SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-23309
LINC CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0850149
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
303 East Wacker Drive, Suite 1000, 60601
Chicago, Illinois (Zip Code)
(Address of principal executive offices)
(312) 946-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At March 30, 2000, 5,265,050 shares of the Registrant's Common Stock were
outstanding.
<PAGE>
LINC CAPITAL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 (unaudited).......... 3
Consolidated Statements of Operations -
Three Months ended March 31, 2000 and 1999 (unaudited).... 4
Consolidated Statements of Cash Flows -
Three Months ended March 31, 2000 and 1999 (unaudited).... 5
Notes to Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 18
Item 2. Changes in Securities and Use of Proceeds.................. 18
Item 3. Defaults Upon Senior Securities............................ 19
Item 5. Other Information.......................................... 19
Item 6. Exhibits and Reports on Form 8-K........................... 19
SIGNATURES.......................................................... 19
<PAGE>
LINC Capital, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
<S> <C> <C>
ASSETS
Net investment in direct finance leases and loans................. $441,313 $436,820
Equipment held for rental and operating leases, net............... 29,292 26,115
Accounts receivable............................................... 11,178 13,354
Restricted cash................................................... 13,017 11,254
Other assets...................................................... 16,768 17,726
Goodwill.......................................................... 3,265 3,225
Cash and cash equivalents......................................... 4,029 4,394
------------------ ----------------
Total assets...................................................... $518,862 $512,888
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior credit facility and other senior notes payable............. $103,386 $102,754
Recourse debt..................................................... 3,118 3,152
Nonrecourse debt.................................................. 356,051 348,098
Accounts payable.................................................. 9,400 15,208
Accrued expenses.................................................. 6,066 8,795
Customer holdbacks................................................ 9,351 7,607
Subordinated debentures........................................... 6,160 6,059
------------------ ----------------
Total liabilities................................................. $493,532 $491,673
------------------ ----------------
Redeemable preferred stock, $25,000 par value, 225 shares
authorized, issued and outstanding, stated at redemption value.. 5,700 -
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........................................ 29,722 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............................ 848 932
Accumulated deficit............................................... (10,465) (9,038)
------------------ ----------------
Total stockholders' equity $19,630 $21,215
------------------ ----------------
Total liabilities and stockholders' equity $518,862 $512,888
================== ================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
LINC Capital, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months ended
March 31,
<S> <C> <C>
2000 1999
REVENUES:
Sales of equipment......................................... $9,088 $6,899
Direct finance lease income................................ 10,437 5,838
Interest income............................................ 947 819
Rental and operating lease revenue......................... 2,164 2,699
Servicing fees and other income............................ 822 2,631
Gain on sale of lease receivables.......................... 166 71
Gain on equipment residual values.......................... 137 251
Gain (loss) on equity participation rights................. (52) 234
------------------ ----------------
Total revenues 23,709 19,442
------------------ ----------------
EXPENSES:
Cost of equipment sold..................................... $7,403 $5,498
Selling, general and administrative........................ 6,089 6,199
Interest................................................... 8,446 4,031
Depreciation of equipment under rental agreements
and operating leases..................................... 1,575 1,783
Amortization of intangibles................................ 426 258
Provision for credit losses................................ 1,197 1,086
------------------ ----------------
25,136 18,855
Total expenses ------------------ ----------------
Earnings (loss) before income taxes.............................. (1,427) 587
Income tax expense............................................... --- 162
---------------- ----------------
Net earnings (loss).............................................. $(1,427) $425
================== ================
Net earnings (loss) per common share:
Basic..................................................... $ (0.29) $ .08
Diluted................................................... $ (0.29) $ .08
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
LINC Capital, Inc. and Subsidiaries
Consolidated Cash Flow Statements (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months ended
March 31,
<S> <C> <C>
2000 1999
