SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
June 30, 1996 0-19516
SUNRISE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1632858
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5500 Wayzata Boulevard, Suite 725
Golden Valley, Minnesota 55416
(Address of principal executive offices)
Registrant's telephone number, including area code
(612) 593-1904
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
7,188,721 shares of Common Stock, $.01 par value as of August 5, 1996
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Included herein is the following unaudited financial information:
Consolidated Balance Sheets as of June 30, 1996 and March 31, 1996.
Consolidated Statements of Operations for the three-month periods ended
June 30, 1996 and 1995.
Consolidated Statements of Cash Flows for the three-month periods ended
June 30, 1996 and 1995.
Notes to Consolidated Financial Statements.
<PAGE>
SUNRISE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
------------ ------------
<S> <C> <C>
ASSETS (Unaudited) (Audited)
Cash and cash equivalents $ 1,258,000 $ 1,629,000
Accounts receivable, less allowance for
doubtful accounts
of $713,000 and $626,000 4,128,000 3,537,000
Income taxes receivable 119,000 1,157,000
Inventory held for sale 92,000 123,000
Loans receivable, less allowance for possible
losses of $2,803,000 and $2,773,000 11,781,000 14,074,000
Investment in leasing operations:
Direct financing leases 61,191,000 65,165,000
Operating leases, less accumulated depreciation
of $20,350,000 and $19,927,000 29,258,000 28,962,000
Equipment held for lease 9,173,000 6,474,000
Initial direct costs 607,000 670,000
------------ ------------
Total investment in leasing operations 100,229,000 101,271,000
------------ ------------
Furniture and fixtures, less accumulated depreciation
of $422,000 and $396,000 502,000 515,000
Other assets 172,000 172,000
Goodwill and non-compete agreement, less
accumulated amortization of $61,000 and $50,000 596,000 607,000
------------ ------------
Total assets $118,877,000 $123,085,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Financing arrangements:
Borrowings under lines of credit $ 22,752,000 $ 18,298,000
Note payable to King Management Corporation 2,690,000 4,127,000
Recourse participations in loans receivable 2,103,000 4,582,000
Discounted lease rentals 49,398,000 56,520,000
------------ ------------
Total financing arrangements 76,943,000 83,527,000
------------ ------------
Accounts payable 5,483,000 4,837,000
Accrued liabilities 4,557,000 3,919,000
Deferred tax liability 1,498,000 1,498,000
------------ ------------
Total liabilities 88,481,000 93,781,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY
Common stock, par value $.01 per share, authorized
17,500,000 shares, 7,189,000 shares issued
and outstanding at both dates 72,000 72,000
Capital stock, undesignated, par value $.01 per share,
authorized 2,500,000 shares, none issued or outstanding -- --
Additional paid-in capital 25,601,000 25,601,000
Retained earnings 4,723,000 3,631,000
------------ ------------
Total shareholders' equity 30,396,000 29,304,000
------------ ------------
Total liabilities and shareholders' equity $118,877,000 $123,085,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
SUNRISE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
1996 1995
----------- -----------
<S> <C> <C>
REVENUES
Operating leases $ 5,724,000 $ 5,633,000
Direct financing leases 2,175,000 2,300,000
Equipment sales 2,487,000 1,644,000
Interest income 219,000 599,000
Fee income 65,000 102,000
----------- -----------
Total Revenues 10,670,000 10,278,000
----------- -----------
COSTS AND EXPENSES
Depreciation 3,156,000 3,629,000
Interest 1,710,000 2,084,000
Provision for lease and loan losses 221,000 48,000
Cost of equipment sold 2,180,000 1,418,000
Compensation expense 781,000 980,000
Other operating expenses 521,000 633,000
----------- -----------
Total Costs and Expenses 8,569,000 8,792,000
----------- -----------
INCOME FROM OPERATIONS BEFORE PROVISION
FOR INCOME TAXES 2,101,000 1,486,000
PROVISION FOR INCOME TAXES 1,008,000 595,000
----------- -----------
NET INCOME $ 1,093,000 $ 891,000
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.15 $ 0.12
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 7,189,000 7,205,000
=========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<PAGE>
SUNRISE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,093,000 $ 891,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for lease and loan losses 221,000 48,000
Depreciation 3,423,000 3,629,000
Deferred income taxes -- --
Change in operating assets and liabilities:
Accounts receivable (678,000) (1,399,000)
Income taxes receivable 1,038,000 --
Other assets 64,000 (13,000)
Inventory held for sale 31,000 124,000
Accounts payable 646,000 370,000
Accrued liabilities 639,000 472,000
Accrued income taxes -- (9,000)
------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 6,477,000 4,113,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in loans receivable (1,063,000) (18,160,000)
Principal portion of loans receivable collected 3,325,000 11,145,000
Purchase of equipment for lease (9,439,000) (14,931,000)
Principal portion of direct financing leases collected 6,939,000 5,397,000
Purchase of furniture and fixtures (25,000) (146,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (263,000) (16,695,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on lines of credit 5,200,000 16,220,000
Payments on lines of credit (747,000) (8,000,000)
Proceeds from discounted lease financing 1,101,000 10,249,000
Payments on discounted lease financing (8,223,000) (5,459,000)
Proceeds from participations in loans receivable -- 280,000
Payments on participations in loans receivable (2,479,000) (982,000)
Proceeds from note payable to King Holding Corporation -- 224,000
Payments on note payable to King Holding Corporation (1,437,000) (1,521,000)
------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (6,585,000) 11,011,000
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (371,000) (1,571,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,629,000 2,398,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,258,000 $ 827,000
============ ============
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<PAGE>
SUNRISE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIODS ENDED JUNE 30, 1996 and 1995 (Unaudited)
1. ACCOUNTING POLICIES
In the opinion of management, the accompanying financial statements contain
all adjustments necessary to present fairly the financial position of
Sunrise Resources, Inc. and Subsidiaries (the Company) as of June 30, 1996
and March 31, 1995 and the results of operations and cash flows for the
three months ended June 30, 1996 and 1995. All such adjustments are of a
normal and recurring nature.
