leases. LINC's assets consist primarily of its
non-securitized lease portfolio, its analytical instrument rental and
distribution business, its equity interest in its equipment lease securitization
entities and equity interests in select growth lessees. The holders of the right
to vote a majority of our common stock have approved of these proposed sales of
assets, subject to the sale or realization proceeds being enough, in the board's
view, to at least pay off our revolving credit debt.
LINC intends to use the net proceeds realized from these sales of assets to
first repay indebtedness secured by the related assets sold or liquidated and
then to pay claims of unsecured creditors and holders of subordinated debt. LINC
is not certain that the proceeds of sale or liquidation of assets, after
operating expenses, will be sufficient in amount to accomplish these objectives.
LINC's board of directors has not yet determined whether, if there are any
assets remaining, the company should be restructured, reorganized, dissolved or
liquidated. If it is determined to dissolve and liquidate, any distributions to
stockholders would be made first to the holders of preferred stock to the extent
of their liquidation preference.
Sales Process
LINC has retained the services of Piper Jaffray to assist in locating
suitable buyers for LINC's assets. LINC has offered its analytical instrument
rental and distribution business to nine potential buyers and, on October 12,
2000, it executed a letter of intent to sell this business to a newly formed
entity controlled by a private equity fund. The letter of intent contains
numerous contingencies and there is no assurance that this sale will be
completed. The purchaser is in the process of its due diligence investigation
and arranging for financing. If this sale is completed, LINC estimates that net
proceeds of $ 20 million to $ 22 million will be received and used to repay
revolving credit indebtedness.
LINC has provided information regarding the sale of its remaining lease
portfolios to seven potential buyers. Management of LINC and its financial
advisors believe that as a result of current market conditions in the leasing
industry, which include a historically high level of failures of leasing
companies, reduction of the number of finance companies interested in the
purchase of lease portfolios and a low level of liquidity in the industry, it is
unlikely that it will find a single purchaser for the entirety of its remaining
lease portfolio at an acceptable price.
Since April 2000, LINC has realized approximately $39 million from the sale
of portions of its owned and securitized lease portfolio to a number of
purchasers, including entities from whom LINC purchased portfolios from its
portfolio finance activities, the proceeds of which have been used to repay
indebtedness under its revolving credit agreement and lower the principal amount
of its commercial paper securitizations facility. LINC is currently negotiating
with three lessors regarding the purchase of the largest portion of the
remainder of the lease portfolio that secures the balance of its revolving
credit agreement, which at June 30, 2000 had a net investment of $70 million.
These negotiations remain ongoing and no agreements have yet been reached and
there is no assurance that any such agreements will be completed by December 31,
2000.
LINC does not currently expect to immediately sell its equity interests in
its securitization entities. Those equity interests are difficult to sell until
the level of debt in those securitization entities has been substantially
reduced and the residual value of the remaining assets can be determined with
greater certainty. Therefore, LINC expects to realize these interests as the
related remaining lease portfolios are amortized or to sell the remaining
investment when market conditions for such purchases improve.
LINC currently holds equity securities in 50 select growth lessees, nine of
which are publicly traded. The market value of the equity securities in publicly
traded lessees at October 19, 2000 was $19.9 million, the substantial majority
of which is attributable to the value of LINC's holdings in Corvis Corporation.
The market values of these equity securities fluctuate daily within their
markets. LINC intends to sell the holdings it has in Corvis Corporation and
other publicly held companies in its portfolio promptly following the lifting of
restrictions on their sale. Such restrictions on the sale of Corvis Corporation
securities will be removed on January 31, 2000. LINC currently expects to hold
the remaining securities it has in private companies until the companies are
sold or become publicly held.
Use of Sales Proceeds
The proceeds of the proposed sales will be used in the following order of
priorities:
(a) pay operating expenses associated with the sale and liquidation of the
assets, including but not limited to interest expense, compensation of
employees and executives, including bonus and severance arrangements,
investment banking fees, fees of our professionals and of our secured
lenders' professionals and the forbearance fee of up to $1 million to its
revolving credit lenders;
(b) pay down indebtedness under our revolving credit agreement; and
(c) pay delinquent amounts owing to unsecured trade and other creditors.
We cannot assure that the proceeds of sales of assets will be sufficient to
pay all these amounts in full.
Certain Tax Consequences
The proposed sales will be taxable transactions to LINC for income tax
purposes. As a result of provisions relating to recapture of depreciation on
leased equipment and other provisions of the Internal Revenue Code, these sales
may result in taxable gains. However, as a result of net operating loss
carry-forwards existing at December 31, 1999, as well as substantial losses for
tax purposes generated during the year 2000, we do not anticipate that LINC will
incur a material federal income tax liability as a result of these sales. After
giving full effect to the proposed sales of assets, LINC will likely retain
substantial net operating loss carry-forwards.
Regulatory Matters
Should a purchaser of LINC's assets have over $100 million in sales or
assets and be purchasing assets from LINC in excess of $15 million, such sale
may not be consummated until notifications have been given and certain
information has been furnished to the Federal Trade Commission and the Antitrust
Division of the Department of Justice and the specified thirty-day waiting
period requirements have been satisfied under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules promulgated thereunder by
the Federal Trade Commission. The waiting period may be shortened by the
government agency. LINC has been advised that the sale of its analytical
instrument rental and distribution business will require such notification.
Interests of Certain Persons in the Proposed Sales of Assets
Some purchasers of LINC's assets may request that some of LINC's officers
and/or directors become employees of or consultants to the purchasers. LINC
understands that as a condition of the sale of LINC's analytical instrument
rental and distribution business, the purchaser has offered employment and
equity ownership to Robert Laing, President of LINC, and Gerard Farren,
Executive Vice-President of LINC's analytical instrument rental and distribution
business.
No Appraisal Rights
Pursuant to Delaware law, holders of shares of common stock will not be
entitled to rights of appraisal in connection with the proposed sales of assets.
Accounting Treatment
The proposed sales of assets will be accounted for under the purchase
method of accounting.
Selected Consolidated Financial Data
The following table sets forth selected consolidated statement of
operations and financial position data for the periods indicated. The financial
data for each of the four years in the period ended December 31, 1998 are
derived from our audited consolidated financial statements. The financial data
for the year ended December 31, 1999 are derived from our consolidated financial
statements on which we received an audit report, but which report did not
express an opinion. The financial data for the six months ended June 30, 2000
and 1999 are derived from our unaudited condensed consolidated financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, that management considers necessary for
a fair presentation of our financial position and results of operations as of
such dates and for such periods. The results of the six months ended June 30,
2000 are not necessarily indicative of full year results. The following table
should be read in conjunction with the consolidated financial statements and
notes thereto contained below in this information statement.
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
2000 1999 1999 1998 1997 1996 1995
(In thousands, except per share data)
Statement of Operations Data:
Revenues:
Sales of equipment $ 20,623 $ 16,009 $ 34,941 $ 32,929 $ 23,131 $22,595 $ 13,852
Direct finance lease income 19,658 12,933 33,438 12,300 5,981 3,055 1,467
Interest income 1,789 1,638 3,573 2,194 877 283 47
Rental and operating lease 4,258 5,377 10,942 9,412 7,492 7,034 9,043
revenue
Servicing fees and other 1,690 3,948 6,603 3,792 2,026 2,376 3,168
income
Gain (loss) on sale of lease (9) 355 1,284 6,839 880 - -
receivables
Gain on equipment residual 441 563 1,321 1,752 860 450 44
values
Gain on equity participation 328 1,238 1,603 3,824 430 263 -
rights
Total revenues 48,778 42,061 93,705 73,042 41,677 36,056 27,621
Expenses:
Cost of equipment sold 16,575 13,067 28,526 26,789 18,549 18,242 11,477
Selling, general and 13,609 11,561 23,790 17,824 8,973 8,008 7,524
administrative (net)
Interest 16,662 9,030 24,686 8,956 4,298 2,545 1,750
Depreciation of equipment 3,011 3,553 7,273 6,073 4,226 3,647 4,054
Amortization on intangibles 865 510 1,428 502 280 226 212
Provision for credit losses 8,266 2,888 15,966 5,280 1,253 749 1,060
Impairment loss on assets 4,509 - 14,177 - - -
Restructuring charges - - 700 - - - -
Total expenses 63,497 40,609 116,546 65,424 37,579 33,417 26,077
Earnings (loss) from continuing
operations before provision for (14,719) 1,452 (22,841) 7,618 4,098 2,639 1,544
income taxes and minority interest
Income tax expense (benefit) - 406 (1,307) 3,024 1,627 1,084 747
Net earnings (loss) from continuing
operations before minority interest (14,719) 1,046 (21,534) 4,594 2,471 1,555 797
Minority interest - - - - (13) (120) (34)
Net earnings (loss) from continuing $(14,719) $1,046 $(21,534) $ 4,594 $ 2,458 $1,435 $ 763
operations
Net earnings (loss) from continuing
operations per common
share:
Basic $ (2.83) $ 0.20 $ (4.10) $ 0.89 $ 0.73 $ 0.48 $ 0.25
Diluted (2.83) 0.19 (4.10) 0.86 0.72 0.45 0.25
Shares used in computing net income per
common share:
Basic 5,265 5,243 5,254 5,171 3,372 2,991 3,006
Diluted 5,265 5,371 5,254 5,347 3,397 3,162 3,103
Dividends declared per common share $ - $ - $ - $ - $ - $ 0.26 $ -
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
2000 1999 1999 1998 1997 1996 1995
(In thousands)
Balance Sheet Data:
Net investment in direct finance leases $ 372,041 $317,736 $ 436,820 $ 164,970 $ 67,653 $34,778 $ 17,861
and loans
Equipment held for rental and operating 27,407 31,147 26,115 30,659 22,007 15,048 18,500
leases, net
Securitization retained interest 399 12,697 444 17,026 3,017 - -
Total assets 443,880 405,873 512,888 248,884 108,977 67,200 58,604
Senior credit facility and other senior 87,180 104,201 102,754 96,646 38,117 29,605 31,914
notes payable
Recourse debt 2,302 6,191 3,898 8,017 2,955 3,361 882
Nonrecourse debt 309,871 213,331 347,352 68,616 17,951 8,276 4,997
Subordinated debentures 6,266 5,869 6,059 5,694 5,386 5,127 4,953
Total liabilities 432,610 362,478 491,637 207,443 72,273 53,258 46,411
Redeemable preferred stock 5,827 - - - - - -
Stockholders' equity $ 5,443 $ 43,395 $ 21,215 $ 41,441 $ 36,704 $13,942 $ 12,193
</TABLE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information contained in this section, which relates only to LINC's
continuing operations during the periods discussed below, should be read in
conjunction with the consolidated financial statements and notes thereto.
LINC's select growth finance, portfolio finance and vendor finance
activities consisted largely of direct finance leases and loans. We funded these
leases and loans through our revolving credit and securitization facilities and
other recourse and nonrecourse debt. In our rental and distribution activities,
LINC rents, leases and sells new and used analytical instruments and related
equipment and funds these activities primarily through our revolving credit
facility. The following briefly describes some of the principal accounting
practices applicable to our 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. We record 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 our rental and distribution business
unit leases equipment, such leases are accounted for similarly to direct finance
leases except that we record the sales value of the equipment as revenue and the
carrying value as cost of equipment sold, thus recognizing our distribution
margin (sales type leases).
In July 1999, LINC completed a term securitization of $237 million. In
connection with the term securitization, we repurchased certain leases, which
had previously been financed in the conduit securitization and removed from the
balance sheet. In accordance with generally accepted accounting principles,
$93.8 million, the amount of the repurchase price, was restored to the net
investment in leases and loans on the balance sheet, including the unearned
lease income. (Included in the additional $93.8 net investment was $99 million
of gross lease receivables.) Direct finance lease income on the statement of
operations includes the amortization of income earned on the net investment of
previously sold leases. The difference between the purchase price of the
restored leases and the net investment of the restored leases at the time of the
term securitization is recorded as an offset to unearned income which is
amortized over the life of the term securitization by applying a constant
periodic rate of return to the declining net investment and included in direct
finance lease income in the consolidated statements of operations.
