SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-23309
LINC CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0850149
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
303 East Wacker Drive, Chicago, Illinois 60601
(Address of principal executive offices) (Zip Code)
(312) 946-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At June 30, 2000, 5,265,050 shares of the Registrant's Common Stock were
outstanding.
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LINC CAPITAL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 (unaudited)................ 3
Consolidated Statements of Operations -
Three and six months ended June 30, 2000 and 1999 (unaudited).. 4
Consolidated Statements of Cash Flows -
Three and six months ended June 30, 2000 and 1999 (unaudited).. 5
Notes to Consolidated Financial Statements (unaudited).............. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 22
Item 2. Changes in Securities and Use of Proceeds........................... 22
Item 3. Defaults Upon Senior Securities..................................... 23
Item 4. Submission of Matters to a Vote of Security Holders................. 23
Item 5. Other Information................................................... 23
Item 6. Exhibits and Reports on Form 8-K.................................... 23
SIGNATURES .................................................................... 24
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LINC Capital, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except share data)
<TABLE>
June 30, December 31,
<S> <C> <C>
2000 1999
ASSETS
Net investment in direct finance leases and loans........ $372,041 $436,820
Equipment held for rental and operating leases, net...... 27,407 26,115
Accounts receivable...................................... 11,102 13,354
Restricted cash.......................................... 9,284 11,254
Other assets............................................. 17,251 17,726
Goodwill................................................. 1,629 3,225
Cash and cash equivalents................................ 5,166 4,394
------------------ ----------------
Total assets............................................. $443,880 $512,888
================== ================
LIABILITIES AND STOCKHOLDERS EQUITY
Senior credit facility and other senior notes payable.... $87,180 $102,754
Recourse debt............................................ 2,302 3,152
Nonrecourse debt......................................... 309,871 348,098
Accounts payable......................................... 14,625 15,208
Accrued expenses......................................... 6,907 8,795
Customer holdbacks....................................... 5,459 7,607
Subordinated debentures.................................. 6,266 6,059
------------------ ----------------
Total liabilities........................................ $432,610 $491,673
------------------ ----------------
Redeemable preferred stock, $25,000 par value, 225
shares authorized, issued and
outstanding, stated at redemption value................ 5,827 -
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 15,000,000 shares
authorized; 5,330,953 shares issued;
5,265,050 shares outstanding........................... 5 5
Additional paid-in capital............................... 29,595 29,797
Deferred compensation from issuance of options........... (11) (12)
Stock note receivable.................................... (182) (182)
Treasury stock, at cost; 65,903 shares................... (287) (287)
Accumulated other comprehensive income................... 80 932
Accumulated deficit...................................... (23,757) (9,038)
------------------ ----------------
Total stockholders' equity $5,443 $21,215
------------------ ----------------
Total liabilities and stockholders' equity $443,880 $512,888
================== ================
See accompanying notes to consolidated financial statements.
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<TABLE>
LINC Capital, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
Three Months ended Six Months ended
June 30, June 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
REVENUES:
Sales of equipment................................. $11,535 $9,110 $20,623 $16,009
Direct finance lease income........................ 9,221 7,095 19,658 12,933
Interest income.................................... 842 819 1,789 1,638
Rental and operating lease revenue................. 2,094 2,678 4,258 5,377
Servicing fees and other income.................... 868 1,317 1,690 3,948
Gain (loss) on sale of lease receivables........... (175) 284 (9) 355
Gain on equipment residual values.................. 304 312 441 563
Net gain on equity participation rights............ 380 1,004 328 1,238
-------------- ------------- --------------- ------------
Total revenues 25,069 22,619 48,778 42,061
-------------- ------------- --------------- ------------
EXPENSES:
Cost of equipment sold............................. $9,172 $7,569 $16,575 $13,067
Selling, general and administrative................ 7,520 5,362 13,609 11,561
Interest........................................... 8,216 4,999 16,662 9,030
Depreciation of equipment under rental agreements
and operating leases............................. 1,436 1,770 3,011 3,553
Amortization of intangibles........................ 439 252 865 510
Provision for credit losses........................ 7,069 1,802 8,266 2,888
Impairment loss on assets.......................... 4,509 - - - 4,509 - - -
------------- -------------- -------------- ------------
38,361 21,754 63,497 40,609
Total expenses
------------- -------------- -------------- ------------
Earnings (loss) before income taxes...................... (13,292) 865 (14,719) 1,452
Income tax expense....................................... - - - 244 - - - 406
------------- -------------- -------------- ------------
Net earnings (loss)...................................... $(13,292) $621 $(14,719) $1,046
Net earnings (loss) per common share:
Basic............................................. $(2.55) $ .12 $(2.83) $ .20
Diluted........................................... $(2.55) $ .12 $(2.83) $ .19
See accompanying notes to consolidated financial statements.