These statements should be read in conjunction with the Notes to the
Financial Statements contained in the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1996, filed with the Securities and
Exchange Commission, and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing in this quarterly
report. Results for the interim periods are not necessarily indicative of
sales trends or future results and performance.
2. INCOME TAXES
Income tax expense has been provided based on management's estimate of the
annualized effective tax rate of 48% and 40% for the three months ended
June 30, 1996 and 1995.
3. LOANS RECEIVABLE
Loans by Collateral Type
The composition of the loans receivable portfolio by collateral type was as
follows:
June 30, March 31,
1996 1996
------------ ------------
Commercial loans, collateralized
primarily by receivables $ 493,000 $ 1,282,000
Commercial loans, collateralized
by equipment, marketable
securities and other 5,528,000 7,563,000
Real estate loans 2,766,000 4,205,000
Non-accrual loans 8,419,000 8,150,000
Non-recourse participations (2,496,000) (4,216,000)
------------ ------------
14,710,000 16,984,000
Less:
Allowance for possible loan losses (2,803,000) (2,773,000)
Unearned fees from loan origination (126,000) (137,000)
------------ ------------
$ 11,781,000 $ 14,074,000
============ ============
Loan Portfolio Activity and Allowance for Possible Loan Losses -
As of June 30, 1996 and March 31, 1996, the Company's recorded investment in
impaired and other loans and the related valuation allowances are as follows:
<TABLE>
<CAPTION>
June 30, 1996 March 31, 1996
---------------------------- ----------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
<S> <C> <C> <C> <C>
Impaired loans -
Nonaccrual $ 8,195,000 $ 2,578,000 $ 7,925,000 $ 2,514,000
Other 225,000 225,000 225,000 225,000
Performing loans 8,786,000 -- 13,050,000 34,000
Nonrecourse participations (2,496,000) -- (4,216,000) --
------------ ------------ ------------ ------------
$ 14,710,000 $ 2,803,000 $ 16,984,000 $ 2,773,000
============ ============ ============ ============
</TABLE>
<PAGE>
The activity in the allowance for possible loan losses during the three
months ended June 30, 1996 and 1995 was as follows:
June 30, June 30,
1996 1995
----------- -----------
Balance, beginning of period $2,773,000 $2,125,000
Provisions for loan losses 30,000 30,000
Write-offs -- --
---------- ----------
Balance, end of period $2,803,000 $2,155,000
========== ==========
The average investment in impaired loans for the three months ended June
30, 1996 and 1995 was $8.3 million and $7.8 million, respectively.
Interest payments received on impaired loans are recorded as interest
income unless collection of the remaining recorded investment is doubtful
at which time payments received are recorded as reductions of principal.
The Company did not recognize any interest income on impaired loans for the
respective three month periods ended June 30, 1996 and 1995.
When, in the opinion of management, a reasonable doubt exists as to the
collectibility of interest or fee income, the accrual of such income is
discontinued and uncollected income accruals are reversed. During the three
months ended June 30, 1996, the Company did not recognize fee and interest
income totaling $127,000 relating to the two loans referred to in the
preceding paragraph.
4. DISCOUNTED LEASE RENTALS
Discounted lease rentals consist of the following:
June 30, March 31,
1996 1996
------------ ------------
Non-recourse $ 38,993,000 $ 43,969,000
Recourse 10,405,000 12,551,000
------------ ------------
$ 49,398,000 $ 56,520,000
============ ============
5. STATUS OF LINE OF CREDIT ARRANGEMENTS
Lines of Credit -
The Company has a $25 million line of credit facility with a bank for use
in its normal operations. Advances under this line of credit are subject to
a borrowing base limitation of $25 million at June 30, 1996. The balance
outstanding as of quarter end was $22.8 million. Advances under the line
are at prime, and are collateralized by substantially all otherwise
unsecured assets of the Company. This line expires at September 30, 1996,
at which time the Company will seek an extension. There is no assurance
that an extension will be granted.