Secured Loans.
Loans made by LINC, 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."
Rentals and Operating Leases.
All rental and lease contracts that do not meet the criteria of direct
finance leases or sales type 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 our cost as
"equipment held for rental and operating leases" and depreciated on a
straight-line basis. We depreciate analytical instruments over a seven-year
life, assuming no salvage or residual value at the end of this life. We have
realized gains from the sale of used analytical instruments each year since the
inception of our rental and distribution activities. Other leased equipment is
depreciated over its estimated useful life to its salvage or residual value.
Equity Participation Rights.
LINC frequently received warrants or other equity participation rights in
connection with leases to select growth finance clients. Such warrants or rights
entitle us 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. We typically obtain 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. We recognize a gain or loss on such securities when sold or when the
securities are classified as trading securities. We periodically review our
portfolio of equity participation rights based on its evaluation of the market
trends for the related clients' equity securities.
Realization of Equipment 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.
Servicing Fees.
LINC realized revenue for off-balance sheet lease receivables serviced
under the terms of our securitization facility until we recently ceased
servicing such receivables. Additionally, we engaged in the business of
servicing lease portfolios originated by third parties but have not entered into
a new agreement to service leases for third parties since December 1994.
Revenues from these activities are classified as "servicing fees and other
income."
Securitizations of Lease Portfolios.
In a securitization transaction, LINC sold a pool of leases to a
wholly-owned special purpose entity, which then transferred or pledged the
leases to the lender. We generally retained the right to receive any excess cash
flows of the special purpose entity. Until October 1, 1998, we 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, we 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. Accordingly, no gain on sale of lease
receivables in securitization transactions has been recorded since October 1,
1998.
Provision for Credit Losses.
Each of our activities involves risk of credit loss. Management evaluates
the collectibility of our 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. We provide 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 our lessees or obligors, as well as any holdbacks or recourse from
portfolio finance customers that serve as credit enhancement.
Results of Operations
1999 Compared to 1998
Sales of equipment increased to $35.0 million from $32.9 million and cost
of equipment sold increased to $28.5 million from $26.8 million due in part to
the acquisition of Internet Finance & Equipment, Inc. assets in August 1999 and
the development of LINC IF+E which distributes and leases telecommunications,
routing and internet enabling equipment. This increase was partially offset by a
2.3% decrease in both sales of analytical instruments and the related cost of
equipment sold in our rental and distribution business. Net margins on sales of
equipment decreased to 18.4% from 18.6% primarily due to lower margins obtained
by LINC IF+E compared to margins on the sale of analytical instruments.
Net direct finance lease income increased to $33.4 million from $12.3
million as a result of a substantially higher level of finance lease receivables
outstanding, arising from acquired portfolios, internal lease originations, and
discontinuance of gain-on-sale accounting in October, 1998. Average finance
lease receivables outstanding increased 163%. In addition, during the quarter
ended September 30, 1999, $99.0 million in lease receivables were repurchased
from LINC's commercial paper conduit facility in connection with completion of a
term securitization and included in our balance sheet. As a result, commencing
in the third quarter of 1999 direct finance lease income for 1999 includes the
net amount of the direct finance lease income relating to such repurchased
receivables.
Interest income increased to $3.6 million from $2.2 million, primarily due
to an increase in interest-bearing notes receivable held by us. Direct finance
lease income and interest income, minus interest expense, was $12.3 million, or
33.3% of direct finance lease income and interest income, known as the interest
margin, compared to $5.5 million, or 38.2%, in the prior year. The decrease in
the interest margin is due to an increase in interest rates throughout the
second half of the year and a decrease in interest income recorded on our
securitization retained interest resulting from the repurchase of lease
receivables from our commercial paper conduit facility in connection with
completion of a term securitization.
Rental and operating lease revenue increased to $10.9 million from $9.4
million primarily due to acquisitions of portfolios of operating leases made
during 1998 and increased rental utilization in our rental and distribution
business unit.
Servicing fees and other income increased to $6.6 million from $3.8
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 our select growth
finance unit, and late fees. The increase over the prior year period primarily
relates to $1.2 million in deferred incentive fees realized in connection with
servicing of a portfolio owned by a third party, $0.5 million realized on the
termination of interest rate swap and cap agreements, and an increase in late
fees collected by our vendor finance business unit. This increase is partially
offset by a decrease in fees received for servicing securitized leases. Since
the elimination of gain-on-sale treatment effective October 1, 1998, the balance
of off-balance sheet lease receivables continues to decline. In addition, during
the quarter ended September 30, 1999, $99.0 million in lease receivables, which
were originally recorded as off-balance sheet securitized leases, were
repurchased from our commercial paper conduit facility in connection with a term
securitization and restored to the balance sheet.
Gain on the sale of lease receivables was $1.3 million for the year ended
December 31, 1999. This amount represented gains on lease receivables sold to
third parties. The $6.8 million gain for the year ended December 31, 1998
represented gains on securitized leases. Effective October 1, 1998, LINC
eliminated gain-on-sale treatment for securitized leases by modifying the
structure of our securitization facility such that it is considered nonrecourse
debt under generally accepted accounting principles. Accordingly, no gain on
sale of securitized receivables was recorded during 1999.
Gains on equipment residual values decreased to $1.3 million from $1.8
million. Gains on equipment residual values fluctuate based on the dollar volume
of the leases maturing in a given year.
During 1999, we recognized a gain of $1.6 million on certain equity
participation rights versus $3.8 million in 1998. Equity participation gains
fluctuate from year to year based on the value of securities in our portfolio
and the timing of the sale of these securities.
Selling, general and administrative expenses, net of initial direct costs
capitalized, increased to $23.8 million from $17.8 million. The increase
resulted primarily from the administrative and operational effects of four
acquisitions completed since February 1998 in our vendor finance business unit,
the acquisition of LINC IF+E in August 1999 in our rental and distribution
business unit, senior and middle management personnel added to support our
growth, and increased activity in our other business segments. The number of
people employed, including employees of companies acquired, increased 50% from
147 at the end of 1998 to 221 during 1999.
Interest expense increased to $24.7 million from $9.0 million, due
primarily to increased borrowings resulting from growth in lease originations,
lease portfolios acquired, and discontinuance of gain-on-sale accounting. In
addition interest expense increased over 1998 levels as a result of the
repurchase by LINC 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 of
nonrecourse debt. Average finance lease receivables outstanding increased 163%.
Depreciation of equipment increased to $7.3 million from $6.1 million,
which was attributable to an increase in equipment under rental agreements. The
average net book value of equipment held for rental and operating leases
increased approximately 8% over the prior year.
Amortization of intangibles increased to $1.4 million from $0.5 million,
due to the amortization of goodwill relating to five acquisitions completed
since February 1998 and to the amortization of issuance costs resulting from a
term securitization completed during the third quarter of 1999.
The provision for credit losses increased to $16.0 million from $5.3
million, due to a substantially higher volume of new leases originated and
substantially higher rates of lease defaults in the select growth and vendor
finance business segments.
At December 31, 1999, LINC recognized an impairment loss of $14.2 million
primarily relating to the impairment of goodwill in our vendor finance business
unit. After evaluating 1999 results of operations and projected future cash
flows, we decided to write off the goodwill associated with the acquisitions of
Comstock Leasing Inc., Monex Leasing, Ltd., Spectra Precision Credit Corp. and
Connor Capital Corporation since projected future cash flows were insufficient
to cover the recorded goodwill. Substantially all of this goodwill is deductible
for Federal income tax purposes.
During the third quarter of 1999, we recorded a restructuring charge of
$0.7 million relating to consolidating additional vendor finance functions in
Chicago, Illinois from Dayton, Ohio and Wheeling, Illinois. The charge primarily
consists of personnel related expenses, such as severance for terminated
employees, recruiting expenses for replacement personnel, and relocation costs,
as well as write-offs of certain assets, including leasehold improvements and
furniture and fixtures. Through December 31, 1999, approximately $0.4 million of
the restructuring charge was utilized for these items.
For 1999, LINC recorded an income tax benefit of $1.3 million on a pre-tax
loss of $22.8 million. The 1999 income tax benefit is the result of the
utilization of investment tax credits for which no benefit had previously been
recognized. We recorded income tax expense of $3.0 million on pre-tax income of
$7.6 million for 1998.
1998 Compared to 1997
Sales of equipment increased to $32.9 million from $23.1 million and costs
of analytical instruments sold increased to $26.8 million from $18.5 million,
due to an increase in volume. et margins on sales of analytical instruments
declined to 18.6% from 19.8% primarily as a result of lower gross margins on
sales type leases originated in our rental and distribution segment during the
first half of 1998.
Direct finance lease income more than doubled to $12.3 million from $6.0
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 to $2.2 million from $0.9 million, primarily due
to an increase in interest-bearing notes receivable and equipment loans held by
LINC, as well as the income recognized on our securitization retained interest.
The interest margin was $5.5 million, or 38.2% compared to $2.6 million, or
37.3% in the prior year. The increase in the interest margin is due to the
income recognized on our securitization retained interest in 1998.
Rental and operating lease revenue increased to $9.4 million from $7.5
million primarily due to acquisitions of portfolios of operating leases upon our
re-entry in the portfolio finance segment after the expiration of a non-compete
agreement in September 1997.
Servicing fees and other income increased to $3.8 million from $2.0
million. Servicing fees and other income primarily consists of fees received for
servicing securitized leases, fees received for servicing third party lease
portfolios, interim rents received by our select growth finance unit, and late
fees. The increase over the prior year period is primarily due to the increase
in the volume of select growth finance leases originated, late fees collected by
vendor finance, an increase in servicing fees relating to a third party lease
portfolio serviced by LINC, 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 LINC for unrelated parties.
During 1998 and 1997, we 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, we 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, we 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 to $1.8
million from $0.9 million. The increase was the result of a greater number of
leases maturing in 1998.
During 1998, LINC experienced increases in the value of certain equity
participation rights held by us and consequently elected to sell a portion of
these rights, realizing a gain of $3.8 million. During 1997, we sold certain
equity participation rights, realizing a gain of $0.4 million.
Selling, general and administrative expenses, net of initial direct costs
capitalized, increased to $17.8 million from $9.0 million. The increase resulted
primarily from additional operations, marketing and sales personnel associated
with our re-entry into portfolio finance, senior and middle management personnel
added to support our growth, three acquisitions completed in 1998, and increased
activity in our other business segments. The number of people employed,
including employees of companies acquired, increased 75% to 147 during 1998.
Interest expense increased to $9.0 million from $4.3 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 to $6.1 million from $4.2 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.
Amortization of intangibles increased to $0.5 million from $0.3 million,
due to three acquisitions completed in the first half of 1998.
The provision for credit losses increased to $5.3 million from $1.3
million, due to a substantially higher volume of new leases originated and
re-evaluation of reserves. Lease fundings, excluding portfolios acquired in
connection with LINC's acquisitions, increased 220% over the prior year.
Our effective tax rate was 39.7% for 1998 and 1997.
Six Months ended June 30, 2000 compared to Six Months ended June 30, 1999
Sales of equipment increased to $20.6 million from $16.0 million and cost
of equipment sold increased to $16.6 million from $13.1 million. Net margins on
sales of equipment increased to 19.6% from 18.4% due to higher margins obtained
by LINC IF+E compared to margins on the sale of analytical instruments. The net
margin on sales of equipment during the six months ended June 30, 1999 was
positively impacted by manufacturer incentives received on equipment sold during
the first quarter of that year.