Cash flows from operating activities:
Net earnings (loss)........................................... $(1,427) $425
Adjustments to reconcile net earnings (loss) to net cash
provided by operations:
Depreciation and amortization....................... 2,296 2,252
Direct finance lease income......................... (10,437) (5,838)
Payments on direct finance leases................... 58,552 21,042
Deferred income taxes............................... --- 162
Provision for credit losses......................... 1,197 1,086
Gain on sale of lease receivables................... (166) (71)
Loss (gain) on equity participation rights.......... 52 (234)
Amortization of discount............................ 101 136
Deferred compensation............................... 1 (26)
Changes in assets and liabilities:
Decrease (increase) in receivables.................. 2,236 (1,249)
Increase in restricted cash......................... (1,763) (544)
Decrease (increase) in assets and goodwill.......... 189 (169)
Increase (decrease) in accounts payable............. (5,808) 3,689
Decrease in accrued expenses........................ (2,729) (981)
Increase (decrease) in customer holdbacks........... 1,744 (1,150)
--------- ---------
Cash provided by operating activities 44,038 18,530
--------- ---------
Cash flows from investing activities:
Cost of equipment acquired for lease and rental............ $(59,388) $(96,965)
Cash used in acquisitions, net of cash acquired............ --- (1,497)
Receipts on securitization retained interest............... 88 2,388
Fixed assets purchased..................................... (446) (474)
Proceeds from sale of investments.......................... --- 234
---------- -----------
Net cash used in investing activities $ (59,746) $ (96,314)
---------- -----------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
LINC Capital, Inc. and Subsidiaries
Consolidated Cash Flow Statements (Unaudited) - (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months ended
March 31,
2000 1999
<S> <C> <C>
Cash flows from financing activities:
Net increase in notes payable............................. $835 $11,933
Proceeds from recourse and nonrecourse debt............... 63,803 86,100
Repayments of recourse and nonrecouse debt................ (56,087) (22,894)
Proceeds from sales of lease receivables.................. 1,167 940
Proceeds from issuance of redeemable preferred stock...... 5,625 ---
Sale of stock............................................. --- 395
--------- --------
Net cash provided by financing activities....................... 15,343 76,474
--------- --------
Net decrease in cash............................................ (365) (1,310)
Cash and cash equivalents at beginning of period................ 4,394 1,428
--------- --------
Cash and cash equivalents at end of period...................... $4,029 $118
========= ========
Supplemental disclosures of cash flow information:
Interest paid............................................. $8,524 $2,706
Income taxes paid......................................... $272 $287
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(1) The Company
LINC Capital, Inc. (the "Company") is a finance company that provides
leasing, asset-based financing, and equipment rental and distribution services
to growing businesses. The Company's principal businesses are (i) the direct
origination of leases and accounts receivable and other asset-backed financing
to 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").
(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 period ended March 31, 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 audited
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.
<PAGE>
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 March 31, 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"). The Company is currently 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.
Liquidity continues to be available to the Conduit Facility until June 19, 2000.
However, the Company is precluded from funding new transactions into the Conduit
Facility and the normal periodic return of its retained interest, concurrent
with the repayment of debt, has been deferred. Should liquidity not be available
to the Conduit Facility beyond June 19, 2000, the interest rate 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 CP Conduit at their discretion. The Company has
agreed with representatives of the Term Securitization to transfer servicing of
the underlying lease portfolio to a third party. In addition, recovery of the
Company's retained interest has been deferred until the Term Securitization debt
has been repaid.
The Company is in the process of selling portfolios of leases to repay debt
and provide working capital, consistent with a plan that has been presented to
its Loan Agreement lenders. This plan also anticipates that the Company will
outsource the servicing of substantially all of its remaining portfolio of
leases, substantially reducing overhead. On-going activities will focus on the
Company's profitable rental and distribution activities, which the Company
intends to refinance. The employee headcount has been reduced from 221 at
December 31, 1999, including 53 in the rental and distribution operations, to
135 at May 19, 2000, including 55 in rental and distribution. The headcount is
expected to be further reduced to fewer than 80 by August 2000, including 57 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.