Event of Non-Compliance -
As of March 31, 1996, the Company was not in compliance with a recourse
discounted loan agreement, with a balance of approximately $5.6 million,
and had not repaid a note payable to King Management Corporation which
matured in February 1996 with a balance of approximately $4.1 million (see
below). These events resulted in an event of noncompliance under
cross-default provisions of the Company's bank line of credit agreement.
The defaults under the recourse discounted loan agreement and the King
Management Corporation note have not been waived and the defaults continue.
As of June 30, 1996, balances outstanding under the recourse discounted
loan agreement and King Management Corporation note were approximately $5.2
million and $2.7 million, respectively. The Company is not currently in a
position to pay off the recourse discounted loan agreement or the King
Management Corporation note.
<PAGE>
Note Payable to King Management Corporation -
The Company has an outstanding note payable to King Management Corporation,
an affiliate of Peter King, former Chairman and existing member of the
Board. This note is collateralized by certain lease and rental equipment.
The note was payable in semi-monthly installments and bears interest at
prime. The maturity date was February 1996. The Company is in default with
regards to that note but is continuing to attempt to renegotiate the terms
of repayment. There is no assurance that King Management Corporation will
agree to any extension of its note. In the event an extension is not
negotiated, King Management Corporation has the right to proceed against
the Company and the collateral security for the approximately $2.4 million
owing as of the date of this report.
6. COMMITMENTS AND CONTINGENCIES
Litigation -
In February, 1996, the Company became aware of a contemplated suit by a
financial services company against Peter King and Sunrise Financial
Resources, Inc. (SFR), a subsidiary of the Company, alleging breach of
contract and unjust enrichment in connection with the aborted sale of
selected loans. The suit has since been dismissed without prejudice.
Peter King has advised the Company that he is reserving all legal rights
relating to the February 1995 merger of the Company with The P.J. King
Companies, Inc. (d/b/a International Leasing Corporation) ("ILC") on the
basis that, in his view, problems underlying the net investment in several
direct financing loans and leases arose prior to the merger and were not
disclosed. He has also asserted other claims regarding valuation of certain
other assets of the Company at the time of the merger. In addition to
seeking money damages or additional shares of the Company Common Stock, Mr.
King may attempt to obtain rescission of the merger. Such an attempt, which
will be resisted by the Company could result in Mr. King and his affiliates
reacquiring ownership of ILC's vendor leasing business and all other ILC
assets and liabilities. Under the terms of the merger agreement, disputes
between the parties must be submitted to arbitration. The parties have been
unable to settle Mr. King's claims and are in the process of submitting the
matter for determination by arbitration. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Cautionary
Statements."
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Revenues
The Company classifies its lease transactions, as required by the Statement of
Financial Accounting Standards No. 13 ("FASB 13"), as either direct financing or
operating leases. Revenue, costs and resulting income are recognized during each
of the accounting periods during the term of the lease. The allocation of income
among the accounting periods within a lease term will vary depending upon the
lease classification.
The Company segregates the sources of its revenue into five categories for
financial statement purposes: (i) operating leases; (ii) direct financing
leases; (iii) sales of new and used equipment; (iv) fee income; and (v) interest
income.
Operating Leases. All leases that are not classified as direct financing leases
are treated as operating leases. Monthly payments from these leases are
recognized as leasing revenue. The Company's cost of the leased equipment is
recorded on the balance sheet and is depreciated on a straight-line basis over
the lease term to the Company's estimate of residual value. Revenue,
depreciation expense and the resultant margin for operating leases are recorded
evenly over the term of the lease. If the lease is discounted to a financial
institution, the related interest expense declines over the term of the lease as
the principal is reduced, with the resultant net margin being lower in the early
periods of the lease and higher in the later periods.
Direct Financing Leases. These leases transfer substantially all benefits and
risks of equipment ownership to the lessee. A lease is a direct financing lease
if the creditworthiness of the customer and the collectibility of lease payments
are reasonably certain and it meets one of the following criteria: (i) the lease
transfers ownership of the equipment to the customer 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.
Direct financing leases consist of future lease payments plus the residual value
(collectively referred to as the "gross investment"). Residual value is the
estimated fair market value at the time of lease termination. The difference
between the gross investment in the lease and the cost (or carrying amount, if
different) of the leased equipment is recorded as unearned revenue. The "net
investment" in the lease is the gross investment less unearned revenue. The
unearned revenue is amortized to leasing revenue over the lease term to produce
a constant percentage return on the net investment whether or not the lease is
discounted to a financial institution.