Direct finance lease income increased to $19.7 million from $12.9 million
as a result of a substantially higher level of finance lease receivables
outstanding, arising from acquired companies and from internal lease
originations, a greater portion of which are retained on our balance sheet.
Average finance lease receivables outstanding increased 68%. Interest income
increased to $1.8 million from $1.6 million primarily due to an increase in
interest-bearing notes receivable held by us during the first quarter of 2000.
Direct finance lease income and interest income, minus interest expense, was
$4.8 million, or 22.3% of direct finance lease income and interest income
compared to $5.5 million, or 38.0%, 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 a decrease in interest income recorded on our
securitization retained interest, resulting from the repurchase of lease
receivables from our commercial paper conduit facility in connection with
completion of a term securitization.
Rental and operating lease revenue decreased to $4.3 million from $5.4
million primarily due to the maturing of operating
leases acquired in 1998.
Servicing fees and other income decreased to $1.7 million from $3.9
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 our select growth
finance unit, 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 less than $0.1
million from $0.4 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 $0.4 million from $0.6
million. Gains on equipment residual values fluctuate based on the dollar volume
of leases maturing in a given period.
During the first half of 2000, LINC recognized a gain of $0.3 million on
certain equity participation rights versus a gain of $1.2 million in the
comparable prior year period. Equity participation gains and losses fluctuate
from period to period based on the value of securities in our portfolio and the
timing of the sale of these securities. In July 2000, Corvis Corporation, in
which the company holds warrants to purchase 327,972 shares at a price of
$0.7625 per share completed its initial public offering. On the basis of the
closing price of such shares at August 10, 2000, our unrealized gain on such
warrants was $30.0 million. LINC is subject to a "lock-up" agreement that
restricts our ability to sell the Corvis warrants prior to late January 2000.
This unrealized gain has not been recorded in income, nor has it been reflected
in stockholders' equity.
Selling, general and administrative expenses, net of initial direct costs
capitalized, increased to $13.6 million from $11.6 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 our rental and distribution
business unit, professional fees incurred related to our violation of covenants
under our revolving credit agreement, conduit facility, and term securitization,
and a decrease in initial direct costs capitalized due to an 44% decrease in
lease originations between periods. The number of people employed, including
employees of companies acquired, decreased 36% to 117 between June 30, 1999 and
June 30, 2000. As a result of the cessation of substantially all leasing
activities and the reduction of its employee headcount to 99 at August 10, 2000
from 221 at December 31, 2000, we substantially reduced our selling, general and
administrative expenses commencing in the third quarter of 2000.
Interest expense increased to $16.7 million from $9.0 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 of over 100 basis points in our 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 us during the quarter ended
September 30, 1999 of $99.0 million in lease receivables previously sold to our
commercial paper conduit facility utilizing proceeds of a term securitization
which increased the level on nonrecourse debt. Average finance lease receivables
outstanding increased 68%.
Depreciation of equipment decreased to $3.0 million from $3.6 million due
to a decrease in operating leases, partially offset by an increase in equipment
under rental agreements. The average net book value of equipment held for rental
and operating leases decreased approximately 13% over the prior year period.
Amortization of intangibles increased to $0.9 million from $0.5 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. The provision
for credit losses increased to $8.3 million from $2.9 million. The portion of
our lease portfolio that was delinquent more than 60 days increased to 4.4% of
the gross receivable balance at June 30, 2000 from 2.6 % of the gross receivable
balance at March 31, 2000. As a consequence of this increase, in the second
quarter of 2000, we recorded a provision to increase its allowance for doubtful
receivables to 4.6 % of its net investment in leases and loans at June 30, 2000
as compared to 2.7 % at March 31, 2000. In addition to the allowance for
doubtful receivables, we retained holdbacks and recourse obligations from
certain of its portfolio finance customers totaling approximately $18.6 million
at June 30, 2000. At June 30, 2000, we 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
related equipment, and an estimated loss on our corporate headquarters' lease
agreement. See Note 4 to "Consolidated Financial Statements."
LINC did not record a tax benefit on the pre-tax loss of $14.7 million for
the six months ended June 30, 2000 since realization of the tax benefit cannot
be assured. We recorded income tax expense of $0.4 million on pre-tax income of
$1.5 million for the same period of the prior year.
Liquidity and Capital Resources
General
LINC's activities are capital intensive and require access to substantial
amounts of credit to fund new equipment leases. We have financed our operations
to date primarily through cash flow from operations, borrowings under our
revolving credit agreement with senior lenders and our CP conduit facility,
other non-recourse and recourse loans, our July term securitization and the sale
of equity. Access to large amounts of capital will continue to be necessary to
acquire equipment for lease and rental.
LINC is not in compliance with certain covenants under the Loan Agreement,
the CP conduit facility and certain covenants under the terms of agreements
relating to the July term securitization. As a result of these covenant
violations and the forbearance agreement discussed above, we have not been
permitted to borrow additional funds under our revolving credit agreement.
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 1999, 1998 and 1997 were $341.8 million,
$326.1 million, and $79.8 million, respectively. The increase between 1999 and
1998 results primarily from the increase in the volume of securitizations
completed in 1999 and payments received on direct finance leases; whereas, the
increase between 1998 and 1997 results primarily from securitizations completed
in 1998 and additional borrowings under our credit facilities. Cash flows from
operating and financing activities for the six months ended June 30, 2000 and
1999 were $64.0 million and $193.2 million, respectively. The decrease between
2000 and 1999 results primarily from no new debt financing or securitizations
during the second quarter 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 we utilized our secured revolving credit facility provided by a
syndicate of banks to fund the acquisition and origination of leases and the
purchase of rental and distribution inventory. As of December 31, 1999, we had
$117.0 million available for borrowing under the agreement, of which we had
borrowed $99.7 million, with a weighted-average interest rate of 7.65%. In
January 2000, the amount available under the agreement was reduced to $107.0
million and the facility was renewed through December 31, 2000. As of June 30,
2000, the balance was $85.1 million and the weighted average interest rate for
the six months then ended was 8.10%. As noted above, we have not been able to
borrow under the revolving credit agreement since March 2000 and have entered
into a forbearance agreement with the lenders. The balance is currently $73.9
million.
Commercial Paper Conduit Securitization Facilities
We, through a special purpose subsidiary, have a commercial paper conduit
securitization facility in an amount of $289 million. At June 30, 2000, $[141]
million of the facility was utilized. Because we are in violation of certain
covenants under the CP conduit facility sales of lease portfolios are being used
to reduce the outstanding amount under the CP conduit facility and the cash
flows available to us from our retained interest in the leases included in the
CP conduit facility as well as our servicing rights have ceased.
Term Securitization
In July 1999, we, through a special purpose subsidiary, completed a term
securitization in the amount of $237 million. $199 million of A-1 Certificates
$9 million of B-1 Certificates and $9 million of B-2 Certificates 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 us.
Because we are in violation of certain covenants under the July term
securitization the cash flows available to us from our retained interest in the
July term securitization as well as our servicing rights have ceased.
Preferred Stock
On February 1, 2000, we 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 our common stock at $5.49
per share. Additional preferred stock warrants for up to 652,500 shares may be
issued on a pro-rata basis through September 30, 2000, if the Series A preferred
stock is not redeemed as a result of a change of control or a refinancing prior
to that time. At June 30, 2000 additional preferred stock warrants for 372,857
shares are issuable. 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 LINC 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, LINC was unable to declare or make
payment of the dividend on the Series A preferred stock due on March 31 or June
30, 2000. As a consequence, we are 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.
Quantitative and Qualitative Disclosures About Market Risk
LINC's primary market risk exposure is interest rate risk, largely related
to our loan agreement. Otherwise, we have attempted 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 respective terms. In addition, we try to
manage exposure to fluctuations in interest rates by establishing fixed interest
rates on the lease portfolios in our 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. We does not use derivative financial instruments for trading
purposes.
LINC is exposed to adverse fluctuations in interest rates as they relate to
our securitization retained interest and to leases and loans funded under its
loan agreement. Additionally, we have been negatively impacted by the early
termination of our 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, 1999, termination of the interest rate swap and
interest rate cap agreements would have resulted in a credit to earnings of $2.1
million.
LINC funded a portion of its lease portfolio under its loan agreement. The
loan agreement provides for interest at LIBOR plus 1.50% to 1.75% or, at our
option, prime plus up to 0.25% or the CD rate or the Fed Funds rate plus 1.55%
to 1.80%, with the precise rate dependent on certain leverage tests. An increase
in these interest rates causes a decrease in the spread between the yield on
each fixed rate lease or loan contract financed under the facility and our
borrowing costs. At December 31, 1999, the net effect of a 100 basis point
decrease or increase in LIBOR over a twelve-month period would result in a $1.1
million decrease or increase in interest expense for the period.
If actual interest rates are different from those estimated by us, the net
impact of interest rate risk on our earnings may be materially different than
disclosed above.
LINC is also subject to foreign currency rate risk relating to a limited
number of leases denominated in Canadian dollars and British pounds. We have
determined that hedging of these assets is not cost effective and instead
attempts to minimize currency exposure risk through working capital management.
LINC does not believe that any foreseeable change in currency rates would have a
material effect on its financial position or results of operations.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of LINC's common stock and preferred stock as of October 20, 2000:
(a) by each person known by LINC to own beneficially more than five percent
of such outstanding common and preferred stock;
(b) by each director;
(c) by the former chief executive officer and the next four most highly
compensated executive officers in 1999; and
(d) by all executive officers and directors of LINC as a group.
Each of such stockholders has sole voting and investment power as to shares
shown unless otherwise noted.
<TABLE>
<CAPTION>
Common Preferred
<S> <C> <C> <C> <C>
Name Shares Owned Percent of Class Shares Owned Percent of Class
Beneficially (2) Beneficially (2)
Martin E. Zimmerman 2,919,129 51.4% 60 26.67%
(1) (4) (5)
Allen P. Palles (3) (4) (5) 352,033 6.2 8 3.56%
Robert E. Laing (3) (4) (5) 350,324 6.2 10 4.44%
Terrence J. Quinn 52,507 0 (less than 1%) 0 0
Gerard M. Farren 18,200 0 3 1.33%
All directors and executives as 4,244,010 74.7% 96 42.67%
a group (8 persons)
</TABLE>
(1) Includes 624,674 shares held by Mr. Zimmerman as trustee under trusts for
the benefit of his two children, 23,000 shares held by LFC Capital, an
entity controlled by Mr. Zimmerman, and 702,357 shares held by Mr. Laing,
Mr. Palles (including 30,000 shares held by The Palles Family Trust, the
beneficiaries of which are Mr. Palles' wife and children and under which
Mr. Palles has disclaimed a beneficial interest) and 146,986 shares held by
a former employee of LINC for which Mr. Zimmerman holds proxies.
(2) Includes shares obtainable upon exercise of stock option which are or
become exercisable prior to January 22, 2001 as follows: Mr. Zimmerman,
55,641 shares; Mr. Palles, 55,389 shares; Mr. Laing, 78,496 shares; Mr.
Quinn, 13,333 shares; Dr. Farren, 5,000 shares; and all directors and
executive officers as a group, 178,188 shares. The percentages set forth in
the above table give effect to the exercise of these options.
(3) All shares are subject to a proxy held by Mr. Zimmerman, except shares
obtainable upon exercise of stock options under the 1997 Stock Initiative
Plan which are or become exercisable prior to January 22, 2001 as follows:
Mr. Palles, 20,532 shares and Mr. Laing, 43,639 shares.
(4) This person;s address is 303 East Wacker Drive, Chicago, IL 60601.
(5) Includes the following purchases of preferred stock: initially, 87,000
shares for Mr. Zimmerman, 14,500 for Mr. Laing, and 11,600 for Mr. Palles;
and then on the last day of each month starting February 29, 2000 and
ending September 30,2000, 21,750 shares per month for Mr. Zimmerman, 3,625
per month for Mr. Laing and 2,900 per month for Mr. Palles.