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 and to re-focus on, and refinance, its rental and distribution
activities, the Company may be required to seek protection under the Bankruptcy
Code. Also, if various unsecured creditors were to enforce their claims, the
Company could be forced into bankruptcy. In addition, even if the Company was to
successfully obtain forbearance from its secured lenders, forestall action by
its unsecured creditors, and successfully sell elements of its lease portfolio,
there can be no assurance that the proceeds of such sales would 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 consolidated financial statements at March 31, 2000 and
December 31, 1999 do not include any adjustments that might result from the
outcome of this uncertainty.
<PAGE>
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
(4) Net Investment in Direct Finance Leases and Loans
Net investment in direct finance leases and loans is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(In thousands)
<S> <C> <C>
Lease and loan contracts receivable in installments............... $503,000 $501,557
Estimated residual value of leased equipment...................... 18,128 17,386
Broker fees....................................................... 4,792 3,857
Initial direct costs.............................................. 5,027 4,482
Unearned lease income............................................. (78,623) (78,544)
Allowance for doubtful receivables................................ (11,011) (11,918)
----------------- ----------------
Net Investment.................................................... $441,313 $436,820
================= ================
(5) Equipment Held for Rental and Operating Leases, Net
The net book value of equipment held for rental and operating leases is as
follows:
March 31, December 31,
2000 1999
(In thousands)
Equipment under operating leases.................................. $6,882 $6,993
Equipment under rental agreements................................. 22,410 19,122
------------------ ----------------
Net book value.................................................... $29,292 $26,115
================== ================
</TABLE>
The book values presented in the above table are net of accumulated
depreciation of $10,337,000 and $9,464,000 at March 31, 2000 and December 31,
1999, respectively. Equipment under rental agreements is comprised primarily of
analytical instruments.
(6) Loss Experience Reserves
The following table sets forth delinquencies as a percentage of gross
remaining receivables on leases included in the Company's owned and managed
lease portfolio and net charge-offs as a percentage of the Company's remaining
net investment in direct finance leases and loans as of the ends of the periods
indicated. Additionally, the table sets forth the allowance for doubtful
receivables provided, as well as holdback reserves on portfolios acquired, as of
the ends of the periods indicated.
<PAGE>
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
(Dollars in Thousands)
<S> <C> <C>
Select Growth Finance:
Gross Receivable Balance $71,075 $79,980
31 - 60 days past due 3.52% 1.08%
61 - 90 days past due 1.12% 0.66%
Over 90 days past due 2.01% 1.20%
Portfolio Finance:
Gross Receivable Balance $205,612 $223,538
31 - 60 days past due 2.95% 2.65%
61 - 90 days past due 1.02% 1.60%
Over 90 days past due 0.54% 0.08%
Rental and Distribution:
Gross Receivable Balance $15,053 $12,450
31 - 60 days past due 6.61% 6.48%
61 - 90 days past due 0.38% - -
Over 90 days past due 0.01% 0.07%
Vendor Finance:
Gross Receivable Balance $244,624 $224,253
31 - 60 days past due 3.38% 3.31%
61 - 90 days past due 1.80% 1.34%
Over 90 days past due 1.73% 1.70%
Totals:
Gross Receivable Balance $536,364 $540,221
31 - 60 days past due 3.33% 2.78%
61 - 90 days past due 1.37% 1.31%
Over 90 days past due 1.26% 0.92%
Average net investment in leases and
loans owned and managed $477,023 $394,628
Net charge-offs $2,177 $10,104
Annualized net charge-off percentage 1.83% 2.56%
Allowance for doubtful receivables included in:
Net investment in direct finance leases and loans $11,011 $11,918
Securitization retained interest - - - 78
------------------ ----------------
Total allowance and holdbacks $11,011 $11,996
Holdback reserves on portfolios acquired 2,082 2,386
------------------ ----------------
Total allowance and holdbacks $13,093 $14,382
================== ================
Recourse to Portfolio Finance customers in addition
------------------ ----------------
to holdback reserves on portfolios acquired $18,363 $18,333
================== ================
</TABLE>
<PAGE>
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
(7) Debt
<TABLE>
<CAPTION>
Notes Payable
Notes Payable to banks and others were as follows:
<S> <C> <C>
March 31, December 31,
2000 1999
(In thousands)
Senior credit facility......................... $101,000 $99,700
Other.......................................... 2,386 3,054
------------------ ----------------
Total....................... $103,386 $102,754
================== ================
</TABLE>
At March 31, 2000 and December 31, 1999, $101,000,000 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 March
31, 2000 and December 31, 1999 was 7.66% 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 March 31, 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 insurance policy that
provides credit enhancement to the Term Securitization. For further information,
see note 3.
