SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
June 30, 1997 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)
(612) 593-1904
(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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
7,787,796 shares of Common Stock, $.01 par value as of August 13, 1997
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Included herein is the following unaudited financial information:
Consolidated Balance Sheets as of June 30, 1997 and March 31, 1997.
Consolidated Statements of Operations for the three-month
periods ended June 30, 1997 and 1996.
Consolidated Statements of Cash Flows for the three-month
periods ended June 30, 1997 and 1996.
Notes to Consolidated Financial Statements.
<PAGE>
SUNRISE RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
--------------- -----------
ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,588,000 $ 2,191,000
Accounts receivable, less allowance for doubtful accounts
of $451,000 and $494,000 2,887,000 1,928,000
Income taxes receivable -- 1,245,000
Inventory held for sale 392,000 388,000
Loans receivable, less allowance for possible losses of $3,431,000
and $3,401,000 6,811,000 7,503,000
Investment in leasing operations:
Direct financing leases 42,263,000 46,759,000
Operating leases, less accumulated depreciation of
$24,315,000 and $22,973,000 43,017,000 42,211,000
Equipment held for lease 10,375,000 6,435,000
Initial direct costs 570,000 590,000
--------------- ----------------
Total investment in leasing operations 96,225,000 95,995,000
--------------- ----------------
Furniture and fixtures, less accumulated depreciation
of $575,000 and $535,000 381,000 411,000
Other assets 1,356,000 1,498,000
--------------- ----------------
Total Assets $ 109,640,000 $ 111,159,000
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Financing arrangements:
Borrowings under lines of credit $ 12,457,000 $ 13,329,000
Securitized borrowings 17,682,000 15,481,000
Recourse participations in loans receivable 311,000 435,000
Discounted lease rentals 35,473,000 40,198,000
--------------- ----------------
Total financing arrangements 65,923,000 69,443,000
--------------- ----------------
Accounts payable 7,478,000 6,808,000
Accrued liabilities 4,453,000 6,252,000
Accrued income taxes 230,000 --
Deferred tax liability 1,899,000 1,899,000
--------------- ----------------
Total Liabilities 79,983,000 84,402,000
--------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 17,500,000
shares authorized, 7,788,000 and 7,189,000
shares issued and outstanding, respectively 78,000 72,000
Capital stock, undesignated, $.01 par value,
2,500,000 shares authorized, none issued or outstanding -- --
Additional paid-in capital 27,618,000 25,601,000
Retained earnings 1,961,000 1,084,000
--------------- --------------
Total Shareholders' Equity 29,657,000 26,757,000
--------------- --------------
Total Liabilities and Shareholders' Equity $ 109,640,000 $ 111,159,000
================ ===============
</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,
-----------------------------------
1997 1996
--------------- ----------------
REVENUES
<S> <C> <C>
Operating leases $ 7,920,000 $ 5,724,000
Direct financing leases 1,390,000 2,175,000
Equipment sales 1,658,000 2,487,000
Interest income 70,000 219,000
Fee income 87,000 65,000
-------------- ----------------
Total Revenues 11,125,000 10,670,000
-------------- ----------------
COSTS AND EXPENSES
Depreciation 4,332,000 3,156,000
Interest 1,491,000 1,710,000
Provision for lease and loan losses 270,000 221,000
Cost of equipment sold 1,650,000 2,180,000
Compensation expense 964,000 781,000
Other operating expenses 734,000 521,000
-------------- ----------------
Total Costs and Expenses 9,441,000 8,569,000
-------------- ----------------
INCOME FROM OPERATIONS BEFORE PROVISION
FOR INCOME TAXES 1,684,000 2,101,000
PROVISION FOR INCOME TAXES 807,000 1,008,000
-------------- ----------------
NET INCOME $ 877,000 $ 1,093,000
============== ================
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ 0.12 $ 0.15
============== ================
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 7,291,000 7,189,000
============== ================
</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,
-----------------------------------
1997 1996
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 877,000 $ 1,093,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for lease and loan losses 270,000 221,000
Depreciation 4,588,000 3,423,000
Change in operating assets and liabilities:
Accounts receivable (1,049,000) (678,000)
Income taxes receivable 1,245,000 1,038,000
Other assets 21,000 64,000
Inventory held for sale (4,000) 31,000
Accounts payable 670,000 646,000
Accrued liabilities (1,799,000) 639,000
Accrued income taxes 230,000 --
--------------- ---------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 5,049,000 6,477,000
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment for lease (11,346,000) (9,439,000)
Principal portion of direct financing leases collected 6,540,000 6,939,000
Investment in loans receivable -- (1,063,000)
Principal portion of loans receivable collected 661,000 3,325,000
Purchase of furniture and fixtures (9,000) (25,000)
---------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (4,154,000) (263,000)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on lines of credit 8,000,000 5,200,000
Payments on lines of credit (8,872,000) (747,000)
Proceeds from securitized borrowings 5,499,000 --
Payments on securitized borrowings (3,298,000) --
Proceeds from discounted lease financing 1,420,000 1,101,000
Payments on discounted lease financing (6,145,000) (8,223,000)
Payments on participations in loans receivable (124,000) (2,479,000)
Payments on note payable to King Holding Corporation -- (1,437,000)
Issuance of common stock 2,022,000 --
--------------- ---------------
NET CASH USED IN FINANCING
ACTIVITIES (1,498,000) (6,585,000)
---------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (603,000) (371,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,191,000 1,629,000
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,588,000 $ 1,258,000
=============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid 821,000 873,000
Income taxes paid -- 7,000
</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, 1997 and 1996 (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, 1997
and March 31, 1997 and the results of operations and cash flows for the
three months ended June 30, 1997 and 1996. 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, 1997, 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.
During March 1997, the Financial Accounting Standards Board released SFAS
No. 128, Earnings per Share, which requires the disclosure of basic
earnings per share and diluted earnings per share. The Company expects to
adopt SFAS No. 128 in fiscal 1998 and anticipates it will not have a
material impact on the financial position or the results of operations of
the Company.