Where You May Find Additional Information
LINC is subject to the informational requirements of the Securities and
Exchange Act of 1934, as amended, and accordingly files reports, proxy
statements and other information with the Securities and Exchange Commission.
The reports, proxy statements and other information filed by LINC with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commissions' Regional Offices at 7
World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission, including LINC. The address is http://www.sec.gov. Copies
of such material also can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549 at prescribed rates.
Financial Statements
Our consolidated financial statements and notes thereto for 1997, 1998 and 1999
and for the six month periods ended June 30, 1999 and 2000 are attached to this
information statement.
Index to Consolidated Financial Statements:
<TABLE>
<CAPTION>
<S> <C>
Page
Independent Auditors' Report.......................................................
Consolidated Balance Sheets, December 31, 1999 and 1998............................
Consolidated Statements of Operations, years ended December 31, 1999, 1998,
and 1997...........................................................................
Consolidated Statements of Stockholders' Equity, years ended December 31,
1999, 1998, and 1997 ..............................................................
Consolidated Statements of Cash Flows, years ended December 31, 1999, 1998,
and 1997...........................................................................
Notes to Consolidated Financial Statements.........................................
Consolidated Balance Sheets, June 30, 2000 and December 31, 1999 (unaudited).......
Consolidated Statements of Operations, three and six months ended June 30,
2000 and 1999 (unaudited).........................................................
Consolidated Statements of Cash Flows, three and six months ended June 30,
2000 and 1999 (unaudited).........................................................
Notes to Consolidated Financial Statements (unaudited).............................
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, 1999 and 1998, 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, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsiblilty is to report 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 1998 and 1997 consolidated finacial 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 the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that LINC Capital, Inc. and subsidiaries will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the Company has
suffered a loss in 1999 and is not in compliance with certain debt convenants of
existing credit facilities. During April 2000, the Company's primary group of
lending banks has effectively ceased advances under the revolving line of
credit, and the Company has substantially curtailed new lease originations. At
December 31, 1999, these circumstances raise substantial doubt about the
entity's ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 2. The 1999 consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Because of the significance of the uncertainty discussed in the preceeding
paragraph, we are unable to express, and we do not express, an opinion on the
accompanying 1999 consolidated financial statements.
/s/ KPMG LLP
Chicago, Illinois
April 13, 2000
F-2
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------
Assets 1999 1998
---------------- --------------
<S> <C> <C>
Net investment in direct finance leases and loans...................... $436,820 $164,970
Equipment held for rental and operating leases, net.................... 26,115 30,659
Accounts receivable.................................................... 13,354 7,593
Securitization retained interest....................................... 444 17,026
Restricted cash........................................................ 11,254 3,935
Other assets .......................................................... 17,282 12,535
Goodwill 3,225 10,738
Cash and cash equivalents.............................................. 4,394 1,428
------------------- ----------------
Total assets .......................................................... $512,888 $248,884
=================== ================
Liabilities and Stockholders' Equity
Senior credit facility and other senior notes payable.................. $102,754 $96,646
Recourse debt.......................................................... 3,152 8,017
Nonrecourse debt....................................................... 348,098 68,616
Accounts payable....................................................... 15,208 7,443
Accrued expenses....................................................... 8,795 8,775
Customer holdbacks.......................................................... 7,607 10,328
Subordinated debentures................................................ 6,059 5,694
Deferred income taxes.................................................. ---- 1,924
---------------- ---------------
Total liabilities...................................................... $491,673 $207,443
---------------- ---------------
Stockholders' equity:
Common stock, $0.001 par value, 15,000,000 shares authorized;
5,330,953 and 5,249,591 shares issued;
5,265,050 and 5,183,688 shares outstanding.............................. 5 5
Additional paid-in capital.................................................. 29,797 29,567
Deferred compensation from issuance of options.............................. (12) (124)
Stock note receivable....................................................... (182) (182)
Treasury stock, at cost; 65,903 shares...................................... (287) (287)
Accumulated other comprehensive income (loss)............................... 932 (34)
Retained earnings (accumulated deficit)..................................... (9,038) 12,496
---------------- ----------------
Total stockholders' equity........................................... 21,215 41,441
---------------- ---------------
Total liabilities and stockholders' equity........................... $512,888 $248,884
================ ===============
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
LINC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Years ended December 31,
------------------------------------------------
1999 1998 1997
------------- ------------- -----------
Revenues:
<S> <C> <C> <C>
Sales of equipment............................................ $34,941 $32,929 $23,131
Direct finance lease income................................... 33,438 12,300 5,981
Interest income............................................... 3,573 2,194 877
Rental and operating lease revenue............................ 10,942 9,412 7,492
Servicing fees and other income............................... 6,603 3,792 2,026
Gain on sale of lease receivables............................. 1,284 6,839 880
Gain on equipment residual values............................. 1,321 1,752 860
Gain on equity participation rights........................... 1,603 3,824 430
-------------- ------------- ------------
Total revenues................................................ 93,705 73,042 41,677
-------------- ------------- ------------
Expenses:
Cost of equipment sold........................................ 28,526 26,789 18,549
Selling, general and administrative........................... 23,790 17,824 8,973
Interest...................................................... 24,686 8,956 4,298
Depreciation of equipment under rental agreements and
operating leases............................................ 7,273 6,073 4,226
Amortization of intangibles................................... 1,428 502 280
Provision for credit losses................................... 15,966 5,280 1,253
Impairment loss on assets..................................... 14,177 --- ---
Restructuring charges......................................... 700 --- ---
-------------- ------------- ------------
Total expenses.......................................... 116,546 65,424 37,57
-------------- ------------- ------------
Earnings (loss) from continuing operations before income taxes
and minority interest........................................ (22,841) 7,618 4,098
Income tax expense (benefit).................................... (1,307) 3,024 1,627
------------- -------------- -------------
Earnings (loss) from continuing operations before minority
interest..................................................... (21,534) 4,594 2,471
Minority interest............................................... --- --- (13)
------------- -------------- -------------
Net earnings (loss) from continuing operations.................. (21,534) 4,594 2,458
Discontinued operations:
Loss from discontinued operations, net of
income tax benefit for the year ended 1997
of $258.............................................. --- --- (402)
------------ -------------- -------------
Net earnings (loss)............................................. $(21,534) $4,594 $2,056
============= ============== =============
Per common share:
Net earnings (loss) from continuing operations:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4.10) $ .89 $ .73
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.10) .86 .72
Net earnings (loss):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.10) .89 .61
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.10) .86 .61
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
LINC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share data)
Compre- Retained Accumulated
Additional Deferred Stock Treasury Stock hensive Earnings Other
Common Stock Paid-in Compen- Note at cost Income (Accumulated) Comprehensive
Shares Amount Capital sation Receivable Shares Amount (Loss) Deficit Income (Loss) Total
------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,1996 3,012,757 $ 3 $ 978 $ - $ - 61,999 $ (270) $12,883 $ 348 $ 13,942
Comprehensive income:
Net income............ $2,056 2,056 205
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
----------------------------------------------------------------- ------------------------------
Comprehensive loss:
Net loss................ - - - - - - - $(21,534) ( 21,534) - (21,534)
Other comprehensive --------
income:
Unrealized gain on
Securities............ - - - - - - - 707 - -
Translation adjustment. - - - - - - - 259 - - -
---------
Other comprehensive
income.................. - - - - - - - 966 - 966 966
--------
Comprehensive loss....... - - - - - - - $(20,568) - - -
---------
Purchase and sale of
stock, net................ 81,362 - 395 - - - - - - 395
Deferred compensation from
issuance of stock
options.................. - - (165) 112 - - - - - (53)
Balance at December 31, ----------------------------------------------------------------- ---------------------------
1999...................... 5,330,953 $ 5 $29,797 $(12) $(182) 65,903 $ (287) $(9,038) $932 $21,215
----------------------------------------------------------------- ---------------------------
See accompanying notes to consolidated financial statements.
F-5
</TABLE>
<TABLE>
LINC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended December 31,
-------------------------------------------------
1999 1998 1997
------------- ------------- --------------
<CAPTION>
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)..................................... $(21,534) $4,594 $2,056
Adjustments to reconcile net earnings to net
cash provided by continuing operations:
Net loss from discontinued operations............ -- -- 402
Depreciation and amortization.................... 9,668 6,904 4,665
Direct finance lease income...................... (33,438) (12,300) (5,981)
Payments on direct finance leases................ 153,319 66,961 27,148
Deferred income taxes............................ (2,357) 2,269 1,194
Provision for credit losses...................... 15,966 5,280 1,253
Gain on sale of lease receivables................ (1,284) (6,839) (880)
Gain on equity participation rights.............. (1,603) (3,824) (430)
Impairment loss on assets........................ 14,177 -- --
Amortization of discount......................... 365 308 259
Deferred compensation............................ (53) 47 50
Minority interest................................ -- -- 13
Changes in assets and liabilities:
Decrease (increase) in receivables............... (5,687) 44 (4,688)
Decrease (increase) in restricted cash........... (7,319) (3,252) 293
Increase in other assets and goodwill............ (4,777) (6,119) (5,111)
Increase (decrease) in accounts payable.......... 6,050 1,334 (119)
Increase (decrease) in accrued expenses ......... (36) 2,855 843
Increase (decrease) in customer holdbacks ....... (2,721) 6,993 417
------------- ------------- --------------
Cash provided by continuing operations..................... 118,736 65,255 21,384
Cash flows from discontinued operations............... --- --- 10,198
------------- ------------- --------------
Cash provided by operating activities...................... 118,736 65,255 31,582
------------- ------------- --------------
Cash flows from investing activities:
Cost of equipment acquired for lease and rental ...... (339,293) (274,304) (78,366)
Cash used in acquisitions, net of cash acquired ...... (4,977) (39,180) --
Funding of securitization retained interest .......... -- (20,077) (3,381)
Receipts on securitization retained interest ......... 5,656 6,121 --
Fixed assets purchased................................ (1,801) (1,092) (753)
Proceeds from disposal of discontinued operations..... -- -- 2,265
Proceeds from sale of investments..................... 1,603 3,824 430
------------- ------------- --------------
Net cash used in investing activities....... (338,812) (324,708) (79,805)
------------- ------------- --------------
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
LINC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
(Dollars in thousands)
<TABLE>
Years ended December 31,
--------------------------------------------------
1999 1998 1997
--------------- ------------- --------------
<CAPTION>
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in notes payable......................... 6,108 55,850 8,512
Proceeds from recourse and nonrecourse debt........... 501,352 63,214 17,285
Repayments of recourse and nonrecourse debt........... (238,889) (23,507) (8,016)
Proceeds from sale of lease receivables............... 35,259 164,995 16,822
Repurchase of receivables from conduit facility, net
of securitizaton retained interest................ (81,183) -- --
Proceeds from stock notes receivable.................. -- 329 --
Purchase of stock..................................... -- -- (38)
Sale of stock......................................... 395 -- 27,184
Payment of notes from discontinued operations......... -- -- (13,526)
-------------- ------------- --------------
Net cash provided by financing
activities............................... 223,042 260,881 48,223
------------ ------------- --------------
Net increase in cash and cash equivalents ................. 2,966 1,428 --
Cash and cash equivalents at beginning of year............. 1,428 -- --
-------------- ------------- --------------
Cash and cash equivalents at end of year................... $4,394 $1,428 $ --
============== ============= ==============
Supplemental disclosures of cash flow information:
Interest paid......................................... $20,446 $8,542 4,644
Income taxes paid..................................... 1,075 898 275
See accompanying notes to consolidated financial statements.
</TABLE>
F-7
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
(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 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 businessess ( 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.
F-8
<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 statements of operations.