</TABLE>
LINC Capital, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
<TABLE>
Three Months ended Six Months ended
June 30, June 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
Cash flows from operating activities:
Net earnings (loss)........................................ (13,292) $621 $(14,719) $1,046
Adjustments to reconcile net earnings (loss) to net cash
provided by operations:
Depreciation and amortization.................... 2,154 2,223 4,450 4,475
Direct finance lease income...................... (9,221) (7,095) (19,658) (12,933)
Payments on direct finance leases................ 59,729 37,364 118,281 58,406
Deferred income taxes............................ - - - 550 - - - 712
Provision for credit losses...................... 7,069 1,802 8,266 2,888
(Gain) loss on sale of lease receivables......... 175 (284) 9 (355)
Gain on equity participation rights.............. (380) (1,004) (328) (1,238)
Impairment loss on assets........................ 4,509 - - - 4,509 - - -
Amortization of discount......................... 106 89 207 175
Deferred compensation............................ - - - 7 1 (19)
Changes in assets and liabilities:
Decrease (increase) in receivables............... 16 (997) 2,252 (2,246)
Decrease (increase) in restricted cash........... 3,733 (2,947) 1,970 (4,369)
Decrease (increase) in other assets and goodwill. (4,871) (616) (4,682) 143
Increase (decrease) in accounts payable.......... 5,225 1,537 (583) 5,226
Increase (decrease) in accrued expenses.......... 840 829 (1,889) (152)
Increase (decrease) in customer holdbacks........ (3,892) (268) (2,148) (1,418)
--------- -------- -------- --------
Cash provided by operating activities......................... 51,900 31,811 95,938 50,341
--------- -------- -------- --------
Cash flows from investing activities:
Cost of equipment acquired for lease and rental......... (3,743) (100,639) (63,131) (197,604)
Cash used in acquisitions, net of cash acquired......... - - - - - - - - - (1,497)
Receipts on securitization retained interest............ - - - 2,507 88 4,895
Fixed assets purchased.................................. (184) (205) (630) (679)
Proceeds from sale of investments....................... 440 - - - 440 234
--------- --------- --------- ---------
Net cash used in investing activities......................... (3,487) (98,337) (63,233) (194,651)
--------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
LINC Capital, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited) - (Continued)
(Dollars in thousands)
Three Months ended Six Months ended
<S> <C> <C>
June 30, June 30,
2000 1999 2000 1999
Cash flows from financing activities:
Net increase (decrease) in notes payable.................... (15,945) (4,378) (15,110) 7,555
Proceeds from recourse and nonrecourse debt................. - - - 92,435 63,803 178,535
Repayments of recourse and nonrecourse debt................. (47,257) (24,906) (103,344) (47,800)
Proceeds from sales of lease receivables.................... 15,926 3,257 17,093 4,197
Proceeds from issuance of redeemable preferred stock........ - - - - - - 5,625 - - -
Sale of stock............................................... - - - - - - - - - 395
-------- -------- --------- ---------
Net cash provided by financing activities......................... (47,276) 66,408 (31,933) 142,882
-------- -------- --------- ---------
Net increase (decrease) in cash................................... 1,137 (118) 772 (1,428)
Cash at beginning of period....................................... 4,029 118 4,394 1,428
-------- -------- --------- ---------
Cash at end of period............................................. $5,166 $- - - $5,166 $- - -
======== ======== ========= =========
Supplemental disclosures of cash flow information:
Interest paid............................................... $8,677 $2,620 $17,201 $5,326
Income taxes paid........................................... $14 $282 $286 $569
See accompanying notes to consolidated financial statements.
</TABLE>
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(1) The Company
LINC Capital, Inc. (the "Company") is a finance company that provides
leasing, asset-based financing, and equipment rental and distribution services
to businesses. The Company's principal activities are (i) the direct origination
of leases and accounts receivable and other asset-backed financing to emerging
growth companies primarily serving the telecommunications, high-tech
manufacturing, Internet-related and information technology industries ("Select
Growth Finance"), (ii) the financing of leases generated by smaller equipment
lessors ("Portfolio Finance"), (iii) the rental, leasing and distribution of
analytical instruments and related equipment to companies serving the
environmental, pharmaceutical and biotechnology industries and the leasing and
distribution of equipment to Internet-related businesses ("Rental and
Distribution"), and (iv) the establishment of leasing programs for manufacturers
and distributors ("Vendor Finance").
The Company has ceased lease originations in its Select Growth Finance,
Portfolio Finance and Vendor Finance business units. The Company is continuing
the operations of the largest portion of its Rental and Distribution business.
As a consequence of the cessation of substantially all of its leasing
activities, the Company has reduced overall employment to 99 at August 10, 2000
from 221 at December 31, 1999. See Note 3.
(2) Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and the
rules and regulations of the Securities and Exchange Commission for interim
financial statements. Accordingly, the interim statements do not include all of
the information and disclosures required for annual financial statements. In the
opinion of the Company's management, all adjustments (consisting solely of
adjustments of a normal recurring nature) necessary for a fair presentation of
these interim results have been included. Inter-company accounts and
transactions have been eliminated. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999. The results for
the three-month and six-month periods ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the full year ending December
31, 2000.
The balance sheet at December 31, 1999 has been derived from the
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
Reclassifications
Certain reclassifications have been made in the 1999 financial statements
to conform to the 2000 presentation.
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
(3) Debt Covenant Violations and Continuance of the Company as a Going Concern
At June 30, 2000 and December 31, 1999, the Company was in violation of the
minimum tangible net worth, minimum earnings, leverage and interest coverage
covenants under its senior revolving credit facility (the "Loan Agreement"). The
violations under the Loan Agreement have also resulted in cross-defaults in the
agreements relating to the Company's commercial paper conduit securitization
facility (the "Conduit Facility") and its term securitization completed in July
1999 (the "Term Securitization"). Since March 2000, the Company has been in
discussions with the lenders under the Loan Agreement and the liquidity
providers under the Conduit Facility regarding forbearance from enforcement of
remedies available to such parties as a result of the Company's failure to
comply with the applicable covenants. During these forbearance discussions, the
Company is not permitted to borrow additional funds under its Loan Agreement.
New lease originations have therefore been suspended, with the exception of a
small number of leases originated as a by-product of the Company's rental and
distribution activities. The Company continues to operate its analytical
instrument rental and distribution business in the ordinary course. The
commercial paper liquidity facility available to support the Conduit Facility
has been extended by the liquidity providers to October 17, 2000. The Company
has been precluded from funding new lease transactions into the Conduit Facility
since March 31, 2000. Should liquidity not be available to the Conduit Facility
beyond October 17, 2000, the interest rate on this facility would immediately
increase by approximately 300 basis points, with further increases over time,
and the Company may be required by the liquidity providers to sell the lease
portfolio held by the Conduit Facility.
The Company has entered into agreements providing for the servicing of
substantially all of its lease portfolio by a third party, effective in August
2000. As a consequence of the transfer of servicing of lease portfolios held by
the Term Securitization and the Conduit Facility to this third party, the
Company will no longer receive servicing fees from either the Term
Securitization or the Conduit Facility. Such servicing fees for the first six
months of 2000 were $783,000.
As a result of the defaults in the Term Securitization and the Conduit
Facility, all cash flow from the leases owned by the Term Securitization and the
Conduit Facility is being used to amortize the debt certificates issued by the
Term Securitization and the amount owed to the Conduit Facility, respectively.
As a consequence, recovery of the Company's retained interest in the Term
Securitization and the Conduit Facility has been deferred from its originally
expected recovery period. This deferral has the effect of further limiting the
Company's liquidity position.