Equipment Sales. Revenue from equipment sales transactions is recognized by the
Company at the time title to the equipment passes to the customer. Leases that
entitle the customer to purchase the leased equipment for a nominal sum at the
end of the lease term and which are discounted on a nonrecourse basis at the
lease commencement date, leaving the Company with no interest in the
transaction, are treated by the Company as a sale of equipment.
Fee Income. The Company earns fee income principally for arranging leases
between unrelated parties. These fees are recognized at the closing of such
transactions. At lease termination, the Company may also be entitled to
additional fee income equal to a portion of the net proceeds from a subsequent
lease or sale of the equipment. The Company's portion of such net proceeds, if
any, is reported as fee income at the time of the subsequent lease or sale of
the equipment.
Interest Income. Interest income is accrued on unimpaired loans receivable under
the effective interest method. Interest income is not recognized on loans which
have been identified by the Company as impaired.
<PAGE>
Financing
As of June 30, 1996, the Company's total borrowings of $76,943,000 were
comprised of $38,993,000 and $37,950,000 in nonrecourse and recourse debt, or
51% and 49%, respectively. This compares to June 30, 1995 where the Company had
total borrowings of $96,372,000, which were comprised of nonrecourse discounted
lease rentals totaling $39,448,000 and recourse borrowings totaling $56,924,000,
representing 40.9% and 59.1%, respectively, of total funds borrowed.
In addition to the finance arrangements described above, the Company has entered
into certain SFR lending transactions prior to fiscal 1995, for which
nonrecourse financing was available. As of June 30, 1996, these loans and the
related nonrecourse participations totaled $2.5 million. Since the Company's
only obligation with respect to these loans is as a servicer for a fee, the
loans and related nonrecourse participations have been eliminated from the
Company's consolidated balance sheets.
As of March 31, 1996, the Company was not in compliance with a recourse
discounted loan agreement, with a balance of approximately $5.6 million, and had
not repaid a note payable to King Management Corporation which matured in
February 1996 with a balance of approximately $4.1 million. These events
resulted in an event of noncompliance under cross-default provisions of the
Company's bank line of credit agreement. The defaults under the recourse
discounted loan agreement and the King Management Corporation note have not been
waived. As of June 30, 1996, balances outstanding under the recourse discounted
loan agreement and King Management Corporation note were approximately $5.2
million and $2.7 million, respectively. The Company is not in a position to
payoff these remaining balances. While the Company does continue to make regular
payments against these facilities, there is no assurance that either funding
source will agree to extend its note.
Cash Flows from Leases
Cash flows are not affected by how a particular lease is classified, but are
affected by the Company's decision on how its investment in a particular lease
will be financed. When the Company discounts lease payments on a nonrecourse or
recourse basis with a financial institution, the discounted future lease
payments are received up-front, and are recorded on the Company's balance sheet
as discounted lease rentals. If, however, the Company chooses not to discount
the remaining lease payments, the total lease payments are received by the
Company over the lease term.
Sunrise Financial Resources, Inc.
The Board of Directors made the determination in fiscal 1996 to discontinue the
SFR business. The Company has sold the SFR asset-based lending accounts and
one-half of its SFR commercial accounts. Management believes the loan portfolio
is reflected at its estimated liquidation value as of June 30, 1996.
Results of Operations for the Three Months Ended June 30, 1996 and 1995
Total revenue increased approximately $392,000 (3.8%) for the three months ended
June 30, 1996 as compared to the corresponding period in fiscal 1995. The
increase in revenue for the quarter came from the 51% increase in equipment
sales over the previous quarter. This increase was offset by a 63% decrease in
interest income quarter over quarter. In addition, operating and direct
financing lease revenues showed no growth for the quarter ended June 30, 1996
compared to the three month period ended June 30, 1995.
Total leasing revenues were as follows (dollar amounts in millions):
Three Months
Ended June 30,
1996 1995
---------------- --------------
Amount % Amount %
------ ---- ------ ----
Leasing Revenues:
Vendor $ 4.2 53% $ 3.2 41%
Equipment 3.7 47 4.7 59
----- ----- ----- ----
Total $ 7.9 100% $ 7.9 100%
===== ===== ===== ====
As a percent of total revenues 74.0% 77.2%
===== =====
<PAGE>
Margins from leasing activities (leasing revenue less $4.9 million of
depreciation and interest expense) were 38.4% and 32.8% for the three months of
first quarter fiscal 1996 and fiscal 1995, respectively. Margins will fluctuate
from period to period based upon the mix of direct financing and operating
leases and the extent to which the Company finances leases with internally
generated funds. The increase in margins for fiscal 1997 relates primarily to
more leases being financed with internally generated funds versus externally
generated funds during the corresponding period in fiscal 1996. Margins will
also be affected by the mix and age of direct finance and operating leases in
the current portfolio.