2. INCOME TAXES
Income tax expense has been provided based on management's estimate of the
annualized effective tax rate of 48% for the three months ended June 30,
1997 and 1996.
3. LOANS RECEIVABLE
Loans by Collateral Type
The composition of the loans receivable portfolio by collateral type was as
follows:
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
--------------- ----------
<S> <C> <C>
Commercial loans, collateralized primarily by receivables $ 112,000 $ 161,000
Commercial loans, collateralized by equipment, marketable
securities and other 4,704,000 5,163,000
Real estate loans 1,028,000 1,038,000
Non-accrual loans 5,319,000 5,475,000
Non-recourse participations (857,000) (867,000)
--------------- ---------------
10,306,000 10,970,000
Less:
Allowance for possible loan losses (3,431,000) (3,401,000)
Unearned fees from loan origination (64,000) (66,000)
--------------- ---------------
$ 6,811,000 $ 7,503,000
=============== ===============
</TABLE>
<PAGE>
Loan Portfolio Activity and Allowance for Possible Loan Losses -
As of June 30, 1997 and March 31, 1997, the Company's recorded investment
in impaired and other loans and the related valuation allowances are as
follows:
<TABLE>
<CAPTION>
June 30, 1997 March 31, 1997
------------------------------------ ----------------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
<S> <C> <C> <C> <C>
Impaired loans -
Nonaccrual $ 5,094,000 $ 3,206,000 $ 5,250,000 $ 3,176,000
Other 225,000 225,000 225,000 225,000
Performing loans 5,844,000 -- 6,362,000 --
Nonrecourse participations (857,000) -- (867,000) --
----------------- -------------- ---------------- ---------------
$ 10,306,000 $ 3,431,000 $ 10,970,000 $ 3,401,000
=============== ============= ============== ==============
</TABLE>
The activity in the allowance for possible loan losses during the three
months ended June 30, 1997 and 1996 was as follows:
June 30, June 30,
1997 1996
-------- --------
Balance, beginning of period $3,401,000 $2,773,000
Provisions for loan losses 30,000 30,000
Write-offs -- --
---------- ----------
Balance, end of period $3,431,000 $2,803,000
========== ==========
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, 1997 and 1996.
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, 1997, the Company did not recognize fee and interest
income related to impaired loans.
4. DISCOUNTED LEASE RENTALS
Discounted lease rentals consist of the following:
June 30, March 31,
1997 1997
--------------- ---------------
Non-recourse $ 27,864,000 $ 30,761,000
Recourse 7,609,000 9,437,000
--------------- ---------------
$ 35,473,000 $ 40,198,000
=============== ===============
5. FINANCING 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 $24.7 million at June 30, 1997. The balance
outstanding as of quarter end was $12.4 million. Advances under the line
bear interest at prime, and are collateralized by substantially all
otherwise unsecured assets of the Company. This line of credit facility
matures on September 30, 1997. The Company believes this credit facility
will be renewed on terms similar to the current facility.
<PAGE>
This credit facility requires compliance with financial covenants,
including the maintenance of certain liquidity and net worth ratios,
prohibits the payment of dividends and requires compliance with other
financial covenants. As a result of fourth quarter charges for lease and
loans losses and related events, as of March 31, 1997, the Company did not
meet certain financial and other covenants contained in credit agreements
with certain lenders. With the assistance of King Management Corporation,
the lenders have subsequently modified the financial covenants or waived
the events of noncompliance. As of June 30, 1997, the Company is in
compliance with the revised terms of these agreements.
Securitization
On October 31, 1996, the Company, Sunrise Leasing Corporation ("Sunrise
Leasing") and Sunrise Funding Corporation I (a newly formed wholly-owned
special purpose subsidiary of Sunrise Leasing)("Sunrise Funding"), entered
into an agreement with a subsidiary of Dougherty Dawkins, Inc. to place up
to $20 million of notes issued by Sunrise Funding to private institutional
investors. Dougherty Dawkins, Inc. is an investment banking firm of which a
former director of the Company is Vice Chairman. The notes are secured by
certain leases contributed to Sunrise Funding by Sunrise Leasing. This
securitization facility was closed on November 8, 1996, with an initial
funding of $13,000,000. The funds were used to pay off the $3.1 million of
loans from The King Management Corporation, to pay accrued legal expenses,
interest and fees in connection with the financing, and to repay $9.4
million under the Company's bank line of credit. A subsequent advance of
$7.0 million was funded on January 31, 1997, the proceeds of which were
used to reduce the outstanding balance of the Company's line of credit.
On May 16, 1997, Sunrise Leasing Corporation completed a $5,500,000 funding
on a securitization facility with National City Bank of Minneapolis. These
notes are secured by certain leases of the Company. These funds were used
to reduce the debt outstanding under the Company's bank line of credit.
6. COMMITMENTS AND CONTINGENCIES
Litigation
During fiscal 1997, former shareholders of ILC commenced arbitration
proceedings against the Company 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 their view, problems underlying
the net investment in several direct financing loans and leases arose prior
to the merger and were not disclosed. They 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's Common Stock, the former ILC shareholders attempted to obtain
rescission of the merger.
On June 17, 1997, a decision was released by the arbitrator on these
proceedings. ILC shareholders were denied rescission and reformation of the
merger agreement as well as relief on five other claims. They were however
granted relief on one count of breach of warranty and awarded damages of
560,257 additional shares of Sunrise Resources, Inc. common stock. This
award, valued at $1,891,000, was charged to expense for fiscal 1997.
Additionally, certain ILC shareholders were awarded repayment of attorneys'
fees payable in the form of 38,818 additional shares of Sunrise Resources,
Inc. common stock. This award valued at $131,000 was also charged to
expense for fiscal 1997. These proceedings were conducted under the
agreement of binding arbitration and therefore no further disputes or
settlements with the Company are expected to arise in connection with the
merger agreement.