The Company is in the process of selling portfolios of leases to repay debt
under the Loan Agreement and to repay amounts owed under the Conduit Facility as
well as to provide working capital, consistent with a plan that has been
presented to its Loan Agreement lenders. The outsourcing of servicing of
substantially all of its remaining portfolio of leases will permit the Company
to substantially reduce its overhead. Employee headcount has been reduced from
221 at December 31, 1999, including 53 in the rental and distribution
operations, to 99 at August 10, 2000, including 50 in rental and distribution.
Lenders under the Loan Agreement have been asked to forebear to allow the
Company to implement its plans in an orderly fashion. At this time, such Lenders
have continued to reserve their rights under the Loan Agreement and the Company
is in continuing discussions with such Lenders intended to lead to an
out-of-court restructuring and refinancing of the Company's operations.
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
The Company is also in the process of soliciting proposals to either
refinance its Analytical Instrument Rental and Distribution business or to sell
this business to a third party.
In addition to its lease portfolios and its Rental and Distribution
business, the Company holds warrants and other equity interests in 55 companies
who are lessees of its Select Growth business. Based on the closing price of
publicly held securities in this portfolio at August 10, 2000, the value of the
Company's warrants in publicly held securities was $30.3 million, substantially
all of which was attributable to warrants held by the Company in Corvis
Corporation (the "Corvis Warrants"). In July 2000, Corvis Corporation, in which
the company holds warrants to purchase 327,972 shares at a price of $0.762 per
share completed its initial public offering. The Company is subject to a
"lock-up" agreement that restricts the Company's ability to sell the Corvis
Warrants prior to late January 2001. The unrealized gain on the Corvis Warrants
has not been included in income or stockholders' equity. See Item 5 - Other
Information.
In the event that the Company is unable to successfully obtain forbearance
from its secured creditors for a period that enables it to sell elements of its
lease portfolio, to refinance or sell its Rental and Distribution business
and/or to liquidate its portfolio of warrants, the Company may be required to
seek protection under the Bankruptcy Code. Also, if various unsecured creditors
whose obligations are past due, were to enforce their claims, the Company could
be forced into bankruptcy. In addition, even if the Company were to successfully
obtain forbearance from its secured lenders, forestall action by its unsecured
creditors, successfully sell elements of its lease portfolio, refinance or sell
its Rental and Distribution Business and liquidate its portfolio of warrants,
there can be no assurance that the proceeds of the sale or refinancing of these
assets would provide the Company with sufficient liquidity to continue operating
as a going concern. These circumstances raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements at June 30, 2000 and December 31, 1999 do not include any adjustments
that might result from the outcome of this uncertainty.
(4) Impairment of Assets
At June 30, 2000, as a result of the substantial decline in new lease
originations and downsizing, the Company recognized an impairment loss of
$4,509,000. Included in the impairment loss is $1,600,000 relating to the
estimated net excess cost of the space lease for the Company's corporate
headquarters, which the Company is actively attempting to sublease. Due to the
downsizing of its operations, the Company recognized an impairment loss of
$1,240,000 on furniture, fixtures, computer and related equipment for assets no
longer in use equal to the difference between the net book value of these assets
and their estimated fair value. Also included in the impairment loss is
$1,669,000 relating to the goodwill associated with the acquisition of LINC IF+E
in August 1999, part of the Company's Rental and Distribution business unit,
since the Company expects to either sell LINC IF+E at approximately tangible
book value or liquidate its operations.
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
<TABLE>
(5) Net Investment in Direct Finance Leases and Loans
Net investment in direct finance leases and loans is as follows:
<S> <C> <C>
June 30, December 31,
2000 1999
(In thousands)
Lease and loan contracts receivable in installment............... $431,819 $501,557
Estimated residual value of leased equipment..................... 15,651 17,386
Broker fees...................................................... 4,175 3,857
Initial direct costs............................................. 4,201 4,482
Unearned lease income............................................ (66,694) (78,544)
Allowance for doubtful receivables............................... (17,111) (11,918)
----------------- ----------------
Net Investment................................................... $372,041 $436,820
================= ================
(6) Equipment Held for Rental and Operating Leases, Net
The net book value of equipment held for rental and operating leases is as follows:
June 30, December 31,
2000 1999
(In thousands)
Equipment under operating leases................................ $6,589 $6,993
Equipment under rental agreements............................... 20,818 19,122
------------------ ----------------
Net book value.................................................. $27,407 $26,115
================== ================
</TABLE>
The book values presented in the above table are net of accumulated
depreciation of $11,131,000 and $10,128,000 at June 30, 2000 and December 31,
1999, respectively. Equipment under rental agreements is comprised primarily of
analytical instruments.
(7) Loss Experience Reserves
The following table sets forth delinquencies as a percentage of gross
remaining receivables on leases included in the Company's owned and managed
lease portfolio and the allowance for doubtful receivables provided, as well as
holdback reserves on portfolios acquired, as of the ends of the periods
indicated.
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
<TABLE>
June 30, December 31,
<S> <C> <C>
2000 1999
(Dollars in thousands)
Select Growth Finance:
Gross Receivable Balance $50,020 $79,980
31 - 60 days past due 2.28% 1.08%
61 - 90 days past due 1.15% 0.66%
Over 90 days past due 2.58% 1.20%
Portfolio Finance:
Gross Receivable Balance $174,009 $223,538
31 - 60 days past due 3.08% 2.65%
61 - 90 days past due 1.39% 1.60%
Over 90 days past due 1.90% 0.08%
Rental and Distribution:
Gross Receivable Balance $16,041 $12,450
31 - 60 days past due 5.84% 6.48%
61 - 90 days past due 0.28% - -
Over 90 days past due 0.23% 0.07%
Vendor Finance:
Gross Receivable Balance $219,234 $224,253
31 - 60 days past due 4.89% 3.31%
61 - 90 days past due 2.03% 1.34%
Over 90 days past due 3.75% 1.70%
Totals:
Gross Receivable Balance $459,304 $540,221
31 - 60 days past due 3.95% 2.78%
61 - 90 days past due 1.63% 1.31%
Over 90 days past due 2.80% 0.92%
Allowance for doubtful receivables included in:
Net investment in direct finance leases and loans $17,111 $11,918
Securitization retained interest - - - 78
------------------ ----------------
$17,111 $11,996
Holdback reserves on portfolios acquired 1,535 2,386
------------------ ----------------
Total allowance and holdbacks $18,646 $14,382
================== ================
Recourse to Portfolio Finance customers in addition
------------------ ----------------
to holdback reserves on portfolios acquired $17,063 $18,333
================== ================
</TABLE>
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
<TABLE>
(8) Debt
Notes Payable
Notes Payable to banks and others were as follows:
<S> <C> <C>
June 30, December 31,
2000 1999
(In thousands)
Senior credit facility................................... $85,065 $99,700
Other.................................................... 2,115 3,054
------------------ ----------------
Total................................. $87,180 $102,754
================== ================
</TABLE>
At June 30, 2000 and December 31, 1999, $85,065,000 and $99,700,000,
respectively, was outstanding under a senior credit facility (the "Loan
Agreement"). The weighted-average interest rate on the Loan Agreement at June
30, 2000 and December 31, 1999 was 8.10% and 7.65%, respectively. The facility
is secured by substantially all of the assets of the Company and was used by the
Company to finance the acquisition of equipment pending completion of permanent
financing and for normal working capital purposes. As of June 30, 2000 and
December 31, 1999, the Company was in violation of the covenants of its Loan
Agreement relating to minimum earnings, minimum tangible net worth, leverage and
interest coverage. It was also in violation of covenants contained in the
agreements relating to the Conduit Facility and the Term Securitization. For
further information, see Note 3.