Nonrecourse and Recourse Debt
At March 31, 2000 and December 31, 1999, the Company had $172,651,000 and
$134,228,000 of nonrecourse debt recorded on its consolidated balance sheet
under its Conduit Facility, with weighted-average interest rates of 7.33% and
6.26%, respectively. Additionally, at March 31, 2000 and December 31, 1999,
$155,936,000 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 and/or partial recourse basis. At March 31, 2000 and
December 31,1999, the Company had $30,582,000 and $37,131,000, respectively,
outstanding under these financings.
<PAGE>
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
(8) Earnings per Share
<TABLE>
<CAPTION>
The following table sets forth the computation of basic and diluted earnings per share.
Three months ended March 31,
2000 1999
(In thousands, except share data)
<S> <C> <C>
Net earnings (loss) from operations......................... $(1,427) $425
Preferred stock dividends............................... 75 -
Numerator for basic and diluted earnings (loss) per share -
Net earnings (loss) available to common ---------- ----------
stockholders............................................... $(1,502) $425
---------- ----------
Denominator for basic earnings (loss) per share -
Weighted average shares outstanding......................... 5,265,050 5,221,682
Effect of dilutive stock options............................ - 135,247
--------- ----------
Denominator for diluted earnings (loss) per share........... 5,265,050 5,356,929
Net earnings (loss) --------- ----------
Basic earnings per share....................... $(0.29) $.08
Diluted earnings per share..................... $(0.29) $.08
(9) Comprehensive Income
The components of comprehensive income (loss) for the three months ended
March 31, 2000 and 1999 are as follows:
Three months ended March 31,
2000 1999
(In thousands)
Net earnings (loss)......................................... $(1,427) $425
Other comprehensive income (loss), net of tax:
Unrealized loss on securities................... (109) (96)
Foreign currency translation adjustment......... 25 27
--------- --------
Comprehensive income (loss).................................. $ (1,511) $356
========== ========
</TABLE>
Accumulated other comprehensive income (loss), net of tax, at March 31,
2000 and December 31, 1999 consists of unrealized gains on securities of
$662,000 and $771,000 and accumulated foreign currency translation adjustments
of $186,000 and $161,000, respectively.
<PAGE>
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
<TABLE>
<CAPTION>
(10) Segment Information
The Company has four reportable segments: Select Growth Finance, Portfolio
Finance, Rental and Distribution, and Vendor Finance. The following table
presents certain information by segment.