<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 and
depreciation expense 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.
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.
<PAGE>
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, 1997.
Results of Operations for the Three Months Ended June 30, 1997 and 1996
Total revenue increased approximately $455,000 (4.3%) for the three months ended
June 30, 1997 as compared to the corresponding period in fiscal 1997. The
increase in revenue for the quarter came from a 38% increase in operating lease
revenue over the previous quarter. This increase was offset by a 36% decrease in
direct financing revenue and a decrease of 33% in equipment sales in the quarter
as compared to the first quarter in fiscal 1997.
Total leasing revenues were as follows (dollar amounts in millions):
Three Months
Ended June 30,
------------------------------------
1997 1996
-------------- --------------
Amount % Amount %
Leasing Revenues:
Vendor $ 6.4 69% $ 4.2 53%
Direct 2.9 31 3.7 47
------- --- ------- ---
Total $ 9.3 100% $ 7.9 100%
======= ==== ======= ====
As a percent of total revenues 83.7% 74.0%
===== =====
Margins from leasing activities (leasing revenue less depreciation and interest
expense) were 37.5% and 38.4% for the three months of first quarter fiscal 1997
and fiscal 1996, 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. 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 decreased $829,000 (33.3%) in the first three
months of fiscal 1998 compared to the same period in fiscal 1997. This decrease
is primarily a result of lower off-lease sales coming from direct customer
leasing business. Gross margins on equipment sales were 0.5% in the first
quarter of fiscal 1998 as compared to 12.3% for the same period in fiscal 1997.
This decrease in gross margins was due to lower than anticipated market values
of computer equipment coming off lease. Gross margins will vary depending on
the Company's ability to purchase equipment at competitive prices and to
negotiate attractive selling prices for such equipment.
Interest income decreased $149,000 (68.2%) in the first three months of fiscal
1998 as compared to the same period in fiscal 1997. 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 increased $22,000 (33.8%) in the first three months of fiscal 1998 as
compared to the same period in fiscal 1997. This increase was due to higher late
fees caused by the increased number of leases in the vendor leasing portfolio.
Total costs and expenses increased $872,000 (10.2%) for the first three months
of fiscal 1998 as compared to the same period in fiscal 1997. The increase
resulted from higher depreciation expense offset by lower costs of equipment
sold.
Depreciation expense increased $1,176,000 (37.3%) for the first three months of
fiscal 1998 as compared to the same period in fiscal 1997, due to an increase in
activity in the vendor leasing programs and the number of vendor equipment
operating leases that were added in the first quarter.
<PAGE>
Interest expense decreased $219,000 (12.8%) for the first three months of fiscal
1998 as compared to the same period in fiscal 1997. This decrease was caused by
the lower overall debt levels quarter to quarter.
Cost of equipment sold decreased $530,000 (24.3%) for the first three months of
fiscal 1998 as compared to the same period in fiscal 1997. This decrease was
primarily due to decreased sale activity in the direct customer leasing business
during the first quarter of fiscal 1997.
Compensation expense increased $183,000 (23.5%) in the first three months of
fiscal 1998 as compared to the same period in fiscal 1997, which was due to an
increase in commission expense and the addition of some compensation accruals in
the first quarter of fiscal 1998.
Other operating expenses increased $213,000 (40.9%) in the first quarter of
fiscal 1998 compared to the first quarter in fiscal 1997. The majority of this
increase was due to the acceleration of amortization of some capitalized funding
expenses.
Income tax provision as a percentage of income before taxes was 48.0% for both
the three months ended June 30, 1997 and 1996.
As a result of the foregoing factors, net income decreased $216,000 (19.8%) for
the first three months of fiscal 1998 as compared to the corresponding period in
fiscal 1997.
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, 1997, the Company had total borrowings outstanding of $65.9 million,
of which 42.3% were nonrecourse. At March 31, 1997, the Company had total
borrowings outstanding of $69.4 million, of which 44.3% were nonrecourse.
As of June 30, 1997, the Company had a total investment in leasing operations of
$96.2 million, as compared to $96.0 million at March 31, 1997. The slight
increase in investment in leasing operations is due to the increase 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 $7.1 million for the first three
month period of fiscal 1998. Accounts receivable increased $1.0 million,
accounts payable increased by $670,000, and accrued liabilities increased
$223,000 due to an increase in the Company's lease portfolio and other business
activities. The Company expects to fund future 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 $11.3 million for the first three month period of
fiscal 1997 were financed through $7.1 million of cash flows from operations,
through the discounting of $1.4 million of noncancelable lease rentals to
various financial institutions at fixed rates, through the securitization of
leases for $5.5 million, 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.
Inflation has not been a significant factor in the Company's business in any of
the periods presented.
<PAGE>
Liquidity and Financing Sources
As of June 30, 1997, the Company had available a $25 million line of credit. Of
this amount, $12.5 million had been utilized as of June 30, 1997. 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. The
Company's line of credit matures September 30, 1997. The Company believes this
credit facility will be renewed on term similar to the current facility.
This credit facility requires compliance with financial covenants, including the
maintenance of certain liquidity and net worth ratios, prohibits the payment of
dividends and requires compliance with other financial covenants. As a result of
fourth quarter charges for lease and loans losses and related events, as of
March 31, 1997, the Company did not meet certain financial and other covenants
contained in credit agreements with certain lenders. The lenders have
subsequently modified the financial covenants or waived the events of
noncompliance. As of August 14, 1997, the Company is in compliance with the
revised terms of these agreements.
During the first quarter of fiscal 1998, the Company's Sunrise Leasing
Corporation subsidiary entered into a Discretionary Revolving Credit Agreement
with National City Bank of Minneapolis. The agreement provides for discretionary
loan advances up to $5.5 million based on eligible equipment leases. Advances
under the agreement are secured by the eligible equipment leases and are repaid
over the term, up to 48 months, of such eligible equipment leases with interest
at 3.25% above the yield on U.S. Treasury securities of equivalent term. The
credit facility is also guaranteed by Sunrise Resources, Inc. In May 1997, the
Company borrowed $5.5 million under this credit facility.