Nonrecourse and Recourse Debt
At June 30, 2000 and December 31, 1999, the Company had $155,694,000 and
$134,228,000 of nonrecourse debt recorded on its consolidated balance sheet
under its Conduit Facility, with weighted-average interest rates of 8.09% and
6.26%, respectively. Additionally, at June 30, 2000 and December 31, 1999,
$134,677,000 and $179,891,000 was recorded as nonrecourse debt under the Term
Securitization. The weighted-average interest rate on the Term Securitization is
6.24%. The Company also permanently finances leases with financial institutions,
on either a nonrecourse or partial recourse basis. At June 30, 2000 and December
31, 1999, the Company had $21,802,000 and $37,131,000, respectively, outstanding
under these financings.
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
(9) Earnings (Loss) per Share
<TABLE>
The following table sets forth the computation of basic and diluted earnings (loss) per share.
Three months ended Six months ended
<S> <C> <C>
June 30, June 30,
2000 1999 2000 1999
(In thousands, except share data)
Net earnings (loss) from operations......................... $(13,292) $621 $(14,719) $1,046
Preferred stock dividends................................... 127 - - - 202 - - -
--------------- ----------------- -------------- ------------
Numerator for basic and diluted earnings (loss) per share
Net earnings (loss) available to common
stockholders............................................. $(13,419) $621 $(14,921) $1,046
--------------- ----------------- -------------- ------------
Denominator for basic earnings per share - weighted
average shares outstanding....................... 5,265,050 5,265,050 5,265,050 5,243,486
Effect of dilutive stock options..................... - - - 120,872 - - - 128,003
--------------- ----------------- -------------- ------------
Denominator for diluted earnings (loss) per share........... 5,265,050 5,385,922 5,265,050 5,371,489
Net earnings (loss)
Basic earnings (loss) per share...................... $(2.55) $.12 $(2.83) $.20
=============== ================= ============== ============
Diluted earnings (loss) per share......... $(2.55) $.12 $(2.83) $.19
=============== ================= ============== ============
Contingent shares issuable in connection with the acquisition of Monex
Leasing, Ltd. and stock options that could potentially dilute earnings per share
in the future, that were not included in the computation of diluted earnings per
share because to do so would have been antidilutive were 355,610 and 32,352 for
the year six months ended June 30, 2000 and 1999, respectively.
(10) Comprehensive Income
The components of comprehensive income (loss) for the six months ended June 30, 2000 and 1999 are as follows:
Six months ended June 30,
2000 1999
(In thousands)
Net earnings (loss).................................. $(14,719) $1,046
Other comprehensive income (loss), net of tax:
Unrealized loss on securities............. (877) 401
Foreign currency translation adjustment... 25 131
---------- -------
Comprehensive income (loss)........................... $(15,571) $1,578
========== =======
Accumulated other comprehensive income (loss), net of tax, at June 30, 2000 and December 31, 1999 consists of
unrealized gains (losses) on securities of $(106,000) and $771,000 and accumulated foreign currency translation
adjustments of $186,000 and $161,000, respectively.
</TABLE>
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
(11) Segment Information
The Company has four reportable segments: Select Growth Finance, Portfolio
Finance, Rental and Distribution, and Vendor Finance. The following table
presents certain information by segment.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Select Rental
Growth Portfolio and Vendor
(Dollars in thousands) Finance Finance Distribution Finance Corporate Consolidated
Three months ended June 30, 2000
Total revenues....................... $1,500 $3,778 $13,906 $5,885 $ - $25,069
Depreciation and
amortization expense............ 155 111 1,304 305 - 1,875
Interest expense..................... 1,004 3,205 563 3,444 - 8,216
Loss before income taxes*............ (1,716) (2,662) (1,159) (5,816) (1,939) (13,292)
Total assets......................... 37,240 155,882 50,129 193,749 6,880 443,880
Lease fundings....................... $796 $774 $3,103 $1,217 $ - $5,890
Three months ended June 30, 1999
Total revenues....................... $3,714 $4,477 $10,981 $3,447 $ - $22,619
Depreciation and
amortization expense............ 103 552 1,143 224 - 2,022
Interest expense..................... 1,365 2,359 367 908 - 4,999
Earnings (loss) before income taxes.. 308 375 361 35 (214) 865
Total assets......................... 78,434 174,163 34,498 115,907 2,871 405,873
Lease fundings....................... $13,421 $36,275 $2,133 $46,296 $ - $98,125
Six months ended June 30, 2000
Total revenues....................... $3,055 $7,699 $25,252 $12,772 $ - $48,778
Depreciation and
amortization expense............. 287 357 2,530 702 - 3,876
Interest expense..................... 2,062 6,460 1,124 7,016 - 16,662
Loss before income taxes*............ (2,381) (2,987) (1,108) (5,818) (2,425) (14,719)
Total assets......................... 37,240 155,882 50,129 193,749 6,880 443,880
Lease fundings....................... $3,305 $6,511 $6,890 $38,145 $ - $54,851
Six months ended June 30, 1999
Total revenues....................... $6,490 $9,874 $19,765 $5,932 $ - $42,061
Depreciation and
amortization expense............. 214 1,123 2,296 430 - 4,063
Interest expense..................... 2,448 4,215 684 1,683 - 9,030
Earnings (loss) before income taxes.. 545 2,279 517 (1,381) (508) 1,452
Total assets......................... 78,434 174,163 34,498 115,907 2,871 405,873
Lease fundings....................... $19,778 $99,368 $4,774 $70,301 $ - $194,221
* Included in loss before income taxes for the three months and six months
ended June 30, 2000 is an impairment loss on assets as follows: Rental and
Distribution - $1,669 of goodwill associated with LINC IF+E, Vendor Finance -
$123 of furniture, fixtures, computers and related equipment, and Corporate -
$2,717 of furniture, fixtures, computers and related equipment and estimated
loss on lease agreement.