In order to limit the impact of any interest rate fluctuations on its leasing
transactions, the Company continually monitors its lease rate factors relative
to interest rates on borrowed funds. The lease rate factors are adjusted
periodically on new leases to correspond to any change in interest rates on
borrowed funds supporting the related transactions.
Revenue from equipment sales increased $843,000 (51.3%) in the first three
months of fiscal 1997 compared to the same period in fiscal 1996. Although
revenues from sales of equipment increased, gross margins were 12.3% in the
first quarter of fiscal 1997 as compared with 13.7% for the same period in
fiscal 1996, a decrease caused by changes in technology that have lowered the
anticipated market value of computer equipment coming off lease. Gross margin on
sales of equipment will vary based upon the mix of equipment in the Company's
portfolio and the demand for the equipment being sold, as well as the Company's
ability to effectively manage its portfolio prior to and after the expiration of
its lease.
Interest income decreased $380,000 (63.4%) in the first three months of fiscal
1997 as compared to the same period in fiscal 1996. This decrease was caused by
the liquidation of the SFR loan portfolio which coincided with the Company's
decision to discontinue its commercial and asset-based lending services.
Fee income decreased $37,000 (36%) in the first three months of fiscal 1997 as
compared to the same period in fiscal 1996, primarily as a result of the 1996
cessation of SFR lending activities.
Total costs and expenses decreased slightly for the first three months of fiscal
1997 as compared to the same period in fiscal 1996. This resulted from lower
depreciation and interest expense offset by the higher cost from sales of
equipment.
Depreciation expense decreased $473,000 (13%) for the first three months of
fiscal 1997 as compared to the same period in fiscal 1996. This was the result
of more leased equipment reaching the end of its initial lease term and an
increase in equipment disposals.
Interest expense decreased $374,000 (17.9%) for the first three months of fiscal
1997 as compared to the same period in fiscal 1996. This was caused by a
decrease in the prime rate from 9% to 8.25% and lower overall debt levels
quarter to quarter.
Cost of equipment sold increased $762,000 (53.7%) for the first three months of
fiscal 1997 as compared to the same period in fiscal 1996. This was primarily
due to increased sale activity of ILC as well as one large SLC lease termination
during the first quarter of fiscal 1997.
Compensation expense decreased slightly in the first three months of fiscal 1997
as compared to the same period in fiscal 1996. This was the result of a one time
charge in fiscal 1996 of $180,000 which was part of a severance agreement
payable to a former employee of the Company.
Other operating expenses decreased $112,000 (17.7%) in the first quarter of
fiscal 1997 compared to the first quarter in fiscal 1996. This was the result of
higher operating expenses in fiscal 1996 due to the merging and expansion of the
combined ILC and SLC businesses.
Income tax provision as a percentage of income before taxes was 48.0% and 40.0%
for the three months ended June 30, 1996 and 1995, respectively.
As a result of the foregoing factors, net income increased $202,000 (22.7%) for
the first three months of fiscal 1997 as compared to the corresponding period in
fiscal 1996.
<PAGE>
Liquidity and Capital Resources
General
The Company uses a combination of its credit lines and internally generated cash
flows to finance, on an interim basis, loans to customers and the acquisition of
equipment for lease or sale. Generally, upon commencement of a lease, the
Company attempts to assign the remaining lease payment stream to a financial
institution on a discounted, nonrecourse basis. In this manner, the Company
finances a substantial portion of the equipment cost on a long-term basis and
attempts to limit its risk, if any, to its equity investment in the loan or
equipment. The discounted lease proceeds received by the Company are used to
reduce borrowings under the credit lines. An increasing percentage of leases and
loans originated in fiscal 1995 were required to be funded by recourse
obligations. In this type of financing, the Company assumes the entire risk on
its investment in the loan or equipment.
At June 30, 1996, the Company had total borrowings outstanding of $76.9 million,
of which 50.7% were nonrecourse. At March 31, 1996, the Company had total
borrowings outstanding of $83.5 million, of which 53% were nonrecourse.
As of June 30, 1996, the Company had a total investment in leasing operations of
$100.2 million, as compared to $101.3 million at March 31, 1996. The slight
decrease in investment in leasing operations is due to a slow down in the first
quarter in new equipment installations and upgrades. The Company's investment in
leasing operations includes equipment held for lease, which consists of
equipment for which a lease has been signed but which has not yet commenced. The
amount of equipment held for lease fluctuates significantly depending on the
dollar amounts and commencement dates of the Company's leases.
Net cash provided by operating activities was $6.5 million for the first three
month period of fiscal 1997. Accounts receivable increased $1.9 million,
accounts payable increased by $1.1 million, and accrued liabilities increased
$1.8 million due to an increase in the Company's lease portfolio and other
business activities. The Company expects to fund these requirements through
internally generated funds, as well as borrowings under its lines of credit. The
Company also expects to realize additional cash from the future remarketing of
leased equipment.