Based on its completion of the Securitized Facility and its recent success in
obtaining additional discount financing and the commitment of King Management
Corporation to assist the Company in meeting its financing requirements, the
Company believes that it will be able to finance its anticipated equipment
purchasing commitments in fiscal 1998.
Over the past year or more, the Company has continued to monitor several problem
leases and loans. While there continue to be several loans payable to the
Company which could force the Company to take additional write-offs, management
does not currently believe that any such write-offs, other than the loan
described below, would be material or that they would create new covenant
violations on current credit facilities or otherwise limit or reduce the
Company's access to credit. During fiscal 1997, a lessee, which has a lease and
loan agreement with remaining investment totaling $9,500,000, did not fulfill
its commitments in an already restructured lease and loan agreement by failing
to increase its monthly payments from $159,000 to $199,000 in November, 1996.
The lessee has not paid the incremental monthly rent of $40,000 despite demand
and is currently in default. As a result of this default and the lessee's
request to restructure its payments, management recorded a reserve of $3,161,000
against this transaction in the fourth quarter of fiscal 1997. However, any
restructuring is subject to the approval of a federal government agency and the
Company's claims against the assets and collateral may be subject to prior
claims of the federal government. As a result, the remaining $6,300,000 of net
book value is significantly undercollateralized. While the Company believes the
lessee will continue to make the $159,000 monthly payments in fiscal 1998 and
that certain loan and lease guarantees are valid, if the lessee ceases making
any payments and the Company is unsuccessful in asserting its claims under the
guarantees, the Company would be required to write off the remaining lease and
loan balance. This would have a materially adverse affect on the Company's
financial statements and its future cash flow would be reduced by the monthly
payments for the total remaining amount of the agreement. The lessee has made
the $159,000 monthly payments through August 1997.
Outlook
The statements contained in this Outlook section are based on current
expectations. The statements are forward looking and actual results may differ
materially. The forward looking statements contained in this Outlook, in
particular the statements regarding growth of the Company's vendor leasing
business, the Company's ability to finance its business, and management's belief
that any future loan or lease write-off will not be material, involve a number
of risks and uncertainties in addition to the factors discussed above which
could cause actual results to differ from those projected, including the
following:
<PAGE>
Highly Competitive Industry. The 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.
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. As of June
30, 1997, the Company has only two significant vendor leasing programs and has
signed agreements for ten other vendor leasing programs. While the Company
believes it has the ability and capacity to develop other large vendor leasing
programs, there is no assurance that it will be successful in this regard or
that it will be able to generate acceptable revenue growth.
Risk of Additional Loan and Lease Write-Offs. While the Company believes that
its current reserves are adequate, it continues to monitor closely several loans
and a material lease, including a significant casino loan and lease currently in
default, as to which the Company has a book value of $6.3 million and a
remaining investment of $9.5 million. There is no assurance that such loans or
such lease will not go into default or that they are adequately secured. Any
future losses on such loans and lease incurred in excess of the Company's
reserves would likely materially affect the Company's future earnings and cash
flows, and will cause the Company to be in violation of one or more of its
covenants under its credit agreements with its financing sources.
Financing. The Company's growth and profitability are dependent to a great
extent on the willingness of banks and other financial institutions to lend the
Company money to finance the purchase of equipment to be leased. To date, the
Company has financed its equipment and vendor leasing businesses primarily
through the sale of equity to the public, cash flow from operations, bank lines
of credit, non-recourse discount lease financing, recourse discount lease
financing and a securitization of certain lease receivables and related
residuals. The Company normally seeks to fund its traditional equipment business
with non-recourse discount financing. There is no assurance that banks will be
willing to continue to finance the Company's equipment leasing transactions on a
non-recourse basis, and any adverse change in the willingness of banks to
finance the Company's lease transactions on a non-recourse basis could affect
the Company's future equipment leasing revenue. The Company's vendor leasing
business to date has been financed with internally-generated cash flow, bank
lines of credit and a significant securitization program. The Company will seek
to finance its future vendor leasing business in part with similar
securitization programs. To the extent such financing programs are not
available, the Company will assume a significantly higher degree of risk because
the lender has direct recourse against the Company for the amount of any
default. A default on a lease with a significant lease balance could have a
material adverse impact on the Company.
Major Customers/Vendors. Total investments in leases and loans receivables to
customers considered highly leveraged or with cash flows from operations
inadequate to service existing obligations were $25,755,000 or 26.8% of the
portfolio as of June 30, 1997. 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 which
would result in a significant reduction in cash flow.
In addition, 52.5% of the Company's total leasing revenue for the period ended
June 30,1997 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. If the Company is unable to replace this business,
the Company's future financial results could be materially and adversely
affected.
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 term. 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 actual residual values in excess of estimated residual values, a
greater than expected decrease in the market value of data processing or other
equipment leased by the Company could materially and adversely affect the
Company's financial condition and profitability.
<PAGE>
PART II-OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. Legal Proceedings - The arbitration proceeding between the Company and
the former shareholders of ILC regarding the February 1995 merger of
ILC and the Company was resolved during the quarter ended June 30,
1997. See Note 6 to Financial Statements at Part I, Item 1 above.
ITEM 2. Changes in Securities - The following securities were issued by the
Company during the quarter ended June 30, 1997:
(a) Pursuant to an Agreement dated June 16, 1997 among the
Company, The King Management Corporation, and Peter King,
Chairman of the Company, the Company issued Mr. King as of
June 16, 1997, in connection with Mr. King becoming an
employee of the Company, (i) a five-year nonqualified stock
option to purchase 270,753 shares of the Company's Common
Stock at $3.125 per share, which option is immediately
exercisable, and (ii) a five-year nonqualified stock option to
purchase 270,753 shares of the Company's Common Stock at
$3.125 per share, which option will become exercisable on June
16, 2001 if Mr. King is still employed by the Company;
provided, however, that the vesting of such option will be
accelerated if certain conditions are met. Such options were
issued in reliance upon the exemption provided in Section 4(2)
of the Securities Act.
