SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-23309
LINC CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0850149
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
303 East Wacker Drive, Suite 1000, Chicago, Illinois 60601
(Address of principal executive offices) (Zip Code)
(312) 946-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g)of the Act:
Title of class
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates was
approximately $10.0 million based upon the sale price of registrant's Common
Stock as of March 30, 2000. For purposes of the foregoing calculation only, each
of the issuer's officers and directors is deemed an affiliate.
At March 30, 2000, 5,265,050 shares of the Registrant's Common Stock were
outstanding.
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LINC CAPITAL, INC.
TABLE OF CONTENTS
Page
PART I.
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 4. Submission of Matters to Vote of Security Holders. . . . . . . . . . . . . . . . . 25
PART II.
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 29
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . 40
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . 40
PART III.
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . 40
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . 48
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
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Part I
Item 1. Business
General
LINC Capital, Inc. (the "Company") is a specialty finance company that
provides leased equipment, asset-based financing, and equipment rental and
distribution services to growing businesses. The Company provides its
specialized financing services through the following four business units:
o Select Growth Finance (or Select Growth ) directly originates equipment
leases and other asset-based financing to emerging growth companies,
primarily in the telecommunications, high-tech manufacturing,
Internet-related and information technology industries. Lessees are
typically early-stage businesses backed by venture capital funds or other
professional investors. The Company frequently receives warrants or other
equity participation rights in its lessees, in addition to its rights, as
lessor, in the residual values of the leased equipment.
o Portfolio Finance purchases or finances leases originated by smaller
companies within the highly fragmented leasing industry through warehouse
and portfolio purchase programs. Since its re-entry into the Portfolio
Finance business in October 1997, the Company has formed lease financing
and portfolio purchase relationships with over 20 lessors and has financed
over $300 million in leases. By financing the business generated by these
smaller lessors, the Company provides access to the capital markets on more
favorable terms than would be available to them directly.
o Rental and Distribution facilitates the short-term trial, use, and
acquisition of analytical instruments and related equipment by companies in
the pharmaceutical, environmental and biotechnology industries through
rentals, leasing and sales of such equipment. The Company is a distributor
for some of the most significant manufacturers of these types of equipment,
including Agilent Technologies, The Perkin-Elmer Corporation and Varian
Associates Inc. In addition, through its recent acquisition of Internet
Finance + Equipment ( LINC IF+E ), the Company distributes and leases new
and used telecommunication and networking equipment manufactured by such
manufacturers as Lucent Technologies, 3-Com and Cisco Systems.
o Vendor Finance assists the sales efforts of manufacturers and distributors
by developing leasing programs for the users of equipment sold by these
manufacturers and distributors. Since the beginning of 1998, the Company
has made four acquisitions of smaller leasing companies that have
significant levels of vendor relationships, either directly or through
third-party brokers that in turn maintain vendor relationships.
The Company primarily conducts its business throughout the United States.
California and Texas each account for approximately 20% of the Company's
revenues. Otherwise, no state accounts for more than 10% of the Company's
revenues. The Company believes, based on its own research and management's
knowledge of and experience in the equipment leasing industry, that it is a
leading provider of equipment leasing, rental and other services in its
specialized markets and maintains a competitive position in those markets. For
information regarding segment reporting, see note 15 to the Consolidated
Financial Statements.
In August 1999 following efforts by the Company to obtain additional
capital to continue growth in its each of its operations, the Company engaged
U.S. Bancorp Piper Jaffray to investigate opportunities to optimize shareholder
value. It became apparent in March 2000 that the sale of the Company as a
complete unit could not be accomplished on acceptable terms. During March 2000,
the Company made a strategic decision to de-emphasize its traditional leasing
activities and substantially reduce overhead and debt. The Company intends that
its focus on a going-forward basis will be on its profitable distribution and
rental activities. The Company continues to engage U.S. Bancorp Piper Jaffray to
explore the sale of individual leasing business units and elements of its lease
portfolio.
In March 2000 the Company indefinitely suspended the Portfolio Finance
business, which it had scaled back dramatically in the later part of 1999, and
ceased origination of 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 senior secured revolving credit
facility (the Loan Agreement ) and to reduce outstandings under a commercial
paper conduit facility ( 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 further downsize its Vendor Finance business.
Furthermore, as of December 31, 1999, the Company was not in compliance
with certain covenants under the Loan Agreement, the CP Conduit Facility and
certain covenants under the terms of agreements relating to a securitization of
lease receivables completed by a special purpose subsidiary of the Company in
July 1999 (the July Term Securitization ). The Company is 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. See Dependence on Capital and Dependence on External
Financing in Forward-Looking Statements and Associated Risks and Liquidity and
Capital Resources in Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Equipment Leasing Industry
The Equipment Leasing Association of America (the ELA) notes that
approximately 80% of all U.S. businesses use leasing to acquire some of their
assets. Leasing is advantageous since it enables a company to obtain the
equipment it needs while preserving cash flow, and may offer favorable
accounting and tax treatment. These factors, in management's opinion, are
contributing to greater acceptance of leasing as a major financing component of
equipment investment. In particular, the emergence of small, growth and
technology-oriented businesses in the U.S. economy continues to broaden the
market for leasing companies. The ELA notes that leasing financed approximately
$126 billion in new business volume for fiscal year 1998. Independent lessors
represent about 60% of this new business volume as compared to other lessor
types.
Management believes consolidation in the leasing industry will be driven by
(1) basic economies of scale, (2) specialization factors, and (3) the capital
constraints of small companies.
Economies of scale exist in operational and back office functions,
especially those that relate to technological platforms. The increasing level of
automation often allows companies to increasingly rely on technology to perform
tasks previously performed by individuals. Thus, more efficient leasing
companies can acquire less efficient leasing companies and spread the costs of
technology over larger lease portfolios.
Specialization will also drive consolidation, as smaller players will be
disadvantaged relative to their larger peers who often have better resources,
including the skill set and customer service capabilities necessary to attract
meaningful partnerships with manufacturers. Consequently, management expects
competitive pressures from the larger independent leasing companies to drive
smaller companies to seek strategic merger partners.
Capital availability is primary to the success of any leasing company.
Larger leasing companies have the advantages of lower cost of funds and
diversification of funding sources relative to smaller players who can face
capital constraints, especially during periods of tight credit. Therefore,
larger lessors can acquire smaller companies that benefit from a lower cost of
capital.
History
The Company's predecessor was organized in 1975 and, from its organization
through September 1994, focused its activities primarily in the leasing of
equipment to businesses engaged in the healthcare industry. The Company believes
that through internal growth and its acquisition of Scientific Leasing Inc. in
1988, it became the largest independent lessor of healthcare equipment in the
United States with over $500 million in assets owned or managed in 1993. Based
on statements made to the Company by individuals familiar with the
securitization industry as well as its own research, the Company believes that
it was the first equipment lessor in the U.S. to securitize healthcare equipment
leases and related residual values.
The Company commenced its Select Growth Finance operations in 1986 through
its sponsorship and management of limited partnerships, a portion of whose
business was providing equipment lease financing to emerging growth companies
primarily in the healthcare and information technology industries. Beginning in
1992, the Company focused Select Growth Finance on leasing essential operating
equipment to such emerging companies for its own account. The Company originated
over $36 million in new leases through its Select Growth Finance activities in
1999 and has originated over $174 million in such leases since 1993.
The Company first entered the Portfolio Finance business in 1988 through
the acquisition of Scientific Leasing Inc., the majority of whose assets
consisted of a portfolio of leases of healthcare equipment. In 1994, the Company
sold its healthcare equipment leasing and portfolio acquisition and servicing
business to LINC Anthem Corporation ( LINC Anthem ), a subsidiary of Anthem
Insurance Companies, Inc. In connection with the sale, the Company entered into
a non-competition agreement that effectively restricted the Company from
participating in Portfolio Finance activities and from originating leases other
than to emerging growth companies until September 1997 (the Non-Compete
Agreement ). From 1988 through the end of 1996, the Company and LINC Anthem
purchased or financed over $600 million in leases originated by other smaller
lessors. Upon the expiration of the Non-Compete Agreement, the Company
reinitiated its Portfolio Finance operations. In 1999 Portfolio Finance
originated lease volume in excess of $119 million.
The Company's Rental and Distribution activities were developed through the
acquisition in 1991 of a business founded by Robert E. Laing, the Company's
current President and Chief Operating Officer, and the acquisition in 1992 of
the analytical instruments business of AT&T Capital Corporation. The Company
recently expanded its Distribution activities through the acquisition of the
business and assets of Internet Finance and Equipment, Inc., a distributor and
lessor of telecommunications and networking equipment. The Company is now
conducting this business as LINC IF+E.
The expiration of the Non-Compete Agreement allowed the Company to
reinitiate its Portfolio Finance business and to establish its Vendor Finance
business unit in 1998. Since 1998, the Company has developed its Vendor Finance
business unit and expanded its distribution capabilities through the acquisition
of the following companies.
o Comstock Leasing Inc. This company was acquired by the Company in February
1998, with offices in Minneapolis and San Francisco, specializes in leasing
a variety of equipment, including office-based information technology
equipment, largely originated by third-party brokers.
o Monex Leasing, Ltd. This business was acquired by the Company in March
1998, headquartered in Houston, is a lessor of telecommunications and
business equipment, primarily in Texas and the Southwest.
o Spectra Precision Credit Corp. This business was acquired by the Company in
June 1998 and was based in Dayton, Ohio, and was formerly the finance
subsidiary of Spectra Precision Group, an international manufacturer of
laser-based leveling, alignment and surveying instruments and software.
Through this operation, the Company continues to lease equipment
manufactured by Spectra Precision Group, primarily to the construction and
agricultural industries, and has diversified its leasing activities to
include broadcast and medical equipment.
o Connor Capital Corporation. This company was acquired by the Company in
January 1999 and is a Chicago-based lessor that specializes in developing
finance programs for equipment vendors, primarily in the machine tool,
printing and woodworking industries.
o Internet Finance & Equipment, Inc. This business was acquired by the
Company in August 1999 and based in Charlotte, North Carolina, is a
distributor and lessor of Internet access equipment manufactured by several
companies. Its acquisition has further enhanced the synergies between the
Company's Vendor Finance and Rental and Distribution activities.
Following is a description of the Company's business activities by Business
Unit.
Select Growth Finance
General. The Company's Select Growth Finance activities consist primarily
of the origination (directly and through strategic relationships) of
non-cancelable, full pay-out leases and other asset-based financing transactions
(primarily accounts receivable lines of credit) to emerging growth companies in
the telecommunications, high-tech manufacturing, internet-related and
information technology industries. Such companies include manufacturers and
developers of technological products, software developers, information service
providers, and Internet and telecommunications service companies. Since 1993,
the Company has provided leasing to over 175 companies including Northern Light
Technology, Inc., Usinternetworking, Inc., iOwn Holdings, Inc., Goto.com, Inc.,
Corvis Corporation, Verio, Inc., Shopnow.com, Inc., and The Spinner Networks,
Inc. A majority of the Company's Select Growth Leasing clients are supported by
institutional private equity investors, which provide equity and working capital
and management resources to such customers. Such private equity investors
include Kleiner Perkins, Accel Ventures, Institutional Venture Partners, Draper
Fisher Jurvetson, idealab! Capital Partners, Oak Investment Partners, and Menlo
Ventures.
The Company believes that expansion of the information technology industry
and development of new technologies have promoted the formation and growth of
new companies of the type served by its Select Growth Finance activities. Such
companies typically have limited access to financing from commercial banks,
diversified finance companies and traditional leasing companies. The Company's
experience in its targeted industries allow it to serve the specific needs of
its customer base more effectively than its competitors by providing a variety
of financing alternatives, such as flexible lease structures, asset-based
financing, sale-leaseback transactions and secured credit lines.
Select Growth leases to individual customers typically include items with
an aggregate cost ranging from $250,000 to $3.0 million and cover a broad
variety of equipment, each with original purchase prices which are generally
less than $100,000 per item. These leases are generally for essential operating
equipment, including data processing equipment, production equipment, and
analytical instruments, but may include furniture and fixtures and other
equipment necessary for administrative support.
In 1999 compared to 1998, Select Growth Finance lease fundings decreased to
$36.0 million from $52.4 million. This decrease was primarily as a result of the
de-emphasis of this business activity by the Company due to capital constraints
that arose during the third and fourth quarters of 1999. As a consequence of
continuing capital constraints, the Company is currently in discussions which
may lead to the sale of substantially all of its non-securitized Select Growth
lease portfolio, the proceeds of which will be used to repay borrowings under
the Loan Agreement and outstandings under the CP Conduit Facility and to provide
liquidity to the Company. Management's plans are subject to the review and
approval of the secured creditors. No assurances can be made that the secured
creditors will allow the Company to implement its plans. In the event that the
Company is unsuccessful in completing such a sale, the Company may liquidate the
related portfolio. Any strategy adopted by the Company is subject to the
approval of its lenders. See Liquidity and Capital Resources in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
In a significant number of its Select Growth Finance transactions, the
Company receives warrants or other equity participation rights that provide
additional opportunities for profitability upon the realization of value and
sale of such rights. As of December 31, 1999, the Company held equity
participation rights in 65 companies, thirteen of which were publicly traded
companies. The Company has realized gains on disposition of such equity
participation rights in each year since 1996 and expects to realize additional
gains in the future.
Sales and Marketing. Select Growth Leases are originated by representatives
of the Company located in Chicago and San Francisco, often through a network of
independent lease brokers and referrals from institutional private equity
investors. The Company has been able to identify prospective clients through
marketing personnel having investment banking, financial analysis and industry
specific experience; attention to selective information regarding venture
capital investments in targeted industries; direct mail advertising and
representation at major venture capital conferences and symposia. The Company
also pursues an active telemarketing strategy to identify potential lessees.
To ensure prompt customer response, the Company's marketing personnel have
direct access to the Company's customer information data bases which assist them
in responding to sales leads, preparing lease proposals and monitoring the
progress of a transaction through the underwriting process. In addition, the
Company's sales personnel are trained in structuring Select Growth Finance
transactions.