</TABLE>
<PAGE>
LINC Capital, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited) - (Continued)
(12) Redeemable Preferred Stock
On February 1, 2000, the Company issued $5,625,000 of Series A 8%
Cumulative Redeemable Preferred Stock. The issuance of this series of preferred
stock was coupled with warrants to purchase 326,250 shares of the Company's
common stock at $5.49 per share. Additional warrants for up to 652,500 shares
may be issued on a pro-rata basis through September 30, 2000, if the preferred
shares are not redeemed as a result of a change of control or a refinancing
prior to that time. The Preferred Stock bears dividends at 8% per annum through
December 31, 2000, 10% per annum from January 1, 2001 through December 31, 2001
and 12% per annum thereafter. At June 30, 2000, $202,000 of accrued but unpaid
dividends are included in the preferred stock amount on the consolidated balance
sheet. The Preferred Stock is mandatorily redeemable upon a change of control or
on January 31, 2005, whichever occurs first. The Company has not paid or
declared the dividends payable as a result of defaults under the Loan Agreement.
As a consequence, the dividend rate has been increased to 9%.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months ended June 30, 2000 compared to Three Months ended June 30, 1999
Sales of equipment increased to $11.5 million from $9.1 million, while cost
of equipment sold increased to $9.2 million from $7.6 million due to the
acquisition of Internet Finance & Equipment, Inc. in August 1999 (now LINC IF+E)
which distributes and leases telecommunications, routing and Internet enabling
equipment. This increase was partially offset by a 5.4% and 6.1% decrease in
sales of analytical instruments and cost of analytical instruments sold,
respectively, in the Company's other Rental and Distribution business. The
increase in net margins on sales of equipment increased to 20.5% from 16.9%
primarily due to higher margins obtained by LINC IF+E compared to margins on the
sale of analytical instruments.
Direct finance lease income increased to $9.2 million from $7.1 million as
a result of a substantially higher level of finance lease receivables
outstanding, arising from acquired companies and from internal lease
originations, a greater portion of which are retained on the Company's balance
sheet. Average finance lease receivables outstanding increased 44%.
Interest income was $0.8 million for both periods due to a consistent level
of interest-bearing notes receivable held by the Company during those periods.
Direct finance lease income and interest income, minus interest expense, was
$1.8 million, or 18.4% of direct finance lease income and interest income (the
"Interest Margin") compared to $2.9 million, or 36.8%, in the prior year period.
The decrease in the Interest Margin is due to an increase in interest rates
beginning in the second half of 1999 and a decrease in interest income recorded
on the Company's securitization retained interest, resulting from the repurchase
of lease receivables from the Company's commercial paper conduit facility in
connection with completion of a term securitization.
Rental and operating lease revenue decreased to $2.1 million from $2.7
million primarily due to the maturing of operating leases acquired in 1998.
Servicing fees and other income decreased to $0.9 million from $1.3
million. Servicing fees and other income primarily consists of fees received for
servicing off-balance sheet securitized leases, fees received for servicing
third party lease portfolios, interim rents received by Select Growth Finance,
and late fees. The decrease over the prior year period primarily relates to a
decrease in fees received for servicing securitized leases resulting from a
reduction in off-balance sheet securitized leases. Additionally, interim rents
received by Select Growth Finance and late fees collected by Vendor Finance
decreased between periods.
Gain (loss) on sale of lease receivables decreased to a loss of $0.2
million from a gain of $0.3 million. These amounts represent gains or losses on
lease receivables sold to third parties and fluctuate based on the volume of
lease receivables sold in a given period.
Gains on equipment residual values were $0.3 million for each period. Gains
on equipment residual values fluctuate based on the dollar volume of leases
maturing in a given period and the economics of those sales.
During the second quarter of 2000, the Company recognized a gain of $0.4
million on certain equity participation rights versus a gain of $1.0 million in
the comparable prior year period. Equity participation gains and losses
fluctuate from period to period based on the value of securities in the
Company's portfolio and the timing of the sale of these securities. In July
2000, Corvis Corporation, in which the company holds warrants to purchase
327,972 shares at a price of $0.762 per share completed its initial public
offering. On the basis of the closing price of such shares at August 10, 2000,
the Company's unrealized gain on such warrants was $30.0 million. The Company is
subject to a "lock-up" agreement that restricts the Company's ability to sell
the Corvis Warrants prior to late January 2001. This unrealized gain has not
been recorded in income, nor has it been reflected in stockholders' equity.
Selling, general and administrative expenses, net of initial direct costs
capitalized, increased to $7.5 million from $5.4 million. The increase resulted
primarily from an increase in personnel and operating costs associated with the
acquisition of LINC IF+E in August 1999 in the Company's Rental and Distribution
business unit, professional fees incurred related to the Company's violation of
covenants under its Loan Agreement, Conduit Facility, and Term Securitization,
and a decrease in initial direct costs capitalized due to an 94% decrease in
lease originations between periods. The number of people employed, including
employees of companies acquired, decreased 36% to 117 between June 30, 1999 and
June 30, 2000. The Company believes that as a result of the cessation of
substantially all leasing activities and the reduction of its employee headcount
to 99 at August 10, 2000 from 221 at December 31, 2000, it has substantially
reduced its selling, general and administrative expenses commencing in the third
quarter of 2000.