Equipment expenditures of $9.4 million for the first three month period of
fiscal 1997 were financed through $6.5 million of cash flows from operations,
through the discounting of $1.1 million of noncancelable lease rentals to
various financial institutions at fixed rates, and through the use of the
Company's lines of credit. The Company does not have any material commitments
for capital expenditures, other than equipment held for lease.
Investments in loans receivable were $1.1 million for the first three month
period of fiscal 1997 and were financed primarily through internally generated
funds and use of short-term borrowings under the Company's lines of credit.
Inflation has not been a significant factor in the Company's business in any of
the periods presented.
Credit Lines and Loans
As of June 30, 1996, the Company had available a $25 million line of credit. Of
this amount, $22.8 million had been utilized as of June 30, 1996. Advances under
the line are collateralized by substantially all of the Company's assets. The
interest rate is at prime, and the Company is subject to certain financial and
other covenants relating to net worth ratios and liquidity requirements.
As of March 31, 1996, the Company was not in compliance with a recourse
discounted loan agreement, with a balance of approximately $5.6 million, and had
not repaid a note payable to King Management Corporation which matured in
February 1996 with a balance of approximately $4.1 million. These events
resulted in an event of noncompliance under cross-default provisions of the
Company's bank line of credit agreement. The defaults under the recourse
discounted loan agreement and the King Management Corporation note have not been
waived. As of June 30, 1996, balances outstanding under the recourse discounted
loan agreement and King Management Corporation note were approximately $5.2
million and $2.7 million, respectively. Subsequent payments to King Management
Corporation have reduced the balance owing on its note to approximately $2.4
milion as of the date of this report. Repayment of amounts due under these
facilities would eliminate the related defaults, but would put substantial
pressure on the cash flows of the Company. Therefore, the Company is neither in
a position to pay off the recourse discounted loan agreement or the King
Management Corporation note, nor is there any assurance that either funding
source will agree to any further extension of time for payment.
The Company's line of credit matures September 30, 1996. Management anticipates
the line will be extended under terms similar to the current agreement, but
there is no assurance that the line will be extended.
<PAGE>
Liquidity
The Company recognizes that the anticipated volume of business during the
current fiscal year may exceed its present ability to finance that level of
business. As such, the Company is attempting to establish new borrowing
facilities to finance anticipated business opportunities during the coming year.
The Company has encountered significant problems in obtaining financing of its
current and projected lease business. Any inability to fund new equipment
purchases would severely restrict the Company's future growth. Additionally, the
Company is monitoring several leases and loans whose collectibility is not
certain. While a default in one of these transactions would not likely create a
new covenant violation on its credit facilities, a number of such defaults or a
default in a material lease or loan not currently deemed to be monitored could
limit or reduce the Company's access to credit. In addition, the agreement with
a customer who had defaulted on a certain lease payment, and as to which the
Company made a provision for loss of receivables in the amount of $6.8 million
as of March 30, 1995, has defaulted on its settlement agreement with the
Company. However, the Company and the customer are continuing to discuss an
extension to the settlement agreement, and the Company is still hopeful that the
customer will be able to comply with the terms of the settlement agreement.
Nevertheless, the bank which financed the transaction could seek immediate
payment of the entire current loan balance of $5.2 million. If the settlement
agreement is not closed, there will be significant additional pressure on the
Company's cash resources and cash flow. The loss of the Company's principal
credit resources or its continued inability to generate new credit sources,
would severely restrict its future growth and could affect the Company's ability
to stay in business in its present form.
Cautionary Statements
As provided for under the Private Securities Litigation Reform Act of 1995, the
Company wishes to caution investors that the following important factors, among
others, in some cases have affected and in the future could affect the Company's
actual results of operations and cause such results to differ materially from
those anticipated in forward-looking statements made in this document and
elsewhere by or on behalf of the Company.
Need for Additional Capital. The Company's ability to fund its current level of
leasing business and anticipated growth in such business is dependent upon
obtaining significant additional capital, and there is no assurance such capital
is available. See Liquidity and Capital Resources.
Peter King Claims. Until recently, the Company and Peter King were involved in
negotiations related to his claims that there were certain misrepresentations in
connection with the merger of ILC and Sunrise Leasing Corporation. Mr. King has
also asserted other claims regarding valuation of certain other assets of the
Company at the time of the merger. In addition to seeking money damages or
additional shares of Company common stock, Mr. King may attempt to obtain
rescission of the merger. Such an attempt, which will be strongly resisted by
the Company, could result in Mr. King and his affiliates reacquiring ownership
of ILC's vendor leasing business and all other ILC assets and liabilities. While
the Company and its counsel do not believe Mr. King is entitled to rescission,
if Mr. King is successful on his rescission claim, the Company's ability to
continue its operations is not assured. The uncertainly surrounding Mr. King's
claims will, until finally resolved, continue to adversely affect the Company's
ability to obtain additional financing for the Company's business.