Underwriting. The Company has adopted credit policies and procedures
applicable to each of its business units that are periodically reviewed by the
Credit Policy Committee of its Board of Directors. In addition, the Company has
established a Commitments Committee, the members of which are the Company's
Chairman, its President, its Chief Financial Officer, and its Senior Risk
Officer. Because of the nature of its Select Growth Finance activities the
preponderance of the transactions originated by its Select Growth Finance
business unit are reviewed for credit approval by the Company's Commitment's
Committee. The Company's Select Growth Finance underwriting process is based on
due diligence regarding a potential customer's business, management, product,
cash flows and institutional investors, as well as the type of equipment to be
leased.
Portfolio Finance
General. The Company reinitiated its Portfolio Finance activities upon the
expiration of the Non-Compete Agreement on September 29, 1997. The Portfolio
Finance division finances the leases generated by other equipment lessors. In
1999 compared to 1998, Portfolio Finance lease fundings decreased to $119.4
million from $146.0 million. This decrease was primarily as a result of the
de-emphasis of this business activity by the Company due to capital constraints
that arose during the third and fourth quarters of 1999. In the first quarter of
2000, the Company indefinitely suspended the acquisition of new portfolio
finance business due to insufficient capital to support this activity. See
Dependence on External Funding in Forward-Looking Statements and Associated
Risks and Liquidity and Capital Resources in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Company has had portfolio finance relationships with more than 20
companies and has acquired a total portfolio of over 60,000 leases. The Company
finances leasing companies characterized by: (i) strong customer or vendor
relationships; (ii) lease transactions which range in size from $1,000 to
$250,000; (iii) needs for committed financing and servicing relationships; and
(iv) a focus on customers which are not effectively served by more traditional
funding sources. During the later part of 1999 the Company curtailed its
Portfolio Finance activities due to capital constraints. The Company expects to
continue to de-emphasize its Portfolio Finance activities unless it obtains
additional sources of capital that permit it to fund this line of business on a
competitive basis. See Liquidity and Capital Resources in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Sales and Marketing. In connection with the acquisition and financing of
lease portfolios, the Company offers two distinct programs to its customers.
Under its Warehouse Line Programs, the Company provides limited warehouse loan
facilities to lessors on a recourse basis. Following a warehouse period that
typically will not exceed six months, the Company purchases the related pool of
performing warehoused leases from the originating lessor on either a partial
recourse or non-recourse basis. The purchase is usually credit enhanced by
either a holdback reserve and/or, if the creditworthiness of the originating
lessor is acceptable, a recourse obligation of the originating lessor.
Substantially all of the leases the Company acquires through its Warehouse Line
Programs are non-cancelable, full pay-out leases.
Under its Portfolio Finance Programs, the Company acquires portfolios of
leases originated over a specified period of time by the originating lessor. The
purchase is usually credit enhanced by either a holdback reserve and/or, if the
creditworthiness of the originating lessor is acceptable, a recourse obligation
of the originating lessor. Such credit enhancement is intended to reduce losses
under this program. Substantially all of the leases the Company acquires through
its Portfolio Finance Programs are non-cancelable, full pay-out leases.
Underwriting. The Company has developed established underwriting processes
for the management of its Portfolio Finance activities based on the prior
experience of its management. The Company performs a detailed due diligence
review of each potential customer prior to approval of a Warehouse Line or
Portfolio Finance Program. The due diligence process includes site visits, a
review of the potential customer's documentation standards, credit policies,
customer base, management team, equipment focus and servicing capabilities. In
connection with its due diligence, the Company re-underwrites individual lease
transactions to the extent it deems necessary under the circumstances.
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Rental and Distribution
General. The Company's Rental and Distribution activities consist of the
rental, distribution and leasing of analytical instruments, such as gas and
liquid chromatographs, mass spectrometers and atomic absorption systems through
its LINC Quantum Analytics Division headquartered in Foster City, California and
the distribution and leasing of Internet access equipment, routers, networking,
telecommunications and other information technology equipment through its LINC
Internet Finance + Equipment Division located in Charlotte, North Carolina.
LINC Quantum
Analytical instruments typically cost between $15,000 and $60,000 each and
are used by companies serving the environmental, chemical, pharmaceutical and
biotechnology industries to measure the chemical composition of a variety of
substances.
Certain segments of the market for analytical instruments have undergone a
fundamental change over the past several years in that vendors have increasingly
relied upon independent companies, such as the Company, to take responsibility
for the distribution and rental of such equipment. This is consistent with a
trend toward outsourcing among providers of a variety of products and services.
These vendors have increasingly focused on the manufacture of such equipment and
allowed independent companies to focus on other functions such as rental,
inventory management and distribution. The Company believes that its expertise
has allowed it to become a leading independent distribution and rental company
in the analytical instrument market.
The Company is a distributor for most of the significant manufacturers of
this type of equipment, including Agilent Technologies, Varian Associates Inc.,
and Apex Technologies, Inc. The Company is a designated Premier Channel
Partner for Agilent Technologies and believes, based on its own research, that
it is the largest independent source of analytical instruments in the U.S. As an
outgrowth of its relationship with Agilent Technologies, the Company, in concert
with Agilent Technologies, has extended its sales and rental programs in Europe
to accommodate U.S.-based and new European customers. The Company's position as
a distributor of certain types of equipment allows it to purchase such equipment
at a discount, which varies, from manufacturer to manufacturer.
Sales and Marketing. The Company provides analytical instruments, which are
customized, calibrated and made ready for use by the Company. The Company
typically delivers equipment from its centralized warehouse within 24 hours of
receipt of an order. The Company services over 2,500 analytical instrument
customers through its sales force of product specialists and orders directed to
the Company by its vendors. The Company's customers include environmental
testing laboratories, pharmaceutical and chemical manufacturers and
biotechnology companies. The Company's five largest Rental and Distribution
customers are New York City Medical Examiner, Quanterrra Environmental Services,
Inc., Dow Chemical Co., Cargill, Inc., and Battelle Memorial Institute, Inc. The
Company will seek opportunities to capitalize on its distribution and rental
expertise and its knowledge of the healthcare market by developing relationships
with vendors of medical equipment and acquiring other established rental and
distribution companies.
The Company's LINC Quantum Analytic Division offers its Rental and
Distribution customers generally three types of rental and leasing arrangements:
(i) short-term rentals with terms ranging from as short as two weeks to one
year; (ii) operating leases with terms ranging from 12 to 48 months; and (iii)
full-payout leases with terms ranging from 36 to 60 months. Customers under
rental arrangements and operating leases are also offered incentives to purchase
the related analytical instrument either during the term of the lease or at the
end of the lease by applying a portion of the rental payments made by the
customer to the purchase price of the equipment. The Company believes that its
ability to provide a wide range of rental, leasing and purchase options provides
it with a competitive advantage over other providers of analytical instruments.
To further promote awareness of its Rental and Distribution activities, the
Company advertises in trade publications targeted at key customer groups and
participates in numerous trade shows worldwide. In addition, specific mailing
lists targeting selected market segments are purchased from specialized database
providers. Product-specific marketing literature is mailed on a regular basis to
target segments of the Company's over 15,000-account mailing list. Direct mail
targeted at prospective users of analytical equipment has proven to be a
cost-effective way to attract rent, lease and sale customers and to increase
awareness and stimulate demand.
The Company recently implemented a Business-to-Business electronic commerce
web site, www.lincquantum.com. This industry state-of-the-art web site allows
users to access marketing, sales, and support information through a variety of
subject links. In addition, all core products can be accessed in the Product
Store where over 1,300 product line items are available with part number,
product description, US list price, and in many cases, with brochures, tech
notes, site prep guides, etc., available for download. Systems can be configured
and added to a shopping cart and the final configuration can be submitted for a
quotation or a direct sale order. Lease quotes on customer configured systems
can be accomplished through a built-in calculator for estimates of the monthly
rate and followed up on by an inside sales representative after submission. The
Company believes this development will have a major impact with both its
customers and vendors and will enhance overall profitability.
The Company recently expanded its Distribution activities through the
acquisition of the business and assets of Internet Finance and Equipment, Inc.,
a distributor and lessor of telecommunications and networking equipment. The
Company is now conducting this business as LINC IF+E. This business was acquired
by the Company in August 1999 and based in Charlotte, North Carolina. It is a
distributor and lessor of internet access equipment manufactured by several
companies. This acquisition has further enhanced the synergies between the
Company's Vendor Finance and Rental and Distribution activities.
Operations. When the Company's LINC Quantum Analytics Division sells new
analytical instruments, the equipment is subject to a manufacturer's warranty.
When the Company sells used analytical instruments, it typically reconditions
the equipment and provides a 90-day warranty. When the Company rents such
instruments, it exchanges any instruments requiring service with units from its
centralized inventory or provides for on-site service from the manufacturer or
an independent service organization. The Company maintains its rental inventory
and customizes analytical instruments to meet its customers' needs through a
complete repair and reconditioning facility.
The Company's LINC Quantum Analytics Division utilizes a combination of
proprietary software and software licensed to it by a third party in its rental
and distribution activities. All items in the Company's Rental and Distribution
inventory are separately bar-coded and tracked. Its systems permit users to
access information regarding account history, current activity, status of items
in its inventory, utilization, pricing, billing and collections on-line. The
Company believes that the long-term experience of it and its management in
utilizing these systems provides it with the ability to rapidly respond to
customer inquiries and a high level of control over its rental inventory.
LINC Internet Finance + Equipment
The operations of the LINC IF+E Division, acquired in August 1999, are
conducted separately from those of the LINC Quantum Analytics. LINC IF+E
distributes and leases Internet access equipment, routers, networking,
telecommunications and other information technology equipment manufactured by
such companies as Lucent Technologies, Cisco Systems and 3-Com directly and
through its web site, www.internetfinance.com, to Internet service providers,
competitive local exchange carriers and other companies engaged in e-commerce,
and also re-markets used Internet access equipment through its auction web site,
www.ispconsign.com.
Vendor Finance
General. As part of the sale of its healthcare equipment leasing and
portfolio acquisition and servicing businesses in October 1994, the Company
entered into the Non-Compete Agreement that effectively restricted the Company
from originating leases other than to emerging growth companies until September
1997. On September 29, 1997 this Non-Compete Agreement expired and the Company
began to develop a Vendor Finance business unit.
Acquisitions. The Company has focused on acquiring smaller leasing
companies that appeared to have potential to grow significantly. These
acquisitions have been intended to give the Company significant vendor
relationships that the Company can leverage in its other three business
segments.
Since the expiration of the Non-Compete Agreement the Company has acquired
four leasing companies or substantially all their business assets which fit the
parameters of its acquisition strategy. These leasing company acquisitions
compliment the Company's core competencies in customizing lease financing
arrangements to respond to the needs of vendors and equipment end-users, and in
training the vendor's staff in the use of the Company's lease financing products
to provide an additional flow of financing volume.
Comstock Leasing Inc. In February 1998 the Company acquired Comstock
Leasing Corporation ( Comstock ), a small-ticket lessor with offices in
Minneapolis and San Francisco to create the LINC Comstock Division of the
Company ( LINC Comstock ). LINC Comstock supports third-party brokers and
vendors as a lessor of a variety of equipment, including office-based
information technology equipment. The majority of its lease volume is
concentrated in Minnesota and California. The average lease transaction has an
original equipment cost of $25,000.
Monex Leasing, Ltd. In March of 1998, the Company acquired substantially
all the assets of Monex Leasing, Ltd. ( Monex ), a vendor-driven equipment
lessor headquartered in Houston, Texas to create the LINC Monex Division of the
Company ( LINC Monex ). LINC Monex works with distributors and vendors of
telecommunications, business and medical equipment, primarily in Texas and the
Southwest.
LINC Monex originates leasing volume primarily through its direct
relationships with vendors and distributors. Vendors are motivated to promote
leasing since LINC Monex will pay the vendor immediately for the equipment and
then service the lease with the end user, alleviating the vendor's concerns
regarding payment from the end user. The vendor's salespeople often find that
monthly lease payments over time are less daunting to a customer than paying the
full purchase price up front and therefore rely on leasing to increase their
sales volumes. The average lease has an original equipment cost of $25,000.
Spectra Precision Credit Corp. The Company acquired substantially all of
the assets and business of Spectra Precision Credit Corp. ( Spectra Credit ) in
June 1998, including its $34.7 million lease portfolio. Prior to the
acquisition, Spectra Credit was the finance subsidiary of Spectra Precision,
Inc. ( Spectra Precision ), a division of Sweden-based Spectra Precision Group,
an international manufacturer of laser-based leveling, alignment and surveying
instruments and software used in the construction, agricultural and surveying
markets. As part of the acquisition, the Company and Spectra Precision entered
into a seven-year vendor agreement in which the Company will have exclusive
rights to provide financing services to Spectra Precision's clients in the
United States, Canada, and Europe.
The acquisition of Spectra Credit which has become the LINC Vendor Services
Division of the Company ( LINC Vendor Services ) expanded the Company's vendor
financing business, introduced the Company to new equipment and end-user
markets, and provided an international presence for the Company with LINC Vendor
Service's office in the United Kingdom. Through its formal agreement with
Spectra Precision, LINC Vendor Services provides a comprehensive array of
leasing options, progress payment programs, floor plan financing and rental
services to 24 direct sales offices and more than 140 dealer/distributors of
Spectra Precision's products in the United States, Canada and the United
Kingdom. The leases originated by LINC Vendor Services have an average original
equipment cost of $18,000.
LINC Vendor Services has increased its leasing volume by establishing
additional leasing programs with distributors in other niche industries such as
medical and dental, broadcasting and telecommunications, and materials handling
equipment. The Company targets middle-market manufacturers that do not have
existing finance programs and works with these companies in developing
strategies that will increase unit sales and margins. As part of these efforts,
LINC Vendor Services provides the manufacturers with inventory management
assistance that focuses on business growth and sales seminars aimed at
developing more effective salespeople through reduced sales cycles, increased
selling efficiencies, and wider margins.
Connor Capital Corporation. In January 1999, the Company acquired Connor
Capital Corporation ( Connor ), located in Chicago to form the LINC Connor
Division of the Company ( LINC Connor ). LINC Connor specializes in captive
vendor finance programs, primarily in the machine tool, printing and woodworking
industries.