Select Rental
Growth Portfolio and Vendor
(In thousands) Finance Finance Distribution Finance Corporate Consolidated
<S> <C> <C> <C> <C> <C> <C>
Three months ended March 31, 2000
Total revenues....................... $1,555 $3,921 $11,346 $6,887 $ - $23,709
Depreciation and
amortization expense............ 132 246 1,226 397 - 2,001
Interest expense..................... 1,058 3,255 561 3,572 - 8,446
Earnings (loss) before income taxes.. $(665) (325) 51 (2) (486) (1,427)
Total assets......................... 57,310 184,214 49,172 216,761 11,405 518,862
Lease fundings....................... $2,509 $5,737 $3,787 $36,928 $ - $48,961
Three months ended March 31, 1999
Total revenues....................... $2,776 $5,397 $8,784 $2,485 $ - $19,442
Depreciation and
amortization expense............. 111 571 1,141 218 - 2,041
Interest expense..................... 1,083 1,856 317 775 - 4,031
Earnings (loss) before income taxes.. 237 1,904 156 (1,416) (294) 587
Total assets......................... 73,311 147,018 33,216 82,007 3,204 338,756
Lease fundings....................... $6,357 $63,093 $2,641 $24,005 $ - $96,096
</TABLE>
(11) Redeemable Preferred Stock
On February 1, 2000, the Company issued $5,625,000 of Series A 8%
Cumulative Redeemable Preferred Stock. The issuance of this series of preferred
stock was coupled with warrants to purchase 326,250 shares of the Company's
common stock at $5.49 per share. Additional warrants for 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. The Company
has not paid or declared the dividend payable on March 31, 2000 as a result of
defaults under the Loan Agreement. As a consequence, the dividend rate has been
increased to 9%.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months ended March 31, 2000 compared to Three Months ended March 31, 1999
Sales of equipment increased to $9.1 million from $6.9 million and cost of
equipment sold increased to $7.4 million from $5.5 million due to the
acquisition of Internet Finance & Equipment, Inc. in August 1999 (now LINC IF+E)
which distributes and leases telecommunications, routing and Internet enabling
equipment. This increase was partially offset by a 9.1% and 6.5% decrease in
sales of analytical instruments and cost of analytical instruments sold,
respectively, in the Company's other Rental and Distribution business. The
decline in net margins on sales of equipment to 18.5% from 20.3% is due to
manufacturer incentives received on equipment sold during the prior year
quarter.
Direct finance lease income increased to $10.4 million from $5.8 million as
a result of a substantially higher level of finance lease receivables
outstanding, arising from acquired portfolios and internal lease originations.
Average finance lease receivables outstanding increased 111%. In addition,
during the quarter ended September 30, 1999, $99.0 million in lease receivables
were repurchased from the Company's commercial paper conduit facility in
connection with the completion of a term securitization and included in the
Company's balance sheet. As a result, commencing in the third quarter of 1999
direct finance lease income includes the net amount of the direct finance lease
income relating to such repurchased receivables.
Interest income increased to $0.9 million from $0.8 million primarily due
to an increase in interest-bearing notes receivable held by the Company. Direct
finance lease income and interest income, minus interest expense, was $2.9
million, or 25.8% of direct finance lease income and interest income (the
"Interest Margin") compared to $2.6 million, or 39.4%, 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 the Company's securitization retained interest, resulting from the repurchase
of lease receivables from the Company's commercial paper conduit facility in
connection with completion of a term securitization.
Rental and operating lease revenue decreased to $2.2 million from $2.7
million primarily due to the maturity of operating leases acquired in 1998.
Servicing fees and other income decreased to $0.8 million from $2.6
million. Servicing fees and other income primarily consists of fees received for
servicing off-balance sheet securitized leases, fees received for servicing
third party lease portfolios, interim rents received by Select Growth Finance,
and late fees. The decrease over the prior year period primarily relates to $1.2
million in deferred incentive fees realized in connection with servicing of a
portfolio owned by a third party during the first quarter of 1999 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 on sale of lease receivables increased to $0.2 million from $0.1
million. These amounts represent gains on lease receivables sold to third
parties and fluctuate based on the volume of lease receivables sold in a given
period.
<PAGE>
Gains on equipment residual values decreased to $0.1 million from $0.3
million. Gains on equipment residual values fluctuate based on the dollar volume
of leases maturing in a given period.
During the first quarter of 2000, the Company recognized a loss of $0.1
million on certain equity participation rights versus a gain of $0.2 million in
the comparable prior year period. Equity participation gains and losses
fluctuate from period to period based on the value of securities in the
Company's portfolio and the timing of the sale of these securities.