Interest expense increased to $8.2 million from $5.0 million, due primarily
to increased borrowings resulting from growth in lease originations and lease
portfolios acquired, with the resulting increase in borrowings, and an increase
of over 100 basis points in the Company's weighted average interest rates on
outstanding debt. In addition, interest expense increased over the same period
in the prior year as a result of the repurchase by the Company during the
quarter ended September 30, 1999 of $99.0 million in lease receivables
previously sold to its commercial paper conduit facility utilizing proceeds of a
term securitization which increased the level of nonrecourse debt. Average
finance lease receivables outstanding increased 44%.
Depreciation of equipment decreased to $1.4 million from $1.8 million due
to a decrease in operating leases, partially offset by an increase in equipment
under rental agreements. The average net book value of equipment held for rental
and operating leases decreased approximately 9% over the prior year period.
Amortization of intangibles increased to $0.4 million from $0.3 million due
to the amortization of issuance costs resulting from a term securitization
completed during the third quarter of 1999, partially offset by a decrease in
goodwill amortization due to the write-off of goodwill associated with the
acquisitions of Comstock Leasing Inc., Monex Leasing, Ltd., Spectra Precision
Credit Corp. and Connor Capital Corporation at December 31, 1999.
The provision for credit losses increased to $7.1 million from $1.8
million. The portion of the Company's lease portfolio that was delinquent more
than 60 days increased to 4.4% of the gross receivable balance at June 30, 2000
from 2.6 % of the gross receivable balance at March 31, 2000. As a consequence
of this increase, in the second quarter of 2000, the Company recorded a
provision to increase its allowance for doubtful receivables to 4.6 % of its net
investment in leases and loans at June 30, 2000 as compared to 2.7 % at March
31, 2000. In addition to the allowance for doubtful receivables, the Company has
retained holdbacks and recourse obligations from certain of its portfolio
finance customers totaling approximately $18.6 million at June 30, 2000.
At June 30, 2000, the Company recorded an impairment loss of $4.5 million
primarily related to the impairment of goodwill associated with the acquisition
of LINC IF+E in August 1999, the impairment of furniture, fixtures, computers
and related equipment, and an estimated loss on the Company's corporate
headquarters' lease agreement. See Note 4 to Consolidated Financial Statements
The Company did not record a tax benefit on the pre-tax loss for the second
quarter of 2000 since realization of the tax benefit cannot be assured. The
Company recorded income tax expense of $0.2 million on pre-tax income of $0.9
million for the same period of the prior year.
Six Months ended June 30, 2000 compared to Six Months ended June 30, 1999
Sales of equipment increased to $20.6 million from $16.0 million and cost
of equipment sold increased to $16.6 million from $13.1 million. Net margins on
sales of equipment increased to 19.6% from 18.4% due to higher margins obtained
by LINC IF+E compared to margins on the sale of analytical instruments. The net
margin on sales of equipment during the six months ended June 30, 1999 was
positively impacted by manufacturer incentives received on equipment sold during
the first quarter of that year.
Direct finance lease income increased to $19.7 million from $12.9 million
as a result of a substantially higher level of finance lease receivables
outstanding, arising from acquired companies and from internal lease
originations, a greater portion of which are retained on the Company's balance
sheet. Average finance lease receivables outstanding increased 68%.
Interest income increased to $1.8 million from $1.6 million primarily due
to an increase in interest-bearing notes receivable held by the Company during
the first quarter of 2000. Direct finance lease income and interest income,
minus interest expense, was $4.8 million, or 22.3% of direct finance lease
income and interest income (the "Interest Margin") compared to $5.5 million, or
38.0%, in the prior year period. The decrease in the Interest Margin is due to
an increase in interest rates beginning in the second half of 1999 and a
decrease in interest income recorded on the Company's securitization retained
interest, resulting from the repurchase of lease receivables from the Company's
commercial paper conduit facility in connection with completion of a term
securitization.
Rental and operating lease revenue decreased to $4.3 million from $5.4
million primarily due to the maturing of operating leases acquired in 1998.
Servicing fees and other income decreased to $1.7 million from $3.9
million. Servicing fees and other income primarily consists of fees received for
servicing off-balance sheet securitized leases, fees received for servicing
third party lease portfolios, interim rents received by Select Growth Finance,
and late fees. The decrease over the prior year period primarily relates to $1.2
million in deferred incentive fees realized in connection with servicing of a
portfolio owned by a third party during the first quarter of the prior year and
a decrease in fees received for servicing securitized leases resulting from a
reduction in off-balance sheet securitized leases. Additionally, interim rents
received by Select Growth Finance and late fees collected by Vendor Finance
decreased between periods.
Gain (loss) on the sale of lease receivables decreased to less than $0.1
million from $0.4 million. These amounts represent gains or losses on lease
receivables sold to third parties and fluctuate based on the volume of lease
receivables sold in a given period and the economics of those sales.
Gains on equipment residual values decreased to $0.4 million from $0.6
million. Gains on equipment residual values fluctuate based on the dollar volume
of leases maturing in a given period.
During the first half of 2000, the Company recognized a gain of $0.3
million on certain equity participation rights versus a gain of $1.2 million in
the comparable prior year period. Equity participation gains and losses
fluctuate from period to period based on the value of securities in the
Company's portfolio and the timing of the sale of these securities. In July
2000, Corvis Corporation, in which the company holds warrants to purchase
327,972 shares at a price of $0.7625 per share completed its initial public
offering. On the basis of the closing price of such shares at August 10, 2000,
the Company's unrealized gain on such warrants was $30.0 million. The Company is
subject to a "lock-up" agreement that restricts the Company's ability to sell
the Corvis Warrants prior to late January 2000. This unrealized gain has not
been recorded in income, nor has it been reflected in stockholders' equity.
Selling, general and administrative expenses, net of initial direct costs
capitalized, increased to $13.6 million from $11.6 million. The increase
resulted primarily from an increase in personnel and operating costs associated
with the acquisition of LINC IF+E in August 1999 in the Company's Rental and
Distribution business unit, professional fees incurred related to the Company's
violation of covenants under its Loan Agreement, Conduit Facility, and Term
Securitization, and a decrease in initial direct costs capitalized due to an 44%
decrease in lease originations between periods. The number of people employed,
including employees of companies acquired, decreased 36% to 117 between June 30,
1999 and June 30, 2000. The Company believes that as a result of the cessation
of substantially all leasing activities and the reduction of its employee
headcount to 99 at August 10, 2000 from 221 at December 31, 2000, it has
substantially reduced its selling, general and administrative expenses
commencing in the third quarter of 2000.