(b) The Company issued 560,257 shares of Common Stock to three
shareholders of The P.J. King Companies, Inc. d/b/a/
International Leasing Corporation ("ILC Shareholders") as of
June 25, 1997 pursuant to an arbitration award in connection
with the arbitration proceedings against the Company relating
to the February 1995 merger of the Company with ILC. In
addition, the Company issued 38,818 shares of Common Stock to
the ILC Shareholders pursuant to the arbitration award as
repayment for the attorneys' fees. See Note 6 to the Financial
Statements in Part I, Item 1 above. Such shares were issued in
reliance upon the exemption provided in Section 4(2) of the
Securities Act.
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, 1997.
<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, 1997 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, 1997
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.
10.1 The Company's 1991 Stock Option Plan--As amended
through February 1995.
11.1 Per Share Earnings Computations
27.0 Financial Data Schedule (filed with electronic version only)
SUNRISE RESOURCES, INC.
1991 STOCK OPTION PLAN
(as amended through February 13, 1995)
SECTION 1.
DEFINITIONS
As used herein, the following terms shall have the meanings indicated
below:
(a) The "Company" shall mean Sunrise Resources, Inc., a Minnesota
corporation.
(b) A "Subsidiary" shall mean any corporation of which fifty percent
(50%) or more of the total voting power of outstanding stock is owned,
directly or indirectly in an unbroken chain, by the Company.
(c) "Common Stock" shall mean the Common Stock of the Company, subject
to adjustment as described in Section 12.
(d) The "Plan" shall mean The Sunrise Resources, Inc. 1991 Stock Option
Plan, as amended hereafter from time to time, including the forms of
Option Agreements as they may be modified by the Board from time to
time.
(e) The "Optionee" for purposes of Section 9 shall mean an employee of
the Company or any Subsidiary to whom an incentive stock option has
been granted under the Plan. For purposes of Section 10, the "Optionee"
shall mean the director, officer, employee, advisor or consultant of
the Company or any Subsidiary to whom a nonqualified stock option has
been granted.
(f) "Committee" shall mean a Stock Option Committee of the Board of
Directors of the Company consisting of two or more directors who may be
appointed by, and serve at the pleasure of, the Board and shall have
such powers and authority as are granted to it by the Board. Each of
the members of the Committee shall be a "disinterested" person within
the meaning of Rule 16b-3, as then in effect, of the General Rules and
Regulations under the Securities Exchange Act of 1934. A
"disinterested" person under Rule 16b-3 means a director who, among
other things, has not at any time within one year prior to service on
the Committee been granted or awarded options or equity securities
pursuant to the Plan or any other plan of the Company.
(g) The "Internal Revenue Code" shall mean the Internal Revenue Code of
1986, as amended from time to time.
<PAGE>
(h) "Non-Employee Directors" shall mean members of the Board who are
not employees of the Company or of any Subsidiary.
SECTION 2.
PURPOSE
The purpose of the Plan is to promote the success of the Company by
facilitating the employment and retention of competent personnel and by
furnishing incentive to officers, directors, employees and consultants upon
whose efforts the success of the Company will depend to a large degree.
It is the intention of the Company to carry out the Plan through the
granting of stock options which will qualify as "incentive stock options" under
the provisions of Section 422A of the Internal Revenue Code, and through the
granting of nonqualified stock options pursuant to Section 10 of this Plan.
Adoption of this Plan shall be and is expressly subject to the condition of
approval by the shareholders of the Company within twelve (12) months before or
after the adoption of the Plan by the Board of Directors.
SECTION 3.
EFFECTIVE DATE OF PLAN
The Plan shall be effective as of the date it is adopted by the Board
of Directors of the Company.
SECTION 4.
ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company
(the "Board") or, to the extent empowered by the Board, by a Stock Option
Committee (hereinafter referred to as the "Committee" and as defined in Section
1(f) of this Plan) which may be appointed by the Board from time to time. The
Board shall have all of the powers vested in it under the provisions of the
Plan, including but not limited to exclusive authority (where applicable and
within the limitations described herein, and except with respect to the
automatic grants of options pursuant to Section 17 of this Plan) to determine,
in its sole discretion, whether an incentive stock option or nonqualified stock
option shall be granted, the individuals to whom, and the time or times at
which, options shall be granted, the number of shares subject to each option and
the option price, terms and conditions of each option. The Committee shall have
such powers as are granted to it by the Board. The Board, or the Committee if so
empowered by the Board, shall have full power and authority to administer and
interpret the Plan, to make and amend rules, regulations and guidelines for
administering the Plan, to prescribe the form and conditions of the respective
stock option agreements (which may vary from Optionee to Optionee) evidencing
each option and to make all other determinations necessary or advisable for the
administration of the Plan. The Board's interpretation of the Plan, or the
Committee's interpretation if so empowered by the Board, and all actions taken
and determinations made by the Board pursuant to the power vested in it
hereunder, or by the Committee to the extent empowered by the Board, shall be
conclusive and binding on all parties concerned. No member of the Board or the
Committee shall be liable for any action taken or determination made in good
faith in connection with the administration of the Plan.
<PAGE>
In the event the Board appoints a Committee as provided hereunder, any
action of the Committee with respect to the administration of the Plan shall be
taken pursuant to a majority vote of the Committee members or pursuant to the
written resolution of all Committee members.
SECTION 5.
PARTICIPANTS
Except with respect to the options granted to Non-Employee Directors
pursuant to Section 17 of the Plan, the Board, or the Committee if so empowered
by the Board, shall from time to time, at its discretion and without approval of
the shareholders, designate those other directors, officers, employees,
consultants or advisors of the Company or of any Subsidiary to whom nonqualified
stock options shall be granted; provided, however, that consultants or advisors
shall not be eligible to receive stock options hereunder unless such consultant
or advisor renders bona fide services to the Company or Subsidiary and such
services are not in connection with the offer or sale of securities in a
capital-raising transaction. The Board, or the Committee if so empowered by the
Board, shall also designate those employees of the Company or of any Subsidiary
to whom incentive stock options shall be granted. Non-Employee Directors shall
only be able to participate under the Plan as specified in Section 17 of the
Plan.