Selling, general and administrative expenses, net of initial direct costs
capitalized, decreased to $6.1 million from $6.2 million. The decrease was
attributable to an increase in initial direct costs capitalized resulting from a
change in the mix of lease originations between periods. Lease originations for
the Company's Portfolio Finance activities, for which initial direct costs are
not capitalized under generally accepted accounting standards, were 12% and 66%
of total lease originations for the quarters ended March 31, 2000 and 1999,
respectively. This decrease was partially offset by an increase in personnel and
operating costs associated with the acquisition of LINC IF+E in August 1999 in
the Company's Rental and Distribution business unit and increased activity in
the Company's other business units. The number of people employed, including
employees of companies acquired, increased 15% from 176 at March 31, 1999 to 202
at March 31, 2000.
Interest expense increased to $8.4 million from $4.0 million, due primarily
to increased borrowings resulting from growth in lease originations and lease
portfolios acquired, with the resulting increase in borrowings. In addition,
interest expense increased over the same period in the prior year as a result of
the repurchase by the Company during the quarter ended September 30, 1999 of
$99.0 million in lease receivables previously sold to its commercial paper
conduit facility utilizing proceeds of a term securitization which increased the
level on nonrecourse debt, and an increase in interest rates. Average finance
lease receivables outstanding increased 111%.
Depreciation of equipment, decreased to $1.6 million from $1.8 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 10% over the prior year period.
Amortization of intangibles increased to $0.4 million from $0.3 million due
to the amortization of issuance costs resulting from a term securitization
completed during the third quarter of 1999, partially offset by a decrease in
goodwill amortization due to the write-off 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 $1.2 million from $1.1 million
despite a 49% decrease in lease originations due to a change in the mix of
leases originated between periods. Lease originations for the Company's
Portfolio Finance activities, which typically have holdback reserves or recourse
to the Portfolio Finance customers, were 12% and 66% of total lease originations
for the quarters ended March 31, 2000 and 1999, respectively.
The Company did not record a tax benefit on the pre-tax loss of $1.4
million for the first quarter of 2000 since realization of the tax benefit
cannot be assured. The Company recorded income tax expense of $0.2 million on
pre-tax income of $0.6 million for the same period of the prior year.
<PAGE>
Liquidity and Capital Resources
General
The Company's activities are capital intensive and require access to
substantial amounts of credit to fund new equipment leases. The Company has
financed its operations to date primarily through cash flow from operations,
borrowings under its Loan Agreement with its senior lenders and its Conduit
Facility, other non-recourse and recourse loans, the Term Securitization and the
sale of equity.
Cash Flow
Cash flows from operating and financing activities are generated primarily
from receipts on direct finance and operating leases, rentals of analytical
instruments, gross profit on the sale of analytical instruments, realization of
equipment residual values, and financing of new lease origination's and rental
inventory through credit facilities and securitizations. Cash flows from
operating and financing activities for the three months ended March 31, 2000 and
1999 were $59.4 million and $95.0 million, respectively. The decrease between
2000 and 1999 results primarily from a decrease in the volume of securitizations
completed in the first quarter of 2000, partially offset by an increase in
payments received on direct finance leases.
Credit Facilities
In the past, the Company utilized its secured revolving credit facility
provided by a syndicate of banks under the Loan Agreement to fund the
acquisition and origination of leases and the purchase of rental and
distribution inventory. As of March 31, 2000, the Company had borrowed $101.0
million, with a weighted-average interest rate of 7.66%.
The Company is currently in violation of certain covenants under the Loan
Agreement and is in discussions with lenders intended to lead to a forbearance
of enforcement of remedies under the Loan Agreement during a period in which the
Company downsizes its operations by sale of elements of its lease portfolio and
outsourcing of the servicing of the portfolio. A portion of the proceeds of
portfolio sales would be used to repay indebtedness under the Loan Agreement and
to provide liquidity to the Company's remaining activities. During the
forbearance period, the Company intends to refinance indebtedness relating to
the Company's rental and distribution activities. If the Company is not able to
obtain a forbearance, refinance its rental and distribution activities and
provide liquidity to the rental and distribution activities, the Company may not
be able to continue as a going concern. For further information, see note 3.