Vendor Finance lease fundings increased to $168.1 million in 1999 from
$48.0 million in 1998. During the fourth quarter the Company commenced the
consolidation of certain of its Vendor Finance activities into its Chicago
headquarters in order to increase operating efficiencies and to more effectively
implement an Internet based leasing e-commerce system (e-LINC online.com) as
well as an automated credit scoring system for smaller transactions.
In March 2000, the Company ceased originations of new leases in LINC
Connor. Currently, the Company is in discussions to sell or refinance components
of its other Vendor Finance business marketing units and to use the proceeds to
reduce borrowings under the Loan Agreement and to reduce outstandings under the
CP Conduit Facility as well as to provide additional liquidity. The Company's
strategy of selling or refinancing components of its Vendor Finance business is
subject to approval from its lenders. No assurances can be made that the secured
creditors will allow the Company to implement its plans. In the event that the
Company is unable to sell individual leasing business units and related elements
of its lease portfolio, the Company may further downsize its Vendor Finance
business.
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 $13.9 million in 1999.
Lease Portfolio
Equipment Type. The following table sets forth the Company's percentage of
net investment in direct finance leases and loans and the net book value of
operating leases, including leases securitized, as of December 31, 1999, by
equipment type:
<TABLE>
<CAPTION>
% Of Portfolio
<S> <C> <C>
Equipment Type Examples
Point-of-Sale Devices Credit card verification equipment 18.7%
Production & Machine
Tools Pharmaceutical manufacturing, labeling and dispensing equipment 18.3
Information Systems Personal computers, area networks and workstations 18.1
Laser Surveying & Laser-based leveling and alignment instruments, machine control
Construction systems, and surveying instruments 11.6
Telecommunications Microwave transmitters, multiplexing equipment and telephone
Systems 9.9
Medical X-ray machines, infusion pumps and surgical equipment 6.4
Furniture and Fixtures Medical and other office furniture 6.2
Analytical Instruments Gas and liquid chromatographs and mass spectrometers 6.0
Miscellaneous Various equipment accessories and other 4.8
Total ---------
100.0%
=========
</TABLE>
Terms of Equipment Leases. Substantially all equipment leases originated by
the Company are full pay-out net leases with specified non-cancelable terms
ranging from three to six years. The essential terms and conditions of all of
the Company's leases are substantially similar. In most cases, the lessees are
contractually required to: (i) maintain, service and operate the equipment in
accordance with the manufacturer's and government-mandated procedures; (ii)
insure the equipment against property and casualty loss; (iii) pay all taxes
associated with the equipment; and (iv) make all scheduled contract payments
regardless of the performance of the equipment. The Company's standard forms of
leases provide that in the event of a default by the lessee, the Company can
require payment of liquidated damages and can seize and remove the equipment for
subsequent sale, refinancing or other disposal at its discretion. Any additions,
modifications or upgrades to the equipment, regardless of the source of payment,
are typically automatically incorporated into and deemed a part of the equipment
financed.
Residual Values. Residual equipment values on the Company's balance sheet
as of December 31, 1999 totaled approximately $20.8 million. The Company's
experience in remarketing equipment and conservative policies toward estimating
residual values has resulted in the Company consistently recognizing gains on
the remarketing of leased equipment on a historical basis. During 1999, the
Company recognized gains from residual values of approximately $1.3 million.
Equity Participation Rights Held in Select Growth Finance Lessees. The
Company frequently receives warrants or other equity participation rights from
Select Growth Finance Lease clients in connection with its leases to them. Such
warrants or equity rights entitle the Company to purchase common stock or other
equity securities of the client at a price generally based on the most recent
price paid by the client's private equity investors. The Company typically
obtains the rights to have such shares included in certain registered public
offerings of the client's stock. At the time of receipt, the warrant or other
equity participation right is recorded by the Company as an investment. The
Company recognizes a gain or loss on such securities when sold or when the
Company intends to sell such securities in the near term. The Company
periodically evaluates its portfolio of equity participation rights and expects
to sell its equity participation rights as its portfolio companies mature based
on its evaluation of the market trends for the related clients' equity
securities. As of December 31, 1999, the Company held equity participation
rights in 65 companies, thirteen of which were publicly traded companies. The
Company has realized gains of equity participation rights in each year since
1996. During 1999, the Company recognized gains on certain equity participation
rights of $1.6 million, approximately $1.1 million of which related to one such
company. These results may not be indicative of future performance. Potential
gains on both residual values and sale of equity participation rights provide
additional sources of revenue to offset the possibility of losses, which may be
incurred on Select Growth Finance lessees.
Loss Experience
The following table sets forth the amount of delinquencies as a percentage
of Gross Contract Balance of leases included in the Company's owned and
securitized lease portfolio as of the period indicated and net charge-offs as a
percentage of the Company's remaining net investment in direct finance leases
and loans as of the end of the period indicated. Additionally, the table sets
forth the loss reserves provided for on the Gross Contract Balance as well as
holdback reserves on portfolio acquisitions as of the end of the period
indicated.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1999 1998 1997
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Select Growth Finance:
Gross Contract Balance $79,980 $75,882 $56,654
31 - 60 days past due 1.08% 3.07% 11.31%
61 - 90 days past due 0.66% 0.07% -
Over 90 days past due 1.20% 1.52% -
Portfolio Finance:
Gross Contract Balance $223,538 $175,885 $31,630
31 - 60 days past due 2.65% 2.13% 0.39%
61 - 90 days past due 1.60% 1.27% 0.18%
Over 90 days past due 0.08% 0.20% 0.02%
Rental and Distribution:
Gross Contract Balance $12,450 $10,064 $9,352
31 - 60 days past due 6.48% 8.88% 11.70%
61 - 90 days past due - - 5.76%
Over 90 days past due 0.07% - 9.98%
Vendor Finance:
Gross Contract Balance $224,253 92,478 -
31 - 60 days past due 3.31% 3.37% -
61 - 90 days past due 1.34% 0.61% -
Over 90 days past due 1.70% 1.16% -
Totals:
Gross Contract Balance $540,221 $354,309 $97,636
31 - 60 days past due 2.78% 2.85% 7.81%
61 - 90 days past due 1.31% 0.81% 0.61%
Over 90 days past due 0.92% 0.73% 0.96%
Net investment in leases and loans owned
and managed $465,704 $307,843 $84,127
Average net investment in leases and
loans owned and managed $394,628 $242,757 $61,069
Net charge-offs 10,104 3,116 171
Net charge-off percentage 2.56% 1.28% 0.28%
Allowance for Doubtful receivables included in:
Net investment in direct finance
leases and loans $11,918 $3,791 $2,173
Securitization retained interest 78 1,808 328
------------ ------------ ------------
Total Allowance $11,996 $5,599 $2,501
Holdback reserves on portfolio acquisitions 2,386 6,104 603
------------ ------------ ------------
Total allowance and holdbacks $14,382 $11,703 $3,104
============ ============ ============
Recourse to Portfolio Finance customers in
addition to holdback reserves on ------------ ------------ ------------
portfolios acquired $16,665 $10,407 $ -
============ ============ ============
</TABLE>
Rental Inventory
Equipment Type. As of December 31, 1999 and 1998, the Company owned and
managed an inventory of analytical instruments having an original cost of $27.9
million and $26.0 million, respectively. The Company's inventory of equipment at
December 31, 1999 includes over 4,000 items representing more than 500 model
types and has an average age of approximately 25 months.
The following table sets forth the composition of the Company's rental
inventory by equipment type as of December 31, 1999:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
% of
Equipment Type Use Price Range Inventory
- -------------- ------ -------------- -------------
Gas Chromatographs Analysis of evaporated organic compounds $15,000 $20,000 50.3%
Mass Spectrometers Separation and analysis of organic compounds 50,000 60,000 15.2
Liquid Chromatographs Analysis of dissolved organic compounds 15,000 50,000 17.9
Atomic Absorption Systems Analysis of metals 25,000 125,000 3.7
Spectrace Analysis of organic vapor 50,000 60,000 2.9
Accessories Accessories and automatic samplers 8,000 12,000 10.0
Total ------
100.0%
------
</TABLE>
Customers. The following table sets forth the Company's percentage of 1999
revenues from the rental and sale of analytical instruments by customer
industry:
Type Of Customer % of Revenue
----------------- --------------
Environmental 32.4%
Manufacturing 12.3
Chemical 11.1
Pharmaceutical 9.8
Government 9.1
Medical 6.2
Research 5.6
Food 4.3
Other 9.2
------
Total 100.0%
------
Terms of Equipment Rental Agreements. The terms and conditions of all of
the Company's rental agreements are substantially similar. Substantially all of
the rental agreements have terms ranging from two weeks to one year. Unlike the
Company's typical lease, the rental agreements require the Company to: (i)
maintain, service and operate the equipment in accordance with the
manufacturer's and government-mandated procedures; (ii) insure the equipment
against property and casualty loss; and (iii) pay all taxes associated with the
equipment.
Remarketing. Analytical instruments rented by the Company have relatively
long economic lives and have not been subject to rapid obsolescence. The Company
generally depreciates its rental inventory over a seven-year period to zero
salvage value. The Company has realized gains from the sale of used analytical
instruments in each year since the inception of this business.
Capital Resources and Securitizations
In addition to the issuance of equity securities, the Company funds its
activities through a senior, secured revolving credit facility provided by a
group of banks (the Loan Agreement ), commercial paper conduit securitization
facilities, the term issuance of securitized lease backed instruments and
partial-recourse and non-recourse financing arrangements provided by various
institutions.
As of December 31, 1999, the Company had $117.0 million available for
borrowing under the Loan Agreement, of which the Company had borrowed $99.7
million, with a weighted-average interest rate of 7.65%. In January 2000, the
amount available under the Loan Agreement was reduced to $107.0 million and the
facility was renewed through December 31, 2000. However, in March 2000, the
Company became aware that, at December 31, 1999, it was in violation of certain
of the covenants under the Loan Agreement, which it reported to its lenders. As
a result of such discussions, the Company's lenders' severely limited the
Company's ability to borrow.
The Company, through a special purpose subsidiary, has a commercial paper
conduit securitization facility available in an amount of $289 million (the CP
Conduit Facility ). At December 31, 1999, $141 million of the CP Conduit
Facility was utilized. The terms of the CP Conduit Facility permit 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 lease receivables and leased equipment are first sold to a
special purpose entity, which then sells the receivables and pledges a security
interest in the equipment to the financing parties, with limited recourse to the
Company.
In July 1999, the Company completed a term securitization in the amount 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.
The Company also arranges structured financings in which the receivables
from individual leases or portfolios of leases are sold to financial
institutions or pledged as collateral for a loan from these institutions, which
also receive a security interest in the leased equipment. These structured
financings are done on a non-recourse or limited recourse basis.
The Company's financing objective is to maximize the spread between the
yield received on its leases and its cost of funds by obtaining favorable terms
on its various financing transactions. As a result of the Company's established
track record in the specialty finance industry, the Company believes that terms
of its Loan Agreement and its securitization facilities are comparable to the
terms obtained by other companies in its industry of similar size and credit
characteristics.
On January 31, 2000, in order to provide additional capital to the Company
and to satisfy conditions established by its lenders to obtain a renewal of its
Loan Agreement facility, the Company entered into an agreement to issue
$5,625,000 of 8% Series A Cumulative Redeemable Preferred Shares (the Series A
Preferred Stock ) on February 1, 2000.
The Company is currently 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. The Company is 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. For further information, see Dependence on External
Financing in Forward-Looking Statements and Associated Risks and Liquidity and
Capital Resources in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Competition
The Company competes in the equipment financing market with a number of
national, regional and local finance companies. In addition, the Company's
competitors include those equipment manufacturers that finance the sale or lease
of their products themselves and other traditional types of financial services
companies, such as commercial banks and savings and loan associations, all of
which provide financing for the purchase of equipment. The Company's competitors
include many larger, more established companies that may have access to capital
markets and to other funding sources which may not be available to the Company.
Many of the Company's competitors have substantially greater financial,
marketing and operational resources and longer operating histories than the
Company.
Employees
As of March 30, 2000, the Company employed 196 people on a full-time basis.
Sixty-one personnel were involved in marketing and sales, 130 were in lease and
rental processing, servicing and administrative support and five were corporate
executive employees. No employees of the Company are represented by a labor
union.
<PAGE>
Executive Officers and Directors of the Registrant
The executive officers and directors of the Company, their ages as of
December 31, 1999, and their backgrounds are as follows:
<TABLE>
<CAPTION>
Name Age Position
------- ------- ------------
<S> <C> <C>
Martin E. Zimmerman 62 Chairman of the Board and Chief Executive Officer(1)
Robert E. Laing 55 President, Chief Operating Officer and Director
Allen P. Palles 59 Executive Vice President, Chief Financial Officer and Director
William F. DeMars 50 Senior Vice Presiden-Select Growth Finance
William J. Erbes 49 Senior Vice President-Vendor Finance
Gerard M. Farren 58 Senior Vice President-Rental and Distribution
Mark A. Arvin 52 Senior Vice President, Finance
Stanley Green 61 Director
Curtis S. Lane 43 Director
Terrence J. Quinn 48 Director
___________
(1) As of March 31, 2000 Mr. Zimmerman resigned as Chief Executive Officer.
</TABLE>
Martin E. Zimmerman served as Chairman of the Board and Chief Executive
Officer of the Company until March 31, 2000. Mr. Zimmerman resigned as Chief
Executive Officer of the Company on March 31, 2000 and continues as
non-executive Chairman of the Company's Board of Directors. Mr. Zimmerman
founded the Company in 1975 and has served as Chairman of the Board and Chief
Executive Officer since the formation of the Company. From October 1994 until
October 1996, he also served as President and Chief Executive Officer of LINC
Anthem and, after the sale of LINC Anthem to Newcourt, its subsidiary Newcourt
LINC Financial Inc. ("Newcourt LINC"). Before founding the Company, Mr.
Zimmerman founded and served for seven years as President of Telco Marketing
Services, Inc., a leader in the hospital equipment leasing field and the first
independent dealer in used medical equipment. Mr. Zimmerman earned a B.S. degree
in electrical engineering from M.I.T. in 1959 and an M.B.A. in finance from
Columbia University Graduate School of Business; where he was a Kennecott Copper
Fellow and McKinsey Scholar in 1961.