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 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. The cost of
securities sold is based on the specific identification method. At December 31,
1999, the Company held available-for-sale securities with estimated fair values
of $2,448,000, consisting of gross unrealized gains on warrants or common stock
of $1,285,000, and a cost basis of $1,163,000. Cash proceeds received and gross
realized gains on the sale of investments for the years ended December 31, 1999,
1998 and 1997 were $1,603,000, $3,824,000, and $430,000, 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 recognized
an impairment loss of $13,914,000 in 1999 primarily for goodwill related to the
Company's Vendor Finance business unit, as the estimated expected future cash
flows were less than the carrying value. Factors leading to impairment were a
combination of historical performance and inadequate anticipated future cash
flows.
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 consolidated statements of operations in the period of termination.
Reclassifications
Certain reclassifications have been made in the 1998 and 1997 consolidated
financial statements to conform to the 1999 presentation.
(2) Going Concern of the Company
The Company incurred an operating loss of $21,534,000 in 1999, and the
Company was not in compliance with certain debt covenants at December 31, 1999.
During March 2000, the Company made a strategic decision to de-emphasize its
traditional leasing activities and substantially reduce overhead and debt. The
Company indefinitely suspended the Portfolio Finance business, which it had
scaled back dramatically in the later part of 1999, and no longer is funding new
leases in LINC Connor, one of its Vendor Finance origination units. Currently,
the Company is in discussions to sell or refinance components of its Select
Growth business and its Vendor Finance business and to use the proceeds to
reduce borrowings under its Loan Agreement and to reduce outstandings under its
CP Conduit Facility available to a special purpose subsidiary of the Company as
well as to provide additional liquidity. In the event that the Company is unable
to sell individual leasing business units and elements of its lease portfolio,
the Company may liquidate its Select Growth activities and dramatically further
downsize its Vendor Finance business. The Company intends that its focus on a
going-forward basis will be on its profitable distribution
LINC CAPITAL,INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and rental activities. Mangement's plans as to its activities are subject to
review and approval of its secured creditors as more fully discussed below.
Furthermore, the Company was in violation of the minimum tangible net
worth, minimum earnings, leverage and interest coverage covenants under its Loan
Agreement at December 31, 1999. The violations under the Loan Agreement have
also resulted in cross-defaults in the agreements relating to the CP Conduit
Facility and the July Term Securitization. The Company is currently in
discussions with the lenders under the Loan Agreement, the liquidity providers
under the CP Conduit Facility and appropriate parties related to the July Term
Securitization regarding forbearance from enforcement of remedies available to
such parties as a result of the Company's failure to comply with the applicable
covenants. During these forbearance discussions, the Company is not permitted to
borrow additional funds under its Loan Agreement. New lease originations have
therefore been substantially curtailed. In the event that the Company is unable
to successfully obtain such a forbearance from these secured creditors for a
period that enables it to sell individual leasing businesses and elements of its
lease portfolio the Company may not be able to continue some or all of its
business and may be required to seek protection under the Bankruptcy Code. No
assurances can be made as to the Company obtaining such forbearances, that lease
originations will commence at a level to support the operations of the Company,
or that the secured creditors will allow management to implement various
strategic plans. In addition, even if the Company was to successfully obtain
such forbearance and successfully sell individual leasing business units and
elements of its lease portfolio, there can be no assurance that the proceeds of
such sales will provide the Company with sufficient liquidity to continue its
remaining operations. These circumstances raise substantial doubt about the
Company's ability to continue as a going concern. The 1999 consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
<PAGE>
(3) Acquisitions
Effective January 1, 1999, the Company purchased all of the outstanding
common stock of Connor Capital Corporation, a lessor specializing in developing
captive finance programs for equipment vendors. Additionally, effective August
31, 1999, the Company acquired the assets of Internet Finance + Equipment, a
distributor and lessor of Internet access equipment manufactured by several
companies. 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 the
acquisition. These acquisitions had no material impact on results of operations
for the year ended December 31, 1999. See note 18.
The consideration for the 1999 acquisitions included $4,977,000 in cash
payments, net of cash acquired, and future contingent cash payments of up to
$12,250,000. The fair value of assets purchased and liabilities assumed in the
acquisitions were $12,876,000 and $12,247,000, respectively. Total future
payments contingent on earnings performance or volume of lease fundings for all
acquisitions completed by the Company, including those consummated in 1999, were
$16,012,000 at December 31, 1999.
(1) Net Investment in Direct Finance Leases and Loans
Net investment in direct finance leases and loans is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1999 1998
------------------- ---------------
(In thousands)
<S> <C> <C>
Lease and loan contracts receivable in installments......... $501,557 $191,278
Estimated residual value of leased equipment................ 17,386 8,326
Broker fees................................................. 3,857 1,004
Initial direct costs........................................ 4,482 2,447
Unearned lease income....................................... (78,544) (34,294)
Allowance for doubtful receivables.......................... (11,918) (3,791)
------------------- ---------------
Net investment $436,820 $164,970
=================== ===============
</TABLE>
At December 31, 1999 future payments to be received on direct finance
leases and loans are as follows:
<TABLE>
<CAPTION>
Amount
------------------
(In thousands)
<S> <C>
Year Ending December 31,
2000..................................................... $201,082
2001..................................................... 143,704
2002..................................................... 90,261
2003..................................................... 44,250
2004 and thereafter...................................... 22,260
------------------
Future payments $501,557
==================
<FN>
At December 31, 1999 certain future lease contract payments have been
assigned to financial institutions (note 8).
</FN>
</TABLE>
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) Equipment Held for Rental and Operating Leases, Net
The net book value of equipment held for rental and operating leases is as
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
----------- ------------
<S> <C> <C>
(In thousands)
Equipment under operating leases............................ $6,993 $13,905
Equipment under rental agreements........................... 19,122 16,754
----------- ------------
Net book value $26,115 $30,659
=========== ============
<FN>
The book values presented above are net of accumulated depreciation of
$9,464,000 and $8,058,000, at December 31, 1999 and 1998, respectively.
Equipment under rental agreements is comprised primarily of analytical
instruments.
</FN>
</TABLE>
At December 31, 1999 future contract payments to be received on operating
leases are as follows:
<TABLE>
<CAPTION>
Amount
------------------
(In thousands)
<S> <C>
Year Ending December 31,
2000..................................................... $1,430
2001..................................................... 1,398
2002..................................................... 1,091
2003..................................................... 584
2004 and thereafter...................................... 538
------------------
Future payments $5,041
==================
<FN>
At December 31, 1999 certain future contract payments have been assigned to
financial institutions (note 8).
</FN>
</TABLE>
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) 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 $17,386,000 and equipment held for operating
leases of $3,409,000 in the consolidated balance sheet at December 31, 1999.
Year of Estimated net
expected book value at
termination termination
------------------
(In thousands)
2000..................................................... $4,561
2001.................................................... 3,494
2002..................................................... 6,589
2003..................................................... 2,832
2004 and thereafter...................................... 3,319
--------------
Total $20,795
=============
<TABLE>
<CAPTION>
(7) Other Assets
Other assets are as follows:
December 31,
------------------------------
1999 1998
----------- ------------
<S> <C> <C>
(In thousands)
Inventory .................................................. $ 2,815 $ 4,392
Deposits on equipment ...................................... 3,443 3,082
Property and equipment, net................................. 2,479 1,555
Holdback on lease fundings.................................. 2,133 1,349
Available-for-sale securities............................... 2,448 1,087
Prepaid funding costs....................................... 2,627 197
Prepaid expenses and miscellaneous.......................... 1,337 873
----------- ------------
Total................................................. $17,282 $12,535
=========== ============
</TABLE>
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) Debt
<TABLE>
Notes Payable
Notes payable to banks and others were as follows:
December 31,
<CAPTION>
-------------------------------
1999 1998
----------- ------------
(In thousands)
<S> <C> <C>
Senior credit facility..................................... $99,700 $91,700
Other...................................................... 3,054 4,946
----------- ------------
Total............................................... $102,754 $96,646
=========== ============
<FN>
At December 31, 1999 and 1998, the Company had available a senior credit
facility (the Loan Agreement ) in the amount of $117,000,000 and $155,000,000,
of which $99,700,000 and $91,700,000, at December 31, 1999 and 1998, was
outstanding. The weighted-average interest rate on the Loan Agreement at
December 31, 1999 and 1998 was 7.65% and 6.58%, respectively. In January 2000,
the Loan Agreement was amended and renewed for $107.0 million through December
31, 2000. The Loan Agreement, as amended, provides for interest at LIBOR plus
1.50% to 1.75% or, at the Company's option, prime plus up to 0.25% or the CD
rate or Fed Funds rate plus 1.55% to 1.80% with the precise rate dependent on
certain leverage tests. Additionally, the Loan Agreement calls for the Company
to pay a quarterly commitment fee of 0.25% on the unused daily balance below 25%
of the facility and 0.50% on the unused daily balance above 25%. The facility is
secured by substantially all of the assets of the Company and is used by the
Company to finance the acquisition of equipment pending completion of permanent
financing, financing of distribution and rental inventory and for normal working
capital purposes. As of December 31, 1999, the Company was in violation of the
covenants of this facility relating to minimum earnings, tangible net worth,
leverage and interest coverage.
</FN>
</TABLE>
<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 note payable to the former owner of the company. Such note bears
interest at 8% with principal payments over a three-year period. At December 31,
1999 and 1998, $1,000,000 and $2,679,000, respectively, was outstanding.
Additionally, the Company has notes payable to a third party in the amount of
$2,054,000 and $2,267,000 at December 31, 1999 and 1998, respectively, at an
interest rate of 10% with various payment terms and maturity dates included in
other notes payable.
Recourse and Nonrecourse Debt
At December 31, 1999, the Company had a commercial paper conduit facility
available for funding of up to $289,000,000 in lease receivables (the CP
Conduit Facility ). At December 31, 1999 and 1998, $140,534,000 and
$170,712,000, respectively, of this facility was utilized. At December 31, 1999
and 1998, the Company had $134,228,000 and $44,676,000 of nonrecourse debt
recorded on its consolidated balance sheet under its securitization facility. In
connection with the CP Conduit 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 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. The Company, through its wholly-owned
bankruptcy remote, special purpose subsidiary retains a subordinated interest in
the cash flows related to the leases funded by the CP Conduit Facility and
retains the right to service such leases. The weighted-average interest rate on
the CP Conduit Facility at December 31, 1999 and 1998 was 6.26% and 5.63%,
respectively. The facility is subject to renewal on April 28, 2000.
During the nine months ended 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. Under gain-on-sale treatment, the Company reflected the
difference between the aggregate principal balance of the leases securitized and
proceeds received, net of an allowance for doubtful receivables, as the
securitization retained interest on the balance sheet. Effective October 1,
1998, the Company eliminated gain-on-sale treatment for securitized leases by
modifying the structure of its securitization facility such that it is
considered nonrecourse debt under generally accepted accounting principles.
Subsequent to eliminating gain-on-sale treatment, the Company has recorded
non-recourse debt equal to the cash received.
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In July 1999, the Company completed a term securitization of $237 million
(the July 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. In connection
with the July Term Securitization, the Company repurchased certain leases, which
had previously been financed in the CP Conduit Facility and removed from the
balance sheet. In accordance with generally accepted accounting principles,
$93,840,000, the amount of the repurchase price, was restored to the net
investment in leases and loans on the consolidated balance sheet. The proceeds
from the July Term Securitization were recorded as nonrecourse debt. The
weighted-average interest rate on the term securitization facility is 6.24%. At
December 31, 1999 and December 31, 1998, $179,891,000 and $0, respectively, was
recorded as nonrecourse debt under the term securitization.