Interest expense increased to $16.7 million from $9.0 million, due
primarily to increased borrowings resulting from growth in lease originations
and lease portfolios acquired, with the resulting increase in borrowings, and an
increase of over 100 basis points in the Company's weighted average interest
rates on outstanding debt. In addition, interest expense increased over the same
period in the prior year as a result of the repurchase by the Company during the
quarter ended September 30, 1999 of $99.0 million in lease receivables
previously sold to its commercial paper conduit facility utilizing proceeds of a
term securitization which increased the level on nonrecourse debt. Average
finance lease receivables outstanding increased 68%.
Depreciation of equipment decreased to $3.0 million from $3.6 million due
to a decrease in operating leases, partially offset by an increase in equipment
under rental agreements. The average net book value of equipment held for rental
and operating leases decreased approximately 13% over the prior year period.
Amortization of intangibles increased to $0.9 million from $0.5 million due
to the amortization of issuance costs resulting from a term securitization
completed during the third quarter of 1999, partially offset by a decrease in
goodwill amortization due to the write-off of goodwill associated with the
acquisitions of Comstock Leasing Inc., Monex Leasing, Ltd., Spectra Precision
Credit Corp. and Connor Capital Corporation at December 31, 1999.
The provision for credit losses increased to $8.3 million from $2.9
million. The portion of the Company's lease portfolio that was delinquent more
than 60 days increased to 4.4% of the gross receivable balance at June 30, 2000
from 2.6 % of the gross receivable balance at March 31, 2000. As a consequence
of this increase, in the second quarter of 2000, the Company recorded a
provision to increase its allowance for doubtful receivables to 4.6 % of its net
investment in leases and loans at June 30, 2000 as compared to 2.7 % at March
31, 2000. In addition to the allowance for doubtful receivables, the Company has
retained holdbacks and recourse obligations from certain of its portfolio
finance customers totaling approximately $18.6 million at June 30, 2000.
At June 30, 2000, the Company recorded an impairment loss of $4.5 million
related to the impairment of goodwill associated with the acquisition of LINC
IF+E in August 1999, the impairment of furniture, fixtures, computers and
related equipment, and an estimated loss on the Company's corporate
headquarters' lease agreement. See Note 4 to Consolidated Financial Statements.
The Company did not record a tax benefit on the pre-tax loss of $14.7
million for the six months ended June 30, 2000 since realization of the tax
benefit cannot be assured. The Company recorded income tax expense of $0.4
million on pre-tax income of $1.5 million for the same period of the prior year.
Liquidity and Capital Resources
General
The Company's activities are capital intensive and require access to
substantial amounts of credit to fund new equipment leases. The Company has
financed its operations to date primarily through cash flow from operations,
borrowings under its Loan Agreement with its senior lenders and its Conduit
Facility, other non-recourse and recourse loans, the Term Securitization and the
sale of equity.
Cash Flow
Cash flows from operating and financing activities are generated primarily
from receipts on direct finance and operating leases, rentals of analytical
instruments, gross profit on the sale of analytical instruments, realization of
equipment residual values, and financing of new lease origination's and rental
inventory through credit facilities and securitizations. Cash flows from
operating and financing activities for the six months ended June 30, 2000 and
1999 were $64.0 million and $193.2 million, respectively. The decrease between
2000 and 1999 results primarily from no new debt financing or securitizations
during the second quarter of 2000 as well as a decrease in the volume of
securitizations completed in the first quarter of 2000, partially offset by an
increase in payments received on direct finance leases.
Credit Facilities
In the past, the Company utilized its secured revolving credit facility
provided by a syndicate of banks under the Loan Agreement to fund the
acquisition and origination of leases and the purchase of rental and
distribution inventory. As of June 30, 2000, the Company had borrowed $85.1
million, with a weighted-average interest rate of 8.10%. For further
information, see Note 3 to Consolidated Financial Statements.
Commercial Paper Conduit Securitization Facilities
The Company, through a special purpose subsidiary, has a commercial paper
conduit securitization facility in an amount of $289 million (the "Conduit
Facility").
At the time of placing leases in the securitization facilities, the Company
enters into interest rate cap and interest rate swap agreements to manage
interest rate risk. For further information, see Note 3 to Consolidated
Financial Statements.
Term Securitization
In July 1999, the Company, through a special purpose subsidiary, completed
a term securitization in the amount of $237 million (the "Term Securitization").
$199 million of A-1 Certificates rated AAA by Standard and Poor's and Fitch
IBCA, Inc. and Aaa by Moody's Investor Service, Inc., $9 million of B-1
Certificates rated BBB by Fitch IBCA, Inc., and $9 million of B-2 Certificates
rated BB by Fitch IBCA, Inc., were issued in the private market. A portion of
the B-2 Certificates (approximately $3 million) and the C Certificate of $17
million were retained by the Company. The remaining balance of the A-1
Certificates, the B-1 Certificates, the B-2 Certificates, and the C Certificates
at June 30, 2000 was $121.7 million, $6.4 million, $8.9 million, and $12.0
million, respectively. For further information, see Note 3 to Consolidated
Financial Statements.
Preferred Stock
On February 1, 2000, the Company issued $5,625,000 of Series A 8%
Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock"). The
issuance of this series of preferred stock was coupled with warrants to purchase
326,250 shares of the Company's common stock at $5.49 per share (the "Preferred
Stock Warrants"). Additional Preferred Stock Warrants for up to 652,500 shares
may be issued on a pro-rata basis through September 30, 2000, if the Series A
Preferred Stock is not redeemed as a result of a change of control or a
refinancing prior to that time. At June 30, 2000 additional Preferred Stock
Warrants for 372,857 shares are issuable. The Series A Preferred Stock accrues
cumulative preferred dividends at 8% per annum through December 31, 2000, 10%
per annum from January 1, 2001 through December 31, 2001 and 12% per annum
thereafter. The Series A Preferred Stock is required to be redeemed by 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 or June 30, 2000. As a consequence, the Company
is in default of certain provisions of the terms and conditions of the Series A
Preferred Stock and the dividend rate on such preferred stock accruing after
March 31, 2000 has been increased by 1 percentage point.