Robert E. Laing serves as President and Chief Operating Officer and
Director of the Company. Mr. Laing joined the Company in 1991 when it acquired
his analytical instruments rental and distribution business and has served as
President, Chief Operating Officer and Director of the Company since 1994. Prior
to founding such business in 1989, he was employed for 17 years by U.S. Leasing
in various capacities, including Executive Vice President and Group Executive,
Retail Group, President of U.S. Instrument Rental and Distribution, Chief
Executive Officer of U.S. Portfolio Leasing and Chief Operating Officer of U.S.
Fleet Leasing. Previously, he held marketing positions with Data Action
Corporation and IBM Corporation.
Allen P. Palles serves as Executive Vice President, Chief Financial Officer
and Director of the Company. Mr. Palles joined the Company in 1983 and has
served as Chief Financial Officer and a Director of the Company since 1984. From
October 1994 until December 1996, he also served as Chief Financial Officer of
LINC Anthem and Newcourt LINC. Before joining the Company, he was Treasurer of
The Marmon Group, Inc. and held various senior financial and tax positions at
Pullman, Inc. Mr. Palles is a certified public accountant and attorney and
specializes in lease securitization.
William F. DeMars serves as Senior Vice President-Select Growth Finance of
the Company. Mr. DeMars joined the Company in April 1998. Before joining the
Company, Mr. DeMars spent six years as Executive Vice President and Chief
Operating Officer of a manufacturing company. From 1973 to 1991, Mr. DeMars held
various positions with Marine Midland Bank, most recently as senior vice
president.
William J. Erbes serves as Senior Vice President-Vendor Finance of the
Company. Mr. Erbes joined the Company in 1993 and served as Senior Vice
President-Business Development from 1995 to 1998. In January 1999 he was
promoted to his current position. Before joining the Company, he was President
of Narco Medical Services, Inc. and Senior Vice President of Medirec Inc., a
leading medical equipment rental company.
Gerard M. Farren serves as Senior Vice President-Rental and Distribution of
the Company. Dr. Farren joined the Company in 1991 when the Company acquired its
analytical instrument rental and distribution business and has served in his
current position since that time. Previously, he was Senior Vice President and
General Manager of U.S. Analytical Instruments, Inc., a division of U.S.
Leasing, and worked with The Perkin-Elmer Corporation in product development and
sales management. Dr. Farren earned a Ph.D. in physical chemistry from Ireland's
Northern University.
Mark A. Arvin serves as Senior Vice President, Finance of the Company. Mr.
Arvin joined the Company in December 1998. Before joining the Company, over the
prior six years Mr. Arvin was a co-founder and co-owner of three companies
specializing in leasing and equipment finance. From 1988 to 1992, he was
Executive Vice President and Chief Financial Officer of Meridian Leasing
Corporation. Prior to 1988, he was a Partner with the public accounting firm of
KPMG LLP.
Stanley Green serves as a Director of the Company and is a member of the
Company's Office of the Chairman. Mr. Green was Senior Vice-President of
PacifiCorp Capital Corporation from 1987 until 1992. Mr. Green served as
President of Thomas Nationwide Computer Corporation, a company he founded, until
1987 when it was sold to PacifiCorp Capital Corporation. He is also an officer
and Director of BioSterile Technologies, Inc. and Thomas Computer Corporation
and has been employed by M.A. Berman and Co. from 1986 through December 31,
1999. He has served as a Director of the Company since 1996.
Curtis S. Lane serves as a Director of the Company. Mr. Lane is a Partner
of Evercore Partners, Inc., a private equity fund. From 1985 to 1998 he was a
Senior Managing Director of Bear, Stearns & Co., Inc. and head of its healthcare
investment-banking group. He has served in various investment banking capacities
with Bear, Stearns & Co., Inc. and also served on the board of directors of
Bear, Stearns & Co., Inc. He has served as a Director of the Company since 1989.
Terrence J. Quinn serves as a Director of the Company and is a member of
the Company's Office of the Chairman. Mr. Quinn is President and Chief Executive
Officer of Quinn Capital Services, Inc., a financial advisory firm and President
of LFC Capital, Inc., a company controlled by Martin E. Zimmerman, Chairman and
Chief Executive Officer of the Company. From March 1991 until December 1993, he
was President of the Company. Previously, he was President of Medirec, Inc.,
Matrix Leasing International Inc. and Churchill Capital Partners, L. P., a
subordinated debt fund. He has served as a Director of the Company since 1991.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who beneficially own more than ten
percent of a registered class of the Company's equity securities to file reports
of securities ownership and changes in such ownership with the Securities and
Exchange Commission (the SEC ). Officers, directors and greater than ten
percent beneficial owners also are required, by rules promulgated by the SEC, to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such Section 16(a) forms
furnished to the Company, or written representations that no Form 5 filings were
required, the Company believes that during 1999 all of its officers, directors
and greater than ten percent beneficial owners complied with Section 16(a)
filing requirements applicable to them.
Forward-Looking Statements and Associated Risks
This Form 10-K contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Form 10-K, the words and
phrases "expects", "intends", "believes", "will seek", and "will realize" and
similar expressions as they relate to the Company or its management are intended
to identify such forward-looking statements. The Company's actual results,
performance or achievements could differ materially from the results,
performance or achievements expressed in, or implied by, these forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, risks and uncertainties described below. In light of
these risks and uncertainties, there can be no assurance that the performance
and results referred to in the forward-looking statements contained herein will
in fact occur.
Dependence on Creditworthiness of Lessees
The Company provides financing to emerging growth companies through its
Select Growth Finance Leasing activities and to smaller and mid-sized businesses
through it Portfolio Finance and Vendor Finance activities. Leasing to emerging
growth companies and to small businesses presents a greater risk of
non-performance than leasing to well-established or larger companies, which are
generally more creditworthy and more readily able to utilize other sources of
financing. The Company has in the past and may in the future suffer losses as a
result of such risk of non-performance. Beginning in the third quarter of 1999,
the Company experienced significantly greater credit losses in each of its
activities than in recent prior periods. While the Company believes that its
allowances for credit losses are adequate to provide for future losses in its
current lease portfolio, no assurances can be made that future events,
including, but not limited to such events as economic downturns and
deterioration of credit worthiness of existing lessees will not result in the
need for additional provisions for credit losses relating to such portfolio.
The recourse and holdback provisions included in the terms of lease
portfolio purchase and financing agreements mitigate, but do not eliminate the
economic risk of the purchased lease portfolios. The failure of the Company's
lessees to perform under their leases or the failure of the sources of lease
portfolios to perform under their recourse obligations could result in leases
becoming ineligible for funding under the Loan Agreement and commercial paper
conduit facilities. Excessive delinquencies and defaults would adversely affect
the Company's ability to obtain funding and therefore it's financial condition
and results of operations. No assurance can be given that the Company's
experience, criteria or procedures, will afford adequate protection against such
risks.
Dependence on Capital
The Company's activities are capital intensive and require access to a
substantial amount of capital to fund new equipment leases. During 1999 and in
the first quarter of 2000,the Company was unable to obtain additional capital to
continue its prior rate of growth. As a consequence the Company does not expect
to be able to continue to operate its business as it has been previously
conducted. While the Company expects to refocus its business activities on its
Rental and Distribution business, the Company's ability to successfully
accomplish this objective is dependent on its lenders approval of a plan and its
ability to successfully sell a portion of its leasing businesses and segments of
its lease portfolios in order to pay down debt under the Loan Agreement and the
CP Conduit Facility and provide additional liquidity. Furthermore, the Company
is currently not in compliance with certain covenants under the Loan Agreement,
the CP Conduit Facility and the July Term Securitization. The Company is 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. 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.
Dependence on External Financing
The Company funds substantially all of the equipment leases that it
acquires or originates as well as its rental and distribution inventory through
a combination of its Loan Agreement, CP Conduit Facility, term securitizations
and partial-recourse and non-recourse loans and sales of lease receivables. The
Company depends on the pooling of leases in securitizations (in which the
receivables are first sold to a special purpose entity which then sells or
pledges the receivables to the financing parties on a limited recourse basis)
such as the July Term Securitization or other structured financings (in which
receivables are sold or pledged directly to the financing party on a limited
recourse basis) for refinancing of amounts outstanding under it Loan Agreement
and to obtain liquidity in its CP Conduit Facility. Any adverse impact on the
Company's ability to complete securitizations, or to otherwise permanently
finance its leases, could have a material adverse effect on the Company's
ability to obtain or maintain financing facilities or the amount available under
such facilities. Any failure by the Company to successfully obtain a forbearance
from enforcement of remedies under the Loan Agreement, the CP Conduit Facility
and the July Term Securitization and to subsequently renew its existing Loan
Agreement or obtain additional facilities or other financings with pricing,
advance rates and other terms consistent with its existing facilities could
result in the Company's inability to effectively downsize its operations and
refocus its activities on its Rental and Distribution business and will have a
material adverse impact on the Company's financial condition and its ability to
continue as a going concern.
In general, the recourse to the Company as a result of a securitization
transaction is limited to the repurchase of receivables upon breach of the
representations and warranties made by the Company with respect to such
receivables when they were transferred to the special purpose entity and the
financing parties. However, the Company will generally retain the residual
interest in the financing entity, which represents the right to receive any
excess cash flows after payment of the obligations on the securities issued in
the securitization. The Company's right to receive this excess cash flow will
generally be subject to certain conditions specified in the securitization
documents, which are intended to provide additional credit enhancement to
holders of the securities issued in the securitization. The owner of the
residual interest generally bears the risk of loss on the entire portfolio of
securitized receivables, and fluctuations in charge-off rates and other factors
could have a material adverse effect on the Company's ability to fully recover
such residual interest and could have a material adverse effect on the Company's
financial condition and results of operations. In the event that the Company is
unable to successfully complete a forbearance agreement under the CP Conduit
Facility or the July Term Securitization or to successfully renegotiate their
terms and conditions, the cash flow available to the Company relating to its
residual interest and its servicing rights under such facilities will be delayed
and possibly impaired. This delay and potential impairment will have a material
adverse impact on the Company's financial condition and its ability to continue
as a going concern.
Interest Rate Risk
Leases originated or acquired by the Company are non-cancelable and require
payments to be made by the lessee at fixed rates for specified terms. The rates
charged by the Company are based on interest rates prevailing in the market at
the time of lease commencement or acquisition. Until the Company's leases are
securitized or otherwise sold or permanently financed, the Company generally
funds such leases under its Senior Credit Facility or from working capital.
Should the Company be unable to securitize or otherwise sell or permanently
finance leases with fixed rates within a reasonable period of time after
funding, the Company's operating margins could be adversely affected by
increases in interest rates under its Senior Credit Facility. The Company
expects to undertake to hedge against the risk of interest rate increases when
its equipment lease portfolio exceeds certain amounts. As of December 31, 1999,
the Company entered into interest rate swap or cap agreements with respect to
all lease receivables sold under its conduit facility and term securitization.
Such hedging activities limit the Company's ability to participate in the
benefits of lower interest rates with respect to the hedged portfolio of leases.
In addition, there can be no assurance that the Company's hedging activities
will completely insulate the Company from interest rate risks. At December 31,
1999, the Company had $99.7 million in loans outstanding that were not fixed
rate loans or otherwise protected against interest rate risks.
Risks Related to Residual Values
The Company retains a residual interest in the equipment covered by certain
of its leases. The estimated fair market value of the equipment at the end of
the contract term of the lease, if any, is reflected as an asset on the
Company's balance sheet. The Company's results of operations depend, to some
degree, upon its ability to realize these residual values. Realization of
residual values depends on many factors, several of which are outside the
Company's control, including general market conditions at the time of expiration
of the lease, whether there has been unusual wear and tear on, or use of, the
equipment, the cost of comparable new equipment, the extent, if any, to which
the equipment has become technologically or economically obsolete during the
contract term and the effects of any additional or amended government
regulations. If, upon the expiration of a lease, the Company sells or refinances
the underlying equipment and the amount realized is less than the recorded value
of the residual interest in such equipment, a loss reflecting the difference
will be recognized as a loss and could have a material adverse effect on the
Company's financial condition and results of operations.
Risks Related to Equity Participation Rights
The Company frequently obtains warrants or other equity participation
rights in its Select Growth leasing clients in connection with leases to them.
At the time of receipt, the warrants or other equity participation rights are
recorded as investments. The Company recognizes a gain or loss on such
securities when they are sold or classified as trading securities. Fluctuations
in the market price of such rights or the underlying securities and the timing
of the exercise or sale of such rights or the underlying securities may result
in significant fluctuations in the Company's operating results. Failure of the
Company to realize gains from their sale may have an impact on the future
earnings of the Company.
Risks Related to Utilization of Rental Portfolio
The profitability of the Company's Rental and Distribution activities
depends, in part, on the demand for the rental and sale of specific items in the
Company's Rental and Distribution inventory and the cost of maintaining
inventory in ready to use condition. In addition, the Company's rentals of
analytical instruments are generally of short duration and the Company's ability
to profit from its investment in analytical instruments held for rental is
dependent in large part on its ability to continue to rent or profitably sell
such equipment. A decline in the demand for such equipment or failure to rent or
profitably sell such equipment could have a material adverse effect on the
Company's financial condition and results of operations.
Dependence on Vendor Relationship
A material portion of the Company's revenue and net income from it Rental
and Distribution activities depends on it relationship with Agilent Technologies
as a distributor. In 1999, approximately 87% of the Rental and Distribution
business unit revenues were derived from the rental, leasing and sales of
analytical instruments manufactured by Agilent Technologies. However, the net
profits from sales of Agilent Technologies products represented a smaller
percentage of the Company's overall net profits. The Company's agreement with
Agilent Technologies is renewable annually and the current term expires on
September 30, 2000. In event that the Company's relationship with Agilent
Technologies was to be terminated, such failure could have a material adverse
effect on the Company's financial condition, results of operations and
liquidity.
Economic Conditions
For the past few years, the Company has been operating in a favorable
economic environment. Any decline in economic conditions in the United States in
the future may have an impact on the ability of the Company's lessees to make
their lease payments and therefore on the rate of lease defaults and
charge-offs. The Company's financial condition and results of operations would
consequently be adversely impacted.