In connection with the July Term Securitization and the CP Conduit
Facility, 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 $35,406,000
and $318,653,000, respectively. These agreements effectively established fixed
interest rates ranging from 5.99% to 6.76% on a substantial portion of the
Company's nonrecourse debt and all of its off-balance sheet debt, to limit its
exposure to adverse fluctuations in interest rates. The agreements terminate at
various dates from July 21, 2003 through December 20, 2006.
The Company also 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 7).
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. At December
31, 1999 and 1998, the Company had $37,131,000 and $31,957,000, respectively,
outstanding under these financings. Interest rates in connection with these
loans ranged from 6.50% to 10.99% at December 31, 1999.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 1999 the future scheduled principal maturities of recourse
and nonrecourse debt are as follows:
<TABLE>
<CAPTION>
Amount
-------------------
(In thousands)
<S> <C>
Year Ending December 31,
2000..................................................... $133,528
2001..................................................... 106,973
2002..................................................... 67,847
2003..................................................... 31,183
2004 and thereafter...................................... 11,719
-------------------
Total recourse and nonrecourse
discounted lease rentals................................... $351,250
===================
</TABLE>
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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1999 1998
-------------- ------------
(In thousands)
<S> <C> <C>
Subordinated debentures.................................... $7,759 $7,759
Less discount.............................................. (1,700) (2,065)
-------------- ------------
Total............................................... $6,059 $5,694
============== ============
</TABLE>
Covenants and Restrictions
The Company's various debt agreements contain restrictions on, among other
things, the payment of dividends, capital expenditures, the issuance or
repurchase of capital stock, and the maximum percentage of delinquent leases.
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). Additionally, the
Company was required to maintain a minimum earnings level for the
<PAGE>
LINC CAPITAL,INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
fourth quarter of 1999. The Company was in violation of the minimum tangible net
worth, minimum earnings, leverage and interest coverage covenants under the Loan
Agreement at December 31, 1999. It is also in violation of similar covenants
contained in the agreements relating to the CP Conduit Facility and the
insurance policy that provides credit enhancement to the July Term
Securitization. For further information, see note 2.
(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, 1999 and 1998 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.
<TABLE>
<CAPTION> December 31,
------------------------------------------------------------------
1999 1998
-------------------------------- -------------------------------
(in thousands)
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
--------------- --------------- --------------- ---------------
Liabilities
Other notes payable..................... $ 3,054 $ 3,213 $ 4,946 $ 5,362
Recourse and nonrecourse debt........... 351,250 345,738 76,633 76,769
The prior table excludes the notional amount outstanding and estimated fair
value of derivative financial instruments, which were as follows:
December 31,
-----------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
(in thousands)
Notional Fair Notional Fair
Amount Value Amount Value
--------------- --------------- --------------- ---------------
Derivative financial instruments
Interest rate swap agreements........... $318,653 $ 1,732 $165,576 $ (1,135)
Interest rate cap agreements............ 35,406 324 16,557 50
The fair values of derivative financial instruments were estimated based on
their termination values.
</TABLE>
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(10) Stockholders' Equity
Preferred Stock
During 1997, 1,000,000 shares of $0.01 par value preferred stock were
authorized. At December 31, 1999 no shares are outstanding. However, 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 up to 652,500 shares may be issued on a pro-rata
basis through September 30, 2000, if the preferred shares are not redeemed as a
result of a change of control or a refinancing 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. The
Preferred Stock is mandatorily redeemable upon a change of control or on January
31, 2005, whichever occurs first.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Comprehensive Income
The changes in the components of other comprehensive income (loss) are
reported net of income taxes, as follows:
<TABLE>
<CAPTION>
Pre-Tax Tax Expense/ Net-of-Tax
Amount (Benefit) Amount
---------------------------------------------------
<S> <C> <C> <C>
(in thousands)
Year ended December 31, 1999
Unrealized gain on securities:
Unrealized holding gains ......... $ 2,743 $ 1,042 $ 1,701
Reclassification adjustment for gains
realized in net loss......... (1,603) (609) (994)
---------------------------------------------------
Net unrealized gain............... 1,140 433 707
Foreign currency translation adjustments. 418 159 259
---------------------------------------------------
Other comprehensive income............... $ 1,558 $ 592 $ 966
===================================================
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 earnings..................... (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
===================================================
<FN>
Accumulated other comprehensive income (loss), net of tax, at December 31,
1999, 1998, and 1997 consists of unrealized gains on securities of $771,000,
$64,000, and $926,000, and accumulated foreign currency adjustments of $161,000,
$(98,000), and $0, respectively.
</FN>
</TABLE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(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, 90,481 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, as amended, permits the grant of options and other
equity-based awards with respect to 1,000,000 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 or $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)
<TABLE>
<CAPTION>
The following table summarizes the activity under the Plans during the year
ended December 31, 1999, 1998, and 1997.
1999 1998 1997
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 year 650,468 $ 7.70 376,482 $ 8.21 504,704 $ 1.77
Granted . . . . . . . . . . . . . 145,541 8.39 585,901 11.06 241,412 11.67
Exercised . . . . . . . . . . . . (51,986) 1.93 - - (369,634) 1.67
Forfeited . . . . . . . . . . . . . (71,651) 7.20 (24,719) 9.69 -
Canceled . . . . . . . . . . . . . (287,196) 15.08 -
--------- ------- --------- --------- --------- --------
Outstanding at the end of year . . . . 672,372 8.35 650,468 7.70 376,482 8.21
--------- ------- --------- --------- -------- --------
Options exercisable at year-end . . . . 284,763 $8.47 202,981 $7.29 - -
--------- ------- --------- --------- -------- --------
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999:
<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........................ 82,673 6.4 $2.19 51,073 $2.17
$2.69................................ 7,808 7.5 2.69 - -
$6.88 to 8.62........................ 436,892 8.6 7.64 146,191 7.48
$13.00 .............................. 114,999 8.0 13.00 76,249 13.00
$19.25 .............................. 30,000 8.4 19.25 11,250 19.25
-----------------------------------------------------------------------------------
672,372 8.2 $ 8.35 284,763 $ 8.47
</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 1999, the Company
recognized $56,000, net of compensation cost incurred, in income upon the
forfeiture of options granted in 1997. During 1998, and 1997, the Company
recognized $47,000, and $50,000, 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 (loss) from continuing
operations and earnings (loss) per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1999 1998 1997
----------- ------------ ------------
(In thousands)
<S> <C> <C> <C>
Net earnings (loss) from continuing operations
As reported........................................ $(21,534) $4,594 $2,458
Pro forma ....................................... (22,006) 4,131 2,366
Net earnings (loss) from continuing operations per
common share as reported:
Basic .............................................. $(4.10) $.89 $.73
Diluted ............................................ (4.10) .86 .72
Net earnings (loss) from continuing operations per
common share pro forma:
Basic .............................................. $(4.19) $.80 $.70
Diluted ............................................ (4.19) .77 .70
</TABLE>
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 1999 and 1998, respectively, was calculated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: risk-free interest rates of 4.6% and 5.3%, expected lives of 5.0
and 4.7 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 1999 and 1998 was
$3.72 and $4.18, respectively, 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.
(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,
---------------------------------------------------------
1999 1998 1997
----------- ------------ ------------
( in thousands, except per share data)
<S> <C> <C> <C>
Numerator for basic and diluted earnings per
share from continuing operations--
net earnings (loss) from continuing operations $ (21,534) $ 4,594 $ 2,458
-------------- ------------- --------------
Denominator for basic earnings per share--
weighted average shares 5,254,357 5,171,359 3,371,527
Effect of dilutive stock options - 175,222 25,811
-------------- ------------- --------------
Denominator for diluted earnings per share--
adjusted weighted average shares 5,254,357 5,346,581 3,397,338
-------------- ------------- --------------
Net earnings (loss) from continuing operations:
Basic earnings (loss) per share $ (4.10) $ .89 $ .73
Diluted earnings (loss) per share (4.10) .86 .72
<FN>
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 704,724,
78,528, and 0, for the year ended December 31, 1999, 1998, and 1997,
respectively.
</FN>
</TABLE>
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(13) Income Taxes
The provisions for income tax expense (benefit) for continuing operations
were comprised of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
(In thousands)
Current:
Federal..................................... $ 564 318 $ 367
State....................................... 486 437 66
Deferred:
Federal..................................... (1,677) 2,318 852
State....................................... (680) (49) 342
------------ ------------ ------------
Total income tax expense (benefit).... $ (1,307) $ 3,024 $ 1,627
============ ============ ============
Deferred tax expense (benefit) 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.
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1999 1998 1997
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
Expected tax provision (benefit)................... $ (7,995) $ 2,666 $ 1,434
State taxes, net of Federal tax benefit............ (127) 252 265
Adjustment to valuation allowance.................. 6,806 - -
Other.............................................. 9 106 (72)
------------ ------------ ------------
Income tax expense (benefit)............ $ (1,307) $3,024 1,627
============ ============ ============
For the year ending December 31, 1999, the Company provided a deferred tax
benefit only to the extent of its previously recorded deferred tax liabilities.
</TABLE>
<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.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1999 1998 1997
------------ ------------- ------------
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ - $ 1,350 $5,159
Investment tax credit carryforwards..................... - 2,409 2,741
Alternative minimum tax credit carryforwards............ 325 944 671
Investment in leased equipment.......................... 4,786 - -
Goodwill .............................................. 5,177 - -
Deferred compensation................................... 623 - -
--------- --------- ---------
Total gross deferred tax assets..................... 10,911 4,703 8,571
Less valuation allowance............................... (10,438) (3,632) (4,319)
--------- ----------- -----------
Net deferred tax assets............................. 473 1,071 4,252
---------- ----------- ----------
Deferred tax liabilities:
Investment in leased equipment.......................... - (2,955) (3,873)
Unrealized gain on securities........................... (473) (40) (615)
-------- ---------- ---------
Total gross deferred tax liabilities................ (473) (2,995) (4,488)
-------- ---------- ---------
Net deferred tax asset (liability).................. $ - $ (1,924) $ (236)
========= ========== =========
<FN>
The net change in the total valuation allowance for the years ended
December 31, 1999 and 1998 was an increase of $6,806,000 and a decrease of
$687,000, respectively. At December 31, 1999, the Company has established a
valuation allowance on deferred tax assets as their realization are not "more
likely than not."
</FN>
</TABLE>
<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. The future minimum rental payments due under
these leases are as follows:
<TABLE>
<CAPTION>
Amount
------------------
(In thousands)
<S> <C>
Year Ending December 31,
2000..................................................... $2,113,000
2001..................................................... 2,006,000
2002..................................................... 1,712,000
2003..................................................... 1,289,000
2004 and thereafter...................................... 3,138,000
------------------
Total.................................................. $10,258,000
==================
</TABLE>
[FN]
The Company's total obligation for rent was $2,014,000, $1,438,000, and
$1,042,000 for 1999, 1998, and 1997, respectively. A portion of the Company's
obligation for rent, set forth above, during 1999, 1998 and 1997 has been
allocated and charged to LFC Capital, Inc., a related party (note 16).
The Company's corporate headquarters and its Select Growth Finance,
Portfolio Finance, and a substantial portion of its Vendor Finance activities
are located in Chicago, Illinois and occupy approximately 44,000 square feet of
office space. This space is occupied under a lease, which expires on June 30,
2006. The Company's Rental & Distribution activities are located in Foster City,
California and Charlotte, North Carolina and occupy approximately 23,500 square
feet and 1,600 square feet of office space, respectively. This space is occupied
under leases, which expire on May 31, 2002 and July 31, 2000. A portion of the
Company's Vendor Finance activities operate out of offices located in
Minneapolis, Minnesota, and Houston, Texas, which occupy approximately 15,000
and 9,000 square feet of office space and are leased under leases that expire on
February 28, 2003 and July 31, 2004, respectively.