Commercial Paper Conduit Securitization Facilities
The Company, through a special purpose subsidiary, has a commercial paper
conduit securitization facility in an amount of $289 million (the "Conduit
Facility"). At March 31, 2000, $178.7 million of the facility was utilized. The
terms of the facility permitted the financing of substantially all of the leases
originated in the Company's Portfolio Finance, Vendor Finance, and Rental and
Distribution activities as well as the majority of the leases originated in the
Company's Select Growth Finance activities. The Company is currently in
violation of certain covenants under the Conduit Facility. Consequently, the
Company is precluded from funding new transactions into the Conduit Facility and
the normal periodic return of its retained interest, concurrent with the
repayment of debt, has been deferred, reducing the funds available to the
<PAGE>
Company for working capital. Liquidity continues to be available to the Conduit
Facility until June 19, 2000. Should liquidity not be available to the Conduit
Facility beyond June 19, 2000, the interest rate would increase and the
liquidity providers would be permitted to sell the lease portfolio at their
discretion. The Company is in discussions with the liquidity providers to such
facility to extend the maturity of the facility for an interim period during
which time the Company anticipates that sales of lease portfolios will be used
to reduce the outstanding amount under the Conduit Facility. There can be no
assurance that the providers will extend the availability of liquidity beyond
June 19, 2000. For further information, see note 3.
At the time of placing leases in the securitization facilities, the Company
enters into interest rate cap and interest rate swap agreements to manage
interest rate risk.
Term Securitization
In July 1999, the Company, through a special purpose subsidiary, completed
a term securitization in the amount of $237 million (the "Term Securitization").
$199 million of A-1 Certificates rated AAA by Standard and Poor's and Fitch
IBCA, Inc. and Aaa by Moody's Investor Service, Inc., $9 million of B-1
Certificates rated BBB by Fitch IBCA, Inc., and $9 million of B-2 Certificates
rated BB by Fitch IBCA, Inc., were issued in the private market. A portion of
the B-2 Certificates (approximately $3 million) and the C Certificate of $17
million were retained by the Company. The remaining balance of the A-1
Certificates, the B-1 Certificates, the B-2 Certificates, and the C Certificates
at March 31, 2000 was $142.9 million, $6.4 million, $8.9 million, and $12.0
million, respectively.
The Company is currently in violation of certain covenants under the Term
Securitization. As a result, the Company has consented to be replaced as
servicer of the Term Securitization. This will result in a loss of servicing
fees of approximately $800,000 during 2000. In addition, the cash flows
available to the Company from its retained interest have been deferred until the
Term Securitization debt has been repaid, reducing the funds available for
current operations. For further information, see note 3.
Preferred Stock
On February 1, 2000, the Company issued $5,625,000 of Series A 8%
Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock"). The
issuance of this series of preferred stock was coupled with warrants to purchase
326,250 shares of the Company's common stock at $5.49 per share. Additional
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. The Series A
Preferred Stock accrues cumulative preferred dividends at 8% per annum through
December 31, 2000, 10% per annum from January 1, 2001 through December 31, 2001
and 12% per annum thereafter. The Series A Preferred Stock is required to be
redeemed by the Company upon a change of control or on January 31, 2005,
whichever occurs first. As a result of the violation of certain covenants under
the Loan Agreement, the Company was unable to declare or make payment of the
dividend on the Series A Preferred Stock due on March 31, 2000. As a
consequence, the Company may be in default of certain provisions of the terms
and conditions of the Series A Preferred Stock and the dividend rate on such
preferred stock accruing after March 31, 2000 has been increased by 1 percentage
point.