Fluctuations in Quarterly Results
The Company has in the past and may in the future experience significant
fluctuations in quarterly operating results due to a number of factors,
including, among others, the timing and volume of sales of lease receivables,
the timing of realization of residual values, fluctuations in the market values
of trading securities, the sale of equity participation rights, and special
charges such as additional provisions for credit losses. As a result of the
fluctuations, results for any one quarter should not be relied upon as being
indicative of performance in future quarters.
Concentration of Ownership
Mr. Zimmerman and members of his family beneficially own (including shares
held by other members of management for which Mr. Zimmerman holds proxies)
approximately 49.8% of the outstanding shares of Common Stock of the Company.
Mr. Zimmerman and members of his family beneficially own approximately 28.2% of
the outstanding shares of Series A Preferred Stock of the Company and the
related detachable warrants. Accordingly, these stockholders will have the
ability to control or significantly influence all matters requiring approval by
the stockholders of the Company, including the election of directors and
approval of significant corporate transactions.
Item 2. Properties
The Company's principal executive offices and its Select Growth Finance,
Portfolio Finance, and a substantial portion of Vendor Finance activities are
located at 303 East Wacker Drive, Chicago, Illinois 60601 and occupy
approximately 44,000 square feet of office space. This space is occupied under a
lease, which expires on June 30, 2006. An unrelated third party has committed to
sublease 8,200 square feet of this space through June 30, 2006. The Company's
Rental and Distribution activities conducted through it LINC Quantum Analytics
Division are located in Foster City, California and occupy approximately 23,500
square feet of warehouse, laboratory and office space under a lease, which
expires on May 31, 2002. The Company's IF+E Division operates out of an office
located in Charlotte, North Carolina which occupies approximately 1,600 square
feet of equipment storage and office space under a lease, which expires on July
31, 2000. The Company expects to relocate its IF+E Division to larger facilities
in the third quarter of 2000 to accommodate this division's growth. A portion of
the Company's Vendor Finance activities operate out of two full service offices
(where marketing, credit analysis, and other functions are performed) located in
Minneapolis, Minnesota, and Houston, Texas, which occupy approximately 9,000 to
15,000 square feet of office space and are leased under leases that expire on
July 31, 2004 and February 28, 2003, respectively. The Company is in
negotiations to terminate the lease of facilities in Minneapolis, Minnesota. The
Company believes that its current corporate headquarter facilities are surplus
to its existing requirements and is seeking to sublease these facilities and
anticipates relocating to more suitable space during the second half of 2000.
Item 3. Legal Proceedings
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to its business, to which the Company is a party
or of which any of its property is the subject. 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 4. Submission of Matters to Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1999.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Price Range of Common Stock
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "LNCC". The following table sets forth for the periods indicated the
high and low sale prices for the Company's Common Stock as reported by the
Nasdaq National Market.
1999 High Low
------ ------- ------
First Quarter $10.13 $7.50
Second Quarter $9.75 $7.38
Third Quarter $9.63 $3.88
Fourth Quarter $6.88 $4.00
1998
-------
First Quarter $18.75 $16.50
Second Quarter $20.50 $16.25
Third Quarter $18.75 $8.00
Fourth Quarter $9.63 $6.00
At March 30, 2000, there were approximately 35 holders of record of the
Common Stock. The Company believes that the beneficial ownership of the Common
Stock is substantially greater than the number of holders of record.
Dividend Policy
The Company did not pay any dividends in 1999 or 1998. The Company intends
to retain earnings for use in the operation of its business and therefore does
not anticipate declaring any cash dividends on its common stock in the
foreseeable future. The payment of dividends on common stock, if any, will be
made at the discretion of the Company's Board of Directors and will depend upon,
among other things, the Company's future earnings, operations, capital
requirements and financial condition, as well as general business conditions and
other factors. The Senior Credit Facility also contains provisions limiting the
Company's ability to pay dividends.
The Series A Preferred Stock issued on February 1, 2000 accrues dividends
at 8% per annum through December 31, 2000, 10% from January 1, 2001 through
December 31, 2001, and 12% thereafter. Payment of the dividends is subject to
declaration of the Board of Directors.
The Company is precluded from paying dividends on its common or preferred
stock while it is in violation of its Loan Agreement.
Recent Sales of Unregistered Securities
On March 31, 1999, the Company issued 16,176 shares of Common Stock, valued
at $7.63 per share, to the former owner of Monex Leasing, Ltd. as part of the
consideration for the acquisition of Monex Leasing Ltd., which was exempt from
registration under the Securities Act of 1933 pursuant to Section 4 (z).
Item 6. Selected Financial Data
The selected financial data set forth below should be read in conjunction
with the Company's Financial Statements and related notes thereto and with Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Sales of equipment $34,941 $32,929 $23,131 $22,595 $13,852
Direct finance lease income 33,438 12,300 5,981 3,055 1,467
Interest income 3,573 2,194 877 283 47
Rental and operating lease revenue 10,942 9,412 7,492 7,034 9,043
Servicing fees and other income 6,603 3,792 2,026 2,376 3,168
Gain on sale of lease receivables 1,284 6,839 880 - -
Gain on equipment residual values 1,321 1,752 860 450 44
Gain on equity participation rights 1,603 3,824 430 263 -
------------ ---------- ----------- ---------- ---------
Total revenues 93,705 73,042 41,677 36,056 27,621
------------ ---------- ----------- ----------- ---------
Expenses:
Cost of equipment sold 28,526 26,789 18,549 18,242 11,477
Selling, general and administrative (net) 23,790 17,824 8,973 8,008 7,524
Interest 24,686 8,956 4,298 2,545 1,750
Depreciation of equipment 7,273 6,073 4,226 3,647 4,054
Amortization of intangibles 1,428 502 280 226 212
Provision for credit losses 15,966 5,280 1,253 749 1,060
Impairment loss on assets 14,177 - - - -
Restructuring charges 700 - - - -
------------ ---------- ------------- ------------- -----------
Total expenses 116,546 65,424 37,579 33,417 26,077
------------ ---------- ------------- ------------- -----------
Earnings (loss) from continuing operations
before provision for income taxes and
minority interest (22,841) 7,618 4,098 2,639 1,544
Income tax expense (benefit) (1,307) 3,024 1,627 1,084 747
------------ ---------- ------------- ------------- -----------
Net earnings (loss) from continuing operations
before minority interest (21,534) 4,594 2,471 1,555 797
Minority interest - - (13) (120) 34
------------ ---------- ------------- ------------- -----------
Net earnings (loss) from continuing operations $ (21,534) $ 4,594 $ 2,458 $ 1,435 $ 763
============ ========== ============= ============= ===========
Net earnings (loss) from continuing
operations per common share:
Basic $ (4.10) $ .89 $ .73 $ .48 $ 0.25
Diluted (4.10) .86 .72 .45 0.25
Shares used in computing net income
per common share:
Basic 5,254 5,171 3,372 2,991 3,006
Diluted 5,254 5,347 3,397 3,162 3,103
Dividends declared per common share - - - $ .26 -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Operating Data:
Leasing:
Lease fundings:
Select Growth Finance $36,005 $52,405 $32,568 $16,604 $16,320
Portfolio Finance 119,376 146,051 39,671 1,795 -
Rental and Distribution (1) 9,645 6,916 7,001 5,674 4,159
Vendor Finance (2) 168,101 48,012 - - -
-------------- ---------- ------------- ------------- -------------
Total fundings (1),(2) $333,127 $253,384 $79,240 $24,073 $20,479
============== ========== ============= ============= =============
$27,868 $48,426 $31,170 $5,864 $8,609
Backlog of unfunded leases (3)
Leases and loans owned and
managed (3) 465,704 307,843 84,127 34,554 17,861
Unearned lease income, net (3) 74,062 31,847 13,276 6,820 4,333
Net charge-off percentage (4) 2.6% 1.3% 0.3% 1.6% 0.8%
Rental and Distribution:
Net margin on sales of equipment 18.4% 18.6% 19.8% 19.3% 17.1%
Equipment held for rental and
operating leases, net (3) $26,115 $30,659 $22,007 $15,048 $18,500
As of December 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(In thousands)
Balance Sheet Data:
Net investment in direct finance leases and
loans $436,820 $164,970 $67,653 $34,778 $17,861
Equipment held for rental and operating
leases, net 26,115 30,659 22,007 15,048 18,500
Securitization retained interest 444 17,026 3,017 - -
Total assets 512,888 248,884 108,977 67,200 58,604
Senior credit facility and other senior
notes payable 102,754 96,646 38,117 29,605 31,914
Recourse debt 3,898 8,017 2,955 3,361 882
Nonrecourse debt 347,352 68,616 17,951 8,276 4,997
Subordinated debentures 6,059 5,694 5,386 5,127 4,953
Total liabilities 491,637 207,443 72,273 53,258 46,411
Stockholders' equity $21,215 $41,441 $36,704 $13,942 $12,193
____________
<FN>
(1) Excludes lease portfolios acquired in connection with company acquisition in 1999 of $0.6 million.
(2) Excludes lease portfolios acquired in connection with company acquisitions totaling $10.8 million and $55.7 million for 1999
and 1998, respectively.
(3) At period end.
(4) As a percentage of net investment in direct finance leases and loans owned and managed before allowance for doubtful accounts.
</FN>
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in this section, which relates only to the
Company's continuing operations, should be read in conjunction with the
Consolidated Financial Statements and notes thereto.
Introduction
The Company's Select Growth Finance, Portfolio Finance and Vendor Finance
activities consist largely of direct finance leases and loans. The Company funds
these leases and loans through its revolving credit and securitization
facilities and other recourse and nonrecourse debt. In its Rental and
Distribution activities, the Company rents, leases and sells new and used
analytical instruments and related equipment and funds these activities
primarily through its revolving credit facility. The following briefly describes
some of the principal accounting practices applicable to the Company's business.
Direct Finance Leases. Direct finance leases transfer substantially all
benefits and risks of equipment ownership to the lessee. A lease is accounted
for as a direct finance lease if the collectibility of lease payments is
reasonably certain and it meets one of the following criteria: (i) the lease
transfers ownership of the equipment to the lessee by the end of the lease term;
(ii) the lease contains a bargain purchase option; (iii) the lease term at
inception is at least 75% of the estimated economic life of the leased
equipment; or (iv) the present value of the minimum lease payments is at least
90% of the fair value of the leased equipment at inception of the lease. The
present value of the future lease payments and the present value of the residual
value are recorded as the initial investment in such leases. This initial
investment generally represents the cost of leased equipment. Unearned lease
income is equal to the difference between (i) the future lease payments and
residual value and (ii) their corresponding present values. Unearned lease
income is amortized and recorded as revenue over the term of the lease by
applying a constant periodic rate of return to the declining net investment.
Initial direct costs incurred in originating leases, such as salaries for
marketing personnel and commissions, are capitalized as part of the net
investment and amortized over the lease term. The Company records direct finance
leases as "net investment in direct finance leases and loans." At the end of the
lease, a remarketing gain or loss is recorded to the extent the proceeds of sale
or re-leasing of the equipment exceed or are less than the originally estimated
residual value. When the Company's Rental and Distribution business unit leases
equipment, such leases are accounted for similarly to direct finance leases
except that the Company records the sales value of the equipment as revenue and
the carrying value as cost of equipment sold, thus recognizing its distribution
margin ( sales type leases ).
In July 1999, the Company completed a term securitization of $237 million.
In connection with the term securitization, the Company 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 the Company, which are secured by equipment or
other assets of the borrowers, are recorded as "net investment in direct finance
leases and loans" at the present value of the future note payments. Initial
direct costs incurred in originating loans are capitalized as part of the net
investment and amortized over the term. Income is recognized over the term of
the note by applying a constant periodic rate of return to the declining note
balance and is recorded as "interest income".
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 the Company's cost as "equipment held for rental and operating
leases" and depreciated on a straight-line basis. The Company depreciates
analytical instruments over a seven-year life, assuming no salvage or residual
value at the end of this life. The Company has realized gains from the sale of
used analytical instruments each year since the inception of its Rental and
Distribution activities. Other leased equipment is depreciated over its
estimated useful life to its salvage or residual value.
Equity Participation Rights. The Company frequently receives warrants or
other equity participation rights in connection with leases to Select Growth
Finance clients. Such warrants or rights entitle the Company to purchase common
stock or other equity securities of the client at a price generally based on the
most recent price paid by the client's private equity investors. The Company
typically obtains the right to have such shares included in registered public
offerings of the client's stock. At the time of receipt, the warrant or other
equity participation right is recorded as an investment at cost. The Company
recognizes a gain or loss on such securities when sold or when the securities
are classified as trading securities. The Company periodically reviews its
portfolio of equity participation rights based on its evaluation of the market
trends for the related clients' equity securities. The Company expects to sell
its equity participation rights as its portfolio companies mature.
Realization of 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. The Company has not had a net loss from the realization of
residual values for any quarterly period.
Servicing Fees. The Company realizes revenue for off-balance sheet lease
receivables serviced under the terms of its securitization facility.
Additionally, the Company engages in the business of servicing lease portfolios
originated by third parties but has not entered into a new agreement to service
leases for third parties since December 1994. Revenues from these activities are
classified as "servicing fees and other income."
Securitizations of Lease Portfolios. In a securitization transaction, the
Company sells a pool of leases to a wholly-owned special purpose entity, which
then transfers or pledges the leases to the lender. The Company generally
retains the right to receive any excess cash flows of the special purpose
entity. Until October 1, 1998, the Company recognized a gain on the sale of
leases in securitizations equal to the excess of the net proceeds from the sale,
after deducting issuance expenses, over the cost basis of the leases sold.
Effective October 1, 1998, the Company eliminated gain-on-sale treatment for
securitized leases by modifying the structure of its securitization facility
such that it is considered a non-recourse debt instrument under generally
accepted accounting principles. Accordingly, no gain on sale of lease
receivables in securitization transactions has been recorded since October 1,
1998.