Bank Relationships. The Company is not in compliance with a recourse discounted
loan with a balance as of July 31, 1996 of approximately $5.2 million and has
not repaid a note payable to King Management Corporation which matured in
February 1996 with a balance as of the date of this report of approximately $2.4
million. As a result, the Company is in noncompliance under cross-default
provisions of the Company's line of credit agreement. The Company is not
currently in a position to repay either the recourse discounted loan agreement
or the King Management Corporation note. King Management Corporation has
threatened foreclosure on its note, which could result in a disruption in the
Company's vendor leasing business. The principal bank with whom the Company has
the recourse discounted loan agreement could foreclose and accelerate its loan
with the Company. If either King Management Corporation or the principal bank
proceed with their foreclosure rights, the Company's ability to fund its
operations could be materially impaired.
Future Growth. The Company's ability to grow at an acceptable rate is dependent
to a great extent on the expansion of its vendor leasing programs. The Company
is in the initial stages of developing several other vendor leasing programs
which management believes could be significant future revenue producers. The
Company's ability to successfully develop these vendor leasing programs is
dependent in part on its ability to obtain the requisite financing. The
requirement for additional financing could be substantial. There is no assurance
that such financing will be available or that the Company will be able to
successfully develop these other vendor leasing programs.
<PAGE>
Nonrecourse Financing. The Company's growth and profitability are dependent to a
great extent on the continued willingness of banks and other financial
institutions to lend the Company money to finance its leasing transactions on a
nonrecourse basis. In order for the Company to obtain such financing, its
customers must have a credit standing which is satisfactory to the Company's
lenders. There is no assurance that bank or other financial institutions will be
willing to continue to finance the Company's leasing transactions on a
nonrecourse basis or that the Company will continue to attract customers that
meet the credit standards of its financing sources.
Recourse Financing. Although nonrecourse financing will continue to be the
Company's preferred form of financing, recourse financing may be used when
nonrecourse financing is not available for a particular lease or when the
benefits of recourse financing outweigh the risks. The Company assumes a
significantly higher degree of risk with recourse financed leases because the
lessee is often more susceptible to default and the lender has direct recourse
against the Company for the amount of any default by the lessee. Such a default
could have a material adverse effect on the Company if the fair market value of
the leased equipment at the time of default is insufficient to satisfy the
obligations due the lender.
There is no assurance that such defaults will not occur.
Risk of Additional Write-Offs. While the Company believes that its current
reserves are adequate, it continues to monitor closely several restricted loans.
There is no assurance that such loans will not go into default or that they are
adequately secured. Any future losses on such loans incurred in excess of the
Company's reserves could materially affect the Company's future earnings.
Major Customer/Vendors. As of June 30, 1996, $25,649,000 in leasing operations
and loans receivable balances were funded internally or with recourse
obligations held by 15 customers having balances outstanding in amounts greater
than $500,000. Total investments in leases and loans receivables to customers
considered highly leveraged or with cash flows from operations inadequate to
service existing obligations were $36,361,000 or 32% of the portfolio as of June
30, 1996. Defaults by such customers would result in a significant loss to the
Company to the extent such amounts are not already reserved. In addition, as
these leases and loans are funded internally or through recourse financing, the
Company would be obligated to repay the remaining principal balance to the
financial institution out of internally generated funds while receiving no cash
payments from the lessee/borrower.
In addition, 39% of the Company's leasing revenue for the three months ended
June 30, 1996 was generated through a single vendor leasing program. Should this
program terminate, the Company would continue to realize related revenues for a
period of up to three years. The Company believes that during this period, it
would be able to replace this business. If, however, the Company would be unable
to replace this business, the Company's future financial results could be
materially and adversely affected.
Highly Competitive Industry. The data processing equipment leasing business is
highly competitive. The Company competes with numerous companies, including
leasing companies, commercial banks and financial institutions, some of which
the company relies on to obtain capital to finance its leases. Most of the
Company's competitors are significantly larger and have substantially greater
resources than the Company. Because of its relative lack of capital, the Company
typically chooses not to compete with large leasing companies for those leases
in which the cost of the equipment greatly exceeds the amount of nonrecourse
financing available.
Residual Values of Leased Equipment. The value of the data processing equipment
leased by the Company to its customers represents a substantial portion of the
Company's capital. At the inception of each lease, the Company estimates the
residual value of the leased equipment, which is the estimated market value of
the equipment at the end of the initial lease terms. The actual realized
residual value of leased equipment may differ from its estimated residual value,
resulting in profit or loss when the leased equipment is sold or leased again at
the end of the initial lease term. If a lessee defaults on a lease which has
been discounted by the Company to a financial institution, the financial
institution may foreclose on its security interest in the leased equipment and
the Company may not realize any portion of such residual value. In addition,
data processing equipment is subject to rapid technological obsolescence typical
of the computer industry. While the Company's experience to date has generally
resulted in data processing or other equipment leased by the Company could
materially and adversely affect the Company's financial condition and
profitability.