The Board, or the Committee if so empowered by the Board, may grant
additional incentive stock options or nonqualified stock options to some or all
participants then holding options or may grant such options solely or partially
to new participants. In designating participants, the Board, or the Committee if
so empowered by the Board, shall also determine the number of shares to be
optioned to each such participant. Notwithstanding the foregoing, neither the
Board nor the Committee shall grant Non-Employee Directors any options other
than as specified in Section 17 of the Plan.
SECTION 6.
STOCK
The Stock to be optioned under this Plan shall consist of authorized
but unissued shares of Common Stock. Seven Hundred Fifty Thousand (750,000)
shares of Common Stock shall be reserved and available for options under the
Plan; provided, however, the total number of shares of Common Stock reserved for
options under this Plan shall be subject to adjustment as provided in Section 12
of the Plan. In the event that any outstanding option under the Plan for any
reason expires or is terminated prior to the exercise thereof, the shares of
Common Stock allocable to the unexercised portion of such option shall continue
to be reserved for options under the Plan and may be optioned hereunder.
<PAGE>
SECTION 7.
DURATION OF PLAN
Incentive stock options may be granted pursuant to this Plan from time
to time during a period of ten (10) years from the earlier of the date the Plan
is approved by the Board of Directors or the date it is approved by the
shareholders of the Company. Nonqualified stock options may be granted pursuant
to the Plan from time to time after the date the Plan is adopted by the Board of
Directors and until the Plan is discontinued or terminated by the Board.
SECTION 8.
PAYMENT
Optionees may pay for shares upon exercise of options granted pursuant
to this Plan with cash, a certified check, or, if authorized by the Board of
Directors or the Committee, in the form of Company stock.
SECTION 9.
TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS
Each incentive stock option granted pursuant to the Plan shall be
evidenced by a written stock option agreement (the "Option Agreement"). The
Option Agreement shall be in such form as may be approved from time to time by
the Board or the Committee (if so empowered by the Board) and may vary from
Optionee to Optionee; provided, however, that each Optionee and each Option
Agreement shall comply with and be subject to the following terms and
conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state
the total number of shares covered by the incentive stock option. The
option price per share shall not be less than one hundred percent
(100%) of the fair market value of the Common Stock per share on the
date the Board, or the Committee if so empowered by the Board, grants
the option; provided, however, that, if an Optionee owns stock
possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or of its parent or any
Subsidiary, the option price per share of an incentive stock option
granted to such Optionee shall not be less than one hundred ten percent
(110%) of the fair market value of the Common Stock per share on the
date of the grant of the option. For purposes hereof, if such stock is
then reported in the national market system or is listed upon an
established exchange or exchanges, "fair market value" of the Common
Stock per share shall be the highest closing price of such stock in
such national market system or on such stock exchange or exchanges on
the date the option is granted or, if no sale of such stock shall have
occurred on that date, on the next preceding day on which there was a
sale of stock. If such stock is not so reported in the national market
system or listed upon an exchange, "fair market value" shall be the
mean between the "bid" and "asked" prices quoted by a recognized
specialist in the Common Stock of the Company on the date the option is
granted, or if there are no quoted "bid" and "asked" prices on such
date, on the next preceding date for which there are such quotes. If
such stock is not publicly traded as of the date the option is granted,
the "fair market value" of the Common Stock shall be determined by the
Board, or the Committee if so empowered by the Board, in its sole
discretion by applying principles of valuation with respect to all such
options. The Board, or the Committee if so empowered by the Board,
shall have full authority and discretion in establishing the option
price and shall be fully protected in so doing.
<PAGE>
(b) Term and Exercisability of Incentive Stock Option. The term during
which any incentive stock option granted under the Plan may be
exercised shall be established in each case by the Board, or the
Committee if so empowered by the Board, but in no event shall any
incentive stock option be exercisable during a term of more than ten
(10) years after the date on which it is granted. The Option Agreement
shall state when the incentive stock option becomes exercisable and
shall also state the maximum term during which the option may be
exercised. In the event an incentive stock option is exercisable
immediately, the manner of exercise of the option in the event it is
not exercised in full immediately shall be specified in the Option
Agreement. The Board, or the Committee if so empowered by the Board,
may accelerate the exercise date of any incentive stock option granted
hereunder which is not immediately exercisable as of the date of grant.
(c) Other Provisions. The Option Agreement authorized under this
Section 9 shall contain such other provisions as the Board, or the
Committee if so empowered by the Board, shall deem advisable,
including, without limitation, rights of repurchase and transfer
restrictions with respect to any shares acquired by the Optionee
pursuant to the exercise of the option. Any such Option Agreement shall
contain such limitations and restrictions upon the exercise of the
option as shall be necessary to ensure that such option will be
considered an "Incentive Stock Option" as defined in Section 422A of
the Internal Revenue Code or to conform to any change therein.
(d) Holding Period. The sale or other disposition of any shares of
Common Stock acquired by an Optionee pursuant to the exercise of an
option described above shall be eligible for the favorable taxation
treatment of Section 421(a) of the Internal Revenue Code if no
disposition of such shares is made by the Optionee within two (2) years
from the date of the granting of the option under which the shares were
acquired nor within one year after the acquisition of such shares
pursuant to the exercise of such option, or such other periods as may
be prescribed by the Internal Revenue Code. In the event of an
Optionee's death, such holding period shall not be applicable pursuant
to Section 421(c)(1) of the Internal Revenue Code.
<PAGE>
SECTION 10.
TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS
Each nonqualified stock option granted pursuant to the Plan shall be
evidenced by a written Option Agreement. The Option Agreement shall be in such
form as may be approved from time to time by the Board or the Committee (if so
empowered by the Board), and may vary from Optionee to Optionee; provided,
however, that each Optionee and each Option Agreement shall comply with and be
subject to the following terms and conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state
the total number of shares covered by the nonqualified stock option.
Unless otherwise determined by the Board of Directors, or the Committee
if so empowered by the Board, the option price per share shall be equal
to one hundred percent (100%) of the fair market value of the Common
Stock per share on the date the Board or the Committee grants the
option; provided, that in no event shall the option price be equal to
less than eighty-five percent (85%) of such fair market value on the
date of grant. For purposes hereof, the "fair market value" of a share
of Common Stock shall have the same meaning as set forth under Section
9(a) herein.
(b) Term and Exercisability of Nonqualified Stock Option. The term
during which any nonqualified stock option granted under the Plan may
be exercised shall be established in each case by the Board, or the
Committee if so empowered by the Board. The Option Agreement shall
state when the nonqualified stock option becomes exercisable and shall
also state the maximum term during which the option may be exercised.
In the event a nonqualified stock option is exercisable immediately,
the manner of exercise of the option in the event it is not exercised
in full immediately shall be specified in the stock option agreement.
The Board, or the Committee if so empowered by the Board, may
accelerate the exercise date of any nonqualified stock option granted
hereunder which is not immediately exercisable as of the date of grant.
(c) Withholding. In the event the Optionee is required under the Option
Agreement to pay to the Company, or make arrangements satisfactory to
the Company respecting payment of, any federal, state, local or other
taxes required by law to be withheld with respect to the option's
exercise, the Board or the Committee may, in its discretion and
pursuant to such rules as it may adopt, permit the Optionee to satisfy
such obligation, in whole or in part, by electing to have the Company
withhold shares of Common Stock otherwise issuable to the Optionee as a
result of the option's exercise equal to the amount required to be
withheld for tax purposes. Any stock elected to be withheld shall be
valued at its "fair market value," as provided under Section 9(a)
hereof, as of the date the amount of tax to be withheld is determined
under applicable tax law. The Optionee's election to have shares
withheld for this purpose shall be made on or before the date the
option is exercised or, if later, the date that the amount of tax to be
withheld is determined under applicable tax law. Such election shall
also comply with such rules as may be adopted by the Board or the
Committee to assure compliance with Rule 16b-3, as then in effect, of
the General Rules and Regulations under the Securities Exchange Act of
1934, if applicable.
(d) Other Provisions. The Option Agreement authorized under this
Section 10 shall contain such other provisions as the Board, or the
Committee, as the case may be, shall deem advisable.
<PAGE>
SECTION 11.
TRANSFER OF OPTION
No option shall be transferable, in whole or in part, by the Optionee
other than by will or by the laws of descent and distribution and, during the
Optionee's lifetime, the option may be exercised only by the Optionee. If the
Optionee shall attempt any transfer of any option granted under the Plan during
the Optionee's lifetime, such transfer shall be void and the option, to the
extent not fully exercised, shall terminate.
SECTION 12.
RECAPITALIZATION, SALE, MERGER, EXCHANGE
CONSOLIDATION OR LIQUIDATION
In the event of an increase or decrease in the number of shares of
Common Stock resulting from a subdivision or consolidation of shares or the
payment of a stock dividend or any other increase or decrease in the number of
shares of Common Stock effected without receipt of consideration by the Company,
the number of shares of Common Stock covered by each outstanding option and the
price per share thereof shall be equitably adjusted by the Board of Directors to
reflect such change. Additional shares which may be credited pursuant to such
adjustment shall be subject to the same restrictions as are applicable to the
shares with respect to which the adjustment relates.
In the event of the sale by the Company of substantially all of its
assets and the consequent discontinuance of its business, or in the event of a
merger, exchange, consolidation or liquidation of the Company, the Board of
Directors may, in connection with the Board's adoption of the plan for sale,
merger, exchange, consolidation or liquidation, provide for one or more of the
following: (i) the acceleration of the exercisability of any or all outstanding
options; (ii) the complete termination of this Plan and cancellation of
outstanding options not exercised prior to a date specified by the Board (which
date shall give Optionees a reasonable period of time in which to exercise the
options prior to the effectiveness of such sale, merger, exchange, consolidation
or liquidation); and (iii) the continuance of the Plan with respect to the
exercise of options which were outstanding as of the date of adoption by the
Board of such plan for sale, merger, exchange, consolidation or liquidation and
provide to Optionees holding such options the right to exercise their respective
options as to an equivalent number of shares of stock of the corporation
succeeding the Company by reason of such sale, merger, exchange, consolidation
or liquidation. The grant of an option pursuant to the Plan shall not limit in
any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, exchange or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business or assets.
<PAGE>
SECTION 13.
INVESTMENT PURPOSE
No shares of Common Stock shall be issued pursuant to the Plan unless
and until there has been compliance, in the opinion of Company's counsel, with
all applicable legal requirements, including without limitation, those relating
to securities laws and stock exchange listing requirements. As a condition to
the issuance of Common Stock to Optionee, the Board, or the Committee if so
empowered by the Board, may require Optionee to (a) represent that the shares of
Common Stock are being acquired for investment and not resale and to make such
other representations as the Board, or the Committee if so empowered by the
Board, shall deem necessary or appropriate to qualify the issuance of the shares
as exempt from the Securities Act of 1933 and any other applicable securities
laws, and (b) represent that Optionee shall not dispose of the shares of Common
Stock in violation of the Securities Act of 1933 or any other applicable
securities laws. Company reserves the right to place a legend on any stock
certificate issued upon exercise of an option granted pursuant to the Plan to
assure compliance with this Section 13.
SECTION 14.