Provision for Credit Losses. Each of the Company's activities involves risk
of credit loss. Management evaluates the collectibility of the Company's leases
and loans based on the creditworthiness of the related lessee or obligor,
delinquency statistics, historical loss experience, current economic conditions
and other relevant factors. The Company provides a reserve for credit losses at
the time that the lease or loan commences and periodically evaluates the reserve
based on current delinquency experience and the financial status of its lessees
or obligors, 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 the Company's 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 the Company's commercial paper conduit facility in connection with
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
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 the Company. 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 (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 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 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 the Company's 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 Select Growth Finance,
and late fees. The increase over the prior year period primarily relates to $1.2
million in deferred incentive fees realized in connection with servicing of a
portfolio owned by a third party, $0.5 million realized on the termination of
interest rate swap and cap agreements, and an increase in late fees collected by
the Company's 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 the Company's 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, the Company
eliminated gain-on-sale treatment for securitized leases by modifying the
structure of its securitization facility such that it is considered nonrecourse
debt under generally accepted accounting principles. Accordingly, no gain on
sale of securitized receivables was recorded during 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, the Company 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 the
Company's portfolio and the timing of the sale of these securities.
Selling, general and administrative expenses, net of initial direct costs
capitalized, increased to $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 the Company's Vendor Finance
business unit, the acquisition of LINC IF+E in August 1999 in the Company's
Rental and Distribution business unit, senior and middle management personnel
added to support the Company's growth, and increased activity in the Company's
other business segments. The number of people employed, including employees of
companies acquired, increased 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 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
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, the Company recognized an impairment loss of $14.2
million primarily relating to the impairment of goodwill in the Company's Vendor
Finance business unit. After evaluating 1999 results of operations and projected
future cash flows, the Company 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, the Company 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, the Company 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. The Company 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. Net 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 the Company's 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
the Company, as well as the income recognized on the Company's 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 the Company's 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 the
Company's 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 Select Growth Finance, 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 the Company, and an increase in fees received in connection with
servicing securitized leases. This increase was partially offset by the decline
in the number of leases serviced by the Company for unrelated parties.
During 1998 and 1997, the Company securitized leases with a book value of
$200.2 million and $15.2 million, respectively, net of bad debt reserves and
customer holdbacks of $7.7 million and $0.3 million. In connection with these
securitizations, the Company realized gains on the sale of lease receivables of
$6.8 million and $0.9 million in 1998 and 1997, respectively. Effective October
1, 1998, the Company eliminated gain-on-sale treatment for securitized leases by
modifying the structure of its securitization facility such that it is
considered nonrecourse debt under generally accepted accounting principles.
Accordingly, no gain on sale of lease receivables was recorded during the fourth
quarter of 1998.
Gains from sale and re-leasing of leased equipment increased to $1.8
million from $0.9 million. The increase was the result of a greater number of
leases maturing in 1998.
During 1998, the Company experienced increases in the value of certain
equity participation rights held by the Company and consequently elected to sell
a portion of these rights, realizing a gain of $3.8 million. During 1997, the
Company sold certain equity participation rights, realizing a gain of $0.4
million.
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 the Company's re-entry into Portfolio Finance, senior and middle management
personnel added to support the Company's growth, three acquisitions completed in
1998, and increased activity in the Company's other business segments. The
number of people employed, including employees of companies acquired, increased
75% to 147 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 the Company's acquisitions, increased 220% over the prior year.
The Company's effective tax rate was 39.7% for 1998 and 1997.
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 CP Conduit
Facility, other non-recourse and recourse loans, the 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.
The Company is currently 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. The Company is 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.
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 the Company's credit facilities.
Credit Facilities
The Company utilizes 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 December 31, 1999, the Company had $117.0 million available for borrowing
under the Loan Agreement, of which the Company had borrowed $99.7 million, with
a weighted-average interest rate of 7.65%. In January 2000, the amount available
under the Loan Agreement was reduced to $107.0 million and the facility was
renewed through December 31, 2000.
As of December 31, 1999, the Company was and 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 certain elements of its leasing businesses and lease portfolio. A portion of
the proceeds of such sale would be used to repay indebtedness under the Loan
Agreement and to provide liquidity to the Company's remaining activities.
Following such forbearance period the Company anticipates refinancing the
remaining indebtedness, the largest portion of which would relate to the
Company's rental and distribution activities. If the Company is not able to
achieve such a forbearance and to successfully refinance such indebtedness, the
Company may not be able to continue as a going concern.
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 CP Conduit
Facility ). At December 31, 1999, $141 million of the facility was utilized. The
terms of the facility permit 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 facility is subject to renewal
on April 28, 2000. The Company is currently in violation of certain covenants
under the CP Conduit Facility and is in discussions with the liquidity providers
to such facility to forbear from enforcement of remedies under the facility and
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
substantially reduce the outstanding amount under the CP Conduit Facility. If
the Company is unable to successfully achieve a forbearance by the liquidity
providers, the cash flows available to the Company from its retained interest in
the leases included in the CP Conduit Facility as well as its servicing rights
may be interrupted permanently or temporarily. In such a case the Company may
not be able to continue as a going concern.
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 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.
The Company is currently in violation of certain covenants under the July
Term Securitization and is in discussions with applicable parties intended to
lead to their forbearance from enforcement of remedies under the July Term
Securitization while the Company downsizes its operations as well as to
renegotiate certain of its terms. If the Company is unable to successfully
achieve a forbearance and renegotiation of certain of the terms of such July
Term Securitization, the cash flows available to the Company from its retained
interest in the July Term Securitization as well as its servicing rights may be
interrupted permanently or temporarily. In such a case the Company may not be
able to continue as a going concern.
<PAGE>
Non-recourse and Partial Recourse Lease Financing Facilities
During 1999, the Company completed financing or sale of $67.3 million in
leases through the use of non-recourse and partial recourse financing
facilities.
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.
Other
Year 2000 compliance refers to the ability of computer hardware and
software to respond to the problems posed by the fact that computer programs
have traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer systems will not be
able to differentiate between the year 2000 and 1900. As a result of the
calendar year change to 2000, neither the Company nor, to the Company's
knowledge any of its significant third parties, including parites to the
Company's credit facilities and its signifcant Portfolio Finance customers, have
experienced any material adverse effects to their respective businesses as a
result of the Year 2000 issue. The Company will continue to monitor the year
2000 issue on its own systems and those of significant third parties with which
the Company conducts business and will promptly address any latent Year 2000
issues that may arise.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary market risk exposure is interest rate risk, largely
related to the Company's Loan Agreement. Otherwise, the Company is able to
mitigate the effects of changes in interest rates through financing leases or
loans on a nonrecourse or partial recourse basis at fixed interest rates, which
maintains the spread on lease or loan transactions over their respective terms.
In addition, the Company manages exposure to fluctuations in interest rates by
establishing fixed interest rates on the lease portfolios in the Company's
securitization facility through interest rate swap and cap agreements. Interest
rates associated with new originations of leases or loans can be adjusted to
compensate for changes in the interest rate environment. The Company does not
use derivative financial instruments for trading purposes.
The Company is exposed to adverse fluctuations in interest rates as they
relate to the Company's securitization retained interest and to leases and loans
funded under its Loan Agreement. Additionally, the Company could be negatively
impacted by the early termination of its interest rate swap or interest rate cap
agreements based on the fair value of these derivative financial instruments on
the date of termination. At December 31, 1999, termination of the interest rate
swap and interest rate cap agreements would have resulted in a credit to
earnings of $2.1 million.
The Company funds a portion of its lease portfolio under its Loan
Agreement. Loan Agreement 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 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 would cause a decrease in the spread
between the yield on each fixed rate lease or loan contract financed under the
facility and the Company's 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 the Company,
the net impact of interest rate risk on the Company's earnings may be materially
different than disclosed above.
The Company is also subject to foreign currency rate risk relating to a
limited number of leases denominated in Canadian dollars and British pounds. The
Company has determined that hedging of these assets is not cost effective and
instead attempts to minimize currency exposure risk through working capital
management. The Company does not believe that any foreseeable change in currency
rates would have a material effect on its financial position or results of
operations.
The table below presents the principal (or notional) amounts and related
weighted average interest rates of the Company's debt obligations and derivative
financial instruments by expected year of maturity.
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total
------------ ----------- ------------ ------------ ------------ -------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Senior credit facility $99,700 $- $- $- $- $- 99,700
Variable rate 7.65% - - - - - 7.65%
Other notes payable $ 1,549 $798 $707 $- - - $3,054
Weighted average
interest rate 11.64% 13.00% 13.00% - - 12.31%
Recourse and nonrecourse debt $133,528 $106,973 $67,847 $ 31,183 $10,457 $1,260 $351,249
Weighted average
interest rate 7.30% 7.15% 7.18% 7.31% 7.55% - 7.25%
Subordinated debt - - $1,581 $6,178 - - $7,759
Weighted average
interest rate - - 8.25% 8.25% - - 8.25%
Derivative financial
instruments:
Interest rate swaps $103,412 $ 89,029 $ 57,886 $ 22,655 $ 7,208 $ 859 $318,653
Weighted average fixed
interest rate 6.11% 6.14% 6.19% 6.31% 6.42% 6.32% 6.14%
Interest rate caps $11,490 $9,892 $6,432 $2,517 $801 $95 $35,406
Weighted average
fixed interest rate 6.11% 6.14% 6.19% 6.31% 6.42% 6.32% 6.14%
<FN>
The table above reflects the expected maturity of the Company's debt
obligations and derivative financial instruments as of December 31, 1999
and does not reflect changes, which could arise after that time.
Additionally, because the Company's lease portfolio is not presented in the
table above, the information presented therein has limited predictive
value. As a result, the Company's ultimate realized gain or loss with
respect to interest rate fluctuations will depend on exposures that arise
during the respective period, the Company's hedging strategies at the time,
and actual interest rates. For information regarding the fair value of
financial instruments, see note 9 to the Consolidated Financial Statements.
</FN>
</TABLE>
Item 8. Financial Statements and Supplementary Data
The financial statements begin on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item with respect to the identity and
business experience of the Company's executive officers and directors is set
forth in Part I, Item 1 under the caption Executive Officers and Directors of
the Registrant.
Items 11. Executive Compensation
The following table presents certain information concerning compensation
earned for services rendered during 1999, 1998 and 1997 to the Company by the
Chief Executive Officer and each of the four most highly compensated executive
officers. A substantial portion of the compensation paid to Messrs. Zimmerman,
Laing and Palles during 1997 was with respect to operations of LFC Capital and
other discontinued operations of the Company and was charged to LFC Capital.
Effective November 12, 1997, the Company entered into employment contracts with
Messrs. Zimmerman, Laing, Palles and Dr. Farren. In addition, the Company
entered into an employment contract with Mr. DeMars upon his employment with the
Company in 1998. See Employment Contracts.
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------------ --------------------------
Other Annual Awards All Other
Name and Principal Position Year Salary Bonus Compensation Options(#) Compensation
------ -------- -------- --------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Martin E. Zimmerman................ 1999 $312,385(1) $ - $51,248(2) - $4,800
Chairman and Chief Executive 1998 297,669 137,500 48,249(2) 58,141 5,000
Officer 1997 555,193 - 89,012(2) 20,000 4,750
Robert E. Laing.................... 1999 271,154(1) - - - 4,800
President and Chief Operating 1998 258,210 120,000 - 36,107 5,000
Officer 1997 269,504 - - 10,000 4,750
Allen P. Palles.................... 1999 197,411(1) - - - 4,800
Executive Vice President and 1998 197,718 92,500 - 36,107 5,000
Chief Financial Officer 1997 230,066 - - 10,000 4,750
Gerard M. Farren................... 1999 211,475(1) 60,000 - 5,000 4,800
Senior Vice President-Instrument 1998 204,600 100,000 - - 5,000
Rental and Distribution 1997 204,600 70,200 - 7,500 4,750
William F. DeMars.................. 1999 176,469(1) - - 10,000 4,800
Senior Vice President-Select 1998 114,519 75,500 - 20,000 4,750
Growth Finance 1997 - - - - 4,750
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) This amount includes base salary and customary benefits and perquisites as provided in each person's
employment contract.
(2) This amount consists of life insurance premiums and tax preparation services paid for by the Company.
</FN>
</TABLE>
The following table sets forth the number of shares of the Company's Common
Stock subject to stock options granted to the individuals listed in the Summary
Compensation Table through December 31, 1999, together with related information.
Option Grants in 1999
<TABLE>
<CAPTION>
Individual Grants
Potential realizable
Percent of value at assumed annual
total options Exercise rates of stock price
granted to or base appreciation for option
Options employees price Expiration term (1)
Name granted (#) in 1999 ($/Share) date 5% 10%
------- ------------- ------------- ----------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Martin E. Zimmerman....... - - - - - -
Robert E. Laing........... - - - - - -
Allen P. Palles........... - - - - - -
Gerard M. Farren.......... 5,000 3.4% $8.62 02/01/09 $27,105 $68,690
William F. DeMars......... 10,000 6.9% $8.62 02/01/09 $54,211 $137,381
- ------------------------------
<FN>
(1) In calculating the potential realizable value, the Company used the grant price per share as of the date of grant.
</FN>
</TABLE>
The following table sets forth the number of shares of the Company's Common
Stock subject to stock options exercised by the individuals listed in the
Summary Compensation Table during 1999, together with related information, and
the value of the unexercised options.
<TABLE>
<CAPTION>
Aggregated Option Exercises in 1999,
and 1999 Year-End Option Values
<S> <C> <C> <C>
Shares Number of Value of unexercised
acquired on Value Unexercised options in-the-money options
Name exercise (#) Realized At December 31, 1999 at December 31, 1999 (1)
- ------ ------------- ---------- ---------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------- --------------- ------------- ---------------
Martin E. Zimmerman.... - $ - 49,391 28,750 $ - $ -
Robert E. Laing(2)..... 51,986 361,006 62,536 37,492 77,934 58,486
Allen P. Palles........ - - 48,724 22,858 42,990 21,462
Gerard M. Farren....... - - 3,750 8,750 - -
William F. DeMars...... - - 5,000 25,000 - -
- ------------------------------
<FN>
(1) Based upon the difference between the closing price of the common stock on the Nasdaq National Market on
December 31, 1999 of $4.75 and the exercise price.
(2) Based upon the difference between the closing price of the common stock on the Nasdaq National Market on
the exercise date of $8.88 and the exercise price.