</FN>
<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 a month-to-month
sublease agreement and a portion of its other office space under a sublease
agreement that expires in October 2000. Rent received under the sublease
agreements for 1999, 1998 and 1997 was $273,000, $204,000, and $191,000,
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 emerging growth companies, primarily serving the
telecommunications, high-tech manufacturing, Internet-related and information
technology industries ( Select Growth Finance ). 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 and the distribution and leasing of
telecommunications and networking equipment. 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. Corporate assets
consist of cash, including restricted cash; certain investments, property and
equipment, and other assets not identifiable with any particular segment.
<TABLE>
<CAPTION>
Select Rental
Growth Portfolio and Vendor
(Dollars in thousands) Finance Finance Distribution Finance Corporate Consolidated
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year end December 31, 1999
Total revenues..................... $12,623 $20,842 $43,306 $16,934 $- $93,705
Depreciation and
amortization expense ......... 439 2,684 4,806 772 - 8,701
Interest expense................... 4,273 12,588 1,048 6,777 - 24,686
Earnings (loss) from continuing
operations before income taxes
and minority interest (2,903) 1,394 2,163 (21,459) (2,037) (22,842)
Total assets....................... 61,075 202,687 47,805 195,756 5,565 512,888
Lease fundings..................... $36,005 $119,376 $9,645 $168,101 $- $333,127
---------------------------------------------------------------------------------
Year end December 31, 1998
Total revenues..................... $13,036 $11,059 $40,249 $8,698 $- $73,042
Depreciation and
amortization expense............. 399 1,628 4,275 273 - 6,575
Interest expense................... 3,207 2,265 1,041 2,443 - 8,956
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............. 407 420 3,679 - - 4,506
Interest expense................... 2,356 787 1,155 - - 4,298
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
---------------------------------------------------------------------------------
</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 year ended December 31, 1997 were $7,405,000. 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. The Company
received $156,000, $270,000 and $83,000 for such services performed in 1999,
1998 and 1997, respectively. The Company has agreed to provide such services to
LFC Capital, Inc. in 2000 on a month-to-month basis for $4,000 per month.
Additionally, LFC Capital, Inc. subleased from the Company, approximately 1,000
square feet in 1999 and 2,500 square feet in 1998 and 1997 of space adjacent to
the Company's executive offices for approximately $27,000 in 1999 and $68,000 in
1998 and 1997, which was equal to the Company's cost for such space. In 2000,
LFC Capital, Inc. will sublease from the Company on a month-to-month basis,
approximately 600 square feet for approximately $1,000 per month. Thirty-day
notice is required to by either party to terminate these agreements.
<PAGE>
LINC CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The agreements relating to the net assets of the discontinued operations
prohibit 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, 1999,
1998, and 1997 were $156,000, $188,000, and $119,000, respectively.
(18) Fourth Quarter Results and Adjustments
During the fourth quarter of 1999, the Company incurred a net loss of
$21,209,000. The operating results were adversely effected by the following
items. As a result of the operating results of its Vendor Finance activities and
re-evaluation of the expected future cash flows from these activities, the
Company recognized an impairment of the goodwill related to certain of its
Vendor Finance companies and charged off $13,914,000. Also, the Company recorded
a provision for credit losses in the amount of $8,765,000 resulting from
substantially higher rates of lease defaults in the Select Growth and Vendor
Finance companies.
LINC Capital, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except share data)
<TABLE>
June 30, December 31,
<S> <C> <C>
2000 1999
ASSETS
Net investment in direct finance leases and loans........ $372,041 $436,820
Equipment held for rental and operating leases, net...... 27,407 26,115
Accounts receivable...................................... 11,102 13,354
Restricted cash.......................................... 9,284 11,254
Other assets............................................. 17,251 17,726
Goodwill................................................. 1,629 3,225
Cash and cash equivalents................................ 5,166 4,394
------------------ ----------------
Total assets............................................. $443,880 $512,888
================== ================
LIABILITIES AND STOCKHOLDERS EQUITY
Senior credit facility and other senior notes payable.... $87,180 $102,754
Recourse debt............................................ 2,302 3,152
Nonrecourse debt......................................... 309,871 348,098
Accounts payable......................................... 14,625 15,208
Accrued expenses......................................... 6,907 8,795
Customer holdbacks....................................... 5,459 7,607
Subordinated debentures.................................. 6,266 6,059
------------------ ----------------
Total liabilities........................................ $432,610 $491,673
------------------ ----------------
Redeemable preferred stock, $25,000 par value, 225
shares authorized, issued and
outstanding, stated at redemption value................ 5,827 -
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............................... 29,595 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................... 80 932
Accumulated deficit...................................... (23,757) (9,038)
------------------ ----------------
Total stockholders' equity $5,443 $21,215
------------------ ----------------
Total liabilities and stockholders' equity $443,880 $512,888
================== ================
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
LINC Capital, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
Three Months ended Six Months ended
June 30, June 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
REVENUES:
Sales of equipment................................. $11,535 $9,110 $20,623 $16,009
Direct finance lease income........................ 9,221 7,095 19,658 12,933
Interest income.................................... 842 819 1,789 1,638
Rental and operating lease revenue................. 2,094 2,678 4,258 5,377
Servicing fees and other income.................... 868 1,317 1,690 3,948
Gain (loss) on sale of lease receivables........... (175) 284 (9) 355
Gain on equipment residual values.................. 304 312 441 563
Net gain on equity participation rights............ 380 1,004 328 1,238
-------------- ------------- --------------- ------------
Total revenues 25,069 22,619 48,778 42,061
-------------- ------------- --------------- ------------
EXPENSES:
Cost of equipment sold............................. $9,172 $7,569 $16,575 $13,067
Selling, general and administrative................ 7,520 5,362 13,609 11,561
Interest........................................... 8,216 4,999 16,662 9,030
Depreciation of equipment under rental agreements
and operating leases............................. 1,436 1,770 3,011 3,553
Amortization of intangibles........................ 439 252 865 510
Provision for credit losses........................ 7,069 1,802 8,266 2,888
Impairment loss on assets.......................... 4,509 - - - 4,509 - - -
------------- -------------- -------------- ------------
38,361 21,754 63,497 40,609
Total expenses
------------- -------------- -------------- ------------
Earnings (loss) before income taxes...................... (13,292) 865 (14,719) 1,452
Income tax expense....................................... - - - 244 - - - 406
------------- -------------- -------------- ------------
Net earnings (loss)...................................... $(13,292) $621 $(14,719) $1,046
Net earnings (loss) per common share:
Basic............................................. $(2.55) $ .12 $(2.83) $ .20
Diluted........................................... $(2.55) $ .12 $(2.83) $ .19
See accompanying notes to consolidated financial statements.
</TABLE>
LINC Capital, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
<TABLE>
Three Months ended Six Months ended
June 30, June 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
Cash flows from operating activities:
Net earnings (loss)........................................ (13,292) $621 $(14,719) $1,046
Adjustments to reconcile net earnings (loss) to net cash
provided by operations:
Depreciation and amortization.................... 2,154 2,223 4,450 4,475
Direct finance lease income...................... (9,221) (7,095) (19,658) (12,933)
Payments on direct finance leases................ 59,729 37,364 118,281 58,406
Deferred income taxes............................ - - - 550 - - - 712
Provision for credit losses...................... 7,069 1,802 8,266 2,888
(Gain) loss on sale of lease receivables......... 175 (284) 9 (355)
Gain on equity participation rights.............. (380) (1,004) (328) (1,238)
Impairment loss on assets........................ 4,509 - - - 4,509 - - -
Amortization of discount......................... 106 89 207 175
Deferred compensation............................ - - - 7 1 (19)
Changes in assets and liabilities:
Decrease (increase) in receivables............... 16 (997) 2,252 (2,246)
Decrease (increase) in restricted cash........... 3,733 (2,947) 1,970 (4,369)
Decrease (increase) in other assets and goodwill. (4,871) (616) (4,682) 143
Increase (decrease) in accounts payable.......... 5,225 1,537 (583) 5,226
Increase (decrease) in accrued expenses.......... 840 829 (1,889) (152)
Increase (decrease) in customer holdbacks........ (3,892) (268) (2,148) (1,418)
--------- -------- -------- --------
Cash provided by operating activities......................... 51,900 31,811 95,938 50,341
--------- -------- -------- --------
Cash flows from investing activities:
Cost of equipment acquired for lease and rental......... (3,743) (100,639) (63,131) (197,604)
Cash used in acquisitions, net of cash acquired......... - - - - - - - - - (1,497)
Receipts on securitization retained interest............ - - - 2,507 88 4,895
Fixed assets purchased.................................. (184) (205) (630) (679)
Proceeds from sale of investments....................... 440 - - - 440 234
--------- --------- --------- ---------
Net cash used in investing activities......................... (3,487) (98,337) (63,233) (194,651)
--------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
LINC Capital, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited) - (Continued)
(Dollars in thousands)
Three Months ended Six Months ended
<S> <C> <C>
June 30, June 30,
2000 1999 2000 1999
Cash flows from financing activities:
Net increase (decrease) in notes payable.................... (15,945) (4,378) (15,110) 7,555
Proceeds from recourse and nonrecourse debt................. - - - 92,435 63,803 178,535
Repayments of recourse and nonrecourse debt................. (47,257) (24,906) (103,344) (47,800)
Proceeds from sales of lease receivables.................... 15,926 3,257 17,093 4,197
Proceeds from issuance of redeemable preferred stock........ - - - - - - 5,625 - - -
Sale of stock............................................... - - - - - - - - - 395
-------- -------- --------- ---------
Net cash provided by financing activities......................... (47,276) 66,408 (31,933) 142,882
-------- -------- --------- ---------
Net increase (decrease) in cash................................... 1,137 (118) 772 (1,428)
Cash at beginning of period....................................... 4,029 118 4,394 1,428
-------- -------- --------- ---------
Cash at end of period............................................. $5,166 $- - - $5,166 $- - -
======== ======== ========= =========
Supplemental disclosures of cash flow information:
Interest paid............................................... $8,677 $2,620 $17,201 $5,326
Income taxes paid........................................... $14 $282 $286 $569
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. The Company's principal activities are (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 lease originations in its Select Growth Finance,
Portfolio Finance and Vendor Finance business units. The Company is continuing
the operations of the largest portion of its Rental and Distribution business.
As a consequence of the cessation of substantially all of its leasing
activities, the Company has reduced overall employment to 99 at August 10, 2000
from 221 at December 31, 1999. 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 six-month periods ended June 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
consolidated 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 and Continuance of the Company as a Going Concern
At June 30, 2000 and December 31, 1999, the Company was 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"). Since March 2000, the Company has been in
discussions with the lenders under the Loan Agreement and the liquidity
providers under the Conduit Facility regarding forbearance from enforcement of
remedies available to such parties as a result of the Company's failure to
comply with the applicable covenants. During these forbearance discussions, the
Company is not permitted to borrow additional funds under its 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. The Company continues to operate its analytical
instrument rental and distribution business in the ordinary course. The
commercial paper liquidity facility available to support the Conduit Facility
has been extended by the liquidity providers to October 17, 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 October 17, 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 for the first six
months of 2000 were $783,000.
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. This deferral has the effect of further limiting the
Company's liquidity position.
The Company is in the process of selling portfolios of leases to repay debt
under the Loan Agreement and to repay amounts owed under the Conduit Facility as
well as to provide working capital, consistent with a plan that has been
presented to its Loan Agreement lenders. The outsourcing of servicing of
substantially all of its remaining portfolio of leases will permit 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 99 at August 10, 2000, including 50 in rental and distribution.
Lenders under the Loan Agreement have been asked to forebear to allow the
Company to implement its plans in an orderly fashion. At this time, such Lenders
have continued to reserve their rights under the Loan Agreement and the Company
is in continuing discussions with such Lenders intended to lead to an
out-of-court restructuring and refinancing of the Company's operations.