Note on Forward Looking Information
Certain statements in this Form 10-Q and in the future filings by the
Company with the Securities and Exchange Commission and in the Company's written
and oral statements made by or with the approval of an authorized executive
officer constitute "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
<PAGE>
of 1934, and the Company intends that such forward-looking statements be subject
to the safe harbors created thereby. The words and phrases "expects", "intends",
"believe", "will seek", and "will realize" and similar expressions as they
relate to the Company or its management are intended to identify such
forward-looking statements. These forward-looking statements reflect the
Company's current view with respect to future events and financial performance,
but are subject to many uncertainties and factors relating to the Company's
operations and business environment which may cause the actual results of the
Company to be materially different from results expressed or implied by such
forward-looking statements. Examples of such uncertainties, include, but are not
limited to, the Company's plans for reducing overhead and for selling portfolios
of leases, the Company's plans and intentions with regard to its rental and
distribution operations, and the availability of financial resources. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements whether as a result of new information, future events
or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes from the 1999 Annual Report on Form
10-K related to the Company's exposure to market risk from interest rates. At
December 31, 1999, termination of the $354.1 million interest rate swap and
interest rate cap agreements would have resulted in a credit to earnings of $2.1
million. At March 31, 2000, termination of the $334.6 million interest rate swap
and interest rate cap agreements would have resulted in a credit to earnings of
$2.0 million.
Part II - Other Information
Item 1. Legal Proceedings
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to its business, to which the Company is a party
or of which any of its property is the subject. The Company is currently in
default of certain of its obligations relating to the acquisition of one of its
Vendor Finance origination units and has been threatened with litigation as a
consequence of such default.
Item 2. Changes in Securities and Use of Proceeds
On February 1, 2000, the Company issued $5,625,000 of Series A 8%
Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock"). The
issuance of this series of preferred stock was coupled with warrants to purchase
326,250 shares of the Company's common stock at $5.49 per share. Additional
warrants for 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. The Series A
Preferred Stock accrues cumulative preferred dividends at 8% per annum through
December 31, 2000, 10% per annum from January 1, 2001 through December 31, 2001
and 12% per annum thereafter. The Series A Preferred Stock is required to be
redeemed by the Company upon a change of control or on January 31, 2005,
whichever occurs first. As a result of the violation of certain covenants under
the Loan Agreement, the Company was unable to declare or make payment of the
dividend on the Series A Preferred Stock due on March 31, 2000. As a
consequence, the Company may be in default of certain provisions of the terms
and conditions of the Series A Preferred Stock and the dividend rate on such
preferred stock accruing after March 31, 2000 has been increased by 1 percentage
point. The total arrearage in the payment of dividends on May 18, 2000 was $0.1
million.
<PAGE>
Item 3. Defaults Upon Senior Securities
The Company was in violation of the minimum tangible net worth, minimum
earnings, leverage and interest coverage covenants under its Loan Agreement at
March 31, 2000 and December 31, 1999. The violations under the Loan Agreement
have also resulted in cross-defaults in the agreements relating to the Conduit
Facility and the Term Securitization. The amount outstanding under the Loan
Agreement at May 18, 2000 was $100.0 million. The amount outstanding under the
Conduit Facility and the Term Securitization at April 20, 2000, the most recent
settlement date, was $171.2 million and $147.6 million, respectively. For
further information, see Note 3 to Consolidated Financial Statements and
Management's Discussion and Analysis - Liquidity and Capital Resources.
Item 5. Other Information
The Company has not scheduled an Annual Meeting of Shareholders at this
time due to the time commitment and costs associated with such a meeting.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit
Number Document Description
--------- -------------------------
27.1 Financial Data Schedule
Reports on Form 8-K
On March 17, 2000, the Company filed a current report on Form 8-K reporting
under Item 5 thereof the placement of preferred stock and the renewal of its
revolving credit facility until December 31, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LINC CAPITAL, INC.
Dated: May 19, 2000
By: /s/ Allen P. Palles
----------------------------
Allen P. Palles
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Mark A. Arvin
----------------------------
Mark A. Arvin
Senior Vice President, Finance
(Principal Accounting Officer)
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