</FN>
</TABLE>
Employment Contracts
Effective as of November 12, 1997, the Company entered into an employment
contract with Mr. Zimmerman. The employment contract provides for (i) an annual
base salary of $275,000 per year, subject to increase at the discretion of the
Board of Directors; (ii) reimbursement of premiums at an annual estimated cost
of approximately $50,000 for a life insurance policy; and (iii) customary
benefits and perquisites. The agreement has a three-year evergreen term unless
either the Company or Mr. Zimmerman gives ninety (90) days' notice of
termination. If the agreement is terminated by the Company without cause or
within six months prior to or one year after a change of control, Mr. Zimmerman
will be entitled to severance pay equal to three times the sum of (i) his
then-current annual base salary; (ii) his most recent annual bonus and incentive
payment; and (iii) employer contributions to his retirement plan for the twelve
(12) months preceding such termination, plus an additional amount if necessary
to make the executive whole with respect to any excise taxes on such severance
pay. The agreement provides that Mr. Zimmerman will not engage in other business
activities without the consent of the Company, except for charitable and
professional trade associations and passive personal investments, and except
that Mr. Zimmerman may serve as chairman and as an officer and director of an
affiliated company, LFC Capital, so long as such activity does not materially
interfere with his duties to the Company. The agreement prohibits Mr. Zimmerman
from competing with the Company for one year following the termination of his
employment with the Company. Effective June 29, 1999 the Company entered into an
amendment of that employment contract with Mr. Zimmerman. The amendment to the
contract provides for (i) reimbursement for tax preparation and estate planning
expenses, commencing January 1, 1998, not to exceed $15,000 in any one year and
not to exceed $30,000 in the aggregate from January 1, 1998 through December 31,
1999 and (ii) payment or reimbursement of life insurance premiums by the Company
on Mr. Zimmerman's life for any policies owned by Mr. Zimmerman so long as the
annual premiums do not exceed the $50,000 amount described above. Mr.
Zimmerman's employment contract and his employment as Chief Executive Officer of
the Company was terminated by mutual agreement on March 31, 2000. Pursuant to
such agreement, Mr. Zimmerman will receive severance payments equal to three
months of base salary to be paid bi-weekly until June 30, 2000.
Also, effective November 12, 1997, the Company entered into employment
contracts with Messrs. Laing and Palles and Dr. Farren providing for (i) an
annual base salary of $240,000 for Mr. Laing, $185,000 for Mr. Palles, and
$195,000 for Dr. Farren, all subject to increase at the discretion of the Board
of Directors and (ii) customary benefits and perquisites. The agreements have a
one-year evergreen term and may be terminated by the Company or the applicable
executive upon sixty (60) days' notice. If the agreements are terminated by the
Company without cause or within six (6) months prior to or one year after a
change of control, the applicable executive will be entitled to severance pay
equal to the sum of (i) his then-current base salary; (ii) his most recent
annual bonus and incentive payment; and (iii) employer contributions to his
retirement plan for the 12 months preceding such termination. The agreements
prohibit the applicable executive from competing with the Company for one (1)
year following the termination of his employment with the Company. Such
employment agreements require that the applicable executive devote substantially
all of his business time to the Company's affairs, except for charitable and
professional trade associations and passive personal investments, and with
respect to Mr. Palles, except for his services as a director of LFC Capital. Mr.
Palles' employment contract was amended by mutual agreement on March 31, 2000 to
delete provisions relating to the payment of severance benefits in consideration
of elimination on restrictions on Mr. Palles' ability to engage in certain
activities. The Company currently anticipates that Mr. Palles will continue as
Executive Vice President and Chief Executive Officer of the Company for the
foreseeable future.
On April 6, 1998, the Company entered into an employment letter with
William F. Demars providing for (i) an annual base salary of $175,000, subject
to increase at the discretion of the Board of Directors and (ii) customary
benefits and perquisites. The employment letter does not have a specified term
and DeMars's employment thereunder may be terminated by the Company without
prior notice. If the employment is terminated by the Company without cause
DeMars will be entitled to severance pay equal to his current base salary for
twelve (12) months from the date of such termination. The employment letter
prohibits DeMars from competing with the Company for one (1) year following the
termination of his employment with the Company.
Compensation of Directors
Each director who is not an officer of the Company received fees of $18,000
in 1999 for attending Board and Board Committee meetings and was reimbursed for
out-of-pocket expenditures incurred to attend Board and Board Committee
meetings. The Company's directors are eligible to be granted options under the
Company's Non-Employee Director Stock Option Plan. No options were granted to
directors in 1999. Messrs. Quinn and Green, as members of the Office of the
Chairman, which was formed in March 2000, are entitled to receive compensation
equal to $275 per hour, not to exceed $2,220 per day in connection with services
rendered by them at the Company's headquarters. The Company anticipates that
Messrs. Green and Quinn will devote approximately two days per week during the
course of the next 90 days to the Company's affairs at its headquarters.
Stock Option Plans
The Company adopted its 1994 Stock Option Plan, 1997 Stock Incentive Plan
and Non-Employee Director Option Plan to align the interests of its executives,
employees and directors with those of its shareholders. Options covering 488,928
shares of Common Stock were granted pursuant to the 1994 Stock Option Plan (of
which, options covering 90,482 shares were outstanding as of March 30, 2000) and
no further options can be granted under such plan.
The 1997 Stock Incentive Plan permits the grant of stock options and other
equity based awards with respect to 375,000 shares of Common Stock to executives
and employees of the Company and its subsidiaries. In May 1999, the shareholders
approved an amendment to the 1997 Stock Incentive Plan (the 1997 Plan
Amendment ) to increase the number of shares of Common Stock with respect to
which options may be granted under the 1997 Stock Incentive Plan to 1,000,000
and increased the number of options which may be granted to any one person
during any one year from 50,000 to 75,000. The Board of Directors or the
Compensation Committee is authorized to select recipients and to establish the
exercise price, number of shares, option term and other provisions of any grant.
As of March 30, 2000, options covering 594,592 shares of Common Stock were
granted pursuant to the 1997 Stock Incentive Plan (523,392 of which were
outstanding as of such date).
During 1999, Messrs. Farren and DeMars were granted options under the 1997
Stock Incentive Plan with respect to 5,000 and 10,000 shares of Common Stock,
respectively. The options granted to Messrs. Farren and DeMars vest annually
over four years following the grant date based upon continued employment by the
Company over such period. (See the table captioned Option Grants in 1999 for
the exercise price applicable to those options. )
The Non-Employee Director Stock Option Plan permits the grant of options
with respect to 100,000 shares of Common Stock to the non-employee directors of
the Company. In May 1999, the shareholders of the Company approved an amendment
to the Non-Employee Director Stock Option Plan (the Director Plan Amendment )
to increase the number of shares of Common Stock with respect to which options
may be granted under the Director Plan to 150,000. As of March 30, 2000 options
covering 58,332 shares of Common Stock were granted pursuant to the Non-Employee
Director Stock Option Plan (44,999 of which were outstanding as of such date).
During 1999, no options were granted to the non-employee directors of the
Company with respect to shares of Common Stock.
With the exception of the grant under the 1994 Stock Option Plan, the grant
of options under the Non-Employee Director Option Plan and the grant of options
under the 1997 Stock Option Plan, the Company has no other option plans.
Executive Incentive Compensation Plan
Effective as of the Company's initial public offering, the Board of
Directors adopted the Executive Incentive Compensation Plan (the Incentive
Plan ). The Incentive Plan provides for the payment of additional annual cash
bonuses if the Company's after-tax earnings for the fiscal year (determined
without regard to payments under the Incentive Plan) exceeds 17.5% of the
Company's Average Common Equity (as defined below) for such fiscal year. If the
threshold is satisfied in any given fiscal year, the aggregate award
compensation that will be paid under the Incentive Plan for that particular
fiscal year (the Incentive Pool ) will be equal to 2.5% of the Company's
pre-tax earnings (determined after deduction for payments under the Incentive
Plan), to the extent that after-tax earnings (determined after deduction for
payments under the Incentive Plan) are not less than 17.5% of the Company's
Average Common Equity for such fiscal year. The Average Common Equity for such
fiscal year is the average of the balance of equity attributable to the
outstanding Common Stock of the Company (including par value, additional paid in
capital and retained earnings), as reflected in the financial statements of the
Company at the end of each quarter during the fiscal year. The entire amount in
each Incentive Pool will be paid in cash to the Incentive Plan participants
within three and one-half months after the last day of the fiscal year to which
such Incentive Pool relates. Not more than 75% of the Incentive Pool will be
paid to the Chief Executive Officer, the President and the Chief Financial
Officer of the Company, with each such individual's share of such aggregate
amount to be determined by the Chief Executive Officer and subject to approval
of the Board of Directors. The balance of the Incentive Pool will be paid to
other senior management employees of the Company as determined by the Chief
Executive Officer and subject to the approval of the Board of Directors. No
awards were made under the Incentive Plan for 1999 or 1998.
Report of the Compensation Committee
During 1999 the Compensation Committee (hereinafter, the "Committee"), was
comprised of two out of six of the Company's directors, Stanley Green and Curtis
S. Lane. The Committee reviews and approves the compensation of each of the
executive officers of the Company (hereinafter, the "Officers"). The Committee
also administers employee stock option plans and other benefit plans.
The Company's compensation program for Officers is designed to reward such
officers for their individual performance and contribution to the Company while
at the same time being tied directly to the Company's overall performance. The
Committee and the Board of Directors believe that a direct relationship between
Officers' compensation and the Company's performance is a very important factor
in achieving the Company's objective of maximizing shareholder value. The
Company's executive compensation program consists of a base salary, a
discretionary cash bonus plan, and participation in the 1997 Stock Incentive
Plan and the Incentive Plan.
During 1999, the Compensation Committee, on recommendation of the Chairman
and Chief Executive Officer, authorized the granting of options to purchase
145,541 shares of the Company's common stock to forty-three (43) employees of
the Company under the 1997 Stock Incentive Plan. No awards were made under the
Executive Incentive Compensation Plan for 1999.
During 1999, the Chief Executive Officer received a base salary of $302,500
plus other amounts as provided for in his employment agreement. The Chief
Executive Officer did not receive a cash bonus for 1999. In determining the
Chief Executive Officer's compensation package, the Compensation Committee uses
the same criteria as for all other Officers, as well as the comparable
compensation packages of other chief executive officers in other financial
service companies and considers the extensive experience of the Chief Executive
Officer in the development of specialty finance companies. The Compensation
Committee did not recommend the payment of a cash bonus after consideration of
the Company's failure to achieve sufficient numbers of key business objectives
in 1999.
COMPENSATION COMMITTEE
Stanley Green
Curtis Lane
Stock Price Performance Graph
The following graph compares the total return of the Company's Common Stock
with the Center for Research in Securities Prices ("CRSP") Total Return Index
for the Nasdaq Stock Market (U.S. Companies) (the Nasdaq Stock Market-U.S.
Index ) and the CRSP Total Return Index for Nasdaq Financial Stocks (the Nasdaq
Financial Index ) during the period commencing on November 6, 1997, the date of
the Company's initial public offering, and ending on December 31, 1999. The
comparison assumes $100 was invested on November 6, 1997 in the Company's Common
Stock, the Nasdaq Stock Market-U.S. Index, and the Nasdaq Financial Index and
assumes the reinvestment of all dividends, if any.
<TABLE>
<CAPTION>
11/6/97* 12/31/97 12/31/98 12/31/99
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
LINC Capital, Inc. $100 $135 $57 $33
Nasdaq Stock Market - U.S. Index 100 97 137 247
Nasdaq Financial Index 100 107 104 103
*The Company's Common Stock began trading publicly on November 6, 1997.
</TABLE>
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 30, 2000, (a) by each person
known by the Company to own beneficially more than five percent of such
outstanding Common Stock, (b) by each director, (c) by the Chief Executive
Officer and the next four most highly compensated executive officers, and (d) by
all executive officers and directors of the Company as a group. Each of such
shareholders has sole voting and investment power as to shares shown unless
otherwise noted.
<TABLE>
<CAPTION>
Shares Owned Percent of
Name Beneficially (2) Class
<S> <C> <C>
Martin E. Zimmerman (1)(5)(7).......................... 2,919,129 51.4%
Wellington Management Company, LLP (3)................. 513,200 9.4
Allen P. Palles (4) (5)(7)............................. 352,033 6.2
Robert E. Laing (4)(5)(7).............................. 350,324 6.2
Stanley Green (6)....................................... 114,967 2.0
Curtis S. Lane......................................... 69,659 1.2
Terrence J. Quinn...................................... 52,507 *
Gerard M. Farren....................................... 18,200 *
William F. DeMars...................................... 12,500 *
All directors and executive officers as a group (10
persons)............................................... 4,428,636 77.9%
_________________
* Represents less than 1%.
</TABLE>
(1) Includes 624,674 shares held by Mr. Zimmerman as trustee under trusts for
the benefit of two of his 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 the Company for which Mr. Zimmerman holds proxies.
(2) Includes shares obtainable upon exercise of stock options which are or
become exercisable prior to May 30, 2000 as follows: Mr. Zimmerman, 55,641
shares; Mr. Palles, 55,389 shares; Mr. Laing, 78,496 shares; Mr. Lane,
13,333 shares; Mr. Green, 18,333 shares; Mr. Quinn, 13,333 shares; Dr.
Farren, 5,000 shares; Mr. DeMars, 12,500 shares; and all directors and
executive officers as a group, 209,854 shares. The percentages set forth in
the above table give effect to the exercise of these options.
(3) Share ownership data was provided on Form 13G as of February 9, 1999 as
filed by the holder on such date. The address of this entity as provided on
Schedule 13G is 75 State Street, Boston, Massachusetts 02109
(4) All shares are subject to a proxy held by Mr. Zimmerman, except shares
obtainable upon exercise of stock options under the 1997 Stock Incentive
Plan which are or become exercisable prior to May 30, 2000 as follows: Mr.
Palles, 20,532 shares and Mr. Laing, 43,639 shares.
(5) This person's address is 303 East Wacker Drive, #1000, Chicago, Illinois
60601.