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
The Company is also in the process of soliciting proposals to either
refinance its Analytical Instrument Rental and Distribution business or to sell
this business to a third party.
In addition to its lease portfolios and its Rental and Distribution
business, the Company holds warrants and other equity interests in 55 companies
who are lessees of its Select Growth business. Based on the closing price of
publicly held securities in this portfolio at August 10, 2000, the value of the
Company's warrants in publicly held securities was $30.3 million, substantially
all of which was attributable to warrants held by the Company in Corvis
Corporation (the "Corvis Warrants"). In July 2000, Corvis Corporation, in which
the company holds warrants to purchase 327,972 shares at a price of $0.762 per
share completed its initial public offering. The Company is subject to a
"lock-up" agreement that restricts the Company's ability to sell the Corvis
Warrants prior to late January 2001. The unrealized gain on the Corvis Warrants
has not been included in income or stockholders' equity. See Item 5 - Other
Information.
In the event that the Company is unable to successfully obtain forbearance
from its secured creditors for a period that enables it to sell elements of its
lease portfolio, to refinance or sell its Rental and Distribution business
and/or to liquidate its portfolio of warrants, 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 successfully
obtain forbearance from its secured lenders, forestall action by its unsecured
creditors, successfully sell elements of its lease portfolio, refinance or sell
its Rental and Distribution Business and liquidate its portfolio of warrants,
there can be no assurance that the proceeds of the sale or refinancing of these
assets would provide the Company with sufficient liquidity to continue operating
as a going concern. These circumstances raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements at June 30, 2000 and December 31, 1999 do not include any adjustments
that might result from the outcome of this uncertainty.
(4) Impairment of Assets
At June 30, 2000, as a result of the substantial decline in new lease
originations and downsizing, the Company recognized an impairment loss of
$4,509,000. Included in the impairment loss is $1,600,000 relating to the
estimated net excess cost of the space lease for the Company's corporate
headquarters, which the Company is actively attempting to sublease. Due to the
downsizing of its operations, the Company recognized an impairment loss of
$1,240,000 on furniture, fixtures, computer and related equipment for assets no
longer in use equal to the difference between the net book value of these assets
and their estimated fair value. Also included in the impairment loss is
$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,
since the Company expects to either sell LINC IF+E at approximately tangible
book value or liquidate its operations.
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
<TABLE>
(5) Net Investment in Direct Finance Leases and Loans
Net investment in direct finance leases and loans is as follows:
<S> <C> <C>
June 30, December 31,
2000 1999
(In thousands)
Lease and loan contracts receivable in installment............... $431,819 $501,557
Estimated residual value of leased equipment..................... 15,651 17,386
Broker fees...................................................... 4,175 3,857
Initial direct costs............................................. 4,201 4,482
Unearned lease income............................................ (66,694) (78,544)
Allowance for doubtful receivables............................... (17,111) (11,918)
----------------- ----------------
Net Investment................................................... $372,041 $436,820
================= ================
(6) Equipment Held for Rental and Operating Leases, Net
The net book value of equipment held for rental and operating leases is as follows:
June 30, December 31,
2000 1999
(In thousands)
Equipment under operating leases................................ $6,589 $6,993
Equipment under rental agreements............................... 20,818 19,122
------------------ ----------------
Net book value.................................................. $27,407 $26,115
================== ================
</TABLE>
The book values presented in the above table are net of accumulated
depreciation of $11,131,000 and $10,128,000 at June 30, 2000 and December 31,
1999, respectively. Equipment under rental agreements is comprised primarily of
analytical instruments.
(7) Loss Experience Reserves
The following table sets forth delinquencies as a percentage of gross
remaining receivables on leases included in the Company's owned and managed
lease portfolio and the allowance for doubtful receivables provided, as well as
holdback reserves on portfolios acquired, as of the ends of the periods
indicated.
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
<TABLE>
June 30, December 31,
<S> <C> <C>
2000 1999
(Dollars in thousands)
Select Growth Finance:
Gross Receivable Balance $50,020 $79,980
31 - 60 days past due 2.28% 1.08%
61 - 90 days past due 1.15% 0.66%
Over 90 days past due 2.58% 1.20%
Portfolio Finance:
Gross Receivable Balance $174,009 $223,538
31 - 60 days past due 3.08% 2.65%
61 - 90 days past due 1.39% 1.60%
Over 90 days past due 1.90% 0.08%
Rental and Distribution:
Gross Receivable Balance $16,041 $12,450
31 - 60 days past due 5.84% 6.48%
61 - 90 days past due 0.28% - -
Over 90 days past due 0.23% 0.07%
Vendor Finance:
Gross Receivable Balance $219,234 $224,253
31 - 60 days past due 4.89% 3.31%
61 - 90 days past due 2.03% 1.34%
Over 90 days past due 3.75% 1.70%
Totals:
Gross Receivable Balance $459,304 $540,221
31 - 60 days past due 3.95% 2.78%
61 - 90 days past due 1.63% 1.31%
Over 90 days past due 2.80% 0.92%
Allowance for doubtful receivables included in:
Net investment in direct finance leases and loans $17,111 $11,918
Securitization retained interest - - - 78
------------------ ----------------
$17,111 $11,996
Holdback reserves on portfolios acquired 1,535 2,386
------------------ ----------------
Total allowance and holdbacks $18,646 $14,382
================== ================
Recourse to Portfolio Finance customers in addition
------------------ ----------------
to holdback reserves on portfolios acquired $17,063 $18,333
================== ================
</TABLE>
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
<TABLE>
(8) Debt
Notes Payable
Notes Payable to banks and others were as follows:
<S> <C> <C>
June 30, December 31,
2000 1999
(In thousands)
Senior credit facility................................... $85,065 $99,700
Other.................................................... 2,115 3,054
------------------ ----------------
Total................................. $87,180 $102,754
================== ================
</TABLE>
At June 30, 2000 and December 31, 1999, $85,065,000 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 June
30, 2000 and December 31, 1999 was 8.10% and 7.65%, respectively. 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. As of June 30, 2000 and
December 31, 1999, the Company was 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 Term Securitization. For
further information, see Note 3.
Nonrecourse and Recourse Debt
At June 30, 2000 and December 31, 1999, the Company had $155,694,000 and
$134,228,000 of nonrecourse debt recorded on its consolidated balance sheet
under its Conduit Facility, with weighted-average interest rates of 8.09% and
6.26%, respectively. Additionally, at June 30, 2000 and December 31, 1999,
$134,677,000 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 June 30, 2000 and December
31, 1999, the Company had $21,802,000 and $37,131,000, respectively, outstanding
under these financings.
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
(9) Earnings (Loss) per Share
<TABLE>
The following table sets forth the computation of basic and diluted earnings (loss) per share.
Three months ended Six months ended
<S> <C> <C>
June 30, June 30,
2000 1999 2000 1999
(In thousands, except share data)
Net earnings (loss) from operations......................... $(13,292) $621 $(14,719) $1,046
Preferred stock dividends................................... 127 - - - 202 - - -
--------------- ----------------- -------------- ------------
Numerator for basic and diluted earnings (loss) per share
Net earnings (loss) available to common
stockholders............................................. $(13,419) $621 $(14,921) $1,046
--------------- ----------------- -------------- ------------
Denominator for basic earnings per share - weighted
average shares outstanding....................... 5,265,050 5,265,050 5,265,050 5,243,486
Effect of dilutive stock options..................... - - - 120,872 - - - 128,003
--------------- ----------------- -------------- ------------
Denominator for diluted earnings (loss) per share........... 5,265,050 5,385,922 5,265,050 5,371,489
Net earnings (loss)
Basic earnings (loss) per share...................... $(2.55) $.12 $(2.83) $.20
=============== ================= ============== ============
Diluted earnings (loss) per share......... $(2.55) $.12 $(2.83) $.19
=============== ================= ============== ============
Contingent shares issuable in connection with the acquisition of Monex
Leasing, Ltd. and stock options that could potentially dilute 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 355,610 and 32,352 for
the year six months ended June 30, 2000 and 1999, respectively.
(10) Comprehensive Income
The components of comprehensive income (loss) for the six months ended June 30, 2000 and 1999 are as follows:
Six months ended June 30,
2000 1999
(In thousands)
Net earnings (loss).................................. $(14,719) $1,046
Other comprehensive income (loss), net of tax:
Unrealized loss on securities............. (877) 401
Foreign currency translation adjustment... 25 131
---------- -------
Comprehensive income (loss)........................... $(15,571) $1,578
========== =======
Accumulated other comprehensive income (loss), net of tax, at June 30, 2000 and December 31, 1999 consists of
unrealized gains (losses) on securities of $(106,000) and $771,000 and accumulated foreign currency translation
adjustments of $186,000 and $161,000, respectively.
</TABLE>
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
(11) Segment Information
The Company has four reportable segments: Select Growth Finance, Portfolio
Finance, Rental and Distribution, and Vendor Finance. The following table
presents certain information by segment.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Select Rental
Growth Portfolio and Vendor
(Dollars in thousands) Finance Finance Distribution Finance Corporate Consolidated
Three months ended June 30, 2000
Total revenues....................... $1,500 $3,778 $13,906 $5,885 $ - $25,069
Depreciation and
amortization expense............ 155 111 1,304 305 - 1,875
Interest expense..................... 1,004 3,205 563 3,444 - 8,216
Loss before income taxes*............ (1,716) (2,662) (1,159) (5,816) (1,939) (13,292)
Total assets......................... 37,240 155,882 50,129 193,749 6,880 443,880
Lease fundings....................... $796 $774 $3,103 $1,217 $ - $5,890
Three months ended June 30, 1999
Total revenues....................... $3,714 $4,477 $10,981 $3,447 $ - $22,619
Depreciation and
amortization expense............ 103 552 1,143 224 - 2,022
Interest expense..................... 1,365 2,359 367 908 - 4,999
Earnings (loss) before income taxes.. 308 375 361 35 (214) 865
Total assets......................... 78,434 174,163 34,498 115,907 2,871 405,873
Lease fundings....................... $13,421 $36,275 $2,133 $46,296 $ - $98,125
Six months ended June 30, 2000
Total revenues....................... $3,055 $7,699 $25,252 $12,772 $ - $48,778
Depreciation and
amortization expense............. 287 357 2,530 702 - 3,876
Interest expense..................... 2,062 6,460 1,124 7,016 - 16,662
Loss before income taxes*............ (2,381) (2,987) (1,108) (5,818) (2,425) (14,719)
Total assets......................... 37,240 155,882 50,129 193,749 6,880 443,880
Lease fundings....................... $3,305 $6,511 $6,890 $38,145 $ - $54,851
Six months ended June 30, 1999
Total revenues....................... $6,490 $9,874 $19,765 $5,932 $ - $42,061
Depreciation and
amortization expense............. 214 1,123 2,296 430 - 4,063
Interest expense..................... 2,448 4,215 684 1,683 - 9,030
Earnings (loss) before income taxes.. 545 2,279 517 (1,381) (508) 1,452
Total assets......................... 78,434 174,163 34,498 115,907 2,871 405,873
Lease fundings....................... $19,778 $99,368 $4,774 $70,301 $ - $194,221
* Included in loss before income taxes for the three months and six months
ended June 30, 2000 is an impairment loss on assets as follows: Rental and
Distribution - $1,669 of goodwill associated with LINC IF+E, Vendor Finance -
$123 of furniture, fixtures, computers and related equipment, and Corporate -
$2,717 of furniture, fixtures, computers and related equipment and estimated
loss on lease agreement.
</TABLE>
<PAGE>
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
(12) 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 up to 652,500 shares
may be issued on a pro-rata basis through September 30, 2000, if the preferred
shares are not redeemed as a result of a change of control or a refinancing
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 June 30, 2000, $202,000 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%.