Note on Forward Looking Information
Certain statements in this Form 10-Q and in the future filings by the
Company with the Securities and Exchange Commission and in the Company's written
and oral statements made by or with the approval of an authorized executive
officer constitute "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, and the Company intends that such forward-looking statements be subject
to the safe harbors created thereby. The words and phrases "expects", "intends",
"believe:, "will seek", and "will realize" and similar expressions as they
relate to the Company or its management are intended to identify such
forward-looking statements. These forward-looking statements reflect the
Company's current view with respect to future events and financial performance,
but are subject to many uncertainties and factors relating to the Company's
operations and business environment which may cause the actual results of the
Company to be materially different from results expressed or implied by such
forward-looking statements. Examples of such uncertainties, include, but are not
limited to, the Company's plans for reducing overhead and for selling portfolios
of leases, the Company's plans and intentions with regard to its rental and
distribution operations, and the availability of financial resources. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements whether as a result of new information, future events
or otherwise.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes from the 1999 Annual Report on Form
10-K related to the Company's exposure to market risk from interest rates. At
December 31, 1999, termination of the $354.1 million interest rate swap and
interest rate cap agreements would have resulted in a credit to earnings of $2.1
million. At June 30, 2000, termination of the $296.0 million interest rate swap
and interest rate cap agreements would have resulted in a credit to earnings of
$1.6 million.
Part II - Other Information
Item 1. Legal Proceedings
The Company is the subject of lawsuits alleging that the Company has not
made timely payment of amounts owed for services provided to the Company or for
equipment purchased by the Company in the ordinary course. The aggregate amount
owed with respect to these claims is approximately $200,000.
The Company is in default of its obligations relating to its Senior
Revolving Credit Facility and negotiations are in progress to implement a
standstill agreement under that facility.
The Company is in default of certain of its obligations relating to the
acquisition of one of its Vendor Finance origination units and has been
threatened with litigation as a consequence of such default. The Company has
been advised by the former owner of one of its Vendor Finance origination units
that certain claims asserted by those owners have been submitted for
arbitration. A Demand For Arbitration and Statement of Claim has been filed with
the American Arbitration Association in Chicago, Illinois by Monex Leasing,
Ltd., Monex Group, Inc., Catherine Ross and Monex Finance. The aggregate amount
alleged to be due and owing to such former owner is approximately $3,649,584.
The Company is in the process of defending such claims.
Item 2. Changes in Securities and Use of Proceeds
On February 1, 2000, the Company issued $5,625,000 of Series A 8%
Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock"). The
issuance of this series of preferred stock was coupled with warrants to purchase
326,250 shares of the Company's common stock at $5.49 per share. Additional
warrants for up to 652,500 shares may be issued on a pro-rata basis through
September 30, 2000, if the Series A Preferred Stock is not redeemed as a result
of a change of control or a refinancing prior to that time. The Series A
Preferred Stock accrues cumulative preferred dividends at 8% per annum through
December 31, 2000, 10% per annum from January 1, 2001 through December 31, 2001
and 12% per annum thereafter. The Series A Preferred Stock is required to be
redeemed by the Company upon a change of control or on January 31, 2005,
whichever occurs first. As a result of the violation of certain covenants under
the Loan Agreement, the Company has been unable to declare or make payment of
the dividends on the Series A Preferred Stock. As a consequence, the Company may
be in default of certain provisions of the terms and conditions of the Series A
Preferred Stock and the dividend rate on such preferred stock accruing after
March 31, 2000 has been increased by 1 percentage point. The total arrearage in
the payment of dividends on August 10, 2000 was $0.2 million.
Item 3. Defaults Upon Senior Securities
The Company was in violation of the minimum tangible net worth, minimum
earnings, leverage and interest coverage covenants under its Loan Agreement at
June 30, 2000 and December 31, 1999. The violations under the Loan Agreement
have also resulted in cross-defaults in the agreements relating to the Conduit
Facility and the Term Securitization. The amount outstanding under the Loan
Agreement at August 7, 2000 was $80.8 million. The amount outstanding under the
Conduit Facility and the Term Securitization at July 20, 2000, the most recent
settlement date, was $153.4 million and $128.3 million, respectively. For
further information, see Note 3 to Consolidated Financial Statements and
Management's Discussion and Analysis - Liquidity and Capital Resources.
Item 4. Submission of Matters to a Vote of Security Holders
Annual Meeting
The Company has not scheduled an Annual Meeting of Shareholders at this
time due to the time commitment and costs associated with such a meeting.
Item 5. Other Information
Subsequent Events
Unrealized Gain on Warrants
The Company holds warrants for 327,972 common shares of Corvis Corporation
(Corvis) with a per share exercise price of $0.762. Corvis Corporation completed
its initial public offering on July 28, 2000. At August 10, 2000, the closing
price of the Corvis Common Shares was $92.19 per share, resulting in an
unrealized gain at the then current market of $30.0 million. The Company has
entered into Lockup Agreement with Corvis pursuant to which it is materially
restricted from selling or otherwise realizing proceeds from these shares until
late January 2001.
Delisting from Nasdaq Stock Market
On August 1, 2000, the Company's common stock was delisted from the Nasdaq
Stock Market because the Company was not in compliance with a rule that requires
annual reports to contain audited financial statements and a rule that requires
the stock to maintain a minimum bid price of $1.00 over the last 30 consecutive
trading days.
Resignation of Directors
On August 9, 2000, Mr. Stanley Green and Mr. Curtis S. Lane resigned from
the Board of Directors.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit Number Document Description
---------------- ------------------------
27.1 Financial Data Schedule
Reports on Form 8-K
On April 11, 2000, the Company filed a current report on Form 8-K reporting
under Item 5 and Item 7. The filing contained information relating to fourth
quarter results and the Company's violations of covenants under its revolving
credit and other borrowing agreements.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. LINC CAPITAL, INC. Dated: August 14,
2000
By: /s/ Allen P. Palles
------------------------
Allen P. Palles
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Mark A. Arvin
------------------------
Mark A. Arvin
Senior Vice President, Finance
(Principal Accounting Officer)