RIGHTS AS A SHAREHOLDER
An Optionee (or the Optionee's successor or successors) shall have no
rights as a shareholder with respect to any shares covered by an option until
the date of the issuance of a stock certificate evidencing such shares (except
as otherwise provided in Section 12 above). No adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property), distributions or other rights for which the record date is prior to
the date such stock certificate is actually issued (except as otherwise provided
in Section 12).
SECTION 15.
AMENDMENT OF THE PLAN
The Board of Directors of the Company may from time to time, insofar as
permitted by law, suspend or discontinue the Plan or revise or amend it in any
respect; provided, however, that no such revision or amendment shall impair the
terms and conditions of any option which is outstanding on the date of such
revision or amendment to the material detriment of the Optionee without the
consent of the Optionee. Notwithstanding the foregoing, no such revision or
amendment shall, (i) materially increase the number of shares subject to the
Plan except as provided in Section 12 hereof, (ii) change the designation of the
class of employees eligible to receive options, (iii) decrease the price at
which options may be granted, or (iv) materially increase the benefits accruing
to Optionees under the Plan, unless such revision or amendment is approved by
the shareholders of the Company. Furthermore, the Plan may not, without the
approval of the shareholders, be amended in any manner that will cause incentive
stock options to fail to meet the requirements of "Incentive Stock Options" as
defined in Section 422A of the Internal Revenue Code. In addition to and
notwithstanding the foregoing, the provisions of Section 17 below shall not be
amended more than once every six months, other than to comport with changes in
the Internal Revenue Code, the Employee Retirement Income Security Act, or the
rules thereunder.
<PAGE>
SECTION 16.
NO OBLIGATION TO EXERCISE OPTION
The granting of an option shall impose no obligation upon the Optionee
to exercise such option. Further, the granting of an option hereunder shall not
impose upon the Company or any Subsidiary any obligation to retain the Optionee
in its employ or as a director for any period.
SECTION 17.
GRANTING OF OPTIONS TO NON-EMPLOYEE DIRECTORS
(a) Upon Joining Board. Each Non-Employee Director who was or is
elected for the first time as a director of the Company after October
3, 1991, shall, as of November 11, 1992 (with respect to Non-Employee
Directors elected on or before such date of approval) or as of the date
of such election (with respect to Non-Employee Directors elected after
such date of approval), automatically be granted an option to purchase
10,000 shares of the Common Stock at an option price per share equal to
100% of the fair market value of the Common Stock on such date. Such
option shall be immediately exercisable to the extent of twenty percent
(2,000 shares), and shall become exercisable to the extent of an
additional twenty percent (2,000 shares) of the total number of shares
subject to such option on each of the first, second, third and fourth
anniversaries of the date of grant.
(b) Upon Re-election to Board. Each Non-Employee Director who, on and
after November 11, 1992, the date of approval of this Section by the
Board, is re-elected as a director of the Company or whose term of
office continues after a meeting of shareholders at which directors are
elected shall, as of the date of such re-election or shareholder
meeting, automatically be granted an option to purchase 2,000 shares of
the Common Stock at an option price per share equal to 100% of the fair
market value of the Common Stock on the date of such re-election or
shareholder meeting; provided that a Non-Employee Director who received
an option pursuant to subsection (a) above shall not be entitled to
receive an option pursuant to this subsection (b) until at least twelve
months after such Non-Employee Director's initial election to the
Board. Options granted pursuant to this subsection (b) shall be
immediately exercisable in full.
(c) General. No director shall receive more than one option to purchase
2,000 shares pursuant to this Section 17 in any one fiscal year. All
options granted pursuant to this Section 17 shall be designated as
non-qualified options and shall be subject to the same terms and
provisions as are then in effect with respect to granting of
non-qualified options to officers and employees of the Company except
that the option shall expire on the earlier of (i) three months after
the optionee ceases to be a director (except by disability or death)
and (ii) ten (10) years after the date of grant. Notwithstanding the
foregoing, in the event of the disability or death of a Non-Employee
Director, any option granted to such Non-Employee Director may be
exercised at any time within twelve months of the disability or death
of such Non-Employee Director or on the date on which the option, by
its terms expires, whichever is earlier.
EXHIBIT 11.1
SUNRISE RESOURCES, INC. AND SUBSIDIARIES
PER SHARE EARNINGS COMPUTATIONS
<TABLE>
<CAPTION>
Three Months Ended
June 30
------------------------
1997 1996
----------- ----------
<S> <C> <C>
Primary Earnings Per Share:
Weighted average number of common shares outstanding 7,222,000 7,189,000
Common stock equivalents from assumed exercise of
options and warrants 69,000 14,000
---------- ----------
Total shares 7,291,000 7,203,000
========== ==========
Net income $ 877,000 $1,093,000
========== ==========
Net income per common and common equivalent share $ 0.12 $ 0.15
========== ==========
Fully Dilutive Earnings Per Share:
Weighted average number of common shares outstanding 7,222,000 7,189,000
Common stock equivalents from assumed exercise of
options and warrants 95,000 14,000
---------- ----------
Total shares 7,317,000 7,203,000
========== ==========
Net income $ 877,000 $1,093,000
========== ==========
Net income per common and common equivalent share $ 0.12 $ 0.15
========== ==========
</TABLE>
Net income per common and common equivalent share is computed using the weighted
average number of shares outstanding 11ring each period.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,588,000
<SECURITIES> 0
<RECEIVABLES> 13,580,000
<ALLOWANCES> 3,882,000
<INVENTORY> 392,000
<CURRENT-ASSETS> 107,903,000
<PP&E> 956,000
<DEPRECIATION> 575,000
<TOTAL-ASSETS> 109,640,000
<CURRENT-LIABILITIES> 79,983,000
<BONDS> 0
0
0
<COMMON> 78,000
<OTHER-SE> 29,579,000
<TOTAL-LIABILITY-AND-EQUITY> 109,640,000
<SALES> 11,125,000
<TOTAL-REVENUES> 11,125,000
<CGS> 9,441,000
<TOTAL-COSTS> 9,441,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,684,000
<INCOME-TAX> 807,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 877,000
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