(6) Includes 88,799 shares held by Mr. Green and Danielle Zimmerman as
trustee(s) under a trust for the benefit of Justine and Lauren Zimmerman,
Mr. Zimmerman's daughters.
(7) Includes warrants issued in connection with Preferred Stock purchase. The
initial grant was 87,000 for Mr. Zimmerman, 14,500 for Mr. Laing, and
11,600 for Mr. Palles. The warrrants vest the last day of each month
starting February 29, 2000 with the last vesting September 30, 2000 as
follows: 21,750 per month for Mr. Zimmerman, 3,625 per month for Mr. Laing
and 2,900 per month for Mr. Palles.
<PAGE>
Item 13. Certain Relationships and Related Transactions
Effective as of November 12, 1997 and simultaneously with completion of the
Company's initial public offering, the Company distributed all of the issued and
outstanding stock of LFC Capital, Inc. (formerly known as LINC Finance
Corporation) ( LFC Capital ) to Mr. Martin E. Zimmerman, Chairman and Chief
Executive Officer of the Company and Mr. Allen P. Palles, a Director and
Executive Vice President and Chief Financial Officer of the Company, in
redemption of 446,483 shares and 36,209 shares, respectively, of Common Stock of
the Company held by them. The principal business activity of LFC Capital
consists primarily of managing liquidation of a portfolio of leased diagnostic
imaging equipment as well as managing several limited partnerships and other
assets that were not used in the Company's ongoing business. In addition, LFC
Capital invests in real estate and the equity and debt securities of other
companies. Mr. Zimmerman is Chairman of LFC Capital and Mr. Palles is a director
of LFC Capital and they are compensated by it for their services.
Pursuant to an agreement (the Servicing Agreement ) with LFC Capital,
which became effective on November 12, 1997, the Company agreed to provide
limited servicing, including billing and cash application for the portfolio of
leases owned by LFC Capital until December 31, 1999. The Company received
$156,000 and $270,000 for such services performed in 1999 and 1998,
respectively. The Company has agreed to provide such services to LFC Capital in
2000 on a month-to-month basis for $4,000 per month. In addition, 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 which is equal to the Company's cost for
such space. Thirty-day notice is required by either party to terminate these
agreements. The Servicing Agreement prohibits LFC Capital from competing with
the Company for the longer of (i) three years or (ii) the period of time during
which Messrs. Zimmerman or Palles are employed by the Company plus one year. The
Servicing Agreement also requires LFC Capital to refer all lease origination
opportunities it encounters to the Company. Effective January 31, 2000, Mr.
Palles terminated his relationship with LFC Capital.
In connection with the distribution of the stock of LFC Capital, LFC
Capital has also agreed to pay the Company an aggregate of $2,508,000 until the
maturity of the Company's 8 1/4% Subordinated Debentures due 2003 of which
$365,000 was paid during 1999 and $308,000 was paid during 1998.
As of March 30, 2000, LFC Capital owns 23,000 shares of the Company's
Common Stock.
Terrence J. Quinn, a director of the Company also serves as President of
LFC Capital and is compensated for his services to LFC Capital by LFC Capital.
Mr. Quinn also serves as a consultant to the Company with respect to various
aspects of the Company's business and strategic issues. Fees paid for such
services by the Company were $156,000 for the year ended December 31, 1999 and
$188,000 for the year ended December 31, 1998 (including, a referral fee paid in
connection with the acquisition of Comstock Leasing, Inc.). A portion of the
such fees were paid pursuant to the terms of a one-year consulting agreement the
Company entered into with Mr. Quinn on October 31, 1997 to perform certain
consulting services in connection with the Company's activities relating to
acquisitions of leasing and rental companies as well as other strategic
initiatives (the Consulting Agreement ). Fees paid under the Consulting
Agreement during 1998 were dependent on the number of days of consulting
services provided per month with a base monthly fee of $6,250 for three days of
consulting services provided per month and $2,500 per day for each additional
day, plus reimbursement for travel and entertainment expenses directly incurred
in connection with the services provided to the Company. In 1998, the term of
the Consulting Agreement was extended through October 31, 1999, with the per
diem decreased from $2,500 to $2,100 per day for each additional day in excess
of the three (3) days. The Consulting Agreement with Mr. Quinn has not been
renewed by the Company; however, the Company continues to engage Mr. Quinn for
consulting services on a per diem basis. The Company may also pay such other
additional fees relating to the success of an acquisition transaction as may be
approved by the Compensation Committee of the Board of Directors. The Consulting
Agreement is subject to termination by the Company or Mr. Quinn on ninety (90)
days notice.
During 1997, Robert E. Laing, President, Chief Operating Officer and
Director of the Company, and Allen P. Palles, Executive Vice President, Chief
Financial Officer and Director of the Company issued promissory notes secured by
shares of the Company's Common Stock to the Company in connection with the
exercise of stock options by them. The secured promissory notes bear interest at
8%. In 1998, Mr. Laing repaid all of such indebtedness. As of December 31, 1999,
the indebtedness outstanding under the note issued by Mr. Palles was $203,000,
which was the largest indebtedness outstanding under the note for such year.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
See Index to Financial Statements at page F-1.
(2) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts is at page S-2. All
schedules, other than those included herein, are omitted because they are not
applicable or the required information is shown in the financial statements or
notes. (3) Exhibits
(3) Exhibits
Exhibit Document Description
Number --------------------
- ------
3.1 Form of Restated Certificate of Incorporation of the Company (incorporated
by reference to Exhibit 3.1 to the Company's Registration Statement on Form
S-1 (Registration No. 333-34729) ("Registration Statement 333-34729")
3.2 Form of Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.2 on Registration Statement 333-34729)
4.1 Form of certificate representing shares of Common Stock, $0.001 par value
per share (incorporated by reference to Exhibit 4.1 on Registration
Statement 333-34729)
4.2(a) Offering of Units of Series A 8% Senior Cumulative Preferred Stock; Stock
Purchase Agreement
4.2(b) Certificate of Designation of the Rights and Preferences of Series A 8%
Senior Cumulative Preferred Stock 4.2(c) Stock Purchase Agreement and
Registration Rights Agreement 10.1(a) Third Amended and Restated Loan
Agreement, among the Company, the various lending institutions named
therein and Fleet Bank, N.A., as Agent (incorporated by reference to
Exhibit 10.1(a) on Registration Statement 333-34729)
10.1 (b) Amendment No. 1 to Third Amended and Restated Loan Agreement, among the
Company, the various lending institutions named therein and Fleet Bank,
N.A., as Agent (incorporated by reference to Exhibit 10.1(b) on
Registration Statement 333-34729) 10.1(c) Amendment No. 5 to Third Amended
and Restated Loan Agreement, among the Company, and various lending
institutions named therein and Fleet Bank, N.A., as Agent (incorporated by
reference to the Company's Form 10-Q for the quarterly period ended
September 30, 1998)
10.1 (d) Amendment No. 9 to the Third Amended and Restated Loan Agreement, among
the Company, the various lending institutions named therein and Fleet Bank,
N.A., as Agent 10.1(e) Amendment No. 10 to the Third Amended and Restated
Loan Agreement, among the Company, the various lending institutions named
therein and Fleet Bank, N.A., as Agent
10.2 Agreement between the Company and LINC Finance Corporation ("LFC")
regarding distribution of LFC shares and related matters (incorporated by
reference to Exhibit 10.2 on Registration Statement 333-34729)
10.3 Employment Agreement for Mr. Zimmerman (incorporated by reference to
Exhibit 10.3 on Registration Statement 333-34729)
10.4 Form of Employment Agreements for Messrs. Palles, Laing, Erbes and Dr.
Farren (incorporated by reference to Exhibit 10.4 on Registration Statement
333-34729)
10.5 Non-Employee Director Option Plan (incorporated by reference to Exhibit
10.5 on Registration Statement 333-34729) 10.5(a) Amendment No. 1 to the
Non-Employee Director Option Plan (incorporated by reference to Exhibit A-2
filed with the Company's Proxy Statement dated April 28,1999) 10.6
Executive Incentive Compensation Plan (incorporated by reference to Exhibit
10.6 on Registration Statement 333-34729) 10.7 1994 Stock Option Plan
(incorporated by reference to Exhibit 10.7 on Registration Statement
333-34729)
10.8 1997 Stock Incentive Plan (incorporated by reference to Exhibit 10.8 on
Registration Statement 333-34729)
10.8(a) Amendment No. 1 to the 1997 Stock Incentive Plan (incorporated by
reference to Exhibit A-1 filed with the Company's Proxy Statement dated
April 28, 1999)
10.9 Consulting Agreement for Mr. Quinn (incorporated by reference to Exhibit
10.9 on Registration Statement 333-34729)
10.10Form of Indemnification Agreement for Non-Employee Directors (incorporated
by reference to Exhibit 10.10 on Registration Statement 333-34729)
10.11(a) Receivables Purchase Agreement, among the Company, LINC Receivables
Corporation, Blue Keel Funding, LLC, and Fleet Bank, N.A., as agent
(incorporated by reference to the Company's Form 10-Q for the quarterly
period ended September 30, 1998)
<PAGE>
Exhibit
Number Document Description
- ------- --------------------
10.11(b) Second Amendment to Receivables Purchase Agreement, among the Company,
LINC Receivables Corporation, Blue Keel Funding, LLC, and Fleet Bank, N.A.,
as agent (incorporated by reference to the Company's Form 10-Q for the
quarterly period ended September 30, 1998) 10.11(c) Fourth Amendment to
Receivables Purchase Agreement, among the Company, LINC Receivables
Corporation, Blue Keel Funding, LLC, and Fleet Bank, N.A., as agent
10.12Asset Purchase Agreement by and among LINC Capital, Inc., Spectra Precision
Credit Corp., Spectra Precision Funding Corporation, and Spectra Precision,
Inc. dated June 30, 1998 (incorporated by reference to the Company's Form
8-K dated June 30, 1998)
10.13Receivables Purchase Agreement, among the Company, LINC Receivables 1999
Corporation, Blue Keel Funding, LLC, and Fleet Bank, N.A., as agent 10.14
Sale Agreement, among LINC Capital, Inc., as Seller, and LINC Equipment
Receivables One, LLC, as Purchaser 21.1 Subsidiaries of the Company
(incorporated by reference to Exhibit 21.1 on Registration Statement
333-34729)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the last quarter of
the fiscal year ended December 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized. LINC CAPITAL, INC.
Dated: April 13, 2000
By: /s/ Robert E. Laing
---------------
Robert E. Laing
President and Chief Operating Officer
By: /s/ Allen P. Palles
---------------
Allen P. Palles
Executive Vice President and Chief
Financial Officer
(principal executive officers)
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below on April 13, 2000, by the following persons on
behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Capacity
------------ ------------
<S> <C>
/s/ Martin E. Zimmerman
- -----------------------------------------------------------
Martin E. Zimmerman Chairman of the Board
/s/ Allen P. Palles
- -----------------------------------------------------------
Allen P. Palles Chief Financial Officer and Director
(principal financial officer)
/s/ Robert E. Laing
- -----------------------------------------------------------
Robert E. Laing Director
/s/ Stanley Green
- -----------------------------------------------------------
Stanley Green Director
/s/ Terrence J. Quinn
- -----------------------------------------------------------
Terrence J. Quinn Director
/s/ Curtis S. Lane
- -----------------------------------------------------------
Curtis S. Lane Director
</TABLE>
<TABLE>
<CAPTION>
LINC CAPITAL, INC. AND SUBSIDIARIES
Index to
Consolidated Financial Statements
Page
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets, December 31, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations, years ended December 31, 1999, 1998,
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity, years ended December 31, 1999, 1998, and 1997 . . . F-5
Consolidated Statements of Cash Flows, years ended December 31, 1999, 1998,
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
and Stockholders
LINC Capital, Inc.:
We have audited the accompanying consolidated balance sheets of LINC Capital,
Inc. and subsidiaries as of December 31, 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>
<TABLE>
<CAPTION>
LINC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
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.
[KPMG LLP Letterhead]
Independent Auditors' Report
The Board of Directors and Stockholders
LINC Capital, Inc.:
Under date of April 13, 2000 we reported on the 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, as
contained in the annual report on Form 10-K for the year 1999. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related financial statement schedule. The financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our
audits.
The audit report on the consolidated financial statements of LINC Capital, Inc.
and subsidiaries referred to above contains an explanatory paragraph that states
the Company incurred a loss in 1999, the Company is not in compliance with
certain debt covenants of existing credit facilities, and 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.
These circumstances raise substantial doubt about the entity's ability to
continue as a going concern. The financial statement schedule included does 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
financial statement schedule.
/s/ KPMG LLP
Chicago, Illinois
April 13, 2000
<PAGE>
Schedule II - Valuation and Qualifying
Accounts
For the Three Years Ended December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance at
beginning of costs and Recoveries end
Description period expenses and other Charge offs of period
- ---------------------------------------- --------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year ended December 31, 1997 1,294 1,253 203 (198) 2,552
Year ended December 31, 1998 2,552 5,280 1,079 (3,312) 5,599
Year ended December 31, 1999 5,599 15,966 1,163 (10,732) 11,996
Inventory Reserve
Year ended December 31, 1997 552 123 - (105) 570
Year ended December 31, 1998 570 106 - (58) 618
Year ended December 31, 1999 618 126 - (75) 669
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000936094
<NAME> LINC Capital, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,394
<SECURITIES> 2,448
<RECEIVABLES> 13,354
<ALLOWANCES> 11,918
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 35,579
<DEPRECIATION> 9,464
<TOTAL-ASSETS> 512,888
<CURRENT-LIABILITIES> 0
<BONDS> 460,063
0
0
<COMMON> 29,515
<OTHER-SE> 8,300
<TOTAL-LIABILITY-AND-EQUITY> 512,888
<SALES> 34,941
<TOTAL-REVENUES> 93,705
<CGS> 28,526
<TOTAL-COSTS> 28,526
<OTHER-EXPENSES> 40,095
<LOSS-PROVISION> 15,966
<INTEREST-EXPENSE> 24,686
<INCOME-PRETAX> (22,841)
<INCOME-TAX> (1,307)
<INCOME-CONTINUING> (21,534)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,534)
<EPS-BASIC> (4.10)
<EPS-DILUTED> (4.10)
</TABLE>