Control by a Small Group of Investors. As of June 30, 1996, 39.6% of the
outstanding shares of Sunrise Resources, Inc. was controlled by Peter King and
an individual acting as Trustee on behalf of two trusts benefiting the sons of
Peter King. Because of such share ownership, these individuals may be able to
control the election of all members of the Board of Directors and may be able to
control all future corporate actions.
<PAGE>
PART II-OTHER INFORMATION
ITEM 1. Legal Pro Peter King has advised the Company that he is reserving
his rights in connection with the merger with ILC in February 1995. See
Note 6 to Financial Statements at Part I, Item 1, above.
ITEM 2. Changes in Securities - NONE
ITEM 3. Defaults on Senior Securities - See Note 5 to Financial Statements at
Part I, Item 1, above.
ITEM 4. Submission of Matters to a Vote of Security Holders - NONE
ITEM 5. Other Information - NONE
ITEM 6. Exhibits and Reports on Form 8-K.
a. Exhibits
See Exhibit Index immediately following the signature page.
b. Form 8-K
There have been no Current Reports on form 8-K filed on behalf
of the Company during the quarter ended June 30, 1996.
<PAGE>
SIGNATURE
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.
SUNRISE RESOURCES, INC.
Date: August 14, 1996 By: /s/ Errol Carlstrom
Errol Carlstrom, President and Chief
Executive Officer (principal executive
officer)
By: /s/ Barry J. Schwach
Barry J. Schwach
Executive Vice President of Finance and
Administration and Chief Financial
Officer (principal financial officer)
By: /s/ Paul R. Wotta
Paul R. Wotta
Controller (principal accounting
officer)
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
Commission File No.: 0-19516
For the quarter ended
June 30, 1996
SUNRISE RESOURCES, INC.
Exhibit
Number Description
3.1 Restated Articles of Incorporation, as amended - incorporated by
reference to Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the year ended March 31, 1995.
3.2 Restated Bylaws--incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-18,
Reg. No. 33-42477C.
4.1 Specimen of Common Stock Certificate--incorporated by
reference to Exhibit 4 to Amendment No. 1 to the
Company's Registration Statement on Form S-18, Reg.
No. 33-42477C.
11.1 Per Share Earnings Computations
27.0 Financial Data Schedule (filed with electronic version only)
EXHIBIT 11.1
SUNRISE RESOURCES, INC. AND SUBSIDIARIES
PER SHARE EARNINGS COMPUTATIONS
<TABLE>
<CAPTION>
Three Months Ended
June 30
1996 1995
---------- ----------
<S> <C> <C>
Primary Earnings Per Share:
Weighted average number of common shares outstanding 7,189,000 7,189,000
Common stock equivalents from assumed exercise of
options and warrants 14,000 16,000
---------- ----------
Total shares 7,203,000 7,205,000
========== ==========
Net income $1,093,000 $ 891,000
========== ==========
Net income per common and common equivalent share $ 0.15 $ 0.12
========== ==========
Fully Dilutive Earnings Per Share:
Weighted average number of common shares outstanding 7,189,000 7,189,000
Common stock equivalents from assumed exercise of
options and warrants 14,000 16,000
---------- ----------
Total shares 7,203,000 7,205,000
========== ==========
Net income $1,093,000 $ 891,000
========== ==========
Net income per common and common equivalent share $ 0.15 $ 0.12
========== ==========
</TABLE>
Net income per common and common equivalent share is computed using the weighted
average number of shares outstanding during each period. Common equivalent
shares represent the dilutive effects of outstanding stock options and warrants
using the treasury stock method and average market prices during the periods.
The calculation of fully dilutive earnings per share uses the higher of the
ending market price for the period or the 11erage market price.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U. S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,258,000
<SECURITIES> 0
<RECEIVABLES> 19,425,000
<ALLOWANCES> 3,516,000
<INVENTORY> 92,000
<CURRENT-ASSETS> 117,607,000
<PP&E> 924,000
<DEPRECIATION> 422,000
<TOTAL-ASSETS> 118,877,000
<CURRENT-LIABILITIES> 88,481,000
<BONDS> 0
0
0
<COMMON> 72,000
<OTHER-SE> 30,324,000
<TOTAL-LIABILITY-AND-EQUITY> 118,877,000
<SALES> 10,670,000
<TOTAL-REVENUES> 10,670,000
<CGS> 8,569,000
<TOTAL-COSTS> 8,569,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,101,000
<INCOME-TAX> 1,008,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,093,000
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
